Category: Finance

TARP Warrants: Auctions and the Oversight Panel

Good news on the TARP warrant front today (previous installments here and here).

First off, Reuters reports that:

JPMorgan Chase & Co, seeking to completely extricate itself from a federal bailout program, has asked the government to auction warrants to buy the bank’s stock, after the Treasury Department demanded too high a price for the bank to buy them back.

This is great news. Treasury should be driving a hard bargain. And JP Morgan should allow private investors to compete to buy the warrants — maybe that will allow JPM to use its capital for better purposes. As an economist, I also welcome the opportunity to find out the market price of the warrants, so we can compare it to what all the modelers have been estimating.

Next question: How do I bid? I hope Treasury does this in a way that lets small investors participate, much as they can in Treasury bond auctions.

Meanwhile, the Congressional Oversight Panel released a report on the warrants. The Panel suggests, albeit with major caveats, that some initial warrant repurchases were done too cheaply:

Continue reading “TARP Warrants: Auctions and the Oversight Panel”

The Citigroup Repo

As I’ve noted in a series of posts (here’s the most recent), there’s an anomaly in the pricing of Citigroup securities. Several issues of Citi’s preferred stock are scheduled to convert into common by the end of the month. Yet the common stock has been trading at a significant premium to the preferred in recent months. As I type this, for example, the common is trading at roughly a 14% premium to the preferred common, even though the conversion is just a few weeks away.

As best I can tell, the only explanation for this pricing anomaly is that Citigroup common stock is very difficult to sell short. So arbitrageurs can’t bid the spread down to levels that would be normal for such a deal.

This anomaly intrigues me for two reasons. First, it appears to be a blatant rejection of strong versions of the efficient markets hypothesis. However, as I will discuss in a later post, the market for Citigroup securities is actually ruthlessly efficient in many ways. As a result, it’s extremely difficult to profit from the anomaly. Sharp financial types have already bid other prices — most notably those for Citi options — to a level where obvious profit opportunities don’t exist.

Second, the anomaly is a big dangling carrot for big-money types to get creative. Markets always try to find ways around imperfections like the limits on short-selling. So I’ve been wondering what creativity would come out of the woodwork. Well, today I got an answer.

Continue reading “The Citigroup Repo”

Citigroup & Berkshire Anomalies

Summary: Both Citigroup and Berkshire Hathaway continue to violate the law of one price.

Citigroup

In previous posts (this is the most recent), I’ve pointed out that there are three ways you can purchase common shares of Citigroup:

Simple: Buy shares of common stock.

Preferred: Buy shares of preferred stock that will convert into common.

Synthetic: Use call and put options to replicate the financial returns of owning common stock.

In a perfect world, these three approaches would give nearly identical prices. That’s the law of one price.

Over the past few months, however, Citi securities have been breaking that law. Investors who have been buying common shares have been significantly overpaying relative to the values implied by the prices of the preferred stock and options.

Continue reading “Citigroup & Berkshire Anomalies”

Stimulus Lifts Government Transfers

A few weeks ago, I posted some charts showing that Americans are increasingly reliant on government transfers as a source of income. Friday’s data on personal income for May confirmed that the trend is continuing.  Government transfers made up a record 18% of personal income in May:

In interpreting this increase, it’s important to keep several points in mind:

  • May’s increase was driven entirely by the recent stimulus act. The act provided for one-time payments of $250 to a range of Americans who are beneficiaries of various other programs, including Social Security, SSI, and veterans’ benefits. Those payments more than account for the increase in transfers from 16.9% of personal income in April to 18.0% in May. Continue reading “Stimulus Lifts Government Transfers”

Progress on Auctioning TARP Warrants

Ten major banks repaid almost $70 billion to TARP in recent weeks. But they aren’t free from TARP just yet: Treasury still owns warrants to purchase their common stock.

I’ve previously argued that Treasury ought to auction these warrants to the highest bidder. Auctions would (a) be transparent, (b) provide full, fair value to taxpayers, (c) free banks from the TARP, and (d) give banks the opportunity, but not the requirement, to repurchase the warrants. As close to a win-win-win policy as one can hope for in Washington.

Unfortunately, as I noted in a follow-up post, the original TARP investment contracts include a specific process by which banks can negotiate to repurchase the warrants. As much as I like auctions, I believe even more strongly that the government should live up to its agreements. Which is why you haven’t seen me blogging about warrant auctions lately.

Until now.

Earlier today, Treasury announced the process by which it will divest itself of the warrants of banks that have repaid their original TARP investments. This announcement includes lots of good news: Continue reading “Progress on Auctioning TARP Warrants”

The Subsidies in TARP

How much is TARP costing American taxpayers? We know that Congress originally authorized up to $700 billion in TARP investments. And we know that $439 billion has been committed to various programs. But how much of that money are taxpayers likely to see again? And to what extent will they be compensated for making those investments?

The Congressional Budget Office took a crack at answering those questions in a report released last night. The headline finding is CBO’s estimate that subsidies in the TARP program are $159 billion. Taxpayers put up $439 billion and, in return, now own assets (including recent repayments) worth $280 billion.

The following chart shows the estimated value of the TARP portfolio (dark red) and subsidies (light red) across the major TARP programs:

Key insights from the chart: Continue reading “The Subsidies in TARP”

Catherine Zeta-Jones & Consumer Finance

Catherine Zeta-Jones has an important message for policymakers who want to help consumers make better financial decisions.

Really.

Let’s go to the video:

I should emphasize that the message is not that economists are bow-tie-wearing geeks who should be sprayed with garden hoses. That may be true, but it isn’t CZJ’s message to policymakers.

No, the special message of the T-Mobile ad is that …  Continue reading “Catherine Zeta-Jones & Consumer Finance”

The TARP Peace Sign

Wednesday was a rare day in Washington: the Federal government was actually cash-flow positive.

The reason, of course, is that ten major banks repaid $68 billion in TARP money. Smaller banks had previously repaid about $2 billion, so Wednesday’s action lifted total repayments to $70 billion, almost 30% of TARP support to individual banks.

(For those who don’t get the title, this pie chart reminds me of a peace sign.)

As noted in my previous post on TARP, that means that two firms — Citigroup and Bank of America — now account for the majority of outstanding TARP support to banks.  Citigroup has received $50 billion in three transactions, and B of A has received $45 billion in two transactions. Investments in all other banks now total “only” $79 billion.

Continue reading “The TARP Peace Sign”

Linkfest

Some good items elaborating on topics I’ve discussed in the past week:

Tracking the TARP

The TARP continues to grab headlines, so I thought it would be useful to summarize how the TARP money has been used to date.

As you may recall, the Troubled Asset Relief Program (TARP) created a pool of $700 billion that the Treasury Secretary could use to stabilize the financial sector.  The following chart summarizes the TARP transactions that have already occurred (dark blue) and any additional funds that Treasury has announced for each program (grayish):

As the chart illustrates, Treasury has announced plans for about $645 billion of the TARP money, of which $435 billion has been committed to specific transactions.  But the most interesting facts involve the specific programs:

Continue reading “Tracking the TARP”

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