Tags: treasury | tarp | warrants

Treasury Screwed Up TARP Deal, Costing Taxpayers

Wednesday, 20 May 2009 09:53 AM

By Julie Crawshaw

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U.S. taxpayers are losing as banks that accepted funds from the Troubled Asset Relief Program (TARP) repay the monies they borrowed at a discount.

At issue are warrants that provide their owners with the right to buy stock for a specified amount of time.

For example, Old National Bancorp, an Indiana bank, bought back what analysts estimate were $6.9 million in warrants for $1.2 million.

"It's a great deal for Old National," Linus Wilson, a finance professor at the University of Louisiana, Lafayette told The New York Times.

"Treasury accepted a lowball offer."

Though the Obama administration promised taxpayers would be rewarded for helping out troubled banks with TARP funds, those banks now want to unwind the warrants they promised the government would have for 10 years as soon as possible.

The warrants were essentially stock options that could provide a potential jackpot for taxpayers once the crisis blew over — leading some observers to question why the administration isn’t doing more to maximize profit for taxpayers.

Wilson estimates that the warrants on nearly 300 publicly traded banks, which account for more than 95 percent of the government’s investments, were conservatively worth $2.4 billion to $10.9 billion.

“While banks would prefer to buy back warrants to avoid potential government ownership, it is currently unclear whether the government would want to continue owning the warrants even after TARP repayment to benefit from the potential upside,” analyst David Trone wrote in a note to investors with Fox-Pitt Kelton Cochran Caronia Waller.

“We estimate that warrants repayment will increase the cost of TARP preferred repayment by 2.7 percent.”

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