Oversight board: Treasury overpaid $78 billion for bank stocks

Official faults former Treasury Secretary Henry Paulson for using a uniform standard in pricing stocks across the board, rather than pricing for risk according to each institution.

A Senate panel was told Thursday that the Treasury Department has overpaid $78 billion for bank stocks and warrants it took in firms participating in the Troubled Asset Relief Program, providing further ammunition to congressional critics who could thwart efforts by the Obama administration to ask for more financial sector aid.

Elizabeth Warren, chairwoman of the TARP congressional oversight board, told Senate Banking Committee members on Thursday that her group did a valuation study on the $254 billion in TARP transactions in 2008 and found that Treasury only received assets worth approximately $176 billion.

Warren laid blame on former Treasury Secretary Henry Paulson for using a uniform standard in pricing stocks across the board, rather than pricing for risk according to each institution.

"Despite the assurances of then-Secretary Paulson, who said the transactions were at par -- that is, for every $100 injected into banks, the taxpayer received stocks and warrants from banks worth about $100 -- the valuation study concludes that Treasury paid substantially more for assets it purchased under the TARP than their then-current market value," Warren testified.

Expressing shock, Senate Banking Chairman Christopher Dodd, D-Conn., called the $78 billion figure "a pretty large disparity." Warren noted that Paulson could have had some legitimate reasons for setting a uniform price. For example, he could have said it was easier to implement or that it was the quickest way to get money out to stabilize the financial sector -- but with the result of a larger subsidy from taxpayers to banks.

Banking ranking member Richard Richard Shelby, R-Ala., a strong TARP critic, was incensed. "They misled Congress. ... Did they not?" Shelby asked Warren. He then answered his own question. "Absolutely. ... They said one thing and did another." The study by Warren's committee is higher than a Congressional Budget Office estimate that found a subsidy of $64 billion on $247 billion worth of TARP transactions. Warren said she believes that the CBO numbers are understated.

The revelation will put additional pressure on Treasury Secretary Timothy Geithner to make sure he gets a better bargain on what he does with the remaining $350 billion in TARP funds. That's especially true with the difficult task in purchasing toxic assets from troubled banks -- such as devalued subprime mortgages -- that are weighing down their ability to lend.

Geithner must decide whether to pay the current market price, forcing already shaky banks to write off even more losses, or to pay more for their long-term prospects, which could force an even greater taxpayer subsidy. Complicating matters, many believe the Obama administration will have to ask for even more than the $700 billion Congress allocated for TARP. Geithner testifies before the panel Tuesday.

The administration has pledged greater transparency and at least $50 billion toward home-foreclosure prevention.

"The political support for putting up the money will not be there," said Sen. Robert Bennett, R-Utah. "I hope the administration will understand it."

Sen. Jim Bunning, R-Ky., noted that Geithner -- the former head of the New York Federal Reserve -- was with Paulson as he was making his TARP decisions.