Treasury Bailout Records Fail To Include Key Details, Says Watchdog

05/11/2010 03:54 am ET | Updated May 25, 2011

WASHINGTON — The Treasury Department is lax about keeping records of its negotiations with bailed-out banks, including undocumented conversations in which billions of taxpayer dollars are at stake, a new watchdog report says.

Treasury fails to keep meeting minutes or notes from phone calls with banks that received money from its $700 billion financial bailout, says the report from Neil Barofsky, the Special Inspector General for the bailout fund.

Barofsky's audit concerns Treasury's negotiations to sell bank warrants – securities that allow the holder to buy stock in the future at a fixed price. Treasury received the warrants from hundreds of banks as a deal-sweetener as it injected billions of dollars to stabilize the reeling banking sector.

The report blasts Treasury for failing to keep complete notes about the process by which it sells those warrants after banks have returned their bailout money.

"When a brief telephone call can mean the difference of tens of billions of dollars, it is a basic and essential element of transparency and accountability that the substance of that call be documented," Barofsky writes.

The warrants were designed during the financial crisis to give taxpayers an extra benefit if the bailouts were successful in calming the stock market and reviving the banks. When stock prices rise, the warrants become more valuable because holders can pocket the difference.

After banks pay back their bailout money, they negotiate with Treasury over how much they will pay to buy back their warrants. Banks prefer to buy the warrants because selling them to third parties would eventually dilute the value of existing shares.

During these negotiations, officials failed to keep detailed minutes of meetings during which they set target prices, Barofsky writes. Even more troubling, he writes, is Treasury's failure to document its contact with the banks.

"Even assuming that Treasury is making decisions in every case based on reasonable and fair rationales, in the absence of documentation Treasury leaves itself vulnerable to criticism that its decisions are unwise, arbitrary or unfair," he writes.

The report also says Treasury lacks clear rules about what information is shared with banks as they attempt to bid the lowest acceptable amount to buy back the warrants. Investigators found that different banks received widely varying amounts of information, the report says.

Barofsky says Treasury should begin collecting detailed notes on meetings and phone calls, and should develop guidelines about what banks will be told concerning Treasury's price estimates.

As of March 19, Treasury had collected $5.63 billion by selling the warrants, the report says.

Treasury will review its procedures surrounding warrant negotiations and will detail its response within 30 days, according to a statement from Herb Allison, Treasury's assistant secretary for financial stability.