Sunday, March 29, 2009

Good Times for PEU's

On Meet the Press Treasury Chief Tim Geithner said private investors in his proposed public-private partnerships (PPP's) could lose all their money. With Uncle Sam loaning six times equity and investing up to 4/5ths of equity capital, that's not a big risk. Private investors stand to lose their 3% equity in the PPP enterprise. They stand to gain a double digit, even 25% rate of return.

With $3 trillion in distressed assets, supply could exceed demand for years. That means rock bottom prices in an elastic market. I guess that's better than no market, but it feels like Tylenol putting the bad stock out through a resale chain.

How much more financial junk will wash through Tim's PPP's? He proposed rules allowing Treasury to wind down nonbanks, hedge funds and private equity underwriters (PEU's). Will it happen under massive investor redemptions or when shadow banks hold too much trash? Can they just hand their problem over to Uncle Sam vs. declaring bankruptcy with a court managing an orderly wind down?

Time will tell if taxpayers continue to fund private sector losses and executive incentive compensation. The trend isn't pretty. Corporafornication is always disturbing to glimpse.