Bailouts on Hold

Part of the Public-Private Investor Partnership (PPIP) -- one of several government-backed bailouts designed to right the banking industry -- could be on hold just weeks after it was announced.

The plan originally called for up to $100 billion of taxpayer money to leverage into a $1 trillion public-private investment fund able to purchase toxic assets from banks. The idea was that by getting private money involved, a "fair" price for the assets could be found, creating an environment where banks could deleverage their balance sheets while not exposing taxpayers to undue losses.

PPIP is divided into two segments: One run by the Treasury designed to purchase debt securities, and one run by the Federal Deposit Insurance Corporation designed to purchase loans in their entirety. Both programs rely on the idea that private investors would be lured in by government-funded leverage that could result in big-time payoffs.

Unfortunately, as The Wall Street Journal reports, prospective investors are shunning the idea of having the government as a business partner. The FDIC's portion of PPIP -- known as the Legacy Loans Program -- appears to be getting such an icy welcome that it could be put on hold entirely.

Can anyone blame investors for getting cold feet? Of course not. After the bonus snafu with AIG (NYSE: AIG  ) , followed by the arm-wrestled negotiations with General Motors bondholders, private business wants to stay as far away from Washington as humanly possible. Meanwhile, Goldman Sachs (NYSE: GS  ) and JPMorgan Chase (NYSE: JPM  ) are trying to free themselves from the shackles of government intervention as fast as they can.

One good example of private investors shunning PPIP comes from hedge fund behemoth Bridgewater Associates. The firm recently opted out of managing PPIP's assets in part, as its CEO wrote, because "there will be reasons for politicians to complain and to focus on the [asset managers] to see how they 'abused' the system."

In other words, we saw you slap around the bank CEOs for not acting like good little government wards. Now you want us to step up to the plate? Seriously? That's what you want us to do? Please sir, may I have another?

Now, some say this is no big deal. And not because they're opposed to bailouts in the first place, but because the economic "green shoots" are apparently so convincing that banks mightn't need to dispose of their toxic loans anymore.

I don't buy this for a second. The idea that a six-week stock rally can erase the need to cleanse literally trillions of dollars from banks' balance sheets seems quite optimistic, especially as unemployment continues to climb and real estate continues to fall. Sure, banks like Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) are on their way to convincing the Treasury that they're adequately capitalized. But I still can't figure out why investors should believe the Treasury can determine precisely how much capital banks need when the market surely couldn't.

Bottom line, banks still need a mechanism to cleanse their balance sheets, but it doesn't look like PPIP will be as big a help as some thought. Then again, the program was fraught with problems to begin with. So maybe this is a blessing in disguise.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (15) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 02, 2009, at 6:26 PM, judyshrink wrote:

    It seems to me if the government 'restrictions' are motivating companies to solve their own problems and/or get paid out of trouble ASAP, that they are doing the very best thing for all of us. Paying companies to run their businesses poorly does not work to the best advantage of anyone in the long run

  • Report this Comment On June 02, 2009, at 6:48 PM, robertf36009 wrote:

    No one is interested in having the FED as a busines partner. They saw how bond holders were treated at Chrysler and Government Motors. Should we change that to Democrat Motors? Buy the 2010 Obama SUX 6000. Peddal power on demand and a two cylender engine you can use on alternate Saturdays when you are allowed to burn fossile fuel. Bridge Water was wise to ditch this one.

  • Report this Comment On June 02, 2009, at 7:09 PM, Keeg013 wrote:

    The government can be likened to cockroaches; once they get it it is damn hard to get rid of them.

    Another problem do you really want Barney "Da Pimp" Chuckie "Little Porky" , Chris "The bad Republican made me lie", Nancy "Doing Something is Better than doing nothing" and company as your partners? They cannot even balance a budget let alone tell you how to run a company - but they sure will try.

    As far as GS is concerned, they got what they wanted; the death of LB and lots of free cash from AiG.

  • Report this Comment On June 02, 2009, at 7:21 PM, xetn wrote:

    The worst part of this "bailout" is there is no way to determine by government fiat what the market price is. Only the MARKET can determine the price and the market does not include the government. This is another scheme to bailout the banks with a ponzi scheme of using the taxpayer's money to prop up the value of these toxic assets. So, if this were to happen, the end result would be that the losses would be transferred from the holders to the taxpayers. The only real way to liquidate these assets is to allow the market to work. and write off the bad assets. If some one wishes to purchase them at a "fair" price, it will be the price that is offered, not what government wants everyone to believe is the price.

  • Report this Comment On June 02, 2009, at 7:39 PM, jbrt wrote:

    I didn't bother reading the article , I am just tired of seeing the Scottrade advertisement , between this guy with the basketball and the guy in the helicopter , I've had it . You couldn't pay me to join Scottrade , if they wanted to give me free trading I wouldn't take it . Enough is enough !

  • Report this Comment On June 02, 2009, at 7:43 PM, jbrt wrote:

    after just reading a few comments , EASY BOYS , lets just remember who started these " bailouts " , enough of the finger pointing . OBAMA didn't start it , remember who did ? you all had your chances to buy some very good companies at historic LOW PRICES ! , if you didn't take advantage of it , its YOUR MISTAKE ! " he who hesitates "

  • Report this Comment On June 02, 2009, at 8:28 PM, digbydiehl wrote:

    I don't understand how Mr. Housel's whine can be construed as financial advice. Motley Fool seems to be uncertain about what this market is going to do (with good reason), so they are allowing just about anyone to run his mouth in their space. Please guys, let's have some thoughtful speculation on the market. Isn't that why we are here?

