Geithner PPIP Plan Is Just More Cash for Trash

Hi All,

Sometimes we Americans may expect too much from our public officials. I’ve had a chance to digest the latest Geithner plan a little bit. Its looking more and more like a clever retread of last September’s famous “cash for trash” plan advanced by former secretary Paulson.

The plan, euphemistically called the Public-Private Investment Program (PPIP) or “Legacy Assets Plan”, has been billed as a way to mobilize private capital to help address the problem of toxic assets held by banks. The main idea of the plan is to set up a number of public/private partnerships to encourage market based valuation of “legacy assets”. The Federal Reserve and Treasury Department would subsidize the risk by guaranteeing up to 85% of the value of assets in question using Federally backed loans.

The main potential problem with the plan is that financial markets have demonstrated that these “legacy assets” are worth very little. If they had any real value at all, they would have been traded without government assistance. To make matters worse, most of the organizations who have an incentive to participate in these programs are the banks themselves. So, whats probably going to happen is the banks will create shell companies or use proxies to get involved in the program. They will then allow their subsidiaries to take the loss, thus jettisoning their worst “assets”. – From the banks standpoint, that’s the rational thing to do.

Of course, what this means is that the Treasury and the Federal Reserve will be on the hook for the balance of the losses. It could very well be a neat transfer of bad “assets” from the big banks to the public balance sheet. Hardly getting rid of the problem, this just makes Americans as a conglomerate on the hook financially. That means, yes, that it will come from our wealth-building activities be it work or investing.

If you haven’t seen it, here is an excellent video which gives one persons views on the downsides of the PPIP scheme. I’m leery of promoting videos from less well known sources, but this one seems well thought out.

Here is a piece from Nobel winning Economist Paul Krugman opposing the plan. Here is a collection of links from major press sources giving some initial reactions to the proposal.

Best,

James