Tag: Finance

How Did Treasury Vote Its Citigroup Shares?

The United States Treasury is Citigroup’s largest common shareholder, owning 7.7 billion shares, or about 27% of the company. Which raised an interesting issue at today’s annual meeting: how should the Treasury vote its shares?

Treasury answered as follows:

As we have previously stated, Treasury is a reluctant shareholder in private companies and intends to dispose of its TARP investments as quickly as practicable.  When it acquired the Citigroup common shares, Treasury announced that it would retain the discretion to vote only on core shareholder issues, including the election of directors;  amendments to corporate charters or bylaws; mergers, liquidations and  substantial asset sales; and significant common stock issuances.  At the time of the exchange, Treasury agreed with Citigroup that it would vote on all other matters proportionately–that is, in the same proportion (for, against or abstain) as all other shares of the company’s stock are voted with respect to each such matter.  Treasury is abiding by the same principles in the few other companies in which it owns common shares, which are very few, as most TARP investments were in the form of nonvoting preferred stock.

Those sound like good principles. So how did Treasury actually vote?

Treasury voted FOR three ballot proposals:

  • 15 Nominees to the Board of Directors
  • To issue $1.7 billion of “common stock equivalents” to workers in lieu of cash incentive compensation (a way to conserve cash that Citi agreed to in a deal to repay some TARP money)
  • Reverse stock split

Treasury voted PROPORTIONALLY on the remaining proposals:

  • Ratify KPMG as the firm’s accountant
  • An increase in shares for a stock incentive plan
  • Executive compensation (nonbinding “say on pay”)
  • A “Tax Benefits Protection Plan” which discourages ownership changes that would reduce the value of Citi’s $46 billion in deferred tax assets
  • Six shareholder proposals covering such issues as corporate governance and political activity.

Treasury emphasizes that its proportional votes don’t mean it lacks an opinion on these proposals. Referring to two corporate governance proposals, for example, Treasury noted that it may have a policy preference but:

Treasury believes that it would be inappropriate to use its power as a shareholder to advance a position on matters of public policy and believes such issues should be decided by Congress, the SEC or through other proper governmental forums in a manner that applies generally to companies.  For this reason, and because voting on such matters was not necessary in order to fulfill its EESA responsibilities, Treasury refrained from exercising a discretionary vote.

Although Treasury expressed that view with respect to the corporate governance provisions, I can’t help but wonder what it felt about the “Tax Benefits Preservation Plan.”

You can see all the proposals in Citigroup’s proxy statement.

Disclosure: I own no Citigroup securities of any kind (see this post for a summary of my previous thoughts about Citi securities).

Microlending Comes to Washington

Banks continue to be reluctant to lend to small businesses. As a result, NPR reports (ht Ray), some small businesses are turning to a form of microlending. A case in point is Ryan Fochler, a pet care entrepreneur:

After being turned down by bank after bank, Fochler came across the Latino Economic Development Corporation, a nonprofit microlender based nearby in Washington, D.C.

Fochler is not Latino, but he was told that was OK. The LEDC works with all kinds of local businesses that have been turned down by traditional banks. Their goal is to help fledgling, independent businesses get on their feet.

They don’t operate exactly like microlenders in the developing world, some of which issue interest-free loans and let recipients repay whatever they can, whenever they can.

In contrast, American microlenders charge competitive interest rates, and the loans must be repaid on time. Defaulting on a microloan has the same consequences as defaulting on a bank loan.

The LEDC issues loans ranging from $500 to $50,000. Often in the past, those who came to the LEDC to apply for a microloan had little or no credit history.

But Rob Vickers, director of lending at the LEDC, says the profile of his average microloan applicant changed dramatically during the credit crisis.

“I was seeing clients that I couldn’t believe weren’t bankable coming in, and thinking, ‘Wow, this person has a credit score in the mid-700s, their business existed for more than two years, and yet, not only are they not able to obtain a bank loan, but they’re having their credit line slashed.'”

As noted, it isn’t exactly the same as the microlending made famous in developing economies. But it has some interesting similarities.

For more, read the transcript on which the NPR article is based.

Good Charts from the ERP

Last week, the Council of Economic Advisers released its 2010 Economic Report of the President (ERP). I haven’t had time to read it yet, but I did take a quick spin through looking at the charts and getting a feel for it.

