"Gaming" the PPIP

Paul Krugman says that Jeff Sachs's worries "need to be taken seriously." I think people need to stop taking academics seriously on the bank rescue.

Sachs claims that banks like Citi can game the PPIP by partnering with the government to buy their own toxic securities at inflated prices.

No, professor, they can't. The terms of the PPIP explicitly prohibit this:

A Fund Manager may not, directly or indirectly, acquire Eligible Assets from or sell Eligible Assets to its affiliates, any other Fund or any private investor that has committed 10% or more of the aggregate private capital raised by the Fund.

All the hoopla over the banks possibly "gaming" the PPIP is overblown. It's true that some of the investment banks (e.g., Morgan Stanley, Goldman) have explored the possibility of buying toxic securities under the PPIP, and repackaging them for sale to new investors—in effect creating a new CDO market. But this will never happen. If it ever got that far, Treasury would kill the idea.

Regulators have repeatedly stated that "healthy banks" will be able to buy toxic assets in the PPIP program. That obviously doesn't include Citi or BofA, and there's no way regulators would let either of them participate on the investment side. The reason Treasury hasn't ruled out TARP recipients en masse is that hundreds upon hundreds of banks have received TARP money, and their degree of health varies considerably. Some regional banks that received TARP money are no doubt healthy enough at this point to participate in the PPIP. These determinations are best made on a case-by-case basis, which is why Treasury hasn't issued a blanket prohibition on TARP recipients participating in the PPIP on the investment side.