What will the government pay for those warrants? Nothing? I’ll bet those warrants have a floor value, based on my calculations of....zero. So they will make money.
The Chrysler bailout had a nominally predictable outcome, in the sense that the underlying factories would not vanish into vapor, and were capable of producing cars (or...something else) Plus, had the workers become unemployed, and the suppliers lost all the parts business...the ripple effects were fairly predictable and obviously negative.
This bailout will perhaps make money in far more ephemeral ways. It will, I guess, prevent the banks from being able to take gargantuan tax losses on the eventual mark to market of hundreds of thousands or millions of non-performing loans. But if a bank loses $1 million on a loan, it can nominally take about a 35% tax loss. If the government takes over the loan, the governmant will likely incur about a 60%-80% loss after the insiders raid, cherrypick, and sweetheart-deal themselves the assets. Plus whatever amortized share of the 15 six-figure bureaucrats’ salaries who divvy out the assets. Who do you think is going to take those assets off the govts’ books? Ya think it could be...THE BANKS who offloaded the bad loans onto the government in the first place? Who do you think has the inside skinny on the assets underlying the loans? That bother you at all? Of course, then the assets can be returned to productive use and the govt can collect taxes on the revs generated by the assets. But those assets will start brand-new depreciation schedules for the new holders and so will likely throw off nearly zero taxable income if a good Wall St. accountant is involved. So I don’t consider that making money. I consider it insider dealing.
It will also prevent macro-economic bank runs
by institutional bond holders like Bill Gross, sovereign wealth funds, and multiple large holders, and maybe in the sense of preventing a near-collapse of the US banking system, will make the government money.
Here’s my bottom line: This is an extra-Constitutional insider deal whose immediate and ultimate beneficiaries are and will be none other than the banks who encouraged and engineered and benefitted from the biggest piece of this debacle going in, but who will likewise benefit ABSOLUTELY the most going out. If that makes you happy, God bless you. Mortgage your home and buy every share of JPM, MS, GS common you can because there is now utterly no limit on the earnings these stocks will enjoy. Because each and every risk they take is guaranteed to be underwritten by the government. You and me.
Understanding that the “conservative” position on making money for oneself is its a good thing, I believe the opinions expressed on FR by some at some times are flexible based on the issues impact on them personally. In other words, maybe you’re arguing with bankers on this thread for all we know.
I hope you took your blood pressure medicine before writing all of that. I agree with you that there will be positive macroeconomic effects, and this is going to help a lot of little guys too. It’s significant that the equity of the common shareholders isn’t going to be wiped out. That means it isn’t as bad as you think.
You’ve said it, very well.