The first thing I noticed is that the folks at the CEA have made an important innovation: the ERP now includes references to the academic studies, government reports, etc. on which it bases some of its conclusions. That’s a welcome break from a long-standing tradition (which I never really understood) that the ERP didn’t include references.

A second useful innovation is that the ERP is available in eBook formats, including for my beloved Kindle. Not to add to their already enormous workload, but I look forward to the 2011 or 2012 version having dynamic graphics and live links to the references.

Here are some of the charts that I particularly liked:

1. The boom and bust of house prices. By this measure, house prices are still historically high–except for the bubble.

2. The declining role of banks in the financial sector. Note the growth of mutual funds and ABS issuers.

3. How rising health care costs may consume a rising share of employee compensation. (Note, however, that by setting the axis at $30,000 rather $0, the chart visually exaggerates the effect.)

4. How the rate of being uninsured varies with age.

Goldman Really Did Overpay for Its TARP Warrants

Yesterday, Treasury released a comprehensive report on the disposition of TARP warrants through 12/31/2009. It’s a font of fascinating information–at least for fellow TARP warrant aficionados.

Treasury apparently did quite well when it negotiated with banks that wanted to repurchase their TARP warrants. I am still a fan of auctions, but you have to give Treasury credit–they did defend taxpayer interests in the negotiations.

Treasury drove an especially hard bargain with Goldman Sachs. As shown in the following chart from the report, Goldman ended up paying much more than any of the estimates that Treasury considered:

The green line is what Goldman actually paid: $1.1 billion. The yellow lines are Goldman’s earlier bids ($600 million and $900 million). The black bars are the range of estimates from three different modeling efforts. Bottom line: Goldman overpaid.

The report has similar graphs for the other 33 firms that have repurchased their warrants; some of them paid at the upper end of the black bars, but none overshot like Goldman.

Disclosure: I have no investments in Goldman Sachs (or any TARP recipients).

Federal Reserve Earns $46 Billion for Taxpayers

The Federal Reserve system is doing its part to cut the budget deficit (at least for now). Treasury will receive $46.1 billion of profits from the Federal Reserve profits for fiscal 2009. That’s about a third higher than the amount remitted for 2008.

According to the Fed’s news release this morning, the following items drove profits:

$46.1 billion in earnings on securities acquired through open market operations (U.S. Treasury securities, government-sponsored enterprise (GSE) debt securities, and federal agency and GSE mortgage-backed securities) [Profits on traditional open market operations plus the new credit easing operations]

$5.5 billion in net earnings from consolidated limited liability companies (LLCs), which were created in response to the financial crisis [Profits on the Maiden Lane partnerships etc.]

$2.9 billion in earnings on loans extended to depository institutions, primary dealers, and others [Profits on the new loan facilities]

[$2.6 billion in] net earnings from currency swap arrangements, which have been established with 14 central banks, and investments denominated in foreign currencies

Additional net earnings of $1.5 billion were derived primarily from fees of $0.7 billion for the provision of priced services to depository institutions

Those $58.6 in gross earnings were slightly offset by the following expenses:

[$3.4 billion for] operating expenses of the twelve Reserve Banks, net of amounts reimbursed by the U.S. Treasury and other entities for services the Reserve Banks provided as fiscal agents

[$2.2 billion in] interest paid to depository institutions on reserve balances [As noted previously, the Fed’s still-new ability to pay interest on reserves is a big deal for monetary policy; this is the cost side]

[$0.9 billion in] Board expenditures, including the cost of new currency

The resulting $52.1 billion in new profits were then distributed as follows: $46.1 billion to the Treasury, $1.4 billion as dividends to member banks, and $4.6 billion retained to “equate surplus with paid-in capital.”

What’s the United States Worth? $1.4 Quadrillion

Happy 2010, everyone. To kick off the new year, I am in Atlanta at the annual meeting of the American Economic Association. As Paul Kedrosky notes, there are lots of sessions on the financial crisis and its aftermath. Perhaps not surprisingly, many presentations have a pessimistic tone. But there are pockets of optimism, including Robert Shiller’s luncheon speech about the potential benefits of continued financial innovation.

One of Shiller’s ideas is that the federal government should issue a new kind of security that would pay quarterly dividends based on the nation’s gross domestic product (GDP). More specifically, each security would entitle its owner to one-trillionth of America’s gross domestic product (GDP). These “Trills” would be perpetual, like common stock in a private company, and would be backed by the government’s full faith and credit.

