Senate Passes Reed Amendment to Give Taxpayers More of a Return on Their Investment When Banks Recover
WASHINGTON, DC -- In an effort to protect and reimburse taxpayers who made significant investments in the financial system through the Troubled Asset Relief Program (TARP) program, the U.S. Senate today passed Senator Jack Reed's (D-RI) amendment giving the U.S. Treasury the right to purchase common stock at a later date so taxpayers can receive more of a return on their investment when the banking industry recovers.
In September of 2008, Reed authored legislation giving the federal government warrants to purchase stock in companies that participated in the bailout plan, so that taxpayers might be able to profit should the firms flourish after selling their bad debts to the government. However, the banks won a little noticed provision in the American Recovery and Reinvestment Act (ARRA) which required that warrants be purchased by the Treasury at the time TARP is paid back. Today's amendment, which was passed unanimously by the Senate, reverses that win for the banks and instead gives the Secretary of the Treasury, not the banks, the choice of when to exercise the warrants based on what is best for the taxpayers.
"Tax payers should not be forced to assume all the risk and then let the companies get all the reward. That is not fair in any kind of deal. This will be an important way for the Treasury to recoup some of the taxpayer investment in this program," said Reed, a senior member of the Banking Committee. "My amendment will protect taxpayers who were supposed to share not just in any downside risk, but also in any upside as institutions receiving TARP funds recovered. It does this by clarifying the status of warrants that are currently held by the Department of Treasury with respect to TARP. It will give the Secretary of the Treasury discretion to dispose of those warrants when he feels it is appropriate, thereby reversing language adopted in the Recovery Act that requires the Secretary to surrender or dispose of the warrants immediately if the TARP funds are returned by a financial institution. That language was included to enable banks to repay their TARP funds, but these warrants are separate, valuable financial products, and the government, like any investor, should have the flexibility to buy and sell the product at our discretion, based on what is best for taxpayers."
Reed's amendment removes the program's requirement that Treasury liquidate the warrants after a TARP recipient repays the government and gives the Secretary of the Treasury discretion to dispose of those warrants when he feels it is appropriate.
"I believe the Secretary should have the discretion to hold these warrants if he thinks it is in the best interests of the taxpayers. I urge Secretary Geithner to use this provision to ensure value for taxpayers. The whole point of the warrants is, in addition to our investment in preferred stock which pays dividends, the government would also have the right to obtain warrants; that would be the right to acquire stock in the future," stated Reed.
Reed noted that at the time the Senate was debating the TARP bill, Warren Buffett, who is a very sophisticated investor, made a preferred stock investment in a large financial institution and also received warrants.
"The premise of my original legislation was that not only would the direct investment be repaid, but taxpayers would benefit from the recovery of these institutions. We have a ways to go but we are seeing encouraging signs of that recovery now," concluded Reed. "I believe, again, that having assumed risks, taxpayers should benefit from the rewards of a revived financial institution. This amendment provides discretionary authority to the Secretary of the Treasury so that he can judge whether and when the appropriate time is to surrender the warrants, to receive fair market price for the warrants, and to ultimately help benefit the taxpayers who have put up the money to deal with a huge financial crisis."