“Treasury Rights… most controversial investment of the last 25 years”

Sniffing out Steve Sjuggerud's teaser for True Wealth Systems

By Travis Johnson, Stock Gumshoe, March 28, 2012

We’ve now reached a groundswell of eager reader questions about Steve Sjuggerud’s “Treasury Rights” teaser, so let’s dig in and have a look.

Steve’s letter tells us that this is “the most realistic way to make outrageous ‘once-in-a-lifetime’ gains today” … a very tantalizing promise indeed. And of course, for the full information about these “Treasury Rights” he’d like you to sign up for a subscription to his True Wealth Systems, which is the “upgrade” letter for his True Wealth subscribers ($1,550 per year for Systems versus $39 per year for the basic True Wealth). The pitch is that he’s hired a bunch of Eastern Bloc programmers to develop quantitative systems and sift market data to find the buy signals he looks for, but in this case he’s specifically talking about one kind of investment, those aforementioned “Treasury Rights.”

Which you’ve probably heard of — these “Treasury Rights” are more commonly referred to as “TARP Warrants” … they’re the warrants that the US government demanded from bailed-out financial firms to make sure that the bailers-out participated somewhat in whatever recovery the stocks of the bailed-out might subsequently enjoy. And unlike past bailouts, the government in many cases facilitated a secondary market in these warrants by selling them, so it’s possible (and has been for a while) to buy the long-term TARP warrants on a handful of banks and other financial firms.

And there’s some definite temptation here, because these are very long-term warrants — and it’s otherwise very hard for small investors to get the leverage that’s provided by long-term derivative exposure to large-cap stocks. Established and profitable large cap companies almost never have publicly traded warrants, and even for speculative little stocks you almost never see warrants that go out this far — most of these are ten-year warrants, which means they still have six or seven years before they hit their expiration date.

There are roughly a dozen of these TARP warrants trading now, about half are from national banks that you would definitely know (JP Morgan Chase, Wells Fargo, Bank of America, etc.) and the rest from smaller or regional banks or insurance companies (Comerica, PNC, Hartford Financial and the like). The expiration dates are all in 2018 or 2019, ten years out from when the initial bailout deals were made. And with the exception of Bank of America, most of the warrants have strike prices that are in reasonable proximity to the current trading price — some warrants are already trading “in the money” (above the warrant strike price), and most others are close enough to give you a fighting chance. They also, in most cases that I’ve seen, adjust for dividends — so in case the company hikes dividends substantially over the next few years you’ve got a chance for your warrant to enjoy some of the impact of those dividends (that’s another feature that makes these warrants stand out from others — in most cases, holders of warrants or options don’t get any dividend protection).

Here’s how Sjuggerud describes these warrants and their reason for being:

“‘The Treasury’s Big “Upside-Kicker’

“Lehman Brothers had just gone under…

“AIG—one of the biggest and most important links in the financial chain—was collapsing…

“The stock market crashed…

“Even Goldman Sachs had to beg the government for help.

“On October 3, 2008, President George Bush signed the emergency Troubled Asset Relief Program (TARP) into law.

“In short, it was the mother of all bailouts.

“As I mentioned before, over 920 different businesses got a piece of the $700 BILLION TARP money.

“But here’s what most people don’t know about the bailouts…

“The government INSISTED on receiving Treasury rights for just about every single business that accepted TARP money.

“Of course, these businesses had little choice. They HAD to take the government’s deal. It was that… or go under.

“And here’s where it gets interesting…

“Companies who took bailout money, in exchange for the Treasury rights, had two choices when they paid their loan back:

“1) They could buy the Treasury rights back from the government privately, if a “fair market value” price could be agreed…


“2) If a price couldn’t be agreed, the government could keep the rights and cash them out later… or sell them on the open market.”

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So that’s what we’re dealing with here — the warrants (rights) that the government has sold on the open market, and that are now traded among investors.

And why should we want to buy these unique little assets? In Sjuggerud’s words:

“While the government certainly made decent money on these Treasury rights, they actually cashed out way, way too early.

