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ASSESSING TREASURY’S PROCESS TO
SELL WARRANTS RECEIVED FROM
TARP RECIPIENTS

SIGTARP-10-006
MAY 10, 2010

SIGTARP
Office of the Special Inspector General
for the Troubled Asset Relief Program

Summary of Report: SIGTARP-10-006

Why SIGTARP Did This Study
The Emergency Economic Stabilization Act of
2008 (“EESA”) mandated that the Department of
the Treasury (“Treasury”) receive warrants or
debt instruments when it invests in troubled
assets under the Troubled Asset Relief Program
(“TARP”). For public held institutions, the
warrants provide Treasury the right, at its option,
to purchase shares of common stock at a
predetermined price. As recipient institutions
repay their TARP investments, Treasury sells the
warrants, either directly to the recipient
institution at a negotiated price or via public
auction.
Pricing the warrants is not straightforward,
however, because there is limited market
information concerning warrants of this duration.
Treasury thus developed an approach to estimate
fair market value in order to assess offers from
institutions seeking to repurchase warrants.
This audit seeks to determine (1) the process and
procedures Treasury has established to ensure
that the Government receives fair market value
for the warrants; and (2) the extent to which
Treasury follows a consistent and welldocumented process in reaching its decision to
sell warrants back to recipient institutions.

What SIGTARP Recommends
SIGTARP recommends that Treasury (1) ensure
that more detail is captured in Warrant
Committee meeting minutes, in particular, about
the members’ qualitative considerations
regarding why bids are accepted or rejected; (2)
document in detail the substance of all
communications with recipients concerning
warrant repurchases; and (3) develop and follow
guidelines and internal controls concerning how
negotiations will be pursued, including the
degree and nature of information to be shared
with repurchasing institutions concerning
Treasury’s valuation of the warrants.
In commenting on a draft of this report, Treasury
agreed to review their procedures to ensure that
there is sufficient consistency in their process,
but did not specifically respond to our
recommendations; instead, Treasury indicated
that it would respond more fully to the report’s
findings and provide a detailed description of the
actions it intends to take with regard to the
concerns raised in the report within 30 days.
SIGTARP will provide an update on that
response in its next Quarterly Report to
Congress.

May 10, 2010
Assessing Treasury’s Process To Sell Warrants Received
from TARP Recipients
What SIGTARP Found
Once a publicly traded bank pays back its TARP investment, Treasury undertakes a
process for the sale of the bank’s warrants, either directly back to the bank through
negotiation or to third parties through an auction. If a bank decides to repurchase its
warrants, Treasury assesses the bank’s bid after arriving at a “composite” estimated
value for the warrants that references market quotes, financial modeling valuations,
and third-party estimates. Treasury’s Warrant Committee recommends whether to
accept the offer, and the Assistant Secretary for Financial Stability makes the final
decision. If a price cannot be negotiated, the warrants are auctioned publicly.
To its credit, Treasury has generally succeeded in negotiating prices from recipients
for the warrants at or above its estimated composite value. Of the 33 warrant public
company repurchases analyzed, 20 of the final negotiated prices were at or above
Treasury’s composite value, and nine of the final negotiated prices were just under
the composite value. The four remaining transactions included the first two
completed (during which time Treasury was operating under a governing statute that
limited how long Treasury had to negotiate and before Treasury had its valuation
methodology worked out) and two for warrants in small institutions that received
less than $100 million in TARP funds (for which valuation is difficult because of
less liquidity in the bank’s stock). In total, for all warrant transactions (repurchases
and auctions) through March 19, 2010, Treasury received $5.63 billion in proceeds
from warrant sales.
This audit, however, has identified two broad areas in which Treasury’s process for
selling warrants directly to financial institutions is lacking in ways that impair
transparency and have led to a lack of consistency in the process. The first is that
Treasury does not sufficiently document important parts of the negotiation process:
the substantive reasons for Warrant Committee decisions are not reflected in
Warrant Committee minutes, and negotiations between Treasury and recipient
institutions are not documented. This lack of documentation makes it impossible to
test whether Treasury is fairly and consistently making decisions that could mean a
difference of tens of millions of dollars for taxpayers.
The second significant deficiency is that Treasury does not have established
guidelines or internal controls over how the negotiations proceed, and in particular
as to how much information is shared with recipient institutions about Treasury’s
estimated fair market value and the price it will likely accept for the warrants.
Descriptions provided to SIGTARP by several of the banks that engaged in
negotiations with Treasury confirmed that Treasury was willing to provide detailed
information about its estimates to certain banks, but was unwilling to share similar
details with others. Moreover, although Treasury indicated that it generally would
not provide an indication of its valuation until the institution’s bid was close, the
cases examined in detail in the audit do not bear this out. Indeed, the amount of
information provided, the circumstances of when information would be provided,
and the results of the negotiation varied widely.
Unless Treasury addresses these deficiencies, it risks subjecting itself once again,
fairly or unfairly, to criticism from third parties that through TARP it is favoring
some institutions over others—picking winners and losers—irrespective of whether
in fact it had legitimate reasons to take the negotiating positions that it did. Although
SIGTARP acknowledges that every case is different and that Treasury needs to have
some flexibility to address each particular situation, without some objective
guidelines and, importantly, internal controls to ensure that such guidelines are
followed, the risks and costs of arbitrary results and unjustifiable disparate treatment
are just too great. The absence of documentation and uniform guidelines for
negotiation may make it difficult for Treasury to defend itself convincingly against
charges of arbitrariness or favoritism. Only through adoption of the
recommendations in this report can Treasury minimize this reputational risk.

Special Inspector General for the Troubled Asset Relief Program

Office of the special inspector general
For the Troubled Asset Relief Program
1801 L Street, NW
Washington, D.C. 20220

May 10, 2010

MEMORANDUM FOR:

The Honorable Timothy F. Geithner, Secretary of the Treasury

SUBJECT:

Assessing Treasury’s Process to Sell Warrants That It Received
From TARP Recipients (SIGTARP-10-006)

We are providing this audit report for your information and use. It discusses the results of the 46
warrant repurchases completed as of March 19, 2010. As of that date, 33 banks had bought back
their warrants through a negotiated process, seven banks allowed their warrants to be auctioned,
and six private banks repurchased the preferred shares that Treasury received as the result of the
warrants it exercised at the time of the investments. The audit highlights deficiencies in the
documentation of and a lack of established guidelines and internal controls over the negotiation
process.
The Office of the Special Inspector General for the Troubled Asset Relief Program
(“SIGTARP”) conducted this audit under the authority of Public Law 110-343, as amended,
which also incorporates the duties and responsibilities of inspectors general of the Inspector
General Act of 1978, as amended.
We considered comments from the Department of the Treasury when preparing the final report.
The comments are addressed in the report, where applicable, and a copy of Treasury's response
to the audit is included in the Management Comments appendix of this report.
We appreciate the courtesies extended to the SIGTARP staff. For additional information on this
report, please contact Mr. Kurt Hyde, Deputy Special Inspector General for Audit (202-6224633/kurt.hyde@do.treas.gov).

Neil M. Barofsky
Special Inspector General
for the Troubled Asset Relief Program

Table of Contents
Introduction

1

Treasury’s Process to Sell the Warrants

9

Bank-By-Bank Results of Treasury’s CPP and TIP Warrant Sales Process 26
Conclusions and Recommendations

32

Management Comments and Audit Response

38

Appendices
A. Scope and Methodology

39

B. Largest Positions in Warrants Held by Treasury, By Program,
as of March 19, 2010

41

C. Investments in 707 CPP Banks

42

D. CPP Warrant Disposition Timeline

43

E. Treasury’s Warrant Process Description (Excerpt)

44

F. Example of Treasury’s Warrant Valuation Analyst

47

G. Analyst’s Fair Market Value Determination (Example)

48

H. Supplemental Prospectus

53

I. Acronyms

61

J. Audit Team Members

62

K. Treasury’s Comments

63

ASSESSING TREASURY’S PROCESS TO SELL WARRANTS
THAT IT RECEIVED FROM TARP RECIPIENTS
SIGTARP REPORT 10-006

MAY 10, 2010

Introduction
To facilitate a return to the taxpayer, the Emergency Economic Stabilization Act of 2008
(“EESA”) mandated, with limited exceptions, that the Department of the Treasury (“Treasury”)
receive warrants from assisted financial institutions when it invests in troubled assets under the
Troubled Asset Relief Program (“TARP”). For a specified period of time, the warrants provide
Treasury the right to purchase, at a previously determined price, shares of common stock for
publicly traded institutions, or preferred stock or debt for non-publicly traded institutions.
Because warrants rise in value as the financial institution’s underlying stock price rises, warrants
give taxpayers an opportunity to benefit from an institution’s potential recovery following the
receipt of TARP funds.
Under TARP’s Capital Purchase Program (“CPP”), Treasury invested $204.9 billion in 707
banks and other financial institutions in exchange for preferred stock and, in some instances, debt
securities.1 In connection with these CPP transactions, Treasury received warrants from 282
publicly traded banks and 402 companies that are private, S-corporations, or mutual holding
companies.2 For these 402 companies, Treasury received warrants of additional preferred shares
or debt instruments, in an amount equal to five percent of the CPP investment, that were
immediately exercised when the investments were made, thus effectively providing Treasury
more preferred shares or debt than it purchased. For publicly traded institutions, Treasury
received warrants of common stock with a 10-year expiration date that give Treasury the right to
purchase common stock worth 15 percent of the total amount of Treasury’s CPP investment in
the institution.3
Under the CPP Security Purchase Agreement (“SPA CPP”), banks originally were not permitted
to repay investments within the first three years unless the company completed a qualified equity
offering of at least 25 percent of the CPP investment amount. On February 17, 2009, however,
the American Recovery and Reinvestment Act 2009 (“ARRA”) changed the timing of when CPP
recipients could pay back its Treasury investment, providing that, “subject to consultation with
the appropriate federal banking agency, [Treasury] shall permit a TARP recipient to repay [the
1
2
3

As of December 31, 2009, CPP is closed to new applicants.
Twenty-two community development financial institutions (“CDFIs”) that received CPP funds were not required
to issue warrants to Treasury
According to the Annex D of the CPP Securities Purchase Agreement, the warrants received by Treasury do not
entitle Treasury to any voting rights with respect to any voting stock prior to the date of exercise. This restriction
also applies to any person to whom Treasury transfers the shares or warrants.

1

CPP investment] without regard to whether the financial institution has replaced such funds from
any other source or to any waiting period.” Pursuant to the CPP SPA, publicly traded banks are
permitted, once the bank repays the CPP investment, to repurchase their warrants at a price equal
to fair market value. On March 31, 2009, the first banks repaid Treasury, and on May 8, 2009,
Old National Bancorp became the first CPP recipient to repurchase its warrants from Treasury.
Treasury also holds warrants for common stock in companies in connection with investments
made under other TARP programs. Specifically, Treasury has received warrants from American
International Group (“AIG”) under the Systemically Significant Failing Institutions (“SSFI”)
program, from Citigroup and Bank of America under the Targeted Investment Program (“TIP”),
from Citigroup under the Asset Guarantee Program (“AGP”), from General Motors and GMAC
under the Automotive Industry Financing Program (“AIFP”), and from each of Public-Private
Investment Funds under the Legacy Securities Public-Private Investment Program (“S-PPIP”).
Treasury’s disposition process has been the same for warrants acquired under all TARP
programs.
As of March 19, 2010, 33 publicly traded banks had bought back their warrants when they repaid
the CPP investment. In addition, Treasury auctioned the warrants of seven banks, including the
warrants received from Bank of America under both CPP and TIP. Finally, six private banks
also repurchased the warrant preferred shares that Treasury exercised at the time of the
investment. 4 As of March 19, 2010, Treasury still held warrants in 242 public institutions.5

Audit Objectives
This audit, which was conducted in response to requests by Senator Jack Reed and
Representative Maurice Hinchey, seeks to determine:
•

the process and procedures Treasury has established to ensure that the Government
receives fair market value for the warrants

•

the extent to which Treasury follows a consistent and well-documented process in
reaching decisions where differing valuations of warrants existed.

This audit complements a Congressional Oversight Panel report released on July 10, 2009, that
examined the warrant valuation process. The scope of this audit covers 33 warrant repurchases
by CPP recipient banks through March 19, 2010. We also reviewed auctions of seven banks’
warrants that were auctioned through March 12, 2010.

4

5

Treasury gave privately held banks that pay back the CPP investment the right to repurchase the preferred shares
or debt that Treasury received when it previously exercised the warrants. Six privately held banks bought back at
par value the preferred shares Treasury received when it exercised warrants at the time of the CPP investment.
This audit does not address further those repurchased-at-par transactions.
Since March 19, 2010, and as of April 29, 2010 per OFS Transaction report, six additional banks have
repurchased their warrants. Of the 6, three went through the negotiated process, one went through the auction, and
two additional privately held banks redeemed their additional preferred shares.

2

Background
On October 3, 2008, Congress enacted EESA to provide the Secretary of the Treasury with
authority and facilities to restore liquidity and stability to the financial system. EESA requires
that the Secretary use that authority and those facilities in a manner that, among other things,
“maximizes overall return to the taxpayer of the United States.” Under EESA, Treasury is
required to obtain warrants in exchange for any Government investment over $100 million.
Although not required by EESA, Treasury also received warrants for institutions that received
less than $100 million, except for community development financial institutions (“CDFIs”).
Treasury received warrants related to investments under
Warrants 101 - Example
CPP, SSFI, TIP,6 AGP, AIFP, and S-PPIP. Appendix B
provides information on the largest positions in warrants
Assume that Treasury has the right to
held by Treasury, listed by TARP program, as of March
buy 100 shares of stock in a bank at a
19, 2010. Appendix C provides a summary of
price of $10 per share; this price is
Treasury’s CPP investments, including the number of
called the strike price. During the term
of the warrant, Treasury has the option
institutions that provided warrants to Treasury as part of
to exercise the warrant and purchase
the capital investment.
On October 14, 2008, Treasury announced CPP, a
program with the stated goal of strengthening financial
markets and increasing lending by making capital
investments in healthy, viable U.S. financial institutions.
In exchange for its CPP investments, Treasury obtained
dividend-paying preferred shares or interest-bearing debt
instruments. The preferred shares pay dividends of five
percent in the first five years and nine percent afterward.
The debt instruments, which were received from
participants that are S-corporations, pay interest of 7.7
percent for the first five years and 13.8 percent
thereafter.

shares from the company at the strike
price. If the bank’s stock is currently
trading on the New York Stock
Exchange at $12, for example, Treasury
could purchase shares from the bank at
$10 and sell them for a profit at the
market price to make $2 per share.
When, as in this example, a warrant’s
exercise price is lower than the current
market price of the stock, the warrants
are considered “in the money.” When
the strike price is above the stock’s
market price, it is “out of the money.”
However, even warrants that are “out of
the money” have value, based on the
possibility that the share price will
eventually rise above the strike price. It
is not unusual that warrants are “out of
the money” at the time they are issued.

