The Geithner plan has taken on a whole new complexion with this story from the Financial Times:
US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system.
The plans proved controversial, with critics charging that the government’s public-private partnership – which provide generous loans to investors – are intended to help banks sell, rather than acquire, troubled securities and loans.
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.”
(Via the Corner.)
Under this scheme, banks would drive up the prices of their toxic assets by trading them with each other, obtaining a taxpayer subsidy in the process. On the face of it, this sounds like terrible use of taxpayer money. If the Geithner plan admits this abuse, then that would seem like a serious problem.
But the Wall Street Journal reports that Sheila Bair, chairwoman of the FDIC, would be okay with it:
Federal Deposit Insurance Corp. Chairman Sheila Bair said Thursday she would be open to letting banks see some of the profits if they dump problem loans that ultimately recover some value. . .
The Treasury Department’s Public-Private Investment Program involves setting up investment funds to buy loans from banks. Ms. Bair said banks might be able to take an equity stake in those funds as partial payment for their loans, which would give them a payoff if the loans ultimately rise in value and would provide bankers with more incentive to sell troubled assets.
“We’d be open to comments on that,” Ms. Bair said.
(Via the Business Insider, via Contentions)
Moreover, it would be very hard to prevent this from happening, since banks could act through third-parties. They might even do it unknowingly. We might as well view it as part of the plan.
In fact, if the point is to prop up the value of the bad assets with government subsidies, how does it matter who owns the assets in the end. Come down to it, maybe this doesn’t really matter. Well, there’s moral hazard: it is offensive that the banks that created the problem should profit from its cleanup. But with all the bailouts, moral hazard is pretty much institutionalized already.
In any case, as Yuval Levin points out:
It certainly sheds a different kind of light on the risks and costs to the taxpayer the plan will involve.
POSTSCRIPT: I’ll make another prediction, viz a viz my earlier post about political risk. Recall there are two ways the Geithner plan can work out (if it’s implemented): either the private sector will make a lot of money or the government will lost a lot. Either way, someone will be accused of wrongdoing. I think we have here a glimpse of what the accusation will be.
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