First off, Reuters reports that:
JPMorgan Chase & Co, seeking to completely extricate itself from a federal bailout program, has asked the government to auction warrants to buy the bank’s stock, after the Treasury Department demanded too high a price for the bank to buy them back.
This is great news. Treasury should be driving a hard bargain. And JP Morgan should allow private investors to compete to buy the warrants — maybe that will allow JPM to use its capital for better purposes. As an economist, I also welcome the opportunity to find out the market price of the warrants, so we can compare it to what all the modelers have been estimating.
Next question: How do I bid? I hope Treasury does this in a way that lets small investors participate, much as they can in Treasury bond auctions.
Meanwhile, the Congressional Oversight Panel released a report on the warrants. The Panel suggests, albeit with major caveats, that some initial warrant repurchases were done too cheaply:
Eleven banks have repurchased their warrants from the Treasury for a total amount that the Panel estimates to be only 66 percent of its best estimate of their value. However, it is important to note that Treasury is just beginning its warrant repurchase program. Banks have bought back only a fraction of one percent of all warrants issued, and the prices paid thus far may not be representative of what is to come. The report further analyzes how Treasury is constrained by the provisions of the contracts governing the TARP investments in the banks and recognizes that the Panel’s valuations do not include the liquidity discounts and other adjustments contemplated by Treasury.
Later in the report, the Panel endorses auctions:
Treasury would be more likely to maximize taxpayer returns if it sold the warrants through auctions. The reason is straightforward: an auction would cause the warrants to be allocated to the buyers willing to pay the highest price, and competitive pressures in the bidding process may push bids up. By setting proper reserve values, Treasury can protect itself against a failed auction and ensure that it will at least receive fair market value. Equally important, auctions can put upward pressure on negotiated transactions by setting new, higher transaction precedents and by showing that a secondary market for these warrants exists, leading to a smaller liquidity discount in the negotiated transactions.
All in all, a good day on the TARP warrant front.
Disclosure: I have no positions in any TARP recipient with one exception: I am currently long a small amount of Citigroup preferred and short some call options on the common as part of my research on the Citigroup anomaly.