Public-Private Investment Program

Later today, we get the gritty details about the latest bank rescue plan. In the WSJ, Treasury Secretary Tim Geithner details his new toxic asset disposal program.

It is now nearly 18 months since the crisis erupted, and we are several trillion dollars into this, with little to show except a halting of sheer panic. The thought process seems to be, whats another trillion dollars?

Regular readers know my preferences: Nationalize the banks, eliminate the dent, clear out the toxic assets without saddling taxpayers with absurd costs.

Here is some of the specifics to via Geithner:

“The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

The new program starts at $500 billion dollar,s and ramps up to $1 trillion dollars. Creating a market for these thinly traded hard to value assets is harder than it appears. Hence, the massive outlay of cash.

Originally published at The Big Picture blog and reproduced here with the author’s permission.

54 Responses to "Public-Private Investment Program"

  1. Marilyn Russell   March 23, 2009 at 8:22 pm

    Clearly this plan will allow the oversea arms of our investment firms to send our bad assets home. By purchasing them overseas where they have no market, they can pick them up for pennies. However, can we be sure when these assets are repackaged for sale in the U.S. they will not contain foreign bad assets as well? This could result in the U.S. becoming the bad bank of the world.

  2. fake economist   March 24, 2009 at 6:20 am

    Geithner’s plan is siphoning planGeithner’s plan is worse than Pualson’s plan because the plan will definitely cause over-pricing assets purchase and also cause the siphoning from taxpayers’ money into banks and Wall street investors, definitely worse than Madoff ponzi scheme. Why? We are allowed the assets sellers-Wall street investors (Banks, Hedge funds and all kinds of funds) can join in the program to buy assets. They can be both buyers and sellers and they can set up groups of buyers to bid the assets at the over-price and the loss will come to taxpayers’ money. For example, the intrinsic value of asset at 100 dollars but the sellers and buyers are the same Wall Street investors such as CITIGROUP, JP Morgan of BofA. They definitely want to buy like 150 dollars meaning they will gain 43 dollars (gain from assets sales at 50 dollars but loss from private capital investment at 7 dollars) but the tax payers’ money will lose 43 dollars from the public capital at 7 dollars and the FDIC guaranteed bonds at 36 dollars. Therefore, Geithner’s plan is siphoning plan from taxpayers’ money into the banks and Wall Street investors. If the total plan is 1 trillion dollars, we could expect the loss up to 300-400 billion dollars if they allow Wall street investors to join buying at 40-50 % over intrinsic value. Therefore, we should reduce conflict of interest by not allowing the sellers or the investors who are holding the assets to join buying assets in the program.Why depression occur from government’s reckless interventionAnother point I would like to explain why the economic situation is getting worse to depression if the policy makers transfer the loss from the private investors to taxpayers or we call it as the severe cost of intervention. We have to understand that the private investors/speculators hold the risky assets under risk management plan that they can get loss from investing; however, the taxpayers do not have the plan or risk management for the loss on investment. Therefore, when the government intervene the market and get loss (we are definitely facing the increasing loss of FED and FDIC and we could expect to see more under reckless Geithner’s plan), it is like money transfer from private investors into taxpayers and taxpayers will have to compensate the loss by higher taxes and higher cost of living such as the higher inflation or higher cost of fund such as the higher long-term government bond yield. I think the worst case scenario is not recession with deflated price but the depression with hyperinflation because there will be the wealth destruction to consumers and taxpayers not free lunch private investors or producers. I think every country face the same problem; all the loss going to taxpayers but all the gain going to investors and producers and this is the real crisis of economic sustainability and the huge burden to the next generation.

  3. Guest   March 27, 2009 at 10:00 am

    PPIP explained with poo poo: