US Treasury's Accounting Methods

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Treasury Hid A.I.G. Loss, Report Says

Published: Tuesday, 26 Oct 2010
By: Mary Williams Walsh

The United States Treasury concealed $40 billion in likely taxpayer losses on the bailout of the American International Group earlier this month, when it abandoned its usual method for valuing investments, according to a report by the special inspector general for the Troubled Asset Relief Program.

In early October, the 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.

“The American people have a right for full and complete disclosure about their investment in A.I.G.,” 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 A.I.G. 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 S.E.C. 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 A.I.G. “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 A.I.G. 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 A.I.G.’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 A.I.G.’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 A.I.G. 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.

This story originally appeared in the The New York Times

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http://www.cnbc.com/id/39846384


So, whom do you believe or trust? Geithner or Barofsky?

Both. The $5 billion and the $40 billion are projections only. The realized loss, well, hasn't been realized. Though this is what they get for overzealously pitching this "barely any loss!" story to the media.

It's not a matter of belief, it's simple math. They didn't change anything, they just used a different stock price (AIG's stock price has recovered slightly in recent months). Obviously there's going to be some dilution, but if the Treasury sells their outstanding shares at a moderate rate, it's quite possible the bill would be relatively low.

Anyways, this is all a WAG anyways. We don't know the full bill for the various financial bailouts until all of the government's assets have been sold and gains/losses have been realized. The Treasury has been pushed to give estimates based on prevailing trends, which they have gone ahead and done. I don't see the problem - their model was very transparent, and they recognize that a lot could change.

The same thing happened with the sale of Citigroup stock a while back (it's still ongoing) - prices fluctuate, so expected returns fluctuate, too.

At the end of the day, TARP has been a very cheap way to keep the financial system from wholesale collapse. I think that it did create a gigantic moral hazard problem that has yet to be addressed, but the near-term threat has been averted at a bargain-basement price.

But whose opinion do you trust, as far as public statements that are quoted in news sources?

If using different methods (or projections) can be construed as discrepancy or "spin", then it's not clear to me why Treasury wouldn't have simply complied with the request.

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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.

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:confused:

The Treasury works for the president. Why would you even expect it to be non-biased?

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Originally Posted by Loki

The Treasury works for the president. Why would you even expect it to be non-biased?

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The Treasury is ours. Secretary of the Treasury may work for the administration or "at the pleasure of the President", but it still belongs to the US people. It's our money.

Now should be the time to resist temptation for spin; to be as transparent and consistent as possible. After the bail-outs, TARP, financial reform (word used lightly) and all that's gone on the last few years, especially from AIG (!) people need to trust what's in the news and how facts are presented. This is the worst time to be fiddling around with trust or confidence from the American populace.

And since the administration also appointed this inspector general to investigate TARP, it's even stranger.

I could have done a better job titling this thread. :noob:

The president is "ours" too. The reality is that the Treasury is part of the Executive branch and serves at the pleasure of the president.

Considering that the trend over the last several decades has been toward more spin (culimnating in the Obama presidency), I really don't see why you'd expect a sudden reversal now. Perhaps people shouldn't have voted for the king of spin and of the non-stop election cycle if they didn't want so much spin.

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Originally Posted by Loki

The president is "ours" too. The reality is that the Treasury is part of the Executive branch and serves at the pleasure of the president.

Considering that the trend over the last several decades has been toward more spin (culimnating in the Obama presidency), I really don't see why you'd expect a sudden reversal now. Perhaps people shouldn't have voted for the king of spin and of the non-stop election cycle if they didn't want so much spin.

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Riiight. Since it's a decades-long trend (as you said), I can see your point. Business as Usual, ho hum. How you blame it on Obama, then, is a mystery. :donkey:

I actually blame it on voters for choosing someone who accentuated that trend.

You can't have it both ways, Loki. Either the spin cycle has escalated over the years, regardless of candidate or administration, or not. You can't blame voters for who was elected, and then criticize voters for having expectations of those they elected.

In your mind, it's both silly for voters to discuss politics, and silly to vote for politicians. Blame the voters, by all means, but never the politicians or the system they created? Got it! :rolleyes:

You could learn to read instead. There's nothing contradictory between saying there was a trend and saying that someone is behaving worse than what the trend would predict.

If so many voters didn't have contradictory and inane views when it comes to most issues, the politicians would find it much harder to get away with passing stupid policies.

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Originally Posted by Loki

You could learn to read instead. There's nothing contradictory between saying there was a trend and saying that someone is behaving worse than what the trend would predict.

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But that's not what you said. You said the trend culminated with Obama, not that he is "behaving worse than what the trend would predict". :donkey:

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If so many voters didn't have contradictory and inane views when it comes to most issues, the politicians would find it much harder to get away with passing stupid policies.

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Then it's not a characteristic reserved just for the Obama administration, let alone people who voted for Obama. The spin-cycle would continue regardless of who was President, according to what you said earlier. So make up your mind already.

Are you really trying to blame the voters for the fundamental flaws in our political climate? Then critical when voters complain about business as usual and political spin? Really? Sorry to break it to you, Loki, but I'm not the only only voter reading news, asking questions, and writing about it in forums or social media.

