Panel: Banks underpaying gov’t to exit bailout
WASHINGTON — The Treasury Department is selling its financial stakes in bailed-out banks for one-third less than they’re worth, potentially shorting taxpayers up to $2.7 billion, a bipartisan congressional watchdog said Friday.
Treasury countered by noting that banks, including JPMorgan Chase & Co., think the department’s asking prices are too high. Unable to agree on a price, some institutions are letting the department sell the warrants in public auctions.
While risky for both sides, the auctions give Treasury political cover amid growing criticism that its policies are too easy on big banks.
The shortfall estimated by the Congressional Oversight Panel concerns warrants, financial instruments that allow Treasury to buy shares of the firms at a set price in 10 years. If the stock prices of the banks go up, as they are expected to do, taxpayers could reap a healthy profit.
Treasury obtained the warrants when it began injecting billions into the nation’s largest financial institutions in October. They were considered a “deal-sweetener” — a way to help taxpayers benefit from the upside of a financial recovery that depended on billions of federal dollars.
Many large banks received permission to exit the program far earlier than was initially expected. Last month, Treasury announced that 10 of the nation’s largest banks — including JPMorgan, Goldman Sachs and Morgan Stanley — could repay about $68 billion of bailout money.
Treasury on Friday said the first large bank has completed negotiations with the government and repurchased its warrants. The government this week received $60 million from State Street Corp. of Boston to pay for the stock warrants. State Street had received $2 billion in bailout support from the government and repaid that money on June 17.
Twenty-two smaller banks already have repaid their bailout money, and 11 of those have repurchased their warrants. If the warrants for those firms “had been sold for their true market values, taxpayers would have recovered $10 million more,” according to a report Friday from the Congressional Oversight Panel, which was created by Congress to oversee the $700 billion bailout fund.
The warrants were sold at a one-third discount over their true prices, according to the panel’s study. If warrants in the more than 600 banks participating in the bailout were sold at such a discount, that would mean taxpayers received $2.7 billion less than the panel estimates the warrants are worth.
Treasury last month announced a method for valuing the warrants through negotiation with the banks. The agency’s offers reflect financial modeling and surveys of market participants.
The government also can sell the warrants in auctions instead of negotiating the prices. The panel said Treasury should consider holding open, public auctions to stop “any speculation about whether Treasury has been too tough or too easy on the banks.”
Treasury disputed the panel’s findings. Department spokesman Andrew Williams said the estimates are based on assumptions, so they may be higher or lower than the actual market prices of the warrants. “For that reason Treasury is using a more comprehensive approach to valuing the warrants,” including obtaining quotes from investors who buy and sell similar securities, he wrote in a statement.
As evidence, Williams pointed JPMorgan’s decision to let Treasury sell its warrants at auction — an indication the bank thought Treasury was asking for too much.
“We’ve taken this action, which is consistent with Treasury’s process … and which allows Treasury to find the true market price,” said JPMorgan spokesman Joseph Evangelisti.
Banks have been eager to exit the bailout quickly to avoid the stigma and exempt themselves from restrictions, including limits on executive compensation. Repurchasing the warrants is a necessary step, but has been challenging because of disagreement about the prices.
The oversight panel’s analysis was reviewed by three finance professors from Harvard Business School. The panel is headed by Harvard Law School professor Elizabeth Warren. She was the first to propose a new consumer protection agency for financial products, which has become a cornerstone of the Obama administration’s reform efforts.
One of the group’s Republicans, Texas Rep. Jeb Hensarling, warned against interpreting the report as critical of Treasury’s approach to the warrants.
“It is exceedingly difficult to predict the value of financial securities and time the markets over the short term much less the 10-year term of the TARP warrants,” he wrote.
_____
AP Economics Writer Martin Crutsinger contributed to this report.
Related News
Summary Box: FDIC weighs steps, including loans from banks, to shore up insurance fundSeptember 22nd, 2009 Summary Box: FDIC weighs steps to shore up fundTHE PROBLEM: The fund to insure deposits has been depleted by bank failures since the financial crisis struck. THE OPTIONS: Regulators could borrow billions from healthy banks, levy an extra fee on the industry, borrow from Treasury or collect banks' insurance premiums early.
AIG shares gain over 20 percent after talk of bailout revamp between key lawmaker, GreenbergSeptember 21st, 2009 AIG shares jump after talk of bailout revampWASHINGTON — Shares of American International Group Inc. jumped more than 20 percent Monday after the head of the House Committee on Oversight and Government Reform said that panel will examine a plan to reduce the company's massive bailout package.
Congressional investigators find AIG improving, but may never fully repay bailout fundsSeptember 21st, 2009 GAO: AIG improving but may never fully repay gov'tWASHINGTON — Despite some progress, congressional investigators on Monday cast doubt on whether efforts by American International Group Inc. to restructure its operations and pay back the government will ever prove successful.
GOP leader names former SEC commissioner Paul Atkins to bailout oversight panelAugust 20th, 2009 GOP adds ex-SEC commissioner to bailout watchdogWASHINGTON — Paul S. Atkins, a former member of the Securities and Exchange Commission and strong advocate of free-market capitalism, has been appointed to the congressional panel overseeing the $700 billion financial bailout.
