Big Estimate, Worth Little, on Bailout
Just how much could the bailout of the financial system end up costing American taxpayers?
Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program set up by the Treasury Department, came up with the largest number yet in testimony prepared for delivery Tuesday to a House committee. “The total potential federal government support could reach up to $23.7 trillion,” he stated.
But in the report accompanying his testimony, Mr. Barofsky conceded the number was vastly overblown. It includes estimates of the maximum cost of programs that have already been canceled or that never got under way.
It also assumes that every home mortgage backed by Fannie Mae or Freddie Mac goes into default, and all the homes turn out to be worthless. It assumes that every bank in America fails, with not a single asset worth even a penny. And it assumes that all of the assets held by money market mutual funds, including Treasury bills, turn out to be worthless.
It would also require the Treasury itself to default on securities purchased by the Federal
The sheer unreality of the number did not stop some members of Congress from taking the estimate seriously.
“The potential financial commitment the American taxpayers could be responsible for is of a size and scope that isn’t even imaginable,” said Representative Darrell E. Issa of California, the ranking Republican on the House Committee on Oversight and Government Reform, which will hold the hearing. “If you spent a million dollars a day going back to the birth of Christ, that wouldn’t even come close to just one trillion dollars — $23.7 trillion is a staggering figure.”
Mr. Issa’s staff distributed a briefing memo for Republicans on the committee that quoted the testimony relating to the $23.7 trillion number, but did not mention any of the qualifications contained in the report.
In an interview Monday evening, Mr. Barofsky said he did not view his testimony as misleading. (He also defended his work in an interview with CNBC. See video).
“We’re not suggesting that we’re are looking at a potential loss to the government of $23 trillion,” he said. “Our goal is to bring transparency, to put things in context.”
Asked what he thought the maximum total cost could be, he replied that it was not his job to estimate that, and declined to give a figure.
Mr. Barofsky has no authority to investigate most of the programs he discussed. He came up with far smaller numbers for the Troubled Asset Relief Program, known as TARP, that he is charged with monitoring. Of the $700 billion appropriated by Congress, the Treasury has so far spent $441 billion, and about $70 billion of that has been repaid.
“TARP does not operate in a vacuum,” Mr. Barofsky said in his prepared testimony. To properly evaluate that spending, “the context of these broader efforts” must be considered.
That $23.7 trillion figure would amount to about $77,000 for every person in the United States, and would be almost $10 trillion more than the country’s entire economic output, which is $14.1 trillion.
To reach that figure, Mr. Barofsky added up all possible Federal Reserve programs, and got a total of $6.8 trillion. He figured the TARP program could end up costing $3 trillion, including possible spending by the Federal Deposit Insurance Corporation and the Fed.
For those totals to be reached, every dollar invested by the government in banks would have to become worthless, and the banks would have to default on securities guaranteed by the F.D.I.C. All the collateral posted by the banks to get loans from the Fed would also have to become worthless.
Added to those figures are $4.4 trillion in other possible Treasury programs, and $2.3 trillion in F.D.I.C. guarantees of deposits. The final $7.2 trillion comes mostly from various mortgage-related programs.
Even if all those numbers somehow turned out to be accurate, the report conceded that the total would be smaller because “there is potential for double-counting of exposures where different federal agencies provide guarantees for the same financial institutions.”
The report does not appear to discuss how total government obligations are increased when the Fed either guarantees or purchases Treasury securities. In the interview, Mr. Barofsky declined to address that question.
Andrew Williams, a spokesman for the Treasury Department, called the figures “distorted” because they did not consider the value of the collateral posted for loan programs, as well as the value of securities the Treasury has received from banks.
“These estimates of potential exposures do not provide a useful framework for evaluating the potential cost of these programs,” Mr. Williams said, according to Bloomberg News. “This estimate includes programs at their hypothetical maximum size, and it was never likely that the programs would be maxed out at the same time.”
He added that the United States had spent less than $2 trillion so far, and that much of that was backed by valuable assets.
It may be the first time that $2 trillion appears to be a small number.