Andrew Ross Sorkin's Bad Math on AIG
Posted on September 11, 2012 by Yves Smith
Memo to Andrew Ross Sorkin: if you are going to try to discredit someone, it's more effective if you are less obvious about it.
Having missed out on gang attack on Neil Barofsky on the CNBC show Squawk Box (where Sorkin normally acts as co-host) that prompted a general take-down of CNBC's reporting bias by Columbia Journalism Review, Sorkin apparently decided to get his own digs in. His latest article, "Plot Twist in the A.I.G. Bailout: It Actually Worked" is a unabashed effort at a twofer: a recitation of pet Administration talking points (the piece starts with a quote from the White House) and an attack on a high profile critic.
I'll be doing a longer form treatment later on the recent, clearly Administration-driven "the TARP worked" PR campaign. As far as the Sorkin contribution to this initiative is concerned, it's an example of how the Treasury and bank defenders will try all sorts of creative accounting and will conveniently ignore their own past work to pass off Big Lies deemed to be important.
Sorkin (and one has to assume the Administration) is now trying a new angle on "the TARP made money" canard by arguing that the way to look at the investment is by treating the Fed/Treasury "investment" jointly, as opposed to looking at the TARP (Treasury program) in isolation. That is just another exercise in three card monte. If you are going to include Fed actions, you need to look at them in aggregate, and not cherry pick the ones that suit your case. The Fed's apparent recouping of its "investment" in garbage barges like Maiden Lane 2 and 3 results from its extraordinary interventions to goose the prices of financial assets, including the alphabet soup of special facilities during the crisis, ZIRP, and QE and QE2. These represent a considerable transfer of wealth away from savers to financial institutions, by design. The most colorful account of how this worked comes from Steve Waldman:
Suppose my kid's meth habit got the best of him. He's needs to come up with $100K quick or his dealer's gonna whack him. But he's a good kid, really! Coulda happened to anyone. So I "lend" him the money, even though he has no visible means of support and the sketchiest loan sharks in town wouldn't give him the time of day. Now I believe in bootstraps and hard work, individualism and self-reliance. So I tell my son. "Son, you are going to pay me back every penny of that loan. You are going to work it off. I have arranged with one of my golf buddies, a guy who owes me a favor or three, a job that pays $200K a year. You'd better show up every day at 9 a.m. and sit behind that desk, and get me back my money!" And he does! After a year, he's made me whole. What a good kid.
No bail out, right? He paid me back every penny! Worked it off!
Bullshit. The opportunity I provided him, the $200K job that he would not have received without my intercession, was a huge grant. On the open market, if I were to accept bribes from the highest bidder to wangle the job from my friend, that opportunity would be worth more than the $100K advanced. I paid my son's loan with my own money. I just obscured the cash flows, so my son and I can pretend and sustain our mutual self-regard and our righteous disdain for the moochers and the hippies and the riff-raff.
In the Sorkin article, the article revolves around a MEGO (My Eyes Glaze Over) inducing argument of which share price for AIG is the right one to use for determining whether the government got the dough it put at risk in TARP back (never mind the point that Waldman, your truly, and numerous others have made: that merely paying the money back is also a big gimmie, given that the banks wrecked the global economy and no private party would have given them funds at anything other than extremely tough terms when the financiers were on death's door). Barofsky contends that the price is over $43 a share (above the Treasury's latest sales price of $32.50) while Sorkin repeats Treasury's claim that the price (by throwing in the Fed's three card monte "profits") is really $28.73.
But buried in the article, Sorkin concedes Barofsky's position: "Mr. Barofsky is technically correct that if you isolate the original cost to TARP for its investment in A.I.G., $43.53 a share is the break-even number."
And Sorkin has a convenient episode of amnesia, that his own previous work proves that the Treasury number he flogs in this article is also too low.
In a February article, "Bending the Tax Code, and Lifting A.I.G.'s Profit," Sorkin described how AIG was allowed to retain $26.2 billion of net operating losses that should have been wiped out as a part of the rescue of the company as well as an additional $9 billion of "unrealized loss on investments." That increased AIG's fourth quarter and hence fiscal year earnings by a remarkable $17.7 billion, which dwarfs the mere $1.6 billion its operations produced that quarter. And the article includes this juicy bit:
Analysts at Bank of America and JPMorgan Chase last year estimated that the tax benefits from the losses propped up A.I.G. stock by $5 to $6 a share. Its shares closed at $28.66 on Monday, just shy of the $29 mark that the government says it needs to sell its shares to break even.
