WASHINGTON — The Treasury Department cleared another hurdle for banks to return rescue funds by releasing guidance on Friday for repaying the warrants tied to the assistance.
Under the guidance, the Treasury made clear it has no intention to hold onto the warrants for a long period.
"The president has clearly state that his objective is to dispose of the government's investments in individual companies as quickly as is practicable," the guidance states.
To repurchase the warrants, the Treasury lays out a four step process. A bank wishing to repay the warrants must submit an offer of the fair market value of the warrant within 15 days of the repayment of the Troubled Asset Relief Program funds. The Treasury would then have 10 days to accept the bank's offer.
If the government rejects the bank's offer, the Treasury and the bank would each select independent appraisers to conduct their own valuations. Finally, if the appraisers can not agree, a third appraiser would be hired to establish the fair market price of the warrants.
The Treasury said it would value the warrants based on market prices, modeling tools, and outside consultants or financial agents.
If a bank does not choose to repurchase the warrants, the Treasury would have the discretion to dispose of the warrant however it wishes over time, such as through an auction process over the next few months. The Treasury did not provide guidance how the auction process would work.
While the administration acknowledged it had considered holding warrants for a longer period of time in the hopes of making more money off them, it said such a move would be inappropriate.
"There was no certainty that we would realize higher values, and it was not appropriate for the government to be exercising discretionary judgment on timing market sales," the Treasury says in the guidance.
The administration does promise transparency with the process. The Treasury said it would publish information on all capital transactions, including investments, repayments and warrant repurchases within two business days of closing. In addition, the agency will publish information on each warrant that is repurchased, including a bank's initial and subsequent determinations of fair market value, if applicable.
Most industry observers praised the process and said it was largely in line with existing market practices. "They are using fairly typical tools to establish the valuation so the banks will find the process the Treasury outlined consistent with what the market is using," said Mark Tenhunfeld, senior vice president for regulatory policy for the American Bankers Association.