PPIP on Its Way to Execution Mode

With Blackrock (BLK), TCW and most probably PIMCO submitting bids as Asset Managers for the legacy securities program, the PPIP program has definitely gotten the kick start it needed!

There is definitely still a lot of skepticism in the program - however some provisions that have become clearer as the program reaches execution phase should give some comfort to skeptics.

Again, to reiterate fundamentals, this US program is far better than similar programs - unlike the UK Asset protection Program for bad assets where exposure is not clearly ring-fenced, the US program has definite quantifiable upside and downside. Also, executive compensation restrictions for entities which invest money and avail government funding/debt for the same ensure asset managers clearly segregate agency functions and principal functions.

However, the complex structure (of both the legacy loan and securities programs) and other parallel government initiatives in the credit markets make program administration tricky if not tough.

For example, the Home Mortgage Modification program under which the Treasury has earmarked money for mortgage servicers (see article) will pose questions on applicability of the subsidy to investors in the PPIP program - since the subsidy is targeted at servicers and not loan/asset owners. Similar programs would potentially increase book value of the loan pools and raise acquisition price for PPIP investors, but the actual subsidy is tied to servicers and would be lost to investors unless the servicing contract with the same servicer is retained durign period of ownership.

Another example of uncertainty/complexity is the extent to which ongoing asset management strategies for the pool (as employed by selected asset managers), and management of the program in general would be subject to Treasury oversight, is not known yet. Some or all of these will become clearer as the program unfolds, but some amount of fluidity is unfortunately bound to prevail.

There's a lot of money and time invested in this program - and enough and more stakes for all parties to ensure it helps revive the distressed securities market and hence credit markets in general! The onus is on the Treasury to continue effective articulation of program logistics/operating model and also interlinkages with other credit market initiatives.

Disclosure: None

Comments

[Andrew Butter:]

I would be amazed if PPIPever goes ahead (a) the banks don't want to sell at the price PIMCO et al want to pay (b) they don't need to thanks to Stress Tests and changes in FASB (c) someone will find a way to run a scam if it does go ahead - that's what happens with most complicated Private/Public schemes.

Apr 27 09:31 AM

[shootpar2001:]

You outlined more questions than you answered.
With the majority of the asset holders having insurance on their debt holdings (CDS). Why sell at a lower price?
Yes, CDS programs sold by AIG; that are now backed by the gov't.
Did anyone think that a bunch of lawyers (politicians) were going to outsmart a bunch of bankers or financial guys at the money game?
Even changing the rules as you go along; will not stop capital from finding the most efficient route.

Apr 27 10:58 AM

[Leftfield:]

I'm so glad that "executive compensation restrictions" "clearly segregate agency functions and principal functions" which apparently means happy days there.

Taxpayers are subsidizing asset purchases from mega banks in partnership with a small circle of qualified mega-investors. UNDOUBTEDLY written by same. There will be years of entertaining reading coming from the easily-foreseen abuses upcoming.

Apr 27 11:08 AM