economics

January 21, 2010

Treasury says it got bailed-out banks to pay more

Filed under: Uncategorized — ktetaichinh @ 5:33 am
Tags: , , ,

The Obama administration said Wednesday it’s increased the investment return to taxpayers by pushing banks to pay higher prices to repurchase stock warrants given to the government during the financial crisis.

The government made $4 billion from the sale of the warrants it held, a Treasury Department report said. The warrants are instruments that let the holder buy stock in the future at a fixed price. The government received them in return for aid it provided to banks from the $700 billion bailout fund.

Of the $4 billion, $2.9 billion came from 31 institutions that repurchased their warrants from the government. And $1.1 billion came from the auction of warrants from three banks that couldn’t agree on a purchase price in talks with the government.

The Treasury said the $2.9 billion it received in the repurchase transactions exceeded estimates it and others had made. Those estimates had put the value of the warrants at between $2.6 billion and $2.7 billion. Treasury said the initial bids from the banks, which it rejected, totaled $1.7 billion on this group of warrants.

“This report makes clear that Treasury’s process for selling these warrants has been consistent, transparent and has delivered strong returns for taxpayers,” Herb Allison, the head of Treasury’s financial rescue program, said in a statement.

Last week, President Barack Obama said the administration would ask Congress to impose a tax designed to generate about $90 billion over the next decade to recoup the cost of the bailout program.

Obama, sensitive to criticism about the rescue program, attacked what he called “massive profits and obscene bonuses” being paid by some institutions that received bailout funds. He vowed that taxpayers would recoup “every penny” spent in the financial rescue.

The report released Wednesday said that at the end of 2009, Treasury held warrants in 18 institutions that have fully repaid the government’s capital injections made from the rescue fund. It said it planned to sell those warrants.

In addition, Treasury said it still held warrants from 230 public companies that haven’t repaid their investments from the rescue fund, known as the Troubled Asset Relief Program.

In all, Treasury invested $205 billion from the $700 billion rescue fund into 707 banks to bolster their capital cushions, the amount of reserves banks hold to guard against losses. The government also provided support to insurance giant American International Group and automakers General Motors and Chrysler and the financing arms of the two Detroit companies.

Under the law Congress passed in October 2008 creating the program, the government required Treasury to obtain warrants for shares of common stock. The warrants were designed to give taxpayers an additional potential return on the government’s investment.

Once a bank repays its government support, it can buy back the warrants the government holds if the bank and the government can settle on a price.

If the two sides can’t agree on a price, then Treasury can proceed and sell the warrants at an auction. So far, JPMorgan Chase & Co., Capital One Financial Corp. and TCF Financial Corp. have opted to have their warrants sold at auction.

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