In addition, Treasury generally7 received warrants from
CPP participants as a way to generate additional returns
for taxpayers. For publicly held institutions, the
warrants give Treasury the right to purchase common stock in the institution, in an amount equal
in value to 15 percent of the CPP investment,8 at a predetermined price called the “strike price,”
6

7
8

As of December 31, 2009, the Targeted Investment Program was effectively closed as both Citigroup and Bank of
America repaid the funding received under this program. Treasury still holds the warrants it received from
Citigroup, as of March 31, 2010. On March 29, 2010, Treasury announced that it intended to dispose of
approximately 7.7 billion shares of Citigroup; however, the disposition does not affect Treasury’s holdings of
Citigroup warrants for its common stock.
CDFIs, which are financial institutions that provide financial services to under-served communities, were not
required to provide warrants to Treasury for investments less than $50 million.
The CPP SPA provided that participants could halve the number of shares subject to their warrants by completing,
before December 31, 2009, one or more qualified equity offerings with aggregate gross proceeds equivalent to the
value of Treasury’s CPP investment. A total of 38 CPP participants did so; of those, nine have repaid their CPP
investments and Treasury has sold the corresponding warrants. In addition, under the CPP SPA, Treasury has the

3

at any time up to 10 years from the date of issuance. Treasury calculated the strike price by
averaging the bank’s common stock price during the 20-day period prior to the date when the
bank was preliminarily approved for CPP funds. For companies that are private, S-corporations,
or mutual holding companies, Treasury received the right to purchase, at a nominal price,
additional preferred shares (or debt instruments) in an amount equal to five percent of the CPP
investment. Treasury immediately exercised those warrants and thus effectively received more
preferred shares or debt than it purchased.
The circumstances under which Treasury has been required to dispose of the warrants have
changed over time. Under the standard CPP SPA, publicly traded TARP recipients are permitted
to repurchase their warrants with proper notice to Treasury (after the bank has redeemed its
preferred shares) at the fair market value.9 On February 17, 2009, Congress enacted the
American Recovery and Reinvestment Act of 2009 (“ARRA”), which required, following the
repayment of TARP funding, that Treasury “shall liquidate warrants associated with such
assistance at the current market price” (emphasis added). Treasury officials interpreted ARRA to
mean that the warrants should be liquidated expeditiously once a bank repays the CPP
investment. On May 20, 2009, Congress passed the Helping Families Save Their Homes Act of
2009, which amended the ARRA provision requiring Treasury to liquidate its warrants
immediately upon TARP repayment. Specifically, Section 403 of the Act provided that
Treasury, “at the market price, may liquidate warrants associated with such assistance”
(emphasis added). According to Treasury officials, this amendment provided Treasury more
flexibility, removing any requirement that the Secretary of the Treasury dispose of the warrants
at any particular time. For a timeline of the key events and legislative amendments related to
Treasury’s warrant disposition process, see Appendix D.
On June 26, 2009, Treasury announced guidance for the warrant repurchase process for publicly
traded institutions. A copy of this guidance is included in Appendix E. Treasury has stated that
it intends to liquidate as quickly as practicable the warrants of institutions that have redeemed
their CPP preferred shares. Pursuant to this guidance, if an institution wishes to repurchase
warrants from Treasury, it must first take Steps 1 through 4 below; if a repurchase is not
accomplished through those steps, Treasury can hold or dispose of the warrants as discussed in
Step 5.
•

9

Step 1 – Notification to Treasury with Determination of Fair Market Value: Any
institution wishing to repurchase its warrants may notify Treasury within 15 days of
repayment of TARP funds. According to the CPP SPA, the notification must include the
number of warrants to be repurchased and the determination of fair market value from the
board of directors. Moreover, the board of directors must be acting in good faith with
reliance on an “independent investment banking firm.” The independent appraiser must
be hired by the TARP recipient. CPP banks may buy back the warrants at any time after
the preferred shares have been repurchased.

right to exercise or transfer half of the warrants it holds at any time for such institutions, even if they had not yet
redeemed their preferred shares. As of March 19, 2010, Treasury had not done so for any bank.
Publicly traded companies have an incentive to repurchase and retire warrants because the exercise of warrants of
common stock results in the issuance of new shares, which diminishes, or “dilutes,” the value of existing shares.
Non-public TARP recipients have the right to repurchase the preferred shares and subordinated debt that Treasury
took when it immediately exercised the warrants at the time their CPP transactions closed.

4

•

Step 2 – Treasury Evaluates the Repurchase Offer: According to the CPP SPA and
the guidance announced by Treasury, Treasury has 10 days to evaluate the TARP
recipient’s offer of fair market value. Treasury uses three different valuation
methodologies to evaluate the CPP recipients’ determination of fair market value of the
warrants:
o Market Quotes – The long duration warrants that Treasury holds are not listed on
a securities exchange. Accordingly, Treasury uses market prices of securities
with similar characteristics to assess the market value of the warrants. Securities
with similar characteristics include publicly traded warrants and options of similar
institutions. Treasury gathers quotes on the value of the warrants from 3-10
market participants, such as investment banks and asset management firms.
o Treasury’s Financial Models – Treasury conducts valuations based on wellknown, common financial models, such as the binomial and Black-Scholes
models. The models use various known inputs as well as assumptions about the
volatility and dividends of the common stock of the institution to calculate the
value of the warrants. To estimate the long-term volatility of the common stock,
Treasury uses the implied volatility of any traded short-term options on the stock
as well as the long-term historical average of 60-day trailing volatility for the past
10 years of the common stock price. Treasury also uses the implied volatility of
publicly traded, long-dated warrants of similar institutions to determine the
volatility assumption.
o Third-party Valuation – Treasury uses eight external asset managers that it has
hired to manage TARP assets to assess independently the value of each
institution’s warrants.

•

Step 3 – Resolution Period: Should Treasury reject the TARP recipient’s repurchase
offer, the chief executive officer of the TARP recipient or a designee and a representative
of Treasury meet to discuss Treasury’s objections to the valuation proposed by the TARP
recipient and attempt to reach an agreement. As of March 19, 2010, 33 warrant
repurchases have occurred as a result of Treasury accepting a bank’s initial offer or as a
product of this effort to resolve Treasury’s objections to the price offered by the bank.

•

Step 4 – Appraisal Procedure: If no price is agreed upon after 10 days, either the
institution or Treasury may invoke the “Appraisal Procedure.” This involves Treasury
and the TARP recipient each choosing an independent appraiser to agree upon the fair
market value of the warrants. If the two appraisers are not able to agree upon a fair
market value after 30 days, then a third independent appraiser will be chosen with the
consent of the first two appraisers. The third appraiser has 30 days to make a decision,
and, subject to limitations—such as if one of the three valuations is significantly different
from the other two—a composite valuation of the three appraisals is used to establish the
fair market value. Treasury will be bound by this price determination, but Treasury has
stated that if the recipient is not satisfied with this price it may withdraw its notification
to repurchase the warrants. Under the CPP SPA, the costs of conducting any appraisal
procedure “shall be borne by the Company.” As of March 19, 2010, no CPP bank has
invoked the appraisal procedure.
5

•

Step 5 – Alternative Disposition: If neither the institution nor Treasury invoke the
“Appraisal Procedure,” or if the institution decides not to seek to repurchase its warrants,
Treasury has various options as to how it manages these investments over the 10-year
exercisable period—it may sell them, exercise them, or hold them as it sees fit to
otherwise maximize benefit to the taxpayers. On June 26, 2009, Treasury clarified its
intentions on selling the warrants that it had received and indicated that it would publicly
auction warrants in cases where it could not reach agreement upon a fair market value.

As of March 19, 2010, 46 CPP institutions had completely exited TARP, with Treasury selling
its associated warrants holdings either directly to the issuers or via the public auction process. In
addition, Treasury auctioned warrants obtained from Bank of America under the TIP. In total,
Treasury received $5.63 billion from the sale of TARP warrants, broken down as follows:
•

Repurchase of Warrants Directly from Treasury – $2.92 billion from 33 banks that
transacted directly with Treasury to complete the warrant sales through March 19, 2010.

•

Proceeds from Auctions – $2.71 billion from the auction of warrants from seven banks.

•

Sale of Preferred Shares – $2.6 million from preferred stock repurchases by six
privately held banks.

These proceeds provide an additional return to taxpayers from Treasury's investment beyond the
dividend and interest payments it received on the related preferred stock or debt instruments. For
a list of institutions, both public and private, that have repaid their TARP funds and repurchased
their warrants as of March 19, 2010, see Table 1. These institutions are no longer part of TARP.

6

Table 1: TARP Warrant Repurchases, as of March 19, 2010
Institutions
PUBLIC INSTITUTIONS
Old National Bancorp
Iberiabank Corporation
First Merit Corporation
Independent Bank Corp.
Sun Bancorp, Inc.
Alliance Financial Corporation
Berkshire Hills Bancorp, Inc.
First Niagara Financial Group
SCBT Financial Corporation
Somerset Hills Bancorp
HF Financial Corp.
State Street Corporation
U.S. Bancorp
BB&T Corp.
The Goldman Sachs Group, Inc.
American Express Company
Bank of New York Mellon Corp
Morgan Stanley
Northern Trust Corporation
Old Line Bancshares, Inc.
Bancorp Rhode Island, Inc.
Manhattan Bancorp
CenterState Banks of Florida
CVB Financial Corp.
Bank of the Ozarks, Inc.
LSB Corporation
Wainwright Bank & Trust Co.
Union Bankshares Corporation
WesBanco, Inc.
Trustmark Corporation
Flushing Financial Corporation
OceanFirst Financial Corp.
Monarch Financial Holdings, Inc.
Capital One Financial Corpa
JP Morgan Chase & Coa
TCF Financial Corporationa
Bank of America Corporationa
Bank of America Corporationa
Bank of America Corporationa,b
Signature Banka
Texas Capital Bancshares, Inc.a
Washington Federal, Inc.a
PRIVATE INSTITUTIONS
Centra Financial Holdings, Inc.
First ULB Corp.
First Manitowoc Bancorp, Inc.
Midwest Regional Bancorp, Inc.
1st United Bancorp, Inc.
Midland States Bancorp, Inc.
Totals

Redemption Pursuant to a
Qualified Equity Offering

X

X
X

X

X
X
X

$1,200
$1,200
$5,025
$2,200
$2,100
$900
$1,040
$2,700
$1,400
$275
$650
$60,000
$139,000
$67,010
$1,100,000
$340,000
$136,000
$950,000
$87,000
$225
$1,400
$63
$212
$1,307
$2,650
$560
$569
$450
$950
$10,000
$900
$431
$260
$148,731
$950,318
$9,600
$186,343
$124,229
$1,255,639
$11,321
$6,709
$15,623

4/15/2009
4/22/2009
5/27/2009
11/10/2009
11/18/2009
12/23/2009

X

Amount of Repurchase
($000)

5/8/2009
5/20/2009
5/27/2009
5/27/2009
5/27/2009
6/17/2009
6/24/2009
6/24/2009
6/24/2009
6/24/2009
6/30/2009
7/8/2009
7/15/2009
7/22/2009
7/22/2009
7/29/2009
8/5/2009
8/12/2009
8/26/2009
9/2/2009
9/30/2009
10/14/2009
10/28/2009
10/28/2009
11/24/2009
12/16/2009
12/16/2009
12/23/2009
12/23/2009
12/30/2009
12/30/2009
2/3/2010
2/10/2010
12/3/2009
12/10/2009
12/15/2009
3/3/2010
3/3/2010
3/3/2010
3/10/2010
3/11/2010
3/9/2010

X

Repurchase Date

$750
$245
$600
$35
$500
$509

46 Banks

Notes:
a. Treasury sold these banks’ warrants through a registered public offering or auction.
b. This represents the sale of Bank of America Corporation’s warrants received under the Targeted Investment Program.
Source: TARP Transactions Report, March 19, 2010.

7

$5,628,829

Oversight of Treasury’s Warrant Disposition Process
On June 17, 2009, the Government Accountability Office (“GAO”) published a report that
discussed Treasury’s initial implementation of the warrant disposition process. According to
GAO, at that point, Treasury had provided only limited information about the warrant repurchase
process, and GAO recommended that Treasury “ensure that the warrant valuation process
maximizes benefits to taxpayers and consider publicly disclosing additional details regarding the
warrant repurchase process, such as the initial price offered by the issuing entity and Treasury’s
independent valuations, to demonstrate Treasury’s attempts to maximize the benefit received for
the warrants on behalf of the taxpayer.” After Treasury published its June 26, 2009, guidance on
its warrant valuation process, GAO confirmed in its October 2009 report that this
recommendation was partially implemented.
On July 10, 2009, the Congressional Oversight Panel released the results of its technical
valuation of Treasury’s warrants. Based on the result of its own financial modeling of the
warrants, the Congressional Oversight Panel concluded that “eleven small banks have
repurchased their warrants from Treasury for a total amount that the [Congressional Oversight]
Panel estimates to be only 66 percent of its best estimate of their value.” The Congressional
Oversight Panel later reported in its January 13, 2010 report that “subsequent to the publication
of the July report, an additional 25 financial institutions have repurchased their warrants or sold
warrants in auction sales, generating total aggregate proceeds to Treasury of $4.0 billion, which
represented more than 92 percent of the [Congressional Oversight] Panel’s best estimate of their
values.” The July report recommended that “Treasury should promptly provide written reports
to the American taxpayers analyzing in sufficient detail the fair market value determinations for
any warrants either repurchased by a TARP recipient from Treasury or sold by Treasury through
an auction, and it should disclose the rationale for its choice of an auction or private sale. Most
important, Treasury should undertake to negotiate the disposition of the warrants in a manner
that is as transparent and fully accountable as possible.”
Initially, Treasury described the general process of its warrant repurchases without providing any
detail about individual transactions other than the price at which the warrants were sold. This
lack of transparency was criticized by SIGTARP, the Congressional Oversight Panel and GAO.
On January 20, 2010, Treasury published its Warrant Disposition Report, which included
information on Treasury’s warrant sales process and decision-making considerations. The report
included valuation estimates, banks’ rejected offers, and accepted prices for 34 completed sales
of warrants for public institutions through December 31, 2009. For those institutions that directly
repurchased warrants, Treasury reported rejected and accepted offers, Treasury’s price estimates
used to assess the submitted offers, and information on some of the assumptions Treasury and
third parties used to arrive at its various price estimates. For those institutions whose warrants
were sold at auction through December 31, 2009, Treasury described the initial offer it received
from the bank and the results of the auctions after the bank elected not to continue direct
negotiations with Treasury. For each warrant sale, Treasury showed a graphical representation
of the final estimates used by Treasury officials when analyzing a bank’s offer for its warrants.
An example of this graphical representation is provided in Appendix F.

8

Treasury’s Process to Sell the Warrants
This section discusses the process Treasury takes to determine the appropriate price for the sale
of warrants and describes its process for negotiating the repurchase of warrants from financial
institutions.
Once a publicly traded bank pays back its TARP investment, there are steps (as noted previously
in this report) that culminate in the sale of the warrants, either directly back to the bank through
negotiation (or an appraisal process) or to third parties through an auction. For purposes of
illustration, SIGTARP has labeled these as Steps 1 through 5. If the bank elects to offer to
repurchase its warrants, the bank starts at Step 1 of the process, as described below. If Treasury
rejects the offer, the bank can make a new offer that Treasury will consider. If the bank elects to
forgo its opportunity to make an offer or cannot agree with Treasury on a negotiated price for the
warrants, Treasury proceeds to Step 5, the auction process. Figure 1 provides a summary of the
various steps of Treasury’s warrant disposition process.
Figure 1: Treasury’s Warrant Disposition Process for Public Institutions
START: Publicly
held institution
repays CPP
investment
redeeming preferred
sharesa

Step 1: Notification
- Bank notifies
Treasury of intent to
buy its warrantsb and
submits an offerc

Step 5: Auction – Via a public auction,
Treasury sells warrantse to the highest
bidders if Treasury accepts the clearing
price after the auction closes

END: Warrants Sold to Winners

Notes:
a.
b.
c.
d.
e.

