Financial Follies

Banks might be back to their old tricks. There’s speculation that some banks might be looking to buy more toxic assets using taxpayers' dollars!

That’s right. Those same banks that received billions of dollars of TARP money want to place bets on the same level 3 assets that got them into trouble in the first place -- and with government support.

The $1 trillion Public-Private Investment Program (PPIP), where the government provides much of the financing and shoulders much of the risk, leaves open the prospect that banks could buy the troubled securities and loans.

This means recipients under the government's $700 billion bank bailout fund, the Troubled Asset Relief Program, might take part.

And late word suggest it’s more than just a hypothesis – according to published reports big banks are looking to get into the game.

Which Banks?

Reuters says, Morgan Stanley Chief Executive John Mack told employees his bank may buy toxic assets and package them for sale to individual investors, according to a person who heard him speak, but was not authorized to comment publicly. Three days earlier, Goldman Sachs Chief Executive Lloyd Blankfein said his bank may also join the PPIP, as an investor.

Each of these banks took $10 billion from TARP.

A recent article the Financial Times supported these claims and went on to say that Citigroup and JPMorgan Chase, which together took $70 billion of taxpayer money, might also buy toxic assets under the PPIP.

Two other large TARP recipients, Bank of America and Wells Fargo, had no immediate comment on their plans.

Where's The Oversight?

"If indeed we allow banks to buy each others assets – to bid each others assets up – it would be the greatest Ponzi scheme of all time," says Chris Mutascio, managing director at Stifel Nicolaus.

In all fairness, it’s unclear whether U.S. regulators will just say no – in other words it’s unclear if they will simply exclude TARP participants from the auctions.

In fact, Spencer Bachus, the top Republican on the House Financial Services Committee, introduced a bill on Thursday to block TARP recipients from "gaming" the PPIP. He said if banks "are colluding to swap assets at inflated prices using taxpayers' dollars, the bailout cycle has sunk to a new level of absurdity."

The Alabama congressman is not alone.

"It's not a Democrat or Republican issue, it's a right or wrong issue," says Dan Alpert, an investment banker at Westwood Capital LLC in New York. "There are going to be voices who say this is ridiculous, we're giving them money with one hand and then with another hand. But theoretically there is no reason to keep (banks) out of the market. Their asset management arms have considerable asset aggregation capabilities."

Meanwhile, a rule adopted on Thursday by the Financial Accounting Standards Board to give banks greater freedom to value securities as they would in a normal market rather than at distressed or fire-sale prices, could complicate matters.

What do you think? We want to know.

Should banks that received TARP money be allowed to participate in the PPIP?

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