Earlier this week, Treasury Secretary Tim Geithner said that allowing some of the nation’s biggest banks to repay their TARP money may render the plan for removing the banks’ toxic assets (the Public-Private Investment Program or PPIP) effectively dead. “As confidence has improved a little bit, we may see less interest — both on the selling side and the buying side,” Geithner said.
And like clockwork, we have Federal Deposit Insurance Corp. (FDIC) Chairman Sheila Bair postponing her agency’s half of the PPIP due to a lack of interest from the banks:
The Federal Deposit Insurance Corporation indefinitely postponed a central element of the Obama administration’s bank rescue plan on Wednesday, acknowledging that it could not persuade enough banks to sell off their bad assets…Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay.
Policy toward the banks — from altering mark to market accounting to ensuring that they would all pass their stress tests — has seemingly been aimed at allowing them to pretend that their balance sheets are in good shape, instead of actually making them get their balance sheets into good shape. And as Yves Smith pointed out, “as long as they can preserve the fantasy marks for the nuclear waste, they have no compelling reason to clear up the bad assets.”
James Kwak posited that the banks’ “current strategy is to wait out the recession and hope the prices of their legacy loans recover.” This sounds absolutely right, and maybe the loans will gain in value, eventually. But some of these banks (looking at you, Citi!) have a very toxic portfolio, and it’s unclear how they think they’ll ever be healthy again without offloading some bad loans.
As the New York Times noted, “some analysts said the banks’ reluctance to clean up their balance sheets meant they were merely postponing their day of reckoning“:
“What’s happened is that the government’s programs have addressed the symptoms of the financial crisis, but not the cause,” said Frederick Cannon, chief equity strategist at Keefe, Bruyette & Woods, which analyzes the industry. “The patient feels better, but the underlying cause of the problem is still unaddressed.”
The other half of the PPIP, aimed at toxic securities, seems to still be moving forward. But will there be any more interest in that? And if not, what does it mean for the future of our banking system?