Wall Street Journal: Banks Aiming to Play Both Sides of Coin

There’s a very interesting story in today’s Wall Street Journal, which you can read here.  The banks are lobbying the FDIC for permission to use bail out funds to bid on the very toxic assets that they are putting up for sale as part of the Public Private Investment Program.

From the article:

“PPIP was hatched by the Obama administration as a way for banks to sell hard-to-value loans and securities to private investors, who would get financial aid as an enticement to help them unclog bank balance sheets. The program, expected to start this summer, will get as much as $100 billion in taxpayer-funded capital. That could increase to more than $500 billion in purchasing power with participation from private investors and FDIC financing.

The lobbying push is aimed at the Legacy Loans Program, which will use about half of the government's overall PPIP infusion to facilitate the sale of whole loans such as residential and commercial mortgages.”

So the banks want to be able to sell the loans, to themselves, at a huge loss, buying them back with government money.  As an example:

Assume that the bank has a real estate loan for $10 million that is now worth far less.  The bank then uses the LLP funds to purchase it for $3 million.  They’ve removed the toxic loan from their balance sheet, and created a write down of $7 million, a huge write off for tax purposes.  They then use the cheap government financing to profit when the asset rises, without risking anything, since they are using the government money.

These are the same banks that spent millions in campaign contributions and lobbying efforts to sink the cramdown legislation, which would have reduced the amount of mortgages to the actual value of the house.  Now that they’ve prevented this change in bankruptcy law, we can expect a HUGE wave of foreclosures.  There’s no end in sight to the housing crisis, but that doesn’t stop the banks from trying to make money at tax payer expense.  If you are thinking of buying a home right now, don’t.  Read this article first.