Matt Yglesias quotes the CBO
Consistent with the budgetary treatment of financial assets purchased under the TARP, the federal budget would record the cost of such loans using procedures similar to those specified in the Federal Credit Reform Act, with an adjustment to account for market risk. On that basis, CBO estimates that the expected cost of the proposed loans would be roughly 70 percent of the aggregate face value—or about $17.5 billion. That estimate takes into account the current financial condition of firms that would qualify for loans—as demonstrated, for example, by current market interest rates on outstanding
debt—and reflects historical data on defaults and subsequent amounts recovered
The procedure is to assume that the Treasury should be exactly as risk averse as the private sector. This is totally insane and, in fact, has it exactly backwards. If a market tanks we *want* the deficit to grow (That's called an automatic stabilizer).
Why the hell does the CBO assume that an agent which benefits from taking risk away from the private sector should be risk averse ? I think the reason is clear. If publicly owned assets were valued in a half way rational way major purchases of, say, common stock would be counted as gains for the Treasury (reducing net debt etc). That is, it would suggest that the US government should invest in index funds. Now we can't have that. That can't be a good policy. So we have to make the totally nonsensical assumption that we want the deficit to be constant rather than high in recessions and low in expansion in order to not conclude that such a policy would have an effect on national welfare similar to finding $ trillion worth of goods under a rock.
Obviously I think the social security trust fund should be invested in index funds. The case agains is that if we assume it is very important that the deficit be constant and not counter cyclical then such a policy would be no better than current policy. I can't imagine a weaker policy argument.
I say public sector assets should be valued by the expected payments discounted at the current T-bill rates. No correction for risk. Now really, the Federal Government should be risk seeking, but I am willing to compromise. This does imply that the public sector can profit (reduce it's net indebtedness) by investing in risky assets.
In particular I betcha the Treasury profits from its loan to Goldman Sachs *and* I think that the outcome in dollars gained or lost is an unbiased estimate of what we should care about which has no public sector risk aversion (rather the opposite but I am willing to compromise).