PPIP: Banks 'Making A Killing' On Government Toxic Asset Program

PPIP: Banks 'Making A Killing' On Government Toxic Asset Program

Remember the Public-Private Investment Program (PPIP)? The Treasury Department unveiled the program in March and intended it as a way to help banks unload hard-to-sell (read: often toxic) mortgage securities. In short, private investors partnered with the government to get bad loans off the banks' books -- and everyone, including taxpayers, was supposed to come out ahead on the proceeds of the asset sales.

But, as Bloomberg reports this morning, some of the nation's largest banks have actually bought more risky home loans instead of getting them off their balance sheets.

In other words, the program that was supposed to help banks dispose of these toxic assets instead made those assets so marketable that banks bought more -- which has pushed Wall Street's titans to even greater exposure to the stalled housing market. The banks apparently decided that the government's entry into the mortgage security market was simply a guaranteed money-making opportunity.

Per Bloomberg's figures, Bank of America, Citigroup, Morgan Stanley and Goldman Sachs added $2.74 billion of this kind of mortgage debt since March. The value of the debt was up 13 percent from the second quarter. Here's more:

The Public-Private Investment Program was introduced in March by Geithner as a means of helping struggling banks by reviving the market for unpackaged loans and mortgage securities that aren't backed by government-supported institutions, such as Fannie Mae or Freddie Mac. Under the program, asset managers were supposed to raise money from investors and, with additional capital and loans from taxpayers, buy as much as $1 trillion in toxic assets from U.S. banks, freeing up money for lending.

It's "absolutely ridiculous" that banks, which were expected to reduce their holding of such volatile mortgage securities, bought them before the government program was running and may now profit, said Michael Schlachter, managing director of Wilshire Associates, the Santa Monica, California- based investment-consulting firm. "Some of them created this mess, and they are making a killing undoing it."

Eric Petroff, director of research at Wurts & Associates, a Seattle-based investment advisory firm, told Bloomberg: "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'."

The PPIP initiative has been widely criticized since it was unveiled last year. In December, TCW Group, was removed as one of the government's program managers after a management shake-up at the firm.

Read Bloomberg's entire piece here


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