Congress: Shortsighted About Financials

Following the firestorm over the AIG (AIG) retention bonuses, Goldman Sachs (GS) now says it plans to repay its TARP money ASAP, possibly as soon as April. Given the abuse lately heaped upon TARP recipients generally, and particularly the bonus flap of last week, I can’t say I blame Goldman or anyone else. One would expect that Morgan Stanley (MS) and other recipients likely to be deemed well-capitalized after the “stress test” is complete would follow quickly, as well, for competitive reasons and as valuations normalize.

But I don’t see why the government seems so eager to get repaid so quickly. More pointedly, it is fiscally stupid.

Some numbers: the government is receiving 5% annually on its $20 billion investment in Morgan Stanley and Goldman Sachs preferred. That works out to $1 billion in dividend income per year. To fund the investment, the government pays less than 2% on duration-matched obligations. Spread income on the Goldman-Morgan investment alone, therefore, comes to $600 million. Administrative costs are de minimus, and let’s assume the associated warrants are worth nothing.

So the income to the government on its preferreds to the brokers alone is enough to fund the notorious AIG bonuses nearly four times over. Yet the government’s outrage over those bonuses is a key reason Goldman wants to repay the investment early. Does something not add up here?

We already have proof that this whole bonus affair will end up with a negative NPV to the government. In the case of Goldman by itself, and putting aside the other Big Nine recipients, the company had said earlier it planned to repay the TARP investment by the end of 2009, to avoid paying a warrant kicker at the end of this year. Should Goldman prepay eight months earlier as a result of the AIG Bonus Rage, the government will forgo $200 million in net interest income. This already exceeds the AIG payout, even before Attorney General Cuomo got his jackboots on to force repayment. And as for how evil and unreasonable those bonuses really are, be sure to read the op-ed in today’s New York Times by a recently resigned AIG-FP bonus recipient.

Good work, Congress! Way to put the country first!

Comments

[Vobogeck:]

Spot on!

Mar 25 02:17 PM

[Robert Perrego:]

Question: When has the Congress, a collection of self-serving lawyers, ever been far sighted about anything? (except the next election)

Mar 25 02:23 PM

[Think!:]

The nine most terrifying words in the English language are:
"I'm from the government and I'm here to help."

Ronald Reagan - 40th president of US (1911 - 2004)

Mar 25 02:26 PM

[twitee:]

Corruption/Collusion created by Mr. Thief Paulson to benefit Goldman and Morgan mafia Stanley….hay it’s only free money (taxpayer)….

Mar 25 02:27 PM

[DudeKabob:]

Like a lot of people appear to be doing, you're missing the point. When it comes to the AIG bonus, it's not about the money. Those who do bad shouldn't be rewarded. The money itself is ancillary to the justification for the outrage. Using your logic, attempted murder wouldn't be a crime because the intended victim is still alive.

Mar 25 02:39 PM

[Mbuna:]

An important rule with Congress-
When it comes to money and government politics always comes first.
When it comes to money and the member of Congress money always comes first.

Mar 25 02:45 PM

[Kott16:]

Cry me a river! Wall Street and NY metro area execs have managed to swindle and bleed the entire world with their greed. If they do not like the public furor over their behavior too bad. They can just quit. Their so-called expertise is replaceable since no one can truly call themselves indispensable. People need to think the way the military does when it comes to personnel. In order to win a war you have to accept that there will be people lost. The ability to win hinges on replacing those loses with troops who can step up and continue the fight. If the cry-baby execs think they are so valuable then find another job. There will always be plenty of intelligent and very able people to take their place, especially in the present economy.

Mar 25 02:46 PM

[market ace:]

When you talk about being short sighted and missing the point, you are the ultimate example. The real point is that these banks cried wolf and had Paulson play congress and the taxpayers for suckers .They were just trying to further line the pockets of their all too wealthy executives at the expense of the taxpayers. It is obvious these firms still care nothing about putting country first and are more concerned about their bonuses than anything else, so much so that they would repay money they tried so hard to steal from the taxpayers to protect them.

Since they also got unjustified free money from AIG at the expense of the taxpayers, why would they want to share any gains with the taxpayers on the preferred stock deal. Hopefully these worthless greed monsters do pay us back and expose the fact they never needed the bail out in the first place and were just bent on more greed and theft, but amazingly someone may finally called their bluff just by cutting off their outrageous bonuses.

