Troubled Asset Relief Program
Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency
Gao ID: GAO-09-161 December 2, 2008
On October 3, 2008, the Emergency Economic Stabilization Act was signed into law. The act established the Office of Financial Stability (OFS) within the Department of the Treasury (Treasury) and authorized the Troubled Asset Relief Program (TARP). Every 60 days, the U.S. Comptroller General is required to report on a variety of areas associated with oversight of TARP. This report reviews (1) the activities that have been undertaken through TARP as of November 25, 2008; (2) the structure of OFS, its use of contractors, and its system of internal controls; and (3) preliminary indicators of TARP's performance. GAO reviewed documents related to TARP, including contracts, agreements, guidance, and rules. GAO also met with OFS, contractors, federal agencies, and officials from some participating institutions. GAO plans to continue to monitor these and other issues including future and ongoing capital purchases, other transactions undertaken as part of TARP (e.g., capital purchases in Citigroup and American International Group), and the status of other aspects of TARP.
Treasury has taken a number of steps to stabilize U.S. financial markets and the banking system, including injecting billions of dollars in financial institutions. Through the capital purchase program (CPP)--a preferred stock and warrant purchase program--Treasury provided more than $150 billion in capital to 52 institutions as of November 25, 2008. GAO recognizes that TARP has existed for less than 60 days and that a new program of such magnitude faces many challenges, especially in this current uncertain economic climate. However, Treasury has yet to address a number of critical issues, including determining how it will ensure that CPP is achieving its intended goals and monitoring compliance with limitations on executive compensation and dividend payments. Moreover, further actions are needed to formalize transition planning efforts and establish an effective management structure and an essential system of internal control. To help ensure the program's integrity, accountability, and transparency, GAO recommends that Treasury (1) work with the bank regulators to establish a systematic means of determining and reporting in a timely manner whether financial institutions' activities are generally consistent with the purposes of CPP and help ensure an appropriate level of accountability and transparency; (2) develop a means to ensure that institutions participating in CPP comply with key program requirements (e.g., executive compensation, dividend payments, and the repurchase of stock); (3) formalize the existing communication strategy to ensure that external stakeholders, including Congress, are informed about the program's current strategy and activities and understand the rationale for changes in this strategy to avoid information gaps and surprises; (4) facilitate a smooth transition to the new administration by building on and formalizing ongoing activities, including ensuring that key OFS leadership positions are filled during and after the transition; (5) expedite OFS's hiring efforts to ensure that Treasury has the personnel needed to carry out and oversee TARP; (6) ensure that sufficient personnel are assigned and properly trained to oversee the performance of all contractors, especially for Contracts priced on a time and materials basis, and move toward fixed-price arrangements whenever possible; (7) continue to develop a comprehensive system of internal control over TARP, including policies, procedures, and guidance that are robust enough to protect taxpayers interests and ensure that the program objectives are being met; (8) issue final regulations on conflicts of interest quickly and review and renegotiate mitigation plans to enhance specificity and compliance; and (9) institute a system to effectively manage and monitor the mitigation of conflicts of interest.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director:
Team:
Phone:
GAO-09-161, Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency
This is the accessible text file for GAO report number GAO-09-161
entitled 'Troubled Asset Relief Program: Additional Actions Needed to
Better Ensure Integrity, Accountability, and Transparency' which was
released on December 2, 2008.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to Congressional Committees:
United States Government Accountability Office:
GAO:
December 2008:
Troubled Asset Relief Program:
Additional Actions Needed to Better Ensure Integrity, Accountability,
and Transparency:
GAO-09-161:
GAO Highlights:
Highlights of GAO-09-161, a report to congressional committees.
Why GAO Did This Study:
On October 3, 2008, the Emergency Economic Stabilization Act was signed
into law. The act established the Office of Financial Stability (OFS)
within the Department of the Treasury (Treasury) and authorized the
Troubled Asset Relief Program (TARP). Every 60 days, the U.S.
