????Taxpayers could get a $1 billion windfall as the government sells TARP securities to investors.

????By Colin Barr

????The U.S. government is preparing to cash in on its investment in JPMorgan Chase.

????On Thursday, the Treasury Department will auction off the stock warrants it received from the bank as part of its $25 billion Troubled Asset Relief Program loan.

????The warrants could be worth as much as $1.5 billion to taxpayers, according to one estimate -- though the results of an auction held last week suggest the feds may not get quite that much.

????JPMorgan (JPM, Fortune 500) repaid its TARP loan in June, but the New York-based firm declined to repurchase the warrants, which the government received for free as part of the deal. Warrants give the holder the right to buy stock at a certain price within a certain period.

????Under the terms of TARP, banks have the right to repurchase the 10-year warrants they gave the government, with the proceeds going to taxpayers as profits. A number of big banks including Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) made large payments to the government this past summer to buy back their warrants.

????A bank that declines to repurchase its warrants, for whatever reason, triggers an auction at which the government sells the warrants to private sector bidders.

????Treasury held its first warrant auction last week, reaping $147 million via the sale of warrants to buy shares in credit card lender Capital One (COF, Fortune 500). That's a nice chunk of change, though it was less than one researcher was expecting.

????Linus Wilson, a finance professor at the University of Louisiana at Lafayette, had estimated that Treasury could take in as much as $286 million on the Capital One warrants.

????Wilson said the results of the Capital One auction suggest investors are expecting the stock price to be relatively stable between now and when the warrants expire, in nine years. He had forecast bigger swings.

????Using the lower volatility assumption, Wilson said he now expects Treasury to receive as much as $1.5 billion for the JPMorgan warrants. His middle estimate is $928 million, or $10.50 a warrant.

????The minimum bid price is $8 a warrant. If the warrants sell at that price, Treasury will get $700 million.

????The advantage of the auction format is that it resolves questions about the fairness of deals negotiated behind closed doors. Early this year, Treasury appeared to allow some small banks that were repurchasing their warrants in private to underpay for the privilege, shortchanging taxpayers.

????"We can be cheered by the fact that the private investors" are now driving the valuations, said Wilson. "Security prices should be set by investors, not deals between Treasury officials and bank executives."