Will the Public-Private Investment Program (PPIF) announced today by Treasury Secretary Timothy Geithner work or won’t it? If you listen to former Treasury Secretary Paulson’s chief of staff, the PPIF won’t work—Paulson and his team rejected a similar scheme last year. The program—which seeks to “unfreeze” credit markets by having government and private investors buy toxic assets side-by-side—is the ultimate SIV, Stephen Morrow writes in today’s New York Post. Read here for Morrow’s opinion piece listing the reasons why Obama’s PPIF won’t work. One main reason: It will still be hard getting buyers and sellers anywhere near each other in pricing the securities.
Banks still believe there is intrinsic value to many of these securities and that the prices will, therefore, come back. But one critic of Geithner’s plan argues the exact opposite: that the PPIF will not work because it assumes that the toxic assets will recover in value.
Economist James Galbraith said today that Geithner’s plan may give the banks a chance to offload assets, but the assets will realize massive losses and those losses “will fall to the Treasury and the FDIC.” Galbraith, author of the book, Predatory State (an anti-free-market polemic), says, “The recovery rate on sub-prime mortgages is extremely low, because they are mortgages that should have never been issued in the first place.” The mortgaged-backed securities were issued fraudulently and aided by fraudulent ratings agencies. “For the banks, it’s an extremely good deal,” because they get those assets off their books, giving them a smaller loss than they otherwise would get, Galbraith says. It’s a bad deal for the taxpayer and the private investors, who would absorb the losses.
Rochdale Research’s Dick Bove thinks the PPIF is a “mixed blessing” for banks and financial companies holding real estate backed loans and securities. “Many banks have written down their securities holdings to levels where they might be enticed into this new program,” Bove writes in a research note issued just a couple of hours ago. “Virtually no banks have written down their loan portfolios to levels that might lead to transactions.”
He says banks are loath to mark down their loan portfolios since “it would destroy bank capital,” and might cause a bank to fail the new ‘stress’ tests underway. Banks will not take this risk.”
Meanwhile, former Oppenheimer & Co. analyst Meredith Whitney is setting up her new shop in some 5,000 square feet Lexington office space. In an interview with New York magazine, Whitney—heralded as a Wall Street soothsayer for saying in October 2007 that Citi was a bust—but says “I don’t need a bear market to stay in business.” Her new company, Meredith Whitney Advisory Group, LLC, will continue to focus on research, but Whitney says she is applying for a broker/dealer license, “because she believes the investment banks are distracted by their problems, she thinks she can grab a piece of the business advising banks on restructuring and acquisitions.”