Bank of America TARP Warrants Surge 12% on First Day of Trading

Bank of America Corp. bailout warrants climbed as much as 12 percent in the first day of trading after the U.S. Treasury Department sold the securities in a record-setting auction.

The sale grossed $1.57 billion after bids came in higher than some traders estimated, and the Group B warrants climbed 20 cents, or 7.8 percent, to $2.75 at 11:36 a.m. on the New York Stock Exchange. They rose as high as $2.85. The Group A warrants advanced 10 cents, or 1.2 percent, to $8.45.

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“Most of the guys that I talk to think the warrants were pretty rich at the auction levels, and they have gotten even richer,” said Tim Freeman, head of U.S. equity derivatives sales at Capstone Global Markets LLC in New York.

Investors are trying to duplicate profits from earlier Treasury auctions of bailout warrants tied to JPMorgan Chase & Co. and Capital One Financial Corp., which rose more than 30 percent in 30 days. The Treasury is trying to fulfill a vow by President Barack Obama to recover “every single dime” contributed to the $700 billion Troubled Asset Relief Program while divesting stakes in U.S. lenders as soon as possible.

The 150.4 million Group A warrants were priced at $8.35 each, compared with the minimum bid of $7, while the 121.8 million Group B warrants sold for $2.55, compared with the base bid of $1.50, the Treasury said today in a statement.

Record Sale

The sale grossed $1.57 billion, eclipsing the $950.3 million from the Dec. 10 auction of JPMorgan Chase warrants and the $1.1 billion that Goldman Sachs Group Inc. paid to repurchase its warrants in July. The Treasury netted $1.54 billion after commissions and fees, bringing the total generated from warrant sales to about $5.5 billion.

Deutsche Bank Securities Inc. led the sale, which is expected to close about March 9, the statement said.

“Treasury got a good price,” said Bernard Chriqui, a trader at Nomura Securities International Inc. in New York. “The A warrants were picked up at a fair value by investors with a longer-term outlook, versus opportunistic investors looking to make a short-term profit.”

Banks have repaid $129.8 billion of the $204.9 billion borrowed under TARP’s Capital Purchase Program, according to a Treasury transaction report. U.S. companies also have paid more than $12.5 billion in dividends and $476.9 million in interest as of Jan. 31, according to a separate Treasury report.

The Group A warrants expiring in January 2019 may be converted into an equal number of common shares at $13.30 apiece. The Group B warrants expiring in October 2018 may be converted at $30.79 each. Bank of America, based in Charlotte, North Carolina, gained 6 cents to $16.43.

Hedge Funds

Paulson & Co., the hedge fund run by billionaire John Paulson that counts Bank of America among its largest holdings, told investors in a quarterly letter that the stock might rise to almost $30 by December 2011. As of Dec. 31, Paulson’s firm owned 18.7 million of the JPMorgan TARP warrants, according to a filing by the firm.

Bank of America granted the warrants to the Treasury after the lender took bailouts totaling $45 billion, which it returned in December. After repaying TARP money, banks get a chance to negotiate a price to buy back the warrants. If talks fail, the warrants are auctioned; banks get none of the proceeds. Bank of America spokesman Scott Silvestri declined to comment.

The Treasury turned to auctions after the Congressional Oversight Panel said July 10 that the department sold warrants back to 11 small banks in negotiated deals for about 66 percent of their value. The government’s take subsequently improved to 92 percent of the estimated value, the panel said in a Feb. 10 report.

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