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Congress: Be Careful What You Wish For
The government's outrage over those AIG bonuses figures to cost it some real money

Rick Biggs
Posted 03/25/2009
bankstocks.com
rbiggs@bankstocks.com

Following the firestorm over the AIG retention bonuses, Goldman Sachs now says it plans to repay its TARP money ASAP, possibly as soon as April. Given the abuse lately heaped upon TARP recipients generally, and particularly the bonus flap of last week, I can’t say I blame Goldman or anyone else. One would expect that Morgan Stanley and other recipients likely to be deemed well-capitalized after the “stress test” is complete would follow quickly, as well, for competitive reasons and as valuations normalize.

But I don’t see why the government seems so eager to get repaid so quickly. More pointedly, it is fiscally stupid.

Some numbers: the government is receiving 5% annually on its $20 billion investment in Morgan Stanley and Goldman Sachs preferred. That works out to $1 billion in dividend income per year. To fund the investment, the government pays less than 2% on duration-matched obligations. Spread income on the Goldman-Morgan investment alone, therefore, comes to $600 million. Administrative costs are de minimus, and let’s assume the associated warrants are worth nothing.

So the income to the government on its preferreds to the brokers alone is enough to fund the notorious AIG bonuses nearly four times over. Yet the government’s outrage over those bonuses is a key reason Goldman wants to repay the investment early. Does something not add up here?

We already have proof that this whole bonus affair will end up with a negative NPV to the government. In the case of Goldman by itself, and putting aside the other Big Nine recipients, the company had said earlier it planned to repay the TARP investment by the end of 2009, to avoid paying a warrant kicker at the end of this year. Should Goldman prepay eight months earlier as a result of the AIG Bonus Rage, the government will forgo $200 million in net interest income. This already exceeds the AIG payout, even before Attorney General Cuomo got his jackboots on yesterday to force repayment. And as for how evil and unreasonable those bonuses really are, be sure to read the op-ed in today’s New York Times by a recently resigned AIG-FP bonus recipient.

Good work, Congress! Way to put the country first!

What do you think? Let me know!

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Comment:

midwestbanker Posted On 3/25/2009 12:27:46 PM

When lenders turn generally unfriendly it is their best loans that get repaid. The ones that can't repay have to take it.

Dave from Indy Posted On 3/25/2009 1:37:25 PM

I think the now ex-AIG employee quoted in the NY Times needs to stop his whining. I suspect his bonus arrangement was negotiated at the parent company level, and not just for his division. Yes, others took down AIG, but like it or not, he was part of that sinking ship. And when the gov't effectively became an 80% owner, all bets were off. How much of his bonus would he have collected if AIG went into bankruptcy? Not much. US taxpayers saved his job, at least temporarily, and now he voluntarily quits. I say, goodriddance. He can't have it both ways!

pmulqueeney@comcast.net Posted On 3/25/2009 1:43:26 PM

When will the adults be admitted to the conversation of this administation? Someone needs to step-up and explain to this administration that it is time to tend to the business of the this country and not pander to the underproductive elements of the congress and our population. You don't need to be a Harvard policy wonk to know that if our economy continues to struggle, none of these plans have a chance. Obama needs to understand that this is his ball game to win or loose, W is gone. PMM

Erich Riesenberg Posted On 3/25/2009 2:42:06 PM

A lot doesn't add up. Your presumption that the preferreds are somehow "duration matched". Your presumption that the US has been missing out by not having a large soverign wealth fund. Your presumption that there will be no losses on the preferreds. Have you already forgotten about Citi's conversion, or are you just ignorning it? How safe would the preferreds be if the Fed and FDIC had put in additional money to bail these companies out? I wondered how bankstocks missed the implosion of the financial world, but I am getting a better idea.

jsc173 Posted On 3/25/2009 3:46:44 PM

Even if it was temporary insanity, "vengence-is-mine" demonstration of legislative fiat last week scared the bejesus out of everyone who's participated in TARP (voluntarily or otherwise) and everyone who has given thought to participating in PPIP. If a group of mid-level workout managers at AIG, trying to save as much of the company as possible (which only serves to benefit the US Treasury), are threatened personally by senior members of Congress, do you really want to join that club? Tempting though it may sound, I'm betting some investors have just decided they don't need the government as a partner, thank you.

mopedman Posted On 3/25/2009 4:56:57 PM

Who said the government wants it back now? The market take is it will make the ones who have to wait will look even worse. I am reminded at this point of Rice's statement soon after 911..."Are there any other opportunities we might want to try and take advantage of at the present?"<-----Iraq? I've said all along the government will make money from this and it will keep those extra taxes forever in order to help perpetuate itself. Yes it can and does too often happen, over 200 million people looking at the wrong thing. Example.."Did you arrive here on a corporate jet?" Didn't make you think of the members of Congress who live right in the area and fly in on helicopters...every day...did it?

rbliss Posted On 3/25/2009 6:41:56 PM

Yeah that is the big issue here, the interest spread on TARP investments.

Namadi Posted On 3/25/2009 7:55:59 PM

The only thing I have read in a long time that makes sense!!

Millerd1 Posted On 3/25/2009 8:56:20 PM

When are the congressional members going to be held accountable by the press for the "spendulicous" ear mark BONUSES they sent to their home states and districts, and from a failing deficit budget?

Consistency Posted On 3/26/2009 11:14:56 AM

So Rick - which is it: you want the government to be a banker or not? Because what you just outlined would lead to the logical conclusion that all banking should be nationalized, as the US has a "duration-matched" funding advantage. First of all, what diration, exactly, is that? There is no term to the TARP program. Second, they already lost the Citi investment - did you take losses into account? Of course not. All I hear on this site is how poor the government understands banking. And you are saying that government getting out of the lending business is a bad thing. Seriously, you guys need to stop and think before writing.

TampaRichman Posted On 3/26/2009 8:40:21 PM

I do not blame GS for pre-paying early I would, saves them big $ and gets the ObamaNation off its back.

Paul Posted On 3/26/2009 11:55:55 PM

The banks have been making noise about paying back TARP funds for a while. The only reason that they may actually DO it now, is because of the behind-the-back pass (of taxpayer money) Geithner just gave to them and the hedge funds with the PPIF. I'm wondering two things: 1) Once the FDIC runs out of funds, will the taxpayers pay of will the FIDC have to raise bank fees? 2) How will the taxpayers react in a few years if the hedge funds profit, the banks profit, and the taxpayers loses money? The banks should have been careful what they wished for...

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