Obama’s huge public Hedge fund

President Obama has triangulated with the masters of the universe from Wall Street. His Treasury Secretary this week proposed the world’s largest Hedge fund to be created with around one trillion dollars of largely public money. Yes, one trillion. Why not? It’s a large round number. You are nobody in public finance these days unless you talk trillions.

This Hedge fund will lever private capital raised from Wall Street with large sums of matching public capital, expanded by even more massive sums of public borrowing. In the FT worked example a private investor might put in $6, the taxpayer put in $6 and then the state guarantees borrowing of another $72. All this cash is used to buy up $84 of what used to be called toxic assets from banks, but are now to be called “legacy” assets to make it sound more worthwhile.

I thought it was this kind of massively leveraged hedge fund operation which had gone wrong for the Investment banks in the Credit bubble. I thought we were all trying to stop this type of thing, and have more sobre less leveraged financial activities, so the masters of the universe could no longer lend to everyone at cheap rates and earn mega bonuses on the back of it. I thought we had worked out that such activities led to a big balance of payments deficit and people unable to repay their borrowings.

Apparently, in Obama’s public sector world, having the world’s largest hedge fund trying to make money out of bankers’ past errors is a must have. He is trying to fix yesterday’s problems by adopting yesterday’s mistakes as public policy, doing it all over again with public money.

Let’s try again. There is no substitutue for working through all the toxic assets of the banks. They have to decide which to carry on with in the hope they will be repaid, and which to write off. They have to decide which investments will come good good, which can be sold, and which are now valueless. Switching them all to a taxpayer funded hedge fund does not solve the problem. It just lumbers the taxpayer with even more risk.

Wall Street’s immediate response was very favourable to the scheme, because they hoped it would mean the banks could dump all the rubbish on the taxpayer. Time will tell if this mega hedge fund gets off the ground on the scale imagined. There are still some interesting questions ahead, like which “assets” will the banks want to offload, and how much should the taxpayer pay for them? Then there is the little matter of how they are managed.