Wednesday, May 27, 2009

Buying things from yourself

There is a story today in the Wall Street Journal about banks which want to buy assets from themselves through the PPiP program. PPiP was put in place to help buyers of toxic assets, basically because if no one bought them, the banks that held them would be insolvent. But no one was buying them, and the banks needed to get rid of them quickly, and so PPiP uses taxpayer money to make a crappy asset seem less crappy to potential investors. Now, however, the banks who own these crappy investments want to use taxpayer money to buy them so they they themselves can profit from the very program that was intended to keep them solvent. And the only way they can do this is by selling the assets to themselves!

Sound like a scam? It's not, because scams are things that small-time con artists do, and these guys are in a different league. This is a massive transfer of wealth from taxpayers to shareholders. And the bankers who are engineering it will get a cut. They always do.

I think this is one of those issues where the Obama administration needs to speak out. Obviously, they need to make it very clear that this is unacceptable.

But Obama should do more than that. He should use the presidency as a bully pulpit here. We have been asked to understand his reluctance to make the banks suffer, or to speak out strongly against them, because those kinds of words or actions might harm a bank that was on the brink of insolvency.

This, however, is a perfect opportunity for the president to speak out against banking executives and to shame them in front of the taxpayers. The crisis has passed, as the administration says. It's obvious to investors that no big bank will be allowed to fail.

But if the administration wants to enact any kind of meaningful legislation regarding the industry, it will need public support. And the industry is making it easy for them.

Here's what I would like to hear from the mouth of the president himself:

"You may have heard stories in the media about banks trying to profit from the program that we set in place with taxpayer money to ensure that these banks did not fail. These stories are true. We bailed out these banks, not because we agreed with what they did, but because we felt we had no choice. In fact, we believe that many of these bank were financially irresponsible. However, because we allowed them to become too big to fail, we had to hold our noses and help them out.

"Today, however, these same banks are trying to profit from this program by using a loophole to buy investments from themselves, using taxpayer money as a guarantee in case these investments go bad. This means that if their investment does well, they make money. If it does poorly, you, the taxpayer, will pay for it.

"I am telling you this because I want to assure you that I will not allow this kind of behavior to continue, and that I will do all in my power to ensure that these banks never again have the kind of influence that they have today."

I'm very disappointed in the fact that the administration has not spoken out more strongly. This is a perfect opportunity for them to do so.

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