Buying bad assets

Cue the outrage. US banks such as Goldman Sachs and even Citigroup are pondering whether they can share in the goodies of the Treasury’s public-private investment programme by acting as buyers, not just sellers. This is unsurprising – there is cheap leverage on offer, after all. Combined with supposedly underpriced assets, that creates the most tempting of all banking mirages, the sure thing. The risk is a political backlash. That may be reason enough for some sensible types not to push their luck.

The PPIP’s rules, in any case, suggest it may be difficult for banks to participate directly. For example, the securities programme, where more aggressively marked-down assets increase the chances that buyers and sellers agree on pricing, requires the selection of perhaps five fund managers, each with $10bn of eligible assets already under management. That limits the universe of possible managers to banks with the largest fund management arms, along with the likes of BlackRock. However, the rules imply that a fund manager cannot also be a seller of assets. That excludes banks most desperate to sell. (Alternatively, crafty banks may opt to buy rather than sell assets in the hope that the programme lifts the prices of securities on their books.)

Of course, kickstarting the market for these assets so that all banks benefit is not an unfortunate side-effect; it is the aim of the plan. A certain incestuousness is unavoidable. And rebuilding the financial system requires the active engagement of its component parts, even those that caused the trouble in the first place. Regardless, banks by inclination will want to dream up structures or vehicles through which they, via their clients, can profit. For the average bank, deploying leverage and securitisation to fix a crisis, even if it was caused by the same, amounts to a gilt-edged invitation to the party.

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