Post by Tim Collins on Aug 31, 2009 12:25:54 GMT -7
dealbook.blogs.nytimes.com/2009/08/31/are-profits-on-tarp-funds-enough-feel-free-to-change/
August 31, 2009, 2:15 pm
Some Profits From TARP, but Are They Enough?
Taxpayers may have earned about $4 billion so far for their rescue of the banking system, but some people believe there was a lot more money left on the table.
The profits made from the eight banks that have repaid their obligations under the Troubled Asset Relief Program, or TARP, have yielded an annualized return of about 15 percent. Not so shabby for an investment that many believed would never be profitable. But private investors, making a similar investment in the banks at the same time as the government, would have pocketed a $12 billion profit, for an annualized rate of return of 44 percent.
All told, taxpayers have forgone about $8 billion in potential profits on the banks that have fully repaid their TARP funds, according to calculations compiled for The New York Times by Linus Wilson, a finance professor at the University of Louisiana, Lafayette.
Of the big banks that have repaid their bailout money, Morgan Stanley represents the largest loss of potential profit. The Treasury Department, which invested $10 billion in the firm, paid $1,000 a share for the newly issued preferred stock on Oct. 28 and received warrants that would provide an additional boost to the 5 percent dividend in the event of a recovery.
But private investors could have purchased Morgan Stanley’s preferred shares, which do not include the warrants, on the open market for an average price of $523.60 a share on the same day, according to Professor Wilson’s calculations.
As the economy improved, Morgan Stanley redeemed its preferred stock and warrants in July, netting taxpayers a $1.3 billion profit including the accumulated dividend payments for an annualized rate of return of about 17 percent. Yet private investors who sold their shares at the same time would have scored a $6.6 billion profit, for an annualized rate of return of 92 percent since October, according to Mr. Wilson’s calculations.
“If you save a company like Morgan Stanley, you deserve much more than a 17 percent return on your investment,” said Alexander F. Brigham, executive director of the Ethisphere Institute, an independent think tank that is tracking the government bailout.
In addition to Morgan Stanley, taxpayers have passed up $611 million of potential profit on their investment in U.S. Bancorp, $1.4 billion on Goldman Sachs $110 million on BB&T Bank, $19 million on Northern Trust and $614 million on Bank of New York Mellon by overpaying for their preferred shares and allowing the firms to pay back their warrants.
Of course, the government’s chief priority was to stabilize the teetering financial system, not necessarily to maximize profit. Now, the worst of the crisis is past, and the rewards from avoiding a widespread financial meltdown are incalculable.
“You do not stop a financial panic by putting capital and offering capital at the banks on the terms — the only terms that is available in the middle of a crisis,” former Treasury Secretary Henry M. Paulson Jr. said at a Congressional hearing in July.
Taxpayers actually did better than private investors in their investments in two big banks, American Express and the State Street Corporation. The two relatively healthy firms actually returned about $418 million more to taxpayers than private investors would have received if they purchased the preferred stock in the market at the same time.
Of course, taxpayers are currently sitting on billions of dollars more in paper losses from some institutions still holding bailout money, as well as from other government programs being used to support other financial institutions. Treasury has allocated $30 billion to help private investors buy toxic securities from banks, $95.6 billion to nationalize the mortgage companies Fannie Mae and Freddie Mac and $77.8 billion to rescue the troubled auto industry.
But it is the bailout of the nation’s big banks that infuriates many American taxpayers, who believe Wall Street is to blame for the greatest recession in a generation. Now that many financial firms have returned to profitability and risk-taking, taxpayers want to know if they are being properly rewarded.
“The reason why a private investor would have done so much better than taxpayers is because the bailout was set on such generous terms by Hank Paulson,” Professor Wilson said. “In short, he used taxpayer money to overpay for the preferred stock.”
Still, there are some benefits that taxpayers received from the bailout that are difficult to quantify.
“The total return on investment is hard to estimate because it is difficult to quantify the number of jobs and businesses that were saved by investments that pulled the financial system back from the brink,” said Herbert Allison, assistant secretary for financial stability at the Treasury Department, in an e-mail last week.
