Tuesday, March 24, 2009

Steve Waldman's dark musings

Steve Waldman (interfluidity) is my all time favourite blogger.  

We disagree on a lot - but his is the only blog I have ever back read every article on.  I really like smart people I disagree with.

Today he has some (very) dark musings about the Geithner plan.   His musing is that conflicts of interest could render the Geithner funds liable to massive fraud.

I agree.  

I remember chatting to a journalist about the Geithner plan and I suggested that one of the big problems is that almost everyone is conflicted – and conflict-of-interest with that much government participation poses a very serious fraud risk.  

The solution of course is to find non-conflicted funds.  

May I suggest – and I am only half joking here – Bronte Capital. 

The only problem is that the criteria for eligibility specifically include only those with a conflict of interest.  Here they are:

Fund Managers will be pre-qualified based upon criteria that are anticipated to include:

• Demonstrated capacity to raise at least $500 million of private capital.

• Demonstrated experience investing in Eligible Assets, including through performance track records.

• A minimum of $10 billion (market value) of Eligible Assets currently under management.

• Demonstrated operational capacity to manage the Funds in a manner consistent with Treasury’s stated Investment Objective while also protecting taxpayers.

• Headquarters in the United States.

Given that we are start-up we fail the first, second, third, fourth criteria.  We are Australian and we fail the fifth criteria.

Now did I once say something positive about the Geithner plan?

Actually I have too much integrity to withdraw that – but the dark musings are to be taken seriously - and indeed the criteria described above are precisely the criteria you would pick if you want conflicted people to rip off the taxpayer.



septizoniom said...

two items support the "dark musings"

1. the long time lag (about 6 weeks) from the original announcement (early feb) to yesterday; the details offered were quite modest (and missing in some cases, such as the critical haircut for legacy AAA mbs under the expanded TALF). the details could not have taken 6 weeks to formulate, but perhaps the rounding up of a coalition to support would.

2. the almost immediate announcement of PIMCO and Blackrock of support for the plan (one would think a few days reflection would be prudent, unless you have already been working with the government to announce support).

Jeff R said...

I had the same thoughts as soon as it was leaked.

Why not start a fund of US taxpayers - or anyone really - collect the minimum ($500m - might take awhile, but surely do-able) and have the shareholders *elect* management who would choose which securities to buy with (mostly) the US governments money.

That would prevent conflict of interest of the firms and give all of us "a tidy 16.7% return" if Nero's reasonable assumptions can be trusted.

I'm in.

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