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Putting “The Fix” in the PPIP

By Larry Doyle on May 28, 2009 at 9:00 AM in Economy, Sense on Cents (Larry Doyle blog)

Is the Obama administration once again going to be party to “underworld” business principles in an attempt to promote the success of a program to clean up the banks? Let’s go down into ‘the street.’

The TALF (Term Asset Based Lending Facility) so far has had middling success. The PPIP (Public-Private Investment Partnership) is yet to be rolled out. Investors have been reluctant to participate in these programs, despite attractive financing terms, because of concerns in partnering with a capricious and at times vindictive Uncle Sam. These programs, as with any transactional program, have one major potential flaw: self-dealing. I highlighted this point on April 7th in my post Games of Chance: TALF, PPIP, TARP, FDIC, FASB. I wrote:

In a slightly different version of the game – and in attempt to attract more players, if not necessarily truly new money – the government is considering allowing the sellers of toxic assets to also be buyers. How does that version of the game work? The sellers (Citi, BofA, JP Morgan, et al):

. . . can put up a few percent of their own money, and swap each other’s toxic assets financed by a bewildered public suddenly bearing more than 90% of the downside risk. The “investors” in this happy “public-private partnership” keep half the upside while ordinary Americans take the downside off of their hands. Some partnership. [From John Hussman at John Mauldin's Outside the Box]

Fast forward to May 27th and this version of the “game” is being proposed by the dealers. The Wall Street Journal highlights, Banks Aiming to Play Both Sides of Coin:

Some banks are prodding the government to let them use public money to help buy troubled assets from the banks themselves.

Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government’s Public Private Investment Program.

PPIP was hatched by the Obama administration as a way for banks to sell hard-to-value loans and securities to private investors, who would get financial aid as an enticement to help them unclog bank balance sheets. The program, expected to start this summer, will get as much as $100 billion in taxpayer-funded capital. That could increase to more than $500 billion in purchasing power with participation from private investors and FDIC financing.

The lobbying push is aimed at the Legacy Loans Program, which will use about half of the government’s overall PPIP infusion to facilitate the sale of whole loans such as residential and commercial mortgages.

I can already hear the pontificating on how rigorous the oversight of this program will be. Geithner and team will produce a set of selling points to “make the case.” All that said, games of chance are actually exceedingly simple. The dealer and another player or two fabricate a reasonable chance for success for new participants (taxpayers) while knowing full well the table is tilted, the “fix” is baked in, and the “dough” is going home with them. The WSJ highlights these concerns:

“To allow the government to finance an off-balance-sheet maneuver that claims to shift risk off the parent firm’s books but really doesn’t offload it is highly problematic,” said Arthur Levitt, a former Securities and Exchange Commission chairman who is an adviser to private-equity firm Carlyle Group LLC.

“The notion of banks doing this is incongruent with the original purpose of the PPIP and wrought with major conflicts,” said Thomas Priore, president of ICP Capital, a New York fixed-income investment firm overseeing about $16 billion in assets.

One risk is that certain hard-to-value assets mightn’t be fairly priced if banks are essentially negotiating with themselves. Inflated prices could result in the government overpaying. Recipients of taxpayer-funded capital infusions under the Troubled Asset Relief Program also could use those funds to buy their own loans.

The fact that banks want to “play the game” again truly indicates the character and integrity of this crowd. Self-dealing is common practice in the underworld. We have witnessed the violation of private contracts in the housing and automotive sectors.

Will Geithner and team allow taxpayers to be run over once again via self-dealing within the PPIP?

Doc99

Uh oh … looks like This Story’s Got Legs.

Evidence appears to be mounting that the Obama administration has systematically targeted for closing Chrysler dealers who contributed to Repubicans. What started earlier this week as mainly a rumbling on the Right side of the Blogosphere has gathered some steam today with revelations that among the dealers being shut down are a GOP congressman and closing of competitors to a dealership chain partly owned by former Clinton White House chief of staff Mack McLarty.

The basic issue raised here is this: How do we account for the fact millions of dollars were contributed to GOP candidates by Chrysler who are being closed by the government, but only one has been found so far that is being closed that contributed to the Obama campaign in 2008?
http://www.sonicninjakitty.wordpress.com Sonic Ninja Kitty

Larry–great article. Depressing as all get out. That question has got to be rhetorical.

Is there any doubt left as to what has really been going on these past few months–years, and decades, for that matter?

The Fed and the government are not friends of the taxpayer. They are in it for personal profit. We the people are forced to privatize their gains, socialize their losses.

Audit the Fed, support HR 1207. Then end it: HR 833. Break the stranglehold these people have on our earnings and futures.
candymarl

It looks as though the taxpayers are going to get thrown under the bus again.

I still don’t understand why the taxpayer has to pay for the poor financial planning and greed of these banks.

Another 100 billion huh? Of course the “oversight” will consist of much huffing and puffing and promises from Geithner and crew.

Or maybe they’ll behave as the Fed did and just tell Congress it’s none of their business.
FrenchNail

Larry,

Could you elaborate, in a post, on what both of those propositions are (HR1207 and HR833). Or if you already have done it, could you refer to it.
Doc99

Obama Stimulus A Failure At 100 Days.

Apparently, the new Obama math is that 150K jobs “saved” or “created” at a cost of 1.57 million real private sector jobs and $787 billion from taxpayers is “success.” Perhaps that success is part of the reason why unemployment is at its highest level in 20 years and will continue for months and months ahead.

Or, if that doesn’t work, it’s BOOSH’S fault.
http://www.senseoncents.com Larry Doyle

I have not but will put it on the list.
http://noquarter foxyladi14

he can’t keep blaming Bush forever.
sooner or later he is going to own this mess..
Portia Elizabeth

Thank you, Larry.
I’d be interested to learn more on these, too. I’m trying not to be too alarmed without knowing all the facts, but it’s getting harder to keep calm with all the facts mounting up.
oowawa

In an article titled “The Looting has Become Brazen,” Karl Denninger, steam coming out of his ears, writes about this same topic:

http://market-ticker.denninger.net/archives/1065-The-Looting-Has-Become-Brazen.html

This is the way he puts it:

Most of the time when you rob someone . . . you wear a ski mask so your identity is at least somewhat obscured. This has gone well beyond that; the banks are now robbing the public out on the open with the full complicity and cooperation of the government.
http://www.sonicninjakitty.wordpress.com Sonic Ninja Kitty

FrenchNail and Portia Elizabeth,

Larry could write something much better, but here is my attempt at shedding some light:
http://sonicninjakitty.wordpress.com/2009/05/28/feducation-for-all/

I wrote it for you guys. I hope it helps.
http://www.senseoncents.com Larry Doyle

Great recap of these two proposals. Very well done.

Why wouldn’t we audit the Fed and create real transparency and integrity in the process. This is a no-brainer. Unfortunately it appears that perhaps those who need to make this happen have no brains. The pols are beholden to the power and not the people.
http://www.sonicninjakitty.wordpress.com Sonic Ninja Kitty

Thanks LD! You made my day

Yes–why wouldn’t we audit the them?? The argument against it is so thin (they ‘need’ some confidentiality). The benefits to the markets (ie, the public) would be tremendous.

It seems there is unprecedented steam behind Ron Paul’s bill this time around–179 co-sponsors. I hope it goes through.