The NYPost reports the two biggest banking wrecks, CitiGroup amnd Bank of America, have been aggressively buying toxic assets with bailout money, and goosing the MBS auctions.

You can imagine why this might get people upset. I suspect its rather unavoidable. These banks have investment wings, and they are trolling for opportunities.

“As Treasury Secretary Tim Geithner orchestrated a plan to help the nation’s largest banks purge themselves of toxic mortgage assets, Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market, sources told The Post. . . But the banks’ purchase of so-called AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.

One Wall Street trader told The Post that what’s been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.

Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids . . .”

If anything, this argues against bailouts and in favor of nationalization, firing management, wiping out S/Hs, zeroing out debt, haircutting bond holders, etc.

>

Source:
CITI, BOFA BUYING BACK LAUNDERED LOANS AT LOWER RATES
MARK DeCAMBRE
NYPost, March 25, 2009

http://www.nypost.com/seven/03252009/business/double_dippers_161157.htm

Category: Bailouts, Credit, Derivatives

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

32 Responses to “Buying Toxic Assets with Bailout Money”

  1. Froglips says:

    Heck, the hell with nationalization it would be too nice for them, these entities do not deserve to survive under any way, shape or form. Let the sharks have them.
    They had their chances and blew it, break them up and feed them to the sharks.
    Let someone else get an honest shot at the game.
    Kill’em

  2. Dan Duncan says:

    An interesting compliment to this post is an Opinion piece in today’s WSJ by Andy Kessler

    http://online.wsj.com/article/SB123802165000541773.html

    I think Kessler is too Wall Street centric in that he appears to blame too much of the woes on hedge fund machinations in an epic bear run. In doing so, he ignores the underlying problem of waaayyy too much debt amongst households, banks and the government.

    If you can get past the fact that Kessler gives too much credence to the notion that this is all just essentially “hedge fund shenanigans”….

    Kessler does make an interesting point on the role of the spread of the credit default SWAPS influencing the value of the credit default OBLIGATIONS, thereby contributing to the death spiral. Namely, the Treasury would be better served by flooding the CDS market with supply, thereby decreasing the spreads, thereby decreasing pressure on the CDOs so that the banks might ultimately sell the loans at a more tolerable price.

    Don’t know if Kessler is right, but seemed somewhat relevant nontheless.

  3. HCF says:

    This is what happens when we let them gamble with house money… Either they’ll make a killing or WE the taxpayer will get killed!

    HCF

  4. Bruce in Tn says:

    http://www.youtube.com/watch?v=94lW6Y4tBXs

    If you haven’t seen this, it is certainly worth 3 minutes….

    Absolutely riveting..

  5. Moss says:

    At least it lowers there cost basis. A kinda of toxic waste swap.
    Offload the crap they paid too much for to the taxpayers via PPIP while buying more accurately priced crap with taxpayers money and keeping it to profit from the potential appreciation.
    Of course this is all in the name of patriotism.
    This scheme will certainly improve the balance sheet.
    Amazing how the Banksters will pretty much do anything for money.

  6. Dan Duncan says:

    Sorry, I forgot to add about the Kessler piece….

    The reason it’s a decent compliment to Barry’s post is that Kessler states that the best course would be the opposite of purchasing more of these sucurities ala C and BofA….Accoring to Kessler, the better couse, instead, would to get rid of the shit (not buy more of it). Pretty obvious, I know…

    But his point that it’s very stupid to buy more of these securities without addressing the CDS market influences added some interesting context.

  7. Bruce,

    all the more telling was Gordon Brown laughing at him..

  8. call me ahab says:

    @ Bruce in Tn:

    Thanks for the clip. Saw a bit of it on a news show last night but well worth seeing again. The man definitely said a lot in those three minutes.

  9. Kyle says:

    Dan, I’m pretty sure you have no idea what you’re talking about. Neither does Kessler, the author of that WSJ article. First off, I want you to know that CDO = collateralized debt obligation. Second… This

    “The Treasury needs to fight fire with fire. If I were Mr. Geithner, I’d pull off a bull run — i.e., pile into the CDS market and sell as many swaps as I could, the opposite of a bear raid. If the bears are buying, I’d be selling, using the same asymmetry against them. Sensing the deep pockets of Uncle Sam, the bears will back off. Worst case, the Fed is on the hook for defaults, which they are anyway!”

