The Wonk Room

Banks Planning To Game Geithner’s Investment Fund By Swapping Toxic Assets

Last week, reports surfaced showing that bailed-out banks Citigroup and Bank of America were actively speculating on toxic mortgages with taxpayer money, potentially gaming the public-private investment fund that Treasury Secretary Timothy Geithner has created to clean up the banking system.

Today, Financial Times highlighted another way in which financial institutions may be hijacking Geithner’s plan. Financial behemoths Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase are actually considering participating in the fund as buyers, in order to purchase each others toxic assets. This would drive up the assets’ prices and leave taxpayers liable for any losses, while not removing the assets from the system.

As Joe Wisenthal pointed out at The Business Insider:

Banks buying assets from each other to inflate their books has nothing to do with ‘price discovery’ or any such nonsense. It’s all about using taxpayer money to create bids that are higher than what the market currently prices those assets at. And if it turns out those bids were too high and the cash flows never materialize then, oh well, it’s the taxpayer left holding the bag.

Rep. Spencer Bachus (R-AL) said that it would mark “a new level of absurdity” if financial institutions were “colluding to swap assets at inflated prices using taxpayers’ dollars.” Indeed, the public-private investment fund was set up — with significant taxpayer risk built in — in order for the banks to purge themselves of toxic waste. Why should the very firms that brought the economy to the brink be allowed to profit off of the system aimed at clearing away their mess? This stands reason on its head.

In its Lex column, FT argued that “the risk [to the banks] is a political backlash. That may be reason enough for some sensible types not to push their luck.” But should we really trust that political backlash will dissuade the banks from participating in a system in which they are protected from losses by taxpayer money?

In any case, the growing number of identifiable loopholes has revealed just how difficult it’s going to be to police Geithner’s plan. Treasury needs to sort this all out, before tax dollars begin subsidizing profits for Citigroup and Goldman Sachs.