Banks could bet on toxic assets with taxpayers' money

By Jonathan Stempel and Karey Wutkowski - Analysis

NEW YORK/WASHINGTON (Reuters) - U.S. banks that received billions of dollars of taxpayer money to bolster their capital could place bets on the same toxic assets that got them into trouble in the first place -- and with government support.

It is unclear whether U.S. regulators will prevent banks receiving government aid from participating as buyers in the $1 trillion Public-Private Investment Program (PPIP) designed to unclog credit markets and bank balance sheets.

But the program, where the government provides much of the financing and shoulders much of the risk, leaves open the prospect that banks, as well as private investors, could buy the troubled securities and loans. This means recipients under the government's $700 billion bank bailout fund, the Troubled Asset Relief Program, might take part.

"Without very strict regulation you're potentially creating big risks by allowing banks to buy toxic assets with house money," said Wayne Shaw, a professor at Southern Methodist University's Cox School of Business. "It's a terrible risk."

On Monday, Morgan Stanley Chief Executive John Mack told employees his bank may buy toxic assets and package them for sale to individual investors, according to a person who heard him speak, but was not authorized to comment publicly.

Three days earlier, Goldman Sachs Group Inc Chief Executive Lloyd Blankfein said his bank may join the PPIP as an investor.

Each of these banks took $10 billion from TARP.

The Financial Times said on Friday that Citigroup Inc and JPMorgan Chase & Co, which together took $70 billion of taxpayer money, might also buy toxic assets under the PPIP. Neither returned calls seeking comment. Two other large TARP recipients, Bank of America Corp and Wells Fargo & Co, had no immediate comment on their plans.

BACKLASH?

U.S. regulators may be open to letting TARP recipients participate in the new program.

Sheila Bair, chairman of the Federal Deposit Insurance Corp, said on a conference call with bankers last month that "healthy banks will be able to participate on the investment side, not obviously on the assets you'd be selling," a transcript on the FDIC website shows.

Regulators have suggested that letting banks share in the upside as prices of largely illiquid toxic assets rise could provide an incentive for them to sell their own assets at discounted prices.

Banks, for their part, have expressed concern that selling distressed assets at prices below their carrying value could punch a sizable hole in their depleted capital levels.

But a backlash could occur as weariness over using tax dollars to prop up an errant sector grows.

This reached a crescendo last month as Congress flayed American International Group Inc for awarding $165 million of bonuses to workers in a unit that brought the insurer to the brink of failure.