Financial Regulatory Forum

JPMorgan wants U.S. to auction its TARP warrants

By Reuters Staff
July 10, 2009

   By Elinor Comlay and Jonathan Stempel
   NEW YORK, July 10 (Reuters) – JPMorgan Chase & Co, seeking to extricate itself from a federal bailout program, wants warrants held by the government to be sold at auction, after the Treasury Department demanded too high a price for the bank to buy them back. The bank revealed its decision as a Congressional Oversight Panel overseeing the $700 billion Troubled Asset Relief Program said it could could cost taxpayers billions of dollars if the government lets banks repurchase warrants too cheaply.
   Valuing the warrants has become a flashpoint for some of the 10 large banks, including Goldman Sachs Group Inc and Morgan Stanley, that repaid more than $68 billion of TARP funds last month.
   The repayments included $25 billion by JPMorgan, whose chief executive, Jamie Dimon, has described participation in TARP as a “scarlet letter” for banks.
   “The objective is to get out of the clutches of government,” said Marshall Front, chairman of Front Barnett Associates LLC in Chicago. “That is an urgent objective.”
   The 10-year warrants were meant to allow taxpayers to share the upside as banks recover. Banks can buy back the warrants if they agree with the Treasury Department on the fair market value. Otherwise, Treasury can auction them to investors.
  
   “TRUE MARKET PRICE” SOUGHT
   While repaying bailout money frees banks from caps on executive pay, banks still have a big incentive to shed the warrants because the government can change the rules on banks still tied to TARP.
   Either way, the warrants will cost them. If investors exercise warrants they buy at auction, banks will have to issue more shares. On the other hand, if banks repurchase their warrants, that cost would reduce their earnings.
   JPMorgan spokesman Joseph Evangelisti said an auction “is consistent with the Treasury’s process, which we fully support, and it will result in the true market price for the warrants.”
   A Treasury representative said the government wants to dispose of warrants “in a manner that protects taxpayers.”
   According to the Congressional Oversight Panel, outstanding warrants industrywide could be worth anywhere from $4.71 billion to $12.27 billion.
   The panel said 11 smaller banks were permitted to buy back their warrants at 66 percent of estimated fair market value, which means the government passed up $10 million of profit. It said taxpayers could lose $2.7 billion if the government accepted the same percentage on all the warrants it still holds.
   Elizabeth Warren, a Harvard Law School professor who chairs the panel, told Reuters Television she was pleased with the decision to auction the JPMorgan warrants, which her panel estimated are worth $1.02 billion.
   “When you go to the market, sometimes you get burned and sometimes you make out, but that really is fair market value in an open and transparent process,” she said. “Nothing substitutes for real market valuations.” 
   
   OTHER BANKS
   It is unclear whether the other nine big companies to repay TARP in June will seek to auction or buy back their warrants.
   The nine are Goldman, Morgan Stanley, American Express Co, Bank of New York Mellon Corp, BB&T Corp, Capital One Financial Corp, Northern Trust Corp, State Street Corp and U.S. Bancorp. 
   Bank of New York Mellon, Goldman Sachs and Morgan Stanley declined to comment. The others had no immediate comment or did not immediately return calls seeking comment.
   In midday trading, JPMorgan shares fell $1.05 to $32.57 on the New York Stock Exchange. (Reporting by Elinor Comlay and Jonathan Stempel, additional reporting by Dan Burns, Steve Eder, Svea Herbst-Bayliss, David Lawder and Ellis Mnyandu; editing by John Wallace)

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