The Debt Potato

The past year has been all about shifting debt.

The financial crisis drove American homeowners into debt. Homeowners defaulted on their loans (or threatened to), driving the banks into debt. The U.S. government bailed out the banks, shifting debt to the public balance sheet.

And over the last few weeks the "hot potato" has once again begun to move. From the government back to the private sector.

Today, the U.S. Treasury announced the auction of 600,000 warrants in Signature Bank. Treasury acquired the warrants as part of a "sweetener" package when the government agreed to lend money to keep Signature solvent.

The warrants allow the owners to purchase shares of Signature at $19 per share. With the bank currently trading at $39, these instruments now have significant value.

Rather than take ownership of the bank, the government is seeking to monetize the warrants by auctioning them to buyers from the private sector. Expected proceeds from the sale are over $11 million.

This is the next phase of the ongoing shift in debt. Money is now flowing back from the private sector to the government. Changing liabilities from one set of hands to another.

The Signature transaction is a relatively minor one. But the government over the last few weeks has announced a number of similar sales, amounting to billions in total value.

Of course, the U.S. government is still carrying trillions in debt associated with its bank bailouts. Debt that was shifted from the private sector to the public in an attempt to rescue the economy.

But the interesting thing is many analysts assumed this debt would finally rest with the government. There would be no one else to pass the potato to.

Transactions like the Signature warrant sale are proving this wrong. There are buyers in the private sector willing to buy back these instruments from the government.

The big question is: will this trend extend to major government debt pools like mortgage-backed securities? The Federal Reserve holds over $1 trillion in MBS. A major drag on public finances.

But that problem could be solved if these securities can eventually be sold back to the private sector, the way bank warrants are today. We'll see if private appetite for a side of hot potatoes continues.

Here's to the flow of funds,

By. Dave Forest of Notela Resources.