---

Treasury Inc.: The Shadow National Debt
...When Peter Orszag ran the Con­gres­sional Bud­get Office, he fought the Bush admin­is­tra­tion over con­sol­i­dat­ing Fan­nie and Freddie’s debt into the national bud­get. His posi­tion was that two prin­ci­ples of gov­ern­ment account­ing require consolidation. Principle one, we con­trol these com­pa­nies; prin­ci­ple two, we guar­an­tee their debt. For more, take a look at, after I tes­ti­fied on this issue here, this press release from the Con­gres­sional House Over­sight Com­mit­tee about how I dis­cov­ered the prob­lem described in this post.

Orszag has been notice­ably silent since join­ing the Obama Administration. Omitting appro­pri­ate lia­bil­i­ties from our government’s books is decep­tive, allows us to bor­row more than we should and feeds our habit for deficit spending.

The admin­is­tra­tion dis­putes its con­trol of TARP com­pa­nies. Yet the gov­ern­ment tells GM what kind of cars to build and GM and Cit­i­group which direc­tors to elect. It tells Fan­nie and Fred­die which mort­gages to subsidize. Secretary Gei­th­ner affirms that we stand behind the banks, which means we stand behind their debt as well. Budget con­sol­i­da­tion prin­ci­ple one, check. Prin­ci­ple two, check.

This doesn’t mean we should con­sol­i­date debt of all com­pa­nies tak­ing TARP money, and gov­ern­ment account­ing prin­ci­ples aren’t fully pre­pared for this unique situation. Since the gov­ern­ment is act­ing like a pri­vate investor by pur­chas­ing com­mon stock, pri­vate finan­cial account­ing prin­ci­ples also pro­vide use­ful guidance.

The first use­ful rule in finan­cial account­ing is that con­sol­i­da­tion of debt is appro­pri­ate where a par­ent com­pany con­trols another com­pany by own­ing a major­ity of its stock. This cov­ers GM at 60% Trea­sury own­er­ship, AIG at 85%, and Fan­nie Mae and Fred­die Mac at 100%. The sec­ond rule is that even if a share­holder has less than 50% own­er­ship, if the equity and non-equity posi­tion of the par­ent com­bined make it the ben­e­fi­ciary of most of the company’s future prof­its, con­sol­i­da­tion will also be appro­pri­ate. This should clearly cover Cit­i­group, with 34% gov­ern­ment own­er­ship (pur­chased with $40 bil­lion of TARP money) and an addi­tional $301 bil­lion in out­stand­ing guar­an­tees from Treasury.

Look only at the out­stand­ing debt of these five TARP com­pa­nies (out of over 600 of them). Cit­i­group has $1.8 tril­lion in debt; AIG, $807 bil­lion; Fan­nie and Fred­die, $5.2 tril­lion; and GM, $10 bil­lion. This means the Admin­is­tra­tion is hid­ing $7.8 tril­lion of the national debt. (As a com­par­i­son, Bernie Mad­off hid $50 bil­lion in other people’s money and is reviled as the crook of the cen­tury. The cur­rent admin­is­tra­tion, by the way, is hid­ing $7.8 tril­lion of the nation’s debt.)...