The Journal has a story today about how and why the PPIP--the government's plan to partner with private investors in order to buy up "toxic" assets--appears to be losing steam, something I've commented on before. On the one hand are the reasons you'd group under the heading "execution"--that is, the big banks are worried about having to accept too low a price, while investors are worried about possible political fallout from doing business with the government (and, more specifically, of appearing to get too good a deal from the government).

On the other hand are the reasons you could group under the heading "upside surprises"--namely, the banks have had a much easier time raising private capital than anyone expected, so the need just isn't as pressing. My sense is that the first set of reasons became much bigger obstacles once the second set of reasons emerged. (If you're the government, you're probably much more inclined to knock heads together when banks are desperate for capital than when they appear to be raising it relatively easily.) As one Goldman Sachs executive put it to the Journal, PPIP is "the greatest program that never occurred ...[because it] created confidence in the markets so banks can raise equity capital."

For what it's worth, I've actually talked to several Treasury people about this on background in recent weeks. And while they all tell me the legacy securities part of the PPIP is moving forward in some form, they generally say they'd be pretty happy if it turned out the PPIP were unnecessary. In fact, it ties in with Treasury's view that the Geithner plan was misunderstood in some quarters from the beginning. The point was not, as one Treasury official recently told me, to solve the financial crisis by providing liquidity and magically reviving the prices of toxic assets. (Though Treasury certainly wouldn't have minded if that happened.) The point was largely to make it easier for banks to raise capital by removing the toxic assets from their balance sheet--the thinking being that the bad assets create uncertainty and generally frighten potential investors. So with the banks raising capital relatively easy, one can understand why Treasury isn't disappointed to see the PPIP peter out.

Anyway, here's a riff from one of the officials I spoke with:

I think there was a broad appreciation within Treasury that, even if [the big banks] were not insolvent, that capital was central. That it wasn’t just liquidity. If you were to caricature--the Paul Krugman caricature--there was a set of people who said we thought it was all liquidity, that there was free magic to be had. That if you get rid of the illiquid equilibrium and get to a good one, you'd fix things. ...

If you had asked--I don’t want to speak for the secretary--what’s problem number one? I think he'd say capital. Problem two? Capital. Problem three? Capital. Everything was in the service of that view. The legacy loans program was meant to help clean balance sheets. It was not an independent good in itself. It was seen as friendly to equity raising. Now people say the legacy loans thing is not gaining as much traction, so is that a failure? But because we had a good outcome in terms of raising equity, they [the banks] were able to raise equity without shedding assets ... you should be okay with that.

--Noam Scheiber