Banks buying bad assets with taxpayer money as bailout confusion grows

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The formula is simple, and may be insidious in the eyes of many taxpayers and Congressmen. Big banks will buy toxic asset from other big banks under the government's new plan to get bad assets off the balance sheets of financial firms. Once the assets have been sold, banks should be able to avoid raising more money and be more inclined to lend.

The plan has the benefit of making enough sense that it just might work, especially if private capital joins the government in an effort to cleanse the banks of their most troubled paper. But now word has come out that some banks that got TARP money will try to profit from the new toxic asset buying system. Looked at simply, they would be using public TARP money to make potential profits from a second federal program that provides loans to buy toxic assets.

According to the Financial Times, "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 news shows how the law of unintended consequences is likely to undermine programs set by Congress, the Fed, and the Treasury. There are so many overlapping bailout schemes that they are bound to conflict with one another. How does that get fixed? Well, Congress is likely to be mad enough about the situation that it will pass a law saying recipients of TARP money cannot use it to make returns from other federal programs set up to benefit private investors if they help to save banks.

That would be one more law or mandate out of dozens of others, that banks would have to keep track of as they try to operate in the new environment.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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