“Now that we can see the economy and stock market recovering, there is simply enormous potential in these investments over the next few years.

“You see, despite the incredible sums of money the government’s made on Treasury rights…

“And that the fact that you can buy them on the open market…

“Most people have never heard of them before—and as a result they are still incredibly cheap.”

And Sjuggerud says that his True Wealth Systems “supercomputer” was used to sift through the available warrants and pick out the best ones — apparently not all of the TARP warrants are good speculations. So which are his favorites? Here’s what he teases:

“My favorite of these issues is another industry leader, this one based in Pennsylvania. It’s been around since the early 1900’s. This company’s financials are in excellent shape.”

Well, from the relatively short list of available warrants I’d wager this is probably PNC Financial (PNC for the stock, PNC-WT or PNC.WT for the TARP Warrant). PNC has actually been around a bit longer than that, since the 1850s or so under various names, but it’s the best fit for an “industry leader” in Pennsylvania.

Their warrants give you the right to buy PNC for $67.33 before December 13, 2018, and the stock is currently at about $66, so it’s right near the money — the warrant last traded at about $12, so you’re basically betting that PNC’s shares will go up by at least 20% over the next six and a half years. Not a bad bet, one assumes. I’m not a bank analyst and I rarely understand banking balance sheets, but PNC is trading at right about book value and is large and profitable (their $35 billion market cap doesn’t put them in the same league as national titans like Wells Fargo and Bank of America, but there aren’t many larger regional banks — PNC is in the top ten US banks measured by deposits or book value).

So that’s one guess. Another one?

“There’s also a second issue I recommend that gives you the chance to take advantage of nearly the exact same gains.

“This company, with offices in Chicago, has a fortress-like balance sheet… and is also in a clear uptrend”

Well, “offices in Chicago” doesn’t necessarily mean that much. If we’re to assume a “real” Chicago connection, headquartered in or near the Windy City, than this is very likely Wintrust Financial (WTFC for the stock, WTFCW for the warrants). WTFC is one of the smaller banks that has warrants available, and the warrants are trading well “in the money” to give you a bit of downside protection — the strike price for the warrants is $22.82 by December 19, 2018, and the shares are currently trading at over $35, so they’d be worth $13 or so if you exercised the warrant today. The warrant currently trades at about $17, so that means you’re betting on the stock go to up only about 10% over the next six and a half years. I don’t know much about the company, but that also seems a decent bet if they’re able to do as well as analysts expect — they’re profitable and trade at a discount to book value.

I think that, as last time around, most of these TARP Warrants probably provide a pretty nice leveraged bet on a recovering economy over the next six years … and if you make even tepid estimates about the next six years the warrants are almost all very cheap — probably because anyone who sat through the 2008-2009 financial crisis has a healthy but probably now overly pessimistic skepticism about banks. There are a few individual investors who have put up decent listings of most of the warrants now available, including this slightly outdated one at SeekingAlpha if you want to dig into them a bit. If you do decide to every buy into these warrants, I’d suggest reading through their prospectus (should be available in their SEC filings somewhere) to, at the least, check up on their dividend protection and any other conditions — I think they’re mostly pretty straightforward, but I certainly haven’t researched them all.

Also do note that the financial services business is very prone to mergers and acquisitions — and that can sometimes screw over warrant holders, since in most cases that I’ve seen warrants are worthless unless “in the money” if and when a takeover of the company occurs (ie, if the strike price is $40 and the stock is taken over for $38 in cash next year, the warrant may be worthless even if you paid $8 for it hoping for six years of appreciation). And as with all warrants, they tend to lose value over time unless the stock is moving up — so although you do have a lot of time, a shockingly long time in the case of these warrants, keep an eye on that erosion of the “time value” premium.

I went into some additional detail on this stuff when I wrote about a Nilus Mattive teaser on these same types of warrants in a Friday File for the Irregulars back in December, if you’re a paid member of the site you can see that here, but I have not personally invested in any of these warrants so far.

So, what do you think? Interested in the leverage of long-term warrants on some (mostly big) US financial companies? Let us know which ones tickle your fancy with a comment below.