Marketplace Scratch Pad

Such a shell game

Scott Jagow Apr 3, 2009

Banks are considering buying toxic assets from each other, the Financial Times reports. They would do this under the Treasury’s public-private plan to get the assets off bank books. In a world that makes less sense every day, this takes the nonsensical cake.

I thought the concept of the Treasury’s plan was to rid the banks of the assets, not shuffle them around between banks. Of course, the only stipulation the Treasury made was that banks couldn’t buy their own assets. From the FT:

… public opinion may not tolerate the idea of banks selling each other their bad assets. Critics say that would leave the same amount of toxic assets in the system as before, but with the government now liable for most of the losses through its provision of non-recourse loans.

Administration officials reject the criticism because banking is part of a financial system, in which the owners of bank equity – such as pension funds – are the same entitites that will be investing in toxic assets anyway. Seen this way, the plan simply helps to rearrange the location of these assets in the system in a way that is more transparent and acceptable to markets.

Move the shells. The toxic pea is still there somewhere. Or is it now a healthy pea, since the banks can also determine the value of it?

More on this tonight on Marketplace PM, but it just proves the point that no matter what the government does, Wall Street will find a way around it. Marketplace editor Paddy Hirsch gently puts it this way: “Everything Washington does seems to be put together with staples and f—ing duct tape. There are always holes you can drive a train through.”

More from the FT article:

Spencer Bachus, the top Republican on the House financial services committee, vowed after being told of the plans by the FT to introduce legislation to stop financial institutions “gaming the system to reap taxpayer-subsidised windfalls”.

Mr Bachus added it would mark “a new level of absurdity” if financial institutions were “colluding to swap assets at inflated prices using taxpayers’ dollars.”

It’s not a new level of anything. Wall Street was built on gaming the system. It will always try to game the system. And unless it proves otherwise, the government will always be one step behind.

Go ahead, Mr. Bachus, introduce your after-the-fact legislation. It’s great political theater. But like brilliant stage actors, Wall Streeters know how to improvise.

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