To collect even fatter taxpayer subsidies, "troubled" banks buying assets to flip

A week ago, I warned that the government’s gift of non-recourse loans of up to 97% of the cost of buying bank assets could lead to massive overpayments — at taxpayers' expense — for bank assets:

Heck, if Citibank is allowed to bid, it buys up all of Bank of America’s crappy assets for 100 cents on the dollar and BofA does the same for Citibank. Problem solved. Bank balance sheets are in wonderful shape. Except taxpayers have massively overpaid trillions of dollars for garbage assets.

I’m even more concerned after reading that banks are using taxpayer bailout money to buy up even more assets at higher prices than other private buyers are willing to pay:

As Treasury Secretary Tim Geithner orchestrated a plan to help the nation’s largest banks purge themselves of toxic mortgage assets, Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market, sources told The Post.

Both Citi and BofA each have received $45 billion in federal rescue cash meant to help prop up the economy and jumpstart the housing market.

But the banks' purchase of so-called AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.

One Wall Street trader told The Post that what’s been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.

Even if the Geithner plan were limited to assets troubled banks held on a certain past date, its incentive scheme was totally screwed up. But the fact that banks seem to be able to buy more bad assets now and re-sell them for a big profit — thanks to taxpayer subsidies — is totally outrageous.

Posted by James on Friday, March 27, 2009