On July 22, 2009, the House Financial Services Committee’s Subcommittee on Oversight and Investigations held a hearing entitled “TARP Oversight: Warrant Repurchases and Protecting Taxpayers”. Testifying before the Subcommittee were the following witnesses:
- Herbert M. Allison, Jr., Assistant Secretary for Financial Stability, U.S. Department of the Treasury
- Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program (SIGTARP)
- Professor Elizabeth Warren, Chairwoman, Congressional Oversight Panel (COP)
- Thomas J. McCool, Director of the Center for Economics, Government Accountability Office (GAO)
Subcommittee Chairman Dennis Moore (D-KS) began the hearing by noting that, after favorable results from the Federal Reserve’s stress tests, ten of the largest bank holding companies were allowed to repay $68.2 billion of TARP funds. Some firms were also seeking to repurchase the warrants that the Treasury Department obtained from firms receiving TARP funds. Old National Bancorp was the first TARP recipient to repay TARP funding, and based on a review of the repayment, Mr. Moore noted that “Treasury missed a return of an additional $5.4 million.” A later COP report noted that Treasury was only receiving 66% of the value of the warrants repurchased.
Mr. Allison began his testimony by describing the procedure under which a TARP recipient repays Treasury’s investment under the Capital Purchase Program (CPP). A firm is entitled to a repurchase price determined at fair market value through an independent valuation process. If the firm and Treasury cannot agree on the process, then the warrants may be sold by Treasury using an auction process. He stated that Treasury had the following policy goals with respect to the warrant repurchases:
- Disposing of the government’s investments as quickly as possible rather than holding for a substantial period;
- Future value of the warrants will be reflected in the current valuation, meaning that Treasury will obtain the expected future benefit even if it does not hold the warrants; and
- The valuation models take into account the decaying value of the warrant as its term expires.
Mr. Barofsky stated that, as Special Inspector General of the TARP program, he began coordinating his efforts with other agencies to determine the value of the warrants repurchased, including two other Subcommittee witnesses, Ms. Warren and the other members of the Congressional Oversight Panel and Mr. McCool and GAO. He also reviewed steps that his department was recommending to improve transparency in the TARP program, specifically:
- Requiring a specific disclosure of the actual use of funds by TARP recipients
- Regular updates on the financial performance of the TARP portfolio made available to taxpayers
- Disclosure of collateral surrendered under the Term Asset-Backed Loan (TALF)
- Regular disclosure of the Public-Private Investment Funds activity in the Public-Private Investment Program
Ms. Warren began by reviewing the findings of the COP report and remarked that since Treasury was just beginning the warrant repurchase program, some policymakers might decide that other objectives, namely bank operations without government assistance, might override the goal of maximizing taxpayer returns. She noted that early warrant repurchases were not representative of future repurchases, highlighting the recent negotiations with Goldman Sachs and JP Morgan in arriving at a repurchase price as an example of Treasury’s seeking to maximize taxpayer returns. She also stated that Treasury was considering moving to an open, public auction for price discovery for warrant repurchases, rather than privately negotiated repurchases, which would both end speculation about whether the repurchase price was too high or too low and would also permit banks to bid for their own warrants.
Mr. McCool reviewed the nature and purposes of the activities initiated under TARP, including the repurchases of warrants and preferred shares. He noted that as of July 10, 2009, Treasury had disbursed approximately $361 billion of the $700 billion in authorized TARP funds. Most of the funds went to purchase preferred shares and subordinated debentures under the CPP. While Treasury still has preferred shares in institutions, others have paid over $70 billion to purchase shares. He commented that while Treasury has provided some limited information about the warrant valuation process, it has not yet provided the taxpayer the greatest transparency about whether Treasury is maximizing the taxpayers’ return. He noted Treasury’s commitment to taxpayer transparency, and remarked on the Federal Reserve’s disclosure of the results of the 19 financial institutions’ “stress tests.” However, he stated that the Federal Reserve had no plans to disclose information about the firms going forward, and had not yet developed a mechanism to share information about the condition of the other financial institutions participating in the TARP programs.