It’s great news that American Express has repurchased the warrants held by the Treasury’s bailout program. And it’s even better news that the $340 million they paid represents the full price for the warrants.
Some prior repurchases of TARP warrants were seriously discounted from their full value, meaning the taxpayer wound up getting shafted. Some banks had lobbied to have the warrants just cancelled free of charge.
Goldman Sachs, however, paid a fair price for its warrants. And it seems to have started a trend.
Linus Wilson, the University of Louisiana at Layfayette professor who has become our favourite expert on the value of TARP warrants, estimates that the price paid by American Express is just about “full price.” Of course, the pricing of options is complex and depends upon assumptions about future stock prices. But Wilson estimates that at the low range of Amex’s future value, the $340 million amounts to 110% of fair value, at the middle range about 107% of fair value, and at high range its 84% of fair value.
“Even Mad Money’s Jim Cramer thinks the Treasury should auction the TARP warrants,” Wilson said. “The threat of auctions may have convinced the big banks that sweetheart deals of the past cannot be had today.”
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