Financial Assistance
Ongoing Challenges and Guiding Principles Related to Government Assistance For Private Sector Companies Gao ID: GAO-10-719 August 3, 2010The recent financial crisis resulted in a wide-ranging federal response that included providing extraordinary assistance to several major corporations. As a result of actions under the Troubled Asset Relief Program (TARP) and others, the government was a shareholder in the American International Group Inc. (AIG); Bank of America; Citigroup, Inc. (Citigroup); Chrysler Group LLC (Chrysler); General Motors Company (GM); Ally Financial/GMAC, Inc. (GMAC); and Fannie Mae and Freddie Mac (Enterprises). The government ownership interest in these companies resulted from financial assistance that was aimed at stabilizing the financial markets, housing finance, or specific market segments. This report (1) describes the government's ownership interest and evaluates the extent of government involvement in these companies, (2) discusses the government's management and monitoring of its investments and exit strategies, and (3) identifies lessons learned from the federal actions. This work was done in part with the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) and involved reviewing relevant documentation related to these companies and the federal assistance provided. GAO interviewed officials at Treasury, Federal Reserve, Federal Housing Finance Agency (FHFA), and the banking regulators, as well as the senior executives and relevant officials at the companies that received exceptional assistance.
The extent of government equity interest in companies receiving exceptional assistance varied and ranged from owning preferred shares with no voting rights except in limited circumstances (Bank of America until it repurchased its shares in 2009) to owning common shares with voting rights (Chrysler, Citigroup, GM, and GMAC) to acting as a conservator (the Enterprises). In each case, the government required changes to the companies' corporate governance structures and executive compensation. For example, of the 92 directors currently serving on boards of these companies, 73 were elected since November 2008. Many of these new directors were nominated by their respective boards, while others were designated by the government and other significant shareholders as a result of their common share ownership. The level of involvement in the companies varied depending on whether the government served as an investor, creditor, or conservator. For example, as an investor in Bank of America, Citigroup, and GMAC, the Department of the Treasury (Treasury) had minimal or no involvement in their activities. As both an investor in and a creditor of AIG, Chrysler, and GM--as a condition of receiving assistance--the government has required some combination of the restructuring of their companies, the submission of periodic financial reports, and greater interaction with company personnel. FHFA--using its broad authority as a conservator--has instituted a number of requirements and practices that involve them in the Enterprises.
GAO-10-719, Financial Assisstance: Ongoing Challenges and Guiding Principles Related to Government Assistance For Provate Sector Companies
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
August 2010:
Financial Assistance:
Ongoing Challenges and Guiding Principles Related to Government
Assistance For Private Sector Companies:
GAO-10-719:
GAO Highlights:
Highlights of GAO-10-719, a report to congressional committees.
Why GAO Did This Study:
The recent financial crisis resulted in a wide-ranging federal
response that included providing extraordinary assistance to several
major corporations. As a result of actions under the Troubled Asset
Relief Program (TARP) and others, the government was a shareholder in
the American International Group Inc. (AIG); Bank of America;
Citigroup, Inc. (Citigroup); Chrysler Group LLC (Chrysler); General
Motors Company (GM); Ally Financial/GMAC, Inc. (GMAC); and Fannie Mae
and Freddie Mac (Enterprises). The government ownership interest in
these companies resulted from financial assistance that was aimed at
stabilizing the financial markets, housing finance, or specific market
segments. This report (1) describes the government‘s ownership
interest and evaluates the extent of government involvement in these
companies, (2) discusses the government‘s management and monitoring of
its investments and exit strategies, and (3) identifies lessons
learned from the federal actions.
This work was done in part with the Special Inspector General for the
Troubled Asset Relief Program (SIGTARP) and involved reviewing
relevant documentation related to these companies and the federal
assistance provided. GAO interviewed officials at Treasury, Federal
Reserve, Federal Housing Finance Agency (FHFA), and the banking
regulators, as well as the senior executives and relevant officials at
the companies that received exceptional assistance.
What GAO Found:
The extent of government equity interest in companies receiving
exceptional assistance varied and ranged from owning preferred shares
with no voting rights except in limited circumstances (Bank of America
until it repurchased its shares in 2009) to owning common shares with
voting rights (Chrysler, Citigroup, GM, and GMAC) to acting as a
conservator (the Enterprises). In each case, the government required
changes to the companies‘ corporate governance structures and
executive compensation. For example, of the 92 directors currently
serving on boards of these companies, 73 were elected since November
2008 (see table 1). Many of these new directors were nominated by
their respective boards, while others were designated by the
government and other significant shareholders as a result of their
common share ownership. The level of involvement in the companies
varied depending on whether the government served as an investor,
creditor, or conservator. For example, as an investor in Bank of
America, Citigroup, and GMAC, the Department of the Treasury
(Treasury) had minimal or no involvement in their activities. As both
an investor in and a creditor of AIG, Chrysler, and GM”as a condition
of receiving assistance”the government has required some combination
of the restructuring of their companies, the submission of periodic
financial reports, and greater interaction with company personnel.
FHFA”using its broad authority as a conservator”has instituted a
number of requirements and practices that involve them in the
Enterprises.
Table 1: Changes in Boards of Directors since November 2008:
Company: AIG;
Current number of directors: 13;
New directors since November 2008: 8;
Government-designated directors: 2.
Company: Bank of America;
Current number of directors: 13;
New directors since November 2008: 10;
Government-designated directors: none.
Company: Citigroup;
Current number of directors: 15;
New directors since November 2008: 8;
Government-designated directors: none.
Company: GM;
Current number of directors: 13;
New directors since November 2008: 13;
Government-designated directors: 10.
Company: Chrysler;
Current number of directors: 9;
New directors since November 2008: 9;
Government-designated directors: 3.
Company: GMAC;
Current number of directors: 9;
New directors since November 2008: 8;
Government-designated directors: 3.
Company: Fannie Mae;
Current number of directors: 10;
New directors since November 2008: 8;
Government-designated directors: 10.
Company: Freddie Mac;
Current number of directors: 10;
New directors since November 2008: 9;
Government-designated directors: 10.
Company: Total;
Current number of directors: 92;
New directors since November 2008: 73;
Government-designated directors: 38.
Source: SIGTARP and GAO analysis of government‘s agreements and
company-provided data.
[End of table]
The government has taken a variety of steps to manage its investments
and consider exit strategies. It developed guidance outlining its
approach and hired asset managers to help manage some of its
investments. Treasury‘s staff manage the investments of Chrysler, GM,
and GMAC, including others. Also, the Federal Reserve and Treasury
collaborate in monitoring the government‘s debt and preferred equity
investments in AIG, while the AIG trustees appointed by the Federal
Reserve are responsible for divesting the government‘s beneficial
interest. Conversely, although FHFA is responsible for monitoring the
Enterprises and Treasury holds the preferred equity investment,
congressional action will be needed to determine the long-term
structures and exit strategies for the Enterprises.
While the debate about whether the government should intervene in
private markets to avert a systemic crisis continues, only the future
will reveal whether the government is again faced with the prospect of
having to intervene in private markets to avert a systemic crisis. As
with other past crises, experience from the most recent crisis offers
additional insights to guide government action, should it ever be
warranted.
Specifically, the government could protect the taxpayer‘s interest in
any crisis by not only continuing to follow the principles previously
identified by GAO (i.e., identifying and defining the problem,
determining a national interest and setting clear goals, and
protecting the government‘s and taxpayer‘s interests) but also by
adhering to five additional principles based on the federal government‘
s experience with the current crisis. First, it is essential to
develop a strategic and coordinated approach when comprehensive and
global governmental action is required. Second, taking actions to
ensure the government has a strategy for managing any investments
resulting from its intervention is necessary to help mitigate
perceived or potential conflicts and manage external influences.
Third, the federal government‘s intervention in private markets
requires that those efforts be transparent and effectively
communicated. Fourth, establishing an adequate oversight structure to
help ensure accountability is essential. And finally, taking steps to
mitigate moral hazard will be necessary to not only ensure that
regulatory and market-based structures limit risk taking before a
crisis occurs, but to also create strong disincentives to seeking
federal assistance through utilization of stringent requirements.
Table 2: GAO Framework for the Federal Government When Providing
Financial Assistance to Private Market Participants:
Principles:
Established guiding principles: Identify and define the problem;
Description: Separating out those issues that require an immediate
response from the structural challenges that will take longer to
resolve.
Established guiding principles: Determine national interests and set
clear goals and objectives;
Description: Choosing whether a legislative solution or other
government intervention best serves the national interest.
Established guiding principles: Protect government‘s Interests;
Description: Ensure not only that financial markets continue to
function effectively, but also that any investment provides the
highest possible return. For example, requiring concessions from all
parties, placing controls over management, obtaining collateral when
feasible, and being compensated for risk.
New guiding principles: Coordinate actions on a global and
comprehensive basis;
Description: Financial crises that are international in scope require
comprehensive, global actions, and government interventions must be
closely coordinated by the parties providing assistance”including U.S.
and foreign governments”to help ensure that limited resources are used
effectively.
New guiding principles: Mitigate perceived or potential conflicts;
Description: Any action that results in the government having an
ownership interest in private sector companies requires that the
government‘s strategy for managing its investments include plans to
mitigate perceived or potential conflicts that may arise from its
newly acquired role as shareholder or creditor and its existing role
as regulator, supervisor, or policymaker.
New guiding principles: Ensure adequate transparency by establishing
an effective communication strategy:
Description: Federal intervention into the private markets requires a
strategy to help ensure open and effective communication with Congress
and taxpayers. An effective communication strategy is important during
changing market events and could help the public understand the policy
goals that the government is trying to achieve and its rationale for
spending public funds.
New guiding principles: Establish a strong system for accountability:
Description: A system of accountability helps ensure that the interest
of the government and taxpayers are adequately protected and the
programs‘ objectives are achieved efficiently and effectively.
Monitoring and other internal controls can help prevent and detect
fraud.
New guiding principles: Take steps to mitigate moral hazard;
Description: Federal government‘s financial assistance may create
moral hazard or encourage market participants to expect similar
emergency actions”the too big to fail perception. The government
should ensure that financial assistance to private market participants
include terms that make it a last resort and specify when the
assistance will end.
Source: GAO.
[End of table]
View GAO-10-719 or key components. For more information, contact Orice
Williams Brown at (202) 512-8678 or williamso@gao.gov.
[End of section]
Contents:
Letter:
Background:
How the Federal Government Acquired Its Equity Interest Varies by
Institution, but Resulted from Assistance Aimed at Stabilizing
Financial Markets, Housing Markets, or Individual Market Segments:
Federal Government Has Involved Itself in the Corporate Governance of
the Companies Receiving Exceptional Amounts of Assistance, but Its
Involvement in the Companies Has Varied:
Federal Government Continues to Take Steps to Monitor Its Investments
and Develop Exit Strategies:
The Government's Recent Involvement in Private Markets Provides
Important Lessons:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Government Assistance and Outstanding Balances of the
Companies:
Appendix III: Legislation and Government Communication with GM and
Chrysler:
Appendix IV: Comments from the Department of the Treasury:
Appendix V: Comments from the Federal Housing Finance Agency:
Appendix VI: GAO Contacts and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Definitions of Equity Investments:
Table 2: Changes in Boards of Directors since November 2008, as of
June 30, 2010:
Table 3: Selected Changes in Senior Management at Corporations
Receiving Exceptional Assistance, from September 18, 2008, through May
1, 2010:
Table 4: Key Requirements Imposed in Government Agreements:
Table 5: Treasury Special Master's Initial Determinations for Top 25
Employees for 2009:
Table 6: Additional Company Payments to the Treasury, as of March 31,
2010:
Table 7: Topics of Other Bills Placing Requirements or Restrictions on
TARP Recipients in the Auto Industry:
Figures:
Figure 1: Government's Share of Common Equity in Selected Companies,
as of June 1, 2010:
Figure 2: Government Assistance Provided to Selected Companies, as of
March 31, 2010:
Figure 3: Amount Outstanding and Government Equity Interest, as of
June 1, 2010:
Abbreviations:
AGP: Asset Guarantee Program:
AIFP: Automotive Industry Financing Program:
AIG: American International Group, LLC:
CAP: Capital Assistance Program:
CEO: Chief Executive Officer:
CFO: Chief Financial Officer:
Citigroup: Citigroup, Inc.
Chrysler: Chrysler Group, LLC:
CPP: Capital Purchase Program:
EESA: Emergency Economic Stabilization Act of 2008:
Enterprises: Fannie Mae and Freddie Mac:
FDIC: Federal Deposit Insurance Corporation:
Federal Reserve: Board of Governors of the Federal Reserve System:
FHFA: Federal Housing Finance Agency:
FRBNY: Federal Reserve Bank of New York:
GM: General Motors Company:
GMAC: Ally Financial, Inc.
HAMP: Home Affordable Modification Program:
HERA: Housing and Economic Recovery Act of 2008:
OCC: Office of the Comptroller of the Currency:
OFS: Office of Financial Stability:
Recovery Act: American Recovery and Reinvestment Act of 2009:
SCAP: Supervisory Capital Assistance Program:
SEC: Securities Exchange Commission:
SIGTARP: Special Inspector General for the Troubled Asset Relief
Program:
SSFI: Systemically Significant Failing Institutions Program:
TARP: Troubled Asset Relief Program:
TIP: Targeted Investment Program:
Treasury: Department of the Treasury:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
August 3, 2010:
Congressional Committees:
The federal government historically has intervened in financial
markets during times of economic crisis from the Great Depression to
the Savings and Loan crisis of the 1980s. During the most recent
financial crisis, the federal government has shown a willingness to
intervene in private markets after determining that national interests
were at stake. From the fall of 2008 to June 2010, eight large
financial institutions and companies have received more than $447
billion in exceptional amounts of financial assistance, which resulted
in the government having an ownership interest in these companies.
[Footnote 1] Specifically, the government is currently a significant
shareholder in five companies and acts as conservator of two housing
government-sponsored enterprises--Fannie Mae and Freddie Mac
(Enterprises).[Footnote 2] In addition, the government has provided
financial assistance to these companies to support the credit,
insurance, and the secondary mortgage markets through the purchase of
debt and mortgage-backed securities, asset guarantees, and the
extension of lines of credit. These situations have raised questions
about the appropriate role of the federal government as a shareholder,
its management of its assets, the implications of government ownership
for private markets, and the government's plans for divesting its
investments in the companies and finding a sustainable solution to the
current problems of the Enterprises.[Footnote 3]
This report, done in part with the Special Inspector General for the
Troubled Asset Relief Program (SIGTARP), looks at the extent of the
government's involvement in companies that have received exceptional
assistance from the federal government, including American
International Group Inc. (AIG); Bank of America Corporation (Bank of
America); Chrysler Group LLC (Chrysler); Citigroup, Inc. (Citigroup);
General Motors Company (GM); and Ally Financial Inc. (GMAC),[Footnote
4] as well as the government's involvement in the Enterprises.
[Footnote 5] Under the Emergency Economic Stabilization Act of 2008
(EESA), GAO is required to report at least every 60 days on findings
resulting from, among other things, oversight of TARP's performance in
meeting the purposes of the act, the financial condition and internal
controls of TARP, the characteristics of both asset purchases and the
disposition of assets acquired, TARP's efficiency in using the funds
appropriated for the program's operations, and TARP's compliance with
applicable laws and regulations.[Footnote 6] The report objectives are
to (1) describe how and why the government obtained an ownership
interest in the companies, (2) evaluate the extent of government
involvement in companies receiving exceptional assistance, (3)
describe the government's monitoring of the companies' financial
viability and exit strategies, and (4) discuss the challenges
associated with the government's ongoing involvement in the companies
and the Enterprises.
To address the first objective, we reviewed relevant documents from
the Board of Governors of the Federal Reserve System (Federal
Reserve), Department of the Treasury's (Treasury) Office of Financial
Stability (OFS), Federal Housing Finance Agency (FHFA), the
Enterprises' regulator, and the Federal Reserve Bank of New York
(FRBNY); contractual agreements between the government and the
companies; Troubled Asset Relief Program (TARP) transaction reports;
and Securities and Exchange Commission (SEC) filings. We also
interviewed officials from Treasury, the Federal Reserve Board, and
FRBNY. In addition, as appropriate, we used information from previous
reports by GAO and SIGTARP.[Footnote 7]
To determine the extent of government involvement in those companies
receiving exceptional assistance, we reviewed the contractual
agreements between Treasury and these companies to determine how
Treasury intended to use its voting rights and to identify the
requirements Treasury imposed on the companies. We also interviewed
officials from Treasury, OFS, FHFA, and federal banking regulators--
the Federal Reserve, FRBNY, Federal Reserve Bank of Chicago (FRB-
Chicago), Federal Reserve Bank of Richmond (FRB-Richmond), Federal
Deposit Insurance Corporation (FDIC), and Office of the Comptroller of
the Currency (OCC). We also interviewed the AIG trustees appointed by
FRBNY and the senior management of the companies that received
exceptional amounts of assistance and the Enterprises. Further, to
understand the extent of any external influence that Congress and the
federal agencies might be placing on the companies, we reviewed
correspondences, including both letters and e-mail messages, that
Chrysler and GM officials received from members of Congress and other
government officials and interviewed the government relations staff at
AIG, Bank of America, Chrysler, Citigroup, GM, and GMAC.
To describe the management and monitoring of the government's
investment and the development of exit strategies for the investments,
we reviewed financial information prepared by the asset managers, as
well as the Bank of America and Citigroup proposals submitted to the
Federal Reserve requesting that the institutions be allowed to
repurchase their preferred shares and the financial reports that
Chrysler and GM submitted to the team within OFS overseeing Treasury's
investment in the auto industry (Auto Team). We also interviewed
officials from the Federal Reserve, FHFA, FRBNY, FRB-Chicago, FRB-
Richmond, and OFS teams that monitor government investments, including
the AIG investment team, the Auto Team, and financial firms serving as
asset managers for Treasury.
We conducted this performance audit from August 2009 to August 2010 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provided a reasonable basis for our
findings and conclusions based on our audit objectives.
Background:
The federal government intervention and involvement in the financial
markets was created through a number of existing and recently enacted
laws. This legal framework provided the financial resources for
assistance, the federal government's authorities, and the restrictions
companies were required to comply with in exchange for the financial
assistance. In assisting the public to understand its involvement in
the companies, in May 2009 the administration published a set of core
principles that are to guide the government's management of ownership
interests in private firms. Most of the institutions that the
government had or has an ownership interest in are regulated by one of
several financial regulators, which have a role in overseeing the
financial condition and operations of its regulated entities.
The federal government's efforts in late 2008 to stabilize the
financial markets are not its first intervention in private markets
during economic downturns. The government has previously undertaken
large-scale financial assistance efforts, including to private
companies. For example, in the 1970s and early 1980s Congress created
separate financial assistance programs totaling more than $12 billion
to stabilize Conrail, Lockheed-Martin, and Chrysler, with most of the
funds being distributed in the form of loans or loan
guarantees.[Footnote 8] Most recently, in response to the most severe
financial crisis since the Great Depression, Congress provided
Treasury additional authority to stabilize the financial system. In
particular:
* In July 2008, Congress passed the Housing and Economic Recovery Act
of 2008 (HERA), which established FHFA--the agency responsible for the
monitoring of safety and soundness and the housing missions of the
Enterprises and the other housing government-sponsored enterprises,
namely, the Federal Home Loan Banks--and among other things, provided
for expanded authority to place the Enterprises in conservatorship or
receivership and provides Treasury with certain authorities to provide
financial support to the Enterprises.[Footnote 9] In accordance with
HERA, on September 6, 2008, FHFA placed the Enterprises into
conservatorship because of concern that their deteriorating financial
condition ($5.4 trillion in outstanding obligations) would destabilize
the financial system.[Footnote 10] The goals of the conservatorships
are to preserve and conserve the assets and property of the
Enterprises and enhance their ability to fulfill their missions. FHFA
has the authority to manage the Enterprises and maintains the powers
of the board of directors, officers, and shareholders. Treasury agreed
to provide substantial financial support so that Enterprises could
continue as going concerns to support mortgage financing,
subsequently, the Federal Reserve Board committed to a variety of
activities, including purchasing substantial amounts of their debt and
securities to support housing finance, housing markets, and the
financial markets more generally.
* In October 2008, Congress passed EESA, which authorized the creation
of TARP to, among other things, buy up to $700 billion in troubled
assets, such as mortgage-backed securities and any other financial
instrument that the Secretary of the Treasury, in consultation with
the Chairman of the Federal Reserve Board, determined that it needed
to purchase to help stabilize the financial system.[Footnote 11] EESA
created OFS within Treasury to administer TARP, which comprises a
number of programs that were designed to address various aspects of
the unfolding financial crisis. Early in the program, Treasury
determined that providing capital infusions would be the fastest and
most effective way to address the crisis. In return for these capital
infusions, Treasury received equity in the hundreds of companies that
have participated in the program. In return for receiving these
capital infusions, TARP-recipients were subject to certain
requirements and restrictions, such as dividend requirements and
limits on executive compensation.
The American Recovery and Reinvestment Act of 2009 (Recovery Act)
amended and expanded EESA's executive compensation provisions and
directed Treasury to require appropriate standards for executive
compensation and corporate governance of TARP recipients.[Footnote 12]
On June 10, 2009, Treasury adopted an interim final rule to implement
the law for executive compensation and corporate governance, including
limits on compensation, providing guidance on the executive
compensation and corporate governance provisions of EESA, and setting
forth certain additional standards pursuant to authority under EESA.
The requirements for executive compensation generally include: (1)
limits on compensation that exclude incentives for senior executive
officers to take unnecessary and excessive risks that threaten the
value of TARP recipients; (2) provision for the recovery of any bonus,
retention award, or incentive compensation paid to certain executives
based on materially inaccurate statements of earnings, revenues,
gains, or other criteria; (3) prohibition on "golden parachute"
[Footnote 13] payments accrued to certain executives; (4) prohibition
on payment or accrual of bonuses, retention awards, or incentive
compensation to certain executives; and (5) prohibition on employee
compensation plans that would encourage manipulation of earnings
reported by TARP recipients to enhance employees' compensation. The
regulation required the establishment of Office of the Special Master
for TARP Executive Compensation (Special Master) to review the
compensation payments and structures of TARP recipients of
"exceptional financial assistance," which includes all of the
companies in our study with the exception of the government-sponsored
Enterprises. The Senior Preferred Stock Agreements between Treasury
and the Enterprises negotiated prior to EESA and the Recovery Act
included a requirement that FHFA consult with Treasury relating to
executive compensation.
Several TARP Programs Have Resulted in the Government's Ownership
Interest:
A number of programs under TARP--designed to help stabilize
institutions and financial markets--have resulted in Treasury having
an ownership interest in such institutions.
* The Capital Purchase Program (CPP) is the largest TARP program and
at its peak had more than 700 participants, including Bank of America
and Citigroup. Created in October 2008, it aimed to stabilize the
financial system by providing capital to viable banks through the
purchase of preferred shares and subordinated debentures.[Footnote 14]
These transactions generally provide that the banks pay fixed
dividends on the preferred shares, that the debentures accrue
interest, and that the banks issue a warrant to purchase common stock,
preferred shares, or additional senior debt instruments.[Footnote 15]
* The Targeted Investment Program (TIP), established in December 2008,
was designed to prevent a loss of confidence in financial institutions
that could (1) result in significant market disruptions, (2) threaten
the financial strength of similarly situated financial institutions,
(3) impair broader financial markets, and (4) undermine the overall
economy. Treasury determined the forms, terms, and conditions of any
investments made under this program and considered the institutions
for approval on a case-by-case basis. Treasury required participating
institutions to provide warrants or alternative considerations, as
necessary, to minimize the long-term costs and maximize the benefits
to the taxpayers, in accordance with EESA. Only two institutions
participated in TIP, Bank of America and Citigroup, and both
repurchased their preferred shares and trust preferred shares,
respectively, from Treasury in December 2009. Treasury has terminated
the program.
