http://www.bloomberg.com/apps/news?pid=20601087&sid=a5rt7SUG0QdQ U.S. Plan to Sell TARP Warrants Will Favor Banks, Wilson Says July 1 (Bloomberg) -- The Treasuryâs plan to sell warrants back to banks that are leaving the U.S. bailout program undervalues the securities by $525 million, said a University of Louisiana professor who has studied the process. The expected value of warrants for 10 of the largest banks that repaid their Troubled Asset Relief Plan funds earlier this year is $3.3 billion using the Treasuryâs valuation approach, compared with $3.82 billion with a more conventional method, Linus Wilson, a finance professor in Lafayette, Louisiana, said in an interview. Investors are debating whether taxpayers will be fairly compensated for the risk they took by providing rescue funds for the banking industry. Wilson contends prices on 10 buybacks so far were too low; bankers say the U.S. shouldnât get a short- term windfall. The Treasury said June 26 it will employ âwell- knownâ financial models to come up with fair values that use a range of assumptions about market conditions and dividends. âTreasury should be making assumptions that favor taxpayers,â Wilson said. âWith this statistical sleight of hand, the Treasuryâs approach favors the banks.â Estimates of the total value of all warrants outstanding vary from $5 billion by the Treasury to Wilsonâs projection of about $11 billion. The Congressional Budget Office pegs the value at $6 billion. The Treasuryâs formula corrects for âwell-documentedâ biases of some pricing models, the agency said. The regulatorâs approach is more appropriate for estimating the volatility of a three-month option that wonât be actively traded, Wilson said. Itâs less useful for determining the volatility of a 10-year warrant such as the TARP securities, he said. Exit Strategy Policy makers want to speed the withdrawal of the government from the banking industry, rather than attempt to maximize returns for the taxpayers by waiting for share prices to rise, Washington banking lawyer William Sweet of Skadden, Arps, Slate, Meagher & Flom said last week. âThe president has clearly stated that his objective is to dispose of the governmentâs investments in individual companies as quickly as is practicable,â the Treasury statement said. The Obama administration gave approval in June for 10 of the biggest U.S. banks, including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, to repay $68 billion of TARP funds. When the money was first obtained, banks had to give the Treasury preferred stock plus warrants to buy stock at a future date at a specific price, called the strike price. Negotiated Prices Banks will have 15 days after retiring government stakes to propose a âfair market valueâ for the warrants, the Treasury said last week in a statement. Should officials object to the estimate, up to three âindependent advisersâ will help set a price. If lenders donât make an offer, the warrants will auctioned off. Negotiations as planned by Treasury open the door to political favoritism and corruption, Simon Johnson, an economist at Massachusetts Institute of Technology, said in an interview. Johnson favors public auctions. âThe question is why wouldnât you sell these on the open market and the answer is that the banks would probably lose,â he said. Treasury is bound by contracts with the banks that set out a specific negotiating process, spokesman Andrew Williams said. Valuing the warrants may rile Congress because lawmakers including Sen. Jack Reed, a Rhode Island Democrat, have warned Treasury Secretary Timothy Geithner not to let banks buy back government stakes at discount prices. Senate Watchdog âI will be watching closely to ensure Treasuryâs pricing system works both fairly and efficiently for the benefit of taxpayers,â Reed said in a June 26 statement. At least 10 smaller banks have negotiated warrant buybacks with Treasury, including First Niagara Financial Group Inc., which paid $2.7 million, according to a statement this week. Itâs among the best prices Treasury has received so far, equal to 65 percent of what the warrants were actually worth, compared with an average of 48 percent for the 10 previous repurchases, Wilson said.