Merkley: Treasury Tarp Buyback Could Cost Taxpayers $2.7 Billion

Merkley: Treasury Tarp Buyback Could Cost Taxpayers $2.7 Billion

Oregon’s Senator Urges Geithner to Pursue a Better Deal for American Taxpayers

– 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 taxpayers lose.”

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 independent appraisals.

“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.”



July 10, 2009




The Honorable Timothy Geithner

Secretary of the Treasury

U.S. Department of Treasury

1500 Pennsylvania Avenue, NW

Washington, DC 20520


Dear Secretary Geithner:


I 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. 


While 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. 


I 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. 


Obtaining 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 emergency investment. 


I look forward to hearing your response and stand ready to work with you on these important issues.





Jeff Merkley

U.S. Senator