Bank Bailout: Treasury Wrestles With Making Good to Taxpayers

Wondering how U.S. taxpayers are making out on our massive investment in financial institutions via  the federal Troubled Asset Relief Program? Thus far, not so hot.

The Congressional Oversight Panel, which lawmakers created last fall to monitor the progress of financial reform, said in a report released Friday that 11 small banks participating in TARP have repurchased their warrants from the Treasury Department at a price of only 66 percent of their market value. That amounts to $10 million less than taxpayers could’ve gotten if the banks had paid current market value for the warrants, according to COP.

Congress approved TARP in late 2008 on condition that the public lending its hard-earned dough get to participate in any upside if participating banks eventually returned to profitability. Firms that got money had to give the federal government warrants, meaning the right to buy their shares at a set price sometime down the road. The idea was that when a bank’s stock rose, Treasury could exercise the warrants, buy the shares at a below-market price and eventually sell them, pocketing the profits.

To date, however, taxpayers appear to be getting shortchanged. “These results may suggest that Treasury has not been successful in receiving fair market value for its warrants and in maximizing taxpayer returns,” the group wrote.

Fair enough. Then again, it’s worth remembering that repaying taxpayers, while obviously important, is not the only issue at stake. “Every dollar that goes to buying back these warrants reduces capital for banks and leaves them less able to expand their lending,” said Jaret Seiberg, an analyst with investor adviser Washington Research Group. “We were in the midst of the worst financial crisis in several generations, and one has to look at what is the greater good for the economy and the taxpayers.”

Right. Treasury must walk a fine line between maximizing repayment to taxpayers and ensuring that banks have the necessary capital to boost lending and help revive the economy.