Panel: Bailout Overpaid $78B For Stocks

Treasury Department Overspent For Banks' Troubled Assets, Oversight Committee Finds

(CBS/AP)  From a banker's perspective, it was a sweet deal.

The federal government's $700 billion financial rescue program has had its share of problems since it was introduced last fall. CBS News correspondent Priya David reports that that the Bush administration's Troubled Assets Relief Program (or TARP), created to purchase the illiquid assets of tottering financial firms, overpaid banks by billions of taxpayer dollars.

One of the big problems with TARP was how to value the toxic assets the banks were putting up in exchange for receiving bailout money.

A congressional oversight panel recently took a look at the first $254 billion the government spent buying shares of the big banks to keep them afloat. After six weeks of number-crunching, what did they find? The Treasury Department substantially overpaid for those assets, by a whopping $78 billion.

The panel said that in the fall, the government spent $254 billion on assets that were only worth $176 billion.

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To see the panel's report, click here.

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Among the recipients: Citigroup was paid $25 billion by Treasury for assets the panel valued at only $15 billion - $10 billion too much.

The government also paid AIG $40 billion for assets the panel valued at less than $15 billion - $25 billion too much.

And how does $78 billion compare to what the government spends elsewhere? It's more than what the U.S. spends on its nuclear weapons and related programs ($52 billion in 2008), and much than on the National School Lunch Program ($8 billion) and cancer research (approximately $5 billion).

"They're trying to push money into banks, and the question the oversight panel was asking is, are you getting an equivalent amount back?" Harvard Law professor Elizabeth Warren, who chairs the five-member Congressional Oversight Panel, told CBS Early Show anchor Julie Chen.

"Now there could be lots of policy reasons that Treasury might decide that it wanted this money to be in the banks, but our question is the one we put to Secretary Paulson, and that is, are you putting it in and getting back assets that are worth equivalent value? He told us yes; our independent investigation said no."

"So are you saying he was lying?" CBS Early Show anchor Julie Chen asked.

"Well, I'm telling you he told us 'yes,' and our independent investigation said no," said Warren. "It didn't happen. Under these circumstances, when Treasury pays more, effectively they're subsidizing the banks. It's like giving a gift to the banks in order to help prop the banks up."

Warrens said that if subsidization of financial firms is meant to be the government's policy about the use of public funds, then a public debate is required, one which didn’t happen.

"Our real point is, if we're going to subsidize [banks], then we need
to call it subsidization, and we need to have that good, old-fashioned debate about whether that's the right way to spend our money here. You don't get to call it one thing and sell the American people on it by calling it that thing and actually have it be something very different."

Warren said her panel's report is not about seeking criminal prosecution but rather shining a light on the actions of the Treasury Department, which was given the responsibility of disbursing $700 billion with tremendous leeway.

"This is about how Treasury is conducting its business," she said. "It's about how Secretary Paulson said that he thought the right way to spend this money is to inject it into banks. We can talk about whether that's the right way to go, [rather than] describing it one way, telling the American people one thing about it, and doing something very different."

"You know, if we didn't have any Congressional oversight, we wouldn't be sitting here this morning talking about this. It's the fact that we have a Congressional oversight panel that's here. We're asking the hard questions. We're making the independent evaluation, and we're going to come back to the public with this," Warren told Chen. "And when everybody is involved, then we can make better decisions about how to get ourselves out of this mess."

AIG told CBS it sold its shares to the government at a fair market value at the time. The company said for the most part its securities are performing, and if they continue to appreciate, taxpayers will get the majority of that upswing ... which in this market could take a very long time.

Anger On Capitol Hill

What appears to be wasteful spending is angering many lawmakers, already wary of the $700 billion rescue plan. Congress approved TARP last fall, but members of both parties criticized spending decisions.

The misgivings come as new Treasury Secretary Timothy Geithner is preparing to place the Obama administration's imprint on the program with a sweeping new framework for helping banks, loosening credit and helping reduce foreclosures. Geithner plans to unveil the changes Monday.

The oversight panel examined 10 transactions, including eight made under a capital purchase program designed to put liquidity into the banks in hopes of easing credit. That money went to banks considered "healthy" financially but in need of capital to make loans.

Two other transactions went to AIG and to Citigroup Inc. under programs designed to help companies that were facing serious financial difficulties.

Overall, the panel and the analysts it retained to conduct the valuation study found that the Treasury used taxpayers' money to pay $62.5 billion more than the value of assets in the 10 transactions it examined. By extrapolating to the more than 300 institutions that received money, it concluded that the government in effect paid $78 billion more than the actual value of the asset at the time.

