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Bailed-out banks eye toxic asset buys
By Francesco Guerrera in New York and Krishna Guha in Washington
Published: April 2 2009 23:20 | Last updated: April 2 2009 23:57
US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasurys $1,000bn (£680bn) plan to revive the financial system.
The plans proved controversial, with critics charging that the governments public-private partnership - which provide generous loans to investors - are intended to help banks sell, rather than acquire, troubled securities and loans.
Spencer Bachus, the top Republican on the House financial services committee, vowed after being told of the plans by the FT to introduce legislation to stop financial institutions gaming the system to reap taxpayer-subsidised windfalls.
Mr Bachus added it would mark a new level of absurdity if financial institutions were colluding to swap assets at inflated prices using taxpayers dollars.....
Inside the Toxic-Asset Story
FRANCIS CIANFROCCA - 04.04.2009 - 7:14 AM
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Its all about finding the least painful place to stash the losses from the collapse of the housing bubble and the subsequent destruction of leveraged financial procedures.
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What makes these assets toxic is that they cant be sold or marked to market, because the current value of a typical mortgage is now a small fraction of its face value. So the largest banks are stuck holding these assets....
...Now Tim Geithner wants to change that dynamic, and artificially elevate the prices at which mortgage-backed assets can trade today. In theory, that would make it somewhat easier for banks to sell off their most putrid paper, thus improving both their anticipated earnings and their capital positions.
Now as the Business Insider story points out, banks and other financial institutions are smacking their lips over the possibility of buying up MBS from other banks. What could possibly make that an attractive thing to do?
You guessed it: the taxpayers will finance the purchases, and guarantee any losses. Nobel-winning economist Joseph Stiglitz is absolutely correct when he says that the Geithner plan doesnt sell assets to private investors. It sells options on assets. The upside for the buyers is unlimited, and there is no downside. Its an easy decision. (Its also massively inflationary, but Geithner hopes youre not paying any attention to that part.)
At the end of the chain, Geithner hopes this will result in more bank lending, but thats not a necessary consequence of this game. What is a necessary consequence, is that the taxpayers will be committing a huge amount of money to allow banks to continue to wait another few years for their mortgage portfolios to mature. Thats money that will either be printed afresh, or else borrowed or taxed away from existing uses.
At the end of the day, the picture remains the same. Someone has to take the hit for the deflation of the housing bubble. As I said, the problem is to find the least painful place to stash the losses. The genius of the Geithner plan is that it shifts that pain to the people who are least in a position to complain about it: you, the taxpayers.
The inevitable result, of course, is less private capital available for growth, because its all tied up financing overpriced mortgage paper.
Yup.
The structure of this so called bailout is absurd.
It is an affront both to the Libertarians who see it as an offense to capitalism (and they're spot on correct about that!) and it is an offense to people interested in social justice because it is rewarding the wealthiest people in this nation for screwing it, and sending the bill for this screwing to the American people.
It's not capitalism, it's perverted form of SOCIALISM designed to give welfare to the RICH.
Both Bush II and Obama are essantially doing the same thing.
It's proof positive, that there is essantially no philosophical difference between the Republican and the Democratic leaderships, folks.
