As part of its bailout programme, the US government has spent some US$205bn on a range of securities from more than 700 banks. In recent months, some aid recipients have repaid Uncle Sam for this support.
Last week, the treasury department published a report on these repurchases. At the end of 2009, the government had collected US$2.9bn from 31 banks that repurchased warrants (long-dated options). Details of the bids these lenders submitted to the treasury before settling on a price make for interesting reading.
For one, it looks like Goldman Sachs overpaid. For each group of warrants, the treasury used three valuations to guide the negotiations—a composite market quote, a third-party’s model-based estimate and the treasury’s own internal evaluation. For Goldman, the average of these three estimates suggested a price of US$907m for the warrants. The bank ended up paying US$1.1bn, around 20% more than the purported fair-market value.
Compared to what others paid in relation to their warrants’ average valuations, the larger financial firms—including Goldman Sachs and Morgan Stanley—appear to have paid over the odds to buy back their warrants. Although Old National Bank of Evansville, Indiana no doubt employs many capable negotiators, it’s not often that the lender can say it drove a harder bargain than Wall Street’s finest.