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Greedy Banks

by admin on June 11, 2009

greed Greedy BanksBanks are trying to milk the government through the PPIP (Public Private Investment Program).  The program was designed to provide liquidity for the so-called “toxic assets” on the balance sheets of financial institutions in the hope of increasing bank lending. However, it seems like the program is getting twisted.

As described in this Wall Street Journal article, “Banks Aiming to Play Both Sides  of Coin“, the banks are lobbying to bid and buy the assets they’re trying sell.

Here are a few excerpts from the article:

“Some banks are prodding the government to let them use public money to help buy troubled assets from the banks themselves.

Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government’s Public Private Investment Program.”

Conflict of interest here?

“Allowing banks to have it both ways would give them added incentive to sell assets at low prices, even at a loss, the banks contend. They claim it also would free up capital by moving the assets off balance sheets, spurring more lending.”

So, more accounting gimmicks. Mark-to-market rules were relaxed in the first quarter and as a coincidence most major banks reported first quarter profits. Now, they want to just take assets off the balance sheet while still keeping them. So the crap is still there, but we just won’t know about it.

The jackpot in this scheme though is that the banks are trying to limit the losses of their toxic assets with taxpayer money.

“Some critics see the proposal as an example of banks trying to profit through financial engineering at taxpayer expense, because the government would subsidize the asset purchases.

To allow the government to finance an off-balance-sheet maneuver that claims to shift risk off the parent firm’s books but really doesn’t offload it is highly problematic,” said Arthur Levitt, a former Securities and Exchange Commission chairman who is an adviser to private-equity firm Carlyle Group LLC.

Now, here is what the banks are trying to do (besides getting the assets off the balance sheet).  As an example, lets say a bank has a “toxic” loan with a face value of $100. However, nobody is willing to pay that maturity value of the loan (or anything near) and, say, the maximum price the market is willing to pay is $40.

With PPIP, the purchase of the loan involves an equity stake (50% of which is provided by the auction winner and 50% from the Treasury TARP), and collateralized debt is issued by the investment fund and guaranteed by the FDIC to finance the remainder of the purchase price.

What does all this add up to? If the banks sell their assets to themselves though PPIP, a big portion of that asset gets guaranteed by the government (who would incur the majority of the losses) and they enjoy 50% of the upside.

Considering a lot of the loans these banks have may be worth zero dollars, it’s not a bad deal at all.

In summary, you have the banks trying to make the government guarantee their worthless? assets. So, in regard to that $100 loan. Without the PPIP scheme, if the loan is worth zero dollars, the bank loses 100%. However, if they sell it to themselves through PPIP, they’ll limit their losses to some $40 while the government eats up the rest.

Technorati Tags: banks, credit crisis, Financial Crisis, greed, PPIP, TARP

{ 1 comment… read it below or add one }

Gil 10.27.09 at 9:06 pm

I put together 3 original songs inspird by Capitalism and Greed and what it has done to us:

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