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TARP Warrants a Review

Posted by Larry Doyle on July 28th, 2009 5:09 PM |

How is Uncle Sam doing with his TARP investments? Recall that there are two components of the TARP (Troubled Asset Relief Program):

1. Straight capital injections

Treasury would have us believe that we are doing fine on these disbursements given returns from a select few institutions. Neither Treasury, other government officials, nor the media choose to highlight that as of June 30th, the TARP disbursements had a $159 billion loss. Although Treasury defines this ‘loss’ as a ‘subsidy,’ Sense on Cents classifies the negative difference in dollars allocated versus market value of investments as a ‘loss.’

Read my full review:  “The TARP Has a $159 Billion Loss”

2. Purchase of warrants

What is a warrant? From our trusty Investing primer, we learn a warrant is:

A derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue as a “sweetener” to entice investors.

These warrants were purchased last Fall at the time of allocating capital to a wide array of financial institutions. How is Uncle Sam doing? Should he exercise these warrants? Are they ‘in the money,’ meaning the current price of the stock is higher than the ‘strike price?’ Warrants also have time value. That is, the amount of time until the warrant expires. TARP warrants were generally 10 year warrants. That is a long time and represents a lot of value for the taxpayer.

Let’s check Subsidyscope, our fabulous link in the right sidebar here at Sense on Cents, to monitor a whole host of developments going on in Washington with OUR tax dollars. In regard to the TARP warrants, we learn:

Based on the closing prices on July 27, 2009, only 37 of the 234 warrant transactions listed on Subsidyscope are in the money. Some of the biggest recipients of TARP funding are in the most difficult financial situations. For example, the closing stock price for AIG was $13.00 on July 27, which is 420 percent below the strike price of $2.50 of the warrants that the government received on November 25, 2008; and Citigroup’s closing stock price of $2.69 on July 27 is 85 percent below the strike price of $17.85 of the warrants the government received on October 28, 2008.

While AIG’s stock valuation may appear to be in the money, please be aware that AIG recently executed a reverse stock split.

Readers can regularly check these TARP warrants at Subsidyscope’s Monitoring the Value of the TARP-Funded Warrants.

Additionally, not unlike many brokers who tout their winners while disregarding their losers, please do not allow Secretary Geithner or any other government official to ‘blow smoke’ about how well we are doing with our TARP investments.

A $159 billion loss combined with only 37 of 234 warrants being in the money after an enormous rally in our equity markets is not exactly a stellar performance.

Please utilize the tools at Sense on Cents and Subsidyscope to keep Uncle Sam honest as we all navigate the economic landscape.

LD






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