So Polar Bear tipped me off that Congress is actually on top of the ball for once, and is proposing, oddly, exactly what I am suggesting. This, of course, lead me to believe I had gotten it terribly wrong.
http://thomas.loc.gov/...
H. R. 3232
To amend the Emergency Economic Stabilization Act of 2008 to require certain warrants held by the Secretary of the Treasury to be sold at public auction upon the repayment of the associated assistance provided under the Troubled Asset Relief Program.
July 16, 2009
Ms. KILROY (for herself, Mr. SHERMAN, Ms. SUTTON, Ms. FUDGE, Mr. BOCCIERI, Ms. SPEIER, and Mr. GRAYSON) introduced the following bill; which was referred to the Committee on Financial Services
Hot dog! We got a ball game.
First off, Goldman Sachs is trying to get you to Indian wrestle when you should be fighting standing up. You are never going to beat GS at their game, and as much as you hate it, they play clean by the letter of the law, and they do it the best.
No matter how clever you think you are, there are three even more clever monkeys at GS working on the same thing with the capital of the world funding their development. And they work in dark pools you don't even know exist.
No, a magnificent beast like this you have to sucker punch to get anything of it. It is high time the Treasury, and the House of Representatives, stand up for themselves and uphold the rule of law and have a public auction for the warrants of Goldman Sachs and any other TARP recipients in an open and free market, as per the TARP agreements.
Goldman Sachs is the zenith of corporate capitalism, the very torch bearers of free open markets and American finance. Why by Goldman Sachs standards, the market for their warrants should be an international auction. That would definitely make the Chinese grin.
The warrants in question is thus:
http://www.ustreas.gov/...
Warning! PDF! Because an html page would be just to transparent.
Warrant: The UST will receive warrants to purchase a number of shares of common stock of the QFI having an aggregate market price equal to 15% of the Senior Preferred amount on the date of investment, subject to reduction as set forth below under "Reduction".
The number of common stock of the Qualifying Financial Institution (QFI) that the warrants contained as a security is dependent on variables such as amount borrowed and the current state of affairs at the QFI.
For example:
Goldman Sachs bites Uncle Sam's hand
By Allan Sloan, senior editor at large
http://money.cnn.com/...
The warrants are very valuable, especially with the recent sharp run-up in Goldman's stock price. The warrants carry the right (but not the obligation) to buy 12.2 million Goldman (GS, Fortune 500) shares at $122.90 each.
So after the variables were applied to the $10 billion borrowed by Goldman Sachs under TARP, there are now 12.million warrants issued.
Back to the TARP document:
The initial exercise price for the warrants, and the market price for determining the number of shares of common stock subject to the warrants, shall be the market price for the common stock on the date of the Senior Preferred investment (calculated on a 20-trading day trailing average), subject to customary anti-dilution adjustments.
This sets the strike price of the warrants, which is the price they will be sold at later when they are exercised. When Goldman Sachs agreed to TARP, the stock price was $122.90.
Allan Sloan did the homework:
Goldman's closing price of $156.84 yesterday put the warrants "in the money" by a bit over $400 million. (That's the $33.94 difference between $156.84 and $122.90, multiplied by 12.2 million.)
Last things you need to know is:
Term: 10 years
Now also remember Goldman Sachs is just the largest gold mine. All the smaller borrowers warrants should also be in the money, or they are about to die. Either or.
Though not as much as GS, but even Chrysler Financial's warrants are good investments. And that's saying something.
Now the question is how to introduce these warrants into the market. Luckily, that was covered in the TARP agreement:
Transferability: The warrants will not be subject to any contractual restrictions on transfer; provided that the UST may only transfer or exercise an aggregate of one-half of the warrants prior to the earlier of (i) the date on which the QFI has received aggregate gross proceeds of not less than 100% of the issue price of the Senior Preferred from one or more Qualified Equity Offerings and (ii) December 31, 2009.
Okay, there's the deadline, December 31, 2009. The rest sets the terms for this last hurdle to be jumped before the members of the Money Trust are allowed to shower themselves with money again.
The QFI will file a shelf registration statement covering the warrants and the common stock underlying the warrants as promptly as practicable after the date of this investment and, if necessary, shall take all action required to cause such shelf registration statement to be declared effective as soon as possible.
http://en.wikipedia.org/...
Shelf registration is an arrangement with the U.S. Securities and Exchange Commission that allows a single registration document to be filed that permits the issuance of multiple securities.
So basically, the Qualified Financial Institution registers the common stock that underlies the warrants in a shelf registration.
