Does the bailout have you down? If so, Daniel Gross of Slate and John Berry of Bloomberg have the perfect cheer-me-up tonic in their clever redefining of the bailout. First, Daniel Gross tells us that the bailout is like a hedge fund for the masses:
The Wall Street bailout is alive again...What's most interesting about the Emergency Economic Stabilization Act of 2008 is just how much it reads like a prospectus for a hedge fund. In the past, hedge funds—secretive pools of capital—were open only to qualified (read: rich) investors. But with the stroke of a pen, President Bush will soon make all American citizens investors in the world's biggest fund—and a democratic one at that. Taxpayers won't just be the investors. We'll own the management company, too. Best of all? For at least a few months, we'll have the former CEO of Goldman Sachs run our investment for a very small fee. Call it the "Universal Hedge Fund."Universal hedge fund coverage for people like me. I love it! But wait, it gets better. Not only is this endeavor a hedge fund for the masses, it may just be one of the more successful ones in history. John Berry tells us how this is possible:
Hedge funds use leverage: That is, they borrow money to amplify their returns. The Universal Hedge Fund will use massive leverage, borrowing up to $750 billion, which it will use to buy up distressed assets. The Universal Fund might best be described as a multi-multistrategy fund. Its stated goals are to maximize returns to its investors while promoting general market stability and bolstering the crippled housing market.
There might be a gem in the Treasury's plan to buy $700 billion of dubious mortgage-related assets.Now that it music to my ears! I just hope that if this investment income does appear it is not earmarked for new spending, but used to reign in the existing structural budget deficit.
Call it the biggest carry trade in history. It might just put as much as $60 billion a year in the government's coffers.
The government will get the $700 billion by selling a range of Treasury securities to the public with yields of 3 percent to 4 percent. With investors around the world clamoring to buy risk-free Treasuries, the market should be able to absorb the jump in supply without a significant increase in yields.
Contrast that with likely yields on the troubled assets for which there currently is no market. No one can be sure how big a haircut there will be on the assets Treasury buys, though if it's 50 percent or more, their yields should be 10 percent or higher.
That is, the government will be borrowing at 3 percent to 4 percent to buy assets yielding 10 percent or even 12 percent. Conservatively, that spread on an investment of $700 billion should generate income of $40 billion to $60 billion annually.
(1) Print money
(2) Buy overvalued assets in a declining market
Why didn't we think of this before?
This is all very optimistic, but I remain unconvinced. How will the Treasury know how to accurately price these assets? Everyone simply assumes that the plan will be successful so long as we buy the assets at the right prices, but nobody seems to know the right prices.ReplyDelete