Beyond the $23.7 Trillion Headline

Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program (affectionately known as SIGTARP), is making headlines with his estimate that the government has provided “potential support totaling more than $23.7 trillion” in fighting the financial crisis. That estimate will be officially released on Tuesday morning in the SIGTARP’s latest quarterly report (you can find an early copy here – ht WSJ).

As the media are already noting (e.g., WSJ and Yahoo), there are many reasons to believe that the $23.7 trillion figure is overstated. For example, as noted in the footnote to the table above, the figure “may include overlapping agency liabilities … and unfunded initiatives [and] … does not account for collateral pledged.” In other words, there may be double-counting, some of the programs won’t happen or are already winding down, and the estimates assume that any collateral is worthless. For example, to get to $5.5 trillion in potential losses on Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) (part of the $7.2 trillion Other category), you would have to assume that all GSE-backed mortgages default and that all houses backing them are worthless.

In short, the SIGTARP estimate is a way upper-bound on likely Federal support to the financial support. That fact shouldn’t detract, however, from the importance of the rest of this report.

The 262-page report provides a wealth of information about the policy response to the financial crisis. Naturally, the most detailed information involves programs that are part of TARP — e.g., the bank stress tests, the auto bailouts, etc. But the report also summarizes the non-TARP activities.

Numerical issues aside, the report also drives home a key point about the potential cost of the response to the financial crisis: many of the potential costs are contingent liabilities. If the economy performs well, the ultimate costs will be relatively low. If the economy performs poorly, however, some of those guarantees may come home to roost.

On a happier note, the SIGTARP’s estimates also suggest that there’s been some healing in the system. As shown in the table, he estimates that existing policies had provided $4.7 trillion in support to the financial system. But now that support has been dialed back to $3.0 trillion. The $1.7 trillion decline reflects reductions in several Federal Reserve programs including the Term Auction Facility, the Commercial Paper Funding Facility, and Liquidity Swaps with Foreign Central Banks.

Disclosure: I have no investments in any companies that have received TARP investments.

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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