Posted on 26 Oct 2010
According to a report by the special inspector general for the Troubled Asset Relief Program, The United States Treasury concealed $40 billion in likely taxpayer losses on the bailout of the American International Group (AIG) earlier this month, when it abandoned its usual method for valuing investments.
"In our view, this is a significant failure in their transparency,” said Neil M. Barofsky, the inspector general, in an interview on Monday.
The Treasury issued a report in early October predicting that the taxpayers would ultimately lose just $5 billion on their investment in AIG, 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 AIG, 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.
“The American people have a right for full and complete disclosure about their investment in AIG,” Mr. Barofsky said, “and the U.S. government has an obligation, when they’re describing potential losses, to give complete information.”
An official of the Treasury disputed Mr. Barofsky’s conclusions, saying the department appropriately used different methods for different purposes. He said the smaller loss was a projection of future events, and the larger one was the result of an audit, which includes only realized gains and losses.
The Treasury will include more information about AIG when it issues its own audited financial statement in November. Because those numbers must pass an auditor’s scrutiny, the loss it reports is likely to grow once again, to more than $5 billion.
Members of Congress who have been critical of the federal bailouts jumped on Monday to commend the special inspector general and challenge the varying numbers.
“If a private company filed information with the government that was just as misleading and disingenuous as what Treasury has done here, you’d better believe there would be calls for an investigation from the SEC and others,” said Representative Darrell Issa, the senior Republican on the House Committee on Oversight and Government Reform. He called the Treasury’s October report on AIG “blatant manipulation.”
Senator Charles E. Grassley of Iowa, the senior Republican on the Finance Committee, said he thought “administration officials are trying so hard to put a positive spin on program losses that they played fast and loose with the numbers.” He said it reminded him of “misleading” claims that General Motors had paid back its rescue loans with interest ahead of schedule.
Mr. Barofsky said he had written to the Treasury secretary, Timothy F. Geithner, in mid-October, after widespread reports in the news media about the possibility that the Treasury could wind down its position in AIG with just a $5 billion loss. He recommended that the Treasury correct the October report, perhaps by adding a footnote saying the methodology for calculating its losses had changed.
The Treasury declined. It sent back a letter saying its methodology for calculating losses had not really changed, although its assumptions had. For instance, it based the values of several future transactions on the current price of AIG’s common stock. The letter, signed by Timothy G. Massad, the acting assistant secretary for financial stability, said this reflected the fact that a crucial component of its exit strategy would be the exchange of preferred for common stock.
Mr. Barofsky said the government failed to account for the volatility of AIG’s common stock. A relatively small portion of the company is publicly traded, and that portion will be soon diluted further. The government now has a 79 percent stake, which will rise to about 92 percent, in the form of common stock, under the exit plan.
It is not clear whether the Treasury will be able to sell so much stock without making the price fall. Mr. Barofsky said the Treasury’s projection also assumed that all the other steps for the federal government to withdraw from AIG would go smoothly.
He said the Treasury’s statements tended to contribute to a “widespread, but mistaken, belief that TARP is at or near its end.”
As inspector general, Mr. Barofsky has extensive powers of investigation but no enforcement power.