WASHINGTON (MarketWatch) -- A panel that oversees the $700 billion bank bailout package said Friday that financial institutions buying out warrants they gave the government in exchange for capital injections are now buying back those stakes at well below their fair value.

The Congressional Oversight Panel, which is charged with overseeing the Troubled Asset Relief Program, or TARP, said in a report that a group of 11 small banks that have repurchased government warrants in exchange for taxpayer-funded assistance, have bought-out the stakes at 66% of their face value.

The oversight panel, which employed three Harvard University valuation experts to conduct the analysis, said taxpayers would have received $10 million more had the warrants been sold back to the banks at their face value.

The report argues that liquidity discounts are a key factor for why the warrants were purchased at such low prices. Should a similar discount be a major factor for warrant repurchases at larger institutions buying out government stakes, the shortfall to taxpayers could be as much as $2.7 billion, the report said.

A group of 32 financial firms, including 10 large financial institutions, paid $70.2 billion to buy out preferred shares Treasury received when they received financial assistance. These buyouts have made the firms eligible to buy back the warrants the government received along with the preferred shares.

Banks that received financial assistance as part of TARP were required to give the government warrants for the future purchase of some of their common shares. Warrants are the right to buy common shares of a company at a set price at some point in the future.

The report said, however, that the Treasury may have other goals with the repurchases that supersede maximizing taxpayer returns.

"Treasury has said that it wants to allow banks to operate again without TARP assistance as soon as they are strong enough to do so," it said.

However, some large financial institutions believe that the government is asking too much, not too little, for the warrants.

Treasury and J.P. Morgan Chase & Co. JPM, +1.80% have been unable to agree on a price for the warrants, prompting J.P. Morgan to take steps to waive its rights to them, according to company spokesman Joe Evangelisti. That process allows the government to auction them in the public markets, said Evangelisti.

"Treasury turned down our price," said Evangelisti. "That enables Treasury to auction the warrants."

J.P. Morgan provided a valuation for the warrants that Treasury rejected as too low, Evangelisti said. "We support the process," Evangelisti said.

The oversight panel's report said the panel is exploring the possibility that Treasury consider selling the TARP warrants in an open, public auction -- an alternative that could possibly give taxpayers a better valuation for the stakes.

"This has the benefit of stopping any speculation about whether Treasury has been too tough or too easy on the banks that want to repurchase their own warrants. It also permits the banks to bid for their own warrants -- in direct competition with outsiders," the report said.

Should TARP be repaid?

The report also raises the question of whether banks should be repaying TARP funds at all at this stage in the economic recovery. The C.O.P.'s next report will examine this question.

"Any exit from the TARP system implicates an important policy question: If the banks give up federal support prematurely, will the economy suffer as a result? The panel has not reached a consensus on whether it is wise policy to release banks from the TARP program at this time, but our June report on the bank stress tests raised key questions about whether we know enough about the banks' overall health," the report said.

Harvard Law School professor Elizabeth Warren chairs the panel, which has five members including AFL-CIO General Council Damon Silvers; Rep. Jeb Hensarling, R-Tex.; and former GOP senator John Sununu.

The panel also urged the Treasury to make the process for repayments as transparent as possible.

"As always, it is critical that Treasury make the process -- the reason for its decisions, the way it arrives at its figures, and the exit strategy from or future use of the TARP -- absolutely transparent. If it fails to do so, the credibility of the decisions it makes and its stewardship of the TARP will be in jeopardy," the report said.

As of June 30, the Treasury has received roughly $6.7 billion in dividend payments from TARP-funded financial institutions, according to a GAO report Thursday.

The dividend funds have been allocated to pay down the national debt, but legislation under consideration on Capitol Hill would use some of the revenues from those funds to help revitalize neighborhoods and create affordable housing.