The Croesus Chronicles
Pete Peterson's $1 Billion Bully Pulpit
Forbes.com
Robert Lenzner 05.30.08, 6:00 PM ET
Imagine a humongous business with assets of $1.6 trillion, balance sheet liabilities north of $10 trillion and off-balance-sheet obligations of $41 trillion. That's debt--whether explicit liabilities, commitments and contingencies, or implicit exposure--that produces a debt to assets ratio of 32-to-1, roughly similar to the late and not-so-great Bear Stearns and the quickly departed Carlyle Credit Corp., which lost a bundle for its well-heeled investors.
No, we're not talking about such leveraged monsters as Fannie Mae, Freddie Mac, Countrywide Financial, Ambac or MBIA, whose equity values will probably be entirely wiped out as time goes on, according to one of Croesus' confidential sources. They will need massive capital injections just to operate.
This entity has promised to pay out a fortune 32 times greater than its listed assets, though its credit rating is a perfect triple-A, as its securities are rated the safest in the world. Like MBIA and Ambac, the two troubled monoline insurance operators, these wonders never cease.
Croesus' topic today is Uncle Sam, the federal government of the United States, a highly leveraged concern that carries big-time public policy implications.
That's why Croesus wants to celebrate the formation of the Peter G. Peterson Foundation with $1 billion of the fortune built by Croesus' admirable friend Pete Peterson, senior chairman and co-founder of the giant Blackstone Group buyout firm.
That billion is to support Peterson's long and dedicated crusade to wake up America to the sorry state of its balance sheet, especially obligations for Social Security and health care that are growing at a troubling rate of $2 trillion per year.
Peterson wants to do something about these liabilities, these crushing fiscal obligations that will have a deleterious impact on our economy and our place in the world unless we act.
There is widespread ignorance and denial surrounding these future obligations, to which Peterson has been trying to alert and alarm the public for decades. Now he has made the brilliant move of wresting David Walker away from his post as U.S. comptroller general and placing him squarely into the bully pulpit.
Croesus is impressed with Walker's firsthand knowledge of these perplexing matters and the fire in his belly. Trust Walker. He's an expert on the consolidated financial statements of the United States and the separate State of Social Insurance, a document nobody ever reads, which spells out how the costs of Social Security and Medicare will continue to strangle us over the next 75 years.
"The U.S.," says Walker, "is on a burning platform and suffers from three key illnesses: myopia, tunnel vision and self-centeredness."
Walker described to Croesus how the bonds in the so-called "trust funds" that are supposed to finance these impossible liabilities are merely pieces of paper locked in a drawer in a government office in West Virginia. No, Virginia, there are no money deposits standing behind those bonds, which are simply printed IOUs from Uncle Sam. All that Walker and the Peterson Foundation have to do is "educate and activate the American people in order to accelerate action by policymakers on selected key sustainability challenges facing our nation," says Walker. "This will involve seeking sensible solutions, building strong coalitions and engaging in a range of grass-roots related activities," he adds.
Good luck! Croesus has always been morally outraged that no one ever tackles these impending crises until we are on the verge of cataclysmic danger. It's a shame that our hidden debt never becomes a major issue until it threatens the value of the dollar and sends inflation sky-high. Praise is in order for Messrs. Peterson and Walker and their $1 billion crusade to awaken the nation to its potential demise as a financial superpower. It is always treated as a problem that someone else will have to handle. Just like Enron, WorldCom, Citigroup, UBS, Merrill Lynch, Lehman Brothers and a host of other concerns, all of which had hidden debt that was about to throw the financial markets into a tailspin.
Those promises to pay in West Virginia have no liquidity at all, and they don't have cash flow committed to them. They are little more than a figment of Uncle Sam's imagination, though the consequences of failing to honor them will be real indeed.
Stay tuned for the Citizen's Guide to the Nation's Financial Health, which will be up on the Peterson Foundation's Web site by the end of June. Croesus will be fascinated to see if anyone cares until it's too late.
Find this article at: http://www.forbes.com/business/2008/05/30/federal-finance-blackstone-oped-cx_rl_0530croesus.html
