This morning we reported that JP Morgan Chase has decided it wants to have a public auction for the TARP warrants that it gave to the Treasury when it received a capital injection last year. This looks like a great way for the government to receive fair value for the warrants, guaranteeing that the Treasury gets a market price for the warrants.
This is a departure from other banks that chose to privately negotiate deals with the Treasury to buy back the warrants. This meant that the price paid was not subject to a market check, and many banks appear to have underpaid for the warrants. Morgan Stanley, for instance, paid something along the lines of 68 cents on the dollar for the warrants, according to some estimates. Elizabeth Warren, the TARP watchdog for Congress, thinks that lowball deals have shortchanged taxpayers by $2.7 billion.
Of course, not everyone underpaid. The best estimates from economist Linus Wilson tell us that Goldman Sachs, BB&T and American Express paid fair value or more for the warrants. Of course, all of these are just estimates. All along we’ve said that it would be better to have a market auction for the warrants.
But JP Morgan’s decision to do exactly this is now raising questions: what are they up to? Why didn’t they want to cheaply buy back the warrants?
You can just imagine the talks around the boardroom. “Hey, I’ve got an idea! Let’s potentially lose money by letting the public bid on our warrants instead of just lowballing the Treasury like everyone else did. It would be so much more fair to Americans.”
Forgive the cynicism, but fairness has never been a driving factor in dealmaking before, so it’s tough to see why now is the time for it to start. It’s also difficult to imagine how the bank officials expect to get a better deal from the auction than they would by spending an afternoon with Treasury officials.
Perhaps JP Morgan executives believe in karma, hoping that the goodwill accumulated by this stunning public relations coup will translate into more checking accounts and customer loans. Perhaps it’s all part of a bigger effort to give Americans a warm and fuzzy feeling when they see the Chase sign down the street.
And perhaps they’re right to do so. After all, how many $33 overdraft fees does it take to make up for the potential losses from a fair and open warrant sale?
This strikes us as overly suspicious. At this point, many are ready to assume that just about everything banks do is a scam of some sort. Maybe just this once a bank wanted to be as transparent as possible, if perhaps just to avoid getting grilled by lawmakers about the price they paid.
If you really want to be suspicious, however, try imagining that perhaps JP Morgan believes the market for the warrants will fetch a lower price than mathematical estimates of fair value. In that case, the bank might try to buy the warrants itself in the auction or buy them afterwards from the primary buyers.
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