Why Is the PPIP Still a Go For Launch

Remember the Public-Private Investment Program announced by Treasury back in March? The program was supposed to buy up the toxic assets that were weighing down bank balance sheets. Well, after taking its good ‘ole time in coming together, the program is now ready to take off—right about the time that it’s almost certainly not needed:

Five investment funds that raised $1.94 billion in private capital to purchase troubled assets through the Public Private Investment Partnership can start buying next week. The PPIP, announced by the Treasury back in March, was designed to boost demand for toxic securities backed by residential and commercial mortgage loans.

While prices have been rallying for months, sometimes as much as 50%, many public pension funds have invested in the PPIP funds. Because of the gains, investors are unlikely to get the 20% to 30% returns that were expected when the program was first announced. Instead, analysts and investors say returns of 15% are more likely.

The recent surge in prices has caused critics to question the need for the government program. The PPIP did its job, they argue, even before it even came into existence. But others say the government involvement will help add a floor under the market, especially if delinquencies on the underlying mortgages rise. The program, too, may help banks and insurance companies offload toxic assets that are weighing on their balance sheets.

Even though the program was originally pitched as a $1 trillion program, it has now been significantly scaled down:

With the financial crisis abating, the government’s first foray into buying troubled assets totaled around $4.5 billion, a quarter of which came from private investors. Treasury officials said the initiative could eventually expand to $40 billion, a fraction of what was initially envisioned by the Obama administration. Even at that amount, it is unclear how much impact the program would have on the markets for mortgage securities and other assets, which reach into the trillions of dollars. The effort was scaled down significantly in recent months as banks became less interested in selling off mortgage securities at bargain prices just as they were beginning to recover their value.

In July, I wrote that we should just scrap PPIP:

One half of the PPIP plan, or TARP II, has already been shelved. PPIP was going to use a combination of private capital, taxpayer funds, and FDIC guarantees to buy toxic assets—legacy assets—from the banks… Interestingly, though, the FASB adjustment of mark-to-market accounting rules in April has reduced the need for this program. Banks have been able to adjust what the declared value of their assets are worth, easing the liquidity pressure.

PPIP was a bad idea when it was launched, it was a bad idea to pursue, and its an even worse idea now. Why should the government expand its debt guarantees when a focus on controlling the money supply and reducing the deficit should be of the highest priorities? Short answer: no good reason.