Positive Impact of Public Private Investment Program Still Under Debate
With the U.S. Treasury Department now naming nine managers for the Public-Private Investment Program, TABB Group, through research analyst Jonathan Miller, recently issued comments saying that “The attractive risk/reward tradeoff of the Public-Private Investment Program (PPIP) has more than 100 buy-side participants pounding on the gates of the Federal Reserve, but its potential positive impact on the economy is still under debate. From the perspective of the stock market, PPIP is at least a non-negative factor, with major US equity rising as much as 20% after losing roughly 30% from its peak in October 2007. Nevertheless, with potentially $950 billion in charges stemming from legacy loans and securities at the epicenter of the current crisis, PPIP carries a disproportionate amount of the burden among government programs to end the negative economic cycle while replenishing lost bank capital and restoring liquidity to the legacy securities markets.
The capital, then, is set for PPIP to work, yet the question lingers over whether the program can fulfill its original intention of halting the negative economic cycle where declining asset prices cause deleveraging, leading to further assets sales and markdowns. With FDIC-guaranteed debt, non-recourse loans through TALF and 50% equity contributions from the government, buy-side participants could stand to reap massive profits from PPIP. However, should buy-side participants overpay for legacy securities or the economy continue its downward spiral and assets suffer further devaluation, buy-side participants would lose their 50% equity stake and the shaky underlying assets.
Compared to the government’s risk of guaranteeing loans, holding unwanted assets and losing the 50% equity stake, PPIP emerges as a bailout for the selected, massive buy-side institutions based on the program’s terms and generous upside for participating funds.”
To read the report, visit TABB Group
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