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Why the Obama Administration is Feuding with TARP Watchdog Neil Barofsky

By Alain Sherter

Updated on: October 28, 2010 / 3:52 PM EDT / MoneyWatch

Dodd-Frank, the recently enacted financial reform law, encourages corporate whistle-blowers to notify the government of bogus accounting, securities fraud other insider schemes. Neil Barofksy should look into it.

He's the "Special Inspector General" who since December 2008 has been dutifully exposing problems with TARP, the government's $700 billion bank bailout. Which is why it's reprehensible that the Obama administration -- and U.S. Treasury Secretary Tim Geithner -- appear to be trying to discredit him.

In a tough new report that challenges the Treasury's administration of TARP, Barofsky this week questioned whether the agency is using creative bookkeeping to estimate likely government losses on AIG. Now the government is punching back.

In a post on the White House blog, deputy communications director Jen Psaki defends Treasury's accounting of the more than $182 billion in taxpayer funds poured into the insurance giant. But she doesn't stop there. Psaki also ridicules Barofsky and, to my ear, comes mighty close to impugning his integrity. Some excerpts:

Some people just don't like movies with happy endings. How else to explain this week's report by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP)? Rather than focusing on the growing evidence we've seen in recent months that TARP will be far less costly than anyone expected, SIGTARP instead sought to generate a false controversy over AIG to try and grab a few, cheap headlines....
SIGTARP's analysis seems to be stuck in a time warp if they believe that we should ignore AIG's exit strategy in evaluating our investment in that company....
All of this financial talk can get complicated, but here's the bottom line: Any truly independent observer would say that Treasury's stake in AIG will be worth more than taxpayers originally invested in that company.

Needless to say, it's unusual for the government to openly attack its own public servants in this manner -- after all, as SIG Barofsky works for Treasury and the White House (not to mention taxpayers). It's also counterproductive. The government has, of course, a right to defend the record of senior officials like Geithner. But Psaki's prickly response makes it appear the government has something to hide, even if it doesn't.

Geithner certainly seems rattled. Treasury felt ruffled enough by Barofsky's report to go to the trouble yesterday of rebutting a post at TheAtlantic.com that questioned the agency's record of disclosing information, deriding the IG's claims about AIG's loss projections as "baseless." Again, without getting into the specifics of who's right or wrong on the question of how these estimates should be calculated, the tone here is suspiciously defensive, like a teenager swearing up and down to his parents that he didn't have a party while they were away on vacation (honest!).

The White House's ham-fisted response also unnecessarily continues the feud between Treasury and Barfofsky, a persistent critic of the agency's handling of TARP and of Wall Street's conduct during the financial crisis. Indeed, he's been positively post-partisan in carrying out his mission. Before going after Geithner, for instance, Barofsky accused former Treasury chief Henry Paulson of misrepresenting the financial stability of the banks that initially received funding under the program.

Earlier this year, Barofsky also joined a lawsuit against Bank of America (BAC) filed by New York Attorney General Andrew Cuomo that charged the company with fraud over its 2008 acquisition of Merrill Lynch. More recently, Barofsky has blasted the performance of HAMP, the Administration's underwhelming mortgage relief program, and argued that TARP consolidates Wall Street's grip on the financial industry. Most worrisome for Geithner, Barofsky is investigating whether the New York Federal Reserve participated in a criminal cover up related to the goverment's bailout of AIG.

In short, Barofsky scares the bejeezus out of people, as good investigators should. If he puts noses out of joint in Washington, it's largely because he's unafraid to confront powerful federal officials and unusually frank in discussing government and corporate misconduct. As he told Bloomberg in April in a revealing profile:

"There's a reason there are Tea Partiers out there, and when you look at it, anger at the bailout is one of the first things they talk about," says Barofsky, referring to the anti-Obama political movement. "This Treasury Department and the previous Treasury Department bear some of the responsibility for not being straightforward with the American people."

This penchant for straight talk is what led Geithner in 2009 to try to rein Barofsky in. The agency asked the Justice Department to rule on whether his office, known as SIGTARP, should report to Geithner or to President Obama. Barofsky fought to retain his autonomy, and Treasury eventually relented.

Or so he thought. The White House's latest actions suggest it's willing to go only so far in supporting SIGTARP's mission of promoting government transparency. That's a shame.

The bank bailout isn't, as Psaki would have it, a movie. It's regrettably all too real. Nor can it possibly have a "happy ending," no matter what profit or loss taxpayers ultimately realize on the program. That's because TARP didn't end anything -- it's merely an intermission. In rescuing Wall Street from itself, it set up the sequel for the next bailout.

Psaki insinuates that Barofsky isn't a "truly independent observer," perhaps to weaken him as he burrows into corners of government it would rather keep dark. The White House's real concern, it seems, is precisely the opposite -- that he's too independent.

Update: Barofsky's office sent me a long statement responding in detail to Psaki's post. Here it is in its entirety:

The White House blog entitled "The Facts on AIG" mischaracterizes a portion of SIGTARP's most recent quarterly report and the facts contained within it. Set forth below are statements that we believe are inaccurate or misleading, followed by the actual facts.

