Saturday, March 6, 2010

Profiting From TARP: The Treasury Department Nets $1.5 Billion In Bank Of America Warrant Sale

On Wednesday, the Treasury Department completed an auction of warrants it received from Bank of America in exchange for emergency TARP loans. The government indicated that it netted $1.54 billion from the Bank of America warrant auction. By all indications, this is the most lucrative and profitable warrant auction for the Treasury Department since it began the warrant auction process in December. A warrant is a derivative security that gives the holder the right to purchase securities from an issuer at a specific price within a certain time frame. The Bank of America TARP warrants expire in 2018 and 2019 and have a strike price that is close to double Bank of America’s recent trading price ($16.42 as of the close of the NYSE on Wednesday).

Recall, Bank of America repaid $45 billion in TARP funds to the federal government late last year, in December. As reported earlier on this Blog, things are looking up for American banks. Last year, the Congressional Budget Office (“CBO”) estimated that the TARP program would cost taxpayers $356 billion. Recently, indeed in January, the CBO estimated that the TARP program would only cost taxpayers $99 billion over its lifetime. The Obama administration’s Office of Management and Budget produced a similar estimate. The stock market rally in recent months, and the fact that relatively few banks retain TARP funds has narrowed the original gap somewhat. Again, the estimates regarding the TARP program are just that—estimates—it may take a number of years to fully understand the impact of the program and see fully just how much it might end up costing taxpayers.

TARP recipients have two options: 1. to repurchase their own warrants; or 2. to allow the government to auction the warrants to others. Goldman Sachs spent $1.1 billion to repurchase its warrants in July, after repaying $10 billion in TARP loans. Morgan Stanley spent $950 million to purchase its warrants associated with a $10 billion TARP loan. The Treasury Department began its first warrant auctions in December of 2009. In these first auctions, the Treasury Department raised $950 million auctioning JPMorgan Chase warrants. JPMorgan had received and repaid $25 billion in TARP funds. Citigroup and Wells Fargo, the last two megabanks to receive and repay TARP funds, have not yet decided whether they want to repurchase their own warrants or have the Treasury Department auction off those warrants.

At the end of the day, for all the criticism of the TARP program, the Treasury Department has recouped some profit for taxpayers. From the taxpayer’s perspective, however, when it comes to TARP bailouts in the auto and housing industries we might not end up being so lucky. The jury is still out!


  1. The fact is, as long as there are outstanding debts and our nation is in a deficit, the media will be charged to follow politics and the politicians that agreed to loan the money. The success of TARP will take years to assess but in the meantime, banks will not feel pressured to continue to lend money once they pay back the government's auctions. So far, this has been the case; Goldman Sachs borrowed less money from TARP so they quickly paid it back so that they would not be forced to lend money when they do not feel like it. JP Morgan and other banks will soon follow. Hopefully this will not be a consistent trend for the future or else we will be back in this position again within another 5-10 years.

  2. On Monday March 29 2010 The Treasury Dept. decided to sell its stake in troubled banking giant Citigroup over the course of the year. This sets up the government to make a substantial profit at the bank's current share price.

    Treasury says it will sell the 7.7 billion shares of Citigroup common stock it received in June, 2009, in connection to a $45 billion federal bailout. The government paid $25 billion for the stake, or $3.25 a share. At Citi's current share price of around $4.28, Treasury would book a profit of about $8 billion.

    Treasury adds that the sales don't affect its holdings of Citigroup trust preferred securities or warrants for its common stock. After the sale, the United States will continue to hold about $5.3 billion Citigroup trust preferred securities. The bank raised more than $20 billion of capital in December to buy trust preferred securities held by the United States.At the end of 2009, Citi repaid $20 billion of the funds received under the federal government's Troubled Asset Relief Program (TARP).

    These profits are going to make a great PR victory for the current administration …I sincerely thought that it would have taken a lot longer for banks and institutions to pay the TARP funds back. I think Citi should wait until the end of the year to pay back their TARP because the country is not quite out of the financial crises. Paying back the TARP funds to soon could hurt the capitalization ratios along with the banks earnings which might stimulate another sell off. We wouldn’t want to have to bail out a bank whose already paid their TARP funds back do we????