AndyKroll.com

The same day I wrote about the potential for gaming and fraud in the bailout’s Public-Private Investment Program in my TomDispatch piece “The Greatest Swindle Ever Sold” one of the largest business newspapers in the country highlighted the same problem. 

Here are the highlights from a story in today’s Wall Street Journal:

Some banks are prodding the government to let them use public money to help buy troubled assets from the banks themselves.

 

Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government’s Public Private Investment Program.

 

PPIP was hatched by the Obama administration as a way for banks to sell hard-to-value loans and securities to private investors, who would get financial aid as an enticement to help them unclog bank balance sheets. The program, expected to start this summer, will get as much as $100 billion in taxpayer-funded capital. That could increase to more than $500 billion in purchasing power with participation from private investors and FDIC financing.

 

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. 

 

…

 

 

Some critics see the proposal as an example of banks trying to profit through financial engineering at taxpayer expense, because the government would subsidize the asset purchases.

 

“To allow the government to finance an off-balance-sheet maneuver that claims to shift risk off the parent firm’s books but really doesn’t offload it is highly problematic,” said Arthur Levitt, a former Securities and Exchange Commission chairman who is an adviser to private-equity firm Carlyle Group LLC.

 

“The notion of banks doing this is incongruent with the original purpose of the PPIP and wrought with major conflicts,” said Thomas Priore, president of ICP Capital, a New York fixed-income investment firm overseeing about $16 billion in assets.

 

One risk is that certain hard-to-value assets mightn’t be fairly priced if banks are essentially negotiating with themselves. Inflated prices could result in the government overpaying. Recipients of taxpayer-funded capital infusions under the Troubled Asset Relief Program also could use those funds to buy their own loans.

 

 

“Sensible restrictions should be placed on banks, especially those that have received government capital, from investing their own balance sheets in a backdoor effort to reacquire what could be their own assets with an enormous amount of federally guaranteed leverage,” said Daniel Alpert, managing director at Westwood Capital LLC, an investment bank.