Are Citi, Bank of America Pushing Prices Up?

Few, if any, investors really remember the saga of the Loans to Developing Countries (LDCs) or Highly Leveraged Transactions (HLT). Mr. Timothy Geithner, Secretary of the Treasury, is finishing his plan (somewhat akin to The Brady Plan) to purge the nation's banks of the toxic mortgage assets -- predominately the poster children Citigroup (C) and Bank of America (BAC) in order to get our country's lending mechanism back on track.

However, these same institutions appear to have found a potential loophole to prop up revenues while utilizing, it would appear, government funds to be in a position to benefit from Mr. Geithner's Public Private Investment Program (PPIC), by aggressively scooping up the same securities in the secondary market.

So far, Citigroup and Bank of America each received $45 billion in Troubled Asset Relief Programs (TARP) funds, which were suppose to have been utilized to prop up the economy and jumpstart the housing market. However, as of late, these banks have been out purchasing what continues to be called "AAA" rated mortgage-backed securities (MBS). These securities are supported by the underlying mortgage as collateral (to include -A and option-ARM as collateral).

Considering that during the current economic crisis the MBS market has been experiencing significant volatility, some investors seem to have begun to bet that a bottom has been reached, as these financial institutions appear to be willing to outbid competing bidders.

As the MBS market has been sparse in recent months, some of these "AAA" securities have been trading at $0.30 on the dollar with yield as high as 22% potentially. While these purchases of secondary-mortgage paper have breathed life back into the moribund securitization market, Bank of America's rationale is that these MBS purchases increase liquidity in the mortgage market allowing people to buy a home

In one way, we applaud a company's willingness to take risks in uncertain times (in chaos there is always significant opportunity). However, to take a more cynical view, this could be a way for these institutions to artificially prop-up the prices of the securities that the PPIC will be in the market to buy.

We would also suspect that these companies have been in talks with both the government and the prospective buyers of their toxic assets and may have observed a "tell." Either way, the actions would appear to be highly suspect that these institution are potentially gambling with government funds (your and my money) instead of lending as they promised they would.

In addition, we have some concerns that the actions taken by these institutions could potentially have some aspect of insider information/trading illegalities. (Isn't that what they got Martha Stewart on, after all?)

Here's another question: If the financial institutions think these are such good investments, why the need for additional government intervention?

Comments

[It Figures:]

This story has a lot of misperceptions, in my opinion.

First, in a market with thousands of participants involving trillions of dollars, a single institution buying a few tens or hundreds of millions of securities doesn't move the needle.

Second, with the feds promising to finance, almost for free, private speculators to buy this paper "to remove toxic assets from the banking industry's balance sheet" in the popular terminology, how can it be bad in any way if a private entity puts it's own capital on the line in an attempt to acquire assets it deems undervalued.

Third, the author has no concept of what "insider trading" means. These banks have been telling the world that the current market prices are nuts, and are now acting on their analysis, for their own profit. Yes, they probably have better insight into the economic value of these securities, because they own similar paper and know first hand the cash flow and prepayment behavior, but this information is readily available to market participants, and the banks have made no secret of their opinions. That's why they carry them on their books at the values they do.

This is exactly what the dozens of government programs are hoping to accomplish.

Mar 27 12:05 PM

[Tom K:]

I agree with comments made by "It Figures".

what a poorly informed, ignorant and poorly written article by zacks. com.

Remind me to never subscribe

Mar 27 02:56 PM

[Chezfrederick:]

I would not put it beyond banks to be manipulating prices and loading up on cheap paper in anticipation of the trillion dollar subsidy Geitner is offering.

All it takes is a few greedy traders who think they can outsmart anyone and arbitrage the opportunity offered, even if it is to the detriment of taxpayers...

I wonder if they might expect to receive big bunuses to reward their greed.

Mar 27 06:21 PM

[James Wilson:]

The new MBS require a 20 % down and good credit .

So buying these is a good thing to get sell homes of all kinds new and foreclosed.

Mar 28 06:41 AM

[vodop09798:]

Folks, THEY'RE BACK! Citbanks short interest is over 18%. Here we go again. They're trying to kill another bank.

Mar 28 08:15 AM

[dcb:]

almost every academic economist believes this plan to be bad and a failure in the long run. so if smart money is following the likes of Rogoff, stiglitz, and Krugman can you blame them. As I have listened to Nassim Taleb say on multiple occasions: Bankers are not your friends, and they are not on your team. I think any analysis needs to be done with this in mind. Taleb is smarter than me, he was in the industry, he predicted much of what has happened. I don't get why there are so any people out there who bash people with nobel prizes who are smarter than any of us, and who have no financial interest in what is going on other than being concerned tax payers. Folks, you must think of the source of the information first and foremost. At this point any plan that the bankers like must be viewed as suspect and must be further investigated. I am not saying it is bad, but the lessons of this crisis whould have taught us that at least. Fool me once shame on you fool me twice shame on me. The American public keeps getting fooled by a white house and congress that have been paid to deliver by the financial industry. When things go wrong over and over they jump up and down with fake outrage and say bad bankers. Yet they keep doing it over and over again. wake up and stop being fooled as to what is really going on. this is just anoither example of them gaming the system any way they can which is why we should just nationalize, break apart and get this game over with.

