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.

Related Articles
  1. Products and Investments

    There's a Reason They're Called Junk Bonds

    The closing of Third Avenue Managemet's Focused Credit Fund is a warning to investors and advisors. Beware the junk.
  2. Economics

    The 2007-08 Financial Crisis In Review

    Subprime lenders began filing for bankruptcy in 2007 -- more than 25 during February and March, alone.
  3. Home & Auto

    Rent-To-Own Homes: How The Process Works

    A rent-to-own agreement can benefit homebuyers with bad credit or insufficient funds for a down payment. Here’s how one works.
  4. Stock Analysis

    Tribune Media: An Activist Investment Analysis (TRCO)

    Learn more about the breakup of Tribune Company, once a powerful newspaper and broadcasting giant, and the role of activist investor Cliff Robbins.
  5. Home & Auto

    7 Must-Have Real Estate Contract Conditions

    Buying a home can bury you in paperwork. But it’s worth your time to make sure your contract contains these seven important conditions.
  6. Stock Analysis

    Air Products and Chemicals: An Activist Investment Analysis (APD)

    Learn about the productive, and uncommonly friendly, activist investment made by Bill Ackman into Air Products and Chemicals.
  7. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  8. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  9. Stock Analysis

    Jana Partners: An Activist Investor Analysis

    Learn about Jana Partners, a hedge fund founded by Barry Rosenstein. Read about new positions in ConAgra and Qualcomm the fund took in 2015.
  10. Investing News

    Under Pressure: Eyeing Pershing Square's Holdings

    A look at Pershing Square's recent performance, portfolio and future outlook. Should investors follow the money?
RELATED FAQS
  1. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  2. Can FHA loans be used for investment property?

    Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements ... Read Full Answer >>
  3. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  4. Does an FHA loan require a down payment?

    Federal Housing Administration (FHA) loans require down payments, which can be as low as 3.5% of the total purchase price ... Read Full Answer >>
  5. Can a 401(k) be used for a house down payment?

    A 401(k) retirement plan can be tapped to raise a down payment for a house. You can either borrow money or make a withdrawal ... Read Full Answer >>
  6. Are 401ks FDIC insured?

    The Federal Deposit Insurance Corporation (FDIC) works as a protector for customers when banks and financial institutions ... Read Full Answer >>
Trading Center