Should Banks Be on Both Sides of Asset Program?

By Cheyenne Hopkins


Banks will clearly be sellers in the Treasury Department’s new program to clear toxic assets, but will they also be buyers? The question is provoking plenty of hand-wringing, and the Treasury has yet to release the fine print on its Public-Private Investment Program. Andrew Williams, a Treasury spokesman, confirmed Monday that bankers will be allowed to buy assets under the program. However, only healthy institutions need apply. “This is an open program designed to get markets going on these legacy mortgage related assets — it’s between a bank and their supervisor whether they are healthy enough to acquire assets,” Williams said. Wayne Abernathy, executive director of financial institutions policy for the American Bankers Association, argued that banks should be allowed to be both sellers and buyers. “These will all be discounted assets, so the hits will be taken, but after you’ve taken the hit, isn’t it sensible to allow banks to pass them back and forth from each other to reduce their concentration either in type, company, regional?” he asked. “I think that makes a lot of sense, and we would be a little bit alarmed if people were saying, ‘Well, if you sell into the program, you can’t be a purchaser from the program.’ I think that doesn’t recognize the benefits that could come from diversifying your risk and broadening the pool of potential purchasers.” Karen Shaw Petrou, managing director for Federal Financial Analytics Inc., disagreed with that assessment. “I think there are profound conflicts in letting banks both send assets into the program and then invest in the resulting structures,” she said. “If banks are on both sides of the same transaction, then I see the potential for very significant conflict, which does not in turn provide the desired degree of protection for the public a public-private partnership is supposed to ensure.”