(Source: PRNewswire)
CHICAGO, June 16 /PRNewswire/ -- OptionsHouse (http:// www.OptionsHouse.com/) CEO, George Ruhana, today posted an open letter to U.S. Department of Treasury Secretary Timothy Geithner to his blog on the online brokerage's Web site in an effort to highlight the shortcomings of the TARP warrant buyback process and propose real alternatives to help bolster the struggling U.S. economy and chip away at the national deficit.
(Logo: http://www.newscom.com/cgi-bin/prnh/20090407/OPTIONSLOGO)
"The U.S. taxpayers backstopped the banks that accepted TARP money when no one else would and should be rewarded for stabilizing the system. However, rather than working to secure the best return for the American people by opening up the sale of these warrants to the highest bidder, the firms that took TARP money are instead being rewarded with a private sale. ... there is no reason for you to sell out these warrants directly to the banks without opening up the sale to competitive buyers."
-Excerpted from Ruhana's blog post on the OptionsHouse Web site
In this letter, Ruhana explains how a customer of the firm would have paid 50 percent more for the Old National Bancorp (ONB) warrants had they been open to competitive bid.
"The banks that accepted bailouts from the U.S. government in the form of TARP warrants are in luck," said Ruhana. "Rather than opening up the warrant buy-back process to competitive bids, the U.S. government has decided upon a process that basically enables the bank to repurchase its company's interest from taxpayers at a massive discount."
According to Ruhana, the TARP warrants banks are now eligible to buy back from the U.S. government operate almost exactly like "call options" - a term familiar to seasoned investors but relatively unknown to the majority of U.S. taxpayers.
"By definition, a warrant is actually a call option in almost every way," said Ruhana. "It gives the holder the right, but not the obligation, to buy a security at a set price before a set expiration date."
With call options, investors typically buy in with the belief that the stock price will rise in the future. Conversely, the seller either enters the transaction with the belief that the stock price will not rise in the future, or rather, with the willingness to forego some of the profit in exchange for having a smaller, yet immediate, return.
"In the case of the TARP warrants, I worry that my customer would be willing to pay a much higher price than the price the banks will eventually pay, especially since he likely feels that his bid is already below market value," Ruhana explained.