Step 2: Evaluate Using three pricing
methods, Treasury
decides to accept or
reject the bank’s
offer

ACCEPT

END: Warrants Transferred to Bank

REJECT

Step 3: Negotiations - Treasury and bank
discuss to resolve objections; banks may
submit additional offers

BANK SUBMITS MULTIPLE OFFER(S)

BANK DOES NOT INVOKE APPRAISAL OR ELECTS TO FORGO ITS
RIGHT TO DIRECTLY BUY WARRANTS FROM TREASURY

END: Warrants Transferred to Bank

BANK INVOKES APPRAISAL
AND AGREES WITH PRICE

BANK DOES NOT
SUBMIT MULTIPLE
OFFER(S)

Step 4: Appraisal Either party can invoke
the appraisald to
determine fair market
value

For privately held institutions and S-Corporations, Treasury immediately exercises the warrants at the time of the initial
CPP transaction and receives additional preferred shares or subordinate debt as a result.
If the institution does not wish to repurchase the warrants, Treasury can sell the warrant to a third party; however,
Treasury is required to notify the institution at least 30 days prior to the sale of the warrants in an effort to reissue and
register warrants to allow sale to third parties.
The board of directors must certify to Treasury that they acted in good faith to arrive at the fair market value
determination.
The determination by the independent appraisers is binding on Treasury if the institution chooses to proceed with the
sale.
At any time throughout this process, the institution may revoke its intent to repurchase its warrant, at which point
Treasury proceeds to the auction process.

Source: SIGTARP analysis of the Securities Purchase Agreement.

9

Step 1: Notification to Treasury with Determination of Fair
Market Value
If the bank decides to make a repurchase offer, it notifies Treasury of its intent to make an offer
and may do so within 15 days of repayment of the TARP investment.10 The offer must include
the number of warrants the institution would like to repurchase, its board of directors’ fair market
value determination for the warrants, and a certification that the bank was “acting in good faith
in reliance on an opinion of a nationally recognized independent investment banking firm.”
Treasury has 10 days to evaluate the offer.

Step 2: Treasury Evaluates the Repurchase Offer
Treasury’s valuation team consists of three to five Treasury analysts and one supervisory analyst.
This team prepares Treasury’s assessment of offers from banks. Treasury assigns an analyst
whose role is to evaluate the offer by using three pricing methods—market quotes, financial
modeling outputs, and third-party estimates (third party’s modeling outputs)—and determine the
warrants’ fair market value. These inputs drive Treasury’s “composite value,” which is the
analyst’s opinion of the appropriate price for the warrants.

Market Quotes
First, Treasury seeks observable market prices for a bank’s 10-year warrants—a difficult task
given the scarcity of warrants that have such a long term. If a market price for a specific bank’s
warrants is unavailable (as has been the case in every instance reviewed by SIGTARP), Treasury
surveys the market for parties that are willing to provide voluntary indicative bids. An indicative
bid is a price quote provided for informational purposes but not for purposes of executing a
trade. Treasury solicits bids from 10 to 15 firms, including investment banks, hedge funds, and
asset management firms active in the options markets. Treasury’s process requires a minimum of
three market quotes.11 According to Treasury, firms receive no confidential information from
Treasury and must rely on publicly available information in making their quotes.
Market quotes typically generated the lowest estimates of Treasury’s three pricing methods.
According to Treasury, indicative market bidders—the firms that provide the price quotations—
may tend to price the warrants as much as they are willing to pay for them and not necessarily
fair market value. A senior Treasury official told SIGTARP that one of the limitations of this
pricing method is that the bidders have no stake in the transaction. SIGTARP found that the
market quotes tended to be below the final negotiated price, with only 2 of 33 warrant
repurchases analyzed by SIGTARP with market quotes above Treasury’s final negotiated price.

10

Treasury is free to sell the warrants any time up until it receives an offer from the bank, however, Treasury must
give the institution 30 days notice before selling the warrants.
11
Treasury continues to solicit market quotes from market participants until a minimum of three prices are obtained.

10

Warrants 101 - Modeling

Financial Modeling Outputs
The analyst also uses two financial models to estimate the
fair market value of the warrants. These models—a BlackScholes model and a binomial model—are generally
accepted as standard option valuation tools throughout the
financial industry. These models produce a range of
potential values based on known inputs such as the maturity
date of the warrant (here, 10 years) and the warrant’s strike
price (established in the CPP contract), and on certain
assumptions of future activity, such as the future volatility
of the underlying stock price and future dividend payments.
Treasury also uses observable market prices when
estimating its model inputs, such as 2-year Long Term
Equity Anticipation Securities (also known as LEAPS),
which are options with longer terms than other more
common options. In addition, since the recently auctioned
warrants trade in the secondary market, there are now
observable market prices that Treasury uses when
determining key inputs to its modeled valuation.
After Treasury computes an estimated value using the
financial models, the Treasury analyst may also apply a
liquidity discount based on, among other things, the volume
of shares traded and the extent to which the security can
easily be sold in the market. This discount attempts to
quantify the markdown that the market would apply to the
value of the warrants because of the difficulty of selling
infrequently traded securities (such as long-maturity
warrants in small banks) in the market. For large
institutions, Treasury does not apply a liquidity discount.12
Table 2 on the next page provides definitions of Treasury’s
key model assumptions, summarizes Treasury’s approach to
calculating each assumption, and describes Treasury’s
rationale for its approach on how it estimates each
assumption.

12

The Black-Scholes model
calculates the value of an option
based on the price movements of
the underlying stock. The model is
geared for pricing European-style
options that cannot be exercised
before expiration, whereas
American-style options—like CPP
warrants—can be exercised at
points in time before and up to the
warrant’s maturity. The BlackScholes model has some
limitations, such as the fact that
several of the model’s assumptions
do not account for changes over
time.
The binomial model uses the same
analytical approach as the BlackScholes model; however, its
assumptions vary over time as
opposed to the assumptions
remaining constant. The binomial
model accounts for changes in
stock prices over time intervals,
dividend-paying stocks, and more
long-dated warrants. Therefore, the
model can calculate the price of an
American-style option, determining
at each point in the warrant’s life
where the underlying share price
will exceed the strike price (referred
to as intrinsic value).
Treasury applied a combined
approach of using both BlackScholes and binomial models. For
both models, the price depends on
the input assumptions used.
Accordingly, warrant valuation
varies significantly based on the
assumptions that an individual
modeler inputs into the models.
Because it is difficult to predict the
future activity of prices, dividend
payments and other events, two
modelers who use the same models
may arrive at very different prices
because of varying assumptions.
Differing assumptions about the
volatility of the institution’s common
stock price, for example, can drive
significantly different values.

In its July 10, 2009 report, the Congressional Oversight Panel questioned Treasury’s decision to include a
liquidity discount. The Congressional Oversight Panel’s own analysis did not include such a discount because, in
its view, Treasury has the option to hold the warrants until expiration and therefore illiquidity is irrelevant.

11

Table 2: Treasury’s Financial Modeling Assumptions
Definition

Treasury’s Methodology for
Calculating the Assumption

Treasury’s Rationale for Using
the Assumption

Stock Price
The stock price is the price of
a single share of the
institution’s common stock,
which is the asset Treasury
would receive if the warrant is
exercised. The higher the
stock price, the higher the
value of the warrant.

Treasury uses a 20-day trailing average of
past stock prices to smooth any dramatic
short-term fluctuations in the stock’s price
movements. To account for the industry
practice of using the current stock price,
Treasury also considers the current stock
price to include any recent shifts that may
impact valuation.

According to a Treasury official,
then-Assistant Secretary Neel
Kashkari decided to use the 20-day
trailing average because it is the
same method used to calculate the
strike price set in the CPP contract.

Volatility
Volatility reflects the
unpredictable changes of the
underlying stock’s price
throughout the life of the
warrant. Higher volatility will
increase the value of the
warrant because, with higher
volatility, there is a higher
probability that the stock price
will exceed the warrant’s strike
price.

Treasury uses both historical and optionimplied volatility to estimate future
volatility of a company’s stock price. For
historical volatility, Treasury calculates the
60-day trailing average volatility for the
last ten years. Some larger, public
institutions have options with maturities of
up to two years. Using prices of these
shorter-maturing options, Treasury
forecasts option-implied volatility over ten
years. Treasury’s recent auctions created
a market for 10-year warrants;
accordingly, Treasury incorporates
volatility data from these traded warrants.

Treasury uses the 60-day trailing
average to smooth out daily price
swings. Treasury also considers 6
months to 10 years of past market
volatility data to project the stock’s
future volatility.

Dividend Payments
Dividends are the payments
made to common shareholders
for investing in the company.
Higher dividend yield will
decrease the price of the
warrant by eroding the value of
the underlying shares.

Treasury analyzes the bank’s dividend
payment history and reviews the implied
or explicit dividend policies issued by the
institution. Treasury reviews historical
dividends over the last 10 years as an
indication of how to estimate future
dividend payments.

Treasury assumes that dividends
normalize over time and thus uses a
constant yield based on historical
observations.

Liquidity Discount
Treasury applies liquidity discounts from Treasury’s liquidity discount depends
on, among other things, the size of the
0 to 50 percent. A Treasury contractor
warrant position, the average trading
developed a survey of the CPP banks
volume of the underlying stock, and the
to establish a range of possible liquidity
liquidity of the equity underlying the
discounts. Treasury assesses the
warrants. For Treasury, the institutions
ranges from the survey and the factors
whose shares are widely traded do not
of the institution to determine where the
receive a discount.
bank falls within that established range
relative to its peers. Qualitative factors
include stock volatility and average daily
trading volume of the underlying stock.
Treasury also compares the model
price of the bank to liquid option prices.
Note:
For CPP warrants, the warrant’s maturity date and strike price are established in the CPP contract.
Source: This table was compiled from multiple sources, including Congressional Oversight Panel July 10, 2009 Report;
Treasury June 26, 2009 Announcement on Warrant Valuation and Disposition; “TARP Warrants Valuation Methods”
written by Robert A. Jarrow dated September 22, 2009; OFS Iberiabank Warrant Valuation Models and Methodology;
and SIGTARP interviews of OFS staff.
A liquidity discount is a discount
to account for an investor holding
shares that are not easily sold in
the secondary market. Higher
liquidity discounts will decrease
the price of the warrant.

12

Third-party Estimates
To provide an independent price assessment, Treasury employs one of eight asset managers to
run its own proprietary valuation models to arrive at an independent price to use for Treasury’s
analysis. According to Treasury, each of these eight firms is assigned a group of banks for
purposes of warrant valuation. When banks are starting the process to buy back their warrants,
Treasury contacts one of the eight firms to obtain a third-party valuation.
Prior to April 2009 and for the first two warrant sales, Treasury relied on financial modeling
consultants to provide the third-party estimates, which according to Treasury, “may not have had
market expertise necessary to make reasonable assumptions for key inputs such as volatility and
dividend yield.” Treasury hired three of the eight current asset managers in April 2009 following
an evaluation of about 200 companies that submitted proposals to a publicly announced
solicitation in November 2008. Treasury hired the remaining five asset management firms in
December 2009. According to Treasury, it expanded the asset manager selection to hire more
diverse firms in addition to the three firms already retained.
For the first 11 warrants analyzed, SIGTARP found that the third-party estimates generally
tended to be the highest of the three pricing methods. After the first 11 banks, third-party
estimates more closely aligned with Treasury’s financial modeling estimates. Treasury’s largest
asset manager―AllianceBernstein―told SIGTARP that it has refined the inputs for its valuation
based on the results of the auctions and completed warrants repurchase transactions.
In an analysis of 33 warrants repurchases through March 19, 2010, SIGTARP found that
Treasury’s model estimate tended to be in the middle of the three pricing methods and was
generally the one closest to the final negotiated price. Figure 2 provides a graphical depiction of
how final prices have compared to estimates from the three different valuations—market quotes,
financial modeling, and third-party estimates—for 33 warrant repurchases.

13

Figure 2: Fair Market Value Estimates as Percentages of Final Warrant Prices
Market Quotes

Financial Modeling

Third-party Estimates

Source: SIGTARP analysis of OFS warrant files.

Assessment of the Bank’s Determination of Fair Market Value
After Treasury collects estimated price ranges from the three pricing methods, the Treasury
analyst graphs the estimates from these ranges and plots the bank’s offer to assess where within
the ranges the offer falls.13 An example of how Treasury plots these ranges and the bank’s offer
is provided in Appendix F. From these three price ranges, the Treasury analyst determines a
composite value (also referred to in Treasury documents as an estimate of fair market value).
The analyst presents the analysis to the Warrant Committee. The Warrant Committee then votes
to recommend that the Assistant Secretary accept or reject the institution’s offer.

13

Prior to June 2009, the written fair market value assessment and graph also included what Treasury refers to as a
“fundamental analysis,” which is an analysis of value based on the fundamental facts about a company such as
sales, earnings, and dividend prospects. In June 2009, the fundamental analysis was removed by Assistant
Secretary Allison because it was not industry standard for valuation. Treasury analysts told SIGTARP that, prior
to its removal, they considered the fundamental analysis as a check to the other valuation estimates and that the
analysis was “not really important” and “not a material input” to Treasury’s determination of fair market value.

14

Treasury officials describe the composite value as what, after analysis, the analyst believes the
warrants are worth. Treasury does not have formal guidance or written policies on how the
analyst determines the composite value, and, according to Treasury’s CPP staff, this
determination of fair market value is largely done on a case-by-case basis, depending on the
analyst’s subjective weighing of the three price estimates and the following factors:
• Existence of outliers within the pricing methodologies
•

Spreads of the ranges of the three fair market value estimates

•

Market volatility of the underlying stock price

•

Size of the institutions for purposes of measuring liquidity of the underlying stock

Treasury’s CPP staff stated that it is difficult to have procedures to determine how to set the
composite value because each offer differs. The CPP team told SIGTARP that, basically, the
preparer compares the three valuation metrics and decides where the most agreement between
the three price ranges regardless of whether the point incorporates prices from all three ranges.
Where the composite value line is drawn within these three ranges is a judgment call, and thus
the composite value may depend on which analyst works on a particular warrant.14
When SIGTARP requested the rationale for the composite price calculation, the CPP staff
demonstrated the approach for Old Line Bancshares. Using the bar charts in Figure 3, the staff
pointed to where the CPP team thought the three estimates converged, which in Treasury’s
opinion was around $200,000 or $210,000. Old Line Bancshares’ warrants were sold back to the
bank at $225,000.

14

This has particular importance in light of the fact that the analyst’s recommendation has, thus far, been followed
by the Warrant Committee in every case and by the Assistant Secretary in all but one case.

15

Figure 3: Excerpt from Analyst’s Fair Market Value Determination, August 7, 2009

$210,000

Note: SIGTARP added $210,000 in the margin for demonstrative purposes.
Source: OFS warrant files.

The Treasury analyst next prepares a recommendation on the banks’ offer that includes a detailed
written fair market value assessment. The documentation of the assessment provides summary
details of Treasury’s warrant position in the bank, the details of the bank’s submitted offer, the
analyst’s graphical representation of the three fair market value ranges, the submitted offer, the
composite value, and an explanation of how each of the three price ranges were derived. For an
example of the analyst’s documentation of a fair market value determination, see Appendix G.

Warrant Committee Makes a Recommendation to the Assistant
Secretary
Although the Assistant Secretary for Financial Stability ultimately decides whether to accept or
reject an offer, Treasury established a CPP Warrant Committee (“Warrant Committee”)15 to
recommend whether an offer should be accepted or rejected. When the Warrant Committee
convenes, the Treasury analyst who performed the analysis and set the composite value (a
qualitative judgment) presents his fair market value assessment to the Warrant Committee
members. Warrant Committee members told SIGTARP that the composite value is not
necessarily determinative. The committee members also rely on the quantitative analysis
represented by the three evaluation metrics in deciding whether to accept or reject a financial
institution’s determination of fair market value. Each member of the Warrant Committee and the
Assistant Secretary weigh the three valuation ranges as they deem appropriate. In addition, they
consider the analyst’s presentation and recommendation as well as the following factors in
determining whether to accept or reject an offer:
15

The Warrant Committee consists of the CPP Director, Deputy Director, Head of CPP Asset Management, and a
representative from the Office of the Chief Investment Officer.

