WASHINGTON, DC – A report released today by the
Congressional Oversight Panel (COP) of the Trouble Asset Relief Program (TARP)
details how the current buyback policies could be costing taxpayers billions of
dollars. Oregon’s Senator Jeff Merkley asked the Treasury Department to
pursue a new course that would ensure taxpayers’ investments in troubled banks
are fairly redeemed.
“When financial institutions were on the brink of collapse,
the American taxpayers stepped in and saved those institutions. In
exchange, taxpayers were guaranteed a share in the profits as those banks
recovered. Unfortunately, the Treasury Department is pursuing policies
that are undervaluing taxpayer investments,” said Merkley. “The TARP
program cannot be yet another case where it’s heads Wall Street wins, tails
When the TARP program was implemented last year, financial
institutions were required to give the government warrants that could be used
for the future purchase of common shares of stock. If the value of the
bank stock prices went up as our financial systems recovered, those warrants
would ensure that taxpayers made a profit.
However, as banks have sought to end their involvement in
the TARP, the Treasury Department is implementing a buyback program that does
not require the warrants be redeemed at market value. Instead, the
program allows banks to negotiate prices directly with the federal
government. Since banks have an incentive to underestimate the value of
the warrants, taxpayers are at great risk of seeing their profits evaporate.
In at least one case, this has already occurred.
Bloomberg News has reported that Old National Bancorp bought back their
warrants for $1.2 million. Others estimated these same warrants may have
been worth $5.81 million. While Treasury has subsequently modified their
system for valuing warrants, the COP found that the new formula could still
cost taxpayers $2.7 billion in lost profits.
Senator Merkley today urged Treasury Secretary Timothy
Geithner to publicly auction warrants to determine a fair market value.
Barring that, he advocates the Treasury Department adopt assumptions for values
based on models more commonly used in the marketplace, such as using
“The Treasury Department needs to be a strong advocate on
behalf of its shareholders – the American taxpayers,” said Merkley.
“Taxpayers, just like private investors, should be entitled to the full upside
on their emergency investment.”
Honorable Timothy Geithner
of the Treasury
Department of Treasury
Pennsylvania Avenue, NW
write to express serious concern with the valuation process for selling
warrants acquired from investments made under the Troubled Assets Relief
Program (TARP). I was deeply troubled by the valuation of the warrants
repurchased by Old National Bancorp in May. I strongly believe that
taxpayers deserve the full “upside” for their TARP investments, which these
warrants are meant to provide.
I commend the Treasury Department for taking steps to increase disclosure
regarding the valuation process, based on the information detailed in today’s
Congressional Oversight Panel report, I am concerned that the warrants continue
to be undervalued. Specifically, the report suggests that the Department
is systematically adopting assumptions that lead to valuations significantly
below that which private actors would demand. If applied to all warrants,
the government could be giving up $2.7 billion or more. This is unfair to
taxpayers. Moreover, it creates incentives for early repayment of TARP,
which could be dangerous to the broader purposes of economic stability and
lending which TARP was meant to promote.
continue to believe that publicly auctioning the warrants is the best way to
ensure fair valuation. At a minimum however, the Department should
strengthen the present valuation process and adopt assumptions for its models
that are more commonly used in the marketplace. Because valuations will be
negotiated, the Department should initially apply the most favorable
assumptions possible to counter what are certain to be unreasonably low bids by
the banks. Furthermore, the Department should not hesitate to use the
independent appraisal process. In short, Treasury should take seriously
its role of advocate on behalf of the taxpayer.
the maximum value on the warrants is a matter of basic fairness to my
constituents in Oregon and taxpayers across the country. Taxpayers, just
like private investors, should be entitled to the full upside on their
look forward to hearing your response and stand ready to work with you on these