More Ways to Cheat the Geithner Plan?

The FT reports that big banks are thinking of buying each other's toxic assets with the government subsidy:

US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury's $1,000bn (£680bn) plan to revive the financial system.

The plans proved controversial, with critics charging that the government's public-private partnership - which provide generous loans to investors - are intended to help banks sell, rather than acquire, troubled securities and loans.

But if the government doesn't want certain institution's to participate as buyers, it doesn't have to let them. It can reject applicants under the legacy securities half of the program, and it can restrict the bidding under the legacy loans side of the program. What's interesting about the plan above is that the government isn't necessarily opposed to it, because it thinks there is useful price discovery information to be obtained by letting banks bid on each other's assets. One capital market adviser with knowledge of the plan writes:

The interesting point is that the article claims the Treasury and FDIC are considering allowing banks to bid on each others assets as part of a price discovery mechanism. That is, reshuffle these assets among the banks and in the process generate pricing info. Obviously, there's the potential for banks to collude behind the scenes and agree to bid at inflated levels to mutually bolster each others balance sheet. And because the purchase is made with FDIC insured debt, the net effect is the FDIC guaranteeing the performance of assets similar to those that were once on the bank's balance sheet.

I think PE and hedge fund investors will lobby against this, as it creates the potential to inflate the prices they'll have to pay. Given that some pretty major players have expressed in interest (e.g., PIMCO), that resistance will probably not be taken lightly.