A quick WTF about the recent hatchet job on SIG TARP cop and Bailout! author Neil Barofsky by the NYT columnist Andrew Ross Sorkin.

In an article earlier this week, the Dealbook founder and current CNBC anchor parrots the Treasury Department’s position to make the claim that the A.I.G. Bailout Actually Worked. Sorkin’s experience channeling  Treasury Secretary Geithner in TBTF must have come in handy when he repeated Geithner’s claim that the AIG bailout was actually profitable for the government, and what is the deal with this gloomy Gus named Barofosky? Some people just don’t like movies with happy endings.

Why would anyone be unhappy with the AIG bailout, Sorkin mused. We avoided Armageddon, and made a profit to boot!

Except we didn’t. That claim was shown to be absurd by one . . .  wait for it . . . Andrew Ross Sorkin, columnist for the NYT and CNBC anchor. Wait, its the same guy? How did Sorkin vs Sorkin manage to resolve itself vis-a-vis AIG?

On February 27, 2012, Sorkin reported that AIG had received $182 billion in bailouts (“A.I.G. Earnings an Illusion of a Bend in U.S. Tax Laws“). AIG was given a special tax dispensation (which in my opinion, was of dubious legality). Net operating losses, which should have been lost in the bailout (or bankruptcy) of the company were “gifted” to AIG from Treasury, without Congressional approval:

“However, according to longstanding tax laws, if a company files for bankruptcy or is taken over, it loses the ability to use its net operating losses. A.I.G. would fit that profile perfectly: on the verge of bankruptcy, the federal government took control of A.I.G., exchanging its bailout billions for shares in the company.

Sorkin estimated the value of this tax gift at about $25 billion dollars. As he explained, AIG was able to offset taxes owed with these phantom losses. If the earnings the company reported were an illusion, how could the profits the Treasury reported not also be an illusion?

This was nothing less than $25 billion dollars in tax receipts lost to American taxpayer — the people who bailed out AIG in the first place. This accounting sleight of hand amounted to a transfer of obligations, removing a liability from the balance sheet of AIG to the detriment of taxpayers. As Sorkin wrote, last year alone AIG “claimed almost $9 billion in other unrealized loss on investments.” Accounting Net Operating Losses that should never had existed after the bailout/takeover of AIG. Losses that managed to magically reduce their tax burden to the people who rescued them.

So to sum up, AIG made money for the taxpayer, except for the $25 billion that the taxpayer forfeited due to actions of Treasury which may or may not have been unauthorized by Congress, and in any event amounted to an enormous subsidy to AIG beyond the original bailouts.

Here’s a $25 billion tax break — please use it to pay us back our money so we can claim to be breakeven.

What utter nonsense.

