Banks Want Government Subsidies to Buy Assets from Themselves

From the headlines of the Wall Street Journal: “Banks Aiming to Play Both Sides of Coin — Industry Lobbies FDIC to Let Some Buy Toxic Assets With Taypayer Aid From Own Loan Books (subscription required, but Calculated Risk has an excerpt). 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.

Assume that a bank has a portfolio of loans on its books at $100 and that, when held to maturity, those loans will turn out to be worth $90. In the absence of any transaction, it will end up losing $10.

First, imagine the bank is buying these loans from itself with no government support. Let’s say it decides to pay itself $80. Obviously this does nothing – no cash has changed hands, and the bank still has the toxic loans. It might take a $20 “loss” today, but it will gain $10 by holding those loans to maturity, so its net loss is still $10.

Second, imagine that the bank creates an investment fund where its own money is matched dollar-for-dollar by Treasury money. If the fund buys the loans from the bank at $100, then the fund will eventually lose $10. That loss will be split between the bank and Treasury, so now the bank’s net loss is only $5, because the other $5 of losses is absorbed by Treasury. Conversely, if the fund pays less than $90 for the loans, the gains will be split with Treasury, so the bank’s net loss will exceed $10. If it pays exactly $90, then the bank is no better or worse off than before the transaction.

In other words, it’s exactly the same as if half of the loans were sold to Treasury, with the bank holding onto the other half. From the bank’s perspective, it wants the price to be as high as possible.

Third, imagine that the equity in the investment fund is split evenly between the bank and Treasury, but it is leveraged up to six-to-one by a loan that has an FDIC guarantee. This has the effect of capping the bank’s downside if the loans do really badly. The guarantee wouldn’t kick in if the loans end up being worth $90, but let’s say they end up being worth $70. Now if the fund pays $90 for the loans, that is about $6.50 of bank money, $6.50 of Treasury money, and $77 of FDIC-guaranteed loan. So the bank loses $6.50, Treasury loses $6.50, and the FDIC loses $17. With no transaction, the bank would have lost $30. 

The third scenario is the PPIP.   

So if banks are allowed to buy their own loans, they will have the incentive to overbid for those loans. As long as the price they pay exceeds the eventual value of the loans, they will come out ahead, even without the loan guarantees. This is bound to close the gap between buyers’ bids and sellers’ reservation prices – by ensuring that at least one buyer (the bank) will bid more than the reservation price set by the seller (the bank). And the way these investment funds are set up, the private equity partner – the bank – will be the one deciding how much to bid; the whole point of these “partnerships” was to get the government out of the business of valuing assets. In short, since the government doesn’t have the expertise necessary to guard the henhouse, we’ll let the fox do it.

Do you think this is so crazy it couldn’t possibly be what the banking lobby is asking for? Consider this:

[Norman R.] Nelson proposed to the FDIC that banks be allowed to control as much as half the capital in a buyers’ group. In some cases, he wrote, “the selling bank should be able to participate as the only private-sector equity investor.”

(Nelson is general counsel of the Clearing House Association, a trade group representing ten of the world’s largest banks.)

The blather being spouted in support of this self-dealing is so blatantly disingenuous it makes you wonder if this is some sort of joke.

“Banks may be more willing to accept a lower initial price if they and their shareholders have a meaningful opportunity to share in the upside,” Norman R. Nelson . . . wrote in a letter to the FDIC last month.

Um, no. Participating as buyers will only ensure that banks will be motivated to overpay. If they think that the price is too low, they would prefer to just hold onto the asset – especially now that the stress tests have made clear that no bank will be forced to liquidate assets under pressure.

“Bankers see it as a win-win,” said Tanya Wheeless, chief executive of the Arizona Bankers Association, which has urged the FDIC to let banks buy their own assets through PPIP.

That’s absolutely true – for them, that is.

Towne Bank of Arizona plans to sell some of its soured real-estate loans into PPIP and wants to profit from the program. “We think it would be attractive to our shareholders to be able to share in whatever profits there are from the venture,” said CEO Patrick Patrick.

It seems like this proposal is too extreme for some people in the banking lobby to support; neither Scott Talbott of the Financial Services Roundtable nor Edward Yingling of the American Bankers Association was quoted.

You would think that the government would slap down this idea in a second. But here’s the FDIC spokesman on the issue: “It’s an issue that’s been raised and an issue we’re aware will need specific guidelines.” 

Now, even if banks aren’t allowed to buy assets directly from themselves, there are still reasons to be worried. If you think of the banking sector as one big entity, then it’s obviously in the interests of that entity to buy assets from itself exactly as described above – only with Bank A buying from Bank B and Bank B buying from Bank A (or more complicated permutations as required). In other words, there is a massive incentive to collude. Now, collusion is illegal. So the question is whether the banks can get themselves into an equilibrium where they all overpay for each other’s assets – thereby benefiting everyone – without actually conspiring to do so. This is like when one airline raises prices and immediately every other airline follows suit – there’s nothing illegal about it, even though the end result is the same as if they had colluded. 

But let’s not make it easy for them. If this proposal has any chance of going anywhere, then Tim Geithner or Sheila Bair should come out and reject it right now.

By James Kwak

86 thoughts on “Banks Want Government Subsidies to Buy Assets from Themselves

  1. You know what I love about this story? You do not need any detailed explanations or any knowledge of finance to suspect that you are getting shafted.

