Fair Value Costs / Valuation of Bailouts
Term: Fair Value Costs / Valuation of Bailouts | Book: Lipstick on a Pig (financial bailouts): book profile and conceptual summary
Definition and core idea
Assessing the cost of a government financial intervention requires separating the gross amount paid from the final cost and the remaining risks. In some methods, the value of assets received, repayments, interest, dividends, guarantees and the timing of cash flows affect the cost estimate.
Explanation and elaboration
The summary of the book criticises the fact that some “we got the money back” claims are framed by looking simply at cash amounts, whereas the economic estimate of cost may be more complex. To assess a programme at least these things need to be separated: gross investment or payment, repayments and income received, the value of assets held by the state, realised loss, contingent risks, and the opportunity cost of public capital.
The GAO report on TARP says that by the end of the programmes on 30 September 2023, 31.1 billion. This figure gives a framework for understanding the difference between gross amount and final cost, but it does not answer all the questions about the distribution of benefits, other guarantees or macroeconomic costs.
Notes and limits of interpretation
Separating claim from fact
Without examining the calculation method, “fair value” should not be taken as equal to a single number or as the only measure of social cost. The government’s financial cost, the socio-economic cost and the distribution of benefits are three different questions.
Relations to other concepts
Review questions
- What problem does this concept clarify?
- Who benefits and who is harmed?
- What evidence is needed to test this claim in a real case?
- Which part is the author’s position and which part needs independent evidence?