Banks negotiating to reclaim stock warrants they granted in return for Troubled Asset Relief Program money may shortchange taxpayers by almost $10 billion if Treasury Secretary Timothy Geithner’s first sale sets the pace, data compiled by Bloomberg show.

While 17 financial institutions have repaid TARP funds, two have come to terms with the U.S. on the value of the rights to buy stock that taxpayers received for the risk of recapitalizing the industry. The first was Old National Bancorp in Evansville, Indiana, which gave the Treasury Department $1.2 million last week for warrants that may have been worth $5.81 million, according to the data.

If Geithner makes the same deal for all companies in the rescue program, lenders may walk away with 80 percent of the profits taxpayers might have claimed.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

“For once we’d like to get a fair value when we come into contact with the banking system,” said Representative Brad Miller, a North Carolina Democrat and chairman of the Investigations and Oversight Subcommittee of House Science and Technology Committee. “We don’t want a ruthless bargain.”

 

 

 

 

 

 

 

 

 

 

 

 

For the 20 largest TARP recipients, the total savings would be $9.985 billion, the data show.

Senator Jack Reed, a Rhode Island Democrat and chairman of the Banking Subcommittee on Securities, Insurance and Investment, said today in a letter to Geithner that warrants were part of the TARP so that taxpayers could be compensated for the risks they took investing in lenders.

“We need to ensure that the financial industry recovers and that banks can start lending again, but taxpayers must be fairly compensated as well,” Reed said.

Geithner wants to move swiftly to sell the TARP warrants, he said on May 20. Their worth depends on assumptions about the chances the underlying stock will go higher than the rights. Depending on the input, different valuation models reach a range of conclusions.

Lenders shouldn’t be trusted to make suppositions that would be to the advantage of taxpayers, said Linus Wilson, an assistant professor of finance at the University of Louisiana at Lafayette.

 

 

 

 

 

 

 

 

 

 

 

 

“The point of the warrants is that taxpayers participate in the upside,” said Johnson, who testified on the securities before Miller’s subcommittee on May 19. “It defeats the whole purpose if you’re going to sell them way below market price.”

 

 

 

 

 

 

 

 

 

 

 

 

Treasury Department spokesman Andrew Williams declined to comment on Old National.

 

 

 

 

 

 

 

 

 

 

 

 

“We’re doing our best to protect the taxpayers’ interest and make sure we get fair market value,” he said.

 

 

 

 

 

 

 

 

 

 

 

 

The American Bankers Association said in an April 16 letter to Geithner that a company that wants to get out of the TARP now faces an “onerous exit fee” because it has held the investment for so little time.

 

 

 

 

 

 

 

 

 

 

 

 

“There is no reason for Treasury to impose such a punitive obstacle to exiting,” said Diane Casey-Landry, the association’s chief operating officer in Washington.

After Shore Bancshares Inc. returned $25 million in TARP money, plus $208,333 in interest, it offered to buy its 173,000 warrants, according to CEO Moorhead Vermilye. He declined to disclose the bid, which he said the U.S. rejected.

The Easton, Maryland-based bank’s warrants were valued yesterday at $12.33, or $2.1 million, according to data compiled by Bloomberg and modeled by Black-Scholes. Paying that to reclaim them would amount to an annual interest rate of more than 30 percent a year.

“It’s a tough penalty for the short time we had the money -- three months,” Vermilye said.