More on the Misalignment of the U.S. Treasury and Taxpayer Interests 26 comments
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In an academic paper analyzing the value warrants that Old National Bancorp (ONB) paid to the U.S. Treasury in order to become the first bank to buy back its Capital Purchase Program obligations, Assistant Professor of Finance Linus Wilson at the U of L in Lafayette, has come to the conclusion that Geithner et al accepted a discount that may have been as much as 82% to the fair value. Old National paid back $1.2 million for its CPP warrants that in Wilson's view were valued at between $1.5 million and $6.9 million. Wilson says "This low negotiated price from the perspective of taxpayers indicates that the UST could probably get a better price marketing the CPP warrants to third party investors." As Wilson is an academic, and he is unable to use more blunt words, we will paraphrase: Geithner's scams continue, with virtually free bailouts of banks at the expense of the U.S. Taxpayer, leading to an increasingly more worthless dollar.
While these days, when $9 trillion misplaced here or there by the Federal Reserve is taken as almost a given, the amounts in question are nominal, it merely underlines the continuing trend of short shrifting taxpayers at the cost of established banking interests. One can be sure that what is valid for ONB, is more than valid for Goldman Sachs (GS), Citi (C) and BofA (BAC).
Wilson summarizes it best:
U.S. taxpayers do not appear to be receiving fair market value for the risky securities that they purchased. Policy makers should be troubled because Wilson estimates that the CPP warrants could be worth between $5 billion and $24 billion based on May 1, 2009 closing prices. It could mean billions of dollars in lost revenue if the U.S. Treasury continually negotiates deals at the low-end of or below fair market value. Further, if the U.S. Treasury agress to sell the CPP warrants below fair market value, then the estimates of the subsidies involved in the CPP investments by the Congressional Budget Office (2009) and the Congressional Oversight Panel (2009) may be significantly underestimated.
And here comes the kicker:
Many readers will not be surprised by this results. U.S. Treasury officials' incentives are not as well aligned with the interests of taxpayers as bank managers' incentives are aligned with the interests of their shareholders. For this reason, we should probably continue to expect the U.S. Treasury to negotiate a price that is below or on the low-end of the fair market value of the CPP warrants. Without a major change in the structure of compensation in the federal bureaucracy, which seems nearly impossible, the best hope for taxpayers is to sell the warrants to third party investors. Third party investors competing against each other will get the best price for the U.S. taxpayer. The U.S. Treasury is comfortable marketing the U.S. national debt to investors all over the world. Whenever possible, it should seriously consider doing the same with the CPP warrants even if this means hiring an independent brokerage firm, asset manager, or investment bank to market these securities.
Wilson hits the nail on the head: the UST's interests are not only not aligned with those of the taxpayers, but based on recent M1-M3 euphoria, as well as shady practices such as this one, are in fact diametrically misaligned with what is best for the nation (and implicitly with what is best for Wall Street). This constant abuse of taxpayer interests has to stop.
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Where the beneficiary of an asset is everybody then nobody has an interest in protecting it.
i want no king. i only want to rule myself.
buy some gold and silver. take possession. or, just trust in the benevolence of statists and banksters.
Duh, okay, Tyler. Now what?
Treasury Offers Incentives for Mortgage Modifications (Update2)
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By Dawn Kopecki
May 14 (Bloomberg) -- The U.S. Treasury, seeking to strengthen government anti-foreclosure programs, will provide new incentives for lenders to modify mortgages where home-price declines are most severe or to pursue so-called short sales.
“These are critical steps in stemming the foreclosure crisis and stabilizing the housing market, both of which are critical to our economic recovery,” Treasury Secretary Timothy Geithner said at an event in Washington to announce changes to the Making Home Affordable program.
The new compensation for lenders is designed to help more borrowers whose home values are below what is owed on the mortgage obtain loan modifications or more easily sell off the property. About 20.4 million of the U.S.’s 93 million houses, condos and co-ops had loan balances higher than the properties were worth as of March 31, according to data service Zillow.com.
“We’re not going to fix all problems and this won’t help all homeowners,” Geithner said, adding that the effect of the program will still be “powerful.”
The Making Home Affordable program, announced in February, seeks to cut monthly mortgage payments for borrowers by reducing interest rates, lengthening repayment and forgiving principal in some cases. The program, part of the biggest federal foray into real estate since the Great Depression, seeks to curb a jump in foreclosures that, along with a drop in consumer credit, is dragging down the economy.
Short Sales
Geithner and Housing and Urban Development Secretary Shaun Donovan spoke at the headquarters of the National Community Reinvestment Coalition, the nation’s largest affordable-housing nonprofit advocacy group.
Donovan said earlier this week that lenders participating in the program have taken “hundreds of thousands” of applications and have already modified “tens of thousands” of loans to make them more affordable. Donovan said in a May 12 interview on Bloomberg Television that JPMorgan Chase & Co. has modified at least 15,000 loans under the president’s plan.
