The New York Post is reporting that insolvent banks Citigroup and Bank of America are using some of the vast subsidies the federal government has bestowed on them to buy up more of the very assets they’ve been complaining about:
As Treasury Secretary Tim Geithner orchestrated a plan to help the nation’s largest banks purge themselves of toxic mortgage assets, Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market, sources told The Post.
Both Citi and BofA each have received $45 billion in federal rescue cash meant to help prop up the economy and jumpstart the housing market.
But the banks’ purchase of so-called AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.
What else would one expect? Through the government’s actions over the last half year these institutions have been notified that they’ll be indemnified against losses. Consequently, they’re willing to take larger risks, indeed, they aren’t risks at all.
People tend to keep doing what’s been working for them and when gaming the system is what’s been working for you that’s what you’re going to do. See memeorandum for plenty of commentary from econbloggers on this.
If this turns out to be true I doubt that it will boost Treasury Secretary Geithner’s repute.
At thirty cents on a dollar, who wouldn’t want to buy? Even gloomy Calculated Risk is predicting that we are closing in on the bottom. And the federal government is still pushing plans to subsidize the housing market.
I do wonder though if the banks’ willingness to play in the real estate market might provide some regulatory angle to encourage the banks from unwinding their worse MBS positions for better? For example, I think we need to begin capping the percent of various bank books that are supported by a housing market. Could we begin ratcheting in such restrictions in a way that encouraged banks to replace some of its worst MBS positions for better?
Also, what is the current evidence that banks aren’t loaning? There seems to be plenty of evidence that consumers and businesses aren’t borrowing as much.
As I understand the numbers I’m seeing it’s less that the banks aren’t making loans than that the rate of increase isn’t what it was and consumers are paying down debt rather than making purchases.
That’s the effect that I predicted whenever economists complained about our low savings rate. If people stop buying, the economy will contract. Seems pretty obvious to me.
I think the biggest problems we’re contending with now are
1) too much capital tied up in nonproductive assets, i.e. overbuilt financial and construction sectors
2) too many people overly worried about the future
3) subsidies of the healthcare sector result in capital flight to that sector and away from other sectors that could provide longterm growth
4) we’ve become accustomed to a growth rate unnatural in a developed economy
Vote today. (And vote often, Chicagoans) Dave Schuler for King!
Separately –
PD – I can’t remember the blog, perhaps Mankiw’s, but a Fed study was cited (St Louis??) recently and had some stats on borrowing activity. Far from “no lending” going on, the numbers simply demonstrated that borrowing was less than the previous unsustainable pace. Further, comments such as “credit standards and costs” have increased have been reported by the idiot mainstreams as “no borrowing.”
Oy.