'Ocean's 11' Type Scam: The Toxic Asset Purchase Plan

Includes: IYF, KBE, XLF
by: Markham Lee

Here is a look at plans by various banks to potential participate in the Treasury's toxic asset purchase plan as both buyers and sellers:

(From the Financial Times): "US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system.

The plans proved controversial, with critics charging that the government’s public-private partnership - which provide generous loans to investors - are intended to help banks sell, rather than acquire, troubled securities and loans.

Spencer Bachus, the top Republican on the House financial services committee, vowed after being told of the plans by the FT to introduce legislation to stop financial institutions ”gaming the system to reap taxpayer-subsidised windfalls.” …

...Banks have three options if they want to buy toxic assets: apply to become one of four or five fund managers that will purchase troubled securities; bid for packages of bad loans; or buy into funds set up by others. The government plan does not allow banks to buy their own assets, but there is no ban on the purchase of securities and loans sold by others.

“It’s an open programme designed to get markets going,” a Treasury official said. But he added: “It is between a bank and their supervisor whether they are healthy enough to acquire assets,” raising the possibility regulators may prevent weak banks from becoming buyers.

Wall Street executives argue that banks’ asset purchases would help achieve the second main goal of the plan: to establish prices and kick-start the market for illiquid assets.

But public opinion may not tolerate the idea of banks selling each other their bad assets. Critics say that would leave the same amount of toxic assets in the system as before, but with the government now liable for most of the losses through its provision of non-recourse loans."

I'm not a conspiracy theorist but the Treasury's blasé attitude over this makes me wonder if this was the intention from the start: re-arrange the deck chairs in a way that allows banks to dump their bad assets for inflated prices, whilst simultaneously investing in similar assets in a way that positions them to reap the gains and the taxpayer to hold the bag for any losses.

In fact it doesn't matter if it's truly a "conspiracy" because what I described above is the likely outcome no matter how you slice it. Either way this plan is looking more and more like an "Ocean's Eleven" type scam, where the government is trying to sell us on the idea that handing Wall St. a taxpayer funded subsidy is actually in our best interests.

You can read more here.


The Financial Times: "Bailed-out banks eye toxic asset buys" -- Franceso Guerrera, Krishna Guha, April 02, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.