CFO: Trillions in Dry Powder?
According to an article at CFO.com (reporting on a private industry report on alternative asset investment), "there’s still more than $1 trillion in ‘dry powder’ for future deals." While this is good news, it also raises some troublesome questions about policy developments in D.C. Is the uncertainty emanating from Congress, the Fed, the Treasury, and the outgoing and incoming Administrations keeping that "dry powder" on the sidelines?
It’s an important question because, from the figures provided, there may be enough private capital available to return the financial system to health (eventually). For example, in an interview on CNBC this morning, economist Nouriel Roubini estimated that an infusion of at least $2T is required by the financial system (an equivalent amount to his estimate of "toxic" financial assets). The U.S. Treasury’s TARP program is expected to infuse $750B, and while Congress has proposed an $800B stimulus plan, at this point it involves very little assistance to the financial sector (the Fed’s programs can be thought of as more analogous to bridge loans than equity infusions). But while there may be sufficient private capital, it’s possible that the uncertainty over federal policy — created by the multiple twists and turns by various policymakers and regulators since the crisis began, and the pending installation of a new Congress and Administration — is keeping that capital on the sidelines. In other words, due to the uncertainties that are an unintended consequence of policymaking, private capital is sitting tight and allowing (future) U.S. taxpayers to assume the risk instead.
A few caveats: first, depending on the kinds of deals Treasury strikes with TARP and its successors (if any), taxpayers may very well want to stand in the front of the line, as the eventual returns could be very attractive; second, it’s not clear (from the CFO.com report anyways) whether there’s any leverage behind the funds raised (if the current crisis has taught anything, it’s that only truly unencumbered capital should be called "dry powder"); and finally, we’re obviously speculating about how the managers of that private capital would behave in the absence of policy uncertainty.
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News and Views | art January 15, 2009
