Give Tim Geithner credit for his latest shot at fixing the banking system: At least the name is getting more sophisticated.
Six months after Treasury and the Fed rushed through the original $700 billion "Troubled Asset Relief Program" to buy up "toxic assets" held on bank balance sheets, they continue to linger in stagnant, unpriceable pools around the global financial system's backwaters. Today we get new details on the latest plan to fix the problem, but the ideas don't seem to have changed much from the original. Replace "toxic assets" with "legacy assets" and the TARP with the Public-Private Investment Program (PPIP!), and the Treasury Department is essentially repeating the plan it had back when the crisis started, namely buying (or in this case finding buyers) for those toxic loans based on subprime mortgages and other risky assets.
The price? The total public-private partnership starts at $500 billion, and could eventually hit a trillion dollars. The risk? That buyers won't fall in line following the uproar over executive compensation and the AIG bonus tax.
The plan won't be comforting for Americans angry over the (necessarily) cozy relationship between Washington and Wall Street right now. It's ripe for concessions to financial sector. FDIC guarantees and reports that PPIP investors won't be subject to punitive compensation rules are sweeteners. Essentially, the government has to make these assets attractive and then coerce investors to step up. Unfortunately, it has to do so without much leverage to negotiate the best deal for taxpayers. As White House economist Christina Romer said on "Fox News Sunday," buyers of these assets are "kind of doing us a favor."
So this plan isn't perfect, but it is so far the only meaningful road map we have for solving the single largest problem facing the banking sector. It can't be repeated enough: "Toxic" or "legacy" or whatever name you want to give the darker corners of our banking system have to be valued before lending can resume in a way that will support an economic recovery. Whether the government actually understands the risks it's taking on as a junior partner to banks, hedge funds and the private equity industry is another question altogether.
Geithner's WSJ Op-Ed on the plan is here.
More on the Treasury plan here.
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