Morgan Stanley Redeems Warrants For $950 Million

Morgan Stanley Redeems Warrants For $950 Million

  • Posted Friday, August 07, 2009 -
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By Chris Carey, Bailout Sleuth Another financial institution has struck a deal to buy back stock warrants it sold the Treasury Department in return for bailout funding.

Morgan Stanley & Co. announced that it would pay $950 million to redeem the warrants. When added to dividends paid on the government's initial $10 billion bailout package, the return to taxpayers equals $1.27 billion.

"Morgan Stanley is pleased to be repurchasing this warrant and providing U.S. taxpayers a 20 percent annualized return on their investment in our company," said John J. Mack, the company's chief executive.

How to value the stock warrants has been a tricky question for bailed-out companies and government regulators alike. Because they permit the holder to buy common shares at a specified price, some have argued that the government should hold on to them until the financial sector fully recovers.

Under that scenario, taxpayers might make a significant profit. Selling them at the price they might make on the open market today would mean the taxpayers aren't compensated for the risk they took in accepting them in the first place.

In June, with banks clamoring to leave TARP and escape a perceived unfriendly regulatory environment, Treasury announced the procedure by which it would price the warrants.

Under the announced terms, banks that have already redeemed the stock they sold the government submit their own valuation of the warrants. Treasury then has 10 days to accept the bank's valuation or initiate a two-stage cooperative appraisal process.

So far, however, the process has been easy and relatively noncontroversial. Last month, American Express Co. paid the Treasury Department $340 million for stock warrants - an annualized 26 percent return for taxpayers. Goldman Sachs Group Inc., after having its initial offer of $500 million rejected, eventually paid $1.1 billion for its warrants.

Other companies that have redeemed warrants and made a final exit from the TARP program include U.S. Bancorp, BB&T Corp., and State Street Corp.

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