Where’s PPIP?

For several weeks beginning in late March, Tim Geithner and others on the Rubin wing of the White House expended significant political capital convincing the listless business press and the broader electorate that PPIP, the taxpayer-subsidized toxic asset removal program, was the only way forward.

Two months later, and without any PPIP toxic transfers, Geithner assured critics last week that the program would be activated in July.

During the original PPIP news cycle, Geithner argued that removing substantial toxicity from bank balance sheets was the last, best hope for restoring global confidence in the American financial system, and that the enormous social risks created by the program were preferable to the chaos that might result from a permanently contaminated banking system.

Even Nouriel Roubini, the freethinking savant of the financial crisis, endorsed the Geithner plan, which creates a mechanism for “discovering” inflated prices for bank-held toxic assets by burdening the public with most of the downside risk while giving hedge fund investors a piece of the upside reward.

Given the consensus among Rubinites and Roubini followers, arguably the two most powerful ideological schools shaping financial crisis policy, what explains the interminable PPIP delays?

The likely answer is that chieftans of companies saddled with toxic assets now believe that they may be able to skate by without shedding them and are unwilling to bear the write-downs that would result from any toxic transfers, even at the inflated prices that PPIP would generate.

The modicum of market “confidence” restored by the stress test news cycle is a major factor in this calculus. Since the stress tests and the abandonment of “mark to market” accounting, Wall Street’s leading lights have been signaling a return to happier days, when the securitization of junk real estate and consumer loans generated massive paper wealth for the financial sector. H. Rodgin Cohen, Wall Street’s chief apologist, recently pronounced, “The system will look more like what preceded the current environment than many people seem to believe. I am far from convinced there was something inherently wrong with the system.”

No matter that, according to IMF estimates, $2.7 trillion in toxicity is still seeping through the poorly-constructed foundations of American financial titans and that potentially catastrophic losses in commercial real estate and personal credit have just begun, some market investors evidently want to believe Mr. Geithner’s determination that only $75 billion in new capital needs to be raised.

And even if they know better, both Treasury and the banks appear to believe that the crisis can be overcome with a series of interventions designed to improve the social psychology and media perception of the financial sector. In its pursuit of confidence-building measures, the Rubin wing of the Obama team has not hesitated to sacrifice coherence and rationality. PPIP‘s mechanism for regaining market and public confidence is the hoped-for “discovery” of toxic asset price-points that exceed previous dismal estimates for such assets. In the stress test pageant, the confidence-building numbers are the lower-than-expected capital needs of banks, as determined through highly suspect “negotiations” between regulators and the regulated, chronicled today by the Wall Street Journal.

PPIP, with the chance for less-than-stellar asset valuations that it brings, now constitutes a threat to Treasury’s fragile confidence-building enterprise. Why “discover” that subprime CDOs are worth 45 cents on the dollar through PPIP when the post mark-to-market accounting regime permits subjective valuations at 60 cents?

PPIP was on the ropes even before the stress test charade thanks to Jamie Dimon‘s announcement that JP Morgan would not require government help to sell its toxic assets and would do so at its own discretion. Dimon’s maneuver masked the reality that the bank would never sell toxic assets privately at rock-bottom market rates. But given JP Morgan’s public rejection of the program, participation in PPIP by others might be seen as a sign of weakness.

In a context as fluid and hysterical as the present, a refurbished PPIP could be revived by the Rubin boys when the new confidence erodes in a future news cycle. For now, though, it appears that Wall Street will solider on, doing its best to counter talk of toxicity and insolvency by critics in their midst such as Krugman and Stieglitz with make-believe asset valuations and phony assessments by friends in the regulatory community.

As many have noted, this strategy presents grave risks for Obama, should the much-feared zombie bank syndrome take hold. With accounting maneuvers and a multiplicity of massive government subsidies, most importantly the free money banks are receiving from the Fed for lending, the banks may postpone their fate with a re-energized confidence game. But the zombies will likely walk again, given the growing crises in real estate and consumer credit.