OK, This Is the Pinnacle of Corporate Crony-Socialism for Wall Street

Let's break this whole banking mess down into simple terms.

After a relentless push for deregulation, major Wall Street players thought they'd figured out a magical formula for effectively laundering the risk out of shaky, high-risk loans. 

They told lenders that they'd buy up any loans they generated, regardless of how dubious their prospects of repayment might be if the real estate market didn't continue its unprecedented growth.

The "shit-pile" of bad debt-backed securities was thus created. The titans of finance admitted they'd miscalculated, but insisted that they couldn't be allowed to fail -- or at least some of them couldn't -- or the Four Horsemen of the Econopocalypse would arrive and we'd all be dodging flesh-eating zombies in the streets. They were, simply, "too big to fail," regardless of how incompetently they'd been managed or how much damage they'd inflicted on the economy as a whole.

So the government took a big chunk of the crap-paper off the banks' hands. The feds bought some directly, and they put the U.S. government on the hook for much more by offering guarantees on the loans. This was because without guarantees, the mortgage-backed assets on the banks' books was impossible to sell, and they couldn't lend money until they got at least a portion of them off of their books.

OK, that was the bailout -- you know all this.

So who bought the crap-loans, now backed in part by the full faith and credit of the United States of America? Investors, among whom were the very banks that we had to rescue because they were "too big to fail."

Bloomberg:

To understand the meaning of no good deed goes unpunished, Treasury Secretary Timothy F. Geithner can look no further than Wall Street where the banks that received the biggest taxpayer bailouts are seeking to reap trading profits from securities rescued by the government.

Of the seven biggest owners of residential mortgage-backed securities, only San Francisco-based Wells Fargo & Co. reduced holdings of the debt on its trading book, by $130 million to $44 million. JPMorgan added $49 million to the trading book, while cutting its other holdings of the securities by $1.47 billion to $12.7 billion, according to the Fed data.

Why? Because they knew there would be people who would buy these securities as long as the tax-payers had a piece of the downside risk.

“Anytime people know there’s a buyer coming, they position for that, and that’s clearly what happened here,” said Kuhn, who is co-manager of the Nisswa Fixed Income Fund.

And here's the part that should make your blood boil if it's not already simmering:

Prices of these securities may slump again, leaving the banks exposed to potential losses that the Treasury Department’s rescue plan was designed to mitigate, said Joshua Rosner, a managing director at New York-based Graham Fisher & Co., which advises regulators and institutional investors.

“It’s a trade that will likely work out, but it’s still a speculative trade, which is not what a taxpayer should want from firms that have only recently come out of critical care,” Rosner said.

So, if it works out, they stand to make a bundle. And if it doesn't ... they'll be too big to fail, again, right?

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