JPMorgan Chase seeks to take the auction route

JPMorgan Chase, seeking to extricate itself from a federal bailout programme, wants warrants held by the government to be sold at auction, after the Treasury Department demanded too high a price for the bank to buy them back.

The bank revealed its decision as a Congressional Oversight Panel overseeing the $700 billion (Dh2.5 trillion) Troubled Asset Relief Programme (Tarp) said it could cost taxpayers billions of dollars if the government lets banks repurchase warrants too cheaply. Valuing the warrants has become a flashpoint for some of the 10 large banks, including Goldman Sachs Group and Morgan Stanley, that repaid more than $68bn of Tarp funds last month. The repayments included $25bn by JPMorgan, whose Chief Executive, Jamie Dimon, has described participation in Tarp as a "scarlet letter" for banks.

"The objective is to get out of the clutches of government," said Marshall Front, Chairman of Front Barnett Associates in Chicago. "That is an urgent objective."

The 10-year warrants were meant to allow taxpayers to share the upside as banks recover. Banks can buy back the warrants if they agree with the Treasury Department on the fair market value. Otherwise, Treasury can auction them to investors. State Street Corporation, one of the 10 large banks to repay Tarp funds last month, was the first from this group to directly buy back the warrants, paying $60m to do so according to the latest Tarp transaction report on Friday. State Street had received $2bn in bank bailout funds.

While repaying bailout money frees banks from caps on executive pay, banks still have a big incentive to shed the warrants because the government can change the rules on banks still tied to Tarp. Either way, the warrants will cost them. If investors exercise warrants they buy at auction, banks will have to issue more shares. On the other hand, if banks repurchase their warrants, that cost would reduce their earnings.

JPMorgan spokesman Joseph Evangelisti said an auction "is consistent with the Treasury's process, which we fully support, and it will result in the true market price for the warrants."

A Treasury representative said the government wants to dispose of warrants "in a manner that protects taxpayers". According to the Congressional Oversight Panel, outstanding warrants industrywide could be worth anywhere from $4.71bn to $12.27bn. The panel said 11 smaller banks were permitted to buy back their warrants at 66 per cent of estimated fair market value, which means the government passed up $10m of profit. It said taxpayers could lose $2.7bn if the government accepted the same percentage on all the warrants it still holds.

Elizabeth Warren, a Harvard Law School professor who chairs the panel, said she was pleased with the decision to auction the JPMorgan warrants.

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