When Citigroup heard that the government was planning on financing investors who were willing to buy toxic assets, it came up with the dastardly scheme of using taxpayer dollars to buy the assets from itself. In essence, the Citigroup wanted to recapitalize its collateralized debt obligations with taxpayer dollars. And it would have got away with it too—if not for the heroism of Sheila Bair.
The Wall Street Journal today explains how Citigroup and other banks tried to game the system by buying assets from themselves, their subsidiaries and their parent companies. It was almost the perfect scam, allowing the banks to transfer most of the remaining risk to taxpayers while keeping the upside for themselves. Losses would be socialized, profits privatized and the public befuddled by the complexity of it all.
According to the Journal it was FDIC chair Bair who saw the scam for what it was and put the kibosh on it. And the banks reacted by suddenly becoming unwilling to sell their assets into the public-private partnership program. If it wasn’t a scam, they didn’t want any part of it.
Thank you, Sheila. We all owe you one.
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