U.S. Taxpayers May Reap $3.17 Billion in TARP Warrant Auctions

By Peter Eichenbaum

Dec. 2 (Bloomberg) -- U.S. taxpayers may reap $3.17 billion from the first auctions of warrants demanded by the government for bailing out banks, including Capital One Financial Corp., JPMorgan Chase & Co. and TCF Financial Corp.

“This is definitely the best possible outcome for taxpayers,” Linus Wilson, the University of Louisiana finance professor who provided the estimate, said yesterday after the Treasury Department started auctioning 12.7 million warrants in Capital One, the McLean, Virginia-based credit-card lender.

The auction was set after the agency and the bank couldn’t agree on a price for selling the warrants back to Capital One. They were granted last year in return for money from the $700 billion Troubled Asset Relief Program. The Treasury said Nov. 19 it also will auction warrants in New York-based JPMorgan and TCF Financial. All three have repaid funds received from TARP.

The sale of Capital One’s warrants will provide returns to taxpayers beyond the $105.2 million in dividends paid to the government in June when the bank returned $3.56 billion in TARP funds received in November 2008, the Treasury said in a statement. Wilson’s low estimate for the three auctions was $1.35 billion.

Warrants give investors a long-term option to buy common shares for a specified period -- in this case, 10 years. The longer the term, the more they’re typically worth.

The auction runs tomorrow from 8 a.m. to 6:30 p.m. New York time. The minimum bid is $7.50 per warrant and the bank may be among the bidders, Capital One said in a prospectus.

Bids Values

“Taxpayers are going to get the best price when many investors bid on the warrants, instead of the bank itself,” said Wilson, whose studies earlier this year found the Treasury sold warrants back to banks for as little as 32 cents on the dollar. “It’s refreshing to see the U.S. Treasury is looking to markets to price securities instead of looking to price them through negotiations between Treasury officials and the banks.”

While Capital One’s warrants would be worth $94.9 million at the minimum bid price, Wilson expects they will fetch $242 million to $390 million based on yesterday’s closing price of $38.09 on the New York Stock Exchange. The warrants expire on Nov. 14, 2018, and give investors the option to buy the underlying shares for $42.13.

Deutsche Bank Securities Inc. is the sole book-running manager and Siebert Capital Markets is the co-manager of the offering. Capital One spokeswoman Julie Rakes and Jason Korstange at TCF declined comment. JPMorgan’s Jennifer Zuccarelli referred questions to the government, and Treasury spokesman Andrew Williams didn’t return phone and e-mail messages.

Financial Crisis

The Treasury may bring in $1.08 billion to $2.72 billion through the sale of 88.4 million JPMorgan warrants, which expire in 2018 and have a $42.42 strike price, and $10 million to $26 million for the warrants of Wayzata, Minnesota-based TCF Financial, which expire in 2018 at a strike price of $16.93, Wilson said.

JPMorgan received $25 billion and TCF Financial $361 million through the bailout program enacted in October 2008 and used to inject capital into banks during the height of the worst financial crisis since the Great Depression. JPMorgan said it paid the Treasury $795.1 million in dividends.

The Treasury has said it intends to conduct similar auctions in the future as banks repay their TARP stakes. There are 693 banks in the capital purchase program, the Treasury said. Banks that want to pay back their capital injections can offer to repurchase the warrants, as Goldman Sachs Group Inc. did for $1.1 billion.

Cumulative Tally

The policy to auction the warrants benefits taxpayers, said Robert Jarrow, an economics professor at Cornell University and former managing editor of the journal Mathematical Finance, whom the Treasury hired to review its approach.

“This is the built-in fairness to the Treasury warrant valuation and repurchase process,” he said.

Cumulatively, taxpayers are “extremely unlikely” to see profit on their investment in banks and firms including insurer American International Group Inc. and General Motors Co., TARP watchdog Neil Barofsky said in an Oct. 21 report to Congress.

The Treasury, which faces a year-end deadline on whether to extend the TARP for another 10 months, had $317.3 billion left to spend as of Sept. 30, according to the report. Recipients of government assistance have repaid about $71 billion of the $289.7 billion distributed under the program, according to Bloomberg data.

-- With assistance from Brendan Murray and Rebecca Christie in Washington. Editors: Rick Green, William Ahearn

To contact the reporter on this story: Peter Eichenbaum in New York at peichenbaum@bloomberg.net