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PPIP Lives! At Least a Little Bit!

Mike Konczal takes a look at one of the first deals reached by Geithner's half-living PPIP program. The assets, in this case, come from Franklin Bank, a Houston-based lender who failed and got taken over by the FDIC last November. Here's the deal that taxpayers got:

Private investors have come in with $64m, to get a 50% stake in ... $1.3bn in mortgages. The Treasury provides the other $64m, while the FDIC provides 6-to-1 leverage to purchase this. The [total] bid on the loan is $727m. So for the small price of $64m, or about 8% of the bid, they get half the upside gains while only absorbing a bit of the downside loses.

"This is a terrible deal," Mike concludes, and I'm inclined to agree. But then, the deal wasn't necessarily the point. As Mike writes, there were two larger arguments for PPIP: get banks to lend again, and get information on the price of these assets. But in this case, Franklin Bank is dead and buried, never to lend again. As for the pricing function?

We [now] have a market price for toxic assets. $1.3bn is only worth $727m. Is the Rubin family and the rest of the Obama economics team going to march to Wall Street and use this to mark down the asset values of the largest banks? I’m not holding my breath. Most of the crucial actions taken to replace PPIP – replacing the accountancy rules and enacting the stress test – were used to replace this information problem with methods that produced numbers that were less transparent and more friendly to the big banks.

So we’ve just auctioned out half the upside of this loan while retaining most of the downside for pennies, without accomplishing either of the major goals of why we were interested in PPIP in the first place. I’d like call my elected official but nobody voted for this bill. I seriously worry this is a prep run for bigger bids coming down the line …

There's a final argument that the Treasury Department is simply showing that this program can work in order to encourage larger, living banks that need to use it. I don't know how seriously to take that rationale, however. There's a good argument that if we hit another rough patch and the banks needed to use the PPIP program to clear out their books, then they'd use the program on the already favorable terms they've been given. We don't have to run taxpayer-funded demonstrations for them.

By Ezra Klein  |  September 21, 2009; 12:42 PM ET
Categories:  Financial Crisis  
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how can this be considered creating a "market" price with have the capital coming from taxpayers?

if it becomes a bench mark going forward it is a hell of lot better than the last open source information of such a trade that had the toxics valued at, if memory serves, 23 cents on the dollar (WSJ October/November 2007).

In any case if there is no buyer on the other side can it be said there is a market let alone a market price?

as to "if we hit another rough patch and the banks needed to use the PPIP program to clear out their books.." I believe it is not a question of if but when...

Posted by: teoc2 | September 21, 2009 1:12 PM | Report abuse

This is a weird use of the PPIP. It seems like a way for FDIC to buttress its disappearing balance sheet, and that the main thing that's being auctioned is lucrative management fees.

Posted by: bmull | September 21, 2009 1:15 PM | Report abuse

I just want to point out that pennies on the dollar is pretty meaningless. Both .99 and .02 quality. I'd be ok if we got 99 cents on the dollar, but two cents? Not so much.

Posted by: jeirvine | September 21, 2009 1:42 PM | Report abuse

Who are the "private investors"? Can I get in on one of these deals? If they're getting say 4% net from $1.3B, that's $52M a year. But they only own a 50% stake so that knocks them down to a paltry $26M annually. For a $64M investment that is a 26/64=41% return. As taxpayers, we own the other 50%. How's that a bad deal? You can argue the risk is high but the mortgages are already discounted to 56% of face value.

Posted by: BertEisenstein | September 21, 2009 1:52 PM | Report abuse

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