So get this: the government break even figure, which it has calculated down to the penny per share, excludes $35 billion of what Sorkin in February called "a tax benefit, er, gift, from the United States government" that goosed the stock price by at least $5. Reverse that out and even using the government's remarkably aggressive view of the matter, the AIG bailout was and remains a turkey.
This entry was posted in Federal Reserve, Media watch, Politics, Regulations and regulators, Ridiculously obvious scams on September 11, 2012 by Yves Smith.
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Conscience of a Conservative September 11, 2012 at 6:24 pm
Bloomberg just did a story today on Bernanke on how he's going all out on unemployment, like it's a personal vendetta.
So the question is how much are reporters, anchors etc beholden to their publishers or media owners. Of course we know its true on some level, but how much?
Yves Smith Post author September 11, 2012 at 6:29 pm
Google "access journalism". There is a completely separate problem, in that government officials parse out leaks and interviews to reporters that carry their water and freeze out the ones that don't play ball.
Government and CNBC have related agendas here. CNBC wants to show that Banks and related firms are doing well and don't need gov't regulation or future bail-outs and the Gov't wants to show the bail-outs worked and were profitable.
JEHR September 11, 2012 at 6:49 pm
Yves, I did google "access journalism" and found a great website of the Canadian Association of Journalists ( http://www.caj.ca/?p=692 ). There a found a list of all the many ways that the Harper government keeps secrets and denies access to journalists. As I have suspected for some time now Our Democracy is in Deep Trouble!
bobh September 11, 2012 at 7:10 pm
Sorkin's brand of "access journalism" has mostly involved high ranking corporate miscreants. He gets access to the mighty and pays them back by putting their BS in the Times as news.
jake chase September 12, 2012 at 1:41 pm
Sorkin is such a toadying putz that even watching him with the sound off makes me grind my teeth. Nobody on CNBC has ever told the truth in the nine years I have been watching it. It is corporate propaganda from morning to night and sometimes I wonder if the prices are fake too.
hermanas September 12, 2012 at 5:08 pm
"It's nice to have friends in high places."
JamesW September 11, 2012 at 6:50 pm
Interesting to note that all those Swedes involved in anti-WikiLeaks/Assange activities are also financially connected to the rightwing Bonnier family, owner of Bonnier AB, among the 10 largest global media corporations.
http://www.nnn.se/nordic/assange/suspicious.pdf
briansays September 11, 2012 at 6:35 pm
since mitt has said he would fire zimbabwe ben i assume he will do what ever to help obama and geitner will enable
printing presses running
ask the investors in goldman's "crap" who got 100 cents on the dollar at timmy's insistance we wouldn't want them to have to take any haircut
and maria at cnbc really seems to have a thing for the old fart at AIG who was president who was allowed to cash out at 100 percent defending him against spitzer
what is it maternal instinct or old man/sugar
daddy fantasy??
TK421 September 11, 2012 at 8:54 pm
Maria's married to an investment banker, so she probably just loves money-men.
And while it would be hilarious to see Bernanke and Foamy swept out of their jobs, they'd likely end up with two of the biggest, shiniest golden parachutes in history.
Jim September 12, 2012 at 2:41 pm
Maria? Married?
I thought that she cost Cit's Todd Thomson his job.
DP September 12, 2012 at 9:06 am
I recall Maria fawning over Sandy Weill (it could not be fairly called an interview, she behaved like a Citi PR flak) years ago, well before the financial collapse and she made sure to tell Sandy that she owned stock in Citi.
And there's also the issue that Joe Kernan is married to a Squawk Box producer. So is Becky Quick; a few years ago she left her husband and her producer left his wife and kids so they could be together. They are now married.
CNBC apparently has no policies whatsoever in areas like access journalism (except perhaps to encourage it), nepotism, supervisors having relationships with subordinates, reporters owning stocks in companies they report on, or how guests are treated. If the New York Times was still a serious newspaper it would have let Wall Street water carrier Sorkin that if he went to work for CNBC he could no longer write for the Times.
