How The TARP Warrants Are Valued

There’s been a lot of blather over the last couple of days about the banks trying to lowball the price for the warrants that the government received when they extended TARP funds. Most of it seeks to paint the banks as the bad guys, as hardball negotiators who are trying to pull a fast one on the taxpayer.

It makes for good copy, the problem is there’s no way for the banks to pull that off. You see, the rules for liquidating the warrants were laid down by Congress when it enacted the TARP legislation. It’s a very clear cut and I might add transparent process for reaching an agreement on price.

I won’t go through the rules here but I will refer you to a blog — Economics of Contempt — which sets forth the process and has links to the actual legislation. The author of the blog is an attorney with a specialization in banking and finance.

Keep in mind as you see people trying to spin this story that the government has an incentive to get the most money they can for the warrants and the banks have an incentive to pay as little as possible. That’s a condition that occurs under an arcane economic system that was known as free market capitalism. There are a few vestiges that still survive.

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