Tags: bad | assets

Levitt: Bank Use of Public Aid to Buy Bad Assets Bad Idea

Thursday, 28 May 2009 09:41 AM

By Dan Weil

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In a new twist on the idea that what comes around goes around, some banks are seeking permission to use government funds to buy troubled assets from themselves.

They want to purchase bad assets under the government’s Public Private Investment Program (PPIP), The Wall Street Journal reports. The program gives financial aid to investors as an incentive for them to buy banks’ soured loans and securities.

PPIP will likely start this summer and will receive up to $100 billion in seed money from the government.

Federal officials haven't yet made clear whether banks will be allowed to buy assets as well as sell them. But a list of likely buyers issued by the FDIC and Treasury Department didn’t cite banks.

If banks can buy as well as sell, they may be willing to dump assets at low prices. The banks also say they can free up capital by pushing the assets off their books, allowing them to lend more.

Some experts are skeptical.

"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," Arthur Levitt, former Securities and Exchange Commission chairman, told the Journal.

Regardless of who is buying them, there certainly should be plenty of bad assets available. Whitney Tilson, managing partner of money manager T2 Partners, told FT.com that banks’ losses from the credit crisis will total at least $2.6 trillion worldwide.

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