"Rather than focusing on the growing evidence we've seen in recent months that TARP will be far less costly than anyone expected, SIGTARP instead sought to generate a false controversy over AIG to try and grab a few, cheap headlines."

FACT: The report makes numerous references to the declining estimates in TARP costs, characterizesthem as "undoubtedly good news" (p. 6), and prominently reprints the most recent Treasury and CBO estimates (p. 45). Moreover, SIGTARP referred to the potential restructuring of AIG as "an otherwise positive story â€"- calculations of loss far lower than what was previously expected and a potential exit from AIG that few thought would ever be possible" (p. 10).
FACT: SIGTARP is required by statute to recount its recommendations to Treasury over the past quarter. On October 13, 2010, in a letter to Secretary Geithner, SIGTARP made the straightforward recommendation to Treasury that it fix what SIGTARP believed to be a failure in transparency by simply disclosing the uncontestable facts that (1) Treasury used a method to calculate its anticipated losses in AIG in its October Retrospective that was different from that used previously; and (2) that Treasury would be using its previous method, and not the methodology contained in its October Retrospective, in its November 2010 audited financial statement. Treasury refused, even though it could have avoided the ensuing controversy simply by adding a footnote to its existing tables with the recommended disclosures. As required by statute, SIGTARP then included in its quarterly report its exchange of letters with Treasury (pp. 330 and 332) and summarized the issues contained within them. In other words,
SIGTARP gave Treasury every opportunity to avoid this controversy. If carrying out SIGTARP's statutory duty by commenting on what it determined to be a failure of transparency by Treasury in failing to disclose certain information to the public is viewed by Treasury as generating a "false controversy," so be it.

"Under federal accounting rules, we are required to value that common stock at the current market price."

FACT: Treasury's own published methodology only contemplates valuing an asset at the common stomarket price if the asset is in fact held as common stock. Treasury's investment in AIG is in preferred stock, not common stock, which is why past valuations have not been based on the market price of AIG common stock, and why Treasury's November audited financial statement will not be based on the price of AIG common stock. SIGTARP did not object to Treasury using a common stock valuation in its October Retrospective (see below); SIGTARP only objected to Treasury's failure to disclose alongside that projection that it had not used this method in the past and would not be using it in the very near future.
FACT: In its Retrospective, Treasury did not value similarly situated investments (preferred shares that it held in banks with which Treasury has an agreement in place to convert to publicly traded common shares) in a manner similar to AIG. For those banks, the shares continued to be valued in their current form, as preferred shares of stock. Only AIG was selected for different treatment.

"SIGTARP, however, incorrectly claims that our report is inconsistent with TARP's audited financial results from March 2010."

FACT: Treasury did change its method for calculating anticipated losses in AIG from March 2010, as Treasury officials have explicitly acknowledged. SIGTARP merely set out the simple fact that the methodology used in Treasury's March 2010 estimate (which was based on valuing the TARP's investment as preferred shares of stock) is different from the methodology it used in its October Retrospective (which valued them as common shares of stock), a fact that Treasury failed to disclose (p.8).

"SIGTARP's analysis seems to be stuck in a time warp if they believe we should ignore AIG's exit strategy in evaluating our investment in that company."

"SIGTARP seems to be arguing that when Treasury conducts any evaluation of the cost of its investment in AIG, it should pretend that the company's exit strategy was never announced."

FACT: In the report, SIGTARP never suggests that Treasury should not have adopted the methodology used in the October Retrospective or that Treasury should ignore its anticipated exit strategy. Indeed, SIGTARP specifically states that it "offers no opinion on the appropriateness or accuracy of the valuation contained in the Retrospective" (p. 8), and even acknowledges that TARP's investment in AIG may result in gains greater than Treasury's most recent estimate (p. 7). SIGTARP's complaint is that as a matter of basic transparency, Treasury should have also disclosed that it had changed how it calculates the anticipated AIG losses in the October Retrospective, and that it would be changing back its methodology in November in its audited financial reports (p. 8). Further demonstrating the inaccuracy of this argument, Treasury itself acknowledged that SIGTARP took no such position in an online posting on October 27, 2010, at theatlantic.com ("SIGTARP never cast doubt on the validity of our AIG valuation."), yet somehow still cited to the blog posting as support for its claim that SIGTARP's report was "baseless."

"Any truly independent observer would say that Treasury's stake in AIG will be worth more than taxpayers originally invested in that company."

FACT: Treasury's own valuation of its TARP investment projects a $5 billion loss. OMB's October 15, 2010, estimate (as of May 31, 2010) of TARP's loss in AIG stands at $47.7 billion. Only by including the 79.8 percent equity interest received by the Federal Reserve in September 2008 for its bailout of AIG, an action taken weeks before TARP's passage and months before TARP's initial investment in AIG, can one come to the conclusion, based on Treasury's own projections, that "Treasury's stake" is worth more than that originally invested. In any event, SIGTARP takes no position whatsoever in its report on the issue of whether the Government's overall position in AIG would be profitable; SIGTARP's concerns addressed the lack of disclosure regarding the different methods that Treasury has used at different times to calculate such gains or losses.

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