* The Asset Guarantee Program (AGP), was created in November 2008 to
provide a federal government guarantee for assets held by financial
institutions that had been deemed critical to the functioning of the
U.S. financial system. The goal of AGP was to encourage investors to
keep funds in the institutions. According to Treasury, placing
guarantee assurances against distressed or illiquid assets was viewed
as another way to help stabilize the financial system. In implementing
AGP, Treasury collected a premium on the risk assumed by the
government that was paid in preferred shares that were exchanged later
for trust preferred shares. Citigroup terminated its participation on
December 23, 2009. Treasury has since terminated AGP.[Footnote 16]
While the asset guarantee was in place, no losses were claimed by
Citigroup and no federal funds were paid out.
* The AIG Investment Program--originally called the Systemically
Significant Failing Institutions Program (SSFI)--was created in
November 2008 to help avoid disruptions to financial markets from an
institutional failure that Treasury determined would have broad
ramifications for other institutions and market activities. AIG has
been the only participant in this program and was provided the
assistance because of its systemic importance to the financial system.
The assistance provided under this program is reflected in the
securities purchase agreements, which required Treasury to purchase
preferred shares from AIG and entitles Treasury to dividends declared
by AIG on these preferred shares and provide warrants to purchase
common stock.
* The Automotive Industry Financing Program (AIFP) was created in
December 2008 to prevent a significant disruption to the U.S.
automotive industry. Treasury determined that such a disruption would
pose a systemic risk to financial market stability and have a negative
effect on the U.S. economy. The program was authorized to provide
funding to support automakers during restructuring, to ensure that
auto suppliers to Chrysler and GM received compensation for their
services and products, and to support automotive finance companies.
AIFP provided sizeable loans to Chrysler and GM (including a loan to
GM that was convertible into shares of GMAC that were purchased with
the proceeds). Treasury loaned up to $1.5 billion to Chrysler
Financial, which was fully repaid on July 14, 2009. Ultimately the
government obtained an equity stake through the restructurings and
loan conversion.
* The Capital Assistance Program (CAP), established in February 2009,
was designed to help ensure that qualified financial institutions have
sufficient capital to withstand severe economic challenges. These
institutions were required to meet eligibility requirements
substantially similar to those used for CPP. A key component of CAP
was the Supervisory Capital Assessment Program (SCAP), under which
federal bank regulators, led by the Federal Reserve, conducted capital
assessments, or "stress tests," of large financial institutions.
Participation in SCAP was mandatory for the 19 largest U.S. bank
holding companies (those with risk-weighted assets of $100 billion or
more as of December 31, 2008).[Footnote 17] The tests were designed to
determine whether these companies had enough capital to absorb losses
and continue lending even if economic and market conditions were worse
than expected between December 2008 and December 2010.[Footnote 18]
Institutions deemed not to have sufficient capital were given 6 months
to raise private capital. In conjunction with the test, Treasury
announced that it would provide capital through CAP to banks that
needed additional capital but were unable to raise it through private
sources. GMAC was the only institution determined to need additional
capital assistance from Treasury. GMAC received the additional capital
assistance through AIFP on December 30, 2009. Treasury announced the
closure of CAP, on November 9, 2009.
In addition to loans and guarantees, Treasury purchased or received
various types of equity investments, ranging from common stock to
subordinated debentures and warrants.
Table 1: Definitions of Equity Investments:
Type of investment: Common stock;
Definition: Unit of ownership in a company that generally entitles the
owner to a pro rata share of company assets and right to vote.
Type of investment: Preferred stock;
Definition: Preferred stock is a form of ownership in a company that
entitles its holders to some preference or priority over the owners of
common stock, usually with respect to dividends or asset distributions
in liquidation.
Type of investment: Mandatory convertible preferred stock;
Definition: A type of preferred share that must be converted to common
stock at the issuer's request, if specific criteria are met by a
certain date.
Type of investment: Trust preferred stock;
Definition: Cumulative preferred stock instruments that are considered
hybrid securities because they contain features of both debt and
equity.
Type of investment: Subordinated debenture;
Definition: Subordinated debentures are bonds whose claim on income
and assets of the issuer in the event of default or if the issuer
files for bankruptcy is ranked below the claims of senior bondholders,
but above all classes of equity.
Type of investment: Warrants;
Definition: An option to buy shares of common stock or preferred stock
at a predetermined price on or before a specified date.
Source: GAO and SIGTARP.
[End of table]
Four Core Principles Guide Treasury's Management of Its Equity
Interest:
Recognizing the challenges associated with the federal government
having an ownership interest in the private market, the administration
developed several guiding principles for managing its TARP
investments. According to the principles issued in March 2009, the
government will:
* Act as a reluctant shareholder. The government has no desire to own
equity stakes in companies any longer than necessary and will seek to
dispose of its ownership interests as soon as practical. The goal is
to promote strong and viable companies that can quickly be profitable
and contribute to economic growth and jobs without government
involvement.
* Reserve the right to set up-front conditions. The government has the
right to set up-front conditions to protect taxpayers, promote
financial stability, and encourage growth. These conditions may
include restructurings as well as changes to ensure a strong board of
directors that selects management with a sound long-term vision to
restore their companies to profitability and to end the need for
government support as quickly as is practically feasible.
* Not interfere in the day-to-day management decisions of a company in
which it is an investor. The government will not interfere with or
exert control over day-to-day company operations. No government
employees will serve on the boards or be employed by these companies.
* Exercise limited voting rights. As a common shareholder, the
government will vote on only core governance issues, including the
selection of a company's board of directors and major corporate events
or transactions. While protecting taxpayer resources, the government
has said that it intends to be extremely disciplined as to how it uses
even these limited rights.
Regulators Play Key Role in Overseeing Regulated Institutions That
Received Assistance:
Federal financial regulators--Federal Reserve, FHFA, FDIC, OCC, and
Office of Thrift Supervision--play a key role in regulating and
monitoring financial institutions, including most of the institutions
that received exceptional amounts of financial assistance. Because
Bank of America, Citigroup, the Enterprises, and GMAC are all
regulated financial institutions, not only were they monitored by
Treasury as an investor but they continued to be regulated and
overseen by their primary federal regulator.[Footnote 19]
Specifically, the Federal Reserve oversees bank holding companies--
including Bank of America, Citigroup, and GMAC--to help ensure their
financial solvency.[Footnote 20] As regulated institutions, Bank of
America, Citigroup, and GMAC were subject to ongoing oversight and
monitoring before they received any government financial assistance
and will continue to be regulated and supervised by their regulator
after the assistance has been repaid. FHFA regulates and supervises
the Enterprises and established their conservatorships in 2008.
The Federal Reserve's program for supervising large, complex banking
organizations is based on a "continuous supervision" model that
assigns a team of examiners dedicated to each institution and headed
by a central point of contact. The Federal Reserve regularly rates the
bank holding company's operations, including its governance structure.
[Footnote 21] Throughout the crisis, staff dedicated to the largest
institutions have increased, as has the oversight and involvement in
supervising the financial condition and operations of the institutions.
In addition to its bank holding company regulatory and supervisory
responsibilities, the Federal Reserve conducts the nation's monetary
policy by influencing the monetary and credit condition in the economy
in pursuit of maximum employment, stable prices, and moderate long-
term interest rates. Also, under unusual and exigent circumstances,
the Federal Reserve has emergency authorization to assist a financial
firm that is not a depository institution.[Footnote 22] The Federal
Reserve used this authority to help address the recent financial
crisis, which also resulted in the government acquiring an ownership
interest in AIG.[Footnote 23]
Subsidiary banks of Bank of America, Citigroup, and GMAC are
supervised by other federal regulators, including OCC and FDIC. For
example, OCC supervises Citibank--Citigroup's national bank. In
addition, FDIC oversees the banks' condition and operations to gauge
their threat to the deposit insurance fund. It also is the primary
federal supervisor of GMAC's bank. These bank supervisors generally
use the same framework to examine banks for safety and soundness and
compliance with applicable laws and regulations. As described above,
they examine most aspects of the bank's financial condition, including
the bank's management.
Finally, FHFA was created in 2008 to oversee the housing enterprises,
Fannie Mae and Freddie Mac. It replaced the Office of Federal Housing
Enterprise Oversight and the Federal Housing Finance Board, and the
Department of Housing and Urban Development's mission authority was
transferred to FHFA. The Enterprises are chartered by Congress as for-
profit, shareholder-owned corporations, now currently under federal
conservatorship.[Footnote 24] Using a risk-based supervisory approach,
FHFA examines the Enterprises, including their corporate governance
and financial condition.[Footnote 25]
How the Federal Government Acquired Its Equity Interest Varies by
Institution, but Resulted from Assistance Aimed at Stabilizing
Financial Markets, Housing Markets, or Individual Market Segments:
The federal government's equity interest was acquired in a variety of
ways and resulted from assistance aimed at stabilizing markets or
market segments. Moreover, the government's equity interest in the
companies varies from company to company--ranging from preferred
shares to common shares. In some cases, the government acquired an
equity interest when it canceled outstanding loans in exchange for
common shares of the debtor. As of June 1, 2010, the government held
an equity ownership interest in the form of preferred or common shares
in the five major corporations--AIG, Chrysler, Citigroup, GM, GMAC--
and the Enterprises. As shown in figure 1, the government holds the
largest share of common stock in GM, but it also holds significant
common stock in GMAC and smaller amounts, in terms of percentage, of
Citigroup and Chrysler. It holds significant amounts of preferred
shares, convertible preferred shares, or warrants for common shares in
AIG and the Enterprises,[Footnote 26] as a result of the assistance
provided.
Figure 1: Government's Share of Common Equity in Selected Companies,
as of June 1, 2010:
[Refer to PDF for image: horizontal bar graph]
Company: AIG;
Percentage government ownership stake: 79.8%.
Treasury has a beneficial interest in a trust that holds preferred
shares that are convertible into 79.8 percent of total common shares.
Company: GM;
Percentage government ownership stake: 60.8%.
Ownership stake in privately traded common equity.
Company: GMAC[A];
Percentage government ownership stake: 56.3%.
Ownership stake in privately traded common equity.
Company: Citigroup;
Percentage government ownership stake: 21.4%.
Ownership stake in publicly traded common equity.
Company: Chrysler;
Percentage government ownership stake: 9.9%.
Ownership stake in privately traded common equity.
Source: GAO analysis of OFS documents and SEC filings.
[A] In addition to the common equity shares, Treasury holds mandatory
convertible preferred shares which, if converted, would give Treasury
more than 80 percent of GMAC's common equity.
[End of figure]
Treasury Provided Funds to Bank of America and the Enterprises in
Exchange for Preferred Stock:
Treasury provided funds to Bank of America and the Enterprises in
exchange for preferred stock with no voting rights except in limited
circumstances, giving the federal government an equity interest in
these companies. Specifically, the government's $45 billion investment
in Bank of America--which participated in CPP and TIP--gave Treasury
ownership of nonvoting preferred shares in the company. Bank of
America received $25 billion in CPP funds and $20 billion in TIP
funds. The transactions were consummated pursuant to a securities
purchase agreement, and the terms of the preferred shares acquired by
Treasury included the right to payment of fixed dividends and no
voting rights except in limited circumstances. On December 9, 2009,
Bank of America repurchased all of its preferred shares previously
issued to Treasury, ending the company's participation in TARP. The
company, as required, also paid over $2.7 billion in dividends to
Treasury. On March 3, 2010, Treasury auctioned its Bank of America
warrants for $1.54 billion.
On September 6, 2008, when FHFA placed the Enterprises into
conservatorships, Treasury provided financial assistance in
consideration of equity interest.[Footnote 27] Under the transaction
agreements, the Enterprises immediately issued to Treasury an
aggregate of $1 billion of senior preferred stock and warrants to
purchase common stock. The warrants allow Treasury to buy up to 79.9
percent of each entity's common stock, can be exercised at any time,
and are intended to help the government recover some of its
investments if the Enterprises become financially viable. Under the
terms of the preferred shares, Treasury is to receive dividends on the
Enterprises' senior preferred shares at 10 percent per year and,
beginning March 31, 2010, quarterly commitment fees from the
enterprises that have not yet been implemented. Further, the preferred
share terms include restrictions on the Enterprises' authority to pay
dividends on junior classes of equity, issue new stock, or dispose of
assets. At the end of the first quarter 2010, Treasury had purchased
approximately $61.3 billion in Freddie Mac preferred stock and $83.6
billion in Fannie Mae preferred stock to cover losses. Because of the
continued deteriorating financial condition of the Enterprises, the
amount of government assistance to them is likely to increase. The
government's most substantive role is as conservator of the
Enterprises, which is discussed later.
Treasury Provided Funds and Other Financial Assistance to Citigroup,
GMAC, GM, and Chrysler, in Exchange for Common Stock:
Treasury has provided funds and other financial assistance to
Citigroup, GMAC, GM, and Chrysler in exchange for common shares with
voting rights, giving the federal government an equity stake in these
companies. For Citigroup and GMAC, the common stock strengthened their
capital structure, because the markets view common equity more
favorably than preferred shares. Initially, Treasury invested $25
billion in Citigroup under CPP and an additional $20 billion under
TIP. Treasury also entered into a loss sharing arrangement with
Citigroup on approximately $301 billion of assets under AGP under
which Treasury assumed $5 billion of exposure following Citigroup's
first losses of $39.5 billion.[Footnote 28] In exchange for this
assistance, Treasury received cumulative nonvoting preferred shares
and warrants to purchase common shares. FDIC also received nonvoting
preferred stock for its role in AGP. Citigroup subsequently requested
that Treasury exchange a portion of the preferred shares held by
Treasury for common shares to facilitate an exchange of privately held
preferred shares for common shares. Taken together, Treasury and
private exchanges improved the quality of Citigroup's capital base and
thereby strengthened its financial position.[Footnote 29] From July
2009 to September 2009, Treasury exchanged its preferred shares in
Citigroup for a combination of shares of common stock and trust
preferred shares, giving the government a 33.6 percent ownership
interest in Citigroup. Treasury now has voting rights by virtue of its
common stock ownership. On December 23, 2009, Citigroup repurchased
$20 billion of trust preferred shares issued to Treasury and the
Federal Reserve, FDIC, and Treasury terminated the AGP agreement. FDIC
and Treasury, collectively, kept approximately $5.3 billion in trust
preferred shares, including the warrants that were associated with
this assistance, as payment for the asset protection provided under
AGP. As of May 26, 2010, Treasury still owned almost 6.2 billion
shares, or 21.4 percent, of Citigroup's common shares and warrants.
[Footnote 30]
Treasury's AIFP assistance to GMAC, a bank holding company, resulted
in the government owning more than half of GMAC by the end of 2009.
After GMAC received approval from the Federal Reserve to become a bank
holding company in December 2008, Treasury initially purchased $5
billion of GMAC's preferred shares and received warrants to purchase
an additional $250 million in preferred shares. Treasury exercised
those warrants immediately.[Footnote 31] At the same time, Treasury
also agreed to lend up to $1 billion of TARP funds to GM (one of
GMAC's owners), to enable GM to purchase additional equity in GMAC. On
January 16, 2009, GM borrowed $884 million under that commitment, to
purchase an additional interest in GMAC. Treasury terminated the loan
on May 29, 2009, by exercising its option to exchange amounts due
under that loan for an equity interest in GMAC.
The Federal Reserve required GMAC to raise additional capital by
November 2009 in connection with SCAP. On May 21, 2009, Treasury
purchased $7.5 billion of mandatory convertible preferred shares from
GMAC and received warrants that Treasury exercised at closing for an
additional $375 million in mandatory convertible preferred shares,
which enabled GMAC to partially meet the SCAP requirements. On May 29,
2009, Treasury exercised its option to exchange its right to payment
of the $884 million loan it had made to GM for 35.4 percent of the
common membership interests in GMAC. Treasury officials told us that
exercising the option prevented the loan from becoming part of the GM
bankruptcy process and therefore, was a measure intended to protect
Treasury's investment. According to the Federal Reserve, the
exercising of the option strengthened GMAC's capital structure. In
November 2009, the Federal Reserve announced that GMAC did not satisfy
the SCAP requirements because it was unable to raise additional
capital in the private market and was expected to meet its SCAP
requirement by accessing the AIFP. On December 30, 2009, Treasury
purchased an additional $1.25 billion of mandatory convertible
preferred shares and received warrants that Treasury exercised at
closing for an additional $62.5 million in mandatory convertible
preferred shares, and further purchased $2.54 billion in GMAC trust
preferred securities and received warrants that Treasury exercised at
closing for an additional $127 million in GMAC trust preferred
securities, which were all investments under the AIFP.[Footnote 32]
Also, in December 2009, Treasury converted $3 billion of existing
mandatory convertible preferred shares into common stock, increasing
its equity stake from 35 percent to 56.3 percent of GMAC common stock.
As of March 31, 2010, Treasury owned $11.4 billion of GMAC mandatory
convertible preferred shares and almost $2.7 billion of its trust
preferred securities.
Treasury's equity stake in GM and Chrysler was an outgrowth of the $62
billion it loaned to the companies under AIFP before the companies
filed for bankruptcy in June and April 2009, respectively. Through the
bankruptcy process, these loans were restructured into a combination
of debt and equity ownership in the new companies. As a result,
Treasury owns 60.8 percent of the common equity and holds $2.1 billion
in preferred stock in "new GM." Also, Treasury owns 9.9 percent of
common equity in the "new" Chrysler. As a common shareholder, Treasury
has voting rights in both companies.
The Federal Reserve and Treasury Provided Funds to AIG in Exchange for
Preferred Stock and a Warrant:
The Federal Reserve and Treasury provided funds to AIG under a series
of transactions that ultimately resulted in the federal government
owning preferred stock and a warrant to purchase common stock. While
the Federal Reserve is not AIG's regulator or supervisor, FRBNY
assisted AIG by using its emergency authority under Section 13(3) of
the Federal Reserve Act to support the government's efforts to
stabilize systemically significant financial institutions. In the fall
of 2008, the Federal Reserve approved assistance to AIG by authorizing
FRBNY to create a facility to lend AIG up to $85 billion to address
its liquidity needs. As part of this agreement, AIG agreed to issue
convertible preferred stock to a trust to be created on behalf of the
U.S. Treasury (the AIG Credit Facility Trust). This was achieved
through the establishment of an independent trust to manage the U.S.
Treasury's beneficial interest in Series C preferred shares that, as
of April 2010, were convertible into approximately 79.9 percent of the
common stock of AIG that would be outstanding after the conversion of
the Series C preferred shares in full.[Footnote 33] While the Series C
preferred shares initially represented 79.9 percent of the voting
rights, after Treasury's November 2009 TARP investment, the amount of
Series C preferred shares voting rights to be acquired was reduced to
77.9 percent to account for the warrant to purchase 2 percent of the
common shares that Treasury received in connection with that TARP
investment. A June 2009 20 to 1 reverse stock split adjusted the
exercise price and number of shares associated with the Treasury
warrant, allowing warrants held by Treasury to become convertible into
0.1 percent common equity. Part of the outstanding debt was
restructured, when as noted above, Treasury agreed to purchase $40
billion of cumulative perpetual preferred stock (Series D) and
received a warrant under TARP. The proceeds were used to reduce the
debt owed to FRBNY by $40 billion. To address rating agencies'
concerns about AIG's debt-equity ratios, FRBNY and Treasury further
restructured AIG's assistance in April 2009. Treasury exchanged its
outstanding cumulative perpetual preferred stock (Series D) for
perpetual preferred stock (Series E), which is noncumulative and thus,
more closely resembles common equity than does the Series D preferred
stock. Treasury has also provided a contingent $29.8 billion Equity
Capital Facility to AIG whereby AIG issued to Treasury 300,000 shares
of fixed-rate, noncumulative perpetual preferred stock (Series F). As
AIG draws on the contingent capital facility, the liquidation
preference of those shares automatically increases by the amount
drawn. AIG also issued to Treasury a warrant to purchase up to 3,000
shares of AIG common stock. As of March 2010, the government has a
beneficial interest in the Series C preferred shares held by the AIG
trust, which is convertible into approximately 79.8 percent of the
ownership of the common shares and the trustees have voting rights
with respect to the Series C preferred shares.[Footnote 34]
Federal Government Has Involved Itself in the Corporate Governance of
the Companies Receiving Exceptional Amounts of Assistance, but Its
Involvement in the Companies Has Varied:
The government decided early on that in managing its ownership
interest in private companies receiving exceptional TARP assistance,
it would set up certain conditions in order to protect taxpayers,
promote financial stability, and encourage growth.[Footnote 35] As
noted in a recent SIGTARP report, these conditions include requiring
limits on or changes to the companies' governance structure such as
boards of directors, senior management, executive compensation plans,
lobbying and expense policies, dividend distributions, and internal
controls and submission of compliance reports.[Footnote 36] Treasury
also decided early on that it would not interfere with the daily
business of the companies that received exceptional assistance--that
is, it would not be running these companies. However, the level of its
involvement in the companies has varied depending on the role it has
assumed--investor, creditor, or conservator--as a result of the
assistance it has provided.
Government Involvement Has Prompted Changes to Some Boards of
Directors and Senior Management at Companies Receiving Exceptional
Assistance:
Both Treasury and the federal regulators directed that strong boards
of directors and qualified senior management be in place to guide the
companies' operations. Treasury designated new directors and requested
that some senior executives step down from their positions at some of
the companies. Using its authority as conservator, FHFA appointed new
members to the boards and senior management of the Enterprises. The
federal regulators requested reviews of the qualifications of senior
management at two of the companies.
Government Involvement Has Prompted Changes to Some Boards of
Directors:
A significant number of new directors have been elected to the
governing boards of all companies that received federal assistance. Of
the 92 directors currently serving on these boards, 73 were elected
since November 2008 (table 2). The board of Chrysler, for instance, is
made up entirely of new members, and more than half of current board
members of the other companies were designated after the government
provided assistance. Many of these new directors were nominated to
their respective boards because it was determined that a change in
leadership was required as a result of the financial crisis, while
others were designated by the government and other significant
shareholders as a result of their common share ownership. In addition,
federal regulators also asked the boards of directors at two of the
companies to assess their oversight and evaluate management depth. The
assessments were submitted to the regulators, and the board of
directors subsequently made changes to their composition.
Table 2: Changes in Boards of Directors since November 2008, as of
June 30, 2010:
Company: AIG;
Current number of board of directors[A]: 13;
New directors since November 2008: 8[B];
Government-designated directors: 2.
Company: Bank of America;
Current number of board of directors[A]: 13;
New directors since November 2008: 10[C];
Government-designated directors: none.
Company: Citigroup;
Current number of board of directors[A]: 15;
New directors since November 2008: 8;
Government-designated directors: none.
Company: GM;
Current number of board of directors[A]: 13;
New directors since November 2008: 13;
Government-designated directors: 10[D].
Company: Chrysler;
Current number of board of directors[A]: 9;
New directors since November 2008: 9;
Government-designated directors: 3.
Company: GMAC;
Current number of board of directors[A]: 9;
New directors since November 2008: 8;
Government-designated directors: 3.
Company: Fannie Mae;
Current number of board of directors[A]: 10;
New directors since November 2008: 8;
Government-designated directors: 10.
Company: Freddie Mac;
Current number of board of directors[A]: 10;
New directors since November 2008: 9;
Government-designated directors: 10.
Company: Total;
Current number of board of directors[A]: 92;
New directors since November 2008: 73;
Government-designated directors: 38.
Source: SIGTARP and GAO analysis of government's agreements and
company-provided data.
[A] Includes the Chairman of the Board and the CEO.
[B] AIG shareholders elected 10 directors since November 2008; one of
these directors was subsequently elected as Chairman of the Board. In
cooperation with AIG's board, the AIG trustees were actively involved
in the recruitment of five new directors.
[C] Bank of America added 10 directors since November 2008; one of
these directors was subsequently elected as Chairman of the Board. Due
to retirement or resignation 9 of the newly-elected directors remain.
[D] Of these designated directors, five were members of the "old GM"
board of directors.
[End of table]
The terms of Treasury's agreements with AIG and Bank of America
require the expansion of the board of directors of the company, if the
relevant company fails to pay the dividends to Treasury for several
quarters.[Footnote 37] Treasury would then have the right to designate
the directors to be elected to fill the newly created vacancies on the
board. While Bank of America made the required dividend payments prior
to exiting TARP, AIG did not pay its required dividends. As a result,
Treasury designated two new directors for election to AIG's board on
April 1, 2010. They were subsequently re-elected at the May 12, 2010,
annual shareholders meeting. The trust agreement between FRBNY and the
AIG trustees also provides the trustees with authority to vote the
shares held in trust to elect or remove the directors of the company.
