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JPMorgan TARP Warrants Sold by Treasury Fetch $10.75

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By: Peter Eichenbaum and Joshua Fineman | December 10, 2009

Dec. 11 (Bloomberg) -- JPMorgan Chase & Co.  warrants held by the U.S. Treasury Department sold for $936.1 million, less than some traders predicted, closing out the federal bailout program’s stake in the New York-based lender.

The Treasury drew $10.75 each for 88.4 million of the securities in the second auction of warrants held by the Troubled Asset Relief Program, the agency said today in a statement. Nomura Securities International Inc. trader Bernard Chriqui, who expected a price of at least $12, said he may lower his forecasts for the pending sale of Bank of America Corp. warrants.

“These results could be telling for the upcoming BAC auctions, should they take place,” Chriqui, Nomura’s vice president of equity derivatives trading, wrote in an e-mail.

The Treasury sought to get higher prices for TARP warrants after a Congressional report found that some were sold back to banks for about 66 percent of their fair value. JPMorgan’s warrants sold for 34 percent more than the minimum bid of $8, and the sale was oversubscribed, said Treasury spokesman Andrew Williams.

The price per share was more than JPMorgan Chief Executive Officer Jamie Dimon offered, and which Treasury Secretary Timothy Geithner rejected, during negotiations earlier this year, Williams said in a telephone interview.

“We chose instead to go the auction, and we ended up getting the taxpayers a better deal,” Williams said.

JPMorgan didn’t bid in the auction, said company spokesman Joseph Evangelisti. JPMorgan is the second-biggest U.S. lender behind Bank of America.

Goldman Sachs

The Treasury demanded warrants from banks that took bailout funds to compensate taxpayers for the risk of investing in the companies during the height of the credit crisis. The warrants give investors a long-term option to buy common shares for a specified period -- in this case, 10 years from the date of issuance. The longer the term, the more they’re typically worth.

Banks have 15 days after buying back preferred stock to propose a “fair market value” for the warrants, which triggers a Treasury appraisal process. If the lender and the government can’t agree on a price, the Treasury will sell them at auction, according to the guidance the agency provided in June.

Below Forecast

Espen Robak, president of Pluris Valuation Advisors LLC, which specializes in pricing illiquid assets, had forecast the JPMorgan Chase warrants would sell for $13 to $17.

“The Treasury had been getting significantly better prices in the buyback transactions,” Robak said in an e-mail. He previously said the Treasury should consider postponing the JPMorgan auction after last week’s public sale of warrants from McLean, Virginia-based Capital One Financial Corp. netted $146.5 million, less than what analysts including Robak had estimated.

Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, bought back its warrants for $1.1 billion, or 11 percent of the $10 billion in preferred stock it repurchased from the Treasury to exit the bailout program. The $936.1 million taxpayers netted from yesterday’s auction amounts to 3.7 percent of JPMorgan’s $25 billion bailout.

The warrants sold yesterday give holders the right to buy common shares at $42.42 each until Oct. 28, 2018. JPMorgan fell 31 cents to $40.96 at 4 p.m. in New York Stock Exchange composite trading. The warrants rose 60 cents to $11.35.

Bank of America paid back $45 billion to TARP earlier this month. The Charlotte, North Carolina-based company hasn’t said what will happen to its warrants.