The Times was never a serious newspaper. Now it isn't even a newspaper. It prints Administration PR, corporate PR, toady opinions, and letters from illiterates. I am amazed that anyone reads it, but I suppose it is useful to people who need to be told what to think.
dirtbagger September 12, 2012 at 9:59 pm
Now I understand why Kernan, the village idiot, is still on squawk box. Watching it in the early AM when the occasional insomnia attack strikes, Joe acts like he is loaded on crank or coke. He continually interrupts his guests and just can't shut up. Wouldn't be so annoying if he had anything of consequence to convey to the audience.
mac September 11, 2012 at 6:42 pm
Why does it take so many words to say "the government gave money to AIG and the taxpayers have to eat the loss"?
Are those of you who oppose the Fed's bailout of AIG equally against the ECB's bailout of the hedge funds holding peripheral debt.
Arguably, the Fed's bailout of AIG will cost the US taxpayer FAR LESS than the ECB's bailout of the periphery will cost taxpayers in northern Europe.
Guy Fawkes September 11, 2012 at 6:47 pm
After reading Sorkin's propaganda book, I read his articles with better knowledge that they are not, in fact, journalism. They are propaganda. And he even does propaganda bad.
Peasant Pinguin Society September 11, 2012 at 7:22 pm
Two minutes have already passed since President Obama, Lloyd Blankfein, Jamie Dimon, Robert Rubin, and Hank Paulson arrived at the theater.
Oh, and last but not least, Joseph Cassano arrived, flush with the $300 million he got from AIG, having just flown in from his huge Townhouse, near Harrod's, in London.
All at once the curtains opened, and the stage appeared, completely transformed.
The center was occupied by a staircase, and at the top of the staircase was the unattached head of a 35 year old male, placed on a wide red disk with a metal armature that held it upright: THIS IS Andrew Ross Sorkin.
The stage assistant, holding this solid red disk with Sorkin's Head in both hands, showed Obama and company the bodiless Head, which began to jabber gaily in the most inventive way possible. With every word Sorkin's prominent lower jaw emitted a slobbery spray of spittle that, spewing in a shower from his mouth, landed in front of the President's feet.
Sorkin Head: "the TARP made money!! AIG was a great deal for the taxpayer!! Treasury turned a profit of $12.4 billion on the AIG bailout"… and so forth…"
We could find none of the customary subterfuges used in the classic talking head routine. There was no system of mirrors hidden under the disk, which the stage assistant manipulated freely and without any suspect precautions.
Next the stage assistant walked to the edge of the stage and offered the round plate to whoever wanted it.
Blankfein took a few steps forward to receive the Sorkin Head, Dimon picked it up and laughed, and they passed it from hand to hand. With each spectator, the unattached Head carried on a brief, impromptu, and droll conversation, related to the success of TARP or the AIG bailout. Some held the Head at arm's length, trying to avoid the astounding sprays of sputum flying from the prodigy's mouth.
After making the rounds, the unattached Sorkin Head was handed back to the stage assistant, who had remained onstage. Immediately the stage assistant pressed a hidden catch that opened the red box, which in reality was composed of two parts held together by a thin hinge. The lower disk dropped in a vertical profile and below this, wearing a flesh-colored leotard, now hung a minuscule human body that had been able to fit in the narrow hiding place of the hollow plate, barely an inch thick.
This sudden vision completed the person of Andrew Ross Sorkin, a loquacious dwarf, displaying an outsized head. Still talking and spraying spittle, "TARP made money!" "AIG was good for the taxpayer!" the astounding chatterbox gesticulated freely with his puppetlike limbs.
As the stage assistant carried him off into the wings, the dwarf gripped a foot in each hand, and disappeared in a final gibe, but not before launching huge droplets of his abundant saliva far afield, landing, once again, just in front of the President's feet.
You'll laugh, you'll cry, you'll kiss billions of dollars goodbye.
Howard Beale IV September 11, 2012 at 11:23 pm
I much prefer Vir Cotto's take on the whole "what do You Want?": question: http://www.youtube.com/watch?v=S0n2vurSBIQ
jim beene September 12, 2012 at 8:17 am
Great thought; shame it's against the law.
Robin Hood September 11, 2012 at 7:43 pm
What a messed up century this is. In my time, when you cut a Joker's head off, they stay dead!