Bad assets still threaten banks' stability, congressional watchdog saysAugust 11th, 2009 Watchdog says bad assets still threaten banksWASHINGTON — Despite signs that the financial system has stabilized, banks remain threatened by billions of dollars of bad loans on their balance sheets, and more could fail if the economy worsens, a congressional watchdog reports. In its latest assessment of the $700 billion financial system bailout, the Congressional Oversight Panel warns that banks still hold many risky loans of uncertain value.
Inspector general: Treasury has not adopted accountability measures for bailout programJuly 20th, 2009 Watchdog: Treasury bailout disclosure falls shortWASHINGTON — The government's main watchdog over the federal financial bailout says the Treasury Department has repeatedly failed to adopt recommendations aimed at making the $700 billion program more accountable and transparent. Neil Barofsky (buh-RAHF'-skee), the inspector general for the Troubled Asset Relief Program, says in a report to Congress that Treasury's inaction means taxpayers have not been told what the financial institutions that have received assistance are doing with the money.
Billions remaining in bank bailout fund drive debate in Congress over how to use itJuly 9th, 2009 Tens of billions remain in bank bailout fundWASHINGTON — The government has tens of billions of dollars left in the eye-popping $700 billion bank bailout fund created last fall, prompting a debate in Congress over what to do with it. The Treasury Department wants to keep the money at its disposal in case the economy gets worse.
Treasury OKs 3 more firms for mortgage relief program; $3.4 billion to Hartford FinancialJune 30th, 2009 Treasury OKs 3 firms for mortgage relief programWASHINGTON — The Treasury Department said Tuesday that it has approved three more firms for its mortgage relief program. The new approvals brought the number of companies participating in the mortgage effort to 23 with the total amount authorized for all of the firms rising to $17.98 billion out of a maximum of $50 billion the government has said it could spend on this program.
Obama administration pledges to strike proper balance with executive compensationJune 24th, 2009 Administration pledges to achieve balance in payWASHINGTON — The Obama administration is pledging to strike the proper balance in decisions about executive compensation at banks that have received billions of dollars of taxpayer bailout money. The Treasury Department says the administration is aggressively implementing the law that Congress passed to govern compensation and plans to achieve a balance that would discourage excessive risk taking while rewarding performance for top executives.
Treasury says decision on bank stock warrants tied to bailout program could come MondayJune 19th, 2009 Treasury: no decision yet on bank stock warrantsWASHINGTON — The Treasury Department and the nation's largest banks are still negotiating over what price the government should receive for stock warrants and an announcement has been delayed until next week. Treasury Department spokeswoman Meg Reilly says the announcement is expected no earlier than Monday.
Geithner defends plan to increase financial oversight, bolster powers of the FedJune 18th, 2009 Geithner defends plan to step up oversightWASHINGTON — Treasury Secretary Timothy Geithner says it is clear that the government could have done more to prevent the economic downfall. In prepared testimony, Geithner says that gaps and weaknesses in the regulatory framework governing banks and other financial institutions "presented challenges" to the government's ability to monitor and address risky market bets.
House chairman: Fed e-mails raise questions about merits of $20B Bank of America bailoutJune 11th, 2009 House chairman questions Bank of America bailoutWASHINGTON — The top Democrat on a House investigative committee says internal e-mails by Federal Reserve employees raise serious questions about $20 billion in government aid provided to Bank of America to buy Merrill Lynch. Rep. Edolphus Towns of New York calls the money a "dowry for a shotgun wedding." The chairman of the House Oversight and Investigative Reform Committee said Thursday that questions remain about what happened exactly and "who was holding the shotgun."
The panel is investigating claims that top government officials, including then-Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke, urged Bank of America to go through with the acquisition and not to disclose to shareholders the details of Merrill Lynch's deteriorating financial state.
US lets 10 big banks start repaying bailout moneyJune 9th, 2009 WASHINGTON - The US government has cleared the way for 10 big banks to start repaying billions of dollars in bailout funds, a crucial step in easing the adminstration' grip after an unprecedented series of interventions. The banks were deemed strong enough to leave the Troubled Asset Relief Programme (TARP) after months of lobbying and strong performances on recent stress tests, the New York Times reported Tuesday.
Tuesday's Treasury bond market at a glanceApril 21st, 2009 Treasury bond market at a glanceKey barometers in the Treasury market late Friday, compared with late Thursday. Price changes in the 10-year note and 30-year bond are per $1,000 invested:
10-year bond -3.13 +10.6330-year bond -7.81 +17.19
Yield Pvs Session1-month bill 0.02 0.023-month bill 0.09 0.096-month bill 0.13 0.142-year note 0.88 0.885-year note 2.21 2.1910-year note 3.22 3.1830-year bond 4.00 3.96Inflation note 1.40 1.35Federal Funds 0.11 0.07Municipal bonds(1) 4.93 4.94
(1)Bond Buyer index of 40 actively traded municipal bonds.
Pandit, other top US bankers to defend use of bailout fundsFebruary 10th, 2009 WASHINGTON - Vikram Pandit, Indian American chief executive of CitiBank, and the heads of seven other major American banks will defend the use of hundreds of billions of dollars in bailout money to lawmakers on Capitol Hill Wednesday. 'American people are right to expect that we use funds responsibly, quickly and transparently to help American families, businesses and communities,' Pandit is expected to say before the House Financial Services committee, according to prepared remarks.
Loading ...