10.28.2010 0

The “Simple” Math of TARP and AIG

“The math isn’t that complicated,” White House Deputy Communications Director Jen Psaki claims. She was speaking of the Obama Administration’s plan to convert the federal government’s preferred stock in American International Group, Inc. (AIG) into 1.653 billion common shares.

The government currently owns about 80 percent of AIG because of the 2008-09 taxpayer multi-billion-dollar bailouts of the insurance giant, but the White House expects it will get all of the taxpayers’ money back.

Says the government, if those 1.653 billion shares are sold at the $38.86 price apiece that they fetched on October 1st, and it is able to turn over its remaining preferred equity interests of $22.3 billion at face value, the government will get back $86.23 billion on its $69.8 billion investment. That’s a profit of $16.7 billion on its AIG investment, it claims.

This, readers will recall, resulted in attention-grabbing headlines like “Breaking Even on AIG,” “AIG makes plans to fully pay back taxpayers,‎” and “AIG’s Miller Says U.S. May Profit on Bailout.” Who knew?

Of course, it’s all based on the favorable assumption that when the government tries to sell its 1.653 billion shares, it will be able to do so at $38.86 apiece any time soon. However, the October 1st stock valuation for the common stock is based on its 667.2 million currently outstanding shares. Increasing the common shares by more than a billion to 2.317 billion shares, a 247 percent increase, will have a major impact on the price of the common stock.

As anyone familiar with the basic laws of supply and demand knows, the price is likely going to go down when that happens.

Maybe not instantly, but once government attempts to dump its shares, the bids on the stock will behave predictably. If the current private demand for the common shares remains constant, then the value per share would go down to about $11 to $12 a share, or an $18.5 billion stake. That means losses of at least $29 billion, if not more.

That’s not only simple math, it has the advantage of actually reflecting the potential behavior of the market through the sudden increase of AIG’s common shares. However, what’s even more distressing than the Obama Administration’s lack of knowledge about supply-and-demand economics is its attack on the Special Inspector General of the Troubled Asset Relief Program (SIGTARP) program, Neil Barofsky, from the White House website.

What did Barofsky do? He simply had the audacity to do his job and question the Administration’s underlying assumptions. According to SIGTARP’s website, its mission according to the law is to promote “the efficiency and effectiveness of TARP management, through transparency, through coordinated oversight, and through robust enforcement against those, whether inside or outside of Government, who waste, steal or abuse TARP funds.”

In a quarterly report to Congress, Barofsky notes that the Administration’s claim that the taxpayer bailout of AIG will only cost $5 billion differs drastically from the Treasury’s previous estimates of up to $45 billion. “While AIG’s fortune may have indeed improved during the course of those six months, there is a serious question over how much of this decrease comes from a change in Treasury’s methodology for calculating the loss as opposed to AIG’s improved prospects,” Barofsky wrote.

Psaki counters that, “SIGTARP’s analysis seems to be stuck in a time warp if they believe that we should ignore AIG’s exit strategy in evaluating our investment in that company.” Barofsky, for his part, did not ignore the exit strategy, he essentially said the valuations based solely on future expected stock performance of a publicly-traded company are not an apples-to-apples comparison to what those losses would be under the Treasury’s previous, audited methodology.

Barofsky explained, “Treasury’s previous loss estimate for AIG, as with its estimates of other TARP investments in preferred shares of stock, accounts for a broad range of factors that might affect the value of Treasury’s holdings. The Retrospective, however, abandoned the published Methodology, instead estimating a $5 billion loss based solely on the recent market closing price of AIG’s common stock, on the assumption that the recapitalization plan will go exactly as planned…”

But as any stock investor knows full well, selling shares — especially a large quantity — at a preferred price is hardly a sure-thing. In this case, dumping 1.653 billion shares on the market and expecting the price to do anything but go down is hare-brained. Just to keep its current price, demand for AIG’s common stock would have to almost triple, something the Treasury fails to note in its report.

Adding insult to injury, as Barofsky reports, the Treasury’s “common-stock-based valuation would not and could not be used in Treasury’s fiscal year 2010 TARP financial statements, will be published in November and which will continue to use auditor-approved methodology that has characterized every other Treasury estimate of loss on its AIG investment.” Therefore, when that report is presented next month, it is likely to show a significantly higher cost associated with the AIG bailout than the Treasury has let on its most recent estimate.

Barofsky even alerted the Treasury that the methodology had been switched that resulted in the new estimate of just a $5 billion cost for the bailout. But, alarmingly and unfortunately, reports Barofsky, “In its October 19, 2010, letter response, Treasury rejected SIGTARP’s call for greater transparency, instead making the seemingly counterfactual claim that ‘there has not been any change in our established valuation methodology.’”

Barofsky called the Treasury’s explanation “puzzling” since “[t]here is nothing in the Methodology that suggests that calculations on the valuation of preferred shares will be based on a planned conversion to common shares, which is presumably why Treasury’s auditors will continue to require Treasury to use the more complex methodology in its audited financial statements.”

Barofsky continued, “This conduct has left Treasury vulnerable to charges that it has manipulated its methodology for calculating losses to present two different numbers depending on its audience: one designed for release in early October as part of a multifaceted publicity campaign touting the positive aspects of TARP and emphasizing the reduction in anticipated losses, and one, audited by the Government Accountability Office for release in November as part of a larger audited financial statement.”

“Treasury’s unfortunate insensitivity to the values of transparency has led it to engage in conduct that risks further damaging public trust in Government,” Barofsky added.

But, what does the White House care? Quips the White House’s Psaki, “Some people just don’t like movies with happy endings.” Then again, maybe the White House just does not like Inspectors General (IGs). That would explain why it fired Inspector General Gerald Walpin from AmeriCorps because the agency was “unhappy with his investigation into the misuse of AmeriCorps funds by Kevin Johnson, the former NBA star who is now mayor of Sacramento, California and a prominent supporter of President Obama,” as noted by the Washington Examiner’s Byron York.

And it would also explain why Obama has not even bothered nominating, as reported by the Washington Post, IGs for the Departments of Health and Human Services, Interior, and State, Special Inspectors General for Financial Stability and for Tax Administration. Not to mention failing to nominate IGs for the General Services Administration, the Office of Personnel Management, the Social Security Administration, the Nuclear Regulatory Commission, the U.S. Agency for International Development, and the Federal Deposit Insurance Corporation.

Can’t have those guys running around, holding the government accountable for wasting trillions of dollars, right?

Ultimately, the SIGTARP questioned the Administration’s claims of a “profit” on the TARP bailout that actually has yet to materialize. He called them out on it. That’s what an Inspector General is supposed to do. He did his job.

Perhaps the White House would prefer it if no one in government or elsewhere was allowed to question its rosy assertions about the nation’s dire fiscal outlook, with a $13.6 trillion national debt, endless bailouts, and government takeovers. The White House’s attack on Barofsky is just its latest example of the politics of personal destruction, this time against an honest civil servant doing his best to hold a massive government bureaucracy answerable for its blatant propaganda claiming taxpayer “savings” within weeks of a critical election.

That’s unfortunate. If there ever was a time when the government needed to be held accountable, it is now.

Robert Romano is the Senior Editor of Americans for Limited Government (ALG) News Bureau.

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