Now that a government program to buy up toxic assets finally appears ready to fly, many observers are wondering if there is any need for it.
The Treasury Department announced this week that five investment funds have raised $1.94 billion in private capital to purchase toxic assets through its Public Private Investment Program.
Yet it is unclear if there is anyone willing to sell to them. In the six months since the Treasury announced its program, many banks have already taken writedowns on toxic securities, the Financial Accounting Standards Board has given banks more latitude to value assets and most banks have been able to raise necessary private capital. Additionally, the main problem with the program — how to price toxic assets — remains largely unsolved.
Many observers said demand for the program has dropped off significantly, and will not rebound unless the Treasury can prove there are deals to be had. "I don't see any toxic assets selling yet," said Cornelius Hurley, a professor at the Graduate Program in Banking and Financial Law at Boston University School of Law. "Right now, it's just a bunch of announcements. There's a certain jawboning effect of this, and if Treasury keeps making these announcements, no one is going to believe them anymore, until we have actual deals."
The Treasury announced the PPIP in March to great fanfare in an effort to do what the Troubled Asset Relief Program did not do: buy up toxic securities and loans. The plan was split into two parts. The Federal Deposit Insurance Corp. would provide financing for public-private partnerships that bid on toxic whole loans, while the Treasury would run a program devoted to creating a market for toxic securities.
Both efforts have made strides over the past few weeks, but are well short of what was originally envisioned. The FDIC launched a pilot program and successfully competed the sale of a pool of toxic loans on Sept. 16. It is expected to announce another sale soon. However, the FDIC's effort is now focused on loans from failed banks, not open and operating institutions, which was the original idea. The FDIC has said it hopes to expand the program to open banks eventually.
The Treasury, meanwhile, has lined up financing for five of the nine firms it selected to help purchase toxic securities and expects to close on the remaining four by the end of the month. But its ambition has also narrowed. The Treasury initially said the toxic-asset program would have $500 billion to $1 trillion of capital. The Treasury now plans to invest only as much as $30 billion.
The International Monetary Fund has estimated that financial institutions worldwide hold about $2.8 trillion in troubled loans and securities, with the big share of those assets in American banks.
Industry representatives said banks have long since lost interest in the program. "No one has heard from any ABA members about this," said Mark Tenhundfeld, senior vice president for regulatory policy for the American Bankers Association. "This could be anecdotal, but we are not hearing of a lot of action on this. The level of interest is a lot less than when this program was announced."
Ron Glancz, a partner at Venable LLP who has clients with toxic assets, agreed. "It's not created a lot of stir," he said. "We have banks that have a lot of toxic assets, and they are not selling to PPIP. It doesn't deal with the fundamental problem that banks can't book these losses, because that's a depletion of capital."
In many cases, banks have already taken big writedowns on their toxic securities. They would receive little benefit from selling them, but could see an upside by holding on to them if the market recovers.
How to price the assets, a problem that helped thwart the Treasury's first effort to buy assets, remains such.
"The current pricing is still an issue," said William Mutterperl, a counsel for Reed Smith LLP.
Nonetheless, many observers said banks may eventually sell their assets through the program, but that the representation would be relatively small. Overall, most saw only a minimal impact from PPIP.
"The PPIP will not make a major dent in the stock of impaired assets, so it's not going to have a major structural impact," said Lou Crandall, chief economist for Wrightson ICAP. "The more buyers, the better … but this is not a major wave of purchases."
The Treasury said, however, that even if the program does not result in a large amount of sales, just a few could help reestablish a market price for toxic assets.
Some observers said the government was taking the right approach, even if it had to start small, because if the economy were to backslide there could be a heightened need for the program.
"It is important to pursue PPIP just in case," said Mark Zandi, chief economist and co-founder of Moody's Economy.com. "As long as you have hundreds of billions of loans on banks' balance sheets, it could come back and be a problem. The coast isn't clear. Things could still go wrong."