Can the political narrative get any stranger, and in many ways, even incredulous? First off, the country is undergoing an election season wherein the two front runners are disdained by the majority of Americans. One (the Dem) purports to have experience, but seriously, she merely has had “exposure”: yes, a nice (planned) resume, but has she actually accomplished anything as a statesperson or legislator? Ask about “her” treaties or “her” laws or initiatives that have translated into real progress or meaning, domestically or abroad. Seems to be a goose-egg. But give her credit for marketing… Then the other (the Rep) is waxing on about areas of foundational principles that are more daft not deft. So we have an electorate with the propensity to vote to negate the opposing side, or simply support the lesser of two whatevers. How would our founding fathers, such as Jefferson or Madison or Adams or Washington or Franklin, view the current roster? Graves are turning.
And then look at recent comments, the most amazing (not to be construed as a positive perception) is the “Trumpette” about defaulting on the national debt. Rather than even spending a moment of time on the incomparable ramifications of such on both the US and global markets, the inane unlettered intimation should cast a big question mark on the quasi-politician’s understanding of how certain things work. I can certainly appreciate Mr. Trump’s effort to utilize his experience as financier and investor, even how he desires to show his acumen with overleveraged situations which need restructuring. Some can certainly posit that the US balance sheet is overleveraged, and the national debt should be reduced. But those that understand banker’s parlance, including cash flows, debt serviceability, cost of capital along with primary, secondary and tertiary sources of repayment, may view the national financial statements as not really that bad. The economy is servicing its debt, and true, the government continues to spend more than it takes in, thus expanding the debt level, which could prove deleterious in a higher rate environment. But with its cost of capital and ability to adjust its revenues, the debt is currently manageable, and fundamentally, the government does pay it bills.
Mr. Trump, as a “restructuring expert” should look at other pathways to address the debt overload, like many private equity firms or companies with problematic portfolio company balance sheets. Why not think asset sales to monetize less needed assets with proceeds to pay down the debt, if that truly is part of the agenda? The nation’s balance sheet holds tens of millions of acres of land and thousands of buildings, that are used for both private and public sector purposes. Would private sector participants be interested in outright purchases of such, and for properties used by the public sector, what about “huge” sale-leaseback programs? What about a trillion-dollar REIT, sponsored by the Federal Government, with the faith and credit of the government, as a lowcredit risk tenant?
What about operating segments of the government which could be sold off, like an underperforming or non-strategic corporate subsidiary? One target may be the US Postal Service. Federal Express, UPS and Amazon have proven that investors have an appetite for the logistics business. Pull in a Blackstone or a KKR or TPG or probably all of them to take USPS “private”. How much would it monetize? Certainly hundreds of billions.
Of course, we have listened to exhaustive conversations about returning the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, to private ownership outside the current conservatorship of the government. While lip service has been paid to such, the government has little motivation IMHO as these two entities are absolute cash cows now. Having invested $187 billion during the financial crisis to stave off further collapse of the housing finance system, the government made a right choice to intercede. But we have evolved from the crisis, and over the last five years or so, the GSEs have paid the government back over $400 billion in dividends, not even retiring any portion of the original preferred stock. Put a multiple on say $100 billion a year in cash flow, and what would the market cap be for these entities? And with the 90% market share of the mortgage market, maybe even a “premium” could be achieved. In fact, given the prospective deal size, the country could even provide “seller financing” to ease the transition to private ownership.
And besides the GSEs, even though Rand Paul has stated that our central bank is broke, vehemently opining that our monetary system will shortly collapse, he obviously hasn’t taken a look at the financial performance of the Federal Reserve. Yes, there are financials and audits to review. It may surprise folks that the Fed is probably the best performing bank in the country, based on (ROA) return on assets and (ROE) return on equity metrics. The problem is that virtually every dollar of profit goes back to the Treasury department for government spending, generally outside the appropriations process. Member banks of the Fed receive a small dividend, say around 7% annually, but the Treasury Department pulls 90% of the annual profit, leaving limited retention of earnings for the Bank, resulting in an excessively leveraged institution. This is not underperformance of the Central Bank, rather a land grab of its positive cash flows. Though there are policy and pragmatic reasons to have control of the Fed, imagine the monetization opportunity for a segment of the private sector to participate as investors. Compared to other financial institutions, its market cap would not match Wells Fargo, but still there would be hundreds of billions of value to be availed.
Yes, if you want to reduce the debt levels, think about other tools of restructuring, like shedding some assets. Upon review, there may be multiple trillions of dollars to put a major dent in, maybe even eliminate, the national debt. As long as the sales proceeds are directed to the purpose of deleveraging, rather than redirected to new spending. A one-time proposition, but a restructuring path forward. But the notion to threaten haircutting our sovereign creditors? Please.
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