The plan that Tim Geithner guaranteed would work looks like it might be dead on arrival.  As we’ve been hammering home for months, the PPIP is inherently flawed and reports from the WSJ are now confirming that the plan may be on hold.

WASHINGTON — A government program designed to rid banks of bad loans, part of a broader effort once viewed as central to tackling the financial crisis, is stalling and may soon be put on hold, according to people familiar with the matter.

Prospective buyers and sellers have expressed reluctance to the FDIC about participating for fear the program’s rules will change in a political atmosphere hostile to Wall Street. In addition, some banks that might have sold troubled loans into the program earlier in the year have become less eager as they regained a sense of stability.

The government has essentially shot themselves in the foot here.  We could have forced these banks to take the losses on the toxic assets rather than allowing the banks to continue living in their current zombie form with balance sheets loaded with toxic assets, but instead we gambled on this PPIP which had all of the flaws of the TALF.   M2M & the recent government bank recapitalization plan has given the banks the impression that they don’t need to sell these assets.  They will now attempt to earn their way out of their troubles just like the Japanese banks tried.

In addition, the government has made it abundantly clear that doing business with them is a very bad idea.  You either lose control of your company or get your income slashed by 90%.   The banks have little incentive to use the PPIP now.   We said it the day it came out – this plan would not matter one iota.  That is of course, unless the FDIC allows the banks to purchase the assets from themselves or from eachother – in which case the U.S. government is turning a blind eye to the largest money laundering scheme in the history of the world.  See here and here for more on the PPIP and potential fraud.