What About the Bank BailOut Money ?

Lots of articles in the past few days wondering what the banks are going to do with the bailout money. Its of course a legitimate question.

The response of the banks has been that the cash goes into a pool of capital and you cant segregate the new capital from the bailout capital. Fair point. You cant look at the cash in your wallet or bank account and know what the source of each dollar was. On the other hand, if someone offers you say 10pct of your networth in the form of a loan, don’t you immediately consider all you could do with the money ? Of course you do.

But you also try to figure out if it’s worth taking the money, and more importantly, how you are going to pay it back. The key to understanding how banks will use the money is understanding and having complete transparency about each bank’s  capital structure and its impact on owners of the bank, its shareholders.

If you look at the actual TARP document for the loans to banks, it has a lot of detail about what will happen to banks capital structure. It also creates a ton of issues, that if not handled properly by the Treasury, SEC and the banks receiving funds, will lead to confusion, lawsuits and loss of investor confidence in the banks.

Here are the issues that I think will be raised over the next 24 months that are going to get people upset:

1.  There are going to be questions about the timing and accuracy of traditional SEC Filings in banks.  The Treasury, through its ownership of warrants attached to the TARP, effectively owns a material amount of stock in each bank that has taken the funds.  WHERE are the 13D filings ? For bigger banks in particular, stock prices have been devastated. I haven’t done the calculations for the banks, but warrant coverage is at 15pct of the loan amount.  Given that the more the bank needed the cash, the further its stock price was depressed, there is possibly a better than good chance that the Treasury effectively owns more than 5pct of more than a couple of the banks it has loaned money to. Where are the 13D filings ?  Where are the banks taking the conservative approach and disclosing the exact details of the warrants and their impact on the current equity structure of the bank  ?

2. There are going to be questions on how the warrants granted to the Treasury are priced.  The TARP says that the warrants will be priced at the “market price”, which it defines as  previous 20 days average price.  It doesn’t define the average price. Is it the closing price ? The bid or ask price ? Given the volatility of share prices and the widening spreads during this financial crisis, we are talking about enough money that shareholders could be up in arms about that definition.

3. There is the impact of the timing of the funding on shareholder dilution. There has been a significant amount of volatility in bank share prices since the first payouts. If you happened to own shares in a bank that got TARP money while the market was down, you are going to be diluted further than the investor in a bank who got funded while the market was higher. At some point, someone will make an issue of this and sue someone for not acting quickly enough or timing the loan to be more beneficial to one bank over another. If the market sees a big sell off from current levels, the accusations will get stronger and louder. Regulatory agencies should get ahead of this curve and acknowledge this issue and possibly make the pricing mechanism longer than 20 days.

4. Where are the shelf registrations ? The Treasury was smart. They told the banks that they wanted to be able to sell the shares pretty much anytime they wanted after dec 31, 2009, to anyone they choose. In order to do so, the banks are required to file shelf registrations for the shares that could be created by exercising the warrants. Where are the shelf registrations ? Maybe they are all there and have flown under the radar. Maybe the banks and regulatory agencies interpretation of “The QFI will file a shelf registration statement covering the warrants and the common stock underlying the warrants as promptly as practicable after the date of this investment and, if necessary, shall take all action required to cause such shelf registration statement to be declared effective as soon as possible”  are something I don’t fully understand.

Regulatory agencies should set standards on how much time banks have to get these filed and take care to make sure that these are filed so shareholders can better understand the details and impact of the warrants.

5. Where the shit will reallly hit the fan is when the Treasury decides to start exercising the warrants they own and selling the shares. No matter what, its going to upset people. No one knows what the future of stock prices will be. But starting in 2010 when the selling can start, everyone who owns shares in the same companies the Treasury owns, will be freaking out wondering when the Treasury will sell. Shareholders will be screaming that they shouldn’t sell. Everyone else will want the Treasury to take what will hopefully be profits and cash out, using the money to pay down our zillion dollar budget deficit. Of course, if the warrants are in the money,  our politicians will be saying the same thing. No politician will pass the chance to look like a smart investor of taxpayer money.

