We're All Hedge Fund Managers Now

Aside from the far left, most of us understand the words of Hayek as highlighted in our Sep/19 sketch, that government intervention of any sort is suspect, that the foundation to government planning means a limited group of individuals deciding the relative importance of different ends for the rest of us. Unfortunately we have arrived at a point in time when we must ignore that warning, confronted with events of such gravity that to ignore them would mean a near-immediate decline in the personal net worth of every one of us. Really.

We all now run a hedge fund, the largest in the world. Pauslon is president of that endeavor. Maybe we’ll do alright.

Taxpayers have rescued the twins and taken a near 80% stake in the business. That means at least $25bln down the drain, already allocated to fiscal ‘09 and ‘10. We may never recover a cent, who knows. Taxpayers "rescued" Bear and through the Fed took on the risk that $29Bln in sub-par assets, which may eventually regain some value (unlike most hedge funds, we don’t have a problem with just sitting on stuff; we can weather it). As taxpayers we tossed Lehman to the hyenas. And now as taxpayers we orchestrated the largest bail out ever of some of the most miserable dogs on wall st, the kind that wouldn’t bother to pxxs on you if you were on fire. We are about to begin buying their so-called toxic assets to deliver relief. But is this necessarily a bad deal for us. Are we out $700bln? I mean, never more, a loss, history?

The answer is no. First, our fund may be able to eventually sell this stuff at a profit. Maybe. But in the meantime we will do just fine on the "carry," that is, the difference between what we will pay to borrow to get the $ with which to buy these assets, and their yield. Where do we get the $700bln? We borrow it, through a range of Treasury securities that practically every large international investor wants to own right now - still the securest investment in the world, all the more attractive in times of trouble. So we may have to pay 3 or 4%. But the paper we will own yields anywhere from 7% to 10% or higher (no one knows yet because it depends on the price we pay). We can hold it to maturity if we have to, or, until the housing market recovers. As Bloomberg illustrated, if we borrow at 3 or 4% and buy assets at 10 or 12% on an investment of $700 bln this will generate some $40 to $60 bln annually.

Peter Orszag, the director of the CBO told the House on Sep/24 that the budget would not reflect the $700 bln "bailout". Instead, there would be an estimate of the net cost to the government equal to the purchase price minus the expected value of future earnings from holding these assets, and minus the proceeds from eventual sale. So that is good for our books, reported results.

I think we’ll do alright.

Robert Craven