I came across an interesting article in the New York Post about how Citigroup and Bank of America have been aggressively purchasing AAA mortgage-backed securities in the secondary market. Surely, its a bit bizarre that those banks that hold the largest amount of these securities and have taken the largest writedowns are back playing in the same market that hurt them so badly in the past.

“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.”

Both BoA and Citigroup were the recipients of $45 billion in TARP funds meant to to help prop up the economy and jumpstart the housing market.

Despite receiving the TARP funds, both BoA and Citigroup are positioned to take large writedowns if the market for AAA MBS deteriorates further.

“One source said that the banks’ purchases have helped to keep prices of these troubled securities higher than they would be otherwise”

Since trading is very light in these markets, it would be very easy to purchase up to $1 billion in assets at slightly inflated prices to prevent writedowns on the remaining $20 billion or so that they are likely to still have on their balance sheet.

I’m sure this won’t be the last time we hear about this…….

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