The Treasury Department has achieved "slightly better" returns on average from negotiating warrant repurchases with financial firms as opposed to selling warrants, the department's chief investment officer told lawmakers Tuesday.
David Miller, who heads the Troubled Asset Relief Program's investment strategies, said that in measuring the value the Treasury receives from warrant repurchases and auctions, the agency looks at "implied volatility." The higher the volatility of a transaction, the greater the value received.
"Comparing implied volatilities suggests that Treasury received better pricing in its negotiated transactions than it received in the warrant auctions," Miller said.
On warrant negotiations, the Treasury received an average implied volatility of 35%; while the auctions handed the agency an average implied volatility of 33%.
Miller's testimony before a subcommittee of the House Financial Services Committee came after an audit of Tarp was released Tuesday by Neil Barofsky, the special inspector general for Tarp. Barofsky's report warned that the Treasury'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.
At issue is a lack of detailed documentation on what information is shared with banks that are attempting to repurchase their warrants. According to the report, the Treasury's estimated market value and the price the department was willing to accept on warrant repurchases was provided to some banks, while other banks received no guidance.
Linus Wilson, a University of Louisiana at Lafayette finance professor who has been closely following the government's warrant auctions, testified at the hearing as well. Though Wilson primarily testified about the Treasury's efforts to recoup taxpayer dollars, he said by e-mail that the audit report "raises some interesting issues about Treasury personnel feeding banks their minimum acceptable bids."
"If I told my students that $1.2 million was the answer to question one on the test, then they would answer $1.2 million," he said. "That would not be ethical and, in the U.S. Treasury's case, that can cost taxpayers hundreds of millions of dollars on a single transaction."
Answering lawmaker questions related to the topic, Miller said each firm's warrant negotiation proceedings must be handled differently because each firm has unique circumstances.
Barofsky's report said the Treasury needs to make its warrants negotiations more transparent to avoid being criticized — "fairly or unfairly" — that it is favoring some institutions over others.
Despite the transparency concerns Barofsky raised, Treasury officials have been able to drive a hard bargain with some firms, particularly major banking companies such as Goldman Sachs Group Inc. and Morgan Stanley, rejecting bids that were in line with, or above, internal and external estimates.
As of May 5 the Treasury had received about $6 billion from warrant repurchases and auctions, Miller said.
Miller said the Treasury treats all banks the same even though it is harder for his team to determine the value of warrants from the roughly 655 remaining smaller firms.
Monetizing its warrant holdings as soon as possible in a "prudent and sensible" manner remains the Treasury's principal goal, Miller aid.
