Is Treasury About to Give Banks Yet Another Subsidy By Letting Them Repay TARP Warrants Too Cheaply?

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The very fact that it took such a long headline to explain the latest (possible) Treasury bouquet to the TARP recipients says the odds are high the troubling scenario will come to pass. With the Fed a combo hedge fund/SIV and the Treasury actively engaged in regulatory arbitrage (evading budgetary restrictions by making clever use of the Fed) the powers that be have established that the public can indeed be fooled by fancy financial footwork.

The latest bit of chicanery, as Bloomberg tells us, is that the first TARP repayment, by munchkin Old National Bancorp in Evansville, Indiana, was at what appears to be a big discount to the value of the warrants, an estimated 80%. If this becomes the formula for all TARP repayments, the taxpayer will again be getting the short end of the stick.

From Bloomberg:

Banks negotiating to reclaim stock warrants they granted in return for Troubled Asset Relief Program money may shortchange taxpayers by almost $10 billion if Treasury Secretary Timothy Geithner’s first sale sets the pace, data compiled by Bloomberg show.

While 17 financial institutions have repaid TARP funds, only one has come to terms with the U.S. on the value of the rights to buy stock that taxpayers received for the risk of recapitalizing the industry. That was Old National Bancorp in Evansville, Indiana, which gave the Treasury Department $1.2 million for warrants that may have been worth $5.81 million, according to the data.

If Geithner makes the same deal for all companies in the rescue program, lenders may walk away with 80 percent of profits taxpayers might have claimed….

For the 20 largest TARP recipients, the total savings would be $9.985 billion, the data show.

Geithner wants to move swiftly to sell the TARP warrants, he said on May 20. Their worth depends on assumptions made about the chances the underlying stock will go higher than the rights. Depending on the input, different valuation models reach a range of conclusions.

Lenders shouldn’t be trusted to make suppositions that would be to the advantage of taxpayers, said Linus Wilson, an assistant professor of finance at the University of Louisiana at Lafayette.

“Bank managers have stronger incentives than Treasury personnel to get a better deal for their constituents,” said Wilson, who has written about appraising warrants.

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  1. Mrs. Watanabe

    I caught some of Timmy’s testimony on the hill (via C-Span). He said he wanted to sell the warrants as soon as possible to maximize taxpayer value. I suppose he doesn’t expect bank stocks to rise in value.

    A Senator (don’t recall which) asked if he might sell to third parties to get a higher price, and Timmy’s answer was something like “I haven’t considered it and will have to get back to you…” which is his code for “I don’t want to answer that question.”

  2. Steve

    Typical M.O. these days. None of the political braying about upside for the taxpayer was convincing when TARP was passed. The government received perhaps 1/10th of the warrants it should have (judged by Buffet’s GS deal), and Obama’s creatures want to turn even that taxpayer pittance into pennies. There was never ANY consideration of exercising the warrants for common shares: smokescreen and bullshit to get TARP passed, nothing more.

    Geithner is an unspeakable toad with a hard-on for a job in the industry. But his behavior here has the blessing of the leadership of the House and Senate…and Obama.

  3. Doc Holiday

    FYI: “Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

    That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

    “If I go into a bank,” said Bo Lundgren, who was Sweden’s minister for fiscal and financial affairs at the time, “I’d rather get equity so that there is some upside for the taxpayer.”

    Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.”

    Stopping a Financial Crisis, the Swedish Way

    Also see the connected thoughts on SUNDAY, MARCH 22, 2009 at Yves/NC w/ SL: Lundgren’s conclusions are intended to be of general nature and are not only applicable to lilliputian Sweden. The Swedish approach, as summarised by Lundgren, leaves no room for Faustian bargains à la Geithner. The Swedish Government during the financial crisis intervened comprehensively, not to socialise, but to solve the problem while avoiding moral hazard. All in the general interest. This point was reinforced during the Q/A session at the COP hearing when Lundgren was asked how the Swedish Government managed to avoid corrupt management of nationalised banks and of the other financial institutions that effectively were under Government tutelage for a certain period. The response was in essence that it was obvious, and never in doubt, that the Government, and its appointed agents, would act to protect the general interest.