    I mean, come on. Why would anyone ever buy something from themselves? To commit some kind of fraud.

    Even the average person could understand this. (If they were still paying attention, which they aren’t.)

  2. I’ll be very surprised if the proposal is not approved. After all, what has the government denied the banks so far? Nothing.

  3. As much grief as everyone gives bankers, I still have much more respect for them than the “servants” in DC. Bankers are smart. They may be greedy…and they may have no heart…but they are smart. And if they’re incentives are appropriately aligned with their shareholders (as in the old-style partnerships, or as in hedge fund managers), then these smart guys will deliver exceptional amounts of value for those stakeholders.

    Our representatives in government on the other hand, have constantly been screwing taxpayers over since the dawn of time. Its like the old poker analogy…if you’re sitting at a poker table and don’t know who’s the sucker…then its you. The finance industry (buy-side, sell-side, insurance, etc.) is at the table with Geithner…and poor old Geithner thinks that things are going swimmingly.

    This is as close to a system-wide arbitrage as I’ve ever seen. And Geithner is serving it up to the bankers on a silver platter. If only we had a greedy banker running things in washington (who’s interests were aligned with the taxpayer, NOT GS). Too bad we have a president who’s too in love with his own popularity, and a collection of yes-men who are the proverbial “suckers” at the poker table.

  4. I think this is one of those issues where the Obama administration needs to speak out. Yes, they need to make it very clear that this is unacceptable.

    But Obama should take the opportunity to use the presidency as a bully pulpit here. We have been asked to understand his reluctance to make the banks suffer, or to speak out strongly against them, because those kinds of words or actions might harm a bank that was on the brink of insolvency.

    This, however, is a perfect opportunity for the president to speak out against banking executives and to shame them in front of the taxpayers. The crisis has passed, as the administration says. It’s obvious to investors that no big bank will be allowed to fail.

    But if the administration wants to enact any kind of meaningful legislation regarding the industry, it will need public support. And the industry is making it easy for them.

    Here’s what I would like to hear from the mouth of the president himself:

    “You may have heard stories in the media about banks trying to profit from the program that we set in place with taxpayer money to ensure that these banks did not fail. These stories are true. We bailed out these banks, not because we agreed with what they did. In fact, we believe that many of these bank were financially irresponsible. However, because we allowed them to become too big to fail, we had to hold our noses and help them out.

    “Today, however, these same banks are trying to profit from this program by using a loophole to buy investments from themselves, using taxpayer money as a guarantee in case these investments go bad. This means that if their investment does well, they make money. If it does poorly, you, the taxpayer, will pay for it.

    “I am telling you this because I want to assure you that I will not allow this kind of behavior to continue, and that I will do all in my power to ensure that these banks never again have the kind of influence that they have today.”

    I’m very disappointed in the fact that the administration has not spoken out more strongly. This is a perfect opportunity for them to do so.

  5. Interesting. Why would you respect anybody merely for being smart or for making money?

    I do not think we need a “greedy banker running things in Washington”. What we need is a populace with some minimal level of understanding.

    Yeah, we’re doomed.

  6. Jim (beg pardon if it’s James), are you afraid that “financial institutions participating” in this program will receive “unjust enrichment?” Fear not. Government equity funding for PPIP comes from TARP. The TARP legislation cautions the Secretary of the Treasury against just this result:

    (e) Preventing unjust enrichment. In making purchases under the authority of this Act, the Secretary shall take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset.

    12 USCS § 5211(e).

    Congress seems to have anticipated this. We can all relax.

  7. “If only we had a greedy banker running things in washington (who’s interests were aligned with the taxpayer, NOT GS).”

    Alas such a person, if they even exist, wouldn’t get within sniffing distance of Treasury. Geither got his job because he is a gullible fool in the pocket of Wall Street. It’s a feature not a bug.

  8. “And Geithner is serving it up to the bankers on a silver platter. If only we had a greedy banker running things in washington…”

    Uh, I think Geithner is pretty good friends with the greedy bankers and that’s why the greedy bankers are being allowed (helped?) to screw the tax payers. If banks were aligned with the taxpayers’ interests, why would they be lining their pockets with billions of taxpayer dollars with no intention, or reasonable plan, of paying it back?

    The only suckers at this poker table are US citizens; the banks and their government cronies are playing the game quite well.

  9. Not really, read again.

    “unjust enrichment” That’s subjective, it doesn’t say no profit, it says unjust enrichment. Is a 20% profit unjust, 30%?

    “…preventing the sale of a troubled asset to the Secretary at a higher price that what the seller paid to purchase the asset.”

    The sellers paid much more to purchase these assets than even the worst designed plan is talking about selling them for. The banks bought these assets at par, we’re talking about selling them at 70,80, 90 cents on the dollar. The issue is that they were bought at 100, are worth 60 but can be sold at 90. That is not disqualified by the statement above, they are selling them at a loss, just not the 40% loss that should actually be realized, and by using the leverage of the program that loss could be single digits for assets that are now on the books for fractions of the original price, a pretty good deal.

    As coffee boy said, the bankers are smart. Not smart enough to keep the world from almost coming to an end, but smarter than Congress. Of course my 7 year old is smarter than Congress but that’s another issue.

