More Sweetheart Deals
| Wed Jul. 1, 2009 5:14 PM PDT
Back in October, when we started bailing out banks with TARP funds, the Treasury received warrants from each bank in return for their investment. Several of these banks have now paid back the TARP money, but what about the warrants? While I was on vacation the Treasury announced its plan for selling the warrants back:
The Treasury Department said the banks will make the first offer for the warrants. Treasury will then decide to sell at that price or make a counteroffer. If the government and a bank cannot agree on a fair price for the warrants, the two sides will have the right to use private appraisers.
This is ridiculous. This isn't like the toxic waste on bank balance sheets that can't be sold because it's impossible to value. If you want to know how much the warrants are worth, just offer them to the highest bidder. Simon Johnson has it right: "The only sensible way to dispose of these options is for Treasury to set a floor price, and then hold an auction that permits anyone to buy any part — e.g., people could submit sealed bids and the highest price wins."
If the Obama administration wants us to believe that it's not entirely in thrall to the banking industry, it needs to stop offering absurd sweetheart deals like this to banks that already received sweetheart deals in the original TARP bailout — and are continuing to benefit from trillions of dollars in various Fed support programs and liquidity guarantees. Just auction the damn warrants.
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Comments
The Obama administration is
Submitted by g. powell on Wed Jul. 1, 2009 5:37 PM PDT.
The Obama administration is totally in thrall to the bankiing industry. Where have you been the last six months?
Yes, this is absolute nonsense. But who really besides a few of us really gives a fllying fuck?
Thanks for the post, Kevin
Submitted by DevilDog on Wed Jul. 1, 2009 10:37 PM PDT.
While I feel like g. powell, at least Simon Johnson is speaking out. Why don't the president's GOP critics hit him with these criticisms? Oh, that's right; their base is the group that benefits. Makes you wonder why Obama is so infatuated with the big banks?
What is a warrant anyway?
Submitted by sal on Thu Jul. 2, 2009 3:52 AM PDT.
What is a warrant? How is it different from a loan? What is a derivative? Why do banks use inscrutable jargon?
Warrants are a right to buy a security.
Submitted by The Lounsbury (not verified) on Thu Jul. 2, 2009 9:42 AM PDT.
They are in no way like a loan. It is not Bank jargon, it is investment terminology, and it is used because these instruments have precise meanings. Nothing new in this, and indeed Warrants are very old instruments in fact.
You can look up a fairly decent description on wikipedia, whose opening I quote:
"In finance, a warrant is a security that entitles the holder to buy stock of the company that issued it at a specified price, which is usually higher than the stock price at time of issue.
Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the bond, and make them more attractive to potential buyers. Warrants can also be used in private equity deals. Frequently, these warrants are detachable, and can be sold independently of the bond or stock."
Insofar as they are an option to excercise a right, they are NOT cash that the banks already received, but represent extra value your Treasury may extract from the initial capital injection.
The Tyranny of the Powerful
Submitted by Trippp on Thu Jul. 2, 2009 9:45 AM PDT.
Why is Obama in thrall to the big bankers?
I would think the answer is obvious - because the ultra-rich have the power, including power of the President of the United States.
Shoot, I was railing about this last year at this time. I'm not saying Obama is as bad as Bush. Clearly not. But both political parties are bought and paid for for by the ultra-rich. This seems very clear to me. I really do wonder why more people don't see it.
The bottom line, then, is if you want to understand at a fundamental level why politicians do certain things you need to look to the ultra-rich and see what it is that they want.
The first thing they want is to stay ultra-rich. They are on the top and they intend to stay there forever.
Tripp
While not having an opinion about the well-foundedness of this
Submitted by The Lounsbury (not verified) on Thu Jul. 2, 2009 11:05 AM PDT.
It is worth noting that the fulminating about the Rich, etc, would seem to me to be off-mark, insofar as the US Treasury move is likely motivated by a desire not to presently decapitalize the banks (which large payments would do, the government interest in financial stability here in conflict with any profit maximizing interest - which I believe private investment observers are taking as a given when it is not) or to have force a large dilution of current surviving bank shareholders, which is what a public auction would end up doing.
This may be viewed as unduly punitive to the shareholders of these reasonably good banks that were forced into an all system program; recalling that many of said shareholders are in fact general public retirement funds, meaning one is punishing the public (although few would understand that).
Of course not as sexy, this analysis as fulminating about corruption and the Rich, etc.
