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.


  1. Steven_L
    March 25, 2009

    I almost spat my coffee out all over my PC at work when I read about it the FT website the other day.

    What shall we do with all the dodgy securitised debt that led to this massive damaging bout of delevaging? Securitise it again, leverage it up again and find some new mugs to buy it.

    Has anyone considered what happens if it does work? What if the investment banks buy it all with our money at firesale prices and make a mint off it?

    Anyway, I think they should slice it up smaller so we can all play.

  2. Brian Tomkinson
    March 25, 2009

    Why after all this time have the banks and their auditors not agreed a proper value for these so-called toxic assets and written them down in their books? If the answer is that the losses would be so high as to bankrupt the banks then isn’t the conclusion that they are going to sell these assets for a price higher than their own valuation and thereby have less to write off? The game of pass the parcel is continuing but reaching the end where the losses are passed on to those poor US taxpayers.

  3. Bazman
    March 25, 2009

    Turn all these bad debts into lottery tickets and scratch cards. Can’t fail and is as entertaining as it is insulting to the taxpayer.
    Might even play that one.

  4. mikestallard
    March 25, 2009

    Americans assume that because they run the world and all that is therein that they are fireproof.

    Afraid not.
    Spain went bust a just a century after Columbus and Potosi.
    England went bust just a century after Palmerston.
    France went bust a century or so after Louis XIV’s accesson. (John Law).
    Germany went bust just half a century after Bismarck.

    The US of A, though, is different, natch.

Comments are closed.