  • Report this Comment On June 02, 2009, at 9:11 PM, RANSOMsPOINT wrote:

    Just let the taxpayers keep their money! Let the banks work to extricate themselves without bailout money!

  • Report this Comment On June 02, 2009, at 9:40 PM, jbrt wrote:

    why not quit all the griping , take advantage of this site , made 40% in the past month on VIT dumped just yesterday as it was pulling back a bit , it will find a new base and ascension will occur again , nice little ( for now ) software company , bought some LFT today , missed out on ANR , JRCC , PCX and BTU was paying too much attention to software , could've and should've made another 60% in a month on coal stocks alone , did you know theres 589 power plants being built in China right now ? , they won't be running on solar wafers either .

  • Report this Comment On June 03, 2009, at 12:19 AM, SintUniversal wrote:

    I bought shares in March at historical low, not only US stocks , but also Australian and Thai. Within weeks, the Australian and Thai stocks double their value, plus the currency gain as US dollar weakens. By instinct, I got alarmed how could the stock markets run up so sharply while the real economy is bad, and still very bad now. I sold and took profit instead of moving with the upwards flow and making stop loss along the way to protect profits. I laugh at myself now. Stock market is really a sentimental thing. It does not match with reality. Why should I apply logic and rationality on this game? Silly me to get out so early in May. But I want to add the worldwide optimism is mainly because we feel Obama and his team is really working hard and do have the ability to solve this severe US financial crisis.

  • Report this Comment On June 03, 2009, at 3:22 AM, Jedermann wrote:

    bonus snafu! shackles! How's a recession for a snafu? Or getting into this situation in this first place because greedy bastards at top have no scruples and less regulation? Sounds like shackles to me.

    Let the market regulate...as long as their is a moral code too. But there isn't.

  • Report this Comment On June 03, 2009, at 3:47 PM, ChingCho wrote:

    Just a comment about the person above who stated... "after just reading a few comments , EASY BOYS , lets just remember who started these " bailouts " , enough of the finger pointing . OBAMA didn't start it , remember who did ?" Yes, I remember that the Democratically controlled congress and their media arm (NBC, CBS, MSNBC, ABC, CNN) used the "CRISIS" attack angle which unfortunately President Busch gave into (as did other Republicans) and later regretted (The President anyway). A few questions... Where are all spending bills created? How does a bill become a law? What party controlled both the House and the Senate? So, remember, half the truth is no different than a lie. And, no mater how may times you repeat a lie, it is still a lie.

  • Report this Comment On June 03, 2009, at 5:53 PM, jbrt wrote:

    Yo' Ching ! , you know who this is , " easy boys "... lets not forget where the NATIONAL DEBT was when your American Idol stole the first election , do you remember Chad ? whar state ? and who was the governor there at the time . How about your other ' Idol " DICK singing a different song know ? " it is what it is "

  • Report this Comment On June 03, 2009, at 9:56 PM, ChingCho wrote:

    You do not seek to correct my observations, but simply to switch to a new topic. Trained well, but these tricks are well known to those of us that observe such things. Let's see, President Clinton was in office 1993-2001. The national debt during those years was, brace yourself:

    09/30/2001 5,807,463,412,200.06

    09/30/2000 5,674,178,209,886.86

    09/30/1999 5,656,270,901,615.43

    09/30/1998 5,526,193,008,897.62

    09/30/1997 5,413,146,011,397.34

    09/30/1996 5,224,810,939,135.73

    09/29/1995 4,973,982,900,709.39

    09/30/1994 4,692,749,910,013.32

    09/30/1993 4,411,488,883,139.38

    * Source: http://www.treasurydirect.gov/govt/reports/pd/histdebt/histd...

    I believe you are referring to the fact that during the Clinton years (not sure how many of those years), and we must also look at who was controlling the House (spending bills originate in the House) and Senate to give propper credit or blame, that there was a surplus and thus the deficit did not grow during those years, but it was still there... (This can be confusing to us average folks and certain news organizations take advantage of this fact.)

    If your leg is beginning to tingle, that is a sure sign you are watching to much NBC, CBS, MSNBC, ABC, and CNN. These organizations only tell half truths or in some cases no truth at all. We can only hope they to do not qualify for a bailout along with so many of their print counter parts.

    The true credit for any surplus does not go to any elected official, but to the American people. (Government produces nothing, it only takes.)

  • Report this Comment On June 03, 2009, at 11:26 PM, ChingCho wrote:

    In regards to your other comments... Busch was not really my guy, though I voted for him. The "CHAD" issue benefited VP Gore, not then Gov Busch as he had already won Florida. Had the election gone the other way it would have been truly stolen by the CHAD. Perhaps we can both agree on this, voter fraud, at least for the first offense, should be a felony offense with no jail time. Do it a second time and you go to jail. (An interesting question to ask yourself is which political party would support this sort of legislation and which would not? The answer should make it quite clear which party benefits from voter fraud.)

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