We'll look at these unintended consequences of the bailout, but let's start by reminding ourselves how the toxic assets mess began. These were bundles of loans that were packaged into securities and then sold off in different slices that supposedly carried tailor-made risks and rewards. But it turned out the credit ratings on the bundles were unreliable, and investors began to fear that they couldn't trust what was inside the wrappers.
The panic began with "subprime" mortgage-backed securities, but it spread to other securities that were backed by student loans, auto loans and the like. These asset-backed securities, as they were known, couldn't be sold - or even valued reliably - and the big banks that held them began taking huge write-downs that pushed them toward insolvency.
The Obama administration has struggled to revive the market for asset-backed securities. The problem isn't with securitization, they argue, but with restoring investor confidence. So they have launched a variety of schemes aimed at detoxifying the credit system that developed during the 1990s. Not coincidentally, the U.S. Treasury team during that financial boom included Lawrence Summers and Timothy Geithner, who are now Obama's top financial advisers.
To restart the securitization machine, Treasury and the Federal Reserve have proposed a series of programs with tongue-twister names. They include the Term Asset-Backed Securities Loan Facility (known as "TALF") and the Public-Private Investment Program (known as "P-PIP"). But these programs have had limited success, so far.
The Treasury argues that securitized lending is slowly coming back, thanks to TALF. That program made available up to $200 billion in public loans to support new issuance of asset-backed securities. A Treasury fact sheet boasts that $13.6 billion of these new securities have been issued this month, more than double the combined total for March and April, with $9.6 billion financed though TALF.
That's all fine, but the new issues are a small fraction of the securitized lending that was taking place two years ago - for the simple reason that investors remain wary of buying and selling the bundles of debt. In the fourth quarter of 2006, the total issuance of asset-backed securities (excluding mortgage-backed securities) was $250 billion; in the fourth quarter of last year, that total was just $5 billion. The market has come back a little from that low point, but not much.
Private lenders are extremely wary of having the federal government as a partner. And this phobia about government money could actually cripple Geithner's plan for public-private partnerships to buy up toxic mortgage securities. After the public flaying of AIG executives' bonuses, financial CEOs became wary of taking P-PIP loans - fearing that they would be attacked as profiteers or morons, depending on whether they made or lost money. Many analysts predict P-PIP will have few big-name players.
Fear of federal funds has become so acute that leading bankers are competing to see how quickly they can pay back last year's capital infusions from the Treasury. Jamie Dimon, the chief executive of J.P. Morgan Chase and perhaps the industry's most successful banker (a relative term), says he wants to pay the government capital back as soon as possible - and as for P-PIP, forget it.
Summers and Geithner keep hitting the credit restart button. But what if the securitization process itself is the problem? What if the mistake of the 1990s was that we strapped a casino to our economy, and let the roulette wheel take control? Summers and Geithner may want a better-regulated casino, but is that really the right way to build a new foundation for the economy?
You can argue the question either way, in the abstract. But the future of securitized lending will be decided, in the end, by the markets. The Fed can offer loans to encourage new issues of debt securities, and the Treasury can insist on better labeling for the bundles. But if investors don't want to play the securitization game, it's over. Rather than repackaging, the best solution, as with real toxic waste, may be to bury it.
David Ignatius is a respected analyst who writes for the Washington Post Writers Group. Contact him at firstname.lastname@example.org or 1150 15th St. N.W., Washington, D.C. 20071.