The Obama administration rolled out a revamped Public-Private Investment Program (PPIP) the week of Oct. 5. The program is designed to accomplish the original goals of the Troubled Asset Relief Program (TARP). According to observers, the program still contains too little disclosure of conflicts of interest among those charged with implementing it.

Despite being created over a year ago, TARP still has not been used to actually alleviate the strain of troubled assets at the heart of the near-collapse of the financial sector. When former Treasury Secretary Henry Paulson came to congressional leaders in 2008 with dire warnings of the collapse of the nation’s economy, he argued that resources were needed to purchase toxic assets from many of the nation’s leading financial institutions.

After Congress passed a program Paulson advocated, however, the Bush administration shifted course. Instead of purchasing toxic assets, the Treasury Department has used almost half of the committed TARP funding to infuse banks with additional capital, which could be seen as providing relief from the troubled asset symptoms but not providing a cure. The rest of the funding is split between auto industry bailouts, AIG support, small business loans, mortgage modification programs, and Citigroup and Bank of America investments. The fact that jars the most with Paulson's earlier dire warnings is that, to this day, Treasury has yet to even commit about a third of the $700 billion it requested from Congress.

Starting the week of Oct. 5, however, Treasury began to focus more of its attention on TARP and toxic assets by announcing that by the end of the month, PPIP should be operating at full strength. Created in March, the Obama administration designed PPIP as a way to purchase some of the toxic assets still on the balance sheets of many banks. The PPIP was originally planned as a massive $1 trillion program, with the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve joining Treasury in helping to finance the effort, though it has since been scaled back. The program would use federal dollars, matched dollar-for-dollar with private money through Public-Private Investment Funds (PPIFs), to purchase the toxic assets. With the toxic assets off their books, financial institutions should be better positioned to loosen up financing in capital markets.

Although the financing system is fairly straightforward, there are still complicated problems within the program related to how to value the assets in question. Previously, financial institutions had to value the assets using the "mark-to-market" rule, by which assets are valued at current market price. In the current economic situation, current market price for these toxic assets is startlingly low, forcing banks to declare losses on the assets. This is the very reason why there is a need for PPIP.

In April, however, thanks to a change in regulations, these institutions were allowed to be a little more creative in how to value toxic assets. Instead of going by current market rates, institutions can value assets at "fair value," which theoretically will be higher than the current, recession-era value. While the rule change has taken some pressure off of financial institutions in the short term, it has an unfortunate effect on PPIP. Now, the administration is left with what many see as a bad choice to make: either purchase the toxic assets at an artificially inflated price (giving the financial sector a nice subsidy in the process) or offer a mark-to-market price and have the financial institutions refuse to let go of their toxic assets, since they do not want to be forced to take a loss.

Considering the administration's desire to deal with toxic assets, it will probably choose the first option. According to experts, such a choice would not only be bad for the PPIF investors (i.e., taxpayers), it would also create a conflict of interest situation. The PPIFs are run by prominent private fund managers, such as Invesco Ltd, BlackRock, and the Wellington Management Company, which are charged with determining the fair value for the toxic assets the PPIFs will be purchasing. However, these companies could also be managing toxic assets for their private clients. If so, there is a clear incentive for the fund managers to overvalue toxic assets in order to receive a larger subsidy from the government. By arranging potentially bad deals for the government, fund managers would be relieving themselves of toxic assets while at the same time reaping a profit for their private clients and themselves.

The conflict of interest problem is not new, and the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) has been questioning Treasury's safeguards since its April report. More recently, SIGTARP went as far as writing in its July report that there exist "numerous potential opportunities for fraud, waste, and abuse in PPIP." While Treasury has adopted many of SIGTARP's recommendations for PPIP, it has resisted several of the core conflict of interest recommendations, including the imposition of information "walls" between the PPIFs and their parent fund managers and increased disclosure requirements for PPIF fund managers.

By not adopting the SIGTARP recommendations, the PPIP program remains riddled with potential conflicts. While the program may succeed in taking toxic assets off the books of prominent financial institutions, it could do so at the risk of hurting the bottom line for taxpayers.