Treasury Secretary Hank Paulson made his bones pleasing his former colleagues on Wall Street by using a chunk of $350 billion taxpayers' TARP to pay $16 billion in bonuses to the bankers who got us into this mess. But let's face it, bankers only make tens of millions in bonuses. The really big bucks -- that is the annual earnings in excess of $1 billion -- go the the hedge fund and private equity runners. And that's where Paulson's replacement is upping the ante.
Rather than pandering to bankers who will now have their salaries capped at $500,000 if they take TARP money, Tim Geithner is going to make $1 trillion of taxpayer money available to those hedge fund honchos at the very pinnacle of the Wall Street food chain. To be fair, not all that $1 trillion will come from Treasury. In the initial phase, the Treasury will provide just $20 billion and the Fed will provide $180 billion -- but the Treasury could increase its commitment to $100 billion to allow the Fed to lend up to $1 trillion.
What is Geithner proposing to do with that money? It will use the Term Asset-Backed Securities Loan Facility (TALF) to make loans to hedge funds and private equity funds which would then buy new asset-backed securities. To his credit, Geithner is trying to solve a problem here -- specifically the evaporation of the $1.6 trillion securitization industry which had financed about half of U.S borrowing. But in my estimation the securitization market should cease to exist -- which, given the virtual evaporation of demand -- is also the verdict of the "free market."
If hedge funds and private equity firms are not eager to buy asset-backed securities without the benefit of Fed debt, I am not at all clear why the borrowing would make these assets any more attractive. But if, by some chance, Geithner's plan should work, it strikes me as bad public policy to put $1 trillion of taxpayer money at risk to further enrich the billionaires whose recent huge losses have been decimating the portfolios of investors around the world.
Hank Paulson was not a stellar Treasury Secretary and it does not seem that great an idea for Geithner to be using $1 trillion in taxpayer money to pander to the very richest of the rich.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.
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