The Treasury might have scored a big victory recently, since the Public-Private Investment Program, or PPIP, drew bids from more than 100 fund managers. The PPIP program plans to attract private investors that are able to raise more than $500 million in capital to bid for the “illiquid” assets. 

“Most likely, some of these potential buyers will be rejected by the Treasury’s term and conditions. However, the remainder would still be able to create a sizable market for the distressed assets,” Trade Team said. “By having such a big number of possible bidders, the Treasury might come up with a more realistic price for the toxic assets, one that would also encourage the banks to sell them,” they added.

“The timing may be very good, if all the recent positive news continues in the coming period. If the fund managers perceive that the economy is recovering, they may place some very high bids for the banks’ assets, as theoretically their value will recover with the economy,” Trade Team said. “The only problem would be, in this case, to convince banks to let their assets go, and write-down additional losses.”

On the other hand, the main condition for this to happen is that investors must think the economy is bottoming at the time the toxic-assets auction process starts. If not, bids may be lacking, especially at the first auctions, something that might have a negative impact over the entire program.

Additional problems could come from the fact that the recent changes in the market-to-market accounting rules turned many (if not all) of these toxic assets into winners, since now banks can value illiquid assets using their own models. The question that rises now is why would a bank actually want to write-down a loss (the difference between the book value of the asset and the auction’s price) and more specifically, sell it when the bank can be certain that at some point in time the asset will recover its original value?