So Pat Garofalo had a smart post yesterday on the Public-Private Investment Program, whose heritage dates back to Neel Kashkari's (remember him?) original plan to stop the financial crisis in the summer of 2008. It was rejected by then-Treasury Secretary Hank Paulson, started up again by the Geithner Treasury Department and the FDIC last spring, and stopped by the FDIC over the summer. In the last few months, it's finally getting off the ground at Treasury. Garofalo correctly observes that the biggest banks are making a killing with the program, which involves Treasury using TARP money to provide incentives for the purchase of so-called toxic assets -- often mortgage-backed securities, which weren't being bought or sold because of worries about their real value. Meanwhile, taxpayers only stand to make a small profit. But if the deals go bad, the banks lose their small stake while the public loses it's much larger one. It's not exactly a fair deal for a commercial investor, but the point of the program is to create a market for these securities and find a way for banks to strengthen their capital holdings, not to make money for taxpayers. That might be morally offensive, but the program is working if banks are making money and these assets are being sold. (I can't say I'm too impressed by the criticism from the other money managers in this Bloomberg piece, since these guys generally have huge undisclosed financial conflicts of interest with whatever issue is being discussed.) This was a much better plan last spring, when banks still looked incredibly shaky and recovery seemed frighteningly far away, but it took too long to get off the ground. Now, we should be much less concerned about strengthening the financial system and more interested in fixing it. PPIP is set to move from a clever scheme to one more talking point for those who take a zero-sum view of the financial sector -- anything that benefits the banks must hurt the public -- even if that isn't the smartest way to look at the situation. Optics aside, the real worry is that this will fuel another speculative bubble if the fundamental value of these securities isn't reflected in their prices, which seems likely. The best way to strengthen these markets is from the ground up, by stopping foreclosures and getting people into homes they can afford to make the payments on. I've documented the problems with Treasury's approach to that project, and even more trouble is in the offing.
-- Tim Fernholz
