Good News: Goldman and Morgan Might Face Tough Negotiations Over Warrant Buybacks!

It’s very good news that Bernstein Research thinks Goldman Sachs and Morgan Stanley will have to face challenging negotiations with the U.S. Treasury regarding valuation of warrants they sold.

Both firms won the right to this week to repay their TARP funding, including the right to repurchase warrants the government holds. 

The warrants were issued when the TARP money was doled out last fall. They give the government the right to buy common stock for up to 10 years. They were a key part of the promise that taxpayers might actually see gains from the “investment” in the troubled financial firms.

The firms are supposed to buy back the warrants at “fair market value,” but some have recently been arguing to regulators that they should be expunged for free. The idea is that since many of the warrants are currently underwater, they would have no value if they had to be exercised immediately. As anyone with a lick of financial sense knows, however, there’s still plenty of value in these things because they don’t have to be exercised right now. Economist Linus Wilson has told us that they are actually worth millions of dollars.

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