Taxpayers Take Early Hit In Bailout Gamble

Bank Shares Bought Up By U.S. Have Lost $9 Billion In Last Month

(CBS/AP)  Stock intended to eventually earn taxpayers a profit as part of the Bush administration's massive bank bailout has lost a third of its value - about $9 billion - in barely one month, according to an Associated Press analysis. Shares in virtually every bank that received federal money have remained below the prices the government negotiated.

Most of the Treasury Department's investments since late October have been in preferred bank stocks, more than $180 billion worth, with investments in giants like Citigroup and JPMorgan Chase, and many small community banks. But the government also negotiated options to buy up to 1.2 billion shares of common bank stock that was valued at $27 billion.

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. 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 government would only earn a profit if the share price eventually exceeds the negotiated warrant price. Under the bailout plan, the common stock warrants - effectively treated as stock options for non-employees - would allow taxpayers to share the wealth as banks recover.

"We're not exercising the warrants today," Treasury spokeswoman Brookly McLaughlin said. "We have 10 years to exercise the warrants, so it's more accurate to look at what the market believes are the 10-year prospects for these banks."

The Treasury Department projects that the $180 billion in preferred stock will generate roughly $9 billion per year during the first five years and $16.2 billion per year afterward, assuming the banks remain solvent.

The preferred stock has a fixed value of $1,000 per share, and a 5 percent annual dividend for the first five years of the investment.

Meanwhile, as banks continue to struggle despite the bailout, Congress was weighing a separate financial rescue for the auto industry. The Detroit Three have asked lawmakers for $34 billion, but that number could may soar to up to $125 billion, reports CBS News investigative correspondent Sharyl Attkisson.

So far, the automakers' request has been met with skepticism on Capitol Hill.

Treasury Secretary Henry M. Paulson Jr. describes the cash infusion into the financial industry as "an investment, not an expenditure."

So far, however, only two of the 53 banks can be considered a good investment.

The AP's analysis found that only HF Financial Corp. of Sioux Falls, S.D., and First Niagara Financial Group of Lockport, N.Y., would make money for taxpayers if the common stock options were exercised today. According to records filed with the Securities and Exchange Commission, both are small banks, far removed from the wheeling and dealing of federally insured giants that ravaged the global economy by making bad bets on subprime mortgages.

The South Dakota bank, for example, has a market value of $54 million, a fraction of the size of JPMorgan Chase, the nation's largest. The Treasury Department gave $25 million to HF Financial on Nov. 21 in exchange for 25,000 shares of preferred stock and warrants that allow taxpayers to buy 302,000 shares at $12.40 within the next decade. For now, it's a good deal; the bank's stock is trading around $13. If the government exercised its option to buy HF stock today, taxpayers would collect $63,500.

More companies would be in the black, but the government used a 20-day stock price average to set the warrant price, meaning it willingly negotiated to pay roughly 25 percent more than the stock was worth on the day it signed the deals on behalf of taxpayers.

Nara Bancorp, created in 1989 to serve Southern California's growing Korean-American community, borrowed $67 million from taxpayers on Nov. 21, when its stock was trading at $7.50 per share. But the government negotiated the option to buy 1 million shares of Nara common stock at $9.64, higher than its stock is currently trading.

"It's a complete mistake to think this is a good investment for us," said Paola Sapienza, a finance associate professor at Northwestern University's Kellogg School of Management, who spearheaded a September protest of the bailout by more than 200 of the nation's leading economists. "It's a gamble. It's like going to Las Vegas."

[wardoglrs]

Should of listened to Dr Paul but you all turned your back on the one guy that could still turn thing''s around

[airboatboy1]

Did anyone really think anything diferent would happen?

[clovisbuford]

To stay on topic ,however , this article just shows how in the final days of the Bush admin . how incompetent they are . remember at first paulsen insisted on a blank check with no oversight at allk and freedom for any kind of criminal prosecution, interesting conditions those are .Bush and co are AWOL right now , Obama cannot constitutionally do anything till Jan.20 never mind the fact he does have to put a team together ,no matter how time constrained he is . The Bush admin needs to provide competent leadership even if its only in their last two months out 0f 96.

[clovisbuford]

What freedoms were trampled on? You are still free to spout your ignorance on this site. What privacy has been violated? I wnat to see a case where the court decided that someones rights have been violated as a result of actions by the republicans. I want real events not conjecture or hypothetical it could happen arguements. can you put your money where your big mouth is?
Posted by redbds at 01:54 PM : Dec 05, 2008 I would suggest you got to the James Comey testimony on you tube before congress,on the UN warranted surveillance of americans , turned down by the justice dept of which comey was acting head of that time . look at how 2 weeks before the 2004 elections ,you almost had the resignatiuon of the FBI the AG''s office etc. over what they consuidered illegal and unconstitutional spying on americans . You should also check out the fine articles on washington post called the angler , and on PBS online the series on *** cheney.

