Valuation of Warrants

From the CBO’s June update on TARP funds (that’s a .pdf):

The market value of outstanding warrants held by the Treasury is around $6 billion, CBO estimates.14 Of the total, about $1 billion is from warrants issued by the 10 banks that recently repaid their TARP funds. However, those calculations are sensitive to the assumptions used in CBO’s models—particularly for treating the volatility of future stock prices (that is, how widely stock prices fluctuate over a given period).

14. CBO uses a Black-Scholes options-pricing model to price TARP warrants that relies on observed stock prices, estimated dividend yields, and historical data on volatility compiled from weekly securities returns for a period of 10 years.

Because what other methods are you gonna use?

Interestingly, the current estimate of the amount of ‘subsidy’ from $700+ billion TARP (that is, the part we’re not going to get back) is $159 Billion. Cost is weird here, since there are three main sources of governmental assistance: 1) asset guarantees; 2) very cheap loans; and 3) payments not going to get paid back.

And in particular (ahem, Goldman Sachs), $35 Billion to AIG in loans and stock purchases, lots of which went directly to pay off GS and others’ credit default swaps. Another $40B lost to the auto industry, and $50B to the as-yet-established mortgage relief plan.

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