Once again, it all comes down to transparency.  If our regulators are smart, they will proactively deal with these issues. Hopefully, at worst, they will require the Treasury to file the same forms that any other shareholder would be required to file. If this doesn’t happen, it will call into question whether or not full information about the banks capital structure is available and accurate. This will create  a serious lack of investor confidence in the banking sector. A loss of confidence  will hinder or worse banks ability  to raise private  capital. If they cant raise capital, they cant buy out the preferred they sold the treasury and they can’t expand their loan portfolios, which was the entire point of the TARP.

30 thoughts on “What About the Bank BailOut Money ?

  1. I have worked with Banks for Over 20 years in Canada and I am now
    seeing the affects of the US Sub-Prime Issues. Canadian Banks also
    received bailouts from the Canadian Government and instead of loosening
    their lending they have tightened it to an almost strangle hold?
    Even with the Sub-Prime auto Loans and Prime Auto Loans in Canada the banks
    have tightened their approval process. Just a month ago I could get an
    auto approval for anyone with a 680 beacon score of higher. Now the Banks
    are turning down people with 700+ Beacons and sending them to their
    sub-prime divisions dedicated for people with bad credit?
    I’m amazed at how Banks get money from Tax payers but yet refuse to help them?
    After years of Billion dollar quarterly Profits and Government Bailouts
    Banks still are slow to loosen their strong hold on money

    Comment by CarloansCanada -

  2. Are bail outs to the banks really the answer? Is there a secret real estate market with only information available to a few?

    Is bail out relief in the billions to banks and the mortgage industry really the answer? Will it really help the economy or hurt the economy and country even more? We have many families losing jobs and the highest unemployment in 15 years hitting 9.3% in Los Angeles. California being more and more less desirable for businesses to remain in California or be able to do their business here.

    Is it just another way for the rich to get richer and the poor get poorer? Just another way for wealthy investors to flip homes? Isn’t many of the reasons why we are really in this mortgage mess is investors flipping properties, some realtors not listing homes on the MLS so they can double end a property instead of split a commission, only present an offer to a homeowner if that listing real estate agent represents the homebuyer too and even holding open houses and telling a homebuyer if they really want this home they can’t use their real estate agent and would have to go through the listing agent to get the home, telling a homebuyer to get that home the homebuyer would have to pay such and such price and at times $100,000 or even more over the last recent sale in the same year. Even real estate agents were told that there is so many relocating to Southern California that from this point on there will not be enough housing to those moving to Southern California and many homebuyers may never be able to afford to buy a home due to increasing prices so homebuyers will need to pay the growing inflated prices. Homebuyers getting an interest only loan just so they could get into a home thinking in a few years there would be so much equity in their home they can refinance getting a better loan or just buy another upgraded home.

    I’ve personally lived in Canyon Lake for 3 years and some homes have been sitting vacant since before I’ve lived here and obviously no one has maintained the home including water and probably the POA dues weren’t paid by someone. Seeing the properties sit vacant for at least 3 years and not even having a for sale sign or on the MLS personally ticks me off. In the 1990’s banks would list their properties with real estate agents and put the homes on the MLS once vacant and available so the home still had a chance to sell for a fair price not hurting the property values drastically as home auctions. In today’s economy many families are willing to work with the banks, still many getting kicked out of their homes because the bank won’t work with them, the homes sit vacant long lengths at a time with no real estate sign and not even listed for sale, not on the MLS so real estate agents and the public see it available and have the opportunity to be sold at a fair price and even auction off the home for an unreasonable way below even current market values.

    Example a Canyon Lake home sold in August 2004 single family residence, 1500 sq. ft. waterfront with dock, 50 ft. wide lot, sale price $690,000 loan amount $565,000. The homeowner recently had financial problems and instead of the bank reappraising the home to today’s fair market value, negotiating a lower interest rate, not working with the current homeowner, doesn’t list the property so real estate agents know the home is available, not listed on the MLS, auctions off the home with the homeowner still living in the home that’s still wanting to negotiate with the bank to keep the home. Most of the public doesn’t know about auctions or how to get information about homes being auctioned. Most homebuyers wanting to purchase a home rely on websites such as http://www.Realtor.com and a real estate agent thinking all real estate agents have access to what is available to buy. Even going to a search engine such as Google inputting the actual address most times no information comes up on these homes and is a secret to even real estate agents that may even have a homebuyer that would consider buying that home at fair market value. The example home was auctioned off recently for $250,000. Is this right? We have wealthy investors buying up properties well below a fair market price, less than half of what the actual loan is, available to very few that have information on the property with just intentions of turning around listing with a real estate agent for what the area is currently selling for. The losers are families being kicked out of their home, ruined credit, many that can never recover and tax payers having to pay to help the bank bail outs and the banks keep asking for more and more bail out money.

