We asked professor Linus Wilson, a finance professor at the University of Louisiana at Lafayette, to analyse Bank of America’s agreement with the US Treasury to end the $118 billion asset guarantee by paying $425 million. As you’ll see, once again the taxpayers got screwed.
Here’s Wilson’s report:
This agreement is another example of a “too-big-to-fail” bank underpaying taxpayers for the insurance that helped keep it afloat during the market troughs.
This is less than one-tenth of the price Bank of America promised taxpayers on January 15, 2009. For all the talk by BofA CEO Ken Lewis and others that they did not reach a final agreement, it took Bank of America until May 6, 2009, to notify the Federal Reserve that the loss-sharing agreement was to be cancelled per the asset guarantee term sheet. During that period, BofA’s stock hit a low of $2.53 in March. It could have gone lower without the explicit federal support.
According to my calculations based on the May 6, 2009, cancellation date, BofA owed taxpayers $96 million in dividends, the fair market value of the warrants as of yesterday would have been about $331 million, and the preferred stock was worth $4 billion. Thus, taxpayers were owed $4,4 billion for the guarantee. They got $425 million. That is less than 10 cents on the dollar. Just because you don’t burn down your house, the insurance company will not give you a 90 per cent refund of the premiums.
Taxpayers do benefit from getting rid of the insurance liability, but that liability was likely worth much less than $4 billion. Asset markets have significantly recovered since January 15, 2009, and the guarantee likely worth less today. If the asset insurance liability was worth just over $4 billion in January when Ken Lewis agreed to the guarantee, then it is likely worth at least a couple of billion dollars less on May 6, 2009. Thus, if Tim Geithner was protecting taxpayers’ interests, he would not have agreed $425 billion settlement, he should have demanded a couple of billion dollars more.
Unfortunately, since there is no publicly available actuarial analysis of the value of the BofA asset guarantee on May 6, 2009, we cannot easily come up with a good estimate of how much taxpayer money was given to BofA’s shareholders from the deal announced on September 21, 2009. That underpayment to taxpayers is likely over a billion dollars.
I’m glad BofA wants to exit TARP. It should not be relying on taxpayer subsidies to be “freeing” itself of government assistance. For that reason, Tim Geithner should require that BofA repays the subsidized 5 per cent dividend Capital Purchase Program (CPP) shares prior to the 8 per cent Targeted Investment Program (TIP) preferred shares. If BofA pays back the higher dividend TIP shares first with Tim Geithner’s permission, BofA would be still signaling that its business model is free riding off taxpayer subsidies, and Mr. Geithner would be signaling that the Treasury supports the banks first and taxpayers second.