Allan Sloan: In Passing on Troubled Assets, Treasury Plays It Smart

By Allan Sloan
Tuesday, June 9, 2009

Sometimes the best investment is the one you didn't make. That's the case with one of the biggest investment pools in the country: the $700 billion Troubled Assets Relief Program, which Congress authorized last October to help combat the financial meltdown. The smartest thing the Treasury has done is to not buy troubled assets with the money. Instead, it has used most of it to buy preferred stock in banks to shore up their capital.

There was lots of yowling when the Treasury wisely changed its mind in November -- critics yelled "bait and switch" because the pre-Obama Congress would never have approved a plan for the government to buy ownership stakes in banks. But forgoing asset purchases has turned out to be the right decision.

TARP certainly hasn't been run perfectly. Among other things, the Treasury has lavished subsidies on nonbanks like General Motors and American International Group, and used its authority under TARP to tell banks how to run their business and pay their staff. But this is trivial stuff compared with the problems we'd have had if the Treasury had tried to buy troubled assets from banks and insurance companies at a price both fair to taxpayers and high enough not to bankrupt the sellers.

How do I know this about a program that was never launched? By looking at the problems the Federal Deposit Insurance Corp., Federal Reserve and Treasury have run into in the course of trying to set up a public-private investment program to buy troubled assets.

PPIP (pronounced PEE-pip -- do you expect good taste from the government?) would avoid the problem of the Treasury putting a fair price on assets of institutions it's trying to help. But even without this problem, the program is having so much difficulty getting started that it may not appear for months, if ever.

The FDIC's program, involving whole loans, is on hold. The Fed-Treasury program, involving mortgage-backed securities, is moving far more slowly than expected.

The idea is to give public investors like the Treasury and state pension funds a chance to profit from private investors' expertise. In return for a chance to buy assets at steep discounts with generous financing made available by Uncle Sam, the private investors will let the Treasury et al. match their investment dollar for dollar.

It's a nifty concept -- you let private capital set the price, and public entities invest alongside and get 50 percent of the profits. To be sure, the government would be taking most of the risk because it would be on the hook for both the loans (up to 85 percent of the assets' purchase price) and up to half the capital (another 7.5 percent). But the private investors would have to suffer a total wipeout before the loans cost the government anything -- giving the public buyers a serious incentive not to overpay. The government, by contrast, would have had no such constraints.

The program has bogged down over questions such as whether to let banks that have gotten bailouts play this game (talk about double-dipping!), whether pay and perks of private investors would be capped, and whether it's right to let Wall Street, which made fortunes while creating this mess, make additional fortunes cleaning it up.

Sure, it would be nice if banks and insurance companies got to unload hinky real-estate-related loans and mortgage-backed securities at reasonable prices, whatever "reasonable" means. But it might not be the end of the world if the institutions held these assets for a few years to see how things played out.

For many of us, the best investment we ever made was the one we never made, such as not bottom fishing for GM or Lehman common stock. For Uncle Sam, the best investment was not buying troubled assets on his own. And that's the bottom line.

Allan Sloan is Fortune magazine's senior editor at large. His e-mail address is

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