WASHINGTON, DC -- With some banks claiming "we shouldn't have had to pay a dime," to buy back warrants purchased by the U.S. Treasury on behalf of American taxpayers, U.S. Senator Jack Reed (D-RI), today called on Treasury to ensure that banks pay fair value for the warrants and ensure the best return for taxpayers. Reed, a senior member of the Banking Committee, wrote the law giving the federal government warrants to purchase stock in companies that participated in the Troubled Asset Relief Plan (TARP), so that taxpayers might be able to profit should the firms flourish after selling their bad debts to the government.

"All of the financial institutions that participated in TARP are benefitting from the stabilization of the banking industry. Taxpayers stepped in at a critical moment to stabilize the financial system. These steps have allowed banks to recover and it is only fair that taxpayers should benefit from their investment in shoring up the system," said Reed.

Yesterday, Reed and Treasury Secretary Tim Geithner discussed the issue and Reed reiterated the need to ensure taxpayers are appropriately compensated for their TARP investments through the use of warrants. Reed also made these points in a May 22, 2009 letter (below) urging Treasury to use the existing tools Congress has provided to get the best return for taxpayers.

"These financial institutions and their shareholders benefited from taxpayer's assistance and government guarantees that they would not be allowed to fail. Congress gave Secretary Geithner the power and discretion to hold these warrants if he thinks it is in the best interests of the taxpayers. I urge him to use this authority to hold banks accountable and ensure the best value for taxpayers," stated Reed.

The Emergency Economic Stabilization Act of 2008 included a provision authored by Senator Reed requiring financial institutions receiving TARP funds to issue warrants which give the government the option to purchase common stock in each of the rescued banks. Reed's provision attracted bipartisan support because it ensured that if taxpayers were going to be exposed to downside risk, they would also share in the potential success of these financial institutions as they recover.

Last month, Congress provided additional leverage to Treasury under the Helping Families Save Their Homes Act through an amendment authored by Senator Reed eliminating the requirement that Treasury liquidate the warrants immediately after a TARP recipient repays the government. Reed's provision gave Treasury the leverage to sell or exercise the warrants at its discretion.

The May 22nd letter from Senator Reed to Secretary Geithner is below:

May 22, 2009

The Honorable Timothy F. Geithner
United States Secretary of the Treasury
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

Dear Secretary Geithner,

As you know, under the Emergency Economic Stabilization Act of 2008, Congress required financial institutions receiving TARP funds to issue warrants which give the government the option to purchase common stock in each of the rescued banks. This was a provision I insisted be included in the legislation to help protect taxpayers and ensure they get a return on their investment. If taxpayers are going to be exposed to downside risk, then they must share in the potential success of these financial institutions as they begin to recover. Academic experts cited by the New York Times have noted that my warrants provision could help taxpayers recoup up to $10.9 billion of their investment in the TARP program.

News reports indicate that Old National Bancorp in Evansville, Indiana, recently became the first bank to repay its TARP funds and come to terms with the U.S. government on its warrants. Old National Bancorp paid Treasury $1.2 million for warrants that may have been worth over $5.8 million. We need to ensure that the financial industry recovers and that banks can start lending again, but taxpayers must be fairly compensated as well.

A bill signed by the President on Wednesday—the Helping Families Save Their Homes Act—included an amendment I authored eliminating the requirement that you liquidate the warrants after a TARP recipient repays the government. My provision, supported on a broad, bipartisan basis, gives you the leverage to sell or exercise the warrants at your discretion. I urge you to use this newly enacted statutory language to ensure the best return for taxpayers.

With this new leverage to hold the warrants after financial institutions repay TARP funds, I believe we now have the tools to ensure that taxpayers are appropriately compensated. I will closely monitor the purchases of the warrants. Also, in light of news reports that some financial institutions are lobbying to have the warrants expunged entirely, I remind you that there is no legal authority for the Secretary of the Treasury or any other official to surrender these instruments without requiring adequate compensation to taxpayers.

I look forward to working with you to ensure that the handling of warrants and other aspects of the economic recovery process move forward in the most effective way possible.


Sincerely,

Jack Reed
United States Senator