U.S. Undercharging on Warrants, Oversight Group Says
The U.S. Treasury has sold warrants it obtained from rescued banks for about two-thirds of what they are worth, a group overseeing the federal bailout said.
The Congressional Oversight Panel, in a report released today, said taxpayers should have recovered $10 million more from warrant sales with 11 small banks. A Treasury official countered that the Obama administration is seeking to protect taxpayers. The official said on condition of anonymity that the Treasury has rejected as too low most of the valuation proposals from the largest banks seeking to retire the warrants.
The clash underscores a debate that’s likely to intensify as JPMorgan Chase & Co., Goldman Sachs Group Inc. and other firms seek to complete the elimination of government stakes dating from the depth of the financial crisis last year.
“With non-traded securities, some will conclude that any price at which Treasury sells is too low, and some will say it is too high,” said Andrew Williams, a Treasury spokesman. The department has a plan for disposing of the warrants that specifies “a consistent and clear process for valuing warrants in a manner that protects taxpayers,” he said.
New York-based JPMorgan, the second-largest U.S. bank by assets, said it supports the Treasury’s process of establishing warrant values.
JPMorgan Warrant Auction
“We made a bid on the warrants, based on an independent appraisal, which the Treasury turned down,” Joseph Evangelisti, a spokesman at JPMorgan, said in an e-mailed statement. “According to this process, the Treasury will now be able to auction the warrants in the public market, which will result in the actual market price.”
If the department sells the warrants it holds in all rescued banks at the same 66 percent value as realized with the 11 smaller banks, taxpayers could lose $2.7 billion, the Congressional Oversight Panel’s study concluded.
“These results may suggest that Treasury has not been successful in receiving fair-market value for its warrants and in maximizing taxpayer returns,” the panel wrote.
The group noted that the securities sold by the government to date “represent less than one quarter of 1 percent” of its estimate of the total value of the portfolio of warrants business card templates. In all, the government has injected about $200 billion into more than 600 banks in exchange for preferred shares and warrants that give it the ability to buy common stock at a specified price.
‘Crunching’ Numbers
In an interview with Bloomberg Television today, the panel’s chairwoman, Elizabeth Warren, said that the group decided to write the report early on in the process to show the American public that “we’re going to be here crunching every one of these numbers” as the Treasury continues to sell warrants.
“This is the taxpayers’ last chance to have any participation in the upside for having bailed out these financial institutions,” said Warren, a Harvard Law School professor.
The five-member congressional panel’s report said that the Treasury’s portfolio of warrants could be worth as much as $12.3 billion, with a “best estimate” of $8.1 billion and a “low estimate” of $4.7 billion. It used a Black-Scholes options pricing model for the study. The group, set up last year, issues monthly reports on the $700 billion financial-rescue fund.
Last month, the Treasury said it will aim to sell its bank warrants “quickly” once the lenders repay their government shares.
Deepest Crisis
The Treasury is currently negotiating with the group of 10 of the largest U.S. banks that last month repaid $68 billion of government preferred shares. The shares, along with the warrants, were issued under the Troubled Asset Relief Program that was set up last year to address the deepest financial crisis since the Great Depression.
Banks have 15 days after retiring the government shares to propose a “fair market value” for the warrants, the Treasury said in guidance released June 26. Should officials object to the estimate, up to three “independent appraisers” will help set a price. For lenders that don’t want to make an offer, the Treasury will sell the securities at auction.
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