Why Shouldn't PPIP Participants Face Scrutiny?

The news outlets are buzzing with analysis about what it might mean that the Treasury's Public-Private Investment Program (PPIP) has nine participants. I can still remember that some people predicted that no one would participate, because the government was sure to put investors reaping big returns under a microscope, like they did the banks who got bailout money. Indeed, that might be why some prominent names like Pimco and Goldman aren't participating. When I spoke to the Treasury in March about the program, a source there insisted that no such strings would ever get attached to the PPIP. I can't help but ask: why not?

Let's reflect on why bailout banks were under government scrutiny. Was it because they did something illegal? Not exactly -- then orange jumpsuits would have been appropriate. Was it because they were stupid? Not really -- the government knows even less about finance than banks. Was it because the government provided them monetary assistance? Exactly.

Because the government "loaned" money to the banks, they expected for banks to behave in certain ways. For example, they didn't want golden parachutes for executives or "excessive" compensation for its bankers.

So let's think about the PPIP. What's the government doing? Well it's giving investors money through financing to purchase securities that those investors hope to make a profit on.

Wait a second! Did I just say the government is providing cash to investors? How is that different from when the government provided cash to banks? It isn't. The same logic should still apply, unless the investors were not benefiting from that financing in any way. Obviously, they are.

And what about the banks who sell securities under the plan? They're the ultimate recipients of that money. In other words, rather than paying the government periodic preferred stock dividends and providing warrants, banks are now providing investors with toxic securities. If it weren't for the government, these transactions never would have happened and banks never would have gotten that cash. Sure it isn't all from the government, but a large portion is. So why are there no strings attached?

In fact, the PPIP is just another bailout. In fact, it's explicitly so. The funding for it comes from the $700 billion in bailout money that Congress gave to the Treasury last year. If that money went straight to banks, strings were attached. But if that money first goes through the hands of a 3rd party investor and then makes its way to the banks, there are no strings.

How about an example. Last year, when the government provided Goldman Sachs with an equity injection, Goldman was restrained by what it could pay its executives. The idea being that executives shouldn't be getting bailout money. But under the PPIP, imagine if Blackrock uses government financing to purchase mortgage-backed securities from Goldman. Then Goldman can take those proceeds and pays its executives whatever it wants. Why aren't the same kind of strings attached?

Maybe I'm nuts, but I just don't see much of a difference. A bailout is a bailout. If you wanted to hold those who benefit from the bailout accountable then, why not now?