June 27, 2009
Authored by: Robert Klingler
On June 26, 2009, the Treasury announced its policy with regard to the repurchase or other disposition of the warrants it received from exchange-traded companies under the TARP Capital Purchase Program.
Under the terms of the Capital Purchase Program contract, publicly-traded institutions that have repaid the Treasury’s TARP investment have 15 days following repayment to make a determination of the “fair market value” to repurchase the warrants as well. This determination is made by the institution’s Board of Directors, acting in good faith on the opinion of an independent banking firm. The Treasury then has 10 days to either accept the “fair market value” offered by the company, or will initate the three appraiser process established in the original contract to determine a final “fair market value.”
If a company decides not to repurchase the warrants, the Treasury intends to sell the warrants through an auction process over the next few months. The Treasury is in the process of establishing guidelines for these auctions. Treasury also has the authority to dispose of warrants held by companies that have not redeemed their TARP investment generally (subject to a requirement to retain half the warrants through December 31, 2009). Although the Treasury’s announcement of an upcoming auction does not specifically differentiate between companies that have and have not redeemed the TARP investment, presumably the upcoming auction is intended only for institutions that have elected not repurchase the warrants after redeeming the TARP investment.
The Treasury’s announcement clarifies the process that the Treasury uses to determine whether to accept an institution’s determination of “fair market value.” The Treasury will use market prices, financial modeling and outside advisors to reach a decision with regard to each warrant. The Treasury intends to begin publishing each bank’s initial and susequent determinations of fair market value as well the valuation inputs used to assess the bank’s determination of fair market value.
Details of the Treasury’s methodlogy include:
- Treasury will likely not use market pricing for smaller publicly traded companies, as they are likely to have no meaningful comparable securities with observable market prices.
- Treasury may solicit quotations from 5-10 market participants.
- Financial modeling with include binomial and Black-Scholes option-pricing models.
- Volatility will be based on the stock’s average 60-day trading volatility for the last ten years.
- Treasury has retained three asset managers, each of which will provide full independent valuations for each repurchase.