Are the Big Banks Gaming the Taxpayer?

Multiple sources for this story - this is not a tin oil hat sort of story. Anyone who thinks this is "innocent" should ask why Bank of America (BAC) and Citigroup (C) were not buying these securities 3 months ago? or 6 months ago? Welcome to corporate socialism 101 and the unintended consequences - aggressively buy securities that the taxpayer is going to subsidize hedge funds and private investors to buy in a few weeks/months - you never lose in reverse Robin Hood America. Watch for the new HGTV show: Flip that MBS (Mortgage Backed Security)!

Via Clusterstock

• The huge subsidy to banks hidden inside of Tim Geithner's public-private partnership program may already be leading banks to load up on securities they plan to sell at inflated prices.
• According to the New York Post, Citi and Bank of America have been aggressively buying up Alt-A and ARM mortgage backed securities, sometimes paying more than the going rate of around 30 cents on the dollar.
• This raises serious questions about how the banks are using TARP funds. Instead of stimulating the economy by making new loans, B of A and Citi seem to be spending money to buy up old loans. That's probably a bet that the Geithner plan will create renewed demand for MBS.

The source story is here at The New York Post:

• 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.
• 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.
• Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.

The video explanation courtesy of Yahoo Tech Ticker

A "funny" thing is happening just as Treasury Secretary Tim Geithner seems to have finally found a scheme to deal with banks' toxic debt: Some big banks are aggressively bidding for toxic debt in the open market.

Specifically "Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market," Mark DeCambre of The NY Post reported earlier this week.

Friday, DeCambre joined Henry Blodget and me to discuss the story in the accompanying video.

The banks contend they are helping to bring liquidity to the "frozen" mortgage-backed-securities market, as per their "marching orders" under the TARP program, DeCambre notes.

Furthermore, the banks' buying of toxic assets may be on behalf of clients rather than for their internal accounts.

A less generous interpretation is that Citi and BofA (among others, no doubt) are attempting to "front run" Geithner's program, which presumably will result in banks being able to unload these assets at prices above the current "depressed" market levels - leaving taxpayers on the hook for future losses.

Furthermore, having put their franchises - if not the entire global economy - in jeopardy by gorging on MBS securities the first time around, do Citi, BofA and other TARP recipients have any business jumping back into that (still) toxic pool?

******************

More Reverse Robin Hood here on a related but different subject... seriously folks, what is going on in this country? Everything appears to be a Ponzi scheme at this point. So sad. Again, have your kids grow up to be financiers - the world is their oyster.

Via Clusterstock: Sheila Bair Open to Allowing Banks to Launder Trash Assets

Let's see if we've got this right. Yesterday FDIC boss lady Sheila Bair said that she was open to banks taking equity stakes in those the public-private partnership funds as partial payment that will buy up illiquid loans from banks. The banks would be allowed to pay for their stakes with the very loans they are selling into the partnerships.

It's mind boggling. Let's try this once again.

• Let's say Citigroup has a bunch of commercial backed securities that have become toxic assets because Citi insists they are worth 87 cents on the dollar but the market thinks they are worth 30 cents.
• Along comes Bair, offering loans to buyers willing to pay much higher amounts for the assets because most of the purchase price will be paid with government subsidies.
• The bank then sells the assets to a special vehicle set up to pay for the assets, and it gets an ownership stake in that vehicle in exchange for the assets.
• So the bank will trade the assets themselves for ownership in a special purpose vehicle that owns those assets.

You might be wondering why any bank would want equity in a fund that is buying assets it is desperately trying to get off their balance sheet. That's because you haven't realized that this program involves a huge subsidy for the buyers, allowing them to make money even if half the assets they buy are worth nothing at all. Essentially, the deals allow banks to move their risk off-balance sheet, with much of it taken by the government.

It's hard to believe that after all of this, the Obama administration is convinced that off-balance entities are the key to prosperous and healthy banks. What could go wrong?

Comments

[BxCapricorn:]

We went along with the Iraqi war for 8 years now, what makes you think we care about anything other than delivery style pizza and our MySpace pages? I think more people have an opinion on whether or not chimps should be pets than how we as a nation will survive this crisis. All I can tell you is that I'm planning on getting through this, while knowing that roughly 15% of the population is not going to. It will be their own fault that they chose to read TMZ vice Seekingalpha.

Mar 28 09:52 PM

[Jolly_Rancher:]

I would add one more stipulation: when banks start making money again, they shouldn't be allowed to use past losses as tax credits.


