Tuesday, November 25, 2008

Was the bailout as much of a scam as it looked.

Have you heard the Treasury Secretary Henry Paulson lately? If so he has been using the term warrants when he is talking about the governments investment into companies that claim the are in need of capital. 

The holder of a warrant does not have any voting, shareholding or dividend rights. The investor can therefore have no say in the functioning of the company, even though he or she is affected by any decisions made.[1]

If the Fed is indeed taking a 79.9 percent interest in warrants, A.I.G. still needs a sufficient number of authorized shares to make this share issuance. To issue enough shares to support the warrants, A.I.G. shareholders would need to approve an amendment to A.I.G.’s certificate of incorporation to authorize the issuance. [2

N.Y.S.E. Rule 312 requires that shareholders approve any common stock issuance when the common stock will have voting power equal to or in excess of 20 percent of the voting power outstanding before the issuance of such stock. [3

The Bank of America Corporation received $15 billion from the Troubled Assets Relief Program (TARP). In exchange Bank of America Corporation issued 600,000 shares to the Federal government these shares give the government voting rights during any shareholder process. They also were given 73,075,674 warrants and when converted to shares $30.79 would be their cost. The shares outstanding for Wells Fargo & Company are 3,325,244,000. The market cap for The Bank of America Corporation is $72,754,895,500. The government invested $15,000,000,000 into a failing company and we the tax payer received stock warrants that only give us a 1% stake in the company. When you compare the investment to the market cap you find out that our investment is 20% of the market cap. [4] The share price today is $14.59. 

The Wells Fargo & Company received $25 billion from the TARP. In exchange Wells Fargo & Company issued 600,000 shares to the Federal government. These shares give the government the same voting rights as any shareholder has. They also were given 110,261,688 warrants. To convert these warrants into shares $34.01 would be their cost. The shares outstanding for Wells Fargo & Company are 3,325,244,000. The market cap for the Wells Fargo & Company is $85,658,285,440. The government invests $25,000,000,000 into another failing company and we the tax payer receive overpriced stock warrants, when the warrants are converted into shares they only give the taxpayer a 3% stake in the company although our investment is actually 29% of the market cap. [5] The share price today is $26.98.

The JPMorgan Chase & Co. received $25 billion from the TARP. In exchange JPMorgan Chase & Co. issued 2,500,000 shares to the Federal government. These shares give the government and any other share holder the same voting rights during any shareholder process. They also were given 3,732,357,000 stock warrants to convert the warrants into shares the cost is $42.42 per share. The market cap for the JPMorgan Chase & Co. is $110,477,767,200. The government invested $25,000,000,000 into another failing company and all that we the tax payers have to show for it is some overpriced stock warrants. These warrants only give us a 2% stake in the company although our investment is actually 23% of the market cap. [6] The share price today is $29.63. 

Why did we pay so much for so little?  These figures don’t add up to me.

3 comments:

Jacob said...

I believe this happened for ideological reasons. The Bush administration and everyone appointed by that administration is ideologically opposed government influence on the financial sector, as well as government influence on most other sectors. They simply could not bring themselves to embrace the true and complete theory of government bailouts which also includes: government control, more regulation and government profit.


As a result, we got the worst of both worlds: wasteful spending without benefit to the economy or society.

Mike said...

In most of those cases the shares TARP bought aren't common stock (ie - the number it trades at on its ticker). Preferred stocks = investments, with warrants as ice toppings.

Warrants are good because they are essentially call options on stocks (issued by the firm) - it gives us exposure on the upside without making new investors, whose excitement we are trying to generate, worried about dilution of shares.

steve said...

"Why did we pay so much for so little? These figures don't ad up me."

Why? Perhaps because the people running Treasury and the major banks are crooks, out to weasel as much money out of their customers, and then the US Gov't itself, as possible, after making risky bets with their assets, bets they now don't want to pay off.

I long since stopped believing any statement coming from this administration, a habit I gradually developed during the previous administration as well.

Thanks for visiting my blog. I use it as an auxilary memory -- I stick things in it I might want to remember later. I find things in the news that are so mindboggling that I have to put them somewhere.