Can the stress tests breathe new life into PPIP?

By Felix Salmon
April 24, 2009

According to the FT today, there are increasing signs that the PPIP is going to go the way of the MLEC — which is to say, nowhere. Potential buyers are worried about regulatory uncertainty, while potential buyers have very little interest in selling at fire-sale levels.

Meanwhile, Ryan Avent reckons that the government is going to have to come up with hundreds of billions of dollars, somewhere, to recapitalize banks in the wake of its stress tests — even as it doesn’t have hundreds of billions of dollars, and there’s no chance that it will be able to get hundreds of billions of dollars from Congress.

Are you thinking what I’m thinking? Just as the original TARP was designed to buy up toxic assets and then got repurposed to inject capital directly into the banks, might the same thing happen with the PPIP? Might it be the case that investors who are wary of buying up hard-to-value toxic assets might be more keen on leveraging FDIC guarantees to buy common stock in public banks? And if Timmy asks her nicely, is there any way that Sheila Bair could say no to such a plan?

I’m not clever enough to come up with a structure which would make such a plan workable — it’s hard to see what kind of event would trigger the FDIC guarantee. Still, I’m sure there’s an options whiz out there who could construct something. The market could then be asked to value those equity-like securities, and any private investor — even you or me — would have the ability to buy them at the market price, thereby helping to recapitalize the banks concerned.

Neither the stress tests nor the PPIP has really gone according to plan since they were announced: maybe some kind of marriage of the two is the only way of saving them.

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