It Seemed Like a Good Idea at the Time
It’s not easy to recall, but the cornerstone of the administration’s policy to stabilize the banking system is the so-called PPIP — the Public-Private Investment Partnerships designed to help get troubled assets off the balance sheets of the nation’s banks. The idea was to use up to $100 billion in remaining Troubled Asset Relief Program money, leveraged to up to $1 trillion in purchasing power, to create public-private investment funds that would bid on packages of troubled assets. While the plan did offer to wring the maximum bang out of $100 billion in TARP bucks, it seemed overly complex, and almost perfectly designed to allow tomfoolery on the part of participants.
Of the opportunities for tomfoolery available, the one that generated the most hand-wringing was the prospect for self-dealing. It was felt that banks might submit a small portfolio of assets for auction, while also signing up to join a bidding partnership. A bank could then bid up the price of its own assets using the government subsidy as support. This would help the bank in two ways. The government subsidy would allow the bank to overpay for assets and still have the opportunity to enjoy a gain on the portfolio, and the high price established for the loans would extend to all similar assets on the bank’s balance sheet, making it look much stronger financially than it actually is.
Yesterday, The Wall Street Journal reported that banks were basically asking for the explicit ability to do this, as a condition for them to participate in the program at all. This led The New Republic’s Noam Scheiber to ask whether PPIP was actually necessary at all. According to a story in The Journal today, a growing number of people in Washington are concluding that no, it really isn’t.
I am very much inclined to agree. The world has changed quite a bit since the plan was introduced. Markets have risen, making it easier for banks to raise private capital, and the results of the stress test seem to have been broadly accepted. In this climate, many of the healthier banks seem to be able to recapitalize themselves privately. Devoting TARP resources to such banks would be a poor use of increasingly scarce funds — essentially, government handouts to firms that no longer need the help.
Instead, it seems like a better idea to hold those funds in reserve, to be used if the more troubled banks, like Bank of America or Citigroup, cannot find their way out of their messes without additional support. While $100 billion would not be sufficient to shore up the banking system as a whole without a lot of FDIC-facilitated leverage, $100 billion is enough to stabilize one or two large banks. Having come this far in improving faith in the banking system and bolstering confidence in the leadership at the Treasury department, it seems unnecessarily risky to try and move forward with the opaque and uncertain PPIP auctions. Time to consign that particular policy to the scrap heap.