The past few days have seen considerable disagreement over a report from the Special Inspector General of the TARP program (SIGTARP) which disputed a recently released Treasury report announcing that the bailout of AIG would cost much less than was expected. An analysis of the substantive details about whether the Treasury report is right or wrong is interesting on its own, but the campaign from the Administration against the SIGTARP report is more noteworthy.
Earlier this month, the Treasury Department’s Office of Financial Stability released a 100 page “Two Year Retrospective” on TARP, which defended various aspects of the program and updated some of their costs and repayments. The New York Times summarized the key finding on AIG:
“[T]he Treasury issued a report predicting that the taxpayers would ultimately lose just $5 billion on their investment in A.I.G., a remarkable outcome, since the insurance company was extended $182 billion in taxpayer money in the early months of its rescue. The prediction of a modest loss, widely reported as A.I.G., the Federal Reserve and the Treasury rushed to complete an exit plan, contrasted with an earlier prediction by the Treasury that the taxpayers would lose $45 billion.”
Erasing $40 billion in losses is big news, and was used to highlight the merits of the government intervention into the financial markets. The Administration claimed that AIG had a sound plan to pay back taxpayers, and this was proof that the plan would work.
On Monday, SIGTARP released its Quarterly Report to Congress, which highlighted several aspects of the program which required further scrutiny, including the new AIG losses. The report found that Treasury was being misleading in suggesting that the AIG losses had shrunk due to any activity by AIG, when the primary reason the valuation had changed was due to Treasury changing the methodology to produce the valuation.
The $40 billion difference arises because Treasury now assumes that AIG’s new plan to give the government common stock will allow taxpayers to sell off their ownership stake in the company at current market prices. This seems overly optimistic, since stock prices fluctuate, especially when the market knows the federal government is planning to quickly sell tens of billions of dollars worth of stock. Therefore, the assumption by Treasury that the sale of over one billion shares of AIG stock will take place at its current price is extremely unrealistic, as the price will likely engage in a downward spiral as potential buyers wait for the price to continue falling while the government desperately tries to unload its stake in the company.
Even so, a simple footnote in Treasury’s Retrospective would have sufficed to explain why this new methodology is preferable. Instead the Administration made no effort to clarify the changes and took credit for the new outcome. Of course, it didn’t help that they seem to be attacking anyone who questions the legitimacy of the claims.
While SIGTARP offers no opinion on the appropriateness or accuracy of the valuation contained in the Retrospective, we believe that the Retrospective fails to meet basic transparency standards by failing to disclose: (1) that the new lower estimate followed a change in the methodology that Treasury previously used to calculate expected losses on its AIG investment; and (2) that Treasury previously would be required by its auditors to use the older, and presumably less favorable, methodology in the official audited financial statements.
In response, the White House is fiercely criticizing the SIGTARP report. Jen Psaki, the Deputy Communications Director at the White House went on the attack on the official White House Blog.
Some people just don’t like movies with happy endings. How else to explain this week’s report by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP)? Rather than focusing on the growing evidence we’ve seen in recent months that TARP will be far less costly than anyone expected, SIGTARP instead sought to generate a false controversy over AIG to try and grab a few, cheap headlines….
All of this financial talk can get complicated, but here’s the bottom line: Any truly independent observer would say that Treasury’s stake in AIG will be worth more than taxpayers originally invested in that company. Of course, as with any investment, prices could rise or fall in the future. That’s the nature of any financial transaction. But Treasury is confident that we are in a much stronger position today to recoup our investment in AIG than two years ago – or even a few short months ago. And that’s very good news for taxpayers. [emphasis added]
Unfortunately, this looks like an attack on the integrity of Neil Barofsky, the Special Inspector General, whose purpose is to be an objective observer and potentially express skepticism with questionably “good news.” This is especially troubling when the SIGTARP report deliberately expressed agnosticism on the substance and simply called for transparency and disclosure. Conscientious public servants shouldn’t have to worry about being defamed by the White House if they call into question legitimate problems with transparency in official government reports.