The Treasury Department announced this week it would sell $18 billion worth of AIG shares at $32.50 and the applause started almost immediately. Treasury said taxpayers would see a "positive return" from the investment in AIG, a nonbank financial services firm so systemically important we gave them more than $182 billion to survive.
This is Treasury's biggest dump of AIG shares since the crisis forced a rescue of the insurer in 2008 and supplemental support in 2009. Taxpayers owned almost 80% of AIG in exchange for all that cash.
It can never be proven that the crisis bailouts saved us from financial Armageddon. That's the logical fallacy of asserting a claim with no way to disprove the opposite. So saying we made a profit on the deal is the next best thing. The New York Times' Andrew Ross Sorkin claims, if you combine Treasury actions and "positive returns" on Federal Reserve activities, the Treasury is now "on a path to actually turn a profit." That's where the debate starts.
Former Special Inspector General for the Troubled Asset Relief Program Neil Barofsky says, "Not so fast." I agree. If your intention is to try to prove or disprove the government PR claims that the taxpayer has made an accounting profit on any of the bailouts, or even broken even, you must remember this: That's not why the government supposedly did what they did. And on the two counts of failing to unfreeze credit and failing to help homeowners – how the bailouts were justified to Congress – the government is guilty.
Treasury never uses the term "profit," even in press releases. The term it does use, "positive return," is a non-Generally Accepted Accounting Principles metric. Treasury has sunk to the level of a social commerce IPO like Groupon, whose infamous Consolidated Segment Operating Income (CSOI) – which was slammed by the Securities and Exchange Commission – glossed over losses to convince investors there was a gain instead.
Combining numbers from the Fed's AIG investment with Treasury's has two big problems. The first is that each entity tracked the value of their AIG investments differently. The second is that you can't assume the numbers published by the Treasury have received the same level of independent scrutiny by independent outside auditors as the Fed's.
Treasury uses a government version of GAAP to prepare its annual reports. The Treasury's caveat: "The statements should be read with the realization that they are for a component of the U.S. Government, a sovereign entity."
Treasury uses Statement on Federal Financial Accounting Standards No. 2 to account for equity investments which requires measurement at the net present value of estimated future cash flows. AIG common stock is held on an "available-for-sale" basis and Treasury records it at fair value using models to calibrate to market prices of similar securities. Modeling the value of Treasury's investment in AIG preferred shares is imperfect since no other asset like it exists.
The Fed's caveat is stronger: "Decisions regarding securities and foreign currency transactions, including their purchase and sale, are motivated by monetary policy objectives rather than profit." At the Fed, these investments are recorded at cost on a settlement-date basis rather than the trade-date basis required by GAAP. The Fed records them at amortized cost rather than fair value.