So the last few days have seen various bloggers tussling over what the postponement of one part of the public-private investment program -- Treasury's effort to remove toxic assets from bank balance sheets -- means. But not so fast! The government isn't about to admit that the plan is dead.
I e-mailed Treasury spokesperson Meg Reilly to get a handle on the situation, and specifically to check on the progress of the Federal Reserve-financed half of PPIP, which targets securities and not loans. "Treasury is definitely still moving forward with PPIP -- actively refining the program and interviewing asset managers," Reilly writes back. Really, I ask, citing the Times? "That article is about a pilot program. The PPIP itself is still moving forward," Reilly e-mails. Both parts of the PPIP? "Yes. The two parts are legacy and securities. Both are still in development."
Huh. Given that the pilot program looked to be basically equivalent to the funding mechanism envision by the PPIP -- investors provide a small amount of capital, it is leveraged by the Federal Agency, used to purchase legacy assets, with the bulk of the risk on the government's balance sheet but profit split 50-50 (remember, this is about getting credit going, not making money) -- it's hard to see how the pilot program's failure doesn't take the whole FDIC side back to the drawing board. (I've seen no reports thus far that the Fed-side is having similar troubles.) But in any case, I called the FDIC, and found something interesting: Though one pilot program is dead, there's going to be a new pilot program this summer to test the financing mechanism I just described. The only difference is that the legacy assets in question have been seized from failed banks taken into recievership. Check it:
As a next step, the FDIC will test the funding mechanism contemplated by the LLP in a sale of receivership assets this summer. This funding mechanism draws upon concepts successfully employed by the Resolution Trust Corporation in the 1990s, which routinely assisted in the financing of asset sales through responsible use of leverage. The FDIC expects to solicit bids for this sale of receivership assets in July.
Interesting -- they couldn't get banks to sell their legacy assets, so the government is going to sell the toxic assets acquired through seizure back to private investors -- financed by the government! It could actually work, since part of the financing plan was an implicit driving-up of prices, meaning that the FDIC could lose less capital on losses sustained on seized assets. Presumably, if the mechanisms work, banks will be more iinterested in participating in the future.
So PPIP apparently survives. Long live PPIP?
-- Tim Fernholz
Picture of FDIC Chair Sheila Bair courtesy the New America Foundation.