Karl September 11, 2012 at 8:18 pm
The real problem with his article is that it's trying to change the entire focus. In the end it doesn't matter if the government made or lost money whatever the accounting you want to use. The government should be in the business of doing what's best for the country. Even if you think TARP was a reasonably decent response to a dire situation, the focus now should be on what government can do to fix the source of the problems. If they can put everything behind them by saying that they turned a profit and everything worked out for the best, then they ignore fixing the financial system.
This is all a distraction to try to keep people from realizing that nothing has been done about the banks and our financial system! It's much better for Obama to have people arguing about accounting then pointing to how little has been done.
scraping_by September 11, 2012 at 10:50 pm
True enough. It's all sales patter, but it's empowering to us marks if we see the lies. Makes cutting back to the real question, of public money converted to private good with no compensation, a quicker process.
The problem is debt currency in the end and very few even mention.
SR6719 September 11, 2012 at 10:17 pm
As jsmith might have said (if he or she were still around) anyone who believes a single word from Andrew Ross Sorkin is an effing moron.
"For a lie to work it must be shrouded in truth." –The Master, from Doctor Who: "The Trial Of a Time Lord".
PQS September 11, 2012 at 11:25 pm
I heard this "AIG made money" story on the radio tonight, and my BS meter immediately went off.
Glad to know I wasn't just paranoid.
I can just imagine what Matt Taibbi will say about this Latest Lie.
Charlie Gasparino September 11, 2012 at 11:38 pm
He did it, he finally stole my byline.
"reporting live from under the table and between the legs of the biggest names on wall st.
Geoff September 12, 2012 at 2:36 am
AIG = CIA = bottomless head of state = headless state of bottom
Keep those guillotines sharp and oiled.
psychohistorian September 12, 2012 at 3:59 am
Nice post Yves.
Its too bad Big Liers like Sorkin don't have their karma get them soon enough.
EMT September 12, 2012 at 7:04 am
Yves: this fascination with the math of the Treasury's "return" on its investment in AIG on your part is the ultimate forest for the trees. Barofsky to his credit is also making a bigger point about the hasty and almost exclusive focus of TARP dollars on banking and not on housing which while obvious, has the virtue of truth. But his incessant ranting over the accounting of Treasury's returns on its investment is schoolboy stuff, just taunting by a bully with a pulpit you and the press have given him.
And the point is what? That saving the banks from collapse (and from taking your savings, investments, pensions and insurance policies with them) cost the taxpayers money? This just in! Breaking news! Or that it shouldn't have cost any money, that taxpayers should have made a return because Government programs should be run like Blackstone investments so that when Government invests it should target an IRR rather than the achievement of a chosen policy objectives? and failure to meet those IRRs should be grounds for impeachment?
The math is simple: on "TARP" accounts solely, the breakeven price is $45. taking into account the "gift" to the Treasury of the shares it received from the AIG Trust (set up to hold "for the benefit of the Treasury" the shares received by the Fed as a commitment fee for the Credit Facility it extended in 2008 to AIG), the breakeven price is $28.73. Since those trust shares were a "gift", the Treasury has no "basis" in those shares and so its "gain" on their sale is equal to the entire sales price of those shares. Therefore, taking into account its zero basis and its $45 dollar basis shares, its overall breakeven price is $28.73. That's the math. Neal can say Treasury is selling its TARP shares at a loss at $32.50 with conviction but then he's also got to acknowledge that when Treasury sells its AIG Trust zero basis shares at $32.50, it is doing so with huge gains that more than offset the loss on the TARP shares.That's the truth which his self promoting "i am the only truth teller in a sea of corruption" carping about "returns" is intended to obscure.
On counting the Fed and Treasury "returns" together, yes, they are separate institutions and there are separate accounts for each of their activities. But since the Fed's "profits" are turned over every year to the Treasury and the AIG rescue was a joint production between Treasury and the Fed (in which they cooperated in on how the rescue and on how the exit from that funding were structured to protect each of them to the greatest extent possible), it's not mere "spin" to look at how they did on a consolidated basis. Yes, the AIG rescue cannot be looked at in isolation from the broader effort made to keep all of its major counterparties from failing as well (TARP, TALF, TAF, CPP, CAP, TLGF,etc.), or in isolation from the tax regulations that allowed them (and GM) to keep their NOLs, despite the "change of control" that would otherwise have limited (not forfeited) their "value".