In cooperation with AIG's board, the AIG trustees were actively
involved in the recruitment of six new directors who have experience
in corporate restructuring, retail branding, or financial services,
and believe that these new members will help see AIG through its
financial challenges. The board, in turn, has elected two additional
members to replace departing board members. The trustees stated that
they kept FRBNY and Treasury officials apprised of the recruitment
efforts.
Treasury's common equity investment in Citigroup, GM, Chrysler, and
GMAC also gives it voting rights on the election or removal of the
directors of these governing boards, among other matters.[Footnote 38]
In addition, the agreements with GM, Chrysler, and GMAC specifically
authorize Treasury to designate directors to these companies' boards.
* As authorized in a July 10, 2009, shareholder agreement with GM,
Treasury, as the majority shareholder, designated 10 directors who
were elected to GM's board, 5 of whom were former directors of "old
GM." Based on the smaller number of common shares they owned in the
company, two other GM shareholders--Canada GEN Investment Corporation
(owned by the Canadian government) and a Voluntary Employee
Beneficiary Association composed of GM's union retirees--each
designated one director.
* As authorized in a June 10, 2009, operating agreement with Chrysler,
Treasury designated three of nine directors, who in turn, collectively
elected an additional member to the board. Chrysler's other
shareholders designated the other five board members, for a total of
nine directors. Chrysler's Voluntary Employee Benefit Association
appointed one director, Fiat appointed three directors, and the
Canadian government appointed one director. Under the operating
agreement, the number of directors that Fiat has the right to
designate increases as its ownership in Chrysler increases, with a
concomitant decrease in the number of directors designated by Treasury.
* As authorized in a May 21, 2009, governance agreement with GMAC,
Treasury appointed two new directors to the board because it held 35
percent of the company's common stock. With the conversion of $3
billion in mandatory convertible preferred shares of GMAC on December
30, 2009, Treasury's common ownership interest increased to 56.3
percent, authorizing it to appoint two more directors. On May 26,
2010, Treasury appointed a new director to GMAC (Ally Financial Inc.,
formerly GMAC Financial Services). The fourth director appointment is
pending.
As conservator of the Enterprises, FHFA has appointed new members to
the boards of directors. The Director of FHFA has statutory authority
under HERA to appoint members of the board of directors for the
Enterprises based on certain criteria. FHFA's former director, at the
onset of conservatorships, decided to keep three preconservatorship
board members at each Enterprise in order to provide continuity and
chose the remaining directors for each board. Initially, on September
16, 2008, FHFA's former director appointed Philip A. Laskawy and John
A. Koskinen to serve as new nonexecutive chairmen of the boards of
directors of the Enterprises. On November 24, 2008, FHFA reconstituted
the boards of directors for the Enterprises and directed their
functions and authorities. FHFA's delegation of authority to the
directors became effective on December 18-19, 2008, when new board
members were appointed by FHFA. The directors exercise authority and
serve on behalf of the conservator, FHFA. The conservator retains the
authority to withdraw its delegations to the board and to management
at any time.
Government Involvement Has Prompted Changes to Senior Management:
In addition to changes in the boards of directors, the companies
receiving exceptional assistance have also made a few changes to their
senior management (table 3). Some of these decisions were made by the
companies' boards of directors without consultation with Treasury or
federal regulators. Specifically, Bank of America,[Footnote 39]
Citigroup, and GMAC executives stated that the decisions to replace
their chief executive officer (CEO) or chief financial officer (CFO)
were made by the companies' boards of directors without influence from
Treasury or federal regulators. However, federal regulators had
directed the banks to assess their senior management's qualifications.
After receiving government assistance, Bank of America's shareholders
approved an amendment to the corporation's bylaws prohibiting any
person from concurrently serving as both the company's chairman of the
board and CEO. As a result, the shareholders elected Walter Massey to
replace Kenneth Lewis as chairman of the board in April 2009.
Citigroup's board of directors also appointed a new CFO in March 2009
and again in July 2009.
Table 3: Selected Changes in Senior Management at Corporations
Receiving Exceptional Assistance, from September 18, 2008, through May
1, 2010:
Company: AIG;
New senior management:
* Edward Liddy replaced Robert Willumstad as CEO on September 18, 2008;
* Robert Benmosche replaced Edward Liddy as CEO on August 10, 2009.
Company: Bank of America;
New senior management:
* Shareholders approved an amendment to the corporation's bylaws to
require an independent chairman of the board on April 29, 2009;
Walter Massey replaced Kenneth Lewis as the new Chairman;
* Kenneth Lewis retired on December 31, 2009; Brian Moynihan became
CEO on January 1, 2010.
Company: Citigroup;
New senior management:
* Edward "Ned" Kelly became CFO on March 20, 2009; he was appointed
Vice Chairman on July 09, 2009;
* John Gerspach became CFO on July 09, 2009.
Company: GMAC;
New senior management:
* Michael Carpenter (member of the Board of Directors) replaced Alvaro
de Molina as CEO on November 16, 2009.
Company: GM;
New senior management:
* Frederick "Fritz" Henderson replaced Rick Wagoner as CEO on March
30, 2009;
* Edward Whitacre (also Chairman of the Board) replaced Fritz
Henderson as CEO on December 1, 2009;
* Chris Liddell replaced Ray Young as CFO on January 1, 2010.
Company: Chrysler;
New senior management:
* Sergio Marchionne (also CEO of Fiat) replaced Robert Nardelli as CEO
on June 10, 2009.
Company: Fannie Mae;
New senior management:
* Herbert M. Allison was put in place by FHFA as CEO, replacing Daniel
Mudd on September 7, 2008;
* Michael Williams was promoted to CEO from his chief operations
officer position on April 20, 2009, and replaced Herbert M. Allison,
moving to Treasury to head the TARP program.
Company: Freddie Mac;
New senior management:
* In September 2008, David Moffett was appointed to replace Richard
Syron and resigned as CEO and member of the board, effective on or
before March 13, 2009;
* John A. Koskinen was named interim CEO on March 11, 2009, replacing;
* Charles Haldeman became CEO on July 21, 2009.
Source: SIGTARP and GAO analysis of Treasury and company information.
Note: This is a list of selected changes and is not comprehensive.
Some of the companies experienced other changes that may not be
reflected in the table.
[End of table]
The AIG trustees stated that they and the Treasury officials
monitoring AIG's investments were kept apprised of the selection of
Robert Benmosche to replace Edward Liddy--who was put in place as
AIG's CEO on September 18, 2008, at the request of the government to
help rehabilitate the company and repay taxpayer funds--as the new CEO
in August 2009. Meeting minutes provided by the AIG trustees show that
the trustees and FRBNY and Treasury officials discussed the CEO search
process as it was occurring. The trustees and Treasury officials also
met with Benmosche before he was elected as AIG's new CEO. According
to the trustees, they encouraged the AIG board to select the most
qualified CEO, but that the final decision to elect Benmosche rested
with the AIG's board of directors.
GM's selection of new senior managers during the restructuring process
was directly influenced by Treasury. For example, in March 2009,
Treasury's Auto Team[Footnote 40] requested that Rick Wagoner, GM CEO
at the time, be replaced by Frederick "Fritz" Henderson, then the GM
president. According to a senior Treasury official, the Auto Team had
determined that the senior leadership in place at that time was
resistant to change. But, rather than appointing an individual outside
GM to serve as CEO, the team asked Fritz Henderson to serve as the CEO
to provide some continuity in the management team. Henderson resigned
on December 1, 2009, but the same Treasury official said that the Auto
Team did not request his removal. The GM board of directors named Ed
Whitacre to replace Henderson. After the partnership between Chrysler
and Fiat was completed, Sergio Marchionne (CEO of Fiat) was elected as
Chrysler's new CEO on June 10, 2009. Subsequent to his election, all
changes to Chrysler's senior management were made by new company
leadership without Treasury's involvement.
As the conservator, the FHFA director has the authority to appoint
senior level executives at both Enterprises. On September 7, 2008,
FHFA's former director appointed Herbert M. Allison, Jr. as President
and CEO for Fannie Mae and David M. Moffett as President and CEO of
Freddie Mac. Michael Williams was promoted to CEO for Fannie Mae from
his Chief Operation Officer position to replace Herbert M. Allison,
Jr., who became Treasury's Assistant Secretary for Financial
Stability. On March 11, 2009, FHFA appointed John A. Koskinen as
Freddie Mac's interim CEO and on July 21, 2009, Charles Haldeman was
appointed CEO of Freddie Mac.
The Government Placed Restrictions on Executive Compensation and Other
Activities:
As a condition of receiving assistance under TARP, recipients must
adhere to the executive compensation and other requirements
established under EESA and under Treasury regulations (see table 4).
In addition, Treasury's agreements with these companies included
provisions requiring the companies to adopt or maintain policies
regarding expenses and lobbying, report to Treasury on internal
controls, certify their compliance with agreement terms, restrict the
amount of executive compensation deductible for tax purposes, and
limit dividend payments, among others.[Footnote 41] In prior reports,
GAO and SIGTARP had reviewed Treasury's efforts in ascertaining the
companies' compliance with the key requirements in financial
assistance programs, such as CPP. GAO had recommended to Treasury that
it develop a process to ensure that companies participating in CPP
comply with all the CPP requirements, including those associated with
limitations on dividends and stock repurchase restrictions.[Footnote
42] Overtime, Treasury addressed these issues and established a
structure to better ensure compliance with the agreements.
Table 4: Key Requirements Imposed in Government Agreements:
Key requirements: Executive compensation;
AIG: [Check];
Citigroup: [Check];
Bank of America: [Check];
GMAC: [Check];
GM: [Check];
Chrysler: [Check].
Key requirements: Expense or luxury expenditures policies;
AIG: [Check];
Citigroup: [Check];
Bank of America: [Check];
GMAC: [Check];
GM: [Check];
Chrysler: [Check].
Key requirements: Lobbying policy;
AIG: [Check];
Citigroup: [Check];
Bank of America: [Check];
GMAC: [Check];
GM: [Check];
Chrysler: [Check].
Key requirements: Dividends and repurchases;
AIG: [Check];
Citigroup: [Check];
Bank of America: [Check];
GMAC: [Check];
GM: [Empty];
Chrysler: [Empty].
Key requirements: Internal controls and compliance reports;
AIG: [Check];
Citigroup: [Check];
Bank of America: [Check];
GMAC: [Check];
GM: [Check];
Chrysler: [Check].
Source: SIGTARP and GAO's analysis of government's agreements.
Note: The Enterprises are restricted similarly in the area of
corporate governance, but some of the restrictions were placed by FHFA
through its authority as the conservator and not through a contractual
agreement. The Enterprises have not received TARP funding; therefore,
TARP restrictions would not apply to them.
[End of table]
Restrictions on Executive Compensation:
Companies must adhere to the executive compensation and corporate
governance rules as a condition for receiving TARP assistance.
[Footnote 43] Treasury created the Office of the Special Master to,
among other things, review compensation payments and structures for
certain senior executive officers and most highly compensated
employees at each company receiving exceptional TARP assistance. The
Special Master is charged with determining whether these payments and
structures under the plans are inconsistent with the purposes of the
EESA executive compensation provisions and TARP or otherwise contrary
to the public interest.
On October 22, 2009, the Special Master issued his first
determinations with respect to compensation structures and payments
for the "top 25" employees of companies receiving exceptional TARP
assistance.[Footnote 44] In reviewing the payment proposals the
companies submitted for 2009, the Special Master noted that the
companies in some cases (1) requested excessive cash salaries, (2)
proposed issuance of stock that was immediately redeemable, (3) did
not sufficiently tie compensation to performance-based benchmarks, (4)
did not sufficiently restrict or limit financial "perks" or curb
excessive severance and executive retirement benefits, and (5) did not
make sufficient effort to fold guaranteed compensation contracts into
performance-based compensation. As a result, he rejected most of these
initial proposals and approved a modified set of compensation
structures and payments.
For the 2009 top 25 compensation structures and payments, table 5
shows that the Special Master required that AIG, Bank of America, and
Citigroup reduce cash compensation for their top executives by more
than 90 percent from the previous year. Although Bank of America
repurchased preferred shares on December 9, 2009, it agreed to remain
subject to the Special Master's determination for its top 25 employees
for 2009. Similarly, Citigroup repurchased its TIP trust preferred
shares on December 23, 2009, but also agreed to abide by all
determinations that had been issued for 2009, including the Special
Master's requirement that Citigroup reduce its cash compensation by
$244.9 million, or 96.4 percent from 2008. While Citigroup had the
largest percentage cash reduction, GMAC had the largest overall
reduction in total direct compensation (both cash and stock)--GMAC was
required to reduce its total direct compensation by $413.3 million, or
more than 85 percent of 2008 levels. Table 5 also shows that the
Special Master approved a compensation structure for the most highly
compensated executive at AIG that provides up to $10.5 million in
total direct compensation on an annual basis.
Table 5: Treasury Special Master's Initial Determinations for Top 25
Employees for 2009:
Company[A]: AIG;
Decrease in cash compensation from 2008: $34.4 million (90.8%);
Decrease in total direct compensation from 2008[B]: $28.4 million
(57.8%);
Highest total direct compensation for covered executives for 2009[C]:
$10.5 million.
Company[A]: Bank of America;
Decrease in cash compensation from 2008: $89.3 million (94.5);
Decrease in total direct compensation from 2008[B]: $149.2 million
(65.5);
Highest total direct compensation for covered executives for 2009[C]:
$9.9 million.
Company[A]: Citigroup;
Decrease in cash compensation from 2008: $244.9 million (96.4);
Decrease in total direct compensation from 2008[B]: $272 million
(69.7);
Highest total direct compensation for covered executives for 2009[C]:
$9.0 million.
Company[A]: GMAC;
Decrease in cash compensation from 2008: $10.4 million (50.2);
Decrease in total direct compensation from 2008[B]: $413.3 million
(85.6);
Highest total direct compensation for covered executives for 2009[C]:
$8.5 million.
Company[A]: GM;
Decrease in cash compensation from 2008: $3.9 million (31.0);
Decrease in total direct compensation from 2008[B]: $5.6 million
(24.7);
Highest total direct compensation for covered executives for 2009[C]:
$5.4 million.
Company[A]: Chrysler;
Decrease in cash compensation from 2008: $1.5 million (17.9);
Decrease in total direct compensation from 2008[B]: $2.1 million
(24.2);
Highest total direct compensation for covered executives for 2009[C]:
$2.2 million.
Source: SIGTARP and GAO analysis of Treasury data.
[A] Although Chrysler Financial also had to abide by the Special
Master's determination (under Treasury regulations it was considered a
recipient of "exceptional financial assistance" until May 2010 because
of TARP obligations of affiliates), we did not include it in the table
because it had repaid its direct TARP assistance in July 2009 and will
wind down its operations in the near term.
[B] Total direct compensation equals cash salary, stock salary, and
long-term restricted stock:
[C] Amounts reflected in the table do not include amounts the company
has asserted to be payable under legally binding employment contracts.
[End of table]
On December 11, 2009, the Special Master released his second round of
determinations on executive compensation packages for companies that
received exceptional TARP assistance. These determinations covered
compensation structures for the "next 75" most highly compensated
employees including executive officers who were not subject to the
October 22, 2009, decisions. Unlike the determination for the top 25
employees, which addressed the specific amounts paid to individuals,
the Special Master was required only to approve the compensation
structure for this second group of employees. The determination
covered four:
companies: AIG, Citigroup, GMAC, and GM.[Footnote 45] The Special
Master also rejected most of the submitted proposals and required that
they be modified to include the following features.
* Cash salaries generally no greater than $500,000, except in
exceptional cases, as specifically certified by the company's
independent compensation committee.
* Limits on cash compensation in most cases to 45 percent of total
compensation, with all other pay in company stock in order to align
executives' interests with long-term value creation and financial
stability.
* In most cases, at least 50 percent of each executive's pay be held
or deferred for at least 3 years, aligning the pay each executive
actually receives with the long-term value of the company.
* Payment of incentives only if the executive achieves objective
performance targets set by the company and reviewed by the Special
Master that align the executives' interests with those of shareholders
and taxpayers.
* Limits on total incentives for all covered executives to an
aggregate fixed pool that is based on a specified percentage of
eligible earnings or other metrics determined by the compensation
committee and reviewed by the Special Master.
* A "clawback" provision covering incentive payments to covered
executives that will take effect if the achievements on which the
payments are based do not hold up in the long term or if an executive
engages in misconduct.[Footnote 46]
On March 23, 2010, the Special Master released his determinations of
compensation structures and payments (for 2010) for the top 25
employees at the five remaining firms that received exceptional TARP
assistance from taxpayers: AIG, Chrysler, Chrysler Financial, GM, and
GMAC. Examples of his determinations include a 63 percent decrease in
cash compensation from 2009 levels for AIG, 45 percent decrease for
GMAC, and 7.5 percent decrease for GM executives. Chrysler's 2010 cash
salary rates for its executives remained at the same level as 2009.
Similar to the determination for 2009, the Special Master approved an
annual compensation structure for AIG's highest compensated executive
that provides up to $10.5 million in total direct compensation on an
annual basis. Overall, the 2010 determinations included the following
significant changes.
* On average, a 33 percent decrease in overall cash payments from 2009
levels for affected executives.
* On average, a 15 percent decrease in total compensation from 2009
levels for affected executives.
* Cash salaries frozen at $500,000 or less, unless good cause is
shown. Eighteen percent of executives subject to the March 2010
determinations (21 employees) were approved for cash salary rates
greater than $500,000.
HERA provides the Director of FHFA, in a conservatorship, the
authority to establish executive compensation parameters for both the
Enterprises. On December 24, 2009, the FHFA director approved Fannie
Mae and Freddie Mac 2010 compensation packages. The compensation
package for each chief executive officer was established at $6 million
with each package consisting of a base pay amount of $900,000,
deferred pay of $3.1 million, and a long-term incentive pay of $2
million. Twelve other Fannie Mae executives and 14 other Freddie Mac
executives are covered by the same system, but will receive lesser
amounts. The deferred pay will be paid quarterly in 2011 to executives
still at the Enterprises, and half will vary based on corporate
performance. The long-term incentive pay will vary according to
individual and corporate performance. Pursuant to the preferred stock
purchase agreements, FHFA consulted with the Special Master for TARP
Executive Compensation with regards to the 2010 compensation packages.
Compensation of the executives at the Enterprises is presented in the
form of cash payments. According to the Special Master and the FHFA
Acting Director, compensation in the form of stock was viewed as
ineffective because of the questionable value of the shares and the
potential incentives stock compensation might generate to take
excessive risk in hopes of making the stock valuable.
Restrictions on Other Company Activities:
In addition to executive compensation, Treasury also placed
requirements pertaining to other business activities, including
expense and luxury expenditures, lobbying, dividends and stock
repurchases, and internal controls and compliance. For example,
companies receiving exceptional assistance are required to implement
and maintain an expense policy that covers the use of corporate
aircraft, lease or acquisition of real estate, expenses related to
office or facility renovations or relocations, expenses related to
entertainment and holiday parties, hosting and sponsorship of
conferences and events, travel accommodations and expenditures, and
third-party consultations, among others. They are also required to
implement and maintain a lobbying policy that covers lobbying of U.S.
government officials, governmental ethics, and political activity.
[Footnote 47] Furthermore, until Treasury no longer owns company debt
or equity securities (e.g. common, preferred, and trust preferred
stock), the companies may not declare or pay any dividends; make any
distribution on the company's common stock; or redeem, purchase, or
acquire any of the company's equity securities. They are also
prohibited from redeeming or repurchasing any preferred or trust
preferred stock from any holder unless the company offers to
repurchase a ratable portion of the preferred shares then held by
Treasury on the same terms and conditions, with limited exceptions.
Lastly, the companies agreed to establish appropriate internal
controls with respect to compliance with each of the requirements in
agreement. They are required to report to Treasury on a quarterly
basis regarding the implementation of those controls and their
compliance with the requirements (including any instances of
noncompliance). They are also required to provide signed
certifications from a senior officer attesting that, to the best of
his or her knowledge, such report(s) are accurate.
The Government's Involvement in the Companies Varied Depending on Its
Role as Investor, Creditor, or Conservator:
Treasury states that it does not interfere with or exert control over
certain activities of companies that received exceptional assistance.
Nevertheless, SIGTARP and GAO found that the level of government
involvement in the companies varied among the recipients, depending on
whether Treasury and other federal entities are investors, creditors,
or conservators.
For example, Treasury's involvement in Bank of America, Citigroup, and
GMAC has been limited because, in exchange for its investments,
Treasury--as an investor--initially received preferred shares that did
not have voting rights except in certain limited circumstances, such
as amendments to the company charter, in the case of certain mergers,
and the election of directors to the companies' boards in the event
that dividends are not paid for several quarters. As of April 30,
2010, Treasury still held an ownership interest in Citigroup because
of the June 9, 2009, agreement that exchanged Treasury's preferred
shares for common shares.[Footnote 48] Treasury's initial investment
in GMAC also came in the form of preferred shares with limited voting
rights. As an up-front condition to its May 2009 investments in
Chrysler and GMAC, Treasury played a central role in establishing the
agreement reached between GMAC and Chrysler in April 2009 that made
retail and wholesale financing available to Chrysler's dealer network.
[Footnote 49] Specifically, Treasury provided GMAC with $7.5 billion
on May 21, 2009, of which $4 billion was to be used to support
Chrysler's dealers and consumers. According to Treasury officials,
this agreement was part of the initial restructuring of the companies
that was done under the auspices of the bankruptcy court, a situation
that is quite different from the Bank of America and Citigroup
investments.
Senior executive officers at Bank of America, Citigroup, and GMAC
agreed that Treasury was not involved in the daily operations of their
companies, but they noted that the federal regulators--the Federal
Reserve, FDIC, and OCC--had increased and intensified their bank
examinations. The executives explained that the closer scrutiny was
the result of the financial crisis, and was not directly tied to TARP
assistance. GMAC's senior officers further explained that the Federal
Reserve's involvement with their company had been due, in part, to its
obtaining bank holding company status upon conversion of Ally Bank
(formerly known as GMAC Bank) from an industrial loan company to a
commercial bank. As a result of the conversion, GMAC has had to work
closely with the Federal Reserve to establish policies, procedures,
and risk management practices to meet regulatory requirements of a
bank holding company.
As both an investor in and creditor of AIG, GM, and Chrysler, the
government has been more involved in some aspects of the companies'
operations than it has been with other companies. Treasury, FRBNY, and
the AIG trustees closely interact with senior management to discuss
restructuring efforts, liquidity, capital structure, asset sales,
staffing concerns, management quality, and overall strategic plans for
the company. Members of Treasury's AIG team meet regularly with AIG
management, attend board committee meetings, and provide input on
decisions that affect the direction of the company. Similarly, FRBNY
(as creditor) also attends board meetings as an observer, and FRBNY
and the AIG trustees (as overseers of the AIG Trust) receive various
AIG financial reports, review the quality of senior management, and
provide their opinions on company strategy and major business
decisions.
Treasury officials continue to monitor GM and Chrysler's strength
through monthly and quarterly financial, managerial, and operations-
related reports, and regular meetings with senior management, but
stated that they do not micro-manage the companies. However, the
government's stated "hands-off" approach towards managing its equity
interest applied only after GM and Chrysler exited bankruptcy. In the
period before and during the bankruptcies, Treasury played a
significant role in the companies' overall restructuring and certain
overarching business decisions. For example, Treasury issued viability
determinations in which it stated that GM needed to decrease its
number of brands and nameplates, and Chrysler needed to improve the
quality of its vehicles. Treasury's credit agreements with the
automakers established additional requirements for the companies. For
example, the companies are required to maintain their domestic
production at certain levels,[Footnote 50] abstain from acquiring or
leasing private passenger aircrafts, and provide quarterly reports on
internal controls.[Footnote 51] Treasury officials pointed out that
another reason for differences is that AIG, GM, and Chrysler are not
subject to the extensive federal regulations that Bank of America,
Citigroup, and GMAC, as bank holding companies, face. Moreover,
officials believe that the path to exit the investments in the case of
AIG, GM, Chrysler, and GMAC is more complex than in the case of Bank
of America and Citigroup.
