Wednesday, July 22, 2009

The “WTF Number”

I am putting together a symposium titled, “The Financial Crisis: New Administration Initiatives and How Practitioners Should Advise Clients as a Result.” The morning portion of the program will focus on the impact of the financial crisis on corporate governance and what boards should do in the wake of the financial crisis. The program's afternoon portion will focus on financing strategies, restructuring, reorganizations and bankruptcy, and also consider board and senior management fiduciary duties in the context of financing distressed business. On a conference call to discuss the morning session, one of the panelists began to talk about the role that institutional investors should play in reforming corporate governance practices. I intended to explore this issue in my blog post today. However, yesterday I caught an NPR Marketplace story that was so astounding I need to write about the Marketplace story instead.

According to Marketplace, Neil Barofsky, the Special Inspector General overseeing TARP, reported to Congress that the financial system rescue could cost American taxpayers $23.7 trillion. Yes, that’s right, $23.7 trillion. That number was described as a “WTF number”. In case you (like me) are not familiar with the expression, “WTF number,” use your imagination, or recall the first expression that came to your mind when you heard that taxpayers may be on the hook for close to $24 trillion. Get the picture?

The number is unimaginable, although some in Congress have attempted to wrap their minds around the figure. The New York Times and ABC reported that Representative Darrell Issa of California (R), on the House Committee on Oversight and Government Reform, calculated “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 . . . .”

But let’s not blithely talk about how the bailout could cost American taxpayers $23.7 trillion, and then move on. First, it is important to note that Mr. Barofsky came up with that figure by adding up the maximum costs of the approximately 50 different rescue programs, including Federal Reserve and Treasury Department programs, FDIC deposit guarantees, funds for bailing out troubled automakers, and funds earmarked for other mortgage related programs, and then assuming that all of the programs would be implemented and maxed out at the same time. Second, Mr. Barofsky explained in a report that he was calculating the worst possible scenarios. In a Bloomberg interview, Andrew Williams, a Treasury Department spokesperson, noted that the US has spent less than $2 trillion, so far.

Why did Mr. Barofsky report $23.7 trillion? Apparently, Mr. Barofsky is of the opinion that transparency and accountability is lacking with respect to how TARP funds, and other financial rescue funds, are being spent and the value of the investments. In my view, transparency IS lacking. As Scott Jagow noted on the Marketplace Scratch Pad blog, the $23.7 trillion figure in and of itself may not be a useful number. However, if Mr. Barofsky’s motivation for reporting that shocking figure was to make a point about the need to implement his recommendations—such as the recommendation to require TARP recipients to report how they use TARP funds—then I hope his point hit home on Capitol Hill. You may listen to a conversation between Mr. Barofsky and Jake Tapper, ABC News Senior White House Correspondant, regarding the most recent quarterly report from the Office of the Special Inspector General for the Troubled Asset Relief Program on ABC News’ Shuffle podcast posted earlier this afternoon.

Thank you, Mr. Barofsky.

Professor R. Burch
Capital University Law School
July 22, 2009


  1. Excellent post!!! This "WTF Number" is astonishing. I pray that we don't reach that threshold. I agree that transparency and accountability are a must. I find it baffling that our government would give out so much money with so few strings attached. Generally, when you loan someone a large sum of money don't you have an idea about how they're going to use the money? Moreover, what are the repayment terms (when and how will repayment be made)? Thank you Professor Burch for a thought provoking post!

  2. professor burch:

    how did barofsky arrive at this number. was he transparent in his calculations? is this described on the podcast? i will listen to it momentarily. still, how can that number be correct?

  3. I wonder about the $23 trillion number. On one hand, one may be comforted by the fact that banks are "profitable" again, as Professor Pierre-Louis has previously blogged. On the other hand, that profitablility is a direct result of massive government subsidies and changes to mark to market accounting that essentially encourage banks to pretend they have more capital than they actually have.

    The problem is this: pretend capital does not earn money. So if the subsidies ever subside these banks will effectively have to earn money with more liabilities than assets. The 1980s proved that to be folly. Ultimately banks with fewer assets than liabilities lead to spiralling losses.

    Go back and check history. Insolvent banks that are on life support usually become more insolvent.

    Since the government now guarantees these banks a very large cost, perhaps ten or fifteen trillion, seems inevitable.

  4. Grant and Anonymous:

    Barofsky claimed that he took the numbers provided by the various government entities and added them up. The $23.7 trillion figure included double-counting, for example where more than one government agency has provided guarantees for the same financial institution. Also, the number would include certain assumptions that are not likely to become true—here’s an example from

    “For instance, Mr Barofsky assigned US$6.8 trillion in potential exposure to the Federal Housing Finance Agency, which oversees mortgage giants Fannie Mae, Freddie Mac and the 12 federal home loan banks. However, losses of that magnitude would require every homeowner with a Fannie or Freddie guaranteed mortgage to default and the value of the homes drop to zero. And Mr Barofsky conceded that the finance agency and Treasury are not entirely liable for Fannie and Freddie losses.”

    It would seem that Mr. Barofsky was transparent about the numbers associated with the program over which he has direct oversight—TARP. Regarding the $23.7 trillion, the number itself has no value as far as providing transparency into the eventual dollar cost of the bailout. I am focused on the following questions from an ABC News story:

    “I’m not sure how you could come up with a number like [$23.7 trillion] without lots of assumptions involved,” said Kevin Petrasic, a private financial services lawyer with broad government experience. “Throwing out a number you can’t provide a tremendous amount of insight about: what's in that? You just get a headline. Why do we even need to know that this number, in a worst case scenario, is the number? What is gained from that?”

    Its value is in providing fuel for Barofsky’s (and others') argument that the TARP is one part of a vast bailout program, much of which has little transparency. Mr. Barofsky was transparent about that point. From Bloomberg:

    “TARP has evolved into a program of unprecedented scope, scale and complexity,” Barofsky said in testimony prepared for a hearing tomorrow before the House Committee on Oversight and Government Reform. . . .

    Barofsky offered criticism in a separate quarterly report of Treasury’s implementation of TARP, saying the department has “repeatedly failed to adopt recommendations” needed to provide transparency and fulfill the administration’s goal to implement TARP “with the highest degree of accountability.” As a result, taxpayers don’t know how TARP recipients are using the money or the value of the investments, he said in the report.
    . . .
    Treasury Secretary Timothy Geithner should press banks for more information on how they use the more than $200 billion the government has pumped into U.S. financial institutions, Barofsky said in a separate report."

  5. Steve,

    It may be too much to ask that Mr. Barofsky hoped to move the administration to shed some light on the real cost, or to consider alternatives to massive subsidies, as described in your post on Monday. But I have just begun reading the quarterly report.