Public private investment program PPIP

The Bloomberg article linked below is not strictly about the PPIP but it is intimately related. I’ve read a number of explanations of this boondoggle and when I try to explain it to people I know, I see them glaze over. I’d like to take another crack at it because when approved, this program is the get-out-of-jail-free card for all those that have speculated and amassed fortunes over the past twenty years and now that things are going against them, they are passing the buck unto you and me.

Here is the skinny on PPIP.

You’ve heard that the major banks are in trouble due to their ownership of “toxic assets”

Toxic assets are assets that have lost most of their value.

Assets have lost most of their value because they cannot be sold.

Assets cannot be sold because nobody wants that type of asset at the price the banks are asking.

Banks are asking higher prices because if they sell at a lower price they would go bankrupt

– (it is a bit as if you were in debt to the bank but did not want to sell your house to cover your debt because at current prices, the amount of money you would get is not enough to cover your debt) –

Now

Although Western governments have given Trillions in cash to the banks and have underwritten the obligations of the worst offenders, the banks are still in trouble. The value of the toxic assets in question is truly gargantuan and most folk would have only come across similar figures when reading science fiction books.

Enter Geitner

What Geitner proposes and will most likely get approved is the following.

Suppose you are Citi Bank and you have $100 in toxic assets

Geitner proposes to induce private investors to buy these assets from the banks

Inducement will take the form of cash incentives

Private investors will pay $5

The Treasury will match the $5

The Fed Reserve will pony up $90

Presto! Citi gets $100 dollars and the private investor walks away with the toxic asset.

Here is the trick.

If toxic assets should appreciate one day, the private investor makes money and reimburses the Fed and the Treasury (other than repaying their participation, it is not clear if profits will be shared with the Treasury and the Fed i.e. you and me)

If toxic assets should bomb out one day, the private investor has lost $5 … but… if you are a keen observer, the Fed and the Treasury (i.e. you and me) lose $95

If you haven’t spotted the problem in this boondoggle here it is.

It is impossible to prevent Citi Bank from becoming the private investor and using the $90 of taxpayer money to buy the assets from themselves. All Citi needs to do is create a Special Investment Vehicle (SIV) and impersonate a private investor.

Suddenly, if you refer to the calculation above, if assets should one day appreciate, Citi makes out like a bandit

But if assets crater, Citi loses $5 whereas the taxpayer loses $90

Boondoggle?

Absolutely and it is about to be approved.

http://www.bloomberg.com/apps/news?pid=20601087&sid=armOzfkwtCA4&refer=home

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One Response to “Public private investment program PPIP”

  1. What the PPIP program is all about… « Guido’s temple of the absurd Says:

    […] What the PPIP program is all about… By guidoamm For a refresher on what the PPIP is, read this. […]

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