Remember PPIP? The Public-Private Investment Program was to provide cheap government financing to encourage investors to overbid for banks' toxic assets.
Investors would overbid, it was thought, because they were being offered a free put option. If the toxic assets they bought fell further in value, taxpayers would be left holding the bag.
The program has been largely left for dead, but the FDIC still sees some life in its part of the plan. Last week, the agency had a pilot sale, offering loans out of the estate of failed Franklin Bank, whose assets are in FDIC receivership.
Sure enough, the winning bidder elected nearly the maximum available amount of non-recourse leverage, resulting in a 22 percent premium for the assets over bids that didn't take advantage of leverage.
On the surface, this seems like a good thing for taxpayers, since the higher purchase price accrues to the FDIC's Deposit Insurance Fund.