The Easter Bunny, the Tooth Fairy, and P-PIP

The Easter Bunny, the Tooth fairy, and P-PIP
Most adults recognize the Easter Bunny and the Tooth Fairy as childhood fantasies that they are. On the other hand, most adult Americans have no idea what P-PIP even stands for or what it is supposed to do.

P-PIP stands for Public Private Investment Program. In case you haven’t figured it, P-PIP is a federal government program. It is one element of the federal government’s vision to lead the financial system out of the current mess.

Here’s how it is supposed to work. Nine or ten private investment companies will contribute about $10 billion in total. The federal government, on behalf of taxpayers like you and me, will contribute $30 billion. The money will be used to purchase toxic loans and assets that are being carried on the books of the nation’s banks. Once the toxic assets are sold off, the banks, in theory, will be able to make more loans and the increased volume of lending will help the economy to recover quicker.

Doesn’t that sound swell?

Or, are you more nervous now and worried about the future?

I, for one, am worried about the future because I think this plan is not going to work.

Here’s why I don’t think P-PIP will work. The total capital of P-PIP will be $40 billion. If we assume the program uses leverage [borrowing money from someone else to increase toxic asset purchasing capacity] and we use a 10 to 1 leverage factor, we have about $400 billion to purchase toxic assets.

Sounds good so far, right?

Unfortunately, the $400 billion will not even come close to covering the total amount of toxic assets in the banking system. The Treasury Department’s press release from last week said the total amount of toxic assets was around $1 trillion. The New York Times stated the total amount of toxic assets was in “the trillions.”

Anyway you do the math; you end up with not enough money to do the job.

There are other reasons why this program is unlikely to work. I don’t think anyone really knows how many toxic assets there are out in the financial system. In the December 17, 2008 issue of the New York Times, it reported that there was at least $107 billion in commercial real estate loans that were in default or headed towards a default.

Today, that number is probably much higher. The $107 billion amount was determined only three months after the financial meltdown began in earnest. I know that it takes time for an asset to go from being a good, solid asset for a bank to becoming a toxic asset that no one wants to have anything to do with.

The next trouble area for me is that I wonder how much experience these investment companies have in managing troubled, toxic assets. Having spent a year working for the FDIC’s Division of Liquidation in the mid-1980s, I know how difficult it is manage commercial properties, even for highly trained experts. I suppose that the investment companies could hire property managers to look after things but that will cost money that they probably don’t have.

How do you value a toxic asset?

How do you determine what its true worth is?

Those are simple questions that are extremely difficult to answer. There is no readily available data on values or prices for toxic assets like we have with the stock markets that have a precise closing price at the end of the day for each security that is listed on that exchange. Many of the toxic assets are a one of a kind project that makes comparison difficult. If we wanted to invest in Intel or AMD, for example, we could find precise price information in addition to substantial amounts of other useful data.

Where will the P-PIP find lenders who are willing to make a loan to purchase a known toxic asset, even at a steep discount? I think that most bankers who will still have jobs in 2010 will be only willing to consider lending on gold plated, rock solid assets.

So, gentle readers, this is why I have my doubts with P-PIP to accomplish its stated mission.

Regrettably, I don’t have any solutions of my own to offer except to suggest that failure is not such a bad idea. Failure cleans the debris and financial cancer from the economy, leaving it healthier and more robust that before. Historically, our nation has experienced financial panics and depressions and survived. The survivors of any cleansing of the financial system will be stronger and more viable and this is a natural process where the strongest survive, grow, and prosper.

Now, if the federal government wants to get the economy moving, I’d settle for my share of the $30 billion P-PIP contribution. I think that would work out to $100 or so; math has never been a strong skill for me. I would promise that I would go out and spend that money on all sorts of useful things such as lunch at Morton’s The Steakhouse with my son.


Be well and stay happy.