The warrant valuations matter. First, if banks are on solid enough ground to pay back their bailout loans and take the final step of buying back the warrants, it is appropriate for the Treasury to negotiate hard on price. Second, the warrants represent the only — and still modest — remaining upside for taxpayers on the risky and low-yielding investments made in banks on their behalf.
The basic rescue program to date has invested roughly $200 billion in banks, mostly in the form of preferred stock. That brings in 5 percent annually in interest payments. The sale of unexercised warrants could bring in an additional $9 billion, according to Pluris Valuation Advisors. Spread that over two years and that raises taxpayers’ annual returns above 7 percent. That is still scant compensation for the risk in propping up teetering banks.
Yet in the first deal in early May, even this level of return looked unlikely. Old National paid the Treasury only 8 percent of the value of the shares underlying the warrants, drawing glee at Old National and criticism from analysts. In the 10 transactions since, the Treasury has managed to get banks to pay twice to three times that. Pluris reckons the latest deals come close to market value once the oddities and, especially, the illiquidity of the 10-year warrants are taken into account.
Other valuations, including a Breakingviews.com analysis derived from a Congressional Oversight Panel study, suggest the warrants might be worth a bit more. Either way, it seems the Treasury has been much less of a pushover in recent deals than it was with Old National.
That is good, because the bulk of the warrant value — something approaching $5 billion — resides with half a dozen big banks that have yet to buy warrants back. Goldman Sachs, JPMorgan Chase and Morgan Stanley may be first in line to do so, but sooner or later most if not all the big banks will want to wash their hands of government help. The Treasury should save the toughest negotiations for them.
Citi’s Reshuffling
Citigroup is making nice with regulators. That much is evident from the troubled bank’s latest reshuffling of its executive bench. Though the changes look primarily intended to please Citigroup’s many financial watchdogs, shareholders can still take some comfort from the apparent acquiescence ofVikram S. Pandit, the company’s chief executive.
Citigroup named Eugene McQuade to run its core depositary institution. As the former president and chief operating officer of FleetBoston, Mr. McQuade understands retail and commercial banking. This is the very career experience that regulators, led by Sheila C. Bair of the Federal Deposit Insurance Corporation, had worried that Citigroup and Mr. Pandit lacked. Thus, one criticism is neutralized.
Second, the bank is replacing Ned Kelly as the group’s chief financial officer with a numbers guy, chief accounting officer John Gerspach. Since the chief financial officer is one of the primary executives to deal with regulators, this move appears sensible. Though Mr. Kelly has the confidence of his peers in the bank, his career within the investment banking industry made him an odd choice as the bank’s public face for finance.
Moreover, Mr. Kelly — who also studded his delivery on shareholder calls with Wall Street jargon during his tenure of less than four months — proved a lightning rod with the bank’s overseers. This year, after Citigroup lost out to Wells Fargo in a bid for Wachovia, Mr. Kelly publicly called the F.D.I.C. the group’s “tertiary regulator,” behind the Federal Reserve and Comptroller of the Currency.
So with these changes, Citigroup appears to have removed one irritant to relations with its watchdogs and answered criticisms it lacked sufficient commercial banking expertise at the top. That should secure more time for Mr. Pandit and his team to implement plans to jettison assets, slim down the balance sheet and make Citigroup more manageable. In this respect, the interests of shareholders and regulators look to be nicely aligned.