U.S. Treasury Does Not Charge a Risk Premium in Purchase of Bank Preferred Stock with TARP Money

The Bush administration received assets that were worth $78 billion less than the amount it invested as part of the massive infusion of capital into the country's banks, congressional investigators have found.

The investigators concluded that the Treasury under the federal bailout had invested $254 billion into companies but the preferred stock it got in return had a market value at the time of only $176 billion, or 69 percent of what the government paid, according to a congressional oversight panel report scheduled to be released today.

Elizabeth Warren, the chairwoman of the panel, said former Treasury secretary Henry M. Paulson Jr. had promised that the government would buy the assets at their market value and that it was alarming that he didn't do so. "At various points, Treasury has articulated policy objectives which could result in a program involved paying substantially more for investments than they appear to have been worth at the time of the transaction," she said in written testimony submitted to the Senate Banking Committee yesterday. "The American people want to know what's going on and they deserve answers.

The panel's findings do not imply that the government has lost money on the investment because companies are still required to repay the amount invested plus interest. The lower market value determined by the panel reflects the risk that companies will default on those obligations. The panel found that a private investor would have charged significantly more to invest the same amount in the companies because of the greater risk and that the government did not charge this premium.

Lawmakers were furious about the panel's findings and said they provided an example of incompetence and waste in the government's $700 billion bailout program.

"Isn't that a terrible way to look after the taxpayers' money and to make purchases anywhere?" Sen. Richard C. Shelby (R-Ala.), ranking member on the Senate Banking Committee, said at a hearing on oversight of the bailout.

Warren replied, "Senator, Treasury simply did not do what it said it was doing."

"In other words, they misled the Congress, did they not?" said a visibly flustered Shelby.

Michele A. Davis, a spokeswoman for Paulson, could not be reached for comment.

Paulson repeatedly said in announcing details of the bailout that the government would not lose money because of the plan and might actually profit from it. "This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything," Paulson said in October.

Obama administration officials did not echo the congressional concerns about Warren's findings, saying that the goal of the investments was to calm the economy. These officials noted that the purchases had already yielded $271 million in dividend payments, though they added that they would reconsider how valuations are done for the next group of bailout purchases. "Treasury's efforts since the fall prevented a systemwide collapse, but more needs to be done to stabilize the financial sector, increase lending and protect taxpayer dollars," Treasury spokesman Isaac Baker said.

According to the analysis by the oversight panel, the Treasury invested $40 billion in American International Group, the insurance giant, and received shares of equal face value but worth only $14.8 billion, or 37 percent of the price it paid. It said the real value of the $10 billion in Morgan Stanley that the government purchased was only $5.8 billion, or 58 percent of what it spent.

The study was conducted for the panel by the international valuation firm Duff & Phelps, which analyzed the 10 largest bailout investments and then extrapolated. For the eight banks it studied that were relatively healthy, the Treasury received assets worth $78 for every $100 it invested. In the two transactions for the riskier firms, the government received preferred shares worth $41 for every $100 it invested.

Those findings follow a five-page report by the Congressional Budget Office last month that also determined the government spent more on the assets than they were worth, but that study was far less detailed and estimated the total discrepancy was $64 billion.

Lawmakers and outside analysts have previously criticized the government for purchasing the assets on terms that were far less profitable than those procured by private investors. The congressional oversight panel's analysis provided an example in which one private investor received $123 worth of securities for every $100 invested.

Warren said a major part of the reason for the discrepancy between what the Treasury paid and the value of the assets that it received was a uniform pricing scheme used by the government, which did not account for the relative health of each institution included in the bailout.

"The best way I can explain it would be is if we had 10 paintings in front of us and I announced that I was going to pay a million for each painting. And one was a Picasso, and, you know, one was a Rembrandt and the other seven were not," she said. "They did not price for risk. That's what markets do."

Treasury Overpaid for Bank Assets in Bailout, Oversight Panel Says

By Amit R. Paley
Washington Post Staff Writer
Friday, February 6, 2009; A03