TARP Warrants: Let the Bidding Begin

Thursday is a nice milestone in TARP’s history: with the help of Deutsche Bank, Treasury is auctioning off the warrants it received when it invested in Capital One. The company has already paid off the preferred stock that the government purchased last fall, and will now be free from TARP oversight once the warrants are in private hands. Or, perhaps, in its own hands. Although Capital One (COF) declined to purchase the warrants from Treasury at a negotiated price (as had other firms that repaid the government’s TARP investments), it can still bid in the auction.

A few months ago, I pointed out many benefits from auctioning the warrants rather than selling them back to the companies at negotiated prices. To my mind, the biggest benefits are transparency and the fairness of market pricing. Everyone—including, at least in principle, small investors—can bid in the auction.

If you are interested, here’s the prospectus, which includes (pp. S-15 to S-16) a list of participating brokers. I don’t see my broker on the list, which is disappointing, but maybe others will be luckier.

For a nice discussion of the auction mechanism (a modified Dutch auction in which all winning bidders pay the market-clearing price, very similar to the method used to sell Treasury bonds) and some estimates of the warrant values, see this Seeking Alpha piece by Linus Wilson.

Disclosure: I have no position in Capital One and, apparently, no way to bid on the warrants. If I find a way, I might do it for fun

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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