Geithner's toxic waste plan is flaming out before it even gets started
May 28th 2009 11:25AM
Updated Dec 4th 2009 11:14AM
The idea of buying toxic waste from banks has already failed once -- and now it looks poised to die a second death. The lesson here is that a bad idea is bad regardless of whether Hank Paulson or Tim Geithner pushes it. Why is it so hard for leaders to learn the difference between a bad idea and a good one?
As I posted in February, Hank Paulson sold the initial $750 billion Troubled Asset Relief Plan (TARP) last fall as a way to get toxic waste off the books of banks. The plan foundered when nobody could solve the problem of how to price TARP purchases -- price too high and banks take advantage of taxpayers; price too low and the banks take a bigger write-off and need to raise new capital.
But the failure of this idea did not stop Tim Geithner from taking the same failed idea and juicing it up -- into the $1 trillion Public Private Investment Partnership (PPIP) -- so that it would be guaranteed to enrich hedge funds and private equity firms while still avoiding a solution to the same problems that bedeviled the idea when Paulson proposed it.
Two new problems have since popped up. Hedge funds did not want to risk getting involved in a political firestorm about their compensation. And TARP recipients could end up being able to participate in PPIP investment pools that would buy up the bad loans on their own books -- creating a huge conflict of interest that could cost taxpayers a bundle and politicians their power.
What this means is that PPIP appears to be an even worse idea than Paulson's original TARP concept. And now, the FDIC's portion of the PPIP, called the Legacy Loans Program (LLP), is flaming out before it even gets started. The LLP was conceived as a smaller program than the Treasury's to buy so-called whole loans from banks. But thanks to the two problems I mentioned above, LLP looks stillborn.
If we are lucky, the Treasury portion of the PPIP will meet a similar fate. And thanks to an April change in an accounting rule that allows financial institutions to mark their toxic waste to myth instead of market, we may be able to keep taxpayer money out of the toxic waste buying business one more time.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.