Addison Wiggin and Bill Bonner wrote the classic, must-read, "The Empire of Debt". The US Empire, the book surmised, had grown economically weak and unsustainable. It has burdened itself with too much debt. Its collapse is imminent.
From the roots of this book has emerged one of the most talked about documentaries: "I. O. U.S.A." (the "O" as in "owe") which highlights the extraordinary debt levels of the US government. A debt that is estimated at USD 410,000 per full-time worker in America - about 9x the average annual per capita income in USA. (Unfortunately, I missed the movie on a recent trip to USA but am hoping to get hold of the DVD.)
Well, the debt levels of the US government just got higher.
A lot higher.
In some shape or form the US government and the Fed (the central bank) have just taken on an estimated US 1,000 billion in debt. Thanks to the guarantees and loans given to Bear Stearns (an investment bank that got its gambling bets wrong); Freddie Mac and Fannie Mae (home loan companies that own 30% of all mortgages in USA and seemed to have mis-priced their risk); and AIG (the world's largest insurance company that used its AAA rating to borrow cheap and insure against the risk of company defaults - collecting premium income which looked like free money, till the defaults began).
While many are mulling the higher costs of this action - just as I have done above - there are a few fundamental differences that lead to some interesting possibilities.
FAT Cat: The world's largest private equity and hedge fund
The most notable feature of this rescue is that the Fed and the US Treasury now own 90% of the equity of the home loan companies and 79.9% of AIG.
The Fed and the Treasury have become, overnight, the largest private equity fund in the world.
The new fund should be called FAT Cat denoting the partnership between the "Fed and Treasury".
And the "Cat" for their well entrenched and smooth political connections.
(Origin: Bombay lingo: he is a cool "cat", a person who gets all the women mostly because of certain smoothness)
And the fund managers of FAT Cat are not even charging a "2/20" fee structure for it.
Blackstone, Carlyle, KKR, TPG, and the other luminaries of the private equity world may be having sleepless nights. (An irrelevant relevant fact: One of the main sponsors of the I.O.U.S.A. documentary is a foundation set up by Peter G. Peterson - the Chairman of Blackstone.)
The birth of FAT Cat is being labelled by many as the death of private business in the US. Critics have called the government rescues a mockery of the free market practices that the US has stood for. A country that always criticised governments around the world for interfering in the private sector has, with amazing speed, become an owner of the some of the world's largest businesses.
The "business of America is business" said President Calvin Coolidge in the 1920's.
Not any more, howl the critics of FAT Cat.
An insider, now playing from the inside
Maybe the critics are wrong?
Maybe they are jealous of the power, the financial muscle and political connections of FAT Cat.
Hank Paulson is a deal-maker by nature.
In his new role as the Secretary of the Treasury, he probably surveyed the landscape and figured out that the hedge funds who borrowed billions to make bets and charged their clients "2/20" were gamblers dressed up as gods.
That the private equity firms who used other people's money to make bets while they earned their "2/20" fees were people of average intelligence - but from well known universities with good political connections.
Table 1: The gamblers lose big time.
The hedge funds and the private equity firms could fool a person like Alan Greenspan into believing that they actually made a difference to life.
Greenspan gave them all the billions they needed to make them rich beyond imagination.
Greenspan gave them money for free. And was happy to be named as some sort of Advisor to Deutsche Bank.
But these folks could not fool Hank.
They could not offer him some Advisory role after his tenure.
Hank did not need it: he had come from their side of the business.
He was one of the architects of the success of Goldman, Sachs.
He was, in many ways, one of their own: An insider.
And Hank knew the true value of these Czars of Finance: zero.
So Hank decided to be the fund manager, the CIO, the investment architect of FAT Cat.
So when Hank "rescued" AIG, he "allowed" AIG to borrow money from the US Treasury at 8% more than the US government's borrowing cost.
This man has put our Indian money lenders to shame.
When the Finance Minister in India rescues companies, he gives them cheap loans.
Not Hank. To be rescued by Hank is to be given what was called the "bear hug". What the Soviets did to much of Eastern Europe. What China has done to Tibet.
Hank makes offers they cannot refuse.
Shakespeare will have to re-write the description of Shylock.
The death of greed
The traditional private equity and buy-out firms may not have realised it as yet.
And this may be a breaking news article (maybe I can collect some McKinsey style consulting fee for outlining the new business environment?).
The Czars of Finance have a new competitor: the FAT Cat, a powerful combination of the US Treasury and the Fed.
And the "fund manager" of this largest private equity firm charges no fees.
There is no 2% annual management fee.
There is no extra performance fee of "20% of profits earned".
The "2/20" model has been discarded.
The fee is zero. Yes, you read this correctly: FAT Cat is not charging anyone any fees.
And FAT Cat can target any company they wish, and take over that company.
At any terms they deem fit.
With all the connections in the world to make that deal a success.
That is Hank over there on the left -- representing the US Government. The man next to him is Ben Bernanke, the Fed Chairman. And on the right is Representative Nancy Pelosi - a Democrat from the state of California. That is the miracle of Hank - he could get the first elected lady Speaker of the House of Representatives, from the opposition Democrat party, to endorse the actions of FAT Cat.
For example, FAT Cat can ensure that the SEC imposes a rule that limits the short selling of the stock once FAT buys it: an immediate price floor is created for the company that they buy into.
The SEC just banned shorting in 799 finance companies.
FAT Cat has so far only invested in finance companies.
If that does not work, FAT Cat has the ability to call central banks around the world and have them pump in money into the global financial system.
Just as they did this past week.
USD 247 billion of it.
Stock markets surged across the world on Friday - without any exception.
With those kinds of connections, any deal that the FAT Cat does can make them look smart from day one.
The naked fools
I think we are watching economic history unfold.
No, not the kind that most analysts are whining about: the excess debt that will make the prophecy of I.O.U.S.A. a reality sooner, rather than later.
Hank Paulson may go down in history as the man who took the world from its path of greed and destruction to a more "socialist" path.
And he may help reduce the US debt by selling the companies he is buying at a huge profit.
Hundreds of billions of dollars of profit.
Enough money to stay another 436 days in Iraq and Afghanistan.
Enough profit to cover - for 269 days - the oil required to fill all those 50 million cars driving across USA.
Hank's deals may not save the USA but it will postpone the inevitable.
The Secretary of the Treasury, Hank Paulson, is not a typical government bureaucrat and a "do-gooder".
Nor is he an academic that made it to the top job because of some theoretical paper on "inflation targeting" or "interest rates and cost of money" or "public ownership of private goods".
Remember: Mr. Paulson has worked with Goldman, Sachs.
He was a key member responsible for the firm's global success.
This man is a walking power-point on building businesses - successfully.
He is a turn-around artist.
I think he knows what he is doing: there is method in this madness.
Many years ago, President John F. Kennedy was asked why he was keen to send an expedition to the moon.
To which President Kennedy replied: "because it's there."
It was the height of the Cold War. Kennedy made the Soviets look like fools. Like losers.
And so it must be with Hank.
"But, Hank", a reporter may ask, "why build the world's largest private equity fund and hedge fund and charge zero fees for it?"
And I can picture Hank saying, "because I can".
The Czars of Finance just got a new Emperor.
And Hank makes them all look so foolish.
And so naked.
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The US$ 700 bn financial rescue plan announced by the US government and Federal Reserve last weekend is probably the most extensive intervention