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

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.

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.

Comments

[Mad Hedge Fund Trader]

what are they really worth? The world’s largest hedge fund is taking profits on one of its biggest positions. I’m talking about the US Treasury allowing ten banks to repay $83 billion in TARP money. I guess the banks really want to get the government green eye shades out of their board rooms, who have been surreptitiously swiping the soap out of the executive washroom. This means paying back 5% money when it costs 6% to fund in the markets, and 10% of you want to raise equity. I guess it’s worth it if this enables you to revive your celebrity golf tournaments in California for “clients,” throw Caribbean parties for your top producers, and get the Gulfstream out of storage after it couldn’t be sold. Could bonus compensation also be an issue? Gee, do you think? I have to begrudgingly give the government credit for making a ton of money on this trade. Not only did they borrow from us at zero and lend at 5% in huge size. They also got, at the point of a shotgun, fistfuls of equity warrants that have tripled. And they did stop the bank runs that took Morgan Stanley (MS) down to a near death experience of $6, boosting it back up to a positively virile $32. Alas, if only I could play by their rules. I have a question, Mr. Geithner. Does the government have to pay taxes on those profits? Will it report them?

2009 Jun 10 04:40 PM

[discov]

I guess it's a win for the Treasury if you can really separate the treasury from the Fed. but I don't see it that way.

2009 Jun 10 05:41 PM

[Linus Wilson]

Research Recap,
I suspect that are not factoring in the cancellation provisions in the TARP warrants. See ssrn.com/abstract=1413442 for a methodology of how to do this.

2009 Jun 11 09:10 AM