For years leading up to the near collapse of our banking system, bank and Wall Street executives lined their personal pockets, through incentive compensation, with ill-gotten gains from securities transactions that they did not understand. What they did understand was how much money was being made for themselves and their banks so they continued to party until the party was over. Then they came hat-in-hand to the federal government to bail them out at taxpayer’s expense. The government rescue strategy included approximately $300 billion in capital to troubled banks under the Troubled Asset Relief Program (TARP); higher guarantee limits for FDIC bank deposits; plus the Federal Reserve lowered the discount rate to zero…meaning the banks could borrow money from the Federal Reserve for nothing and use the funds for operations. ‘Operations’ included continuing the ridiculous bank executive pay packages until public outrage and government regulators moved in to stop them. Initially the bankers were incensed at the suggestion that the government would restrict their outrageous compensation but soon acquiesced after realizing that the alternative was a government takeover, potentially putting them out of a job and off the gravy train.
Understand that the $300 billion in TARP capital that the banks received was intended to be repaid with interest. As an incentive for making the loans, the government received the right (known as warrants) to buy 1.4 billion shares of common stock in the participating financial institutions. The warrants were equal to 15% of the TARP funds received. The purpose of the warrants was to allow taxpayers to participate in any ‘upside’ of bank stock performance as a result of the bailout.
So far so good. Fast forward to March 31, 2009. Old National Bancorp of Evansville, Indiana became the first bank to repurchase the warrants issued to the U.S. Department of Treasury. The negotiated repurchase price was $1.2 million. It is estimated that the value of the warrants were as much as $5.8 million. If we assume that this deal sets the standard for the rest of the bank repurchase agreements, it means that the bankers now stand to reap 80% of the profits that should have gone to the taxpayers. At risk to taxpayers is an estimated $10 billion in profits. Soon, Goldman Sachs, JPMorgan, and Morgan Stanley may negotiate their own warrant repurchase and taxpayers could lose $3 billion or more.
So when is ‘enough, enough’? Understand that congressional representatives’ primary concern is getting re-elected and they definitely adhere to the ‘squeaky- wheel’ theory. Until you make a lot of noise, they will do little to protect your money. When you scream loud enough they will jump up and down and take action even if it is senseless. A recent example occurred when the House passed legislation to confiscate all AIG senior employees’ bonuses in the wake of public outrage.
If you’ve had enough, contact your congressional representative and let him or her know that you demand that taxpayers receive full value for the warrants issued by the banks we bailed out. Otherwise the bank executives who got rich while creating the current crisis will get still richer off of the crisis itself. To contact your representative, go to the Resource Center at www.welchgroup.com; click on ‘Links’; then “Congressional Representatives Contact List”.