This morning, the Congressional Oversight Panel (COP) released its July report entitled “TARP Repayments, including Repurchase of Stock Warrants.” Many firms that received TARP assistance and issued warrants are now repaying the TARP funds and are seeking to repurchase the warrants from the U.S. government. In response, the U.S. Treasury has issued guidance regarding the warrant repurchase process, including a description of the process for determining the warrant repurchase price. Even before Treasury issued its latest guidance, the COP announced that it would undertake a review of the warrant valuation process to “determine whether the taxpayer is receiving maximum benefit from the TARP.”
As part of its review, the COP utilized what it characterized as “the most widely-accepted mathematical model” to value the warrants and consulted with Professors Robert C. Merton, Daniel Bergstresser and and Victoria Ivashina, all of Harvard Business School, to review the mathematical model and the high, low and best estimate assumptions and inputs used for warrant valuations. After the professors determined that the COP’s approach was reasonable and produced reliable estimates, the COP applied the model to the warrant repurchases.
The COP has determined that the price paid thus far for the warrants repurchased to be only 66% of the best estimate of the warrant value, while some firms are criticizing the U.S. Treasury Department for demanding too high a repurchase price. The issuing firms are permitted, should any of them disagree with the repurchase price negotiated, to waive the right to repurchase the warrants and have the U.S. Treasury sell them in an open auction. Less than 1% of all warrants issued have been repurchased by the issuing firm, and the COP acknowledged that regardless of the repurchase price negotiated, the process for the negotiation, including the reasons and the assumptions used, must be absolutely transparent to taxpayers.