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09:50PM (15 mins delay)
Jun 18, 2009 - 6:40 AM EDT
Linus Wilson submits:Many of the ten big banks repaid their TARP preferred stock loans on Wednesday, June 17, 2009. This means that they can begin negotiations to repurchase the warrants that they issued to taxpayers. I estimate that the warrants issued by those banks are worth $4.2 billion. That is over one third of the value of the taxpayers' warrants. Yet, if history is any guide, we taxpayers could expect to get 50 cents or less on the dollar. My hope is that the U.S. Treasury will take a hard line in these negotiations and take steps to create markets in the TARP warrants. The best prices will come from taxpayers selling their warrants to third party investors.
One of the problems that plagues the valuation of the TARP warrants is the cancellation provisions. Apparently, to encourage banks to raise equity on their own, the purchase agreements for the TARP capital infusions say that half the taxpayers’ warrants will be cancelled if the bank issues equity in the amount of the U.S. Treasury's investment. Recent valuations by Credit Suisse and Bloomberg have assumed a zero chance of cancellation. These studies systematically overvalue the taxpayer's warrants for this reason. Moreover, they most overvalue the banks which are the most likely to cancel half the TARP warrants. Of the 10 big banks due to pay back TARP yesterday, Morgan Stanley (MS) and Goldman Sachs (GS) have such high share prices and have already issued so much equity that they have a 90 and 80 percent chance respectively of issuing enough equity to cancel half the taxpayer’s warrants by year end, according to my estimates. That means that both Bloomberg and Credit Suisse are overvaluing the taxpayers’ warrants in these companies by 45 to 40 percent, if you believe their estimates of volatility and dividend yield.
Source: Seeking Alpha (Jun 18, 2009 - 6:40 AM EDT)
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