The very fact that it took such a long headline to explain the latest (possible) Treasury bouquet to the TARP recipients says the odds are high the troubling scenario will come to pass. With the Fed a combo hedge fund/SIV and the Treasury actively engaged in regulatory arbitrage (evading budgetary restrictions by making clever use of the Fed) the powers that be have established that the public can indeed be fooled by fancy financial footwork.
The latest bit of chicanery, as Bloomberg tells us, is that the first TARP repayment, by munchkin Old National Bancorp in Evansville, Indiana, was at what appears to be a big discount to the value of the warrants, an estimated 80%. If this becomes the formula for all TARP repayments, the taxpayer will again be getting the short end of the stick.
Banks negotiating to reclaim stock warrants they granted in return for Troubled Asset Relief Program money may shortchange taxpayers by almost $10 billion if Treasury Secretary Timothy Geithner’s first sale sets the pace, data compiled by Bloomberg show.
While 17 financial institutions have repaid TARP funds, only one has come to terms with the U.S. on the value of the rights to buy stock that taxpayers received for the risk of recapitalizing the industry. That was Old National Bancorp in Evansville, Indiana, which gave the Treasury Department $1.2 million for warrants that may have been worth $5.81 million, according to the data.
If Geithner makes the same deal for all companies in the rescue program, lenders may walk away with 80 percent of profits taxpayers might have claimed….
For the 20 largest TARP recipients, the total savings would be $9.985 billion, the data show.
Geithner wants to move swiftly to sell the TARP warrants, he said on May 20. Their worth depends on assumptions made about the chances the underlying stock will go higher than the rights. Depending on the input, different valuation models reach a range of conclusions.
Lenders shouldn’t be trusted to make suppositions that would be to the advantage of taxpayers, said Linus Wilson, an assistant professor of finance at the University of Louisiana at Lafayette.
“Bank managers have stronger incentives than Treasury personnel to get a better deal for their constituents,” said Wilson, who has written about appraising warrants.