June 26, 2009 / 7:00 PM / 9 years ago

FACTBOX-U.S. Treasury unveils its warrant repurchase plan

June 26 (Reuters) - The U.S. Treasury Department on Friday laid out details of its proposal for dealing with bank stock warrants it received in return for cash injections into troubled banks.

Banks that have repaid the money get the right to repurchase the warrants, provided they and the Treasury can agree on a fair market value for them. The money, about $200 billion, came from the taxpayer-funded Troubled Asset Relief Program and banks had to offer warrants as a way for taxpayers to share in their recovery.

If the Treasury and the banks cannot agree on a fair market price at which the banks would repurchase warrants, the Treasury would be able to sell them to the highest bidder through an auction process it still is developing.

About 10 large banks that repaid $68 billion in government funds have until the end of next week to notify Treasury whether they will exercise their right to buy back warrants.

REPURCHASE PROCEDURE

Below are a series of steps involved in the warrant repurchase process:

Step 1: Within 15 days of repaying capital, a bank that wants to repurchase warrants must submit a determination of fair value to the Treasury.

Step 2: The Treasury conducts a “robust” process for assessing the bank’s offer and deciding whether or not to accept it and has 10 days to respond to a bank’s offer.

Step 3: If the Treasury objects to the bank’s offer and can’t reach agreement on a fair market value, the bank and the Treasury may each select an independent appraiser and they will try to agree on a fair market value within 10 days.

Step 4: If the appraisers fail to agree, a third appraiser is hired and a composite valuation of the three appraisals is used to establish a fair market value.

If a bank decides not repurchase the warrants, the Treasury can dispose of them as it sees fit. The intent is to do so through an auction process that treasury said it currently is developing and will publish on www.financialstability.gov.

Treasury said the Obama administration’s intent is to dispose of the government’s investments in individual banks “as quickly as is practicable.”

Not all the warrants the Treasury holds are listed on a securities exchange or otherwise traded, so it may use financial models like the Black-Scholes option-pricing models to value them. The Treasury has retained three asset managers and will use outside consultants to help it assess the value of the warrants it holds.

VALUATION PROCEDURES

To evaluate a bank’s buyback offer, the Treasury will rely on market prices, financial modeling and outside consultants.

Consultants: It has hired three firms, New York-based AllianceBernstein LP (AB.N), FSI group LLC of Cincinnati and Piedmont Advisors LLC of Durham, North Carolina, to help it manage TARP investments, including warrants. Each firm will provide an independent valuation for each repurchase proposal, including key assumptions made.

Market prices: The Treasury will use observable market prices for listed warrants and comparable securities where available, but for many smaller banks there are no comparable securities. It will seek quotations for warrants from five to 10 market participants, which may include investment banks regularly trading options or other securities with embedded options.

Financial modeling: The Treasury will employ well-known financial models such as binomial and Black-Scholes option pricing models. It will base assumptions about future volatility on historical trends and implied volatilities for a given stock, using a 60-day trailing average. Assumptions about future dividends will be based on current, historical and option-implied dividend yields. (Reporting by Glenn Somerville and David Lawder; Editing by Neil Stempleman)

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