Equity Warrants

Here is a good read. I have no idea nor do I care about the politics of advancing or rejecting the argument. It simply makes sense to me.

If I understand correctly, when nobody knows the real value of an asset, any agreeable price is legitimate. Letting the government be the buyer of last resort puts a real price on something nobody else can or will buy. The government, not being strapped for cash or needing to turn a profit in any short period of time, can make a price offer on an asset offer an equity warrant at the same time.

The equity warrant allows the seller some exclusive right to buy the asset back at a price fixed at the time of the sale.

So here's the example.

Let's say I have a portfolio of 100M of 'toxic assets'. It doesn't really matter what they are, I've valued them at 100M in a non- mark-to-market accounting basis. Meaning I'm stuck with them like the junk in my garage before the garage sale. Instead of actually emptying the garage and risking having to sell them at deep discounts, I sell that portfolio to the government in exchange for cash and warrants.

So lets say that the feds offer me 80M in cash and 20M in warrants. I get 80% liquidity. Boom that's great, but I also get a chance to buy 20M worth at some future date at a discount rate. The assets will have to appreciate for me to exercise those warrants - for them to be worth anything, but it's a cool deal for me because I can conceivably get the entire 100% of my non-market valuation at some point in the future. So basically I can buy some of my assets back when they are not toxic.

The problem with this entire scenario is that the government is not particularly equipped to do anything with those 'toxic assets' except sit on them until this whole mess boils over. Park them until the panic subsides. I think the issuing of warrants to the original asset-holders and to the investing public is a cool idea and it saves the feds cash.