There’s evidently a bit of a tussle brewing between some Wall Street banks and the Treasury Department over the pricing of stock warrants that the government currently owns. Treasury received warrants — which are the right to buy stock at some point in the future — from the banks in return for TARP money, and I’ve noted before that Treasury could shortchange taxpayers by selling the warrants back to the banks for too low a price.
The banks, though, think Treasury Secretary Tim Geithner is expecting prices that are too high:
The Treasury has rejected the vast majority of valuation proposals from banks, saying the firms are undervaluing what the warrants are worth…J.P. Morgan Chase & Co. Chief Executive James Dimon raised the issue directly with Treasury Secretary Timothy Geithner, disagreeing with some of the valuation methods that the government was using to value the warrants.
There are two points to make here. The first is that I’m glad to see Geithner rejecting the banks’ initial offers. The system for selling back the warrants was designed in such a way that it almost guaranteed that the banks would lowball the price. If Geithner is truly telling the banks to take their offers and beat it, that’s an encouraging sign.
Second, this charge from the banks that Treasury is somehow overvaluing the warrants doesn’t hold much water. According to a report released today by the TARP’s Congressional Oversight Panel, Treasury has thus far sold warrants for 66 percent of their value. From the panel’s report:
Treasury has to date sold warrants only from smaller banks. In those sales, liquidity discounts are likely to be a major factor in a way that they are not likely to be for large publicly traded institutions. If, however, liquidity discounts or any other rationales are accepted as a reason for taking only 66 percent of market value for the full group of warrants Treasury holds, the shortfall to taxpayers could be as much as $2.7 billion.
JP Morgan has reportedly “waived its right to buy the warrants and will allow the Treasury to auction them in the public market.” This, in the end, is the best way for Treasury to dispose of the warrants, as it “has the benefit of stopping any speculation about whether Treasury has been too tough or too easy on the banks” and “permits the banks to bid for their own warrants — in direct competition with outsiders.” If the banks really think that Treasury is expecting too much, then they should all waive their buying rights and let Treasury put the warrants on the open market. Then we’d see whose valuation is right.