Even though Congress in general seems pretty clueless on matters financial (the Wall Street/high end variety), some members appear to understand the mindset.

One consequence of the ever-delayed “buy the bad assets” program, which clearly has to pay at or above banks’ current marks (otherwise they show losses, which hurts their capital bases, something that the Fed/Treasury team is keen to avoid) is that banks have no incentive to unload that paper now. They might as well wait to see what the sugar daddy from Washington has to offer.

From Reuters:

Global credit markets are unlikely to revive as long as the U.S. government continues to dangle the vague prospect of a toxic asset purchase plan in front of distressed banks, some lawmakers warned on Wednesday.

The chance that taxpayers could be made to overpay for underperforming assets is making bankers, whose balance sheets are saddled with them, reluctant to sell to lower bidders, suggested Texas Republican Rep. Randy Neugebauer.

“People are afraid to buy and afraid to sell because they’re afraid the government is going to sweeten the deal,” he told Reuters in an interview. “The markets are just waiting to see when we’re going to be done.”

Uncertainty about the government’s strategy for toxic assets props up their value above what private investors might pay for them and delays potential resolution of the problems they pose, said California Democratic Rep. Brad Sherman.

“As long as there’s the prospect the federal government will overpay for the toxic assets … these banks would be insane to sell” in the private market, Sherman told Reuters.

“As long as they hold the toxic assets, they have regular value, plus a politically enhanced value that you may be able to sell it to Uncle Sam for more than it’s worth. Why dispose of an asset where it has politically enhanced value?”…

Neugebauer hit on the toxic assets issue in questioning of Goldman Sachs Group Inc’s (GS.N) Lloyd Blankfein and Citigroup Inc’s (C.N) Vikram Pandit.

Both CEOs told Neugebauer they could sell some of the worst toxic assets on their balance sheets, but they won’t because the price private investors would pay is too low.

“That low price is generated by the fear in general … and the lack of risk capital,” Blankfein said.

Similarly, Pandit said: “When we look at some of the assets that we hold, we have a duty to our shareholders. The duty is that if it turns out they’re marked so far below what our lifetime expected credit losses are, we can’t sell them.”