Warrants Released by Financial Institutions

Warrants are simply securities (legal obligations) that companies issue to entitle the holder to payment if the company stock will rise up past a certain level. Take note that financial institutions issued warrants to government last year in exchange for capital infusions.

Warrants are called sweetener for investors.

Warrants also function like call options – there will be an option to buy stock at a given time and at a certain price (similar to stock options that are issued to executives). For example, if there’s a newly-formed cable company, they will issue the usual securities such as shares of stock. However, it’s faced with competition so it needs to go to new investors. The company might offer these investors with warrants to guarantee them that they get the “upside” (success that will be spurred by the money).

This is the same thing that happened to the banks that took government money. They have no choice but to give warrants to the government at the time. However, last Thursday, Morgan Stanley, a former investment bank who received $10 billion government bailout, already purchased back the warrant it issued. Paying $950 million buys back its obligation to sell 65.25 million shares in the next 10 years for $22.99 per share (at the time, the share price of Morgan Stanley is only $15.20). Today, their stock is trading at $31 per share and if it will keep going up, the value of the warrants will also keep rising.

“The government’s take,” said CEO John Mack, “is the nearly $1.3 billion the company paid for the dividends of the government’s $10 billion share. Also, it provided a 20% annualized return on the U.S. taxpayers’ investment in the company.”


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