Cheap warrants

May 20, 2009

I’ve argued that we all benefited from the bubble (before it popped).  I thought Taibbi’s piece on Wall Street’s power grab was pure conspiracy-monguering.  I’ve even been skeptical of Krugman and HuffPo bloggers’ accusation that Geithner and Obama are in the banks’ pocket.

But now I’m very concerned:  Banks are buying back their warrants???

We lent them money, with great risk, and as a condition we got warrants to buy X amount of shares at some price.  These contracts have long multi-year terms, so the government can choose to exercise them after the institutions are back in shape, and their stock worth a lot more.  At least that WAS the bargain.

Now some banks are starting to buy back their warrants, which the contract specifies is allowed at ‘fair market value’, but apparently they are getting sweetheart deals.

As a taxpayer I support a bailout, but if we are to take on risk, we must participate on the reward as well.

This doesn’t just erode trust on the administration:  Having nothing to show in the way of a return after this mess will make it that much harder to get public opinion behind another costly intervention if needed.

UPDATE 5/20: Barry Ritholtz is now on top of this.  I really hope it gets traction.  Today I will call my congresswoman.

UPDATE 5/22: Bloomberg picked up the story! They’re using prof. Wilson’s model to calculate we would be fleeced out of 10 billion by the top 20 TARP recipients alone.

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Nowhere near over

January 24, 2009

Seems like every day another bank needs another fresh cash infusion or fails altogether, which invariably results in another round of articles, analyst opinions and “is it over?” type queries from every financial news anchor.

The obvious answer is, it isn’t.  And it won’t be for as long as home prices keep dropping and foreclosures stay up.

It’s not rocket science: Banks still have 40 trillion of derivatives on their books, much of it CDSs and MBSs whose value declines when the value of the underlying assets they represent or insure goes down.

We have a clear choice to make as a country, do we:

a) Let home prices fall until some sort of historic affordability level is reached, in the meantime injecting another 2-3 trillion into our banking system just to keep it from imploding.

b) Stem foreclosures and stabilize prices where they are (already 20-40% from high depending on market).

I believe the first option is dangerous and maybe even impossible to achieve: If the financial system isn’t stabilized soon, the resulting deep and protracted slowdown will result in such loss of jobs and purchasing power, historic affordability figures will be meaningless.

Home prices must be stabilized, one way or another.  I hope the rest of the TARP is used this way to a large extent.

As if they weren’t out of favor enough, the GOP continues to shrink its base.

They opposed a Detroit auto bailout in a last ditch effort to weaken the unions.  In the process they’ve alienated voters in Indiana, Ohio and other midwestern states that they would need to get back in the White House.

Such a useless exercise too:  Surely they must have known Bush would blink.  How could he afford to let Detroit fail and unemployment go to 10%? That would have singlehandedly solidified his record as the worst president ever.  No discussion necessary.

Wait there’s more: When the foreign manufacturers get hit (and they will soon), they will get bailed out by their respective governments, but not without first trimming away some of the excess capacity…. in Tennessee, Mississippi, Louisiana, etc.  So who will come to the rescue of these non-union, unprotected, Southern white working folk?  Obama, who else.

It’s already looking like Republicans will be defending red territory again in ’12.

UPDATE 12/15/08: News today that a second Republican is not running for re-election on ’10, this one from Michigan.  Hmmm, I wonder what might have changed his mind.

A better fix for housing

December 3, 2008

Trillions have been spent to prop up the banks, but little has been done to address the other side of the problem: home prices keep falling and foreclosures climbing.  Obama is right to keep bringing this up.  The crisis must be attacked from both sides.

Paulson has introduced some programs, to be sure, but the money allocated is a drop in the bucket compared to bank bailouts.  Much more was spent just saving Citi in one day than on all the homeowner help programs so far.

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