Sunday, March 22, 2009

United Hedgefund of America

It appears from leaked reports of Secretary Geithner's plan to be released this coming week that the official policy of the Treasury Department has become, if you can beat 'em, join 'em. The United States will buy risky and distressed assets in the hope they are substantially undervalued. One trillion will make us all partners in the worlds larges hedge fund.

$150 Billion comes from the TARP in the form of equity, $820 Billion will come from the FDIC in the form of debt and $30 billion from hedge fund and pension fund managers hired to run the program. The funds will be leveraged up providing adequate incentive to keep the private managers interested. The typical hedge fund operates on a 2 and 20 principal with fees of 2% of capital and 20% of profits. In this program, Treasury will be paying 0% of capital and 17% of profits.

The purpose of the structure to be announced will be to remove $1 trillion of risky, information impaired assets. This presumably will enhance the ability of banks to lend and raise the prices of the risk assets.

Based on the trillions destroyed in the private sector this could well be inadequate to fill the hole, but staunching the bloodletting of asset values while adding public trillions may cauterize the financial wound.

The market effects of this plan I expect will positive. The economy will require much longer recovery time but stabilizing the banking system is needed first. I admit to misgivings of the plan and the phrase, "if one lays down with dogs....," comes to mind.

It is still unclear to me how the various assets will be wrested from the banks which hold them unless either a price is mutually agreed upon or the assets are part of a reorganization plan. I look forward to hearing the plan first hand in a few days.

John Barnyak