Bank bailout lashed by senators and watchdogs

The U.S. Treasury building is seen in Washington, September 29, 2008.

WASHINGTON (Reuters) - The Treasury Department misled the public about the pricing mechanism it used to inject about $250 billion into financial institutions and changes are needed to improve management of the program, a congressional watchdog said on Thursday.

The money was spent as part of the $700 billion bailout fund known as the Troubled Asset Relief Program (TARP), created late last year by Congress to help stabilize the U.S. banking system and revive credit markets.

At a Senate Banking Committee hearing, the taxpayer-funded program was also criticized by Democratic lawmakers who said TARP was poorly run. The Obama administration is expected to unveil a new strategy next week to help U.S. banks, which is expected to include a new approach to administering TARP.

Elizabeth Warren, chairman of a TARP oversight panel appointed by Congress, said Treasury misled the public about pricing the capital injection program.

"Treasury simply did not do what it said it was doing ... They described the program one way, and they priced it another," said Warren, a Harvard University law professor.

She also complained that after three months of reviewing the TARP program, her panel is still not getting enough answers from Treasury.

"The question now is whether or not we have a Treasury that's going to be more transparent, more responsive and is going to bring to Congress and the American people a statement of its diagnosis of the problem," Warren said.

TARP's activities are being scrutinized by other groups as well.

Neil Barofsky, the independent TARP inspector general who resides within the Treasury Department, told the Senate panel that his office is turning to criminal investigations. "That's going to be a large focus of my office," he said.

A third entity -- the Government Accountability Office, which is the investigative arm of Congress -- told the committee the Treasury Department needs to keep closer track of TARP money disbursed and stronger internal controls.

"CHAOTIC, UNORGANIZED"

Lawmakers on the Senate panel expressed frustration at the management of TARP.

"There will be no additional funding for this program without airtight assurances that it will be better managed," said Sen. Evan Bayh, a Democrat from Indiana.

Sen. Daniel Akaka of Hawaii, another Democrat, said the former Bush administration ignored queries from Congress. "Typical of the Bush administration, congressional inquiries... went unanswered and implementation of the program proceeded in a chaotic, unorganized and ad hoc manner," he said.

Lawmakers from both parties have criticized banks for failing to use taxpayer money from the TARP for lending to help stabilize the economy. The Obama administration on Wednesday set a $500,000 annual cap on executive pay and imposed other conditions on companies receiving TARP money.

In a report to Congress, Barofsky raised concerns about potential fraud in one of several programs funded by the bailout money -- the Federal Reserve's Term Asset-Backed Loan Facility (TALF).

"Treasury should consider requiring that some baseline fraud prevention standards be imposed," the report said. Likewise, the government should be cautious if it wants to expand TALF to mortgage-backed securities, the report said.

Now that the government owns big stakes in so many banks, Treasury must develop an investment strategy and a way to value the preferred shares and warrants it holds, Barofsky said.

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

Treasury now 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, Bank of America, Citigroup and General Motors.

(Additional reporting by John Poirier, Julie Vorman; Editing by John Wallace and Tim Dobbyn)