GAO Report Debunks Fair Value Accounting, Protecting Students and Homeowners

By David Dayen, a freelance writer (Salon, The Intercept, The New Republic, etc.) and author of Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud, which releases May 17, 2016 (available for pre-order now). Follow him on Twitter @ddayen.

A couple of weeks ago, the Government Accountability Office saved the country’s students, homeowners, farmers, and others from tens if not hundreds of billions of dollars in future loan costs. The news passed with almost no notice, yet it stopped cold a growing movement to privatize currently public services and turn them over to financiers. I know it sounds crazy that not everything in government turns on the events of a presidential candidate rally, but this little report really did help millions of people, and ought to be recognized.

The GAO report concerned federal credit programs, where the government either personally issues credit or guarantees credit issued by third parties. Though this exposé by Politico senior writer Michael Grunwald features some fun vignettes about tiny agencies struggling to assess huge baskets of loans, the majority of the $2.9 trillion in federal credit in Fiscal Year 2014 – about two-thirds – comes from just two programs: federally issued student loans, and the Department of Housing and Urban Development’s mutual mortgage insurance program. (This doesn’t include Fannie and Freddie because they are public/private hybrids.)

Critics have claimed for years that budget accounting understates the true cost of federal credit programs. Since the Federal Credit Reform Act of 1990 (FCRA), all loan and guarantee programs include a current up-front estimate of its costs over time, which gets re-estimated as time goes on based on new repayment data. This is based on what the government actually “spends” in defaults and receives in loan payments. Critics say this isn’t good enough, and that the budget should incorporate a “fair value accounting” method that includes a risk premium, reflecting what the loans would be worth in the private market, based on the expectation of repayment.

It’s important to understand why these critics want to go to fair value accounting. GAO states it pretty clearly on page 38 of their report: “Some proponents of the fair value approach to budgeting cited as motivation the perceived over-reliance on federal credit as a policy tool and the desire to correct any bias toward under-estimated costs under FCRA.” They want the government to get out of the business of issuing or guaranteeing loans. In that absence, there would still be demand for student loans or mortgage insurance, and private companies would have to fill the gap.

In 2010, we actually went in the other direction in the Affordable Care Act, when we eliminated bank middlemen from providing federally guaranteed student loans, because they created no value whatsoever and just skimmed $68 billion from students off the top. I know about this because Michael Grunwald – the same guy who wrote the federal credit article – led off with it in his hagiographic account of the Obama presidency. But in the federal credit story, he was giving space to this group of critics who wanted to effectively wrench that back, and get private lenders back in the lucrative student loan game again.

The problem the critics have is this: the current accounting method for federal credit programs is pretty accurate, and there’s no “bias toward under-estimated costs,” as they claim. In fact, “GAO did not identify any overall consistent trends in under- or overestimates of subsidy costs across federal credit programs government-wide,” as they say right in the executive summary.

Upon a request from Sen. Chris Coons, GAO looked at re-estimates of 14 years of federal credit programs from 2001-2014. If the government was systematically under-estimating costs, that would show up in these re-estimates. But it did not. A bit less than half of the programs studied (42 direct loan and 35 loan guarantee programs) over-estimated costs and a bit more than half (59 direct loan and 41 loan guarantee programs) under-estimated. There was no overriding trend.

In aggregate, over 14 years of many trillions of dollars in programs, GAO found a total under-estimation on direct loans of just $3.1 billion, and a total under-estimation on loan guarantees of $39 billion. This sounds like two big numbers, but compared to the overall portfolio it’s pocket lint, representing far less than 1 percent (closer to 0.1 percent).

Indeed, without re-estimates on student loans and HUD mortgage insurance during the financial crisis and its attendant stress, there would be hardly any re-estimate at all. And the reason you saw relatively large re-estimates there is because those are extremely large portfolios. In other words, on percentage terms, the current accounting standard is very accurate. And because it is partially based on past performance and will now incorporate the financial crisis into its modeling, it’s likely to get even better.

The one program across the government calculated with a fair value accounting method was actually TARP. GAO kept that out of their analysis, but they added this (fairly devastating) note:

TARP is an example of a federal program that implemented a budgeting process similar to the fair value approach. Cost estimates were re-estimated annually to reflect revised assumptions for market risk, asset performance, and other key variables. As program funds were repaid, re-estimates reflected reduced costs because of improvements in the economy and also because the noncash cost that was considered in the market-risk-adjusted discount rates was not reflected in the actual federal cash flows. Overall, TARP has had lifetime downward re-estimates of nearly $177bn through FY2014. If the FCRA methodology had been used to initially estimate the subsidy cost of TARP, the lifetime downward re-estimate would have been significantly less – meaning that the over-estimate of initial subsidy costs would have been less.

Emphasis mine. In other words, the initial TARP estimates through fair value accounting wildly over-estimated the costs of the program. When they came down, people like… well, Michael Grunwald!… were there to remind everyone of TARP’s successes, and how inaccurate those initial claims were. Let’s set aside how absurd it is to judge TARP solely on whether or not it turned a profit. The reason TARP outperformed estimates on this metric was because of the use of fair value accounting, which in this case completely over-estimated the cost!

And that’s the point, for fair value accounting advocates. They want to discourage the use of federal credit programs, to shift the loans – and the profits – to private lenders. Of course, this would also prove much more costly for borrowers, as we’ve already seen when banks were the middlemen in student loans. The advocates can’t come out and say “we want private companies to make more expensive loans for people,” so they concocted this claim about government accounting practices. And GAO, as objective a source as you’ll find, just came as close as a government report gets to calling them liars.

