Critics of Geitner's most recent scheme to remove toxic assets from bank balance sheets, claimed it could create major problems. Some thought banks might go back into the market to buy back junk securities with the sole purpose of reselling them back to the government at a higher price.
According to the NY Post, this is already happening.
Traders are seeing surprising new demand for junk MBS, that few people would touch a few weeks ago. Some of the buyers are Bank Of America and Citi which owe their very existence to taxpayer bailouts and guarantees. Do they suddenly see a dramatic turnaround in mortgage default rates? (they are rising) Have home prices started to rise boosting the collateral behind the loans? (they are still falling)What new factor makes them suddenly so bullish-- aside from the new government player in the market. Do they think this new player will buy these securities for more than they are worth?
"One Wall Street trader told The Post that what's been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.
Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids."
The really weird thing is that the recent jump seems to be in loan classes like Atl-A and Option Arms which are expected to see increasing default rates.
Original source was a link from the Implodometer to this site.