The U.S. Treasury Department, on average, has achieved "slightly better" returns from negotiating warrant repurchases with financial firms, as opposed to selling warrants, the department's chief investment officer told lawmakers Tuesday.

David Miller, who heads the Troubled Asset Relief Program's investment strategies, said in measuring the value Treasury receives from warrant repurchases and auctions--the department looks at "implied volatility." The higher the volatility of a transaction, the greater the value received.

"Comparing implied volatilities suggests that Treasury received better pricing in its negotiated transactions than it received in the warrant auctions," Miller said.

On warrant negotiations, Treasury received an average implied volatility of 35%; while the auctions handed Treasury an average implied volatility of 33%.

Miller's testimony before a subcommittee of the House Financial Services Committee comes after an audit of TARP was released Tuesday morning by Neil Barofsky, the special inspector general for TARP. Barofsky's report warned that Treasury's program to negotiate and sell billions of dollars of warrants received from banks that got government aid could favor some financial firms over others.

At issue is a lack of detailed documentation regarding what information is shared with banks who are attempting to repurchase their warrants. According to the report, Treasury's estimated market value and the price the department was willing to accept on warrant repurchases was provided to some banks, while other banks received no guidance.

Linus Wilson, a University of Louisiana at Lafayette finance professor who has been closely following the government's warrant auctions, testified at the hearing as well. While Wilson primarily testified about Treasury's efforts to recoup taxpayer dollars, he said via email the audit report "raises some interesting issues about Treasury personnel feeding banks their minimum acceptable bids."

"If I told my students, that $1.2 million was the answer to question one on the test; then they would answer $1.2 million," he said. "That would not be ethical and, in the U.S. Treasury's case, that can cost taxpayers hundreds of millions of dollars on a single transaction."

It's unfair for one bank to receive a better deal over another, Wilson said, adding that a general rule should be in place mandating Treasury officials refrain from discussing prices with bidders.

Answering lawmaker questions related to the topic, Miller said each firm's warrant negotiation proceedings must be handled differently because firms' circumstances are unique.

Barofsky's report said Treasury needs to increase the transparency of its warrants negotiations to avoid being criticized--"fairly or unfairly"--that it is favoring some institutions over others.

Despite the concerns about transparency raised by Barofsky, Treasury officials have been able to drive a hard bargain with some firms, particularly major banks such as Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), rejecting bids that were in line with, or above, internal and external estimates.

As of May 5, Treasury has received about $6 billion from warrant repurchases and auctions, Miller said. That's in addition to $2.6 million Treasury received from preferred stock repurchases by six privately held banks.

On Treasury's effort to leverage more dollars from larger firms, Miller pointed out the larger firms--all of whom have since repaid their TARP aid--received the bulk of bailout funds. Still, he said Treasury treats all banks the same--despite it being harder for his team to determine the value of warrants from the roughly 655 remaining smaller firms.

When all is said and done, Treasury's goal remains: to monetize its warrant holdings as soon as possible in a "prudent and sensibly" manner.

-By Darrell A. Hughes, Dow Jones Newswires; 202-862-6684; darrell.hughes@dowjones.com
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