Simon Johnson reaches new levels of cluelessness, criticizing "Treasury's scheme" for pricing TARP warrants, which he claims was "[b]uried in the late wire news on Friday":

This is a mistake. The only sensible way to dispose of these options is for Treasury to set a floor price, and then hold an auction that permits anyone to buy any part – e.g., people could submit sealed bids and the highest price wins. In Treasury’s scheme, there is significant risk of implicit gift exchange with banks - good jobs/political support/other favors down the road – or even explicit corruption. For sure, there will be accusations that someone at Treasury was too close to this or that bidder. Why would Treasury’s leadership want to be involved in price setting in this fashion? ... In any crisis, technical mistakes are made due to high pressure, lack of information, and political considerations; this is unavoidable. But this proposed pricing for TARP warrants looks like a pure unforced error, and should be quietly overriden by the White House – hopefully, senior congressional leaders will quickly make this point behind the scenes.

Treasury didn't "announce the rules for pricing" TARP warrants on Friday. The rules for pricing were established in the original Securities Purchase Agreements last October. Section 4.9(a) provides that after a bank has paid back its TARP money, it has the right to repurchase the warrants from Treasury at the "fair market value." The procedures for determining the fair market value—the "scheme" Johnson thinks Treasury just announced on Friday—were established in Sections 4.9(c)(i)–(ii). Essentially, the bank first submits its estimate of fair market value to Treasury. Treasury then evaluates the bank's estimate to determine if it's too low (it will be), and has 10 days to formally object (it will). After objecting, a Treasury representative will meet with the bank's CEO to try to agree on a fair market value. If they can't agree, then an appraisal procedure that uses independent appraisers will be used to determine fair market value. (The appraisal procedure is described in Section 4.9(c)(i).) Johnson criticizes Treasury's pricing procedures for "nontransparent decision making," which is ironic because what Treasury was actually announcing on Friday was the method it plans to use to estimate the fair market value of the warrants, including specific inputs and assumptions. It also announced:
Treasury will begin publishing additional information on each warrant that is repurchased, including a bank’s initial and subsequent determinations of fair market value, if applicable. Following the completion of each repurchase, Treasury will also publish the independent valuation inputs used to assess the bank’s determination of fair market value.
In other words, Treasury is making the decision making process as transparent as possible. Johnson wants Treasury to set a floor price and hold an auction for the warrants. Again, to the Treasury announcement:
If an issuer chooses not to repurchase the warrants according to its existing contractual rights, Treasury has the discretion to dispose of the warrants as it sees fit over time. In these instances, Treasury will sell the warrants through an auction process over the next few months.
This guy testifies in front of Congress as an "expert" on the financial crisis. Amazing.


jck said...

Amazing and SCARY.
Same for Chris Whalen, the promoter of the $400 billion loss on lehman cds meme, off by about 2 orders of magnitude which means he is good enough to be called as an "expert" in front of Congress.

Eric Hancock said...

Didn't some smallish bank already go through this process?

Anonymous said...

I think it is you who are clueless or wilfully mi-reading what he stated. The set-up where the Banks have the right of first refusal is what is problematic, and open auction is what is needed. you stating the contractual sub-clauses does not negate the criticism of the set-up. I guess you're a lawyer with some exposure to the economics but that does not make you an expert on that either.

q said...

reading through the document it is clear what the valuation methodology is.

in the last round there were lots of funny answers getting lots of press (including one by linus wilson that used >80% vol for a nine year warrant).

Anonymous said...

Another hatchet job on a prominent critic of the bailouts. Let's see, whose agenda is furthered by discrediting Simon Johnson? Connect the dots people.

Economics of Contempt - I challenge you to disclose the amount of billable hours and gross revenue that were generated for your law firm in the past 24 months by TARP recipients. I bet you won't do it.

Economics of Contempt said...

@Anonymous 7:23PM:

You know who also benefits from my pointing out that Simon Johnson's claims are patently false? The truth. And reality-based discussion.

Obviously I'm not going to disclose any information about my or my firm's clients. Perhaps you should look up the definition of "pseudonymous."

Anonymous said...

While there has been much debate about the fairness of the price banks are paying to repurchase their TARP warrants, there has been little analysis based on actual valuation of warrants.

Pluris Valuation Advisors has just completed a study valuing the warrants of all 265 public banks participating in TARP. Using data accumulated from several years worth of TARP transactions, Pluris found that -- with the exception of Old National Bancorp -- purchase prices have been close to the "fair value" of the warrants.

A copy of the study is available here: The study will be updated regularly as banks continue to repurchase their warrants.

You can also download a white paper on valuing warrants here:

Espen Robak, President

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