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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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