I'm a hedge fund manager. A small, but safe and, even now, profitable one. The business part of me wants in on an incredible giveaway that Treasury Secretary Geithner and the Fed are now planning through the "TALF" program to bribe big hedge funds to increase lending availability. The taxpayer part of me is sickened by it.
You should be sickened by it also. In fact you may be, because they'll be giving away enough that it could pay for universal healthcare, instead.
This New York Times' article intro from last Friday should concern everybody:
The Obama administration hopes to encourage new lending by effectively subsidizing the profits of hedge funds and private equity firms that serve as bankers to the banks.
The potential risk to taxpayers: Up to $1 trillion. The potential profit to the taxpayers as "investors"? Zero. Zip. Nada. In fact, probably guaranteed $100 billion losses.
Why would Geithner and the Fed want to do this? Because banks normally sell ("securitize") their loans to investors like hedge funds and private equity funds. But they took major beatings because of how hyper-leveraged they were on such securitized loans, so they're a little gun-shy and short on cash now. This means the banks can't make as many new loans because they don't have anybody to sell them to now.
Geithner plans to bribe the hedge funds and private equity firms to start buying them again by giving them an offer they'd be crazy to refuse, since it's essentially a transfer of tax-dollars to their pockets:
Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent.
1.5 percent to 3 percent? Sign me up. They get to use that essentially free money from the Fed to buy as many of those securitized loans as they can -- loans that yield on the order of 7-18% (you know, how much you pay on on your credit card). The funds only have to put between 5 to 16 percent down.
A hedge fund could make an awful lot of money using subsidies from the Fed that way. But it gets better for the hedge funds than that. A lot better. To make sure there's extremely little risk to them, Geithner is proposing that they would not be liable for any losses beyond the 5 to 16 percent they put down.
Who gets the other 84% to 95% of the risk of the up to $1 TRILLION they are proposing on lending this way? Taxpayers like you and me.
The Times reported that Simon Johnson, the former chief economist at the IMF, said:
... many people might take a dim view of the TALF program because it provided government subsidies to investors like hedge funds. Investors who borrow from the Fed could enjoy annual returns of 20 percent or more. "The TALF," he said, "raises a lot of questions."
Yes it does raise a lot of questions. Especially since in the very best case it will cost taxpayers $100 billion for those subsidies because the Fed will be lending funds $1 trillion at rates substantially lower than the government can borrow. In the worst case, it could cost a lot more.
This is a very bad deal for all of us.
Yes, the banks need to be able to sell their loans to somebody else so their capital is freed up to make new loans. Geithner is right about that. But there's no reason it has to be to the same hedge funds and private equity firms that helped get us into this mess in the first place.
It would be much better for the government to buy the securitized loans itself. Taxpayers' risk would be about the same, but if we paid fair prices we would break even and could even profit, rather than having a guaranteed $100 billion loss. And there are probably other ways to do it that wouldn't give away the bank, too.
The government has already lost a reported at $70 billion or more by purchasing toxic assets at well above-market rates using first $350 of TARP money that Henry Paulson's Treasury Department used. We can't afford for Geithner's Treasury Department to do even worse.
About that $100 billion – that's about what many people estimate it would cost to provide universal healthcare. That's a lot better thing to do with the money than to give it away to hedge funds.
Even mine.