Monday, March 23, 2009

The New Treasury Proposal for Public Private Investment Program

Here's a quick analysis of the P3 program announced by Treasury:

1. The program will pump enormous new sums of money into the banking system, since the Treasury will pump in 50% of equity into the P3's, and because the huge debt (6 to 1 debt ratio, in parts of the program) will be government guaranteed, it is for all practical purposes government financed debt.

2. The program will distort money flows away from where markets would direct money flows, thus distorting the structure of the economy---and crowding out borrowers who are not part of the government favored bank and real estate sectors.

3. I suspect the FDIC will place enormous pressure on some banks to offer assets for sale, regardless of the price they will receive. Thus, benefiting the P3's.

4. The players in the P3 game have hit a gold mine at the expense of a properly structured economy. Further, the inflation that will develop out of all these plans, along with other Fed money printing, will result in the P3's benefiting by being able to generate cheap dollars to pay off the debt they are taking on.

In conclusion, this is a huge, sophisticated play to shovel money to the private P3 partners. And, it is based on huge inflation down the road to lift the asset prices of the stuff the P3's buy. However, my entire analysis is based on the assets that banks liquidate being worth something. I don't see this program getting off the ground unless the FDIC hammer, to force banks to liquidate some of their good assets, is right over the banks' heads. On the other hand, if the banks attempt to liquidate only truly junk assets , then even a David Rubenstein lookalike is unlikely to go near them.

How well Treasury understands the key is the willingness of banks to let go of good assets is not clear to me.

In today's NYT, Paul Krugman makes an interesting observation, in an otherwise mad column about nationalizing the banks:

The likely cost to taxpayers aside, there’s something strange going on here. By my count, this is the third time Obama administration officials have floated a scheme that is essentially a rehash of the Paulson plan, each time adding a new set of bells and whistles and claiming that they’re doing something completely different. This is starting to look obsessive.
It is obsessive. And it is because Treasury continues to try and work these assets into the hands of the Carlyle Group and the like, and they are really not interested in any other direction.

1 comment:

  1. We've already tried PPP over in the UK. It works great provided you are Capita (see many years worth of back issues of Private Eye for details).