Hedge funds sponsored by the U.S. Treasury are reporting eye-popping returns, but the costs to taxpayers and households could end up being massive.
Funds created under the Public-Private Investment Program reported annualized net internal rates of return averaging 36 percent through Sept. 30, the Treasury announced on Friday, a figure that could encourage the belief that the banking bailout was a shrewd investment rather than a transfer of wealth.
The PPIP was created in 2009 to allow private investors to partner with the public purse to purchase distressed assets from the banking system, using cheap loans from the government for leverage.
Eight of these funds were created, with the Treasury having a 50 percent equity stake in each but providing all of the debt funding at extremely low rates averaging just over 1 percent a year.
It’s hard to know which to debunk first: the returns of the PPIP, which are the outputs of the “models” we’ve come to know and love; the structure, which privatizes profits and retains for the public the bulk of the risks; or the conception of the whole enterprise, which is aimed at propping up asset values to avoid more direct subsidies to banks.