Was The Treasury Wrong To Auction Warrants?

Last week, the Treasury sold some warrants it was given from Capital One as part of the bank bailout. The good news is that they successfully sold in the market. The bad news is that they sold at the bottom end of the range of prices expected. With an upcoming sale of JPMorgan warrants, Breakingviews.com (via the New York Times) suggests that JPMorgan was right to make a low offer on the warrants, which the Treasury rejected. Is that true, and what does it say about the Treasury's strategy?

Here's what Breakingviews.com on the Capital One warrant sale:

The Capital One warrants sold for nearly $150 million, but experts who consider their option value along with discounts for illiquidity and other factors had pegged their minimum value at more than $200 million and as high as $400 million.

This raises a question about future warrant sales: might the government have done better to sell them directly to the firms themselves? In particular, a sale is planned for a much large number of JP Morgan warrants -- was the bank right to offer a bid too low for the Treasury to accept? Yes. No. Maybe.

On one hand, JP Morgan isn't foolish. It should have had a pretty good idea the price these warrants would fetch in the market. There's no reason it should pay more than that. After all, it can just purchase these warrants for the market price when the Treasury conducts the auction anyway.

On the other hand, if it offered a price well below what those warrants would have for sold in the market, in the hopes that the Treasury would prefer not to go to the market, then it may have chosen poorly. It could have offered a more reasonable price and gotten these warrants to itself, which would have been better for shareholders.

I couldn't find the price JP Morgan offered for the warrants, so it may not have been publicly disclosed. As a result, I can't determine how much better or worse that price was compared to what the Treasury is likely to get in the auction. So did JP Morgan do right by its shareholders? Maybe. It depends what price it could have gotten from the Treasury versus for what the warrants end up selling for.

But either way, a market auction is best. If JP Morgan overpaid for the warrants, then that would have been bad for shareholders. If it underpaid, then that would have been bad for taxpayers. The Treasury shouldn't be out to gouge banks, but it also shouldn't be out to make them richer.