Fisher Investments Editorial Staff
US Economy

The Program That Wasn’t There

By, 06/30/2009

Story Highlights:

  • The Treasury's Public-Private Investment Program (PPIP) has made little concrete progress since its unveiling three months ago—sapped by lackluster interest.
  • PPIP's failures won't stall the financial system's recovery—and are in fact a bullish sign. The lack of interest in PPIP suggests banks are finding other viable ways to deal with these assets outside Uncle Sam's stewardship.
  • The emergency Fed lending programs—TSLF, TALF, CPFF, PDCF, etc.—paint a similar picture of improving bank health.

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Good in theory doesn't always translate to good in reality. For example, the Treasury's Public-Private Investment Program—PPIP—looks to be DOA. Originally conceived to rid banks' balance sheets of "toxic" assets through auctions to private and government-backed investors, the program's made little concrete progress since its unveiling three months ago, sapped by lackluster reception. Already, the program is a shell of what was originally promised—the FDIC postponed the Legacy Loans Program arm of PPIP (essentially the "public" component of PPIP) earlier this month.

Why don't investors want to play ball with the government? Perhaps because it plays dirty—it's known to change the rules mid-game. Perhaps PPIP (and its predecessors—the original TARP, the "bad bank" concept, etc.) fails simply because the "toxic" assets are worth far more than "market" prices. In this way, federal programs are often at odds with their intended aims and with each other—which is ironic.

PPIP's failures won't stall the financial system's recovery—and are in fact a bullish sign. The lack of interest in PPIP suggests banks, for the most part, are finding other ways to deal with these assets rather than resorting to government aid. Banks are no longer in desperate positions grasping at government straws.

PPIP's acronym cronies—TSLF, TALF, CPFF, PDCF, etc.—paint a similar picture of improving bank health. These emergency Fed lending programs provided $1.4 trillion to financial institutions at the peak of the financial crisis, but activity has since fallen to $900 billion outstanding. Encouragingly, the Fed will allow TALF (Term Asset-Backed Securities Loan Facility) to wind down by 2009's end and TSLFO (Term Securities Lending Facility Options) to immediately suspend operations. The Fed also reduced terms for two other core programs—suggesting demand for Fed loans is slowing.

The market has natural ways to signal when something's obsolete. Banks are showing signs they prefer to operate independently of government aid. It's fine and good to have these programs function as backstops, so long as they stay in the background and allow capital markets to continue recovery otherwise unfettered.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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