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.
"Most homeowners don't sell their house to the previous owner. They usually find that a new buyer is willing to pay a higher price," Wilson noted. "Treasury's current approach of selling the taxpayers' warrants back to the banks who sold them in the first place has led to very bad deals for taxpayers."
Another problem, he said, is that bank CEOs like Jones are "more closely aligned" with their shareholders than Treasury's negotiators are with American taxpayers.
For his part, Jones acknowledged, "My primary role is to make sure I get the best value for my shareholders," but added that just across the negotiating table, Treasury was "very firm in their role to protect the taxpayer."
With about $11 billion worth of warrants, according to Wilson's estimates, the government had better be firm: a trio of oversight groups is already on the case.
The Government Accountability Office recently cautioned that Treasury's "limited" transparency about the valuation process has hurt taxpayers' chances of getting back a good chunk of their money from sales of the warrants. Specifically, the federal watchdog agency noted in a June report that Treasury has not revealed the initial offers made by either the department or the financial institution.