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 out, with titles so lengthy I will not attempt to list them in full. Remember the M-LEC programme that was launched to reorganise the shadow banks (but quickly died)? Then came Talf, TSLF and Tarp, which aim 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. Part of the programme will cover loan sales and be run by the Federal Deposit Insurance Corporation; the other half, relating to securities, will be organised by the Treasury. In both schemes, asset managers will be given state finance to encourage bids. So will this latest acronym-filled endeavour work? (Or, at least, avoid the fate of the ill-starred M-LEC?) If you listen to some senior US bankers, it is easy to feel pretty doubtful that the PPIP can really fly. The key sticking point is price. The PPIP plan will work if banks take part to sell assets. But right now, no banker wants to participate in an auction that produces asset prices lower than those 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 hope to avoid this scenario by encouraging asset managers to place high bids for the bank assets, by offering non-recourse leverage of up to five times (or far higher than non-recourse leverage available in the market). Some politicians hate that, since the details of the deals mooted so far appear to leave taxpayers with little embedded upside.
That political scrutiny, in turn, makes asset managers nervous. As a result, it is still unclear whether enough asset managers will produce bids that are high enough to make the banks happy with an auction price.
So some large banks are – unsurprisingly – adopting a policy of quiet footdragging. A senior official at one large bank observed this week that his group would participate in a pilot scheme, as a gesture of goodwill. But after that token gesture, this bank will probably stop.
And while the government wants to set a minimum lot size of $1bn, this bank is lobbying for a figure nearer $250m to limit the auction to a few choice (token) assets. Unsurprisingly, this banker – like others – concludes that he is “not optimistic” about PPIP, not least because the urgent pressure to sell assets is receding as banks raise capital.
That view may not be 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). 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 as a chunk of firelighter on a pile of wet wood. Thus, the sheer act of talking about PPIP – and then staging a few sales – may be enough to kickstart a private sector trading toxic assets again. Or so the hope in Washington goes. “Success is what happens to the market overall,” says one.
They have a point, given that there is some evidence that schemes such as Talf are contributing to a market thaw. But, almost irrespective of whether PPIP “succeeds” in delivering many deals (and personally I have doubts that it will), there may be another reason to welcome it.
Most notably, irrespective of the complexities of arranging deals, the PPIP 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. Hence their continued horror at the idea of open trading.
That is the real scandal that bedevils the PPIP idea. That in turn points to a wider lesson for the future: namely that to avoid a similar credit disaster, it is crucial that financiers are forced to place as much financial activity as possible on transparent trading arenas. Better still, they need to do that well before a bubble bursts – or there is any need to start fighting over whether a PPIP can truly fly.