GAO concludes that they “do not support the use of the fair value approach to estimate subsidy costs for the budget.” They emphasize that there is no actual monetary cost present in the risk premium that fair value accounting attaches to the cost of a loan. It’s more of a social cost of using the government to lend instead of the private sector. As GAO notes:

Because the federal budget was not envisioned to present a complete picture of the total costs and benefits to society of government programs and policies, it should not be used as the sole rationale for federal activities.

The report adds that this would create inconsistencies in budgeting (we don’t factor in the environmental costs to a government-funded construction program, for example), be impossible to implement, and remove transparency. So while they acknowledge that fair value accounting might be OK in evaluating a program’s worthiness, it doesn’t belong in the budget. Even Obama’s Office of Management and Budget opposes the inclusion of fair value accounting, according to the report, “because it would make the budgeting process less transparent and less accurate.”

Foes of federal credit programs dreamed up a way to legislate them out of existence with phony accounting, and GAO just shut it down. GAO may not be a sexy agency, but politicians pay heed to its recommendations. I’d prefer that the government paid for free tuition at public colleges and universities than gave a bunch of student loans. But I’d also rather those loans be federally provided rather than through a profit-seeking bank middleman. So this is a victory of sorts.

Outside of the Center on Budget and Policy Priorities, nobody even noticed this important work from GAO. Politico, whose story worked hard to make the government look like a bunch of bungling fools handing out loans willy-nilly without expertise, should be made to answer for why they gave valuable space in their magazine to a story whose premises have just been completely refuted. Here’s Politico’s Feedback form. Maybe you can ask them whether they’ll print a retraction, correction, or update to their debunked story, and whether they will present a greater diversity of voices on this issue in the future.

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This entry was posted in Guest Post, Social policy, Student loans, The dismal science on by .

About David Dayen

David is a contributing writer to He has been writing about politics since 2004. He spent three years writing for the FireDogLake News Desk; he’s also written for The New Republic, The American Prospect, The Guardian (UK), The Huffington Post, The Washington Monthly, Alternet, Democracy Journal and Pacific Standard, as well as multiple well-trafficked progressive blogs and websites. His has been a guest on MSNBC, CNN, Aljazeera, Russia Today, NPR, Pacifica Radio and Air America Radio. He has contributed to two anthology books, one about the Wisconsin labor uprising and another on the fight against the Stop Online Piracy Act in Congress. Prior to writing about politics he worked for two decades as a television producer and editor. You can follow him on Twitter at @ddayen.


  1. diptherio

    Gawd, the Politico office must absolutely reek of brimstone…

    This is what can happen, Matsuda says, when a little marine agency like MarAd is assigned to evaluate big-money credit deals. “It’s never going to lure financial talent away from Wall Street,” says Matsuda, who left the government in 2013 and is now a transportation consultant in Washington. “It’s not a bank.”

    Oh yes, because we all remember what a great job Wall Street pros did valuing those RMBS and CDS and CDOs, etc. before the crisis. Those guys would never make disastrously bad loans…

    Bill Hicks had a term for people like Matsuda and the writer of this article, but it’s a family site, so I’ll leave it up to your imagination.

    1. diptherio

      I wonder if he’ll show up to defend himself? Ha! I crack me up. I’m sure he’s too much of a coward.

  2. NeqNeq

    I still scratch my head over Politico. I would have thought they would be about as relevant as The Economist by now.

    Sadly my normal source for federal news (the hill) did not carry the GAO report, so thanks for the link!

  3. SomeCallMeTim

    What’s the percentage reduction in the TARP estimate through the lowering highlighted?

  4. ke

    Home ownership is obviously a myth, employed by wall street as a convenient source of paper repo, derivative event horizon control.

    The reason u want a wall in front of the cliff is to accelerate refraction, to see what u r doing and accelerate recycling, Like separating photons in water vapor and molecules in aq, creating opportunity for quant porosity and reconfiguration.

  5. participant-observer-observed

    Glad to hear there is someone in DC willing to put the breaks on the griftopia boon doggles.

    I am still interested to know how even the student loan servicing companies (like Great Lakes in Wisconsin, land of Koch Bros/Scott Walker), compete for their contracts and are awarded them, their profit margins, CEO pay etc.

    Meanwhile, grad students pay 8% while the fed lends money to the banks at nearly negative interest. This is a sick generation that eats its own youth.

  6. vlade

    It’s a well known fact that using real-world measure (i.e. historical data) gets a) more realistic b) cheaper results than using risk-neutral (i.e market, i.e. “fair-value”) measures.

    The only time market measure makes sense is if you can be forced to liquidate your holdings at market prices at any time. There is no such constraints on the agencies above, hence using real-world measures is the right methodology.

  7. Dick Burkhart

    The same kind of scam “fair value accounting” has been applied to US Export-Import Bank. It should be called “privatization accounting”. The ExIm Bank is a public institution – a perfect example of socialism – that makes loans to foreign companies to buy US products. Either Wall Street won’t finance these loans due to perceived risk, or their rates would be much higher. Yet ExIm Bank has not lost money. Despite this, it is accused of subsidizing companies like Boeing, using the same kind of bogus argument cited in this article.

    Now I disagree with some of the management decisions of the ExIm Bank, like loans for overseas fossil fuel projects, but that is a separate issue.

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