PPIP, irrelevant before its time

October 5, 2009

Maybe the problem is with the acronyms.

The government’s once-sweeping PPIP plan to suck out venomous assets from a crippled financial system now looks more like a public relations campaign to prove to the world that the U.S. Treasury will finally make good on an initiative that has failed more than once.

First there was M-LEC, the superfund championed by former Treasury Secretary Hank Paulson early in the credit crisis to vacuum up unwanted assets held by SIVs. It never got off the ground.

Then there was TARP, a Paulson brain child that was going to target toxic assets corroding bank balance sheets. Those funds were quickly diverted elsewhere.

Now there’s PPIP, the Public-Private Investment Program, which was first announced earlier this year as a trillion-dollar powerhouse that would once and for all deal with the securities that brought the global financial system to its knees.

No matter that Wall Street banks have since increased their capital cushions, and a more favorable accounting treatment of the assets makes holding onto them much more attractive. The Treasury is pushing ahead. It has no choice.

To again pull back from such a program would be a public relations disaster. It would also most likely undo PPIP’s big, and arguably more relevant, success in helping kick existing commercial and residential real estate bonds out of the doldrums this year.

So far, five funds participating in PPIP have raised roughly $3 billion to spend on distressed real estate bonds. Even with Treasury’s matching funds and the government’s generous financing, the total to be deployed by these funds stands only at little more than $12 billion — a mere sliver of the original planned amount.

But just the idea of PPIP has done wonders for valuations of difficult-to-trade mortgage bonds. According to Barclays Capital, prices have gone up about 10 to 15 points, or cents on the dollar, over the last few months, with bonds backed by fixed-rate Alt-A mortgages increasing from the low 50s to high 60s.

That’s been excellent news for the banks and insurance companies that gorged on these securities during the boom, and blanched when they went into a death spiral during the last year’s panic. It could also mean that sellers will prove much more reluctant to part ways with the assets now that things are finally beginning to look up.

“I don’t think people really want to sell,” said Simon Johnson, an economics professor at MIT and co-founder of the website BaselineScenario.com. “It seems largely irrelevant at this point.”

But not for markets. So expect more headlines this month about the amount raised as the remaining eligible funds get closer to closing. It should keep the positive momentum going.

Just don’t confuse this with actually ridding the system of toxic assets once and for all. That goal was abandoned a long time ago.

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