Treasury’s Transparency Two-Step

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Is Treasury not getting the message? When it comes to administering TARP, the agency has been warned again and again about its lack of transparency by the three government watchdogs monitoring the bailout. Back in January, the Government Accountability Office concluded that goings on at the agency were so opaque it was difficult to tell whether Treasury even had a “strategic vision” for TARP at all. The agency has even tried to stonewall Neil Barofsky, the Special Inspector General for TARP (or, SIGTARP), refusing to hand over certain documents he requested. Meanwhile, Elizabeth Warren, the Harvard law professor chairing the Congressional Oversight Panel, has said that “without more transparency and accountability…it is not possible to exercise meaningful oversight over Treasury’s actions.” It must have been all the more frustrating for her when COP recently requested specific information about the stock warrants Treasury received from bailout recipients only to be told that none would be forthcoming.

At issue is whether Treasury is maximizing taxpayers’ return on investment, or giving bailed out banks sweetheart deals by allowing them to repurchase their warrants at bargain rates. So far it looks like the latter. The COP’s latest report [PDF], released on Friday, found “eleven small banks have repurchased their warrants from Treasury for a total amount that the Panel estimates to be only 66 percent of its best estimate of their value,” shorting taxpayers about $10 million overall. While the agency has only sold warrants from smaller banks so far, if it were to unload its holdings under the same terms, taxpayers could lose out on as much as $2.7 billion. Given this, it would seem particularly important to find out how exactly Treasury is valuing these warrants. But this is specifically the information the agency is refusing to part with.

In a June 12 letter, Warren posed a series of questions to Treasury Secretary Timothy Geithner relating to the repayment of TARP funds, which many bailout recipients are hastening to do in order to avoid the pesky scrutiny that accompanies their participation in the program. Among other things, she asked Geithner to “provide any information relating to Treasury’s internal valuations of warrants not yet exercised or repurchased.” Imagine Warren’s dismay when Geithner came back with this:

It is not Treasury’s policy to publish estimates of the fair market value of its investments made under the Troubled Asset Relief Program (“TARP”). In the present case, Treasury believes it would not be in the taxpayer’s interest for Treasury to disclose any valuations it has performed in connection with warrants whose repurchase is currently pending or that may be repurchased in the near term.

The panel singled this out as a “disheartening” sign that the transparency message, which “the Panel has emphasized..since its first report,” had yet to sink in for Treasury. Pointing out that “the disposition of the warrants is of direct financial interest to the public,” the report notes that “it is especially important that Treasury be absolutely transparent about the nature and substance of the decisions it is making and the reasons for those decisions.”

Since it is the healthy banks that are currently repaying, the value of their respective warrants has no doubt gone up.  In this respect, early sales of these warrants may leave Treasury holding the warrants of weaker institutions with lower stock prices and less likelihood of appreciation in the value of their warrants, at least in the immediate future.

The Panel recognizes that Treasury must protect proprietary information and use care to avoid giving other institutions information that would prejudice the interests of the taxpayer, but it must make any decision to restrict disclosure for these reasons only in the most thoughtful and judicious manner.

This seems like a polite way of saying that COP regards Treasury’s decision to withhold warrant valuations as neither thoughtful nor judicious.

Follow Daniel Schulman on Twitter here.

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