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Send in the Clown

Posted by Larry Doyle on March 26, 2009 5:15 AM |

clownIn the process of a business transaction, have you ever encountered the sudden appearance of another interested buyer?  Where does this other mysterious buyer suddenly come from?  How is it that the new buyer appears at the most inopportune time? If you thought you were the primary buyer, do you feel as if your bid is being shopped? In business, this appearance of a supposed late buyer is known as “send in the clown!”

This part of the circus act is played out on Wall Street all the time. As we enter into the largest liquidation sale in the history of Wall Street, the big fellow with the red nose, floppy feet, baggy pants, and squeaky voice has just shown up, in the form of Citigroup and Bank of America’s bank portfolios. 

Citigroup and Bank of America’s broker-dealer units will likely be the two largest sellers of toxic mortgage securities through the recently released Public-Private Investment Program. While the PPIP  has been conceptually well received, the issue of price for the securities remains a highly problematic and unknown factor.

What’s a seller to do? Send in the clown!! How does this work?  The bank portfolios of these two respective banks can enter the marketplace and buy, or announce their intention to buy, some of these toxic assets at ever higher prices. The bank portfolio is a totally separate and distinct entity from the broker-dealer division which holds the toxic mortgage assets and will look to sell them through the PPIP.

The New York Post reports Citi, BofA Buying Back Laundered Loans.

The risk in the PPIP is in making sure transactions occur at arm’s length. The fact that the Citi and BofA bank portfolios are currently entering the marketplace to buy these types of assets while their broker-dealer units are preparing to sell the same assets is very disconcerting. 

The real risk in the PPIP is that assets, for which the American taxpayer bears the overwhelming degree of risk, are transferred at inflated levels.

That’s not very funny!! Is Uncle Sam monitoring and properly regulating this situation or is he riding the large bicycle and selling the popcorn?


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