TARP Watchdog Eyes AIG Aid Math

Barofsky says the earlier estimates, released in March, were based on a "Methodology to Calculate Estimated TARP Costs."

The report describes how the Treasury Department values all of its investments, including its preferred shares in AIG.

"Consistent with that document, Treasury's previous loss estimate for AIG, as with its estimates of other TARP investments in preferred shares of stock, accounts for a broad range of factors that might affect the value of Treasury's holdings," Barofsky says.

A "Two-Year Retrospective" published by the Treasury Department earlier this month "abandoned this published methodology, instead estimating a $5 billion loss solely on the recent market closing price of AIG's common stock in return for its current preferred interests," Barofsky says.

He says the new estimate is based on the assumption that the recapitalization will go exactly as planned and result in the Treasury Department receiving about 1.1 billion common shares of AIG stock in return for its current preferred interests.

"While Treasury did its new methodology in the retrospective, it did not disclose that this methodology differed from that previously used and from what is set forth in its published methodology," Barofsky says.

Barofsky says in the report that he offers "no opinion on the appropriateness or accuracy of the valuation contained in the retrospective."

But, he says, the new estimate fails to meet transparency standards by failing to disclose that the new lower estimate followed change in the methodology that the Treasury Department previously used to calculate expected losses on its AIG investment.

"Treasury would be required by its auditors to use the older, and presumably less favorable, methodology in the official audited statements," Barofsky says.