Report: ‘Lack Of Progress’ On Toxic Assets ‘Threatens To Prolong The Crisis And Delay The Recovery’

Today, the Wall Street Journal provided a good dissection of how efforts to rid banks of the toxic assets clogging their balance sheets have “sputtered repeatedly“:

[T]hat initiative — called the Public-Private Investment Program, or PPIP — has lost momentum. Big banks worried about having to sell at fire-sale prices while small banks feared they would be shut out. Potential buyers balked at the risk of doing business with the government, concerned that politicians might demonize them for making big profits. The program’s problems threaten to stymie efforts by struggling smaller banks, in particular, to clean up their balance sheets.

The PPIP, much discussed and debated upon its release, has definitely faded from view. But just because we’re successfully ignoring the toxic assets doesn’t mean that the problem has gone away.

In fact, today, the Bank for International Settlements (BIS) — which The Guardian calls “one of the few bodies consistently sounding the alarm about the build-up of risky financial assets and under-capitalised banks in the run-up to the credit crisis” — warned that “taxpayers around the world still face potentially large losses because governments have failed to act quickly enough to remove toxic assets from the balance sheets of key banks.” And the BIS’ prime example is the U.S.:

Progress on problem assets has been slowed by the complexity of the securities affected, legal constraints and, above all, the limited political will to commit public funds to the clean-up effort. The lack of progress threatens to prolong the crisis and delay the recovery because a dysfunctional financial system reduces the ability of monetary and fiscal actions to stimulate the economy. The lack of progress on removing troubled assets from the banks’ balance sheets and recognising the associated losses is illustrated by the US experience.

Federal officials reportedly told the Journal that the “because a dozen or so big banks recently succeeded in raising capital,” there is less pressure to get the PPIP off the ground. But even if those few banks are healthy (and that’s a big if), what of every other institution, particularly small and mid-sized, grappling with toxic portfolios? The financial system is not repaired simply because Bank of America can raise capital.

For all the talk of “green shoots,” toxic assets and housing still seem to have bedeviled the administration, and unfortunately, those are two areas (along with rising gas prices) that can stop an economic recovery right in its tracks.