Clean Up the Toxic Asset Mess

Principles for helping the Treasury Department's Public-Private Investment Program get the job done.

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The U.S. Treasury Department’s Public-Private Investment Program unveiled on March 23 will finally, it is hoped, solve the problem of “toxic assets” held by banks. These mortgage loans, mortgage-backed securities, collateralized debt obligations, asset-backed securities, exotic credit derivatives, and other credit instruments have significantly deteriorated in value over the past two years due to poor underwriting and weak economic conditions. This has left holders of these assets, including our nation’s largest financial institutions, teetering on the brink.

The nation needs healthy financial institutions performing their much-needed role in the economy as providers of credit, and for that to happen these bad assets must be dealt with. The Treasury’s PPIP plan—pronounced “Pee-Pip” in the corridors of finance in Washington and Wall Street— is the Obama administration’s effort to address this problem after the stumbling attempts of the Bush administration.

PPIP is designed to address the toxic asset issue by creating public-private partnerships that allow the cash-strapped private sector to participate in the marketplace for these so-called “legacy” assets—the term used by Treasury for toxic mortgages and securities—thereby resolving the question of pricing by establishing demand for the assets of which there is all too much supply. Whether PPIP will succeed remains to be seen. Because the program is a partnership with the private sector much depends on how the private sector responds, something that cannot be predicted with certainty. And how taxpayers fare with the program—which puts great sums of taxpayer dollars at risk while also offering opportunity for gain—depends on how the private market prices these assets and the future of the housing market and the economy in general.

If Treasury addresses a number of key issues still to be resolved, we believe that PPIP has a better chance of delivering on its promise to protect taxpayers, resolve the toxic assets problem, rebuild credit markets, and help the economy recover from the recession which began in December 2007. As implementation of PPIP proceeds, we believe it is important that the administration:

  • Ensures moving mortgages off the books of lending institutions doesn’t adversely affect the opportunities for mortgage modification—both to allow responsible homeowners facing mortgage-payment problems to avoid unnecessary foreclosures and to ensure that holders of mortgages choose modification over foreclosure where that will maximize the value of the mortgages they hold.
  • Limits the holders of large quantities of toxic assets from participating in the PPIP investment vehicles that will purchase these assets.
  • Applies appropriate standards for private fund managers chosen to purchase toxic assets from financial institutions.
  • Makes transaction information readily available to ensure an efficient, fast-moving market.
  • Sets up performance metrics to determine if the program is working as conceived.
  • Provides the general public with information as the program proceeds.
  • Includes the broad public in the benefits from any windfall profits.
  • Ensures the amount of debt financing provided by taxpayers is not too high as Treasury fleshes out the amount of leverage it will provide as part of PPIP.


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