  10. I misspoke…I would rather a greedy FORMER banker running things in Washington. Someone who has the skills and qualities of a banker/trader (incredibly analytical, shrewd, and yes, greedy). One who has no need to see the banking industry continue with its status quo (holds no shares in banks, etc. etc.), but who cut his teeth on a cutthroat trading floor. If we had someone with those qualities, and somehow got him to work for the US taxpayer, we’d have the best possible person as our advocate. Alas we’ve got Geithner instead.

    Banks are not working for taxpayer interests, but they’re not supposed to. They’re supposed to work for their shareholders. While there have been a few failures (Leh, Bear, AIG), for the most part, they are doing a better job delivering value for THEIR stakeholders than our government has been doing in delivering value to ITS stakeholders (the taxpayer).

    Like I said before, its a poker table with two players, Geithner and Bankers. As a taxpayer, you’re on Geithner’s team. If you’re a bank shareholder, creditor, or employee, you’re probably on the bankers’ teams (obviously some people are on both teams). It turns out that Geither is a $hitty poker player. Are you mad at the bankers for winning? Or Geithner for being an idiot? For me its the latter. My point was that we should recruit a worthy opponent to represent us at the poker table. In fact…we should get the best poker player available. When it comes to financial markets, its generally someone who’s made a life out of being greedy and protecting their backside from being screwed over.

    The problem is that most financial market insiders still have vested interests in the current financial system (Paulson), such that they can’t act truly in the interests of the taxpayers vs. the banks. But I bet if you get a local from the CBOT/CBOE/Merc who never worked for a brand-name bank and who’s made a 20 year career out of floor trading and trying not to be screwed over, we’d get a much better advocate on our side of the table. Surely better than any ivy league educated economist.

  11. So how do we, ordinary citizens and taxpayers, prevent this from happening?

    My congressman is an ignoramous trying to ascend to Roland Burris’ illustrious senate seat. He can’t be bothered with stopping a theft in progress.

    Who do we complain to?

  12. Lucien Bebchuk wrote about this at FT too:

    The benefit of PPIP for banks, as I understand it, is to remove toxic assets from their books, enabling them to engage once again in business as usual.

    Banks now seek to profit from their own internal toxicity that brought down the economy and created the need for a massive federal bailout. It’s a horror wrapped in a nightmare from which we will perhaps never awake….

  13. Buy guns and wait for this government to fail, which now appears to be only a matter of time.

  14. I agree the beef is over what is unjust. As we’ve seen however, 4 out of 5 dentists seem to want to hold their nose while looking into this maw. It is one thing if in an arm’s length transaction the banks make a profit selling legacy assets into PPIP. It’s another thing (to my mind) if they do it in a related-party deal.

    The phrase “including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset” is obviously not exclusive, it is by way of example. Congress has told the Secretary of the Treasury not to let banks game the system this way.

    This is our authority for blocking this deal. I suggest we all remind our members of Congress of it.

  15. There are plenty of pitfalls with PPIP, but this is an obvious attempt at self-dealing. I’m surprised that any banks would want to be associated with such a blatant scheme. See

    I think JPM, BAC, BBT, C, PNC, WFC, KEY, and USB have some major damage control to do. Wisely, GS is not on this list.

    I wrote a blog on this at

  16. “by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset”

    If the bank paid par for the asset but the asset cannot be sold on the open market for more than 50 cents on the dollar, the bank could sell the asset to the Secretary for par and meet this requirement.

    Also, since the purchasers of the assets will be a partnership of public and private funds, no matter how much they pay, it probably would not be considered selling it to the Secretary.

  17. They don’t have to be on the list to participate, or to get the best “deal”.

  18. Well, it is a sort of litmus test on this administration I suppose then. If they go for it, there’s no more guessing as to who’s pocket they’re in.

    I imagine it’s only a matter of time before the banks will be asking to get in on the PIPP of the government assets. Now that’ll be a fire sale.

  19. Maybe The Solution is to make the US Government the bad bank and start over via collapse of The United States.
    Its frightening to consider, but I can’t see how it can be disregarded.

  20. Buy your own assets? You have got to be kidding. Well, at least it makes it easy to identify the dumber and/or more dishonest bankers. (No grin. I am not kidding.)

    OTOH, how is this? Let banks buy assets with two provisions. 1) They cannot buy their own assets. 2) The government does not participate in their buys in any way. They are on their own. Then we would get to see what they think these assets are worth. (Assuming no collusion, of course.)

  21. Here’s another question, was the PPIP designed for this purpose all along? Put out eroneous stress tests, don’t nationalize the banks, say the banks don’t need anymore government money to operate – then funnel the billions more that is actually needed through a convoluted system like this so it’s politically feasable?

    Any thoughts?

  22. Once again (and over and out), the “including …”, etc., clause is by way of example, not limitation. The mandate is to “prevent unjust enrichment.” Do you think it unjust that banks should be enriched by selling assets to themselves?

    PPIP is a “public-private partnership investment program.” “Public,” that’s the government. The Treasury is contributing equity. It’s buying an ownership interest in the assets. The unjust enrichment clause should apply.

    No one here seems to like this deal yet here you (collectively) are trying to make the banks’ arguments for them.

