ASSET MONETIZATION: SUBPRIME, HEDGE FUND & PRIVATE EQUITY MELTDOWN POINTS CORZINE TO LONGTERM STRATEGY

In the lead up to the November elections one would well expect Governor Corzine's "asset monetization" to take on an increasingly negative connotation and its supporters ostracized by the electorate as advocates of an "Ivy League Ponzi scheme.”

As the mainstream press gains a greater familiarity with the problems, as calls for greater disclosure by and stricter regulation of Hedge Funds and Private Equity Funds grows, and as the availability of buyers for structured product diminishes, the aftershocks of current global financial turmoil will leave a bitter aftertaste in the economy and a new sense the "cultural of credit" has come to an end.

Despite the current financial meltdown, however, Governor Corzine has made no showing that he has abandoned his drive to use asset monetization to restructure the State's balances sheet. Indeed, if we believe what former Chief of Staff Tom Shea told NJN’s Michael Aron (On The Record) the drive to securitize future revenue is more a function of when rather than if.

The question, therefore, is what is Governor Corzine's monetization strategy, and what is a likely timetable?

Part 1. It is said that it is better to be lucky than smart. Regardless of which is the case in this instance, Governor Corzine is positioned to weather the current financial storm. The Governor has, since returning to Office, been relatively silent on the subject. During this pause, the Governor has listened to objections, made several principle adjustments, but has generally refused to engage his critics on the particulars of his plan.

Silence prevents recrimination. No on can compare his plan to the hedge funds and private equity firms currently falling by the wayside or point out the structure of his proposed financing has defects similar to the financings that set off the current round of turmoil.

Indeed, watching the turmoil develop has allowed the Governor to preempt criticism. Hedge fund and private equity firm involvement would taint the plan and thus has been removed by committing not to “sell the turnpike” to such firms, but rather to sell future revenues to the State through a “public benefit corporation.”

Furthermore, seeking to place the approval of any asset monetization on the ballot not only disengages the issue from the November election (or at least provides Democrats with cover), it kicks the can down the road until there is a settling of the market’s dust. Maybe the next budget.

Finally, with Treasury Secretary Abelow as Chief of Staff, Governor Corzine makes a surrogate expert voice available to the press and the public. This voice serves to (1) deflect criticism of the concept, (2) rehabilitate legislative and public opinion about asset monetization and restore their confidence in, or at least a necessary evil acceptance of, the concept, and (3) to do all of this in a manner consistent with new legal, political and market realities. In effect, Chief of Staff Abelow is the Investment Banker brain, the deal man driving and reshaping both the product and the ongoing public relations effort.

Part 2. Going forward, the first task of Governor Corzine and Chief of Staff Abelow will be to defend their past actions and assure the public all is well. The New Jersey track record with the hedge fund world is mixed. Although Amaranth Advisors may have cost NJ $8 million on a $25 million investment, the thirst for higher returns has not been dampened by the higher risk. And, while NJ investment types are scattered throughout various sectors of the world economy, and thus generally impacted by the global crisis and any resultant downturn, primary focus will be on the infrastructure investments. As of May 23, 2007 NJ owned 32 million shares in the private equity firms of Cintra and Macquarie Infrastructure. Both Cintra and Macquarie are managers of public goods like toll roads and bridges. Both have been mentioned as potential buyers for the Turnpike.

Part 3. Words like monitor, assess, gauge and manage, adjust and refashion are the bywords for the foreseeable future. Short term, market volatility should set the tone for any monetization strategy. At this point tactics seem reactive. Only when the markets really stabilize and the damage to economic growth better understood will the Governor be able to shift asset monetization from a defensive to offensive posture.