A strange thing happened over the past could weeks: the incredibly hyped and debated Public-Private Investment Program started to die and no one seemed to notice. There have been a handful of stories. The Wall Street Journal reported on May 28 about the first part of the program’s death:
The Legacy Loans Program, being crafted by the Federal Deposit Insurance Corp., is part of the $1 trillion Public Private Investment Program the Obama administration announced in March as a way to encourage banks to sell securities and loans weighing on their balance sheets to willing investors.
But prospective buyers and sellers have expressed reluctance to the FDIC about participating for fear the program’s rules will change in a political atmosphere hostile to Wall Street. In addition, some banks that might have sold troubled loans into the program earlier in the year have become less eager as they regained a sense of stability.
The other half of PPIP is supposed to be run by the Treasury department. However, given the success banks have had in raising capital in the wake of the stress tests, banks may continue to show reluctance to participate in the program in the near term until they are sure they need to.
This is good news, first because PPIP puts the taxpayers at significant financial risk while removing it from the banks that should be stuck with their bad investments. Second, because it shows that there might be more health in the banks than originally thought. Still, many economists believe that the banks need to clear their toxic assets before becoming healthy and this is just delaying that process.