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U.S. Treasury Sets Auction for Bank of America Bailout Warrants

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By: Peter Eichenbaum and David Henry | March 01, 2010

The U.S. Treasury Department set tomorrow for auctioning warrants tied to the bailout of Bank of America Corp., a sale that may raise more than $1 billion. The auction announced yesterday in a Treasury statement covers two sets of warrants Bank of America granted to the U.S. when the Charlotte, North Carolina-based lender received $45 billion from the Troubled Asset Relief Program. The securities grant holders the right to buy an equivalent number of common shares at pre-set prices.

One block of 150.4 million warrants, expiring in January 2019, may be exercised $13.30 a share. Another set of 121.8 million warrants convert at $30.79 until October 2018. The warrants with the lower strike price would generate about $1.05 billion if all are sold at the minimum bid of $7 each. The base bid for the remaining warrants is $1.50 each, implying a value of at least $182.7 million. Bank of America common shares traded for $16.71 yesterday in New York.

“The proceeds of these sales will provide an additional return to the American taxpayer from Treasury’s investment in the company beyond the dividend payments it received on the related preferred stock,” the Treasury said in the statement.

The U.S. has raised about $4 billion by selling warrants in more than 35 banks, most of which repurchased the securities in direct negotiations. The agency has auctioned warrants of New York-based JPMorgan Chase & Co., Capital One Financial Corp., based in McLean, Virginia, and TCF Financial Corp. of Wayzata, Minnesota.

Record Auctions

If all of the 272.2 million Bank of America warrants are sold at the minimum bid, the sale would eclipse the record $1.1 billion Goldman Sachs Group Inc. paid to repurchase its warrants in July and the $936.1 million the Treasury netted from its Dec. 10 auction of JPMorgan warrants. Under TARP rules, the Treasury can auction the warrants when it’s unable to agree with the lenders on a price. The Treasury turned to auctions after the Congressional Oversight Panel in a July 10 report criticized the agency for selling warrants back to 11 small banks in negotiated deals for about 66 percent of their value. The Treasury’s proceeds from later sales, including auctions, improved to 92 percent of the estimated value, the panel said in a Feb. 10 report.

Analysts including Espen Robak, president of Pluris Valuation Advisors LLC, have said the auctions generated less than fair value because the securities are thinly traded and concerns remain about the banking system’s health. Robak, whose firm specializes in pricing illiquid securities, had recommended that Treasury delay the JPMorgan auction after the Capital One warrants sold below his estimates.

Warrants Outperform Shares


The three sets of publicly traded warrants have outperformed the underlying common shares since the December sales. The Capital One warrants climbed 7.6 percent, compared with a 1.4 percent decline in the shares, while the JPMorgan warrants advanced 19 percent, compared with a 2 percent gain for the stock. The TCF warrants have surged 35 percent as the stock rose 9 percent.Bank of America has applied to have the warrants listed on the New York Stock Exchange, the company said yesterday in offering documents filed with the Securities and Exchange Commission. The modified Dutch auction will start at 8 a.m. and close at 6:30 p.m. Eastern Time, the Treasury said in its statement. Deutsche Bank Securities Inc. is leading the auction, according to the agency.