Bailed-Out Banks (C, MS, GS, JPM) May Actually Buy Toxic Assets

Citigroup (NYSE: C), Morgan Stanley (NYSE: MS), Goldman Sachs (NYSE: GS), and JPMorgan Chase (NYSE: JPM) all who have received government aid, reportedly are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000 billion (plan to revive the financial system, according ot the Financial Times.

The plan is controversial, with some arguing 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.

The top Republican on the House financial services committee, Spencer Bachus, said he'll introduce legislation to stop financial institutions "gaming the system to reap taxpayer-subsidised windfalls."

Mr. Bachus told the FT that would bring "a new level of absurdity" if financial institutions were "colluding to swap assets at inflated prices using taxpayers’ dollars."

Participating in the plan as a buyer could be difficult for Citi, which has suffered billions of dollars in writedowns and is about to give a 36% stake to the government.

"It’s an open program designed to get markets going," a Treasury official said. But he added: "It is between a bank and their supervisor whether they are healthy enough to acquire assets," raising the possibility regulators may prevent weak banks from becoming buyers.

The FT did say public opinion may actually prevent the idea of banks selling each other their own bad assets. Analysts argue that this would leave the same bad assets in the system as before, but with the government now liable for most of the losses.

Goldman Sachs and Morgan Stanley have large fund management units and have said they'll increase investments in distressed assets. Actually, Morgan Stanley's CEO John Mack said the bank was considering how to become "one of the firms that can buy these assets and package them where your clients will have access to them."

Goldman Sachs and JPMorgan did not comment to the FT, but bankers said they were considering buying the toxic assets.

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The Goldman Sachs Group, Inc. (Goldman Sachs) is a bank holding company.
Morgan Stanley is a global financial services firm.
Citigroup Inc. (Citi) is a global diversified financial services holding company

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