On Mar 28 07:05 AM Chezfrederick wrote:

> Geitner should revise his plan in 2 ways:
>
> 1. Reduce the non recourse offered to private investors to 50% of
> the leverage loan amount. This would then allocate the risk 50:50
> between investors and taxpayers, giving taxpayers a shot at some
> upside and will ensure that private investors price these toxic assets
> more realistically, rather than offer inflated prices.
>
> 2. Disallow banks from participating in the PPIF in any way other
> than as a seller of toxic debt to eliminate any double dipping, or
> appearance of such.
>
> If Geitner chooses not to make such changes, an alternative would
> be to fess up to the fact that the plan is purely a government subsidy,
> and that private investors are nothing more than a screen he is using
> to determine the inflated prices for the toxic assets as an attempt
> to imply these are market prices. He could use instead, these private
> investors as professional advisers to help determine the prices to
> be paid, determine the premium(donation) he is willing to add to
> the price to support the banks, and buy the toxic assets entirely
> with taxpayer money. This is a more transparent and honest aproach,
> giving taxpayers a shot at the upside if the premiums pais are not
> unreasonable.
>
> As it stands, let's all be clear, this is an almost 50% subsidy to
> the banks with optimistically little chance of taxpayers recovering
> more than 50% on the loans.
>
> I am not so much against the plan, rather it is the opacity and misleading
> packaging that I dislike most. I wonder, whatever happened to openness,
> trasparency, accountability... did Geitner consult with Obama?????????
> This is demeaning to taxpayers' intelligence.
>
> Let's all hope that common sense prevails in these tough times.

Mar 28 11:11 PM

[workedlate:]

and a nice arbitrage it is when you can use tarp money to buy the assets while having the governement match you dollar for dollar. Am I understanding this correctly? The banks are buying more toxic assets, the very assets that have crushed our economy, and adding them to their balance sheet? They are getting matching funds so at a minimum banks are using 50% government money and paying more than market price for these assets? Please someone tell me this is not true. If it is true I think we need to be screaming a little bit louder and a little bit longer at our administration. It makes perfect sense for the banks because they have been given a free pass by the treasury by saying he won't allow banks to fail. The banks have unlimited capital now to over pay for assets and try and re-price all of the toxic assets they already own. I hope someone can tell me this is not true and that it is absurd and that the government would never let it happen but this is not the first story I have read on the matter. This will be the biggest fleecing of the American tax payer ever. Unless of course everyone thinks we should let the banks use federal dollars to by more of what everyone has been saying is clogging the system so they can raise prices and take fewer write downs. We could stuck in this mess forever if the to big to fail banks are loading up on garbage. I need some feed back on this one people.


On Mar 27 02:58 PM notblind wrote:

> It should be obvious to any m*ron that the PPIP offers banks an arbitrage
> opportunity to neutralize the writedowns that the problem may require.
>
>
> If I am a bank that will sell 10 billion of MBS to the PPIP that
> I have on my books for 70 cents on the dollar and I ftech 50 cents
> on the dollar, I have to write down the 20 cent difference.
>
> To alleviate this write down, I have an opportunity to buy artificially
> marked down MBS for 30 cents on the dollar and keep it on my books.
> As the PPIP makes a market for MBS off the artificial bottom, my
> 30 cent cost basis MBS bought before the program started will now
> be marked up to the market rate of 50 cents, counterbalancing my
> write down of the assests that I bought.
>
> Anyone who says this is somehow wrong is stupid and belongs in Cuba
> or Russia, not the USA.

Mar 29 01:32 AM

[workedlate:]

Yeh I get the fact that this is good for the banks and that it might save them and that it is capitalism etc etc....I say buy all the toxic garbage you want but just not after you cam crawling to the government for a bailout. Can not imagine why mainstreet USA might have some doubts about the integrity of the banks, bankers, the financial system and even the federal governement.

Mar 29 01:56 AM

[schlumpf:]

because mainstreet have no power - nothing to say.
thats live.
go to work and pay your tax.
lol

Mar 29 09:19 AM

[mrmillergd:]

Geithner is the new Palin. So on message he comes across incomprehensible.

Mar 29 06:13 PM

[bigspender:]

"The bankers work for their shareholders" .. not anymore. They work for themselves. Have the bank shareholders fared well? I don't think so.

On Mar 27 04:27 PM rrbatch wrote:

> Is it any surprise that the bankers are smarter than the bureaucrats?
>
>
> The bankers work for their shareholders, not the taxpayers (except
> for AIG). If they (the bankers) have an opportunity to make money
> by arbitrage on a poorly-conceived PPIS, more power to them!
>
> But I have an uncomfortable feeling that this will provoke a new
> round of "outrage" among the politicos, that greedy, money-grubbing
> businesspeople are again taking advantage of the "public servants"
> who conceive these misbegotten plans to "solve" the financial crisis
> that the bureaucrats and academics created.

