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.


Matt Taibbi is pissed about the bonuses.  Unlike the rest of the angry mob though, he is particularly well informed.  In fact he does a wonderful job explaining how it all happened, with particular attention to the central role of AIG and Goldman Sachs.

But he fails to support his claim that the crisis is a massive power-grab by Wall Street insiders (though it definitely sounds plausible).

My fear is that in these most unsettling of times we are all so desperately looking for a culprit, plausible is all we need to render a verdict.  Never mind proof or at least a solid case.

Sure Blankfein and Paulson were old Goldman friends and that’s why Goldman was involved in AIG’s bailout unlike all other counter-parties.  In fact half of these guys are Goldman alumns.  Sounds very fishy.  It reminds me of Michael Moore unearthing how Bush helped some of the Bin Ladens leave the country on 9/11 and using it as ‘evidence’ of a cover up by the administration.

But what exactly does it prove?  Perhaps it just means that they have traditionally attracted top performers in the field, which naturally have gone on to high posts.  Perhaps these relationships have put them in front of the rescue line, which is great for its stockholders (individuals like you and me, mutual funds, insurance companies, hedge funds, etc.)

I’m not saying he’s wrong, I’m just saying his theory is only as likely as the conspiracy-free “they screwed up royally, we have to bail them out (or we go down with them), and then we’ll regulate the hell out of them so it doesn’t happen again” explanation.