Bank Bailout Loans Become Partial Subsidies

Remember back when we bailed out the banks? Remember how politicians promised they would work tirelessly to get taxpayers as fair a deal as possible? Looks like they lied. A Congressional oversight panel is finding that banks giving back their bailout money are repurchasing their warrants for less than their market value. And the Treasury is okay with that.

The Washington Post reports:

The five-member Congressional Oversight Panel, which oversees the bailout initiative, looked at 11 small banks that have repurchased their warrants from the Treasury for $18.7 million. The panel's study found that the warrants were sold for only 66 percent of their estimated value, meaning that taxpayers would have recovered $10 million more if the securities had been sold at their market value.

The post also says that the panel determined just how much this would cost taxpayers if all banks end up repurchasing their warrants this way:

If the full group of warrants is valued that way, taxpayers could be shortchanged by as much as $2.1 billion.

This seems incredibly counterintuitive. First, why isn't the Treasury making banks pay market value? Second, why would they allow banks to exit the program, and relinquish its power over them earlier, by allowing them to pay less?

According to the Post, the Treasury disputes it's doing that:

Andrew Williams, a Treasury spokesman, said that the department "has laid out a consistent and clear process for valuing warrants in a manner that protects taxpayers." He added: "Treasury is using a more comprehensive approach to valuing the warrants that includes obtaining quotes from multiple market participants who regularly participate in buying and selling similar securities."

Really? How about this idea: why not let the market decide? That's what the oversight panel recommends, via the Post:

The oversight group says in the report that the best option may be to sell the warrants in an open public market in order to increase transparency and boost returns for the government.

Absolutely. Rather than claiming to have obtained quotes from multiple market participants, how about actually asking investors to buy them? If the oversight panel is right, then you'll actually get taxpayers a fair deal. If the panel is wrong, and the Treasury's valuation is reasonable, no harm done -- the bank can still repurchase those warrants from the market for the same price it would have from the government.

The panel's conclusions, if correct, are extremely disturbing. I can only see one positive result coming out of this: Americans' skepticism towards bailouts will continue to grow.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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