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russiangambit (99.01)

Who owns future bank profits?

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May 10, 2009 – Comments (10) | RELATED TICKERS: TAR , PED

I’ve been thinking about the TARP banks. Many of them are insolvent, in my view, i.e. without the TARP money and various government guarantees and back stops, those banks would’ve been bankrupt. Those included C, BAC, WFC, FITB and the rest that needed to raise capital after stress tests.

These  banks should’ve been taken over by FDIC  and sold, but they were deemed “too big to fail”. Now, shares of these banks rallied 100-300% last few weeks as investors decided that these banks are not going into bankruptcy , and so they will be worth quite a bit a few years from now. But remember, it is taxpayer money that allowed that to happen. So, here is my question – if is taxpayers money that saved those banks, why do private investors think that the profits from those banks (whenever those profits manifest themselves) will go to them? Shouldn’t the profits go to the taxpayers? If the profits are allowed to go to the private investors instead of compensating the taxpayers, watch out for the Congress going berserk. This is not how it is supposed to work. Whoever provides the money, should get the profits, not the “speculators”. Expect AIG-bonuses like witchhunt. I am not quite sure why people buying the shares of the banks don’t see that.

10 Comments – Post Your Own

#1) On May 10, 2009 at 11:00 PM, rd80 (99.25) wrote:

Why do you think the gov't should get preferential treatment over other investors with similar securities?

The gov't bought preferred shares.  They're entitled to the dividend payment and repayment of the preferred, no more, no less - just like any other preferred stock holder. 

By investing in preferred shares, the gov't has a limited upside but also has less risk than common shareholders.  Part of the deal that goes along with being higher up in the capital structure is your upside is limited.

The Treasury also got warrants for common as part of the deal, so Treasury does get to participate in the upside.  In WFC's case, Treasury has warrants for about 110 million shares with a strike price of about $34 - those numbers may have adjusted a bit after the secondary for the Wachovia buy and the recent capital raise if there was an anti-dilution clause.  Here's my rundown of TARP and what it meant for WFC.  I don't have the numbers for the warrants on the other banks in your list.

In the case of C, some of that preferred is being converted to common. The gov't gets to participate in the upside (and downside) that goes with that just like any other shareholder.

I thought and still think the TARP program was illconceived, unconstitutional and wrong.  That said, once the terms were agreed to, the government should live up to its end of the bargain and stop adding new conditions or terms because someone thinks they made a bad decision.

And, I disagree with your assessment that Wells would be insolvent without TARP.  They simply would have had a bigger secondary associated with the Wachovia acquisition if they hadn't had TARP forced on them.  The next few years will tell which one of us is correct.  

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#2) On May 10, 2009 at 11:12 PM, russiangambit (99.01) wrote:

> Why do you think the gov't should get preferential treatment over other investors with similar securities?

Because the government (taxpayer)  role was crucial in those banks survival. Without this money, the other investors would've been wiped out. It is obvious that Treasury didn't negotiate well on our behalf, given that so many private investors think they can get so much return on their money in the next 3-5 years. Wait until Congress realizes that. 

> And, I disagree with your assessment that Wells would be insolvent without TARP.

I don't have the facts.Lets just say I am too lazy to work through balance sheets and notes unless there is a big potential pay off.  But it is my suspicion, based on observation of events that WFC is loosing money faster than it is earning it. I am not going to stake a fortune on this statement, but it is my opinion. If I had a fortune to stake on it,  then I wouldn't touch the banks on either side short or long, there is too much govenrment intervention.

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#3) On May 10, 2009 at 11:31 PM, jgseattle (96.22) wrote:

When TARP money was first distributed Paulson forced all the large banks to take the money.  This was so investors would not think that just because you took the money that you were going to fail. 

"Treasury didn't negotiate well on our behalf"  I agree 100%.  If you look at terms BRK got for theri investment in GS and GE you will see this is a FACT.  But because the governmetn negotiates a poor deal does not change the sad fact that we, the taxpayer, are stuck with it. 

