One big question in the push to pay back TARP funds is how will all those warrants be valued. The government, which received the warrants when they purchased preferred shares in TARP banks, will have to buy them back, but at what price?  

Barron's Online asked Credit Suisse derivatives strategists Edward Tom and Sveinn Palsson for help valuing the warrants. They built a model that takes into account stock prices, the implied volatility of 10-year CDS and other factors. The results: Citigroup's warrants were worth about $166 million on May 20, down from $1.67 billion when issued Oct. 28; Bank of America's warrants were worth about $221 million, versus $921 million; and Wells Fargo's, about $1.06 billion, down from $1.48 billion. Ouch. 

But the government, if it relied on this model, would actually make money on other banks. Goldman's warrants were worth $982 million, up from $680 million; JPMorgan's, $1.4 billion, up from $1.2 billion; Morgan Stanley's, $1.25 billion, versus $410 million. The combined value of those three rose from about $2.3 billion to about $3.7 billion. 

Most banks are staying mum on the issue, except for Goldman Sachs, whose spokesman said that the bank will indeed buy back the warrants and that taxpayers deserve "a decent return." 

But the reality is that we don't know how the government will value these options. No doubt the numbers are being crunched.   

There is some warrant repurchase precedent, however. Two smaller banks have already come to terms on selling warrants back to the government. Old National Bancorp in Evansville, Indiana, gave the Treasury Department $1.2 million for warrants that may have been worth $5.81 million, according to Bloomberg. If the government were to make the same deal for other banks, "lenders may walk away with 80 percent of the profits taxpayers might have claimed," the article notes. For the top 20 TARP banks, total savings would be nearly $10 billion. 

It's not inconceivable that the government would change its valuation model. There is a bit of pressure building in Congress to make sure taxpayers are treated fairly. My guess is that we'll see something of a break even scenario. Of course, the markets could always shift. By the time actual repayment is at hand, these warrants may be valued much differently. - Jim