Bankruptcy

Bailout Results

By J. Michael McBride

The bailout which at first was to be used to buy up toxic paper but then morphed into stock purchases has resulted in a net loss for taxpayers (if the options were exercised today) in a net loss of 9 billion dollars, according to a report prepared by the Associated Press.

“The Treasury Department said it did not expect these common stock options to be profitable immediately and negotiated them so taxpayers could share in the wealth if the bank stocks recover.

Now, however, the value of that common stock is worth less than $18 billion. If the government exercised all its warrants to purchase the stock today, it would lose money on 51 of its 53 agreements. Taxpayers would be out $9.1 billion.

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 more than $3 billion for the administration's biggest deal, a $45 billion injection into Citigroup Inc. http://research.scottrade.com/public/stocks/snapshot/snapshot.asp?id=1&symbol=C ) The government gave the New York-based giant $25 billion on Oct. 28. In addition to 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 main point here is not that the value of the taxpayers’ investment would reflect a loss if it were sold today, but more that the injection appears not to have worked, the stock prices are still in freefall.

Michael

Full post as published by Texas Lawyer Blog on December 08, 2008 (boomark / email).