Some banks are still hoping that they’ll be allowed to game the Tim Geithner’s Public-Private Investment Partnership.
You forgot about that one didn’t you?
Refresher: The idea is to create a more liquid (read: pricier) market in certain toxic assets, by offering asset managers free leverage to purchase them. If investors like PIMCO and Blackrock are given government cash to help lever up their purchases, the idea is that they’ll place bids on assets the banks are comfortable selling at (read: overbid).
It’s couched as creating a market, but it’s a subsidy pure and simple. And from the very beginning, the same banks that could be selling the assets want in on buyers, too. And though this sounds outrageous, the lobbying continues, reports WSJ.
The lobbying push is aimed at the Legacy Loans Program, which will use about half of the government’s overall PPIP infusion to facilitate the sale of whole loans such as residential and commercial mortgages.
Federal officials haven’t specified whether banks will be allowed to both buy and sell loans, but a list released by the FDIC and Treasury Department of the types of financial firms likely to be buyers made no mention of banks.
Allowing banks to have it both ways would give them added incentive to sell assets at low prices, even at a loss, the banks contend. They claim it also would free up capital by moving the assets off balance sheets, spurring more lending.
We’re going to go out on a limb and guess that ultimately banks will be allowed to participate as buyers in some manner. They’ll find a way to do it. It’s not right — the idea that Bank of America (BAC) and Citigroup (C) could just buy assets from each other using government money is laughable — but without this, we think the plan is dead.
Think about it. All the major banks are ostensibly healthy now, having passed the stress tests and raised private money. The market isn’t all that worried about their solvency anymore, at least for now. Selling into the PPIP would be the new ‘accepting TARP,’ a mark of problems that you’re trying to hide. If a bank can both sell and buy into it, they can save some face, and the ultimate goal of the program (to transfer more private sector risk to the government) remains intact.