    Banks should be doing everything possible to work with the homeowner or as soon as the home is foreclosed and vacant list the property for sale with a real estate agent with a for sale sign on the property and on the MLS so everyone can see the home is available and for what price. Laws need to be in place that banks need to have to list a property for at least 90 for sale with a real estate agent and listed on the MLS for the public to see at a fair market price before a home can be auctioned off. If the bank does not they should lose their license. Receiving bail out money and just dumping a property for any price is not the answer and will not help the economy or country.

    Comment by Debbie Phillips -

  3. It’s a quite difficult decision for any politician choosing between more bailout packages or letting the free market economic principles take care of the failed businesses, whether it is the financial institutions or automakers. The main focus should be defending the interests of middle-class Americans and creating a stable economic system that will guarantee long-term stability and sustainability. But here we also can face more challenges, since right now the Washington politicians are talking about the second large bailout package. If we bailout financial institutions and other industries again, when are they going to ask for the third bailout package? Or fourth? Maybe this is a time to let free market economy work rather than keep bailing out large, failed corporations? After all, it is the small and medium size businesses that create vast majority of middle-class jobs in America, not the large corporations. Maybe the government is better off to replace banks in lending practices and directly give loan packages with low interest rates to small and medium size businesses? That might work better and have a direct, immediate impact on economy and the middle-class America…

    Comment by David Dzidzikashvili -

  4. Mark,

    You bring up a very good point with bringing to light the issue on what will happen when the treasury happens to sell their shares. Yea all is find and dandy that they have these shares now, but the point of this program is to make money for the treasury. Therefore when reasonable they will have the ability to unload millions of shares on the market. Will there be buyers? Could this wave of selling bring down the banks even more? Granted this is all hoping that these companies are still around….

    Comment by Dave -

  5. Pingback: Mortgage Loan Blog » Blog Archiv » More unthought details about the Bailout funds.

  6. Mark,
    You are spot on with your assessments. This is why you have made it and while others may be hyper-critical. Very good perspective on the federal government and my readership also appreciates your strong stand on the SEC. Rather than chasing innocent people like you, the SEC really should have been focusing their efforts on Madoff, who is a king-pin scum-bag.

    Keep the faith!
    Steve
    http://www.stevenwevodau.biz

    Comment by Steven Wevodau -

  7. Mark,
    You are spot on with your assessments. This is why you have made it and while others may be hyper-critical. Very good perspective on the federal government and my readership also appreciates your strong stand on the SEC. Rather than chasing innocent people like you, the SEC really should have been focusing their efforts on Madoff, who is a king-pin scum-bag.

    Keep the faith!
    Steve
    http://www.stevenwevodau.biz

    Comment by Steven Wevodau -

  8. Your making me hate these bailouts.
    The bank managers and the like are in total control. No wonder the
    government is bailing them out.THE BANKS own The government.
    So the government will always fix the banks screw ups. They do not want the American public
    to lose american confidence in the banking system.

    Comment by Mark Farwell -

  9. Personally I don’t think they should be bailing out anyone.
    Let the Free Market decide their fate,
    if they made the huge mistakes enough to make it the downturn of
    their company, then let it fall because of that.

    Another company will fill it’s space, why should taxpayers be used
    on the scale of Millions, or even Billions for a blunder they made?

    They was taking the risk, this could of fallen on them even without
    the ecomonmic situation going bad.
    Some will argue what about all the lost jobs; they won’t be lost for long,
    Other companies will fill their space, and new, and better management,
    will be there instead of keeping in ones who made the risky and bad mistakes.