    So he wants the Treasury to write up a bunch of new CDS contracts to insure the toxic assets again? BRILLIANT.

    “With the pressure of default assumptions easing, prices of CDOs should rise, which not only gives breathing room to banks, but may actually get these derivatives to a price where banks would be willing to sell them, replacing toxic assets in their reserves with cash or short term Treasurys, which ought to stimulate lending.”

    This guy is a raving idiot. I don’t know how he got a job writing for the WSJ. CDOs prices are low because some of people who are obligated to pay their debt aren’t paying it, not because people who hold insurance on that debt think it might not be repaid. This guy seems to think that shorting insurance company stock would cause hurricanes and wildfires. I don’t know how anyone could take what he has to say seriously.

  10. ottovbvs says:

    BR: you have the realism to recognize it’s unavoidable. It’s what these guys do for a living… trading assets. For 15 years after the end of WW2 folks were delivering lumber in army trucks and turning jeeps into station wagons. In parts of Europe as late as the seventies I saw WW2 US army trucks still in service…the detritus of war you could call it….I expect it’s going to take at least five years to unwind all this in a semi orderly way and it’s going to create trading opportunities along the way…you even may participate in some……if this minor stuff is an argument for nationalization, bondholder wipeouts, management wipouts etc, it isn’t much of one.

  11. KidDynamite says:

    WHO is selling at these prices? i thought the whole problem was that the sellers wouldn’t sell at “depressed” levels?

    and doesn’t this nullify the whole “there is no liquidity” argument? or was that just “there is no liquidity at the price I want to sell at” ???

    the question of who the seller is is actually a very important one – since it’s obviously not C/BAC… if it’s hedgies selling at 30c because they know the crap is worth even less, well then, Geithner’s PPIP will clearly have a rude awakening coming…

  12. ottovbvs says:

    Bruce in Tn Says:
    March 26th, 2009 at 7:47 am

    ……Dan Hannen is far right conservative MEP, a sort of British Mike Pence, he’s a member of the European Parliament which is where you go if you can’t get elected to the house of commons…This is about as surprising/relevant as the comments on the US of Mr Toplanek the far right, just ousted PM of a country the size of MD…..He just happened to have the revolving EU presidency at this moment…..I’m sure it didn’t cause the people who matter like Brown, Sarko and Merkel a moments sleeplessness.

  13. Bruce N Tennessee says:

    Ottobs:

    No, I am sure there are Pollyannas here who feel the same way…

  14. Bruce N Tennessee says:

    @Ottobs:

    There are always those who, when hearing a message of clarity, disparage the messenger.

    I would certainly not want to be that high-handed…

  15. ottovbvs says:

    @bruce

    …..”Consider the messenger” is a proverb not without resonance in this case…..

  16. mndavids says:

    “CitiGroup amnd Bank of America, have been aggressively buying toxic assets with bailout money…

    “One Wall Street trader told The Post that what’s been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.”

    Let me get this straight, they are sometimes paying higher prices more than other buyers are willing to do so…isn’t that what buyers in an auction always do? If I offer to pay less than someone else, why would you sell it to me. This statement alone makes the article pathetic.

  17. Froglips says:

    Otto,

    No excuses for the banks, if the tax payer is on the hook at 100% of asset value no reason it should be a deal at .30 value for the banks. Would be ok is tax payer was paying .30 for the assets which they are NOT!!!

    I second Bruce for the message of clarity, Europeans parliament is not an escape from national politics, the pay and extras are better and the microphone is better suited for effective propaganda. It is true that it’s power is limited however, the mic is ON.

  18. Dan Duncan says:

    Damn Kyle…

    You are correct: I don’t know what I’m talking about—which is why I put up the article. I found it to be interesting—but again, he was explaining an area of which I am quite ignorant. I referenced the article for feedback, so that I’m not merely left to my own devices trying to learn about this stuff.

    Thank you for the feedback…but, please tell me something I don’t already know. I am quite aware of my ignorance.

    Now…to the matter at hand.

