Elizabeth Warren, running for Senate in Massachusetts, today called attention to a stealth bailout of AIG through special tax breaks created for them and other bailed-out companies. Warren joined a bipartisan group of her former colleagues on the Congressional Oversight Panel, the group that oversaw TARP, to assail the tax preferences for AIG, and demand that Congress change the law to end them. This suggests that Warren will maintain her independence from the White House, and particularly the Treasury Department, despite the election campaign.

Warren and her colleagues – Democratic appointee Damon Silvers, and Republican appointees Mark McWatters and Kenneth Troske – detailed the net operating expense rules that allow AIG to carry over its losses and save massive amounts of money. They estimate that AIG has been able to cancel out its recent profits for tax purposes with these expanded past losses, and save around $17.7 billion in the process.

This has a number of perverse consequences. First, as Warren said, “When the government bailed out AIG, it should not have allowed the failed insurance giant to duck taxes for years to come [...] It also gives AIG a leg up against its competitors at a time when everyone should have to play by the same rules – especially when it comes to paying taxes.” Basically, AIG can’t pay taxes for several years under these rules, because it can continue to carry over its past losses for tax purposes on an unlimited basis. The tax benefits, according to Warren, accounted for 90% of total profits at AIG last year.

Moreover, executives and shareholders credit from the benefit. “This flows through to AIG’s executive compensation structure,” said Damon Silvers, the COP member who also works on policy at the AFL-CIO. “The result is artificial inflation of executive compensation in a company 70% owned by the public. And substantial amounts of money leak out to the benefit of private parties who should not be benefiting from public policy at this point,” he added in a conference call with reporters.

Creditors of AIG also make out on this. Republican Kenneth Troske explained that protecting creditors “circumvents the natural regulatory role that creditors play in the market.” If creditors know they’ll get bailed out if a company gets into trouble, they will have little incentive to oversee the company’s practices, Troske reasoned. And if AIG is less risky, creditors profit. “This further distorts an already very distorted market,” Troske concluded.

But the most insidious by-product of this AIG tax deal is that it artificially makes the government look like they “made” money on the bailout, when they actually just transferred the losses. “The actions taken by Treasury enhance the value of AIG,” said COP member Mark McWatters. “This alchemy creates the illusion of fewer tax dollars required to fund the bailout of AIG. It does reduce the total cost to TARP, but not the total cost of the bailout.” The government gets deprived of corporate tax revenue from AIG so that Treasury can have a talking point about profits from AIG stock sales.

That’s why you simply cannot trust stories about how TARP worked. Treasury has a number of ways to offload and hide those TARP costs.

It’s interesting that Warren came out with this now. The ask is for Congress to end tax breaks for too big to fail firms, which obviously works for her election against Wall Street darling Scott Brown. But this is also an assault on Treasury’s special dealings, and indeed the Obama Administration’s entire philosophy with the financial industry. It suggests that Warren will not be constrained by party and instead speak the truth about special deals that rip off the US taxpayer and consumer, no matter where they originate.