Karl S. Okamoto
September 24, 2008
Treasury Secretary Henry Paulson’s $700 billion bailout of Wall Street essentially places the federal government at the helm of the world’s biggest hedge fund.
After all, isn’t that what this bailout is proposing to do with taxpayers’ money?
Under the plan, Paulson will invest $700 billion – at his discretion, with no strings – into so-called mortgage-related assets.
That sure sounds like a hedge fund.
So shouldn’t we – or the fiduciaries we’ve elected to Congress – ask some of the same questions an investor would ask before putting his or her money into a hedge fund?
For example: Secretary Paulson, how do you plan to make money?
Apparently, the plan is to buy mortgage-related securities and hold them until the current crisis passes. Everyone understands that a buy-and-hold strategy can make money provided that you buy low and sell higher.
But since the purpose of this new fund is to allow banks to unload inflated securities in order to avoid significant further write-downs, Secretary Paulson is looking to launch his new hedge fund by buying in at prices that are higher than the prevailing market price.
In other words, Paulson seems to be overpaying.
Of course, it may well turn out that in time, as markets stabilize, he still may recover his costs and even earn a profit.
But Paulson is certainly not starting out with the goal of making money.