TARP Warrant Sale Shows Banks May Reap ‘Ruthless Bargain’

Source: Bloomberg.com

Banks negotiating to reclaim stock warrants they granted in return for Troubled Asset Relief Program money may shortchange taxpayers by almost $10 billion if Treasury Secretary Timothy Geithner’s first sale sets the pace, data compiled by Bloomberg show.

While 17 financial institutions have repaid TARP funds, only one has come to terms with the U.S. on the value of the rights to buy stock that taxpayers received for the risk of recapitalizing the industry. That was Old National Bancorp in Evansville, Indiana, which gave the Treasury Department $1.2 million for warrants that may have been worth $5.81 million, according to the data.

If Geithner makes the same deal for all companies in the rescue program, lenders may walk away with 80 percent of profits taxpayers might have claimed.

“For once we’d like to get a fair value when we come into contact with the banking system,” said Representative Brad Miller, a North Carolina Democrat and chairman of the Investigations and Oversight Subcommittee of House Science and Technology Committee. “We don’t want a ruthless bargain.”


Read more: http://www.bloomberg.com/apps/news?pid=20601087&sid=aOQPmbrh1ZrA&refer=home

$10 billion seems pretty irrelevant.

you're talking about real money. :sarcasm:

Please make sure the US receives adequate payment for TARP bank warrants -- we really do need the money and it is a breach of faith with the American people to sell these warrants at such a steep discount when we were promised less of a bath.

This process, if fairly conducted, should have a positive impact on deficit reduction and reduce the actual operating cost of the TARP program.

See
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOQPmbrh1ZrA&refer=home

Thank you.

I did get a value of $4.10MM or $5.04 per warrant on 813,000 warrants - so the Treasury definitely got a raw deal. The article said they assumed an implied volatility of 61%, which is too high because that is the vol for very short dated options. The Dec 09 options with a $17.50 strike trading in the market had a 45 vol - so the term structure of vol is downward sloping - these warrants are expiring in ten years, so I will call the vol 40 - which might actually be high. I did not account for the dilution to ONB stock from exercising the warrants, but that should value them only a few cents lower since it is only 1.3% dilution. I valued them based on the $13.89 closing price on May 11. The article used a slightly high interest rate in their option price calculation which overvalued the options by about 10 cents. Here are my numbers:

edited to add - if the warrants are American (ie can be exercised any time instead of only at expiration), then the warrants are worth $5.34 - or thirty cents more.

begin with. And now, the U.S. is taking 20 cents on the dollar to boot?



Sonny Wortzik (Al Pacino): Kiss me.

Det. Sgt. Eugene Moretti: What?

Sonny: Kiss me. When I'm being fucked, I like to get kissed a lot.

Dog Day Afternoon (1975)

on the preferred stock - and the warrants involved. No question about it.