"Treasury chose to offer 'one size fits all' pricing in order to encourage all institutions to participate, and in so doing disregarded apparent differences in their financial condition," the report states. "A consequence is that Treasury effectively offered weaker participants greater subsidies than it offered to stronger participants."

In a bright spot for the rescue program, the same banks that received capital infusions from Treasury have already paid $271 million in dividends to the federal government and are expected to pay $1.5 billion more in dividends by the end of this month. Wells Fargo, which received a $25 billion infusion, has already announced it would pay Treasury $371 million in dividends this month.

Reacting to the panel's conclusions, Treasury spokesman Isaac Baker said in a statement: "Treasury's efforts since the fall prevented a systemwide collapse, but more needs to be done to stabilize the financial sector, increase lending and protect taxpayer dollars."

He said the plan that Geithner will announce on Monday aims to free up credit, "while strengthening transparency and accountability measures so that taxpayers know where and how their money is being spent and whether it's achieving real results."

Senate Banking Chairman Chris Dodd, D-Conn., said the overpayment was sure to "raise eyebrows."

"I can understand some gap," he said. "No one is expecting perfection between the price you pay and what you think you're getting. But that's a pretty large disparity."

Another fund watchdog urged the Obama administration to be clearer about the true value of the nearly $300 billion the Treasury has infused into more than 300 institutions through purchases of assets such as preferred stock.

"Treasury needs, in the near term, to begin developing a more complete strategy on what to do with the very substantial portfolio that it now manages on behalf of the American people," said Neil Barofksy, the special inspector general for the rescue program.

The reports of the Congressional Oversight Panel are available at cop.senate.gov.

[jncc1701]

Hey McCain, Rush and other brain dead party before country Republicans - where is your consternation? Oh right this was your man Bush''s doing....no wonder there is silence.
McCain if you are a true patriot go on TV and call this Generational Theft.....

[bigloudbike]

I agree! this is all happening because of Republican Policies. Which time after time never work! Seems the Dems always are stuck fixing the economy after the fact. Just look at the History.Republicans equals war, giant deficits,Tax shifts to the Middle Class,And big time Corruption( Dems aren''''t perfect either,but there is less thier seems). Also It seems all republicans do the blame on everone else except them even when it is their policies which they put in power.Who was in Power the last eight years? Looks like they will never learn to take responsibilities for thier own actions.Now its time to fix it and they want no part in what they did. Time to abolish the Republican Party as a whole.

[mywordtoo]

Has anyone of these fricken politicians thought to ask for the overpayment back???? or is that just a no no. American citizens we are in serious trouble. We are being ripped off right in front of our faces and there is nothing we can do. You can say, yes there is you need to make sure to vote these people out. You vote one out only to get in another fricken crook.

[smt451d]

It''s a ruling-class feeding frenzy at the expense of the middle-class. Stalin would blush.

[notfooled]

Lets impeach Obama now for overpaying for this stock. His legacy has been one of one mistake after another.

Posted by mrs_bun at 01:44 PM : Feb 06, 2009

You need a serious upgrade to reality.

No matter what Obama does it''ll only ever amount to fixing everything the Bush/Cheney crime syndicate purposely robbed us of.

It took 8 long desperate years to get us into this mess - I''m willing to give Obama the benefit of more than 2 weeks in office to repair the damage done.

[xyno-2009]

The CDS paper was nothing more than a bet on a mixed bag of mortgage components, most the result of predatory practices and collusion by lending institutions, local governments, and construction firms, and thus were doomed from the start.

Posted by brianbwb at 02:49 PM : Feb 06, 2009
************

The derivatives are on the balance sheets of the institutions, they are not what the gov''t purchased. The gov''t purchased preferred stock and warrants of the institutions.

The problem with valuing those purchases is that no one knows exactly what the companies are worth because of the difficulty in valuing the derivatives.

They are not worthless (as you contend) in the sense that there are no willing buyers for them at the current time. If people can stop defaulting on their mortgages (the underlying asset) and the credit markets ease, the value of these derivatives will increase dramatically.

[nvorr]

You are nothing but a liberal apologist.

Posted by mrs_bun at 02:40 PM : Feb 06, 2009
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You, are just out there!

[brianbwb-2009]

"I wouldn''''t put too much stock (pun intended) in this $78 billion figure. Nobody knows the exact value of these derivatives, which is part of the reason this whole problem exists in the first place." Posted by Xyno

Actually we do know the value, it is ZERO.

The CDS paper was nothing more than a bet on a mixed bag of mortgage components, most the result of predatory practices and collusion by lending institutions, local governments, and construction firms, and thus were doomed from the start.

