Government’s Injections
The Government’s Injections
On Oct. 14, the federal government announced that the nine largest U.S. financial institutions would be receiving a $125 billion injection of funds under the federal bailout plan. However, the first round of injections was finalized only last week.
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Thus, we have a treat: The injections were documented under form agreements presumably drafted by the government’s counsel, Simpson Thacher & Bartlett.
These transactions offer us a glimpse of how the remaining injections will be structured. For those who want to see a real life example, you can take a look at the relevant documents filed by Morgan Stanley with the Securities and Exchange Commission on a Form 8-K here. The Treasury has also posted the forms to its Web site.
The final terms appear to largely mirror the program as first announced by Treasury.
However, there is one modification that will likely cost the taxpayers a bit of money. In connection with the injection the government is receiving preferred stocks and warrants to purchase common stock. The number of warrants is calculated by dividing the value of the investment by the exercise price of the warrants.
However, the exercise price on the warrants was not set as the government initially stated they would be: based on the market price of the participating institution’s common stock at the time of issuance, calculated on a 20-trading day trailing average.
Instead, this 20-day average, per the Morgan Stanley 8-K filing, is calculated for the “20 trading days ending on the last trading day prior to the date the Company’s application for participation in the Capital Purchase Program was approved by the United States Department of the Treasury.”
The result is that the strike price on the Goldman Sachs warrants, for example, is $122.90 instead of the $112.80 it would be if based on the date of the issuance of the Goldman warrants, Oct. 28. So, in the case of Goldman, the government received only 12,205,045 warrants at a strike price of $122.90 instead of 13,297,872.34 warrants at a strike price of $112.80.
For those counting, that is a loss to the government of about $134 million until Goldman reaches $122.90 plus another $1.09 million more for every dollar over $122.90 Goldman stock goes up. Goldman closed at $92.50 on Friday. Although, to be fair to the government and Goldman almost any number is valid, this is certainly one that results in a gain to Goldman.
Otherwise, the terms are pretty much what the government announced. Still, this shows it pays to read the details.
http://dealbook.blogs.nytimes.com/2008/11/03/kkr-and-other-things-that-arent-what-they-seem/