How Elizabeth Warren saved taxpayers $1 billion

Elizabeth Warren's work keeping tabs on the bank bailout is a great argument for good government

By Matt Stoller

Published October 30, 2012 4:15PM (EDT)

While Mitt Romney and Barack Obama battle nationally for the right to occupy the White House for the next four years, perhaps the second most contentious significant race in the entire country is occurring in Massachusetts. That is where the Democratic Party's candidate for Senate, self-described advocate for the middle class Elizabeth Warren, faces off against Republican Scott Brown. Polls show the race is close, and the bitterness of the rhetoric matches the polling.

One of Scott Brown's most consistent arguments is that Elizabeth Warren represents Obama's liberal "tax and spend" policies leading to big government. But a new paper by Stanford political scientist Lucas Puente published in PS. Political Science and Politics shows that Elizabeth Warren's work on the Congressional Oversight Panel was highly advantageous to the taxpayer, saving over a billion dollars money by taking a skeptical approach towards the Treasury Department's bailout plans.

The issue has to do with an obscure part of the Troubled Asset Relief Program, or TARP, known as warrants. This was a piece of the bailout that was designed to allow the government to profit from its investment in banks.

In 2008, at the height of the financial crisis, Treasury Secretary Hank Paulson decided to put money into the banking system by investing in preferred shares of the banks. These investments entitled Treasury to dividend payments of 5 percent a year for the first five years, and 9 percent thereafter. In addition, as part of the deal, the government received warrants, or the right to purchase common stock at a preset price at any time over the next ten years, at a value of roughly 15 percent of the government investment. The strike price of these warrants was equivalent to, as Puente wrote, "the 20 day trailing average of first's common stock trading price at the time of the deal." Two hundred and seventy-three firms eventually exchanged warrants. Treasury has sold many of them, including those from the largest banks.

Bailout politics are fraught with bitter political accusations. Just this week, Financial Services Committee Chairman Spencer Bachus released a report showing that Section 204 of the Dodd-Frank bill allows AIG-style bailouts to happen again, despite the claims of the administration. And scholarship is showing that the political influence of financial institutions, as measured by campaign contributions, was correlated with receipt of TARP funds. This makes sense - high level White House official Michael Froman, who apparently advised Obama to hire Geithner during the transition, made millions from Citigroup, the largest recipient of bailout funds and as Sheila Bair notes in her book Bull by the Horns, the least stable bank. Jack Lew, current White House Chief of Staff did as well. And Bob Rubin, a frequent below the radar advisor to Obama and mentor to Tim Geithner and Larry Summers, was the Chairman of Citigroup at the time of the bailouts.

TARP and Federal Reserve lending were correlated with political connections. But with the disposal of warrants, what Puente found is that political connections did not play a role in the valuations Treasury got when the government decided to auction them off. In fact, according to Puente, there was only one factor that mattered: Congressional Oversight Panel Chair Elizabeth Warren. It was Warren who, along with the Special Inspector General of TARP Neil Barofsky, put out a series of reports that forced Treasury to modify its process for selling the warrants. Puente noted that "warrant deals that occurred prior to the July 2009 COP report were systematically discounted." The deals that came after were not. "With $8.97 billion in warrant deals having been completed between May 2009 and March 2011, that the COP helped Treasury get 10 percent more after publishing its report is non-trivial."

Oversight works, but it's rarely pleasant. Barofsky, who recounted his experience as a government watchdog in the new book Bailout, noted that the relationship between the Treasury Department and the oversight bodies could be quite poor. He said, "The sad reality is that often in government arrogance and the political imperative to never acknowledge fallibility leads to egregious errors that can and have cost the taxpayer billions of dollars. With TARP, Elizabeth and I were able to leverage one another as well as Congress to shine a bright light on Treasury's actions." This leverage saved the taxpayer roughly a billion dollars. The final budget for Warren's Congressional Oversight Panel was $10,684,422. That's roughly a one hundred to one return on investment for every dollar invested in oversight. And that's not including anything else that Warren's oversight body did.

Oversight is the most overlooked part of the Congressional process, but it is arguably the most important. The indelible picture of tobacco executives raising their hands before a Congressional panel headed by Congressman Henry Waxman was the precipitating event for reform of the tobacco industry. Chuck Grassley, Carl Levin, Henry Waxman, and Claire McCaskill are all known for their investigative work. As Senator, if she wins, Elizabeth Warren will in all likelihood continue the work she did at the Congressional Oversight Panel. The Treasury Department may not like it, but the taxpayers will be grateful.

Matt Stoller

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Elizabeth Warren Federal Government\ Financial Crisis Government Spending Tarp