Goldman buys back TARP warrants for $1.1B

/ Source: The Associated Press

Goldman Sachs Group Inc. said Wednesday it has repurchased warrants given to the U.S. Treasury under the Troubled Asset Relief Program for $1.1 billion.

The announcement came as lawmakers urged the Obama administration to ensure taxpayers get a sufficient return on the warrants the government owns as part of its preferred stock investments in banks.

Goldman Sachs said it believes the price it paid for the warrants, as determined by the Treasury, was fair.

Goldman already paid $318 million in preferred dividends on the $10 billion in TARP funds it received, which it repaid in full last month.

Combined with the warrant repurchases, Goldman has paid the government $1.42 billion, for an annualized return of 23 percent.

“Taxpayers have gotten a good return on their investment,” the Treasury said in a statement. “The process we designed on valuation worked to protect taxpayers.”

In return for doling out hundreds of billions of dollars to banks last fall at the height of the credit crisis, the government received warrants that would have enabled it to buy shares of the banks at a set price in 10 years. Some argue that by letting the banks pay back the warrants now, taxpayers potentially lose out on money if the price of the bank’s stock appreciates over the years, as expected.

Herb Allison, the Treasury official overseeing TARP, said Wednesday that the Obama administration wants to sell the warrants quickly to end its involvement in the financial sector as soon as possible.

The Treasury doesn’t want to speculate whether the warrants will become more valuable in the future, he said during a congressional committee hearing examining whether taxpayers are getting an adequate return on the warrants.

“We are not in the business of ... market timing,” he told a House Financial Services subcommittee.

The Treasury announced in June that it would value the warrants through negotiation with the banks. The agency’s offers reflect financial modeling and surveys of market participants. If the two sides can’t agree on a price, the banks can elect to have the Treasury auction the warrants.

Earlier this month, a bipartisan congressional watchdog claimed the Treasury was selling the warrants for one-third less than they’re worth, potentially shorting taxpayers up to $2.7 billion.

But some banks, including JPMorgan Chase & Co., elected to have the warrants sold at auction. Treasury said this showed it was driving a hard bargain, asking more than the banks were willing to pay.

Treasury has faced mounting accusations that its relationships with big banks are too cozy. After months of multibillion-dollar bailouts, the banks are reporting strong profits while the economy remains weak.

Elizabeth Warren, chairwoman of the congressional oversight panel that claimed Treasury didn’t get a good deal on its earlier sales, said the price Goldman Sachs paid was similar to her panel’s calculation of their value.

“That certainly increases our confidence” in the process Treasury is using to value the warrants, she said.

Still, auctioning the warrants could yield a higher return, she said, and would be more transparent to the public.

Initial reaction from lawmakers to Goldman’s repayment, meanwhile, was guardedly optimistic.

“That sounds pretty good, but is it enough?” asked Rep. Dennis Moore, a Kansas Democrat, who chaired Wednesday’s hearing.

Rep. Spencer Bachus, senior Republican on the House Financial Services Committee, said the return on the Goldman investment “is certainly good news for the taxpayers,” though unlikely to be repeated by other banks.

Allison said it is impossible to know whether the government would have gotten a better deal by auctioning Goldman’s warrants because it’s difficult to determine how the market would value them.

“It’s a question we ask ourselves all the time,” he added.