Now that bailed-out banks are reporting record-breaking profits, the U.S. taxpayer, who bought into these institutions at bottom-barrel prices, could wind up on the winning end of a nice profit. That's what happens, after all, when you buy low and sell high.
When Congress bailed out Wall Street, it required banks to give warrants to the treasury. That way, if the market turned around and a bank's stock rose, the taxpayer could profit. Indeed, the notion that the taxpayer might profit from the bailout was floated by members of Congress on both sides of the aisle.
The Congressional Oversight Panel, however, looked into the early sales of warrants and found earlier this month that Treasury would only get about 66 percent of the market value for the warrants. And it was doing so in private negotiations with the banks.
A group of Democrats in Congress want to end that practice. A bill introduced by Rep. Mary Jo Kilroy (D-Ohio) would require the Treasury to sell warrants in a public auction and do so in a transparent way. On Wednesday, the Financial Services Subcommittee on Oversight and Investigations holds a hearing on the sale of warrants, focusing on protecting profits for the taxpayer.
"We have to decide as a nation if we are going to have a real free market or crony capitalism and this bill is part of that decision-making process," Rep. Alan Grayson (D-Fla.), a cosponsor of the bill, told the Huffington Post.
"There is a dynamic change in people's views about transparency because there's a new threat to transparency that we never saw before September," said Grayson, referring to the original bailout. "There's never been anything like this in the history of the United States when the government hands out huge amounts of money to particular institutions and doesn't tell anybody about it -- refuses to tell anybody about it."
Kilroy said it was the COP report that generated the legislation. "Certainly the sales that have happened so far, we've been at a minimum skeptical of," she says. "Other investors would want to get a return on their investment. There's no reason taxpayers shouldn't."
Kilroy has an unusual ally in the fight: Jim Cramer. The loudmouth CNBC financial analyst pilloried by Jon Stewart didn't know a bill had been introduced when he called public auctions "such a logical solution."
The Treasury Department still holds more than 99 percent of its warrants and the COP report was based on only 11 transactions with relatively small banks. "This means that the process is still at an early enough stage that the maximum benefit for the taxpayer could be realized if the open market process is enacted now," advised the oversight panel, which is chaired by Harvard Prof. Elizabeth Warren. Kilroy said she's looking for the quickest way to get the bill into law and is considering attaching it as an amendment to a moving vehicle.
Her bill would only apply to the largest bailed-out banks, those that took at least $250 million.
Democratic Reps. Brad Sherman (Calif.), John Boccieri (Ohio), Betty Sutton (Ohio), Jackie Speier (Calif.), Marcia Fudge (Ohio) and Grayson joined Kilroy in cosponsoring the bill. (The name of the bill doesn't quite rise to PATRIOT Act levels of cleverness, but the Provide a Return on Financial Investment for the Taxpayer Act of 2009 (PROFIT Act), is an impressive acronym for a freshman nonetheless.)
A Treasury spokeswoman, asked to respond to the effort, referred back to the statement the department put out when it announced the warrant repurchase program: "Regarding transparency: Treasury publishes information on all CPP transactions, including investments, repayments and warrant repurchases, in the TARP Transactions Reports within 2 business days of closing. All Transaction reports are available on our website at www.financialstability.gov. Further, Treasury will begin publishing additional information on each warrant that is repurchased, including a bank's initial and subsequent determinations of fair market value, if applicable. Following the completion of each repurchase, Treasury will also publish the independent valuation inputs used to assess the bank's determination of fair market value."
Telling the public what happened after it has already happened isn't what Kilroy and those backing her bill have in mind. "It is a simple bill. It is a simple idea. It's of critical importance to sell them at a public auction and leave no questions about insider deals with Treasury," she said.
Former Sen. John Sununu (R-N.H.), who sits on the oversight panel, was less concerned about the 66 cents the treasury got back. "While it is important that taxpayers receive fair value for these securities, it is equally important that the principal objectives of TARP, namely a stable financial system, be realized and sustained," Sununu wrote, though he still concurred with the report.
COP panelist Richard Neiman, the New York state superintendent of banks, emphasized in a concurring opinion appended to the report that drawing firm conclusions from the small number of transactions studied is difficult.
"We should be cautious before extrapolating too many conclusions about the entire repurchase program based on these early and small redemptions," Neiman wrote. "Hopefully lessons can be learned from these early efforts."
Those objections miss the point, said Grayson. "The issue is not evidence; the issue is principle," he said. The transactions should be transparent and public as a matter of principle, he said, regardless of whether that transparency leads to greater profits to the taxpayer - although he expected that it would.
Neiman and Sununu both dismissed the relatively low rate of return on the first TARP repayments, which they said are a small price to pay for broader economic calm.
"The total benefit to the American taxpayer has to take into account the non-financial as well as the financial returns," Neiman wrote. "The non-financial benefits include the important policy objectives that have been achieved on behalf of the American people of stabilizing and reviving the financial system during a very difficult period of time. The CPP program has achieved and continues to achieve objectives and we should not lose sight of this."
Given that the panel report does not suggest that Treasury purposely failed to maximize the return to taxpayers, COP panelist Rep. Jeb Hensarling (R-Texas) argued, "we are left with a fairly pedestrian disagreement." Hensarling went further than Neiman or Sununu in his concurrence, arguing that there is no one definitive fair-market value in the world of business.
"The panel should appreciate that the use of financial models to value ten-year term warrants will at best only offer a 'sticker price' and, like careful consumers, sophisticated market participants seldom pay 'sticker.'" Hensarling wrote. "Treasury should resist the temptation to rely upon science to the exclusion of art."
Holding firm to COP calculations of fair-market value may limit sales of the warrants in the short term, Hensarling warned, and undermine President Obama's goal of quickly ridding the government of its many private-sector investments. Getting less return on investment could be the price the taxpayer pays for a quick exit from the market. Hensarling cited a statement from Treasury indicating that Obama "has clearly stated that his objective is to dispose of the government's investments in individual companies as quickly as is practicable."
"Although I disagree with the President on many issues, I concur with this determination," Hensarling wrote.
Nonsense, said Grayson. A public auction, he said, can be called with 15 minutes notice. "We're talking about a world financial system that does over a trillion dollars in financial transactions every single day," he said. "I think they can handle a public auction of these warrants."
Jeff Muskus contributed reporting