You can't seem to make up your mind who you hate worse --- voters in general, or Obama. :bored:

I will blame voters for simultaneously opposing tax increases and spending cuts. Voters in many Western countries hit far harder than the US have either voted for politicians promising a combination of tax increases and spending cuts or support austerity programs by current governments. When people are unwilling to be reasonable, it's hard to blame politicians for pandering to their lack of reason. The only difference between us and France is that we punish courageous politicians before they get into office, while France punishes them after they're elected.

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Originally Posted by Loki

I will blame voters for simultaneously opposing tax increases and spending cuts.

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Then don't whine when voters (like me) notice, criticize, or discuss schizoid policy. And don't blame the voter when media coverage is spotty at best, or inconsistent at worst. That leaves a huge gaping hole in credibility and trust for what's reported, or how. People have been asking for specifics for a long time, especially about spending cuts. Everyone knows they're needed and will happen, but NO politician will specify. They're only concerned with raising money, lobbying, and getting elected. Unfortunately, we don't have a None of the Above option when we vote. We're limited by our two party system that's built on (many) closed primaries. And for the most part, the only way to get through a primary and on the ticket, is to have tons of money backing the candidate.

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Voters in many Western countries hit far harder than the US have either voted for politicians promising a combination of tax increases and spending cuts or support austerity programs by current governments. When people are unwilling to be reasonable, it's hard to blame politicians for pandering to their lack of reason. The only difference between us and France is that we punish courageous politicians before they get into office, while France punishes them after they're elected.

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There are many differences between the US and France. But I know what you mean about pandering. It's a leap to accuse voters of being unreasonable, though, when our whole system is built on pandering to emotions, lobbyists and PACs orchestrating the machinery, and money behind the power to manipulate. If anyone's a victim, I'd say it's the average US voter. We can only read what we can read, or know what we might find. But we can't compete with the Big Boys who control what's written (or spinned) or who's chosen by the party powers.

:(

You assume voters in other countries have access to better information.

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Originally Posted by GGT

But whose opinion do you trust, as far as public statements that are quoted in news sources?

If using different methods (or projections) can be construed as discrepancy or "spin", then it's not clear to me why Treasury wouldn't have simply complied with the request.

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Using the prior stock prices would have been meaningless. It's not a different methodology, it's a different set of numbers fed into the methodology. Those numbers change with time, and will undoubtedly change in the future. Everyone knows this is an estimate based on a number of WAGs; I don't understand why they should use old numbers as if that's somehow more 'honest'.

The issue isn't their numbers, their methodology, or anything else. The issue is the administration pushing the 'good news' story to the media when in reality the 'news' is just more of the same.

I already said the title sucked. :mad:

Whom do you trust? What information, reporting, or source do you find most believable?




Loki, how do you explain Sarkozy being elected and the current riots against his reforms? You said:

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The only difference between us and France is that we punish courageous politicians before they get into office, while France punishes them after they're elected.

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First of all, we don't have many courageous politicians in office because they can't get elected by being courageous. If France punishes their courageous politicians after they get elected, then how did they get elected?

Reading really is a problem for you, eh? :confused: The point is they're willing to elect someone who's promising reform, but then they riot when that person tries to follow through. Here, people will just refuse to vote for someone like that.

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Originally Posted by Loki

Reading really is a problem for you, eh? :confused: The point is they're willing to elect someone who's promising reform, but then they riot when that person tries to follow through. Here, people will just refuse to vote for someone like that.

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Make up your mind, Loki. :rolleyes: Earlier you said Americans elect someone making promises for reform. Stupid voters, expecting action.

Then you say the French are willing to elect a promising reformer, but their main problem is rioting when promises are implemented.

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Originally Posted by GGT

Make up your mind, Loki. :rolleyes: Earlier you said Americans elect someone making promises for reform. Stupid voters, expecting action.

Then you say the French are willing to elect a promising reformer, but their main problem is rioting when promises are implemented.

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No, they elect someone for making incredibly vague promises that could be summed up by the words "hope" and "change". How you can equate that with supporting actual reform is beyond me. Let me know when Americans vote in a candidate who promises to raise taxes and cut spending, and actually offers specific proposals for both.

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Originally Posted by Loki

No, they elect someone for making incredibly vague promises that could be summed up by the words "hope" and "change".

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Is that a criticism of the French electing Sarkosy? Sounds just like your criticism of US voters electing Obama. Not sure what "they" means here......

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How you can equate that with supporting actual reform is beyond me. Let me know when Americans vote in a candidate who promises to raise taxes and cut spending, and actually offers specific proposals for both.

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The point is they're willing to elect someone who's promising reform, but then they riot when that person tries to follow through. Here, people will just refuse to vote for someone like that.

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As I recall, Obama said some taxes should be raised, but Republicans didn't like that. He offered some specific proposals, but Republicans didn't like those either. He was elected on a platform of raising taxes and cutting some spending, but the house and senate didn't follow through.