Comptroller General is required to report on a variety of areas
associated with oversight of TARP. This report reviews (1) the
activities that have been undertaken through TARP as of November 25,
2008; (2) the structure of OFS, its use of contractors, and its system
of internal controls; and (3) preliminary indicators of TARP‘s
performance. GAO reviewed documents related to TARP, including
contracts, agreements, guidance, and rules. GAO also met with OFS,
contractors, federal agencies, and officials from some participating
institutions. GAO plans to continue to monitor these and other issues
including future and ongoing capital purchases, other transactions
undertaken as part of TARP (e.g., capital purchases in Citigroup and
American International Group), and the status of other aspects of TARP.
What GAO Found:
Treasury has taken a number of steps to stabilize U.S. financial
markets and the banking system, including injecting billions of dollars
in financial institutions. Through the capital purchase program (CPP)”a
preferred stock and warrant purchase program”Treasury provided more
than $150 billion in capital to 52 institutions as of November 25,
2008. GAO recognizes that TARP has existed for less than 60 days and
that a new program of such magnitude faces many challenges, especially
in this current uncertain economic climate. However, Treasury has yet
to address a number of critical issues, including determining how it
will ensure that CPP is achieving its intended goals and monitoring
compliance with limitations on executive compensation and dividend
payments. Moreover, further actions are needed to formalize transition
planning efforts and establish an effective management structure and an
essential system of internal control. To help ensure the program‘s
integrity, accountability, and transparency, GAO recommends that
Treasury:
* work with the bank regulators to establish a systematic means of
determining and reporting in a timely manner whether financial
institutions‘ activities are generally consistent with the purposes of
CPP and help ensure an appropriate level of accountability and
transparency;
* develop a means to ensure that institutions participating in CPP
comply with key program requirements (e.g., executive compensation,
dividend payments, and the repurchase of stock);
* formalize the existing communication strategy to ensure that external
stakeholders, including Congress, are informed about the program‘s
current strategy and activities and understand the rationale for
changes in this strategy to avoid information gaps and surprises;
* facilitate a smooth transition to the new administration by building
on and formalizing ongoing activities, including ensuring that key OFS
leadership positions are filled during and after the transition;
* expedite OFS‘s hiring efforts to ensure that Treasury has the
personnel needed to carry out and oversee TARP;
* ensure that sufficient personnel are assigned and properly trained to
oversee the performance of all contractors, especially for Contracts
priced on a time and materials basis, and move toward fixed-price
arrangements whenever possible;
* continue to develop a comprehensive system of internal control over
TARP, including policies, procedures, and guidance that are robust
enough to protect taxpayers interests and ensure that the program
objectives are being met;
* issue final regulations on conflicts of interest quickly and review
and renegotiate mitigation plans to enhance specificity and compliance;
and:
* institute a system to effectively manage and monitor the mitigation
of conflicts of interest.
It is too soon to determine whether the program is having the intended
effect on credit and financial markets. Moreover, given that U.S.
regulators as well as foreign governments are continuing to take a
variety of actions aimed at stabilizing markets and the economy,
separately evaluating the impact of Treasury‘s efforts under TARP will
be difficult. Nevertheless, GAO has identified a number of preliminary
indicators that when viewed collectively should signal whether TARP as
well as other related programs may be functioning as intended. Among
these preliminary indicators are trends in interest rate spreads,
mortgage rates, mortgage originations, and foreclosures.
Treasury has operated on parallel tracks in implementing the act. The
following timeline highlights key actions associated with program
implementation to date.
Timeline of Key Treasury Activities (Program Activities, Selection of
Financial Agents and Contractors, and Organizational Activities), as of
November 25, 2008:
Program activities:
10/14: Treasury announces that it will purchase up to $250 billion in
financial firms‘ preferred stock under TARP via the Capital Purchase
Program (CPP)Nine major financial institutions agree to participate in
CPP. Treasury issued executive compensation guidelines on Tuesday,
October 14, for three TARP areas: CPP, Troubled Asset Auction Program,
and Systemically Significant Failing.
10/20: Treasury, the Federal Reserve, the Office of the Comptroller of
the Currency, the Office of Thrift Supervision, and the Federal Deposit
Insurance Corporation issue application guidelines and other documents
for all banks wishing to participate in CPP.
