Treasury apparently did quite well when it negotiated with banks that wanted to repurchase their TARP warrants. I am still a fan of auctions, but you have to give Treasury credit–they did defend taxpayer interests in the negotiations.
Treasury drove an especially hard bargain with Goldman Sachs. As shown in the following chart from the report, Goldman ended up paying much more than any of the estimates that Treasury considered:
The green line is what Goldman actually paid: $1.1 billion. The yellow lines are Goldman’s earlier bids ($600 million and $900 million). The black bars are the range of estimates from three different modeling efforts. Bottom line: Goldman overpaid.
The report has similar graphs for the other 33 firms that have repurchased their warrants; some of them paid at the upper end of the black bars, but none overshot like Goldman.
Disclosure: I have no investments in Goldman Sachs (or any TARP recipients).
Thursday is a nice milestone in TARP’s history: with the help of Deutsche Bank, Treasury is auctioning off the warrants it received when it invested in Capital One. The company has already paid off the preferred stock that the government purchased last fall, and will now be free from TARP oversight once the warrants are in private hands. Or, perhaps, in its own hands. Although Capital One declined to purchase the warrants from Treasury at a negotiated price (as had other firms that repaid the government’s TARP investments), it can still bid in the auction.
A few months ago, I pointed out many benefits from auctioning the warrants rather than selling them back to the companies at negotiated prices. To my mind, the biggest benefits are transparency and the fairness of market pricing. Everyone—including, at least in principle, small investors—can bid in the auction.
If you are interested, here’s the prospectus, which includes (pp. S-15 to S-16) a list of participating brokers. I don’t see my broker on the list, which is disappointing, but maybe others will be luckier.
For a nice discussion of the auction mechanism (a modified Dutch auction in which all winning bidders pay the market-clearing price, very similar to the method used to sell Treasury bonds) and some estimates of the warrant values, see this Seeking Alpha piece by Linus Wilson.
Disclosure: I have no position in Capital One and, apparently, no way to bid on the warrants. If I find a way, I might do it for fun.
Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program (affectionately known as SIGTARP), is making headlines with his estimate that the government has provided “potential support totaling more than $23.7 trillion” in fighting the financial crisis. That estimate will be officially released on Tuesday morning in the SIGTARP’s latest quarterly report (you can find an early copy here – ht WSJ).
As the media are already noting (e.g., WSJ and Yahoo), there are many reasons to believe that the $23.7 trillion figure is overstated. For example, as noted in the footnote to the table above, the figure “may include overlapping agency liabilities … and unfunded initiatives [and] … does not account for collateral pledged.” In other words, there may be double-counting, some of the programs won’t happen or are already winding down, and the estimates assume that any collateral is worthless. For example, to get to $5.5 trillion in potential losses on Fannie Mae and Freddie Mac (part of the $7.2 trillion Other category), you would have to assume that all GSE-backed mortgages default and that all houses backing them are worthless.
In short, the SIGTARP estimate is a way upper-bound on likely Federal support to the financial support. That fact shouldn’t detract, however, from the importance of the rest of this report.
JPMorgan Chase & Co, seeking to completely extricate itself from a federal bailout program, has asked the government to auction warrants to buy the bank’s stock, after the Treasury Department demanded too high a price for the bank to buy them back.
This is great news. Treasury should be driving a hard bargain. And JP Morgan should allow private investors to compete to buy the warrants — maybe that will allow JPM to use its capital for better purposes. As an economist, I also welcome the opportunity to find out the market price of the warrants, so we can compare it to what all the modelers have been estimating.
Next question: How do I bid? I hope Treasury does this in a way that lets small investors participate, much as they can in Treasury bond auctions.
Meanwhile, the Congressional Oversight Panel released a report on the warrants. The Panel suggests, albeit with major caveats, that some initial warrant repurchases were done too cheaply:
I’ve previously argued that Treasury ought to auction these warrants to the highest bidder. Auctions would (a) be transparent, (b) provide full, fair value to taxpayers, (c) free banks from the TARP, and (d) give banks the opportunity, but not the requirement, to repurchase the warrants. As close to a win-win-win policy as one can hope for in Washington.
Unfortunately, as I noted in a follow-up post, the original TARP investment contracts include a specific process by which banks can negotiate to repurchase the warrants. As much as I like auctions, I believe even more strongly that the government should live up to its agreements. Which is why you haven’t seen me blogging about warrant auctions lately.
How much is TARP costing American taxpayers? We know that Congress originally authorized up to $700 billion in TARP investments. And we know that $439 billion has been committed to various programs. But how much of that money are taxpayers likely to see again? And to what extent will they be compensated for making those investments?
The Congressional Budget Office took a crack at answering those questions in a report released last night. The headline finding is CBO’s estimate that subsidies in the TARP program are $159 billion. Taxpayers put up $439 billion and, in return, now own assets (including recent repayments) worth $280 billion.
The following chart shows the estimated value of the TARP portfolio (dark red) and subsidies (light red) across the major TARP programs:
Wednesday was a rare day in Washington: the Federal government was actually cash-flow positive.
The reason, of course, is that ten major banks repaid $68 billion in TARP money. Smaller banks had previously repaid about $2 billion, so Wednesday’s action lifted total repayments to $70 billion, almost 30% of TARP support to individual banks.
(For those who don’t get the title, this pie chart reminds me of a peace sign.)
As noted in my previous post on TARP, that means that two firms — Citigroup and Bank of America — now account for the majority of outstanding TARP support to banks. Citigroup has received $50 billion in three transactions, and B of A has received $45 billion in two transactions. Investments in all other banks now total “only” $79 billion.
The TARP continues to grab headlines, so I thought it would be useful to summarize how the TARP money has been used to date.
As you may recall, the Troubled Asset Relief Program (TARP) created a pool of $700 billion that the Treasury Secretary could use to stabilize the financial sector. The following chart summarizes the TARP transactions that have already occurred (dark blue) and any additional funds that Treasury has announced for each program (grayish):
As the chart illustrates, Treasury has announced plans for about $645 billion of the TARP money, of which $435 billion has been committed to specific transactions. But the most interesting facts involve the specific programs:
Summary: Readers had some excellent comments on last week’s post about auctioning the TARP warrants. Here are some updated thoughts.
Last week I argued that the Treasury should auction off the warrants it received when it made TARP investments in banks. Specifically, when banks are ready to repay the TARP investment, Treasury should auction the associated warrants to the highest bidder, which might turn out to be a private investor or the bank itself. Among other things, I argued that this approach would enhance the transparency of the process, ensure that taxpayers get a fair return on their investment, and allow banks to preserve needed capital. A potential win all-around.
In response, readers sent me several very helpful comments that deserve highlighting.