Some Bailout Holdings Down $9 Billion

WASHINGTON (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.
Stocks dropped again Friday after the government reported a
larger-than-expected number of job losses in November, but a top
Treasury Department official told the Mortgage Bankers Association
that the tax dollars are being invested in "very high-quality
institutions of all sizes."
"We're not day traders, and we're not looking for a return
tomorrow" said Neel Kashkari, the director of Treasury's Office of
Financial Stability, which oversees the $700 billion financial
rescue fund. "Over time, we believe the taxpayers will be
protected and have a return on their investment."
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 $9.3 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's stock on Friday was trading at about $7.50.
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
Treasury Secretary Henry M. Paulson Jr. describes the cash
infusion 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."
AP Economics Writer Christopher S. Rugaber contributed to this
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