Apparently, U.S. banks such as Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase which have received government aid could become buyers of toxic assets under the Treasury’s $1 trillion Public-Private investment Plan (PPIP).

Critics are saying that the PPIP, which basically is set up to allow the private sector to make substantial gains with little risk, is intended to help banks sell troubled securities and loans and not purchase them.

The government plan does not allow banks to buy their own assets, but there is no ban on the purchase of securities and loans sold by others.

Banks have three options if they want to buy toxic assets: apply to become one of four or five fund managers that will purchase troubled securities; bid for packages of bad loans; or buy into funds set up by others.

Spencer Bachus, the top Republican on the House financial services committee, vowed to introduce legislation which would stop financial institutions from”gaming the system to reap taxpayer-subsidized windfalls”.

Mr. Bachus added it would mark”a new level of absurdity” if financial institutions were”to swap assets at inflated prices using taxpayer dollars.”

Lawmakers are going to have a difficult time understanding why banks will be allowed to purchase troubled securities when the entire purpose of the plan is to get them off bank balance sheets in order to free up lending. Allowing banks to make such purchases could leave the same amount of toxic assets in the system as before, but with the government (meaning the taxpayers) now liable for most of the losses through its provision of non-recourse loans.

“It’s an open program designed to get markets going,” a Treasury official said. “It is between a bank and their supervisor whether they are healthy enough to acquire assets,” raising the possibility regulators may prevent weak banks from becoming buyers.

There's no question that the private sector stands to be the big beneficiary of any profits realized under the PPIP while at the same time the government (and therefore, the taxpayer) holds the majority of the risk. The way the PPIP is set up, the government is to provide about 92% of the money but would stand to receive only 50% of any gains.

Writing in the New York Times, Joseph Stiglitz, former chief economist of the World Bank and Chairman of the Council of Economic Advisors under President Clinton, works out the numbers. For example, let’s say the price for an asset is bid 50% higher than its true worth of $100. In this case, the private sector puts up $12, and the government supplies the rest; $12 in “equity” plus $126 in the form of a guaranteed, non-recourse loan it makes to the private investor.

If after a year it turns out that the true value of the asset is zero, the private partner loses only the original $12 investment (because the loan made to fund the majority of the purchase is non-recourse) and the government loses $138 (the $12 investment plus the $126 loan).

Should the true value of the asset turn out to be $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. But what's really happened is that the private partner more than triples his $12 investment while the taxpayer, having risked $138, gains just $37.