    Comment by Chris Bourton -

  10. Below from Rupert Murdoch and the Lord William Rees-Mogg’s Times of London provides more proof(to me)that Steve Forbes has known about his colleague James Dale Davidson’s phoney naked short sale claim fraud and his running penny stock frauds from their NTU office near the SEC office for years.
    Remember last year Rupert’s Times was the first to make the naked shorting assertion for Northern Rock.It appears to me that there is a ‘conspiracy’ indeed among the very wealthy involved in ’securities’ to use Davidson’s,Grant Atkins,Brent Pierce’s,Dave Patch’s and of course now Patrick Byrne’s NCANS because he plagiarized it from Davidson’s NAANSS,naked shorting to divert attention from what really happened to Fannie Mae and Freddie Mac, et.al..

    Comment by Alemextra -

  11. So far, the goverment has not used the money
    properly wasting our taxpayer money. I think
    in the future the money will be spent the same.
    We will still suffer long and hard with taxpayer
    money long gone and huge debt left for us to pay.

    Comment by Chad Atkins -

  12. Nice points! I don’t expect the banks to accurately disclose where
    they’re spending the money…it would definitely be difficult if they
    pooled it with the rest of their funds.

    I imagine this “bailout drama” is years from ending – hopefully we
    (taxpayers) don’t lose out too much; I doubt we’ll make money but
    if we can cut loses as much as possible and save these institutions,
    I’ll be happy.

    Comment by Jayson -

  13. If you’re rich and pissed off imagine what us struggling middle class Americans feel. Have a great New Year!

    Comment by darryl -

  14. Excellent insightful questions and interesting comments. Nothing so astonished as common sense

    Comment by Joseph Ryan -

  15. Basically, the monies have been given to the banks with no restrictions.

    2 trillion has been disbursed by the Fed, and they refuse to say where it went.

    Until those in Congress start to act in a more responsible way in terms of their oversight responsibilities, we will continue to have problems.

    Comment by nat stone -

  16. Transparency will help this process a huge amount! It is also something the Federal Gov’t has had a problem with in the past. I hope that this is handled in a way that will positively affect our economy, not just be an expensive band-aid for the politicians.
    Only time will tell….

    Comment by Pam Pugmire -

  17. Your comments are all on-point, but let’s get to the crux of the matter: Shareholder derivative suits are completely toothless.

    Comment by Mark (not Cuban) -

  18. Ponzi effect: Pay first investors their money with the
    next investors money until, at the end, the ‘fools’ at the bottom
    are left holding the bag

    junk bonds to tech stocks to real estate to mortgage backed securities and CMBS

    It is all the same pattern, scoped out just long enough not to be overtly oppressing

    Our U.S. dollar is being driven to junk status as countries all over start valuing
    their commodities in other currency. Instead of thinking, wow these wall street bankers are so stupid! how could they let these mistakes happen!
    people outta try to critically think thru what is happening,
    how its happening, and to who’s ultimate preference.

    Ok, now i’m done🙂

    Best,
    Tom

    ______________________
    “Give me liberty or give me a society with hover boards at least” Schmidt

    Comment by Tom Schmidt -

  19. To think Americans are going to hold Congress responsible for
    rolling over is very optimistic. The above issues absolutely deserve to be
    scrutinized, and our government’s lack of DD on these actions is scary
    and very telling.

    Congressmen are spineless when it comes to the hand that feeds them.
    The politicians’ world revolves around funding.

    “If elected, I will get this and that for our Constituency..and i’ll tell
    those fatheads in Washington -blah, blah-”

    Politicians, in my opinion, have a responsibility to pull their collective heads out of their asses
    and realize that there is no Santa Claus, and Central Bankers probably
    don’t give a shit about the Sovereignty of our Country. It is naive
    to believe that the Powers that be are ‘noble’ and that good
    Americans should pay their bills and do as they’re told.

    That money for all the government projects/socialized what-have-you’s
    comes from somebody, and that somebody is more than happy to put our
    country into crippling debt. The $amount doesn’t matter so much as
    transfer of power and real property.

    Unfortunately, to hold up the rules and enforce them against
    the people/companies who essentially control the entire game
    will amount to lip service and a spin that makes it appear enough
    like justice to calm people down.

    Things are much worse than the trillion added to taxpayer burden.
    The entire global monetary pyramid scheme based on U.S. Federal Reserve Notes is going to eventually hit a wall.

