A Fighting Chance

value of the shares they got back was also $100: Treasury noted in “Responses to Questions of the First Report of the Congressional Oversight Panel for Economic Stabilization” on December 30, 2008: “When measured on an accrual basis, the value of the preferred stock is at or near par” (8) (http://www.treasury.gov/press-center/press-releases/Documents/123108%20cop%20response.pdf).

a $78 billion shortfall: The financial valuation study of TARP assets was conducted by the COP’s Advisory Committee on Finance and Valuation and by the international valuation firm Duff & Phelps Corporation (D&P). The Advisory Committee was composed of Adam M. Blumenthal, former First Deputy Comptroller of the City of New York, Professor William N. Goetzmann of Yale University, and Professor Deborah J. Lucas of Northwestern University. Together, the Advisory Committee and D&P devised a methodology for evaluating the fair market value of TARP assets. Rather than rely on any single valuation approach, the team used multiple methods to calculate, company by company, the fair market value of preferred stock and warrants received by Treasury, applying a “reduced marketability discount” under each approach to reflect the diminution in value of these relatively illiquid securities. (The team concluded that, given the liquidity and market volume in the trading of securities, it was reasonable to rely on market pricing for ascertaining economic value.) This analysis yielded a range of values per company, and the team selected the midpoint as representative for purposes of the final report. The final report ultimately revealed that for the ten largest TARP investments made during 2008, Treasury received about $66 for every $100 spent, amounting to about a $78 billion shortfall. See “Valuing Treasury’s Acquisitions,” Congressional Oversight Panel, February 6, 2009, http://cybercemetery.unt.edu/archive/cop/20110402010539/http://cop.senate.gov/documents/cop-020609-report.pdf.

brought the company to its knees: The story first broke on March 14–15, with the number “$165 million” quoted (others would later cite the $168 million figure). See Edmund L. Andrews and Peter Baker, “A.I.G. Planning Huge Bonuses After $170 Billion Bailout,” New York Times, March 14, 2009. The reaction was swift and intense. There were rumors of death threats against AIG executives, and the House quickly passed a bill that called for a 90 percent tax on bonuses for certain TARP recipients. Neil Barofsky, Bailout, (2012), 140. There is considerable debate about the role of Treasury oversight in this debacle. Secretary Geithner told AIG that these bonuses were “unacceptable” and “demanded they be renegotiated.” He also convinced AIG to reduce its bonuses for the financial products units by 30 percent. See Edmund L. Andrews and Peter Baker, “Bonus Money at Troubled A.I.G. Draws Heavy Criticism,” New York Times, March 15, 2009.

However, Neil Barofsky, then Special Inspector General of TARP, is quite critical of Treasury’s handling of the bonuses: “Had Treasury officials been more effectively monitoring the government’s investment in AIG and more concerned with accountability and basic fairness, they might have helped prevent the blowup. For example, they could have forced AIG to renegotiate the terms of the contracts as a condition of the additional $30 billion in TARP funds that they had announced several days after learning about the imminent bonus payouts.” Barofsky also notes: “… the rationale Neel Kashkari had given me for making the payments—that the bonus recipients were essential personnel necessary to wind down AIG’s complex transactions—didn’t quite wash.” Barofsky, Bailout, 182. For more on executive compensation during the bailout and what he calls “the abject fetishization of the lords of high finance,” see Barofsky, Bailout, 139–40. He argues that TARP recipients “showed no shame in pushing for ever-high salary awards. More noteworthy, however, was the pressure exerted by several Treasury officials, who also pushed to increase the value of the pay packages.” Barofsky, Bailout, 140.