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Beyond the $23.7 Trillion Headline

Monday, July 20, 2009 at 08:10 PM EDT

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 and Freddie Mac (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.