Watchdog: Funny math used on AIG bailout

By Jennifer Liberto, senior writer


WASHINGTON (CNNMoney.com) -- The Treasury Department changed its accounting style and produced an overly optimistic estimate of taxpayer losses in the AIG bailout, the special investigator for the federal bailouts said in a report released Monday.

Treasury disputes the inspector general's criticism, and says it was transparent in its calculations.

Special Inspector General Neil Barofsky's latest report to Congress also heaps new criticism on Treasury for taking credit for efforts to help homeowners with mortgages exceeding their home's value to secure modified loans.

Reporting directly to Congress, Barofsky reviews all the programs that came about via the original $700 billion Troubled Asset Relief Program (TARP) that Congress passed during the height of the financial crisis in October 2008.

While Treasury can no longer allocate any new money to the program since it expired, Barofsky reported that $178.4 billion in bailout funds have yet to be repaid. In addition, Treasury has another $80 billion that can still be spent under existing TARP programs.

"There's a lot of people saying TARP is dead, TARP is out of its misery," Barofsky said Monday in an exclusive interview with CNNMoney.com's Poppy Harlow. "But legally, there's another $80 billion dollars of TARP money that's obligated and still can be spent. . .We're looking at more money that's going to go out after Oct. 3rd than in the year previous," he added.

Critics of the program seized on the report as further evidence of a failed policy.

"This report calls into significant question the very credibility and competence of the Treasury Department," Darrell Issa, a Republican congressman from California who is the ranking member of the House Oversight Committee, said in a statement.

Earlier this month, Treasury reported that its new plan to extricate the government from American International Group (AIG, Fortune 500) would result in losses to taxpayers of around $5 billion, much less than the $45 billion that the agency reported in March.

While all the loss estimates were much lower than the $180 billion that the government had said it might be willing to commit to in order to prop up the insurer, Barofsky questioned Treasury's current accounting methodology on losses.

The report basically said Treasury's $5 billion loss estimate rests on market prices for common shares as of Oct. 1, without taking into account "volatility in AIG's stock price." The report accuses Treasury of changing its accounting practices to make the cost of the AIG bailout less eye-popping, without explaining that its methodology had changed.

"This conduct has left Treasury vulnerable to charges that it has manipulated its methodology for calculating losses," the report said.

However, Treasury said it was transparent in its October estimate, because it clearly stated the cost estimate assumed the final exit strategy for AIG would be completed.

"That criticism that we haven't been fully transparent is unfair," said Jim Millstein, Treasury's chief restructuring officer.

The reason the October estimate diverged from Treasury's past calculations is that its recent estimate looks forward to when the government completes its exit strategy.

Right now, Treasury owns preferred shares, which are tougher to value, because they aren't traded and are not easily converted to cash, Millstein explained. Yet, the exit plan creates a way for the government to convert its preferred shares to common shares.

Treasury used the common share price in its recent report on AIG losses. SigTARP thinks they should have used preferred shares method to calculate its estimate.

When Treasury reports to the auditors, it will use both techniques to put a cost estimate on the AIG bailout, according to Treasury officials.

Issa criticized Treasury's October AIG bailout figure as a "betrayal of public trust," he said in a statement. And he asked Treasury to publish a new cost estimate on the AIG bailout, using the methodology that assumes Treasury still owns the preferred shares.

Help for homeowners

The inspector general's report also said Treasury took too much credit for helping homeowners who did not ultimately benefit from Treasury's Home Affordable Modification Program.

Treasury has said several times that its mortgage modification program has "helped" more than 1.3 million homeowners by reducing their monthly mortgage payments, calling each of these a "success," the report said.

However, Barofsky's team took issue with the level of success, saying more than 700,000 of the modifications ultimately failed and another 173,000 remained in limbo.

"They say for example that they've helped more than 1.3 million people through mortgage modifications, but more than half of those have failed," Barofsky said. "Then, they go and say, ' Well, each one of those had a significant benefit for the homeowner.' And that's just not true."

Treasury responded that the HAMP program is an important part of the administration's effort to stabilize the housing market and has "redefined the loan modification standard for the mortgage industry," said Treasury Acting Assistant Secretary Tim Massad. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 16,804.71 -238.19 -1.40%
Nasdaq 4,422.09 -71.31 -1.59%
S&P 500 1,946.16 -26.13 -1.32%
Treasuries 2.40 -0.10 -4.19%
Data as of 1:53am ET
Company Price Change % Change
Bank of America Corp... 16.82 -0.23 -1.35%
Ford Motor Co 14.59 -0.20 -1.35%
Facebook Inc 76.55 -2.49 -3.15%
Apple Inc 99.18 -1.57 -1.56%
Cisco Systems Inc 25.03 -0.14 -0.56%
Data as of Oct 1

Sections

In the last five years, pumpkin sales have risen 34% as people demand pumpkin in everything from beer to beef jerky. More

Facebook's chief product officer issued an apology to Sister Roma and the drag community on Wednesday for its flawed 'real name' policy. More

New York City launches a comprehensive site for all things related to its digital tech scene, Digital.NYC. More

For these seniors, the best retirement is not to retire. From a 102-year-old Wal-Mart worker to an activist park ranger, these workers have stayed on the job well into their golden years. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.