Saving Private Equity


Treasury Secretary Tim Geithner is said to be looking to the fox to help rebuild the hen house.

Treasury officials are said to be asking private-equity  and hedge fund money to step in and create trading ranges for some assets, which may be the true shock and awe of the plan that markets are looking for.

After last week’s road show of beating up Wall Street over executive pay and speaking of protecting the taxpayer with mortgages modifications, the details to be released tomorrow have a bias to tip the scales toward the banks.

While Geithner was New York Fed President last year he instituted The Term Asset-Backed Securities Loan Facility (TALF), which in November was funded with $200 billion to help liquidify the student loans, auto loans and credit card loans market.

Treasury officials are hinting that this program will be expanded exponentially through the Fed by leveraging $100 billion of TARP funds through buying treasury notes. The officials believe that acting proactively in guaranteeing the consumer loan paper will entice hedge funds and private equity to buy the underlying asset-backed securities for this paper to spur future lending in the these consumer loans as well as the commercial real estate paper market, which most analyst see as the next shoe to drop.

According to hedge fund industry players Treasury will guarantee returns on the paper and repurchase illiquid paper from industry on losing traunches.

News of this plan has been circulating in the markets for about a week as Treasury officials worked with industry on the plan. The few publically traded companies who would benefit have seen large moves to the upside. Blackstone Group, whose founder Pete Peterson was an early supporter of President Barack Obama has risen 23.8 percent, Fortress Investment Group rose 23.6 percent and Blackrock was up almost 11 percent in the last week.

This a change from Treasury wanting to entice private-equity and hedge-funds firms into buying the toxic mortgage paper on the banks balance sheet, because the pricing of this paper would have needed to be so drastic from the current marks that the feds would need to inject a huge supply of capital in common shares to buoy the flagging stocks. These injections would lead to a de facto nationalization of banks.

“Private capital is reluctant to become involved in bank equity because of the treat of nationalization,” said Bill Gross of Pimco Capital.

“Treasury Secretary Geithner needs a clear plan of steering away from bank nationalization so that private investors can come in,” Gross added

Also if Treasury put a line in the sand with bank guarantees –– by putting a floor on the marks on the banks balance sheets through a bad bank or aggregated bank –– then it would lead to an incremental move toward nationalization, without the shock and plenty of awe as banks’ market caps move toward zero, which both Geithner and Senior Economic Advisor Larry Summers both refuted over the weekend.

“Credit markets in this country are not working right,” said Summers, and “we’ll do whatever is needed,” to fix them.

Geithner is looking to get ahead of the markets with consumer loans and commercial real estate before rising unemployment rates make this paper as toxic as subprime mortgages.

Geithner is also said to be committed to mortgage moderation as The Post reported exclusively last week to stem the tide of home foreclosures. Under the “Mo Mod” plan foreclosed homes can be reassessed at true market value for resale, which will allow banks to securitize these loans to spur additional lending.

Modifying existing mortgages to keep owners in their homes through extending the term of the loan as well as the rate of the note allows the existing underlying paper to be valued better in the derivative markets.

For more on Wall and Washington and the cratering economy see:


One thought on “Saving Private Equity

  1. Pingback: Auto Industry Bailout » Blog Archive » Microsoft Cuts 5000 Jobs, Michigan’S 10.6% Jobless & Obama To …

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