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 Treasury Releases TARP Warrant Disposition Report



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The US Department of the Treasury today released a TARP Warrant Disposition Report. This report provides an overview of the warrants received by Treasury under the Capital Purchase Program (CPP) of the Troubled Asset Relief Program (TARP) as of December 31, 2009 and an explanation of the warrant disposition process and the results achieved on behalf of taxpayers.

The Emergency Economic Stabilization Act of 2008 (EESA) requires that Treasury receive warrants in connection with the purchase of troubled assets.

A major part of the TARP was the CPP. It was created in October 2008 to stabilize the financial system by providing capital to viable banks of all sizes nationwide. Under this program, Treasury invested $205 billion in 707 banks.

Under the CPP, Treasury purchased shares of senior preferred stock or other securities from qualifying U.S.-controlled banks, savings associations, and other financial institutions. As part of its investment, Treasury also received warrants to purchase shares of common stock or other securities from the banks. The purpose of the warrants was to provide taxpayers with an additional potential return on the government's investment.

To date, the disposition of warrants has succeeded in significantly increasing taxpayer returns on the CPP preferred investments that have been repaid. As of December 31, 2009, Treasury has received $4 billion in gross proceeds on the disposition of warrants in 34 banks, consisting of (i) $2.9 billion from repurchases by the issuers at agreed upon fair market values and (ii) $1.1 billion from auctions.1 For those 34 institutions, Treasury received an absolute return of 3.1% from dividends and an added 5.7% return from the sale of the warrants for a total absolute return of 8.8%.2 These returns are not predictive of the eventual return on the entire CPP portfolio.

When a bank repays the CPP investment, it has the right to repurchase its warrants at an agreed upon fair market value. The warrants do not trade on any market and do not have observable market prices. Accordingly, Treasury has established a methodology for evaluating a company's determination of fair market value. If a bank chooses not to repurchase its warrants, then Treasury intends to sell the warrants to a third party.

The first CPP warrant repurchase was completed in May 2009, and Treasury began the public sale of warrants to third parties in December 2009. Treasury follows a consistent process to dispose of the CPP warrants for all banks, regardless of the size of the institution or the warrant position. This process is designed to ensure that taxpayers receive fair market value for the CPP warrants whether they are repurchased by the issuer or sold to a third party.

At the end of 2009, Treasury held warrants in 18 institutions that have fully redeemed the CPP investment, and Treasury intends to sell those positions in the near future. Treasury also holds warrants in 230 public companies that have not repaid the CPP investments. In addition, Treasury also holds warrants in public companies in connection with other TARP programs, such as the Targeted Investment Program (TIP) and the Asset Guarantee Program (AGP). For example, Treasury holds warrants in Bank of America Corporation associated with both CPP (121,792,790 shares with an exercise price of $30.79) and TIP (150,375,940 shares with an exercise price of $13.30). Treasury's disposition process is the same for warrants acquired under all TARP programs.

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