A Fighting Chance

give the taxpayers their bonus: Senator Jack Reed was a vocal advocate for the view that the taxpayers would be taking a huge risk that one or more of the banks might fail and leave the government stuck with the bill. He argued that if TARP worked, it wasn’t enough for the banks to pay back the TARP money; taxpayers should be compensated for the risk they had assumed. The warrants were an important component of that and he insisted that TARP include a provision for warrants. See Senator Reed’s statement, “Floor Statement on TARP Warrants,” May 5, 2009, http://www.reed.senate.gov/news/speech/floor-statement-on-tarp-warrants

value that Treasury was entitled to: With the support of three renowned finance experts, Professor Robert Merton, Professor Daniel Bergstresser, and Professor Victoria Ivashina, COP—along with the Special Inspector General of TARP, Neil Barofsky—set out to determine how much the warrants were actually worth. In terms of methodology, COP adopted a modified version of the Black-Scholes method for valuing warrants to account for dilution and dividend yield. COP did not apply a liquidity discount to this valuation. Using different stock price volatility scenarios, COP generated high, low, and best estimates for the value of the warrants Treasury held on July 6, 2009. COP also estimated the value of the warrants Treasury had already sold using the same Black-Scholes method, except that the relevant date was changed to the date of the sale to enable comparison. The experts independently ratified the technical valuation model and its underlying assumptions. For more information on the methodology used for this analysis, see Annex A of the July 10, 2009, COP report.

COP ultimately found that eleven small banks had repurchased their warrants from Treasury for about 66 percent of their best-estimated value. COP report, 2. In other words, Treasury failed to maximize return to the taxpayers by selling warrants to banks at below-market value. See “TARP Repayments, Including the Repurchase of Stock Warrants,” COP report, July 10, 2009.

$8.6 billion back in taxpayers’ pockets: In the final COP report, March 16, 2011, COP reported: “Due in part to pressure generated by the Panel’s work, Treasury changed its approach, and subsequent sales recovered 103 cents on the dollar, contributing to $8.6 billion in returns.”

Several articles reported that Goldman Sachs initially offered the government around $400 million to $600 million to repurchase its stock warrants. See “Chump Change from Goldman?” DealBook (blog), New York Times, July 23, 2009. Shortly after the COP report, Goldman doubled its offer for TARP warrants to $1.1 billion, representing an improvement of $500 million to $700 million for the taxpayer. This offer was considered “the best deal taxpayers ha[d] got to date.” Kristin Wong, “Goldman Buys Back TARP Warrants for $1.1 Billion,” ABC News, July 22, 2009.