A burden rightly to be borne?
By Daniel M. Ryan
So far, hedge fund participation in the U.S. government's TALF program has been basically nil. Two reasons have been advanced to explain why. First of all, the AIG-bonus uproar has introduced an unacceptably high political risk or deterrent. Secondly, forecasted new regulations of the hedge-fund industry will make for too many ties that will bind any would-be hedge fund participants. Both have been put in morality-play form in the business media, and can be likened to someone threatening the doctor that's about to operate on him.
Common sense suggests one of two alterative reasons. Firstly: despite the seemingly attractive prices relative to cash flows, and loss-limiting government backstop guarantees, the TALF assets really don't rate an acceptable bid. Co-operating with the U.S. Treasury in this way would result in limited losses, but losses nonetheless. Secondly: the assets can be scooped up at an overall profit, but any qualifying hedge funds have been too blinded to see it. Because they've been so burned for so long, they only perceive an 'opportunity' to go from one loss to another.
The last pair makes for an either/or combo. Whichever one you think is plausible will show in your evaluation of a program proposed last Monday: letting the general public invest in TALF-shielded securities through mutual funds or ETFs. Those intermediaries would take the place of the shied-away hedge funds.
It's interesting that no-one has portrayed it as a way to take advantage of 'Uncle Sucker'. On the other hand, it has been criticized as an attempt to bilk the public by 'Uncle Sleazebag'. (One's here.) So far, a call to the public to rescue the TALF program has not met with any great enthusiasm.
Wrong Time, Wrong Securities?
Once again, common sense explains why. If experts shy away from distressed assets, even with the airbagged terms TALF offers, then why shouldn't the general public? In addition, the message seems somewhat mixed: help the government out, and get gains while doing so. The hedge funds' refusal makes the second part dubious, hence the air of 'Uncle Slimeball.'
Certain earlier loan appeals to the public were far more successful. I refer, of course, to Liberty and war bonds. These issues were successes because: a) outright wars prompted the calls; b) the issues were straight, and straightforward, government obligations. The credit crunch has been serious, but it doesn't have any Valley Forge feel to it. The proposed securities, emerging from the private sector, don't have the direct-to-government tug associated with a funding emergency. If the fire truck isn't brought in, how serious can a cry of "Fire!" be?
In contradistinction to the above, there is a funding crisis that is amenable to the national-call approach. Recently, the government of China has been critical of U.S. dollar policy…as one of the U.S. government's largest creditors. If the Chinese government decides to forego holding its approx. $700 billion worth of U.S. Treasury securities, the U.S. government would be hobbled in its time of greatest funding needs. There's already a class of security that would fit as a replacement: savings bonds. Although less ubiquitous than Canada Savings Bonds, they do exist. There's even a choice between floating rate and inflation-protection adjustments.
A sustained call to buy savings bonds, for a straight, clear and genuine funding emergency, would probably be greeted with enthusiasm. In addition, a call now would play into the aftereffects of the recently-ended credit binge. Americans have been building up the savings, largely as a fear-based deviation from normal free-spending ways; pushing savings bonds as patriotic would turn that negativity into positivity. Implying it's patriotic to save would inculcate the sea-change that many think necessary nowadays.
If the purpose is repatriation of debt from foreign hands, then a purchase fund can be set up with the proceeds. Failing any transactions from foreigners, the funds could be used to refinance any federal government debt.
This initiative won't fly unless extraordinary measures evince exigent circumstances. Ads alone, no matter how stirring, wouldn't suffice. If there's a real funding crisis, then restrictions designed for normal times should be dropped. It would also be sensible to resurrect the lay-away plans used to sell the original war-bond issues - especially if a subsidiary goal is to make the youngsters savers at heart.
The Government of Canada already has a tax break that would fertilize any such initiative in Canada: the Tax-Free Savings Account. This measure could be retooled to make it savings-bonds only, as an exigent measure for threatening circumstances.