TARP Shortchanged Taxpayers $78 Billion, Panel Says (Update2)
Mark Pittman and Bob Ivry
Feb. 6 (Bloomberg) -- U.S. taxpayers are being shortchanged by about $78 billion through the Treasury Department’s bank bailout, the panel overseeing the program said.
The Treasury, when it was headed by Secretary Henry Paulson, received bank assets worth about $176 billion in exchange for capital purchases of $254 billion under the Troubled Asset Relief Program, the Congressional Oversight Panel said in a report today.
“The loss estimate is conservative,” said Representative Alan Grayson, a Florida Democrat on the House Financial Services Committee. “It could turn out that those assets in the end are worthless. These are massive handouts to favored institutions to try to make up with taxpayer money the mistakes they made with investor money.”
The public’s stake in the nation’s banking system continues to grow as first the Bush administration and now President Barack Obama’s team work to pull the U.S. out of the deepest recession in at least two generations. TARP, part of the more than $9 trillion the government has pledged to rescue the financial system, has guaranteed $350 billion to banks so far, with another $350 billion set for use in coming months.
Harvard Law Professor Elizabeth Warren, who is chairman of the oversight panel, said the Treasury’s strategy of giving the same aid to all banks “results in substantial subsidies that are disproportionately granted to the riskiest institutions.”
‘Near Par’
The panel asked Paulson in December to value taxpayers’ return on the investments, Warren said. According to Warren, he said they were made “at or near par,” meaning they received about $1 for every $1 invested.
The panel subsequently found the value to be about 66 cents on the dollar, Warren said.
“If the intent is to subsidize institutions then that should be made clear to the American people and we should have a good old-fashioned debate as to where we should spend our tax dollars,” Warren said today in a conference call.
Treasury spokesman Isaac Baker declined to discuss the panel’s report directly. He said Treasury officials have already “prevented a system-wide collapse” and plan to make an announcement next week.
Stabilize the System
“We will outline a comprehensive strategy to strengthen our financial system in order to provide American businesses and families the credit they depend on, while strengthening transparency and accountability measures so that taxpayers know where and how their money is being spent and whether it’s achieving real results,” Baker said today in an e-mail.
Financial companies have paid $270 million in dividends to the Treasury Department, according to TARP Inspector General Neil Barofsky. San Francisco-based Wells Fargo & Co. announced Monday it would pay a $371.5 million dividend to Treasury on Feb. 15.
Neel Kashkari, who runs TARP as a holdover from the Bush administration, told a Mortgage Bankers Association conference on Dec. 5 in Washington that the government isn’t “looking for a return tomorrow.”
“We are looking to try to stabilize the financial system, get credit flowing again, and over time, we believe that the taxpayers will be protected and have a return on their investment,” he said.
The study “does not explore whether these investments were the best means of achieving broader policy goals,” the report said.
Investment Policy
The oversight committee faulted TARP’s “one-size-fits-all investment policy” for the shortfall.
“The use of standardized documents probably contributed to Treasury’s ability to obtain speed of execution and wide participation, but it meant Treasury could not address differences in credit quality among various capital infusion recipients,” the report said.
More than 300 companies, from New York-based Citigroup Inc. to Saigon National Bank in Westminster, California, have received TARP money, according to Bloomberg data.
“From day one, it’s been apparent that Treasury’s interest leaned more favorably toward that of the bank’s, with taxpayers as simply an afterthought,” said Representative Scott Garrett, a New Jersey Republican on the Financial Services Committee. “Unfortunately, the actions of the Treasury ultimately resulted in negative, albeit foreseeable by some, consequences for the banks, and questionable benefit for the taxpayer.”
‘Hasn’t Helped’
TARP hasn’t succeeded in clearing bad assets from banks’ balance sheets, which would allow the companies to lend money and get the economy going again, said Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta. The KBW Bank Index of 24 financial institutions has fallen 58 percent from Sept. 15 through yesterday.
“It hasn’t cleaned up the asset side of bank balance sheets and it hasn’t helped bank uncertainty about bank balance sheets at all,” Miller said. “Uncertainty has now overwhelmed economic decision making.”
Paulson, who was succeeded last month by Timothy Geithner, designed TARP as a possible money maker.
“This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything,” Paulson said Oct. 20.
The analysis was conducted by the oversight panel’s financial and valuation advisory committee with the help of New York-based valuation firm Duff & Phelps Corp.
The committee was composed of Adam Blumenthal, a former New York City first deputy comptroller, Professor William Goetzmann of Yale University and Professor Deborah Lucas of Northwestern University.
Warren told Bloomberg TV today that she hoped the panel’s work would help shape the future direction of the bailout.
“Our job is to ask the hard questions and ask them and ask them and ask them until we get the answers,” Warren said.
To contact the reporters on this story: Mark Pittman in New York at mpittman@bloomberg.net; Bob Ivry in New York at bivry@bloomberg.net.
Last Updated: February 6, 2009 14:11 EST