The New York Times (pg. B1)  [Printer-friendly version]
July 21, 2009

BIG ESTIMATE, WORTH LITTLE, ON BAILOUT

By Floyd Norris

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 Reserve system.

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.

"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.