'The Biggest Warrant Auction in U.S. History'

Abstract

On December 10, 2009, the auction of JP Morgan Chase's warrants raised gross proceeds of $950 million, topping the previous warrant auction record of the 1983 Chrysler warrants in real and nominal terms. This paper analyzed the results from the secondary market trading on December 9, 2009, of the Troubled Asset Relief Program (TARP) warrants issued by Capital One Financial (COF) to estimate the likely auction price of the JP Morgan Chase (JPM) TARP warrants. The Capital One Financial warrants have displayed an implied volatility discount relative to other historic and implied volatility metrics. The paper translates the percent volatility discounts from traded TARP warrants to estimate the likely implied volatility of long-dated TARP warrants that have not yet gone to auction.

Anchoring bias in the TARP warrant negotiations

“…Jarrow (2009) outlines the various option pricing methods used at the U.S. Treasury and discusses how transaction costs may affect the U.S. Treasury's and the banks' estimates of fair market value. Wilson (2010) argues that, prior to the warrant auctions in December 2009, there were no call options or publically traded warrants that expired after 2014. Thus, using implied volatilities of traded warrants or call options of similar expirations to estimate volatility was not possible for the TARP warrants, which expire in 2018 and 2019, before the December 2009 auctions.…”

An Optimal ICO Mechanism

“…• Previous warrant auctions: JP Morgan Chase and Capital One Financial raising funds [Wil09] based on the high volatility due to the financial crisis while sharing the upside with the bidders as they recover.…”