When the OFS invested TARP funds in banks (through CPP, TIP, AGP, and SSFI), it took in return preferred stock and warrants. The preferred stock has a coupon of 5% for five years and then a coupon of 10% thereafter, meaning that OFS is paid a five percent return on investment for 5 years and then a ten percent return. The institution can buy back the preferred stock at its face value at any time, which limits the upside return for OFS (the taxpayers). Thus, from preferred stock alone, we bear the risk that the financial institution goes broke and the preferred stock becomes worthless without positive upside return should the institution do very well.
The warrants give the taxpayers an upside. They are an option which gives OFS the right to purchase the (common) stock of the company at a given price (the 20-day trailing average of the banks common stock price as of the date of approval of participation in the CPP). As an institution’s stock price rises, the value of these warrants rises since they may end up allowing OFS to purchase the stock at much less than its market price. As the market has recovered, the upside has been quite good. We are now about a year and a quarter from the first CPP investments (and about a year from the median) and the warrants that have been repurchased have now made ‘we the people’ about 4 billion (total CPP investment was about $200 billion). The total return on the 34 institutions that have repurchased is about 8.8% of which 5.7% is from the warrants.
Now the remaining institutions are unlikely to be as profitable for taxpayers. The banks that have done the best are the ones most likely to repay (or it could be the banks with the fewest lending opportunities, but I suspect this effect is small). So probably the return on the remaining institutions will be lower. But still, a positive return so far helps the final tally. Here is the report on the warrants to date. And the OFS end-of-fiscal-year report which marked to market the entire portfolio is here.