WASHINGTON — The Treasury Department's program to negotiate and sell billions of dollars of warrants received from banks that got government aid could favor some financial firms over others, a government watchdog said Tuesday.

Neil Barofsky, the special inspector general for the $700 billion Troubled Asset Relief Program, said in a report that the lack of documentation has made it "impossible" for his office to determine why Treasury accepted bids for some institutions, but rejected similar bids from others. The watchdog entity is also unable to verify whether decisions surrounding warrant offers were "consistently or objective across all institutions."

Barofsky's office characterized Treasury's lackluster documentation of conversations and negotiations it had with bailout recipients about warrant repurchases as "troubling."

"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 be documented contemporaneously," the report said.

U.S. lawmakers plan to scrutinize Barofsky's findings at a Tuesday hearing before a U.S. House subcommittee. Treasury's Chief Investment Officer, David Miller, is scheduled to testify, along with Kevin Puvalowski, deputy special inspector general for Tarp.

Miller, according to excerpts of his testimony, will tell the panel that of the $245 billion that was invested in financial institutions, $177 billion, or 72%, has been returned to pay down the deficit. "Taxpayers have earned a modest profit on those investments, including more than $6 billion in warrant proceeds," he said.

The warrants — issued by banks to Treasury for receiving government aid under Tarp — give the holder a right to purchase stock at a future date.

Most banks that have sought to repay the government aid have repurchased their warrants from the Treasury, usually at a mark-up from internal Treasury estimates. In a handful of cases, however, banks and the Treasury have been unable to agree upon a price and the Treasury has auctioned off the warrants.

Despite the concerns about transparency raised by Barofsky, Treasury officials have been able to drive a hard bargain with some firms, particularly major banks such as Goldman Sachs Group Inc. and Morgan Stanley, rejecting bids that were in line with, or above, internal and external estimates.

As of March 19, Treasury has received $5.63 billion from warrant repurchases and auctions, the report said. That's in addition to $2.6 million Treasury received from preferred stock repurchases by six privately held banks.

The report also shows that of the 33 public warrant repurchases completed through March 19, 20 of the final negotiated prices were at or above Treasury's internal fair market value estimates. Nine of the final prices were just below the composite value, typically between 90% and 99%. The remaining four were below that range, but the report doesn't say by how much.

Barofsky's office raises concerns with several warrant negotiations where it seems no clear or concise guidelines were established, particularly regarding the amount of information shared regarding Treasury's estimated market value and the price the department was willing to accept on warrant repurchases.

In the case of discussions with JPMorgan Chase & Co., Treasury provided "essentially no valuation guidance" to the bank and suggested it wouldn't do so. JPMorgan declined to submit a subsequent bid, prompting a public auction, and Treasury ended up collecting roughly $950 million from the auction — $50 million below the department's fair market value estimate.

The report also cites Treasury's negotiations with American Express Co., where Treasury likewise declined to give the firm any guidance. American Express' second offer for its warrants was $260 million, $20 million below Treasury's internal fair market value estimate but within the 90% to 99% range where Treasury settled with other banks. That bid wasn't accepted and American Express countered with a $340 million offer, which Treasury accepted.

The report found that certain firms, particularly smaller banks, did receive information about Treasury's valuation range for the warrants. Barofsky's report said that Treasury needs to increase the transparency of its warrants negotiations to avoid being criticized — "fairly or unfairly" — that it is favoring some institutions over others.

Assistant Treasury Secretary Herbert Allison, who oversees the Tarp, said in a letter included in Barofsky's report that Treasury disagrees with some of the findings but would review its procedures.

Responding to the special inspector general's report, Treasury raised several points, one being that the report does not suggest Treasury change its auction process.

The department also said it maintains a detailed warrant valuation analysis on each offer made by an institution. "The outcomes from this process continue to achieve the best possible result for the taxpayer," Treasury said.

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