The Treasury Department has released details on the Public-Private Investment Program (PPIP) to help remove toxic assets from bank balance sheets.  Unfortunately, I see this as a further transfer of taxpayer dollars to Wall Stree (around a trillion dollars).

Here is the way it works.  For every dollar you invest to buy toxic assets, the treasury will match a dollar.  You can then borrow 6x the capital investment (i.e., $12) for a total purchase of $14.  This loan will be guaranteed by the FDIC and is non recourse.  That means for each dollar an investor puts at risk, they can purchase $14 dollars of assets and the most they can lose is $1.

Prices for troubled assets will be determined in an auction environment.

There are two reasons this program is a really bad idea.  First, because the loans are non recourse, this puts the majority of the risk on the FDIC (i.e., tax payers) allowing the investor to pay a higher price while maintaining a positive exptected return.  This will inevitably inflate the asset prices above where they should be, leading to more tax dollars funneling in through the FDIC guarantees.

The second problem is even more severe.  Imagine for a moment that you are a large bond holder of Bank X (say $100B face value).  Because Bank X is effectively insolvent the value of those $100B of Bank X bonds is currently only $50B).   Now if were willing to invest $10B to buy troubled assets from Bank X, with the above leverage this would lever up to a $140B injection of capital.  So even if you have completely over paid for the troubled assets and lose the full $10B investment, you have more than made up that amount in your Bank X bond holdings which are now worth their face value since the bank is now solvent and rid of its troubled assets (i.e., net gain of $40B for investor).  Effectively this is a transfer from the taxpayer to the finance institution bond holders.

I really hate this plan.  It looks like more taxpayer transfers hidden under the covers so that no one will notice.  Watch for Bill Gross to be very favorable towards this plan.  PIMCO has a lot of bank debt and I would expect PIMCO to play a large roll in buying troubled assets.

Alternative:  Assume bank with troubled assets is insolvment.  Wipe out existing shareholders and move all troubled assets of the insolvant bank into its own entity.  Give the equity of this new bank to the current bond holders.  You can now recapitalize the healthy bank and reprivatize it.  The bond holders will get whatever value the troubled assets eventually turn out to have without weighing down the healthy bank or providing bondholders taxpayer bailout money.