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JPMorgan Auction Not as Transparent as It Seems


It's hard to believe that JPMorgan wants a public warrant sale simply because it's fair.

Since the downfall of Lehman Brothers, many of the biggest Wall Street banks have moved in lock step with one another, as if to assume there is safety in numbers. Everyone took the bailout money at the same time (not that they had much choice), and now everyone wants to pay it back.

But now that the worst is behind the banking industry, or so many of them hope, at least one bank is finding reason to zig when everyone else zags. JPMorgan (JPM) is taking the unusual step of auctioning off the warrants held by the US government, instead of buying them back for a price negotiated privately with Treasury officials, according to the New York Post. The auction will be held in the open market and conducted by the Treasury department.

It's different. It's transparent. It's fair. It makes sense.

It's also suspicious.

Here's how it works: When the banks took bailout money from the government's TARP program, they gave the government warrants. Those warrants give the owner, in this case the US Treasury, the right to buy shares of the banks' stock at a later date for a discounted price. In returning the bailout money to the US Treasury, the banks are also buying back those warrants. So far, the deals with other big banks like Goldman Sachs (GS) and Morgan Stanley (MS) have been struck behind closed doors, with the banks buying back warrants for prices determined in closed negotiations.

One finance professor who spoke to the Post likened it to selling your house back to the person who sold it to you. Maybe you'd have gotten a better price if you put it on the open market.

Since this is the taxpayers money, critics argued, those negotiations should be out in the open. How are we to know that Morgan Stanley's warrants, which it bought back from the government for $0.68 on the dollar, were sold for the right price? Maybe someone else was willing to pay more for those warrants, giving more money back to the taxpayers' coffer. We'll never know.

Elizabeth Warren, the Harvard professor charged with public oversight of the troubled TARP program, estimates that taxpayers have lost about $2.7 billion on it so far.

Enter JPMorgan's Jamie Dimon, with the idea of letting the market determine the price of the warrants instead of striking a deal with Washington officials in a shroud of secrecy. Sure, JP Morgan may very well end up paying more to redeem those warrants than we would if we bought them back ourselves, but it's so much more fair than the way Goldman Sachs, Morgan Stanley, American Express (AXP), and the others did it.

You can just imagine the talks around the boardroom. "Hey, I've got an idea! Let's potentially lose money by letting the public bid on our warrants instead of just lowballing the Treasury like everyone else did. It would be so much more fair to Americans."

Forgive the cynicism, but fairness has never been a driving factor in dealmaking before, so it's tough to see why now is the time for it to start. It's also difficult to imagine how the bank officials expect to get a better deal from the auction than they would by spending an afternoon with Treasury officials.

Perhaps JP Morgan executives believe in karma, hoping that the goodwill accumulated by this stunning public relations coup will translate into more checking accounts and customer loans. Perhaps it's all part of a bigger effort to give Americans a warm and fuzzy feeling when they see the Chase sign down the street.

And perhaps they're right to do so. After all, how many $33 overdraft fees does it take to make up for the potential losses from a fair and open warrant sale?
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