But after all those caveats, AIG didn't fail (and take its creditor/investors and policyholders and derivative counterparties with them), the USG spent a ton of money avoiding that failure and on a consolidated basis the USG got all the money its spent on AIG back. Those are the facts.
Barofsky may think the money should have been spent on mortgage principal reduction or interest rate relief or on a new Homeowner Loan Corporation; the right and the left may think the banks should all have been left to fail, letting the chips fall where they may.
But that's not what happened. What happened was the Bush Administration decided to bail out the banks. By the time Obama got into office the USG had committed over $7 trillion of taxpayer money to the banking system to keep it from collapse. Obama and the folks at his Treasury Department were handed those cards and played them as best they could, continuing those policies and trying to minimize the losses to the Government from that sunken investment in the banking system.
Getting the taxpayers' money back from AIG was better than the alternative of losing it, no? Or would it have been better for the ideologues who opposed the bailout for the money to have been lost so the public's outrage could continue to be stoked? Is it possible that this more positive than anticipated outcome just doesn't fit the narrative you have been selling for four years and you are propping up Barofsky's silly accounting points to keep that failed narrative alive?
Bert_S September 12, 2012 at 8:38 am
Thankyou for defining the New and Improved Bernanke-Geithner Put. Greenspan just cut interest rates whenever something blew up on his watch.
So you give us the false choice of Bailout or Shoot Ourselves in the Foot – or somewhere worse.
If this was a one time thing and we were "fixing the system so that this can never happen again" – Geithner's words around TARP time – I would say ok, we learned our lesson and that was the price of education.
But where are the fixes?
Don't say Dodd-Frank.
Michael Olenick September 12, 2012 at 10:43 am
Since when is the US Government an investment bank? It is not the government's job to make money. If it were then the opportunity costs Yves addresses would come into play. They are using a triple standard. On one hand they argue that by saving AIG (and the rest) they fulfilled a public policy, and that since they're the government they need not address opportunity cost. On the other hand, they're arguing that they made money, the job of an investment bank.
Finally, and most importantly, while they were massively intervening to prop up the banks they entirely ignored the counter-parties to all those mortgages, the borrowers, going so far as to screech "free market" during evictions. However, every banker knows that if those "illiquid" assets — which weren't illiquid at all, just not worth much — were sold on the open market to vulture investors that there would have been plenty of room for the vultures to refi and still make a mint. That would have quickly deleveraged an enormous amount of middle class debt. They could have even given people a first right of refusal to buy their own loans, for cash, at a small premium to what they fetched at auction.
Would this have destroyed the world as we know it? It would have nuked the existing banks, and many large irresponsible businesses — think GE, who thanks to their loan-sharking operation at GE Capital almost missed payroll — but it also would have freed up an enormous amount of spending capital. People who work for big businesses may have lost their jobs, but thanks to outsourcing many of those losses would have been in India and China, not the US. Arguably the net macroeconomic effect would have been a net positive, for most people and for the overall economy, as the market redistributed the wealth from the wealthiest to everybody else, with little or no government intervention.
While it's oftentimes attributed to Goebbels it was actually Lenin that originally said tell a lie often enough and people will believe it, though whereas Goebbels saw that as a strategy Lenin was explaining how people were being misled about basic economics. That is, there is nothing new about this tactic. Yes, AIG would have failed, and so would many of their counterparties. That's why it's called "investing."
Obama decided to throw good money after bad, continuing an unjustifiable public policy that is the worst of both world's. He broke market discipline, distorted private contracts in favor of the party who had the most information and experience entering into it, then lied about it.
It's called socialism for the rich, free enterprise for the poor. The Fed was created to engineer it; the National Security State was created to maximize it. All the analysis is just opera.
monday1929 September 12, 2012 at 1:24 pm
EMT concedes that the Banks failed and almost took the System with it. Of course the welfare-queen recipients ie. the Socialist bankers like Jamie Dimon still deny they needed any bailout. They have this routine down to a science- admit we are at "the edge of a precipice" when a trillion or so is needed, like Hank "the vomiter" Paulson did, then talk about the Profits from the rescue and green shoots. EMT has also conceded, inadvertently, that the Systemically Dangerous Institutions do need to be broken up and scattered to the wind.
