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Posts Tagged ‘Warrants’

Some good items elaborating on topics I’ve discussed in the past week:

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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):

Tracking the TARP

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:

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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.

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Summary: Treasury should give up on negotiated sales and simply auction the bank warrants it received through its TARP investments.  Auctioning the warrants will enhance the transparency of the process, ensure that taxpayers get a fair return on their investment, free banks from the nuisance of government involvement, and allow banks, if they choose, to preserve needed capital.

Healthy banks are anxious to escape from the government’s Troubled Asset Relief Program.  TARP capital seemed cheap at first since the government offered more generous financial terms than were available from private investors.  But now the hidden costs of government investments – compensation limits, tighter regulatory scrutiny, and a public backlash against financial bailouts – have become apparent.  As a result, many banks want to pay off Uncle Sam and free themselves from the TARP.

Repayment sounds simple.  Subject to regulatory approval, banks can simply write a check to Treasury that covers the amount of money they received (by selling preferred stock) plus any outstanding dividends.  But there’s a complication.  When Treasury purchased the preferred shares, it also received warrants to purchase common stock in the future.  To fully escape the burden and stigma of TARP, the banks thus need a way to get Treasury to relinquish those warrants.

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