Fallout: The Financial Crisis

Rescued banks buy rivals’ bad assets?

Amy Scott Apr 3, 2009
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Fallout: The Financial Crisis

Rescued banks buy rivals’ bad assets?

Amy Scott Apr 3, 2009
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TEXT OF STORY

KAI RYSSDAL: Two more unemployment items before we move on. One promising, one perhaps not. There is a chance that today’s numbers might be a sign of better times. Bad as they were, they are a marked improvement from the January report, it was revised upward today to three-quarters of a million jobs lost. On the flip side, the way things are going, the unemployment rate is rising a tenth of 1 percent each and every week.

This is going to sound like an odd thing to say after all we’ve been through, but you can read things in the financial press even today that make you say, “Ooh, I don’t know if that’s such a good idea.” You remember the Obama Administration’s plan to have private investors help buy up some of those mortgage backed securities, the ones that are weighing down bank balance sheets? What do you suppose might happen if banks decided they wanted to invest in the very program that’s supposed to let them unload their bad debts? Our New York bureau chief Amy Scott is on that story.


Amy Scott: The idea that banks could buy the very kinds of troubled assets they’re supposed to be selling has lit a fire under Spencer Bachus. He’s the top Republican on the House Financial Services Committee. In response to a report in the Financial Times that banks might actually do this, he offered a bill last night to try to stop them.

Spencer Bachus: The idea is to get the toxic assets off their books, not to swap them around at taxpayer expense. If they end up selling and buying assets among themselves, it accomplishes nothing.

The FT named Citigroup, JP Morgan Chase, Goldman Sachs, and Morgan Stanley. The banks either declined to comment or didn’t return our calls. Bachus’s plan is light on details. He says he’s hoping to drum up public outrage. His objections: That the banks could unload bad loans and mortgage backed securities through the Treasury’s plan, and then turn around and buy other assets with Uncle Sam taking on most of the risk.

Chris Whalen is managing director of Institutional Risk Analytics. He says banks are already buying up distressed assets on the cheap, in hopes of selling them at higher prices when the Treasury’s auctions begin.

Chris Whalen: It’s another government arbitrage. You buy at 30, you sell at 80, it’s great. I’d do that trade all afternoon.

Kidding aside, Whalen says the loopholes show the flaws in the Treasury’s plan.

Whalen: If you want to throw money at banks, there’s a much more creative and direct way to do it, is you restructure them, and you put more government money in, so that we know they’re solid, and then we’re done.

Politically, that could be a tough sell. But Whalen says, then we could all move on to fixing the rest of the economy.

In New York, I’m Amy Scott for Marketplace.

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