Getting Full Value for Bailout Warrants

From a friend on the Hill:

Good news today. Some of you have noted that it is somewhat outrageous for the Treasury to privately price and sell warrants back to the banks that got TARP money instead of doing an open auction that will fetch the best price for the taxpayer. The Congressional Oversight Panel claims that the currently used secret process returns only 66 cents on the dollar to the taxpayer.

Mary Jo Kilroy, a freshman Democrat from Ohio, introduced a bill (HR 3232) to compel an open auction of these warrants with six cosponsors: Brad Sherman, John Boccieri, Betty Sutton, Jackie Speier, Marcia Fudge and Alan Grayson.

All of these members except Brad Sherman are in their first or second term in Congress, and all are Democrats. Sherman was the leader of the little noted but important ‘skeptics caucus’ that attempted to stop the $700B bailout in September.

There is also a hearing on the TARP warrant repayments on Wednesday. Many of you don’t have faith in Congress, but there are lots of crosscurrents and sometimes people here do show leadership.

Information on the bill is below.

Source:
PROFIT Act to Make Taxpayers, Transparency Priority in Bank Bailout Payback
July 16, 2009 4:21 PM
http://kilroy.house.gov/2009/07/profit-act-to-make-taxpayers-transparency-priority-in-bank-bailout-payback.shtml

Mary Jo Kilroy, a member of the House Committee on Financial Services, and 6 other co-sponsors file legislation to increase profit for Americans, increase transparency and remove any secrecy from ongoing negotiations between Treasury and banks

WASHINGTON—U.S. Rep. Mary Jo Kilroy filed legislation today that would maximize the profit due to the American people from the taxpayer bailout of banks and make the payback process between Treasury and the banks transparent to the public. H.R. 3232, the “Provide a Return on Financial Investment for the Taxpayer Act of 2009” (PROFIT) would ensure stock options owed to the American people would be sold in the open market for the best price, instead of the current practice where Treasury and banks negotiate behind closed doors.

On July 10, the investigative arm charged with oversight of the Troubled Assets Relief Program (TARP), released a report that said Americans could lose $2.7 billion if Treasury continues to sell stock warrants for approximately 66 percent of their value back to banks.

“The American taxpayer took on a great amount of risk to bail out banks whose dicey decisions hurt many Ohio families. Now the banks are making profits again after our help and taxpayers deserve to reap the full benefits in a transparent process,” Kilroy said. “The banks and Treasury are negotiating the repayment of this debt behind closed doors instead of allowing trading in the open market. We do not know if the current process is producing the benefits we are owed and a market-based approach would remove the secrecy and special interests and maximize the return on the taxpayers’ investment.”

In 2008, Congress passed the TARP and included provisions to ensure the taxpayers benefit from a turnaround in the financial sector. Banks were mandated to give stock options to the American people equal to 15 percent of the total loan provided by the taxpayer. These stock options, or warrants, are agreements for the taxpayer to purchase stocks at a preset lower price so when the companies’ stock prices rebound there would be higher returns for the taxpayers.

Kilroy’s bill would also remove a loophole that allows banks to choose whether they want to negotiate with Treasury or open the process to a public auction. The PROFIT Act would mandate the public auction process that the Congressional Oversight Program (COP) said “would be more likely to maximize taxpayer returns …” Kilroy was joined on the bill with six other original co-sponsors including Reps. Brad Sherman, John Boccieri, Betty Sutton, Jackie Speier, Marcia Fudge and Alan Grayson.

According to the July 10th COP report, at the time 10 of the nation’s largest financial institutions, and other small banks, had already repaid TARP funding, but less than one percent of warrants held by Treasury have been sold. This means that the process is still at an early enough stage that the maximum benefit for the taxpayer could be realized if the open market process is enacted now.

The PROFIT Act Would:

-Maximize profits for the taxpayers as part of the payback of loans from bailed out banks.

-Ensure transparency and an open process by eliminating the loophole that allows banks to negotiate behind closed doors with Treasury.

-More quickly divest the American government of any holdings of bailed out companies.

-Reform the current process early enough to fix the problems identified by the Congressional Oversight Panel before larger sales of warrants becomes final.

PROFIT Act of 2009 FAQ

What is a warrant?

A warrant is a security (such as a share in a financial institution) that gives the holder of the warrant the right to purchase securities from the issuer at a specific price within a certain time frame.

Why does the Department of Treasury have them?

Treasury received warrants in financial institutions that took funds through the Troubled Asset Relief Program (TARP) to compensate for the risk of investing American taxpayer dollars to bailout these troubled institutions.

Why are these warrants so important?

The warrants are the only opportunity American taxpayers have to profit from the risk they took in bailing out troubled financial institutions.

What is the total value of the warrants held by the federal government?

The Congressional Oversight Panel (COP), in its July 10, 2009, oversight report, estimates the value of the warrants to be between $8.1 billion and $12.3 billion.

What is the current process?
A bank wishing to repurchase its warrants must first submit an offer to Treasury. If Treasury objects to the bank’s determination, the warrants are evaluated by independent appraisers to establish the fair market value of the warrants.If a bank chooses not to repurchase the warrants according to the aforementioned process, Treasury has the discretion to dispose of the warrants as it sees fit over time, including through an auction process.
What is the problem with the current process?

COP found that the current process allowed 11 banks to repurchase their warrants at just 66 cents on the dollar. Furthermore, COP estimates that if Treasury continues to use this approach to repurchase all remaining outstanding warrants, American taxpayers could lose out on as much as $2.7 billion.

What does the PROFIT Act of 2009 do?

The PROFIT Act would require Treasury to sell all warrants in an open, public and transparent auction. Furthermore, the auction process would only apply to public institutions that received $250 million or more in TARP funds.

Why is an open, public auction the best way to value the warrants?

An open, public auction would utilize competitive market forces to allow the warrants to be sold to the buyer willing to pay the highest price.

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