Under HERA, FHFA has broad authority over the Enterprises' operations
while they are in conservatorship. The law authorizes FHFA to:
* appoint members of the board of directors for both Enterprises based
on certain criteria;
* prescribe appropriate regulations regarding the conduct of
conservatorship or receivership;
* immediately succeed to all powers, privileges, and assets of the
regulated Enterprises;
* operate the Enterprises;
* provide for the exercise of any functions of any stockholder,
officer, or director of the entity; and:
* take any actions that may be necessary to put the entity into a
solvent and operationally sound state and conserve and preserve the
assets of the entity.
According to FHFA officials, the agency has generally delegated
significant day-to-day responsibility for running the Enterprises to
the management teams that the agency has put in place for two reasons:
First, FHFA has limited staff resources. Second, the Enterprises are
better positioned with the expertise and infrastructure necessary to
carry out daily business activities, such as the routine purchases of
mortgages from lenders and securitization of such loans. At the same
time, FHFA maintains its fulltime examination and supervisory programs
for the Enterprises.
However, FHFA, as the Enterprises' conservator and regulator, has
instituted a number of requirements, policies, and practices that
involve them in the Enterprises. For example:
* Lobbying activities for both Enterprises have been dismantled and
prohibited, and FHFA directly reviews all the Enterprises' responses
to congressional members.
* Officials from FHFA's Office of Conservatorship Operations attend
the board meetings and senior executive meetings at both of the
Enterprises.
* FHFA reviews and approves performance measures for both of the
Enterprises. Each Enterprise has developed scorecards with criteria
that focus on safety and soundness issues while at the same time
aligning loan modification goals.
* FHFA reviews to confirm that they have no objections to SEC filings
for both of the Enterprises. The Division of Enterprise Regulation
within FHFA was established by a statutory mandate within HERA to
examine all functions of the Enterprises, with the exception of those
explicit accounting examinations that are handled by the Office of the
Chief Accountant.
* FHFA and Treasury work closely with the Enterprises to implement a
variety of programs that respond to the dramatic downturn in housing
finance markets. FHFA monitors the Enterprises' implementation of
Treasury's Home Affordable Modification Program (HAMP).[Footnote 52]
The Enterprises are acting as Treasury's agents in implementing the
program and ensuring that loan servicers comply with program
requirements, with Fannie Mae as the program's administrator and
Freddie Mac as Treasury's compliance agent for the program. FHFA has
also provided advice and resources to Treasury in designing the Making
Home Affordable Program. FHFA and Treasury stay in contact with the
Enterprises on a daily basis about HAMP. Executives for FHFA meet with
executives of both of the Enterprises on a weekly basis, and Treasury
executives meet with the Enterprises' leadership monthly.
Federal Government Continues to Take Steps to Monitor Its Investments
and Develop Exit Strategies:
As a shareholder with respect to TARP recipients, the government has
taken a variety of steps to monitor its investments in each company
receiving exceptional assistance, while at the same time considering
potential exit strategies. First, Treasury developed a set of guiding
principles that outline its approach for monitoring investments in the
companies. Second, OFS has hired asset managers to help monitor its
investments in certain institutions, namely Citigroup and Bank of
America.[Footnote 53] Third, Treasury's Auto Team (or other Treasury
investment professionals) manages investments in GM, Chrysler, and
GMAC made under AIFP.[Footnote 54] Fourth, the Federal Reserve and
FRBNY collaborate with Treasury in monitoring the Federal Reserve's
outstanding loan to and the government's equity investments in AIG.
Finally, because Treasury's ownership in the Enterprises is not part
of TARP, staff outside of OFS is responsible for monitoring these
investments. Given the varied forms of ownership interest and the
complexity of many of the investments, Treasury will likely have to
develop a unique exit strategy for each company. The divestment
process, however, is heavily dependent on company management
successfully implementing strategies discussed with their regulators
and Treasury. Further, external factors, such as investors demand for
purchasing securities of these companies receiving exceptional
assistance and broader market conditions, must be considered when
implementing exit strategies. Because most of the shares are expected
to either be sold in a public offering or be redeemed or repaid using
funds raised in the public markets, the financial markets must be
receptive to government efforts. A public offering of shares, such as
those considered for AIG subsidiaries American International Assurance
Company, Ltd and American Life Insurance Company[Footnote 55]
emphasizes the importance of market demand.[Footnote 56] Congressional
action will be needed to determine the long-term structures and exit
strategies for the Enterprises.
Federal Government Has Developed Guidance for Monitoring Its
Investment in Companies:
Treasury has stated that it is a reluctant shareholder in the private
companies it has assisted and that it wants to divest itself of its
interests as soon as is practicable. In managing these assets,
Treasury has developed the following guiding principles.
* Protect taxpayer investment and maximize overall investment returns
within competing constraints.
* Promote the stability of financial markets and the economy by
preventing disruptions.
* Bolster markets' confidence to increase private capital investment.
* Dispose of the investments as soon as it is practicable and in a
manner that minimizes the impact on financial markets and the economy.
Treasury Monitored Its Investments in Bank of America and Citigroup
with the Assistance of Asset Managers but the Decision of When to
Divest Was Not Always Treasury's:
Treasury relied on its staff and asset managers to monitor its
investments in Bank of America and Citigroup. Treasury officials said
that the asset managers value the investments including the preferred
securities and warrants. This valuation process includes tracking the
companies' financial condition on a daily basis using credit spreads,
bond prices, and other financial market data that are publicly
available. Treasury also uses a number of performance indicators,
including liquidity, capital levels, profit and loss, and operating
metrics to monitor their financial condition. The asset managers
report regularly to Treasury and provide scores that track the overall
credit quality of each company using publicly available information.
For the bank holding companies, Treasury monitors the values of its
investments, whereas, the Federal Reserve and other regulators monitor
the financial condition of these institutions as part of their role as
supervisory authorities.
While federal regulators routinely monitor the financial condition of
the financial institutions they supervise, this oversight is separate
from the monitoring Treasury engages in as an equity investor. This
supervisory monitoring is related to the regulatory authority of these
agencies and not to investments made under TARP. For example, bank
regulators had daily contact with Bank of America, Citigroup, and GMAC
as they oversee the banks activities and help ensure their safety and
soundness and monitor their financial condition. This daily
interaction involves discussions about the institutions' financial
condition and operations. Moreover, the Federal Reserve and OCC
officials said that they do not share supervisory information with
Treasury to avoid a potential conflict of interest.[Footnote 57]
Rather than requiring the development of an exit strategy by Treasury,
Bank of America and Citigroup, with the approval of their federal
banking regulators, repurchased preferred shares and trust preferred
shares from Treasury in December 2009. The holding companies and their
regulators share the duty of identifying the appropriate time to repay
the assistance provided through Treasury's purchase of preferred
equity. The regulators leveraged their onsite examiners to provide
information on the overall health of the banks and their efforts to
raise capital. In September 2009, Bank of America and Citigroup
initiated the process by informing the Federal Reserve that they
wanted to redeem their TARP funds. Federal Reserve officials told us
that in conjunction with FDIC and OCC, they reviewed Bank of America's
and Citigroup's capital positions and approved the requests using
primarily two criteria. First, the institutions had to meet the TARP
redemption requirements outlined under SCAP.[Footnote 58] Second, they
had to raise at least 50 percent of the redemption amount from private
capital markets. In December 2009, Bank of America and Citigroup
redeemed the preferred shares and the trust preferred shares,
respectively, that Treasury held.[Footnote 59]
In contrast to the process of unwinding trust preferred shares, in
developing a divestment strategy for the common stock held in
Citigroup, Treasury and its asset manager will evaluate market
conditions and time the sale in an attempt to maximize taxpayers
return. On December 17, 2009, Treasury announced a plan to sell its
Citigroup common stock over a 6-to 12-month time frame. Treasury plans
to use independent investment firms to assist in an orderly sale of
these shares. A recent example of the difficulties that could be
encountered occurred when Treasury announced plans to sell its
Citigroup common shares in December 2009 following share sales by Bank
of America and Wells Fargo. Market participants said at that time the
supply of bank shares in the market exceeded demand and thus lowered
prices. Selling the Citigroup shares in that market environment would
have recouped less money for the taxpayers, so Treasury postponed the
proposed sales. In March 2010, Treasury announced that it hired Morgan
Stanley as its sales agent to sell its shares under a pre-arranged
written trading plan. In April 2010, Treasury further announced that
Citigroup had filed the necessary documents with SEC covering
Treasury's plan sale. According to Treasury's press release, it began
selling common shares in the market in an orderly fashion under a
prearranged written trading plan with Morgan Stanley. Initially,
Treasury provided Morgan Stanley with discretionary authority to sell
up to 1.5 billion shares under certain parameters outlined in the
trading plan. However, Treasury said that it expects to provide Morgan
Stanley with authority to sell additional shares beyond this initial
amount. According to Treasury officials, Morgan Stanley is providing
on-going advice and ideas to Treasury regarding the disposition in
order to assist Treasury in meeting its objectives.
Treasury Is Monitoring Its Assets and Is Responsible for Developing an
Exit Strategy for Chrysler, GM, and GMAC, But the Strategy Depends on
a Variety of External Factors:
To manage its debt and equity investment in the automotive companies
that received assistance and determine when and how to exit, Treasury
monitors industry and broader economic data, as well as company-
specific financial metrics. The information is important both for
Treasury's management of its equity in the companies and the repayment
of the companies' term loans, because it enables Treasury to determine
how receptive the market will be to an equity sale--which affects the
price at which Treasury can sell--and how likely it is that the
companies will have sufficient liquidity to repay the loans. While the
companies in the other categories discussed in this section also rely
on the economic well-being of the country, consumer purchases of new
cars are highly correlated with the health of the overall economy,
making these broader measures especially relevant when discussing the
automotive industry. In addition to monitoring industry and broader
economic data, Treasury reviews financial, managerial, and operational
information that the companies are required to provide under the
credit and equity agreements with Treasury. Treasury will also be
monitoring, as needed, information beyond that which is delineated in
these agreements with Treasury, for example updates on current events
such as the sale of the Saab brand. The companies provide the
information, as needed, and the items specified in the agreements to
Treasury in monthly reporting packages.
Treasury officials said that they reviewed and analyzed the reports
they received to identify issues, such as actual market share that
lagged behind the projected market share, excess inventory, or other
signs that business might be declining. While Treasury has maintained
that it will not direct the companies to take specific actions, it
does notify the companies' management and the Secretary of the
Treasury if it sees any cause for concern in the financial reports,
such as actual market share lagging behind projected market share. In
addition to reviewing financial information, Treasury officials meet
quarterly in person with the companies' top management to discuss the
companies' progress against their own projections and Treasury's
projections. Important findings that result from the review of
financial reports or management meetings are conveyed to key staff in
OFS and other Treasury offices with responsibilities for managing TARP
investments. This level of access was the result of the various legal
and other agreements with the companies.
Treasury will determine when and how to divest itself of its equity
stake in GM, Chrysler, and GMAC. Treasury officials said that they
would consider indicators such as profitability and prospects, cash
flow, market share, and market conditions to determine the optimal
time and method of sale. However, these efforts are complicated by the
fact that Treasury shares ownership of GM and Chrysler with the
Canadian government and other third parties.[Footnote 60] Treasury has
yet to announce a formal exit plan but has publicly stated that a
public offering of its shares in GM is likely, and, in June 2010,
provided guidance on its role in the exploration of a possible initial
public offering of the common stock of GM. Treasury is still
considering both a public offering and a private sale of the common
stock it owns in Chrysler. The companies' term loans--the other
component of Treasury's investment--were scheduled to be repaid by
July 2015 for GM and by June 2017 for Chrysler. In April 2010, GM
repaid the remaining balance on the $6.7 billion loan from Treasury.
GM made this payment using funds that remained from the $30.1 billion
Treasury had provided in June 2009 to assist with its restructuring.
Our November 2009 report on the auto industry noted that the value of
GM and Chrysler would have to grow tremendously for Treasury to
approach breaking even on its investment, requiring that Treasury
temper any desire to exit as quickly as possible with the need to
maintain its equity stake long enough for the companies to demonstrate
sufficient financial progress. This report also included three
recommendations related to Treasury's approach to managing its assets
and divesting itself of its equity stake in Chrysler and GM. First, we
recommended that Treasury ensure that it has the expertise needed to
adequately monitor and divest the government's investment in Chrysler
and GM, and obtain needed expertise where gaps are identified.
Following this recommendation, Treasury hired two additional staff to
work on the Auto Team, which is composed of analysts dedicated solely
to monitoring Treasury's investments in the companies. Treasury also
hired Lazard LLC in May 2010 to act as an advisor on the disposition
of Treasury's investment in GM. Second, we recommended that Treasury
should report to Congress on its plans to assess and monitor the
companies' performance to help ensure that they are on track to repay
their loans and to return to profitability. In response to this
recommendation, Treasury stated that it already provides updates to
TARP oversight bodies including the Congressional Oversight Panel and
SIGTARP, concerning the status of its investments and its role in
monitoring the financial condition of Chrysler and GM and that it will
provide additional reports as circumstances warrant. Third, we
recommended that Treasury develop criteria for evaluating the optimal
method and timing for divesting the government's ownership stake in
Chrysler and GM. In response to this recommendation, Treasury stated
that members of the Auto Team are experienced in selling stakes in
private and public companies and are committed to maximizing taxpayer
returns on Treasury's investment. Treasury also stated that private
majority shareholders typically do not reveal their long-term exit
strategies in order to prevent other market participants from taking
advantage of such information. However, we note that because
Treasury's stakes in the companies represent billions of taxpayer
dollars, Treasury should balance the need for transparency about its
approach with the need to protect certain proprietary information, the
release of which could put the companies at a competitive disadvantage
or negatively affect Treasury's ability to recover the taxpayers'
investment. Moreover, Treasury could provide criteria for an exit
strategy without revealing the precise strategy.
Although GMAC is a bank holding company, it received assistance under
AIFP. While investment in GMAC was previously managed by Treasury's
Auto Team, the investment in GMAC is currently managed by other
Treasury officials. This team uses many of the same indicators that
are used for bank holding companies. For instance, to monitor GMAC's
condition, the Treasury's team views liquidity and capital levels at
the company and observes management's strategic decision making. Due
to it not being publicly traded and the challenges it faces in its
transition to a more traditional bank holding company model, Treasury
is more actively involved in managing and valuing its investment in
the company.
As of January 27, 2010, Treasury had not decided how it would divest
its GMAC preferred shares or recommended a time frame for the
divestment. The Federal Reserve and FDIC will be involved in the
approval process that would allow GMAC to exit TARP by repurchasing
its preferred shares. Treasury could recover its investment in GMAC
preferred shares through the same process used to exit its preferred
equity investments in Citigroup and Bank of America, but other options
exist. For example, Treasury could sell its preferred shares to a
third party, convert its preferred shares into common equity and sell
those shares, or hold the preferred shares to maturity. Throughout
2009, the company continued to experience significant losses as it
attempted to follow through on its strategies as a relatively new,
independent company. As we have seen, Treasury purchased $3.8 billion
in preferred shares ($2.54 billion of trust preferred shares and $1.25
billion of mandatory convertible preferred shares) from GMAC on
December 30, 2009, because the company could not raise capital in the
private markets to meet its SCAP requirements.
According to Treasury officials, for its common stock in GMAC,
Treasury is continuing to explore many options to exit its investment,
including an initial public offering or other alternatives. Divesting
itself of GMAC's common stock will be more difficult because the
shares are not currently publicly traded. Treasury could divest its
GMAC common stock through multiple methods, including by making a
public offering of its shares as company officials have suggested,
selling the stock to a buyer or buyers through a private sale, or
selling the stock back to the company as the company builds up capital.
The Federal Reserve, FRBNY, and Treasury Monitor AIG, But the Trustees
and Treasury Are To Determine Their Exit Strategy Once AIG Repays Its
Debt:
The Federal Reserve, FRBNY, and Treasury share responsibility for
managing the government's loan to and investment in AIG, but the
trustees and Treasury must develop exit strategies for divesting their
interest in AIG.[Footnote 61] The Federal Reserve and FRBNY have
different roles than they do in overseeing the bank holding companies,
because their relationship with AIG is not a supervisory one but a
relationship between creditor and borrower. The Federal Reserve and
FRBNY have acted to ensure that AIG maintains adequate capital levels
after it suffered a severe loss of capital in 2008 that compromised
its ability to sell certain businesses and maintain its primary
insurance subsidiaries as viable businesses. A strengthened balance
sheet, access to new capital, profitability, and lower risk levels are
important in tracking AIG's progress in returning to financial health.
In order to monitor this progress, the Federal Reserve, FRBNY, and
Treasury use various indicators, including liquidity, capital levels,
profit and loss, and credit ratings. Although each of these entities
monitors AIG independently, they share information on such indicators
as cash position, liquidity, regulatory reports, and other reports as
necessary. AIG is also responsible for regularly providing periodic
internal reports as specified in the FRBNY credit agreement and the
Treasury securities purchase agreements. According to the AIG
trustees, in monitoring AIG, they rely on information gathered by the
FRBNY, Treasury, and AIG, and their respective outside consultants, to
avoid, to the extent possible, redoing work that has already been done
at unnecessary cost. The AIG trustees are responsible for voting the
trust stock, working with AIG and its board of directors to ensure
corporate governance procedures are satisfactory, and developing a
divestiture plan for the sale or other disposition of the trust stock.
As we have seen, government assistance to AIG was provided by or is
held by FRBNY, the AIG Trust, and Treasury, which are independently
responsible for developing and implementing a divestment plan and must
coordinate their actions. Over time, more of the government's credit
exposure has been converted to equity that potentially poses greater
risk to the federal government. For example, Treasury purchased $40
billion of preferred shares and the proceeds were used to pay down the
balance of the FRBNY Revolving Credit Facility. More recently, in
December 2009, FRBNY accepted preferred equity interest in two AIG-
created special purpose vehicles that own American International
Assurance Company, Ltd and American Life Insurance Company--AIG's
leading foreign life insurance companies.[Footnote 62] In exchange,
FRBNY reduced the amount AIG owed on the Revolving Credit Facility by
$25 billion. Repayment of AIG's remaining $27 billion debt will
depend, in part, on the markets' willingness to finance the company
with new funds following its return to financial health.
According to officials at Treasury and the Federal Reserve, AIG must
repay the FRBNY credit facility before the AIG Trust can, as a
practical matter, divest its equity shares. As a result, the AIG
trustees said that they would begin developing an exit strategy once
AIG had repaid its debt to FRBNY, which is due no later than September
13, 2013. According to the AIG trustees and Treasury officials, while
Treasury and the AIG Trust are responsible for developing independent
exit strategies, they plan to coordinate their efforts. The Treasury
team that manages the AIG investment has been running scenarios of
possible exit strategies but has not decided which strategy to employ.
A number of options are being considered by the AIG trust for
divesting the Series C Preferred Stock, one of which is to convert the
Series C Preferred Stock to common stock and divest such common stock
through a public offering or a private sale. Treasury has multiple
options available for divesting its preferred shares, including having
AIG redeem Treasury's shares, converting the shares to common stock
that would subsequently be sold in a public offering, or selling the
shares to an institutional buyer or buyers in a private sale.
According to Treasury officials, Treasury is devoting significant
resources to planning the eventual exit strategy from its AIG
investments.
When AIG will be able to pay the government completely back for its
assistance is currently unknown because the federal government's
exposure to AIG is increasingly tied to the future health of AIG, its
restructuring efforts, and its ongoing performance as more debt is
exchanged for equity. Therefore, as we noted in our April 2010 report
on AIG, the government's ability to fully recoup the federal
assistance will be determined by the long-term health of AIG, the
company's success in selling businesses as it restructures, and other
market factors such as the performance of the insurance sectors and
the credit derivatives markets that are beyond the control of AIG or
the government.[Footnote 63] In March 2010, the Congressional Budget
Office estimated that the financial assistance to AIG may cost
Treasury as much as $36 billion compared to the $30 billion estimated
in September 2009 by Treasury. While AIG is making progress in
reducing the amount of debt that it owes, this is primarily due to the
restructuring of the composition of government assistance from debt to
equity.
FHFA and Treasury are Monitoring the Enterprises' Financial
Performance and Mission Achievement, but Any Exit Strategy Will Need
Congressional Action:
FHFA, in its roles as conservator, safety and soundness supervisor,
and housing mission regulator for the Enterprises, has adopted several
approaches to monitoring their financial performance and operations.
FHFA officials said that they have monitored the Enterprises'
financial performance in meeting the standards established in the
scorecards and will continue to do so. Further, FHFA monitors,
analyzes, and reports on the Enterprises' historical and projected
performance on a monthly basis. FHFA provides information based on
public and nonpublic management reports, and the fair value of net
assets is defined in accordance with generally accepted accounting
principles. In addition, FHFA officials said that the agency's safety
and soundness examiners are located at the Enterprises on a full-time
basis, and also monitor their financial performance, operations, and
compliance with laws and regulations through conducting examinations,
holding periodic meetings with officials, and reviewing financial
data, among others things.
FHFA is significantly involved as conservator with the Enterprises
when it comes to reporting financial information and requesting
funding from Treasury. FHFA puts together a quarterly request package
that is reviewed through several levels of management, and it is
ultimately signed off on by the Acting Director of FHFA before it is
sent to the Under Secretary for Domestic Finance at Treasury for
approval as the official request for funding.
Although the structure of the assistance to the Enterprises has
remained constant, the amount of assistance has steadily increased.
Treasury increased the initial funding commitment cap from $100
billion to $200 billion per Enterprise in February 2009, and the
decision was made in December 2009 to lift the caps to include losses
from 2010 through 2012. Treasury stated it raised the caps when it did
because its authority to purchase preferred shares under HERA expired
on December 31, 2009. While Treasury did not believe the Enterprises
would require the full $200 billion authorized per Enterprise prior to
December 31, 2009, it lifted the caps to reassure the markets that the
government would stand behind them going forward. At the end of first
quarter 2010, Treasury had purchased approximately $61.3 billion in
Freddie Mac preferred stock and $83.6 billion in Fannie Mae preferred
stock under the agreements.
While FHFA and Treasury are monitoring the Enterprises' financial
performance and mission achievement through a variety of means, exit
strategies for the Enterprises differ from those for the other
companies that have also received substantial government assistance.
Given the ongoing and significant financial deterioration of the
Enterprises--the Congressional Budget Office projected that the
operations of the Enterprises would have a total budgetary cost of
$389 billion over the next 10 years--FHFA and other federal officials
have said that the Enterprises will probably not be able to return to
their previous organizational structure as publicly-owned private
corporations with government sponsorship.[Footnote 64] Many observers
have stated that Congress will have to re-evaluate the roles,
structures, and performance of the Enterprises and to consider options
to facilitate mortgage financing while mitigating safety and soundness
and systemic risk concerns.
In a September 2009 report, we identified and analyzed several options
for Congress to consider in revising the Enterprises' long-term
structures.[Footnote 65] These options generally fall along a
continuum, with some overlap in key areas.
* Establishing the Enterprises as government corporations or agencies.
Under this option, the Enterprises would focus on purchasing
qualifying mortgages and issuing mortgage-backed securities but
eliminate their mortgage portfolios. FHA, which insures mortgages for
low-income and first-time borrowers, could assume additional
responsibilities for promoting homeownership for targeted groups.
* Reconstituting the Enterprises as for-profit corporations with
government sponsorship but placing additional restrictions on them.
While restoring the Enterprises to their previous status, this option
would add controls to minimize risk. For example, it would eliminate
or reduce mortgage portfolios, establish executive compensation
limits, or convert the Enterprises from shareholder-owned corporations
to associations owned by lenders.
* Privatize or terminate them. This option would abolish the
Enterprises in their current form and disperse mortgage lending and
risk management throughout the private sector. Some proposals involve
the establishment of a federal mortgage insurer to help protect
mortgage lenders against catastrophic mortgage losses.
While there is no consensus on what the next steps should be, whatever
actions Congress takes will have profound impacts on the structure of
the U.S. housing finance system. The Enterprises' still-dominant
position in housing finance is an important consideration for any
decision to establish a new structure.
