The success of Treasury Secretary Geithner’s Public-Private Investment Partnership Program depends on getting private investors interested in buying junk bonds off the banks’ balance sheets. Now it seems that at least one hedge fund is giving the plan “two thumbs-down.”
The New York Post is reporting that Bridgewater Associates, one of the few that might qualify for Treasury’s program, decided that “the numbers just don't add up.” Besides being a bad investment, the fund’s founder raised questions about conflicts of interest – something we find surprising. Hedge fund managers are supposed to be those free-wheeling, unregulated, we’ll-buy-anything investors – always willing to take a risk and suffer the consequences of the market outcomes.
Bridgewater’s concern is that Geithner’s junk bond plan includes hiring asset managers – who will also be investors. There are clear conflicts of interest because these managers will "have both the government and the investors to please and because they will get their fees regardless of how these investments turn out," wrote Bridgewater founder Ray Dalio. Imagine, a hedge fund worried about collusion among asset managers? Maybe it takes one to know one?
The real question is why Geithner would set up a program putting US taxpayer money in the hands of unregulated hedge funds and then go to Europe a few days later and blame the global financial crisis (at least in part) on hedge funds and their lack of regulation? Dalio is right: it just doesn’t add up.