Not a Good Deal for the Taxpayer

Today’s post comes from ProPublica, a remarkable non-profit group made of journalists and editors dedicated to investigative journalism. Look below to see what it has to say about AIG’s government subsidy. ProPublica was featured on NPR this morning and I am sharing with you an article from their website:

by Paul Kiel, ProPublica – February 6, 2009 9:15 am EST.

Former Treasury Secretary Henry Paulson (Lauren Victoria Burke/wdcpix.com)

Former Treasury Secretary Hank Paulson said last October [2] that the taxpayers shouldn’t fret about putting $250 billion in the nation’s banks: “This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything.”

But a draft report from the Congressional Oversight Panel for the TARP says Paulson should have known better. According to the panel’s analysis, the preferred stock and warrants Treasury received are worth far less than the investments themselves, amounting to at least a $43 billion subsidy to the banks. That shortfall, they found, was inevitable from the structure of the investments. That’s because the analysis “demonstrates that the value received – including the market’s estimate of its future worth – was considerably less at the time of the transaction than the amount paid by Treasury.”

In other words, there was every reason to believe the program would cost taxpayers a lot.

The subsidy climbs even more, to $78 billion, when you add in Treasury’s investments to prop up ailing institutions like AIG and Citigroup. As of the report’s completion, the Treasury had used $254 billion to buy stakes in banks and AIG, meaning about a third of that was a giveaway. A breakdown of the panel’s analysis of the size of the subsidies by institution is below the fold.

Update: The panel has posted the final version of the report here [3] (PDF).

First, the eight largest bank investments, excluding the extra help given to ailing Citigroup and Bank of America:

	Amount Invested	Estimated Value	Subsidy %	Subsidy $
Citigroup	$25 billion	$15.5 billion	38%	$9.5 billion
Wells Fargo	$25 billion	$23.3 billion	7%	$1.8 billion
JP Morgan Chase	$25 billion	$20.6 billion	18%	$4.4 billion
Bank of America	$15 billion	$12.5 billion	17%	$2.6 billion
Morgan Stanley	$10 billion	$5.8 billion	42%	$4.2 billion
Goldman Sachs	$10 billion	$7.5 billion	25%	$2.5 billion
PNC	$7.6 billion	$5.5 billion	27%	$2.1 billion
U.S. Bancorp	$6.6 billion	$6.3 billion	5%	$0.3 billion

Next, an analysis of two of the emergency interventions (the analysis was done before Bank of America received an extra $20 billion last month):

	Amount Invested	Estimated Value	Subsidy %	Subsidy $
AIG	$40 billion	$14.8 billion	63%	$25.2 billion
Citigroup	$20 billion	$10 billion	50%	$10 billion

As always, you can see a complete, up-to-date list of the banks and other companies that have gotten bailout money here [4]. Since the report’s completion, the Treasury has continued buying stakes in the nation’s banks. That means the giveaway amount has continued going up. Assuming about a third of the $285 billion invested to date is a kind of subsidy, that means the total subsidy has climbed to $85.4 billion.

The report, signed by the panel’s chair, Harvard Law Professor Elizabeth Warren, cautions that it’s possible the Treasury’s investments might pan out miraculously well. It’s also possible it will be worth much less.

The panel hired an international valuation firm to perform the analysis. An analysis by the Congressional Budget Office last month came to a similar conclusion [5].

The reason for the shortfall, Warren writes, was inherent in the way Treasury structured the deals: they were “certain to create significant subsidies.” For one, the terms were crafted to attract a broad array of participants [6]. And they were one size fits all, regardless of the credit risk of the bank. Even in the cases of AIG and Citi, where the Treasury crafted unique terms, they were generous.

Warren does allow that the purpose of the Treasury’s program was not to make a buck, but rather to support the financial system. For the purpose of this report, at least, she sets aside the question of whether these subsidies are a bad idea. But she does hint that Paulson wasn’t straightforward about the costs, and that’s got to change: “if TARP is to garner credibility and public support, a clear explanation of the economic transaction and the reasoning behind any such expenditure of funds must be made clear to the public.”

What Would Obama Do?

Obama has made quite a few promises regarding Healthcare reform. I agree, that it is a system that is broken and needs to be fixed. Today, I found an interesting website that provides a framework to analyze health care policy effects. It was created by the RAND Corporation and offers some interesting insights to public health care policy. As I play around with the system more, I will offer my own opinions on how it works and what it is good for.

According to the RANDCOMPARE website, it has several purposes:

COMPARE was developed to help public and private decisionmakers systematically assess and compare the effects of different policies across multiple dimensions of health care system performance, encompassing cost, quality, and access. COMPARE gives users a comprehensive framework in which to examine both the intended and unintended effects of changes in health care policy and to examine trade-offs across policies, or across different dimensions of performance for any particular policy (e.g., the effect on spending compared to the effect on insurance coverage or on patient experience).

What Is COMPARE?

COMPARE is a transparent, evidence-based approach to providing information and tools to help policymakers, the media, and other interested parties understand, design, and evaluate health policies.

COMPARE has four objectives:

• Synthesize what is known about the current health care system.
• Describe policy options that have been proposed to address one or more existing challenges.
• Analyze the effects of different health care policy options on multiple dimensions of health system performance.
• Identify gaps in our knowledge about the effects of policy changes.

Rather than constructing specific policy proposals, COMPARE offers objective analyses of policy options currently being used, considered, or discussed by public and private policymakers

Ernst & Young Entrepreneur of the Year Kickoff

Diversified has sponsored Ernst & Young’s Entrepreneur of the Year Program for nearly a decade. Every year in January we begin the hunt for new entrepreneurial companies to honor. Every year I am consistently impressed with the breadth and depth of talent that is found through this program.

The deadline for submitting entries is March 16, 2009. Please help us by contacting me, Kevin (kjessop@digrisk.com), to help us find more great companies to honor through this program. You may also leave contact info in the comments section.

Past program award winners have included Jonathan Coons of 1-800 CONTACTS, Ken Wooley of Extra Space, John Edwards of Move Networks, and Josh James of Omniture. The evening program is a wonderful event to honor some truly great Entrepreneurs in the Intermountain West. This year’s event will be held June 12, 2009.

The EBA Raw Bar with Jeana Hutchings of Diversified Insurance Group

Employee Benefit Adviser is a good resource for Benefit Industry information. EBA recently interviewed Jeana Hutchings, a principal from Diversified Insurance, and has posted the podcast on their website HERE.

Click the icon to listen in.
Jeana is our Benefits Group Leader and a great resource for all things related to employee benefits.