Mr. Rubber, Meet Mr. Road

Earlier this evening I ran across this post over at Seeking Alpha titled “Signs of Life for TARP Banks: Treasury to Auction off Stock Warrants.”  Apparently, JP Morgan Chase, Capital One, TCF Financial warrants are going to be auctioned off:

The three banks, whose warrants will be sold via auctions over the next month, are JPMorgan Chase (JPM), Capital One Financial (COF) and TCF Financial Corporation (TCB). These three banks, that received a total of $28.9 billion from the TARP, have fully repurchased Treasury’s preferred stock investment. The current move to sell their warrants will completely free these banks from government intervention.

Here’s how the Treasury explains this:

The US Department of the Treasury today announced its intention to dispose of several warrant positions received in consideration for investments made under the Capital Purchase Program (CPP).  Over the next month, Treasury intends to conduct auctions to sell its warrant positions in JP Morgan Chase & Co., Capital One Financial Corporation, and TCF Financial Corporation.

Each of these banks has fully repurchased Treasury’s preferred stock investment.  The warrant sales anticipated over the next month, if consummated in full, would represent Treasury’s disposition of its remaining holdings in these companies.  The proceeds of these sales will provide an additional return to the American taxpayer from Treasury’s investments in these banks beyond the dividend payments it received on the related preferred stock.

So this is essentially the last hurdle these banks need to clear to be free from TARP.  It looks like the auction will be open to a variety of participants, including the banks themselves.  More from the Treasury press release:

Treasury intends to sell the warrants through registered public offerings.  These offerings will be executed using a modified Dutch auction methodology that establishes a market price by allowing investors to submit bids at specified increments above a minimum price specified for each auction.

So it sounds like there’s a price floor on the warrants that the Treasury will accept and the bidders have to bid up from there.  Sounds reasonable.  The question is what will the floor be and what’s the premium paid over that floor.  Bigger premiums translate into a bigger return for taxpayers.

And given the CIT bankruptcy and several recent bank failures of TARP recipients, we need these to go well.  A failed auction would not be a good sign.


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Filed under finance, government, Markets

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