How American Taxpayers Could Lose $9 Billion

WASHINGTON, June 25, 2009— -- The government loaned hundreds of billions of taxpayer dollars to help struggling banks, but giving out cash is always easier than getting it back -- and now taxpayers could end up shortchanged by as much as $9 billion.

As a part of dishing out of nearly $200 billion to 623 banks from the $700 billion Troubled Asset Relief Program (TARP), the Treasury department received warrants to buy common stock in these banks. So when banks pay back the actual bailout money, the government then has to work out deals with the banks for them to buy back these warrants.

But with big money at stake here, the crucial question is: How much are these warrants worth?

To date, only a handful of smaller-sized banks have bought back the warrants from Treasury and already some critics are crying foul, warning that taxpayers are getting shortchanged.

Linus Wilson, assistant professor of finance at the University of Louisiana at Lafayette, found that taxpayers could lose up to $9 billion if Treasury makes more deals like the first one they made.

That deal was with Old National Bancorp of Evansville, Ind.

Earlier this spring, the bank spent 10 days working on a deal with Treasury. The bank initially offered $600,000. Treasury countered with a number "well north of there," the bank's CEO Bob Jones told ABC News.

Eventually the two parties settled on a price of $1.2 million.

Jones called it "a good deal."

Wilson called it "the worst deal that Treasury has made." Treasury, he calculated, only recouped about 20 cents on the dollar.

The main problem, he contended, is that Treasury has not opened up the process to third-party investors. If the government had more possible buyers for the warrants other than only Old National Bancorp, that would likely have led to a higher price – and more money back into taxpayers' pockets.