Borrowers must make three months of timely payments before they qualify for federal aid, which will keep their interest rate as low as 2 percent for five years. When a modification isn’t feasible, the Treasury said it’s encouraging lenders to approve a “quick private sale or voluntary transfer.” A short sale is when a bank agrees to let a delinquent homeowner sell the property for less than the outstanding mortgage balance.
Home prices in the U.S. dropped the most on record in the first quarter from a year earlier, led by California and Florida, as banks sold foreclosed properties. The median price fell 14 percent to $169,000, the National Association of Realtors said May 12.
U.S. banks held $26.6 billion of repossessed real estate at the end of 2008, more than double than a year earlier, according to the Federal Deposit Insurance Corp. in Washington. The banking industry lost $26.2 billion in the fourth quarter, the largest loss in FDIC records.
To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net.
Last Updated: May 14, 2009 11:57 EDT
When lenders foreclose they loose huge amounts of money. Now we are giving them more money to do what is in their own best interest. does the con game never end
The senators and reps from mid west appear to be more receptive. I'd imagine because the financial industry isn't a big donor to them. But, who cares what the motives are at this point in time. I only care about results and therefore do not give a damn about party lines as long as they get things done.
Follow the logic here. This program is needed because these "toxic assets" will bankrupt the banks if left on their balance sheets. However, the SAME banks who need to be rescued by this scam have ALREADY ANNOUNCED they plan to be first in line to BUY these assets "because they are such terrific values."
What can turn "toxic" assets which would bankrupt banks into "terrific values"? The ENORMOUS taxpayer subsidies which will be built into every one of these purchases.
It's one thing to "bail out" the banks, it's another to make them even richer (at our expense). That kinda pisses me off.
And, oh yeah, the Summers puppet, the Timster- what a sorry bunch.
I suspect that Tim G. invented this scheme so that he could quietly reflate banks with taxpayer dollars.
Am I the only llaisez-faire capitalist left who is furious about this?
My paper can be downloaded at ssrn.com/abstract=1404069
There has been no investigation as to why Lehman was allowed to fail.
The Fed has expanded its balance sheet by $1 Trillion since September, and no one at the government cares about their newfound liabilities, potential liabilities, current losses nor future losses. Why? If you could monetize your own debt, would you really bother worrying about your personal budget.
The Fed has totaled $9 Trillion, or 30k per every person in this country, in off balance sheet transactions. The Fed's Inspector General does not have a clue about these transactions. That is ludicrous.
Watch the video, then read what is posted on the Fed's website regarding their IG's role below. Then ask yourself how confident are you in our government to ensure accountiblity vis-a-vis these off balance sheet transactions and balance sheet expansions.
"The Office of Inspector General (OIG) conducts independent and objective audits, inspections, evaluations, investigations, and other reviews related to programs and operations of the Board of Governors of the Federal Reserve System (Board). OIG efforts promote integrity, economy, efficiency, and effectiveness; help prevent and detect fraud, waste, and abuse; and strengthen accountability to the Congress and the public. The OIG’s work assists the Board in managing risk and in achieving its overall mission to foster the stability, integrity, and efficiency of the nation’s monetary, financial, and payment systems so as to promote optimal macroeconomic performance. "- federalreserve.org
Do any of you understand the rules of this TARP game have changed dramtically for the banks?
At inception Fall 2008, banks we're being told by their regulators that it was their patriotic duty, as strong banks (since weak banks were not supposed to be able to get the TARP capital), to take the TARP capital so that the banking SYSTEM would be percieved as strong. AIG, by the way, is NOT a bank.
Since then, politicians got involved and gave TARP capital to all manner of weak financial institutions, not to mention the auto companies. As a result, what was initially a move done for the good of the country has become a black eye, and the cost of the TARP capital has gone up dramatically due to political exploitation. The strong banks that took the TARP never would have done so if they'd have known, on the front end, the cost would be what it has become today.
Consequently, since the U.S. Government changed the TARP capital rules, strong banks should be able to exit without paying anything for the warrants. Interestingly, ONB's TARP capital was on its books for a little under three months. If you annualize what they have now paid for the warrants, it effectively increases the U.S. Government's return on the capital to about 9.00% from 5.00% on the TARP capital itself - not bad for a money in place for less than 3 months!
The Justice Department on Monday accused Wyeth, one of the nation's biggest drugmakers, of cheating Medicaid programs out of hundreds of millions of dollars by overcharging for a stomach acid drug.
On May 18 08:47 AM MarkitWacha wrote:
> This is what happens with a financially illiterate nation that votes.
>
>
> I suspect that Tim G. invented this scheme so that he could quietly
> reflate banks with taxpayer dollars.
>
> Am I the only llaisez-faire capitalist left who is furious about
> this?
On May 17 09:51 PM dukeow wrote:
> No blame for the preceeding years of the former president's money
> managers, debt controllers and federal reserve bosses?
>
>
>
>
>