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Jennifer Dauble
Neel Kashkari



Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Former Treasury Assistant Secretary Neel Kashkari today, Tuesday, October 20th. Excerpts of the interview will air throughout CNBC's Business Day programming.

All references must be sourced to CNBC.


JOHN HARWOOD, host: Neel Kashkari, thanks so much for joining us.

Mr. NEEL KASHKARI: Thanks for having me, John. It's a great opportunity.

HARWOOD: A year from now--a year ago you were living in the most incredible pressure cooker that anybody can imagine. What's your life like now?

Mr. KASHKARI: My life is great. I left Treasury in May. My wife and I have a cabin in the mountains, in the forest near Lake Tahoe, and we've been living in the woods. I've been chopping wood, reading, just decompressing. It couldn't be more different from Washington and I couldn't be happier right now.

HARWOOD: Are you writing a book, like everybody else, about your experience?

Mr. KASHKARI: No, I'm not. I thought about it. It's funny. I went and visited Vice President Cheney when I left Washington, just to get some advice and to catch up with him. His recommendation to me was--he said he never wrote a book until now, and that's why he kept getting invited back to future administrations. So he said, `If you want to come back to serve in government again, don't write a book.' So I'm not. I'm helping Hank with his book, which'll hopefully be coming out in a few months.

HARWOOD: So you want to go back into government?

Mr. KASHKARI: You know, I'd love to in 10 or 20 years. This three years that I spent in Treasury was an extraordinary experience. It was a tough three years, as you can imagine. And I'm looking forward to working back in the private sector. But in 10 or 20 years I'd love to have the opportunity to serve again.

HARWOOD: Well, tell me a little bit about what that experience was like, because I know people on Wall Street, people in private business have certain views from the outside of what government is like, what the people who work in government are like. What did you learn? Did anything surprise you about the people that you met in government compared to what you thought going in?

Mr. KASHKARI: Sure. Even before the crisis, I was really pleasantly surprised by the quality of the people at Treasury and how dedicated they were to their jobs and to serving their country, and it really was the spirit of public service. And so I was impressed by them, how hard they worked. In the crisis, it brought out the best of people. You know, we put together a wonderful team at Treasury. We created this thing called the Office of Financial Stability, brought in people from government and the private sector, totally nonpolitical, just focused on doing whatever it takes to stabilize the financial system and the economy. And so I think I saw the very best in people at some of the worst moments in our country's history. But those people were effective, and I'm really proud of what we accomplished.

HARWOOD: It does strike me that even though a lot of the things that you did and that the Obama administration is now doing are unpopular--bailing out Wall Street, for example--that what you all pulled off in combination with Tim Geithner at the Fed, with Congress, ultimately was an example of something that we always lament as not being present in Washington, and that is bipartisan cooperation. Talk a little bit about that, what it was like to, in that crisis, work with people who were coming from different place politically and trying to coming up with something that would work.

Mr. KASHKARI: You're exactly right. In the two years I was at Treasury before we went to Congress for TARP, I had grown very skeptical of Congress' willingness and ability to make tough decisions. And you'll see, it'll be in Hank's book, I was actually against us going to Congress, because I was afraid we wouldn't get the authority. We'd ask for this authority, they'd say no, and that we'd do more damage by asking. But I saw the best in our political system. In a time of crisis, people from both sides of the aisle put politics aside and came together to do something very unpleasant but that was necessary, absolutely necessary. And so again, I think it--in many ways it was the worst time--one of the worst times in our country's history, but it was in many ways the best time, watching all these people come together to put out the fire. And I feel very good about that. You know, we didn't know that our programs would work. Sitting here today, a year later, I feel blessed that our programs appear to have worked; Treasury's, the Fed's, the FDIC's. But at the time, we were making our best shot and we were hoping they would work, but we didn't know.

HARWOOD: What is you--in your view is the evidence that it has worked? Because a lot of people look at what's happened and they say, `We bailed out Wall Street, now they're giving record bonuses to people on Wall Street,' the whole pay, compensation issue is generated some populist backlash. And unemployment's 10 percent, even as the Dow hits 10,000. What has worked?

Mr. KASHKARI: Right. Well, there's no question that the financial crisis has severely damaged our economy, causing the terrible recession and the terrible job losses. But it would have been so much worse. You know, if the financial system had collapsed, businesses of all sizes--not Wall Street firms; industrial companies of all sizes wouldn't have been able to access funds to pay their employees, who then wouldn't have money to pay their bills. It would have cascaded through our economy, leading to economic devastation. As bad as it is today, it could have been so much worse.

HARWOOD: Unemployment would have been much higher?

