Is the Fed's new investment plan a deal with the devil?

One of the wildcards that could stem the flow of commercial real estate foreclosures and auctions is the U.S. government. In early April, the U.S. Treasury, in conjunction with the FDIC and the Federal Reserve, announced a new derivation of the Troubled Asset Relief Program (TARP), the Public-Private Investment Program or PPIP.

The aim is to use $75 billion to $100 billion in TARP funds to entice private investors to partner with the government in buying toxic assets that are clogging many lenders' balance sheets. The assets could include properties and commercial mortgage-backed securities.

Many commercial real estate analysts see pros and cons in the plan. “It seems like a great opportunity, but many of the larger institutions we've talked to are scratching their heads,” says R. John Wilcox, senior vice president with Savills, a New York-based real estate investment banking firm.

“Lenders are wondering if they're making a deal with the devil, if they partner with the government. Three months down the road, what if the lenders become a political hot potato?” asks Wilcox. “Do the rules get changed and do their fees get reduced? And who are you going to use to replace the government financing, which is not clear.”

With so much public outcry over executive compensation and perks, many lenders are a bit gun shy. “Many of them are asking if the federal government is their partner, are they going to have to take the bus to the airport? Really, people are thinking like that,” says Robert White, president of Real Capital Analytics. “The government has been a little capricious about things lately, so it's rightly so.”

Others wonder what incentives are in place for lenders in the private sector to participate. “Does the private guy really step up when he's not sure we've hit bottom yet?” asks Joe Franzetti, a 30-year industry veteran hired by Chicago-based Cohen Financial to lead its debt advisory services business. “Going back to the RTC (Resolution Trust Corp.) days, no one knew how to price real estate until the RTC effectively set a floor. This time, where's the floor?”

Banks also face the prospect of creating more problems than solutions. Selling off so many assets at a market-clearing price could be devastating.

“You're going to blow a hole in the capital base of the bank, rendering them either insolvent or not so well capitalized,” says Brian Olasov, a managing director of law firm McKenna Long & Aldridge LLP in Atlanta. “If that happens, would a bank in that situation be in a position to attract new capital?”