University of Louisiana prof Linus Wilson has done a lot of work on the economics of the TARP capital injections and the various ideas floated for recapitalizing the banks.
In his latest paper, he looks at the warrants which the Treasury received in exchange for investing in the banks. Remember, there was some talk that the banks were pushing the Treasury to cancel the warrants, which, in the absence of preferred stock interest payments, represent the one way the taxpayer could get its promised “upside” (You do remember, don’t you? When they passed the TARP, Treasury swore up and down that there was a good chance taxpayers would actually profit from the scheme).
Anyway, what Linus finds in his new paper is that based on his valuation methodologies, the Treasury is screwing over the taxpayer, selling banks back their warrants at sub-market rates.
My analysis suggests that the U.S. Treasury accepted a lowball offer. My paper “Valuing the First Negotiated Repurchase of the TARP Warrants” estimates that the fair market value of these warrants should have been between $1.5 million and $6.9 million. It is too bad that the U.S. Treasury agreed that they were worth only $1.2 million. That is, the U.S. taxpayers only got 71 per cent less than the median of my lowest and highest estimates, $4.2 million, and $.3 million or 20 per cent less than my lowest estimate. These results indicate that the management at Old National Bank represented their shareholders well. I am not sure that the U.S. Treasury represented taxpayers quite so well.
Taxpayers bore a lot of risk providing capital to the banks, and they deserve to get the fair market value of the warrants that they purchased. Hopefully, if Goldman Sachs (GS) and JP Morgan (JPM) try to repurchase their warrants, Tim Geithner and company will do a better job. I estimate in my paper “The Goldman Sachs Warrants” that TARP warrants at that firm alone could be worth between $250 million to $1.2 billion.
That the Treasury would put the interests of the bailout-receiving banks above the taxpayer isn’t particularly surprising. It’s been the policy to decide everything in favour of the banks. Yesterday, Ed Liddy confirmed to Congress that the government was buying CDS from its counterparties at above-market rates, having the effect of providing more capital at the expense of taxpayers.
Here’s Wilson’s full paper: