Treasury finally getting tough on banks

A $340 million warrant repurchase from credit card giant AmEx shows the Treasury, under pressure from Congress, is holding big banks' feet to the fire.

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By Colin Barr, senior writer

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AmEx chief Ken Chenault joined Goldman Sachs as one of the few bankers to fully repay TARP obligations.
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NEW YORK (Fortune) -- Don't look now, but the government has actually strung a couple modest victories together in its dealings with big banks.

American Express (AXP, Fortune 500), the New York-based credit card giant, said Wednesday it paid the Treasury Department $340 million to repurchase the warrants the bank issued in January after borrowing $3.4 billion under the Troubled Asset Relief Program. AmEx was among 10 banks that repaid their TARP loans last month.

The government accepted the warrants, which confer the right to buy shares later at a specified price, to compensate taxpayers for the risks they took on in the bailout of the financial system.

The AmEx deal is the second-biggest payment the government has received for the warrants. Last week, investment bank Goldman Sachs (GS, Fortune 500) wrote a $1.1 billion check to buy back its warrants. What's more, the AmEx repayment, like the Goldman one before it, appears to offer fair value to taxpayers -- unlike earlier warrant-repurchase deals with BB&T (BBT, Fortune 500), U.S. Bancorp (USB, Fortune 500) and numerous smaller banks.

"It seems that congressional pressure has significantly stiffened the negotiation stance of the U.S. Treasury," said Linus Wilson, an assistant finance professor at the University of Louisiana at Lafayette. "I hope that the TARP warrant repurchase prices of Goldman Sachs and American Express are a trend of things to come."

Scrutiny of the warrant repayment process has risen along with the price of bank shares. Though the warrants represent but a fraction of the $700 billion allocated to TARP, they have become a minor cause clbre because they offer a rare opportunity for the government to recoup some of the costs of the multitrillion-dollar bailout.

"Because the warrants that accompanied TARP assistance represent the only opportunity for the taxpayer to participate directly in the increase in the share prices of banks made possible by public money, the price at which the warrants are sold is critical," Elizabeth Warren's Congressional Oversight Panel said in its July 10 report to Congress.

Congress held a hearing last week on Treasury's handling of the warrants, and legislation introduced this month in the House would force Treasury to adopt a more open process.

Under current procedure, the government negotiates in private with banks over the price they will pay to repurchase the warrants. This has led some to snicker that Treasury is attempting another giveaway to bankers. It has also prompted calls for Treasury to move to an auction format, which should remove much of the guesswork about how to value the warrants.

The skepticism stems in part from the terms Treasury set for the warrants last fall, which were advantageous to banks. Wilson notes that though Goldman paid fair value for its warrants, taxpayers still made less than half the return of private investors in similar securities over the same period.

Of course, making money wasn't Treasury's primary motivation behind the TARP loans, as Congressional Oversight Panel member Richard Neiman noted this month.

"The total benefit to the American taxpayer has to take into account the non-financial as well as the financial returns," Neiman wrote in an appendix to the July 10 report. He cited TARP's role in "stabilizing and reviving the financial system during a very difficult period of time."

Still, watchdogs are cajoling Treasury to reveal more about its approach to the warrant deals, in the name of protecting taxpayer interests.

"While Treasury has provided some limited information about the valuation process, it has yet to provide the level of transparency at the transaction level that would begin to address such questions," the Government Accountability Office said this month in a report to Congress.

The Treasury Department issued a press release last month saying it "will begin publishing additional information on each warrant that is repurchased," including the details of negotiations and internal valuation models.

But so far, the government has published no such data on the Goldman or American Express warrants. Asked Wednesday when taxpayers might start seeing the additional information, a Treasury spokesman replied, "Soon."

Talkback: Should the Treasury Department do more to get banks to pay higher prices for their warrants? Share your comments below. To top of page

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