I will leave to others to argue the pros and cons of Trills. What caught my attention was Shiller’s estimate of how much they would be worth. With GDP around $14 trillion, each Trill would pay about $14 in annual dividends this year. That dividend would then increase (or, of course, decrease) as the economy grows (or contracts) in the future.

How much you would be willing to pay for a Trill? In principle, that should depend on your expectations of future GDP growth and your choice of what discount rate to apply to cash flows that track GDP. Oh, and if you worry about the U.S. government defaulting (still a very low risk), you might include a discount for that as well.

Shiller’s own answer is $1,400. In other words, he thinks Trills would be priced with a yield of about 1%. Trill owners would be willing to accept that low yield because they would expect future economic growth to boost dividends–and, therefore, Trill values–in the future.

That figure feels a bit high to me, but not unreasonable. For example, you could justify a $1,400 per Trill valuation if you believe that nominal GDP growth will be 4 percent and that an appropriate discount rate would be 5 percent.

If you take Shiller’s estimate seriously, it is just a short step to placing a value on the U.S. economy as a whole. If one trillionth of the economy is worth $1,400, then the entire economy would be worth $1.4 quadrillion.

TARP Repayments Reach $164 Billion

An upbeat news release from the Treasury Department as we approach the holiday break: Wells Fargo and Citigroup have repaid $45 billion in TARP money, bringing total repayments to $164 billion. In addition, Treasury now expects that the portion of TARP that stabilized the banking system will actually generate a profit for taxpayers. (Of course, some of the other parts of TARP look like serious money losers, but we can discuss that in the new year.)

I couldn’t find the Treasury news release on its website (either I’m dense or the person in charge of that took the day off), so here’s the full text with my emphasis added:

Today, the U.S. Department of the Treasury received repayments on its Troubled Asset Relief Program (TARP) investments in Wells Fargo and Citigroup in the sum of $45 billion, bringing the total amount of repaid TARP funds to $164 billion. Wells Fargo repaid $25 billion under the Capital Purchase Program (CPP) and Citigroup repaid $20 billion under the Targeted Investment Program (TIP), both of which will wind down at the end of this year. Treasury now estimates that total bank repayments should exceed $175 billion by the end of 2010, cutting total taxpayer exposure to the banks by three-quarters.

In addition, effective today, Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation and Citigroup terminated the agreement under which the U.S. government agreed to share losses on a pool of originally $300 billion of Citigroup assets.   This arrangement was entered into in January of this year under Treasury’s Asset Guarantee Program (AGP) and was originally expected to last for 10 years.  The U.S. government parties did not pay any losses under the agreement and will keep $5.2 billion of $7 billion in trust preferred securities  as well as warrants for common shares that were issued by Citigroup as consideration for such guarantee.  With this termination, the AGP is being terminated at a profit to the taxpayer.

Treasury currently estimates that TARP programs aimed at stabilizing the banking system will earn a profit thanks to dividends, interest, early repayments, and the sale of warrants. Total bank investments of $245 billion in FY2009 that were initially projected to cost $76 billion are now projected to bring a profit. Taxpayers have already received over $16 billion in profits from all TARP programs and that profit could be considerably higher as Treasury sells additional warrants in the weeks ahead.

The Worst Decade for Stock Investors


According to this morning’s Wall Street Journal, the 2000s are on track for a dismal record: the worst performance of U.S. stocks in any decade on record.

According to data from the Yale International Center for Finance, stocks have fallen about 0.5% per year, on average, during the current decade. Unless stocks stage a healthy rally in the next two weeks, the 00s will thus come in behind each of the past 17 decades, including the -0.2% average annual return of the 1930s.

As the article notes, this comparison is partly driven by a “quirk of the calendar, based on when the 10-year period starts and finishes.” For example, stocks fell more in the ten-year period ending in 1938 than they did in the 00s. For a nice year-by-year display, see the WSJ’s graphics (which include the chart to the right).

Let’s hope the 2010s do better.

Mythical Budget Savings from Cutting TARP

The TARP news continues fast and furious. This afternoon’s installment involves the House’s financial regulation bill, officially known as H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009. That bill would make many changes to financial regulation, one of which – enhanced dissolution authority for financial firms that run into severe trouble – would cost about $10 billion over the next five years, according to the Congressional Budget Office.

