Tarpley & Underwood
Financial Advisors, LLC
The Public-Private Investment Program
Can the latest bank rescue plan help to repair troubled thrifts?
President Barack Obama, left, flanked by Treasury Secretary Timothy Geithner, and Federal Reserve Chairman Ben Bernanke, and Vice President Joseph Biden, right, receive an Economic Briefing, Monday, March 23, 2009, in the Roosevelt Room of the White House in Washington.
White House Photo by Chuck Kennedy, www.whitehouse.gov
March 23, 2009
Treasury Secretary Timothy Geithner announced details of a new Obama administration effort to get banks lending again – a “critical piece of our plan to increase the flow of credit and expand liquidity.” The blandly-named Public-Private Investment Program depends on private investors to boldly step up and buy up troubled assets with a little encouragement from the federal government.
Treasury Secretary Timothy Geithner announced details of a new Obama administration effort to get banks lending again – a “critical piece of our plan to increase the flow of credit and expand liquidity.” The blandly-named Public-Private Investment Program depends on private investors to boldly step up and buy up troubled assets with a little encouragement from the federal government.Keyword: Cooperation. The PPIP aims to marshal federal and private resources to remove as much as $1 trillion in illiquid real estate assets from the hands of banks. This way, the private sector can share some of the risk of the effort, the government can leverage taxpayer dollars, and competition can help to set market prices for the assets.
The program calls for a public-private partnership – the federal government will couple $75-100 billion of remaining TARP funds with private capital to generate $500 billion in purchasing power, complemented by financing from the Federal Reserve and debt guarantees from the Federal Deposit Insurance Corporation.1,2
By offering low-interest loans and TARP money, the plan hopes to attract private sector investors to buy about $500 billion in toxic assets in its first stage. The White House expects pension funds, insurance firms and other long-term investors to bid for the troubled assets.3 Private asset managers will be selected by the federal government in May.1
Why doesn’t the government just buy up the bad assets? Some economists have suggested that sweeping move, but Secretary Geithner feels this public-private partnership is the best option among three plausible choices. He doesn’t want to leave the assets sitting on banks’ balance sheets. “Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience,” he noted in the Wall Street Journal.4
Former Reagan-era Treasury Secretary James Baker and Nobel Prize-winning economist Paul Krugman both think that the government should just take over banks in trouble, fire their executives, and dispose of illiquid assets. Geithner disagrees: “We are the United States of America, we are not Sweden.”2
