The Poop on the PPIP

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.

8 Responses to “The Poop on the PPIP”

  1. 1 jan hyde July 13, 2009 at 8:49 am

    No bank wants to sell assets at today’s prices. The big banks issued stock so they don’t need to. The managers at smaller banks don’t have this option and want to live for the next day rather than admit and suffer defeat. Now only toxic securities, not loans, are part of PIPP. And finally there is the negative percption of buyers profiting from 90% govt leverage and partnering 50/50 with Govt. PIPP is pooped.

  2. 2 Charles Cecil July 13, 2009 at 8:52 am

    Hi Bob: Your firm knows me best as Barrington Equities. Opin Partners, LLC is an advisor to private family offices and off-shore funds. We also have our own BVI vehicle for CMBS (so you can imagine how entertaining we have found the Treasury’s efforts to be during the last months!). In property and note acquisition, count us among the frustrated. We have European, Mid-East and Asian investors ready to buy properties in Manhattan, but they want class A office buildings in prime mid-town locations. One wants prime retail condos. As you point out, these have been few and far between. We also have two investors who buy performing 1st mortgage notes at a discount, but so far, the deals we have seen in NYC, LA and Chicago are not sufficiently discounted to get a deal done. On the positive side, we have invested over 18 months doing fundamental re-underwriting of the loans in 2000-2008 CMBS and are gathering capital to buy very selectively in the AM, AJ and AA tranches.

    Be sure to let us know as opportunities in the $20 million+ range come to your screen.


    Charles Cecil

  3. 3 Jack Rosenfield July 13, 2009 at 9:53 am

    As someone who worked at a senior level at the RTC I am very familiar with the PPIP like programs that were developed in the 1990’s. Those programs sold packages of loans that had been obtained only from thrifts that had been taken over by the RTC. The current program has tried to encourage banks to use this technique to discopse of existing troubled loans. Banks are reluctant to participate becuase once they sell loans through this program they will then need to reevaluate similar loans retained in their portfolios which may result in further write-downs potentially impairing the banks.
    For the banks it is better to avoid anything that will cause them to make further write-downs of loans until they are able to increase their capital.

  4. 4 rknakal July 14, 2009 at 12:10 pm

    Hi Jan and Jack, thank you for your posts. You both make great points and I agree with your positions. I do, however, feel that banks needing capital will be motivated to monetize non-performing or sub-performing assets. Our industry is hoping that non-performing loans collateralized by real estate will be among that effort.

  5. 5 rknakal July 14, 2009 at 12:35 pm

    Hi Charles, thank you for your post. I have several properties that I think you might have interest in and will be in touch with you.

  6. 6 Christopher Macke July 15, 2009 at 1:52 pm


    Great discussion.

    Bob we are looking for deals similar to what Charles outlined and would wlecome seeing the opportunities you mentioned as well, especially any stabilized but overlevered Class A office in major US markets as well as luxury/resort projects needing construction funding and or perm debt.

    Re: ppip, as it was originally outlined it would have never set “market” pricing. Subsidized financing ie unusually favorable terms would have led to offer prices well above even normal valuations, it was basically an option.



  7. 7 Barry Smith July 15, 2009 at 1:57 pm

    Hi Bob,its Barry from

    I agree that the revised focus of the PPIP, the TALF, and the Legacy programs have all but left the majority of the banking industry in the cold. Our customers are community and regional banks; most of them are frozen and unable to dispose of their problems. To catagorize them as “healthy” is quite a stretch! If you rode the wave of commercial real estate lending over the past 5 years; you have some problems!! There is a storm brewing and until a program is put together to help these smaller banks either get rid of problems or increase capital ( without strings! ) we will continue to delay recovery.
    We will look back at this spot in time in a year and say “why didn’t we do something”. If you catch a cold, don’t let it turn into pneumonia!

    Barry Smith

  8. 8 Chris Macke July 15, 2009 at 2:10 pm


    By way of introduction, I am CEO of a firm called General Equity Real Estate. We invest in nnn assets, structure slb’s and have an advisory group that has access to debt, both construction and permanent, for luxury/resort hotels, ideally $100M plus. Additionally, like Charles we are also looking for Class A office product in major markets that are stabilized but overlevered and needing to either replace the existing debt and/or equity recapitalization.

    I really enjoyed the comments you previously posted. Regarding the PPIP, it likely would have never set “market” prices. The terms were effectively a financing subsidy to buyers to allow them to pay prices above what the value would be even in a normal market. This is because 88% non-recourse debt and 50% of the profits is not “normal” so the prices the buyers are able to offer will be higher than what they should be which is what got us into this problem in the first place. PPIP was meant to be a “backdoor” bank bailout since politically they couldn’t get an actual bailout. Sad fact is that like another contributor mentioned as a result of the PPIP the equity has not moved because they do not want to pay inflated prices regardless of the financing subsidy because they would effectively be substituted into the current owners overlevered/underwater position and they don’t want that.

    Robert, looking forward to seeing any opportunities that fit what I outlined above.



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