Commenting on Treasury Secretary Timothy Geithner’s latest bank bailout plan, Nobel Prize-winning economist Joseph Stiglitz told Reuters:
Quite frankly, this amounts to robbery of the American people. I don’t think it’s going to work because I think there’ll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer.
We think “robbery” is a little strong of a word, but Geithner’s “Public-Private Investment Program” (PPIP) is definitely flawed. Heritage analyst James Gattuso details why:
- Risk of uncertainty transferred, not eliminated. The main goal of the program is to discover the market price of these assets and to restart the market in them. The plan does a better job at this than prior proposals, using bidding by private investors to determine sale prices. However, much of the valuation will be affected by the government participation and guarantees against losses. In effect, a major portion of the uncertainty as to value is shifted to the taxpayer rather than eliminated.
- Government entanglement in management. The plan will almost inevitably lead to even more expanded government micro-management of financial firms. Recent history with the TARP program shows that participants in PPIP can expect controls—sometimes retroactive—over compensation and other management decisions. It is hard to imagine a hedge fund or other investment group enjoying profits under this program without some level of federal restrictions accompanying the deal or following soon thereafter. It is equally possible that if profits exceed some unspecified percentage, there will be an effort to “recapture” them.
- Lack of participation. The prospect of such restrictions may very well deter many potential private sector investors from participation in the PPIP program at all in order to avoid federal interference in their business operations. Already several banks either have decided to return TARP money or are considering returning it for these reasons, and initial participation in other programs has been less than anticipated for the same reason.
- Problems of complexity. The process both for setting up partnerships and for purchasing assets or loans is extremely complex, necessitating identification of qualified assets, selection of approved fund managers for securities, establishment of bidding rules, conflict of interest rules, and a host of other actions. Although the government predicts that the first transactions could begin in about a month or so, recent experience suggests such a timetable is highly optimistic to say the least. More worrisome, with so many moving parts, the chances of error or poor oversight are substantial, and they only grow if the program is implemented too quickly.
There is not an imminent threat of a collapse. On the whole, financial markets are impaired but functioning. Indeed, many of these “toxic” assets are still performing despite problems in housing and other markets. Given the dangers of market intervention of this kind—not only to taxpayers in the form of massive costs but potentially to the financial markets themselves—actions such as the PPIP program should be a last resort, engaged in only when absolutely necessary. That standard has not been met.