Mr. KASHKARI: In the Depression, it was 25 percent. I have no reason to know if it would have been that high or maybe even higher. And it could have taken many, many years to come out of that. Nonetheless, as you said, we still faced a very tough recession. Unemployment is awfully high, and it's going to stay high for quite a while, and the American people are suffering because of it. And, you know, we have a long, hard road ahead, but at least we know now that we think we've taken the deepest risks off the table. The risk of a collapse is behind us, but we still have real economic challenges. Not just unemployment, which is very serious, we obviously have huge, looming fiscal challenges that we need to deal with in the future.

HARWOOD: The criticisms of what you all did and what continues to be done--I've alluded a little bit to them--but that Paulson shifted gears on what the bailout was going to be, that he didn't communicate clearly to the American public what was going to happen, that a mistake was made in not bailing out Lehman Brothers and many others. What, in your mind, when you look critically at what you all did, what do you see as mistakes?

Mr. KASHKARI: Two mistakes stand out for me, and I've thought about this a lot, as I'm sitting in the woods. First mistake is we've always underestimated the length and the depth of the crisis, at every turn. It was longer than we expected and it was deeper. Even when we were on the Hill negotiating the TARP legislation, markets were deteriorating from underneath us. It was very hard for us to get ahead of the crisis, number one. Number two was communications, which is these policy issues are so complex. Explaining them to average members of Congress who have to deal with a wide range of issues, they're not experts in this, or the American people, who are busy with their jobs and their families, is very challenging given the complexity. And then we had different audiences we were trying to speak to. When we were up on--at Congress trying to get this authority, on one hand we wanted to tell the American people just how terrified we were, what the consequences would be if we didn't act, because that would catalyze support. On the other hand, we didn't want to terrify the markets even more than they already were. So we had a very complex issue and different audiences with different messages, too, and that made it very difficult. And, you know, in hindsight, there are a lot of things I wish we could do differently sitting here today. But given the wide range of possible outcomes, where other places we could be today, I'm really happy with where we are. Mistakes and all, warts and all, you know, what we did, I think, worked, and we feel--I feel good about that.

HARWOOD: One of the issues that hung over some of the response of the government was Hank Paulson had come from Goldman Sachs, you'd come from Goldman Sachs, Bob Steel, though he later left the government, had come from Goldman Sachs. People talked about "Government Sachs," too much intermingling between the two. How much of that was an impediment to your response to the crisis, and was there a real objection, a legitimate objection to the ties between that firm and the government?

Mr. KASHKARI: I think that the perception is important, because perception--people's perception affects their confidence in you and your confidence in your ability and your team's ability to make decisions and do the right things. And so it obviously has an effect. I think that it's a cultural issue. Why there are so many people from Goldman in government? The nature of the people that they recruit, the nature of the culture of the firm encourages people to want to go into service. You know, I personally had had an interest in government ever since I was a kid, watching Sunday morning talk shows with my father, honestly. And, you know, when secretary--when Hank got called to be Treasury secretary, I called him up and I said, `Look, I want to come with you. I don't care what you have me do.' And he brought me down with him then in July '06.

HARWOOD: Did you ever regret saying that to Paulson?

Mr. KASHKARI: No. But...

HARWOOD: Even at the worst time?

Mr. KASHKARI: Even at the worst time. As tough as it was, you know, we learned a lot about ourselves, we learned a lot about our country and our political system. And even at the worst times, my--probably some of the worst times were after some of my hearings in Congress, where I just got beat up like I never expected, and I just locked myself in my office and just decompressed for a couple hours. Even at those times we knew what was at stake, and it was a privilege to get to play a role and to serve and to try to do some good and hope that our action would be successful.

HARWOOD: What was going through your mind when you were sitting in a hearing in Congress when Elijah Cummings of Maryland raised the question about whether you were a chump?

Mr. KASHKARI: It was--first thing that went through my mind is, `Did he just call me a chump? Did he--did I hear that right?' And the second thing that went through my mind was, `No matter what happens to me, just remain calm. You know, I'm now one of the faces of this program. I need to represent us well. I need to'...

HARWOOD: But you haven't had a second where you wanted to call him something back?

Mr. KASHKARI: No, I never did. I just said, `You know what, it's times like this when we're tested, and I'm being tested and that's OK. I just need to remain calm and give him a thoughtful response.'

HARWOOD: Tell me--you've watched and assisted the Obama transition from Bush. How much different do you believe the--Obama's response to the crisis has been than it would have been under a Republican administration, had Republicans won the election?

