Monday, July 13, 2009

The state-organised looting of the US taxpayer

The Congressional Oversight Panel's Report for this month (July) focuses on the issue of what the right price is for repurchases of TARP warrants.

You may recollect that TARP (The Troubled Asset Relief Program) was created by the US government to purchase assets and equity from financial institutions in order to save them from possible bankruptcy (TARP is the largest component of the steps taken by the government last year). TARP Warrants are simply the Warrants that were issued to purchase the troubled financial institutions' assets and equity. As the economy stabilises and these banks' financial situation improves, these institutions naturally want to repurchase their assets and equity in order to free themselves from government influence and interference. The question is: what is the right price for these Warrants?

In its Report, the Panel report compares its estimates with other estimates, based on high, low, and best assumptions for key variables.

Applying its calculatons to the warrant repurchases by eleven banks that have already been approved by the US Treasury, the Panel estimates that the price paid was only 66% of the Panel's best estimate of their value.

Concretely, the Panel estimates that an additional US$10 million should have been paid.

In other words, that is US$10 million that the taxpayer should have received and has not received.

Naturally, the question of what the "correct" price is for such warrants is a ticklish one.

The simplest way of settling the question would be to let market forces have their way. Here is an important product for which there is a worldwide market. No need for the US Administration to distort that market.

Let there be auctions.

That is the only way to ensure that the taxpayer does not continue to be looted. Sphere: Related Content

No comments: