The Bailout Swindle, Act II

| Fri Jun. 5, 2009 12:07 PM EDT | Scheduled to publish Fri Jun. 5, 2009 4:21 PM EDT

Numerous are the ways the government’s multi-trillion-dollar bailout has scammed taxpayers. One estimate, from the Congressional Budget Office, says the taxpayer-funded TARP could subsidize bailout recipients by a whopping $356 billion by 2010. Now, eight months into the bailout and on the back of the Treasury's much hyped stress-test results, several of the largest recipients are itching to return their bailout billions. Early next week, the Federal Reserve will announce which banks can begin repaying their TARP stock investments using the Fed's updated criteria.

But to completely extract themselves from government control, the banks will also look to buy back their government-held warrants. Warrants are basically stock options to buy shares at a set price over a certain period of time. (In this case, that period is 10 years.) The government initially purchased banks' warrants as part of its plan to recapitalize them and bolster their financial health. Banks now want to buy those warrants back—and it’s here that taxpayers could lose big again.

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Under Treasury guidelines, each financial institution must hire an independent advisor to calculate a “fair market value” for the warrants it wants to repurchase. The Treasury must also calculate its own value. If the two values differ, the bank and the Treasury will get together to settle on a “fair” price. If in fact both sides settle on a truly fair value for the warrants, taxpayers could get their investment back. But if the Treasury concedes to the bank and drops the price, as has been the case so far, it will be the taxpayer who absorbs the loss.

Take the repayment process for Old National Bancorp, one of the first publicly traded banks to repay its TARP investment. It bought its warrants back for $1.2 million, even though a separate analysis valued them at close to $6 million. Several other banks, including Iberiabank and Sun Bancorp, also got juicy deals, paying about 77 percent of what their warrants were worth, according to one analysis.

Of course, the value of these repurchased warrants was miniscule compared to those of financial giants like JP Morgan Chase or Morgan Stanley, which are estimated to be in the realm of $1 billion. Here's what a similar scenario would look like with the mega-banks, according to a Bloomberg News analysis:

Under the Old National warrants formula, Bank of America Corp. would save $2.03 billion, followed by Wells Fargo & Co. at $1.48 billion and JPMorgan Chase & Co. at $1.46 billion. Morgan Stanley’s benefit would be $983 million, Citigroup Inc.’s would come in at $965 million and Goldman Sachs Group Inc. would have $693 million.

Then again, given that the whole bailout has been a losing bet for taxpayers, what's another $7.5 billion down the drain?

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