[clovisbuford]

What freedoms were trampled on? You are still free to spout your ignorance on this site. What privacy has been violated? I wnat to see a case where the court decided that someones rights have been violated as a result of actions by the republicans. I want real events not conjecture or hypothetical it could happen arguements. can you put your money where your big mouth is?
Posted by redbds at 01:54 PM : Dec 05, 2008U.S. court overturns Pentagon''s case against Guantanamo detainee
By William Glaberson Published: July 1, 200
In the first case to review the U.S. government''s secret evidence for holding a detainee at Guantanamo Bay, Cuba, a U.S. appeals court found that accusations against a Chinese man held for more than six years had been based on bare and unverifiable claims.
With some derision for the arguments of the administration of President George W. Bush, a three-judge panel said the government had contended that its accusations against a detainee should be accepted as true because they had been repeated in at least three secret documents.
The court compared that with the absurd declaration of a character in the Lewis Carroll poem "The Hunting of the Snark": "I have said it thrice: What I tell you three times is true."
http://www.iht.com/articles/2008/07/01/america/gitmo.php

[noloyalisti]

So we are in a mess. Time to seize the assets of the robber barons. Also nationalize the oil companies like in Venezuela, France and Canada. We already nationalized the banks and next the auto industry. Why should We the People not take over a profitable industry?

[jt_lancer]

Actually, BOTH parties are responsible for this financial debacle, as well as various government agencies.

The Federal Reserve held interest rates artificially low for over a year in 2002-2003, thus encouraging risky lending and borrowing and speculation in housing.

Under the Bush admin, government printed money at unprecedented levels, leading to excessive inflation and artificial increase in home values, making homeowners appear to be wealthier than they were.

Lax lending rules by Fannie and Freddie (rules which were supported by Dem House leaders to help the ''less fortunate'') encouraged low income families to borrow beyond their means and buy homes with little or no money down and interest only rates that they could never be able to support.

The fact is that the financial crisis was created by the government and encouraged by both parties.

Government cannot be the ''solution'' to this crisis when it created the problem in the first place.

[redbds]

Like republiCONS still blame Clinton for all this bad stuff going on.
The difference is...Bush IS RESPONSIBLE for this mess. And will be responsible 10 years from now when we might finally be able to get out of this mess, assuming we can keep the republiCONS from re-gaining power.

You, like so many before you, are a true republiCON idiot.

Still, have a nice Holiday...

Posted by joe68sg1 at 01:56 PM : Dec 05, 2008

You liberals will always blame republicans for everything that goes wrong. Well now we will try it your way for a while. Obama in the white house and dems in control of both houses of congress. Let''s see all of those bloviators put their money where their big mouths are. I truely do hope that you dems can fix things. It does not really matter who screwed it up. Just for the record, I think there is plenty of blame to go around for both parties.

I hope you have a happy holidays season too.

[redbds]

Yes, like personal freedoms were trampled, provacy is out the window.
The environment is in shambles, and we bailed out all the people that brought us this...

2 years of DEMS rule, with republiCONS blocking every meaningful piece of legislation, is nothing like the 16 years of total republiCON rule in congress.

Get real dude...we are toast because of people like you...still can''''t see the forest for the trees. If republiCONS would have won the last election, there wouldn''''t be any trees left. We would cut them and sell them for profit...think about that

Posted by joe68sg1 at 01:50 PM : Dec 05, 2008

What freedoms were trampled on? You are still free to spout your ignorance on this site. What privacy has been violated? I wnat to see a case where the court decided that someones rights have been violated as a result of actions by the republicans. I want real events not conjecture or hypothetical it could happen arguements. can you put your money where your big mouth is?

[redbds]

Anyone that makes under $100,000 and ever again votes republiCON is an IDIOT.
Take your high flying morals to the soup kitchen and get a cup of hot soup.
Might make you feel warm & fuzzy...like republiCON economic math !!!

Happy Holidays...

Posted by joe68sg1 at 01:44 PM : Dec 05, 2008

The problem with liberals like you is that you want to blame everyone else for your problems. What will you be saying when Obama is President and unemployment hits 10%? Wait you will still be blaming Bush six years from now when Obama is in his second term. I forgot who I was talking to. I hope yo enjoy your government snake oil.

[joe68sg1]

You forgot to mention a few things that happened since Bush took office...