What narrative has EMT been selling for the past four years?
ohmyheck September 12, 2012 at 3:36 pm
Um, because, not accounted for in the so called "profit-making" are the back-door bailouts? See, that was easy…
Back-Door Bail-Outs, you ask? Here, let The Bears essplen it to ya.
http://www.youtube.com/watch?v=yipV_pK6HXw&feature=related
Cap Vandal September 12, 2012 at 6:20 pm
EMT ….
Thanks for a little perspective on this.
The public seems very very concerned about 'what the bailout COST" and "Did the taxpayers get their money back,."
The answer to this is an unequivical yes.,
This particular blog was OBSESSED ovet this issue 4 years ago. And 10's of thousands of lines of invective were based on the assumption that the government wouldn't get their money back.
But …. since it happened, that is no longer the issue. The issue has changed to something entirely different,
Seriously. This blog (as well as virtually the entire nation) assumed that there was NO WAY the AIG assistance would EVER be paid back. Wrong.
Since you can't admit that — then the subject has to be changed to some other issue.
As late at 2011, Barofsky was arguing that Maiden Lane couldn't be taken in isolation — and that any success there had to be offset against what he still assumed would be Treasury losses.
And, last week, Barofsky was arguing that the Fed profits shouldn't be combined with the Treasury 'losses'. But now, Treasury is virtually guranteed to make a positive return on a stand alone basis.
http://www.treasury.gov/press-center/press-releases/Pages/tg1704.aspx
Treasury needs another $2.6 billion to 'break even' on a stand alone basis, and ownes 234 million shares of AIG which , at the 32.50 price of the latest public offering, would net them $7.6 billion.
And this $7.6 billion would put the total return at $26.2 billion.
The bottom line being that the Taxpayer broke even on AIG and made a positive return under ANY plausible scenario.
Which was the entire purpose of the bailout. Paulson has stated that he bailed out AIG and not Lehman because he believed that AIG had sufficient assets to pay the government back.
And where did AIG get the cash to pay the government back? Primarily from the owners of AIG — the stockholders — who lost over 90% of their investment. Which is exactly what should have occurred. The owners were wiped out. The senior managers were fired.
Maiden Lane III made a $9.9 billion return — which means there was no 'stealth bailout' –as the counterparties had over $30 billion in collateral PRIOR to Maiden Lane III — to cover what ended up becoming $24 billion in losses. They would have ended up better off on a cash basis by simply keeping the collateral and tearing up the CDS's.
Bailing out AIG would have been a huge success even if it had cost $10's of billions of dollars. An insolvency would have been catastrophic. The fact that it more than broke even has to be considered is an even bigger success.
Bert_S September 12, 2012 at 6:33 pm
Glad you staightened us out there.
LETS DO IT AGAIN AND PAY OFF THE NATIONAL DEBT!!!!!!!
Mr No September 12, 2012 at 9:49 pm
Cap Vandal:
How divorced from reality is this gem: "And where did AIG get the cash to pay the government back? Primarily from the owners of AIG — the stockholders — who lost over 90% of their investment."
The cash came from all of the things Yves cites above (ZIRP, TBTF guarantees, regulatory forbearance, DTA, etc) that propped up AIG's stock price at great cost to savers, future taxpayers, the regulatory system, and the national debt. That AIG's shareholders kept a single penny is an indication of the willingness of Treasury to sell out the broader interest of the country for a positive election year press release. To suggest that legacy equity holders somehow kicked in "cash" to Treasury suggests either an astonishing level of ignorance or a willingness to deceive that one expects to see only in a government flack.
Lloyd C. Bankster September 12, 2012 at 10:18 pm
Cap Vandal,
Do you still have all your teeth?
If so, I recommend a good dentist/doctor named Dr. Benway who can take care of this problem.
