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Nickelless
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 Posted - 12/05/2008 : 22:14:37
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By FRANK BASS
Associated Press
The government mounted a vigorous defense Friday of its massive bank bailout, responding to an Associated Press analysis showing that stock in the program intended to eventually earn taxpayers a profit has lost about one-third of its value - nearly $9 billion - in barely one month.
Shares in virtually every bank that received federal money have remained below the prices the government negotiated.
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"We're not day traders, and we're not looking for a return tomorrow," said Neel Kashkari, the director of Treasury's Office of Financial Stability, which oversees the $700 billion financial rescue fund. "Over time, we believe the taxpayers will be protected and have a return on their investment."
Likewise, President Bush said there's no quick fix for the battered economy.
"It's going to take time for all the actions we've taken to have their full impact," Bush said in a statement about a dismal report that official unemployment has climbed to 6.7 percent. "But I am confident that the steps we're taking will help fix the problems in our economy and return it to strength."
Kashkari, speaking in Washington to a Mortgage Bankers Association conference, insisted that the White House has invested tax dollars in "very high-quality institutions of all sizes." Most of the Treasury Department's investments since late October have been in preferred bank stocks, more than $180 billion worth, with investments in giants like Citigroup (nyse: C - news - people ) and JPMorgan Chase (nyse: JPM - news - people ), and many small community banks. But the government also negotiated options to buy up to 1.2 billion shares of common bank stock that was valued at $27 billion to serve as a potential financial bonanza for taxpayers.
Now, however, the value of that common stock is worth about $18 billion. If the government exercised all its warrants to purchase the stock today, it would lose money on 50 of its 53 agreements. Taxpayers would be out $8.6 billion.
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The government can exercise its options to buy the common stock anytime over the next decade, but the options were "immediately exercisable," according to banks' securities filings.
"The markets are saying this plan isn't going to work for the banks," said Ross Levine, Tisch professor of economics at Brown University. "They're asking where this plan is going."
Potential losses among these common stocks include nearly $3 billion for the administration's biggest deal, a $45 billion injection into Citigroup Inc. The government gave the New York-based giant $25 billion on Oct. 28. Besides preferred stock worth $1,000 per share, the deal included warrants to pick up 210 million shares of common stock at $17.85. In late November, the White House put together a plan to give Citibank another $20 billion. The deal also included warrants to pick up 254 million shares, with the price set at $10.61.
Citigroup stock has since fallen below $8.
The government would only earn a profit if the share price eventually exceeds the negotiated warrant price. Under the bailout plan, the common stock warrants - effectively treated as stock options for non-employees - would allow taxpayers to share the wealth as banks recover.
"We're not exercising the warrants today," said Treasury spokeswoman Brookly McLaughlin. "We have 10 years to exercise the warrants, so it's more accurate to look at what the market believes are the 10-year prospects for these banks."
The Treasury Department projects that the $180 billion in preferred stock will generate roughly $9 billion per year during the first five years and $16.2 billion per year afterward, assuming the banks remain solvent.
The preferred stock has a fixed value of $1,000 per share, and a 5 percent annual dividend for the first five years of the investment.
Treasury Secretary Henry M. Paulson Jr. describes the cash infusion as "an investment, not an expenditure."
So far, however, only three of the 53 banks can be considered a good investment.
The AP's analysis found that only HF Financial Corp. (nasdaq: HFFC - news - people ) of Sioux Falls, S.D., and First Niagara Financial Group (nasdaq: FNFG - news - people ) of Lockport, N.Y., would make money for taxpayers if the common stock options were exercised today. According to records filed with the Securities and Exchange Commission, both are small banks, far removed from the wheeling and dealing of federally insured giants that ravaged the global economy by making bad bets on subprime mortgages.
The South Dakota bank, for example, has a market value of $54 million, a fraction of the size of JPMorgan Chase, the nation's largest. The Treasury Department gave $25 million to HF Financial on Nov. 21 in exchange for 25,000 shares of preferred stock and warrants that allow taxpayers to buy 302,000 shares at $12.40 within the next decade. For now, it's a good deal; the bank's stock is trading around $15. If the government exercised its option to buy HF stock today, taxpayers would collect $223,000.
More companies would be in the black, but the government used a 20-day stock price average to set the warrant price, meaning it willingly negotiated to pay roughly 25 percent more than the stock was worth on the day it signed the deals on behalf of taxpayers.
Nara Bancorp (nasdaq: NARA - news - people ), created in 1989 to serve Southern California's growing Korean-American community, borrowed $67 million from taxpayers on Nov. 21, when its stock was trading at $7.50 per share. But the government negotiated the option to buy 1 million shares of Nara common stock at $9.64, higher than its stock is currently trading.
"It's a complete mistake to think this is a good investment for us," said Paola Sapienza, a finance associate professor at Northwestern University's Kellogg (nyse: K - news - people ) School of Management, who spearheaded a September protest of the bailout by more than 200 of the nation's leading economists. "It's a gamble. It's like going to Las Vegas."
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Some US bank bailout holdings down $9B
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