The government mounted a vigorous defense Friday of its massive bank bailout, responding to an Associated Press analysis showing that stock in the program intended to eventually earn taxpayers a profit has lost about a third of its value — nearly $9 billion — in barely one month.
Shares in virtually every bank that received federal money have remained below the prices the government negotiated.
“We’re not day traders, and we’re not looking for a return tomorrow,” said Neel Kashkari, the director of Treasury’s Office of Financial Stability, which oversees the $700 billion financial rescue fund. “Over time, we believe the taxpayers will be protected and have a return on their investment.”
Likewise, President Bush said there’s no quick fix for the battered economy.
“It’s going to take time for all the actions we’ve taken to have their full impact,” Bush said in a statement about a dismal report that official unemployment has climbed to 6.7 percent. “But I am confident that the steps we’re taking will help fix the problems in our economy and return it to strength.”
Kashkari, speaking in Washington to a Mortgage Bankers Association conference, insisted that the White House has invested tax dollars in “very high-quality institutions of all sizes.” Most of the Treasury Department’s investments since late October have been in preferred bank stocks, more than $180 billion worth, with investments in giants like Citigroup and JPMorgan Chase, and many small community banks. But the government also negotiated options to buy up to 1.2 billion shares of common bank stock that was valued at $27 billion to serve as a potential financial bonanza for taxpayers.
Now, however, the value of that common stock is worth about $18 billion. If the government exercised all its warrants to purchase the stock today, it would lose money on 50 of its 53 agreements. Taxpayers would be out $8.6 billion.
The government can exercise its options to buy the common stock anytime over the next decade, but the options were “immediately exercisable,” according to banks’ securities filings.
“The markets are saying this plan isn’t going to work for the banks,” said Ross Levine, Tisch professor of economics at Brown University. “They’re asking where this plan is going.”
Potential losses among these common stocks include nearly $3 billion for the administration’s biggest deal, a $45 billion injection into Citigroup Inc. The government gave the New York-based giant $25 billion on Oct. 28. Besides preferred stock worth $1,000 per share, the deal included warrants to pick up 210 million shares of common stock at $17.85. In late November, the White House put together a plan to give Citibank another $20 billion. The deal also included warrants to pick up 254 million shares, with the price set at $10.61.
Citigroup stock has since fallen below $8.
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