Value of Bank Repayments Draws Scrutiny

The banks participating in the federal bailout program could end up repaying the government as much as $2.1 billion less than taxpayers are entitled to under a plan being implementing by the Obama administration, according to a new congressional oversight report.

The report, scheduled to be released today, addresses the financial instruments, known as warrants, that the banks sold to the federal government as part of the $700 billion bailout effort launched last fall. The Treasury Department is allowing banks, including 10 of the nation's largest, to exit the program, which would require them to buy back the warrants from the government.

The five-member Congressional Oversight Panel, which oversees the bailout initiative, looked at 11 small banks that have repurchased their warrants from the Treasury for $18.7 million. The panel's study found that the warrants were sold for only 66 percent of their estimated value, meaning that taxpayers would have recovered $10 million more if the securities had been sold at their market value.

If the full group of warrants is valued that way, taxpayers could be shortchanged by as much as $2.1 billion, the study concludes. But the report notes that the sales to small banks are likely to be affected by market forces that do not apply to bigger financial institutions, which could reduce the overall shortfall to taxpayers. Warrants are essentially the right to buy shares of a company at a fixed price in the future. For example, a warrant could allow the government to purchase shares of a financial institution for $100 over the next decade. If the shares rise above $100, the government could buy them for less than their market value and then turn around and sell them for a profit.

The panel, chaired by Harvard Law School professor Elizabeth Warren, noted that the Treasury may be choosing not to maximize returns to taxpayers in order to allow banks to exit the program as quickly as possible. They also pointed out that the program is in its very early stages, and the prices paid so far may not be representative of valuations in the future.

The oversight group says in the report that the best option may be to sell the warrants in an open public market in order to increase transparency and boost returns for the government.

Andrew Williams, a Treasury spokesman, said that the department "has laid out a consistent and clear process for valuing warrants in a manner that protects taxpayers." He added: "Treasury is using a more comprehensive approach to valuing the warrants that includes obtaining quotes from multiple market participants who regularly participate in buying and selling similar securities."