Mar 28 09:55 AM

[Fliujniligui:]

I buy Allied Irish Banks. No securitization there, they issue a loan with the idea of holding it to maturity. Way more sane, even if there are bad loans there, the problem is much more manageable and less shadowed.

Mar 28 10:41 AM

[whisperonth...:]

While all the banks are being made to pay and pay and pay, all those jerks who took the loans with no intention of paying, with plans to flip the properties and make massive profits, those jerks have been allowed to walk away from those loans and allow the properties to go into foreclosure. It no longer matters if the previous value was too high. Now those properties are junk that has little value. Same property, value 1/10 what it was. The truth is that the mortgages were bad, the buyers of those mortgages were not all honest, and those properties have a value higher than currently stated. Therefore, if the properties were accurately valued in relation to similar properties in those areas (instead of the reverse, which is what is happening in neighborhoods and communities across the nation), the book value would be higher. If your home/business is foreclosed, MY home/business should not lose value, and the banks who now own that foreclosed property should be able to value it at the going rate in the surrounding area.

Mar 28 11:14 AM

[nukldrager:]

The banksters have bought and paid for a bunch of
obfuscating rhetorators. Now known as Uncle Ponz.

Mar 28 11:28 AM

[AllStreets:]

Nice game. You're sitting on a pile of MBS trash, worhtless home equity loans issued at 90-100% LTV at 2005-2006 values and/or toxic option ARMs bought from Wachovia. Get billions from taxpayers for preferred stock with few strings attached in order to stay in business, and use the money to buy up more, but higher-rated trash, at greatly depressed prices. Outbid your much smaller competitors to raise the apparent market price to get the charts moving in the right direction to stampede the young MBAs at the bond funds and hedge funds The higher rated MBS will improve your capitalization so you might pass the forthcoming "stress test," especially since it's already known that mark-to-market is going to be replaced, so soon your cheap AAA's are going to be worth 85 cents on the dollar, not the 30 cents you paid, and even your real trash might improve.

Now sit on the new assets for Oh, say two months, until Uncle Sam comes along with even more tax money to buy them up at the new 85 cents or help others buy them from you. Better yet, keep the AAA stuff and sell the trash to the government or the greater fool. Probably better sell most of it, though, unless you do have inside information that the government has a new secret plan to do something soon that will actually save the 27 million or more homeowners who are now upside down, particularly the 6 or 8 million second homes and investment properties, that will destroy the values of mortgage securities when the owners sart to walk away in droves...soon. But whatever you do, don't be stupid enough to lend the government funds, or the new cash flows from the AAA to the upside down homeowners, unless, or until the government has such a plan. I suggest The AllStreets Bailout Plan at themortgagenews.info.

Mar 28 03:50 PM

[E Nuff Sed:]

Goes to show that America is not really capitalistic democracy its pretends to be but a plutocratic oligopoly.

Nevertheless since I can't fight them, then I have to join them. I think its time to buy some BAC.

Mar 28 06:31 PM

[User 289589:]

after what ken lewis has done to bac stock holders,who can ever trust bankers again??

Mar 29 10:23 AM

[vreporter:]

One would assume that an entity like Zacks would have a knowledgeable opinion about the securities it covers. This topic is apparently one out of their league. There isn't enough room here to correct the assumptions undertaken in the above article.

Mar 29 11:16 AM

[monday1929:]

Citi and BAC can hardly be called "private entities". They are habitual criminals and if they are gaming their own rescue, which is being funded by taxpayer dollars ( yes, I know, for our "collective" benefit) it needs to be investigated.


On Mar 27 12:05 PM It Figures wrote:

> This story has a lot of misperceptions, in my opinion.
>
> First, in a market with thousands of participants involving trillions
> of dollars, a single institution buying a few tens or hundreds of
> millions of securities doesn't move the needle.
>
> Second, with the feds promising to finance, almost for free, private
> speculators to buy this paper "to remove toxic assets from the banking
> industry's balance sheet" in the popular terminology, how can it
> be bad in any way if a private entity puts it's own capital on the
> line in an attempt to acquire assets it deems undervalued.
>
> Third, the author has no concept of what "insider trading" means.
> These banks have been telling the world that the current market prices
> are nuts, and are now acting on their analysis, for their own profit.
> Yes, they probably have better insight into the economic value of
> these securities, because they own similar paper and know first hand
> the cash flow and prepayment behavior, but this information is readily
> available to market participants, and the banks have made no secret
> of their opinions. That's why they carry them on their books at the
> values they do.
>
> This is exactly what the dozens of government programs are hoping
> to accomplish.
>

Mar 29 09:35 PM

[monday1929:]

Don't worry, future generations will forget the bankers' sins and be fleeced all over again.


On Mar 29 10:23 AM User 289589 wrote:

> after what ken lewis has done to bac stock holders,who can ever trust
> bankers again??

Mar 29 09:46 PM

[70CUDA MAN:]

WONDER WHAT CRAMER HAS TO SAY ABOUT ALL OF THIS..

Apr 01 01:21 AM

[70CUDA MAN:]

I would like to know what the Cramer has to say about this ..

Apr 01 01:21 AM