Progress on Auctioning TARP Warrants
Saturday, June 27, 2009 at 02:24 AM EDT
Ten major banks repaid almost $70 billion to TARP in recent weeks. But they arenâ€™t free from TARP just yet: Treasury still owns warrants to purchase their common stock.
Iâ€™ve previously argued that Treasury ought to auction these warrants to the highest bidder. Auctions would (a) be transparent, (b) provide full, fair value to taxpayers, (c) free banks from the TARP, and (d) give banks the opportunity, but not the requirement, to repurchase the warrants. As close to a win-win-win policy as one can hope for in Washington.
Unfortunately, as I noted in a follow-up post, the original TARP investment contracts include a specific process by which banks can negotiate to repurchase the warrants. As much as I like auctions, I believe even more strongly that the government should live up to its agreements. Which is why you havenâ€™t seen me blogging about warrant auctions lately.
Earlier today, Treasury announced the process by which it will divest itself of the warrants of banks that have repaid their original TARP investments. This announcement includes lots of good news:
In short, kudos to Treasury for striking a reasonable balance between the myriad benefits of auctions and the reality of the existing contracts. There will undoubtedly continue to be concerns about negotiated sales â€” thatâ€™s inherent in the process â€” and Treasury should do its best to drive a hard bargain. Letâ€™s hope that some banks decide to go the auction route instead.
P.S. This is just the first inning of a very long game to come: how will the government divest itself of all the equity stakes it has acquired? Today the issue is warrants in banks. But somewhere down the road â€” one hopes not too far down the road â€” we will have to decide how to divest ownership positions in AIG, Citigroup, GM, Chrysler, Fannie Mae, Freddie Mac, and other firms.
Disclosure: I have no investments in any TARP recipients except Citigroup. As research for my continuing series on the Citigroup anomaly (latest installment here), I am currently long a small amount of Citigroup preferred and short some call options on the common.
This article originally appeared on Donald Marron.