Felix Salmon

pestering preening potentates

How to sell TARP warrants

Jun 29, 2009 08:59 EDT

What is Treasury meant to do with the warrants it acquired as part of the TARP program? Treasury’s proposal is essentially a complicated dance with the banks in question, which involves financial models and a slew of outside consultants and which may or may not end up in front of multiple independent appraisers.

Why the complexity? After all, there’s an incredibly simple way of selling these warrants: just sell them, at the market price, in the market. Says Simon Johnson:

The only sensible way to dispose of these options is for Treasury to set a floor price, and then hold an auction that permits anyone to buy any part – e.g., people could submit sealed bids and the highest price wins.

What’s the problem with the simple solution? Simply that the warrants might — horrors! — end up in the hands of players other than the banks themselves. So maybe the banks should be given the right to match the winning price, if they’re so inclined. If they’re not, then let the warrants start being traded in the open market. There’s no harm in that.

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6 comments so far | Comments RSS
Jun 29, 2009
2:17 pm EDT

The Treasury took warrants as part of the post 9/11 loan guarantee program for the airline industry (the Air Transportation Stabilization Board process), and as I understand it made money when the warrants were sold off. http://www.treas.gov/offices/domestic-fi nance/atsb/

Posted by bdbd | Report as abusive
 
Jun 29, 2009
2:30 pm EDT

Letting the banks match the winning bid is unnecessary. If the banks want to repurchase the warrants, they can bid in the auction.

Posted by thorsteinveblen | Report as abusive
 
Jun 29, 2009
2:49 pm EDT

If the government does the best thing for us – citizens who own the warrants – they will scale sell them to highest bidders.

Thus, there is no chance that will happen. I’m sure the banks will buy these warrants at far below fair value.

http://blog.mdwoptions.com/

Posted by Mark Wolfinger | Report as abusive
 
Jun 29, 2009
4:16 pm EDT

Having an outstanding right-of-first-refusal would dampen the auction, creating optionality problems. thorsteinveblen is right; banks can participate in the auction, or, if they don’t like the dilution of warrants executing, buy back their own shares. The only sympathy I have for the banks on this one is that the warrants that were presumed to be paying for 3-5 years of funding only paid for 8 months of funding after the terms of the deal got significantly rewritten against the banks.

Posted by dWj | Report as abusive
 
Jun 29, 2009
8:31 pm EDT

I have always advocated auctions over negotiations. The problem is that the purchase agreement sets up this negotiation process. The Treasury can only auction warrants where negotiations have broken off. Yet, Treasury has been slow to set up auctions. My valuations of the first 10 repurchases indicate the U.S. Treasury has given the banks great deals at taxpayers’ expense. Tables 2 and 3 of http://ssrn.com/abstract=1413442 provide valuations of 68 banks’ warrants including the 10 that repaid the preferred on June 17, 2009.

Posted by Linus Wilson | Report as abusive
 
 

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