May 23, 2009
TARP Banks and the National Debt
Posted by J.W. Verret

Standard & Poors warned the United Kingdom Friday that it may lose its triple A credit rating.  We're following close behind, and if we were more honest in recognizing U.S. exposure we may be in the same boat.

When I testified before House Oversight about AIG with CEO Ed Liddy and the AIG trustees, I had an interesting question from Ranking member Issa (see his office's subsequent press release here).  He asked whether we should consolidate the debt of TARP banks in which the Treasury holds a control interest into the national debt, and I told him that we should.  Friday's story about S&P's downgrade threat is very relevant, as the U.K. has taken a different approach than we have to the debt of the bailed out banks.  The U.K. has consolidated the debt of RBS and Lloyds onto its national debt, a move which more than doubled its outstanding national debt overnight.  I told the Committee that if we properly consolidated just Citigroup's balance sheet, for example, our national debt would increase by about 15%, and the effect of amortizing that into the budget deficit would increase it by much more.  Throw in the other TARP banks in which we have controlling stakes, and we have a real problem.

I think consolidating banks in which we have a controlling stake is entirely appropriate, a position with which the White House Office of Management and Budget disagrees.  First, holding a controlling interest in another entity is frequently treated under accounting rules as requiring consolidation.  Also, guaranteeing debt of another entity also requires consolidation, and in light of Secretary Geithner's statements assuring that he will not allow the top 18 TARP participants to fail I would say that we have guaranteed their debt.  

In the future Treasury will hopefully be able to sell its stake in some of the TARP banks, at which time it can adjust its balance sheet.  But until then the current picture Treasury and OMB are presenting is disingenuous.

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