– Zachery Kouwe
Copyright 2009 The New York Times CompanyPrivacy PolicyNYTimes.com 620 Eighth Avenue New York, NY 10018
August 31, 2009, 2:15 pm
Some Profits From TARP, but Are They Enough?
Taxpayers may have earned about $4 billion so far for their rescue of the banking system, but some people believe there was a lot more money left on the table.
The profits made from the eight banks that have repaid their obligations under the Troubled Asset Relief Program, or TARP, have yielded an annualized return of about 15 percent. Not so shabby for an investment that many believed would never be profitable. But private investors, making a similar investment in the banks at the same time as the government, would have pocketed a $12 billion profit, for an annualized rate of return of 44 percent.
All told, taxpayers have forgone about $8 billion in potential profits on the banks that have fully repaid their TARP funds, according to calculations compiled for The New York Times by Linus Wilson, a finance professor at the University of Louisiana, Lafayette.
Of the big banks that have repaid their bailout money, Morgan Stanley represents the largest loss of potential profit. The Treasury Department, which invested $10 billion in the firm, paid $1,000 a share for the newly issued preferred stock on Oct. 28 and received warrants that would provide an additional boost to the 5 percent dividend in the event of a recovery.
But private investors could have purchased Morgan Stanley’s preferred shares, which do not include the warrants, on the open market for an average price of $523.60 a share on the same day, according to Professor Wilson’s calculations.
As the economy improved, Morgan Stanley redeemed its preferred stock and warrants in July, netting taxpayers a $1.3 billion profit including the accumulated dividend payments for an annualized rate of return of about 17 percent. Yet private investors who sold their shares at the same time would have scored a $6.6 billion profit, for an annualized rate of return of 92 percent since October, according to Mr. Wilson’s calculations.
“If you save a company like Morgan Stanley, you deserve much more than a 17 percent return on your investment,” said Alexander F. Brigham, executive director of the Ethisphere Institute, an independent think tank that is tracking the government bailout.
In addition to Morgan Stanley, taxpayers have passed up $611 million of potential profit on their investment in U.S. Bancorp, $1.4 billion on Goldman Sachs $110 million on BB&T Bank, $19 million on Northern Trust and $614 million on Bank of New York Mellon by overpaying for their preferred shares and allowing the firms to pay back their warrants.
Of course, the government’s chief priority was to stabilize the teetering financial system, not necessarily to maximize profit. Now, the worst of the crisis is past, and the rewards from avoiding a widespread financial meltdown are incalculable.
“You do not stop a financial panic by putting capital and offering capital at the banks on the terms — the only terms that is available in the middle of a crisis,” former Treasury Secretary Henry M. Paulson Jr. said at a Congressional hearing in July.
Taxpayers actually did better than private investors in their investments in two big banks, American Express and the State Street Corporation. The two relatively healthy firms actually returned about $418 million more to taxpayers than private investors would have received if they purchased the preferred stock in the market at the same time.
Of course, taxpayers are currently sitting on billions of dollars more in paper losses from some institutions still holding bailout money, as well as from other government programs being used to support other financial institutions. Treasury has allocated $30 billion to help private investors buy toxic securities from banks, $95.6 billion to nationalize the mortgage companies Fannie Mae and Freddie Mac and $77.8 billion to rescue the troubled auto industry.
But it is the bailout of the nation’s big banks that infuriates many American taxpayers, who believe Wall Street is to blame for the greatest recession in a generation. Now that many financial firms have returned to profitability and risk-taking, taxpayers want to know if they are being properly rewarded.
“The reason why a private investor would have done so much better than taxpayers is because the bailout was set on such generous terms by Hank Paulson,” Professor Wilson said. “In short, he used taxpayer money to overpay for the preferred stock.”
Still, there are some benefits that taxpayers received from the bailout that are difficult to quantify.
“The total return on investment is hard to estimate because it is difficult to quantify the number of jobs and businesses that were saved by investments that pulled the financial system back from the brink,” said Herbert Allison, assistant secretary for financial stability at the Treasury Department, in an e-mail last week.
– Zachery Kouwe
Copyright 2009 The New York Times CompanyPrivacy PolicyNYTimes.com 620 Eighth Avenue New York, NY 10018