WASHINGTON BUREAU — The Troubled Asset Relief Program (TARP) auditor is questioning recent U.S. Treasury Department projections of the performance of government investments in American International Group (AIG) Inc.
Neil Barofsky, the TARP special inspector general, has published a report with a chart indicating that the government authorized only $176.5 billion in aid to AIG, New York (NYSE:AIG), but that, at its peak, the AIG aid total reached $191.4 billion.
As of Sept. 30, the end of the federal government’s fiscal year, the outstanding balance on the various facilities was $123.3 billion, Barofsky says.
AIG began receiving government aid in September 2008 through a special Federal Reserve Board emergency program.
Barofsky is asking about what he says is a “dramatic shift” to the projected loss of just $5 billion released in recent weeks, down from the $45 billion loss estimate on the government’s AIG investment that was published just 6 months ago
Barofsky says the new loss estimate is based on a different methodology, and that the new figure, based on a common stock valuation, “would not and could not be used” in Treasury’s fiscal year 2010 TARP financial statements.
The TARP financial statements will be published in November and “will continue to use the auditor-approved methodology that has characterized every other Treasury estimate of loss on its AIG investment,” Barofsky says.
Publication of the new figure “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,” Barofsky said. “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. While AIG’s fortunes may have indeed improved during the course of those six months, there is a serious question over how much of this decrease from a change in the Treasury’s methodology for calculating losses as opposed to AIG’s improved prospects.”
Barofsky says the earlier estimates, released in March, were based on a “Methodology to Calculate Estimated TARP Costs.”
The report describes how the Treasury Department values all of its investments, including its preferred shares in AIG.
“Consistent with that document, 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,” Barofsky says.
A “Two-Year Retrospective” published by the Treasury Department earlier this month “abandoned this published methodology, instead estimating a $5 billion loss solely on the recent market closing price of AIG’s common stock in return for its current preferred interests,” Barofsky says.
He says the new estimate is based on the assumption that the recapitalization will go exactly as planned and result in the Treasury Department receiving about 1.1 billion common shares of AIG stock in return for its current preferred interests.
“While Treasury did its new methodology in the retrospective, it did not disclose that this methodology differed from that previously used and from what is set forth in its published methodology,” Barofsky says.
Barofsky says in the report that he offers “no opinion on the appropriateness or accuracy of the valuation contained in the retrospective.”
But, he says, the new estimate fails to meet transparency standards by failing to disclose that the new lower estimate followed change in the methodology that the Treasury Department previously used to calculate expected losses on its AIG investment.
“Treasury would be required by its auditors to use the older, and presumably less favorable, methodology in the official audited statements,” Barofsky says.