  23. (Link to

    By the way anybody interested in this stuff should bookmark links to the Treasury and Fed web sites. There’s a lot of good plain English stuff there. As a bonus there’s a lot of easily garnered facts there with which you can ambush purportedly knowledgable people. I have to admit I’ve ambushed myself a few times, to my embarrassment.

  24. As in every instance in the crisis, – the failed managements, of failed institutions, bruting failed models engage in one or another sort of fraud, collusion, tax evasion, and/or other sundry forms of financial malfeasance and perfidy only to be obscenely rewarded for their crimes and grotesque ethical abuses by the government at the tax payers expense.

    Since nothing has changed in the system outside of trillons of dollars of lost wealth and trillions more monsterous debts and deficits heaped on the American tax payer – how does anyone expect me or any sentient being to believe that the current bruting of “green shoots” and recovery is not another speculative bubble bound to burst in the not too distant future, – with even more pain, suffering, losses, debts, deficits, and burdens heaped on America’s poor and middle class, – while the predator class, and the thieves and swindlers in the finance sector – yet again – funnel even more imponderable wealth into their respective offshore accounts!!!???


  25. That ‘s comforting Art.

    The same people who run the Treasury, ( the Democrats) run Congress. So you expect Nancy and Harry, with maybe the help of Barney and Chris, to investigate Barry and Timmy.

    Good Luck. Just like after it was discovered that people running Fannie and Freddie, ( well connected Democrats) had committed wholesale fraud, the Democrats rushed in to investigate them . Not! The Democrats rushed in to save their butts, and blocked any reform.

    The assumption of many commenters and the general public is that people running the banks and Wall Street are somehow tied to the Republicans. They’re not. The Goldman Sachs crowd, most of the CEO’s of Wall Street, the Big Banks and the big Hedge Fund short sellers like George Soros, whose fingerprints were all over this crisis from the get go, are all Democrats.
    Geithner, Paulsen and Rubin are all Democrats!

    This is how crony capitalism works. Obama have set up some straw horses from the Banks to slay, but behind the scenes the corruption is so intertwined and deep, you can’t tell who is fleecing whom, because it’s just one giant reciprocal payola scheme. And the big losers are the taxpaying public.

    You can lay good money on the position that Congress will never rein in the “unjust enrichment” of the connected Banks.

  26. Is anyone else worried that PIPP provides incentives for banks to sell their most toxic assets while attempting to retain their better assests which have a better likelyhood of appreciation. Normally this would be fine, selling bad assets and retaining quality assets is a no-brainer. But in this situation it basically allows the banks to pawn off the most toxic assest onto the government, which assumes virtually all the downside, while the banks retain their more favorable assets and keep all the upside. I truly the feel the political system needs to be rebuilt, there is not choice, while both parties try to contrast themselves on social/moral issues, on economics/trade (except for those on the extremes of either party) there is almost no difference. When will the american people vote for a third or heaven forbid, fourth party. In all other aspects of life we assume more competition produces better outcomes, well, why not introduce some competition in politics? Im looking at you Bloomberg.

  27. Coffee Boy: “Banks are not working for taxpayer interests, but they’re not supposed to. They’re supposed to work for their shareholders.”

    This is a false dichotomy. For one thing, shareholders are taxpayers. For another, the shareholders and bankers are part of a community, and the banks would not even be able to do business were it not for that community. The phrase to remember is “enlightened self-interest.” Greed and selfishness do not always promote self-interest. Thirdly, we are in a crisis, and one in which the taxpayers are helping the banks, their shareholders, executives, and employees. Under such circumstances for the bankers to take an adversarial posture towards the taxpayers or to try to exploit the them does them (the bankers and their shareholders) no good.

    Coffee Boy: “Like I said before, its a poker table with two players, Geithner and Bankers.”

    Like I said, a false dichotomy.

  28. This assumes that the administration has been holding its nose all along while continuing with the Bush/Paulson agenda, seeing it as the least among evils.

    But it seems the evidence is that this corporatist conveyance of loot from the public to the banksters is in fact the intended and preferred policy. There’s no question at all about the ideological fanaticism of Rubin, Summers, and Geithner on this score. Government as captured enabler and waterboy for the FIRE sector is one area where it really is true that there’s zero difference between Reps and Dems. From Clinton/Rubin/Summers to Bush/Paulson/Geithner to Obama/Rubin/Summers/Geithner has been a seamless continuity.

    The only question here is whether Obama is also consciously such an ideologue, or whether on bank policy he’s in over his head and has let himself be rolled.

    At any rate, he clearly does not object to these outcomes.

  29. Thought I posted earlier, but apparently not.

    It was my understanding that the point of PPIP was to remove toxic assets from the books of these banks. If banks see the gleam of gold in these assets, then let them dispose of them the old-fashioned way – through the free market.

    And if these assets are actually worth something, then what was Paulson’s TARP all about last fall? The great last gasp of the Bushies – trying to transfer more wealth to the wealthy before they headed home?

  30. This, I think, is the fundamental problem. Indeed, it’s the fundamental problem of good government. If the taxpayers don’t understand the issues, then they have no chance.

    In this situation, I think it’s apparent that they not only don’t understand, but think it matters if they do.

  31. “Under such circumstances for the bankers to take an adversarial posture towards the taxpayers or to try to exploit the them does them (the bankers and their shareholders) no good.”

    Agreed, with a qualifier.

