Much of the controversy over the TARP program has been assertions by critics that the big banks were getting sweetheart deals as they exited the program. The criticism focused, in particular, on the warrants that the U.S. Treasury received as part of its investment in the banks. These warrants function like stock options, giving the holder the right to purchase a designated number of shares at a designated price.

The warrants give Treasury the chance to make money for coming to the banks' aid when they needed it most -- as the banks' stock price recovers, the Treasury can realize an investment gain for the taxpayers. Critics have charged that the banks want to repurchase the warrants quickly and at very low prices. So is TARP working out good for the taxpayers?According to Espen Robak, CEO of Pluris Valuation Advisors, the Treasury has actually been getting fair value as it sells the warrants back to the banks exiting the TARP program. Pluris helps companies put fair market valuation on hard-to-sell assets in their portfolios. Pluris put together an extensive study of TARP warrant valuations (download here w/registration), Robak gave DailyFinance his take on Treasury's handling of TARP warrant so far.

DailyFinance: So what's happening with the TARP warrants and preferred stock?
Espen Robak: The government is getting its money back as banks buy their preferred stock back from Treasury. That's the largest part of the taxpayer investment. But these warrants were really meant to be a sweetener and a nice addition to the TARP investments. So trying to get the maximum amount on these warrants when the banks repurchase their preferred stock is obviously paramount. The Treasury should drive the hardest bargain they can but not ask so much that the banks say, 'No, we don't want to do that.' The natural buyer for these warrants are the banks themselves. It really boils down to a valuation question. Is the government getting fair market value for these warrants?

DF: So, is the government getting fair market value? Some critics have said they aren't.
Robak: I think that was true a couple of times in the beginning when a lot of the banks were getting prices of roughly half what we thought was a reasonable estimate of fair market value. But most of the repurchases that we have seen recently have been close to fair market value.

DF: What changed?
Robak: For the Treasury, there is a bit of a learning curve here in terms of what you can get and what you can't get. They have been reaching out to people who are in the market to gauge potential and figure out who could buy these assets. In doing so, they have been getting more of a sense of what might be available in terms of bids. A few smaller banks that got out earlier, such as Old National, got a very good deal. In that first repurchase the Treasury got less than 50% of fair market value for the warrants. But in the case of Goldman Sachs, by our calculations the government got nearly 99% of fair market value or very close to it. That's a big improvement.

DF: How did you determine what fair market is?
Robak: It's very hard to value illiquid warrants. Standard theoretical models don't fully adjust for illiquidity. All the popular theoretical models usually result in the same valuation if you use consistent inputs. But that's a theoretical value. That's not the real value you will get in an auction where you're selling to someone that knows they can't easily resell or hedge this investment. If you're stuck with it, wouldn't you want to protect yourself? So we have a database of illiquid securities that have changed hands. We studied those transactions and set up a mechanism to compare them to TARP warrants.

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