Geithner: TARP Repayment Means Toxic Asset Plan May Fizzle

ap090522018259Yesterday, the Federal Reserve issued the criteria that it will use to determine if the nation’s 19 largest banks — which were the ones subjected to stress tests last month — are healthy enough to repay their TARP funds.

As expected, the Fed announced that if banks want to free themselves of TARP, then they need to cut all of their other government lifelines, particularly proving that “they can raise money without relying on guarantees against losses provided by the Federal Deposit Insurance Corp.”

The Fed and Treasury plan to allow some banks out of TARP as early as next week. In an interview today with CNBC, Treasury Secretary Tim Geithner said that “I think I expect you’re going to see substantial repayments from some institutions relatively quickly.”

But Geithner also went a little further, and seemed to imply that TARP repayment means that the plan for removing toxic assets from the banks (the Public-Private Investment Program or PPIP) will fizzle:

“As confidence has improved a little bit, we may see less interest — both on the selling side and the buying side,” Geithner said. “It’s hard to tell, though, how much interest you’re going to see. There’s still some concerns, too, about the rules of the game.”

First things first, if there are concerns about the rules of the game, isn’t it Geithner’s job to clear them up? But more importantly, does this confirm that the PPIP is, as Yves Smith wrote, “dead on arrival.”

This has been a concern about the PPIP for a while, especially after the banks told Geithner in April that he deserved an A for effort, but they weren’t going to participate in the program. The banks have realized that the PPIP gives them no inventive to sell toxic assets at anything other than an inflated price. And since the stress tests showed that Treasury was willing to extend the banks guarantee after guarantee, they’ve (rightly, from their business standpoint) decided that the status quo is just fine.

But the assets are still there, aren’t they? Even if a firm like JP Morgan can live with them for the moment, what about Citigroup, where 44 percent of the assets are toxic? If PPIP is not the answer, then Treasury needs to find another one, lest Citi and others like it remain stuck as zombie institutions.