With the announcement of the Public-Private Investment Program (PPIP) we now have another BIG announcement from the Treasury and another plan that allows banks to deny the reality of poor lending decisions.

There are three key elements that will determine the success or failure of the PPIP.

1. Price: Will the bid match the ask and create a market clearing price.
2. Mark to Market: Creating a market gives the banks incentive to hold the asset.
3. Incentive: Is there an incentive for the private sector to bid up the price?

Price

To declare the program a success the bid ask spread cannot exist, if the banks are not willing to part with assets at the bid, or market clearing price, then the program will fail. Once again the government has failed to solve the most fundamental problem with these assets: price. The high degree of leverage coupled with FDIC backing could boost the price the private sector is willing to pay, the question remains is that enough to entice the banks to sell?

Mark to Market

The second issue is that if the banks do not sell the assets they can no longer claim there is not a market for these securities. By Treasury’s reasoning, the cheap financing will produce bids above current market levels thus boosting bank capital.