Buy My Book Here

Fox News Ticker

Please check out my new books, "Bullied to Death: Chris Mackney's Kafkaesque Divorce and Sandra Grazzini-Rucki and the World's Last Custody Trial"

Tuesday, June 30, 2009

The New and Improved PPIP Is Ready to Launch

It received much fanfare, speculation and criticism when it was first introduced both in February and in March. Now, the Private Public Investment Program (PPIP) is about set to launch. Secretary Geithner first talked about this in February. When he made his initial speech on the matter, he was very vague and general. The market proceeded to plunge four hundred points in the aftermath. Secretary Geithner came back in March with a much more detailed plan and the market responded more favorably. The plan is extremely complicated and it's ultimately unclear if it will work. It has also since gone through a major rework. The PPIP is the Treasury's plan to try and get so called "toxic assets" off the books of banks. Removing these so called "toxic assets" (very poorly valued Mortgage backed securities for instance) was one of the center pieces of the administration's economic recovery. It would allow for an auction among selected hedge funds and other private financial firms to buy these "toxic assets. The private firms would put up some of their own money and the federal government would loan the rest. (as such the public private investment) Now, it's just about ready to launch.

The PPIP has gone through a long gestation process, interviewing many prospective investors and scaling back its scope, which at one point was hailed as a $1 trillion endeavor. It now looks to do business worth around $50 billion.

Markets initially rallied when Treasury Secretary Timothy Geithner announced back in March, a two-pronged plan to offer government financing to lure investors into buying bad loans and toxic securities from banks.

Originally, the program was supposed to be worth near one trillion dollars. Some estimates put "toxic assets" at near five trillion dollars. Clearly, what we have now won't resolve much of anything. I can only hope and assume that the Treasury has decided to roll it out in a small way to see how it works. If so, that might be wise. This plan is terribly complicated and rolling it out all at once could spell disaster. Still, given the enormous amount of toxic assets banks hold, it's easy to see just how difficult this task will be given they are only rolling out $50 billion for now.

What's much more curious is the list of hedge funds involved in the PPIP. There are reported to be nine and those nine includes GE Capital. It's frankly nothing short of uncanny how often GE, and its subsidiaries, are on the receiving end of a favorable Obama program. It's no secret that both MSNBC, CNBC, and NBC, all GE affiliates, have given President Obama very favorable coverage. Now, we have another example of GE receiving a favorable business deal from the administration.

In April, Bill O'Reilly featured this Talking Points Memo about a GE subsidiary that would stand to benefit handsomely from cap and trade.

Meanwhile, after working behind the scenes, GE was able to convince the Obama administration to change the guidelines of TARP and TALF in order to qualify for bailout funds.

At the same time, GE has avoided many of the restrictions facing other
financial giants getting help from the government.

The company did not initially qualify for the program, under which the government sought to unfreeze credit markets by guaranteeing debt sold by banking firms. But regulators soon loosened the eligibility requirements, in part because of behind-the-scenes appeals from GE. As a result, GE has joined major banks collectively saving billions of dollars by raising money for their operations at lower interest rates. Public records show that GE Capital, the company's massive financing arm, has issued nearly a quarter of the $340 billion in debt backed by the program, which is known as the Temporary Liquidity Guarantee Program, or TLGP.

GE qualified as a bank merely because they own two small banks in Utah. Of course, it is the very same GE Capital that was the recipient of the bailout.

This of course brings up another issue. Why was GE Capital chosen as one of the hedge funds to participate in the program? Aren't we only supposed to be dealing with hedge funds that are healthy? More than that, if GE Capital received a bailout, then wouldn't it stand to reason that they would be using government funds to buy these toxic assets. Wouldn't that remove the "private" from the public private partnership. Here's how the Treasury Department describes the sort of company it wants in the partnership.

The Treasury Department today announced the receipt of more than 100 unique applications from potential fund managers interested in participating in the Legacy Securities portion of the Public Private Investment Program (PPIP). A variety of institutions applied, including traditional fixed income, real estate, and alternative asset managers.

Successful applicants must demonstrate a capacity to raise private capital and manage funds in a manner consistent with Treasury's goal of protecting taxpayers. Treasury will also evaluate the applicant's depth of experience investing in eligible assets. Finally, the applicant must be headquartered in the United States.

Now, given that GE Capital needed bailout money, wouldn't that mean that both their ability to raise PRIVATE capital and their ability to manage funds would be suspect?

Just think about this for a minute. Here's how the PPIP is supposed to work. The private companies would put up only one twelfth of the money. The rest would be loaned from the government. If the investment ultimately lost money, the loans would be forgiven. Any profits would be shared by the private firm and the government. That's a pretty sweet deal for any firm chosen to participate. It's even sweeter when said firm recently received a government bailout. It sounds as though GE Capital will essentially be allowed to buy up toxic assets with no risk and all government money. (I have emailed GE for comment. So far I haven't received a response. I will update if one comes. The Department of Treasury says they will soon release their guidelines for choosing companies to participate in PPIP and have no comment until then)

No comments: