Economist Looks at the Public-Private Investment Program

They appear intrigued by the plan but they point out possible flaws in the plan

In a sense, America has come full circle, reviving the asset-buying component of the original Troubled Asset Relief Programme (TARP), a $700 billion rescue fund created last October which was quickly refashioned into a bank-recapitalisation vehicle. This time, however, private investors will do the buying, not the government, though they will get plenty of help, through co-investment by the Treasury, cheap loans from the Federal Reserve and debt guarantees from the Federal Deposit Insurance Corporation. For every private dollar invested in impaired loans, a matching dollar of equity and $12 of other financing will come from the public purse. And the loans will be non-recourse, meaning investors who walk away from loss-making deals lose only their initial investment.

Concerns:

• Banks are still holding assets, particularly whole loans, at unrealistically high values. With government help, buyers will be able to offer more than they would if relying solely on their own resources. But it may still not be enough to persuade banks to sell, since any amount below the carrying value would force them to take a write-down and deplete precious capital
• 1 trillion may not be enough as we may face 2 trillion in in default between housing and credit cards and debt all together.
• Private money is scared to partner with government when you have so many phony politicians willing to whip up hysteria against "fat cats". What is to stop the government from attaching strings to these companies?
• What if it works and these private companies make "obscene" profits, will politicians restrain themselves or will they pass confiscatory tax rates to recoup "the peoples" money.

At least the White House might recognize that demonizing businesses may appeal to the base, but its hardly a prescription for sound governance.

In a White House meeting late last week, Mr. Obama personally admonished administration officials to join Mr. Geithner in the plan’s public marketing. As for the Treasury secretary, instead of speaking awkwardly from teleprompters to an audience of financial V.I.P.’s and 17 television cameras, as he did on Feb. 10, Mr. Geithner banned cameras on Monday when he met with reporters to release the plan and answered questions without notes and at length.

The administration also paid close attention to the political climate. With the private sector increasingly wary of Congressional intervention in the business of those who participate in government bailout programs, Mr. Obama substantially dialed back the near endorsement he had given late last week to the House vote for a confiscatory 90 percent tax on bonuses like those A.I.G. doled out.

“As a general proposition, you don’t want to be passing laws that are just targeting a handful of individuals,” he said in an interview on Sunday night on CBS’s “60 Minutes,” in what administration officials said was a signal to investors that he understood their concerns about doing business with the government.

It appears they have gotten the Senate on Board with the need to stop the hysteria:

WASHINGTON (CNN) – The populist wave that swept Capitol Hill last week against controversial bonuses paid to AIG executives stalled Monday after the White House and several key senators raised concerns about legislation to heavily tax the bonus payments.

"In light of concerns raised by President Obama and Senate Republicans we need additional time to discuss next steps," Jim Manley, a spokesman for Senate Majority Leader Harry Reid of Nevada said late Monday.

In response to the criticism, Senate Finance Committee Chairman Max
Baucus, D-Montana, who angrily denounced the AIG bonuses last week, said he's been talking to White House officials and to other senators about changing the bill he introduced just Friday.