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TARP required the banks involved to issue preferred stock for purchase by the Treasury; this prices more like bonds than equities due to the fixed dividend.
by NovemberWhiskey 4y ago
TARP required the banks involved to issue preferred stock for purchase by the Treasury; this prices more like bonds than equities due to the fixed dividend.
- Scoundreller 4y agoDid they pay like $10 or less on each $25 par value or something? Or did they buy at par at like a 10-12% or so rate and duh, the banks redeemed them for par? Still sounds like gov took the downside risk while shielding themselves from the upside.
- NovemberWhiskey 4y agoIt was sold and par and redeemed at par. Actually it's a bit more complicated, because the preferred stock was also issued with 10 year warrants to buy common stock with an exercise price based on the company stock at the time of issuance. The warrants could be repurchased at fair market value, or they would end up being auctioned by the Treasury. So the Treasury did also have upside participation. e.g. Morgan Stanley repurchased its warrants for $950M vs. its $10B preferred stock sale. The preferred stock also came with all kinds of covenants that related to government policy objectives (capping of common stock dividends, initial limitations on redemption absent a successful raising of equity, executive compensation restrictions) which really frustrate the notion of "pricing" this. The point still remains; the premise of TARP was "the only way the government loses the entire pot is if the program fails disastrously and the entire financial sector fails" whereas the premise of PPP was "the desired outcome is that all the loans are forgiven and the government loses the whole pot".