One of the three banking companies whose warrants are to be auctioned by the Treasury Department in the next month is interested in making a bid, and industry experts say the others are probably exploring the option as well.
Jason Korstange, a spokesman for TCF Financial Corp., said the Wayzata, Minn., company may bid for the 3.2 million warrants it issued to the Treasury in exchange for $361 million in federal aid.
"If the price is good, we'll probably bid. I don't know why we wouldn't," Korstange said. "We did offer the Treasury a bid in the past, and they declined that."
TCF would like the warrants back to prevent its shares from being diluted if the warrants are exercised by outside investors, he said. Though such dilution "wouldn't be the worst thing in the world," given how it would probably translate into tens of millions of dollars of capital if the warrants are exercised by their new owner, Korstange said, it is something the company would like to prevent if it can get a good deal.
"If indeed the warrants are priced at a level that makes sense for us," he said, "we will put a bid in and see where the auction takes us."
The Treasury said on Thursday that it would hold a modified Dutch auction within a month for the warrants it holds from TCF, JPMorgan Chase & Co. and Capital One Financial Corp. All three have since returned the combined $28.9 billion in bailout money they received last year. But they opted not to repurchase their warrants when negotiations with the government fell through.
The Treasury, JPMorgan Chase and Capital One did not return calls seeking comment.
Linus Wilson, a finance professor at the University of Louisiana at Lafayette, said the other two lenders are probably weighing bidding for their warrants. Though price is a key factor, Wilson said these firms also must decide whether repurchasing securities is the best use of their capital right now.
"When you buy back your warrants, you are reducing your common equity capital — it's costly to raise new common equity," he said. "If a bank doesn't think they are going to get a bargain, they just might want to sit out."
By his estimates, the warrants the government holds in JPMorgan Chase could be worth as much as $2.7 billion, and Capital One's could be worth as much as $393 million. He did not have a comparable estimate for TCF.
There could be another stumbling block: Wilson said it is possible the Treasury will try to curb the potentially unfair advantage these banking companies have in bidding on their own warrants. No one can predict with 100% accuracy how a company's shares will perform over the long term, but these companies probably have a better idea than outsiders, thanks to internal earnings projections, he said. The Treasury could limit this advantage by setting a different bidding standard for the banking companies or by holding multiple bidding rounds, he said.
Gary Townsend, the chief executive of Hill-Townsend Capital LLC, said it is unclear whether these companies might get a better deal in the Dutch auction than they would have in buying directly from the Treasury.
"The fact that they didn't execute on a repurchase earlier may be a disadvantage — their share prices have moved up in the last couple of months," he said. "If they purchased them earlier, they could have purchased them cheaper."
Whether these companies win back their warrants or not, there is one clear advantage to the auction: They will not be tethered to the government any more. "They paid back the Tarp. Part of the entire program was the warrants. Now the warrants are gone — they're free and clear," said William Smith, the president and chief executive of Smith Asset Management Inc. in New York.
