Feb 12 2009

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Seeds of Promise From Treasury

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Despite having triggered the greatest destruction of wealth in American history, Wall Street can still be the Diva.

On Tuesday, Treasury Secretary Tim Geithner laid out a plan to unclog credit networks and restore confidence in the financial system. Wall Street’s reaction?  An immediate and massive sell off.

The media reaction suggested that the Dow’s drop was a vote of no-confidence in the Geithner plan, as all details of this complex undertaking had not been worked out.  If so, it was an unworthy slap in the face by an industry that itself remains flummoxed by public outrage to its avalanche of in-house bonuses by firms that are on the government dole.

Wall Street needs to Man-Up.

Complaints about the lack of specificity in the Geithner plan should be subsumed to a greater recognition of the encouraging principles that Geithner and team are clearly trying to get right.  Indeed Wall Street should lend all practical support to a concept that seems to place importance on a constructive role for free markets and the private sector as a partner in financial recovery.

In dealing with the still toxic debt, Geithner proposed a Public-Private Trust (PPT) that would use government money and private capital to get the bad debt off the books of financial institutions and get banks lending again.

Given the reflexively leftist course that the Obama administration has taken on the Stimulus package, Geithner’s recognition of a constructive role for private capital and the private sector in dealing with the toxic debt is a reassuring breath of fresh air.  Wall Street should be lauding him instead of taking him to the Dow’s wood shed.  He deserves encouragement and help to nurture an idea that is vulnerable to demogogic ramblings and interference from ideologically rigid congressional liberals.

The good news for Geithner and Treasury is that a model for his PPT not only exists, it is operational, proven and effective.

The Overseas Private Investment Corporation, or OPIC, often confused with the oil cartel of similar acronym, is a US government corporation that mobilizes US private capital and skills for the social and economic development of less developed countries.  Through its ability to extend financing and political risk insurance to investors, OPIC can lead private investment to the very countries and regions most in need that are critical to US national security, promoting the private sector, creating jobs and transferring skills. OPIC is required by law to be self sustaining and, in fact, returns money to the US Treasury each year above its congressionally-approved operating budget, while also promoting evolving best practices of corporate social responsibility in the projects it supports.

Since 1991, OPIC has designed and implemented a program to use private equity as a tool for economic development in developing countries. The program married the national security and developmental goals of the US government with market tools to raise money and channel sustaining private sector investment into emerging markets.

Specifically, OPIC provides “seed debt” for the creation of privately-owned and managed investment funds. After OPIC’s debt contribution, Fund managers are responsible for raising the remaining equity capital through limited partners in the private sector. The Funds make direct equity investments in new, expanding or privatizing companies. As of FY 2007, OPIC funds had invested $3.5 billion in more than 400 privately owned and managed companies.1

The program is a win-win for US government policy goals as well as the taxpayer. The government debt is repaid first, with interest, in the “profit waterfall”.  If the fund managers have operated effectively, they profit from the growth and sale of the companies that they have invested in, while contributing to the economic growth of the countries those companies are located in.

Importantly, the OPIC Investment Fund’s program has been tangibly improved over time, with a public Call for Proposals, a structured, competitive and transparent selection process and the introduction of a merit-based “gatekeeper” to provide a “first screen” insight and analysis on the skills and capabilities of potential fund managers. This has enhanced the fairness and credibility of the program and insulated the process from charges of favoritism.

Using the OPIC Funds program as a model, Treasury could advertise a Call for Proposals for several (as opposed to the Geithner single) “PPTs” to buy chunks of packaged and advertised toxic debt. The role, expectation, obligations of the parties, including government support would be laid out in these Calls in a transparent fashion, allowing money managers, entrepreneurs and risk-takers to fashion proposals for consideration.

A temporary Board of Approval could be established involving Treasury, the Federal Reserve, FINRA and the SEC among public players, and potentially representatives from the private sector as well, again modeled on the diverse public-private OPIC board, which coincidentally, has a Treasury Representative. Ironically, it was Tim Geithner who sat on the OPIC board as the Treasury representative during the Clinton administration.

This board would evaluate and approve the “Trust Managers.”

At that point, the government would oversee and monitor but not interfere with the analysis, evaluation or sale of the toxic debt.  The private market would drive decisions by the Trust Managers concerning whether to further invest in underlying assets, or simply hold them until the market improves for sale later.  Here, pricing will be governed by market forces and not an arbitrary and distorting valuation enforced by the government.

If the incentives to the private sector Trust Managers are properly structured and the due diligence on them is done correctly, solid proposals will follow and a constructive, credibility-enhancing process to deal with toxic debt put in place.

Moreover, this is not a “bailout.” The government will get paid back with principle plus interest, while Trust Managers will have the opportunity to restructure debt profitably, serving a critical national economic goal in the process.

It will be important to move fast.

Other, far less successful structures for mobilizing and deploying capital – Enterprise Funds – have been bureaucratic, top heavy, plodding and mostly unsuccessful, though the model enjoys a charmed life in Washington where it pops up time and again, only to fail time and again.

The Geithner PPT concept is tailor-made for the incentives, structures and processes that OPIC has spent nearly twenty years refining.  The Treasury Secretary has been bold in the financial reform package. Will Treasury be equally bold in grafting the elements of a successful, existing program to operationalize the PPT concept before the kitchen sink of Washington interest groups picks at the idea to utter ineffectiveness?

Wall Street and free market proponents have a big stake in the answer.

1. www.opic.com/investment


1 comment

  1. Livia

    If I were a Teegnae Mutant Ninja Turtle, now I’d say “Kowabunga, dude!”

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