The bets were made pledging money the firms didn''t even have, up to twice the annual GDP of the entire planet.

Therefore it is safe to assume that the derivatives had no real value at all, based as they were on lies.

[brianbwb-2009]

"Why is this still Bush''''s fault? When will anything be the Obama''''s and the Dems fault. The DEMS enjoy the first true majority in decades and had a simple
majority for the last TWO YEARS!" Posted by notblue

Irrelevant, Bush made the call, not President Obama.

Mr. Obama''s fault will be not reversing 8 years of Bush''s decisions, such will take a fair bit of time, and might prove fatal to him, because some whose wallets are about to lighten actually own a lot of guns.

[xyno-2009]

I wouldn''t put too much stock (pun intended) in this $78 billion figure. Nobody knows the exact value of these derivatives, which is part of the reason this whole problem exists in the first place.

[credibility2]

If ever there was a lesson in what comes of rushing things through and ramming it down everyone''s throat without deliberence, methodology, scrutiny and due diligence, that the government overspent by this large of an amount of taxpayer money for phase-1, let the new president and all of Congress, but mostly the frenzied hyena Dems and their gluttonous spending hopes, chill and take a time out on phase-2, the so-called stimulus plan and do what you''re supposed to be doing and actually working and expending effort to do the tough things.

[nvorr]

Lets impeach Obama now for overpaying for this stock. His legacy has been one of one mistake after another.

Posted by mrs_bun at 01:44 PM : Feb 06, 2009
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Did you just wake from a coma, or stop taking your meds or something? Do you realize that President Obama has only been in office two weeks. His stimulus plan hasn''t been passed yet, so how could he have overpaid these stocks? And how does he have a legacy already?

[sabre1111]

sabre1111, have there been any Dems in office the last eight years? have the Dems had the majority in both houses the last two? Do they have an even greater majority now? I guess according to your perspective they haven''''t!


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Posted by notblue

I hope you don''t count that slim majority that the Dems had for two years (in the Senate, literally hanging on one flaky independent). Since Bush was able to veto any attempt Dems made to change policy without fear over override in Congress, the majority was just about useless. For example, remember when Bush threatened to veto a troop funding bill because the Dems tried to insert a timetable clause for Iraq? Who won that battle? Bush, as he did all the battles, because the Dems had no ability to override him. Look at now. Even with 59 (potential) Dem Senators and a Dem president, we still can''t force the stimulus through because you need 60 votes. And having 51 Senators? Useless.

[used2bfedup1]

"Bush administration''s Troubled Assets Relief Program (or TARP), created to purchase the illiquid assets of tottering financial firms, overpaid banks by billions of taxpayer dollars."

But u had to be W''s buddy to get overpaid.

[notblue]

sabre1111, have there been any Dems in office the last eight years? have the Dems had the majority in both houses the last two? Do they have an even greater majority now? I guess according to your perspective they haven''t!

[sabre1111]

Why is this still Bush''''s fault? When will anything be the Obama''''s and the Dems fault. The DEMS enjoy the first true majority in decades and had a simple majority for the last TWO YEARS!


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Posted by notblue

When Obama''s been in office for a while and actually is responsible for causing any problems.

[notblue]

Why is this still Bush''s fault? When will anything be the Obama''s and the Dems fault. The DEMS enjoy the first true majority in decades and had a simple majority for the last TWO YEARS!

[joe-ny-2]

DOES THIS SURPRISE ANYONE? NO!!
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Posted by US_1776 at 12:56 PM : Feb 06, 2009

Yes, it does surprise me, because the Democrats controlled the House and majority rule in the Senate, so It was actually the Democrats who passed this bill.....get your facts straight and take off the bush-hating glasses, you can''t see see straight

[us_1776]

The BUSH administration used this Bailout ruse to loot billions of dollars from the American taxpayer. Bush proclaimed to Congress and the American public that we had to give Wall Street this bailout money immediately. No time for putting any controls in place, we have to do it NOW. And so we approved the bailout thinking that the whole economy would crash if we didn''t do it. And just now we are finding out that the BUSH bailout was used to overpay for lots of things. DOES THIS SURPRISE ANYONE? NO!!

[joe-ny-2]

then hide it all in the less public ones. They are all hypocrites.
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Posted by sabre1111 at 11:41 AM : Feb 06, 2009

This may be true, but that''s precisely the reason why the SPendy Republicans have been suffering defeats, because they act like Democrats growing government and spending, instead of reducing it......the main reason why we need to purge the liberal republicans from office and replace them with more conservative (smaller government, reduced spending/debt) leadership