WASHINGTON — Members of a government watchdog panel voiced opposition Tuesday to possible plans by the Treasury Department to convert preferred shares of banks to common stock, and they urged it to let banks promptly repay government rescue funds.

Though none of the members of the Congressional Oversight Panel, which oversees implementation of the Troubled Asset Relief Program, appeared satisfied at a hearing with the program's effectiveness to date, the two Republican members were the most vocal.

Rep. Jeb Hensarling, R-Texas, said a potential plan to convert shares of several Tarp recipients from preferred to common would be a mistake. The government gets a 5% dividend on the preferred shares, he said, and share conversion would do little to stabilize an institution. "At the end of the day, a financial institution after that conversion has no new capital in a practical definition," he said. "Yet what has happened is, the taxpayer clearly is at a greater risk."

In response, Treasury Secretary Tim Geithner, the hearing's sole witness, acknowledged that the move does not "add to the overall level of regulatory capital."

But "it does change the composition in ways that can actually be helpful to the wants and objectives we put in place," he said.

It did not appear that Geithner plans to make any conversion mandatory; if an institution fails a stress test, he said, it will be given the chance to convert its stock, raise private capital or seek additional government funds.

Former Sen. John Sununu, R-N.H., and Hensarling both pressed Geithner to allow healthy companies to repay Tarp funds — a demand Geithner appeared reluctant to satisfy. The Treasury chief said that repaying Tarp would be up to federal bank regulators; decisions would be tied in part to the health of the banking system, not just the individual bank's condition.

"Ultimately … we have to look at two things," Geithner said. "One is, do the institutions themselves have enough capital to be able to lend? And does the system as a whole, is it working for the American people for recovery? And that's the standard we're going to look at."

So far six banks have repaid Tarp capital. Geithner argued that it would be awkward timing for him to provide more clarity before the stress tests being administered at the top 19 banks are completed to determine whether they need additional capital. But the panelists appeared frustrated by his vague responses. "You've left more questions unanswered than answered on the stress tests," Sununu said.

Geithner was similarly vague when pressed on plans to increase consumer protections under a regulatory restructuring plan due out in the next few weeks.

New York State Banking Superintendent Richard Neiman, a member of the oversight board, asked the Treasury secretary what role the states would have in consumer protections, but Geithner declined to give details. "I would expect states to have an important role going forward still, but the exact nature of [that] role you will see laid out in the suggestions we make in what should happen at the federal level," he said.

Geithner also addressed concerns over executive compensation. The administration is writing rules to enforce an executive compensation amendment by Senate Banking Committee Chairman Chris Dodd, he said, and such rules would apply to some participants in the Public-Private Investment Program, not just participants in the capital injection program.

Treasury continues to exempt investors who buy assets from the plan, but would force those that sell to comply with the restrictions.

The hearing came as the Treasury inspector general, Neil Barofsky, released a report concluding that Treasury's asset plan could be vulnerable to fraud.

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