Treasury's Early Contract Change May Hurt Value of Warrants


Author: Michael R. Crittenden

03/31/2009 - A minor tweak made by the Treasury Department in its contracts with banks may end up working against taxpayers if the government decides to exercise its warrants and purchase common stock in firms.

When ironing out the details of its program to inject up to $250 billion capital into U.S. banks in October, the Treasury altered the way it calculated the strike price for the warrants it was receiving for its investment in banks. Instead of basing the price on the day the government closed its investment in a particular bank, Treasury moved the date earlier, calculating the strike price from the day the Treasury first approved a firm's application for government funds.


But the change was never publicly announced by the government; the new language was included as a footnote to the warrant contract posted on the Treasury's Web site, while the original term sheet - also on the Treasury site - includes the later date for calculating the strike price. And in addition to raising concerns about transparency, the change may have made a significant difference in the value of taxpayers' investment, said

John Morton , managing director of economic policy at the Pew Charitable Trusts. "The strike price for the vast majority of the warrants is at a higher price than they would have been had Treasury followed its original policy," Morton said. "It's fair to say it will potentially result in billions in extra subsidies."

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