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.

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