By : David Mildenberg | June, 9 2009
June 10 (Bloomberg) -- Ten lenders that persuaded the U.S. yesterday to sell back preferred shares for $68 billion may need to spend another $5.1 billion on warrants held by the Treasury to free themselves from government curbs.
JPMorgan Chase & Co.’s warrants alone are worth $1.8 billion, followed by Morgan Stanley at $789 million and Goldman Sachs Group Inc. at $609 million, according to estimates by Linus Wilson, assistant finance professor at the University of Louisiana at Lafayette. He values warrants of all 10 companies at $3.7 billion to $4.6 billion, while Credit Suisse AG estimated $4 billion to $5.1 billion on June 2 (see table).
Lenders may pay closer to full value because they’re eager to escape restrictions on operations and perks imposed when they sold preferred stock and warrants to the $700 billion U.S. bank rescue fund. Lawmakers are pressing Treasury Secretary Timothy Geithner to get higher prices after warrants sold for as little as 32 percent of what Wilson calculated they were worth.
“What I don’t want to have us do is sell off at a cheaper rate the upside potential that could come from these warrants because the taxpayer took the risk at the most critical moment for these banks when they were teetering,” Senator Mark Warner, a Virginia Democrat and Senate Banking Committee member, said in a telephone interview. “To leave upside on the table makes no sense.”
At stake are warrants that carry the right to buy more than 1.4 billion common shares of stock in U.S. banks. The warrants were issued as more than $372 billion in capital was disbursed from the Troubled Asset Relief Program to more than 600 firms.
Curbs and Caps
TARP was created last year to prevent the financial system from collapsing by providing banks with capital. The Treasury injected funds by purchasing preferred stock and also demanded warrants -- the right to buy common stock at a set price for 10 years -- so taxpayers could benefit from any rebound. Typically, the warrants equaled 15 percent of the TARP capital.
As long as the government holds the warrants, banks face some restrictions on their activities. Executive pay caps are lifted when the banks buy back the Treasury’s preferred stock in the first step of the TARP repayment process.
“Until you’ve basically evened-up with the government on the warrants, you’re still technically in the program,” said V. Gerard “Jerry” Comizio, a former Securities and Exchange Commission lawyer and now senior partner for banking and financial institutions at Paul, Hastings, Janofsky & Walker LLP.
Valuing Warrants
Credit Suisse on June 2 valued all outstanding TARP warrants at $5.2 billion to $7.8 billion, while Treasury estimated $5 billion. The Credit Suisse tally for the firms on the Treasury list didn’t include Northern Trust Corp.
JPMorgan Chase and American Express Co., both based in New York, Chicago-based Northern Trust, Boston-based State Street Corp., Minneapolis-based U.S. Bancorp and Winston-Salem, North Carolina-based BB&T Corp. were among firms that said in statements or through spokesmen they plan to buy back warrants.
The American Bankers Association has said the U.S. doesn’t deserve a windfall in return for holding warrants for a few months or for investing in banks that weren’t in danger of failing. The Washington-based trade group said in April the warrant buybacks create an “onerous exit fee” and a “punitive obstacle” to leaving TARP.
“We shouldn’t have had to pay a dime,” said Sun Bancorp Chief Executive Thomas Geisel, whose profitable New Jersey-based company bought back its warrants in May for what Wilson calculated was 32 cents on the dollar. “Taxpayers deserve a return for the risk they took on, but it wasn’t a risk to invest in us.”
Jamie Dimon
Jamie Dimon, CEO of New York-based JPMorgan Chase, said June 1 that that the U.S. should cancel half the warrants it holds “out of fairness.” JPMorgan’s warrants have a value of $1.2 billion to $1.7 billion, Credit Suisse said.
Companies have the right to buy the securities “at fair market value,” Treasury’s statement said yesterday.
Banks get the right of first refusal on buying back their warrants. If they can’t agree with Treasury on a price, the government may try to sell them at auction to third parties, a Treasury official said in an interview in May.
“Treasury should try to maximize their return as much as possible,” said Espen Robak, president of Pluris Valuation Advisors LLC in New York, which specializes in valuing assets that aren’t publicly traded. “The scope for disagreement is extremely wide. In some of these cases, there won’t be an agreement.”
Selling Stock
Banks can reduce the tab by selling new stock before Dec. 31 equal to the amount they got from TARP. In that case, half the warrants may be canceled.
Among the smaller banks, the government sold warrants back to Louisiana’s IberiaBank Corp. for 46 cents on the dollar, Wilson said. Ohio’s FirstMerit Corp. paid 82 cents on the dollar and Independent Bank Corp. in Massachusetts paid 74 cents, Wilson said.
The sales improved prices from May 11 when Old National Bancorp, based in Evansville, Indiana, paid $1.2 million --about 21 cents on the dollar -- to buy back a stake valued at $5.8 million, according to data compiled by Bloomberg. Banks would shortchange taxpayers by almost $10 billion if the Old National sale set the pace, Bloomberg reported on May 22.
Congressmen including Brad Miller, a North Carolina Democrat, and Senator Jack Reed, a Rhode Island Democrat, told Geithner to press banks for fair compensation after seeing terms of the Old National transaction.
Making It Easier
“My understanding was the sooner you gave it back, the easier the deal would be on you,” said William Isaac, the former Federal Deposit Insurance Corp. chairman and now an industry consultant.
The Treasury’s bargaining stance may already be hardening. Independent Bank Corp., the largest commercial bank based in Massachusetts, reimbursed TARP and paid $2.2 million on May 22 to buy back warrants Wilson valued at $3 million. Treasury officials “did not budge” in negotiations, said Denis Sheahan, chief financial officer.
TCF Financial Corp., the Wayzata, Minnesota-based lender that redeemed $361 million in TARP funds in April, still hasn’t reached an agreement on its warrants and wants Treasury to allow an auction to set a value, said bank spokesman Jason Korstange.
“We can’t get the government to give us a price that we like,” he said.
