Matthew Yglesias » TARP Warrants

Jul 2nd, 2009 at 12:13 pm

TARP Warrants

I’m too far behind the curve on this for it to be worth offering a detailed analysis, but suffice it to say that if this isn’t the government creating a windfall for banks at taxpayer expense for no good reason then I don’t know what is. Over the past couple of weeks I’ve been pointing out that the final cost of TARP will be far less than $700 billion. But unless I’m badly misunderstanding things, the administration’s plan for selling these warrants will make the final bill higher than it needs to be.

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22

22 Responses to “TARP Warrants”

DTM Says:
July 2nd, 2009 at 12:21 pm
[I]f this isn’t the government creating a windfall for banks at taxpayer expense for no good reason then I don’t know what is.

Well, actually it is more like the government not necessarily maximizing the windfall the taxpayers are going to receive at the bank’s expense.

But that said, they should in fact auction the warrants (maybe giving the banks the right to match the best offer).
Petey Says:
July 2nd, 2009 at 12:22 pm
Hmmm…

Why is this a big story among Dem bloggers, while the story from Tuesday about how the government is essentially handing $340 billion to General Electric to save GE Capital that the government will never get back not a big story among Dem bloggers?

Could it have anything to do with the fact that Dem bloggers hope to appear on GE’s various news channels in the future and don’t want GE to blackball them?

Nahhhh.. Washington doesn’t work like that, right? Felix Salmon thought it was an important story, but Felix Salmon isn’t angling to appear on Rachel Maddow or MTP down the line…

Isn’t $340 billion obtained via improper means worth spilling a few pixels over? It’s a far more expensive, corrupt, and horrific story that the TARP warrant story…
Rich in PA Says:
July 2nd, 2009 at 12:28 pm
Petey- The article you cite says that GE got a quarter of the $340B in guarantees, not the whole thing.

As a result, GE has joined major banks collectively saving billions of dollars by raising money for their operations at lower interest rates. Public records show that GE Capital, the company’s massive financing arm, has issued nearly a quarter of the $340 billion in debt backed by the program, which is known as the Temporary Liquidity Guarantee Program, or TLGP. The government’s actions have been “powerful and helpful” to the company, GE chief executive Jeffrey Immelt acknowledged in December.
Alan Says:
July 2nd, 2009 at 12:28 pm
More Corporafornication. Why should Treasury sell the warrants back to the company on the cheap? Here’s the logic from WSJ, October 2008:

Treasury also has the right to buy common stock equal to 15% of its total investment in the firm. Treasury can convert these so-called warrants to buy stock, which would give it a bigger stake in the company and dilute existing shareholders. It can also sell the warrants, which could make Treasury money if the stock price goes up.

The decision whether to convert the shares into common stock or sell the warrants will be made by the Treasury secretary. It is expected to be based on the health of the financial institution and what’s in the best interest of taxpayers, according to people familiar with the matter.

How’s selling warrants at below market value good for the taxpayer?

http://online.wsj.com/article/SB122398468353632299.html
DTM Says:
July 2nd, 2009 at 12:34 pm
how the government is essentially handing $340 billion to General Electric

Of course that is also a gross misstatement of the nature of the TLGP, but I guess accuracy was not high on the list of things Petey was going for.
Petey Says:
July 2nd, 2009 at 12:47 pm
“Petey- The article you cite says that GE got a quarter of the $340B in guarantees, not the whole thing.”

As Felix Salmon makes relatively clear, the whole thing is never going to be repaid.

It’s similar to what’s happened to GM and many of the banks. The difference, of course, is that General Electric’s management and stockholders will be spared any pain, which wasn’t the case for GM and the other banks.

Prior to rollover, GE Capital will be separated from GE, and GE Capital will go under. The rest of GE won’t even suffer a bruise. And the Treasury will be out $340 billion.

I don’t mind rescuing companies using public moneys if it’s necessary to the economy. I just mind doing so while leaving the management team that created the problem in place. I just mind doing so while leaving the shareholders untouched.