16

•

Comparison of the offer to Treasury’s valuation metrics

•

significant movements of the current stock price

•

deviations of the current stock price from the 20-day trailing average of the stock price

•

trading volume of the underlying stock

•

size of the institution

•

potential auction costs

•

potential investor interest in the warrants

For example, according to Treasury, if a bank’s offer is only slightly below Treasury’s composite
value, and the value of the warrant position is low enough that the costs of auctioning the
warrants will make material difference in the actual return to taxpayers, it does not make sense
for Treasury to reject and go to auction when the costs associated with the auction, which are
approximately the greater of $150,000 or 1.5 percent of the auction’s proceeds, outweigh the
difference between the offer and Treasury’s estimate of fair market value. Treasury also told
SIGTARP that the Warrant Committee considers whether the current stock price of the bank has
been rising significantly over the course of Treasury’s valuation period. For example, at the time
of the decision to accept Goldman Sachs’ offer of $1.1 billion, the bank’s common share price
was $159.80 compared to the 20-day average price of $148.16. According to Treasury, “this
difference was taken under consideration in Treasury’s analysis of the company’s determination
of fair market value.” Treasury accepted Goldman Sachs’ offer of $1.1 billion.
SIGTARP found, based on documentation provided by Treasury, that the Warrant Committee
unanimously voted in agreement with the analysts’ recommendation for every one of the offers
assessed for 33 completed sales through March 19, 2010.
After the Warrant Committee votes16 on the recommendation to accept or reject an offer, it is
submitted to the Assistant Secretary for consideration, along with the Warrant Committee
minutes and the analyst’s fair market value assessment. The Assistant Secretary told SIGTARP
that, in addition to the composite value, he considers all three fair market value ranges when
contemplating an offer. According to the Assistant Secretary, he has not overruled the Warrant
Committee recommendation in any case. However, as discussed more fully below, SIGTARP
found in one case (Morgan Stanley) that after the Warrant Committee approved the firm’s bid of
$900 million, the Assistant Secretary told Morgan Stanley that Treasury was not prepared to
accept its bid for that amount. Morgan Stanley bid $950 million, which was accepted.
A review of the Warrant Committee minutes for 33 warrants repurchases through March 19,
2010, found that Treasury did not document the qualitative factors considered by the Warrant
Committee members when making determinations whether to accept or reject a bank’s offer.
Most of the meeting minutes from Warrant Committee sessions were limited and included only
the name of the institution, the institution’s offer amount, the name of the analyst who presented
Treasury’s analysis of fair market value, the analyst’s recommendation on whether to accept or
reject the offer, whether the offer was at or close to the analyst’s composite value or fair market
16

The Warrant Committee requires three members for a quorum.

17

value range, and the final vote of the Warrant Committee members. Figure 4 provides an
example of Warrant Committee Meeting minutes that was typical of the amount of detail
provided for the banks in our audit.
Figure 4: Example of Treasury’s Warrant Committee Meeting Minutes

Source: SIGTARP analysis of OFS warrant files.

The minutes often focus on how close the offer is to Treasury’s determination or range and do
not document the factors the Warrant Committee members reportedly considered when
recommending whether to accept or reject an offer.17 As a result of the lack of detailed
documentation of the Warrant Committee’s considerations, SIGTARP could not determine the
extent to which the Warrant Committee made decisions consistently or objectively across
institutions, and it is difficult to determine from the documentation why Treasury accepted prices
for some institutions but rejected similar bids from others.
For example, Figure 5 provides a comparison of two banks’ rejected and accepted offers within
Treasury’s ranges of fair market value estimates. In one, Treasury accepted Somerset Hills’
second offer, which was above the mid-point for the market quote range and at the mid-point of
Treasury’s financial modeling range. However, Treasury rejected HF Financial Corp.’s second
bid, which was above both of these ranges. In both examples, the Warrant Committee followed
the analyst’s recommendation.
17

This level of documentation contrasts with the details provided in minutes of meetings of the Investment
Committee, which is a similar decision-making committee that makes recommendations to the Assistant Secretary
regarding the investment of TARP funds. In Investment Committee meeting minutes, Treasury documents details
of each company and records the considerations discussed by the various Committee members that factored into
the final recommendation.

18

Figure 5: Comparison of Two Banks’ Rejected and Accepted Offers within
Treasury’s Ranges of FMV Estimates ($000s)

Treasury Rejected
Offer at Upper Ends of
Modeling and Market
Bids Ranges

Treasury Accepted
Offer at Mid-point of
Modeling and Market
Bids Ranges

Source: SIGTARP analysis of OFS warrant files.

A review of the Warrant Committee minutes for these banks did not reveal any rationale for the
apparent difference in treatment between these two institutions. These are the notes from the
Warrant Committee minutes for the second offers from these two banks:
•

Somerset Hills Bancorp – June 17, 2009: [Analyst A] presented, and recommended that
UST accept the revised offer of $275[000] which is at Treasury’s range. This
recommendation was accepted 4-0.

•

HF Financial – June 29, 2009: [Analyst A] presented HF’s revised offer of $600,000. He
recommended that UST ask for a final offer of $650,000 and conditionally accept that
offer, if made by HF. This recommendation was accepted 3-0.

A member of the Warrant Committee told SIGTARP that he agreed with the analyst’s decision
to reject HF Financial’s second bid of $600,000 because Treasury’s financial modeling valuation
should have been higher than what was depicted in the charts (as shown in Figure 5). He added
that the Treasury analyst ran the financial model and then applied a 50 percent liquidity discount
to the price. However, the third-party estimates and the bank’s offer used a 30 percent liquidity
discount, which he believed was more appropriate. Adjusting the liquidity discount (without rerunning the model) from 50 percent to 30 percent increased the modeling estimate of fair market
value from $550,000 to more than $600,000. Accordingly, the Warrant Committee did not accept
19

HF Financial’s second bid. The same Warrant Committee member said it was his recollection
that, for Somerset Hills’s second bid, Treasury was already using a 30 percent liquidity discount,
and, therefore, he agreed with the analyst that they should accept the bank’s offer. Furthermore,
Treasury stated that the value of the warrant position was very small (under 400,000) and that the
fixed costs of running the auction and legal fees (a minimum of $150,000) would significantly
reduce the real return to the taxpayer. Upon additional research, SIGTARP found Treasury
actually applied a 40 percent liquidity discount to its model price for Somerset Hills. Although
the Treasury analyst documented the liquidity discounts used in both cases, the Warrant
Committee minutes did not reflect that the liquidity discount was a decision-making factor that
led to the rejection of HF Financial’s second bid, and thus SIGTARP cannot definitively verify
the Warrant Committee member’s ex post facto justification.

Step 3: Negotiation Period
If the Assistant Secretary rejects the initial offer, Treasury typically sends a rejection letter to the
bank. The letter includes information for the bank to contact a Treasury analyst to start the
process of resolving differences. The bank decides whether it wants to continue discussions if
Treasury rejects its offer. If the bank decides to submit a subsequent offer, Treasury will assess
the offer the same way it assessed the first offer. A Treasury analyst may collect additional
market quotes or rerun the modeling component if there has been significant time between the
first offer and the subsequent offer or if the Assistant Secretary requests it. The Warrant
Committee reconvenes to review the new offer and determines whether it is acceptable. Final
acceptance remains with the Assistant Secretary. Of the 33 warrant repurchases SIGTARP
reviewed, Treasury accepted 4 initial bids, 15 second bids, 9 third bids, 4 fourth bids, and 1 fifth
bid.
With respect to Treasury’s approach before holding conversations with an institution after the
rejection of an initial offer, the CPP staff told SIGTARP that the valuation team analysts meet in
advance of the discussion and agree on their strategy and approach on what will be discussed
with the institution. Treasury stated that the amount of information it discloses to each
institution is a result of where the bank is within these stages of the negotiation, although none of
this information is reflected in formal guidelines:
•

Discovery Phase: Treasury stated that the first discussions revolve around process. In
this phase, Treasury communicates how the values were derived from three different
methods of market quotes, model valuation, and third-party estimates. A Treasury
official stated that “you can tell from the beginning who understands the process and who
doesn’t.” According to Treasury, some banks do not understand or are confused by the
contractual element of TARP and the warrants repurchase process. With such banks,
Treasury has to educate them on the process. Treasury told SIGTARP that it does not tell
banks where their offer falls within the three price ranges and what they can do to get it
accepted. From time to time, Treasury might share more information on assumptions to
get the institution moving in the right direction, but only if Treasury senses that the
institution has come to an understanding regarding Treasury’s three-pronged valuation
methodology. According to Treasury, it does not provide counteroffers at this stage. One
Treasury official stated that at this stage what is discussed is “approach, not numbers.”
20

•

Post-Discovery Phase: On subsequent calls, Treasury informed SIGTARP that it might
engage in a more detailed discussion once the offer is somewhat closer to Treasury’s
determination of fair market value. Treasury commented that it discusses reactions to
extenuating circumstances during these calls with the banks. For example, Treasury
stated that, if a bank is tremendously off from the composite value, it lets the bank go
back to the “drawing board” to figure out what the value is. In such cases, Treasury
indicated that it would not provide as much detail regarding the inputs and outputs of the
valuation because the institution is too far off. Once the bank is within a closer range,
however, Treasury stated that it may provide valuation input enhancements to the bank
that might eliminate the differences between Treasury’s value and the bank’s price.
According to Treasury, it does not want to disadvantage the smaller banks, as they might
not be equipped or staffed to arrive at as sophisticated a valuation as the bigger banks.
However, Treasury commented that the level of information they provide is not based on
whether the bank is big or small. According to Treasury the negotiating analysts provide
more detailed information depending on how close an institution is to Treasury’s fair
market value estimate. According to Treasury, it does not make sense to give detailed
information, including specific prices, to those that are far off.

•

Post-Warrant Committee: Once Treasury officials receive feedback from the Warrant
Committee, they might provide to the bank a fair market value with which the Warrant
Committee would be comfortable. Treasury makes it clear that these suggestions are not a
commitment to accept that price.

•

Assistant Secretary Conversations: The Assistant Secretary told SIGTARP that
sometimes when he is deciding whether to accept or reject an offer, financial institutions
call him to “feel” him out. The Assistant Secretary told SIGTARP that he does not
negotiate on these calls, but rather just listens to the pitch made by the banks and conveys
Treasury’s position.18 The Assistant Secretary indicated that Treasury’s policy was not to
provide specific numbers to institutions, on the theory that the banks could bid more than
Treasury’s composite value.

None of the conversations between Treasury officials and the banks are documented by
Treasury. Without such documentation, SIGTARP could not further determine the extent to
which institutions were treated consistently and objectively during these discussions.
Descriptions provided to SIGTARP by eight of the banks that engaged in negotiations confirmed
that Treasury was willing to provide detailed information about its estimates to certain banks, but
unwilling to share similar details with others. Unfortunately, because Treasury does not
document these negotiations with financial institutions and because there are no established
guidelines or criteria for the level of information shared with each institution, it is impossible to
determine the justification for the differences in the quality of information shared with these
banks. The following examples illustrate the varying levels of detail provided to different banks:
18

However, as discussed in more detail below, according to a senior official of Morgan Stanley, the Assistant
Secretary called him to communicate that Treasury was not going to accept Morgan Stanley’s offer of $900
million. The official told SIGTARP that a $950 million figure was discussed during that call; although the official
could not recall who suggested that figure, contemporaneous documentation indicates that the official understood
from that call that Treasury was prepared to accept $950 million.

21

•

•

Sun Bancorp: On April 21, 2009, Sun Bancorp (“Sun”) submitted its initial bid of
$1,049,496, which Treasury rejected. According to Sun officials, in subsequent
telephone conversations, Treasury officials explained the valuation process and stated
that their valuation range was around $3 million, a number arrived at by valuing the
warrants at $4 million and applying a 25 percent liquidity discount. On May 19, 2009,
Sun submitted a second bid of $2.1 million (a figure that was slightly higher than
Treasury’s composite value of $2.0 million), which was accepted.

•

SCBT Financial: On June 3, 2009, SCBT Financial (“SCBT”) submitted an initial bid
of $694,060, which Treasury rejected. According to SCBT officials, in subsequent
telephone conversations, Treasury told SCBT that the liquidity discount applied by the
bank was too large and suggested that a smaller discount be applied. SCBT’s second bid
of $1.4 million, which matched Treasury’s composite value, was accepted.

•

Somerset Hills Bancorp: On June 4, 2009, Somerset Hills submitted an offer to
Treasury for $192,752, which Treasury rejected. According to Somerset Hill’s senior
leadership, the bank’s board of directors established a ceiling amount the bank could
offer to Treasury without revisiting the board for approval. The first offer was on the
lower end of the bank’s range and under the ceiling. The bank told SIGTARP that,
during the first phone call, Treasury shared its valuation approach and general process.
For the second call, the bank executives stated that they clearly understood what
Treasury’s valuation range was. Treasury did not give the inputs to the model, but
provided bank officials a dollar range approximate.19 They compared Treasury’s range to
the range approved by the board of directors and commented that the ranges were very
similar (within 10 percent of each other). The officials said that Treasury made clear that
it couldn’t accept anything over the phone; however, the officials had a clear sense of
what the range was. With the new information, the bank submitted a second offer of
$275,000, which was accepted by Treasury. Treasury’s composite value was $275,000.

•

19

Old National Bancorp: On April 15, 2009, Old National Bancorp (“Old National”)
submitted its first bid of $558,862, which Treasury subsequently rejected. Old National
officials told SIGTARP that, during the subsequent negotiation process, Treasury’s
negotiating analyst stated that Treasury estimated a fair market value of around $1.3
million. Bank officials noted that the conversations with the analyst made it somewhat
apparent that Treasury would not accept offers much below the $1.3 million range.
Although Treasury’s negotiating analyst did not say that Treasury would accept an offer
of $1.3 million, the bank left the conversation with the impression that an offer at that
amount would likely have been accepted. Treasury did not provide the inputs; it was up
to the bank to find inputs to get to that number. The bank submitted a second bid of $1.2
million, which Treasury accepted. This price was 11 percent below Treasury’s
determination of fair market value of $1.35 million.

American Express: On July 1, 2009, American Express submitted its first bid of $230
million, which Treasury rejected. American Express officials told SIGTARP that they
were surprised at Treasury’s “no counter offer” approach. The company called the first
subsequent conversation a “discovery conversation,” and noted that Treasury did not
share the actual values of its pricing methods and was not very forthcoming on why there

Somerset Hills’ executives could not recall the exact dollar amount provided by Treasury during the negotiation.