Yes, like personal freedoms were trampled, provacy is out the window.
The environment is in shambles, and we bailed out all the people that brought us this...

2 years of DEMS rule, with republiCONS blocking every meaningful piece of legislation, is nothing like the 16 years of total republiCON rule in congress.

Get real dude...we are toast because of people like you...still can''t see the forest for the trees. If republiCONS would have won the last election, there wouldn''t be any trees left. We would cut them and sell them for profit...think about that

[redbds]

Of course, McBush feels our pain as he buys a new $1.5M house. Wow...he really does feel for us ???

Posted by joe68sg1 at 11:40 AM : Dec 05, 2008

Don''t even mention the $2 million home that the Obamas own in Chicago. Or the several million dollar home that the Clintons own in New York. I wonder what Pelosi''s home is worth. What about Franks? You are an idiot for suggesting that someone who can afford a nice home should nto be able to buy it. It sounds like you are one of those radical class warfare idiots.

[joe68sg1]

AND, as if that was not bad enough...

All the GOV programs, that would help all the people that just lost their jobs because of the republiCONS economy, has been gutted like a deer 1st day of hunting season.

Aren''t tax cuts for the rich and big corps wonderful?

Anyone that makes under $100,000 and ever again votes republiCON is an IDIOT.
Take your high flying morals to the soup kitchen and get a cup of hot soup.
Might make you feel warm & fuzzy...like republiCON economic math !!!

Happy Holidays...

[redbds]

Wake up people...republiCONs are not for the people!
Stop voting them into office !

Posted by joe68sg1 at 12:59 PM : Dec 05, 2008

You forgot to mention a few things that happened since Bush took office. 9-11 had a lot to do with the surpluss going away. Then the dot com bubble burst. There is a lot more to consider than just the fact that a republican was in office. But, you liberals tend to forget a lot of what has happened over the last eight years. Not to mention the fact that the dems have been in control of the congress for the last two years.

[joe68sg1]

One thing everyone here seems to forget...

WE HAD A SURPLUS OF MONEY WHEN BUSH CAME TO OFFICE.
Our budget was balanced
Gov spending was falling, business was flying high.
Most people were doing well...

The republiCONS changed all that.
We agreed with them that we should give everything to rich people & large corps so the money could trickle down to us instead of trickling up to them.
We liked it so well we voted them in for 8 years.
Now, we have record debt.
The rich are still rich
Corps & banks are failing
People are unemployed

Wake up people...republiCONs are not for the people!
Stop voting them into office !

[platteman]

Ah yess, we will share the wealth, or the lack thereof.
don''t worry, BHO will solve all the problems and we will all be rich in a few months.
Don''t worry, be happy, BHO can do no wrong.

When Chris Mathews get to be a senator, he will solve it all along with BHO.

It is only money, you can''t take it with you.

[jt_lancer]

If there is one thing the government does very well, its wasting taxpayer''s money.

[joe68sg1]

PapaBC

I will agree with you once the Bush era is at an end and Obama is in charge for a while.

True, congress should have held up the bailout to further study the situation caused by republiCONs.

But McBush and all his advisors were yelling "we have to act now, can''t wait" just like they did in Iraq and everything else they want to do.

The DEMS do not have the votes yet to override the republiCONS in congress.

Hopefully that will end on Jan 20th.

95% of the blame still rides with republiCONS and their obstruction to any meaningful legislation being passed.

[nothappyatall]

So yes, the stocks have depreciated since the government intervened and if they were sold now it would be a loss. But the government plans to hold it for 10 years and make a profit eventually. The real concern about loss is if the banks collapse and wipe out the stock value.

Posted by malta-falcon "

LOL, you really believe that? you are assuming those banks will even exist 10 years from now, the stock value is only worth anything if the businesses are alive and making money, stocks are the most volatile risky of all investments- it can be worth $1000 a share today and a dime tomorrow, and worthless paper the day after.

Bailing out auto makers would be another big mistake- they WILL fail- all 3 of them no matter what- 500,000 layoffs announced- double what was expected- people are NOT going out and buying $25,000 cars! people are going to be LESS likely to do it NOW, especially with the holidays and holiday BILLS coming soon and layoffs galore'' with job uncertainty, that means you plunge $75 B into the big 3, and in 6 months they go bankrupt ANYWAY, that money will be GONE, we''ll never see it back, so whether they go bankrupt Jan 1st or July doesnt matter- it WILL happen because they are finished, washed up. Bankruptcy is NOT a bad thing in many cases anyway.

[papabc]

Thanks bush :(
Posted by jh6379again
---------------------------------------

You should thank Pelosi, Reid and the Democrat Controlled Congress.