Wednesday, May 20, 2009

Geithner Says Treasury May Move ‘Quickly’ to Sell TARP Warrants

Treasury Secretary Timothy Geithner said he’s inclined to “quickly” sell warrants the government got when injecting capital into banks, offering prospects of a speedy exit to lenders seeking to retire government stakes.

“In general, our objective will be to sell these warrants as quickly as we can,” Geithner told the Senate Banking Committee today. “What I’m reluctant to do is have the government be in a position where we hold these investments for a long period of time, longer than is desirable, in the hopes that we’re going to maximize value.”

The Treasury received warrants with nearly every capital injection it made with its $700 billion bank-rescue fund, called the Troubled Asset Relief Program. As big banks begin to pay back the assistance years earlier than expected, the Treasury may use market bidding to break a logjam over how to value a key component of the government’s equity stakes.

“We’ve got a carefully designed program in place to make sure we’re getting the best price for those warrants as possible,” Geithner said in answering questions at today’s hearing.

The total value of the government’s bank warrants is roughly $5 billion, according to Treasury calculations.

If the Treasury can’t agree with banks about the value of the warrants, the government may try to sell them at auctions, a Treasury official said in an interview this week. That’s because investor offers may be the only way to put a clear value on warrants that can vary widely depending on the model used.

Differing Values

Big banks may value their warrants at an amount that is hundreds of millions of dollars below the prices that other models might generate, the Treasury official said. That range makes it hard for the government to find a price that protects taxpayer funds without penalizing the banks.

“You don’t know the future, so that leads to wildly differing assumptions,” said Joseph Mason, a banking professor at Louisiana State University in Baton Rouge who previously worked at the Treasury’s Office of the Comptroller of the Currency.

Escalating federal demands on the banks have spurred institutions including Goldman Sachs Group Inc. and JPMorgan Chase & Co. to seek an early exit from the TARP. The warrants issue is yet another complication in the rescue effort, which has sparked an outcry among both lawmakers and some bankers.

Restrictions on Banks

As long as the government hangs on to the warrants -- which give it the right to buy stock in the future at a preset price - - the banks will continue to face some restrictions related to the aid. Other limits, such as executive pay caps, are lifted when the banks buy back the Treasury’s preferred stock, in the first step of the TARP repayment process.

Geithner today reiterated that the government can sell the warrants back to the bank or to a third party.

New legislation, passed by Congress late yesterday, removes previously imposed deadlines for extinguishing the warrants once a bank repays the government’s main equity stake, allowing the government more flexibility.

The Treasury says banks can choose whether to negotiate over the warrants or not. The department plans to examine the warrants from four different perspectives, two provided by the Treasury and two by outside financial advisers, the official said.

If the bank refuses or can’t agree on a price, then the government will sell the warrants to a third party, as outlined in the original contracts.

Auctions Likely

Auctions are the most likely mechanism, the Treasury official said. In cases where the Treasury owned a large number of warrants, the department could choose to auction them in blocks to avoid flooding the market.

The Treasury doesn’t see the warrants as posing any kind of prepayment penalty to banks seeking to exit TARP, the Treasury person said. Officials have been discussing whether to consider some type of assistance for small banks that repay TARP early.

At the same time, a few banks have been working on quick deals to exit the government rescue program. Old National Bancorp, the Evansville, Indiana, lender that repaid $100 million from the U.S. bank rescue fund, has also bought back a warrant issued to the Treasury for $1.2 million, the company said in a May 11 statement.

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