This is one of those news stories that leave sensible people scratching their heads and wondering what our financial system has come to. The Wall Street Journal article about this is behind a pay wall, but James Kwak at Seeking Alpha lays out the situation and why it’s such a horrible idea.
…The Public-Private Investment Program provides subsidies to private investors to encourage them to buy legacy loans from banks. The goal is to encourage buyers to bid more than they are currently willing to pay, and hopefully close the gap with the prices at which the banks are willing to sell.
Allowing banks to buy their own assets under the PPIP is a terrible idea. In short, it allows a bank to sell half of its toxic loans to Treasury – at a price set by the bank.
Banks Aiming to Play Both Sides of Coin [WSJ – subscribers only]
Banks Want to Use Government Money to Buy Assets from Themselves [Seeking Alpha]