By MICHAEL R. CRITTENDEN
WASHINGTON -- A tweak by the Treasury Department to its contracts with banks could cost taxpayers billions of dollars if the government exercises its right to purchase common stock in the firms.
While ironing out the details of its program to inject as much as $250 billion into U.S. banks in October, the Treasury altered the way it calculated the strike price for warrants it received. Instead of calculating the price based on the date the government closed its investment, the Treasury moved the date earlier, to the day it first approved a firm's application for government funds.
The change was included as a footnote to the warrant contracts posted on the Treasury's Web site. It may have made a significant difference in the value of taxpayers' investment, said John Morton, managing director of economic policy at the Pew Charitable Trusts, whose SubsidyScope project uncovered the change.
"The strike price for the vast majority of the warrants is at a higher price than they would have been had Treasury followed its original policy," he said.
A Treasury official called the change relatively minor and said it was made to ease the closing of the investment contracts. The official said the date was moved up to allow the figure to be calculated in advance, adding certainty to the contract process.
When the Treasury invested in many of the nation's banks, it received warrants that give the government the right to buy common stock in a bank at any point within 10 years of the investment. The strike price attached to the warrants dictates the price the Treasury would have to pay. If the bank's stock is above the strike price when the Treasury exercises the warrants, taxpayers would make a profit.
Changes in a bank's stock price between the dates could affect the value of the warrants. If the stock price climbed between the two, an earlier strike price would benefit taxpayers. If the stock price fell, the later date would be a better deal for taxpayers.
Of 228 capital injections, SubsidyScope said the change resulted in less favorable pricing 82% of the time. For the Treasury's $15 billion investment in Bank of America Corp., the strike price for the warrants under the new term sheets is $30.79, compared with $25.94 if the original language was used.
The strike-price question could be made moot if firms repurchase the warrants when they repay the government.
Write to Michael R. Crittenden at michael.crittenden@dowjones.com
Printed in The Wall Street Journal, page A2
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