Should We Care That the Banks Don Want to Play Ball With Geithner?
The Treasury Department’s effort to price and purchase the toxic loans clouding bank balance sheets — the PPIP program — appears to have failed. And it’s failed for a very simple reason: The banks refused to participate. They didn’t see it as in their interest. “Let’s say an asset was worth 30 cents on the dollar,” explains David Sharfstein, a finance and banking expert at Harvard, “but the financing guarantee makes it worth 50 cents on the dollar. If it’s on the bank’s books at 100 cents on the dollar, that’s still a fairly big markdown.” And it’s a markdown banks want desperately to avoid. A couple months ago, however, they had no hope of avoiding it. They needed capital to satisfy both regulators and creditors. They needed clean balance sheets to raise that capital. Conventional wisdom was that the first step to solving both problems was to rid themselves of the toxic loans that had thrown their business into such chaos. Even selling the loans at a markdown would be preferable to
