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 priceBankofAmericapromised 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 perthe 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 $4,427 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 ninety percent refund of the premiums.
For that reason, Tim Geithner should require that BofA repays the subsidized 5 percent dividend Capital Purchase Program (CPP) shares prior to the 8 percent 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.
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