Say Hello to ppip, Son of PPIP

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Includes: IYF, KBE
by: The Fundamental Analyst

When Banking Industry Lobbyist Treasury Secretary Geithner announced the PPIP program back in March, markets rallied on the prospect that banks might finally rid themselves of toxic assets. 4 months later and the PPIP has morphed, or more correctly shrunk, into the ppip. Originally meant to deal with some $1 trillion in toxic waste, it now looks more like $100 billion according to the latest estimates by participant Wilbur Ross, a mere 10% of the initial plan.

Wednesday, Geithner, The Fed and the FDIC put out a joint statement about the ‘progress’ or lack of, in getting the program off the ground. The full statement can be found here. Let’s take a look at a few excerpts below:

On March 23, 2009, the Treasury Department, the Federal Reserve, and the FDIC announced the detailed designs for the Legacy Loan and Legacy Securities Programs. Since that announcement, we have been working jointly to put in place the operational structure for these programs, including setting guidelines to ensure that the taxpayer is adequately protected, addressing compensation matters, setting program participation limits, and establishing stringent conflict of interest rules and procedures. Recently released rules are detailed separately in the Summary of Conflicts of Interest Rules and Ethical Guidelines.

Sorry but this laughable, how exactly is the taxpayer protected when they are on the hook for 93% of the funds and the participants have access to non-recourse funds?

Today, the Treasury Department, the Federal Reserve, and the FDIC are pleased to describe the continued progress on implementing these programs including Treasury’s launch of the Legacy Securities Public-Private Investment Program.

Financial market conditions have improved since the early part of this year, and many financial institutions have raised substantial amounts of capital as a buffer against weaker than expected economic conditions. While utilization of legacy asset programs will depend on how actual economic and financial market conditions evolve, the programs are capable of being quickly expanded if these conditions deteriorate. Thus, while the programs will initially be modest in size, we are prepared to expand the amount of resources committed to these programs.

Translation – with the suspension of mark to market, banks were able to create a fantasy regarding their 1Q09 earnings and fool some investors into giving them capital. Now that many banks have raised capital and don’t need to use market prices to price their assets, not many of them actually want to sell their crap. Thus the initial size of the program will be much smaller than initially envisaged but should banks start bleeding red ink again because loss rates across a range of asset portfolios rise well beyond assumptions used in the feather tests stress tests, we will continue our policy of bailing out bank bondholders with taxpayer money.

The Legacy Securities program is designed to support market functioning and facilitate price discovery in the asset-backed securities markets, allowing banks and other financial institutions to re-deploy capital and extend new credit to households and businesses. Improved market function and increased price discovery should serve to reinforce the progress made by U.S. financial institutions in raising private capital in the wake of the Supervisory Capital Assessment Program (NYSEARCA:SCAP) completed in May 2009.

How can they continue to tell such bald faced lies? The PPIP has nothing to do with price discovery, it is all about price obfuscation.

Following a comprehensive two-month application evaluation and selection process, during which over 100 unique applications to participate in Legacy Securities PPIP were received, Treasury has pre-qualified the following firms (in alphabetical order) to participate as fund managers in the initial round of the program:

* AllianceBernstein, LP and its sub-advisors Greenfield Partners, LLC and Rialto Capital Management, LLC;
* Angelo, Gordon & Co., L.P. and GE Capital Real Estate;
* BlackRock, Inc.;
* Invesco Ltd.;
* Marathon Asset Management, L.P.;
* Oaktree Capital Management, L.P.;
* RLJ Western Asset Management, LP.;
* The TCW Group, Inc.; and
* Wellington Management Company, LLP.

Interesting that there is no mention of PIMCO in that group. The false confidence game continues.