What the heck is PPIP?
Friday, 06/26/2009 - 12:11 pm by Arjun Jayadev | 2 Comments
Thorny theories, prickly policies, complicated issues and complex arguments explained by the experts.
It’s pronounced “pee-pip”, rather proposterously, but PPIP, a plan to rid banks of toxic assets, is no joke. So what the heck is it?
The Public Private Investment Program (PPIP) was announced on March 23rd, 2009, as a key initiative of the United States Government to restore the banking system to health.
Currently, banks hold a very large number of what are popularly known as ‘toxic assets’ (i.e. assets which have lost an enormous amount of value and which are hard to sell given the uncertainty about their future value). Given this, banks are unable to raise new capital and are less able and willing to lend money making the cost of credit very high. The PPIP was ostensibly designed to remedy this situation by facilitating the transfer of these toxic assets from the banks to other entities (typically private funds, insurance companies and pension funds which would be willing to hold these risky assets given their different maturity requirements), thereby allowing banks to increase lending again. It was argued that the private market might better be able to price the assets than the public sector and therefore the best policy would be for the government to facilitate this transfer rather than taking over the banks itself.
In order to do this, the PPIP was to provide funding to assist private investors in buying these assets as well as reduce their risk. While the particular details differ between the ‘legacy loans‘ program and the ’legacy securities’ program, in both, the essence of the initiative was for taxpayers to provide funding in partnership with the private sector to buy the securities. In both cases, however, the public sector had potentially more funds at risk than the private sector (in the former, the ratio could be 6 to 1, in the latter 3 to 1). Most problematically, the fact that the loans to the private sector from the taxpayer were non-recourse loans (i.e. loans for which the only guarantee was the collateral of the asset), this means that the taxpayer could be on the hook for the downside more than the private sector. A particularly clear example is provided by Joseph Stiglitz in his NY times op-ed. This, as well as other details has made this a highly controversial program.
As of writing, the PPIP has not yet been started and the more controversial legacy loans program has been indefinitely postponed. Robert Johnson has warned about the scope of the problem in relation to PIMCO here on ND20.
Roosevelt Institute Braintruster Arjun Jayadev is an assistant professor of economics at the University of Massachusetts, Boston, and a visiting research fellow at the Columbia University Committee on Global Thought.
Thank you for this explanation. It behooves all citizens to get themselves an education on economic policy right now. Your site is doing a great job providing this service. Many thanks!
Posted by Nellie Frances | June 26th, 2009 at 12:45 pm
This was a good primer, but you missed a few important points.
You remarked correctly that there was and is an uncertainty about what “legacy assets” (a better name might be “legacy” loans “) will be worth in the future.
Will be worth?….Exactly.
That is in fact a valuation using International Valuation Standards, which is sadly not used in USA. Instead they use the rules laid down by FASB, but those say nothing about what something “will be worth”.
The reason for PPIP was that the TARP program which was initially supposed ti buy “legacy assets” (Troubled Assets Repurchase Program - unkindly tagged Toxic Assets..by some), was changed, mainly (or partially) because no one knew how to do the valuations.
PPIP was supposed to solve that by getting the private sector (the market) to do the valuations, the idea was that companies like PIMCO ought to be able to do those.
But it didn’t work, it is now stalled.
All that was left was for the Fed to buy those legacy assets at an undisclosed price via the TALF program, there are rumors that they paid 100 cents on the dollar, but no one knows, and perhaps no one will ever know.
So far they bought over $1 trillion worth, that may sound like a lot but between 1998 and 2008 about $20 trillion of those assets were packaged up and sold in USA.
The other thing that happened was that bank regulators decided to practice “forbearance” which is what Nelson did when he put the telescope onto his blind eye, and recognize the value of legacy assets on the books of financial institutions at a much higher value (in terms of what they will be worth in the future), that everyone knows they will really be worth.
Posted by Andrew Butter | March 5th, 2010 at 12:50 am