Deals: The financial world's turkeys of the year

By Allan Sloan
Tuesday, November 17, 2009

Thanksgiving is upon us. That makes it a perfect time to contemplate turkeys -- as in "What a turkey that deal was!" Almost all of this year's winners have some connection to the federal government, because the feds have been such a huge factor in the financial markets. But have no fear: Rising stock prices and cheap money, combined with the greed that is beginning to displace fear, are producing plenty of private-sector poults that will be tomorrow's full-grown birds.

-- "Cash for Clunkers." It was a well-intentioned plan that was supposed to increase consumer confidence, spur fuel efficiency, jump-start the auto industry and help create American jobs. Instead, it disproportionately benefited foreign automakers, which create fewer North American jobs per car dollar than the Detroit Three do. And sales came mostly from inventory, doing little to increase production and jobs. What's more, by junking clunkers, the program removed many low-end vehicles from the used-car market, running up prices for the lower-income people who'd normally buy them. So we hurt the people most in need of help, while throwing taxpayer dollars down the drain. As the saying goes, the road to hell is paved with good intentions.

-- Citi sells Phibro too cheap. Citigroup's selling its energy-trading business to Occidental seems a prudent sale of a risky operation by a troubled company. In reality, it was a giveaway of taxpayer money, because Citi, 34 percent owned by the United States, got a crummy price. Phibro fetched merely its book value -- the amount by which its assets exceeded debts. That means no value was placed on the business itself, which had been churning out substantial annual profits. Citi sold so it wouldn't have to deal with whether -- or how -- to pay Phibro's top guy his contractual bonus of about $100 million. Alas, Citi's politically expedient sale, designed to make the firm look good, shortchanged creditors and shareholders. Another example of how optics can be so expensive.

-- Selling TARP warrants the wrong way. The smartest part of the Troubled Assets Relief Program, as far as taxpayers are concerned, was the Treasury's getting stock-purchase warrants from the institutions that borrowed TARP money. The dumbest: forcing the government to immediately sell back the warrants to institutions that repaid TARP loans and were willing to go through a complex pricing procedure. Consequently, the strongest borrowers, with the most attractive stocks, repaid the loans early and got their warrants back just as their stocks were rising. In the real world, the idea is to cut your losses short and let your profits ride. At TARP our gains were cut short. The Treasury's most desirable warrants, aside from J.P. Morgan Chase, have been sold, fetching $2.9 billion, according to SNL Financial. Even with $1.3 billion (my guesstimate) for J.P. Morgan, warrant proceeds won't cover TARP's $2.6 billion losses on bankrupt lender CIT Group and failed United Commercial Bank, and its likely losses on AIG, GMAC and about three dozen other borrowers that have missed payments on $2 billion in loans. Next time let's remember: Take losses first, gains last.

-- Turkey of the decade. Now that Time Warner, my employer, is finally dumping AOL, the old America Online, it's time to close the books on the biggest takeover turkey ever that didn't end in bankruptcy. That was Time Warner's swapping its shares, which represented real assets, for AOL's stock at the height of the tech bubble. The day the deal was announced, Jan. 10, 2000, Time Warner closed at the equivalent of $184.50 a share. After almost 10 years of travail, the $184.50 has shrunk to about $42.25, consisting of one Time Warner share and a quarter of a Time Warner Cable share. The 77 percent decline is triple the decline in the Standard & Poor's 500-stock index over the same period. But enough grousing. Let's enjoy America's quintessential holiday. May your turkeys be on your plate, not in your portfolio.

Allan Sloan is Fortune magazine's senior editor at large.

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