Banks See Dollar Signs in Bailout Program

Illustrating the law of unintended consequences at work, a program meant to help troubled financial institutions rid their balance sheets of debt is encouraging large banks to purchase riskier assets, according to a story in Bloomberg.

Under the Public-Private Investment Program (PPIP), which Treasury Secretary Tim Geithner rolled out in March 2009, the Treasury instructed fund managers from firms including BlackRock Inc. and Wellington Management Company, LLP to raise money from private investors in order to purchase as much as $1 trillion in toxic assets from banks. The purpose: to make more money available for lending.

Instead, Bank of America, Citigroup, Morgan Stanley, and Goldman Sachs added $3.36 billion of this type of mortgage debt to their trading assets since March 2009, before the program was actually enacted. One investment consulting firm manager said it was “absolutely ridiculous” that banks may profit from the program. “Some of them created this mess, and they are making a killing undoing it,” he said.

Mortgage-backed security prices may drop again, leaving banks vulnerable to further losses, which the Treasury plan was intended to quell. If more bailout measures are needed, how will the federal government restructure them to ensure funding is used for its intended purpose?