The QFI will also grant to the UST piggyback registration rights for the warrants and the common stock underlying the warrants and will take such other steps as may be reasonably requested to facilitate the transfer of the warrants and the common stock underlying the warrants.
If you are still reading, CONGRATULATIONS! You are now at the interesting part.
The United States Department of the Treasury has the piggyback registration rights for the warrants.
Registration Rights
http://us.practicallaw.com/...
Contractual rights to participate in or require a public offering of equity securities. These rights are usually contained in a registration rights agreement entered into by the company and certain stockholders. There are two principal types of registration rights:
#Demand registration rights, where an investor can force a company to file a registration statement to register the holder’s securities so that the investor can sell them in the public market without restriction.
#Piggyback registration rights, where the investor is entitled to register its securities when either the company or another investor initiates the registration. Holders of piggyback rights are allowed to include their securities in a registration initiated by another party (the company or another investor). This type of registration right is seen as inferior to demand registration rights, because holders of piggyback rights cannot initiate the registration process.
In other words, we don't get these warrants until the Qualified Financial Institution qualify to leave TARP. The QFI then registers the common stock underlying the warrants and the Treasury registers the warrants as per the piggyback agreement.
Remember, the warrants are just a right to buy, or not buy, the common stock at the original strike price.
The QFI will apply for the listing on the national exchange on which the QFI’s common stock is traded of the common stock underlying the warrants and will take such other steps as may be reasonably requested to facilitate the transfer of the warrants or the common stock.
Goldman Sachs is traded on the New York Stock Exchange, which I heard is another cathedral of capitalism, and is also the national exchange in question. So the warrants are to be issued there, that is going to be one epic IPO (Initial Public Offering).
Free and open markets is what capitalism is all about, so anyone who can trade on NYSE should be eligible for a crack at these warrants. It's right there in the TARP document.
Here is what is going on in reality, get out the crying towels:
Bank Stock Warrants Undervalued, Panel Says
By Edmund L. Andrews, July 10, 2009
http://www.nytimes.com/...
The panel estimated that the government’s approach could cost taxpayers as much as $2.1 billion if it were to be applied to all the banks and Wall Street firms that have borrowed a total of $240 billion since last fall.
Oh lord, here we go.
Because most bank shares have climbed sharply since last fall, the warrants already represent at least a potential profit for taxpayers. But their exact value is open to judgment, in part because the warrants do not trade publicly and have no market price. The banks have what amounts to a right of first refusal to buy back the warrants at "fair market value," a term that was never defined in the loan agreements.
The easiest way to find out the "fair market value" is a "fair market", say the NYSE.
The panel said one big reason for the Treasury’s undervaluation was that it included a liquidity discount based on the possibility that the owner of a warrant would face a cash squeeze and be under to pressure to sell. That discount was inappropriate, the panel said, because the government will never face such a cash crunch.
That is comedy gold. You mean our Treasury, which just can't stop pressing money, is going to face a cash crunch? Get the heck out of town.
"Treasury has laid out a clear and consistent approach," Andrew Williams, a spokesman for the Treasury said. "We recognize that with non-traded securities, some will say that any price at which Treasury sells is too low, and some will say it is too high. The problem is that model valuations alone do not represent what someone will pay for a warrant."
Again, a public auction in an open exchange market will solve this magical value problem the Treasury seems to be having. The Congressional panel also recommended that a public auction for the warrants. I think they got that crazy idea from the TARP document itself.
This is madness.
Corporations like Goldman Sachs and JP Morgan should have to follow the same market rules as everyone else or it is not a free market. It is a rigged market, a closed loop between these financial institutions and our collective Treasury.
Not to mention no such warrants exist, so there is no telling how the market will react to getting the strike price on these warrants for a ten year term. Imagine getting Goldman Sachs or JP Morgan at that strike price in 2017.
The US taxpayer will receive a healthy return, as a public market would dictate, and definitely more than the deflated prices current being offered by the Treasury.
Why no one in Congress has step up to enforce the public auction route for these warrants is a question that needs answering.
Either force these supposedly healthy banks into the public market, or admit that capitalism and free markets are just a ruse for the rubes. Any financial institution that does not offer a public auction of its warrants should also be treated as a social and monetary pariah.
Shunned from polite, and impolite, society.
That happens to stunning hypocrites who got extremely greedy at the cost of our country.
Here are the people who should hear from you, demanding a public auction for these warrants:
Members of the Committee on Oversight and Government Reform
http://oversight.house.gov/...