In order to pay for those costs, the bill would reduce TARP authority by $20.8 billion. Consistent with previous scoring decisions, CBO estimates that this provision would result in budget savings of $10.4 billion (because CBO assumes, for scoring purposes, that each dollar of reduced TARP authority translates into 50 cents of reduced outlays; for more explanation, see this earlier post.)

Why is this important? Because the alleged savings are mythical.

Earlier today, Secretary Geithner predicted that the maximum draw on TARP would be $550 billion out of the $699 billion currently authorized. Reducing TARP authority from $699 billion to $678 billion, as the bill would do, would thus have no effect on spending or the deficit.

Under congressional budget rules, CBO is required to score the House bill relative to the budget baseline developed back in March. That was during the depths of the financial crisis so CBO assumed that all TARP authority would eventually be used. Happily, conditions have since improved, and that assumption is no longer realistic. But it is still used in congressional scoring.

The “savings” attributed to the House bill thus exist because the financial world has improved, not because the House bill is actually doing anything new to pay for its costs.

I hasten to add that this isn’t just my opinion. CBO itself highlights this issue in its cost estimate for the House bill, saying (in its more measured tones):

That reduction in spending relative to the March baseline might occur even in the absence of this legislation because financial conditions have improved considerably since March. Indeed, the Secretary of the Treasury noted in his December 9, 2009, letter to the Congress that “beyond these limited new commitments, we will not use remaining [TARP] funds unless necessary to respond to an immediate and substantial threat to the economy stemming from financial instability.” Thus, if CBO were to estimate the impact of the TARP provision in this legislation taking into account current financial conditions, the agency would not expect that the TARP’s ceiling on outstanding investment would be fully utilized. Therefore, the savings estimated relative to the budget resolution baseline may be attributable to the improvement in financial conditions rather than enactment of H.R. 4173. (emphasis added)

P.S. I should emphasize that there are good reasons for the current congressional budget rules. Developing legislation takes time, and it would be disruptive if CBO were constantly updating cost estimates to reflect changes in the economy. Fixing a baseline in March, however, does open up the possibility of budget game playing, particularly in budget categories that are volatile (TARP spending is one; royalties on oil and gas leases are another).  The hard question is when Congress should decide to deviate from the March baseline to reflect new realities.

Treasury Extends, but Limits, TARP

Well that was quick. This morning Treasury Secretary Geithner laid out the administration’s vision for TARP, answering the questions I posed yesterday.

As expected, Secretary Geithner is using his authority to extend the TARP program to October 3, 2010 (it otherwise would have expired at the end of this month). As I’ve suggested in earlier posts, I don’t see how he could have chosen otherwise. The administration is committed to programs that aren’t complete yet, and it needs to worry about unpleasant surprises. In the words of his letter to House Speaker Pelosi:

This extension is necessary to assist American families and stabilize financial markets because it will, among other things, enable us to continue to implement programs that address housing markets and the needs of small businesses, and to maintain the capacity to respond to unforeseen threats.

Second, Geithner announced that henceforth TARP will be used for only four programs: to mitigate home foreclosures, provide capital to small and community banks, additional efforts to facilitate small business lending, and, possibly, to expand the TALF program that supports securitization markets for loans to small businesses, commercial real estate, etc. Notably (and correctly) absent from this list are some of the ideas — funding for new infrastructure, assistance to state and local governments — that have been floated in recent days.

Geithner is right to draw a moat around TARP and to limit its use to specific activities, except in emergencies:

Beyond these limited new commitments, we will not use remaining EESA funds unless necessary to respond to an immediate and substantial threat to the economy stemming from financial instability.

Third, Geithner provided a new forecast of how much TARP money will eventually be used:

While we are extending the $700 billion program, we do not expect to deploy more than $550 billion.  We also expect up to $175 billion in repayments by the end of next year, and substantial additional repayments thereafter.  The combination of the reduced scale of TARP commitments and substantial repayments should allow us to commit significant resources to pay down the federal debt over time and slow its growth rate.

In short, the administration believes that at least $150 billion of TARP money will never be used. That’s great news. But now attention will turn to Congress to see whether it tries to use that $150 billion to “pay for” new initiatives. As I noted the other day, current budget rules would give Congress credit for 50 cents of savings for each dollar that’s removed from overall TARP authority. But such savings are an accounting fiction, not real, if the TARP authority never would have been used anyway.