"Bailed-Out Banks Eye Toxic Asset Buys".  This is the headline from a report put out by Reuters today talking about how, "U.S. banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury's $1 trillion plan to revive the financial system".

Time out.

I want to make sure I understand what is going on here because I didn't go to a fancy Ivy League school or work on Wall St.

Back in October we were told by then Treasury Secretary Hammering Hank Pauslon that we needed to purchase toxic assets from the banks in order to avoid an economic catostrophe.  (By the way, what avoided this catastrophe was not TARP but rather the Fed's decision to open their window to the commercial paper market.  This happened within weeks of TARP being passed). 

Within days after the $700 billion TARP bill passes Congress, we are then told we are going to abandon the plan of removing the toxic assets and instead are going to provide capital injections into the banks so that they will increase their lending and extend credit to consumers and businesses.  Because after all, it's about credit for consumers and businesses right? 

After several months of tight credit and some interesting executive decisions which included Citigroup purchasing a Spanish Highway business for $10 billion, Bank of America renewing their corporate sponsorship of the New York Yankees, as well as the American people being told by several big bank CEOs that they have been profitable in January and February, Washington announces a new plan, the Public-Private Investment Program (PPIP) in order to restore the credit markets to normal function.  Because after all, it's about credit for consumers and businesses right? 

The plan behind the PPIP is to use tax payer money to guarantee up to $1 trillion in legacy "don't call them toxic" asset purchases by private investors in order to get the toxic assets off of the banks balance sheets so that the banks can lend money.  Because after all, it's about credit for consumers and businesses right? 

Now, this latest report is indicating that these banks which needed to have these toxic assets removed in order to begin lending to consumers, are actually going to do the opposite, they are going to buy more of the toxic assets.  And why not, their asset value is going to be guaranteed by the tax payer.

As I wrote about recently, "Banks will not return to normal credit lending until the housing market and economy stabilizes, no matter how much capital they have or how clean their balance sheets are."