When the U.S. Treasury attempted to recapitalize the nation’s banks via TARP, it received stock warrants in return, which amount to the right to buy stock sometime in the future. The idea was that these warrants would become more valuable as the banks got healthier, which is how taxpayers would see “the upside” from the TARP investments.
Now that banks are hustling to pay back their TARP money, Treasury has to decide what to do with the warrants, and the options are either selling them back to the original bank or selling them to third party investors. So far, only one bank — Old National Bancorp of Evansville, Indiana — has worked out a deal with Treasury for the warrants. And according to an analysis by Bloomberg News, if Old National turns out to be the model for all the other banks, taxpayers may be shortchanged billions:
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….[Old National Bancorp.] 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.
Goldman Sachs and JP Morgan are two of the banks leading the charge out of TARP, and reportedly “want to buy back the warrants and wriggle free of the government.” Linus Wilson, Assistant Professor of Finance at the University of Louisiana at Lafayette, has done the math and come up with what the warrants from these institutions are worth:
The U.S. Treasury holds 88.4 million of JP Morgan’s TARP warrants. These warrants on JPM are worth $20.20 each or about $1.79 billion according to my estimates. According to my estimates, taxpayers’ 12.2 million warrants on Goldman Sachs are currently worth $74.87 each or about $914 million dollars….Instead of JP Morgan and Goldman Sachs buying (or worse being given) the warrants from the Treasury, it is a better idea for the U.S. Treasury to sell those warrants to 3rd party investors.
In some ways, allowing the banks to purchase back the warrants at below-market prices would complete a sorry cycle, since Treasury (under former Secretary Henry Paulson) overpaid for the assets in the first place. But it seems like going the third party route best serves the taxpayers’ interest, which is what Treasury should ultimately be trying to do. As Sen. Jack Reed (D-RI) said, “taxpayers were there at a critical moment. They should enjoy the upside when these institutions recover.”