July 18, 2019

DealBook Column: Plot Twist in the A.I.G. Bailout: It Actually Worked

Neil M. Barofsky, a former Troubled Asset Relief Program official, at a Senate panel in 2010.Mark Wilson/Getty ImagesNeil M. Barofsky, a former Troubled Asset Relief Program official, at a Senate panel in 2010.

“Some people just don’t like movies with happy endings.”

That’s what the White House said about Neil Barofsky, then the special inspector general for the Troubled Asset Relief Program, when he complained two years ago that the Treasury Department was fudging its math about its investment in the American International Group.

At the time, the Treasury Department said that it was likely to lose only about $5 billion on the bailout. Mr. Barofsky declared that the number was “manipulated” as part of a “publicity campaign touting the positive aspects of TARP” ahead of the midterm elections.

Fast forward to this week. The Treasury Department announced it planned to sell $18 billion of its A.I.G. stake, putting it on a path to actually turn a profit. It was a remarkable feat and one that nobody — including Treasury Secretary Timothy F. Geithner — anticipated four years ago at the peak of the crisis during the $180 billion bailout of the company.

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Critics of the A.I.G. bailout — it was the most loathed of the rescues and a centerpiece of the Occupy Wall Street movement — had insisted it was going to be a huge black hole.

Given the latest news, I called Mr. Barofsky to see if he had any regrets about his earlier pronouncements now that the rescue of A.I.G. appeared profitable.

“Whoa! Whoa! Whoa! They are not making money!” Mr. Barofsky, now a senior fellow at New York University School of Law, said when I reached him. “They are on the path to very significant losses!”

What?

Mr. Barofsky, who recently wrote a scathing book about the Treasury Department called “Bailout,” refused to admit defeat, saying, “I was right then and I am right now.”

He said that the government is “really engaged in half-truths and creative accounting.” After that assertion, he quickly followed up with, “Is the timing keyed to the election?”

Mr. Barofsky continues to claim the Treasury Department is playing fast and loose with how it calculates profitability. The Treasury says its break-even cost for A.I.G. shares is $28.73, so that any sale of shares at a higher price — the government is selling its A.I.G. shares for $32.50 — means it stands to make a profit.

Mr. Barofsky says that calculation is “absurd.” He says the real break-even price for TARP is $43.53 a share. But Mr. Barofsky — and other critics of the bailout that have sought to portray the rescue effort as a money-losing failure — may be engaged in half-truths and creative accounting of their own.

Mr. Barofsky is focusing on how much the government paid through the TARP program for A.I.G. shares, not how much the taxpayer will ultimately make — including through a separate investment made by the Federal Reserve.

Mr. Barofsky is technically correct that if you isolate the original cost to TARP for its investment in A.I.G., $43.53 a share is the break-even number.

But that conveniently excludes the huge stake that the Federal Reserve received in exchange for its original $85 billion rescue in September 2008. The Federal Reserve’s stake was later rolled into the Treasury’s stake through a series of complicated transactions.

If you include the TARP stake and the Federal Reserve stake, the break-even sale price for A.I.G. shares is the $28.73 that the Treasury has proclaimed.

And that’s the number that taxpayers should care about.

Mr. Barofsky, however, told me that “it’s just not accurate” for me or anyone else to accept Treasury’s view of profitability because “they mixed the pot.”

He explained: “The Fed’s cost basis is zero and they essentially gifted the shares to Treasury,” adding that the government should disclose its math. “It’s a question of transparency.”

When Mr. Barofsky first raised this issue in 2010, the White House, in a rare rebuke of an inspector general, said he had “sought to generate a false controversy over A.I.G. to try and grab a few, cheap headlines.”

As we approach the four-year anniversary of the collapse of Lehman Brothers and the rescue of A.I.G. next week, sadly, much of the public — and people like Mr. Barofsky, as well-intentioned as he is — are still criticizing and debating the merits of the bailout. It’s almost become a cottage industry.

In his book, Mr. Barofsky wrote, “Treasury’s desperate attempt to bail out Wall Street was setting the country up for potentially catastrophic losses.”

As distasteful as the rescue effort was, it should be clear by now that without it, we faced an economic Armageddon. And the results thus far of bailing out the big banks, and A.I.G., indicate a profit.

The Government Accountability Office, which is not swayed by politics, estimated in May that taxpayers will receive a profit of about $15 billion from the A.I.G. bailout. That includes the profit the Fed had already made as part of the broader rescue. There may still be parts of the bailouts to debate: how they were executed, whether they were as effective as they could have been and, perhaps, whether taxpayers should have received an even bigger return for their investments given the risk.

But on the whole, the rescue of A.I.G. — often called a backdoor bailout of Wall Street — should be considered a success.

Toward the end of my phone call, Mr. Barofsky said it himself: “The government had no choice but to bail out A.I.G.” Then he added that Treasury’s sale of A.I.G. stock “is unambiguously good news for the country.”

Article source: http://dealbook.nytimes.com/2012/09/10/plot-twist-in-the-a-i-g-bailout-it-actually-worked/?partner=rss&emc=rss

You’re the Boss Blog: Thinking About Layoffs Again

Staying Alive

The struggles of a business trying to survive.

