The Bush Administration Overpaid $78 Billion to Banks in Bail Out

by A. Tran | February 6, 2009 at 02:48 pm

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The Troubled Asset Relief Program (TARP) was launched in 2008, by President George W. Bush in response to the alarming slowdown in global capital markets, which was triggered by a housing slump that undermined mortgage-backed bonds carried on the books of major financial institutions.

Congress had approved the $700 billion program in 2008, after the then Secretary of Treasury Henry Paulson said it would be used to buy broken bonds and clean off banks' balance sheets. Shortly after the Congressional approval, Mr. Paulson changed the focus to buying preferred shares in banks in late 2008.

"Despite the assurances of then-Secretary [Henry] Paulson, who said that the transactions were at par...the valuation study concludes that Treasury paid substantially more for the assets it purchased under the Troubled Asset Relief Program (TARP) than their then-current market value," Harvard Law School professor Elizabeth Warren told the U.S. Senate Banking Committee on Thursday.

On Feb.5, 2009, Harvard law professor, Elizabeth Warren testified in Congress that 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 (TARP).

The U.S. Department of Treasury under the direction of then Secretary Paulson had overpaid financial institutions to the tune of $78 billion in carrying out capital injections last year, 2008. The head of a congressional oversight panel for the government's $700 billion bail-out program told Congress on Feb.5, Thursday.

"Treasury simply did not do what it said it was doing ... They described the program one way, and they priced it another," Ms. Warren said at a hearing before the Senate Banking Committee. She added that Mr. Paulson "was not entirely candid" in describing TARP's bank capital injection program.

An analysis of the ten largest TARP investments made by Treasury in 2008, not including investments in the U.S. auto industry, found that for ever $100 spent, they received preferred stock and warrants worth approximately $66.

Extrapolating the analysis out to all of the capital injections made by Treasury in 2008 suggests the government received $176 billion in preferred stock and warrants for investments totaling $254 billion, a shortfall of $78 billion.

In other words, the United States government will be receiving $.66 in return for each dollar given to these investment banks and companies in 2008.

On a 'brighter' note, according to the Washington Post on Feb.5, the panel's findings do not necessarily suggest that the government has truly lost $78 billion, but that these banks are still required to repay the amount invested by the government plus interest.

The caveat of this interpretation is that since the actual market value is much lower, it is entirely possible that these banks or companies will end up defaulting on their obligations to the government, or rather the taxpayers.

The panel's findings do not imply that the government has lost money on the investment because companies are still required to repay the amount invested plus interest. The lower market value determined by the panel reflects the risk that companies will default on those obligations. The panel found that a private investor would have charged significantly more to invest the same amount in the companies because of the greater risk and that the government did not charge this premium.

United States Senate Banking Chairman Christopher Dodd, (D-Conn.),Senator Sherrod Brown (D-OH), and other members of the Senate Banking Committee were not at all pleased with the news nor were they pleased with the ensuing testimony by Mr. Neil Barofsky, the Office of the Special Inspector General, appointed by President George W. Bush.

On the same day, the United States Senate Committee on Finance also heard another troubling testimony from Mr. Neil Barofsky, the Office of the Special Inspector General, a watchdog group to oversee the TARP program has released its findings on Feb. 6.

The full text of SIGTARP is available for readers to read.

This writer suggests that readers might focus on Sections 1 to 3; and Section 4 provides recommendations to Treasury, going forward in 2009.

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Amy Judd

at 15:43 on February 6th, 2009

Wow, shocking - I had no idea, as I don't follow these stories too closely but this seems just terrible.

A. Tran

at 15:57 on February 6th, 2009

Thank you so much, Amy for your comments and recommendation. Yes, it was (still is) quite shocking when I read the Congressional reports just to confirm what I heard were correct ...

Karen Hatter

at 16:51 on February 6th, 2009

What I found most interesting about that monetary figure was an admission that appeared in Forbes magazine, in September 2008, quoting someone from the Treasury Department saying:

It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."

A. Tran

at 21:44 on February 6th, 2009

Thank you so much, Karen, for your comments, the Forbes URL, and recommendation.

So, it was Secretary Henry Paulson who rejected Congressional proposal to limit executives' bonuses and pay at those troubled companies.

And here we are, a few months later, reading about these institutions abusing the public monies and trust, Wells Fargo, Citigroup Inc., AIG, Merrill Lynch, Bank of America, to name a few.

Emilio Lizardo

at 06:28 on February 7th, 2009

"We just wanted to choose a really large number."

