More Evidence The Banks Might Abuse PPIP

I was going to put up a post about the IMF and their new found riches but that will have to wait til tomorrow. This is just too good to pass up.

The FT is reporting that the major banks may be planning a daisy chain to scam the PPIP and drive up the prices of their “legacy” assets. Essentially the idea is that since they can’t buy their own assets under the terms of the program, they would buy those of their competitors.

According to the article this Wall Street executives argue that this will help achieve the program’s objectives which are to establish prices and restart the secondary market for these securities. The administration evidently feels the same way and is dismissive of criticism.:

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.

BusinessWeek was out a couple of days ago with a report that this might happen. Most people, including me, dismissed their article on the basis that the terms seemed to prevent the banks from buying their own assets. Connor Clarke at The Atlantic did some good digging on the BW article — he even talked to Treasury — and determined that it couldn’t happen. Here is the relevant part of the law and what he gleaned from Treasury.

Private Investors may not participate in any [public private investment fund (PPIF)]  that purchases assets from sellers that are affiliates of such investors or that represent 10% or more of the aggregate private capital in the PPIF.
Good luck making sense of that. When I asked for some critical exegesis, a Treasury official told me that this meant (1) Investors cannot bid on their own assets unless they are less than 10% of the fund that’s doing the bidding; and (2) Even when they are less than 10% of the fund, there will be anti-fraud provisions to prevent the sort of self-dealing that BusinessWeek describes.

By quoting Connor I don’t mean to draw attention to any error. He had a good post that was scrupulous in its investigation. Like everyone else, he operated on the assumption that the administration and Treasury was playing this straight-up. Fool me once, etc.

This whole thing also comes together with some comments Sheila Bair made the other day. Here is a link to my post on that. You can make of it what you will but it sounds like she is in on the plan as well. Her comments caused a brief stir and then more or less faded away.

Geithner and associates are going to give subprime mortgage brokers a good name if they truly are considering this scheme.

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