(1) Doubly Screwed
Let it never be said that Geithner is not a true disciple of Hank Paulson.
Paulson screwed us on the way in, when we bought all those lovely securities in troubled banks for way more than they were worth then:
The Treasury secretary has made 174 purchases of banks’ preferred shares that include certificates to buy stock at a later date. He invested $10 billion in Goldman Sachs in October, twice as much as Buffett did the month before, yet gained warrants worth one-fourth as much as the billionaire, according to data compiled by Bloomberg. The Goldman Sachs terms were repeated in most of the other bank bailouts.
The Treasury, when it was headed by Secretary Henry Paulson, received bank assets worth about $176 billion in exchange for capital purchases of $254 billion under the Troubled Asset Relief Program, the Congressional Oversight Panel said in a report today.
Geithner’s screwing us on the way out, as we rush to sell the warrants back for way less than they are worth now:
The U.S. Treasury has sold warrants it obtained from rescued banks for about two-thirds of what they are worth, a group overseeing the federal bailout said.
The Congressional Oversight Panel, in a report released today, said taxpayers should have recovered $10 million more from warrant sales with 11 small banks. A Treasury official countered that the Obama administration is seeking to protect taxpayers.
(2) The Original Screwing
The five-member (Congressional Oversight Panel’s) report said that the Treasury’s portfolio of warrants could be worth as much as $12.3 billion, with a “best estimate” of $8.1 billion and a “low estimate” of $4.7 billion.
At one level, the news is that we stand to lose between $1.6 billion and $4.1 billion as the Obama administration continues to seek to protect taxpayers by selling warrants for two-thirds of what they are worth.
At another level, the news is that we really know very little about how to value such derivatives (which are just about the simplest kind of derivatives that exist). We do have lovely formulae; the Congressional Oversight Panel used the rightly famous (and Nobel-Prize-winning) Black-Scholes options pricing model for their estimates. But nobody really knows with any confidence what numbers should be plugged into the formulae. So the best we can do is say that the warrants are worth anywhere between $4.7 billion and $12.3 billion. That’s how well we know how to value the very simplest derivatives.
And what were these banks and bankers who beat our economy into a bloody pulp doing? They were taking derivatives that are infinitely more complicated, and they were putting billions and trillions of dollars at risk by buying or selling these derivatives.
Roll that around in your mind, and allow yourself to contemplate the awesome risks these banks and bankers blithely took.