Taxpayer Concerns Mounting Over TARP Warrant Sale

Will taxpayers receive what they are owed as banks pay back the government?

May 22, 2009 -- Concerns are growing that taxpayers could receive billions of dollars less than they are owed as bailed-out banks and financial institutions try to pay back the money provided by the government to rescue the industry.

At issue are warrants the government now owns as part of the $700 billion Troubled Asset Relief Program. As many banks such as Goldman Sachs and JP Morgan Chase clamor to pay back the TARP money they received, they also have to buy back these warrants from the government.

The question is how much these warrants are worth.

Only one bank -- Old National Bancorp in Evansville, Ind., -- has both paid back the government the TARP funds and reached a deal to buy back the warrants owned by the government. According to data compiled by Bloomberg, in that deal Treasury sold warrants that would have been worth up to $5.8 million in the open market for only $1.2 million. If Treasury Secretary Tim Geithner gives below-market deals with other lenders, Bloomberg determined, then taxpayers could give up almost $10 billion in profits to the banks.

In a letter sent to Geithner today, Sen. Jack Reed, D-R.I., urged the Treasury chief to make deals that help taxpayers get their full share of the TARP rewards.

"If taxpayers are going to be exposed to downside risk, then they must share in the potential success of these financial institutions as they begin to recover," wrote the lawmaker. "We need to ensure that the financial industry recovers and that banks can start lending again, but taxpayers must be fairly compensated as well."

On Wednesday, President Obama signed a bill -- the Helping Families Save Their Homes Act -- that included an amendment giving Geithner the ability to sell or exercise the warrants at his discretion.

"With this new leverage to hold the warrants after financial institutions repay TARP funds, I believe we now have the tools to ensure that taxpayers are appropriately compensated," Reed told Geithner. "I will closely monitor the purchases of the warrants. Also, in light of news reports that some financial institutions are lobbying to have the warrants expunged entirely, I remind you that there is no legal authority for the Secretary of the Treasury or any other official to surrender these instruments without requiring adequate compensation to taxpayers."

Geithner, GOP at Odds on Rescue Efforts

Geithner said Wednesday that Treasury intended to sell the warrants as quickly as possible.

"I think that in general our objective will be to sell these as quickly as we can," he told Sen. Mark Warner, D-VA, at a Senate Banking Committee hearing. "We think that's probably going to be the best way to maximize value. And we've got a carefully designed fur in place to make sure we're getting the best price for those warrants as possible...What I'm a little reluctant to do is have the government be in a position where we hold these investments for a long period of time, longer than is desirable, in the hopes we're going to maximize value."

The next day, at a hearing before the House Appropriations Subcommittee on Financial Services, Geithner told the panel's chairman, Rep. Jose Serrano, D-N.Y., that Treasury would use outside market-based pricing to make sure taxpayers received fair value from the sales of the warrants.

"The way it works now is firms have the ability to come and repurchase and if they do that, we have an elaborate process in place to try to make sure that we use outside market-based pricing to judge the appropriate value to the taxpayer in that context," Geithner said. "If they don't want to repurchase, we still have the right to sell those warrants into the market and we'd use an auction procedure, if we do that, to make sure, again, we're getting the best price for the taxpayer. We have to make a careful judgment about what the right timeframe is in which to dispose of those warrants and that's something we're thinking through carefully now."

ABC News' Dan Arnall and Charlie Herman contributed to this report.