The Next Big Bailout Bamboozle
One of the main watchdogs over the government's $13 billion financial bailout, the Congressional Oversight Panel, released its monthly report for July today, bringing some much needed scrutiny to the repayment of TARP funds and the Treasury Department's questionable oversight of that process. The COP highlighted the sale of government-held warrants (options to buy stock for a set price over a predetermined time period) back to bailout recipients exiting TARP, who, according to Treasury's guidelines, get the first crack at repurchasing their own warrants. This repurchasing process began earlier this spring, when the first bailed-out banks bought their stocks and warrants to extricate themselves from the taxpayer-funded TARP; since then, the process has been dogged by numerous reports showing that the Treasury sold warrants for much less than they could have. By one estimate, taxpayers were shortchanged in those early transactions by millions of dollars.
The COP's latest report puts a number to what many suspected: The Treasury, the panel estimates, sold warrants back to the 11 small banks who've so far completely exited the bailout for only 66 percent of their value. If the Treasury had sold them for closer to market value, taxpayers could’ve recouped $10 million more—a small sum compared to the entire bailout, but nothing to scoff at. And though the warrant-repurchasing process will differ for megabanks like JPMorgan Chase, Wells Fargo, and several others currently trying to buy back their warrants, applying that 66-percent rate to all government-held warrants could result in a loss of $2.7 billion.
If you've closely followed the COP's reports, you'll notice a troubling similarity to previous reports in this latest finding. The panel's widely cited February report (PDF), which analyzed the Treasury's 10 largest TARP investments in 2008, found that the Treasury had received, on average, only $66 for every $100 spent, resulting in a $78 billion shortfall. (This while Berkshire Hathaway received $110 assets for every $100 when it invested in Goldman Sachs, and Mitsubishi received $91 in assets for every $100 invested in Morgan Stanley.) Which means that the Treasury received a 34-percent markdown on assets it bought (with taxpayer money) last year with its early TARP investments, and received only a 34-percent markdown for its early warrant sales back to banks.