22

were differences. Treasury shared that it was using the market quotes, financial
modeling, and third-party estimates, but it was not willing to articulate how the three
played out in its final valuation. Treasury did not share inputs or assumptions,
methodologies, “not even a number to go by.” Treasury suggested for American
Express’ second offer that the bank use the current stock price in its valuation because the
stock price had risen so dramatically over the past 20-day period. American Express
presented a second offer of $260 million, which again was rejected. At that point,
Treasury simply provided an indication that the bank was getting closer. Finally, on July
28, 2009, the company offered to pay $340 million. Treasury accepted the offer, which
was more than 21 percent above Treasury’s composite value of $280 million.
•

Morgan Stanley: On June 30, 2009, Morgan Stanley submitted its first bid of $500
million, which Treasury rejected. Morgan Stanley told SIGTARP that the first discussion
thereafter centered on the construct and methodology of how Treasury was thinking of
value. Treasury did not provide any numbers, guidance about their inputs, or a firm view
about price—even though Treasury indicated that it would provide more guidance if the
bank got closer to Treasury’s price. On July 15, 2009, Morgan Stanley submitted its
second bid of $500 million, which they viewed as being $80 million better than their
original estimate of FMV because of the decline in their stock price from $29.10 to
$27.88. Treasury rejected that offer as well. On July 31, 2009, Morgan Stanley raised its
bid to $800 million, which Treasury again rejected. On August 4, 2009, Morgan Stanley
submitted a revised offer of $900 million, which was approved by the Warrant
Committee that day. After the Warrant Committee approved the $900 million bid, the
Assistant Secretary asked the CPP team for the volatility and internal rate of return at
$900 million, to which the team replied on that day. According to Treasury, Morgan
Stanley’s chief financial officer called the Assistant Secretary to inquire about the status
of the $900 million bid. According to the Assistant Secretary, he told Morgan Stanley
that he was requesting more information from the Warrant Committee and that Morgan
Stanley needed to “sharpen their pencils” and get back to Treasury.
According to Morgan Stanley, however, it was the Assistant Secretary who contacted
Morgan Stanley’s chief financial officer to inform the bank that Treasury was not going
to accept the $900 million bid. Based on a follow up discussion, the Assistant Secretary
stated to SIGTARP that it was conceivable that he had initiated the call to Morgan
Stanley, but he could not remember. According to the chief financial officer, the
Assistant Secretary communicated that Morgan Stanley would have to bid more to avert
the auction process, the timing of which was uncertain at the time of Morgan Stanley’s
bid. He could not recall who suggested a $950 million figure, but a contemporaneous
document appears to indicate at the very least that he understood from that call that
Morgan Stanley would have to bid $950 million to avoid public auction.20 The chief
financial officer did recall that the Assistant Secretary made very clear that he wanted a
significantly higher price, and that the $900 million bid was unacceptable. The chief
financial officer, after gaining approval from the board of directors, called the Assistant
Secretary back to inform him that Morgan Stanley was prepared to bid the previously
discussed $950 million. After these discussions (which were not documented by

20

In an e-mail from the day of the call, the chief financial officer wrote “Allison rang me 950 or go to auction.
JJM,s [sic] decision, but frankly I would go to auction.”

23

Treasury), Morgan Stanley repurchased its warrants for $950 million, which was nearly
six percent higher than Treasury’s composite value of $900 million.
•

Sterling Bank: On June 5, 2009, Sterling Bank (“Sterling”) submitted an initial bid of
[REDACTED]21 to Treasury, which Treasury rejected. According to Sterling officials, in
subsequent conversations, Treasury provided data that included value ranges for each of
its methodologies (i.e., market prices, third-party valuations, modeling and fundamental
analysis) that resulted in a range of [REDACTED] to [REDACTED]. The bank told
SIGTARP that Treasury suggested a bid of [REDACTED] and later indicated a
willingness to accept even less, [REDACTED]. Sterling decided not to bid further,
however, and Sterling’s warrants will be sold at auction. Treasury’s composite value was
[REDACTED].

•

JP Morgan Chase: On June 17, 2009, JP Morgan Chase (“JP Morgan”) submitted a bid
for its warrants of $825 million, which Treasury rejected. According to JP Morgan
officials, in subsequent conversations, although Treasury provided general information
on its valuation methodologies, Treasury provided very little input on how far JP
Morgan’s bid fell short and did not provide any benchmark figure. JP Morgan officials
told SIGTARP that JP Morgan asked Treasury whether it would be willing to provide
further guidance or clarification if it submitted a second bid that proved to be too low, to
which Treasury responded that it was unlikely to provide additional information. JP
Morgan told SIGTARP that it thought that the negotiation amounted to a game of
“throwing darts in the dark,” and that, having made what it believed was a full and fair
offer, it was very difficult to negotiate a higher purchase price without any feedback from
Treasury. Accordingly, JP Morgan decided to go to auction rather than submit a second
bid. JP Morgan’s warrants were sold at auction on December 10, 2009, for
$950,318,243. Treasury’s composite value was $1.0 billion.

Step 4: Appraisal Process
The CPP contract provides that if Treasury and the bank cannot agree on fair market value either
may invoke an appraisal procedure, which is similar to arbitration. This process has not yet been
used. Treasury and the institution would each choose an independent appraiser to calculate the
value of the warrants. If they came to different determinations, the two appraisers would then see
if they could agree upon a price for the warrants. If they are unable to agree after 30 days, then
the first two appraisers select a third independent appraiser, and the average of the three
appraisals is then determined. This price is binding upon Treasury if the institution agrees with
the determination and wishes to proceed with the sale. If not, the process can be terminated by
the financial institution.
A Treasury official stated that, although the appraisal process is an option, he did not think that
any institution will use it because the bank would have to bear the costs of appraisers. One bank
told SIGTARP that it did not invoke the appraisal procedure because it was too expensive, there
21

Treasury has not yet auctioned Sterling Bank’s warrants. To maximize taxpayer return at the auction, Treasury
asked SIGTARP to redact the details of its negotiations with Sterling until after the auction is completed. SIGTARP
will release an un-redacted version of this report upon completion of the Sterling auction.

24

is uncertainty because no other institution had gone through the process, the appraisal did not
seem easy, and the length of the process added uncertainty. If the appraisal procedure is
invoked, Treasury has 30 days to hire an appraiser. Treasury stated it will likely use one of its
three asset managers as its selected appraiser.

Step 5: Treasury Sells the Warrants at Public Auction
In those instances in which a bank does not make a repurchase offer to Treasury or does make
such an offer but cannot agree with Treasury on a negotiated price for its warrants, Treasury will
seek to sell the warrants at auction. On June 26, 2009,
Warrants 101 – Dutch Auctions
Treasury announced its intention to use public auctions;
on November 19, 2009, Treasury announced that it
For Treasury’s warrant auctions (which
planned to auction warrants through registered public
have multiple bidders bidding for
offerings using a modified Dutch auction. Each warrant
different quantities of the asset), the
accepted price is set at the lowest bid of
offered in an auction gives the buyer the right to
the group of high bidders whose
purchase one share of the bank’s common stock at the
collective bids fulfill the amount offered
strike price on the warrant. The modified Dutch auction
by Treasury. In an example, three
allows investors to submit bids to the auction agent
investors place bids to own a portion of
(Deutsche Bank), at specified increments above a
100 shares offered by the issuer.
minimum price per warrant that Treasury sets for each
- Bidder A wants 50 shares at $4/share
auction. The repaying institutions also have the option
- Bidder B wants 50 shares at $3/share
to bid in the auction, although institutions bidding on
- Bidder C wants 50 shares at $2/share
their own warrants have to submit their bid 30 minutes
prior to the deadline for all other bidders. Deutsche
The seller selects Bidder A and B as the
two highest bidders, and their collective
Bank receives bids from the bidders and determines the
final price of the warrants. It then allocates the warrants bids consume the 100 shares offered.
The winning price is $3, which is what
to the winning bidders. Treasury has the right to reject
both bidders pay per share. Bidder C’s
the results of the auction. For Treasury’s auction
bid is not filled.
process as described in the prospectus supplement of
one of Treasury’s warrant auctions, see Appendix H.

25

Bank-By-Bank Results of Treasury’s CPP and
TIP Warrant Sales Process
This section discusses the results of Treasury’s implementation of its process to determine Fair
Market Value. It also provides information about Treasury’s implementation of the auction
process.
SIGTARP analyzed the 33 warrants repurchase transactions through March 19, 2010, and
collected preliminary observations on Treasury’s seven auctions of warrants. As noted earlier,
this analysis complements the prior work of the Congressional Oversight Panel.
Figure 6 illustrates the final negotiated price in comparison to Treasury analysts’ estimate of
value captured in the composite value. Treasury’s decisions tend to center around its analyst’s
determination of composite value. In fact, of the 33 warrant repurchases through March 19,
2010, 20 of the final negotiated prices were at or above Treasury’s composite value, and 9 of the
final negotiated prices were just under the composite value (generally between 90-99 percent of
composite value). The four remaining transactions, included the first two completed (during
which time Treasury was operating under a governing statute that limited how long Treasury had
to negotiate and before Treasury had its valuation methodology worked out) and two for
warrants in small institutions that received less than $100 million in TARP funds (for which
valuation is difficult because of less liquidity in the bank’s stock).

26

Figure 6: Comparison of Treasury’s Acceptance of Offers and Composite Value for
Completed Warrant Transactions through March 19, 2010
Aggregate Price Range – 33
Rejected Offers – 49

Treasury’s Composite Valueb

Accepted Offers – 33
Institution In Order of Completed Sale
Datea

Above Composite
Below Composite

1 – Old National Bancorp
2 – Iberiabank Corporation
3 – Sun Bancorp, Inc.
4 – FirstMerit Corporation
5 – Independent Bank Corp.
6 – Alliance Financial Corporation
7 – SCBT Financial Corporation
8 – Berkshire Hills Bancorp, Inc.
9 – Somerset Hills Bancorp
10 – First Niagara Financial Group
11 – HF Financial Corp.

First 11 Banks
Reviewed by the
Congressional
Oversight Panel

12 – State Street Corporationc
13 – U.S. Bancorpc
14 – BB&T Corp.c
15 – Goldman Sachs Group, Inc.c
16 – American Express Companyc
17 – Bank of New York Mellonc
18 – Morgan Stanleyc
19 – Northern Trust Corporationc
20 – Old Line Bancshares, Inc.
21 – Bancorp Rhode Island, Inc.
22 – Manhattan Bancorp
23 – CenterState Banks Inc.
24 – CVB Financial Corp.
25 – Bank of the Ozarks
26 – Wainwright Bank & Trust
27 – LSB Corporation
28 – WesBanco, Inc.
29 – Union Bankshares Co.
30 – Trustmark Corporation
31 – Flushing Financial Co.
32 – OceanFirst Financial Co.
33 – Monarch Financial Holdings
Notes:

a. Bars are positioned on the axis in the order that the bank completed the warrant transaction.
b. Bars are not drawn to scale. The bars in this figure show the total range of all estimates provided by Treasury’s three
independent pricing mechanisms. Morgan Stanley submitted the same dollar amount as its second offer; hence, the
graphic above appears to present only one offer because the offers overlap.
c. These are larger institutions that received at $1 billion or more in TARP funds.
Source: SIGTARP analysis of Treasury data.

27

After examining 33 completed warrants repurchase transactions—both pre- and post- the
Congressional Oversight Panel report—SIGTARP found that a number of factors differentiated
the first 11 sales from subsequent sales.
•

Treasury did not apply a liquidity discount for banks that received more than $1 billion
in TARP: Treasury did not apply a liquidity discount for large institutions. For eight
banks that received more than $1 billion in TARP (whose sales account for 99 percent of
direct warrant repurchases), Treasury received 94 percent of the Panel’s estimates. The
Panel does not apply liquidity discounts to any of its valuations; however, as noted above,
Treasury’s policy is to apply liquidity discounts between 0 to 50 percent depending on
the liquidity of the underlying stock and the possibility of greater participation in an
auction. Treasury applied, on average, a 31 percent liquidity discount for the model
valuations for the first 11 institutions, which received 66 percent of the Panel’s estimates.
If the liquidity discount is removed for Treasury’s final prices for all banks,22 the
resulting prices are approximately 92 percent of the Panel’s estimates.

•

For the first two warrant sales, Treasury was operating under a different legislative
mandate and did not yet have its asset managers in place: At the time of the first two
warrant sales, Treasury believed that it was statutorily required to liquidate warrants
expeditiously after a CPP participant repaid Treasury’s CPP investment. This time
pressure was compounded by the fact that Treasury had not yet finalized its process or
had even hired its asset managers to assist in determining valuation.23

•

Treasury has refined its model assumptions over time: As previously discussed, Treasury
continued to refine its assumptions for its model over time, particularly assumptions on
volatility. According to Treasury, the first three auctions that took place in December
2009 established a secondary market for 10-year options allowing Treasury to use
market-based assumptions when it runs its financial models. In addition, the number of
banks that repurchased the warrants from Treasury provided more market-based
information to refine the inputs.

•

Treasury did not agree with the initial valuations of the third-party asset managers:
According to Treasury, for the first 11 warrants, “the CPP team often felt the volatility
assumption used by the external asset managers was too high given the historical
volatility of the institution. In addition, the CPP team also often assumed a higher
illiquidity discount given the size of the institution and the limited trading volume of its
stock.” SIGTARP found that, after the initial warrant sales, the asset managers refined
their models and became more relevant to Treasury’s calculation of a composite value.
Treasury’s largest asset manager—AllianceBernstein—told SIGTARP that the recent
auctions, as well as the number of valuations resulting from banks that repurchased the
warrants from Treasury, provided more market-based information that the firm used to

22

For the purpose of comparison to the Panel’s analysis, SIGTARP removed the liquidity discount from the final
prices; however, the liquidity discount generally is applied to the financial modeling outputs generated by
Treasury.
23
Instead, Treasury used Gifford Fong, which it acknowledged was not an experienced valuation firm and whose
valuation model was found to be missing certain vital assumptions that Treasury thought were fundamental to the
valuation.

28

refine the inputs, specifically regarding volatility. The firm has thus been able to
recalibrate its calculations to reflect new market-based data.
•

Subsequent sales were to larger banks and Treasury rejected more bids before agreeing
on a final price: After the first 11 banks, Treasury rejected more offers before arriving at
final prices than in the negotiations for the first 11 banks. Treasury rejected 65 percent of
the offers from institutions that received more than $1 billion in TARP funds, compared
to 52 percent of the first 11 banks, all of which received less than $200 million in capital
investments. Treasury stated that, for smaller institutions, qualitative factors play more of
a role in the decision making. For larger institutions, Treasury is less concerned about
liquidity and the possibility that no bidders would participate in an auction, and,
therefore, it was more willing to reject bids that were not close to Treasury’s composite
value.

Auction Results
As of March 19, 2010, Treasury had auctioned warrants for seven banks: four banks that did not
submit a repurchase offer to Treasury (Bank of America, Texas Capital Bancshares, Inc.,
Signature Bank, and Washington Federal Inc.) and three banks that could not agree with
Treasury on fair market value and revoked their offers (Capital One, JP Morgan Chase, and TCF
Financial).
Table 3 deals with those firms that made offers to repurchase but could not agree with Treasury
and provides these banks’ initial offers, Treasury’s composite value, and the auction results.
Table 4 provides a summary of the auction results of the first seven banks’ auctions compared to
Treasury’s minimum price and also shows the current price of the 10-year warrants that Treasury
sold into the market.

29

Table 3: Results of Treasury’s Warrant Auctions for Institutions that Revoked
and/or rejected Offers through March 12, 2010 ($000s)

Institutions
Capital One, Inc.

Investment
Date

TARP
Investment

Date of
Bank’s
Offer

Treasury
Composite
Value

Bank’s
Offer

Auction
Date

11/14/08

$3,555,199

6/30/09

$46,500

$110,000

JP Morgan Chase

10/28/08

$25,000,000

6/17/09

$825,539

TCF Financial

11/14/08

$361,172

5/5/09

$3,200
$875,239

$1,123,000

Totals

Treasury
Minimum
Price

Proceeds
From
Auction

12/3/09

$94,900

$148,731

$1,000,000

12/10/09

$707,200

$950,318

$13,000

12/15/09

$4,800

$9,600

$806,900

$1,108,649

Source: SIGTARP analysis of Treasury data.

Table 4: Results of Treasury’s Warrant Auctions Compared to Treasury’s
Minimum Price, as of April 13, 2010
Institutions
Capital One, Inc.
JP Morgan Chase
TCF Financial
Bank of Americaa
Bank of Americaa
Washington Federal
Signature Bank
Texas Capital

Program
CPP
CPP
CPP
CPP
TIP
CPP
CPP
CPP

Auction
Date
12/3/09
12/10/09
12/15/09
3/3/10
3/3/10
3/9/10
3/10/10
3/11/10

Minimum
Proceedsb
$94,900
$707,200
$4,800
$182,689
$1,052,630
$8,500
$9,500
$4,900

Auction
Proceeds
$148,731
$950,318
$9,600
$310,572
$1,255,639
$15,623
$11,321
$6,709

Minimum
Price /
Warrant
$7.50
$8.00
$1.50
$1.50
$7.00
$5.00
$16.00
$6.50

Auction (i.e.
Clearing)
Price /
Warrant

Warrants
Trading
Price
(3/18/10)

$11.75
$10.75
$3.00
$2.55
$8.35
$9.15
$19.00
$8.85

Notes:

a. Treasury conducted two auctions of Bank of America’s warrants. One auction priced the warrants received under the
CPP, and the other priced the warrants received under the Targeted Investment Program.
b. Minimum proceeds were calculated by multiplying the total number of warrants sold by the minimum price.
Source: SIGTARP review of Treasury data and NYSE closing prices. Bloomberg.

