Treasury Goes To The Market To Sell Bank Warrants

By Daniel Indiviglio

The Treasury has been criticized over the past year for ignoring market mechanisms in some of the deals it made with the banks. Some have argued that private investors have done much better with their equity in the bailout banks than Uncle Sam. So it's nice to see the Treasury finally silence some of those critics. For its warrants from JP Morgan and a few other banks, rather than accept the prices offered by the firms, the Treasury is going to the market to auction them off. That's the right decision.

Way back in July, the Treasury made news for accepting Goldman Sachs's price for its warrants, which it sold for $1.1 billion. That price was relatively fair, at around 98% of their estimated value. Meanwhile, JP Morgan offered a more discounted price to purchase theirs, and the government refused. That's why it's going to the market.

Breakingviews.com, via the New York Times, reports:

Now the Treasury has hired Deutsche Bank -- one of the few global investment banks that was neither eligible for the Troubled Asset Relief Program nor bailed out by its own government -- to orchestrate an auction, initially of three sets of warrants.



I'm trying to think of a reason why the Treasury shouldn't go this route. It's utterly fair that it is paid market value for these warrants -- just like any other investor would be. Why should it sell them back to the banks at a deep discount? The banks aren't hurt by these warrants being sold in the market; they just aren't helped by getting warrants on the cheap.

Meanwhile, taxpayers are much better off. And they should be: it's their money that saved these firms in the first place. So they should reap the reward for their investments.

Could the Treasury end up selling these warrants for less than the banks offered? That's possible, but considering how well the stock market -- and financial stocks in particular -- have been doing lately, I doubt it. And even if it does, the price was still technically fair, since it will have been market-based.

So I really see only one criticism left: why is the U.S. government using a German bank for the auction? Does it really rather a bank headquartered in Europe get the fees associated with the warrant sales instead of an equally qualified one with management based in the States? Though, I guess people would be even angrier if they had chosen Goldman Sachs.

This article available online at:

http://www.theatlantic.com/business/archive/2009/11/treasury-goes-to-the-market-to-sell-bank-warrants/30660/