This morning Morgan Stanley said it paid $950 million to repurchase warrants issued to the government as part of last fall’s bank bailout program. So how does that stack up against recent TARP exits?
Not very well, according to TARP warrant expert Linus Wilson.
“This deal was not as good as the Goldman Sachs and American Express deals for taxpayers,” economist Wilson says.
Linus uses options pricing techniques to evaluate the present value of the warrants and compares it to what firms are actually paying. Taxpayers got 98 cents on the dollar–basically full price–from Goldman Sachs. American Express paid about 107 cents on the dollar.
Morgan Stanley paid just 68 cents on the dollar, according to Wilson’s calcuations. By that metric, the Morgan Stanley warrant deal short changed taxpayers by about $400 million.
There’s a wrinkle to this, however. A provision of the Capital Purchase Program agreements allow the banks to cancel half the warrants if they issue equity in the amount of taxpayers’ investment. If you discount Morgan Stanley’s TARP warrants by the chances that they would have cancelled half of them before the end of the year, then taxpayers got 128 cents on the dollar, according to Wilson.
Wilson’s paper “Should Goldman Sachs and Morgan Stanley Try to Get Half Price on the TARP Warrants?” argues that both Goldman Sachs and Morgan Stanley could have increased shareholder value by exercising the cancellation provisions in the TARP warrant agreements.
Morgan Stanley would have to had to issue $10 billion prior to the end of 2009. So far Morgan Stanley has issued $6.9 billion in equity. It was in their shareholders’ interest to issue more equity and cancel half the TARP warrants, if the US Treasury did not discount the warrant price by this amount.
So, maybe we didn’t get as screwed as it seems. Regardless, Morgan Stanley was certaintly less generous to taxpayers than Goldman and American Express.
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