Banks Want Taxpayer Aid To Buy Toxic Assets From Themselves

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]

(Photo: columbuscameraop)

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  1. SacraBos says:

    Yeah, no conflict of interest there…

    This PPIP is yet another case of our government doing something that sounds good on paper, but is bad in practice.

    I’ve been sitting here for a few minutes trying to come up some simple additional rules, and can’t really see any way of doing this such that the Fed (or really, us taxpayers) aren’t going to get fleeced for it.

    • zonk7ate9 says:

      @SacraBos: How about, if you have some of our bailout money you’re not eligable? That shoould eliminate most of the people who could take advantage of this.

      • bmorg003 says:

        @zonk7ate9: Here’s the details of the plan laid out in plain english: [www.doctorhousingbubble.com]
        To participate in the subsidizing of the banks/screwing of the tax payers, you need only have $500 Mil in private capital and $10 Billion Market Value (under Management), expect collusion and/or shell corporation shenanigans. An if you look at the math in the article linked above, the private investors put up a fraction witch is matched by treasury and then the bulk is guaranteed by FDIC. The only thing that would be worse is if they went ahead and passed a 100% payroll tax and gave it to Wall Street (although I wouldn’t rule that out)…

    • zonk7ate9 says:

      @SacraBos: They also can’t set the price too high though because they are paying for half of it right? So it has like limited ability to be abused.

    • sirellyn says:

      @SacraBos: The “Fed” isn’t ever going to be fleeced by any of this. The Fed can print money. If we are unhappy with what the Fed does, “we the people” have no way or right to vote them out, or change leadership. Even the PRESIDENT only RECOMMENDS the appointment of the head of the Fed. Recommend meaning they don’t even have to use his recommendation.

      The fed is also owned in no small part by some of the biggest banks who have received the bailout money. Such as BoA and JP Morgan.

      So believe me, it’s only the tax payers that are going to get screwed.

  2. RStui says:

    They aren’t going to be able to do this, are they? Or is this something ELSE our gov’t is doing to screw us over in the name of saving us?

  3. dragonfire81 says:

    This will happen, I guarantee it.

  4. rekoil says:

    Oh, you think this isn’t already happening, via a few shell companies and/or like-kind exchanges?

  5. Sean Masters says:

    “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”

    How about the buyers bid what they are comfortable with bidding and the banks just lower their damn expectations? Isn’t that how nearly every pricing model in a mixed market works?

    • zonk7ate9 says:

      @Sean Masters: Yea, I think we are being a little too helpful with the banks. Loaning them needed capital is one thing because we get it back. They should have left the old mark-to-market rule intac, realizes your losses bow by selling the toxic assets for cheap to raise capital (maybe some sort of incentive for this like if they can pay back some of the bailout money or w/e if they healthy enough) or leave them on your books with huge unrealized losses. That’s what happens when you gamble, we’ll prop you up, but it won’t be free.

  6. ricosoma says:

    This isn’t a terrible idea for the BANKS!! If anyone harbors any doubt who controls this country just take a look at the $13 trillion (too many zeros) that has been shelled out already by the Federal Reserve and Treasury to bail-out their cronies in the financial industry. If you believe any of the garbage the media and the government has been feeding us about doing all this to keep the economy from collapsing, I have a nice bridge I can sell you cheap!

  7. bmorg003 says:

    Yeah, Krugman (and Stieglitz) has gone on and on many times about how this is a monumentally BAD IDEA (very good heading by the way). There’s also nothing to stop the banks from getting together and make deals like “I’ll buy you toxic stuff for $XX.XX and you buy my toxic stuff for $XX.XX and we’ll let the tax payer take the hit if anything goes wrong. This ranks right up there with really bad ideas like Bush/Cheney for President… Geithner is WAY too close to Wall Street on this and Obama needs to listen to some people who didn’t get us in this mess… The way things are looking now, they are dead set on doing this and I don’t see them listening to anyone with any common sense, so Dragonfire81 is right, it seems guaranteed to happen at this point. Good for Wall Street, Good for the Big Bankers, VERY BAD for the rest of us…

  8. LegoMan322 says:

    Bush said it best, “Wall Street got drunk” which I would say is an admission to the fact that they are screwing everyone with their greed and in a court I hope those exact words would put someone in jail.

    This will not stop because no one can stop it. Everyone just wants the economy back to where it was, but in the mean time, the banks are going to continue to rape and pillage everyone.

    Like a spoiled child they will continue to try to get their way…and more than likely the stupid parents (government) will give in again.

    Billy just one more cookie before bed and that is it!

    • SacraBos says:

      @Zegridathes: Okay, here’s why the “spread the wealth” idea is so bad. Because that basically means that anytime anyone is in trouble, everyone else participates in bailing them out.

      Also, even though banks are a “person” (a Corp.) and pays “taxes”, unlike regular people, they get to charge other people for their services to make up their taxes. So in effect, the amount of taxes they pay are relatively meaningless. The bank customers, and the rest of the public, end up paying all of it via IRS or fees.

  9. laserjobs says:

    Face it the government has been bought and paid for by the banks. I don’t even know if a revolution at this point would stop the Banks, Federal Reserve and Treasury from destroying America.

  10. Zegridathes says:

    How come whenever the word ‘taxpayer’ is used, it implies (to me) that the banks and their executives are some how not actually a part of this group.

  11. ARP says:

    Let’s face it, we let them get too big, to the point that if they don’t get what they want, they threaten us with failure (and then put a further strain on a weakened economy). They know that if we punish them, we punish ourselves. The solution to the problem was probably to allow them into a structured failure where we nationalize them for a short time, until we can sell off their assets. But we had to many problems, Bush was very friendly with the banks and didn’t want to do that. Obama was too afraid of further stoking the “socialism” boogeyman by letting them fail and then nationalizing them (like we do any other bank that fails). So calling him a communist and facist may have prevented him from doing the capitalist thing by allowing the banks to fail in a structured way (again, like we’ve done with other banks in the past).

  12. anduin says:

    am I the only one who feels like all this crazy aid to companies who are coming up with hair brained ideas not something people voted for in the last election? It just seems like there’s too much pandering to companies that have been failing us for years.

  13. t-r0y says:

    Huh, who’d a thunk? Gub’ment lays out a stupid scheme and gets a stupid result! A new adage for the times…

    Purpose a stupid scheme, get a stupid result

  14. Landru says:

    I don’t know if this is the same thing, but around here, whenever foreclosures go up at auction, the winning bid is usually the bank selling it. How does that work?

  15. grapedog says:

    Karl Denniger has been talking about this for weeks now.

    At this point I’m not even angry really anymore. I didn’t vote for this administration, I voted against my current senators(though I like my house rep). I contact the offices of my representatives and get nothing useful back in return.

    Aside from joining some armed revolt, what more can I do?