Report: Treasury's AIG bailout loss estimate too optimistic

Sept. 27 (Bloomberg) -- Bloomberg's Hugh Son talks about the possibility of the U.S. Treasury Department announcing plans as early as this week to return American International Group Inc. to independence and recoup taxpayer money from the insurer's bailout. He speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)
Washington Post Staff Writer
Monday, October 25, 2010; 9:16 PM

The Treasury Department's recent prediction that taxpayers will lose far less than expected on the bailout of American International Group could prove far too optimistic and relies on different methodology than previous estimates, according to a government watchdog report released Monday.

But the estimate also could lowball the return for taxpayers, depending on how AIG's stock performs, noted the quarterly assessment by the special inspector general for the government's Troubled Assets Relief Program.

The report complained that the Treasury's recent $5 billion loss estimate on its TARP investment in AIG - which is far below previous estimates and was announced last month after a complex restructuring deal with the insurance giant - "does not account for the volatility in AIG's stock price, which may result in losses or gains that are either greater or less than the projected amounts."

The change in the estimated losses is largely a result of the methods used to value Treasury's changing types of AIG stock. The core of the restructuring deal involves Treasury swapping more than $49 billion of preferred shares in AIG for 1.7 billion shares of common stock.

Neil Barofsky, the TARP inspector general, wrote that while Treasury officials disclosed the new valuation approach in a recent retrospective of the TARP program, they had not been transparent enough about the change and have left the agency "vulnerable to charges that it has manipulated its methodology for calculating losses."

Treasury officials took issue with that criticism.

"I think the accusation that we've failed to be transparent is unfair," said Jim Millstein, Treasury's chief restructuring officer, who remains confident that taxpayers ultimately will not lose money on the AIG bailout.

Millstein noted that Treasury had been up front about its changing methodology and that the government now will hold a liquid investment that can be sold over the next couple of years.

"Undeniably, we have market risk," he said. But he noted that if the stock price remains relatively stable, "the numbers are pretty straightforward" and that taxpayers should recover most if not all of their investment.

In short, if AIG's stock soars over the next several years, taxpayers stand to make a windfall. If it sinks, the government must either hold onto its shares or take a loss.

The government largely nationalized AIG in September 2008, when the New York Fed extended an $85 billion emergency loan and took an 80 percent stake in the company. That bailout eventually grew to more than $180 billion, though the company's actual tab has decreased over the past year.

Monday's report also included a wider assessment of the government's numerous bailout programs, including measures aimed at helping troubled homeowners modify their loans.

The TARP program technically expired at the end of September, meaning Treasury could not initiate new programs. But Barofsky reported that as of Sept. 30, $178.4 billion of TARP funds remain outstanding, with another $80 billion "still obligated and available for spending" under current programs.

"In short," Barofsky wrote, "it is still far too early to write TARP's obituary."

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