Treasury does not recalculate a composite value using the three pricing methods at or near the
time that an auction was to commence, but instead uses a different, albeit related, procedure to
establish a minimum price that Treasury would accept at auctions. 24 Deutsche Bank suggests
the minimum price, and Treasury calculates a reserve price that is not shared with Deutsche
Bank. If the final auction price is below reserve price, Treasury will retain the warrants.
24

For the seven banks’ warrant auctions, Treasury utilized modified “Dutch” auctions to dispose of the warrants.
The public auctions were registered under the Securities Act of 1933. Only one bank’s warrants were sold in each
auction. With advice from its external asset managers and the auction agent, Treasury publicly disclosed a
minimum bid and privately set a reserve price for each auction. Bidders were able to submit one or more
independent bids at different price-quantity combinations at or above the set minimum price. The auction agent
did not provide bidders with any information about the bids of other bidders or auction trends, or with advice
regarding bidding strategies, in connection with the auction. The issuers of the warrants were able to bid for their
warrants in the auctions. Bids were accepted by the auction agent from 8:00 a.m. to 6:30 p.m. on the day of the
auction. The warrants were sold to all winning bids at the uniform price that cleared the auction. Deutsche Bank
Securities Inc. was Treasury’s auction agent for all the auctions. Deutsche Bank received fees equal to
approximately 1.5 percent of the gross proceeds which is significantly below typical secondary equity offering
fees that run around 3.5 percent to 4.5 percent depending on the size of the offering.

30

$14.81
$14.22
$4.42
$2.98
$8.88
$7.32
$18.98
$8.90

Treasury also solicits their asset manager to provide a minimum price for auctions. Treasury runs
a financial model valuation to set the reserve price. Treasury has set higher reserve prices as the
successive auctions went well. Starting with the Bank of America auction, Treasury was able to
use actual market data made available by the first three auctions to run its financial model
valuation.

31

Conclusions and Recommendations
EESA mandated that financial institutions receiving TARP assistance provide warrants to
Treasury as a way to generate additional returns for taxpayers. For publicly traded companies,
warrants give Treasury the right to purchase additional shares of common stock in the TARP
beneficiary at a predetermined price for up to ten years after the TARP investment. As recipient
institutions repay their TARP investments, Treasury sells the warrants, either directly to the
recipient institution at a negotiated price or via public auction.
Because warrants of this duration are not typically traded on an open market, determining their
value is not straightforward. Treasury determines a fair market value estimate for the warrants,
called a “composite value,” after referencing three different pricing methods: market quotes,
financial modeling outputs and third-party estimates. Treasury uses the composite value as a
reference when considering whether to accept recipients’ bids for the warrants.
To its credit, Treasury has generally succeeded in negotiating prices from recipients for the
warrants at or above its estimated composite value. Of the 33 public company warrant
repurchases completed through March 19, 2010, 20 of the final negotiated prices were at or
above Treasury’s composite value, and 9 of the final negotiated prices were just under the
composite value (generally between 90-99 percent of composite value). Of the 4 remaining
transactions, 2 were the first two transactions completed (during which time Treasury was
operating under a governing statute that limited how long Treasury had to negotiate and before
Treasury had its valuation methodology worked out), and the other 2 were for warrants in small
institutions that received less than $100 million in TARP funds (for which valuation is
particularly difficult because of less liquidity in the bank’s stock). Treasury has over time been
more consistent in obtaining negotiated prices at or above its estimated composite value. Recent
sales of warrants in larger, more widely traded firms have contributed to this trend, as has
improved transparency in the market for long-term warrants overall. This is an important
accomplishment that reflects a significant improvement in Treasury’s ability to better realize
returns for the taxpayer since the Congressional Oversight Panel’s initial review of the warrant
process in its July 2009 report. In total, for all warrant transactions (repurchases and auctions)
through March 19, 2010, Treasury received $5.63 billion in proceeds from warrant sales.
This audit, however, has identified two broad areas in which Treasury’s process for selling
warrants directly to financial institutions is lacking in ways that impair transparency and have led
to a lack of consistency in the process.
The first area of concern is that Treasury does not sufficiently document important parts of the
process, impairing transparency and making a comprehensive review of the integrity of the
decision-making process impossible. This documentation issue manifests itself in two important
contexts. One, Treasury lacks detailed documentation supporting the decisions of the Warrant
Committee, the internal Treasury committee that reviews TARP recipients’ offers to repurchase
their warrants and makes recommendations to the Assistant Secretary on whether to accept or
reject them. Most of the meeting minutes from Warrant Committee sessions were extremely
limited and included only the name of the institution, the institution’s offer amount, the name of
the analyst who presented Treasury’s analysis of fair market value, the analyst’s
32

recommendation on whether to accept or reject the offer, whether the offer was at or close to the
analyst’s composite value, and the final vote of the Warrant Committee members. Significantly,
the minutes generally do not reflect the qualitative factors considered by the Warrant Committee
members when making determinations whether to accept or reject a bank’s offer, or their
justifications or explanations for their decisions.
This lack of documentation contrasts significantly to that of Treasury’s Investment Committee
(part of the decision-making process for making TARP investments), even though both processes
are designed to support a financial decision about a particular firm25 and both committees discuss
analysts’ assessments of potential transactions. Investment Committee minutes, for example,
capture details regarding the qualitative factors that the Investment Committee members consider
in support of each decision. SIGTARP found far less documentation supporting the warrants
sale decision-making process than was standardized and required for the comparable TARP
investment process.
This deficiency significantly limits the ability to test the consistency of Treasury’s decisions. As
noted above, Treasury’s decision making with respect to HF Financial and Somerset Hills
appeared inconsistent when viewed in light of the meager information provided in the Warrant
Committee minutes. Although Treasury officials were able to provide justifications for the
different treatment of the two institutions in interviews in connection with this audit, this is not
an adequate alternative to proper documentation in the first instance. Memories fade over time
(as demonstrated in the case of Somerset Hills, in which a member of the Warrant Committee
could not recall the precise liquidity discount percentage that he identified as being key to his
decision), Treasury officials leave office, and although SIGTARP does not question the
explanations provided by Treasury during the audit process, it is also impossible to know,
without adequate documentation, if the explanations accurately and fully reflect the factors the
members of the Warrant Committee actually considered at the time they made their decisions.
The development of a full record on decisions that can mean the difference of tens of millions of
dollars to taxpayers should not depend on whether an oversight body happens to examine a
particular transaction (particularly, when, as here, hundreds of transactions will be occurring
over a period of years), if the particular decision maker happens to still be available, or if that
decision maker has a detailed recollection of the transaction. Even assuming that Treasury is
making decisions in every case based upon reasonable and fair rationales, in the absence of
documentation Treasury leaves itself vulnerable to criticism that its decisions are unwise,
arbitrary or unfair.
Even more troubling, Treasury similarly does not document the substance of its conversations
and negotiations with the recipient institutions. Treasury officials can interact directly with the
recipient institution on several occasions during the warrant repurchase process. As discussed
below, the transactions examined in detail in this audit suggest that the amount of information
provided to recipient institutions concerning the price that Treasury is likely to accept,
information that is only shared with some institutions, can have a significant impact on the return
25

SIGTARP’s August 6, 2009 audit, “Opportunities to Strengthen Controls to Avoid Undue External Influence over
Capital Purchase Program Decision-Making,” assessed the controls in place throughout Treasury’s process to
approve applications for CPP investments. SIGTARP made recommendations, which Treasury adopted, relating
to documenting Investment Committee votes and all communications with third parties concerning the investment
decision. That audit can be found at www.sigtarp.gov.

33

realized by taxpayers. Because Treasury does not make note of these conversations (or even
keep a list of the institutions with which it shares such information), however, SIGTARP was
only able to partially reconstruct, for the sample of eight institutions interviewed for this audit,
the substance of the conversations and their import based on interviews conducted at times long
after the fact. Again, memories fade and with the passage of time and the occurrence of
intervening negotiations, different parties to a conversation may have different recollections of
what occurred. When a brief telephone call can mean the difference of tens of millions of
dollars, it is a basic and essential element of transparency and accountability that the substance of
that call be documented contemporaneously.
The second significant deficiency is that Treasury does not have established guidelines or
internal controls over how the negotiations proceed, and in particular as to how much
information is shared with recipient institutions about Treasury’s estimated fair market value and
the price it will likely accept for the repurchase of the warrants. Descriptions provided to
SIGTARP by several of the banks that engaged in negotiations with Treasury confirmed that
Treasury was willing to provide detailed information about its estimates, including clear
indications as to what prices it was prepared to sell the warrants back to certain banks, but was
unwilling to share similar details with others. Moreover, although Treasury indicated that it
generally would not provide an indication of its valuation until the institution’s bid was close and
the Assistant Secretary stated that Treasury generally engaged in a strategy not to provide
specific valuation numbers because it would give away key negotiating leverage, the cases
examined in detail in the audit simply do not bear this out. Indeed, in the negotiation reviewed
by SIGTARP, the amount of information provided, the circumstances of when information
would be provided, and the results of the negotiation were all over the lot:
•

Old National Bancorp received information about Treasury’s valuation range even
though its bid was less than half of Treasury’s composite value; it came back with a bid
just under the composite, which was accepted.

•

Sun Bancorp’s initial bid was only about half of Treasury’s composite value. Treasury
responded with a specific number that was substantially higher than its composite value.
Sun’s next bid was just over the composite value and was accepted.

•

SCBT Financial was told expressly that its initial bid used too large a liquidity discount;
SCBT’s subsequent bid, which utilized Treasury’s suggested discount, was essentially at
Treasury’s composite value and was accepted.

•

Following conversations with Treasury, Somerset Hills was clear what Treasury’s
valuation range was; their subsequent bid was right at Treasury’s composite value and
was accepted.

•

Treasury gave essentially no information to American Express about its valuation even
though the bank’s second offer, $260 million, was just $20 million (7.1 percent) less than
Treasury’s composite value of $280 million and thus within the percentage range where
other offers had been accepted. American Express’s next bid, which was accepted, was
$340 million, far in excess of Treasury’s composite value.

34

•

Treasury suggested a specific figure that it would accept from Sterling Bank, but Sterling
found that figure to be too high, even after Treasury then offered an even lower figure.
Its warrants will be auctioned.

•

Treasury provided essentially no valuation guidance to JP Morgan Chase and suggested
that it would not do so even if the bank submitted a further bid. As a result, JP Morgan
declined to submit a subsequent bid and went to auction, at which Treasury received
approximately $950 million, $50 million less than its composite value.

These differing approaches and results raise important questions: what rationale is there for such
disparate treatment, and, if Treasury officials believe that not providing specific valuation figures
generally leads to a better negotiating position, what was the contemporaneous justification each
time that Treasury elected not to follow that strategy? There are potentially good reasons for
treating institutions differently—owing to differences in the size of institutions and thus the
liquidity of their stock and to the costs of an auction if negotiations fail, for example—but
because Treasury does not document the negotiations with financial institutions and because
there are no established guidelines or criteria for what information is shared or when it will be
shared, it is impossible to determine with certainty after the fact whether the difference in the
quantity and timing of the sharing of information is justified or consistently applied, or if those
decisions resulted in a benefit or a detriment to the taxpayer.
The case of the negotiations with Morgan Stanley is illustrative of these deficiencies in
Treasury’s warrant disposition process.
•

The Warrant Committee minutes do not describe what Treasury’s reasoning was with
regard to its consideration of Morgan Stanley’s bid, or even what in fact occurred. The
minutes reflect, without substantial explanation, that the Warrant Committee had
approved Morgan Stanley’s bid of $900 million; however, later documentation reflects,
again without explanation, that the $900 million bid was not approved.

•

Notwithstanding the fact that SIGTARP was told by the Assistant Secretary that he had
not overruled any decisions of the Warrant Committee, in an interview, the Assistant
Secretary explained that, after receiving a recommendation to accept Morgan Stanley’s
$900 million offer, rather than following that recommendation, he instead suggested that
the Warrant Committee re-run its analysis with respect to Morgan Stanley because of an
intervening increase in Morgan Stanley’s stock price; that reason, however, was not
documented.

•

The critical telephone negotiation between the Assistant Secretary and Morgan Stanley
officials during which Morgan Stanley’s $900 million offer was rejected was not
documented by Treasury, and the parties have significantly different recollections about
that call. The Assistant Secretary initially said that Morgan Stanley called him, but the
Morgan Stanley official told SIGTARP that it was the other way around. A
contemporaneous document indicates that the Assistant Secretary initiated the call, and
the Assistant Secretary later said that it is possible that he called Morgan Stanley, but that
he just could not remember. The Assistant Secretary told SIGTARP that he does not
negotiate on such calls but just listens to the recipients’ pitch and/or conveys Treasury’s
position; but Morgan Stanley stated that the Assistant Secretary made it clear that
35

Treasury would not accept $900 million and that Morgan Stanley would have to bid
substantially higher. Indeed, internal Morgan Stanley e-mail unambiguously states that
the Morgan Stanley official understood from that call that Morgan Stanley would have to
bid $950 million or face a public auction. The Assistant Secretary, however, told
SIGTARP that he would not have told Morgan Stanley that they would have to bid at
least $950 million because it would give away key leverage. He stated that, by not
revealing Treasury’s target price to the bidder, Treasury is more likely to receive a bid
exceeding its valuation.
•

Morgan Stanley ultimately bid $950 million, $50 million over Treasury’s composite
value and $50 million more than the Warrant Committee had initially approved.

Although the Assistant Secretary should be commended for exercising the initiative to intercede
by overruling the Warrant Committee’s initial recommendation and thus obtaining $50 million
more for taxpayers from Morgan Stanley, this example shows how Treasury’s lack of
documentation at critical points in the process and the lack of overarching guidelines can lead to
difficult questions. What were the specific factors that were contemporaneously considered by
the Warrant Committee that led to its initial approval of Morgan Stanley’s $900 million bid, and
without documentation of those factors, how can Treasury determine what changes, if any, are
needed in that deliberative process? What actually occurred on the critical call between the
Assistant Secretary and Morgan Stanley? Could similar tactics by Treasury have resulted in
similarly favorable prices for taxpayers from other large institutions? Why was Morgan Stanley
apparently provided a price at which Morgan Stanley believed that the warrant transaction would
close, while others, including American Express and JP Morgan Chase, were not? These
difficult questions simply cannot be answered definitively after the fact because Treasury has not
done an adequate job thus far in documenting its decision making and its negotiation, or in
developing guidelines as to how much information is shared with banks during the negotiation
process.
Unless Treasury addresses these deficiencies, it risks subjecting itself once again, fairly or
unfairly, to criticism from third parties that through TARP it is favoring some institutions over
others—picking winners and losers—irrespective of whether in fact it had legitimate reasons to
take the negotiating positions that it did. Although SIGTARP acknowledges that every case is
different and that Treasury needs to have some flexibility to address each particular situation,
without some objective guidelines and, importantly, internal controls to ensure that such
guidelines are followed, the risks and costs of arbitrary results and unjustifiable disparate
treatment are just too great. The absence of documentation and uniform guidelines for
negotiation may make it difficult for Treasury to defend itself convincingly against charges of
arbitrariness or favoritism. Only through adoption of the recommendations below can Treasury
minimize this reputational risk.

