One Wall Street trader told The Post that what's been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.
Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.
The questions is: are the big banks buying these assets to keep the prices high on their balance sheets, or are they buying them to sell them at a huge profit via the PPIP? As has been widely reported in the right-thinking financial blogs, the PPIP has huge, on-purpose loopholes which make it easy to the big banks to form shell companies which will then buy these legacy assets from the big banks with a non-recourse loan 93% financed by the government. For example, let's say Citi Bank forms a shell company, called Shitty Bank, and capitalizes it with $70 million, which likely came from TARP funds. Shitty Bank can then borrow $1 billion from the PPIP with the $70 million as collateral, and then buy $1 billion worth of legacy assets, at 100% face value, from Citi Bank. Shitty Bank can then file for bankruptcy at any time, and default on the loan, leaving the taxpayer holding a $930 million PPIP bag in addition to the $70 million TARP bag. This scenario can be repeated over and over, until the taxpayer is on the hook for most of the estimated $4 trillion of toxic assets on the banks' balance sheets. There is no reason for anyone but the banks to invest in these assets, as neither the government or the banks have done the forensic accounting analysis necessary to inform serious investors as to what the underlying MBS assets are actually worth. We'll have to see how this all plays out over the next few months...
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