Wednesday, May 20, 2009

Warrants under TARP May Be Problematic For Banks

From Bloomberg.com: "Geithner Says Treasury May Move ‘Quickly’ to Sell TARP Warrants"

"Treasury Secretary Timothy Geithner said he’s inclined to “quickly” sell warrants the government got when injecting capital into banks, offering prospects of a speedy exit to lenders seeking to retire government stakes.

"The Treasury received warrants with nearly every capital injection it made with its $700 billion bank-rescue fund, called the Troubled Asset Relief Program. As big banks begin to pay back the assistance years earlier than expected, the Treasury may use market bidding to break a logjam over how to value a key component of the government’s equity stakes.

“We’ve got a carefully designed program in place to make sure we’re getting the best price for those warrants as possible,” Geithner said in answering questions at today’s hearing."

Carefully designed, Mr. Geithner? Now we know how the October 13, 2008 meeting came about.

"The total value of the government’s bank warrants is roughly $5 billion, according to Treasury calculations.

"Big banks may value their warrants at an amount that is hundreds of millions of dollars below the prices that other models might generate, the Treasury official said. That range makes it hard for the government to find a price that protects taxpayer funds without penalizing the banks."

No kidding. If the example of a bank who already returned the TARP money, the difference may be enormous.

One extreme case is Centra Financial of Morgantown, W.Va., a privately-held bank who repaid the TARP money of $15 million. Centra sold the warrant to Treasury for $750 -- $1 for 750 preferred shares. But when it came time to repurchase the warrants, Treasury demanded $750,000.

Bloomberg article continues:

"The Treasury says banks can choose whether to negotiate over the warrants or not. The department plans to examine the warrants from four different perspectives, two provided by the Treasury and two by outside financial advisers, the official said.

"If the bank refuses or can’t agree on a price, then the government will sell the warrants to a third party, as outlined in the original contracts."

Treasury's calculation may be out of the line, now that the market volatility has declined so much. Maybe their calculation is based on VIX in the sheer panic days of last October (with VIX between 50 and 90).

Maybe this was the news that pressured financials today, which started to weaken during his testimony (Q&A section). Further uncertainty.

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