36

Recommendations
To address these deficiencies, SIGTARP recommends that:
1. Treasury should ensure that more detail is captured by the Warrant Committee meeting
minutes. At a minimum, the minutes should include the members’ qualitative considerations
regarding the reasons bids were accepted or rejected within fair market value ranges.
2. Treasury should document in detail the substance of all communications with recipients
concerning warrant repurchases.
3. Treasury should develop and follow guidelines and internal controls concerning how
negotiations will be pursued, including the degree and nature of information to be shared
with repurchasing institutions concerning Treasury’s valuation of the warrants.

37

Management Comments and Audit Response
SIGTARP received an official written response to this audit report from Treasury, a copy of
which is included in Appendix K. In that response, although Treasury stated that it did not agree
with all of the report’s findings, Treasury noted its view that the audit report should be helpful in
explaining this complicated subject to the public. With respect to the audit report’s
recommendations, Treasury agreed to review their procedures to ensure that there is sufficient
consistency in their process, but did not specifically respond to our recommendations; instead,
Treasury indicated that it would respond more fully to the report’s findings and provide a
detailed description of the actions it intends to take with regard to the concerns raised in the
report within 30 days. SIGTARP will provide an update on Treasury’s follow-up response in its
next Quarterly Report to Congress.

38

Appendix A—Scope and Methodology
We performed the audit under the authority of Public Law 110-343, as amended, which also
incorporates the duties and responsibilities of inspectors general under the Inspector General Act
of 1978, as amended. The audit’s specific objectives were to determine the process and
procedures Treasury has established to ensure that the Government receives fair market value for
the warrants and to determine the extent to which Treasury follows a clear, consistent, and
objective process in reaching decisions where differing valuations of warrants existed.
We performed work at the Department of the Treasury’s Office of Financial Stability in
Washington, DC. We also performed field interviews in New York, New Jersey, and California.
The scope of this audit covered 33 initiated and completed warrant transactions from May 8,
2009, through March 19, 2010, between the CPP recipient and Treasury. We also reviewed
auctions of warrants for stock in seven TARP recipients that did not repurchase the warrants
directly from Treasury.
To determine the process and procedures Treasury has established to ensure that the Government
receives fair market value for the warrants, we reviewed available Treasury guidance on its
warrant negotiation and auction process, Treasury’s internal controls documentation, the
contracts signed by Treasury and the banks upon receipt of funds, and other relevant Treasury
publications on its disposition process. In addition, we reviewed the Emergency Economic
Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009, and Helping
Families Save Their Homes Act of 2009. We interviewed legal, compliance, policy, and CPP
team officials to understand Treasury’s process. We also interviewed Secretary Geithner and the
Assistant Secretary Allison to determine their roles in warrant disposition. We also judgmentally
sampled eight institutions that had participated in Treasury’s warrant disposition process to gain
an understanding of the banks’ perspective on Treasury’s procedures. We also consulted
academic experts and industry participants on general valuation techniques. We also observed
two auctions to determine the steps involved in selling warrants through the auction mechanism.
To determine the extent to which Treasury follows a clear, consistent, and objective process in
reaching decisions where differing valuations of warrants existed, we reviewed Treasury’s
warrant repurchase files for completed warrant transactions and reviewed decision-making
documentation for each transaction. We reviewed Warrant Committee meeting minutes and
evidence of approval, which included email exchanges between CPP officials and the Assistant
Secretary. We interviewed the CPP warrant valuation team to understand the rationale for
Treasury’s valuation methodologies and fair market value assessment. We also interviewed
Warrant Committee members and the Assistant Secretary to understand the factors considered
during decision making.
This audit was performed in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objectives. We completed our review from June 2009 to April 2010. We believe that the
evidence obtained during this period of review provides a reasonable basis for our findings and
conclusions based on audit objectives.
39

Limitations on Data
Some of the decision makers involved at the beginning of TARP and the CPP were no longer at
Treasury at the time of SIGTARP’s review. Moreover, SIGTARP was unable to determine all of
the decision-making factors when Treasury assessed each CPP institution’s warrant offer
because Treasury did not document all of the qualitative factors it considered during the
recommendation, negotiation, and approval process.

Use of Computer-processed Data
To perform this audit, we used data provided by Treasury’s valuation models. To assess the
extent to which these models generate reliable outputs, we reviewed documentation from Ernst
and Young, the independent firm contracted by Treasury to validate the models’ results. We
reviewed the validation report that the firm submitted to Treasury and found nothing material
that would impede the use of the models on the basis of model reliability.

Internal Controls
As part of the overall evaluation of the CPP warrant valuation and disposition process, we
examined internal controls related to the submission, valuation, recommendation, and approval
of financial institutions’ offers for warrant transfer. We also conducted an evaluation of
documentation procedures regarding various decision-making points throughout the process and
examined internal controls as they relate to policies and procedures in place to ensure
consistency throughout the valuation and decision-making process.

Prior Coverage
Congressional Oversight Panel, “July Oversight Report: TARP Repayments, Including the
Repurchase of Stock Warrants,” July 10, 2009.
Congressional Oversight Panel, “January Oversight Report: Exiting TARP and Unwinding Its
Impact on the Financial Markets,” January 13, 2010. This report includes an update on the
Panel’s July 2009 report.
Congressional Oversight Panel, “Commercial Real Estate Losses and the Risk to Financial
Stability,” February 11, 2010. This report includes an update on the Panel’s July 2009 report.
Government Accountability Office, Report GAO-09-658, “Troubled Asset Relief Program: June
2009 Status of Efforts to Address Transparency and Accountability Issues,” June 2009.
Government Accountability Office, Report GAO-09-889, “Troubled Asset Relief Program:
Status of Participants’ Dividend Payments and Repurchase of Preferred Stock and Warrants,”
July 2009.
United States Department of the Treasury, Office of Financial Stability, “Warrant Disposition
Report,” January 20, 2010.
40

Appendix B—Largest Positions in Warrants Held
by Treasury, By Program, as of March 19, 2010

Current
Strike Price

Stock Price
as of
3/31/2010

In or
Out of
the
Money

Amount "In
the Money"
or "Out of
the Money"
as of
3/31/2010

210,084,034

$17.85

$4.05

Out

$(13.80)

110,261,688

$34.01

$31.12

Out

$(2.89)

Transaction
Date

Current Number
of Warrants
Outstanding

Citigroup Inc.

10/28/2008

Wells Fargo & Company

10/28/2008

Participant
Capital Purchase Program:

Systemically Significant Failing Institutions Program/AIG Investment Program:
AIGa

11/25/2008

2,689,938

$50.00

$34.14

Out

$(15.86)

a

4/17/2009

150

$0.00

$34.14

In

$34.14

12/31/2008

188,501,414

$10.61

$4.05

Out

$(6.56)

1/16/2009

66,531,728

$10.61

$4.05

Out

$(6.56)

AIG

Targeted Investment Program:
Citigroup Inc.
Asset Guarantee Program:
Citigroup Inc.

Notes:

Numbers affected by rounding.
All warrant and stock data for AIG are based on the 6/30/2009 reverse stock split of 1 for 20.
Sources: Treasury, Transactions Report, 1/4/2010; Treasury, responses to SIGTARP data call, 1/5/2010 and 10/7/2009; Capital IQ,
Inc. (a division of Standard & Poor's), www.capitaliq.com. Wall Street Journal.
a

41

Appendix C—Investments in 707 CPP Banks
Number of Institutionsa

Treasury’s Investments, as of March 19, 2010
Preferred Stock with Exercised Warrants
Preferred Stock with Warrants
Subordinated Debentures with Exercised Warrants
Preferred Stock
Subordinated Debentures
Trust Preferred Securities with Warrants
Common Stock with Warrants
Contingent Value Rights
Mandatory Convertible Stock with Warrants

353
277
49
19
4
2
1
1
1

TOTAL

707

Note:

a.

Thirty-one institutions received more than one CPP investment. For purposes of this table, these institutions are only
counted once.
Source: Treasury Transaction Report, 3/19/2010.

42

Appendix D—CPP Warrant Disposition Timeline
LEGISLATIVE
October 3, 2008: Congress enacts the Emergency
Economic Stabilization Act of 2008, which provided
[insert timeline]
Treasury the authority to “purchase, and to make and fund
commitments to purchase, troubled assets from any
financial institution” and required that Treasury receive
warrants or additional preferred shares to “sweeten the
deal” for the taxpayers.

February 17, 2009: The American Recovery and
Reinvestment Act of 2009 amended the repayment
provisions, allowing Treasury to permit financial
institutions to immediately repay capital investments. The
law also required Treasury to liquidate the associated
warrants at the current market price after banks repay
their investment.

PROGRAMMATIC
OCT 08

October 14, 2008: Treasury announced the Capital
Purchase Program, whose guidelines dictate that
participants are not permitted to repay Treasury’s capital
infusion during the first three years of the investment
without permission from Treasury.
DEC 08

FEB 09

March 31, 2009: Financial institutions start repaying
Capital Purchase Program investments.
APR 09

May 20, 2009: The Helping Families Save Their Homes
Act amended the requirement that Treasury has to
liquidate warrants after capital repayment. The law
provided Treasury the option as to when to complete
warrant sales after the repayment.

JUN 09

AUG 09

April 15, 2009: The first private bank completely exits
the Capital Purchase Program by buying back preferred
shares that Treasury received when it exercised warrants
at the time of the investment.
May 8, 2009: The first public institution completely exits
the Capital Purchase Program by directly purchasing
warrants from Treasury.
June 26, 2009: Treasury announces its valuation
approach for negotiating directly with banks for warrant
repurchase and states that, in cases that direct negotiations
are unsuccessful, Treasury plans to auction warrants to
third parties.

OCT 09

DEC 09

December 3, 2009: Treasury conducts its first auction of
Capital Purchase Program warrants.

December 31, 2009: Treasury closes the Capital Purchase
Program to new investments.

Sources: Emergency Economic Stabilization Act of 2008, American Recovery and Reinvestment Act of 2009, Helping Families
Save Their Homes Act, Securities Purchase Agreement, and Treasury press releases.

43

Appendix E—Treasury’s Warrant Process
Description (Excerpt)

44

45

46

Appendix F—Example of Treasury’s Warrant
Valuation Analysis
This appendix is an excerpt from Treasury’s January 20, 2010 Warrant Disposition Report. The
figure below “demonstrates the three elements of Treasury’s warrant valuation analysis together
with an institution’s bid for the warrants, using Northern Trust Corporation as an example. The
market quotes are presented as a range from the low to the high estimate of value provided by
market participants (black bar) as well as the average of all the market indications collected (red
point). The third party estimate of value (red point) is presented along with a reasonable range
(black bar) that is also prepared by the third party. Treasury’s estimate of value (red point) based
on its internal model is presented along with a reasonable range (black bar). The ranges of
estimates presented below show the final estimates utilized by Treasury officials to analyze the
bank’s final bid.”

47

Appendix G—Analyst’s Fair Market Value
Determination (Example)

48

49

50

51

52

Appendix H—Supplemental Prospectus
Auction Process
The following describes the auction process used to determine the public offering price of the
warrants. That process differs from methods traditionally used in other underwritten public
offerings. The selling security holder and the underwriter will determine the public offering
price and the allocation of the warrants in this offering by an auction process conducted by the
sole book-running manager, Deutsche Bank Securities, in its capacity as the "auction agent."
This auction process will involve a modified "Dutch auction" mechanism in which the auction
agent (working with a number of other brokers) will receive and accept bids from bidders at
either the minimum bid price of $1.50 or at price increments of $0.05 in excess of the minimum
bid price. We may (but are not required to) bid in the auction for some or all of the warrants.
After the auction process closes and those bids become irrevocable (which will occur
automatically at the submission deadline to the extent such bids have not been modified or
withdrawn at that time), the auction agent will determine the clearing price for the sale of the
warrants offered hereby and, if the selling security holder chooses to proceed with the offering,
the underwriter will allocate warrants to the winning bidders. The auction agent has reserved the
right to round allocations to eliminate odd-lots. The clearing price for the warrants may bear
little or no relationship to the price that would be established using traditional valuation methods.
You should carefully consider the risks described under "Risk Factors—Risks Related to the
Auction Process" beginning on page S-7.

Eligibility and Account Status
In order to participate in the auction process, bidders must have an account with, and submit bids
to purchase warrants through, either the auction agent or one of the other brokers that is a
member of the broker network (collectively, the "network brokers") established in connection
with the auction process. Brokers that are not network brokers will need to submit their bids,
either for their own account or on behalf of their customers, through the auction agent or a
network broker. If you wish to bid in the auction and do not have an account with the auction
agent or a network broker, you will either need to establish such an account prior to bidding in
the auction (which may be difficult to do before the submission deadline) or contact your
existing broker and request that it submit a bid through the auction agent or a network broker.
Network brokers and other brokers will have deadlines relating to the auction that are earlier than
those imposed by the auction agent, as described below under "—The Auction
Because the warrants are complex financial instruments for which there is no established trading
market, the auction agent, each network broker and any other broker that submits bids through
the auction agent or any network broker will be required to establish and enforce client
suitability standards, including eligibility, account status and size, to evaluate whether an
investment in the warrants is appropriate for any particular investor. Each of them will
individually apply its own standards in making that determination, but in each case those
standards will be implemented in accordance with the applicable requirements and guidelines of
FINRA. If you do not meet the relevant suitability requirements of the auction agent or another
53

broker, you will not be able to bid in the auction. Accounts at the auction agent or any other
broker, including broker accounts, are also subject to the customary rules of those institutions.
You should contact your brokerage firm to better understand how you may submit bids in the
The auction agent or network brokers may require bidders (including any brokers that may be
bidding on behalf of their customers) to submit additional information, such as tax identification
numbers, a valid e-mail address and other contact information, and other information that may be
required to establish or maintain an account.
The auction agent and the network brokers, upon request, will provide certain information to you
in connection with the offering, including this prospectus supplement and the accompanying
prospectus and forms used by such brokers, if any, to submit bids. Additionally, you should
understand that:
•

before submitting a bid in the auction, you should read this prospectus supplement,
including all the risk factors;

•

the minimum bid price was agreed by the auction agent and Treasury, and we did not
participate in that determination and therefore cannot provide any information regarding
the factors that Treasury and Deutsche Bank Securities considered in determining the
minimum bid price;

•

if bids are received for 100% or more of the offered warrants, the public offering price
will be set at the auction clearing price (unless the selling security holder decides, in its
sole discretion, not to sell any warrants in the offering after the clearing price is
determined);

•

if bids are received for half or more, but less than all, of the offered warrants, then the
selling security holder may (but is not required to) sell, at the minimum bid price in the
auction (which will be deemed the clearing price) as many warrants as it chooses to sell
up to the number of bids received in the auction, so long as at least half of the offered
warrants are sold, and that in such a case if the selling security holder chooses to sell
fewer warrants than the number of warrants for which bids were received, then all bids
will experience equal pro-rata allocation;

•

if bids are received for less than half of the offered warrants, the selling security holder
will not sell any warrants in this offering;

•

if there is little or no demand for the warrants at or above the clearing price once trading
begins, the price of the warrants will decline;

•

we will be allowed (but are not required) to bid in the auction and, if we do participate,
will participate on the same basis as all other bidders without receiving preferential
treatment of any kind;

•

the liquidity of any market for the warrants may be affected by the number of warrants
that the selling security holder elects to sell in this offering and the number of warrants, if
any, that we purchase in the auction process, and the price of the warrants may decline if
the warrants are illiquid;

54

•

the auction agent has the right to reconfirm any bid at its discretion by contacting the purported
bidder directly and to impose size limits on the aggregate size of bids that it chooses to accept
from any bidder, including network brokers (although the auction agent is under no obligation to
reconfirm bids for any reason). If you are requested to reconfirm a bid and fail to do so in a
timely manner, the auction agent may deem your bid to have been withdrawn, but alternatively
may in its discretion choose to accept any such bid even it has not been reconfirmed;

•

the auction agent may reject any bid that it determines, in its discretion, has a potentially
manipulative, disruptive or other adverse effect on the auction process or the offering; and

•

the auction agent will not provide bidders (including us) with any information about the bids of
other bidders or auction trends, or with advice regarding bidding strategies, in connection with the
auction process.

