UPDATE 3-Watchdogs, senators blast U.S. bank bailout

(Recasts; adds Warren, GAO comments, background)

By Kevin Drawbaugh and Karey Wutkowski

WASHINGTON Feb 5 (Reuters) - Watchdogs monitoring the U.S. government's bank bailout called for a major overhaul on Thursday, with one accusing those running it of misleading the public, while senators slammed the program as chaotic and poorly managed.

Under the $700 billion program meant to stabilize the teetering financial system, the Treasury Department has so far spent nearly $300 billion to bolster financial institutions and U.S. automakers in exchange for preferred shares and warrants.

But in buying those securities, the Treasury under then-Secretary Henry Paulson 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 ... They described the program one way, and they priced it another," Warren said at a hearing before the Senate Banking Committee. Many members of the panel condemned management of the program, which is barely four months old.

"Implementation ... proceeded in a chaotic, unorganized and ad hoc manner," said Democrat Daniel Akaka of Hawaii.

Neil Barofsky, another watchdog for the program, told the Senate committee his office is turning to criminal investigations. "That's going to be a large focus of my office," he said.

Barofsky, the inspector general for TARP, told the Los Angeles Times in an interview Wednesday that misrepresentations in applications for TARP funds would be grounds for criminal prosecution.

On projections by some analysts that the TARP program may need more money soon, Indiana Democratic Sen. Evan Bayh said, "There will be no additional funding for this program without airtight assurances that it will be better managed."

The Obama administration plans to unveil a new strategy on Monday aimed at reviving paralyzed credit markets, helping struggling homeowners, and lifting the economy out of recession.

Tighter TARP management is expected to be a part of that package. A preview of that came on Wednesday when the White House announced a $500,000 annual cap on executive pay at companies receiving TARP money.

RESPONSE TO CRISIS

The TARP was launched last year by the Bush administration in response to an alarming slowdown in global capital markets triggered by a housing slump that undermined mortgage-backed bonds carried on the books of major financial institutions.

Congress approved the $700 billion program after Paulson said it would be used to buy broken bonds and clean off banks' balance sheets. But days after that approval, Paulson changed the focus to buying preferred shares in banks.

Warren, head of the TARP's Congressional Oversight Panel, told the banking committee that after three months on the job, her panel is still not getting enough answers from Treasury. She described the bailout as "an opaque process at best."

Warren said she plans to release a report on Friday that calculates Treasury put about $254 billion into financial institutions in 2008, but got only $176 billion in value.

"That's a shortfall of about $78 billion," she said, adding that Paulson "was not entirely candid" in his description of TARP's bank capital injection program.

Barofsky, the independent TARP inspector general at Treasury, raised concerns about potential fraud in one of several programs funded by bailout money -- the Federal Reserve's Term Asset-Backed Loan Facility (TALF). "Treasury should consider requiring that some baseline fraud prevention standards be imposed," Barofsky said in his first report to Congress.

He told the committee the government has collected more than $271 million in dividends from its TARP-financed bank shares and said the department needs a strategy for administering its holdings.

A Treasury spokesman said the department would adopt many of Barofsky's recommendations.

Treasury holds $279.2 billion in preferred shares from 319 financial institutions, paying dividends of between 5 and 10 percent, according to Barofsky's 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 (AIG.N), Bank of America (BAC.N), Citigroup (C.N) and General Motors (GM.N).

Yet another watchdog group -- Congress's Government Accountability Office -- told the committee Treasury needs to keep closer track of TARP money disbursed and that the program needs internal controls and "a clearly articulated vision."

Barofsky's report was posted on the Web here . (Additional reporting by John Poirier, Julie Vorman; Editing by Tim Dobbyn)