    Nothing new here
    All boom/bust cycles have a Ponzi-scheme element and all end
    with Lots of Losers and a few Winners who own much more than they
    did before. Mr. Cuban was right in the middle of the tech tornado,
    and kudos to him for for seizing the perfect storm.

    Some boom/busts leave us with redeemable products that advance us all,
    i.e. Google, Biotech breakthrus… but this Financial Crisis
    based on Debt derivatives and mortgages is worthless, and shows how many
    peoples’ careers are based on worthless pursuits

    Thanks for letting me rant

    Feeling like a crab in slowly boiling water,

    Tom Schmidt, CEO
    Bing Bong Inc.

    Comment by Tom Schmidt -

  20. Hey Mark, I found out where the bailout money went!! AP explains the inexplicable. Folks. If you want to know what the banks are doing with your hard earned tax bucks. ITS ALL RIGHT HERE!!! http://www.msnbc.msn.com/id/28344965/ Sheeesh I was worried that they wouldnt keep it transparent. LOL Thanks for the thoughts.

    Comment by Frankie from Lawnside -

  21. Mark,

    Clearly the powers that be have no respect for REASON – and don’t
    know what they are losing or why – just as Ayn Rand said. I think
    it’s time morality is introduced before everyone loses everything.
    Your detailed posts that hold the responsible by the balls
    always contain the right questions to problems that if left
    unresolved and inactive will destroy the fabric and integrity
    of all that is left to be thankful for in America. Keep up the good work.

    Comment by Clayton Silva -

  22. I’ll have to admit on this article I don’t understand everything
    you’re talking about Mark. All I know is that the powers that be
    at major banks will never get it.

    The brain trusts at these banks should be fired that allowed the
    down slide and not given a golden parachute. They should not get
    a thing. The Banks gave them millions a year in income to invest of their
    of their own accord.

    Also, I don’t have a high view of the stock market, and if it was up
    to me the stock market would not exist and companies could not depend
    on the public to prop them up with major IPO’s. I personally invest
    in high-interest bank accounts and CD’s only, and run a small writing
    business, along with working a regular part-time job.

    I appreciate your insights on the markets Mark.

    Peace to all,

    Mark

    Comment by mark -

  23. “No politician will pass the chance to look like a smart investor of taxpayer money.”

    That is an extremely important point and one of the exact reasons why our situation is as bad as it is. those leading this country cannot and chose not to think for themselves. who is really to blame – those who are there – or those who put them there?

    Comment by Amber -

  24. Well Mark I suppose your fellow billionaire Steve Forbes would just say they were ‘naked shorted’ just like Fannie Mae and Freddie Mac.Note that not only does Steve molest high school students with
    and his NTU president or ex president J.D.Davidson’s economic porno they call naked shorting but surprise – Rupert Murdoch’s Times of London that led the Northern Rock ‘naked shorting’ rumor in 2007 also allows Steve to repeat the rumor and he says just what Davidson and Byrne say – that ‘naked shorting’ has destroyed(unnamed)companies !
    It is true in my opinion that if naked shorting were occuring for any length of time it would cause damage to A STOCK’S SHARE PRICE – I AM SURE OF THAT AND SO ALWAYS THOUGHT IT WAS ILLEGAL.However as you know and have stated Mark – IT WOULD NOT CAUSE A SUCCESSFUL COMPANY TO FAIL – THAT IS A FORBES LIE AND HE KNOWS IT !
    It would hurt an investor in shares until the problem or crime was dealt with but the successful company WOULD NOT be running on the sale of its own shares or it could not be called successful – it would be a failure until it was generating enough profit to be independent of its own shares for capital wouldn’t it ? Steve Forbes is caught in a big lie but who will call him on it except defrauded amateurs such as myself when he and his pal Rupert Murdoch have a monoploy or better said – a strangle hold – on business journalism ?
    Jesse Eisinger,Barron’s Alpert(who did some good writing in his day),Carol Remond,Gay Weiss and all Steve Forbes-Rupert Murdoch employees should all bow their heads in shame as far as I’m concerned.
    Below from Rupert Murdoch and the Lord William Rees-Mogg’s Times of London provides more proof(to me)that Steve Forbes has known about his colleague James Dale Davidson’s phoney naked short sale claim fraud and his running penny stock frauds from their NTU office near the SEC office for years.
    Remember last year Rupert’s Times was the first to make the naked shorting assertion for Northern Rock.It appears to me that there is a ‘conspiracy’ indeed among the very wealthy involved in ‘securities’ to use Davidson’s,Grant Atkins,Brent Pierce’s,Dave Patch’s and of course now Patrick Byrne’s NCANS because he plagiarized it from Davidson’s NAANSS,naked shorting to divert attention from what really happened to Fannie Mae and Freddie Mac, et.al..

