U.S. needs investment plan for bank shares

U.S. needs investment plan for bank shares

 

he U.S. government has collected more than $271 million in dividends from ownership stakes in American banks and needs to develop an investment strategy for its holdings, a government watchdog said in a Thursday report.

In its first report to Congress, the special inspector general for the Treasury Department's $700 billion bailout program said the government must decide if it plans to exercise warrants in order to hold common stock in some of the banks it has rescued.

If so, the Treasury Department will have to set aside some money in its Troubled Asset Relief Program (TARP) to do so, Inspector General Neil Barofsky said in the report.

Barofsky was scheduled to testify about the banking bailout program at a Senate Banking Committee hearing on Thursday, beginning at 10 a.m. EST.

Lawmakers from both political parties have criticized banks for failing to use the taxpayer money for lending to help stabilize the hard-hit U.S. economy. The Obama administration on Wednesday set a $500,000 annual cap on executive pay and imposed other conditions on companies getting TARP money.

In his report, Barofsky raised concerns about potential fraud in one of several programs funded by the bailout money -- the Federal Reserve's Term Asset-Backed Loan Facility (TALF).

The TALF program, due to begin later this month, is a way for the Fed to give non-recourse loans upon the posting of collateral in the form of newly issued ABS. The program is backed by $20 billion in federal bailout funds.

"Treasury should consider requiring that some baseline fraud prevention standards be imposed, such as minimum underwriting standards or some other combination of provisions that will minimize the risk of fraud" linked to the ABS or the underlying assets of the ABS, the report said.

Requiring that the ABS receive a minimum rating from credit rating agencies is not enough protect the government from securities tied to underlying loans that have been overvalued, it said. After discussing the concerns with the Fed and Treasury, Barofsky said he was told that they are now considering imposing varying "haircut" rates depending on asset class and a risk-screening procedure.

Likewise, the government should be cautious if it wants to expand TALF to mortgage-backed securities, the report said.

"In light of the prevalence of mortgage fraud over recent years, (the inspector general) recommends that Treasury should give careful consideration before agreeing to the expansion of TALF to include MBS without further review and without considering certain minimum fraud protection," it said.

And TALF should not be expanded to so-called legacy MBS that were previously issued without "significant modifications" and a risk assessment, the report said.

"Treasury should establish a compliance protocol with the Federal Reserve before TALF is put into effect," it added.

Now that the U.S. government owes sizable stakes in so many American banks, the Treasury Department must put together an investment strategy, Barofsky said.

"Treasury needs, in the near term, to begin developing a more complete strategy on what to do with the very substantial portfolio that it now manages on behalf of the American people," the report said. The government must also develop a way to value the preferred shares and warrants that it holds, it said.

The Treasury Department now holds $279.2 billion in preferred shares from 319 financial institutions, paying dividends between 5 percent and 10 percent, according to the report. The government also received common stock warrants from 230 institutions, most of which are now out of the money. The largest positions in warrants include AIG, Bank of America, Citigroup and General Motors, the report said.