Rounding Up Investors?

Today’s lead article in The New York Times was titled, “U.S. Rounding Up Investors to Buy Bad Bank Assets.” It describes the attempt by the Obama administration to find private organizations willing to partner with the federal government to purchase many of the toxic assets weighing down bank balance sheets.

The central problem, as I understand it, is the difficulty in placing a value on these so-called “toxic assets” because no one knows how many bad loans they contain. The difference between the value that banks, who are holding the assets, place on them and the value that private investors are willing to pay for them has been significant, and this plan attempts to address that.

The government will pay about 95 percent of the value of the assets and private investors 5 percent, so, the idea goes, private investors would be willing to take a risk for significant returns, even if the face value represents a lot more than they would be willing to spend, if they had to pay the whole thing.

The reason the Obama administration has to round up investors is because the investors are afraid they will be forced to modify their executive compensation arrangements if they enter into a partnership with the federal government.

So, the Obama administration is faced with a conflict between two recent plans, the plan to limit executive compensation as demanded by Main Street, and the plan to avoid it, as demanded by Wall Street. We’ll see which priority wins in the end…

It should be noted that many hedge funds have contributed heavily to Congressional campaigns.