Thursday, July 23, 2009

US Treasury Cashes in

. Thursday, July 23, 2009

It was announced today that Goldman Sachs' repayment of the $10 billion in TARP funds last month that the government provided to the bank in the midst of the financial crisis last fall, generated a 23 percent annualized return for American taxpayers.

Goldman Sachs agreed to the Treasury’s request for $1.1 billion to repay warrants the government received when it invested $10 billion in the New York-based firm last October. The payment is in addition to $318 million in preferred dividends.

The company’s warrant transaction “was the best deal for taxpayers yet,” said Linus Wilson, a finance professor at the University of Louisiana at Lafayette.

The firm is paying about 98 percent of the warrants’ value, based on Wilson’s use of the Black-Scholes and Merton option pricing models. By contrast, he estimates that BB&T Corp. and U.S. Bancorp have struck deals with Treasury to pay less than 60 percent of the value of their warrants.

The 23 percent annualized return to taxpayers “is reflective of the government’s assistance, which benefited the financial system, our firm and our shareholders,” Chief Executive Officer Lloyd Blankfein, 54, said in a statement. “We are grateful for the government efforts.”
A warrant is essentially an option that allows holders to buy stock at a previously specified price. The US received these warrants in addition to preferred dividends in the deal to provide the liquidity.

Not too shabby of a return. $1.418 billion, or about 23%, in what is essentially interest payments for that $10b cash infusion. A nice little comparison - in the same 9 month span (from October to July), the S&P 500 is down roughly 20%.

We'll see what the market value at auction on those JP Morgan and Morgan Stanley warrants yield. We'll also wait to see how much the already agreed upon warrant values at a handful of other TARP-taking banks rakes in. From the initial evidence, it looks like the bailout turned out to be a pretty good investment for the US Treasury.

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US Treasury Cashes in
 
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