HuffPo reports Treasury has allowed three more banks (including Goldman) to pay back warrants, before Congress has had a chance to force them to setup an auction system.


They also report that GS paid full price for theirs (using professor Wilson’s models).  Wilson speculated that “Goldman Sachs decided to pay fair price to avoid more of the bad press that’s been coming its way the last several months”.

Ritholtz has some good news

Good news today. Some of you have noted that it is somewhat outrageous for the Treasury to privately price and sell warrants back to the banks that got TARP money instead of doing an open auction that will fetch the best price for the taxpayer. The Congressional Oversight Panel claims that the currently used secret process returns only 66 cents on the dollar to the taxpayer.

Mary Jo Kilroy, a freshman Democrat from Ohio, introduced a bill (HR 3232) to compel an open auction of these warrants with six cosponsors: Brad Sherman, John Boccieri, Betty Sutton, Jackie Speier, Marcia Fudge and Alan Grayson.

All of these members except Brad Sherman are in their first or second term in Congress, and all are Democrats. Sherman was the leader of the little noted but important ‘skeptics caucus’ that attempted to stop the $700B bailout in September.

There is also a hearing on the TARP warrant repayments on Wednesday. Many of you don’t have faith in Congress, but there are lots of crosscurrents and sometimes people here do show leadership.

Now Elizabeth Warren and the C.O.P is piling on:

The Congressional Oversight Panel, which is charged with overseeing the Troubled Asset Relief Program, or TARP, said in a report that a group of 11 small banks that have repurchased government warrants in exchange for taxpayer-funded assistance, have bought-out the stakes at 66% of their face value.

The report argues that liquidity discounts are a key factor for why the warrants were purchased at such low prices. Should a similar discount be a major factor for warrant repurchases at larger institutions buying out government stakes, the shortfall to taxpayers could be as much as $2.1 billion, the report said.

The report said the C.O.P. is exploring the possibility that Treasury consider selling the TARP warrants in an open, public auction, as an alternative that could possibly give taxpayers a better valuation for the stakes.

“This has the benefit of stopping any speculation about whether Treasury has been too tough or too easy on the banks that want to repurchase their own warrants. It also permits the banks to bid for their own warrants — in direct competition with outsiders,” the report said.

This open market is the same thing Simon Johnson and others have been advocating.  I hope everyone continues applying pressure.  It’s not too late to change the approach.

The Treasury’s plan for selling back TARP warrants was announced last weekend, and it looks bad.

Simon Johnson gets pretty close to calling it corrupt, and he is right: Even if individuals have the best intentions, a poorly laid system will corrupt them.  This is such a system.

If Obama goes through with it he will be making a big mistake: Giving Republicans amunition for the midterms and opening his administration to accusations of favoritism and backroom dealing, all while they could be getting a meaningful return and hoisting it as proof that the bank bailout was not all just a huge waste.

Tonight’s (6/9) episode of Jim Lehrer’s Newshour was outstanding.  It really gave me hope that not all journalism on TV is dead.

Paul Salmon explained bank balance sheets and TARP in a way that a middle schooler could understand, with an assist from Simon Johnson and Chris Whelan.  You couldn’t ask for more professional help.

Then William Cohan (the guy that wrote the best-seller on the crisis) shed light on today’s TARP payback, with an old Treasury official giving a great counterpoint, which actually made a lot of sense (hmm, maybe changing mark-to-market is not such a farce after all).

Bonus: A great piece on the electrical transmission lines we’ll need to transport wind and solar to the cities.

If you’ve never watched the show I really urge you to. If you can get past the not-quite-so-snazzy graphics and sound effects, and normal-looking journalist (as opposed to shallow celebrity anchors) you will get more information in 60 minutes than you could from watching any cable news network all day (actually fair and balanced to boot).

You won’t miss the shouting matches, I promise.

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.

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.


January 3, 2009

People are scared and frustrated.  And no-one wants to step forward and be the face of the greedy capitalist.  So bloggers, the MSM and Barney Frank all fling mud at the banks, Paulson, Rubin, etc.  Some of it is definitely justified, to be sure, but a lot is just opportunistic and counterproductive.  For example:

  • Demanding banks show how they are spending their bailout dollars is silly.  The whole point is to give money to all in order to hide the weak ones temporarily (evening out confidence throughout the system).  If we uncover the ones in trouble we’re back to square one.  I’m not arguing this is the best medicine, but at this point the patient is in treatment, let’s give it a chance to work!
  • Forcing them to use the money to lend out, or some other specific purpose would amount to centralized control, in other words communism.  So we threw them a lifeline.  Now let them figure out what to do with the money as only they can.
    Just because they made a huge mistake (which by the way we ALL committed), we cannot pretend all of a sudden we know how to run their business better than they do.
    Expecting banks to act for the common good is anathema to capitalism. Any program to fix housing that does involve banks should be based on incentives that make it financially desirable for them to participate.

On this I respectfuly disagree with Rachel, Kos and Frank

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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