THE STASH MAY 28, 2009
Yesterday I wondered whether the Public Private Investment Program, designed to provided government financing for the purchase of banks' toxic assets, was still necessary given the banks' success at raising money from investors these last few weeks and the government's view that they'll be able to earn their way out of their financial problems. Today the Journal chimes in with a piece about how some in government are wondering the same thing. Most of the second thoughts seem directed at the government program designed to help investors purchase toxic loans (as opposed to toxic securities, like mortgage-backed securities):
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. ...
At a Wednesday news conference to discuss the condition of the banking industry, FDIC Chairman Sheila Bair hinted at the [loan] program's uncertain future, without providing details. "There are a couple of factors that are still at play here as we try and develop this structure," Ms. Bair said.
She added: "Banks have been able to raise a lot of new capital even before taking more aggressive steps to cleanse their balance sheets, so the incentives to sell may be less."
In an encouraging sign, Bair did rule out the idea of banks being able to buy up their own bad loans using government financing.
My concern here is that the reasons the loan portion of PPIP is more likely to fade away than the securities portion is that the banks would have to sell off their toxic loans at a much bigger loss than they'd have to sell off their toxic securities. Which is to say, the reason may have more to do with the banks refusing to do something they don't want to do than with their improving financial situation.
Update: To clarify, while the seeming improvement in banks' health has made both the loan and securities portions of PPIP less pressing, it sounds like the securities program is still moving forward while the loan program is teetering. The original block quote from the Journal piece muddled that point a bit, so I cleaned it up.