    When you write:

    “CDOs prices are low because some of people who are obligated to pay their debt aren’t paying it, not because people who hold insurance on that debt think it might not be repaid. This guy seems to think that shorting insurance company stock would cause hurricanes and wildfires.”

    I agree. I think he puts too much emphasis as if this crisis is the result of those “bad hedge funds who short the market”. I also agree that the problem is that there’s too much debt, so there’s difficulty in servicing the debt. Etc., etc….although I thought I did state as much in my original post.

    As for CDS…You also bring up the point:

    “So he wants the Treasury to write up a bunch of new CDS contracts to insure the toxic assets again? BRILLIANT.”

    Is Kessler suggesting that the Treasury would actually “write up” these contracts…conjuring them up—-as if there’s not already a market for these contracts? I thought there was a CDS market, and therefore a supply. And said supply could be obtained from the very banks we are bailing out.

    And please…chill out… Believe it or not, my question is not rhetorical. I really don’t know, and I apologize for giving the impression as if I thought I did know. I really appreciate the feedback.

    So…

    If the Treasury would simply write up CDS as you say—then, on it’s face, I guess it does seem stupid, and I appreciate your clarification.

    If the Treasury does not simply write ‘em up….then you’ve managed to be an asshole, while also being ignorant…a most noxious combination.

  19. matt says:

    I just don’t get this “nationalization” talk. Why should the government nationalize an insolvent bank? It would be better for the government to let bad banks fail and start a brand new government bank and fully capitalize it. The bad banks would collapse and their assets would be sold to private parties (and maybe even this newly capitalized government bank) at distressed prices that make the assets economically attractive. The tax payers don’t have to take monster losses just unwind the bad banks’ positions. Additionally, the government wouldn’t have to worry about getting banks lending again (or how they use government funds), as the new government bank would not face the capital restrainst that currently retard lending. When the banking sector becomes healthy, the government then spins off this newly created bank in an IPO to rid the tax payers of the burden (and the proceeds from the operations and the IPO would probably make this a profitable enterprise.

    Of course, the hazard with my plan is that it instantly creates a Too Big To Fail organisation. There is a simple solution to that: Instead of capitalizing one newly created mega-bank, create many new regional banks.

  20. ottovbvs says:

    Froglips Says:

    March 26th, 2009 at 9:31 am
    I second Bruce for the message of clarity, Europeans parliament is not an escape from national politics, the pay and extras are better and the microphone is better suited for effective propaganda. It is true that it’s power is limited however, the mic is ON.

    …..The mic may be on but very few are listening…..having lived/worked in France/Britain/Germany let me assure you the EP is regarded as something between and elephants graveyard and national joke…..although the pay and bennies are fairly good I’ll give you that…..

  21. ottovbvs says:

    matt Says:
    March 26th, 2009 at 9:32 am
    “Instead of capitalizing one newly created mega-bank, create many new regional banks.”

    ……..The US has about 8500 banks…..this, believe it or not, is not a good thing…….it’s a regulatory nightmare for a start…..we need fewer, inevitably larger, but much better regulated banks in the system

  22. paulbenny says:

    “Technical terms mask the crux of an issue. So when the US Treasury asks for “resolution authority” to deal with large “non-bank financial institutions” it is worth asking what exactly is at stake. Consider this piece of the puzzle together with the Treasury’s bank stress tests and its plans to buy bad assets. Selling loans and securities to public-private funds is likely to force banks to crystallise large losses. Meanwhile, stress tests could force thinly capitalised banks to top up with government funds.

    Should these in combination reveal any bank to be in real trouble, the authorities are (belatedly) seeking powers to take the required action. The Treasury and the Federal Deposit Insurance Corporation want to be able to support, restructure or wind down a large financial firm. Not limited to the likes of AIG, these powers would also cover bank holding companies. The government wants the authority to deal with a big, complicated bank, a Citigroup, for example.

    The FDIC’s existing powers over “banks” extend only to deposit taking subsidiaries, not holding companies. That is a problem when much of banks’ funding and derivatives contracts are stuck at the holding company level. Equally, the failure of one subsidiary may prove fatal for other parts of a financial outfit. The new authority would allow the government to control a company’s demise, to renegotiate contracts or potentially impose haircuts on creditors or counterparties.

