Are the Big Banks Gaming the Taxpayer?

Discussion in 'Wall St. News' started by poyayan, Mar 27, 2009.

  1. poyayan


    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 courtesty 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 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 Blair 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?
  2. poyayan


    Enron type SIV. Anyone?
  3. Term


    The source is the NY post. Need I say more? Funny when a story like this turns into some kind of legitimate news item.
  4. poyayan


  5. Its very interesting that Pandit and Lewis both said a few weeks ago that they were profitable for Jan and Feb. Today, they're singing a different tune. March has been a tough month for the "trading desk". They are trying hard to show a profit, but maybe this new treasury plan is a deal too good to pass up? Sounds fishy to me to say that some of the brightest minds on Wall Street couldn't make money this month. No way I'll believe they stayed short after mkts turned up.

    As for "what could go wrong?", suppose the hedge funds and private equity look at this and decide to pass. The risk may not be too high with govt backing most of the investments, but it's a risk just the same. Considering the most recent actions of our govt, would you go into a business transaction with them ? Hell no !

    I believe the AIG fiasco will be a turning point in this game. The public was riled up to a much greater extent than anyone in the WH could have predicted. Granted, they were missing the broader issue, but pissed off anyways. Govt has to be a lot more careful now, the next incident could result in a backlash that proves much more costly to those in office, and to those in question. Just ask an AIG exec how they felt the last couple weeks. What happens when Lewis, Pandit, Giethner, Bernanke, Blankstein, etc become the face of the publics pain and are targeted? I know its a "far out there" thought, but we are on a very slippery slope. If overall conditions for Americans continue to decline, "CHANGE" will be coming again.
  6. poyayan


    You don't need hedge funds and private equity help.

    Look at how SIV in the Enron case work.

    Let's say I, "Good old money corp", bought a pile of shit at $100. I didn't realized it until later it is worth $0.

    Well, now, if I form a entity call "Shit Inc", put $10 in it and get a sucker to lend me $90 bucks. I will buy this shit pile using "Shit Inc" at full price or near full price.

    On top of this, this sucker give me a non-recourse loan. So, if shit happens, shit happens.

    By now, you should be able to guess who the sucker is and who is "Good old money corp".
  7. Illum


    Yes Geitner robbed the taxpayers for Wall Street. Obama presidency is soon ruined. I never thought it was possible. I thought Obama would rain this junk in. Nonono. The straight up robbed everyone. Whatever, lets see if the American public are retarded or not. I dont care anymore. Trade it.
  8. I watched the videos. This is an absolute raping of the US taxpayers. If it is confirmed that BAC and C, and anyone else, are actively buying up these toxic assets in the current market, adding to their own shitty loans, they should be barred from any govt transactions altogether. For them to go out and buy more garbage, at .30 on the dollar, then use a backdoor method to take taxpayer money and buy the shit at full price from themselves is nothing short of treason. And the worst part of the whole deal, the Fed is assisting in the process. Do our leaders have any regard for the common man whatsover ?????

    It's no wonder that Lewis, Pandit, Dimon, etc were all smiles in DC today. And they don't need futher bailout money???...I guess not, bunch of crooked bastards.
    #10     Mar 27, 2009