WASHINGTON -(Dow Jones)- The U.S. Treasury may have significantly overpaid for its investments in financial institutions, a government watchdog said Thursday, as criticism of the $700 billion financial rescue continues to build.
"Treasury paid substantially more for the assets it purchased under the [ Troubled Asset Relief Program] than their then-current market value," Harvard Law School professor Elizabeth Warren told the Senate Banking Committee.
Warren, who chairs a five-person congressional oversight panel overseeing the Wall Street rescue plan, said a report being released Friday by the group includes an analysis of 10 TARP transactions. Extrapolating that analysis for all of the purchases made by the Treasury in 2008 suggests Treasury paid $254 billion for preferred stock and warrants worth approximately $176 billion, a shortfall of $78 billion.
"They did not price for risk, that's what markets do," Warren said, suggesting the Treasury's lack of consistency had made the government funds a better deal for some institutions.
Details of the transactions used to come up with the number were not released.
The Treasury has frequently noted that many of its major investments - those in American International Group Inc. (AIG), U.S. automakers, and a second capital boost to Bank of America Corp. (BAC) - were made to maintain stability in the financial system, and are different than the $250 billion plan to inject capital into the banking system.
"Treasury has made long-term investments to stabilize the financial sector and get credit flowing, but more needs to be done," spokesman Isaac Baker said.
More broadly, both lawmakers and other government watchdogs were sharply critical about the way the program has been implemented; the ad hoc nature of the Treasury's efforts to stabilize individual financial firms; and the lack of transparency surrounding the program.
"For the sake of our economy and the public's confidence ... we must see a sharp change in the direction of the program," Senate Banking Chairman Christopher Dodd, D-Conn., said at the hearing. He said he wants to find out more details on whether Treasury overpaid for its investments, but that previous errors would not prevent better investments in the future.
"The fact that they made a poor one doesn't mean they can't do it right," Dodd told reporters.
The criticisms come as the Obama administration and new Treasury Secretary Timothy Geithner draft their plan for how to comprehensively address the credit crisis and restore confidence in the TARP program. Geithner is expected to announce the administration's plan next week, and various iterations of a "bad bank" to purchase toxic assets from bad banks and asset guarantees are widely reported to be under consideration.
The panel's ranking Republican, Sen. Richard Shelby of Alabama, described Treasury's actions as "haphazard" and "opaque," and suggested the Treasury had been disingenuous when selling the rescue package to Congress and the public in September. He also questioned why Citigroup Inc. (C) and Bank of America were originally deemed "healthy" banks when receiving capital injections, but had to be saved less than two months later with billions in additional funds when they continued to face duress.
Neil Barofsky, the special inspector general overseeing the TARP, said his office is opening an audit of Treasury's multiple investments in Bank of America, as well as how lobbyists are influencing the application process for banks to receive capital infusions.
"The most significant failing from a transparency standpoint: understanding the process and criteria Treasury used to decide who would receive TARP funds and what the recipients have done with the hundreds of billions of dollars that have been invested," he said.
Barofsky's office has significant authority to oversee the TARP, but lawmakers are already pushing to give him additional authority to bolster his authority to pursue criminal investigations. A measure quietly passed by the Senate on Wednesday evening would allow him to seize evidence and ask for warrants without receiving prior approval from the Department of Justice, as well as require the Treasury to address any problems found in audits done by the IG's office.
The three TARP watchdogs testifying Thursday suggested Treasury has to better communicate the purpose of TARP, describing to the public how the many announced programs form a cohesive strategy for stabilizing the financial system.
"Our money - and our economy - are on the line, and we all have a stake in the outcome," Warren said in her testimony.
Treasury's Baker said that the plan being unveiled next week by the administration would address many of the concerns expressed Thursday. It would include new protections, "so that taxpayers know where and how their money is being spent and whether it's achieving real results," he said.
-By Michael R. Crittenden, Dow Jones Newswires; 202-862-9273;
