TARP banks increasingly eye warrant liquidation

By Karey Wutkowski - Analysis

WASHINGTON (Reuters) - Some of the largest U.S. banks are turning an increasingly keen eye to letting Treasury liquidate warrants they awarded the government when they took bailout money, finding shareholder dilution a more desirable alternative to a political firestorm.

More than a week after some of the nation's largest banks repaid almost $70 billion of taxpayer money, Treasury is still trying to figure out how to put a price tag on the billions of dollars of those banks' warrants the government still owns.

Bank hopes for a discount price on the warrants, to compensate them for being asked to take part in a rescue program they argued they did not need, are fading.

Government watchdogs and lawmakers have already warned officials that taxpayers deserve a fair return on the warrants, which were designed as a way for the public to participate in the upside, if and when the banks' stock prices recovered.

Negotiations between the banks and government officials have produced valuations that are wide apart, pushing open-market liquidation to the fore as the way to achieve the "fair market price" required in bailout contracts.

The overseer of the $700 billion bailout program said on Wednesday that Treasury will "soon" issue guidance on its methodology for valuing the warrants and how it might liquidate the securities if banks choose not to buy them back.

"I'm sure there's going to be a wide range of opinions about the approach that is taken," Herb Allison, who heads the Troubled Asset Relief Program (TARP) for the Treasury Department, told TARP's Congressional Oversight Panel.

He highlighted just how difficult it has been to come up with valuations, saying there has been "a wide divergence of opinion" as Treasury has tried to negotiate with the biggest banks on a fair market price.

Repaying rescue funds involves banks buying back the preferred shares that many sold to the government when financial markets were squeezed by a credit crunch last fall. But banks have also been trying to repurchase the warrants that give the government the right to buy common stock at a pre-set price, or "strike price," for up to 10 years.

American Express (AXP.N), Bank of New York Mellon (BK.N), BB&T (BBT.N), JPMorgan (JPM.N), Northern Trust NTRS.O and U.S. Bancorp USB.N have all indicated they intend to buy back warrants for their common stock from the U.S. Treasury.

The largest banks have not commented about the status of negotiations regarding the warrants.

Although the banks have the right to buy back the warrants before Treasury liquidates them, a financial industry source said some banks are starting to view liquidation as a better option. The dilutive effect would be "a drop in the bucket," especially compared to the political headaches.

LESSER OF TWO EVILS

The issue of valuing the warrants has already shown potential to become a political powder keg.

The Congressional Oversight Panel has committed to studying the warrants in its July report, ensuring that a critical eye will be closely watching Treasury's approach.