Mar 29 06:56 PM

[expat in China:]

What has happened is that the bank (especially the CEO's) where shorting their own stock to knowing that they are insolvent hoping to manipulate the treasury into giving them a plum! They then covered their shorts and completed some inside trading buys before the in concert manipulated of the news announcement. Then Obama and the Treasury manipulated the news and the February data to look like a bottom was setting in and rode the stock price to a 50% gain.

Well the PISSPIP plans will not benefit the economy or the tax payers and the citizens are beginning to revolt because of the long term debt. There is more raping and pillaging to come!

Our trading partners around the world took the cue from Obama’s statements about protectionism and the walls are growing. Now world GDP will drop more than 10% this next year and global unemployment will top 50 Million.

So we know that the off balance sheet debt is going to drop out in the news when Geithner is told to spill it and the market will get its final (3rd) leg down and some consolidation time before any bull rally can be considered so take a look at the short interest?

The money machine of the lobbyist just keeps cranking and yanking the American people into submission. Someone recently wrote that the current president may be a 1 term dictator and leave us with another decade of CHANGING policy.

Can you imagine the insider trading and money making in a few weeks and at the same time hanging Obama from a tree? Why does he not complete the CHANGE he talked about.

Make lobbing illegal and fire everyone connected the current banking scandal and that includes Geithner and Summers. Why is Wagnor gone and Lewis and Pandit still there?

Mar 30 02:04 AM

[GOLD DUCK:]

QWAK,THEY will just KEEP doing IT to YOU as long as YOU keep LETING THEM DO IT -- because they CAN -- THEY WILL!:(

WHEN you change YOUR mind -- your WORLD will CHANGE -- untill then -- IT will just continue geting WORSE!

IT AINT ROCKET SCIENCE!

the DUCK

Mar 30 11:18 AM

[Mr. Ed, Jr.:]

Isn't it about time to stop referring to this debacle as Geithner's, as if he doesn't have a boss who approves all of this ?

Apr 02 02:41 PM

[Gus de Racer:]

Nice article -- well done. Below is a copy of an email I sent to President Obama earlier this week (I had sent similar emails to my representatives from the State of California, of course none of whom responded). If you feel similarly you should contact your representatives to express your concerns.

Dear President Obama:

I previously contacted Senators Feinstein and Boxer and Congresswoman Harman to express my concerns about the potential for manipulation and/or fraud (at the taxpayer's expense) presented by the Treasury's latest plan to use public funds to buy so-called "legacy assets" from banks. My prior concern, in short form, was that banks are financially incentivized to sell under this program any assets currently valued at or below 93 cents. The rationale being that a 7 cent equity investment is all that a private investor needs to acquire "legacy assets" at 100 cents. Thus, if a bank has already lost 7 cents (by having its mark below 93 cents), it can spend 7 cents to get the asset off its book at 100 cents without impacting its balance sheet. The financial incentive to the bank increases as the current mark on the asset decreases. And, as we have seen time and again over the recent years, where there is a financial incentive there is a way, even if that "way" leads to long-term disaster.

As more details of the Treasury's plan have emerged, the most obvious form of manipulation appears to be proscribed by the program rules, i.e., the rules appear to prohibit a bank from directly capitalizing a fund to buy assets from itself. That does not, however, prevent all types of improper manipulation or fraudulent activity. For example, the rules would not prohibit a bank from writing a swap or guarantee on "legacy assets" it sold to an investor that would guarantee an attractive return if the purchased "legacy assets" turned out to have less value than the price paid by the private investor. The bank could use the spread between its current mark and the sale price of the asset to finance that swap and still come out ahead. Of course, the taxpayer would have no such guarantee and would end up paying the loss when it turns out the private investor bid too much (which appears to be the intent of the program).

I find it deeply shocking and troubling that there have been no public challenges to this program on grounds that it invites fraud on the taxpayer. That there will be manipulation or fraud under this program is foreseeable to the point of being obvious. Indeed, recent reports suggest that Citibank and Bank of America have been in the past several weeks aggressively buying on the secondary market assets that would qualify as "legacy assets." I do not believe the intent of the program is to permit banks to "flip" newly-acquired toxic assets to the taxpayer at elevated prices, yet that appears to be exactly what is happening (again, without any concern being publicly expressed by your administration or congress).

The dollars involved in the fraud and manipulation that will take place under this program and eventually made known will make the recent AIG scandal look mild. I am holding a faint hope that someone in your administration, congress or the senate will speak up before that happens, but am becoming more disillusioned by the day. I implore you to please look into this situation to prevent banks from further, egregious fleecing of the taxpayer with the implicit support of our elected officials.