Mar 25 02:56 PM

[Realsmartguy:]

My comment really concerns AIG but I want to tell as many people as possible something they can be genuinely outraged by and that is the Congress and administration efforts to disparage AIG at every opportunity. Does it make sense to invest $165b in a company and then do evrything possible to destroy the franchise value and even the company itself ? Why do we let such idiots run our country ?

Mar 25 03:00 PM

[1worldcurrency:]

Thanks GS for paying back TARP with AIG bailout money.

For Citi and JPM to say they're profitable when the real economy is in a downward spiral means only one thing:

The banks are looting the Treasury.

Mar 25 03:08 PM

[JD Plus:]

I think it's clear that Congress has no intention of letting banks or insurers like AIG survive. Congress is actively ruining all stockholders, bondholders, and even us taxpayers by assuring there is no confidence in our banks.

I have yet to hear any single congressional leader say "our companies are important to the world, and we will help them survive".

Just wait until the beginning of April when people receive their retirement fund statements.

Mar 25 03:38 PM

[Mark Bern:]

While I agree with other commentors that banks receiving bailout money should not be paying executive bonuses, I also agree with the concept that Congress is not focused on what is important to the country.

Members of Congress are interested only in public opinion and doing what might improve their chances for reelection. The continue to avoid the difficult questions that concern future generations such as dealing with Social Security and Medicare, Immigration, and the Alternative Minimum Tax. They keep putting temporary, band aid patches on things, hoping that they can make it to retirement and let someone else deal with the problems.

The Stimulus Bill was just another good example: less than 30 percent of the money is scheduled to be spent in 2009, when it is really needed and way too much of the money is earmarked for either small pork-barrel projects that will help garner local votes or for short-term infrastructure projects that will not create the permanent jobs our economy needs.

This country desparately needs term limits so elected officials can spend more time trying to do what needs to be done for the good of our nation instead of trying to get reelected. Representatives in Congress spend their first year legislating and must spend their second year running for reelection. That is not good use of taxpayer money, either.

Mar 25 04:09 PM

[Robert Perrego:]

The US Government is the dumbest investor in history. First we buy a large percentage of ownership of a country then we drive all the talent away. Turning the NY Yankees into the Kansas City Royals. There has to be a better way because our ownership in these company's (i.e. the stock) is never going to pay us back as the interference is gutting the talent and driving them all to foreign banks and whomever pays TARP back first. People like to get paid - human nature.


On Mar 25 03:00 PM Realsmartguy wrote:

> My comment really concerns AIG but I want to tell as many people
> as possible something they can be genuinely outraged by and that
> is the Congress and administration efforts to disparage AIG at every
> opportunity. Does it make sense to invest $165b in a company and
> then do evrything possible to destroy the franchise value and even
> the company itself ? Why do we let such idiots run our country ?

Mar 25 04:48 PM

[Robert Perrego:]

We need to have a complete change - EVERY politician fired and a whole new set of people with new ideas and no favors owed, no dirt held on each other and no buddy network underhanded crap that permeates this nest of snakes pulling us all down.

Dodd, Rangel, Reid and Pelosi should be the first to go.


On Mar 25 04:09 PM Husker Mark wrote:

> While I agree with other commentors that banks receiving bailout
> money should not be paying executive bonuses, I also agree with the
> concept that Congress is not focused on what is important to the
> country.
>
> Members of Congress are interested only in public opinion and doing
> what might improve their chances for reelection. The continue to
> avoid the difficult questions that concern future generations such
> as dealing with Social Security and Medicare, Immigration, and the
> Alternative Minimum Tax. They keep putting temporary, band aid patches
> on things, hoping that they can make it to retirement and let someone
> else deal with the problems.
>
> The Stimulus Bill was just another good example: less than 30 percent
> of the money is scheduled to be spent in 2009, when it is really
> needed and way too much of the money is earmarked for either small
> pork-barrel projects that will help garner local votes or for short-term
> infrastructure projects that will not create the permanent jobs our
> economy needs.
>
> This country desparately needs term limits so elected officials can
> spend more time trying to do what needs to be done for the good of
> our nation instead of trying to get reelected. Representatives in
> Congress spend their first year legislating and must spend their
> second year running for reelection. That is not good use of taxpayer
> money, either.

Mar 25 04:50 PM