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It Looks Like Citi And Bank Of America Are Already Gaming The System (C, BAC)
John Carney|Mar. 25, 2009, 1:01 PM|51

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.

Mark DeCambre reports:

One Wall Street trader told The Post that what's been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.

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.

This raises serious questions about how the banks are using TARP funds. Instead of stimulating the economy by making new loans, B of A and Citi seem to be spending money to buy up old loans. That's probably a bet that the Geithner plan will create renewed demand for MBS.