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Hold the Warrants
The government took warrants when it bailed out the banks. Now the banks are trying to weasel out of the deal by buying back the warrants cheap when they pay back the TARP money.
For taxpayers, a lot of money is at stake. The government has an option to buy stock in 579 banks. By some estimates, the warrants on JPMorgan alone are currently worth more than $1.1 billion. They could be worth much more if JPMorgan's share price rose. So far, one publicly traded bank, Old National Bancorp in Indiana, has repaid the government in full by returning its bailout money and repurchasing its warrants. (Two small privately held banks have done the same.)
This is insane. A private investor, having bailed out a failing firm, would never sell back the warrants at a discount. The government should hold the warrants for the full ten years and cash them in at the point of maximum gain.
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One minor quibble:
The "point of maximum gain" is probably not the full ten years. It is of course impossible to predict the exact point. In any case, yes, a private investor would probably not be selling them back right now....May 19, 2009 1:20 PM | Reply | Permalink
So we are getting screwed twice.
May 19, 2009 1:54 PM | Reply | Permalink
Obama and Geithner have to have cash to fund the coming bailouts, and they don't want to go to the Congress to get it.
It's a buyers' market and the banks know it.
May 19, 2009 2:20 PM | Reply | Permalink
In the case of at least JPMC and Goldman Sachs, they didn't need to be bailed out. The government made them take the money so that the bad banks, like Citigroup, wouldn't be formally exposed as insolvent.
State Street and BNY Mellon probably didn't need a bail out.
May 19, 2009 4:02 PM | Reply | Permalink
Goldman needed a bailout. If you include the AIG money.
May 19, 2009 4:41 PM | Reply | Permalink
If you are thinking of the TARP money that went to AIG and then was passed on to Goldman Sachs and other banks, Goldman isn't planning on paying any of that back. It was owed to them by AIG.
Goldman Sachs was just one benficiary of the AIG bailout -- which Paulson and Bernanke had to do or allow the London derivatives market to collapse and tear down the whole financial system.
May 19, 2009 4:51 PM | Reply | Permalink
None of those people deserved to be paid what AIG owed them. They should have done their due diligence on AIG.
Anyway, Goldman was insolvent before TARP, it wasn't forced into anything. Had it taken its proper lumps on the coutnerparty risk it took aith AIG, it'd be history.
Total charity case.
May 19, 2009 8:48 PM | Reply | Permalink
Save your breath. Merrill's a banker.
He's convinced the whole $70 trillion world economy would have collapsed if we hadn't bought off the players in AIG's London Casino.
May 19, 2009 9:26 PM | Reply | Permalink
- I am not a banker.
- The view that letting AIG fail would endanger the global financial system is widely held. See for example Let battle commence in Tuesday's Financial Times.
Note also that the derivatives business is largely outside of the United States.
May 19, 2009 11:36 PM | Reply | Permalink
Yes yes all well and good, but Destor is still correct they needed the cash because they did not do the proper diligence. Or more ominously they knew AIG would be bailed out and just gamed us.
Notice http://finance.yahoo.com/q/bc?s=GS ">Goldman’s performance over the year?
Total charity case.
May 20, 2009 2:25 AM | Reply | Permalink
Goldman would have known that AIG was "too big to fail". Because of Goldman's relationship with the US Government, they would also have known how close AIG was to the US Government.
May 20, 2009 10:05 AM | Reply | Permalink
If they are paying back six months later, then they didn't need the money, or they sure didn't need as much as they borrowed. However, if it is true that Paulson put the thumbscrews on them to take the money, then they are going to go for the best possible deal they can.
Is there anyone besides me who thinks it's a positive sign that there are banks clamoring to pay back their TARP money? Doesn't that mean the terms weren't all that peachy for them to take the loans in the first place? Isn't that good?
I can see the point of trying to do well by the taxpayer but wasn't the point of TARP to stabilize the financial markets, not to find ways for the gummint to raise money? They're getting interest too ya know.
May 19, 2009 4:13 PM | Reply | Permalink
This whole "if they're paying it back now they didn't really need it" meme should be treated as the steaming pile of horsepucky that it is. Even if some of the banks in question were merely illiquid rather than insolvent (and that only because the government had pumped tens of billions of dollars into their insolvent counterparties), illiquidity becomes insolvency just as soon as someone insists on being paid in cash.
No commercial parties were willing to lend the banks money to cover their liquidity needs at any price, and it's only the trillions in TARP and Fed funds that have made the interest payments and raiding of other capital for repayment possible. So yeah, they needed it. (And might yet need more.)
For an individual analogy, consider the freelancer friend who begs a loan to get the landlord's padlock off their door until some checks clear. Did they need that money? Maybe not for the long term, but without it there wouldn't be any long term.
May 19, 2009 9:08 PM | Reply | Permalink
"The government should hold the warrants for the full ten years and cash them in at the point of maximum gain."
Wow. The government knows the current market value of the warrants will never be greater than the exercise value at expiry? That's wonderful, how else can we put the government's perfect foresight to use?
Look, there are two questions here apropos the warrants. One is whether the Treasury has to sell the warrants after TARP money is repaid - the Treasury is saying it does have to. The other is the mechanism by which the warrants are valued and sold.
Regarding the first question, whether or not the Treasury has to sell, personally, I would prefer they did - the rational for holding on to the warrants amounts to stock market speculation, something which I would rather hope governments did not engage in.
On the second point, if the government is to go through some kind of opaque insider-ish process by which the banks are able to buy their own warrants back, that too is messed up. An independent valuation of the warrants should not to be hard to come by - and if banks are not willing to pay at least what the indepedent valuation suggests they should, then alternatively auction the warrants off.
I don't suppose anyone would support the idea of the warrants being sold "at a discount", but banking stocks have risen considerably since the start of the year and if the government can cash in a bunch of warrants on the back of this, I don't see a good reason not to favor it.
May 20, 2009 6:00 AM | Reply | Permalink