Treasury’s TARP “Two Year Retrospective” (“Retrospective” ) published earlier in 2010 describes an agreement with American Insurance Group (AIG) as leaving “taxpayers in a considerably stronger position to recoup their investment in the company.” The plan calls for providing AIG up $22 billion in TARP funds under its existing equity facility and an exchange of $49.1 billion of TARP preferred shares for approximately 1.1 billion more risky common shares, which will result in a 12% incremental increase in the overall common ownership of AIG. Using current market prices of AIG stock taxpayers should reap a profit on the investment of about $17 billion. Treasury’s most recent estimate of a $5 billion loss on AIG also represents a dramatic shift from the $45 billion loss Treasury had projected just six months earlier.
According to the Special Inspector General for TARP or SIGTARP 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 would be required by its auditors to use the older, and presumably less favorable, methodology in the official audited financial statements. To avoid potential confusion, Treasury should have disclosed that it had changed its valuation methodology and should have published a side- by-side comparison of its new numbers with what the projected losses would be under the auditor-approved 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 (“GAO”), for release in November as part of a larger audited financial statement.
Here again, Treasury’s unfortunate insensitivity to the values of transparency has led it to engage in conduct that risks further damaging public trust in Government. Compounding this potential harm was the comparison made during the rollout of the Retrospective of the lowered projected losses with older estimates. This leaves the Treasury vulnerable to additional criticism for making what some might characterize as an apples-to-oranges comparison, disclosing the change in the relative amounts of losses, but not the accompanying change in methodology used to calculate those losses. As a result of these concerns and with the hope that Treasury would correct this problem, SIGTARP sent a letter to the Treasury Secretary, dated October 13, 2010, recommending that Treasury prominently publish an explanation of its change in methodology along with an updated side-by-side comparison of the loss projection under the prior methodology. In its response, Treasury rejected SIGTARP’s call for greater transparency, instead making the seemingly counterfactual claim that that “there has not been any change in our established valuation methodology,” because its published Methodology contemplates that “investments in common stock are valued at the market price of that common stock” and that the Retrospective valuation “applies our established methodology.”
Indeed, the Treasury has confirmed to SIGTARP that it did not apply the methodology to similarly situated banks in which Treasury holds preferred shares. That Treasury continued to value those shares using the standard preferred share valuation further undermines Treasury’s assertion that there was no change in its treatment of AIG in the Retrospective.
Proving once again that Uncle Sam Cooks the Books.