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U.S. Should Delay JPMorgan Warrants Sales, Pluris Says (Update 2)

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By: Peter Eichenbaum | December 08, 2009

Dec. 9 (Bloomberg) -- The U.S. Treasury Department’s bailout program should delay tomorrow’s auction of JPMorgan Chase & Co. warrants because prices at a sale last week were too low, according to Pluris Valuation Advisors LLC.

“The market does not appear to be giving these warrants quite their due,” said Pluris President Espen Robak, whose New York firm specializes in pricing illiquid assets such as stock options and restricted securities. Pluris estimates the JPMorgan warrants could be worth $1.5 billion.

The Treasury turned to auctions after analysts and Congress said the agency sold warrants back to banks for two-thirds of what they were worth in negotiated transactions. The first auction last week, for 12.7 million warrants of Capital One Financial Corp. drew $146.5 million, less than what some analysts including Robak had forecast.

“It certainly doesn’t seem like a good deal for the taxpayers,” said Robak, whose firm had praised the Treasury in July for improved results on warrant sales. “If they’re going to get these kinds of prices, then why not hold onto them?”

Joseph Evangelisti, a spokesman for New York-based JPMorgan, and Treasury spokesman Andrew Williams declined to comment.

The 88.4 million warrants give holders the right to buy common shares at $42.42 each until Oct. 28, 2018. The warrants should sell for $13 to $17 each, netting taxpayers $1.15 billion to $1.5 billion, based on the $41.21 price of JPMorgan’s common stock yesterday, Robak said. The shares fell 22 cents to $40.99 at 12:25 p.m. in New York Stock Exchange composite trading.

Market Timing

The government shouldn’t hold the warrants for the long term in an attempt to time the market, the agency said in a June 26 statement outlining its plan to divest the securities. The objective is to dispose of the holdings as quickly as practical, the statement said.

“It’s in the Treasury’s best interest to get these off their books and just get it behind them,” said Bernard Chriqui, vice president of equity derivatives trading at Nomura Securities International Inc. Chriqui said he expects the auction will be oversubscribed and that the warrants will fetch $12 to $13 each.

The minimum bid for the JPMorgan warrants is $8, a price that would generate $707 million for U.S. taxpayers if all the securities are sold. Investors paid $11.75 for the Capital One warrants, 57 percent more than the minimum bid of $7.50.

JPMorgan May Bid

JPMorgan Chief Executive Officer Jamie Dimon may be tempted to bid on his company’s warrants if the price is right, according to Robak and Clay Struve, a partner at Chicago-based trading firm CSS LLC. Struve, who said he bought Capital One warrants, estimated the auction would net about $1 billion, making it the biggest one-time sale of warrants “in the history of mankind.”

The bank may bid on some or all of the warrants, according to a prospectus filed yesterday. Deutsche Bank Securities Inc. is handling the auction.

The Treasury demanded warrants from banks that took bailout money under the $700 billion Troubled Asset Relief Program to compensate taxpayers for investing in the lenders during the credit crisis.

Banks have 15 days after buying back preferred stock they sold to the bailout fund to propose a “fair market value” for the warrants, which triggers a Treasury appraisal process. If the bank 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.

JPMorgan decided to allow the government to auction its warrants after the Treasury rejected the bank’s offer as too low. Bank of America Corp., which said Dec. 2 that it would buy back the government’s $45 billion stake, didn’t say whether it would agree to an auction.

The warrant sale would complete JPMorgan’s repayment of $25 billion in capital it received last year from TARP.

To contact the reporter on this story: Peter Eichenbaum in New York at peichenbaum@bloomberg.net