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U.S. to 'Quickly' Sell Warrants When Banks Repay TARP (Update2)

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By: Robert Schmidt and Rebecca Christie | June 25, 2009

June 26 (Bloomberg) -- The Treasury plans to sell warrants obtained as part of the financial bailout “quickly” after banks repay government shares.

Banks will have 15 days after retiring government stakes to propose a “fair market value” for the securities, the Treasury said in a statement today in Washington. Should officials object to the estimate, up to three “independent appraisers” will help set a price. For lenders that don’t want to make an offer on the warrants, the Treasury will sell them at auctions.

Today’s guidance signals that policy makers are aiming to speed the withdrawal of the government from the banking industry, rather than attempting to maximize returns for the taxpayers by waiting for share prices to rise.

“The president has clearly stated that his objective is to dispose of the government’s investments in individual companies as quickly as is practicable,” the statement said.

Holding the warrants for a longer term offers “no certainty that we would realize higher values, and it was not appropriate for the government to be exercising discretionary judgment on timing market sales,” the Treasury said.

The policy comes after the administration gave approval earlier this month for 10 of the biggest U.S. banks, including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, to repay $68 billion in preferred shares from the Troubled Asset Relief Program.

Politically Sensitive

Officials have been debating how to deal with the warrants, an issue that is politically sensitive because some lawmakers have warned Treasury Secretary Timothy Geithner not to let banks buy back government stakes at discounted values.

The new policy is consistent with the overall goal of the TARP, said William Sweet, a banking partner at Skadden, Arps, Slate, Meagher & Flom in Washington. While the law directed the Treasury to steady the financial system, Congress didn’t call for the government to retain warrants on stabilized banks in order to speculate on their value, he said.

“The government realizes they are not investment managers, it’s simply not their expertise,” Sweet said. “You take whatever value there is and move on.”

The department has previously valued the warrants at about $5 billion, while some academic studies have said they are worth closer to $12 billion.

CBO Estimates

The Congressional Budget Office estimates that the market value of the Treasury’s outstanding warrants is about $6 billion, including $1 billion from the 10 big banks that are repaying their TARP stakes. Valuing the warrants “poses significant challenges because of the limited market” for such investments, CBO said in a report yesterday.

Espen Robak, president of Pluris Valuation Advisors, a New York firm that analyzes illiquid assets, said a “reasonable” estimate is about $5 billion.

“This is a nice kicker for the government,” Robak said.

Treasury aides, briefing reporters today, said they hope to hire a firm to run the auctions within weeks.

The officials, speaking on condition of anonymity, also said that banks, should they wish, will be able to waive the appraisal process and attempt to buy the warrants at auction.

In its statement, the Treasury said it will use a set of “well-known” financial models to assess the value of the warrants. These values will be calculated using a range of different assumptions about market changes and stock dividends, while also correcting for “well-documented” biases of some of the models.

Repaid Government

For banks that recently repaid the government, the 15-day deadline on the warrants will come at the end of next week, the officials said.

JPMorgan spokeswoman Jennifer Zuccarelli declined to comment on the bank’s effort to repurchase the warrants, as did Morgan Stanley spokesman Mark Lake.

Goldman Sachs spokesman Ed Canaday said he had no information on the firm’s negotiations. Still, he said, “We feel that the American taxpayers are entitled to a decent return on their investment.”