(Recasts with added detail on criticism of capital injection)
By Kevin Drawbaugh and Karey Wutkowski
WASHINGTON Feb 5 The U.S. Treasury looks to
have overpaid financial institutions to the tune of $78 billion
in carrying out capital injections last year, the head of a
congressional oversight panel for the government's $700 billion
bailout program told lawmakers on Thursday.
Elizabeth Warren, a Harvard law professor, said her group
estimated the Treasury paid $254 billion in 2008 in return for
stocks and warrants worth about $176 billion under the Troubled
Asset Relief Program, or TARP.
Warren said the Treasury, under then-Secretary Henry
Paulson, misled the public about how it would price them.
"Treasury simply did not do what it said it was doing ...
They described the program one way, and they priced it
another," Warren said at a hearing before the Senate Banking
Committee. She added that Paulson "was not entirely candid" in
describing TARP's bank capital injection program.
Members of the committee condemned management of the TARP
program, which is barely four months old.
"Implementation ... proceeded in a chaotic, unorganized and
ad hoc manner," said Democratic Sen. Daniel Akaka of Hawaii.
Warren said Treasury may have had a reason for paying more
for investments than they appear to have been worth at the time
of the transaction. "Once again, Treasury needs clear goals,
methods, and measurement," she said.
Warren will release a report Friday on TARP.
Neil Barofsky, another watchdog for the TARP program, told
the Senate committee his office is turning to criminal
investigations. "That's going to be a large focus of my
office," he said.
Barofsky, the inspector general for TARP within Treasury,
told the Los Angeles Times in an interview Wednesday that
misrepresentations in applications for TARP funds would be
grounds for criminal prosecution.
The Obama administration plans to unveil a new strategy on
Monday aimed at reviving paralyzed credit markets, helping
struggling homeowners, and lifting the economy out of
Tighter TARP management is expected to be a part of that
package. A preview of that came on Wednesday when the White
House announced a $500,000 annual cap on executive pay at
companies receiving TARP money.
On projections by some analysts that the TARP program may
need more money soon, Indiana Democratic Sen. Evan Bayh said,
"There will be no additional funding for this program without
airtight assurances that it will be better managed."
The TARP was launched last year by the Bush administration
in response to an alarming slowdown in global capital markets
triggered by a housing slump that undermined mortgage-backed
bonds carried on the books of major financial institutions.
Congress approved the $700 billion program after Paulson
said it would be used to buy broken bonds and clean off banks'
balance sheets. But days after that approval, Paulson changed
the focus to buying preferred shares in banks.
Warren told the banking committee that after three months
on the job, her panel is still not getting enough answers from
Treasury. She described the bailout as "an opaque process at
Barofsky raised concerns about potential fraud in one of
several programs funded by bailout money -- the Federal
Reserve's Term Asset-Backed Loan Facility (TALF).
"Treasury should consider requiring that some baseline
fraud prevention standards be imposed," Barofsky said in his
first report to Congress.
He told the committee the government has collected more
than $271 million in dividends from its TARP-financed bank
shares and said the department needs a strategy for
administering its holdings.
A Treasury spokesman said the department would adopt many
of Barofsky's recommendations.
Treasury holds $279.2 billion in preferred shares from 319
financial institutions, paying dividends of between 5 and 10
percent, according to Barofsky's report.
The government also received common stock warrants from 230
institutions, most of which are now out of the money. The
largest positions in warrants include AIG (AIG.N), Bank of
America (BAC.N), Citigroup (C.N) and General Motors (GM.N).
Yet another watchdog group -- Congress's Government
Accountability Office -- told the committee Treasury needs to
keep closer track of TARP money disbursed and that the program
needs internal controls and "a clearly articulated vision."
Barofsky's report was posted on the Web here .
(Additional reporting by John Poirier, Julie Vorman; Editing
by Tim Dobbyn)