What it means
When the financial crisis hit, many banks held securities and loans whose value had become very hard to judge. Buyers were scared off, so trading dried up and banks could not sell the assets without taking large losses.
The PPIP was designed to bring buyers back by giving private investors a partner in the government. The structure worked through investment funds run by private managers.
Private investors put in equity, and the government matched that equity and also provided debt financing. Because the government was supplying much of the capital, the private investors could bid more confidently for assets they might otherwise have avoided.
Profits and losses on the equity were shared in proportion to what each side had put in. The government also received warrants (rights to buy a stake in the upside) so that taxpayers shared in the profits if the assets recovered.
Private managers had to invest some of their own money too, which kept them interested in avoiding losses. The programme had two parts.
The securities part bought certain mortgage-backed securities, and the loans part was meant to buy loans directly from banks, with guarantees from the deposit insurer. In practice the securities part went ahead and the loans part was not taken forward at scale.
The PPIP is a good example for non-specialists of how a government can use partnership and leverage (borrowed money) to support a market without buying everything itself. It also shows the main trade-off of such schemes, which is that taxpayers take risk and so need strong safeguards, clear reporting and a fair share of any gains.
In practice
Real-world examples.
Example
A private fund manager raises $500,000,000 from investors and applies to join the programme. With the government matching the equity and adding equal debt, the fund can bid for up to $2,000,000,000 of eligible securities.
Example
A large bank holds mortgage securities that it values at 80 cents on the dollar, but buyers offer only 60 cents. A PPIP fund bids 70 cents because the government financing lowers its cost of capital, and the bank sells and releases capital. The sale also gives other banks a reference price for similar securities, which helps them value their own holdings.
Example
A pension fund considers joining as an investor in a PPIP fund. Its analysts compare the likely return with the risk of further mortgage losses and decide to invest a small amount. They treat it as a satisfying but risky addition that must not become a large share of the overall portfolio.
Formula
Calculation
Total purchasing power = Private equity + Public equity + Public debt
Public share of funding = (Public equity + Public debt) / Total purchasing power
In an illustrative fund, private investors contribute $10,000,000 and the government matches it with $10,000,000 of equity, giving $20,000,000 of equity.
The government then provides debt equal to the equity, so $20,000,000 of debt.
Total purchasing power = $10,000,000 + $10,000,000 + $20,000,000 = $40,000,000.
Public share of funding = ($10,000,000 + $20,000,000) / $40,000,000 = 0.75, or 75%, while the private investors, who put in only 25% of the money, take half of the equity profits before any warrants.Case study
Seen in the real world.
Greystone Asset Partners is a fictional fund manager that applied to run a PPIP-style fund. It proposed buying older mortgage securities that had fallen sharply in price but still paid interest from underlying homeowners.
The government partner matched its equity and lent an equal amount, and the manager invested $1,000,000 of its own money alongside investors. In this illustrative case, the fund bought $400,000,000 of securities over a year, held them as the housing market stabilised and sold most at a gain, with the government sharing in profits through its warrants.
The founders later described the partnership as useful but demanding, with detailed reporting and strict rules on what could be bought. They said that the price of cheap financing was close supervision. The investors in the fund received quarterly reports showing each holding, its price and the cash it had paid out. That level of detail helped them judge whether to stay invested.
Watch out
Common mistakes.
- Assuming the programme simply gave banks free money, when the government bought assets through partnership funds and expected to share in the gains.
- Believing the programme was funded entirely by taxpayers, when private investors put in equity and managers invested their own money too.
- Treating the loans part and the securities part as the same thing, when only the securities part moved ahead in a significant way.
Questions
People also ask.
Who ran the funds under the programme?
Private fund managers who were selected through an application process, with the government as a partner and lender.
Why was leverage used?
To increase the amount of buying power for a given amount of private money, which helped restart trading in assets nobody wanted to bid for.
Did the programme make money for taxpayers?
Results depended on how each fund performed, so the answer is best found in official reports on the programme, but the design aimed to give the government a share of any gains.
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