Thursday, January 14, 2010

Banking follow-up

Bank of America's HQ

The Clarion Content highlighted last month how the bankers made a pile on the front end of the mortgage market collapse. We quoted a New York Times feature that discussed the SEC's on-going investigation into banks that designed synthetic collateralized debt obligations, or C.D.O.’s and then bet against them.

At the time our banner read, "Bankers made it coming and going..." which is no surprise to veteran observers of market capitalism. Here at the Clarion Content, we were weaned on the Latin American debt crisis of the "Lost Decade" and the S&L collapse.

Our last feature was an investigation of how banks made out on the front end of economic chaos, this week we ran across a Business Week story about banks profiting on the back end after being bailed out by the American taxpayer. The flip side profiteering is rooted in the Public-Private Investment Program, (PPIP) which was introduced in March by Obama's Treasury Secretary Tim Geithner, to buy as much as $1 trillion in toxic assets from U.S. banks.

Business Week reports that banks including Charlotte based Bank of America, Citigroup, Morgan Stanley, and Goldman Sachs added a combined $2.74 billion of the debt that was frozen, and considered toxic, as recently as March of last year. Essentially they are investing in the very assets the government was coming in to bail them out of and wipe off their books. Business Week notes, too, "Prices of these securities may slump again, leaving the banks exposed to potential losses that the Treasury Department's rescue plan was designed to mitigate."

They were unable to get a comment from officials for Bank of America, Citigroup, Goldman Sachs, Morgan Stanley or the U.S. Treasury Department about this chicanery. It is inherent and systemic. The mechanism is designed for this to happen whether we are capable of acknowledging it or not. As Business Week notes, "Any time the government says, 'We're going to buy something in the securities market,' they're putting out a sign that says, 'Free money, come and get it!'" They also note that the government is an co-owner via warrants and shareholdings of most the banks involved.

Their conclusion, this is market timing and gaming of the system. These securities are supposed to trade on whether or not the underlying mortgages have value. If they do, then the securities have value. If they don't, well then as Business Week concluded, "PPIP is not going to fill up buildings."

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