Biz Press Largely Misses the TARP News

The financial press way underplays a report by the TARP oversight panel that Treasury Secretary Hank Paulson lied to the public—and to Congress—about the price he paid for banks’ preferred stock*. And no surprise, the panel suggests he paid tens of billions more than he should have.

The oversight panel is headed by Harvard’s Elizabeth Warren, who’s written extensively on the middle-class squeeze, and is one of Audit chieftain Dean Starkman’s favorites.

Warren says this, which the Journal drops in the second-to-last graph of a C3 story:

She said the report suggests Treasury paid $254 billion for preferred stock* and warrants that may be worth approximately $176 billion, a shortfall of $78 billion.

Let’s spell that out: Paulson overpaid the market price for those assets by 31 percent. $78 billion used to be a lot of money, and it still is a lot of money. It’s outrageous. And Warren’s not out on a limb here: The Congressional Budget Office estimated a similar amount recently.

And the Journal story (actually a Dow Jones Newswires story added to by a WSJ reporter) somehow doesn’t mention at all that Warren said Paulson misled the public and Congress. Hello?

The Times is not much better, running a Reuters wire story inside its business section, but at least it reports Warren’s important testimony:

But in buying those securities, Henry M. Paulson Jr., then the Treasury secretary, misled the public about how it was going to price them, said Elizabeth Warren, a Harvard law professor and head of an oversight panel for the bailout, known as the Troubled Asset Relief Program, or TARP.

“Treasury simply did not do what it said it was doing,” Ms. Warren said at a hearing before the Senate banking committee.

But even it doesn’t note that if Warren is correct, Paulson not only misled the public, he misled the Congress, which last I knew was a crime.

The Washington Post is much, much better, putting the $78 billion figure in the lede—and on A3.

My quibble with the Post’s story is that it doesn’t air the whole “lied to the public and Congress” news until the seventh graph:

Warren replied, “Senator, Treasury simply did not do what it said it was doing.”

“In other words, they misled the Congress, did they not?” said a visibly flustered (Senator) Shelby.

To put this starkly, we are subsidizing the shareholders and executives of the very firms who have done us in.

According to the analysis by the oversight panel, the Treasury invested $40 billion in American International Group, the insurance giant, and received shares of equal face value but worth only $14.8 billion, or 37 percent of the price it paid. It said the real value of the $10 billion in Morgan Stanley that the government purchased was only $5.8 billion, or 58 percent of what it spent.

The study was conducted for the panel by the international valuation firm Duff & Phelps, which analyzed the 10 largest bailout investments and then extrapolated. For the eight banks it studied that were relatively healthy, the Treasury received assets worth $78 for every $100 it invested. In the two transactions for the riskier firms, the government received preferred shares worth $41 for every $100 it invested.

Forty-one cents on the dollar*. Heck of a job, Hanky.

* Updated to correct the number and to say more precisely what Treasury bought. I originally referred to it as “debt”, but preferred stock is a sort of debt/equity hybrid, though some say in this case the purchases are effectively of “subordinated debt.”

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.