It is impossible to avoid the conclusion that when it comes to AIG, Sorkin has been thoroughly debunked . . . by Sorkin.

~~~

To keep up with all the bailout data, I have found Pro Publica’s Bailout Tracker to be enormously useful. Those of you who are tax or accounting minded — or just curious –  can get into the weeds on this by checking out what Interfluidity or naked capitalism has to say on the matter.

Barofsky is the keynote speaker at TBP conference, so while I may be biased, the math is not.

Category: Bailouts, Financial Press, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “Sorkin’s AIG Tale Debunked by . . . Sorkin”

  1. Oral Hazard says:

    “Fine, it’s a fucking joke anyway. After all, I am paying you with your money.”
    -Teddy KGB, in Rounders

  2. [...] Today's Sorkin versus a younger, more handsome Sorkin from February on the AIG bailout. BTW, everyone chill out, I doubt he really cares that much about this.  (TBP) [...]

  3. AHodge says:

    sorkin is a putz — i repeat
    i would like to hear a thorough review including the reverse repo arithmetic
    from memory $186 bio went in–what comes out?
    looks like i will get one as i repect barofsky

    big O desperately wants to sound like its all good before nov
    lie for me boys!
    and that further half Trillion for fannie freddie

  4. AHodge says:

    part of the story is tax loss carybacks and carry forward for all these jokers
    your should see what the corporate profit receipts look like in revenues
    shockingly heres how it works
    lose huge amounts, get that taken care of
    thenmake a little money, mainly on complete expected govt guarantee
    and near zero rates for your borrowning
    get a huge 5 year tax break FROM YOUR EARLIER LOSSES on that
    ???
    WTF
    Obama must be shocked he is getting so little wall st support. he delivered

  5. AHodge says:

    i think Austin Goolsby–the good obama econ tax advisor
    resigned partly over this
    he told me he while agreeing at first
    He regretted it

  6. NoKidding says:

    “the A.I.G. Bailout Actually Worked”

    Also AIG was participating in mortgage insurance schemes. They stood to lose plenty in mortgage foreclosures. But:

    Mortgage costs and refinance rates were held low … by the Fed holding risk free rates way below market.

    Older bad mortgages and almost all post AIG mortgages were bought in volume by FNMA/FRE … which are in receivership at HUD … which has its losses covered by the treasury … which is borrowing money from the Fed.

    Mortgage backed securities against the older bad mortgages were unloaded by FNMA/FRE … to the Fed. Their balance sheet is still almost half MBS today.

    How much of the cost of the AIG paper profit is hiding under the rug?

    The more you dig in, the more the story reads like “I flipped a house at a great proffit. I borrowed money from from my brother-in-law to buy my brother-in-law’s house, and sold it to my brother-in-law at a huge profit! My brother-in-law made out great too!”

  7. BennyProfane says:

    @AHodge

    “Obama must be shocked he is getting so little wall st support. he delivered”

    The joke may be on them. Hopefully, and it’s looking better by the day (didya catch Romney’s little foray into foreign policy yesterday?), he puts a bunch of them on a chain gang during his second term. Has to fire that incompetent Holder first.

  8. UncleMilty says:

    A couple clerifying points for those who wish to understand this complex are of corporate tax law:

    Generally, if companies lose $25 in year one and make $100 in yeaar two, they only have to pay tax on $75 (100 – 25) in year two. Essentially, they are only required to pay tax on the net, multi-period profit. This prevents a company who alternates between making $100 and losing $100 continually paying tax every other year despite running a break-even operation. This is fair and logical.

    There is an exception in the tax code that an acquirer cannot use a loss carryforward against future profits if it is more than the total value of the company, which in AIG’s case was (a lot less than) zero. This prevents someone buying a bankrupt company for $1 and getting millions worth of tax benefits from the carryforward.

    This was a case of the gov’t providing temporary funding rather than a true acquisition. Obviously, the gov’t has no use for loss carryforwards. So there was some logic to not applying this anti-abuse provision. The Treasury makes these intrepretive decisions all the time. The gov’t easily could have structured the bail out to fit the tax code, but it would have run counter to the gov’t purpose of making AIG look more stable and well capitalized. You may not like the bail outs, but if we’re going to do them, we should make sure they work.

    The taxpayer hasn’t eaten the $25 yet. The accounting gain is merely recognizing the potental future benefit of being able to use the losses that AIG ligitimately suffered. The accounting gain merely offsets the accounting loss that was recorded when those tax carryforwads were wiped off the books upon being bailed out. That’s the phantom part, but it’s a phantom wash. The taxpayer only “loses” as AIG makes money and doesn’t have to pay taxes over the next 15 or so years. If AIG doesn’t make money before the carryforwards expire, the taxpayer hasn’t lost anything.

    Lastly, you’ve missed the fact that much of the Treasury’s profit has come from stock appreciation. The stock price reflects an investor’s view that cash flow will be improved by the tax carryforwards, as Fairholme’s BB has noted many times in defending his massive investment in AIG.

