Today, the Congressional Oversight Panel (COP) released its February Oversight Report entitled "Valuing Treasury Acquisitions" in which the COP presented the results of an analysis of the value of Treasury’s largest transactions under the Troubled Asset Relief Program (TARP). Specifically the Panel analyzed the ten largest individual TARP investments made during 2008 (53% of the initial $350 billion authorized by Congress for the TARP), which included $124.2 billion to eight large banks and financial institutions under the Capital Purchase Program (CPP), $40 billion to American International Group, Inc. under the Systemically Significant Failing Institutions Program (SSFIP), and an additional $20 billion to Citigroup, Inc. under the Targeted Investment Program (TIP) (formally launched in January 2009). The valuation analysis did not include the approximately $24 billion in loans to General Motors, Chrysler, Chrysler Financial and GMAC as part of the Automotive Industry Finance Program.
As referenced in Professor Elizabeth Warren's testimony during yesterday's Senate Banking Committee hearing, the Oversight Report concluded that Treasury "paid substantially more for the assets it purchased under the TARP then their then-current market value," at an implied effective subsidy of approximately $78 billion. The Panel based its conclusions on a valuation project report (attached as Appendix III to the February Oversight Report) designed by Adam M. Blumenthal, Managing General Partner, Blue Wolf Capital Management, William N. Goetzmann, Professor of Finance and Management Studies at Yale School of Management, and Deborah J. Lucas, Professor of Consumer Finance at Northwestern University, and a more extensive valuation analysis report, which included multiple valuation methods and an evaluation of similar private transactions, prepared by the valuation firm Duff & Phelps. By comparing the amount of Treasury's investment with the value of the preferred stock and warrants it received in return (assuming the preferred stock and warrants received by Treasury were trading in the capital markets at fair value), the COP concluded that:
- In the eight transactions under the CPP program, Treasury received assets worth approximately $78 for each $100 spent;
- In the two transactions under the SSFI and TIP programs, Treasury received assets worth approximately $41 for each $100 spent;
- In the 10 transactions as a whole, Treasury received assets worth approximately $66 for each $100 spent; and
- Extrapolating the results to all capital purchases made in 2008 under TARP, Treasury paid $254 billion, for which it received assets worth approximately $176 billion, a $78 billion shortfall.
It does not appear, however, that the COP or its advisers preformed any sampling or other valuation analysis of smaller transactions to determine whether extrapolating the results for the ten larger transactions yielded a fair estimate of the cost of the entire program.
The Report listed several factors which were "certain to create significant subsidies" and likely led to the substantial $78 billion "discount." These include, among other factors, the following:
- Subject to certain limitations, the recipients of the TARP funds have the ability to call the preferred stock at par, thereby decreasing the value of the securities received by Treasury; this call option is not typical of publically traded preferreds.
- Although the preferred stock and warrants could be registered for resale at Treasury's request, liquidating such a large position would entail substantial cost.
- Pursuant to a legal analysis prepared by Timothy G. Massad, a special legal advisor to the Panel, for CPP transactions: (i) Treasury will receive no premium if the issuer optionally redeems the shares; (ii) warrants and common stock held by Treasury can be repurchased at their then fair-market value if the preferred shares are either redeemed or transferred; and (iii) the number of warrants held by Treasury are subject to an automatic 50 percent reduction if the subject institution sells equity equal in amount to Treasury's investment and qualifying as Tier 1 capital.
Next month, the Panel will release its fourth TARP oversight report examining existing foreclosure mitigation efforts and the status of its TARP oversight activities. Regular reports are required to be submitted to Congress under Section 125(b)(1) of Title 1 of the Emergency Economic Stabilization Act of 2008. Today's Report follows the release of two prior oversight reports, "Questions About the $700 Billion Emergency Economic Stabilization Funds" issued on December 10, where the Panel asked a series of questions on the strategy, goals, methods and operations of the TARP program, and "Accountability for the Troubled Asset Relief Program" issued on January 9, where the Panel analyzed Treasury's initial response to Panel questions and highlighted specific areas (Bank Accountability, Transparency and Asset Evaluation, Foreclosures, and Strategy) where Treasury needed to provide additional information. The Panel also issued a Special Report on Regulatory Reform on January 29 entitled "Modernizing the American Regulatory System: Recommendations for Improving Oversight, Protecting Consumers, and Ensuring Stability."