A review of investor presentations and conference calls by executives of some two dozen banks around the country found that few cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future.
The report concluded that the Treasury's top priority seemed to be to "stabilize financial markets" by simply giving healthy banks more money and letting them decide how best to use it.
During his presentation, John R. Buran, the chief executive of Flushing Financial in New York, said the government money was a way to up the "ante for acquisitions" of other companies.
It is increasingly clear that the sole purpose of TARP is to increase the stock price of financial firms and thereby shield management, partners, directors and equity holders from any further declines in the value of their holdings. Case in point: the additional $20B that Hank Paulson just handed to Bank of America (on top of the $25B they were given already). They claimed that they needed the money to help pay for unexpected losses at Merrill Lynch, which they acquired last September. BofA paid $29/share for Merrill, which represented a 70% premium over the stock price at the time. Recall that Merrill was on the brink of failure that weekend and the stock was plummeting. Why would anyone pay a 70% premium when the acquisition target was begging for a lifeline from the Feds? Instead of bailing out Merrill, Paulson asked a seemingly healthy bank, BofA, if they could buy them out, and they agreed. Naturally, they agreed on a price only after confirming that Uncle Hank would fund $25B of the deal, no strings attached. The net effect: Merrill shareholders, including their entire management, were given a 70% (or more) boost to their stock price and net wealth, courtesy of the American taxpayer.
Now, after three months of looking at Merrill's books, BofA discovered last week that, lo and behold, Merrill was worth nowhere near $29/share. Probably something closer to $17 or $18/share. Hmm, $17 or $18/share...why does that number sound familiar? Oh yeah, that's what ML was trading for when BofA dramatically overpaid for it (the actual closing price on the Friday before the weekend deal was $17.05). That's called the "market price" in economics. The difference from the market price and what BofA paid for it is worth roughly $20B in total market cap. Since BofA "lost" $20B in market cap on the deal, Uncle Hank graciously offered BofA a "makegood" with another no-strings-attached $20B. This time, the $20B goes toward supporting BofA stockholders. (many of whom are not even Americans, by the way. In the case of the Citibank bailout, worth some $300B, the largest shareholder is Prince Al Waleed of Saudi Arabia.) No capitalistic accountability for these boys, no way...that's just not their style. If they make a killing on the market, the government has no right to tax them on their hard-earned money, they've claimed consistently, but if they make a bad deal, then the country must compensate them for it in order to "restore confidence in the American economy." In fact, I suspect that the BofA boys knew the ML acquisition was a bad deal...after all, it was patently absurd to pay such a huge premium for a failing bank. Any fool could have seen that (and did). Is it not plausible that Uncle Hank promised them some taxpayer cash on the back end once the books were closed? Seems at least suspicious, no?
So, you see, everybody wins: Merrill shareholders, BofA shareholders, "the economy"...oh wait, I forgot about you and me. We lose...we lose big. Each American household contributed about $400 to this fun little deal. Think about that: there are janitors working in the Merrill and BofA buildings that will contribute a couple hundred bucks each to make sure that the megamillionaires, whose trash they are emptying, can remain acceptably rich.
I am still utterly perplexed at why our Congressional leaders felt that the bankruptcy courts were not an adequate tool to sort this mess out. The Feds could have still pumped money in to support bad mortgages and the like. The equity holders, quite rightly, are the ones that would have been left holding the bag, instead of you and me. That's the way the system is supposed to work: those who take risks and stand to benefit hugely from them, also stand to lose as well. Instead, taxpayers backstopped certain stockholder losses and there has been virtually no positive impact on lending or economic activity.
But taxpayers at least ended up with equity in the banks, you say. If these banks survive, we'll get all of our money back when the government eventually sells the stock, right? Um, no. According to a fine article by Edmund Andrews at NYT, in an effort to lessen the appearance of nationalizing US banks, the Fed and Treasury have sought to minimize the amount of equity they received for the cash invested. This kind of only-in-Washington, through-the-looking-glass logic has resulted in yet another screaming bargain for the officers and shareholders of America's banks. Can you imagine the negotiations that took place between Mr. Paulson and these bank CEOs?
Paulson: "Now, I'm going to invest billions in your bank with few conditions and no disclosure of how you use the money in exchange for preferred shares, but there's a catch: I insist that you don't give me too many shares, or else people will start calling the US government socialistic. As good-standing Republicans, we can't stand for that. Do we have a deal?"CEO: "Yes."
These negotiations must have lasted about 15 minutes. No wonder over 200 banks took the deal in only a matter of weeks. To give you an example of just how egregious these "investments" are, I cite the BofA deal again. In exchange for investing $45B in capital, Mr. and Mrs. American Taxpayer now own roughly 6% of BofA. That is an implied market cap for BofA of $750B. And the latest market value of BofA shares? $36B, or roughly 1/21 of what we, the taxpayers, paid. Boy, these bankers are going to be laughing their faces off telling these stories over martinis at the Maidstone Club in East Hampton this summer. I wonder if they'll put the drinks on Hank's tab?
I've said it before and I'll say it again: this $700B TARP program is going to go down as the greatest financial rape of the US taxpayer in our nation's history. It is absolutely infuriating, and the worst part is, unlike real rape, it is perfectly legal.
