Treasury incentives versus taxpayers

Posted by Marc Hodak on May 17, 2009 under Invisible trade-offs | Be the First to Comment

Assistant Professor of Finance Linus Wilson has done a valuation of the warrants bought by Old National Bancorp from the U.S. Treasury to satisfy repayment of the Capital Purchase Program, the investment that healthy banks everywhere are dying to pay back.  Prof. Wilson has estimated that Treasury accepted a discount of up to 80 percent.  Tyler Durden comments:

While these days, when $9 trillion misplaced here or there by the Federal Reserve is taken as almost a given, the amounts in question are nominal, it merely underlines the continuing trend of short shrifting taxpayers at the cost of established banking interests. One can be sure that what is valid for ONB, is more than valid for Goldman Sachs, Citi and BofA.

Wilson summarizes it best:

U.S. taxpayers do not appear to be receiving fair market value for the risky securities that they purchased. Policy makers should be troubled because Wilson estimates that the CPP warrants could be worth between $5 billion and $24 billion based on May 1, 2009 closing prices. It could mean billions of dollars in lost revenue if the U.S. Treasury continually negotiates deals at the low-end of or below fair market value. Further, if the U.S. Treasury agress to sell the CPP warrants below fair market value, then the estimates of the subsidies involved in the CPP investments by the Congressional Budget Office (2009) and the Congressional Oversight Panel (2009) may be significantly underestimated.And here comes the kicker:

Many readers will not be surprised by this results. U.S. Treasury officials’ incentives are not as well aligned with the interests of taxpayers as bank managers’ incentives are aligned with the interests of their shareholders. For this reason, we should probably continue to expect the U.S. Treasury to negotiate a price that is below or on the low-end of the fair market value of the CPP warrants. Without a major change in the structure of compensation in the federal bureaucracy, which seems nearly impossible, the best hope for taxpayers is to sell the warrants to third party investors.

Of course, Treasury may have particular reasons for giving Old Bancorp a great deal on their warrants, besides simply not caring about a few measly millions.   Taxpayers are oblivious to the amounts or the reasons.  If the press gave them the information, which would require more financial literacy than possessed by their average readers, they would have no idea what to make of it.  And, because this theft is invisible to the taxpayers, it means absolutely nothing to the bureaucrats managing their money.

But to hear it from our legislators, our country needs a massive dose of help in making its public corporations more accountable to their shareholders.  Meanwhile, the largest accountability gap on earth continues unabated under the very noses of Congress, while their putative oversight focuses on pointy-headed academic dissertations about what Treasury ought to be doing.

HT:  Zero Hedge