    As Nemo pointed out earlier, it only does them no good if the other parties understand that they are being screwed.

  32. “Banks are not working for taxpayer interests, but they’re not supposed to. They’re supposed to work for their shareholders. While there have been a few failures (Leh, Bear, AIG), for the most part, they are doing a better job delivering value for THEIR stakeholders than our government has been doing in delivering value to ITS stakeholders (the taxpayer).”

    This is probably one of the most ignorant things ever written about the financial crisis. Every single large financial institution has delivered horrendous value for its shareholders over the past few years. Take a look at your portfolio and think about that statement.

  33. That is essentially the market without PPIP. We don’t get to see what these assets are worth, because the banks have no incentive to put their assets up for sale.

    However, the PPIP plainly sucks. It is ridiculous, prima facie. It is a backdoor way for the administration to recapitalize banks, without having to go to Congress for another bailout. It is political.

    I am so sick of these banks and their whining and gaming. Boo hoo, you took TARP funds and now the government is in your face. Never mind the fact that you would be out of business without TARP and the myriad other government guarantees.

    This administration has turned out to be such a disappointment with respect to economic policy. If they allow this patently stupid gaming, then I will give up all hope in their competence or honesty.

  34. This is not a bug, it’s a feature. You just described the INTENT of the plan. If you didn’t like it, you should have howled weeks ago.

  35. The first part of your comment I agreed with, but didn’t know how such a robbery could be explained in plainspeak to the american people, but you set it out, and did a very good job of explaining exactly the problem here.

    Good job.

  36. A minor correction… in the third scenario, it looks like the bank actually loses $16.50 (including the $10 lost for selling the loan for $90).

  37. I don’t know which is worse:

    When this kind of stuff used to shock me and make me very angry or the place I find myself in now, where this kind of thing neither surprises me or is capable of making me mad anymore.

  38. Here is a good quote from a recent article (link below):

    Economist Dean Baker, co-director of the Center for Economic and Policy Research in Washington, suggested to TomDispatch in an interview that the opaque and complicated nature of the bailout may not be entirely unintentional, given the difficulties it raises for anyone wanting to follow the trail of taxpayer dollars from the government to the banks. “[Government officials] see this all as a Three Card Monte, moving everything around really quickly so the public won’t understand that this really is an elaborate way to subsidize the banks,” Baker says, adding that the public “won’t realize we gave money away to some of the richest people.”


  39. At least with Paulson, there would only have been one firm to bail out (Goldman) and we could have nationalized the insolvents like we should have done a long time ago…would have been much cheaper.

  40. I think I won the bet. How much was the wager?

    Seriously (and if Pete’s comment was directed to me, it’s only sarcasm to extent seeing no need of vigilence) and in good faith, I’m aware of the crony capitalism “argument” (and you seem to misunderstand it. It is essential to this argument that it is not dependent on which party is in power – otherwise you just vote them out and the problem is solved – so I don’t know why you make a point about the Democrats unless you are mad at them especially). Even if you take a near identity between the banks and the government as a premise, it does not necessarily follow that it can’t be changed. Actually that argument proves too much, because if it were true, what would be the point of this blog, or of Dr. Johnson’s The Quiet Coup? Who are they written for, les sans coulottes? I don’t think you’ll see any banker’s heads on pikes, but I don’t think the moderators here are idle gentlemen. Anyway if you do believe that you shouldn’t be here advocating for change, or hand-wringing even, as the case may be, because that would be just futile. So I happen to believe things can be changed, and that’s why I take the time.

  41. Say what you want. As an owner of broad mutual funds, I’m both a taxpayer and a shareholder in bank equities. And I STILL believe my invested dollars are getting better value than any dollar I pay in taxes.

    Call me ignorant, but if things get worse, I’ll take my ignorant dollars out to Switzerland. Whether its the small issue of PPIP or the larger issue of massively underfunded government liabilities, we are all getting screwed by our government’s complete and utter incompetency.

    I agree…the bank shareholder and creditor has gotten screwed over in favor of bank employees over the last few years…probably over the last 2 decades from when Salomon first went public. However, I am ENCOURAGED when I see banks making actions like this, as they are doing what they are supposed to, which is chase profits. Of course, there’s the whole issue of underpricing risk, but when profits are risk-free, (as buying a buyer in PPIP seems to provide them), they should jump on them immediately. This is good. The people running the banks are profit-maximizing…the division of the profits between employees and shareholders needs to be sorted out, but at least they are going in the right direction.

    Compare that to the govt…rather than doing what’s right by the taxpayer (trying to provide them with as much value as possible), they are literally giving our money away. Whether its being screwed on TARP redemption, or allowing PPIP banks to arbitrage the treasury balance sheet…this ANGERS me. And because of the odd career incentives involved in politics, NO ONE in washington has the incentive to sort out our public finances. As a resident of California, i know what happens at the extreme.

    My biggest issue is that people are expecting bankers to stop being greedy out of the kindness of their hearts, yet are excusing our politicians/regulators for being incompetent. Bankers should be greedy. Regulators should be smart enough to reign them in. And if they’re not (Geithner), our anger should be directed at them, and they should be replaced.