Here's a look at Dr. Benway at work, helping to remove Andrew Ross Sorkin's teeth:
http://www.youtube.com/watch?v=LLGW64oMgRc
Mr No September 12, 2012 at 10:05 pm
Treasury politicized these results in declaring AIG's "profit" as proof of its (meaning TREASURY's) successful handling of the bailout. Having pushed this narrative, is it really "silly" to ask for a level of transparency about the sources of the potential profit, which indicate, as you acknowledge, that the gains came not from Treasury but from the Fed. Treasury could have said that the "government" had a positive return on its AIG investment. But it declared this success because of "Treasury's" investment, part of a broader election year tactic to declare mission accomplished on TARP. From this perspective, it is Treasury that put this question at issue. While Yves is unquestionably correct on why Sorkin's treatment is a dishonest one (including his convenient forgetfulness about the DTAs), simply from the perspective of demanding honesty and transparency from the government, she is also correct to point out the deception that is lurking here.
adwon September 13, 2012 at 1:52 am
That's a nifty treatment of a hypothetical gift tax transaction between Treasury and AIG you have there. I believe you have made an error.
Your treatment of Treasury's shares in AIG as a "gift" is ridiculous on its face. Treasury actually gave money to AIG in exchange for the shares. That is not a gift, that is a sale. A donee may have no basis in his gift, but a buyer's basis is the price he paid.
The error is beside the real point. The value of your example was minimal at best because it really shows nothing at all. Make up any number you like for the basis points, the simple fact that Treasury saved AIG from certain doom does not appear in your calculations. I don't seriously mean you should try to value the rescue in dollars. I just mean that you have mistaken how to properly account for the entire venture. AIG was rescued for a reason and probably not a good one. That being said, the only proper way to value the transaction is whether the policy was both effective as to its stated purpose as well as actually effective (i.e. the same old bull won't happen again, which I suspect it will).
tl;dr – Don't use tax examples if you don't understand the basics.
fresno dan September 12, 2012 at 8:32 am
I agree about TARP. But you know what – I would let them say it made money. Than I would ask, how about making money for the average person – do you not KNOW how to do that, or do you NOT CARE to do that???
http://www.ritholtz.com/blog/2012/09/the-middle-class/
http://www.interfluidity.com/v2/2587.html
http://www.census.gov/hhes/www/income/data/historical/families/
Robert Asher September 12, 2012 at 8:33 am
It is fair to ask why the Bush Administration, whose financial policies were set by the former head of Goldman, Sachs, did not consider alternatives to the TARP program. Note also that the technical experts who advised Paulson were all former employees of large Wall Street banks. Barofsky's main point is not that TARP did not turn a profit: that is a straw horse. Of course he favored New Deal type programs of mortgage relief for homeowners. But Barofsky's main point is the TOTAL lack of concern for the Treasury officials for the massive corruption that existed in the field, as all anti-crisis programs were being executed.And among the corrupt institutions were mortgage companies that were and are subsidiaries of the Wall Street Banks. The Evil Empire is still with it. Why doesn't Luke Skywalker run for President?
Dandelion September 12, 2012 at 10:57 am
How many other businesses failed because of the credit crisis but did not get any "loans" from the government. A nice low interest loan from Uncle Sam might have saved them too. Gee. I wonder why small businesses across America weren't considered too big to fail but instead too small to count. And I wonder if that's one reason these bailouts piss so many off, regardless of how "necessary" their advocates proclaim them to have been.
small businesses across America (the "job creators")were allowed to fail, hence the hypocracy and bankruptcy of America.
Chad M September 12, 2012 at 12:10 pm
I don't see any of these positive reports on AIG talking about the $80B in hand outs to counter-parties via the swap deals. AIG lost 80B less the premium received on that money and there is no way Treasury is including those payouts that were for 100 cents on the dollar rather than at a haircut.
Chad M:
"I don't see any of these positive reports on AIG talking about the $80B in hand outs to counter-parties via the swap deals."
This is accounted for in the Maiden Lane III transactions. As of September 2008, the counterparties already had cash collateral for about $30 billion in losses on the swap deals.
The counterparties then 'sold' the underlying assets to Maiden Lane III for 'fair value' of about $29 billion, funded by a loan of $24 billion from FRBNY and $5 billion AIG contribution.
The amortization of these assets plus the final sales price returned about $10 billion more than the $29 billion 'fair value' @ 9/2008.
The face value of the assets that went into Maiden Lane III was about $62 billion. So the losses on those assets was $23 billion. Or, $62 billion less the $39 billion cash recovery ($39 being the $29 billion from FRBNY and AIG which was repaid + the $10 billion in additional returns).