Everyone else has gone, and I’m sitting in my office, checking our cash-flow numbers. Three weeks without sales mean much less cash on hand than usual (we normally expect to collect $20,000 a week in deposits). I’m not in trouble yet — we still have more than $150,000 in the bank — but next week I’m scheduled to pay my people, and that’s $35,000, every two weeks. And the news from the outside world is dreadful: Europe is collapsing, the stock market is collapsing, the government is likely to stop spending, it never ends.

And then all of a sudden, poof!, and there is a little devil on my right shoulder. Another poof! And there is a little angel on my left shoulder.

Devil: Those numbers, they stink.
Me: Tell me about it.
Angel: What do you mean? You are still up for the year — $44,000 more than on January 1.
Devil: But your backlog is disappearing. And the amount of cash that you know will be arriving in the next month is dropping, too. With your normal backlog of four to six weeks, you can count on $80,000 to $120,000 coming in. Now, you are down to two weeks, and you’ve only got $40,000 on the schedule. All of the cash you squirreled away since the beginning of the year is going to be gone in 3 weeks, and you’ll be dipping into your reserves.
Angel: But the reserve is more than $100,000, and something is bound to turn up before then. It always has in the past.
Me: I guess you forgot all those times it didn’t, and I had to dip into my own pocket or call my relatives and beg.
Devil: She always forgets that stuff. Maybe if you hadn’t kept it such a secret, she’d know.
Me: I hated doing that. It’s humiliating. I never want to talk about it.
Devil: Fantasizing about happy endings won’t help you now. Man up. Cut costs. Fire someone. You’ve got the staff to build $2.5 million per year, but your sales probably won’t top $2 million.
Angel: Aren’t you going to cut your own pay first, like you did in 2008? That would save some money, and you wouldn’t have to fire anyone.
Me: But I finally got my pay up to a reasonable number this spring, after nine years without a raise. And I have my kids’ college tuition to pay — it’s not like I’m living large. I still drive that ‘92 Camry, brown-bag my lunch, and wear thrift-shop clothes.
Devil: I hear you, brother. And it’s about time you wised up. You’ve worked yourself to the bone, and the company owes you more than $350,000 for all the times you covered payroll yourself. Not to mention what it owes your father and brother. Let someone else feel some pain. You’ve proven you can make money at $1.6 million in sales, using 11 employees instead of 14. Get out your knife and start cutting.
Angel: You are spending $520 dollars a day on advertising! Google doesn’t need more money. Cut that first!
Devil: Are you out of your mind? Google is where all of our sales come from.
Angel: But your site is on top of the free listings for a whole lot of valuable search strings. You don’t need to pay them anymore.
Me: Don’t you think that they put us on top of the free listings because we pay them so much money? Why would they just hand out those positions for nothing? I’m afraid that if we stop paying, then we end up on page 31. I really don’t want to find out if that’s true. I can’t afford to lose a single sale.
Devil: Remember when we turned off the campaigns for three days while we updated the site? Incoming calls dropped in half.
Me: Yes, I remember it perfectly. [He shudders.]
Angel: But that was before you revamped the site. Are you really going to cut your payroll? Layoffs are the reason our economy is in the toilet. Why don’t you just scale back work hours? If everyone worked 35 hours a week, you’d save thousands.
Devil: And all the jobs would be late, all the customers unhappy, and all the pre-shipment and final payments would be even further in the future. That will cost us more thousands.
Me: Workers really, really hate to have their pay cut. They like it a lot better if I get rid of people — that way they don’t have to suffer themselves, and the poor chump who got the axe quickly fades from memory.
Devil: So there you have it. [He rubs his hands.] Now, who are you going to get rid of?
Me: Hmmm. The problem is, everyone we have is a good worker. No dead wood in this shop. I’d hate to lose any of them. What if things turn around? We won’t be able to keep our backlog under control. Then we lose sales.
Angel: And just remember how hard it is to hire good people. What a crap shoot that is. You always complain about it. Even in a recession, you were lucky to find such a good crew. Smart bosses always keep their best people close at hand — you never want to send them to your competitors.
Devil: But if you run out of work, what are you going to do? You can’t pay them to do nothing. You’ll be out of money in a flash.
Me: I’m awfully sick of being broke. I don’t want to lose good workers. I can’t stop advertising.
Angel: Maybe our political leaders will take sensible and prudent steps that restore the people’s confidence, and they will start spending again, and the problem will solve itself?
Devil: You had me until you said “sensible and prudent.” We’re on our own with this one.
Me: Well, I don’t have to do anything for another couple of weeks. I guess I’ll just keep on keeping on and see what happens. Are you guys going to be around to kick around some ideas?
Angel: Absolutely.
Devil: Wouldn’t miss it.

Poof! They’re gone. I’m still staring at the numbers, which haven’t changed. What should I do?

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside of Philadelphia.

Article source: http://feeds.nytimes.com/click.phdo?i=e0bc69feb839ee54013dcaf5b18c8a65