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What is the PPIP?

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  • Written By: Henry Gaudet
  • Edited By: A. Joseph
  • Last Modified Date: 31 August 2016
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The Public-Private Investment Program (PPIP) was launched on March 23, 2009, by the United States Department of Treasury, the U.S. Federal Deposit Insurance Corporation (FDIC) and the U.S. Federal Reserve. The PPIP, launched under Treasury Secretary Timothy Giethner, was designed as a response to the financial crisis of 2007–2008. Goals set out for the PPIP include the restoration of solvency and stability to financial institutions, especially those carrying so-called toxic or legacy assets on their balance sheets, with the ultimate goal of making lines of credit once more available to businesses and consumers. Resources for the PPIP were divided into two channels: the Legacy Securities Public-Private Investment Program (S-PPIP), which was designed to restabilize the financial market, and the Legacy Loans Public-Private Investment Program (L-PPIP), which was tasked to restore liquidity to banks by buying up toxic assets.

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Causes for the financial crisis that led to the creation of the PPIP can be traced to 2000 and 2001, when the U.S. Federal Reserve lowered interest rates 11 times (from 6.5 percent in May 2000 to 1.75 percent in December 2001), providing cheap credit that, when combined with deregulation and banks’ relaxed lending practices, created a housing boom. As lenders looked for more customers, deposit requirements relaxed, credit checks became less thorough, and subprime mortgages became available to those with lower incomes or poor credit ratings. These subprime mortgages, which by 2007 had an estimated value of $1.3 trillion U.S. Dollars (USD), were repackaged, reassessed as low-risk investments and sold on to other financial institutions.

By 2007, the crisis had come to a head, the loans began to fail, and banks suddenly found themselves short of funds. When the bubble burst, some of the largest financial institutions in the world, including Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns, Morgan Stanley, Fannie Mae and Freddy Mac, all faced bankruptcy. With no money to lend, consumers and businesses suddenly found themselves without capital, in what became known as the credit crunch.

Congress responded by passing the Toxic Assets Relief Program (TARP), charged with rescuing institutions deemed too big to fail, in October 2008 as part of a larger economic rescue bill. The PPIP, which draws funding from TARP as well as capital from private investors, was given the task of freeing up banks to once again provide credit to consumers and businesses. Three guiding principles guided the design and development of the PPIP: to combine public and private funds for maximum purchasing power, that private investors share in potential risk and reward from the investment and that competition in the private sector will set the price for any loans purchased. By the end of the 2009, the markets had shown signs of recovery, and the value of PPIP-funded securities was an estimated $3.4 billion USD.

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