Auction all TARP warrants
JP Morgan has taken an entirely sensible step with respect to the pricing and sale of its TARP warrants:
The bank has waived its right to buy the warrants and will allow the Treasury to auction them in the public market, which bank executives say will result in an actual market price.
This is a great idea: just auction the warrants off to the highest bidder. Banks want the warrants to be bought, because it reduces the amount of control that the government has over them. But they don’t necessarily have any particular need or desire to buy back those warrants themselves — the same end can be reached by means of selling them to some other bidder. And the less of their own capital they spend on warrant buy-backs, the more well-capitalized they are and the less prone they are to government interference.
Under the terms of the TARP recapitalizations, it seems that banks have to give their permission before the warrants can be auctioned. Banks should go ahead and give that permission with alacrity, especially if their chances of buying back the warrants on the cheap have now dwindled away. If someone else buys the warrants, banks get all the upside of removing themselves from the government yoke, with none of the downside of having to pay lots of money to do so.