Exit Strategy Likely to Depend on the Company Involved and Type of
Assistance Provided:
Finally, some of the companies receiving exceptional assistance have
taken a number of steps to repay the financial assistance owed the
government and to repurchase their preferred shares in light of the
significant restrictions put in place to encourage companies to begin
to repaying and exiting the programs as soon as practicable. At the
same time, the government continues to take steps to establish exit
strategies for the remaining companies and in some cases the federal
government's financial exposure to these companies may exist for years
before the assistance is fully repaid. In other cases, the federal
government may not recover all of the assistance provided. For
example, where the government has an equity interest, its ability to
recover what has been invested depends on a variety of external
factors that are beyond the control of the institution and the
government. Moreover, as of June 1, 2010, the Enterprises have
continued to borrow from Treasury. However, ongoing monitoring of the
institutions and the government's role continues to be important and
other additional insights may continue to emerge as aspects of the
crisis continue to evolve, including mortgage foreclosures and how
best to continue to stabilize housing markets.
The Government's Recent Involvement in Private Markets Provides
Important Lessons:
Assistance that the federal government provided in response to the
recent financial crisis highlights the challenges associated with
government intervention in private markets. Building on lessons
learned from the financial crises of the 1970s and 1980s, we
identified guiding principles at that time that help to serve as a
framework for evaluating large-scale federal assistance efforts and
provided guidelines for assisting failing companies, including the
government's actions during the most recent crisis.[Footnote 66] These
principles include (1) identifying and defining the problem, (2)
determining national interests and setting clear goals and objectives
that reflect them, and (3) protecting the government's interests. The
government generally adhered to these principles during this recent
crisis. But because of its sheer size and scope, the crisis presented
unique challenges and underscored a number of lessons to consider when
the government provides broad-based assistance. First, widespread
financial problems, such as those that occurred in this crisis,
require comprehensive, global actions that must be closely
coordinated. For example, Treasury's decision to provide capital
investments in financial institutions was driven in part by similar
actions in other countries. Second, the government's strategy for
managing its investments must include plans to mitigate perceived or
potential conflicts that arise from the government's newly acquired
role as shareholder or creditor and its existing role as regulator,
supervisor, or policymaker. Acquiring an ownership interest in private
companies can help protect taxpayers by enabling the government to
earn returns when it sells its shares and the institutions repurchase
their shares or redeem their warrants. But this scenario can also
create the potential for conflict if, for example, public policy goals
are at odds with the financial interests of the firm receiving
assistance. Further, the federal government's intervention in private
markets requires that those efforts be transparent and effectively
communicated so that citizens understand policy goals, public
expenditures, and expected results. The government's actions in the
recent crisis have highlighted the challenges associated with
achieving both. The government also needs to establish an adequate
oversight structure to help ensure accountability. Finally, the
government must take steps to mitigate the moral hazard that can arise
when it provides support to certain entities that it deems too big or
too systemically significant to fail. Such assistance may encourage
risk-taking behavior in other market participants by encouraging the
belief that the federal government will always be there to bail them
out.
The Government Generally Adhered to Key Principles When Providing
Federal Assistance during the Recent Financial Crisis:
Building on lessons learned from the financial crises of the 1970s and
1980s, we identified guiding principles to help serve as a framework
for evaluating large-scale federal assistance efforts and provided
guidelines for assisting failing companies.[Footnote 67]
* Identifying and defining the problem, including separating issues
that require immediate response from longer-term structure issues.
* Determining national interests and setting clear goals and
objectives that reflect them.
* Protecting the government's, and thus the taxpayer's, interests by
working to ensure not only that financial markets continue to function
effectively, but also that any investments made provide the highest
possible return. This includes requiring concessions from all parties,
placing controls over management, obtaining collateral when feasible,
and being compensated for risk.
During the recent financial crisis, the government faced a number of
challenges in adhering to these three principles--which we identified
during earlier government interventions in the private markets--when
it provided financial assistance to troubled companies. First, the
scope and rapid evolution of this crisis complicated the process of
identifying and defining the problems that needed to be addressed.
Unlike past crises that involved a single institution or industry, the
recent crisis involved problems across global financial markets,
multiple industries, and large, complex companies and financial
institutions. For example, problems in mortgage markets quickly spread
to other financial markets and ultimately to the broader economy. As
the problems spread and new ones emerged, the program goals Treasury
initially identified often seemed vague, overly broad, and conflicted.
Further, because the crisis affected many institutions and industries,
Treasury's initial responses to each affected institution often
appeared ad hoc and uneven, leading to questions about its strategic
focus and the transparency of its efforts.[Footnote 68]
During a financial crisis, identifying and defining problems involves
separating out those issues that require an immediate response from
structural challenges that will take longer to resolve. The most
recent crisis evolved as the crisis unfolded and required that the
government's approach change in tandem. Treasury created several new
programs under TARP to address immediate issues, working to stabilize
bank capital in order to spur lending and restart capital markets and
seeking ways to help homeowners facing foreclosure. While banks have
increased their capital levels and these companies have begun repaying
the government assistance, constructing relevant solutions to address
the foreclosure crisis has proved to be a long-term challenge. The
recently enacted financial services reform legislation requires that
systemically important financial companies be subject to enhanced
standards, including risk-based capital requirements, liquidity
requirements, and leverage limits that are stricter than the standards
applicable to companies that do not pose similar risk to financial
stability.[Footnote 69] Also, the law creates a procedure for the
orderly liquidation of financial companies if the Secretary of the
Treasury makes certain determinations including a determination that
the failure of the company and its resolution under otherwise
applicable law would have serious adverse effect on financial
stability.
Second, determining national interests and setting clear goals and
objectives that reflect them requires choosing whether a legislative
solution or other government intervention best serves the national
interest. During the recent crisis the federal government determined
that stabilizing financial markets, housing markets, and individual
market segments required intervening to support institutions it deemed
to be systemically significant. It also limited its intervention,
stating that it would act only as a reluctant shareholder and not
interfere in the day-to-day management decisions of any company, would
exercise only limited voting rights, and would ensure that the
assistance provided would not continue indefinitely. Further, Treasury
emphasized the importance of having strong boards of directors to
guide these companies, as discussed earlier. While the U.S. government
developed goals or principles for holding large equity interest in
private companies, its goals for managing its investment have at times
appeared to conflict with each other. Specifically, Treasury announced
that it intended to protect the taxpayer investment, maximize overall
investment returns and that it also intended to dispose of the
investments as soon it was practicable to do so. However, protecting
the taxpayer investment may be at odds with divesting as soon as
possible. For example, holding on to certain investments may bring
taxpayers a higher return than rapid divestment. Recognizing the
tension among these goals, Treasury has tried to balance these
competing interests but ultimately, it will have to decide which among
them is most important by evaluating the trade-offs.
Finally, protecting the government's and taxpayers' interest is an
essential objective when creating large-scale financial assistance
programs that put government funds and taxpayer dollars at risk of
loss. Generally consistent with this principle, the government took
four primary actions that were designed to minimize this risk.
* First, a priority was gaining concessions from others with a stake
in the outcome--for example, from management, labor, and creditors--in
order to ensure cooperation in securing a successful outcome. As we
have pointed out previously, as a condition of receiving federal
financial assistance, TARP recipients (AIG, Bank of America,
Citigroup, GMAC, Chrysler, and GM) had to agree to limits on executive
compensation and dividend payments, among other things. Moreover, GM
and Chrysler had to use their "best efforts" to reduce their
employees' compensation to levels similar to those at other major
automakers that build vehicles in the United States, which resulted in
concessions from the United Auto Workers on wages and work rules.
* Second, exerting control over management became necessary in some
cases--including approving financial and operating plans and new major
contracts--so that any restructuring plans would have realistic
objectives and hold management accountable for achieving results and
protecting taxpayer interests. For example, under AIFP, Chrysler and
GM were required to develop restructuring plans that outlined their
path to financial viability. The government initially rejected both
companies' plans as not being aggressive enough but approved revised
plans that included restructuring the companies through bankruptcy.
The Federal Reserve has also reviewed AIG's divestiture plan and
routinely monitors its progress and financial condition. Finally, as
conservator FHFA maintains substantial control over the business
activities of the Enterprises.
* Third, the government sought to ensure that it was in a first-lien
position with AIG, GM, and Chrysler, which received direct government
loans, in order to recoup the maximum amounts of taxpayer funds.
[Footnote 70] Treasury was not able to fully achieve this goal in the
Chrysler initial loans because the company had already pledged most of
its collateral, leaving little to secure the federal government's
loans. Treasury was however able to obtain a priority lien position
with respect to its loan to Chrysler post-restructuring. FRBNY was
able to obtain collateral against its loans to AIG.
* Fourth, the government sought compensation for risk through fees and
equity participation, routinely requiring dividends on the preferred
shares it purchased, charging fees and interest on the loans, and
acquiring preferred shares and warrants that provided equity. For
example, the government required Bank of America and Citigroup to
provide warrants to purchase either common stock or additional senior
debt instruments, such as preferred shares, under their financial
agreements. As a condition for providing a $85 billion revolving loan
commitment, for example, FRBNY initially required that AIG pay an
initial gross commitment fee of 2 percent (approximately $1.7 billion)
and interest on the outstanding balance, plus a fee on the unused
commitment, and in exchange, issue preferred shares (convertible to
approximately 79.8 percent of issued and outstanding shares of common
stock) into a trust for the benefit of the U.S. Treasury. Treasury's
contractual agreements with the Enterprises detail the terms of the
preferred shares, and require them to pay commitment fees, but
Treasury has not implemented these fees due to the Enterprises'
financial condition.
The Recent Crisis Presented Challenges and Underscored Additional
Principles When Providing Assistance:
The size and scope of the recent crisis were unprecedented and created
challenges that highlighted principles beyond those based upon the
lessons learned from the 1970s and 1980s. These include ensuring that
actions are strategic and coordinated both nationally and
internationally, addressing conflicts that arise from the government's
often competing roles and the likelihood of external influences,
ensuring transparency of and communicating effectively with the
Congress and the public, ensuring that a system of accountability
exists for actions taken, and taking measures to reduce moral hazard.
Challenges Faced by the Federal Government Stemmed From the Global
Nature of the Crisis Highlighting the Need for Coordination of Global
Actions during Times of Crisis:
Financial crises that are international in scope require
comprehensive, global actions and government interventions that must
be closely coordinated by the parties providing assistance--including
agencies of the U.S. government as well as foreign governments--to
help ensure that limited resources are used effectively. In prior
work, we reported that overseeing large financial conglomerates has
proven challenging, particularly in regulating their consolidated risk
management practices and identifying and mitigating the systemic risks
they pose.[Footnote 71] Although the activities of these large firms
often cross traditional sector boundaries, financial regulators under
the current U.S. regulatory system have not always had full authority
or sufficient tools and capabilities to adequately oversee the risks
that these financial institutions posed to themselves and other
institutions. We have laid out several elements that should be
included in a strengthened regulatory framework, including using
international coordination to address the interconnectedness of
institutions, operating cross borders, and helping ensure regulatory
consistency to reduce negative, competitive effects.[Footnote 72]
Initial actions during the crisis were taken and coordinated by the
Federal Reserve, Treasury, and FDIC, and some were made in conjunction
with similar actions by foreign governments. For example, the United
States and several foreign governments took a variety of actions
including providing liquidity and capital infusions and temporarily
banning the short selling of financial institution stock.
On September 6, 2008, initial government actions that were taken to
support the Enterprises were due to their deteriorating financial
condition, with worldwide debt and other financial obligations
totaling $5.4 trillion, and their default on those obligations would
have significantly disrupted the U.S. financial system and the global
system.
Shortly afterwards, as several other large financial firms came under
heavy pressure from creditors, counterparties, and customers, the
Federal Reserve used its authority under Section 13(3) to create
several facilities to support the financial system and institutions
that the government would not have been able to assist without
triggering this authority, prior to the creation of TARP.[Footnote 73]
The global nature of these companies added to the challenges for the
federal government and international community as it resolved these
issues. Concerted federal government attempts to find a buyer for the
company or to develop an industry solution for Lehman Brothers failed
to address its financing needs. According to Federal Reserve
officials, the company's available collateral was insufficient to
obtain a Federal Reserve secured loan of sufficient size to meet its
funding needs. In the case of AIG, after contacting the FRBNY on
September 12, 2008, the U.S. government took action because of its
relationships with other global financial institutions and coordinated
with regulators in a number of countries. According to AIG's 2008 10-
K, AIG had operations in more than 130 countries and conducted a
substantial portion of its general insurance business and a majority
of its life insurance business outside the United States. Because of
its global reach, the company was subject to a broad range of
regulatory and supervisory jurisdictions, making assisting the company
with its divestment plans extremely difficult. In light of AIG's
liquidity problems, AIG and its regulated subsidiaries were subject to
intense review, with multiple foreign regulators taking supervisory
actions against AIG. On September 16, 2008, the Federal Reserve and
Treasury determined that the company's financial and business assets
were adequate to secure an $85 billion line of credit, enough to avert
its imminent failure.
In October 2008, in an unprecedented display of coordination, six
central banks--the Federal Reserve, European Central Bank, Bank of
England, Swiss National Bank, Bank of Canada, and the central bank of
Sweden--acted together to cut short-term interest rates. In a
coordinated response, the Group of Seven finance ministers and central
bank governors announced comprehensive plans to stabilize their
banking systems--making a critical promise not to let systemically
important institutions fail by offering debt guarantees and capital
infusions, and increasing deposit insurance coverage.
Within 2 weeks of enacting TARP, consistent with similar actions by
several foreign governments and central banks, Treasury--through the
newly established Office of Financial Stability--announced that it
would make available $250 billion to purchase senior preferred shares
in a broad array of qualifying institutions to provide additional
capital that would help enable the U.S. institutions to continue
lending. Treasury provided $125 billion in capital purchases for nine
of the largest public financial institutions, including Bank of
America and Citigroup, considered by the federal banking regulators
and Treasury to be systemically significant to the operation of the
financial system. Together these nine financial institutions held
about 55 percent of the U.S. banking assets and had significant global
operations--including retail and wholesale banking, investment
banking, and custodial and processing services--requiring coordinated
action with a number of foreign governments.
Recent Federal Government Assistance to the Private Sector Highlights
the Need to Address Conflicts and Manage External Influences That Can
Arise from the Federal Government's At Times Competing Roles and
Policy Actions:
The government's ownership of common shares in private companies can
create various conflicts and competing goals that must be managed.
First, having an ownership interest in a private company gives the
government voting rights that can influence the firm's business
activities. However, Treasury has limited its voting rights to only
matters that directly pertain to its responsibility under EESA to
manage its investments in a manner that protects the taxpayer. For
example, Treasury used its voting rights elect directors to
Citigroup's board, approve the issuance of common shares, and a
reverse stock split. Likewise, Treasury has designated directors to
serve on Chrysler, GM, and GMAC's boards of directors.
Second, when the government is both investor and regulator for the
same company, federal agencies may find themselves in conflicting
roles. For instance, as noted in our April 2010 report on Chrysler and
GM pensions, until Treasury either sells or liquidates the equity it
acquired in each company, the government's role as shareholder creates
potential tensions with its roles as pension regulator and insurer.
[Footnote 74] This can be illustrated by the conflicting pressures
that would likely arise in two critical and interrelated scenarios:
(1) how to decide when to sell the government's shares of stock and
(2) how to respond to a decline in pension funding. If either or both
companies return to profitability then the government's multiple roles
are less likely to result in any perceived conflicts. However, if
either company had to be liquidated, the government would face these
perceived conflicts, because Treasury would have to make decisions
relating to the value of its investments and the Pension Benefit
Guaranty Corporation would need to make decisions related to the
companies' pensions.
Additionally, on December 11, 2009, the Internal Revenue Service, a
bureau within Treasury, issued a notice stating that under certain
circumstances selling stock that Treasury received under any TARP
program would not trigger an ownership change. As a result, when
Treasury sells such shares there is no change in ownership for tax
purposes, and the companies would not be required to make changes that
limit net operating losses after a change in ownership.[Footnote 75]
Some in Congress have argued that this action created an additional
subsidy to the financial institutions that received federal assistance
and by reducing potential revenue from taxes, it conflicts with
Treasury's duty to take actions that are in the best interest of the
taxpayers.[Footnote 76]
The assistance to the Enterprises illustrates the potential challenges
that can arise when the government uses its assistance to further its
public policy goals--in this case, managing support for the home
mortgage markets and efforts to preserve and conserve assets.
Specifically, Treasury is pursuing public policy goals to address
mortgage foreclosures through the Enterprises, but these actions could
also potentially negatively affect the Enterprises' financial
condition. For example, the Enterprises are participating in the
administration's foreclosure prevention programs by modifying the
terms of mortgages insured or owned by the Enterprises to prevent
avoidable foreclosures by lowering the borrower's monthly mortgage
payments. Treasury and FHFA have argued that such programs, by
improving borrowers' financial condition, will also benefit the
Enterprises, which have large holdings of delinquent mortgages.
However, the Enterprises have stated in their financial disclosures
that these programs may result in significant costs over time, such as
incentive payments made to servicers and borrowers over the life of
the modification and losses associated with borrower redefaults on
modified mortgages. Whether loan modifications would benefit both
borrowers and the Enterprises or further jeopardize the Enterprises'
financial condition is unknown and may depend in part on how the
program is implemented and overseen by FHFA and Treasury over time.
Overseeing the programs aimed at reducing costs to taxpayers remains a
challenge.
Being both a creditor and a shareholder in private companies creates
another conflict for the government. As a major creditor, the
government is more likely to be involved in an entity's operations
than it is if it is acting only as a shareholder, and operational
decisions that it imposes could affect returns on taxpayer
investments. For example, the government is currently both a creditor
and shareholder in Chrysler and was both a creditor and shareholder in
GM until GM repaid its $6.7 billion loan on April 20, 2010. Treasury
made initial loans to the companies to help them avert bankruptcy,
then provided financing that was converted to equity to help them
through the bankruptcy and restructuring process. As a creditor, the
government obtained rights to impose requirements on the companies'
business, including requiring them to produce a certain portion of
their total production in the United States. These requirements
established by Treasury as creditor, could negatively affect the
companies' stock price, which in turn could negatively affect the
return on investment earned by Treasury, as a shareholder.
To manage its different investments, the government has used different
strategies--direct management and a trust arrangement--which have
different implications for the government and the private companies
that may affect how easily it can address conflicts of interest.
Directly managing the investments offers two significant advantages.
First, it affords the government the greatest amount of control over
the investment. Second, having direct control over investments better
enables the government to manage them as a portfolio, as Treasury has
done under CPP. However, such a structure also has disadvantages. For
example, as we have seen, having the government both regulate a
company and hold an ownership interest in it can create a real or
perceived conflict of interest. A direct investment also requires that
the government have staff with the requisite skills to manage it. For
instance, as long as Treasury maintains direct control of its equity
investment in Citigroup, Chrysler, and GM, among others, it must have
staff or hire contractors with the necessary expertise in these
specific types of companies. In previous work, we raised concerns
about Treasury's ability to retain the needed expertise to assess the
financial condition of the auto companies and develop strategies to
divest the government's interests given the substantial decline in its
staff resources and lack of dedicated staff providing oversight of its
investments in the automakers.[Footnote 77]
In contrast, the government has used a trust arrangement to manage its
investment in AIG. Such an arrangement puts the government's interest
in the hands of an independent third party and helps to avoid
potential conflicts that could stem from the government having both
regulatory responsibilities for and ownership interests in a company.
A trust also helps mitigate perceptions that actions taken with
respect to TARP recipients are politically motivated or based on any
"inside information" received from the regulators. While Treasury has
interpreted TARP as prohibiting placing TARP assets in a trust
structure, FRBNY created a trust to manage the government's ownership
interest in AIG before TARP was established.[Footnote 78]
Finally, the varied and sometimes conflicting roles of the government
as an owner, creditor, regulator, and policymaker also potentially
subject private companies to greater government scrutiny and pressure
than they might have otherwise experienced. In particular, the
government's investments in these companies increases the level of
government and public oversight and scrutiny these companies receive,
as policymakers, elected officials, and regulators work to ensure that
taxpayer interests are protected. The companies may also be subject to
pressure from government officials to reconsider or alter business
decisions that affect the companies' bottom lines. For example,
Chrysler and GM faced pressure to reinstate many of the auto
dealerships that had been slated for closure.[Footnote 79]
Government involvement could come from many different sources and in
many different forms, including legislative actions and direct
communications. To gauge the nature and scope of external influences,
we interviewed officials from the six companies that received
exceptional financial assistance and reviewed legislation that would
place requirements or restrictions on these companies.[Footnote 80] We
also reviewed letters sent to Chrysler and GM officials from
legislative and executive branch officials and selected state
government officials. We found that the issues receiving the most
congressional scrutiny were executive compensation, transparency and
accountability, mortgage modifications, and closures of automobile
dealerships.
* Executive compensation. We identified 24 bills that members of
Congress introduced in calendar years 2008 and 2009 involving
restrictions on executive compensation or additional taxation of
executive compensation at companies receiving TARP assistance. Also,
AIG officials stated that the majority of congressional contacts they
received related to executive compensation and bonuses.
* Transparency and accountability. We identified 16 bills introduced
in calendar years 2008 and 2009 that would require the companies to
take steps that would result in increased transparency or
accountability, such as reporting on how TARP funds were used. For
example, the TARP Transparency Reporting Act would require TARP
recipients to report to Treasury on their use of TARP funds.[Footnote
81]
* Mortgage modifications. Officials from the companies whose business
includes mortgage financing told us that one of the most common
subjects of congressional correspondence was requests for
modifications to specific constituents' mortgages.
* Automobile dealerships. About 60 percent of the bills we identified
that specifically targeted the auto industry sought to curtail or
prevent the closure of automobile dealerships. One of these bills,
which established an arbitration process for dealerships that want to
appeal a closure decision, became public law.[Footnote 82]
Furthermore, according to letters from members of Congress that
Chrysler and GM provided to us, dealership closure was the most common
subject. The letters usually either asked for an explanation of how
the closure decisions had been made or for reconsideration of the
closure of a particular dealership.[Footnote 83] (See appendix III for
more information on the nature and scope of communication with the
auto industry.)
Company officials we interviewed told us that the level of government
involvement--from requests for appearances at congressional hearings
to letters from elected officials--had increased since their companies
had requested and received financial assistance from the government.
Company officials told us that this involvement was to be expected and
did not cause them to make decisions that were in conflict with their
respective companies' best interests. However, these officials also
stated that addressing the government's involvement, such as
responding to letters or requests for information, required increased
company resources.
Recent Federal Intervention into Private Markets Illustrates the Need
for Transparency and an Effective Communication Strategy:
Federal government intervention in private markets not only requires
that these efforts be transparent but also requires that the action
include a strategy to help ensure open and effective communication
with stakeholders, including Congress and taxpayers. The government's
actions in the recent crisis have highlighted the challenges
associated with achieving both of these objectives. Throughout the
crisis, Congress and the public often stated that the government
actions appeared vague, overly broad, and conflicted. For example,
Treasury's initial response to the crisis focused on providing
assistance to individual institutions and appeared ad hoc and uneven,
leading to questions about its strategic focus and the transparency of
its efforts.[Footnote 84] Specifically, questions about the
government's decision to assist Bear Stearns and AIG, but not Lehman
Brothers, continued months after the decisions were made. Moreover,
while TARP was created to provide a comprehensive approach to
addressing the unfolding crisis, Treasury's decision to change the
focus of the program weeks after the passage of EESA from purchasing
mortgage-backed securities and whole loans to injecting capital into
financial institutions caught many in Congress, the markets, and the
public by surprise and adversely affected these parties understanding
of the program's goals and priorities which may have undermined the
initial effectiveness of the program.
In general, transparency means more than simply reporting available
information to interested parties, it involves such things as
providing clearly articulated guidelines, decision points, and
feedback mechanisms to help ensure an adequate understanding of the
matters at hand. For the recent actions, transparency would include
providing information on how the companies were to be monitored and
the results of those activities. However, when considering any federal
intervention, part of this decision-making process includes
identifying what information can and should be made public and
balancing concerns about the public's "need to know" against
disclosing proprietary information in a competitive market. For
example, while disclosing detailed information about Treasury's plans
to sell shares of company stock may not be appropriate, the government
should communicate its purpose in intervening in the private market
and approach for evaluating the success of any federal action.
