Greg Mankiw's Blog: The Problem with Warrants

Greg Mankiw's Blog: The Problem with Warrants:

I suppose Treasury could hire option pricing experts to net out the value of the warrant from the price of the package to find the net price of the MBS. But doing so would certainly add noise to the process and make it harder for Treasury's auction experts to make sure the taxpayers is getting the best price for the securities it is buying.

Warren Buffett did not need to worry about this problem. He set the price for his position in Goldman based on his expert judgment, not an auction. But Treasury needs to find a more objective mechanism for setting prices of the things it buys. Auctions are precisely that mechanism, but they would do their job less well if an equity stake in each company is part of the deal.

I think what he is saying is that the Treasury need to value correctly the “warrant pricing for the market value” this would be very difficult for the financial market. How could they measure all these multi-faced time and intrinsic value for the pricing. I wonder how Warren Buffett set the price for his position in Goldman…