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    Public and Private Equity

    By Michael Maiello on Sun, 11/17/2013 - 7:42am | Politics

    Timothy Geithner is getting what some on Wall Street will jokingly refer to as his first "real job" as a President and Managing Director at private equity house Warburg Pincus.  At Business Insider, Joe Weisenthal's take is that it could have been worse from a conflict of interest standpoint -- at least he's not as a Too Big To Fail bank, lobbying against regulations.

    What I find interesting about this move is not really conflict, but more of a symbol of what the U.S. Treasury was during and after the crisis years.  Treasury's interventions in AIG, Fannie Mae, Freddie Mac, Chrysler and GM were all private equity style interventions and they were all very successful, by the parameters given to the public.

    These companies were all nursed back to profitability.  My biggest objections as a tax payer are:

    1. The deals were unfair in that, under equal protection, the government should have as much an obligation to rescue your aunt's computer business or the neighborhood pharmacy as it does GM.

    2. If the U.S. government were a real private equity firm, it would have demand much better returns than it got out of these investments (the government seems satisfied with getting paid back.

    3. If the government was going to sacrifice return, as it did, it could have used its ownership in those companies to further beneficial social ends.

    That aside, the Treasury did act as a giant private equity fund with the power to print its own money.  It's no wonder that Geithner now finds this business attractive.  The way in which Warburg Pincus treats the workers of its portfolio companies going forward will now tell us a lot about what Geithner really believed, and might help us, in retrospect, determine some of his decisions.  AIG's traders got a much better deal than Detroit's auto workers, for example.  We'll see if that pattern repeats in Geithner's private life.

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    Oy. Not sure what to think. Will he do for them what he did for us as the FRB's chief implementer of Greenspan's bubble-inflating policies from 2003-2008 and executioner of Bear, Stearns  and Lehman? Not that I really care all that much if some billionaires drop a few rungs down Forbes 400 list. But will he then return to Treasury or the IMF to 'fix' what he broke? He is really good at doing that. 

    What a terrific skill set for the managing director of a hedge fund to have. Warburg must be very pleased with their choice.

     


    by EmmaZahn on Sun, 11/17/2013 - 12:31pm

    Michael, do you believe that if the government had not intervened: 1) some of the banks would've gone under and some would have struggled back to solvency; 2) regardless of what happened to these banks, including all or some of them going under, there would not have been a domino effect on the rest of the economy?

    It seems to me that number two was the guiding reason to intervene in the banks. If the neighborhood pharmacy goes under, it is sad and has an impact, but, it would be argued, not nearly the impact of Citi, or Citi plus, plus, plus going under.

    Bailing out the banks didn't have much to do with what was fair or right (I know understatement). It was that not doing it would've hurt many more innocent people than got hurt in the event. I think it has to be judged by the accuracy and reasonableness of that prediction.


    by Peter Schwartz on Sun, 11/17/2013 - 3:06pm

    I get the impact argument but I don't see it as moral.  Is the job of an autoworker worth more to society than the job of an office manager in real estate?  Are both worth less than AIG complex derivatives architect?

    But, accepting that something had to be done, did the people get back everything they should have in exchange for their interventions?  AIG owes me free life insurance.  The banks should have been forced to revise onerous loan terms and to invest more in small businesses.  GM, at least, could have dropped its environmental lawsuit against California!

    If the government is going to save some businesses but not others it should turn the businesses it saves into instruments of the public good.


    by Michael Maiello on Sun, 11/17/2013 - 7:57pm

    Michael, no time for an extensive reply now, but I think this points up the complexities of public-private arrangements, especially extraordinary ones like bailouts.

    AIG not only owes you free life insurance--they owe 300 million Americans free life insurance. As true as that might be, how does that work?

    (And who knows, maybe the cost of even the cheapest life insurance plan x 300 million might come to more than what AIG got in the bailout. That would leave the question, who gets the insurance and how much, and who doesn't.)

    Reworking loan terms so that folks could stay in their homes is more workable, but the prospect of that gave rise to the Tea Party a la Santelli's Scream, as I'm sure you recall. "Why should my irresponsible neighbor get bailed out when I did everything right and am straining under the load of my regular mortgage?"

    GM--don't know much about that suit, but I tend to agree sight unseen.

    All this said--and I'm not trying to be polemical here, just mulling over the issues-- the banks should have been required to "give back something" substantial for the public good. I'm not sure what or how, though. I'm sure "fair" criteria with a clear rationale could have been worked out for deciding which homeowners got helped.

    There's that great line at the end of the movie about the crash when the Paulson character says something about the banks like, "They will loan out the money, won't they?" If it was true that not many businesses or individuals were seeking to get further into debt in the aftermath, the banks could've been required to contribute to a large public fund managed by an appointed blue ribbon board with citizen representatives to be doled out according to well-publicized criteria, etc., to those most in need and where the money would've had the greatest impact.

    All of this seems fraught with lots of difficulties and invites huge public acrimony, but the banks should have been required to do something in return for the money they got from the feds.


    by Peter Schwartz on Mon, 11/18/2013 - 9:11am

    The impact argument can be moral if, by impact, we mean "ultimately helping the most number of people."

    So, if the alternative was a much, much worse economy that devastated many more millions, then it could easily be argued that it was moral to avert that outcome. No?

    Perhaps the key would've been to break up the banks and put in place strict rules to prevent this from ever happening again.


    by Peter Schwartz on Mon, 11/18/2013 - 9:13am

    Michael Maiello is a great witer and contributer. I love reading about Public and Private Equity it gave me lots of information

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