Unwarranted premium

JPMorgan warrants: Goldman Sachs seems to have uncharacteristically misjudged a market. The security in question is 10-year warrants linked to the government's banks rescue.

The US Treasury received what are effectively options to buy stock when it invested in the banks at the nadir of the crisis - and now they're being sold.

Having repaid funds from the Troubled Asset Relief Program, some firms are buying back their warrants’ too. Goldman, for instance, paid Treasury's $1.1 billion asking price. Others opted for Treasury to sell them to the highest bidder. Two recent auctions imply that Goldman, for one, overpaid. JPMorgan's warrants yielded just under $1 billion, as announced by Treasury on Friday. It's hard to quibble with the price, since the market determined it. But it's also a lot less than Treasury wanted in private negotiations with Jamie Dimon, JPMorgan's chief executive.

 

The sale may have pulled in as much, or even a little more, than Dimon was willing to pay. Still, JPMorgan's share price has increased since those discussions, which makes the warrants worth somewhat more too. The auctions so far have delivered valuations lower than Treasury in some cases managed to negotiate for itself - and lower than most experts predicted.

Goldman paid more than 70 per cent of the face value of the stock underlying its warrants, and Morgan Stanley a little less on this measure. The Capital One and JPMorgan warrants, by contrast, each sold for around a quarter of face value. There's a lot to be said for a market-driven process. But each new piece of information is making Goldman's buyback look pricier. Sure, the firm's share price at the time was some 30 per cent above the warrants' strike price. And arguing with Treasury probably seemed risky, given the uproar over Goldman's expected bonuses. Even so, if Treasury isn't getting the prices it had hoped for at auction, there's at least one consolation. Tim Geithner and his overworked staff may have achieved a rare feat: persuading the masters of the universe at Goldman to pay well over the going rate.