The independent auditor of the Troubled Asset Relief Program is questioning the Treasury Department's arithmetic as it relates to the government's projected losses on its investment in American International Group.

In a report released last week, the government watchdog questioned the "dramatic shift" from the $45 billion loss on its AIG investment just six months ago to a newly projected loss of $5 billion in recent weeks.

In the report, the Special Inspector General of TARP, Neil Barofsky, said, "While AIG's fortunes may have indeed improved during the course of those six months, there is a serious question over how much of this decrease is from a change in the Treasury's methodology for calculating losses as opposed to AIG's improved prospects."

The special inspector general said earlier estimates, the latest in March, were based on a "Methodology to Calculate Estimated TARP Costs."

According to the report, the new loss estimate was based on different methodology than used earlier and the new calculations of potential losses, based on a common stock valuation, "would not and could not be used" in Treasury's fiscal year 2010 TARP financial statements.

These statements will be published in November and "will continue to use the auditor-approved methodology that has characterized every other Treasury estimate of loss on its AIG investment," the report said.

The report also contains a chart, which indicates that the government only authorized $176.5 billion in aid to AIG, but at its peak, total aid reached $191.4 billion. As of Sept. 30, the end of the government fiscal year, the outstanding balance on the various facilities was $123.3 billion, the report said.

AIG began receiving government aid in September 2008 through a special Federal Reserve Board emergency program.

The report describes how Treasury values all of its investments, including its preferred shares in AIG.

"Consistent with that document, Treasury's previous loss estimate for AIG, as with its estimates of other TARP investments in preferred shares of stock, accounts for a broad range of factors that might affect the value of Treasury's holdings," Mr. Barofsky said in the report.

However, the "Two-Year Retrospective" published by Treasury earlier this month "abandoned this published methodology, instead estimating a $5 billion loss solely on the recent market closing price of AIG's common stock in return for its current preferred interests," Mr. Barofsky said.

He added, "This conduct has left Treasury vulnerable to charges that it has manipulated its methodology for calculating losses to present two different numbers depending on its audience: one designed for release in early October as part of a multifaceted publicity campaign touting the positive aspects of TARP and emphasizing the reduction in anticipated losses, and one, audited by the Government Accountability Office, for release in November as part of a larger audited financial statement."

Mr. Barofsky said, "Here again, Treasury's unfortunate insensitivity to the values of transparency has led it to engage in conduct that risks further damaging public trust in government."

He noted that the estimate was based on the assumption that the recapitalization will go exactly as planned and result in Treasury receiving approximately 1.1 billion common shares of AIG stock in return for its current preferred interests.

"While Treasury did describe its new methodology in the retrospective, it did not disclose that this methodology differed from that previously used and from what is set forth in its published methodology," the report said.

Mr. Barofsky said in the report that he offers "no opinion on the appropriateness or accuracy of the valuation contained in the retrospective."

However, he said the new estimate fails to meet transparency standards by not disclosing that the new, lower estimate followed a change in the methodology that Treasury previously used to calculate expected losses on its AIG investment, and added that "Treasury would be required by its auditors to use the older, and presumably less favorable, methodology in the official audited statements."

Special Reports /

TARP Watchdog Dubious Of Treasury's AIG Loss Calculations

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