After all we’ve learned in the last couple of years, are you still capable of being astonished at the behavior of bankers or have you succumbed to cynicism? Here’s a nice test.
The Wall Street Journal reports today that banks are lobbying the government to let them buy their own toxic assets under the trillion-dollar Public-Private Investment Program, or PPIP.
This comes seven weeks after the Financial Times reported that banks wanted to be let in on PPIP to buy other banks’ assets. That was crazy enough, but these folks have no shame. A banker and hundreds of billions of dollars on the table is like a moth and a flame.
Here we have a trillion-dollar bailout program (on top of the many other trillion-dollar bailout programs) to get banks out of the deep holes they’ve dug themselves. Not only do they want their, um, dirt shoveled, they want to get paid for shoveling it. At least this effort is limited to only half a trillion bucks, the Journal says:
The lobbying push is aimed at the Legacy Loans Program, which will use about half of the government’s overall PPIP infusion to facilitate the sale of whole loans such as residential and commercial mortgages.
Here’s the banks’ “War Is Peace” excuse:
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.
This is the crux of the problem with the banks right now. They’re sitting on tons of bad assets that nobody can sell. Why? Because buyers don’t want to pay very much for them and sellers can’t sell them that cheap without blasting holes in their regulatory capital with resulting writedowns.
The whole thing is a fiction, which is why Geithner’s PPIP plan is so generous to the investors it will subsidize: He needs them to pay much more for bank assets than they would without a government backstop and five-to-one leverage.
But obviously it sets up an untenable incentive for banks to sell themselves assets at high prices, offloading the risk onto the government, and hoping that somehow, maybe, the economy recovers, people pay off their credit cards enough for the investments to pay off. And if they don’t? So what, the banks are only out 6 percent, and the government eats the rest.
The Journal should not have let the bank lobby spit the Big Lie. Read this again, with the following graph:
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.
“Banks may be more willing to accept a lower initial price if they and their shareholders have a meaningful opportunity to share in the upside,” Norman R. Nelson, general counsel of the Clearing House Association LLC, wrote in a letter to the FDIC last month.
The paper does bat back at that, but six paragraphs later. Bull like this really needs an immediate rejoinder:
One risk is that certain hard-to-value assets mightn’t be fairly priced if banks are essentially negotiating with themselves. Inflated prices could result in the government overpaying. Recipients of taxpayer-funded capital infusions under the Troubled Asset Relief Program also could use those funds to buy their own loans.
The Journal gives some decent space to critics of the banks’ proposal:
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.
To say the least.
More broadly, the banks’ chutzpah illustrates the massive money transfer that is the PPIP. You might as well just hand these people the money and get it over with.
I’m hoping you passed the astonishment test. If you didn’t, you’re too far gone.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.