Oversight panel warns of $2B in TARP losses
By Silla Brus
Posted: 07/10/09 12:01 AM [ET]
The government could lose out on more than $2 billion if federal officials continue to undervalue part of the financial bailout package, a government watchdog panel will say on Friday.
The Congressional Oversight Panel, working with a team of Harvard Business School professors, estimated that taxpayers had lost one-third of the value of the very small number of warrants that had already been sold by the Treasury Department.
The panel looked at the 11 banks that so far have repurchased warrants totaling $18.7 million. The panel’s best estimate of the value of those warrants was $28.3 million, meaning that the government sold the warrants at a significant loss to taxpayers, according to a draft of the report.
Warrants were one form of investment required in the bailout package so taxpayers could benefit from banks that returned to health with the aid of government money. The bailout package envisioned that the government would sell the warrants at a profit.
The warrants represented only 15 percent of the total value of the government's investment in the banks at the time of the aid. The warrants came as part of the controversial $700 billion financial bailout package passed by Congress last fall.
The oversight report cautioned that it is very early on in the process, and that the warrants sold so far represent less than one-quarter of one percent of the total value of the warrants. The panel estimated that total as $8.1 billion.
The "liquidity discounts" likely for small banks -- including the 11 that repurchased the warrants so far -- may also be significantly different for bigger banks that issued the vast majority of the warrants.
"If, however, liquidity discounts or any other rationales are accepted as a reason for taking only 66 percent of market value for the full group of warrants Treasury holds, the shortfall to taxpayers could be as much as $2.1 billion," according to the report.
"Banks have bought back only a fraction of on percent of all warrants issued, and the prices paid thus far may not be representative of what is to come."
Between mid-October and late-June, Treasury as part of the Troubled Asset Relief Program (TARP) injected roughly $240 billion in more than 600 banks in return for preferred shares and warrants.
Most recently, 32 banks, including 10 of the nations largest, have redeemed the preferred shares for a total of roughly $70 billion. The banks took steps to raise capital to repay the government after the Obama administration released the results of "stress tests" earlier this year.
The repayments were seen as a sign of improvement in the banking sector.
The bulk of those warrants -- some 70 percent -- were issued by J.P.Morgan, Bank of America, Morgan Stanley, Goldman Sachs, Citigroup and Wells Fargo. Treasury has not sold any of those warrants so far, according to the report.
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