    All in, the taxpayers will likely come out ahead with the AIG bailout, but not by as much as the gov’t will claim. I’m siding with Sorkin on this one.

    ~~~

    BR: Which Sorkin are you siding with? I’m with the February one . . .

  9. b_thunder says:

    If Mitt Romney was as smart of a businessman is he portrays himself to be, and if he really was against the bailouts, than he’d go to the media and make exactly the case that Barry just made. What can be better than a clear proof that Obama’s crew: a) lying to the american public, and b) not protecting the american taxpayers and “gifting” $25B to the fattest of the fat cats.

    So, either Mitt simply not smart enough to understand the matter, or he thinks that american public is not smart enough to understand him, or he agrees with the bailouts. Bottom line: Mitt and Barack represent to wings of the same wholly owned by Wall St. political organization.

    Wall st to America: “We select the presidential candidates – your vote is just a formality.”

  10. AHodge says:

    B profane
    dont take any D cycnicism as my thinkin R ought fo be elected
    they would not be a whit better in shovelling mney to wall st
    the tea party to the contrary-romney is not a tea party guy
    he is first last an forever a wall st finance guy
    in fact a make finance work with government favors guy
    the record there is chrystal clear

  11. gordo365 says:

    @b_thunder Bottom line, no matter what the administration did or says it would do, Romney would find fault with it. It’s getting pretty old. 2nd week of November can’t come soon enough.

    I’m guessing the Romney ship would be rudderless without the “opposite day” decision frame.

  12. rj chicago says:

    Barry:
    With reporting by Sorkin on Sorkin – we the normal little people are like so…….totally F…..ed!!!!

  13. Rick Caird says:

    Isn’t this the same tax loss carryover provision that was given to GM and Chrysler? Those tax losses should also have been lost in bankruptcy.

    ~~~

    BR: Similar, but the bankruptcy shifts when the NOL provision gets triggered. See this PDF article for more details

  14. peter north says:

    Sorkin is brutal. Watching him try and interview someone a while back on CNBC’s morning show just had me shaking my head.

  15. StatArb says:

    Sorkin’s defense of TARP , especially the failed GM scam , and his NYTimes kissing up to Hope and Change has been disgusting over the last 4 years

  16. 873450 says:

    AHodge Says:
    “Obama must be shocked he is getting so little wall st support. he delivered”

    Early 2009, an inexperienced, insensitive President Obama was recorded uttering the phrase “Wall Street Fat Cat” once or twice. Bankers traumatized by Obama’s harsh language can never forgive him for publicly insulting them.

    Besides, Obama is still cheerleading the crippled, sabotaged, stillborn finance reform legislation he can’t get enacted and will not enforce.

  17. Mike.R says:

    I used to feel bad for Sorkin. Kind of like Alan Colmes on Fox, he’s always getting slapped around by ideologues on the right wing of the large government party. But then I read Too Big to Fail and I realized that in his narrative, the only people that are venerated more than the bank bosses are his future CNBC co-clowns.

    “It was a cool September night. Dick Fuld sipped coffee while looking out the window of his corner office in Lehman headquarters. “We need to leak some information to support the stock price, who are we going to call?” How about Liesman? “Oh yes…,” Fuld said, “… [dramatic pause]… THE PROFESSOR!

    I guess he’s getting what he deserves for writing such garbage.

  18. GB says:

    @UncleMilty

    That analysis is fair — and more importantly on topic. Since the comments have gone long political sniping, here’s an attempt to steer the group back to more relevant points.

    1) Consider whether this is a: just an opportunity to point-and-laugh at some journalist (which it is, of course), or also b: a tax policy question.
    2) Consult your neighborhood policy wonk on Section 382 of the code, then re-read @UncleMilty’s comment
    3) Comment on the consistency (or lack thereof) regarding the tax decision in the AIG matter.

    Here’s mine: given the government has no use for NOLs, seems appropriate so far.

  19. yazriel says:

    I think Barry is wrong on this simple tax calculation !

    aig WAS gifted $185B in net operating loss
    But counter parties were respectively PREVENTED from booking a similar loss on their holding
    Hence, these counter parties (presumably) paid tax on more profit that they would have

    Now i realize there is a whole bunch of parties involved here, which may or may not
    reside in tax exempt havens, and may or may not be tax liable on revenue they may or may not
    have booked

    But on the single isolated issue of whether aig tarp was repaid and profit +ve, the answers would be yes

    p.s. I am not a tax expert so i would love to see a more qualified response and explanation

  20. [...] Sorkin’s AIG Tale Debunked by . . . Sorkin Barry Ritholtz [...]

  21. [...] According to a US Treasury bulletin, the combined Federal Reserve assistance and US Treasury investments in AIG during the financial crisis — which totaled $182 billion — is now fully recovered; Andrew Ross Sorkin makes the argument for the alleged profit (Dealbook), while Yves Smith dismisses it as merely creative accounting (Naked Capitalism); also see Barry Ritholtz’s rebuttal to Sorkin in which he also dismisses the profit as an accounting sleight of hand (The Big Picture) [...]