Recall the Geithner Bank Plan in a nutshell: private investors will partner with the government to buy those "toxic" assets off of struggling "zombie banks." The buyers would put about 7 percent of the purchase price down, and the Treasury Department would match that with another 7 or so percent. Then the FDIC would offer government-backed loans for the remainder.

If the assets were to recover their value and turn a profit down the road, the investors would split the profits with the government. But if they don't -- if their values continue to tank, and it's entirely likely many will -- then you and I and everyone else we know who pays taxes will be on the hook for the lion's share of the losses.

In other words, we're letting bargain-hunters' pick up the crappy financial instruments that are burdening a small number of extremely-well connected financial institutions for pennies on the dollar, and limiting their downside risk if it doesn't turn out well for them. It's a pretty sweet deal for those investors. And, as I wrote when Geithner first announced the plan, it's also pretty much the definition of "moral hazard."

That background is important in order to understand just how incredibly infuriating this report from The Financial Times is:

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 plans proved controversial, with critics charging 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.

Participating in the plan as a buyer could be complicated for Citi, which has suffered billions of dollars in writedowns on mortgage-backed assets and is about to cede a 36 per cent stake to the government.

Citi declined to comment. People close to the company said it was considering whether to take part in the plan as a seller, buyer or manager of the assets, but no decision had yet been taken.

Goldman and Morgan Stanley have large fund management units and have pledged to increase investments in distressed assets.

This week, John Mack, Morgan Stanley’s chief executive, told staff 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 and JPMorgan did not comment, but bankers said they were considering buying toxic assets.

Get it? We first pumped tens of billions of dollars into these institutions via the TARP, set up another program to aid them further by offering investors the opportunity to purchase the "shitpile" on their books with sweet federal subsidies, and they then turn around and buy the assets back with taxpayer-backed loans.

FT again:

Critics say that would leave the same amount of toxic assets in the system as before, but with the government now liable for most of the losses through its provision of non-recourse loans.

Administration officials reject the criticism because banking is part of a financial system, in which the owners of bank equity - such as pension funds - are the same entities that will be investing in toxic assets anyway. Seen this way, the plan simply helps to rearrange the location of these assets in the system in a way that is more transparent and acceptable to markets.

What mumbo-jumbo - "banking is part of the financial system." Thanks, but there's a difference between pension funds and other investors and the financial institutions who have taken boatloads of public cash because they were deemed "too big to fail."

But the obviousness of Big Finance's rip-off may get in the way of its success. The Financial Times warns, "public opinion may not tolerate the idea of banks selling each other their bad assets ..

And let's give a Republican who's trying to capitalize on that sentiment some rare credit around here ...

Spencer Bachus, the top Republican on the House financial services committee, vowed after being told of the plans by the FT to introduce legislation to stop financial institutions ”gaming the system to reap taxpayer-subsidized windfalls”.

Mr Bachus added it would mark ”a new level of absurdity” if financial institutions were ”colluding to swap assets at inflated prices using taxpayers’ dollars.”

Shocking but true: Spencer Bachus is 100 percent right.

PS: Make sure to catch this piece in today's WaPo about Giethner's own role in creating the financial meltdown.

elsewhere at the piggery …..

Thanks to an obscure tax provision, the United States government stands to pay out as much as $8 billion this year to the ten largest paper companies. And get this: even though the money comes from a transportation bill whose manifest intent was to reduce dependence on fossil fuel, paper mills are adding diesel fuel to a process that requires none in order to qualify for the tax credit. In other words, we are paying the industry – handsomely - to use more fossil fuel. "Which is," as a Goldman Sachs report archly noted, the "opposite of what lawmakers likely had in mind when the tax credit was established."

The massive tax subsidy has barely been reported in the press, but it's caused a stir in the paper industry, which is struggling to stay profitable in the teeth of the recession. "Everybody's talking about it," paper industry analyst Brian McClay told me. "In the US and elsewhere in the world--in Canada and Brazil and Chile and Europe."

On March 24 International Paper (IP) announced it had received its first check from the IRS for a one-month period this past fall. The total? A whopping $71.6 million. "It's probably close to a billion a year of cash," McClay said. "If you look at the economics of this business, to make that kind of money today you'd have to be on another planet." IP's stock rose 12 per-cent on the news.

http://www.thenation.com/doc/20090420/hayes