Banks will clearly be sellers in the Treasury Department's new program to clear toxic assets, but will they also be buyers?

The question is provoking plenty of hand-wringing, and the Treasury has yet to release the fine print on its Public-Private Investment Program.

Andrew Williams, a Treasury spokesman, confirmed Monday that bankers will be allowed to buy assets under the program. However, only healthy institutions need apply.

"This is an open program designed to get markets going on these legacy mortgage related assets — it's between a bank and their supervisor whether they are healthy enough to acquire assets," Williams said.

Of course, how "healthy" will be defined is a big question, and government officials are not getting into that sort of detail just yet. Suffice it to say, however, that the banking companies that have received repeated rescues — Citigroup Inc. and Bank of America Corp. — are not expected to be big buyers.

It also appears a bank will not be able to bid on assets it is selling.

"Healthy banks will be able to participate on the investment side, not obviously on the assets you'd be selling," Federal Deposit Insurance Corp. Chairman Sheila Bair told bankers on a conference call last week to explain the loan side of this program. "We want to avoid conflicts."

But the FDIC is taking comments until April 10, and the final form of the programs to clear both weak loans and illiquid securities is not expected until later this month.

Wayne Abernathy, executive director of financial institutions policy for the American Bankers Association, argued that banks should be allowed to be both sellers and buyers.

"These will all be discounted assets, so the hits will be taken, but after you've taken the hit, isn't it sensible to allow banks to pass them back and forth from each other to reduce their concentration either in type, company, regional?" he asked. "I think that makes a lot of sense, and we would be a little bit alarmed if people were saying, 'Well, if you sell into the program, you can't be a purchaser from the program.' I think that doesn't recognize the benefits that could come from diversifying your risk and broadening the pool of potential purchasers."

Karen Shaw Petrou, managing director for Federal Financial Analytics Inc., disagreed with that assessment.

"I think there are profound conflicts in letting banks both send assets into the program and then invest in the resulting structures," she said. "If banks are on both sides of the same transaction, then I see the potential for very significant conflict, which does not in turn provide the desired degree of protection for the public a public-private partnership is supposed to ensure."

Even if banks were not buying and selling their own assets, some critics say letting them be buyers at all would simply move assets around the banking system, rather than getting them removed.

"If we start playing musical chairs with the assets, all we do is further lose track of the asset exposure," said Joseph Mason, a professor at Louisiana State University and a former economist at the Office of the Comptroller of the Currency. "If we stir the assets up in the banks, that's going to make it harder for investors."

Another complaint is that banks participating on both sides may end up with big windfalls.

"If I can buy at 30 and sell at 80, I can do that all day long. Then we are just subsidizing the banks," said Chris Whalen, managing director at Lord, Whalen LLC's Institutional Risk Analytics. "We are subsidizing the bondholders, really. That's who is avoiding the loss."

Paul Miller, managing director of Friedman, Billings, Ramsey & Co. Inc., agreed with that assessment.

"They are going to subsidize the banks subsidizing the assets from another bank," he said. "Treasury is getting too complicated and cute."

But Lou Crandall, chief economist for Wrightson ICAP LLC, agreed with Abernathy that bank participation may be beneficial.

"The advantage of having the banks in there buying is, as long as you are resolving the conflict of interest problem of having an entity investing in its own assets, banks have more expertise in valuing these kinds of assets than most other players," Crandall said. "One of the reasons they resist selling these assets at market prices is they firmly believe they are worth more."

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