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.