US Cries Foul On TARP Warrants

The Congressional Oversight Panel which keeps track of the effectiveness of the TARP program claims that the government has gotten much too little for the warrants it received as part of the loans that it gave a number of banks. According to Reuters, the committee charged that “The U.S. Treasury Department allowed 11 smaller banks to repurchase stock warrants at only 66 percent of their market value.”

The worst part of the accusation is that the largest banks that got government money are now negotiating the fate of their warrants and if they get the best of the Treasury Department taxpayers will get badly hurt.

Several economists put the value of the warrants at $5 billion or more, so the Treasury’s missteps could be costly. The taxpayers took a risk in bailing out the banks and the warrants are a large part of their return.

The banks are fighting any attempts to pay top dollar for the warrants. The Wall Street Journal reports that some bank CEOs including the head of JPMorgan (JPM) have gone to the Treasury “disagreeing with some of the valuation methods that the government was using to value the warrants.”

JPMorgan’s solution to the fight is to allow the Treasury to auction the warrants in the public market. And, that should be the solution to the entire dispute between the financial firms and the federal government. The financial markets should be more than efficient enough to look at the risks of the banks having more problems with their balance sheets weighed against the possibility that their earnings will be strong over the next year or two. Those factors should be the major forces that push the value of the warrants up or down.

Taxpayers should not have to rely on government officials to set values on the warrants. The Treasury does not employ investment bankers and is not equipped to handle negotiations about complex financial instruments. The financial markets are filled with companies that have to calculate risk and reward every day. Selling to warrants to them prevents the Treasury from being accused of incompetence.

Douglas A. McIntyre