Obama to get taxpayers to help hedge funds

Ed Lasky
The credit system has broken down. Banks have cooled on lending (maybe because they are not sure if the Obama administration will force a cram down in the future that would result in their loans being worth much less than they thought?). But the system also relies on hedge funds to purchase loans that banks make and package as securities.

Hedge funds would stand ready to buy these loans from banks, releasing more money that could then be used to make additional loans. Hedge funds-often heavily leveraged-made billions over the years with these types of securities. They often rode a wave of lower interest rates that inflated the value of their holdings. It was relatively easy money (especially if you were sophisticated and large enough to borrow overseas in Japan where interest rates were miniscule).

But they now face an unfavorable risk-reward situation. They have stepped back in the wake of recent losses. The easy money is gone. The solution that the Obama proposes? Subsidize hedge funds with taxpayer dollars.

The Obama administration hopes to jump-start this crucial machinery by effectively subsidizing the profits of big private investment firms in the bond markets. The Treasury Department and the Federal Reserve plan to spend as much as $1 trillion to provide low-cost loans and guarantees to hedge funds and private equity firms that buy securities backed by consumer and business loans.

The program also does not try to change securitization practices that, many investors say, spread risks throughout the world and destroyed financial institutions. Policy makers acknowledge that for now, fixing credit ratings, reducing conflicts of interest and improving disclosure can wait.

Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent.

Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond the 5 percent to 16 percent equity that they retain in the investment.

I have commented before that hedge funds were prime funders of  Barack Obama (see "Obama The Hedge Fund Candidate" ). Senator Christopher Dodd has also been a huge beneficiary of hedge fund dollars over the years. He is the Chairman of the Senate Banking Committee that drafts (or not) legislation regarding hedge funds. Many are located in his home state of Connecticut. Senator Chris Dodd (D-Connecticut) is a "beloved advocate of many of the hedge funds housed in his state" and has benefited mightily from donations from these hedge fund managers. Only Barack Obama edged out Dodd when it came to fundraising dollars showered upon him from hedge fund executives. Now both Barack Obama and Christopher Dodd (who will facilitate the passage of any enabling legislation) will be able to help those who helped them.

George Soros, hedge fund billionaire, was an early and crucial supporter of Barack Obama. He and family members and friends were quite generous (even using a loophole in the federal financing laws to channel additional amounts of money per donor to his campaign ). Soros is also the nation’s largest donor to so-called 527 funds that are activist groups which push a liberal agenda. Legally they cannot endorse a candidate but they can certainly tailor their campaigns to support favored candidates.

Soros’s support extended to helping to pay for the inauguration. More importantly, George Soros is a prime funder of the Center for American Progress-a leading think tank that has placed a variety of key people in the Obama administration (see "Soros-Funded Democratic idea factory Becomes Obama Policy Front "). Is this clout heavy group the one developing ideas to help hedge funds-such as the one using taxpayer dollars to insulate them from risk and allowing them a greater chance to earn huge profits?

Rewarding supporters with taxpayer dollars. A multi-billion dollar earmark that will help millionaires and billionaires. Think these programs will require limits on salaries and bonuses? One doubts.

That is the Chicago Way- the way things are done in Chicago, the nexus of donors and politicians. But now the dollar signs are larger, far larger.



The credit system has broken down. Banks have cooled on lending (maybe because they are not sure if the Obama administration will force a cram down in the future that would result in their loans being worth much less than they thought?). But the system also relies on hedge funds to purchase loans that banks make and package as securities.

Hedge funds would stand ready to buy these loans from banks, releasing more money that could then be used to make additional loans. Hedge funds-often heavily leveraged-made billions over the years with these types of securities. They often rode a wave of lower interest rates that inflated the value of their holdings. It was relatively easy money (especially if you were sophisticated and large enough to borrow overseas in Japan where interest rates were miniscule).

But they now face an unfavorable risk-reward situation. They have stepped back in the wake of recent losses. The easy money is gone. The solution that the Obama proposes? Subsidize hedge funds with taxpayer dollars.

The Obama administration hopes to jump-start this crucial machinery by effectively subsidizing the profits of big private investment firms in the bond markets. The Treasury Department and the Federal Reserve plan to spend as much as $1 trillion to provide low-cost loans and guarantees to hedge funds and private equity firms that buy securities backed by consumer and business loans.

The program also does not try to change securitization practices that, many investors say, spread risks throughout the world and destroyed financial institutions. Policy makers acknowledge that for now, fixing credit ratings, reducing conflicts of interest and improving disclosure can wait.

Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent.

Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond the 5 percent to 16 percent equity that they retain in the investment.

I have commented before that hedge funds were prime funders of  Barack Obama (see "Obama The Hedge Fund Candidate" ). Senator Christopher Dodd has also been a huge beneficiary of hedge fund dollars over the years. He is the Chairman of the Senate Banking Committee that drafts (or not) legislation regarding hedge funds. Many are located in his home state of Connecticut. Senator Chris Dodd (D-Connecticut) is a "beloved advocate of many of the hedge funds housed in his state" and has benefited mightily from donations from these hedge fund managers. Only Barack Obama edged out Dodd when it came to fundraising dollars showered upon him from hedge fund executives. Now both Barack Obama and Christopher Dodd (who will facilitate the passage of any enabling legislation) will be able to help those who helped them.

George Soros, hedge fund billionaire, was an early and crucial supporter of Barack Obama. He and family members and friends were quite generous (even using a loophole in the federal financing laws to channel additional amounts of money per donor to his campaign ). Soros is also the nation’s largest donor to so-called 527 funds that are activist groups which push a liberal agenda. Legally they cannot endorse a candidate but they can certainly tailor their campaigns to support favored candidates.

Soros’s support extended to helping to pay for the inauguration. More importantly, George Soros is a prime funder of the Center for American Progress-a leading think tank that has placed a variety of key people in the Obama administration (see "Soros-Funded Democratic idea factory Becomes Obama Policy Front "). Is this clout heavy group the one developing ideas to help hedge funds-such as the one using taxpayer dollars to insulate them from risk and allowing them a greater chance to earn huge profits?

Rewarding supporters with taxpayer dollars. A multi-billion dollar earmark that will help millionaires and billionaires. Think these programs will require limits on salaries and bonuses? One doubts.

That is the Chicago Way- the way things are done in Chicago, the nexus of donors and politicians. But now the dollar signs are larger, far larger.