Specifically, making information available to the public on the
purpose of federal intervention and the decision to intervene could
help ensure that the public understands the implications of not
intervening and the expected results from the government's actions.
While EESA required Treasury to report information about TARP
activities, Treasury's failure to adequately communicate the rationale
for its actions and decisions early on caused confusion about the
motivations behind these actions and decisions and long plagued the
program. Treasury's lack of an effective communication strategy was,
in part, the result of the unfolding nature of the crisis but even so,
the nature of the unfolding crisis was not effectively communicated.
For example, the multifaceted nature of the crisis resulted in
numerous TARP programs to address specific problems in the markets;
however, Treasury did not establish or adequately explain some of the
programs until after assistance had already been announced.
Specifically, Treasury announced assistance to Citigroup, Bank of
America, and AIG before TIP and SSFI--now called the AIG Assistance
Program--were established and announced in January 2009 and November
2008, respectively. Since the inception of TARP, we have recommended
that Treasury take a number of actions aimed at developing a coherent
communication strategy for TARP.[Footnote 85] In our previous reports,
we have recommended that Treasury develop a communication strategy
that included building an understanding and support for the various
components of the TARP program.[Footnote 86] While the actions we
suggested were intended to address challenges associated with TARP--
such as hiring a communications officer, integrating communications
into TARP operations, scheduling regular and ongoing contact with
congressional committees and members, holding town hall meetings with
the public across the country, establishing a counsel of advisors, and
leveraging available technology--most of these suggestions would be
applicable when considering a communication strategy for any federal
intervention. An effective communication strategy is especially
important during rapidly changing market events and could help the
public understand the policy goals that the government was trying to
achieve and its rationale for spending public funds.
Strong System for Accountability Necessary to Help Ensure Taxpayer
Funds Are Used Appropriately:
When considering government assistance to private companies, providing
accountability for taxpayer funds is imperative. The absence of a
system for accountability increases the risk that the interests of the
government and taxpayers may not be adequately protected and that the
programs' objectives may not be achieved efficiently and effectively.
We first highlighted the importance of accountability in implementing
TARP in December 2008, which has been reiterated by Congressional
Oversight Panel and SIGTARP. Specifically, we noted the importance of
establishing oversight structures, including monitoring and other
internal controls that can help prevent and detect fraud.[Footnote 87]
Federal action in the midst of a crisis will undoubtedly require that
actions be taken at the same time that programs are being established.
In December 2008, we reported that a robust oversight system with
internal controls specifically designed to deal with the unique and
complex aspects of TARP would be key to helping OFS management achieve
the desired results.[Footnote 88] For example, OFS faced the challenge
that it needed to develop a comprehensive system of internal controls
at the same time that it was reacting quickly to changing financial
market events and establishing the program. One area that took time to
develop was establishing a plan to help ensure that participating
institutions adhered to program requirements or to monitor companies'
compliance with certain requirements, such as executive compensation
and dividend restrictions. Therefore, when making any decision to
intervene in private markets, Congress and the government must take
efforts to provide an appropriate oversight structure.
Providing Federal Assistance to the Private Sector Creates Moral
Hazard, which Has to be Mitigated:
While the federal government's assistance may have helped to contain a
more severe crisis by mitigating potential adverse systemic effects,
it also created moral hazard--that is, it may encourage market
participants to expect similar emergency actions, thus weakening
private or market-based incentives to properly manage risks and
creating the perception that some firms are too big to fail.
We recently reported that while assisting systemically significant
failing institutions may have helped to contain the crisis by
stabilizing these institutions and limiting potentially systemic
problems, it also may have exacerbated moral hazard.[Footnote 89]
According to regulators and market observers, such assistance may
weaken the incentives for large uninsured depositors, creditors, and
investors to discipline large complex firms that are deemed too big to
fail. In March 2009, Federal Reserve Chairman Bernanke told the
Council on Foreign Relations that market perceptions that a particular
institution is considered too big to fail has many undesirable
effects. He explained that such perceptions reduce market discipline,
encourage excessive risk-taking by the firm, and provide artificial
incentives for firms to grow. He also noted these beliefs do not
create a level playing field, because smaller firms may not be
regarded as having implicit government support. Similarly, others have
noted how such perceptions may encourage risk-taking. For example,
some large financial institutions may be given access to the credit
markets at favorable terms without consideration of their risk profile.
Before a financial crisis, the financial regulatory framework could
serve an important role in restricting the extent to which
institutions engage in excessive risk-taking activities resulting from
weakened market discipline. For instance, regulators can take pre-
emptive steps to mitigate moral hazard by taking the necessary
regulatory actions to help ensure that companies have adequate systems
in place to monitor and manage risk taking. Any regulatory actions
that the government takes to help ensure strong risk management
systems at companies of all sizes would help to lessen the need for
government intervention.
In general, mitigating moral hazard requires ensuring that any
government assistance includes terms that make it a last resort and
undesirable except in the most dire circumstances and specifying when
the government assistance will end. During the recent crisis, the
government has included provisions that attached such costs to the
provision of assistance, including limiting executive compensation,
requiring dividends, and acquiring an ownership interest. Further,
while uncertainty about the duration of the crisis makes it difficult
to specify timetables for phasing out assistance and investments, it
is important to provide a credible "exit strategy" to prevent further
disruption in the financial markets when withdrawing government
guarantees. While Treasury has articulated its exit strategy for some
of the companies we reviewed, the government's plans for divesting
itself of investments in AIG and the Enterprises are less clear.
Because the government's involvement in the private sector creates
moral hazard and perpetuates the belief that some institutions are too
big or interconnected to fail, critics expressed concern that it can
encourage risk-taking.
While the debate about whether the government should intervene in
private markets to avert a systemic crisis continues, only the future
will reveal whether the government will again be faced with the
prospect of having to intervene in private markets to avert a systemic
crisis. As with other past crises, experience from the most recent
crisis offers additional insights to guide government action, should
it ever be warranted. Specifically, the government could protect the
taxpayer's interest in any crisis by not only continuing to follow the
principles that we have discussed earlier (i.e., identifying and
defining the problem, determining a national interest and setting
clear goals, and protecting the government's and taxpayer's interests)
but also by adhering to five additional principles based on the
federal government's experience with the current crisis.
* Develop a strategic and coordinated approach when comprehensive and
global governmental action is required.
* Take actions to ensure the government has a strategy for managing
any investments resulting from its intervention in order to help
mitigate perceived or potential conflicts and manage external
influence.
* Ensure that actions are transparent and effectively communicated to
help ensure that the public understands what actions are being taken
and for what purpose.
* Establish an adequate oversight structure to ensure accountability.
* Take steps to mitigate moral hazard by not only ensuring that
regulatory and market-based structures limit risk taking before a
crisis occurs, but also by creating strong disincentives to seek
federal assistance through utilization of stringent requirements.
Agency Comments and Our Evaluation:
We provided a draft of this report to FHFA, the Federal Reserve, OFS,
OCC, and FDIC for their review and comment. In addition, we provided
excerpts of the draft of this report to the companies receiving
exceptional assistance--AIG, AIG Trust, Bank of America, Chrysler,
Citigroup, and GMAC--to help ensure the accuracy of our report.
Treasury and FHFA provided us with written comments which are
reprinted in appendices IV and V, respectively. Treasury agreed with
the report's overall findings. In its letter, Treasury acknowledged
that the additional guiding principles for providing large-scale
federal assistance should be considered in any future broad-based
government assistance and agreed to weigh these new principles going
forward. FHFA, in its letter, acknowledged, as we pointed out in our
report, the financial assistance provided to the Enterprises
illustrates the potential challenges that can arise when the
government uses its assistance to further its public policy goals,
particularly the Enterprises' participation in the administration's
loan modification efforts, such as HAMP. However, the letter noted
that the loan modification efforts are central to the goals of the
conservatorships and EESA. The letter further explained that efforts
like HAMP may help to mitigate the credit losses of the Enterprises
because a loan modification is often a lower cost resolution to a
delinquent mortgage than foreclosure.
The Federal Reserve, FHFA, and Treasury provided us with technical
comments that we incorporated as appropriate. In addition, AIG, the
AIG Trust, Bank of America, Chrysler, Citigroup, and GMAC also
provided us with technical comments that we incorporated as
appropriate.
We are sending copies of this report to interested congressional
committees and members. In addition, we are sending copies FHFA, the
Federal Reserve, Treasury, OCC, FDIC, financial industry participants,
and other interested parties. The report also is available at no
charge on the GAO Web site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact Orice Williams Brown at (202) 512-8678 or williamso@gao.gov.
Contact points for GAO's Office of Congressional Relations and Public
Affairs may be found on the last page of this report. Staff who made
major contributions to this report are listed in appendix VI.
Signed by:
Gene L. Dodaro:
Acting Comptroller General of the United States:
List of Committees:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Thad Cochran:
Vice Chairman:
Committee on Appropriations:
United States Senate:
The Honorable Christopher J. Dodd:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Kent Conrad:
Chairman:
The Honorable Judd Gregg:
Ranking Member:
Committee on the Budget:
United States Senate:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable David R. Obey:
Chairman:
The Honorable Jerry Lewis:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable John M. Spratt, Jr.
Chairman:
The Honorable Paul Ryan:
Ranking Member:
Committee on the Budget:
House of Representatives:
The Honorable Barney Frank:
Chairman:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Sander M. Levin:
Acting Chairman:
The Honorable Dave Camp:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
The objectives of our report were to (1) describe how and why the
government obtained an ownership interest in the companies, (2)
evaluate the extent of government involvement in companies receiving
exceptional assistance, (3) describe the government's monitoring of
the companies' financial viability and exit strategies, and (4)
discuss the implications of the government's ongoing involvement in
the companies. The report focused on companies receiving exceptional
assistance from the federal government, including American Insurance
Group (AIG), Bank of America Corporation (Bank of America), Chrysler
Group LLC (Chrysler), Citigroup, Inc. (Citigroup), General Motors
Company (GM), and GMAC, Inc. (GMAC), as well as its involvement in
Fannie Mae and Freddie Mac (Enterprises).
To address the first objective, we reviewed the monthly transactions
reports produced Department of Treasury's (Treasury) Office of
Financial Stability (OFS) that lists the structure of federal
assistance provided by Treasury to the companies considered receiving
exceptional assistance (AIG, Bank of America, Chrysler, Citigroup, and
GM) and documentation from Federal Housing Finance Agency (FHFA) to
determine the financing structure for the Enterprises. In addition, we
reviewed the Board of Governors of the Federal Reserve System's
(Federal Reserve) "Factors Affecting Reserve Balances" H.4.1 documents
to determine the assistance provided by Federal Reserve Bank of New
York (FRBNY) to AIG. We reviewed the contractual agreements between
the government and the companies that governed the assistance. In
addition, we reviewed selected Securities Exchange Commission (SEC)
filings, Treasury's Section 105 (a) reports, and other GAO reports on
the Troubled Asset Relief Program (TARP).
To address the second objective, we reviewed the Emergency Economic
Stabilization Act of 2008 (EESA) and the Housing and Economic Recovery
Act of 2008 (HERA) to understand the legal framework for any potential
government involvement in the companies receiving exceptional
assistance, including the establishment of the conservatorship and the
contractual agreements established between the government and the
companies. We reviewed the credit agreements, securities purchase
agreements; assets purchase agreements, and master agreements. To
understand the trust structure established for AIG we reviewed the AIG
Credit Trust Facility agreement between FRBNY and the AIG trustees. We
conducted interviews with officials and staff from the Federal Reserve
Board, FHFA, FRBNY, Federal Reserve Bank of Chicago, (FRB-Chicago),
Federal Reserve Bank of Richmond, (FRB-Richmond), OFS, the Office of
the Comptroller of the Currency (OCC), Federal Deposit Insurance
Corporation (FDIC), and SEC. In addition, we interviewed senior
management--primarily the Chief Executive Officers and the Chief
Financial Officers--for most of the companies in our study, including
the Enterprises, and interviewed the AIG trustees to understand their
role in the governance of AIG.
To address the third objective on evaluating the government's
monitoring of the companies' financial viability and exit strategies,
we interviewed officials from FDIC, Federal Reserve, FHFA, FRBNY, FRB-
Chicago, FRB-Richmond, OCC, and OFS. We also interviewed the asset
managers who are responsible for monitoring and valuing the equity
shares held by Treasury under the Capital Purchase Program, the
Targeted Investment Program and the Asset Guarantee Program. We
reviewed Treasury documents, such as asset manager reports, TARP
transaction reports, and press releases; Treasury testimonies; and
press releases from the companies. We also reviewed the contractual
agreements between the government and the companies including credit
agreements, securities purchase agreements, asset purchase agreements,
and master agreements in order to understand the companies'
responsibilities in reporting financial information and the
government's responsibility for monitoring and divesting its
interests. Finally, we reviewed a Congressional Oversight Panel report
relating to Treasury's approach on exiting TARP and unwinding its
impact on the financial markets.
To address the fourth objective relating to the implications of the
government's ongoing involvement in the companies, we reviewed prior
GAO work on principles for providing large-scale government assistance
and assessed the degree to which the government's activities under
TARP adhered to these principles. To identify actions the government
is taking with the potential to influence the companies' business
decisions, we reviewed legislation that would affect TARP recipients
and determined what, if any action the legislation would require the
companies to take. To identify the nature and scope of contacts TARP
recipients received from executive branch agencies, members of
Congress, and state government officials, we interviewed government
relations staff at AIG, Bank of America, Chrysler, Citigroup, GM, and
GMAC. These interviews also provided us with information on the extent
of government involvement and influence in the companies' business
operations. For Chrysler and GM, we obtained 277 letters that the
companies received from members of Congress, which was the number of
letters the companies received during calendar year 2009 and kept on
file. We reviewed each of the letters to determine their topic and
whether they sought to influence the companies' business decisions. We
also obtained more than 2,300 e-mails that certain senior executives
of Chrysler and GM received from congressional and state government
officials during calendar year 2009, including 1,221 from Chrysler and
1,098 from GM.[Footnote 90] Due to the large number of these e-mails,
we reviewed a random probability sample of 251 from the 2,319 e-mails
the companies provided us with to create estimates about the
population of all the e-mails. Because we followed a probability
procedure based on random selections, our sample is only one of a
large number of samples that we might have drawn. Since each sample
could have provided different estimates, we express our confidence in
the precision of our particular sample's results as having a margin of
error at the 95 percent confidence level of plus or minus 8 percentage
points or less. This is the interval that would contain the actual
population value for 95 percent of the samples we could have drawn.
With this probability sample, each member of the study population had
a nonzero probability of being included, and that probability could be
computed for any member. Finally, we obtained 264 e-mails that certain
senior executives at the companies received from White House and
Treasury officials in calendar year 2009. After removing e-mails that
were out of scope and duplicates, we were left with 109 e-mails,
including 89 sent to Chrysler and 20 sent to GM. We reviewed these e-
mails to determine their purpose and topic and whether they sought to
influence the companies' business decisions.
We provided a draft of this report to FHFA, the Federal Reserve, OFS,
OCC, and FDIC for their review and comment. In addition, we provided
excerpts of the draft of this report to the companies receiving
exceptional assistance--AIG, AIG Trust, Bank of America, Chrysler,
Citigroup, and GMAC--to help ensure the accuracy of our report.
We conducted this performance audit from August 2009 to August 2010 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provided a reasonable basis for our
findings and conclusions based on our audit objectives.
[End of section]
Appendix II Government Assistance and Outstanding Balances of the
Companies:
Since the fall of 2008, a number of large financial institutions and
companies have received more than $447 billion in financial assistance
leaving the government with a significant ownership interest in a
number of companies. The government provided assistance or funds to
American International Group (AIG); Bank of America Corporation (Bank
of America); Chrysler; Citigroup, Inc (Citigroup); Fannie Mae and
Freddie Mac (Enterprises); General Motors (GM); and GMAC, Inc (GMAC).
As of March 31, 2010, the government owned substantial amounts of
preferred or common shares in seven companies--AIG, Chrysler,
Citigroup, GM, GMAC, and the Enterprises. The total amounts of
assistance disbursed to each company are shown in figure 2. The
federal government assisted these companies by infusing capital
through the purchase of preferred shares, direct loans, guarantees,
stock exchanges, or lines of credit that led to the government owning
preferred and common shares.
Figure 2: Government Assistance Provided to Selected Companies, as of
March 31, 2010:
[Refer to PDF for image: stacked horizontal bar graph]
Company: Chrysler;
Debt assistance: $7.1 billion;
Equity assistance: $5.4 billion;
Total: $12.5 billion.
Company: GMAC;
Equity assistance: $16.3 billion;
Total: $16.3 billion.
Company: Bank of America;
Equity assistance: $45 billion;
Total: $45.0 billion.
Company: Citigroup;
Equity assistance: $45 billion;
Total: $45.0 billion.
Company: GM;
Debt assistance: $6.7 billion;
Equity assistance: $42.8 billion;
Total: $49.5 billion.
Company: Freddie Mac;
Equity assistance: $61.3 billion;
Total: $61.3 billion.
Company: Fannie Mae;
Equity assistance: $83.6 billion;
Total: $83.6 billion.
Company: AIG;
Debt assistance: $27.4 billion;
Equity assistance: $74.0 billion;
Indirect assistance: $32.6 billion;
Total: $134.0 billion.
Company: Total;
Debt assistance: $41.2 billion;
Equity assistance: $373.43 billion;
Indirect assistance: $33.9 billion;
Grand total: $447.2 billion.
Source: GAO analysis of Office of Financial Stability, Federal
Reserve, and Federal Housing Finance Agency documents and U.S.
Securities and Exchange Commission fillings.
Notes:
When the government provided debt assistance, the companies received
the assistance in the form of loans.
The government provided equity assistance initially in the form of
preferred shares. Warrants that the government received as a part of
these transactions are not included in the equity totals.
Part of the government assistance includes Maiden Lane II LLC and
Maiden Lane III LLC, which were created as part of the assistance to
stabilize AIG. FRBNY provided credit to each Maiden Lane facility to
purchase from AIG and AIG counterparties residential mortgage-backed
securities and multi-sector collateralized debt obligations (which
enabled AIG to terminate existing credit default swaps).
[End of figure]
Figure 3 shows the variation in the amount of government ownership
interest in the companies and the outstanding balance that is owed to
the government. The financial institutions and the companies have
begun to pay down some of the assistance.[Footnote 91] GM has repaid
the entirety of the debt owed to Treasury under its post-bankruptcy
credit agreement, and Chrysler has repaid a portion of its loan from
Treasury. As previously noted, whether the government will be
recovering all its investment or assistance to Chrysler and GM is
unknown. For companies where the government has an ownership stake,
the amount of recovery depends on a number of external factors,
including the financial health of the companies and the market value
of their stock as well as the companies' ability to repay loans or
repurchase preferred shares. Similarly, Treasury still holds common
shares in Citigroup. The Enterprises have not repaid any portion of
the assistance Treasury has provided and as of June 2010 continued to
borrow from Treasury.
Figure 3: Amount Outstanding and Government Equity Interest, as of
June 1, 2010:
[Refer to PDF for image: stacked vertical bar graph with accompanying
pie-charts]
Company: Chrysler;
Amount outstanding in debt: $7.1 billion;
Amount outstanding in common equity: $3.5 billion;
Assistance repaid: $1.9 billion;
Total: $12.5 billion;
Government ownership stake: 0%.
Company: GMAC;
Amount outstanding in preferred shares: $13.9 billion;
Amount outstanding in common equity: $2.4 billion;
Total: $16.3 billion;
Government ownership stake: 56%.
Company: Citigroup;
Amount outstanding in common equity: $25 billion;
Assistance repaid: $20 billion;
Total: $45.0 billion;
Government ownership stake: 21%.
Company: GM;
Amount outstanding in preferred shares: $2.1 billion;
Amount outstanding in common equity: $40.7 billion;
Assistance repaid: $6.7 billion;
Total: $49.5 billion;
Government ownership stake: 61%.
Company: Freddie Mac;
Amount outstanding in preferred shares: $61.3 billion;
Total: $61.3 billion;
Government ownership stake: 0%.
Company: Fannie Mae;
Amount outstanding in preferred shares: $83.6 billion;
Total: $83.6 billion;
Government ownership stake: 0%.
Company: AIG[A];
Amount outstanding in debt: $27.4 billion;
Amount outstanding in preferred shares: $74.0 billion;
Amount outstanding in indirect assistance: $32.6 billion;
Total: $134.0 billion;
Government ownership stake: 80%.
Source: GAO analysis of Office of Financial Stability, Federal
Reserve, and Federal Housing Finance Agency documents and U.S.
Securities and Exchange Commission filings.
[A] AIG does not owe the government the amounts outstanding to Maiden
Lane II and III. Those loans are to be repaid with proceeds from the
sale of assets in each facility.
[End of figure]
To provide some additional protection for the taxpayer, Treasury
required the companies to commit to certain financial terms and
actions. For example, in exchange for the capital infusions in the
form of preferred shares, Treasury required AIG, Bank of America,
Citigroup, the Enterprises, GM, and GMAC to pay dividends. The
dividend rate varied across the seven companies ranging from less than
5 percent to 10 percent for AIG and the Enterprises. As shown in table
6, as of March 31, 2010, Treasury had collected a total of more than
$16.2 billion in dividends from Bank of America, Citigroup, the
Enterprises, GM, and GMAC. AIG was required to pay dividends at an
annual rate of 10 percent on series D cumulative preferred shares
prior to when they were exchanged for series E noncumulative preferred
shares, but it had not paid any dividends to Treasury as of March 31,
2010. Series D unpaid dividends were capitalized, thereby increasing
the liquidation preference of the Series E shares for which they were
exchanged.
Table 6: Additional Company Payments to the Treasury, as of March 31,
2010:
Company: AIG;
Dividends paid: $0.00;
Interest paid: $0.00[A];
Proceeds from warrant sale: $0.00;
Total: $0.00.
Company: Bank of America;
Dividends paid: $2.73 billion;
Interest paid: n/a;
Proceeds from warrant sale: $1.54 billion;
Total: $4.27 billion.
Company: Chrysler;
Dividends paid: n/a;
Interest paid: $0.13 billion;
Proceeds from warrant sale: n/a;
Total: $0.13 billion.
Company: Citigroup;
Dividends paid: $2.82 billion;
Interest paid: n/a;
Proceeds from warrant sale: $0.00;
Total: $2.82 billion.
Company: Fannie Mae;
Dividends paid: $4.03 billion;
Interest paid: n/a;
Proceeds from warrant sale: 0.00;
Total: $4.03 billion.
Company: Freddie Mac;
Dividends paid: $5.57 billion;
Interest paid: n/a;
Proceeds from warrant sale: 0.00;
Total: $5.57 billion.
Company: GM[B];
Dividends paid: $0.13 billion;
Interest paid: $0.25 billion;
Proceeds from warrant sale: n/a;
Total: $0.38 billion.
Company: GMAC;
Dividends paid: $1.01 billion;
Interest paid: n/a;
Proceeds from warrant sale: n/a;
Total: $1.01 billion.
Total:
Dividends paid: $16.29 billion;
Interest paid: $0.38 billion;
Proceeds from warrant sale: $1.54 billion;
Total: $18.21 billion.
Sources: GAO analysis of Office of Financial Stability and Federal
Housing Finance Agency documents, and GAO-10-475.
[A] All repayments by AIG, thus far, have been applied to principal.
Accrued interest and commitment fees amounted to $5.7 billion as of
March 31, 2010.
[B] On April 20, 2010, GM repaid the remaining balance on the $6.7
billion from Treasury.
[End of table]
The government or, in the case of AIG, FRBNY requires that AIG and
Chrysler pay interest on the loans provided. Moreover, Treasury
currently holds warrants obtained in connection with the preferred
shares that it holds for AIG, Citigroup, and the Enterprises. Because
GMAC is a privately held company, Treasury exercised its warrants
immediately. On March 3, 2010, Treasury received more than $1.5
billion from its auction of Bank of America's warrants.
