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TARP Warrants Are Expiring Soon

Dudley Pierce Baker
Common Stock Warrants

Is there an opportunity here for investors? Perhaps.

Remember back to the financial crisis in 2007-2008.

The U.S. Government via TARP (Troubled Asset Relief Program) stepped in and basically bailed out many financial institutions and in return received stock warrants in those companies most of which had a 10 year life before expiring. The Government then sold the warrants and those warrants began to trade so that investors could buy them.

Those warrants will be expiring between October 2018 and January 2019 on approximately 22 banks and financial institutions currently trading on the NYSE or the Nasdaq.

Investors interested in buying bank stocks to gain exposure to rising interest rates can purchase TARP warrants to cost-effectively increase the size of their stock positions or initiate new positions. Think of the warrants as extremely long-dated call options.

Some history is relevant.

Treasury established several programs under TARP to help stabilize the U.S. financial system, restart economic growth, and prevent avoidable foreclosures.

Although Congress initially authorized $700 billion for TARP in October 2008, that authority was reduced to $475 billion by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Of that, the following amounts were committed through TARP’s five program areas:

  • Approximately $250 billion was committed in programs to stabilize banking institutions ($5 billion of which was ultimately cancelled).
  • Approximately $27 billion was committed through programs to restart credit markets.
  • Approximately $82 billion was committed to stabilize the U.S. auto industry ($2 billion of which was ultimately cancelled).
  • Approximately $70 billion was committed to stabilize American International Group (AIG) ($2 billion of which was ultimately cancelled).
  • Approximately $46 billion was committed for programs to help struggling families avoid foreclosure, with these expenditures being made over time.

The authority to make new financial commitments under TARP ended on October 3, 2010. As of October 31, 2016, cumulative collections under TARP, together with Treasury’s additional proceeds from the sale of non-TARP shares of AIG, exceed total disbursements by more than $7.9 billion. Treasury is now winding down its remaining TARP investments and is also continuing to implement TARP initiatives to help struggling homeowners avoid foreclosure.

TARP Warrants Offer Huge Upside

The excerpts below are from Real Money, Sham Gad, August 31, 2011.

One of the side effects of the U.S. TARP (Troubled Asset Relief Program) capital purchase, the issuance of warrants from TARP recipients, could very well turn out to be one of the best investment opportunities available to investors today.

Back during the height of the financial crisis, all the major financial institutions were infused with capital from the federal government in order to shore up balance sheets. In exchange, the companies issued preferred stock to Uncle Sam. As a kicker, the federal government also received warrants – options – to buy shares at a specified strike price within a specified date.

Rather than hold on to the warrants, the government began cashing out a year ago by selling the warrants to the investing public. In some instances, namely Goldman Sachs (GS) and Wells Fargo (WFC), the company itself bought back all or some of the warrants. However, in most cases the warrants were sold to the investing public and trade freely. For those investors who feel that financials are facing a cyclical downturn and will one day shine again, owning the warrants may actually be more advantageous than owning the stock.

Several attractive factors make these TARP warrants worthwhile investments:

  1. They have an abnormally long time to expiry. The longest -dated options, LEAPS (long-term equity anticipation securities), are usually two years in duration. Most of these warrants expire between 2018 and 2019. Rest assured that if financials do recover, they will do so within the next seven to eight years, according to historical financial industry cycles dating back to the Great Depression.
  2. Banks today have excess capital on the balance sheets. Sooner or later, this excess capital will be used to fund buybacks or dividend payments;
  3. A specific feature to these TARP warrants is that the strike price is adjusted downward for any quarterly dividend above and beyond a set dividend payout. This is not typical of warrants, and this, while banks are waiting for approval to boost dividends, is a valuable provision.

These unique TARP warrants may be the best gifts the financial crisis has bestowed on investors. Normally, options investing can be dangerous, because even a correct bet can lead to loss if time runs out. But with nearly a decade of time on your side, it’s hard to believe that the cycle won’t improve by then.

Note: Depending on the quotation system you use, the warrant suffix may be “WT” or “WS.”

TARP Warrants are Expiring Soon

It has been a great ride for many of these TARP warrants as the common shares of many of the banks have increased greatly in value over the last few years. But the story has been the stock warrants on those banks, many of which have increased in value many times over.

Current Opportunities With These Expiring Warrants

With these warrants expiring within 12 months, they now trade similar to call options presenting both potential gains as well as potentially big losses, all depending upon the overall market performance of the banks and the broad markets in the United States.

Savvy investors might want to consider the following alternatives with these expiring TARP warrants depending upon your personal views of the markets direction over the next 12 months:

  • Long position in the warrants
  • Short the warrants
  • Buy the common shares and short the warrants
  • Buy the warrants and short the shares
  • Short the warrants and hedge with call options

For investors seeking more information on stock warrants I encourage you to visit my website, where you can get a FREE copy of The Stock Warrant Handbook: Your Personal Guide To Trading Stock Warrants.

Disclosure: Neither Dudley Pierce Baker nor is an investment advisor and any reference to specific securities does not constitute a recommendation thereof. is an online newsletter providing complete details on all stock warrants trading in the United States and Canada since 2005. The information and opinions expressed should not be construed as a solicitation to buy any securities mentioned in this service.

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