Let the Games Begin?

The electronic ink is barely dry on my previous blog entry, when comes this story from the Financial Times that U.S. banks may buy each other’s toxic assets under the Geithner plan.

Dear God no.

This recalls a “good news, bad news” joke I read years ago. It goes like this:

The soldiers had been fighting hard for weeks. They were hungry, tired and unwashed. One morning the captain stood before them and said, in a booming voice, “Men, I have some good news and bad news.” Everyone fell quiet. “First, the good news,” the captain said. “Today there will be a change of socks.” A lusty cheer broke out. After a pause, the captain went on, “Now the bad news. Atkins, you change with Smith, Smith you change with Jones, Jones you change with O’Reilly ...”

If the banks just swap their dirty socks (um, toxic assets) among themselves at inflated prices, nothing will be achieved other than the shifting of billions of dollars of losses onto taxpayers. This could turn out to be a breathtakingly brazen gaming of the Geithner plan. I wasn’t sure about the gaming element until the FT story mentioned that Citigroup -- highly leveraged (was the insane ratio 33-1?), mega-bailed out, Citi! -- was among those thinking of bidding on assets under Geithner’s public-private partnership!

Any bank whose lips are fused to the taxpayer teat should be tidying up its own house right now. That the Treasury Secretary did not come out and make this abundantly clear worries me. I would’ve preferred a muscular Geithner quote along the lines of “Citi won’t be using any kind of leverage to buy anything bigger than a lemonade stand, let me assure you, until it repays the government.”

I did slap a question mark on this blog heading because I’m still not convinced that this kind of gaming will be allowed. It would be a naked giveaway to the major U.S. banks who screwed up in the first place. The outcry of fury would be deafening.

If the banks wind up exchanging their rancid socks with each other and taxpayers get stuck with the laundry bill, the truth will out and heads will roll.