TARP Warrants Analysis Flawed

Linus Wilson claims Treasury Accepts a Lowball Price for TARP Warrants.

I read the paper quickly and it seems Linus is making some pretty wild and laughable volatility assumptions.

The warrants have 9.6 years left to expiration. The paper says: “The low end volatility is the annualized historic volatility. This is obtained from calculating the daily instantaneous returns from January 1, 2009, to May 8, 2009….”

A little over 4 months of data, drawn from a period of unusually high stressed market conditions to evaluate a 9.6 years warrant?

Add:
Usual suspects swallow the snake oil.

Comments

[Linus Wilson:]

Dear Jean-Claude,

Thank you for inadvertently spotting a typo in the tables. If you had read the text more carefully, then you probably would not have posted this blog. I'm glad that you brought the typo to my attention, regardless.

My paper at ssrn.com/abstract=1404069 said on page 6 of the first and current draft, "The low-end estimate of volatility was 37.10 percent. It was derived from daily closing stock prices and quarterly dividends paid from January 1, 2002, to May 8, 2009." Thus, there was over 7 years of historic prices behind that estimate. I have updated the description of the tables so there will no longer be any confusion about the time interval used to generate the 37.10 percent number.

I never used the historic volatility from January 1, 2009, to May 8, 2009. If I had done so, I would have found that the historic volatility over that period was 87.74 percent. That is higher than the high-end estimate of volatility that I used of 72.89 percent in the paper. I think my estimates gave the U.S. Treasury the benefit of the doubt. For example, my estimates are also much lower than Bloomberg's at www.bloomberg.com/apps...

May 24 03:24 PM