Now that a government program to buy up toxic assets finally appears ready to fly, many observers are wondering if there is any need for it.

The Treasury Department said in October that five investment funds have raised $1.94 billion in private capital to purchase toxic assets through its Public Private Investment Program.

Yet it is unclear if there is anyone willing to sell to them. In the six months since the Treasury announced its program, many banks have already taken writedowns on toxic securities, the Financial Accounting Standards Board has given banks more latitude to value assets and most banks have been able to raise necessary private capital. Additionally, the main problem with the program - how to price toxic assets - remains largely unsolved.

Many observers say demand for the program has dropped off significantly, and will not rebound unless the Treasury can prove there are deals to be had. "I don't see any toxic assets selling yet," says Cornelius Hurley, a professor at the Graduate Program in Banking and Financial Law at Boston University School of Law. "Right now, it's just a bunch of announcements. There's a certain jawboning effect of this, and if Treasury keeps making these announcements, no one is going to believe them anymore, until we have actual deals."

The Treasury announced the PPIP in March to great fanfare in an effort to do what the Troubled Asset Relief Program did not do: buy up toxic securities and loans. The plan was split into two parts. The Federal Deposit Insurance Corp. would provide financing for public-private partnerships that bid on toxic whole loans, while the Treasury would run a program devoted to creating a market for toxic securities.

Both efforts have made strides over the past few weeks, but are well short of what was originally envisioned. The FDIC launched a pilot program and successfully completed the sale of a pool of toxic loans in September, and has plans for another sale. However, the FDIC's effort is now focused on loans from failed banks, not open and operating institutions, which was the original idea. The FDIC has said it hopes to expand the program to open banks eventually.

The Treasury, meanwhile, has lined up financing for five of the nine firms it selected to help purchase toxic securities and expects to close on the remaining four by the end of the month. But its ambition has also narrowed. The Treasury initially said the toxic-asset program would have $500 billion to $1 trillion of capital. The Treasury now plans to invest only as much as $30 billion.

Industry representatives say banks have long since lost interest in the program. "No one has heard from any ABA members about this," says Mark Tenhundfeld, senior vice president for regulatory policy for the American Bankers Association.

Ron Glancz, a partner at Venable LLP who has clients with toxic assets, agreed. "It's not created a lot of stir," he says. "We have banks that have a lot of toxic assets, and they are not selling to PPIP. It doesn't deal with the fundamental problem that banks can't book these losses, because that's a depletion of capital."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.