[End of section]
Appendix III: Legislation and Government Communication with GM and
Chrysler:
To further examine the extent of government involvement in companies
receiving Troubled Asset Relief Program (TARP) assistance, we reviewed
legislative proposals and government communications with General
Motors Company (GM) and Chrysler Group LLC (Chrysler). We examined the
following: (1) proposed legislation that would place requirements or
restrictions on the companies due to their status as TARP recipients,
(2) letters from members of Congress to the companies, and (3) e-mails
from congressional offices, state government, White House, and
Department of the Treasury (Treasury) officials sent to certain
company officials whom we designated.
Chrysler and GM officials told us that the level of government
involvement--from requests for appearances at congressional hearings
to letters from elected officials--had increased since their companies
had requested and received financial assistance from the government.
They emphasized that the congressional letters and e-mails did not
cause them to make decisions that were in conflict with their best
interests. However, these officials stated that addressing the
government's involvement, such as responding to letters, audits, or
other requests for information, required increased company resources.
Proposed Federal Legislation That Would Affect TARP Recipients in the
Auto Industry Focuses on Dealership Closures and Executive
Compensation:
We identified 38 bills introduced from October 2008, when the
Emergency Economic Stabilization Act of 2008 (EESA) was enacted,
through January 2010 that would impose requirements or restrictions on
GM and Chrysler as TARP recipients. Action on the majority of these
bills has been limited since their introduction in Congress, with two
having become law.[Footnote 92] Although the bills cover a range of
topics, those among the most commonly addressed by the legislation
were dealership closures and executive compensation and bonuses.
Dealerships:
We identified eight bills that addressed, among other issues, the
closure of auto dealerships, a topic specifically directed at
automakers accepting TARP funds. Closing dealerships was a way for the
companies to reduce their operating costs in an attempt to return to
profitability, but since these closures would occur in communities
across the country, they prompted considerable congressional interest.
The bills generally aimed to curtail or prevent the closure of auto
dealerships, as well as plants and suppliers. One of the bills that
became public law requires Chrysler and GM to provide to the dealers
specific criteria for the closures and gives dealers the right to
pursue binding arbitration concerning their closures.[Footnote 93] The
Automobile Dealer Economic Rights Restoration Act of 2009, as
introduced in the House and Senate, would require the automakers to
restore a dealership based on the dealer's request.[Footnote 94] As of
July 30, 2010, this bill has not been enacted.
Executive Compensation:
We identified 17 bills affecting executive compensation and bonuses
for TARP recipients in both the auto and financial industries.
[Footnote 95] Most of these bills would require restrictions on or
repeals of executive compensation and bonuses for TARP recipients. For
example, the American Recovery and Reinvestment Act, which became law
in February 2009, calls for, among other things, limits on
compensation to the highest paid executives and employees at firms
receiving TARP funding.[Footnote 96]
Other Topics:
Other less commonly addressed topics and an example of a bill related
to each category are shown in table 7. As of July 30, 2010, these
bills have not been enacted.
Table 7: Topics of Other Bills Placing Requirements or Restrictions on
TARP Recipients in the Auto Industry:
Topic of legislation: Company investments and financial operations;
Example of introduced bill: H.R. 2633 would prohibit auto
manufacturers receiving TARP funds from opening a new foreign
subsidiary or expanding their current foreign subsidiaries.
Topic of legislation: Transparency or accountability requirements;
Example of introduced bill: H.R. 1472 would require recipients of TARP
or American Recovery and Reinvestment Act funds to report to the
Secretary of the Treasury upon receipt or redistribution of the funds
or contract agreements that use such funds.
Topic of legislation: Conditions or prohibitions on the compensation
and employment of nonexecutive staff;
Example of introduced bill: H.R. 1714 would require at least one
member of the board compensation committee of financial institutions
receiving TARP funds to be an employee whose compensation is within
the lowest 20 percent of compensation of all employees and executives.
Topic of legislation: The use of TARP funds for lobbying or political
purposes;
Example of introduced bill: S. 133 would prohibit TARP recipients from
using TARP funds for lobbying expenditures or political contributions.
Source: GAO analysis of TARP-related legislation.
[End of table]
Chrysler and GM Have Received Numerous Letters from Members of
Congress:
Between May and December 2009, Chrysler and GM received 277 letters
from members of Congress, including 65 sent to Chrysler and 212 to GM.
Company officials told us that the volume of congressional letters
they received sharply increased in the spring of 2009, after the
companies received TARP assistance and when many operational changes
that were part of their restructuring--such as plant and dealership
closures--were being made. In total, 188 individual members of
Congress sent letters to the companies over this time period.
In terms of the content of the letters, many dealt with specific
constituent concerns, with the closing of auto dealerships being the
most common topic. Of the letters sent to Chrysler and GM, 68 percent
pertained to dealership closures, and the majority of these requested
information on specific dealerships in the member's district or state
or provided information for the companies' consideration when
determining whether or not to close specific dealerships. For example,
one letter stated that closing a particular dealership would result in
customers having to drive up to 120 miles round trip to service their
existing vehicle or purchase a new one. Other topics most commonly
discussed in the letters included the renegotiation of union contracts
with companies that haul cars from manufacturing plants to dealerships
(17 percent) and the closure of manufacturing plants (5 percent). None
of the letters pertained to executive compensation.
Across all letters, 56 percent either explicitly requested a change to
the companies' operations or stated a desired change. Just as
dealerships were the focus of most of the letters, dealerships were
the focus of the majority of requests for changes as well, with 62
percent suggesting that the companies reconsider the decision to close
a particular dealership. The remainder of letters that requested
changes pertained to car-hauling contracts (16 percent), plant
closures (5 percent), or other business decisions and operations such
as the sale of brands (21 percent).[Footnote 97]
Chrysler and GM Senior Executives Received E-mails from Federal and
State Officials about the Companies' Business Operations and Other
Topics:
We also reviewed e-mails that the companies' chief executive officers
and most senior state and federal government relations officers had
received from federal and state officials during calendar year 2009.
[Footnote 98] Our review included e-mails sent by White House
officials, the Treasury Department's chief advisors to the
Presidential Task Force on the Auto Industry, [Footnote 99] members of
Congress or their staff, and officials from the five states with the
highest proportion of manufacturing in the auto sector.[Footnote 100]
For the purpose of analysis, we grouped the e-mails into federal
executive branch officials--Treasury and White House--because these
individuals had a defined role in the assistance to the companies, and
federal legislative and state officials. For each group, we recorded
information on the purpose and topic of each e-mail.
White House and Treasury Department E-mails:
According to the documentation the companies provided to us, the
designated officials at Chrysler received 89 e-mails from White House
and Treasury officials. The designated officials at GM received 20 e-
mails. About 60 percent of the e-mails were from Treasury officials
and about 40 percent were from White House officials. Sixty-six
percent of the e-mails were sent for the purpose of either arranging a
call or a meeting between company and government officials (35
percent) or requesting information or input from the companies (31
percent). About 26 percent of the e-mails were sent to provide
information to the companies. The topic of more than 33 percent of the
e-mails was unclear and more than 60 percent of the e-mails with an
unclear topic were sent for the purpose of arranging a call or
meeting. Of the e-mails with identifiable topics, the highest number
pertained to bankruptcy or restructuring (29 percent of all e-mails)
followed by manufacturing plants (12 percent), and dealerships (7
percent). Most of the e-mails that pertained to bankruptcy or
restructuring were sent for the purpose of either providing
information to or requesting information from the companies (34
percent each). For example, one e-mail requested that Chrysler review
and provide comments on a set of talking points on Chrysler's
restructuring. Two of the e-mails--less than 2 percent--requested a
change to the companies' operations or stated a desired change, such
as an e-mail concerning GM's negotiations in a proposed sale of a
company asset.
Congressional and State E-mails:
Chrysler identified 1,221 e-mails it had received from congressional
offices of both parties, mostly from staff, and state officials; GM
identified 1,098. Due to the number of e-mails, we reviewed a random
probability sample of them in order to develop estimates about the
entire group of e-mails.[Footnote 101] Based on this review, we
estimate that 86 percent of these e-mails came from congressional
offices and the remaining 14 percent from government officials in the
five states included in our analysis. The records in the sample showed
that most of the congressional e-mails were sent from staff rather
than from members of Congress.
The purpose of the vast majority of congressional and state e-mails
varied from requesting information to arranging a call or meeting to
simply thanking the recipient. Most common were e-mails sent to
provide information to the recipient (38 percent), followed by e-mails
sent to request information (31 percent), and e-mails to arrange a
call or meeting between government and company officials (22 percent).
We estimate that 13 percent of the e-mails were sent for other
reasons, such as to thank the recipient, or for reasons that could not
be determined based on the content of the e-mail. Roughly 1 percent of
the congressional and state e-mails--either explicitly requested or
stated a desired change to the companies' operations. The topics of
the e-mails varied, with 27 percent focusing on dealerships and 11
percent on manufacturing plants. Thirty-six percent--the largest
group--did not reference a specific topic. For example, many of the e-
mails sent for the purpose of arranging a call or meeting did not
indicate the reason for the requested call or meeting.
[End of section]
Appendix IV: Comments from the Department of the Treasury:
Department of the Treasury:
Washington, DC 20220:
July 21, 2010:
Thomas J. McCool:
Director, Center for Economics:
Applied Research and Methods:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. McCool:
The Department of the Treasury ("Treasury") appreciates the
opportunity to review the GAO's latest report on the Troubled Asset
Relief Program ("TARP"), titled Financial Assistance: Ongoing
Challenges and Guiding Principles Related to Government Assistance for
Private Sector Companies ("Draft Report").
We are pleased that the Draft Report finds that Treasury generally
adhered to the three guiding principles regarding large-scale federal
assistance that the GAO had identified based on the financial crises
of the 1970s and 1980s, while facing the unique and considerable
challenges presented by the recent crisis. Although the Draft Report
contains no recommendations, it describes additional guiding
principles to consider in any future instance of broad-based
government assistance. We thank you and your staff for your analysis
of our efforts to date and will weigh these new guidelines going
forward.
We look forward to continuing this constructive dialog.
Sincerely,
Signed by:
Herbert M. Allison:
Assistant Secretary:
Office of Financial Stability:
[End of section]
Appendix V: Comments from the Federal Housing Finance Agency:
Federal Housing Finance Agency:
Office of the Director:
1700 G Street, N.W.
Washington, D.C. 20552-0003:
202-414-3800:
202-414-3823 (fax):
July 22, 2010:
Ms. Orice Williams Brown:
Director:
Financial Markets and Community Investment:
Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Ms. Williams Brown:
Thank you for the opportunity to review and comment on the Government
Accountability Office (GAO) Report, Financial Assistance: Ongoing
Challenges and Guiding Principles Related to Government Assistance For
Private Sector Companies. Federal Housing Finance Agency (FHFA) staff
provided technical comments directly to GAO staff.
The GAO study notes that assistance provided to Fannie Mae and Freddie
Mac (the Enterprises) illustrates the potential challenges that can
arise when the government uses its assistance to further its public
policy goals. In particular, the study highlighted the Enterprises'
participation in the Administration's loan modification efforts, and
the potential negative impact on the Enterprises' financial condition.
I would like to comment here regarding those efforts.
Since September 2008, the Enterprises have been operating in
conservatorship with financial support from the Treasury Department.
The purpose of conservatorship is to preserve and conserve each
company's assets to enable them to fulfill their mission and mitigate
the systemic risk that contributed to instability in financial markets.
Central to the goals of conservatorship is the mitigation of credit
losses. The Enterprises' foreclosure prevention efforts ” including
loan modifications and refinances as well as short sales and deeds in
lieu of foreclosure ” are essential to meeting those goals. These
efforts also fulfill the Emergency Economic Stabilization Act of 2008
(EESA) mandate that FHFA, as conservator, act to "maximize assistance
for homeowners" while minimizing losses to the Enterprises themselves.
FHFA reports monthly to Congress on the full range of Enterprise
foreclosure prevention activities through its Foreclosure Prevention/
Federal Property Manager's Report. In pursuit of the goal of
minimizing credit losses and fulfilling this statutory mandate, FHFA
and the Enterprises worked with the Administration to design and
implement the Making Home Affordable program (MHA), including the Home
Affordable Modification Program (HAMP).
Loan modifications and other loss mitigation activities are a key
focus for FHFA as the Enterprises' conservator because these
strategies are consistent with the Enterprises' public mission and are
central to the purpose and goals of the conservatorships. In the
current environment, conserving the assets of the Enterprises
requires, first and foremost, minimizing their credit losses from
delinquent mortgages. Fannie Mae and Freddie Mac have played a key
role in the development and implementation of HAMP because a well-
designed loan modification is often a lower cost resolution to a
delinquent mortgage than foreclosure, and these alternatives to
foreclosure save the Enterprises' and taxpayers' money. As with other
participants in HAMP, the Enterprises' modifications under the program
are based on a net present value test, which is designed to test
whether a modification will be in the Enterprises' long-term economic
interest.
The broader adoption of loan modification programs has benefits beyond
reducing losses directly on the Enterprises' resolutions of their
delinquent loans. Since the Enterprises own or guarantee about half
the mortgages in the country, the successful widespread adoption of
'TAMP by others, which is improving the modification process, benefits
the Enterprises by improving stability in housing markets and reducing
credit exposure.
Thank you again for the opportunity to comment on this study. If you
have any additional questions please let me know.
Sincerely,
Signed by:
Edward J. DeMarco:
Acting Director:
[End of section]
Appendix VI: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Orice Williams Brown, (202) 512-8678 or williamso@gao.gov:
A. Nicole Clowers, (202) 512-8678 or clowersa@gao.gov Richard J.
Hillman, (202) 512-8678 or hillmanr@gao.gov:
Staff Acknowledgments:
In addition to the contacts named above, Heather Halliwell, Debra
Johnson, Wes Phillips, and Raymond Sendejas (lead Assistant
Directors); Carl Barden; Emily Chalmers; Philip Curtin; Rachel
DeMarcus; Nancy Eibeck; Sarah Farkas; Cheryl Harris; Grace Haskins;
Damian Kudelka; Ying Long; Matthew McDonald; Sarah M. McGrath; Michael
Mikota; Susan Michal-Smith; SaraAnn Moessbauer; Marc Molino; Omyra
Ramsingh; Christopher Ross; Andrew Stavisky; and Cynthia Taylor have
made significant contributions to this report.
[End of section]
Related GAO Products:
Troubled Asset Relief Program: Continued Attention Needed to Ensure
the Transparency and Accountability of Ongoing Programs. [hyperlink,
http://www.gao.gov/products/GAO-10-933T]. Washington, D.C.: July 21,
2010.
Troubled Asset Relief Program: Treasury's Framework for Deciding to
Extend TARP Was Sufficient, but Could be Strengthened for Future
Decisions. [hyperlink, http://www.gao.gov/products/GAO-10-531].
Washington, D.C.: June 30, 2010.
Troubled Asset Relief Program: Further Actions Needed to Fully and
Equitably Implement Foreclosure Mitigation Program. [hyperlink,
http://www.gao.gov/products/GAO-10-634]. Washington, D.C.: June 24,
2010.
Debt Management: Treasury Was Able to Fund Economic Stabilization and
Recovery Expenditures in a Short Period of Time, but Debt Management
Challenges Remain. [hyperlink, http://www.gao.gov/products/GAO-10-
498]. Washington, D.C.: May 18, 2010.
Financial Markets Regulation: Financial Crisis Highlights Need to
Improve Oversight of Leverage at Financial Institutions and across
System. [hyperlink, http://www.gao.gov/products/GAO-10-555T].
Washington, D.C.: May 6, 2010.
Troubled Asset Relief Program: Update of Government Assistance
Provided to AIG. [hyperlink, http://www.gao.gov/products/GAO-10-475].
Washington, D.C.: April 27, 2010.
Troubled Asset Relief Program: Automaker Pension Funding and Multiple
Federal Roles Pose Challenges for the Future. [hyperlink,
http://www.gao.gov/products/GAO-10-492]. Washington, D.C.: April 6,
2010.
Troubled Asset Relief Program: Home Affordable Modification Program
Continues to Face Implementation Challenges. [hyperlink,
http://www.gao.gov/products/GAO-10-556T]. Washington, D.C.: March 25,
2010.
Troubled Asset Relief Program: Treasury Needs to Strengthen Its
Decision-Making Process on the Term Asset-Backed Securities Loan
Facility. [hyperlink, http://www.gao.gov/products/GAO-10-25].
Washington, D.C.: February 5, 2010.
Troubled Asset Relief Program: The U.S. Government Role as Shareholder
in AIG, Citigroup, Chrysler, and General Motors and Preliminary Views
on its Investment Management Activities. [hyperlink,
http://www.gao.gov/products/GAO-10-325T]. Washington, D.C: December
16, 2009.
Financial Audit: Office of Financial Stability (Troubled Asset Relief
Program) Fiscal Year 2009 Financial Statements. [hyperlink,
http://www.gao.gov/products/GAO-10-301]. Washington, D.C.: December 9,
2009.
Troubled Asset Relief Program: Continued Stewardship Needed as
Treasury Develops Strategies for Monitoring and Divesting Financial
Interests in Chrysler and GM. [hyperlink,
http://www.gao.gov/products/GAO-10-151]. Washington, D.C.: November 2,
2009.
Troubled Asset Relief Program: One Year Later, Actions Are Needed to
Address Remaining Transparency and Accountability Challenges.
[hyperlink, http://www.gao.gov/products/GAO-10-16]. Washington, D.C.:
October 8, 2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions
for October 28, 2008, through September 25, 2009, and Information on
Financial Agency Agreements, Contracts, Blanket Purchase Agreements,
and Interagency Agreements Awarded as of September 18, 2009.
[hyperlink, http://www.gao.gov/products/GAO-10-24SP]. Washington,
D.C.: October 8, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-1048T]. Washington, D.C.: September
24, 2009.
Troubled Asset Relief Program: Status of Government Assistance
Provided to AIG. [hyperlink, http://www.gao.gov/products/GAO-09-975].
Washington, D.C.: September 21, 2009.
Troubled Asset Relief Program: Treasury Actions Needed to Make the
Home Affordable Modification Program More Transparent and Accountable.
[hyperlink, http://www.gao.gov/products/GAO-09-837]. Washington, D.C.:
July 23, 2009.
Troubled Asset Relief Program: Status of Participants' Dividend
Payments and Repurchases of Preferred Stock and Warrants. [hyperlink,
http://www.gao.gov/products/GAO-09-889T]. Washington, D.C.: July 9,
2009.
Troubled Asset Relief Program: June 2009 Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-658]. Washington, D.C.: June 17,
2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions
for October 28, 2008, through May 29, 2009, and Information on
Financial Agency Agreements, Contracts, Blanket Purchase Agreements,
and Interagency Agreements Awarded as of June 1, 2009. [hyperlink,
http://www.gao.gov/products/GAO-09-707SP]. Washington, D.C.: June 17,
2009.
Auto Industry: Summary of Government Efforts and Automakers'
Restructuring to Date. [hyperlink,
http://www.gao.gov/products/GAO-09-553]. Washington, D.C.: April 23,
2009.
Small Business Administration's Implementation of Administrative
Provisions in the American Recovery and Reinvestment Act. [hyperlink,
http://www.gao.gov/products/GAO-09-507R]. Washington, D.C.: April 16,
2009.
Troubled Asset Relief Program: March 2009 Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-504]. Washington, D.C.: March 31,
2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions
for the Period October 28, 2008 through March 20, 2009 and Information
on Financial Agency Agreements, Contracts, and Blanket Purchase
Agreements Awarded as of March 13, 2009. [hyperlink,
http://www.gao.gov/products/GAO-09-522SP]. Washington, D.C.: March 31,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-539T]. Washington, D.C.: March 31,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-484T]. Washington, D.C.: March 19,
2009.
Federal Financial Assistance: Preliminary Observations on Assistance
Provided to AIG. [hyperlink, http://www.gao.gov/products/GAO-09-490T].
Washington, D.C.: March 18, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-474T]. Washington, D.C.: March, 11,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-417T]. Washington, D.C.: February
24, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-359T]. Washington, D.C.: February
5, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-296]. Washington, D.C.: January 30,
2009.
High-Risk Series: An Update. [hyperlink,
http://www.gao.gov/products/GAO-09-271]. Washington, D.C.: January 22,
2009.
Troubled Asset Relief Program: Additional Actions Needed to Better
Ensure Integrity, Accountability, and Transparency. [hyperlink,
http://www.gao.gov/products/GAO-09-266T]. Washington, D.C.: December
10, 2008.
Auto Industry: A Framework for Considering Federal Financial
Assistance. [hyperlink, http://www.gao.gov/products/GAO-09-247T].
Washington, D.C.: December, 5, 2008.
Auto Industry: A Framework for Considering Federal Financial
Assistance. [hyperlink, http://www.gao.gov/products/GAO-09-242T].
Washington, D.C.: December 4, 2008.
Troubled Asset Relief Program: Status of Efforts to Address Defaults
and Foreclosures on Home Mortgages. [hyperlink,
http://www.gao.gov/products/GAO-09-231T]. Washington, D.C.: December
4, 2008.
Troubled Asset Relief Program: Additional Actions Needed to Better
Ensure Integrity, Accountability, and Transparency. [hyperlink,
http://www.gao.gov/products/GAO-09-161]. Washington, D.C.: December 2,
2008.
Guidelines for Rescuing Large Failing Firms and Municipalities.
[hyperlink, http://www.gao.gov/products/GAO/GGD-84-34]. Washington,
D.C.: March 29, 1984.
[End of section]
Footnotes:
[1] See appendix II for the calculation of the total assistance amount
and the assistance amounts by specific company.
[2] On December 9, 2009, Bank of America repurchased $45 billion of
preferred shares, and on March 5, 2010, Treasury auctioned its Bank of
America warrants for $1.54 billion which ended its participation in
the Troubled Assets Relief Program.
[3] While there are several other government-sponsored enterprises,
for purposes of this report the capitalized term "Enterprises" refers
to Fannie Mae and Freddie Mac.
[4] On May 10, 2010, GMAC changed its name to Ally Financial, Inc.
[5] Treasury considers each of these companies, with the exception of
Fannie Mae and Freddie Mac, as "exceptional assistance" companies. A
company is considered receiving exceptional assistance when it has
been provided more assistance than allowed under a widely available
standard program, such as a capital access program.
[6] Pub. L. No. 110-343, Div. A, § 116, 122 Stat. 3765, 3783 (2008)
(codified at 12 U.S.C. § 5226).
[7] Troubled Asset Relief Program: Continued Stewardship Needed as
Treasury Develops Strategies for Monitoring and Divesting Financial
Interests in Chrysler and GM, [hyperlink,
http://www.gao.gov/products/GAO-10-151] (Washington, D.C.: Nov. 2,
2009); Troubled Asset Relief Program: Status of Government Assistance
Provided to AIG, [hyperlink, http://www.gao.gov/products/GAO-09-975]
(Washington, D.C.: Sept. 21, 2009); GAO, Fannie Mae and Freddie Mac:
Analysis of Options for Revising the Housing Enterprises' Long-term
Structures, [hyperlink, http://www.gao.gov/products/GAO-09-782]
(Washington, D.C.: Sept. 10, 2009); and SIGTARP, Factors Affecting
Efforts to Limit Payments to AIG Counterparties, SIGTARP-10-003
(Washington, D.C., Nov. 17, 2009) and Emergency Capital Injections
Provided to Support the Viability of Bank of America, Other Major
Banks, and the U.S. Financial System, SIGTARP-10-001 (Washington,
D.C., Oct. 5, 2009).
[8] The amount was not adjusted for inflation.
[9] Pub. L. No. 110-289, 122 Stat. 2654. (July 30, 2008).
[10] Conservatorship is "the legal process in which a person or entity
is appointed to establish control and oversight of a Company to put it
in a sound and solvent condition." See Federal Housing Finance Agency,
"Fact Sheet: Questions and Answers on Conservatorship" (press release,
Sept. 7, 2008) p. 1. [hyperlink,
http://www.treas.gov//press/releases/report/fhfa_consrv_faq_090708hp112.
pdf].
