Financial Regulatory Forum

Overseer says U.S. treasurer undercharges for warrants

July 22, 2009

WASHINGTON, July 22 (Reuters) – U.S. taxpayers could be short-changed by $2.7 billion if the Treasury Department continues to undervalue warrants it received in return for pumping money into big banks, an overseer of the government’s bailout program warned on Wednesday.

In prepared testimony for delivery to an investigative subcommittee of the U.S. House of Representatives Financial Services Committee, Elizabeth Warren said banks allowed to repurchase warrants so far had paid only about 66 percent of their true value.

Warren chairs the Congressional Oversight Panel, set up to monitor use of the $700 billion bailout program, known as the Troubled Asset Relief Program, or TARP, that Congress approved last year.

In return for giving banks money, the Treasury received warrants to buy stock in them. The warrants were supposed to give taxpayers a chance at sharing in the banks’ future profits.

Warren said 11 small banks allowed to repurchase warrants had paid only 66 percent of what the oversight panel calculated they were worth, for a loss to taxpayers of about $10 million.

Some big banks that received taxpayer funds are now arguing with the Treasury, trying to negotiate the lowest possible price for buying back the warrants and thus becoming free of any government influence.

Warren said taxpayers will lose out if banks are permitted to pay less than fair value for the warrants.

“If Treasury continues to accept only 66 percent of the panel’s estimated market value for the rest of the warrants it holds, the shortfall to taxpayers could be as much as $2.7 billion,” she said.

Warren’s panel is one of three bodies given oversight responsibilities by the law that established TARP.

In testimony to the same panel, the special inspector general for TARP, Neil Barofsky, said he will conduct an audit of the warrant repurchase and sale process, including whether the Treasury follows “a clear and consistent process” in setting prices.

“SIGTARP, if appropriate, will issue recommendations with the report of this audit,” Barofsky said. He did not say when he expects it to be completed. (Reporting by Glenn Somerville; Editing by Dan Grebler)

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