TARP-to-Market?

The New York Post reported that Citigroup and Bank of America went on a TARP-sponsored “toxic asset” buying spree (mostly AAA-rated Option ARMs/Alt-A-backed MBS).

BofA explains that "[these] purchases of secondary-mortgage paper are part of its plans to breathe life back into the moribund securitization market."

Note: Thanks BofA, but isn't the TALF working on that? Weren't the government’s TARP injections meant to be used by you for commercial lending?

As the Post says, what's most troubling about this is “how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay."

Note: Obviously, winning bids should be higher than competing bids but it sounds like the winning bids were significantly higher in these cases.

It may be that both banks are hoping to recoup some of their losses by doubling-down on the same toxic assets, but why go out of your way to pay more than the market?

Well, with the PIPP around the corner, overpaying now may actually allow for profits later.

By buying large volumes at inflated prices, Citigroup and BofA are inflating market levels for these toxic assets. This strategy will allow these banks to temporarily mark-up and sell their own toxic positions to investors participating in the PIPP.

Example:

(Click to enlarge)

I'd keep an eye out for subsequent (inevitable) mark-to-market retractions.