Indiana Jones and Barney Fife

In a recent column in Newsweek, Geithner's Hedge Fund, Robert Samuelson points out that President Obama's much-ballyhooed "solution" to the "financial crisis" is, in reality, nothing but a government-sponsored hedge fund. To understand his point, think about how a hedge fund operates (or did operate, back when it was still legal to make a profit on an investment).

According to that fountain of wisdom known as Wikipedia, "...hedge funds often seek to offset potential losses in the principal markets they invest in by hedging their investments using a variety of methods ... are typically open only to a limited range of professional or wealthy investors ... dominate certain specialty markets such as trading within derivatives with high-yield ratings and distressed debt."

Remember those last two words while I recap what Obama, Geithner, Bernanke, et al have cooked up. Quoting Samuelson, who paraphrased from the published plan:

"The government would lend vast sums to private investors to enable them to buy loss-ridden assets at discounts from banks with the prospects of making sizeable profits. If that's not a hedge fund, what would it be? ...

"Suppose you brought a stock or bond for $100 in cash. If the price rises to $110, you make 10 percent. Not bad. Now, assume that you borrowed $90 of the purchase price at a 5 percent interest rate. Over a year, the stock or bond still increases to $110, but now you've made more than 50 percent. You pay $4.50 in interest and pocket a $5.50 gain on your $10 investment. Note, however, that if the price fell to $95, you'd be virtually wiped out ($4.50 in interest paid plus $5 lost on the security)."

You got it! Do you see why I wanted you to remember those two words, "distressed" and "debt?" That's right! Barak "Mr. Change That We Can Believe In" Obama wants to refinance the economy by sponsoring a glorified hedge fund that will be priced well beyond the reach of anyone but the richest of Americans!

Now, here's the real kicker: the federal government will be the one loaning out our tax money in order for a few fat cats to have a shot at making a killing without being exposed to the risk of a loss. That's right: without risk of a loss!

The money will be loaned out by the FDIC, which happens to find itself stuck with a bunch of worthless "distressed assets" from the financial meltdown. The fat cats put up a relatively small investment, say 10% of the assets face value, and borrow the rest from the FDIC using the purchased assets as collateral on the loan. If the economy recovers the fat cats can sell these assets at a profit, pay off the FDIC, and pocket the rest. But, if the economy stays in the toilet, the fat cats lose only their 10% down payment and the FDIC has to take back their "collateral," the still-worthless "distressed assets."

Somehow the image of Barak Obama as the new sheriff riding into town, astride a white horse, to do battle with the evil cattle rustlers just doesn't fit with the plan. It's more like waiting to be rescued by Indiana Jones and having Barney Fife show up instead.