Treasury paid 44% too much, watchdog says

The Department of the Treasury under Bush administration Secretary Henry Paulson paid 44% more for bank securities than they were worth under the bailout program last year because it didn’t take into account the risks of the particular stocks and warrants, a congressional watchdog found. The Treasury paid $254 billion for shares of preferred stock and warrants from more than 200 financial institutions and got assets worth about $176 billion, Elizabeth Warren, head of the Congressional Oversight Panel, told the Senate Banking Committee today. Mr. Paulson said at the time that the Treasury’s intention was to inject capital into banks by purchasing assets at then-current market value. Instead, the government “paid a uniform price” for the securities, regardless of whether one institution posed a greater investment risk than another, said Ms. Warren, a Harvard University law professor. The panel’s findings “at least raises the possibility” that Mr. Paulson “was not entirely candid,” she said. “Treasury simply did not do what it said it was doing.” Ms. Warren compared Mr. Paulson’s methods to paying the same amount for a Picasso or Rembrandt painting as one would for art by lesser-known artists. The Treasury “has failed to delineate a clear reason for such an overpayment,” she said. The senior Republican on the committee, Sen. Richard Shelby of Alabama, suggested that Mr. Paulson “said one thing and did another.” Efforts to reach Mr. Paulson for comment were unsuccessful. Also at the hearing, Mr. Shelby complained that the Treasury under Mr. Paulson hired a number of employees from banks that were receiving funds under the Troubled Asset Relief Program, creating “incestuous” relationships and potential conflicts of interest. The special inspector general for TARP, Neil Barofsky, told the committee that he was looking into possible conflicts at the Treasury. The Bush administration hoped that injecting capital into banks would loosen credit for businesses and consumers, a promise that hasn’t yet materialized. Among the largest recipients were organizations such as Citigroup Inc., JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. The Senate last month released the second $350 billion of TARP funds for use by the Obama administration. Some senators have said that when that sum is exhausted, the administration will have to come to Congress to ask for another $300 billion. Such a request would meet opposition because the public and Congress are outraged with the way the program was administered by Mr. Paulson, said Sen. Evan Bayh, D-Ind. “There will be no additional funding for this program without airtight assurances that it will be better managed,” Mr. Bayh said. A dozen senators from both parties today blasted Mr. Paulson’s administration of the program, a rare show of bipartisan unity on the committee. “TARP has really become just a slush fund,” said David Vitter, R-La. Ms. Warren’s panel, which was appointed by Congress to monitor TARP, plans to release a 700-page progress report tomorrow. It found a higher government subsidy for banks than did a similar study released last month by the Congressional Budget Office. The CBO found that the Treasury paid $247 billion for bank stocks and warrants worth only $183 billion, an overpayment of 35 percent. A CBO spokeswoman declined to comment on the difference between the two studies. Ms. Warren said she has “great confidence in our numbers,” which were arrived at with the help of Duff and Phelps Corp., a New York-based valuation firm, and two academics. In December, Ms. Warren’s panel asked the Treasury to explain why private investors such as Warren Buffett, Mitsubishi UFJ Financial Group of Japan, and the Abu Dhabi Investment Authority of the United Arab Emirates were getting better returns than the government on investments with the same institutions. “Is the public receiving a fair deal?” the watchdog asked. Officials at the Treasury did not respond to this and two dozen other questions the panel posed.