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Nicking the watch off the hand that fed you

The banking industry is just impossibly shameless:

[T]he banks that received the biggest taxpayer bailouts are seeking to reap trading profits from securities rescued by the government.

Only months after it was started, the U.S. program designed to purge debts of no immediate discernable value from the balance sheets of troubled banks has helped transform the frozen debt into a money-maker as the bonds have rallied. Bank of America Corp. and Citigroup Inc., who received 22 percent of the $418.7 billion American taxpayers loaned to troubled financial institutions, boosted holdings on their trading books of home-loan bonds that lack government guarantees while investors were raising cash for the program, according to Federal Reserve data.

To make this a bit clearer: Treasury gave the banks a bunch of money to save the financial system. Shortly thereafter, it proposed giving a handful of investors a bunch of money so they could buy the worst of the securities off of bank balance sheets. The banks responded to this news by buying up toxic securities quick as they could so they could sell them at inflated prices to the government-subsidized investors. It's like a kid trying to boost his allowance by ripping up his clothes so you'll buy him nicer, newer ones.

As I remember from the unveiling of the PPIP program, though, this was predicted almost instantly. It's the obvious reaction to the government promising to buy securities at inflated prices. The fact that it was so widely predicted made it seem like the government was going to make sure it didn't happen. Guess not.

By Ezra Klein  |  January 5, 2010; 8:30 AM ET
Categories:  Financial Crisis  
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Comments

Doesn't seeing this type of activity take place give you at least some pause for HCR?

There are many features of HCR that its detractors have said will lead to waste, abuse, etc., and supporters have admitted are so obviously flawed and "widely predicted [that supporters of HCR] made it seem like the government was going to make sure it didn't happen".

Individuals waiting out the toothless mandate and measly penalties and then jumping in after diagnosis of a long-term illness comes to mind. How will the same government bureaucrats that allowed this travesty (Dems and Repubs alike) prevent this type obvious HCR abuse again?

Posted by: philly211 | January 5, 2010 9:01 AM | Report abuse

You're presuming that this wasn't the intent in the first place?

It seems that the finance stabilization plan has been to provide extremely lucrative profit opportunities to the banks so that they can be profitable enough to re-capitalize themselves without a direct transfer which wouldn't play well. This is mostly at the expense of taxpayers, of course, but it has the twin charms of putting us in control of the banks that we're (indirectly) bailing out, and that it's indeed so indirect and opaque that it's hard to foment outrage at how effectively we've been fleeced.

Posted by: CaffinatedOne | January 5, 2010 10:06 AM | Report abuse

Hello? What did you think the guys from Goldman would do?

Posted by: obrier2 | January 5, 2010 11:20 AM | Report abuse

Yah, you are right that many were saying that. But as I remember when PPIP was out, Christina Roemer was out on TV saying that 'hedge fund guys are good guys'; the folks to whom subsidized money was given to buy discounted security products!

Next, knowing that many people had been saying this; is anything done here? Nothing. Obama Administration is turning out to be more tone deaf than Bush Administration when it comes to Economic Policy. Just couple of successes (avoiding Bank Nationalization and Auto Bailout); and these guys already not listening to anyone.

Further, I agree with commenter 'philly211'. Yes, Megan McArdlee, Robert Samuelson and many others are pointing the valid faults of HCR. Do you listen? Has all the criticism of weaker Medicare Commission (and when to trigger it's recommendations) stopped Congress to ignore it anyways?

That is the way it is in this country. Ben Bernanke, though right that regulations failed; ignores any of his skin in the game when it comes to owning faults; Congress ignores HCR problems and Administration still 'sleeps' with Bankers and ignores impeding Housing Crisis 2.0 (NYT Editorial).

Matt might think that what those Economists gathered in Atlanta know when they say that America is essentially facing it's another lost decade (growth very tepid at 1 to 2%); but again they are saying that things are looking bad down years. Do we listen? No, we gloat in missed predictions of Economists.

Posted by: umesh409 | January 5, 2010 11:25 AM | Report abuse

Have faith Ezra, the government will do a much better job regulating healthcare because you really really want it to work.

Posted by: kingstu01 | January 5, 2010 1:07 PM | Report abuse

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