Reuters reports that this week Geithner is expected to provide the details of his Public Private Investment Fund, (PPIF) for removing toxic assets from banks’ books.
Yesterday, in the chat with Rob Johnson, I asked him his opinion of this plan, and here’s what he said:
I am not a fan of the current plan for public private investment partnership. It looks like Wall Street and hedge funds who are big campaign contributors get non recourse loans to bet on upside and hand the downside back to the taxpayer. The subsidy from the public pushes up the price that the private will pay banks, who want too much for the assets because marking them down makes them insolvent. This in some cases will make big investors like PIMCO, Carlyle, Blackstone and others some money and will not get to the heart of the problem. The only thing that could be said on the other side is that we already own the losses and maybe a few of the losses could be mitigated because the private guys put up some money. But if the prices are set too high instead of marking down the assets then it is not the case. Note people who specialize in distressed assets like John Paulson in the hedge fund world say there is an active market for all of these assets but they trade at prices the banks will not accept.
The Reuters link above has this tidbit:
The bad asset plan is expected to be structured similar to the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF), which is scheduled to launch this week to help unblock consumer lending markets.
The TALF enables banks to package credit card debt, car loans, etc. into securities and sell those securities to buyers (hedge funds, etc.) who will be be given below-market-interest-rate financing to purchase them. The financing is non-recourse (i.e if any of the securities they buy with the financing become impaired or default, they can merely hand back the security to the government instead of paying off the loan).
Initially, the banks selling the securities were to be bound by the TARP rules limiting employee compensation. The buyers would not be. I suppose that made sense; obviously, they want to get the securities markets going again for this type of debt, and don’t want to discourage buyers.
However, there was a last minute change. Now the banks selling the debt securities will also not be bound by the employee compensation limits.
Perhaps even this is somewhat defensible. The TALF is intended to get new lending started. You could argue that you would want to encourage healthy banks to participate in this program.
But I won’t be the least surprised if Timmeh’s PPIF turns our to share this feature with the TALF.
Last week, on Charlie Rose’s mostly powder-puff interview with Timmeh, Charlie asked what would happen if the banks still refused to sell the toxic assets at the prices that were offered via the PPIF. Timmy replied that they would make it "compelling" for the banks to sell.
I suppose you could interpret the word "compelling" in an ominous light, implying duress.
But maybe, just maybe, he intended it to mean exactly the opposite