Warrants Remain an Issue for U.S. Banks Exiting TARP

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Includes: BAC, C, GS, JPM, MS, WFC
by: Research Recap

CreditSights sees the repayment of TARP funds as “a positive step for the banks allowed to exit the program as well as the U.S. taxpayer.”

Still in our view, the repayment of TARP funds represents only an interim step in full normalization of operating conditions for banks. There are still several major financial institutions which will remain in the TARP program after this initial round of repayments and the FDIC’s TGLP program is still active for banks which cannot issue on a non-guaranteed basis. We note, as well, that there are ongoing reports that the Administration favors compensation limits across the financial services industry, as well as potential regulatory changes, both of which we feel could potentially have long-term implications for the financial industry depending on the ultimate outcome of these initiatives.

The Treasury also noted in its statement that banks which repay their TARP funds have the right to repurchase the warrants which Treasury holds at fair market value.

We note that the price of the warrants has remained a sticking point with many banks, who feel that they are too costly.

warrants

CreditSights provides an analysis of the impact of the potential pricing and impact of repurchasing the warrants in U.S. Banks: Repaying TARP, Off to the Races Again?

Ed Harrison at Credit Writedowns, along with Boston University Professor Mark Williams, argues that the repayments will make make banks weaker and could lead to more failures in the longer term.