But, of course, unlike GM and the other banks, General Electric has the largest “news organization” in the country, and thus, General Electric gets to steal from the Treasury because no one in politics is willing to even bring up their theft for fear of incurring the wrath of their “news organization”.
Why oh why Says:
July 2nd, 2009 at 1:13 pm
There may be problems with TARP, but I’m far more worried about the $9 trillion (!) lent by the Fed with no oversight or control. Now there are reports that banks are expecting giant profits and bonuses. Since they got money from the Fed at a nearly 0% rate, who can say how sound those new loans are, not even mentioning the old “toxic assets”?

Aren’t we on course for a second financial crisis in as many years? How long do we have to wait for real regulation?
CF Says:
July 2nd, 2009 at 1:21 pm
The volatility assumptions the Louisiana guy used were ridiculous give the duration of the warrants.
rapier Says:
July 2nd, 2009 at 1:29 pm
The whole idea is to give them as much money as possible. The Treasury and the Fed with their alphabet soup programs will do everything possible to get as little as possible back. How can anyone miss this? The entire idea is to give them money. The programs were structured as business deals to give them the aura of arms length agreements out of political necessity.

Assuming good faith on the part of Paulson or Geithner is about the silliest thing imaginable. Do yourself a favor and show a little bit of skepticism.
stevie314159 Says:
July 2nd, 2009 at 1:29 pm
I must agree with CF in comment #8.

I have been a professional options trader/market maker on an options exchange for 25 years, and the professor really doesn’t know how options are priced in the real world.
Don Williams Says:
July 2nd, 2009 at 1:39 pm
Well, sometimes there’s miscommunications.

Like, you thought the Banks were PROTESTING the US Government’s intervention into their affairs. In reality, the situation seems more like the following:
———–
“TORRINGTON, Conn. – A group of teenagers misunderstood a woman’s screams during sex and, thinking they were stopping an assault, beat a 25-year-old man in her bedroom, police said.

A 16-year-old girl who lives in the same Torrington home as the 34-year-old woman overheard her and the man on June 6 and rounded up four friends to stop what they thought was an attack, police Lt. Bruce Whiteley said Thursday.

One of the five teens beat the man with a bat and others punched him, police said. The man was treated at a hospital for injuries that were not life-threatening, and was released that night.

“Apparently he didn’t have time to explain himself,” Whiteley said.

Ref: http://news.yahoo.com/s/ap/20090702/ap_on_re_us/us_screaming_sex_arrests
Matt W Says:
July 2nd, 2009 at 1:59 pm
I haven’t got through the story Petey linked yet, but it’s kind of amazing that there’s a GE rollover ad on the page. Or maybe it’s amazing that the WaPo hasn’t let GE spike the story, for a reasonable fee.
Matt W Says:
July 2nd, 2009 at 2:05 pm
Not that it’s much of a substantive point, but it seems to me that the whole TLGP program has issued $340 billion in guarantees, and GE Capital has received a quarter of that $340 billion. So Rich is right and Petey is wrong on that point.
Petey Says:
July 2nd, 2009 at 2:34 pm
“Not that it’s much of a substantive point, but it seems to me that the whole TLGP program has issued $340 billion in guarantees, and GE Capital has received a quarter of that $340 billion. So Rich is right and Petey is wrong on that point.”

Agreed. GE is using the threat of its “news organization” to steal a bit less than $100 billion.

Still, isn’t it amazing that nobody from anywhere in the political spectrum is willing to mention it?

At the end of the day, GE alone will end up costing the public treasury more than what the entire TARP program will cost it. But GE’s management team will remain in place. GE’s stockholders will remain undiluted. And the carrot and stick their “news organization” holds over Washington means that no one will even mention $100 billion.
DTM Says:
July 2nd, 2009 at 2:50 pm
Note that Petey has also offered exactly no evidence to support his implied claim that GE Capital will default on 100% of its guaranteed loans and that the recovery will be 0%.

Isn’t it amazing that nobody from amywhere in the political spectrum is willing to mention things that Petey is just making up? It must be a conspiracy!
Poptarts Says:
July 2nd, 2009 at 3:20 pm
Isn’t it amazing that nobody from amywhere in the political spectrum is willing to mention things that Petey is just making up? It must be a conspiracy!

