Gov’t bailout misses the terms Buffett won

Bloomberg

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Henry Paulson’s bank bailouts, done under "great stress" during the worst financial crisis since the Great Depression, failed to win for U.S. taxpayers what Warren Buffett received for his shareholders by investing in Goldman Sachs Group.

The Treasury secretary made 174 purchases of banks’ preferred shares that include warrants to buy stock at a later date. While he invested $10 billion in Goldman Sachs in October, twice as much as Buffett did the month before, Paulson gained certificates worth one-fourth as much as the billionaire, according to Bloomberg data. The terms were repeated in most of the other bailouts.

"We were not looking to replicate one-off private deals" in the transactions, made under the $700 billion Troubled Asset Relief Program, Paulson said Saturday.

"The market was under stress and the private sector was extracting ... severe terms. What we were attempting to do ... was design a program that would be accepted by ... healthy banks with terms that would replicate what you would get in normal conditions," he said.

Not a good bargain
Paulson’s warrant deals may give taxpayers less profit from any recovery in financial stocks than shareholders such as Goldman Sachs Chief Executive Officer Lloyd Blankfein and Saudi Arabian Prince Alwaleed bin Talal, owner of 4 percent of Citigroup, said Simon Johnson, former chief economist for the International Monetary Fund. The transactions are "just egregious," said Johnson. "You want to do it the way Warren does it."

"The worst aspect of this is that they were designed not to do what they were supposed to do," economist Joseph Stiglitz said in an interview Jan. 7. "In many ways, it’s not only a giveaway, but a giveaway that was designed not to work."

The Treasury would have held warrants for 116 million shares of Goldman Sachs under Buffett’s terms, which would be equivalent to a 21 percent stake when added to those currently outstanding. Instead, the dilution is 2.7 percent under the Treasury plan. Blankfein is the company’s biggest individual investor, with shares worth about $178 million. His 0.47 percent interest would have declined to 0.36 percent under Buffett’s terms and would be 0.44 percent if the Treasury’s warrants were exercised.

Massive injection
Government agencies have committed more than $8.5 trillion to shoring up the financial system, including TARP. The program was sold to Congress as a way to buy securities that had fallen in market value. Paulson shifted his emphasis to capital injections to prevent the financial sector from foundering.

Stiglitz said finance professionals at Treasury possessed expertise on warrant pricing that members of Congress did not. As a result, Paulson gave lip service to the lawmakers’ intent on TARP without gaining much value for taxpayers, he said and described the pricing mechanism as "a gimmick to make sure that they were giving away something worth nothing."

"If Paulson was still an employee of Goldman and he’d done this deal, he would have been fired," he said.

A $5 billion U.S. loan last week to GMAC, the finance affiliate of General Motors, was made under the Treasury program and was part of $6 billion advanced to keep the automaker afloat.

In advancing the $5 billion, Paulson accepted warrants that reward taxpayers with an additional $250 million, or 5 percent of the stake. That compares with 15 percent on the 174 completed bank rescues as well as the 100 percent Berkshire Hathaway Chairman Buffett obtained on an investment in Goldman Sachs in September.

A warrant is a certificate that represents an option to buy a certain number of shares at a specific price by a predetermined date.

If the Treasury had received the same terms as Buffett, taxpayers would have become the biggest investors in most of the bailed-out banks and existing stakes would have been diluted, Bloomberg data show.