Does PPIP's Death Mean It Wasn't Enough Of A Taxpayer Giveaway?

timgeithner 24march09 closeup tbi

So PPIP is dead, or at least on its death bead. Maybe because the banks feel they’re healthy enough such that they don’t need to sell their highest-yielding assets anymore. Or maybe it’s just that nobody wants to partner with Uncle Sam on anything, post-AIG.

But it should still give you pause that the scheme, which was being billed a while back as the most gigantic giveaway and fraud known to man couldn’t find much support on Wall Street or at the asset managers like PIMCO and BlackRock, which were supposed to benefit the most.

Seriously, you can’t count the number of bright guys who called it a gigantic scam, ripoff, hosing, whatever you want to call it. And yet, this really couldn’t fly? Sure, there was some risk of government meddling, but really? The leaches and bloodsuckers weren’tinterested in free money?

It’s at least possible that it was never that big of a scam to begin with.

Eric Falkenstein, for one, thinks that’s it:

Anyway, back on March 31 in the NYTimes Stiglitz used his laser-sharp mind to highlight that Geithner’s then-latest bank plan was a massive give away to banks and the investors in the plan. The government was socializing losses and privatizing gains. His example suggested a 54% return to investors, a -40% return to government. If true, you would expect a stampede of investors.

The Wall Street Journal reports almost no one is interested. By revealed preference–a test made prominent by Stigtlitz’s mentor Paul A. Samuelson–it’s not a good deal for either banks or investors, so either he made a maths error or had flawed assumptions. I noted at the time this was not a give away, primarily because government was a pari-passu partner, not mere senior debt, in the deal. With modest assumptions the leverage on mortgage pools did not generate sufficient convexity in the payoff to generate the massive return asymmetry he suggested. And more importantly, government has given many signals that any assistance implies a large, undefined amount of government ownership, from compensation caps to H1-B visa restrictions, overseas investment restrictions, and Elizabeth Warren.

So even Falkenstein hedges a bit at the end, bringing up the Warren h1-b thing.


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