Bad Debt Plan No Longer Panacea

The government on Wednesday is expected to unveil the latest edition of a plan to allow banks to unload their bad assets, but investors should view it as a downsized backstop rather than the panacea it was once heralded to be.

The plan has been nearly nine months in the making, through several iterations and revisions. The initial focus of the $700 billion Troubled Asset Relief Program was to buy up assets weighing on bank balance sheets, but the program couldn't be set up fast enough. It was instead shifted to inject capital directly into banks.

After a five-month pause plagued with uncertainty, the market rallied in March when the Obama administration outlined its own version, the Public-Private Investment Program, or PPIP. Finally, it seemed, banks would be able to cleanse their balance sheets, and move forward back into profitability with fresh capital.

"PPIP = price discovery," said a note by Goldman Sachs analysts at the time, referring to the ever-present conundrum of what the troubled assets are actually worth.

But it seems that prices may not have actually been discovered. Soon, additional issues started to emerge concerning banks' willingness to sell and investors' willingness to participate in the program. There's no evidence that the government has found -- or can find -- a solution to them.

At a conference in early June hosted by the Securities Industry and Financial Markets Association (SIFMA), participants and panelists gave the impression that PPIP was essentially dead in the water.