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April 14, 2009

The Public-Private Investment Program : That'll cost ya...


by Ron Daly

The government is getting better and better at its magic act. Want to make bad assets disappear? Can do! Let's just shuffle them off of the balance sheet...and into the hands of another bank? Hmm...

A pair of articles in the CU Journal raise questions about the legitimacy and efficiency of the forthcoming Public-Private Investment Program, the most recent "Alphabet Soup" program from the Treasury. While the program has yet to be engaged in full and the kinks still need to be ironed out, concerns about fair play and conflicts of interest are already making financial managers and potential investors uneasy.

[Read the CU Journal Articles: "Should Banks Be Allowed to Play Both Sides?" | "Worries Expressed Over FDIC'S Mission" ]

Obviously, the health of the institutions in question is an issue for critics of the program. CitiGroup and Bank of America, banks that have been "bailed out" to the extreme, are not expected to buy more "Legacy Loans". But can a "healthy" bank really be determined at this point in the recession? And can adding "legacy" liability to your corporate scheme keep you in the black? Sure, if you can count on the government to be able to back the investments - which they're doing. Which raises its OWN questions.

Michael Pereira's WSJ article, "How to Make the Bank Asset Plan Work" (click here to read) calls to mind the legal snares that come with trusting the Government as a trading partner. The fact that the government is cracking down on gains by taxing them out of the hands of investors makes the program a hard sell. Also, as the second CUJ article points out, the FDIC as a guarantor is making many investors uncomfortable. Are more bank failures around the corner? Will the FDIC be able to manage payouts if so?

It's interesting to follow the PPIP. Reminds me of the shell game I saw at the carnival once. The public took the beating in this decline and has had to deal with the constant re-shuffling of these "Legacy Loans" (the re-branded "Toxic Asset"). Is this thing structured to take a little of the burden off the backs of the people? If other banks are going to be able to make money on this whole affair, and the banks where it all started can breathe easy not having the Legacies/Toxics on their books, where does John Q. Public get his share? Do the people benefit from this at all? Or will we be lost in the shuffle?

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What if all corporate bonuses were paid in bad assets? Instead of getting a 1 million dollar check, banking CEOs could get 1 million in delinquent mortgages or low rated mortgage backed securities.

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