What the heck is PPIP?

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.