Mr. KASHKARI: I don't think it's that different. I think--I give President Obama tremendous credit for, first of all, appointing Tim Geithner as Treasury secretary, and then for reappointing Ben Bernanke. We're both--we're very lucky to have had Hank and then Ben and Tim in their seats. They're the right people in the job. And so I think...

HARWOOD: Better to have Bernanke than Larry Summers, who had been considered as the other potential alternative?

Mr. KASHKARI: I think Bernanke is the single best person in the world to serve as Fed chairman right now, and I think we're very lucky to have him there. And so I think between Tim and Ben, they've provided tremendous continuity in our policy response. I think that in fairness, some of the messaging is probably a little bit different, and I think the Bush administration or the McCain administration may talk about things a little differently than the Obama administration. But I think the substance of the actions are very consistent. And again, it's an example of the bipartisanship which this crisis has brought about.

HARWOOD: Meaning there would be less populism than we've heard in the rhetoric?

Mr. KASHKARI: I think perhaps. I think that, you know, both--you know, Tim Geithner's a very smart guy, Larry Summers is a very smart guy. They know what we need to substantively. I think that the way that a Democratic administration talks about certain issues is probably a little different than the way a Republican administration does, and that's appropriate, and that's to be expected. But the substance of the actions, I think, are very consistent, and that's been important.

HARWOOD: Well, speaking of the substance, the administration enacted, with help from Democrats in the Congress, a stimulus package of about $800 billion. Republicans almost uniformly voted against it, criticized it as a waste of money. Is that criticism, in your view, on target and legit, or is it just politics, and a stimulus of that size and of that shape is what we needed?

Mr. KASHKARI: I think we needed a stimulus. You know, I am not a proponent of big government spending. I think we need to get control of our fiscal challenges. But in a big picture, the housing market damaged our financial system, which then triggered the recession and damaged our economy. And as Americans lose their jobs and fall behind on other kinds of loans, it further damages the financial system. So it's a vicious cycle. To break the cycle, you have to stabilize the financial system and the macroeconomy, and so I think that the one-two punch of financial stability and then stimulus was important. I think some of the criticisms were that it wasn't designed perfectly. But in some sense, I think we're getting lucky, because the stimulus did not hit as fast as we would have liked, but I think it's a good thing that stimulus is going to keep trickling out.

HARWOOD: The time-release aspect is good.

Mr. KASHKARI: It's actually good in hindsight. You know, at the time we wanted it to come more quickly, but I think now it's a good thing that we're going to have some stimulus in 2010.


Mr. KASHKARI: Go ahead.

HARWOOD: What do you think, as you look forward, is the near-term course for the economy, and what are the greatest risks going forward?

Mr. KASHKARI: I think the near-term course, our outlook is very moderate growth. You know, we are beginning--you've probably heard of this, a deleveraging process. Consumers are now starting to pay down their high debt levels. That means that consumers are going to have less money to spend on other things while they're paying down their debt, and that deleveraging is going to be a headwind against economic growth. So my outlook, although we may have individual quarters of strong growth, is a very, very moderate recovery, which means that our recovery is fragile, and shocks could tip us back into recession. You know, oil could spike again, could go back up 100, 120, 150. So any number of shocks could tip us back into recession. So between that, the deleveraging and the enormous fiscal challenges we face, I think we're going--we are going to be in for a period of moderate growth for the foreseeable future.

HARWOOD: You talked about populism and the Obama administration. They're trying to get the balance right between supporting the stability of the financial system with being responsive to the anger of Americans at big bonuses after firms get bailed out. Do you think they have that balance right? And what is your feeling about those record bonuses? Do you think that people on Wall Street are not doing the right thing, are not being responsible in how they're approaching compensation in the wake of the crisis?

Mr. KASHKARI: I completely understand the anger of the American people. What people on Wall Street need to remember is that the vast majority of Americans did not create this crisis. The vast majority of Americans did not buy homes they couldn't afford or make risky investments. Yet every single American is paying for this through their taxes and through the recession. So the anger is understandable and justified. It's hard to know where the right balance is in terms of how you talk about it and some of the messaging around this. Ultimately, we needed--I think we all got lucky, in some sense, that the financial system is stabilizing and the economy appears to be stabilizing now, because if we had to go back to Congress for some new authorities it would be very, very difficult. And the populist rhetoric could make it more difficult to get new authority. So hopefully we don't need any new authorities.

HARWOOD: But forget the rhetoric. What about the substance? Wall Street firms are on track to pay $140 million in bonuses. Is there something wrong with that, and whose fault--and if there is something wrong, whose fault is it?

