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This past week, we read an announcement about the Treasury selecting nine fund managers to implement the PPIP program. Is this a positive thing? Should we celebrate? Let’s take a closer look:In what has been called, “The greatest program that never happened”, the government’s Public-Private Investment Program, or PPIP (which is part of the TALF) has lost significant momentum and is a mere shadow of what is was initially intended to be.  Originally slated to help banks rid their balance sheets of $1 trillion of toxic assets, the program is now targeting $30 to $50 billion. These toxic assets were to include bad loans and distressed securities. One of the main goals of the PPIP was to help create liquidity in frozen markets. Our real estate market was hoping that the program would provide a shot in the arm to the CMBS market, a desperately needed component of the massive financing the market requires. As real estate brokers, we were hoping that pools of real estate loans would be purchased by institutions in bulk and funneled back into the market expeditiously creating opportunities for us.At the time of its initial announcement on March 23rd by Treasury Secretary Geithner, markets rallied nearly 500 points or about 7%.  Subsequently, some of the larger banks were able to raise capital based upon the resulting confidence the announcement gave to investors. Federal officials now say that the slimmed down PPIP has been trimmed due the banks’ becoming healthier. But are they really healthier?Since the start of 2008, seventy banks have failed. Most of these institutions have been smaller community banks and regional banks. Banking analysts are projecting hundreds of additional collapses during the next two years. These smaller banks often play key roles supporting their local economies and, taken together, are important to our financial system and our economic recovery.During the S & L crisis in the early 1990′s, the RTC was instrumental in selling off bad loans and securities of banks that failed. In this cycle, efforts to rid banks of toxic assets have sputtered repeatedly. In the fall of 2007, federal officials tried to implement a plan to establish a fund to buy securities from banks, but this effort was aborted. In 2008, the Bush Administration established, through the TARP,  a $700 billion program to purchase banks’ soured assets. Mainly due to difficulties in determining the value of those assets, the US abandoned that plan opting instead to pump taxpayer money directly into banks. But the strings attached to the TARP funds left banks rushing to return the money rather than lending it.Banks still have mountains of bad debt and devalued securities sitting on their balance sheets. As those loans and securities lose value, they are saddling the banks with losses and restricting their ability to lend.  Bankers had hoped the PPIP would help them unload bad assets (many of which were loans on commercial real estate) that were negatively impacting their positions. In June, the FDIC announced that it was indefinitely postponing its Legacy Loan program which was supposed to buy $500 billion of loans from banks. This month, the FDIC plans to use PPIP for a far narrower purpose which is to auction loans the agency has inherited from failed banks.The new iteration of PPIP will focus not on bad loans but on purchasing toxic securities which are a problem for a relatively small percentage of the nation’s banks. This is terrible news for smaller banks burdened with growing piles of defaulted loans. These banks find it more challenging than their larger counterparts to access capital markets. They have been eager for the US to help them unload the loans in order to bolster their capital cushions.Based upon these dynamics, it is hard to believe that “banks’ increased health” is the reason why the PPIP has been trimmed. There are several other challenges that the program has faced. One of these is the risks faced by program participants of being a business partner with the government. It is tough to play a game where the rules can be changed in the middle of play and the government has repeadedly demonstrated that they love changing the rules midstream. This is thought to be the main reason why PIMCO and Bridgewater Associates opted not to participate in the program. Hedge funds and private equity investors were unnerved by the restrictions placed on banks participating in TARP. Fund managers were also bothered by the President’s strong criticism of “all of the speculators on Wall Street” and, particularly,  hedge funds holding Chrysler debt who had refused the government’s buyout offer.Questions remain. Will banks sell toxic assets into this program at significant discounts creating holes in capital? Will pension funds, endowments and municipalities gravatate to the program given they look like natural fits as  partners with the government? Will the need for banks to raise capital or to get their Tier 1 ratios up be so compelling that deals can be made?The answers to these questions will become apparent over time. Many banking experts contend that the financial system won’t fully stabilize until banks get rid of their bad assets. This is precisely why my firm and others have been focused on helping banks sell their troubled loans collateralized by real estate.

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