And where did the $23 billion come from? Indirectly — from the owners/shareholders of AIG at the time of the bailout, who were diluted by over 90%. Which seems about right.
http://www.newyorkfed.org/markets/maidenlane.html
The logic of the 'stealth bailout' argument was primarily that the Fed/Treasury would lose billions on the AIG bailout, and that those 'taxpayer' losses were used ot pay off AIG liabilities that benefitted banks.
And an argument that was made over and over by Barofsky was that the AIG bailout had to be considered in its entirety, and that the banks benefitted — so any loss to the government/taxpayer must be considered a government subsidy to the banks. If the taxpayer is repaid, then any benefit to the banks came from AIG. And, like it or not, AIG did these idiotic deals.
Lloyd C. Bankster September 12, 2012 at 2:29 pm
Nice work, Andrew. Nice work, EMT.
You guys and Steve Liesman just keep doing what you do best, keep giving Barofsky hell along with all the other anti-bailout nutjobs and Wall Street critics.
Or is Barofsky the only critic we have left?
Anyway, give my regards to Joe and Becky and oh, before I forget, sorry 'bout knocking out your front teeth like that. You both have such purty l'il mouths I guess my p*cker got carried away.
But why not use some of that money we give you and hire a dentist to have all your teeth removed?
At least think about it, because that sure would make f*cking you boys in the mouth a lot easier on me, Jamie, Hank, Bob and the rest of the gang.
David Merkel September 12, 2012 at 11:53 pm
Thanks, Yves. Good one.
The far left and the far right were rooting for the TARP funds to have been lost, for different reasons: the right to prove its point that markets should be allowed to clear and self adjust and to let losses be suffered by those who deserved them and the left to prove the point a policy that propped up a financial system that is rotten to its core is a rotten policy.
So the fact that all the TARP money (or most) was retrieved now requires a change in the narrative on the far left and the far right. Barofsky's "acccounting" challenge helps keep the flame burning for both sides but besides the fact that he's wrong, it also tends to highlight that most if not all of the money has been retrieved. Now what?
Yes, i think we should break up institutions that are perceived by policymakers to be too big to fail(because they will bail them out again) or which have the political influence to get the Government to help them avoid failure. Such institutions are bad for democracy and bad for free markets, the functioning of incentives in which have to allow for the possibility and reality of loss.
In the US the top 10 institutions, by assets, all of whom are deeply interconnected in the payment and clearing systems and which together hold 70% of all of the assets of the banking system were all at risk of illiquidity – being unable to fund themselves – in September 2008. But for the Fed, they would have defaulted on massive amounts of debt and other liabilities (like CDS and interest rate swaps and repo) and the system would have frozen NOT cleared. It would have taken years to clear and a decade to recover because 70% of the liabilities of the banking system were also obligations of these institutions, their liabilities being individual's, corporations's and investor's assets: regular folks savings accounts (yes insured by the FDIC), corporate transaction accounts (from which payroll is made and other third party payments) and 401(k), pension management and brokerage accounts. Eventually those bank liabilities would have been repaid at the end of their receiverships, but not immediately when due and the economy would have come to a grinding halt. Hell in the fourth quarter of 2008 it dropped almost 10 percent. that's what the right misses about in its loose talk about "having markets clear": when big institutions fail they don't clear their liabilities after one big asset sale and then a pro rata payout of their liabilities: the asset liquidations go on for years (see RTC). and that's what the left misses about bailing out rotten institutions: those institutions' creditors are actors in the real economy whose inability to get to their deposits and investments and their money in a bank in receivership inflicts hurt on them and the rest of us dependent on their spending, investing and transacting. So when the big guys go down, they take a lot of innocent third parties with them. If institutions holding 70% of the assets and liabilities of the banking system go down, the economy goes down with it.
Everyone should take a deep breath, accept the reality of the deep interconnectedness of all of us to the banking system and then yes we should break the big banks up, we should make the remaining ones more transparent so we all know what we're dealing with and any bank that is the beneficiary of deposit insurance should not be permitted to gamble and any bank that is the beneficiary of lender of last resort funding from the fed should be kept at size where failure is episodic not systemic.
then we won't need EMTs only morticians.