Banks' Bailout Escape Not So Simple

The Senate passed an amendment in early May to allow the Treasury to exercise warrants at a later date, when bank stocks might have recovered even further, offering bigger profits for taxpayers. Sen. Jack Reed (D., R.I.), who serves on the Senate Banking Committee, has been a champion of such a move.

"Taxpayers should not be forced to assume all the risk and then let the companies get all the reward," Reed said in a statement at the time. "That is not fair in any kind of deal."

However, no official guidance has been issued yet for over two dozen financial firms that have applied to repay TARP funds, or have stated intentions to do so. Given lobbying efforts by the banking industry and the ample reserves of populist rage awaiting any decision that seems to benefit bailout recipients, the decision will probably not be as simple as writing out 25 checks for the $160.7 billion in direct funds they received.

Among those that have applied to redeem the TARP investment are JPMorgan, Goldman Sachs (GS), Morgan Stanley (MS), American Express (AXP), BB&T (BBT), State Street (STT), Northern Trust (NTRS) and HF Financial Corp. (HFFC). Among others that have indicated interest in paying back funds as soon as possible are Bank of America (BAC), Wells Fargo (WFC), Fifth Third (FITB), Bank of New York Mellon (BK), PNC Financial Services (PNC), KeyCorp (KEY), Capital One (COF), US Bancorp (USB), SunTrust (STI), and several others.

While changing the rules in midstream again may not bode well for some of the smaller banks that have already redeemed TARP funds, one idea that has gained ground is conducting an auction to sell the warrants to private investors. Given voracious demand for bank stocks, such a move would likely inspire higher prices in competitive bidding.

Setting a price in the private market through an auction might be preferable to the government setting an arbitrary price, or having the price decided by outside analysts. Though banks might chafe at higher market prices, valuation expert Espen Robak, president of Pluris Valuation Advisors, is one advocate.

"They got very cheap money from the government, and so the government deserves a little upside," says Robak.

As for sour grapes from CEOs like Dimon, he adds: "He signed the deal and issued the warrants so it is what it is. You can call it unfair if you want...but at that point you discover what the price is, because the market would set it for you."

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