Banks Want to Buy Their Own Assets With Taxpayer Money

by Manshu on May 27, 2009

in Economy

From the WSJ:

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.

James Kwak has an excellent post on this topic. (Warning: While this post will make you wiser, it will also make you very grumpy)

I thought the headline had to be a mistake until I read the article.

To recap: The Public-Private Investment Program provides subsidies to private investors to encourage them to buy legacy loans from banks. The goal is to encourage buyers to bid more than they are currently willing to pay, and hopefully close the gap with the prices at which the banks are willing to sell.

Allowing banks to buy their own assets under the PPIP is a terrible idea. In short, it allows a bank to sell half of its toxic loans to Treasury – at a price set by the bank. I’ll take this in steps.

{ 7 comments… read them below or add one }

Mikael @ Retire Early May 27, 2009 at 11:15 pm

It is amazing right? We have gotten used to banks being “the good guys” for years and years and now we’re finally starting to see their real faces…. It is scary to know but it is even worse to NOT know.

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Manshu May 28, 2009 at 2:00 pm

What surprises me is that this was done without trying to hide it or anything. They just went ahead and asked for it.

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Mikael @ Retire Early May 28, 2009 at 2:18 pm

Why is that surprising? They have been doing things like that for years (probably). We just didn’t know about it.

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Dividend Tree May 31, 2009 at 7:55 pm

Under the disguise of “systemic risk”, these banking folks are doing whatever they can. There is no accountability left. In the end, whatever these folks do, it is just not sustainable.

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Mikael @ Retire Early May 31, 2009 at 9:56 pm

So the great question to ask is: “what are we personally doing to protect ourselves?”

Any comments?

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manshuv June 1, 2009 at 9:50 am

@Dividend Tree: At least in this case, the proposal was turned down, but one bank can still buy the assets of another bank, which is a way of doing the same thing but not so blatant.

@Mikael: I am not sure if people are directly impacted by this in a manner that they can avoid. I guess they could protect themselves by not buying some of these bank stocks, but other than that I don’t know if they could directly do anything.

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Mikael @ Retire Early June 1, 2009 at 9:59 am

Manshu, I agree that we might not be able to do anything in this particular case but since I guess we can agree that bank as not just “all good” (which goes for pension funds etc. as well) then we’ll HAVE to ask ourselves the question “what can we do?”.

Without asking the question and doing some research we silently accept the way that things are and I personally don’t like that philosophy. 😉

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