Market Talk

Lots of eyebrows raised after the New York Post’s story today detailed some of Citigroup (C) and Bank of America (BAC)’s recent aggressive trading moves.

Both banks are reportedly buying mortgage-backed securities in the secondary market at a premium to what hedge funds and other investors are willing to pay. A source told the paper that the banks’ purchases have helped keep prices of these toxic assets higher than they would be otherwise.  Are Citi and BofA buying these assets in order to resell them at a premium in auctions under Treasury Secretary Tim Geithner’s bank-rescue plan? It looks that way to Yves Smith, who thinks both banks aren’t using TARP funds to increase lending, but instead to “scoop up secondary market dreck assets to game the public private investment partnership.”

So not only are they seeking to extract far more than was intended even with the already generous subsidies embodied in this program, but this activity is also speculating with taxpayer money…Welcome to yet more looting.

But wasn’t there an assumption that there wasn’t a market for these toxic assets, which is what Geithner’s bank-rescue plan is supposed to help create?

In defense of the Public-Private Investment Partnership, James Surowiecki of The New Yorker says don’t worry about fund managers making “vast returns” in the short term by buying these impaired assets from the banks.

The way you’re going to make money investing in them is by buying them at a discount to their true value and holding them over time, so that you can reap the cash flows they generate. I wouldn’t be surprised if people did get rich buying these assets, because I think investors’ risk aversion has likely driven many of them below their true value. But it’ll likely be years before any fortunes are made from these assets — long after Congress will have had to decide whether or not to put more money into the banking system.