Yet another confirmation of the Peter Principal -

The Peter Principle is the principle that "In a Hierarchy Every Employee Tends to Rise to His Level of Incompetence." While formulated by Dr. Laurence J. Peter and Raymond Hull in their 1968 book The Peter Principle, a humorous treatise which also introduced the "salutary science of Hierarchiology", "inadvertently founded" by Peter, the principle has real validity. It holds that in a hierarchy, members are promoted so long as they work competently. Sooner or later they are promoted to a position at which they are no longer competent (their "level of incompetence"), and there they remain. Peter's Corollary states that "in time, every post tends to be occupied by an employee who is incompetent to carry out his duties" and adds that "work is accomplished by those employees who have not yet reached their level of incompetence".

We're doomed ...

kuuva

at 21:02 on February 6th, 2009

remember this is B for $Billion.

Yellow Guitar

at 21:37 on February 6th, 2009

Disgusting eh, but hardly surprising.

Yellow Guitar

at 21:41 on February 6th, 2009

I hope we don't wind up in the same straits in Canada; our gov't is determined to follow suit with the banks. by the way, did you know you'd have to spend a million dollars a week for 20 years just to spend 1 Billion?

A. Tran

at 21:51 on February 6th, 2009

Thank you kuuva and Yellow Guitar for your comments and recommendations.

René

at 05:31 on February 7th, 2009

They over-paid $350 billion, what they already dispersed. Correction, $2 trillion overpaid.

158

at 08:31 on February 7th, 2009

This whole stimulus is a mistake and with what they are spending $78b is not much.

A. Tran

at 08:48 on February 7th, 2009

Thank you to Rene, 158, and Sara for your comments and recommendations.

A. Tran

at 09:51 on February 7th, 2009

In light of the economic downturn, it is even more appalling that those American banks that received over-payments of $78 Billion in 2008 for obviously, exaggerated values estimated by then Secretary Paulson.

As Yellow Guitar and Sara have noted, and Blue Crush's piece on job loss in Canada, the economic downturn doesn't just affect the US, but around the world, as these countries injected monies into their economy under their versions of economic stimulus package.

René

at 16:09 on February 7th, 2009

Oh, that's just the tip of the iceberg: The Financial Coup D'Etat

“You don’t understand. It’s too late. They have given up on the country. They are moving all the money out in the fall [of 1997]. They are moving it to Asia.”

Sure enough, that fall, significant amounts of moneys started leaving the US, including illegally. Over $4 trillion went missing from the US government. No one seemed to notice. Misled into thinking we were in a boom economy by a fraudulent debt bubble engineered with force and intention from the highest levels of the financial system, Americans were engaging in an orgy of consumption that was liquidating the real financial equity we needed urgently to reposition ourselves for the times ahead.

my experience with a Washington-Wall Street partnership that had:

Engineered a fraudulent housing and debt bubble;

Illegally shifted vast amounts of capital out of the U.S.;

Used “privitization” as form or piracy - a pretext to move government assets to private investors at below-market prices and then shift private liabilities back to government at no cost to the private liability holder.

Other presenters at the conference included distinguished reporters covering privatization in Eastern Europe and Russia. As the portraits of British ancestors stared down upon us, we listened to story after story of global privatization throughout the 1990s in the Americas, Europe, and Asia.

Slowly, as the pieces fit together, we shared a horrifying epiphany: the banks, corporations and investors acting in each global region were the exact same players. They were a relatively small group that reappeared again and again in Russia, Eastern Europe, and Asia accompanied by the same well-known accounting firms and law firms.

Clearly, there was a global financial coup d’etat underway.

The magnitude of what was happening was overwhelming. In the 1990’s, millions of people in Russia had woken up to find their bank accounts and pension funds simply gone – eradicated by a falling currency or stolen by mobsters who laundered money back into big New York Fed member banks for reinvestment to fuel the debt bubble.

Reports of politicians, government officials, academics, and intelligence agencies facilitating the racketeering and theft were compelling. One lawyer in Russia, living without electricity and growing food to prevent starvation, was quoted as saying, “We are being de-modernized.”

Yellow Guitar

at 20:58 on February 7th, 2009

Excellent comment/piece Rene. I think the orgy of consumerism was a kind of self-medicating. There is always the menacing threat that the world as we know it will fall to pieces. Mass consumerism and the wreckless pursuit of (material) happiness renders us comfortably numb. The writing has been on the wall for so long ... and they did it. The sobs burned Rome while WE fiddled.