TARP Feeding Trough Loves Repeat Customers

If you put a band aid on a gaping wound and tell the person that they are going to be all right, your actions have done more harm than good. In many ways this is what is happening with the TARP bail out. And like the old potato chip commercial, a lot of these banks can't stop at one - they are lining up at the TARP trough to feed again on public money.

Earlier this week CNBC reported that American International Group (AIG) and the U.S. government are engaged in talks, including the possibility of additional funds for the insurer and trading debt for equity. In case they do not reach a deal, AIG's lawyers at Weil, Gotshal & Manges LLP were preparing for the possibility of bankruptcy, CNBC said. It was said that AIG was too big to fail the first time around. Is that still true? If so, won't the government have to pony the needed funds this time, and next time, and next...?

When there is only one trough to eat at, you have to find new ways to keep the dining experience interesting and Citigroup (C) is doing just that. C has proposed to have the Treasury convert its preferred shares in the bank to common equity. This would bring its capital over the acceptable threshold. Once again, the taxpayers will generously pick up the tab. Under the terms reportedly offered by C, the Treasury would convert its preferred shares to common at a huge premium to Citi’s stock price. If the conversion took place at the current price, taxpayers would own 90% of C’s shares. Under C's proposal they would only end up with 40%. Some analysts complained that C was asking for terms far more generous than it would receive under the Treasury’s new program. “Another *&%# for taxpayers,” observed Henry Blodget on the financial website, Tech Ticker.

Now that C has all but wiped out its shareholders, who's next? It looks like it might be the bondholders. C's debt is trading as if the company were already in default. The bondholders face losses even more severe than the extraordinary hits shareholders have taken. As of Sept. 30, 2008, C had $393 billion of long-term obligations, much of which is unsecured and is owned by many of the world’s leading mutual funds and pension funds, as well as by other banks and insurance companies.

Finally, as if the banks didn't have enough problems. Labor is now targeting banks and the service sector in a big unionization push. I can see their slogan, "You've got problems, we got answers. Let us do for you what we did for the auto industry!" Ugh, never mind....

In every situation, there are winners and losers. Those with cash, such as Warren Buffett, are in a position to come out ahead, and those needing cash will promise or pay anything to get it.

Full Disclosure: No position in the above mentioned securities (whew!)


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