Mr. KASHKARI: It's a very complex issue. First of all, the word "bonus" is a little bit of a misnomer. In some cases it's more like a commission. But the word bonus has a lot of inflammatory rhetoric around that. The American people are angry, but at the same time, I think most Americans don't want the government coming in and saying--getting in the conversation between employees and employers in terms of what's appropriate. I think most Americans believe if you do a good job and you make money for your firm and they want to reward you, that's appropriate and that should be a private discussion. What they don't like having is taxpayer dollars to pay for bonuses on earnings that are later proven to be false. And so I think it's a very complex issue even for Americans who are angry about it.

HARWOOD: But it sounds like you don't really fault the Wall Street firms for what they're doing right now.

Mr. KASHKARI: I think what they're doing right now is--you know, if we came down very hard on compensation on Wall Street firms, let's look at the alternative, and we drove traders to hedge funds. That would make our system less stable, not more stable. And then if we clamp down on hedge funds and we drive them offshore, that may make our system less stable, not more stable. So I...

HARWOOD: But when you talk about government officials acting as patriots, working really hard, doing the right thing for their country, are people on Wall Street doing that?

Mr. KASHKARI: No, they're not. I mean, I think people on Wall Street are doing what most people are doing, which is looking out for themselves and for their families. I don't expect every American to be a patriot and every American to want to--you know, I took a huge pay cut when I went into government. To me it was a no-brainer. I'd get wonderful experience, I'd get to serve my country. But it's not for me to say that everyone should do that, and I don't think it's realistic to say every American should take a pay cut because it's good for their country. I do think Wall Street firms need to show more sensitivity. Every single Wall Street firm, despite their protest today, every single one benefited from our actions. Every single one. And they need to recognize that. And when they get up there and say, `Well, we didn't need it,' that's bull. They did need it. And they're all happy with the actions that we took, and they need to show restraint today.

HARWOOD: The Obama administration has an ambitious proposal to regulate the financial system. Some streamlining of bank regulation, adding a systemic risk regulatory function to the Fed and a council of regulators, trying to shift the compensation incentives to discourage excessive risk-taking. Critique that proposal in substance, whether you think it would make a big difference for the better in the financial system or not.

Mr. KASHKARI: I think it's a good step in the right direction, but I don't think--the crisis is still too fresh. I don't think we know enough today to know what the right answers are. I think it'll take three or five years of dispassionately studying the crisis to figure out what the right answers are. Let me give you a couple examples. Too big to fail. This problem is now well understood. The proposals to deal with it range from increasing capital requirements to breaking up the firms to restricting what actions they can participate in. There's far from consensus on what the right answer is. And that was one of the biggest vulnerabilities that was exposed by this crisis. And even that, we don't know what the right answer is.

The systemic risk regulator. I agree that the Fed is better equipped than any other government agency to serve that role. That's the easy question. The hard question is, what new tools do we give the Fed to deal with any risks that it identifies? Do we give it permanent TARP-like power to be able to buy assets and inject equity? As you know, that would be extremely controversial. But imagine if we don't? Imagine if we tell Ben Bernanke, `You're now the systemic risk regulator, but we're not going to give you anymore tools to deal with any risks you identify.' That also doesn't seem to be a good solution. So these are the right topics, but I don't think we have the right answers yet.

HARWOOD: Well, does that mean that you think President Obama is wrong when he says he wants this enacted this year or next year, and that rather the better thing to do is let the interventions that have taken place work, the stimulus work, watch the system over a of couple years and then reform the regulation of Wall Street?

Mr. KASHKARI: It's hard because it's a political calculus, which is he wants to seize the moment while there's political will. And I understand that desire. The right answer may be a combination of both, which is make some changes today and then two, three, five years from now demand that our leaders lead, don't let this issue drop. What we don't want to do is make a bunch of changes and then give ourselves a false sense of security that we made the right changes. We need to look at this again in three or five years.

HARWOOD: So maybe do something now, but not consider that the end of the chapter?

Mr. KASHKARI: Correct. Correct.

HARWOOD: Let me close by asking you to critique Tim Geithner, who you worked very closely with in the crisis. He got some flak early on for communications problems, not displaying command at Treasury. How do you think he's doing?

Mr. KASHKARI: I think he's doing great. I think Tim Geithner was the right person to be Treasury secretary. He understands these issues as well or better than anybody else. He's very smart, very substantive, focused on finding the right answers and getting them done. And I think he's doing a great job. It was a privilege to get to work with him before he became Treasury secretary and then for a few months when he was Treasury secretary.

HARWOOD: Neel Kashkari, thanks so much for joining us.

Mr. KASHKARI: Thank you. I enjoyed it.

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