Market Talk

The more that comes out about the Treasury Department’s Potemkin Village of a market platform for impaired assets, the so-called Public Private Investment Program (yes, as we all annoyingly know by now, it’s pronounced “PEE-pip” by the smart kids in Washington), the worse it sounds.

Because it’s starting to sound like a rigged game.

The latest revelation comes courtesy of the Treasury Department’s application form to be a fund manager in the PEE-pip, as the Wall Street Journal recounted yesterday. Only firms that already have at least $10 billion of toxic securities under management are eligible. That leaves us out, and just about everybody else, too.

There are myriad large firms that have the wherewithal to get involved in this program, but most don’t already have that large a pool of toxic assets. In fact, that requirement dwindles the pool down to only a very few players, including BlackRock, Pimco, Goldman Sachs and Legg Mason.

From the Journal:

We have no idea if Treasury is playing favorites, but it certainly doesn’t look good. All the more so given that some of these big players may have consulted informally with the Obama Administration as it was writing the plan. Not to mention that the big asset management companies that are most likely to land plum fund-management jobs are also the ones that have been most vocally praising the Treasury plan. (Treasury declined to comment.)

If Treasury truly wanted an open marketplace, if they were truly interested in price discovery, why limit the field of available participants? (We called for a comment; we had to leave a voice mail.)

When Treasury released its fact sheet in March, it provided a very telling “sample” deal. It illustrated a deal in which, through the bidding process, a bank would sell an asset it valued at $100 for $84, with the private player putting up $6, the government $6 and the FDIC loaning the remaining $72.

That $84 number sticks out like a sore thumb. Because if these assets were really worth $84, the world wouldn’t be standing at the edge of the abyss.

Remember, the original TARP program was designed to buy these impaired assets directly from the banks, but it foundered because the Treasury Department couldn’t bridge the gap between what the banks’ were claiming their stuff was worth and what any buyer would offer for it. So the Treasury under Tim Geithner came up with this convoluted “public-private” partnership, purportedly to bridge that gap. It’s an elaborate contraption, and any little shove could derail it.

Like, say, an actual marketplace.

Thornburg Mortgage, which has been on the ropes for probably a year, finally filed for bankruptcy and plans to liquidate. Which means all its assets, all its mortgage-backed securities, will be sold, publicly.

Thornburg’s claim to fame was that it never got involved in subprime. And yet, even its securities, backed by loans to relatively wealthy, creditworthy borrowers, were rendered essentially worthless by the credit crisis. 

“This will significantly hamper the PPIP from providing inflated prices to banks on similar assets,” BNP Paribas wrote in a note.

Could Geithner’s meticulously constructed PPIP get ruined by some noisy, chaotic auction in some hotel ballroom?

(Photo: Paul Vigna)