Has The Obama Administration's Banking Plan Failed?
When Tim Geithner's Public-Private Investment Partnership (PPIP) plan was announced, it dominated commentary for a solid week. It was big, complicated, controversial, and, it seemed, important. It was the center of the administration's most important project: Rescuing the banking industry. The program to buy toxic loans received particular attention: The government's 6:1 match seemed to violate basic rules of fairness. It gave taxpayers a bit of upside but the overwhelming majority of the downside. Wall Street had gotten us into this mess by making risky investments that the rest of us ended up shouldering when they went bad, and now we were asking them to get us out by making risky investments that the rest of us promised to pay for if they proved unwise. Finance, it seemed, was a pretty sweet industry.
But when that piece of Geithner's PPIP plan died last week, it did so with a whimper. A couple of news articles. A smattering of blog posts. This was the center of a trillion dollar effort to rid the balance sheets of toxic assets, and it just....disappeared.
But that doesn't just mean the loans weren't purchased. It also means they weren't priced. That, after all, was the primary virtue of the PPIP plan: The government would pay private investors (by offering them the 6:1 financing deal) to uncover the market prices for the "legacy loans." Once the market could agree on a price for these assets, it could also agree on a form of resolution for the banks -- either the assets could be sold or the institutions nationalized.
Observers suggested there were two ways for this to go. Either the assets would be priced and sold, or they wouldn't be priced because the banks wouldn't be able to sell them without blowing a hole in their balance sheets. In that scenario, the market would have proven the banks effectively insolvent, and we could respond accordingly. Hopefully, this would all happen in tandem with the stress tests, and by the end of the process we'd know two things: Whether the banks could sell their toxic loans, and whether the banks could survive the continual worsening of the economy.
In fact, we know neither. The adverse scenario envisioned in the stress tests looks increasingly mild. The tests imagined a world in which unemployment reached 8.9 percent. Last month, unemployment reached 9.4 percent. The PPIP's loans program has died, the assets sit unpriced, but there is still no judgment as to whether that means the banks are insolvent or, conversely, in such surprisingly good condition that they can let the loans mature on their balance sheets.
In other words, it doesn't seem like we know a lot more than we knew a few months ago. The economy certainly "feels" better, and that's been enough to drain the urgency from some of these questions. But have the questions really gone away?
(photo credit: Bill O'leary -- The Washington Post Photo )
June 8, 2009; 11:02 AM ET
Categories: Financial Crisis
Save & Share: Previous: Does the Federal Reserve Want to Increase Inflation?
Next: Think Tank Update
Posted by: hovaness | June 8, 2009 12:24 PM | Report abuse
Posted by: umesh409 | June 8, 2009 12:24 PM | Report abuse
Posted by: GingerYellow | June 8, 2009 12:44 PM | Report abuse
Posted by: paul314 | June 8, 2009 1:02 PM | Report abuse
Posted by: AgentG | June 8, 2009 1:07 PM | Report abuse
Posted by: rkinneypa | June 8, 2009 2:06 PM | Report abuse
Posted by: 1uncle | June 8, 2009 2:08 PM | Report abuse
Posted by: toiletminded | June 8, 2009 2:11 PM | Report abuse
Posted by: patroclus | June 8, 2009 2:55 PM | Report abuse
Posted by: leshoro | June 8, 2009 3:03 PM | Report abuse
Posted by: billycdc | June 8, 2009 3:09 PM | Report abuse
Posted by: CincyJen | June 8, 2009 3:15 PM | Report abuse
Posted by: bobinfla | June 8, 2009 6:22 PM | Report abuse
Posted by: BruceMcF | June 8, 2009 9:53 PM | Report abuse
Posted by: earther | June 8, 2009 11:57 PM | Report abuse
The comments to this entry are closed.