    Lundgren also said that Sweden had no qualms about diluting the holdings of incompetent owners of failing financial institutions and throwing out their equally incompetent management. On the contrary, it was a prerequisite to make Government intervention legitimate in the eyes of citizens.

    Lundgren’s response to the COP’s question revealed a degree of mutual incomprehension that may express a major cultural divide. That virtual barrier may render the Swedish bailout solution inapplicable to the U.S., despite its substantive merits.

  4. Doc Holiday

    "A central question surrounding the Troubled Asset Relief Program (TARP) is whether the U.S. Department of the Treasury’s (Treasury) policy of injecting cash into financial institutions has resulted in a fair deal for taxpayers."

    Valuation of the transactions is critical because then-Treasury Secretary Henry Paulson assured
    the public that the investments of TARP money were sound, given in return for full value: “This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything.”
    In December, he reiterated the point, “When measured on an accrual basis, the value of the preferred stock is at or near par. This means, in effect, that for every $100 Treasury invested in these companies, it received stock and warrants valued at about $100.

    Overall, in the ten transactions, for each $100 spent, the Treasury received assets
    worth approximately $66.

    For each $100 Berkshire Hathaway invested in Goldman Sachs, it received securities
    with a fair market value of $110

    For each $100 Qatar Holding and Abu Dhabi invested in Barclays, they received
    securities with a fair market value of $123.

    appears to have decided to be a passive investor in each of the institutions in which it invests, choosing not to receive either voting rights or seats on an institution’s board of directors if it converts its warrants to common stock, and with a few exceptions no special covenants are imposed on the institutions that receive capital infusions. This can be contrasted with the more activist approach taken by the U.K. government in its investments in banks. (The legal analysis
    does note that, in some respects, Treasury did obtain better terms than were reflected in the
    Berkshire Hathaway investment in Goldman Sachs, but that those more favorable terms did not affect value.)

    >> This is why we have to get Warren out of there and help banks get better deals …..right? This entire charade is exactly like the slavery issue back in the 1840's, i.e, Congress was corrupt and the majority of Congressional members were slave owners, thus they wanted to increase their power and position by using lobbying processes to suppress efforts by people like John Q Adams and people that wanted America to stand behind its Constitution.

    In this case, we have pirates in congress that are essentially bankers that have vested interests in lobby groups that pay them to support theft and for all practical purposes we could suggest these are the grandchildren of the slave owners who continue their efforts to subdue justice…..

    This is worth reading, if your new to American history:

    n all House proceedings, Adams was purposely contentious and controversial, using every available means to achieve his objective of stirring up debate on slavery. He intentionally baited irate House members to censure him for his conduct. When they did, he employed the time granted him for defense to expound his views on slavery-related issues. On one such occasion, Adams spoke for two weeks on his defense and threatened to go on for another unless the House tabled the censure resolution against him. The resolution was tabled, and Adams emerged doubly successful, for he had used those two weeks to denounce slaveholders for abusing slaves as well as free abolitionists, whose constitutional rights of petition, speech, and the press had been circumscribed. One House rival, Representative Henry Wise, called Adams "the acutest, the astutest, the archest enemy of southern slavery that ever existed."

    The bankers are enslaving Americans!

  5. Doc Holiday

    Is anyone home here? ‘Atlas Shrugged’: From Fiction to Fact in 52 Years

    To wit: “For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises — that in most cases they themselves created — by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.

    In the book, these relentless wealth redistributionists and their programs are disparaged as “the looters and their laws.” Every new act of government futility and stupidity carries with it a benevolent-sounding title. These include the “Anti-Greed Act” to redistribute income (sounds like Charlie Rangel’s promises soak-the-rich tax bill) and the “Equalization of Opportunity Act” to prevent people from starting more than one business (to give other people a chance). My personal favorite, the “Anti Dog-Eat-Dog Act,” aims to restrict cut-throat competition between firms and thus slow the wave of business bankruptcies. Why didn’t Hank Paulson think of that?”

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