Was It Sheila Bair Who Killed The PPIP?

sheilabair thinking tbi

The PPIP is for all intents and purposes dead. Last week we were wondering it could be that a scheme designed as a massive subsidy to banks and investors fail to go over. How could that be?

Mike Rorty and Rortybomb has some smart thoughts:

Using a toy model, I guesstimated that hedge funds would rationally overbid the assets about 15% since FDIC was writing them a put option worth about $75 billion dollars. This is even before taking into account that banks could sell to each other, or implicit handshakes were involved in exchanging overbids for favourable terms on the bond market.

Since FDIC is paid for by banking fees, fees that are certainly going to go up, it would be a direct transfer from small and medium size banks, the ones that are failing at a rate of one a week, to larger banks that are too big and politically connected to fail. The equivalent of a new regressive tax on small businesses to pay for the paving of the parking lot of the local Walmart.

Why did PPIP die? It wasn’t from the hedge fund side – investors (I know a few) were lining up to “swing for the fences” with their portfolios, trying to maximise the volatility and soak the FDIC. My suspicion is that even with the generous terms the banks would have had to take too large of a loss between what they could sell at and what is marked on their books. That or the FDIC revolted. Regardless of new capital rushing in, I believe the banks would be glad to free up their loans on generous terms. So instead we get suspicion of accountancy rules and a weak version of a stress test with the “more adverse numbers” now looking like “optimistic numbers.”

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