    I’m almost tempted to stop posting as I know I’m talking to a hostile crowd on this blog…

  42. The financial engineering racket is simply the best organized white collar crime organization ever !

  43. US Treasury Secretary Timothy Geithner will meet with President Hu Jintao to discuss expansion of ties and current economic turmoil during his trip to Beijing on June 1-2, officials said Wednesday.

    The meetings would involve “a range of issues of importance to both countries, including strengthening US-China economic ties to promote stable, balanced and sustained economic growth in the two nations and further global economic recovery,” a Treasury statement said.

    Abbott: Well Costello, I’m going to Beijing

    Costello: Look Abbott, you must know all the players.

    Abbott: I certainly do.

    Costello: Well you know I’ve never met the Hu et al. So you’ll have to tell me their names, and then I’ll know who’s playing on the team.

    Abbott: Oh, I’ll tell you their names, but you know it seems to me they give these ball players now-a-days very peculiar names.

    Costello: You mean funny names?

    Abbott: Strange names like Hu Tse Ling

    Costello: His brother Bruce lee.


    Abbott: I say Who’s on first, What’s on second, I Don’t Know’s on third.

    Costello: Are you the manager?

    Abbott: Yes.

    Costello: You gonna be the coach too?

    Abbott: Yes.

    Costello: And you don’t know the fellows’ names?

    Abbott: Well I should.

    Costello: Well then who’s on first?

    Abbott: Yes.

    Costello: I mean the fellow’s name.

    Abbott: Who.

    Costello: The guy on first.

    Abbott: Who.

    Costello: The first baseman.

    Abbott: Who.

    Costello: The guy playing…

    Abbott: Who is on first!

    Costello: I’m asking YOU who’s on first.

    Abbott: That’s the man’s name.

    Costello: That’s who’s name?

    Abbott: Yes.

    Costello: Well go ahead and tell me.

    Abbott: That’s it.

    Costello: That’s who?

    Abbott: Yes.


    Costello: Look, you gotta first baseman?

    Abbott: Certainly.

    Costello: Who’s playing first?

    Abbott: That’s right.

    Costello: When you pay off the first baseman every month, who gets the money?

    Abbott: Every dollar of it.

    Costello: All I’m trying to find out is the fellow’s name on first base.

    Abbott: Who.

    Costello: The guy that gets…

    Abbott: That’s it.

    Costello: Who gets the money…

    Abbott: He does, every dollar. Sometimes his wife comes down and collects it.

    Costello: Whose wife?

    Abbott: Yes.


    Abbott: What’s wrong with that?

    Costello: Look, all I wanna know is when you sign up the first baseman, how does he sign his name?

    Abbott: Who.

    Costello: The guy.

    Abbott: Who.

    Costello: How does he sign…

    Abbott: That’s how he signs it.

    Costello: Who?

    Abbott: Yes.


    Costello: All I’m trying to find out is what’s the guy’s name on first base.

    Abbott: No. What is on second base.

    Costello: I’m not asking you who’s on second.

    Abbott: Who’s on first.

    Costello: One base at a time!

    Abbott: Well, don’t change the players around.

    Costello: I’m not changing nobody!

    Abbott: Take it easy, buddy.

    Costello: I’m only asking you, who’s the guy on first base?

    Abbott: That’s right.

    Costello: Ok.

    Abbott: All right.


    Costello: What’s the guy’s name on first base?

    Abbott: No. What is on second.

    Costello: I’m not asking you who’s on second.

    Abbott: Who’s on first.

    Costello: I don’t know.

    etc etc etc

  44. Coffee Boy: “My biggest issue is that people are expecting bankers to stop being greedy out of the kindness of their hearts,”

    Sez who? You are doing mind reading. They should stop being greedy out of self-interest and good sense.

    Coffee Boy: “yet are excusing our politicians/regulators for being incompetent.”

    Again, mind-reading. Not I. I do not excuse them at all. Besides, I do not think that the problem is incompetence. I am not sure what it is, perhaps sharing the bankers’ world-view.

    Coffee Boy: “Bankers should be greedy.”

    Non-sequitur. You have been watching too many movies. It is not only high-minded morality that says that greed is a sin. Greed leads to short-sightedness, over-reaching, and poor judgement.

  45. anne: “It was my understanding that the point of PPIP was to remove toxic assets from the books of these banks. If banks see the gleam of gold in these assets, then let them dispose of them the old-fashioned way – through the free market.”

    Absolutely. Hence my rhetorical suggestion that they buy each other’s assets without gov’t aid. ;) OC, their offer is rhetorical, too. I. e., dishonest (I think).

    Here is my guess: They do not really want to buy each other’s assets. What they really want is to bid them up with gov’t financial support. That way they don’t have to write them down, and they can say that they are marking them to market. Price discovery and all that. And let the gov’t take the risk.

  46. I DID howl weeks ago. I sent letters to Congress and submitted comments to the FDIC during their comment period. Problem is, with the crooks we have at Treasury, howling just won’t do. Everyday, I gain a greater understanding of the colonists of this country’s frustrations circa 1775, and how those frustrations led them to revolutionary actions.

  47. I have to agree – this is a pure test. Perhaps the only pure test we have had to date.

    Every other pro-bank action could be justified, in some sense, by preventing catastrophe. This one cannot. There is no plausible explanation that can be concocted to justify bank participation in subsidized purchases from themselves – something that the administation specifically promised to avoid.