So stop trying to make it sound like the US won't vote for someone promising reform like the French did.

I'm not a fan of Sarkozy, but he was a hell of a lot more specific about the changes he wanted. It wasn't just some vague 'change the french can believe in'. If you look at the present situation in France you will see that most french, while still reflexively sympathising with the demands of the unions (tiny minority actually) also know and accept that Sarkozy is doing the right thing.

The protests in the streets in France are organised by a funny coalition of semi-communist unions and highschool students who should know better than to think that the present system is still in place when they leave the workforce 50 years from today.

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Originally Posted by Hazir

I'm not a fan of Sarkozy, but he was a hell of a lot more specific about the changes he wanted. It wasn't just some vague 'change the french can believe in'. If you look at the present situation in France you will see that most french, while still reflexively sympathising with the demands of the unions (tiny minority actually) also know and accept that Sarkozy is doing the right thing.

The protests in the streets in France are organised by a funny coalition of semi-communist unions and highschool students who should know better than to think that the present system is still in place when they leave the workforce 50 years from today.

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I was referring to Obama. I don't think GGT has actually read anything I said. Sarkozy has s 29% approval rating by the way. The people don't support his reforms; they are furious with the unions for shutting down the country.

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Originally Posted by Loki

I was referring to Obama. I don't think GGT has actually read anything I said. Sarkozy has s 29% approval rating by the way. The people don't support his reforms; they are furious with the unions for shutting down the country.

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'Those people' voted for Sarkozy as their leader. Just as the US has the leader we elected. Of course I've read what you say, Loki. You just don't *like* being called out when you say things like

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The only difference between us and France is that we punish courageous politicians before they get into office, while France punishes them after they're elected.

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The point is they're willing to elect someone who's promising reform, but then they riot when that person tries to follow through. Here, people will just refuse to vote for someone like that.

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Let me know when Americans vote in a candidate who promises to raise taxes and cut spending, and actually offers specific proposals for both.

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WTF, how are any of those things inconsistent?

It seemed to me that you held French voters to a different standard than American voters. Maybe you just liked Sarkozy better than Obama.

I said they're equally bad. :bored:

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Originally Posted by wiggin

It's not a matter of belief, it's simple math. They didn't change anything, they just used a different stock price (AIG's stock price has recovered slightly in recent months). Obviously there's going to be some dilution, but if the Treasury sells their outstanding shares at a moderate rate, it's quite possible the bill would be relatively low.

Anyways, this is all a WAG anyways. We don't know the full bill for the various financial bailouts until all of the government's assets have been sold and gains/losses have been realized. The Treasury has been pushed to give estimates based on prevailing trends, which they have gone ahead and done. I don't see the problem - their model was very transparent, and they recognize that a lot could change.

The same thing happened with the sale of Citigroup stock a while back (it's still ongoing) - prices fluctuate, so expected returns fluctuate, too.

At the end of the day, TARP has been a very cheap way to keep the financial system from wholesale collapse. I think that it did create a gigantic moral hazard problem that has yet to be addressed, but the near-term threat has been averted at a bargain-basement price.

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Totally agreed. The moral hazard is, agreed, a very negative part of it. Though I'd argue that it was unavoidable: "too big to fail" will inevitably create such moral hazard. Perhaps we shouldn't have deregulated banking so that a single company can be in every part of the industry. Had we not deregulated, a certain section of the industry would have gone down and the rest would be fine; no need for creating moral hazard.

This gets back to a theme I've hit on repeatedly: the anger about this current economy should not be directed at any of the current players, but at those who squandered or removed safety nets for quick gain. Examples:
1) deregulation of banking. It was put there after the Depression for a reason. :bored:
2) Massive deficit spending: now we can't use that valuable tool adequately when we really need it.
3) Bailouts when the failures could be tolerated (yes, I'm looking at previous bailouts of the auto industry, not this one). Had GM been allowed to fail, or forced by the market to restructure, we wouldn't have had to bail it out to save our economy now. There's the moral hazard Wiggin talks about.

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Originally Posted by Loki

The Treasury works for the president. Why would you even expect it to be non-biased?

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Yet you never respond to Wiggin this way. I wonder why....

Wiggin didn't reply to me...

If you're actually claiming that the Treasury is non-partisan, perhaps you can look at its deficit projection from about a year ago, when it claimed we'd have something close to 4-5% economic growth every year for a decade.

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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.

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So one is if we sell now, and one is a projection. I do like how on these bailouts we actually bought stock in the company so we can get our money back. Really good way to handle that. String attached loans are the way to go, IF we are going to bail out in the first place.

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3) Bailouts when the failures could be tolerated (yes, I'm looking at previous bailouts of the auto industry, not this one). Had GM been allowed to fail, or forced by the market to restructure, we wouldn't have had to bail it out to save our economy now. There's the moral hazard Wiggin talks about.

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On this issue, to remove that moral hazard, they need to have management get fired if they're doing bail outs, or the company has no reason to play safe. Also we need to end the corruption (buying of votes/favoritism legislation) that likely ensured them a bail out, they probably knew for sure they were going to get one...