UPDATE 1-US bailout cops to police valuations as banks exit

* TARP watchdogs Barofsky, Warren plan warrant audit

* Banks negotiating with Treasury over warrant pricing (Adds quote from letter, comments from Abernathy, Geithner, Reed)

By Karey Wutkowski and Patrick Rucker

WASHINGTON, June 12 (Reuters) - The two primary watchdogs of the U.S. financial bailout program are studying whether taxpayers will get a fair return on banks' warrants as the largest firms repay government investments, according to a letter sent to lawmakers this week.

A Congressional oversight panel has begun a project to "estimate a reasonable range of values" for the controversial warrants the big banks are likely to repurchase as they start to repay Troubled Asset Relief Program (TARP) funds next week.

Some big banks, including JPMorgan Chase & Co (JPM.N: Quote, Profile, Research), are wrangling with the Treasury Department over the billions of dollars of warrants they want to buy back, which the government owns in addition to the banks' preferred stock.

The banks argue they should get a discount on the warrants because they did not want the money in the first place, while some lawmakers say Treasury should give taxpayers their fair share of the gains in the banks' stock prices.

In a letter dated Wednesday to the leading lawmakers on the House and Senate financial committees, Neil Barofsky, the TARP special inspector general, and Elizabeth Warren, the chairwoman of the Congressional oversight panel for TARP, said they will work together on the warrant project. It will also include an audit of the warrant repurchase process, they said.

Barofsky and Warren said they "believe that the pricing of the warrants held by Treasury ... will be critical to ensuring an appropriate return on investment for the government and, consequently, American taxpayers."