PPIP as High-Stakes Poker

Thomas Edsall at HuffPost breaks down the PPIP through an easy to understand poker analogy, revealing its central flaw: that the taxpayer is too much on the hook. (A nod to The New Republic’s Noam Scheiber, whom I don’t always agree with, but who alerted me to this at The Stash).

Compare Geithner’s new March 23 “Public-Private Investment Program” to a poker game – something people are more familiar with than the offloading of toxic assets:

Normally, a poker player has to pay full value for every chip, $1 for a $1 chip, $100 for a $100 chip, and so forth. In the Geithner game, the rules are different. A player acquiring $84 worth of “chips” only puts up $6. Of the remaining $78 which S/he owes, the FDIC would provide – in the form of a nonrecourse loan — $72, and the US Treasury would put up $6.

Let’s say the player has a good night, and makes $200 over and above his/her original $84 “investment” with a total stack of $284 (his/her $200 profit and his/her initial $84 buy-in). Our happy camper then takes $84 off the top out of which s/he pays $72 back to the FDIC, and $6 dollars back to the Treasury. S/he would pocket the original $6 investment.

The remaining $200 would then be split between our talented player and US Treasury, each getting $100, good news for one and all. There are no limits on the upside: if the player has an extraordinary night and makes $10,000, s/he will get $5,000, all from an original investment of $6.

If, however, our player has a terrible night, and loses the initial stake of $84, the downside is just $6. S/he gets to gamble $84 with the worst possible outcome being the loss of $6 — not a bad deal. If Donald Trump could offer that, his Entertainment Resorts would not have filed for bankruptcy on February 18 of this year.

There are a number of folks with expertise in economics who share this way of looking at the Geithner plan. Columbia economist Jeffrey Sachs, an outspoken critic, took the poker image one step further, telling the Huffington Post: “It’s as if the taxpayers, banks, and hedge funds are playing poker, but the hedge funds get to use the taxpayer’s chips.”

For more about this, see my article about the troubles with PPIP.