Eulogy: PPIP RIP

Another last week thing I missed: The PPIP Plan is dead. Good riddance. A quick eulogy: In case we forget, the PPIP was a nasty little plan, a move by Treasury to sidestep the Legislative Branch’s power of purse, in order to shove more taxpayer money into the failing banking system.

In March of 2009, Treasury realized it needed more money to put into the banks but realized the public was exhausted with TARP, and much less interested in expanding it. So Geithner and Summers looked around, saw that FDIC has a lifeline to tax funds and that the government wouldn’t kill it in the middle of a banking crisis, and tried to use it to write put options to anyone who was willing to take toxic waste off the banks hands.

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 favorable 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 maximize 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.”

Ezra Klein asks if this is worrisome or a disaster for the Obama team? I’m seeing green shoots everywhere. Look at the high yields taking off! I think the problem is that we are going to land in 2005-land, where the banks are too big and too politically connected for real regulatory reform. Instead of this crisis showing them how dependent they are on us, I read it the other way around. And sure enough, we are about to see a lobbying campaign that would make the health care industry blush. I take comfort knowing my tax dollars are helping to pay for those ads and lobbyists – that’s change I can believe in.