A Closer Look Here, There and Everywhere
by Trish PurcellI'm not sure why getting warrants instead of actual stock in companies should be a plus, and there are some dangers of deception here.
Warrants, like options, are the right to buy a stock at a given price. The devil is definitely in the details because it all comes down to what price - the depressed stock price of today, the price before this crisis, or some other price in between those two.
Warrants give the holder (the government) the right to buy a stock at a given price (called the strike price). If the warrant price is $10, we make a profit when the stock goes anything over $10... if we get warrants at pre-crisis values (say $100/share) we don't make anything until the price exceeds $100.
It is common practice to just sell the option instead of exercising it and buying the stock. If the stock is at $20 and we have an option for $10, the option is worth $10 or more (more because the stock may still go up, so there is a time value to the option). If the stock is at $50 and we have an option for $100, the option is worth approx $0. Let me spell that out ZERO. If I was one of the greedy corrupt financial industry executives who got us into this mess, I would love to give the government warrants with inflated strike prices in exchange for a few billion dollars.
There is also the opportunity for legislators to say "We got interest in 60% of these companies for our money" which would sound like they protected us, when in reality it may be that what they actually got is options/warrants for 60% of the un-issued stock. When a company issues warrants, they cannot give the right to buy stock that is already owned by some one else. They can only give the right to buy stock the company has the right to issue or ”treasury stock" (which is stock the company has issued and bought back).
In some companies, most of the stock is already sold and in the market, so 60% of what is remaining to be issued or owned by the company may be a small fraction of it's actual stock. And if they get authorization to issue more, it drives down the value of all shares.
So doing this deal with warrants is a great way to make it sound like we made a good deal while keeping us in the dark and leaving open the possibility of robbing the taxpayers blind. It's all in the details and 30 second sound bites with no details could sell this thing to the public.
That must not happen. This bailout, if done, should be a loan, not a gift. We should be discussing ways of securing repayment and effectively structuring the liability so that the cost is recouped. "Hoping" we get our money back is a fool's bet. Stock warrants are not a guarantee. Their value will depend on the strike price at which they are issued.
This is not just a question of whether taxpayers want to pay for this. It affects the credibility of our financial markets and our treasury, which will have lasting impacts on our economy and our national security.
We will not be able to put obligations on the recipients of this bailout after it is granted. They have to be included with the package.
So why aren’t we talking about assurances?
Have you heard about the Birk Economic Recovery Plan by David Birk, a member of the Rainmakers Band? It goes like this:
David says he is against the $85,000,000,000 bailout of AIG and, instead, he is in favor of giving that amount to America in a "We Deserve It Dividend."
Assuming our population is about 301,000,000+/- counting every man, woman and child, he says it might be fair to assume there are 200,000,000 U.S. citizens 18 and up. So divide 200 million adults into $85 billion and you give $425,000 to each adult as a We Deserve It Dividend.
Of course, David says this would not be tax free. Assuming a tax rate of 30%, every 18+ individual has to pay $127,500 in taxes. That sends $25,500,000,000 right back to Uncle Sam. But it means that every adult 18+ has $297,500 in his or her pocket. A husband and wife (or gay married couple) has $595,000.
Here are some suggestions from David on what to do with your We Deserve It Dividend.
Pay off your mortgage - housing crisis solved.
Repay college loans - what a great boost to new grads.
Save in a bank - create money to loan to entrepreneurs.
Buy a new car - create jobs.
Invest in the market - capital drives growth.
Pay for your parents' medical insurance - health care improves.
Enable Deadbeat Dads to come clean - or else.
And the list goes on.
David says he knows this is a crazy idea that can "never work," but adds, "Can you imagine the Coast-To-Coast Block Party! How do you spell Economic Boom?"
And remember, David's plan really only costs $59.5 billion because $25.5 billion is returned instantly in taxes to Uncle Sam!
The Birk Economic Recovery Plan is new to me but it shows more common sense than anything coming out of Washington. Michael Moore also came out with a plan that has some original ideas. I’m sure there are many common sense ideas floating around out there if our congress would but tap into them.
Instead, they seem stuck on tweaking a plan put together by people in whom the majority of us have no confidence – Bush, Cheney, and Paulson. Based on the past actions of this administration, there is nothing to suggest that they are motivated by what is best for the people. All in the name of urgency and with little attention to prudence, once again they are trying to get what they want by crying doom and gloom if they don’t get it and get it right now.
If our representatives and we the people allow ourselves to be bamboozled by this repeat performance of scare tactics then we deserve what we get, and we, our children, our grandchildren, and their children, will have to live with the consequences. It’s the old “act in haste, repent at leisure” axiom in action.
Good letter by you in today's Post, Trish. Here's a comment I phoned in to the 49er on the same Little column, but someone elected not to use it:
"One of the most frivolously false statements in Dick Little's ill-timed Sep. 30 column is that real estate prices are controlled by 'the rule of gravity.' He says that what goes up must come down. Horse pucky! Real estate prices are no more ruled by gravity than is the price of a McDonalds hamburger. Over the long haul those prices continue to go up, but with ups and downs along the way. I remember when my Dad bought a 40-acre farm with a 14-room house for $3,500 in the '30s. It is still a nice property in Ohio and gravity has nothing to do with its value today."
Too bad the Post didn't print your comment, Dode. When regular columnists write things that are so divorced from the reality of what is going on, they should be called on it by as many people as possible. At least your comment is now in print here.
Dode, don't feel bad about not having your 49er comments not printed in the paper. It failed to print my last three, and even when I posted them on my blog site at http://viewsontheridge.com/dragonflight/ the Post failed once again to print them in today's paper in the Sport's section where they print their blogs.
I'm smelling a definite and powerful bias from the Post editorial staff. Funny that the editor considers himself non-biased. And elephants can fly!