Lastly, and on a somewhat personal note, as a member of the younger generation I have a much longer view than, say, my parents' generation, who seem content preserving the status quo for the rest of their lives irrespective of the ultimate cost to future generations. I defended and voted for you with the hope that you would make the difficult decisions that need to be made to advance this country. Sadly, I now see you as being unable or unwilling to fight to make those decisions, as evidenced most strikingly by the Treasury's "legacy asset" plan which I don't think -- in present form -- can be viewed as anything other than a thinly-veiled hand-out to banks and politically connected financiers. I hope that you do something to make it more equitable to taxpayers, and would like to know what your administration's plans are in this regard.

Thank you for your time and consideration of this important issue.

Apr 02 02:56 PM

[dcb:]

Of course the bankers are gaming the system. The issue to be resolved is it being done with government consent and knowledge. I believe the great majority if evidence says yes.

Apr 02 03:03 PM

[User 371080:]

Its heartening to read more and more comments that get that the banksters are evil. It may take a few generations to finally rid ourselves of the Ayn Rand pathology. All journeys begin with a single step.

Apr 02 03:55 PM

[Ned S:]

America's well deserved financial reputation just keeps getting more and more deserved. Too clever by half all round. What does American law say about this? Could Geithner be seen as criminally negligent for anything? Hank Paulson was smart enough to get a "No culpibilty for anything" clause drafted into his original bailout plan if I recall correctly. But as far as I know Geithner doesn't have one? Will this sort of nonsense still keep happening once America finally gets around to nationalising these banks? It is going to have to happen sooner or later surely? The banks are out and out begging for it.

Apr 02 08:14 PM

[Ned S:]

Mr. Ed - I don't think we can actually blame Mr Obama for this. He thinks the P in P/E ratio means Profit so his "I'm a Financial Idiot" defence is rock solid. No better and no worse than Mr Bush on that score I suspect - Regardless of what one might think about their other comparative strengths or weaknesses.
Nope, it is Geithner who people should be able to expect to have a bit of a basic understanding of the ways of Wall Street and the banks.

On Apr 02 02:41 PM Mr. Ed, Jr. wrote:
> Isn't it about time to stop referring to this debacle as Geithner's,
> as if he doesn't have a boss who approves all of this ?

Apr 02 08:42 PM

[Ned S:]

One thing people do have to give Mr Obama for is honoring his transparency promise - The American tax payer is being fleeced in the most transparent of ways.

Apr 02 09:00 PM

[j_remington:]

Please write your Republican congressman. I have.

PPIP is the largest fraud committed on Americans.

Apr 03 06:04 AM

[SFrandsen:]

Ah, but the smaller (and healthier) regional banks don't sit on the Federal Reserve's Board!

Some banks are more equal than others, I guess.


On Mar 27 09:17 PM William Cowie wrote:

> All in the name that disaster will befall us if we don't keep shoveling our dollars into the pockets of these big banks.
>
> Why not just break them up?
>
> Or give the same money to regional banks, who are already healthy, and will actually be able to lend (assuming of course there are still people out there who want to borrow money)?

Apr 03 07:08 AM

[jaxon:]

Yes. See the graphs and watch the video here:

digg.com/d1nozs

When all is said and done, regulations do more to help the status quo that crafts legislation. They say Obama is different. However, he continues to spend and help the banks, crafting legislation with their direct input. We know not where the TARP monies went and are going—and no one is talking—as if Washington is gripped by a secret society on oath to protect these beneficiaries. However, even if they remain secret, we know their implement of choice: The Law. Even if a law is created, there is always an exception. They draft a line-of-law-here to give them an ‘out’ and they put-a-line-of-law there to save face and they put a line-of-law-near-the-end to protect their organization, group and most importantly, themselves.

Apr 03 01:07 PM

[au godfather:]

"are the big banks gaming the taxpayer?"

do bears shit in the woods?

the biggest shoe of all hasn't dropped yet. at some point, taxpayers will balk at funding larceny. our uncle sam isn't just a drunken sailor, he's a doddering old drunken sailor who owes more money than any entity in the history of the universe. i call it "antisynergy" when the sum of the parts suddenly exceeds the whole, for an example, check the old soviet union as the '80s concluded. when it comes round, it's an unstoppable economic force. the economy is a river; when you dam it, the water goes over, around or underneath. your value is what you can do with your hands; creating art, planting a field, fixing a car, spaying a dog, all of which can be done out of sight of our greedy, dying uncle.

what we have, we hold.

Apr 03 01:51 PM