At some point we, the taxpaye, must start to honor contract law, mortgages, and the government needs to set the example.

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#4) On May 10, 2009 at 11:42 PM, russiangambit (99.01) wrote:

> At some point we, the taxpaye, must start to honor contract law, mortgages, and the government needs to set the example.

I am feeling like I am channeling Cassandra today. But I expect populist outrage over this and the big banks either completly chained by regulation or broken up. Banks will not be allowed to earn outsized profits unless the major share goes to the taxpayers. I see hints of what is to come in the current perception of the GS and the credit cards debacle.

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#5) On May 11, 2009 at 12:34 AM, devoish (99.64) wrote:

Contracts get renegotiated. Ask the unions if you don't believe me. If one side is not happy, the two sides can strike a new deal using whatever leverage each has including manipulating public opinion. Perhaps the contract remains unchanged, perhaps it is changed, perhaps it winds up in court. Its a system, for better or worse.

Personally, I would like to see which banks would talk about giving back TARP, if their losses weren't guaranteed by the USA through AIG.

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#6) On May 11, 2009 at 12:59 AM, Xciteddon (75.51) wrote:

Has anyone heard what will happen with the money once the banks "buy back" those shares? Will it really go to pay off the deficit created by all this? Maybe the government has found a new way to create more money to spend while they make us pay the tab. Will these preferred devidend shares go directly to pay down the deficit? I don't think anyone in any position of "power or Control" has said.

 

 

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#7) On May 11, 2009 at 1:23 AM, automaticaev (80.59) wrote:

Because it is a bank.  Come on you all know that bac ceo gos to worship the devil with congress.  The bank will eat all the money in the world and take a crap on you.  Id rather be with the banks then with the people getting violated.

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#8) On May 11, 2009 at 9:07 AM, rd80 (99.25) wrote:

Because the government (taxpayer)  role was crucial in those banks survival. Without this money, the other investors would've been wiped out

Later in your response, you state you haven't worked through the balance sheets and statements.  Therefore, you have no evidence to back up this statement.

My opinion is that the TARP Capital purChase plan was put in plaCe to aid one partiCular bank.  I won't Contribute to wild speCulation by hinting at whiCh one I think it was. Treasury and the Fed wanted all the big banks to partiCipate to provide Cover for the one, unnamed Company.

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#9) On May 11, 2009 at 9:34 AM, russiangambit (99.01) wrote:

rd80, I am sure we will get to the bottom of it, in a year or so, since things will continue deteriorate. We will see where WFC stands.

Things about WFC that I thought were supspicious: I think in July 08 or so, they came in and increased their dividend, causig a major short squeeze. Later on they quetly reduced the dividend. The stock continued to be sold off after that. In March they used the same trick again - came in early with better than expected earnings announcment (at the beggining of this rally), didn't they also increase the dividend again? When the actual earnings details came, they weren't as great as pre-announced. Then we find out they need to raise capital. So, why are they increasing dividend when they know they don't have enough cash? Their actions smell so much of market manipulation, I have no respect for them, and I don't care what Buffet says about WFC. A respectable company wouldn't act like that.

> My opinion is that the TARP Capital purChase plan was put in plaCe to aid one partiCular bank.  I won't Contribute to wild speCulation by hinting at whiCh one I think it was. Treasury and the Fed wanted all the big banks to partiCipate to provide Cover for the one, unnamed Company.

Very funny, thanks. I also keep wondering about WB deal. Remember, WFC and C were fighting over it. C wanted to take over WB? It is surreal.

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#10) On May 11, 2009 at 10:22 AM, rd80 (99.25) wrote:

russiangambit - The earnings report following the March preannouncement came in right in line with the pre-announcement.  You're corrected about the divvy increase last year, then a cut to 5 cents.  The hike was before TARP was announced and, more importantly, before the WB acquisition.  There has been no change to the divvy since the cut to 5c.

Concur that we'll know more in a year or so.  Thanks for this blog entry.  Spirited debate is good for the collective knowledge.

FWIW, I sold the WFC that I bought Fri morning this morning.  Still holding some.

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