The U.S. Treasury has managed to negotiate prices for warrants from bailed out banks at prices largely at or above estimated values, but it needs better controls over its bargaining process, a government watchdog said on Tuesday.

The Special Inspector General for the Troubled Asset Relief Program said in a new audit report that Treasury has failed to document decisions of the internal panel that makes decisions on banks' offers to repurchase warrants from Treasury.

It also said Treasury does not document the substance of its conversations and negotiations with banks, potentially jeopardizing the return realized by taxpayers.

When a brief telephone call can mean the difference of tens of millions of dollars, it is a basic and essential element of transparency and accountability that the substance of that call can be documented contemporaneously, the inspector general, Neil Barofsky, wrote in the report.

He cited a lack of documentation in negotiations with Morgan Stanley, in which the Treasury's warrant committee had approved an initial bid of $900 million from the bank for its warrants, but it was only after Treasury Assistant Secretary for Financial Stability Herbert Allison interceded that the price was renegotiated to $950 million.

What actually occurred on the critical call between the Assistant Secretary and Morgan Stanley? Barofsky asked. Could similar tactics by Treasury have resulted in similarly favorable prices for taxpayers from other large institutions?


The Treasury has been negotiating with banks repaying their TARP funds for several months to decide whether to sell stock warrants back to institutions or auction them off to the highest bidders.

The Treasury received the warrants to purchase common stock in the 282 publicly traded banks that received government capital under TARP, the $700 billion bailout program. As of May 6, the Treasury reported $4.91 billion in net proceeds from warrants, including both direct repurchases and auctions.

The warrants were issued at no cost to the government in an effort to allow taxpayers to share in the financial sector's recovery after the bailouts in 2008 and 2009.

In the most recent auction, Treasury took in $181.1 million from the auction of warrants in Dallas-based Comerica Inc..

But pricing the warrants has been tricky, involving an initial buy-back bid from the bank and the Treasury's determination of compositive value through market quotes, financial modeling and third-party financial modeling estimates. The Treasury can accept or reject a bank's offer, launching a negotiation phase that for larger banks has recently led to auctions.

The inspector general's report said Treasury had generally succeeded in negotiating prices from recipients that were at or above the estimated composite value. Of 33 warrant direct repurchases analyzed, 20 of the final negotiated prices were at or above composite value, and nine were just under.

Barofsky discounted the first two auctions because they were done under now-defunct time constraints and before the valuation methodology had been worked out, while two others were for very small, hard-to-value institutions.

But his report said unless the Treasury addressed deficiencies in the process, it risks subjecting itself to criticism that it is picking winners and losers.

The absence of documentation and uniform guidelines for negotiation may make it difficult for Treasury to defend itself convincingly against charges of arbitrariness or favoritism, Barofsky wrote.

In a written response from Treasury, Allison wrote that while he disagreed with some of Barofsky's findings, he welcomed the audit report and would review the Treasury's procedures to ensure that there is sufficient consistency in our process.

(Reporting by David Lawder; Editing by Diane Craft)