Friday, March 27, 2009

Benefits of Federal Backstopping of PEU's

If "too big to fail" is a problem, why not break up big financial firms? Treasury Secretary Tim Geithner ignores the obvious solution. Instead he offers a chance for wider taxpayer sponsored corporafornication to insurance companies, hedge funds and private equity underwriters (PEU's). Bloomberg reported:

Hedge funds and buyout firms would also fall under the purview of a new regulator that would identify companies deemed “systemically important,” or capable of wreaking havoc on financial markets. Officials would have the authority to seize these firms if they threatened the markets, much as they do now with insolvent banks.

There is a process to unwind "run amok" financial firms. It's called bankruptcy, but that doesn't come with taxpayer bailouts. For the global big money boys to hang on Uncle Sam's bottomless tit, it has to run through the Executive Department. How toothy is Geithner's regulation, the public tough side of getting Uncle Sam cover your backside?

Geithner proposed requiring hedge funds and private-equity firms to register with the U.S. Securities and Exchange Commission and to disclose information about their holdings.

Once registered, the investment firms, including venture capital companies, would have to report information about their trades and counterparties to the SEC. The agency would share the data with the systemic-risk regulator, which could restrict the funds’ reliance on short-term financing and limit how much money they can borrow to maximize trading profits. The disclosures wouldn’t be made public.

Tim's toothless solution doesn't involve breaking up too big to fail, but backstopping it in secrecy. But the PEU boys say their is no risk to their operations. Isn't the government responsible for exploring illegal activity? Let's say The Carlyle Group knows one of its affiliates is approaching bankruptcy. What if they gave the word to a Carlyle European fund investing in distressed debt? A quick credit default swap purchase could lessen the Carlyle wide pain of an affiliate implosion. Who monitors such behavior? Back to original assertion of risk-less private equity firms.

While Rubenstein, who runs Washington-based Carlyle, said more regulation was unavoidable, the U.S. private-equity industry’s main trade group said its members don’t pose a systemic risk.

“Private-equity firms invest in companies, not exotic securities and their investors are long-term investors, eliminating the ‘run-on-the-bank’ type of risk that helped
create the current financial crisis,” Douglas Lowenstein, president of the Washington-based Private Equity Council, said yesterday in a statement.

Eliminating the run on the bank risk? Tell AIG Private Equity, which holds a chunk of an imploding Carlyle investment offering involving Freescale Semiconductor. What if AIG's PEU or another distressed investor needs its money back fast from Carlyle? And what if other investors hear of the run? Then Tim Geithner will step up with public money to make the big boys whole. Feel better? Now how else can Carlyle make money in the current reform environment?