Banks Learn Final TARP Escape Route

JPMorgan Chase (JPM Quote), Morgan Stanley (MS Quote), Goldman Sachs (GS Quote) and other banks that have already repaid government bailout funds now know the process for removing the last vestige of government control.

The Treasury Department on Friday laid out the process by which banks can repurchase stock warrants granted to the government through the Troubled Asset Relief Program. Ten banks that passed government stress tests last month were given permission to repay preferred equity investments the government bought through TARP, but until now Treasury had until now not made clear how the banks could redeem the warrants.

Earlier this month US Bancorp (USB Quote), Capital One (COF Quote), American Express (AXP Quote), BB&T (BBT Quote), Bank of New York Mellon (BK Quote), State Street (STT Quote), Northern Trust (NTRS Quote), JPMorgan, Goldman and Morgan Stanley repaid a total of $68 billion in TARP funds.

Under the plan, the banks have 15 days from the time they repaid the funds to "submit a determination of fair market value" of the warrants to Treasury, according to its Web site.

The Treasury has 10 days after hearing from the banks to determine whether to accept their initial offers. The Treasury may make a counteroffer, but if an agreement cannot be hashed out, third-party appraisers selected by each party will be used to determine fair market value.

The Treasury will use "comparable securities" to value the warrants held by the institutions, it said. For large banks that includes "traded warrants, traded options and common equity issued by the institution, as well as similar securities of peer institutions," among other things, it said. For mid-size and smaller institutions, there are fewer comparable securities, so the Treasury will have to rely on other valuation methods, it said.