As we finalize this weekly report to clients, desirous fund managers are drafting
their applications to Treasury to become fund managers in the public-private
investment program (PPIP, analyzed in Client Report PPIF).  We expect Treasury to
receive a deluge of applications for the legacy-MBS program because, simply put, the
pickings are too rich for Wall Street to resist.  This isn’t to say, though, that the
public-private investment fund (PPIF) in this program and the legacy-loan one are
free from political risk.  Far from it, in fact.   

Last week, the PPIP furor grew to fever pitch.  However, criticism started almost as
soon as Treasury launched the program in March.  FedFin raised numerous
questions about it in our policy analysis of the program (see Client Report PPIF2),
although we suggested that many of these could be resolved with appropriate
controls that wouldn’t doom the program.  Here, of course, we took a far milder tone
than the Special Inspector General for the TARP (SIGTARP).  Last week, it released a
vitriolic report on TARP in general and the PPIP in particular (see Client Report
RESCUE47).  SIGTARP sees serious weaknesses in both the MBS and loan parts of
the PPIP and has thus recommended a series of sweeping controls and conditions
that could make it far more difficult to structure PPIFs that meet both public and
private requirements.  SIGTARP is especially worried by the proposed link between
PPIFs and the Term Asset-Backed Securities Loan Facility (TALF, which is analyzed
in Client Reports in the TALF series).  Because of the added leverage TALF would
give to MBS PPIFs, SIGTARP urges tough new conditions.  Importantly, it noted that
the FRB and Treasury have agreed to many of them – suggesting a significant rewrite
for TALF hair-cuts and other conditions should the program in fact be joined with
the PPIF for legacy MBS.

SIGTARP, though, had nothing on Congress in its concerns over the PPIP.  This
started early – Ranking FinServ Member Bachus (AL) dropped legislation (see FSM
Report PPIF4) before the recess to prohibit PPIF participants from being on two sides
of a transaction.  Chairman Frank (MA) has promised a PPIP hearing, although none
has yet been scheduled.  However, this hasn’t spared Secretary Geithner.  At a
hearing last week before the TARP Congressional Oversight Panel (see Client Report
RESCUE46), Mr. Geithner took a drubbing on PPIP-related issues.   

Of most concern to Congress – other than conflicts of interest, of course – is
compensation.  Mr. Geithner indicated at the hearing that Treasury will soon issue
interim final rules to implement the new TARP compensation restrictions (see FSM
Report COMPENSATION13), but several Members suggested he go further even
before the rule is released.  SIGTARP certainly supports this – compensation was
among the top topics when the SIGTARP report was reviewed last week by the Joint
Economic Committee (see Client Report RESCUE48).   

So, where does all this leave the PPIP?  In limbo, we conclude.  The program will
likely go forward – FDIC Chairman Bair last week noted she expects the first whole-
loan PPIF to go to market in June and we expect that the legacy MBS program will
trundle forward on a similar schedule.  However, the compensation issue remains a
very tricky one, with Treasury almost surely forced soon to issue more guidance on
which participants in PPIFs are in or out of the tough new compensation restrictions.  
It may also be forced to add new beneficial-owner or other conditions – and that’s
only if it avoids still more stringent new conditions.  Rep. Bachus clearly only started
Congressional debate – pending amendments to Senate anti-fraud legislation would
drive stakes into the PPIP’s heart and they are only opening gambits.

Does this mean that PPIP is toast?  We don’t think so because of the critical need
quickly to purge banks of the toxic assets all too evident in the new stress tests.  It
does, though, mean that PPIF participants will need to tread very, very carefully.  
Getting these deals off the ground will require at least as much political-risk
management as market legerdemain.
.