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COF is up?!

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By: Meena Thiruvengadam | December 10, 2009

WASHINGTON ( Dow Jones) - If last week's auction of Capital One Financial Corp. (COF) warrants is any sign, the U.S. likely won't earn as much as expected as it unloads assets acquired through its rescue of the financial sector. The U.S. sold its 12.66 million warrants to buy shares of Capital One stock for $11.75 each. The figure came in well below projections and suggests the government may have done better negotiating warrant sales directly with banks than previously thought. "We expected the price to come in at $15 to $20 a share," said Espen Robak, who heads Pluris Valuation Advisors, a firm that specializes in valuing illiquid assets.

Linus Wilson, a University of Louisiana at Lafayette finance professor, also had expected the warrants to fetch a higher price. "Capital One Financial should have had some of the better prices at auction because they're one of the larger banks and they had so many warrants outstanding," he said.

The modified Dutch auction, designed to set market prices for the warrants, was the first of many the U.S. will likely hold in the coming years. The U.S. Treasury already has announced plans to sell warrants it obtained from JPMorgan Chase & Co. (JPM) and TCF Financial Corp. (TCB) in the next month.

Wilson is expecting those auctions could earn the government a total of between $649 million and $1.56 billion, the bulk of which would be generated from sales of warrants to buy JPMorgan stock. The Treasury sold about two dozen other warrant positions it held through private negotiations with the issuing banks, a technique that garnered criticism for not maximizing taxpayer returns.

The warrants were supposed to be a deal sweetener for taxpayers stepping in to rescue the financial sector with a $700 billion bailout package. But in July, a Congressional Oversight Panel accused the Treasury of shorting taxpayers by at least $10 million by selling warrants back to banks at only 66% of their estimated best value. Robak, however, questions the oversight panel's modeling and suggested the Capital One auction demonstrates the assumptions underlying its techniques may have been flawed.

"It's tough to say this was not a fair market value transaction," he said. And in hindsight, Wilson said, "it looks like the negotiated prices that we got over the summer were very good relative to the Capital One sale." Goldman Sachs Group Inc. (GS), for example, paid $1.1 billion to buy back warrants it issued to the U.S. in connection with $10 billion of government capital it received. JPMorgan is expected to garner the Treasury a maximum of $1.5 billion in warrant revenue after receiving $25 billion in government capital.

Wilson said he believes the Capital One auction also could cause some difficulty for the Treasury should it choose to return to private negotiations with banks to sell its warrant positions. "This is going to hurt the negotiating position of the U.S. Treasury going forward," he said.