Why the PPIP is making bankers squeak and squirm

By Gillian Tett

Published: May 22 2009 03:00 | Last updated: May 22 2009 03:00

Cometh the hour, cometh the acronym. Thus might run the unspoken motto of American financial policy these days.

As the banking saga has unfolded in the past two years, a string of US initiatives have tumbled, with titles so lengthy I will not attempt to spell them all out. Eighteen months ago, for example, the M-LEC programme was launched to reorganise the shadow banks (but then quickly died). Then Talf, TSLF and Tarp emerged, to provide liquidity, restart the securitisation machine and recapitalise the banks.

Now a new focus is emerging. This week Tim Geithner, US Treasury secretary, said that a "PPIP" - or public-private investment plan - would start in early July to use $75bn-$100bn of state funds to encourage the sale of up to $1,000bn of toxic assets by banks.

The part of the programme relating to loan sales will be run by the Federal Deposit Insurance Corporation; the other half, relating to securities, will be organised by the Treasury. But in both schemes, asset managers will be given state finance to encourage bids.

So will the latest acronym-filled endeavour work? (Or, at least, avoid the fate of the ill-starred M-LEC?) If you listen to some senior American bankers today, it is easy to feel cynical.

The key sticking point is price. The PPIP plan can only fly if banks take part. But right now, no banker wants an auction that produces asset prices that are lower than those currently on bank books. After all, if that were to happen, banks would face pressure to make more writedowns - which they can ill afford.

The Treasury and FDIC want to avoid this scenario by encouraging asset managers to place high bids for the bank assets, courtesy of hefty dollops of cheap leverage (and other complex financial incentives). But that stance is controversial with politicians - which, in turn, makes asset managers nervous. As a result, it is unclear whether enough asset managers will produce bids that are high enough in these auctions to make the banks happy with the sales price.

In the meantime, some large banks are - unsurprisingly - adopting a policy of quiet footdragging. A senior official at one large bank, for example, says that his group will participate in a pilot scheme to offset political criticism. But he does not expect the participation to go beyond a token gesture.

And while the government wants to set a minimum lot size of $1bn, this particular banker wants a figure nearer $250m to limit the auction to a few choice (token) assets. Unsurprisingly, this banker concludes that he is "not optimistic" about PPIP.

That view, while echoed elsewhere, is not entirely representative: another bank tells me it is preparing to get properly involved (not least because it has the financial strength to have written many assets down). Meanwhile, the government officials running the PPIP scheme insist there is strong overall interest from potential buyers and sellers.

They also point out that it need not matter if the scheme ends up being limited in size. After all, what PPIP is trying to do (like Talf and much else) is reignite market activity, not replace it. Think of it, if you like, as a chunk of firelighter on a pile of wet wood.

Thus, Washington officials hope that the sheer act of talking about PPIP - and then staging a few sales - will be enough to kickstart a wider initiative to get the private sector trading toxic assets again. "Success is what happens to the market overall," says one.

They have a point. There is some evidence that schemes such as Talf are (slowly) contributing to a market thaw. And while I harbour doubts that the PPIP scheme will fly on a large scale - let alone be a magic bullet to the bad loans - it seems worth pressing ahead.

After all, irrespective of the size of future PPIP sales, it has already served one extremely valuable function by highlighting the sheer insanity that has bedevilled the financial world in relation to asset prices.

Most notably, if large American banks had previously marked their assets at a realistic market-based price, they would not be so scared of engaging in auctions with PPIP now. Better still, they might have spotted earlier the degree to which their assets were deteriorating - and taken action to address it.

But precisely because the supposedly "free market" western financial system has become stuffed with complex assets that were rarely traded - even during the credit boom - banks have been able to use fantasy prices for their assets for years. Somehow, that insanity must end. If a PPIP scheme raises pressure for that, even indirectly, that is good.

In the meantime, the real lesson that financiers and politicians urgently need to learn is a wider one: namely that to avoid a similar credit disaster in the future, it is crucial to place as much financial activity as possible on transparent trading arenas, be that an exchange or anything else. And to do that well before a bubble bursts - or there is any need to start fighting over a PPIP.

gillian.tett@ft.com