[link to market-ticker.denninger.net]

The huge subsidy to banks hidden inside of Tim Geithner's public-private partnership program may already be leading banks to load up on securities they plan to sell at inflated prices.

According to the New York Post, Citi and Bank of America have been aggressively buying up Alt-A and ARM mortgage backed securities, sometimes paying more than the going rate of around 30 cents on the dollar.

....

Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.

There's nothing complicated about this at all.

Buy for 30 cents, sell to the PPIP for 50 cents, pocket a quick (and huge) profit immediately and nobody's the wiser.

Oops - now someone is the wiser.

Oh darn.

The reason ALT-A (liar loans) and Option ARM securities are trading at 20-30 cents on the dollar is that nearly all of those "loans" were either made to someone who lied about their income, couldn't afford the reset/recast payment and is underwater on their house (and thus can't refinance), or both.

When those loans default (and most of them eventually will, even if they're paying now) recovery is extraordinarily poor; 30 cents is likely just about right.

Get the BBQ Sauce.