Banks could shortchange taxpayers

Congressional Oversight Panel says Treasury has left money on the table when selling warrants to small banks exiting bailout program. Yet, Treasury did push one big bank.

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By Jennifer Liberto, senior writer

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WASHINGTON ( -- The Treasury Department is at risk of short-changing taxpayers by not collecting enough from banks trying to get out from under the government's thumb, according to a panel that watches over the federal bailout program.

The Congressional Oversight Panel warns that Treasury must drive a hard bargain with banks exiting the Troubled Asset Relief Program in a report released Friday that was unanimously approved by the entire five-member panel.

TARP is the $700 billion bailout enacted last October that Treasury has used to infuse capital into financial firms through complicated loans.

Chaired by Harvard University Professor Elizabeth Warren, the panel examined 11 small banks that were among the first to pledge to return their bailout money some months ago.

At issue are warrants that the government holds on the banks it has invested in. The warrants allow Treasury to buy a certain number of shares in the future at a certain price. Some banks returning bailout money are now seeking to buy those warrants back.

Treasury did apparently negotiate hard with one big bank: JPMorgan Chase. The bank confirmed Friday that it has decided the price Treasury assigned its warrants was too high, and the bank refused to buy it back at that price.

In fact, most of the warrants Treasury holds come from a handful of the biggest banks. In addition to JPMorgan (JPM, Fortune 500), Bank of America (BAC, Fortune 500), Morgan Stanley (MS, Fortune 500), Goldman Sachs (GS, Fortune 500), Citigroup (C, Fortune 500) and Wells Fargo (WFC, Fortune 500) account for 70% of Treasury's warrants.

The panel said that Treasury, in selling its warrants back to the 11 smaller banks, collected only two-thirds of what it could have and gave up an estimated $10 million.

All told, the government stands to give up as much as $2.7 billion if that 66% threshold applied to the entire population of banks for which it holds warrants, the panel said.

"With the first eleven repurchases, Treasury could have done a better job," said Linus Wilson, a finance professor at the University of Louisiana who has analyzed the warrant repurchases. "The way for Treasury to make their job easier is to adopt an optimistic value of the warrants, otherwise taxpayers will get a very bad deal."

However, the panel suggested that Treasury may weigh other public policy benefits when valuing warrants -- not simply seek to get the highest price.

For instance, Treasury should consider nonfinancial goals such as "stabilizing and reviving the financial system during a very difficult time," wrote panel member Richard Neiman, who is the New York state banking superintendent.

A Treasury spokesman said the valuation process is "consistent and clear" and done in a way that "protects taxpayers."

"We recognize that with non-traded securities, some will conclude that any price at which Treasury sells is too low, and some will say it is too high," spokesman Andrew Williams said in a statement. "And the problem is that model valuations alone do not represent what someone will pay for a warrant."

Treasury is using a "more comprehensive approach to valuing the warrants" that includes obtaining quotes from market players who buy and sell similar securities, Williams said.

In contrast to what happened with the first 11 small banks, JPMorgan didn't like the price that Treasury asked and has walked away from repurchasing its warrants, which will now be sold to the highest bidder in an open auction, spokesman Joseph Evangelisti said on Friday.

"If we don't come to an agreed-upon value, which is consistent with the Treasury's policies, we can revoke our right to purchase them," Evangelisti said. He added that the company "fully supports" the Treasury's valuation process and their executives have not complained about the valuation process.

Tricky business of returning TARP

Between Oct. 14 and June 26, Treasury invested about $240 billion in 600 different bank holding companies.

So far, 32 banks have returned $70 billion in bailout payments, most of which involved preferred shares. Most of the big banks have not repurchased their warrants.

Last fall, when TARP was first debated in Congress, lawmakers wanted the government to get warrants because they gave taxpayers a better opportunity to share the wealth at a later time.

The warrants are also prone to price haggling between the banks and Treasury.

The panel said Treasury could better maximize taxpayer returns by avoiding the haggling with banks from the start and go straight to selling the warrants through auctions, where buyers bid for the highest price, the panel said. Right now, Treasury policy allows the warrants to be sold at auction only after the bank has disputed a price and refused to repurchase its warrants.

An auction, the panel wrote, would have "the benefit of stopping any speculation about whether Treasury has been too tough or too easy on the banks." To top of page

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