Mark-To-Market Follies

"Several Wall Street firms seeking to buy back warrants held by the government as part of the $700 billion financial bailout are complaining that the Treasury is demanding too high a price, according to people familar with the matter. The Treasury has rejected the vast majority of valuation proposals from banks, saying the firms are undervaluing what the warrants are worth these people said. ... The inability to agree on a price has already prompted JPMorgan to take the next step in a complex process to remove the warrants from the hands of the government. The bank has waived its right to buy the warrants and will allow the Treasury to auction them in the public market, which bank executives say will result in an actual market price. ... The bank said it took the action after the Treasury rejected its bid that was based on an independent appraisal. ... Some banks have begun pushing back against some government initiatives, a move fraught with political risk. ... Some banks argue they shouldn't have to pay much, saying the government's investment was essentially a short-term loan that accepted under duress to help stabilize the financial sector. ... But the Treasury is under pressure to extract as much as possible for the warrants and avoid seeming to favor Wall Street over taxpayers. Lawmakers and the bailout's independent overseers have warned the Treasury against settling for too low a price and robbing taxpayers of a richer return. ... Treasury officials are cognizant that their actions will be highly scrutinized, with likely congressional hearings and reports, and are taking a firm line. ... Many observers, say the Treasury left money on the table. Pluris Valuation, a financial advisory firm, contends that the Treasury undervalued the [Old National Bancorp] warrants by 53%. ... Banks also can waive their right to repurchase the warrants and have the Treasury sell them at through a public auction. ... To determine what the warrants are worth, the Treasury said it will use market prices, financial models and consult outside asset managers", my emphasis, Deborah Solomon and Robin Sidel at the WSJ, 10 July 2009, link: http://online.wsj.com/article/SB124718361931620349.html.

Nothing like some sunlight on this. Suppose BigBank has warrants it wants to buy back. Their "worth"? Say $1 billion in the open market. Abracabra! Hire an "independent" appraiser. Give him $500,000 and he says, "They're worth $470 million". Sell them. The bank is $529.5 million ahead! Now wait two years. Leave Treasury. Voila, a $3 million-a-year sinecure at BigBank. 53%. Wow! That means Pluris thinks they were worth 213% of what Treasury paid for them. Consider: financial statements include warrant and stock option values based on various models. What are these financials worth? It's good to see the banks are now enamored of market values. See my 17 July 2008 post, http://skepticaltexascpa.blogspot.com/2008/07/schwartzman-and-mcteer-on-accounting.html.