NEIL BAROFSKY: GEITHNER HIDES TAXPAYER LOSSES ON AIG

Commentary- October 26, 2010 by Neil Garfield –see below for article. Neil Garfield has a blog
LivingLies Weblog and is an esteemed commentator and attorney. This is Neil’s opinion and not
legal advice.

“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.”

“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.”

Editor’s Comment: Barofsky, inspector general, has it right and this is the tip of the
iceberg. The accounting confabulations of the financial world are bleeding over
into government reports. It leads us further away from reality and closer to
economic collapse. In order to preserve the financial interests of managers on
Wall Street and political capital in the coming elections, the administration has
side-stepped the truth.

The truth is worse than anything you can imagine. The finance world is awash in more than
12 times the total currency authorized by all the world governments combined. Some part of
that, perhaps the majority of it, might cancel out in “wash” trades, but a large part of it must
meet a day of reckoning that everyone “in the know” is avoiding. They just kick the can
down the road in the hope that something will happen to change this. Maybe they hope that
inflation, if it gets bad enough, will offset the boated world markets in today’s dollars.
Whatever it is, they are wrong.

All of this is avoidable if we hold their feet to the fire. If the mortgages are no good, then so
be it. Let the chips fall where they may. We’ll clean up the mess once we know how big it is.
If the mega banks must fall, let them. They are only consuming what little capital we have
left and applying it in ways that benefit themselves in foreign investments. If we let
anonymous donors including foreign investors control our elections, we might just as well
admit that we have achieved the dubious status of a banana republic.
October 26, 2010

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

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 our view, this is a significant failure in their transparency,” said Neil M. Barofsky, the
inspector general, in an interview on Monday.

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.