"Games PPIPers play
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- Economist.com | WASHINGTON
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- Financial markets
PEOPLE continue to worry about the potential gaming of the government's public-private partnership plan to relieve banks of troubled assets, now more than ever in the wake of a story last week suggesting that banks might just buy and sell their troubled assets to each other. That's the gist of a Business Week story linked by Tyler Cowen, which says:
Besides the generous terms, the partnerships have loopholes big enough for an investment banker to drive his Ferrari through. The basic problem: Everyone gets to play. Banks selling dubious assets can finance their sale to the partnerships, investors can buy debt from banks in which they own shares, and on and on. Strictly speaking, there's nothing wrong with much of this. But many of the strategies to exploit the partnerships increase the chance that the feds will overpay for the debt, sticking taxpayers with the bill.
And Mike at Rortybomb is raising eyebrows by recounting the Enron-era Death Star strategy—moving stuff around, creating no value, and making tonnes of money along the way.
My reaction to these stories is the same as it has been all along—incredibly damning if true. But is all of this really possible? Many of the scenarios sketched in the Business Week story seem to be explicitly ruled out by the framework provided by Treasury. The latest FAQ on the PPIP plans (updated just today and available at FinancialStability.gov) includes this, for instance:
Are there any restrictions on the acquisition and sale of Eligible Assets by Fund Managers?
Yes. A Fund Manager may not, directly or indirectly, acquire Eligible Assets from or sell Eligible Assets to its affiliates, any other Fund Manager or any private investor that has committed at least 10% of the aggregate private capital raised by such Fund Manager...
Can TARP recipients participate in the Program?
Treasury seeks proposals from a range of participating institutions to be pre-qualified as Fund Managers. Treasury will consider the overall financial health and stability of the applicant as a potential factor in its evaluation.
Who knows how Treasury will choose to exercise its authority in choosing potential participants. It is clear that not everyone gets to play, and it's also clear to me that the Treasury will be under significant political pressure to not let banks like Citigroup get involved in buying things through these funds, particularly if they're also selling (and if they're not selling, I don't know what the point of the plan was in the first place). The government will also be receiving some stress test results fairly shortly. The consequences of allowing banks that perform poorly on the tests to behave in dubious ways in the auctions are sure to be extremely high, politically and financially.
I agree that if the gaming scenarios listed above come to pass, everyone in Treasury ought to be run out of town. Given how absurdly bad those scenarios would be, and how the Treasury seems to be at least nominally interested in preventing them, I don't know that it makes much sense to be accusing the government of bad dealings just yet."
Me:Don the libertarian Democrat wrote:
I agree with you. There's no way to fairly respond to these posts, because they are all " What if X ?" type arguments. What if? When I read the White Paper, it seemed to disallow many of these scenarios, but it's hard to tell.
It's hard to fault these arguments, because it's good to be aware of possible pitfalls,and some of the more heuristic arguments, like Hempton's and Mulligan's, do make sense to me. But these arguments are making their own assumptions and models, which might not have anything to do with reality. Where have we seen that recently?
From The Stash:
http://blogs.tnr.com/tnr/blogs/the_stash/archive/2009/04/04/why-the-geit...
"Then there's this point, which is very important. In a nutshell, Goldman shows why the Geithner plan won't be as bad a deal for taxpayers as all the teeth-gnashing suggests:
We have read numerous op-eds decrying the PPIP [this portion of the Geithner plan] on the grounds that the government is taking on enormous risk. Typically, these criticisms focus on “binary” scenarios: either the loans are worth a lot or they are worth zero, and in the latter case the government loses a fortune. [See here, for example.] While these types of examples are generally good for building intuition, they exaggerate the potential cost to the government"
I couldn't read the whole Goldman paper, but that quote sounds like my view. It's as if there's a contest to concoct the dumbest and most venal plan that the PPIP will allow. Can't we at least wait to see the plan in detail?