The U.S. Treasury, the Federal Deposit Insurance Corporation and the Federal Reserve teamed up to launch the Public-Private Investment Program (PPIP) as part of the government's effort to fix the ailing financial sector of 2008 and 2009. It's one of the many programs in the bailout alphabet soup.
In fact, most of the money to fund it came from the Troubled Asset Relief Program (also a government program). That money was combined with money from private investors to purchase distressed securities from financial institutions. These assets include non-agency residential and commercial mortgage-backed securities that were originally 'AAA' rated. Now Main Street investors can get on these investments. But is this a good idea? (Learn more about this time in The 2007-08 Financial Crisis In Review.)
The Logic and the Evolution
The goal of PPIP was to get the toxic debt off of the banks' books. Theoretically, once the lending institutions are unencumbered from this debt, they will be able to start lending again. This will enable business to expand, jobs to be created and consumers to start spending again. The plan, as originally conceived, would have used taxpayer dollars to fund investment pools run by five large money management firms. The firms, which could include hedge fund managers, mutual fund money managers and institutional investors, would then buy into the pools with minority stakes. The government would provide most of the funding and take most of the risk.
This process creates a market for assets that have been sitting on the books at banks because nobody wants to buy them. Theoretically, selling them at a low rate - as low as 15 cents on the dollar - to investors hoping to get back anywhere from 30 cents to 60 cents provides some capital to banks that were otherwise sitting on toxic assets. (These tales of banking terror sent shivers down the spines of even the most steadfast bankers. See A Nightmare On Wall Street to learn more.)
Critics of the plan called it yet another taxpayer-funded giveaway to Wall Street using cheap financing courtesy of the taxpayers to overpay for toxic debt. With taxpayers funding $970 billion of the trillion-dollar investment and the money managers funding $30 billion, the overwhelming majority of the risk sits with the taxpayers.
Critics worried that the banks that own the bad assets would form subsidiaries to purchase the assets, with the parent company shucking off the worst loans in its portfolio and profiting from their sale, and the subsidiary profiting if/when the assets regain value or reach maturity. Under this scenario, the banks win twice and the taxpayers lose again, or at least bear most risk since the government is using taxpayer dollars to guarantee up to 85% of the value of the assets.
The Obama administration addressed the criticisms by modifying the program to give investors on Main Street the opportunity to participate too. While the money managers (five were chosen from the more than 100 that applied) would still oversee the assets, and institutional investors would still invest in the pools, retail investors will be able to participate as well. It shaped up in a manner similar to a mutual fund, albeit with restrictions on the frequency of redemptions. (How did America's strong economy tumble so quickly? Find out in The Fall Of The Market In The Fall Of 2008.)
A Win/Win Scenario for Everyone?
The government hoped the new and improved plan would be a good thing for investors, taxpayers, banks, consumers and the economy. In reality, it may have proved to be a little less invigorating, as the $100 trillion program wouldn't buy 100% of the bad assets sitting on the banks' books, and there is no guarantee of success. Critics of the program also cite the difficulty in valuing the bad debt.
Of course, there's money to be made in distressed debt. This wouldn't be the first time buying bad loans delivered big money to investors. Professional money management firms certainly saw an opportunity to profit and were anxious to play in the sandbox. (Should investors panic or join in when hedge funds buy up bonds from bankrupt companies? Read Why Hedge Funds Love Distressed Debt.)
For retail investors, it's important to remember that there's money to be lost too. Toxic assets are called "toxic" for a reason. Investing in this program involves buying derivatives, which happen to be a large part of what got the country (and the world) into the mess in the first place. The government wanted this to be a project for the pros, keeping in mind that the initial incarnation didn't even offer the general public the opportunity to invest. The risk is if the investments are a bust, retail investors would lose twice: once with their investment and a second time when their tax dollars are used to clean up the mess.
The Bottom Line
If you decided to invest in the PPIP, tread carefully and take measures to minimize your exposure to risk. Taking a small position could provide an opportunity to diversify your portfolio - betting the ranch might be even riskier than putting all of your assets into junk bonds. Like any investment, moderation provides upside potential and downside protection.