    All these moves suggest some method behind the madness. Certainly, the administration’s output is notably more nuanced and better thought out than its predecessor’s. President Barack Obama has even poured cold water on the loopy notion of punitive taxes on bonuses. Still uncertain, however, is whether the final element is in place to push these pieces together: the political guts to nationalise those banks that at the end of all this prove themselves insolvent.”

    This is from the Financial Times today. Doesn’t this imply that if this legislation passes, the government will be able to haircut whatever they want such as the CDS of whoever this covers?

    Maybe this was already covered somewhere

  23. Froglips says:

    Otto,

    I have been back in frog land for now 5 months, 60% of my life has been in the US, the rest in Europe, by that I am very familiar with both.
    I agree with you that most of the time you don’t hear much about the E.U parliament but when a splash is made it goes all over prime news.
    European elections are up this June, it will mostly be a referendum on the different governments, will be really interesting to see the shape of it. I suspect to see more socialists and nationalists in there.

  24. Aristotle says:

    C & BAC buy ‘em for .30 on the dollar and sell them to the gubmint for .90 on the dollar!

  25. Kyle says:

    Dan, if the gov’t doesn’t own any CDSs, but wants to sell them, it would have to buy them first. So the only way to sell them without buying them is writing them. Anyway my point is mainly that buying/selling CDS will have no affect on underlying asset value. If you’re trying to learn more, the Wikipedia article on CDSs is a good start, I found it very informative.

  26. Transor Z says:

    @ Bruce:

    Thanks for the clip. Dude was riding a righteous nautical metaphor, wasn’t he? — but when you’ve got to provide an aside to translate that “caulking” = non-deficit spending… well, whatever. British political rhetoric in times of crisis is still the gold standard, IMO.

    That one makes the cut for the opening credits montage of the Oliver Stone film depicting this era.

  27. Guitoux says:

    By buying a few “toxic assets” at inflated levels, there’s not doubt they’ll be able to justify selling a good number of their “toxic assets” via PPIP at the same inflated levels.

  28. DeDude says:

    I am not sure that a 30 cents on the dollar investment is bad. It all depends on the properties that are backing the paper. What it really shows is why we should put a firewall between FDIC insurred banking, insurance and investment banking – and never let any entity within these 3 types of businesses become to big to fail.

  29. gnomic says:

    So, essentially they are gambling with taxpayer money on taxpayer-guarenteed assets, essentually re-leveraging using different instraments with no risk. And taxpayers are getting screwed twice, perhaps 3 times if they need more money. OH WAIT, it seems they do:

    Moody’s Downgrades BofA, Wells Fargo

    Saying that it expects both banks to need further “systemic support” — codespeak for government funding — Moody’s Investors Service on Wednesday cut key debt and bank ratings for both Bank of America Corp. (BAC: 7.52 -2.34%) and Wells Fargo & Co. (WFC: 15.90 -3.17%). In particular, Moody’s cut Bank of America, N.A.’s bank financial strength rating (BFSR) to D from B-, while Wells Fargo Bank N.A….
    via http://www.housingwire.com/2009/03/26/moodys-downgrades-bofa-wells-fargo-2/

  30. ottovbvs says:

    Froglips Says:
    March 26th, 2009 at 10:02 am
    “I have been back in frog land for now 5 months,”

    ….Froggo…..I rather envy you…Paris?….I envy you even more…when Britney drops her draws it’s all over prime news but it’s no more relevant than the doings of the EP which is a talking shop…..The fact is all across Euroland they have powerful and interventionist govt’s and as long as that is the case the EP is largely irrelevant…..even if Mr Hannen gets his 15 minutes of fame and it’s giving some tingles up the leg

  31. kfunck1 says:

    @KidDynamite: “WHO is selling at these prices? i thought the whole problem was that the sellers wouldn’t sell at “depressed” levels?”

    This is the question I would like to know. The last time a major bank moved a significant chunk of junk, it was JPM, and it was WIDELY publicized because it was such a sham deal. Unless someone can confirm this story AND tell me who SOLD the assets, I will be skeptical of the accuracy of the article.

  32. Pat G. says:

    I agree completely with your last comment. Problem is, that horse called moral hazard left the barn area about six months ago.