[11] Pub. L. No. 110-343, 122 Stat. 3765 (2008), (codified, as
amended, at 12 U.S.C. §§ 5201 et seq.,). EESA originally authorized
Treasury to purchase or guarantee up to $700 billion in troubled
assets. The Helping Families Save Their Homes Act of 2009, Pub. L. No.
111-22, Div. A. 123 Stat. 1632 (2009), amended EESA to reduce the
maximum allowable amount of outstanding troubled assets under the act
by almost $1.3 billion, from $700 billion to $698.7 billion. Section
1302 of the Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. No. 111-203, 124 Stat. 1376, 2133 (2010), reduced the maximum
amount of authorized TARP funding to $475 billion.
[12] Pub. L. No. 111-5, Div B, Title VII, 123 Stat. 115, 516-521.
[13] A golden parachute is defined as any payment for the departure
from a TARP recipient for any reason or any payment due to a change in
control of the TARP recipient.
[14] Preferred shares are a class of ownership in a corporation that
generally has a higher claim on the assets and earnings than common
stock.
[15] Section 113(d) of EESA, codified at 12 U.S.C § 5223(d), provides
that the Secretary of the Treasury may not purchase any asset,
including equity interests, from financial institutions unless
Treasury also receives a warrant to purchase stock or debt instrument
from the financial institution.
[16] In January 2009, Treasury, FRBNY, FDIC, and Citigroup entered
into an arrangement under the AGP. Under the AGP termination
agreement, Citigroup, FDIC, and Treasury agreed that FDIC and Treasury
retain approximately $5.3 billion of trust preferred securities of
Citigroup, as well as the warrants, and agreed that FRBNY would
receive a $50 million termination fee. In connection with the early
termination of the guarantee, Treasury agreed to cancel $1.8 billion
of the trust preferred securities. Also, in January 2009, Bank of
America entered into a term sheet with the Treasury, FDIC, and the
FRBNY in which agencies agreed in principle to guarantee losses
arising on a $118 billion portfolio of Bank of America assets. In May
2009, Bank of America announced its intentions of terminating
negotiations on the agreement, and in September 2009, Treasury, FRBNY,
the FDIC, and Bank of America entered into a termination agreement
with Bank of America under which Bank of America agreed to pay a
termination fee of $425 million.
[17] Risk-weighted assets are the total assets and off-balance sheet
items held by an institution weighted for risk according to Federal
Reserve regulations.
[18] Federal bank regulators that conducted the stress test included
the Federal Reserve and Federal Reserve Banks, FDIC, and OCC. GAO is
currently conducting a review of the Supervisory Capital Assessment
Program that it plans to issue later this year.
[19] GMAC did not become a bank holding company until after the
Federal Reserve approved its application on December 24, 2008, and
GMAC is now regulated and supervised by the Federal Reserve. Before
GMAC became a bank holding company, GM and a private equity firm had
owned a controlling interest in GMAC. GMAC applied to become a bank
holding company on the conversion of its subsidiary industrial loan
company to a commercial bank. The FDIC was the primary federal
supervisor of GMAC's subsidiary industrial loan company and has
remained the primary federal supervisor of the successor commercial
bank. An industrial loan company is an FDIC-supervised, state-
chartered financial institution whose distinct features included the
fact that it can be owned by a commercial firm.
[20] Bank Holding Company Act of 1956, c. 240, 70 Stat. 13 (May 9,
1956) (codified, as amended, at 12 U.S.C. § 1841 et seq.).
[21] Specifically, Federal Reserve Bank staff evaluate a bank holding
company's risk management practices, financial condition, and the
potential for negative impact that the bank holding company and its
nonbank subsidiaries may have on the depository institutions
controlled by the bank holding company. In assessing risk management,
Federal Reserve Bank staff conduct assessments of a bank holding
company's board and senior management oversight; its policies,
procedures, and limit structures; its management information systems
and risk monitoring mechanisms; and its internal control and audit
processes. These assessments are conducted across five major risk
factors, including: credit, market, liquidity, operational, and legal
and compliance risks. In assessing the financial condition of a bank
holding company, Federal Reserve Bank staff evaluate the bank holding
company's capital, asset quality, earnings, and liquidity.
[22] Section 13(3) of the Federal Reserve Act, c. 6, §13(3), 38 Stat.
251, 263 (Dec. 23, 1913) codified, as amended, at 12 U.S.C. § 343
(2006). This provision allows the Federal Reserve, in "unusual and
exigent circumstances," to authorize any Federal Reserve Bank to
extend credit in the form of a discount to individuals, partnerships,
or corporations when the credit is "indorsed or otherwise secured" to
the satisfaction of the Federal Reserve Bank, after obtaining evidence
that the individual, partnership, or corporation is unable to secure
adequate credit accommodations from other banking institutions.
[23] The Office of Thrift Supervision was the consolidated supervisor
of AIG because it was considered a thrift holding company. According
to Office of Thrift Supervision, on the closure of the FRBNY loan, AIG
no longer met the statutory definition of a thrift holding company.
Thus, Office of Thrift Supervision does not regulate the AIG parent
company and its only supervisory role is with the thrift that AIG owns.
[24] The primary role of the Enterprises is to stabilize and assist
the U.S. secondary mortgage market and facilitate the flow of mortgage
credit. To accomplish this goal, they issue debt and stock and use the
proceeds to purchase conventional mortgages that meet their
underwriting standards, known as conforming mortgages, from primary
mortgage lenders such as banks or thrifts. Most of the purchased
mortgages are packaged into mortgage-backed securities that are sold
to investors. The Enterprises may also hold mortgages in these
retained portfolios.
[25] [hyperlink, http://www.gao.gov/products/GAO-09-782].
[26] Fannie Mae and Freddie Mac were in conservatorship with FHFA
before TARP was established.
[27] The funding liquidity that Treasury provides allows the
Enterprises to continue to function within the realm of the
conservatorship. Under HERA, FHFA also has the authority to place the
Enterprises into receivership and sell all of their assets.
Receivership must be imposed if the debts of an enterprise exceed its
assets during a previous 60 day time frame, or if an enterprise has
not been paying its debts. Some debts are due on an ongoing basis.
[28] Under the AGP agreement, Treasury, FDIC, and FRBNY provided
protection against the possibility of large losses on an asset pool of
approximately $301 billion which remained on Citigroup's balance
sheet. The following loss-sharing terms applied to the transaction:
(1) Citigroup was to absorb the first $39.5 billion in losses and (2)
losses more than the $39.5 billion were to be shared by the U.S.
government (90 percent) and Citigroup (10 percent) with the U.S.
government piece being paid in the following order and amounts: First,
Treasury in an amount up to $5 billion, then FDIC in an amount up to
$10 billion, and lastly had Treasury and FDIC paid out the full amount
of their commitments, Citigroup would have been able to obtain a one-
time recourse loan from FRBNY secured by the remainder of the asset
pool. The Citigroup AGP agreement has been terminated and no losses
were paid by the U.S. government, and stock, warrants, and fees were
obtained by the government and FRBNY in exchange for entering into the
agreement.
[29] The federal banking regulators expect all bank holding companies
to have a level and composition of Tier 1 capital well in excess of
the 4 percent regulatory minimum, and also to have common equity as
the dominant element of Tier 1 capital. The amount and the composition
of a bank holding company's capital contribute to its strength. The
common equity is the first element of the capital structure to absorb
loss and offers protection to more senior parties of the capital
structure. A provision of EESA gives Treasury the authority to acquire
common equity shares. Tangible common equity is equity capital minus
the sum of perpetual preferred stock (net of related Treasury stock)
and intangible assets.
[30] Because Citigroup raised capital through new issuance in December
2009 and selling its common stock, overall stock holdings were
diluted, including Treasury's investment. Moreover, Treasury began
selling its shares in the secondary market in April 2010.
[31] GMAC is a privately held institution. With respect to TARP
investments, privately held institutions did not issue warrants to
purchase shares of common stock. Instead, Treasury receives from
privately held institutions warrants to purchase a specified number of
shares of preferred stock, called warrant preferred stock, that pay
dividends at 9 percent annually. Unlike the warrants issued by
publicly held institutions, such as Bank of America or Citigroup,
Treasury exercised these warrants immediately.
[32] According to GMAC, in December 2009, it exchanged existing
preferred shares and mandatory convertible preferred shares for new
mandatory convertible preferred shares with a total liquidation
preference of $10.1 billion.
[33] The trust structure is discussed in greater detail later in the
report.
[34] Treasury's beneficial interest is managed by three trustees. The
three trustees who manage the trust are independent of the FRBNY, AIG,
and Treasury. The trust agreement provides that the trust is for the
sole benefit of the Treasury General Fund, which means that any
property distributable shall be paid to Treasury for deposit into the
U.S. Treasury General Fund as miscellaneous receipts. See AIG Credit
Facility Trust Agreement, Section 1.01 (Jan. 16, 2009).
[35] These conditions established by Treasury did not apply to Fannie
Mae and Freddie Mac.
[36] See SIGTARP, Treasury's Monitoring of Compliance with TARP
Requirements by Companies Receiving Exceptional Assistance, SIGTARP-
10-007 (Washington, D.C., June 29, 2010).
[37] Treasury's agreements with Bank of America stipulated that if
dividends were not paid for six quarters, whether consecutively or
not, Treasury, along with holders of other parity preferred stock of
Bank of America had the right to elect two additional directors to the
company's board. With respect to AIG, Treasury may elect to the board
the greater of two members, or 20 percent of the total number of
directors, when the company misses four dividend payments.
[38] Treasury can also vote on certain major corporate transactions
such as, mergers, sales of substantially all assets, and dissolution;
issuances of equity securities that entitle shareholders to vote; and
amendments to the charter or bylaws.
[39] According to Bank of America, Bank of America's board of
directors and management worked together to replace its CEO upon
Kenneth Lewis's announced retirement and to replace its CFO once new
CEO Brian Moynihan moved the present CFO into a different role with
the company.
[40] Treasury's Auto Team was responsible for overseeing the
investments made to the auto industry.
[41] Other requirements include producing risk management and use of
funds reports, complying with the Employ American Workers Act, and
maintaining bank holding company status.
[42] GAO, Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-296] (Washington, D.C.: Jan. 30,
2009).
[43] Section 111 of EESA, as amended by the Recovery Act, prescribes
certain standards for executive compensation and corporate governance
for recipients of exceptional TARP assistance. In June 2009, Treasury
adopted an interim final rule to implement the executive compensation
and corporate governance standards of EESA, as well as certain
additional standards adopted under Treasury's rulemaking authority.
See 31 C.F.R. Part 30 (2009). The June 2009 interim final rule
supersedes Treasury's original executive compensation standards for
companies participating in the TARP programs, which were adopted prior
to ARRA.
[44] The top 25 group includes 5 senior executive officers and 20
additional most highly compensated employees. However, the actual
number of covered employees whose compensation was reviewed by the
Special Master was less than 25 for some companies because of
terminations, departures, and retirements between January 1, 2009, and
October 22, 2009. Senior executive officer means a named executive
officer who is an employee of a TARP recipient.
[45] Bank of America had already repurchased its preferred shares, so
its next 75 employees were not subject to the review. Chrysler's and
Chrysler Financial's next 75 employees generally were covered by the
"safe harbor rule" provided in the Treasury regulations because their
annual compensation, not including long-term restricted stock, did not
exceed $500,000.
[46] Clawbacks are recovery by the company of amounts paid to an
employee based on materially inaccurate financial statements or
performance criteria.
[47] The original transaction agreements with GM and Chrysler did not
include restrictions on lobbying and dividends. Restrictions on
lobbying were recently added to the agreements.
[48] In the exchange agreement, Treasury agreed that it would vote all
of its common shares with respect to each matter on which holders of
common shares are entitled to vote (other than certain designated
matters, including certain business combinations, dissolution of the
company, amendments to charter and by-laws, issuances of additional
securities, and election of directors to the company's board), in the
same proportion as all other common shares are voted with respect to
such matter.
[49] Treasury also holds common shares of GMAC. On January 16, 2009,
GM used $884 million loaned by Treasury to purchase common equity in
GMAC. On May 29, 2009, Treasury exchanged this $884 million loan to GM
for a portion of GM's common equity interest in GMAC. Through that
exchange, Treasury held 35.4 percent of GMAC's common shares. In
December 2009, Treasury converted $3 billion of existing mandatory
convertible preferred shares, which increased its common shares in
GMAC from 35 percent to 56.3 percent.
[50] Chrysler must either manufacture 40 percent of its U.S. sales
volume in the United States, or its U.S. production volume must be at
least 90 percent of 2008 U.S. production volume. GM must use its
commercially reasonable best efforts to ensure that the volume of
manufacturing conducted in the U.S. is consistent with at least 90
percent of the level envisioned in GM's business plan.
[51] Not all of the requirements contained in GM's credit agreement
are still in effect since the company repaid its debt obligation in
full in April 2010, but some, including those listed here, will remain
in effect until certain obligations or other milestones are met. All
of the requirements in Chrysler's credit agreement are still in effect.
[52] HAMP is part of the administration's broader Making Home
Affordable Program.
[53] These asset managers also have a role in monitoring other CPP
participants.
[54] As we have seen, GMAC became a bank holding company before
receiving assistance. Due to its previous relationship as a subsidiary
of GM, GMAC received its assistance under AIFP rather than from OFS
programs which were dedicated to provide assistance to financial
institutions.
[55] American Life Insurance Company is under a definitive agreement
to be sold to MetLife and according to Treasury, the transaction is
expected to close before year end.
[56] An initial public offering is a privately-owned company's first
sale of its stock to the public. The result of the initial public
offering is that the once privately owned firm becomes a publicly-
traded company.
[57] Treasury does not have access to nonpublic information collected
by federal banking regulators on the financial condition of TARP
recipients. According to Treasury officials, in terms of the financial
institutions, there should be a separation between the
responsibilities of Treasury as an investor and the duties of the
government as regulator.
[58] As discussed earlier, SCAP is a program managed by the Federal
Reserve that conducted stress tests on 19 bank holding companies from
February through May 2009 to measure the potential impact of various
scenarios or market movements on asset, counterparty exposure, or the
value of a firm's portfolio. As a result of the tests, several bank
holding companies were required to raise additional equity capital.
[59] Under the AGP termination agreement, FRBNY, Citigroup, FDIC, and
Treasury agreed that FDIC and Treasury would retain approximately $5.3
of the $7.0 billion of trust preferred securities of Citigroup, as
well as the warrants, and agreed that the FRBNY would receive a $50
million termination fee. Treasury still holds $2.2 billion of the
trust preferred shares that it received as part of the AGP premium and
may receive an additional $800 million of Citigroup's trust preferred
shares from FDIC. In connection with the early termination of the
guarantee, Treasury agreed to cancel $1.8 billion of the trust
preferred securities. In terminating its AGP agreement with the
government, Bank of America agreed to pay the government a termination
fee of $425 million.
[60] [hyperlink, http://www.gao.gov/products/GAO-10-151].
[61] Office of Thrift Supervision was the consolidated supervisor of
AIG because it was considered a thrift holding company. Federal
statute no longer defined AIG as a thrift holding company at the
closure of the Federal Reserve loan to AIG. AIG's domestic and life
and property and casualty insurance companies are regulated by the
state insurance regulators in which these companies are domiciled.
[62] American International Assurance Company is an international life
insurance subsidiary of AIG with most of its business in Asia.
American Life Insurance Company is an international life insurance
subsidiary of AIG that conducts business world wide.
[63] See GAO, Troubled Asset Relief Program: Update of Government
Assistance Provided to AIG, [hyperlink,
http://www.gao.gov/products/GAO-10-475] (Washington, D.C.: Apr. 27,
2010).
[64] Congressional Budget Office, CBO's Budgetary Treatment of Fannie
Mae and Freddie Mac (January 2010).
[65] [hyperlink, http://www.gao.gov/products/GAO-09-782].
[66] GAO, Guidelines for Rescuing Large Failing Firms and
Municipalities, [hyperlink, http://www.gao.gov/products/GAO/GGD-84-34]
(Washington, D.C.: Mar. 29, 1984) and Auto Industry: A Framework for
Considering Federal Financial Assistance, [hyperlink,
http://www.gao.gov/products/GAO-09-247T] (Washington, D.C.: Dec. 5,
2008).
[67] [hyperlink, http://www.gao.gov/products/GAO/GGD-84-34].
[68] GAO, Troubled Asset Relief Program: Additional Actions Needed to
Better Ensure Integrity, Accountability, and Transparency, [hyperlink,
http://www.gao.gov/products/GAO-09-161] (Washington, D.C.: Dec. 2,
2008).
[69] The Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. No. 111-203, 124 Stat. 1376 (2010).
[70] As of April 20, 2010, GM repaid the total $6.7 billion in debt it
owed to Treasury.
[71] GAO, Financial Regulation: A Framework for Crafting and Assessing
Proposals to Modernize the Outdated U.S. Financial Regulatory System,
[hyperlink, http://www.gao.gov/products/GAO-09-216] (Washington, D.C.:
Jan. 8, 2009).
[72] [hyperlink, http://www.gao.gov/products/GAO-09-216].
[73] Section 13(3) of the Federal Reserve Act, (codified, as amended,
at 12 U.S.C. § 343). This provision allows the Federal Reserve, in
"unusual and exigent circumstances," to authorize any Federal Reserve
Bank to extend credit in the form of a discount to individuals,
partnerships, or corporations when the credit is "indorsed or
otherwise secured" to the satisfaction of the Federal Reserve Bank,
after obtaining evidence that the individual, partnership, or
corporation is unable to secure adequate credit accommodations from
other banking institutions.
[74] GAO, Troubled Asset Relief Program: Automakers' Pension Funding
and Multiple Federal Roles Pose Challenges for the Future, GAO-10-492
(Washington, D.C.: Apr. 6, 2010).
[75] Internal Revenue Service Notice 2010-2 (Dec. 11, 2009)
[hyperlink, http://www.irs.gov/pub/irs-drop/n-10-02.pdf]. The notice
applies to all Treasury shareholdings, but the immediate application
would likely be the planned sale of the Citigroup shares.
[76] COP, January Oversight Report: Exiting TARP and Unwinding its
Impact on the Financial Markets (Jan. 13, 2010).
[77] [hyperlink, http://www.gao.gov/products/GAO-10-151].
[78] EESA § 101(c)(4) authorizes the Secretary of the Treasury to take
all necessary actions to carry out its authorities under EESA,
including, without limitation, "establishing vehicles that are
authorized, subject to the supervision of the Secretary, to purchase,
hold and sell troubled assets and issue obligations." Under a
traditional trust structure, however, the assets of the trust would be
under the supervision of trustees, not Treasury.
[79] [hyperlink, http://www.gao.gov/products/GAO-10-151].
[80] We interviewed officials from all companies receiving exceptional
assistance on the potential of external influence with the exception
of the Enterprises.
[81] H.R. 1095, 111th Cong. (2009) and S. 133, 111th Cong (2009).
Subsequent to this bill's introduction, SIGTARP made a recommendation
that Treasury require all TARP recipients to report periodically on
their use of TARP funds. In response to this recommendation, Treasury
is implementing an annual use of funds survey, which will cover how
each financial institution in the CPP program has used CPP funds. (CPP
is the largest TARP program and has had several hundred participants.
More information on this program is provided in the background
section.) Treasury will post all answers that are collected from
individual recipients as well as a summary of quantitative data on the
Financial Stability Web site. Treasury sent the use of funds survey to
CPP recipients in March 2010.
[82] Consolidated Appropriations Act of 2010, P.L. No. 111-117, Div.
C, Title VII, § 747, 123 Stat. 3034, 3219-3221 (2009).
[83] Congressional ethics rules state that in communications with
nonfederal entities, which would include the companies receiving
exceptional assistance, members of Congress may request information
and may also request reconsideration of decisions based on the merits
of the case.
[84] [hyperlink, http://www.gao.gov/products/GAO-09-161].
[85] GAO, Troubled Asset Relief Program: March 2009 Status of Efforts
to Address Transparency and Accountability Issues, GAO-09-504
(Washington, D.C.: Mar. 31, 2009).
[86] [hyperlink, http://www.gao.gov/products/GAO-09-504].
[87] [hyperlink, http://www.gao.gov/products/GAO-09-161].
[88] [hyperlink, http://www.gao.gov/products/GAO-09-161].
[89] GAO, Federal Deposit Insurance Act: Regulators' Use of Systemic
Risk Exception Raises Moral Hazard Concerns and Opportunities Exist to
Clarify the Provision, [hyperlink,
http://www.gao.gov/products/GAO-10-100] (Washington, D.C.: Apr. 15,
2010).
[90] GM officials told us that the e-mails the company receives are
auto-deleted after 60 days, but that the e-mails it sends out are not.
Thus, GM officials were able to identify e-mails received from
government officials over the course of 2009 by locating them in e-
mails the company sent in response.
[91] Bank of America completely paid off its assistance--$45 billion
that the Department of the Treasury (Treasury) purchased in preferred
shares--and exited from Troubled Asset Relief Program (TARP).
[92] Certain provisions of the Consolidated Appropriations Act of 2010
and the American Recovery and Reinvestment Act, as discussed below,
affected GM and Chrysler due to their status as TARP recipients. See
the following footnotes for citations.
[93] Consolidated Appropriations Act of 2010, Pub. L. No. 111-117,
Div. C, Title VII, § 747, 123 Stat. 3034, 3219-3221 (2009).
[94] H.R. 2743, 111th Cong. (2009) and S. 1304, 111th Cong. (2009).
[95] All of the executive compensation bills included in this analysis
apply to the financial sector as well as the auto sector; none
specifically apply to the auto sector. Although not included in this
analysis, several bills were introduced that would exclusively target
the financial sector. For example, we identified seven bills that
would repeal or limit executive compensations or bonuses exclusively
for TARP recipients in the financial sector, such as the American
Insurance Group (AIG) or Bank of America. We further observed that the
number of bills that would repeal or limit executive compensation and
bonuses for TARP recipients in any industry increased during March
2009 when AIG officials had announced they would be distributing
bonuses to executives. That month showed the most bills introduced
from the time EESA was enacted to the end of December 2009.
[96] Pub. L. No. 111-5, Div. B, Title VII § 7001, 123 Stat. 115, 516-
520 (2009). This act, which amends EESA, requires, among other things,
that annual incentive compensation be paid in long-term restricted
stock and provides an exception for contractually obligated bonuses
agreed on or before February 11, 2009.
[97] Note that percentages do not add to 100 because some letters were
about multiple topics.
[98] GM officials told us that they could not necessarily provide us
with all the e-mails received during calendar year 2009, as we
requested, because the company automatically deletes received e-mails
after 60 days unless either (1) the auto-delete function is suspended
due to some external requirement, such as pending litigation or an
outstanding investigation, or (2) the recipient of the e-mail acts to
preserve a specific e-mail. Moreover, even where the auto-delete
function has been suspended (as it had been for many of the e-mail
recipients included in our document request) individuals still may
delete e-mail where there is no business purpose or other requirement
to retain them. In an effort to satisfy our request, GM provided us
with e-mails retained in the in-boxes of individual recipients. GM
also searched outgoing e-mails for messages that were responses to e-
mails originally received from government officials. This yielded
additional records because in some instances recipients did not retain
the original incoming message but did retain e-mails responding to or
forwarding the original e-mail message. Government e-mails to which GM
officials did not send a response and were received outside of the 60-
day auto-delete window were not available to us for analysis.
[99] The task force was established in February 2009 to assess
Chrysler and GM's restructuring plans and to discuss issues including
financial and operational restructuring, improving competitiveness of
wage and benefit structures, and progress toward creating low-
pollution vehicles. We requested that the companies provide us with e-
mails they had received from members and designees of the task force.
The documentation we received from the companies contained one e-mail
from one member of the task force and no e-mails from designees.
Because this official serves on the Presidential task force, we
consider him a White House official for the purpose of this analysis.
[100] The states included in our analysis are Alabama, Indiana,
Kentucky, Michigan, and Ohio.
[101] To calculate estimates about all of the e-mails provided to us,
we randomly selected a probability sample of 251 of the e-mails.
Estimates calculated from probability samples are subject to sampling
errors. All percentage estimates from the e-mail review presented in
this report have margins of error at the 95 percent confidence level
of plus or minus 8 percentage points or less unless noted otherwise.
For detailed information on our sampling and estimating methodology,
see appendix I.
[End of section]
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