Treasury sold warrants below market value: panel

By David Lawder

WASHINGTON (Reuters) - The U.S. Treasury Department allowed 11 smaller banks to repurchase stock warrants at only 66 percent of their market value, passing up about $10 million of taxpayer profits from government bailouts, a U.S. watchdog panel said on Friday.

In a new monthly report, the Congressional Oversight Panel said the government could lose $2.7 billion if it accepts similar valuation levels on warrants repurchased by remaining banks that received government capital injections.

The panel said the Treasury must apply a vigorous, transparent approach to valuing warrants and should consider leaving valuation to the markets by selling the securities in an open, public auction.

"This has the benefit of stopping any speculation about whether Treasury has been too tough or too easy on the banks that want to repurchase their own warrants,"

The Treasury received the 10-year warrants, along with preferred stock, in exchange for providing taxpayer capital to over 600 bank holding companies since the government's $700 billion financial bailout program was launched in October. The warrants were meant as a way to allow taxpayers to share in the upside as financial institutions recovered.

But a number of banks, including 10 of the largest U.S. institutions, have repaid their bailout money and now want to buy back their stock warrants to be completely free of government restrictions. They have right of first refusal to do so.

But the Congressional Oversight Panel, headed by Harvard Law School Professor Elizabeth Warren, said that a study of 11 banks found most of the prices privately negotiated by Treasury with the banks to be below market value.

One bank, Sun Bancorp of Vineland, New Jersey, repurchased its warrants for $2.1 million, or just 38 percent of the panel's determination of fair value of $5.6 million.