Toxic Asset Program May Be Too Late for Banks

A government plan designed to rid banks' books of the troubled assets that exacerbated the financial crisis will do little to address a fundamental weakness of the industry or the broader economy, analysts say.


The Treasury Department this week will announce the names of between five and 10 fund investment firms participating in the multibillion-dollar plan, according to two industry officials who requested anonymity because they are not authorized to discuss the matter. (See CNBC's report on this development here)

The plan, known as the Public-Private Investment Program, or PPIP, will leverage private capital with government subsidies so that these investment firms can buy up the soured mortgage-related assets that have clogged banks' balance sheets and made them reluctant to lend freely to businesses and consumers.

But since announcing the plan five months ago, the government has shelved part of it that would help these firms buy individual mortgages and other loans held by the banks.

As a result, some analysts say its impact will be muted.

"The real hit lies in the trillions of dollars in residential home loans and commercial loans banks hold in whole-loan form on their balance sheets," said Daniel Alpert, managing director of the investment bank Westwood Capital LLC.

Fears of a deeper recession, including rising unemployment and falling home values, raise the specter of massive defaults on consumer and commercial real estate loans, analysts said.

But the securities backed by mortgages and other complex assets to be targeted by PPIP are no longer as big a threat to the banking industry's stability, Alpert and other analysts said.

Ten of the nation's biggest financial companies — including JPMorgan Chase , American Express and Goldman Sachs — last month got the go-ahead to return $68 billion in federal bailout money, a development viewed as evidence that the financial sector was beginning to stabilize after benefiting from the government's $700 billion financial rescue fund.

Some of the PPIP managers are expected to include Blackrock, Pacific Investment Management (PIMCO) and TCW Group, according to the two industry officials.

Billionaire investor Wilbur Ross said Tuesday on CNBC that he would use up to $1 billion to participate. (See his comments in the video)

Ross said banks will never break even on many of their troubled assets, but that the government plan will get them five-to-10 percentage points closer. The PPIP was initially expected to remove up to $1 trillion in bad assets off the banks' books. But Ross said the program likely will max out at $125 billion.

Treasury spokesman Andrew Williams declined Tuesday to confirm or comment on the $125 billion estimate.

"We're committed to making this program work and we expect to announce the managers soon," he said.

Treasury is going forward with the program largely to improve confidence, said Douglas Elliott, a former investment banker now with the Brookings Institution. He expects that two-thirds of bank losses will be in categories like commercial real estate loans, commercial investment loans and credit cards.

Elliott also said there are problems in the program's design that will limit its usefulness. He said banks still want far more money for the assets than investors are willing to pay, and that the government subsidy is not enough to make up that difference.

In mid-April, Treasury announced that it was making it easier for hedge funds and other private investors to participate in the program, a move seen by analysts as an acknowledgment that investor interest had been lackluster.

A week later, JPMorgan Chase CEO Jamie Dimon said the bank did not intend to participate because it did not need to.

The Treasury Department played down the concerns, saying at the time that there would be significant interest from other banks.