Let's face it: The government has put a heck of a lot of taxpayer money at risk through its various bailouts.
But we the taxpayers -- at least a good portion of us -- were willing
to go along with it. On the one hand, we thought it would be good to
avoid a complete Chernobyl of our financial system, and on the other,
there was some talk about the potential for taxpayers to profit if the
Treasury landed the triple Lutz and banks recovered.
A chunk of that profit potential came from the fact that with every
loan made under TARP, the Treasury received warrants -- which are
similar to stock options -- to purchase stock in the recipient bank
worth 15% of the total loan amount.
We're talking real money here
To put some numbers to this, for the $10 billion TARP loan that Goldman Sachs (NYSE: GS) received, it issued 10-year warrants to purchase 12.2 million shares of its stock at a price of $122.90.
Now, the government could exercise those warrants today and score a
profit upwards of $150 million. However, one of the big advantages of
these warrants is their 10-year life, meaning that the Treasury can
(potentially) watch Goldman's stock climb for the next decade before
cashing in its warrants.
Fortunately, through the Nobel Prize winning work of Fischer Black
and Myron Scholes, we can put a value on those warrants today. Taking
that 10-year life, along with some other factors, we can calculate that
today, those warrants could be worth (drum roll, please!) nearly $1
There's still a long way to go before taxpayers are made whole, but
hey, that's not a bad start. Unfortunately, it's beginning to look as
though taxpayers aren't going to see nearly the return on those
warrants that is due to them.
Giving banks a break
The Treasury has set a hard line on making sure major banks such as JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) return their TARP funds, but there have already been a handful of smaller banks, such as TCF Financial and Old National Bancorp, that have paid back their TARP loans.
In fact, not only has Old National Bancorp returned the TARP funds,
but it was also the first bank to also repurchase the warrants it
issued to the government. Old National paid $1.2 million to reclaim the
warrants, but calculations done by the folks at Bloomberg suggest that
the warrants should have been valued at closer to $6 million. I can't
help giving kudos to Old National's management team for working out
such a plum deal, but as a taxpayer, I'd like to give Tim Geithner a
wedgie for getting lowballed like that.
Now, sure, the $5 million or so that the Treasury failed to claim
from Old National may be a drop in the bucket. However, when we start
looking at all of the banks that may soon be lining up to pay back TARP
funds -- not to mention Citigroup (NYSE: C) and Bank of America (NYSE: BAC), which we hope will pay us back someday
-- these shortfalls could become serious. For the top 20 TARP
recipients, we could be talking about a $10 billion difference if they
got deals similar to that of Old National.
Heads you win, tails you win
It's not the first time that the Treasury has taken a raw deal when it comes to TARP. As my fellow Fool Morgan Housel has noted,
the Treasury's conversion of preferred stock to common stock at
Citigroup left the Treasury with an investment that is a long, long way
away from being whole.
So, apparently, the way the government "help" is going to work is
that taxpayers need to be willing to see money poured into black holes
such as AIG (NYSE: AIG), Fannie Mae, and General Motors (NYSE: GM),
while accepting a haircut on the returns where the loans have actually
helped get companies back on their feet. Seems like a set of rules that
Bernie Madoff would be proud of.
But if you're on the right side ...
hate to say it, but sometimes that old saw "If you can't beat 'em, join
'em" isn't just a tired cliche. Bank shares have had a crazy run
over the past couple of months, and they could be in need of a
cooling-off period. But with the all-too-obvious signs that the
government is going to give the banks every break possible -- even if
it's to the detriment of taxpayers -- it may be time to get more
serious about some of the stronger banking names out there so we can
actually benefit from Uncle Sam's largesse.
I think that group of stronger banks includes JPMorgan Chase, Wells
Fargo, and US Bancorp, but you can chime in yourself and let the
130,000 members of the Motley Fool's CAPS community know which banks
you think have an edge by heading over to CAPS.
Copyright © 2009 Universal Press Syndicate.