Either GE or MSNBC or NBC did something unrelated to this supposed “scam” to get Petey’s panties in a twist.

Why single out GE, it seems like a lot of these banks and financial institutions are getting away with a lot. Heads they win, tails the taxpayers lose.

I’m still waiting to see how the financial regulations turn out. So far they look reasonably good. IMO they should be treated like utilities or else we’ll get more of theae bubbles/panics.

And in the government’s defense the car was veering close to the edge of the cliff and people were spooked so a lot of craziness ensued like the forced marriage of BoA and Merrill Lynch.
DTM Says:
July 2nd, 2009 at 3:43 pm
Either GE or MSNBC or NBC did something unrelated to this supposed “scam” to get Petey’s panties in a twist.

GE is to Petey as the Trilateral Commission is to the John Birch Society. I think if you got a few drinks in Petey, he’d tell you how Rielle Hunter was a GE agent send to bring down John Edwards.
Senescent Says:
July 2nd, 2009 at 4:03 pm
GE is to Petey as the Trilateral Commission is to the John Birch Society. I think if you got a few drinks in Petey, he’d tell you how Rielle Hunter was a GE agent send to bring down John Edwards.

Ha! The guy does know the power of message discipline, though. Respect.
Petey Says:
July 2nd, 2009 at 7:36 pm
“Why single out GE, it seems like a lot of these banks and financial institutions are getting away with a lot. Heads they win, tails the taxpayers lose.”

Why single out GE? Read the article. Second sentence:

GE has avoided many of the restrictions facing other financial giants getting help from the government.

- GE is going to end up sucking more money out of the federal Treasury than all the other financial institutions in the nation put together.

- GE, alone among the financial institutions getting federal money, will suffer no management turnover or shareholder dilution.

- GE was able to get into the federal Treasury in the first place when they didn’t qualify for any program because of the political threat of their “news organization”.

Is any of this enough of a reason to single out GE yet?
DTM Says:
July 2nd, 2009 at 9:22 pm
GE is going to end up sucking more money out of the federal Treasury than all the other financial institutions in the nation put together.

Again, Petey has provided exactly nothing to back up this claim.

By the way, I heard from Petey that GE Capital sacrifices Christian children for their blood . . . pass it on.
Petey Says:
July 3rd, 2009 at 7:51 am
“Again, Petey has provided exactly nothing to back up this claim.”

I’ve linked to the Felix Salmon piece where he agrees with me that the GE Capital rollover will not be able to happen in 2012. That means the process of splitting GE from GE Capital will end up actually costing the Treasury almost $100b.

Most of the estimates of the Treasury’s actual final cost of TARP comes in at less than that number of what GE alone will steal. In short, the one bank no one ever mentions gets more from the public moneys than all the banks that have been relentlessly covered in the news put together.

But I’m sure that I, the WaPo, and Felix Salmon are all just psychotic conspiracy theorists. Right, DTM?

After all, if GE’s “news organization” has managed to intimidate all of the Democratic and Republican political players from complaining about their massive theft of public moneys, it must not be actually happening.
DTM Says:
July 3rd, 2009 at 2:10 pm
I’ve linked to the Felix Salmon piece where he agrees with me that the GE Capital rollover will not be able to happen in 2012.

Actually, that is completely wrong. What he actually writes is this:

It’s also abundantly clear that GE Capital is too big to fail and won’t be allowed to default — instead, the FDIC guarantees will just be rolled over somehow.

Note he doesn’t actually give a reason to think GE Capital will be in danger of defaulting. Regardless, he certainly doesn’t repeat your unfounded claim that GE Capital will default and the government will take a 100% loss on its guarantees.

But I’m sure that I, the WaPo, and Felix Salmon are all just psychotic conspiracy theorists. Right, DTM?

Show me exactly where anyone but you on that list has claimed that the FDIC is going to take a 100% loss on the GE Capital guarantees. The truth is that you are all alone in that tinfoil hat.

Matt Yglesias

TARP Warrants

22 Responses to “TARP Warrants”

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