The world is coming to and end. Citi is going broke and sells for .99. AIG is broke, Fannie and Freddy are swamped with bad loans. American Express, Bank of America, and other big bank names are blowing up. There are no investment banks left. Bear Stearns, and Lehman are are toast, Merill has been bought by B of A. The situation is hopeless. Cramer and Art Cashen are telling us to sell and are bashing poor Henry Paulson and the new Obama administration for socializing the banks with a risky bailout program. Remember?
Guess who bought the banks stocks then? You did. that's right you did. Congratulations on your wise investment. When all those folks were running to the exits in Sept and October your government was playing investment banker and scarfing up these stocks
The NY Times reports the following:
Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.
The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.
These early returns are by no means a full accounting of the huge financial rescue undertaken by the federal government last year to stabilize teetering banks and other companies.
The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group [AIG 46.07 -4.16 (-8.28%) ], the mortgage finance companies Fannie Mae [FNM 1.98 -0.06 (-2.94%) ] and Freddie Mac [FRE 2.31 -0.09 (-3.75%) ], and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.
But the mere hint of bailout profits for the nearly year-old Troubled Asset Relief Program has been received as a welcome surprise. It has also spurred hopes that the government could soon get out of the banking business.
“The taxpayers want their money back and they want the government out of our banking system,” Representative Jeb Hensarling, a Texas Republican and a member of the Congressional Oversight Panel examining the relief program, said in an interview.
Profits were hardly high on the list of government priorities last October, when a financial panic was in full swing and the Treasury Department started spending roughly $240 billion to buy preferred shares from hundreds of banks that were facing huge potential losses from troubled mortgages. Bank stocks began teetering after Lehman Brothers collapsed and the government rescued A.I.G., and fear gripped the financial industry around the world. (Give me a break)
American taxpayers were told they would eventually make a modest return from these investments, including a 5 percent quarterly dividend on the banks’ preferred shares and warrants to buy stock in the banks at a set price over 10 years. ( You know don't invest in the banks it will take years...That's what they said)
But critics at the time warned that taxpayers might not see any profits, and that it could take years for the banks to repay the loans.
As Congress debated the bailout bill last September that would authorize the Treasury Department to spend up to $700 billion to stem the financial crisis, Representative Mac Thornberry, Republican of Texas, said: “Seven hundred billion dollars of taxpayer money should not be used as a hopeful experiment.”
So far, that experiment is more than paying off. The government has taken profits of about $1.4 billion on its investment in Goldman Sachs [GS 162.70 -1.72 (-1.05%) ], $1.3 billion on Morgan Stanley [MS 28.74 -0.77 (-2.61%) ] and $414million on American Express [AXP 33.73 -0.51 (-1.49%) ]. The five other banks that repaid the government — Northern Trust [NTRS 58.21 -0.33 (-0.56%) ], Bank of New York Mellon [BK 28.93 --- UNCH (0) ], State Street [STT 53.08 0.10 (+0.19%) ], U.S. Bancorp [USB 22.4276 -0.0024 (-0.01%) ] and BB&T [BBT 28.14 -0.25 (-0.88%) ] — each brought in $100 million to $334 million in profit.
The figure does not include the roughly $35 million the government has earned from 14 smaller banks that have paid back their loans. The government bought shares in these and many other financial companies last fall, when sinking confidence among investors pushed down many bank stocks to just a few dollars a share. As the banks strengthened and became profitable, the government authorized them to pay back the preferred stock, which had been paying quarterly dividends since October.
But the real profit came as banks were permitted to buy back the so-called warrants, whose low fixed price provided a windfall for the government as the shares of the companies soared.
Despite the early proceeds from the bailout program, a debate remains over whether the government could have done even better with its bank investments. (Nah)
If private investors had taken a stake in the banks last October on par with the government’s, they would have had profits three times as large — about $12 billion, or 44 percent if tallied on an annual basis, according to Linus Wilson, a finance professor at the University of Louisiana at Lafayette, who analyzed the data for The Times.
Why the discrepancy? Finance experts say the government overpaid for the bank assets it bought, because its chief priority was to stabilize the teetering financial system, not to maximize profit.
“Had these banks tried to raise money any other way, they probably would have had to pay quite a bit more than the government received,” said Espen Robak, head of Pluris Valuation Advisors, which analyzes the value of large financial institutions.
A Congressional oversight panel concluded in February that the Treasury paid an average of 34 percent more than the estimated fair value of the assets it received.
Of course, many finance experts suggest that the comparison is academic at best, because there is no way to know what might have become of the banks or the financial system as a whole had the government not acted.
“Taxpayers should heave a sigh of relief that the investment in the banks protected them from even more catastrophic losses from more bank failures,” said Aswath Damodaran, a finance professor at the Stern School of Business at New York University.
A more direct comparison of profits can be made with the investment performance of other governments that poured money into ailing banks last fall.
The Swiss government, for example, said last week that it had pulled in a handsome profit for taxpayers on a $5.6 billion bailout it gave to UBS [UBS 18.39 0.05 (+0.27%) ], the troubled Swiss bank, at the height of the financial crisis in October. The government netted $1 billion on its investment, a gain equal to a 32 percent annual return.
“They are substantially in the money,” Guy de Blonay, a fund manager at Henderson New Star in London, said after the announcement.
What the governments of the world did was take the place of the investment banker who were over leveraged and broke. They made the profits that the Merrill, Bear Stearns, and Lehman would have made. They did it with Fed money the bottomless checkbook. Now they being paid back by the banks for their service. Why did bank stocks rally? The governments of the world cornered the market on bank stocks. These stock ran out of sellers.
Now what you see is that the Warrants are being redeemed by the banks and the experts are saying that the banks are a good buy. That's right the same ones that told us that they were going out of business between October through March of this year.
It is the Magic of the markets and the magic of capitalism to take a bad hand and win with it. That hand has been passed on to the public now and as they say hurray for the taxpayers. We made money! Now lets reduce the interest rates the banks are giving us. Whoops!, it does not work that way. If it did I would be buying stocks right now but sadly that money is going into the insiders pockets. But don't worry in the next crisis they will be back to help us make money again.
The next financial crisis must deal with the commercial loans problem that runs into the trillions. Not to mention that the "jobless recovery" will kick the crap out of the consumer again. Will the Fed and the treasury be there again? You bet and "we" will make a bunch of money again.
The beat goes on...Mikey
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