    My only question now is – where are the business journalists ? Oh yeah they work for Rupert Murdoch and Steve Forbes…….
    Also does anyone know what became of John Berthoud and what was the ‘natural’ cause of this 45 year olds ,who had replaced James Dale Davidson at the NTU office as president,death ? Did Steve and J.D.D. attend his funeral ?

    http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5347922.ece

    He describes it as an “arcane practice” which has put the economy in a “death spiral.” He is no less passionate about the need to reinstate the uptick rule, which he also believes is hitting life assurance. Under the uptick rule a share could not be shorted unless it had gone up in price. “It’s no surprise to anyone . . . that market volatility exploded after the uptick rule ceased. There were no speed bumps left when shorts went after a stock.”

    This was compounded by another of his pet hates “naked” short selling – selling when you have not borrowed the shares. Thankfully he doesn’t have a motoring analogy for this “lunacy”. Finally, he says that Freddie Mac and Fannie Mae should have their bonds guaranteed and be broken into smaller recapitalised companies to get the housing market moving quickly.

    ……………………….

    http://suburban.gmnews.com/news/…siness/ 037.html

    Steve Forbes speaks in Edison
    BY ENID WEISS Correspondent
    Steve Forbes, editor in chief of Forbes magazine and former presidential candidate, gave Wardlaw-Hartridge High School students a crash course in economics on Dec. 1 at the north Edison school.

    Forbes explained, “Most of the losses you read about are not a shortage of cash … . A company can be making money and it still goes broke — only in America.

    To make matters worse, the Securities and Exchange Commission (SEC) eliminated some stock market rules, allowing “naked short selling,” he said.

    “Short selling allows you to pound stocks into oblivion,” Forbes said. “It allows you to sell what you don’t own.”

    Contact Enid Weiss at metuchen@gmnews.com.
    Tony Ryals | 12.20.08 – 12:02 am | #

    Comment by Tony Ryals -

  25. Mark, I wonder what percentage of the bailout funds are being used
    and reserved by management for *payroll*. It seems like a tremendous
    risk that I haven’t heard anyone talking about.

    The banks primary agendas (if they are run by humans) could be to
    stay employed for the next couple of years until the job market for
    bank execs recovers…

    -eric

    Comment by eric shannon -

  26. Who is really going to make the call on when to exercise the new “options” or how to vote at shareholder meetings? There really is not a clear goal. Is the goal to profit or keep the company afloat? There are a lot of things wrong about the government being involved in all of this. The NBA realized a few years ago that each team needed one dominant owner to make decisions because you could not always get a “consensus” with everyone happy. It all started over making a trade for Joe Johnson. What will it take for the government to realize that same thing?

    please visit “www.lawandmarkets.com”

    Comment by Claus -

  27. Who is really going to make the call on when to exercise the new “options” or how to vote at shareholder meetings? There really is not a clear goal. Is the goal to profit or keep the company afloat? There are a lot of things wrong about the government being involved in all of this. The NBA realized a few years ago that each team needed one dominant owner to make decisions because you could not always get a “consensus” with everyone happy. It all started over making a trade for Joe Johnson. What will it take for the government to realize that same thing?

    Comment by Claus -

  28. On the bright side, more work for accountants and lawyers.

    Comment by Mucize iksirler -

  29. Now, Mark, you hit the nail right on the head. A great point of view. The age of common sense is passing right before our very eyes. People! Ask the fundamental questions and demand clear answers.

    Comment by Weldon McKinney -

  30. As the saying goes, “Haste makes waste.” I don’t believe the bailout package has been fully thought out. The execution of this is going to go about as smoothly as the execution of SOX was, just a lot of issues.

    On the bright side, more work for accountants and lawyers.

    Comment by Anmol Garcha -

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