Treasury Gets $12.2M from Warrants

The Treasury Department reported on Friday that after selling the warrants of 17 banks, the department raised $12.2 million. These banks received government support during the financial crisis as part of their participation in the $700 billion Troubled Asset Relief Program (TARP). The program was initiated more than two years ago to rescue the nation’s financial industry.

These 17 banks were aided with about $1 billion during the crisis in 2008 and 2009. All these banks have repaid their TARP money. However, warrants were their ending knot to the TARP program.

Among the banks, the Treasury received gross proceeds of $2.79 million from the warrant sale of Bethesda, Maryland-based Eagle Bancorp Inc. (EGBN - Snapshot Report), followed by $1.75 million from Michigan City, Indiana-based Horizon Bancorp (HBNC - Snapshot Report).

Warrant is a derivative security, providing the holder the right to purchase securities from the issuer at a specific price within a certain time frame. Moreover, the holder of warrants has the right to buy common stock at a fixed price, guaranteed by the company.

Despite commencing public auctions, Treasury has planned to directly sell the warrants to institutional investors. The direct selling decision was taken due to the small size of the warrants that did not qualify to recoup the costs of auction.

The $700 billion TARP, which was initiated in 2008 to rescue the nation’s financial industry, remains a success story. Of the total $700 billion bailout money, banks, other financial institutions and U.S. carmakers received $413.4 billion, out of which $317.6 billion has been recovered by the government till date. The money recovered includes $9.1 billion from the sale of warrants.

Considering the effectiveness in easing credit and capital market pressure, restoring confidence in the financial system and recovering the injected money at a lower-than-expected cost, it can be concluded that the government’s highly criticized bailout program has finally turned out to be a winner.

While most of the major financial institutions have repaid their TARP loans in full, a lot of money is still expected to be recovered. Hence, the ultimate success of the TARP is yet to be seen. However, the estimated overall cost has been continuously falling.

The repayment of the bailout money coupled with the repurchase of warrants is encouraging and can be seen as an indication of recovering financial institutions as well as the economy.

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