    So, let’s look on the bright side. After this, we will finally know who really owns the Obama Administration – the public, or the banks. If it’s the banks, I will be eating a bit of crow, and will think two or three times before defending them again.

  48. You are nearly ready. Now you need to carefully consider, as they did, just what system you would replace the current corrupt arrangement with…

    not so easy now, is it?

  49. A challenge indeed Jim. I would offer this though:

    The system we have NOW only minimally resembles the system the founding fathers established or envisioned.

  50. Banks may be “…doing what they are supposed to, which is chase profits”, and there may also be some truth in your assertion that “Bankers should be greedy” Coffee Boy – but there is no way to justify criminal behavior.

    Greed may be good in your camp, but wanton abuse, which is exactly what poor and middle class Americans are subjected to on a daily basis by the predator class and the swindlers and thieves in the finance sector, and their cohorts and collusionary partners in the government is repugnant, conduct unbecoming, and unacceptable.

    None of the socalled experts bothers to subjectively anaylize the term “toxic assets”. We all just blindly succumb to this multi trillion dollar pool as if it were a natural biproduct of the socalled freemarkets, like a bad wart, or a treatable STD.

    Why are they called toxic assets? What exactly makes them toxic? They are toxic because they are rooted in very sophisticated ponzi schemes, wherein irredeemable debt products and instruments are majikally conjured into investments that select cronies can – again majikally (through overt and covert criminal enterprizes) convert into wildly speculative and highly profitable returns. There is no due diligence. There is no risk assessment, there are no calculations for worstcase, or baseline scenarios, there are no ethical boundaries, and only the most feeble and toothless legal restrictions are applied. Predator class swindlers and thieves pimp, brute and sell these once highly lucrative, (now toxic) assets, instraments, and products to select fellow insider predator class cronies. When the house of card collapses or the bubble bursts, the predator class cronies in the government and regulatory agencies turn a blind eye to the crimes and incompetence, are refuse to redress systemic or structural problems, or to hold criminals accountable for crimes – and once again majikally shield and reward their fellow predator class cronies and heap all the monsterous debts, deficits, burdens, pains, losses, and suffering on the shoulders of America’s poor and middle class children.

    America is doomed because we are a week and apathetic public deserving every abuse the predator class shits upon us, because we are ignorant, stupid, cowards. If we were truly a strong people – the criminals and greed mongers in the finance sector and the predator class would be jailed, or much much worse.

    There is no sense any longer in arguing about the why’s, the whatfors, the whoseresponsible – in the end, “going forward the predator class will continue to abuse and shit on the America people, and the ignorant masses will continue to accept and tolerat the toxic rain, the terrible losses, the expansive suffering, and imponderable debt heaped on our childrens shoulders.

    Until any truly courageous voices leading equally courageous and determined movements are born again in America and demand real accountability from the predator class and real change in the system – we are doomed to continue the endless cycle or irredeemable debt products and Ponzi schemes benefiting the predator class alone creating bubble economies that will inevitably burst, and be paid for by the blood, sweat, and teers, and trillions of dollars raked off of America’s poor and middle class.

    We all get what we deserve.

  51. I am not so sure that the point of PPIP was to get toxic assets off the books. It may also be to re-start the securitization engine.

    As you will recall, securitization was the mechanism that allowed banks to extend more and more credit by selling off the risks of that credit defaulting. Securitization was at the very heart of leveraged fractional reserve lending. It fueled the credit bubble. Securitization, combined with unregulated lending standards and rating agency collusion, allowed banks to turn lending on its head. Rather than be concerned with a borrower’s ability to repay, banks became more motivated by profits made in selling securitized debt.

    Non-government backed debt securitization has essentially died, especially for residential mortgages. It died because the securities (RMBS) turned out to yield alot less than advertized as defaults rose. I think Geithner thinks that, if he can somehow artificially re-inflate the prices of these securities, he can get the credit pump running again.

    The 4T dollar questions are:

    1. Is a return to credit-fueled “growth” with pulled forward demand cycles sustainable or desirable?. Is it a good idea to get that credit pump running again, given what we’ve been through?

    2. Will any private investors gain confidence in these securities just because their prices rise artificially in a taxpayer-backed auction charade?

  52. Personally, I think that the system is fine, but the abuse of the system is not. Replace the people in charge with the same rules and change will happen (for a while).
    After all, most of the fundamental problems are illegal but unenforced. Derivative exposure could have been regulated by requiring additional reserve capital, even if the paper itself is immune to regulation.

  53. I knew this was going to happen from the start. Are they so dumb? Who are the buyers of mortgage paper? Why of course …the folks who already own mortgage paper. Who are the sellers? Why of course… Even if they are not buying there own back…they are buying somebody elses. See my twitter post.

  54. Oh, Blankfiend! Those questions! They really are 4T, aren’t they?! How utterly sad to find ourselves here.

    As I am not an economist, I have no satisfactory answers to them. When Paulson first announced TARP as the means to get the lending going again, I did wonder when debt became the healthiest pillar of the economy (and on life-support at that!) But economists and other business people assure me that without debt, our economy will fail.

    I’ve never understood PPIP, nor do I understand Geithner’s pitch to create a market for toxicity wouldn’t exist without the different federal funding opportunities.

