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Treasury Seeks Unprecedented Power

Posted by Larry Doyle on March 24, 2009 8:47 AM |

I have written at length about the problems within the banking, insurance, hedge fund, and consumer finance industries over the last 6 months. While the bulk of the media focus has been on the banking industry – and primarily the large money center banks – the erosion in asset values at these other financial companies has been accelerating.

This past Sunday evening on my weekly radio show, NQR’s Sense on Cents with Larry Doyle, I spoke extensively about the massive financial shortfall within the insurance industry. In addition, relatively early on I warned that the hedge fund industry had likely been severely mismarking many investments. From a piece I wrote on November 12, 2008:

Give it time, because hedge funds do not have to report to anybody as to what their positions are and where they have them marked. There is no doubt they have positions that are grossly mismarked and have many positions that are totally illiquid. For many investors in these funds, these are truly “roach motels.” Hedge funds will sell what is most liquid when they can to meet redemption requests. We should expect a significant number of hedge fund liquidations, consolidations, and out and out disasters.

The same can be said for a number of private equity shops. Consumer finance companies with large holdings of a variety of consumer assets are fighting for their lives as delinquencies and defaults on these assets ratchet higher.

With massive debt obligations along with capital redemptions coming due, a number of companies within these industries will be unable to refinance that debt or replace that capital.

State guarantee funds to support insolvent insurance companies total a mere $8 billion. Who would step in to support some of these other entities as they approach financial armageddon? Are banks in a position to take over these entities and liquidate assets in a quick and orderly fashion? The markets are in no position to provide the necessary liquidity without massive discounts in price.

Enter Turbo-man, Tim Geithner. U.S. Seeks Expanded Power to Seize Firms is not a mere power grab by our government, but an indication that a number of companies are on the precipice of default. The manpower shortage at Treasury to handle these upcoming situations is a very real concern.

A disorderly collapse of a number of these companies could quickly throw our markets and economy into a further tailspin. The cost of the government assuming and exercising this power, though, is not fully known and should not be underestimated.

How are contracts and outstanding liabilities handled? How are assets liquidated? Who has access to purchasing assets? The transferral of assets and wealth presents enormous challenges and opportunities. Will our government promote financial protectionism in this process? Will certain financial entities be accorded preferable treatment?

So many questions to be asked and answered in the weeks and months ahead. Make no mistake, though, this move by Treasury is an indication that a number of companies are close to going down.


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  • thinkaboutthis

    Listening to Turbo Tax Tim talking with Congress — I notice he refers to “YOUR GOVERNMENT” on more than one occasion.

    • thinkaboutthis

      with a very different tone while talking with Maxine Waters

  • Larry Doyle

    I find Maxine tough to take. Always a lot of pandering and proponent of conspiracy theories.

  • fiscalliberal

    I really get nervous about these wide ranging powers in the government. However business got themselves in this mess and have caused the rest of us to loose life savings and then ask us to bail them out.

    I suppose if the business know that the government can do this, it might serve as a deturent to taking abnormal risks. I would hope that the unwind process could only be used if the corporation asks the the government to do it, as it might be less prohibitive to bankrupcy. Of course the Capital Management Hedge fund comes to mind and I would imagine they did not tell anyone untill it was to late. So I must admit that I do not have a good answer.

    So possibly some combination of regulation and take over with severe punishments (clawbacks) to the managers in a take over, might be of use. However we need to think long and hard in terms of the enabling government take overs.

  • Larry Doyle

    When traveling in uncharted waters, who knows what may happen?

    No doubt we need strong regulation and controls along with increased discipline and integrity.

    In the midst of all this, an individual who strikes me as having a level head and solid approach is Ron Paul.

    I know that he got limited coverage in the past Presidential campaign, but he seems to possess basic logic.

  • anon

    I haven’t finished my research on the constitutionality of the proposed expansion of Treasury power, but I have serious doubts that it would pass muster. The one relevant fact the administration may be able to latch onto here is that the nation is, wait for it… at war.

    When I’ve got a full analysis I’ll share it here if anyone is interested. However, for now I can confidently say this proposal is a VERY BAD idea and if adopted, welcome to centralized economic planning, make no mistake about it.

  • Larry Doyle

    Please share your analysis…thanks…!!

  • lizzy

    Sounds like more Chicago style politics: give them power and ask questions after the fact. Didn’t we learn anything after all the furor over AIG bonuses sneaked into the stimulus bill. This is no credibility Obama we’re talking about. I hope the legislature gives a little consideration to their decision, not just rushing through.

  • Larry Doyle

    Regrettably the legislative bodies have limited knowledge and credibility in this process.

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