HomoEconomus

This past week, Treasury Secretary Tim Geithner released details of the Public-Private Investment Program, his plan to clear devalued, illiquid assets from troubled banks. As outlined in the program, Treasury co-invests with private investors, who bid on bank assets through Public-Private Investment Funds (PPIFs). The PPIFs' purchases are financed -- and levered, up to 6-to-1 -- using Fed- and FDIC-guaranteed debt. The financing is non-recourse, meaning that, if the assets' value declines, the private investor can hand over the paper to the Fed or FDIC and walk away.

Three stated goals of the program are:

• Maximizing the Impact of Each Taxpayer Dollar
• Shared Risk and Profits With Private Sector Participants
• Private Sector Price Discovery

It is the last goal -- price discovery -- that raises red flags.

The price "discovered" in the PPIF bidding process is actually the sum of several different prices. One, clearly, is the market value of the asset. Another, not so obvious, is the value of the option the investor has to put the assets back to the government. (Yet another is the value of below-market financing, but that is small potatoes compared to the value of the put option.)

Under current market conditions, the value of such a put option could be upwards of 20% of the market value of the asset. Therefore, the PPIF price could be 20% higher than the fair market value of the asset.

Now for the red flags:

1. The option premium paid by the investors -- and co-paid by the Treasury -- goes directly to the banks, not the option writer (the Fed or FDIC). In that sense, the PPIF is a hidden transfer from the government to the banks, amounting to perhaps 20% or more of the fair market value of the banks' assets.


2. Banks will inevitably use the PPIF prices to mark to market related assets retained on their balance sheets. Since the banks don't own the put, generally accepted accounting principles suggest the banks should have to mark their retained assets to a lower price -- one that excludes the value of the put. That said, it's not at all clear that the banks will be forced to do this, making the PPIF an accounting sham that will inflate the book value of bank assets.

Let's hope the mainstream press catches up with the government on this one. That giant PPIFing sound is the money getting hoovered out of our pockets. --GAHjr