None of the underwriter, the selling security holder, or we have undertaken any efforts to qualify
the warrants for sale in any jurisdiction outside the United States. Except to the limited extent
that this offering will be open to certain non-U.S. investors under private placement exemptions
in certain countries other than the United States, investors located outside the United States
should not expect to be eligible to participate in this offering.
Even if a bidder places a bid in the auction, it may not receive an allocation of the warrants in the
offering for a number of reasons described below. You should consider all the information in this
prospectus supplement and the accompanying prospectus in determining whether to submit a bid,
the number of warrants you seek to purchase and the price per warrant you are willing to pay.
The following brokers have agreed to be network brokers for purposes of the auction process:
BB&T Capital Markets, a Division of Scott & Stringfellow, LLC; Blaylock Robert Van, LLC;
Cabrera Capital Markets, LLC; Cantor Fitzgerald & Co.; CastleOak Securities, L.P.; Guzman &
Company; Keefe, Bruyette & Woods, Inc.; Loop Capital Markets, LLC; Nomura Securities
International, Inc.; Samuel A. Ramirez & Company, Inc.; Sandler O'Neill & Partners, L.P.;
Muriel Siebert & Co., Inc.; SL Hare Capital, Inc.; Stifel, Nicolaus & Company, Incorporated;
Toussaint Capital Partners, LLC; Utendahl Capital Group, LLC; Wedbush Morgan Securities
Inc.; and The Williams Capital Group, L.P. The network brokers will not share in any
underwriting discounts or fees paid by the selling security holder in connection with the offering
of the warrants but may, subject to applicable FINRA and SEC rules and regulations, charge a
separate commission to their own customers.

The Auction Process
The following describes how the auction agent will conduct the auction process:
General
•

The auction commenced at 8:00 a.m., New York City time, on December 15, 2009, the
date specified by the auction agent via press release prior to the opening of the equity
markets on such day, and closed at 6:30 p.m., New York City time, on that same day (the
"submission deadline"). Unless you submit your bids through the auction agent, your
broker will have an earlier deadline for accepting bids. If a malfunction, technical or
mechanical problem, calamity, crisis or other similar event occurs that the auction agent
55

believes may interfere with the auction process, the auction agent may (in consultation
with the selling security holder) decide to extend the auction or cancel and reschedule the
auction. The auction agent and the network brokers will advise bidders of any such
decision to extend or cancel and reschedule the auction using e-mail, telephone or
facsimile, and will attempt to make such notification prior to the time the auction is
scheduled to close. If the auction process is extended such that it closes at a later time on
the same business day, any bids previously submitted will continue to be valid unless
amended or cancelled by the bidder, but if the auction is extended such that it closes on
the following business day or later, or is cancelled, all bids will be cancelled at the time
of such extension or cancellation. We are permitted (but are not required) to bid in the
auction in the manner described in the last bullet point under "—The Bidding Process"
below.
•

During the auction period, bids may be placed at any price (in increments of $0.05) at or
above the minimum bid price of $1.50 per warrant.

•

The auction agent and the network brokers will contact potential investors with
information about the auction process and how to participate and will solicit bids from
prospective investors via electronic message, telephone and facsimile. The minimum
size of any bid is 100 warrants.

The Bidding Process
•

The auction agent and the network brokers will only accept bids in the auction process at
the minimum bid price and above the minimum bid price at increments of $0.05.

•

No maximum price or auction price range has been established in connection with the
auction process, which means that there is no ceiling on the price per warrant that you or
any other bidder can bid in the auction. If you submit a market bid (i.e., a bid that
specifies the number of warrants you are willing to purchase without specifying the price
you are willing to pay), that bid will be treated as a bid at the highest price received from
any bidder in the auction.

•

Once the auction begins, you may submit your bids either directly through the auction
agent or through any network broker. Bids through the network brokers will be
aggregated and submitted to the auction agent as single bids at each price increment by
those brokers. Bids will only be accepted if they are made on an unconditional basis (i.e.,
no "all-or-none" bids will be accepted).

In connection with submitting a bid, you will be required to provide the following information:
•

the number of warrants that you are interested in purchasing;

•

the price per warrant you are willing to pay; and

•

any additional information that may be required to enable the auction agent and/or
network broker to identify you, confirm your eligibility and suitability for participating in
this offering, and, if you submit a successful bid, consummate a sale of warrants to you.

•

You may submit multiple bids. Canceling one bid does not cancel any other bid.
56

However, as bids are independent, each bid may result in an allocation of warrants.
Consequently, the sum of your bid sizes should be no more than the total number of
warrants you are willing to purchase. In addition, the auction agent may impose size
limits on the aggregate size of bids that it chooses to accept from any bidder (including
any network broker), although the auction agent is under no obligation to do so or to
reconfirm bids for any reason.
•

At any time prior to the submission deadline, you may modify your bids to increase or
decrease the number of warrants bid for or the price bid per warrant and may withdraw
your bid and reenter the auction. Network brokers, however, will impose earlier
submission deadlines than that imposed by the auction agent in order to have sufficient
time to aggregate bids received from their respective customers and to transmit the
aggregate bid to the auction agent before the auction closes. If you are bidding through a
network broker, or another broker that is submitting bids through the auction agent or
network broker, you should be aware of any earlier submission deadlines that may be
imposed by your broker.

•

Conditions for valid bids, including eligibility standards and account funding
requirements, may vary from broker to broker. Some brokers, for example, may require a
prospective investor to maintain a minimum account balance or to ensure that its account
balance is equal to or in excess of the amount of its bid. No funds will be transferred to
the underwriter until the acceptance of the bid and the allocation of warrants.

•

A bid received by the auction agent or any network broker involves no obligation or
commitment of any kind prior to the submission deadline. Therefore, you will be able to
withdraw a bid at any time prior to the submission deadline (or any deadline imposed by
a network broker, if you are bidding through a network broker). Following the
submission deadline, however, all bids that have not been modified or withdrawn by you
prior to the submission deadline will be considered final and irrevocable and may be
accepted. The auction agent and the selling security holder will rely on your bid in
setting the public offering price and in sending notices of acceptance to successful
bidders.

•

If you are requested to reconfirm a bid and fail to do so in a timely manner, the auction
agent may deem your bid to have been withdrawn. The auction agent may, however,
choose to accept your bid even if it has not been reconfirmed.

•

The auction agent may reject any bid that it determines, in its discretion, has a
potentially manipulative, disruptive or other adverse effect on the auction process or
the offering.

•

The auction agent will not provide bidders (including us) with any information about
the bids of other bidders or auction trends, or with advice regarding bidding strategies,
in connection with the auction process.

•

The auction agent or any network broker may require you to deposit funds or securities in
your brokerage accounts with value sufficient to cover the aggregate dollar amount of
your bids. Bids may be rejected if you do not provide the required funds or securities
57

within the required time. The auction agent or any network broker may, however, decide
to accept successful bids regardless of whether you have deposited funds or securities in
your brokerage accounts. In any case, if you are a successful bidder, you will be obligated
to purchase the warrants allocated to you in the allocation process and will be required to
deposit funds in your brokerage accounts prior to settlement, which is expected to occur
three or four business days after the notices of acceptance are sent to you.
•

We will be allowed (but we are not required) to bid in the auction. If we decide to bid, we
will participate on the same basis as all other bidders without receiving preferential
treatment of any kind. You will not be notified by either the auction agent, the network
brokers or the selling security holder whether we have bid in the auction or, should we
elect to participate in the auction, the terms of any bid or bids we may place. We will be
required to submit any bids we make through the auction agent. The submission of issuer
bids may cause the clearing price in the auction process to be higher than it would
otherwise have been absent such bids.

Pricing and Allocation
•

Deutsche Bank Securities will manage the master order book that will aggregate all bids
and will include the identity of the bidders (or their brokers, in the case of bids submitted
through a network broker). The master order book will not be available for viewing by
bidders (including us). Bidders whose bids are accepted will be informed about the result
of their bids.

•

If valid, irrevocable bids are received for all or more of the warrants being offered, the
clearing price will equal the highest price in the auction process at which the quantity of
all aggregated bids at or above such price equals 100% or more of the number of warrants
being offered.

•

If valid irrevocable bids are received for at least 50% but less than 100% of the warrants
being offered, the clearing price will equal the minimum bid price.

•

Unless the selling security holder decides not to sell any warrants or as otherwise
described below, all warrants will be sold to bidders at the clearing price.

If the number of warrants for which bids are received in the auction is:
•

100% or more of the number of warrants offered in this offering as disclosed on the cover
of this prospectus supplement (the "Number of Offered Warrants"), then all warrants sold
in the offering will be sold at the clearing price (although the selling security holder
could, in its discretion, decide to refrain from selling any warrants in the offering after the
clearing price has been determined);

•

50% or more but less than 100% of the Number of Offered Warrants, then the selling
security holder may, but will not be required to, sell, at the clearing price (equal to the
minimum bid price) as many warrants as it chooses to sell up to the number of bids
received in the auction; provided that if it chooses to sell any warrants in such a case it
will sell a number of warrants equal to at least 50% of the Number of Offered Warrants;
or
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•

Less than 50% of the Number of Offered Warrants, then the selling security holder will
not sell any warrants in this offering.

•

Promptly after the auction agent determines the clearing price, it will communicate that
clearing price to the selling security holder. The selling security holder may decide not to
sell any warrants after the clearing price is determined. Once the selling security holder
confirms its acceptance of the clearing price (and, in the case where bids are received for
fewer than 100% of the warrants being offered, the number of warrants to be sold), the
auction agent will confirm allocations of warrants to its clients and the network brokers.
The underwriter will sell all warrants at the same price per warrant.

•

If bids for all the warrants offered in this offering are received, and the selling security
holder elects to sell warrants in the offering, allocation of the warrants will be determined
by, first, allocating warrants to any bids made above the clearing price, and second,
allocating warrants on a pro-rata basis among bids made at the clearing price. The prorata allocation percentage for bids made at the clearing price will be determined by
dividing the number of warrants to be allocated at the bidding increment equal to the
clearing price by the number of warrants represented by bids at that bidding increment.
Each bid submitted at the clearing price will be allocated a number of warrants
approximately equal to the pro-rata allocation percentage multiplied by the number of
warrants represented by its bid, rounded to the nearest whole number of warrants;
provided that bids at the clearing price that are pro-rated may be rounded to the nearest
100 warrants. In no case, however, will any rounded amount exceed the original bid size.

•

If bids for half or more, but fewer than all of the warrants offered in this offering are
received, and the selling security holder chooses to sell fewer warrants than the number
of warrants for which bids were received, then all bids will experience equal pro-rata
allocation. In other words, each bid, not just those at the lowest price increment, will be
allocated a number of warrants approximately equal to the pro-rata allocation percentage
multiplied by the number of warrants represented by its bid, rounded to the nearest whole
number of warrants; provided that the clearing price that are pro-rated may be rounded to
the nearest 100 warrants. In no case, however, will any rounded amount exceed the
original bid size.

•

After the selling security holder confirms its acceptance of the clearing price (and, in the
case where bids are received for fewer than 100% of the warrants being offered, the
number of warrants to be sold), the auction agent and each network broker that has
submitted bids will notify you, in the event your bids have been accepted, by electronic
message, telephone, facsimile or otherwise that the auction has closed and that your bids
have been accepted. They may also provide you with a preliminary allocation estimate,
which will be subsequently followed by a final allocation and confirmation of sale. In the
event your bids are not accepted, you may be notified that your bids have not been
accepted. As a result of the varying delivery times involved in sending e-mails over the
Internet and other methods of delivery, you may receive notices of acceptance before or
after other bidders.

•

The clearing price and number of warrants being sold are expected to be announced via
press release prior to the opening of the equity markets on the business day following the
end of the auction. The price will also be included in the notice of acceptance and the
59

confirmation of sale that will be sent to successful bidders, and will also be included in
the final prospectus supplement for the offering.
•

Sales to investors bidding directly through the auction agent will be settled via their
accounts with Deutsche Bank Securities, while sales through network brokers will be
settled through your account with the broker through which your bid was submitted.

•

If you submit successful bids, you will be obligated to purchase the warrants allocated to
you regardless of whether you are aware that the notice of acceptance of your bid has
been sent. Once an underwriter has sent out a notice of acceptance and confirmation of
sale, it will not cancel or reject your bid. The auction agent and the selling security holder
will rely on your bid in setting the public offering price and in sending notices of
acceptance to successful bidders. As a result, you will be responsible for paying for all of
the warrants that are finally allocated to you, at the public offering price.

You should carefully review the procedures of, and communications from, the institution through
which you bid to purchase warrants.

Auction Process Developments
You should keep in contact with the institution through which your bid has been submitted and
monitor your relevant e-mail accounts, telephone and facsimile for notifications related to this
offering, which may include:
•

Potential Request for Reconfirmation. The auction agent may ask you to reconfirm your
bid at its discretion by directly contacting you (or your broker, if you submitted your bid
through a broker other than the auction agent), although the auction agent is under no
obligation to reconfirm bids for any reason. If you are requested to reconfirm a bid and
fail to do so in a timely manner, the auction agent may deem your bid to have been
withdrawn. The auction agent may, however, choose to accept your bid even if it has not
been reconfirmed.

•

Notice of Additional Information Conveyed by Free-Writing Prospectus. Notification that
additional information relating to this offering is available in a free-writing prospectus.

•

Notice of Acceptance. Notification as to whether any of your bids are successful and
have been accepted. This notification will include the final clearing price. If your bids
have been accepted, you will be informed about the results of the auction process

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Appendix I—Acronyms
Acronym

Definition

ARRA

American Recovery and Reinvestment Act of 2009

COP

Congressional Oversight Panel

CPP

Capital Purchase Program

EESA

Emergency Economic Stabilization Act of 2008

FMV

Fair Market Value

GAO

Government Accountability Office

OFS

Office of Financial Stability

QEO

Qualified Equity Offering

SIGTARP

Special Inspector General for the Troubled Asset Relief Program

SPA

Securities Purchase Agreement

TARP

Troubled Asset Relief Program

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Appendix J—Audit Team Members
This report was prepared and the review was conducted under the direction of Kurt Hyde,
Deputy Inspector General for Audits, Office of the Special Inspector General for the Troubled
Asset Relief Program. The staff members who conducted the audit and contributed to the report
include James Shafer, Anne Keenaghan, Amy Poster, and Kamruz Zaman.

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Appendix K—Treasury’s Comments

63

SIGTARP Hotline
If you are aware of fraud, waste, abuse, mismanagement, or misrepresentations associated with the
Troubled Asset Relief Program, please contact the SIGTARP Hotline.
By Online Form: www.SIGTARP.gov

By Phone: Call toll free: (877) SIG-2009

By Fax: (202) 622-4559
By Mail:

Hotline: Office of the Special Inspector General
for the Troubled Asset Relief Program
1801 L Street., NW, 4th Floor
Washington, D.C. 20220

Press Inquiries
If you have any inquiries, please contact our Press Office:
Kristine Belisle
Director of Communications
Kris.Belisle@do.treas.gov
202-927-8940

Legislative Affairs
For Congressional inquiries, please contact our Legislative Affairs Office:
Lori Hayman
Legislative Affairs
Lori.Hayman@do.treas.gov
202-927-8941

Obtaining Copies of Testimony and Reports
To obtain copies of testimony and reports, please log on to our website at www.sigtarp.gov. 

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