    I did think once, before confusion fogged my mind, that PPIP was supposed to get the toxic assets off the books – they’re bought by people and institutions that are not banks so as to clear the poison from the books of the banks. I’ve read some economists who say that the PPIP math is deliberately fuzzy, to obscure the transfer of wealth from taxpayers to wealthy banks.

    But who am I to say? I’ve never been clear on who gains from the plan, in that taxpayers seem guaranteed to lose; I don’t know why we have to subsidize the purchase of these “toxic assets” and yes, I do have my doubts that launching up the credit capsule again so soon after it blew up could be fatal the next time around.

  55. agreed.

    there are many potential conflicts of interest in PPIP. avoiding even the appearance of conflict of interest is important. but do they understand this?

  56. i am not suprise dof the situation and the events that are unfolding. lets await the out come as I duly envisiege a positive outcome.

  57. I think the key words here are Public-Private. Maybe the banks themselves are the only “private” (with tongue in cheek)entities that are willing to participate. Let’s review. First, it was cram down TARP funds, even when some banks did not want/need the money. (I was for TARP considering the portrayal of the financial crisis.) Then, if we believe Ken Lewis, it was $15bn Merrill Lynch cram down the gullets of Bank of America stockholders. Then it was cram down the stimulus package on states that did not want to participate (at least in part). Follow this with the cram down of bondholders who stood on long-standing legal grounds, in favor of unions. Then came the cram down executive pay and potentially doctors’ fees. I am beginning to suspect that truly private equity, if it still wants to remain private and protect its equity may be giving thumbs down to participating in public-private partnerships with the U.S. government.

  58. I believe that a comprehensive idea that is detailed for every understanding usually sail through any huddles of public debates. this presentation I deem it positive because it will cause funds and ;liquid cash to diffuse into public hands.

  59. This sounds like the mafia went to Wharton. It is better than any smoke screen or red herring discussed to date. It is Son of Ponzi – the money goes up and down and round and round and comes out here. This is better than most “two guys walk into a bar” jokes ever conceived. I just sort of laugh insanely to myself and wonder: does anyone other than those of us who follow things see the punchline coming – like to our fiscal gut? Well, unusual times call for unusual remedies. Sounds like prescribing botulism as a remedy for ecoli!!

    As the toxic assets have been rotting and rotting, the economy hangs on the bogus-cide that we are experiencing as a cure for them. There is no solutiono except to let those who made the bad decisions suffer. Why do we continue to think that there is some clever painless way to cure the problems. There isn’t, and PPIP stands every chance of costing a tremendous amount of money and getting us nowhere. This is just the latest.

    I liken what the financial industry is going through that the suggestions to cure it to the health care industry and private insurers spending more than half a billion to convince us and Congress that they can be the solution. What a joke. We have two extremely large hen houses and two covens of witch foxes to tend to them, and we, like the Roman crowds with the Gladiators, just seem to sit and applaud as the prospect of death looms closer.

  60. @Coffee Boy:

    I wrote: “You have been watching too many movies.”

    I apologize for any disparagement in that remark. I did not intend any. It is just that I thought of the movie, “Wall Street” and the quote from it, “Greed is good.” I did not mean anything personal by it.

  61. Re: But let’s not make it easy for them. If this proposal has any chance of going anywhere, then Tim Geithner or Sheila Bair should come out and reject it right now.

    No, no, no. Banks buying assets from themselves was the plan right from the start! It’s a win-win!

  62. Re: But let’s not make it easy for them. If this proposal has any chance of going anywhere, then Tim Geithner or Sheila Bair should come out and reject it right now.

    No, no, no. Banks buying assets from themselves was the plan right from the start! It’s a win-win!
    OH! You’re my new favorite blogger fyi

  63. Doesn’t the FDIC lost $7 in your example, not $17? Bought at $90, sold at $70, so losses are $6.50/$6.50/$7?

  64. Sorry, I don’t see where greed and self-interest have been destructive to the bankers at all. So, their portfolios are down a bit – that’s just a “market fluctuation.”
    Furthermore, I don’t think they belive it EVER WILL be destructive, as they have been insulated form all serious downsides.
    And, finally, I don’t believe people in the financial sector operate in the interests of their shareholders. Precious few have ever been asked to answer to those shareholders in any way. They operate for pure personal profit – maximizing personal income. The idea that a corporation is governed by, or responsible to, it’s sharholders has been demonstrated to be an utter fantasy.

  65. “It seems like this proposal is too extreme for some people in the banking lobby to support; neither Scott Talbott of the Financial Services Roundtable nor Edward Yingling of the American Bankers Association was quoted.”

    From the NYTimes yesterday, May 28: “The American Bankers Association, led by Edward L. Yingling, noted in a comment letter to the F.D.I.C., it would be somewhat odd ‘to hamper a program designed to benefit banks because of a concern that banks would benefit.'”

    Now here we have numerate people writing to supposedly numerate people, and yet using the same word, “benefit”, in two different senses, in an attempted obfuscation, as though their audience were innumerate. (Maybe the real audience is NYTimes readers, however. :() When you translate “benefit” into numbers, the difference is obvious. This is another example of how the numerate take advantage of the innumerate.

  66. do you recall the old V-8 commercial, where the characters are smacking their heads – oops! they should have had a V-8. it feels like america is having a similar moment – oops! shouldn’t have let the government take it this far with the banks.

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