Profits for the people!



I still have to be convinced that more than 1% of the population understands the concept of risk. That’s for individuals. Public opinion is an entity of very small rationality, and no coherence, memory nor any or the other attributes of intelligence.

This one, for instance was so clearly coming our way, so many people predicted it and yet, nobody seems to have noticed, even now it’s done.

When TARP and the many rescues were mounted (remember Bank of America, AIG, GM, Citi, etc., etc.?) there was a very legitimate concern that private losses were being made public through the operation. The taxpayer was bailing out the banking sector and left holding the bag in exchange of… vague promises of regulatory toughness to come at some point in the (far) future.

These rescue operations were based on acquisition of troubled assets, extension of extraordinary credit (extraordinarily generous – free in fact) and even, everything everything else failing, direct capital injections. All of them amount to handouts of public money, since these operations could not be done in the markets, let alone be priced. The argument at the moment seemed to be that the taxpayer was already in the hook anyway, since not bailing them out would have crippled the economy, with its taxpayers inside.

This is doubtlessly true, but that this inevitably meant bailouts in the form they were made is a non sequitur. All the rules of the game have been bent with the purpose to protect the interests of a powerful group of managers and, to a lesser extent, equity owners.

When the state took a majority stake in companies such as Citi or AIG, it acquired with it the obligation to manage them for the taxpayer, its legitimate owner. The taxpayer was acquiring the risks associated with ownership and his interests should have been protected by his representatives by substituting its own managers with those who provoked the collapse of the institutions and holding its stake until the time when the expensive interventions would have made them profitable, reselling them to recoup losses at that moment. Needless to say, shareholders should have been wiped out, as opposed to bailed out.

Instead, the Treasury relinquished all its obligations and incurred in what in a private funds manager would doubtlessly have been judged criminal abandonment of duty: A Pharisaic appeal was made to some unfathomable concept of “market freedom” to let managers of now publicly owned companies in their jobs, naturally protecting the interest of minority stakeholders – and their own. In a free market, an owner manages his property. The nation is now the owner of AIG, Citi, GM and what not.

We have seen  the Treasury align itself shamelessly with shamelessly open plans of the intervened banks to “pay back the Treasury as soon as possible” and even some whining about how the Government was upset but unable to control the size of bonuses that these masters of failure kept on awarding themselves from the public purse. They didn’t even fire the whole rank at AIG after an infamous hunting trip to England right after the bailout.

These publicly owned companies are routinely referred to by the Treasury and the press as private concerns and entities with a voice and interests separate of the governments. Of the many examples available, check this to see how the Treasury “negotiates” an exit plan with a company it owns at 80% and will own soon at more than 92% Come again? Negotiates with its own property? So it seems.

Adding insult to injury, the Treasury announces that it made a 12 bn. profit on the rescue operation for Citi. Sure? Sure. This is what the bailout cost:

  • 45 bn. Loans – 20 paid back bare of interest for all practical purposes / 25 bn converted to common shares voluntarily stripped of voting rights by the Treasury, now sold for 12 bn. profit.

The Treasury still holds warrants for 465 million of long-dated warrants, creatively priced at 10.61 There is no talk whatsoever about how and when to redeem these. How much would you pay for them? Me, not much, considering the leeway management has over new emissions, new debt, etc. and the conflicting interests of warrant holder and managers. How aggressive you think the Treasury wants to be on cashing these? I’m betting not much, seeing the record.

  • 306 bn guaranteed assets – No retribution at all

Think about this: even at the arbitrary price the Treasury paid for a stock that was basically worth nothing without its bailout, the 45bn would have been just shy of an absolute majority within Citi’s board. What kept the Treasury from stepping in the management? Abandonment of taxpayers’ interest protection duty.

Moreover: why were all these miscellaneous forms of intervention chosen, with the only common factor of giving the Treasury no voting power in the companies’ management? Well, obviously to avoid taking them over.

Sweden is one of the few countries were a major scale bank rescue was successfully pulled. How did Swedes do this in 1992? The capitalist way, of course: take over the company, kick out management prop it up, sell it FOR A REAL PROFIT. See here an interesting report on this marvelously fair operation (as these thing go, of course).

But the real catch is in the guarantee: Let me see: So the taxpayer incurred in risk for 306 bn. Actually it incurred in risk for all possible losses of Citi, potentially much larger than its market capitalization (maybe the 30 times leverage of its operations?) and his reward is NOTHING? You betcha. How much would have this cost in the market? So much nobody can pay for it, much less Citi. And now, they just return the loans and it is paid? Stock sold for a profit? Free insurance on taxpayers money. Heads I win (bank recovers, I give back the funds and get to keep property and job) Tails you loose (bank goes bust, it keeps on the Treasury’s books, gets recapitalized, same managers)

This is where public opinion is fooled easiest, since it does not understand the nature of risk. Risk is a burden at it has a great cost. The fact that a loss never materialized doesn’t mean risk wasn’t incurred and that it shouldn’t be rewarded. Ask your life insurer for a refund of all these years’ premia, if you don’t believe me.

But never mind:

– Darling, we made a profit, look at all these wonderful bargains!

-… why are there all those expensive French, English and German brands?

– Oh don’t be such a cheapskate! I just felt I needed to bail out some European banks, all I ever get are all those dull American brands…


About Outis

Nobody is cooler than you
This entry was posted in Banks, Debt, Tim, Uncle Sam and tagged , , , , . Bookmark the permalink.

2 Responses to Profits for the people!

  1. Pingback: A recurring impossibility | cindeurella

  2. Pingback: Treasury Report: Inflation in China and its Consequences in the US » JK Market Insights - A Thoughtful Approach to Investing

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