Transcripts

Big Banks Make Big Bailout Repayment Plans

JEFF YASTINE: Three big banks are making big plans after the results of last week's stress tests. Now they're getting ready to sell billions of dollars in stock to pay back the TARP program. Capital One Financial, U.S. Bancorp and BB&T announced those plans today. Other banks, including JPMorgan Chase and Goldman Sachs say they will pay back taxpayers to get government minders out of their boardrooms. But for some banks, there's a hitch. In many cases the government got warrants along with preferred shares as collateral and those warrants could cost the banks millions. Scott Gurvey reports.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: GURVEY: The banks issued warrants in return for cash infusions that ranged from hundreds of thousands to tens of billions of dollars of taxpayer money. Warrants are the right to buy the common shares of the company at a fixed or strike price in the future. Most of those warrants are under water. That is, they have a strike price lower than the current price of the underlying stock. Citigroup stock, for example, is trading 77 percent below the strike price of its warrants. Warrants issued by bank of America, Wells Fargo and JPMorgan Chase are also under water. But with the recent rally for financial stocks, there are already some winners. Missouri based Great Southern's stock is more than twice the strike price of its warrants. Big names like American Express and Morgan Stanley are also in the money. To no one's surprise, some want these warrants off their books. Oppenheimer's Michael Levine says that would be good for the industry.

MICHAEL LEVINE, PORTFOLIO MANAGER, OPPENHEIMER FUNDS: I think if the banks get the warrants erased or can buy them back I think it would be great. I think one of the key issues facing the banks is the amount of dilution that's going to occur from converting the government preferred and/or the public preferred. So I think if they could eliminate the warrants attached to the TARP money, I think that would be a big plus for the banks.

GURVEY: But would it be a big plus for taxpayers? We took the risk in making the loans and the warrants were a sweetener. Cashing in warrants on Morgan Stanley, Goldman Sachs and American Express today would net taxpayers $750 million. That profit could help offset losses on other loans. While there have been some calls to simply erase the warrants, most are looking for a negotiated compromise. Goldman Sachs has offered to buy back its warrants, its spokesman saying, we think taxpayers should expect a decent return on their investment and look forward to being able to provide just that when we are permitted to return the TARP money. In most cases the warrants don't expire for 10 years, giving taxpayers plenty of time to get in the money, even for those companies which cannot pay back the loans right now. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.