In The Arena What Happened to Warren the Watchdog?

Jason Delisle is director of the Federal Education Budget Project at New America, a think tank in Washington. Jason Richwine is a public policy analyst in Washington, D.C.

The 2009 version of Elizabeth Warren wouldn’t stand for the financial shenanigans of 2014’s Elizabeth Warren. Once upon a time, you see, before joining Congress, Elizabeth Warren was a tenacious government watchdog. She charged that the Troubled Asset Relief Program, created in the wake of the 2008 recession, was exposing taxpayers to risky investments and thereby imposing costs that the feds were low-balling. She wrote letters, published reports, testified before Congress and demanded answers from tight-lipped administration officials. It was an admirable performance.

But then she became a politician, herself. In advocating for enhancing the federal student loan program, the now-senator from Massachusetts has taken the other side of her own argument, completely disregarding the cost of market risk. And she’s not alone in her inconsistency. Government accounting has become a political tool with politicians selectively hiding or exposing costs, depending on whether they support the program in question.


Under TARP, the federal government purchased “toxic” private-sector assets in an effort to stabilize the financial sector. As chair of TARP’s independent Congressional Oversight Panel, Warren pointed out that the purchases imposed significant costs on taxpayers — costs she said the government was deliberately understating. In February 2009, Warren personally warned the Senate Banking Committee about the government’s accounting sleight of hand: “Despite the assurances of then-Secretary Paulson, who said that the transactions were at par — that is, for every $100 injected into the banks the taxpayer received stocks and warrants from the banks worth about $100 — the valuation study concludes that Treasury paid substantially more for the assets it purchased under the TARP than their then-current market value.”

The valuation study was commissioned by Warren’s panel, and it showed the total market value of TARP assets to be roughly $176 billion. That was $78 billion less than what the government had paid, and the difference constituted a direct transfer of taxpayer money to banks. While no one should be surprised that a government loan program provided subsidies to borrowers, the interesting point here is the accounting method Warren used to expose those costs.

Warren was citing the value of TARP assets according to “fair value” accounting, meaning a valuation that reflects current market prices. Built into the market price of any investment are the expectations of its future value, along with the risk that those expectations may not be met. Warren wisely dismissed a competing estimate that cast the program in a far more favorable light, showing that the assets were immediately valued at $12.6 billion more than taxpayers paid. That dubious estimate, offered by the Bush administration, excludes the cost of market risk.

TARP was one of the few federal credit programs with costs officially calculated using fair value methods. But, unfortunately for taxpayers, the federal government disregards the cost of market risk in most of its credit programs. The government’s method biases cost estimates downward, sometimes to the point of showing negative costs — i.e., profits — generated by subsidized loans.

The best example is the federal student loan program, which offers below-market interest rates and other generous terms to subsidize college attendance. Because the government effectively assumes its estimate of what student loan recipients will pay back carries no risk, official cost figures show the program earning a profit of $135 billion over the next 10 years. But the idea that a government program can subsidize students and generate profits at the same time should give anyone pause. Indeed, when the Congressional Budget Office applied fair value methods to federal student loans, it found that the “profit” is actually an $88 billion loss for the taxpayers.

So is Elizabeth Warren using fair value accounting to reveal the subsidies students collect through the student loan program, just as she revealed the subsidies that financial institutions collected through TARP? No. She has reverted instead to the government’s flawed accounting scheme, ignoring the market risk that she once worked so hard to expose. She now perpetuates the myth of student loan “profits” as a way to justify even more spending on the program.

“The government is making obscene profits on these loans — profits we can and should cut back on to help our kids who are struggling to pay for college,” Warren said in a floor speech last year. And in an op-ed published this fall, she referred to the “billions of dollars in profits for the government” supposedly produced by earlier loans that she now wants to “refinance” so that they can be subsidized even further. She wants risk priced into loans to financial firms but conveniently excluded from the cost of loans to students.

It’s perhaps not fair to single out Elizabeth Warren for her inconsistency, since it’s a problem not limited to her, nor even to her party. Accounting gimmickry has a long history in U.S. politics, and it’s a game that both sides play.

Republicans have correctly argued that public pension funds ignore market risk in their cost calculations, making their bottom lines look better simply by exchanging low-risk and low-return bonds for high-risk and high-return stocks. But many of the same Republicans also hyped individual Social Security accounts in the 1990s and 2000s as providing a “free lunch” due to the higher returns on stocks compared to bonds. For those Republicans, risk apparently has a cost in programs they disfavor (public pensions) but no cost in programs they favor (private retirement accounts).

And the contradictions run even deeper. The left-wing Center on Budget and Policy Priorities, which extolled the virtues of fair value accounting in opposition to Social Security privatization, now opposes budgeting for market risk when it comes to government programs like student loans. (The organization recently recanted its prior support for fair value.) Separately, Republicans helped create a “self-pay” loan guarantee program for nuclear power plant construction in 2005 that appeared to cost taxpayers nothing because market risk was excluded from official cost estimates. Democrats rightly cried foul, pointing to the hidden costs in the nuclear-power loans revealed by fair value accounting. They had no similar complaints, however, about self-pay loans for wind, solar and other green energy projects.

Across the political spectrum, politicians seem to prefer whichever cost estimates fit their current policy agenda, accuracy and consistency be damned. The result is confusion about the most basic question every policymaker must ask about any government program: How much does it cost?

The momentum for fair value accounting is building. The Congressional Budget Office has all but endorsed it, describing fair value as a “more comprehensive” accounting of costs. Scholars with the Federal Reserve, the Financial Economists Roundtable, and the Simpson-Bowles fiscal commission are on board as well. Reps. Paul Ryan and Scott Garrett have championed this issue in the House of Representatives, which passed legislation to put federal loan programs on fair value accounting earlier this year. That vote, however, mostly followed party lines, and the Senate has never advanced similar legislation.

Unfortunately, party polarization on fair value accounting has gotten worse even as support for it has grown among nonpartisan experts. But accounting need not be a left-right issue. Both sides should have a strong interest in establishing accurate cost estimates. If Congress were to mandate fair value accounting across the board, it would help end the budgetary shenanigans and bring some much-needed clarity to political debates.