My offical Kellogg home page | Curriculum Vitae | Research

Jonathan A. Parker

  
From July to December 2009, I worked as a Special Adviser on Financial Stability for the Office of Financial Stability at Treasury. In short, I advised on valuation of the TARP portfolio and on substantive issues for the first OFS annual report.

In terms of valuation, this was a big step for the government. Prior to 1990, all Federal government budgeting was based on inflow and outflows, so that, for example, a loan guarantee would cost nothing when made, and a loan would be counted as an outlay equal to the cost of the loan with no offset for the value of the stream of future interest payments that the government received in return. The 1990 Credit Reform Act required that the government instead calculate the cost of credit-type transactions as equal to the expected outflows discounted back to the present at the maturity-matched interest rate on Treasury debt. A big step -- loan guarantees now had costs when made and loans were booked with an offset for future interest payments. But since value or cost is measured by discounting expected cash flows at a (close to) risk-free interest rate, the these transactions are still not counted in the budget at their true, economic, mark-to-market value or cost.

The Emergency Economic Stabilization Act of 2008 that authorized TARP required that TARP budgeting value investments according to the Credit Reform Act of 1990, but "with an adjustment for market risk." (Even the legislative process noticed market risk in the Fall of 2008.) There are many different ways OFS could have accounted for market risk, and my role was advising on the best way to interpret this directive and on implementation. Ultimately this first annual report is based on mark to market accounting (almost everywhere), using the term "fair values" to describe these valuations. My work on the report involved lots of interesting issues, such as discussing why even "stressed" markets reveal the prices that we wanted to report, why the Treasury interest rate was not the appropriate interest rate at which to discount even though the Treasury can borrow at this rate to fund TARP, why, even when we had superior information about financial institutions or future policies, the (often hypothetical) market price was still the price we wanted to calculate and report, and many other issues of asset pricing in real time and in real life.

In terms of the report, this first OFS annual report is now out here. The report is the cumulation of many many hours by many many people, and while I had contributions throughout (and while some of my arguments clarifying why these are the correct valuation methods did not make the final cut), the most relevant sections for my work are 7 and 8 that deal with issues surrounding valuation.

It was a pleasure and a privilege working with the people at OFS and main Treasury. They are an extremely impressive team -- smart, collegial, public-spirited, incredibly hard-working, and nice.