Their main beef is that Paulson didn't extract enough from the banks in TARP I, and they got a bad deal. They were pretty up front about the injection of capital via preferred shares as being a subsidy. They also used some of the money to bail out AIG and Citi. Not in the original bill and not the best deal. However, the idea that they should have extracted more is simply an opinion -- and not one that everyone shares. If the banks survive and the preferred shares get redeemed, then they will be profitable. One goal was to encourage private capital to follow the government investments. If the terms had been punitive, there would have been no chance of this happening.
Here is their current report. I don't have too much to say, although it is an "open" process, and they show their work product in some detail.
The valuation report concludes that Treasury paid substantially more for the assets it purchased under the TARP than their then-current market value. The use of a one-size-fits-all investment policy, rather than the use of risk-based pricing more commonly used in market transactions, underlies the magnitude of the discount. A number of reasons for this result have been suggested. The Panel has not determined whether these reasons are valid or whether they justify the large subsidy that was created. In addition, the Panel has not made judgments about whether the decision-making underlying these investments was sound. The rationale for the Treasury’s approach and the impact of this disparity will be subjects for the Panel’s continued study and consideration. It is important, however, for the public to understand that in many cases Treasury received far less value in stocks and warrants than the money it injected into financial institutions.So they are saying that the Treasury overpaid, but they aren't making any judgments just yet. It doesn't take a genius to realize that if private investors are asking 10% and the Treasury is asking 5% for perpetual preferred stock [with a feature that increases the Treasury yield to 9% after 5 years, to encourage repayment]. It looks like a 20% to 40% haircut without spending more then 2 minutes pondering the facts.
The idea of subjecting this to private market benchmarks misses a central point. The idea wasn't to subsidize the banks to help the banks, but rather to help borrowers, potential borrowers, and holders of bank debt, which include pension funds. More important, to the extent that it works, the government gets a cut of every cent of profit. They collect about 1/3 of corporate profits and 15% on dividends. They end up with 18% or so of GNP. If the GNP of $13 trillion is increased by 3% for 2 years, that is $260 billion in tax revenue. Plus, they get the money back. Plus a net spread of 2% or so. A lot of assumptions here, but the counterfactual isn't that difficult to imagine. In the absence of any action, it is hard to believe that things wouldn't be a lot worse.