Nope, The P-PIP Probably Still Won't Work

The Business Insider ^ | 7/9/09

[FromLori]

Now that we've got the buy-side managers for the Obama adminstrations Public Private Investment Program lined up, the question is whether there will be anyone on the sell-side. With the buy-side guys saying that the P-PIP will allow them to pay between 5% and 10% more for toxic assets, you might think banks would be all over this thing.

But that's not how its shaping up. The P-PIP is still stumbling. Many are now wondering whether bankers will sell into the program.

We suspended mark-to-market. "A month after the PPIP program was announced, under pressure from banks and Congress, the U.S. Financial Accounting Standards Board watered down accounting rules and made it easier for banks not to mark down the value of toxic assets. For many toxic assets whose fundamental value fell below face value, banks may avoid recognizing the loss as long as they don’t sell the assets."

The Stress Test Gave A Free Pass For Losses After 2010. "In another blow to banks’ potential willingness to sell toxic assets, however, bank supervisors conducting stress tests decided to avoid assessing banks’ economic losses on toxic assets that mature after 2010. The stress tests focused on whether,, the accounting losses that a bank will have to recognize will leave it with sufficient capital on its financial statements.

The combined effect is that banks are strongly discouraged from selling any toxic assets that mature after 2010 for any price lower than the current mark on the books.

To put it more simply, zombie banks will be reluctant to sell even if the toxic assets are marked down to at or below fair market value. The private investors will rationally throw caution to the wind because they get the majority of the upside and taxpayers bear most of the downside.