10/28: Treasury disburses capital injections to 8 of the 9 banks slated
to participate in the first round of the CPP, resulting in the purchase
of $115 billion in senior preferred shares of 8 national financial
institutions.
10/31: Treasury issues form documents for publicly traded financial
institutions applying for CPP participation.
11/10: Treasury announces that it will purchase $40 billion in senior
preferred stock from the American International Group (AIG) under SSFI.
11/14: Deadline for financial institutions to apply for participation
in CPP.
11/17: Treasury announces purchases of almost $33.6 billion in senior
preferred shares from 21 financial institutions under CPP.
11/21: Treasury purchases about $2.9 billion in senior preferred shares
from 23 financial institutions under CPP.
11/25: Treasury purchases $40 billion in senior preferred shares from
AIG under the SSFI program.
Selection of financial agents and contractors:
10/6: Treasury solicits financial institutions interested in providing
custodial and asset management services for TARP.
10/8: Responses due from financial institutions interested in providing
custodial and asset management services for TARP.
10/13: Treasury announces it will contract with EnnisKnupp & Associates
to provide investment consultant services on TARP.
10/14: Treasury announces Bank of New York Mellon selected as financial
agent to provide custodian services for TARP.
10/16: Treasury announces award of contract to Simpson, Thacher &
Bartlett to provide legal advice on the implementation of the act.
10/21: Treasury announces it will contract for accounting and internal
controls support services from PricewaterhouseCoopers and Ernst and
Young under the Federal Supply Schedule.
10/29: Treasury contracts with Hughes Hubbard & Reed, LLP, and Squire
Sanders & Dempsey, LLP to provide legal advice on implementation of
CPP.
11/7: Treasury announces solicitation for financial agents to provide
Equity, Debt, Warrants Asset Management Services to implement CPP.
Organizational activities:
10/3: Congress passes P.L. 110-343, the Emergency Economic
Stabilization Act (the act), which authorized TARP.
10/6: Treasury Secretary appoints Interim Assistant Secretary of the
Treasury for Financial Stability to oversee the Office of Financial
Stability (OFS).
10/7: First meeting of the Financial Stability Oversight Board,
established under the act.
10/13: Treasury identifies individuals to fill chief positions within
the OFS on an interim basis.
10/22: Treasury Department announces appointment of Interim Chief
Investment Officer for TARP.
11/12: Secretary Paulson provides update on priorities for spending
remaining TARP funds, including plans to provide support for
securitizing credit outside of the banking system.
Source: GAO.
[End of timeline]
What GAO Recommends:
Treasury generally agreed with GAO‘s recommendations, but had a
different perspective on the need to monitor how participating
institutions are spending CPP funds. GAO believes that monitoring
aggregate information across the participants would help ensure an
appropriate level of transparency and accountability.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-161]. For more
information, contact Thomas McCool (202)512-2642.
[End of section]
Contents:
Letter:
Scope and Methodology:
Results in Brief:
Background:
Treasury Has Moved Quickly to Establish CPP, but Plans for Other
Approaches for Strengthening Financial Markets Are Ongoing:
Efforts to Establish the Office of Financial Stability Are Ongoing:
Measuring the Impact of TARP on Credit Markets and the Economy Will Be
Challenging:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Analysis:
Appendix I: Comments from the Department of the Treasury:
Appendix II: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: Amount of Capital Investment and Characteristics of the
Qualified Financial Institutions Participating in the Capital Purchase
Program, as of November 25, 2008:
Table 2: Financial Agency Agreement and Contracts Awarded, as of
November 25, 2008:
Table 3: GAO's Standards for Internal Control in the Federal
Government:
Figures:
Figure 1: Process for Accepting and Approving CPP Applications, as of
November 21, 2008:
Figure 2: Organization of the Office of Financial Stability, as of
November 21, 2008:
Figure 3: Three-Month LIBOR and 3-Month Treasury Bill Yield:
Figure 4: Yields on Corporate Bonds (Aaa and Baa) Relative to 10-year
Treasury:
Figure 5: Mortgage Rates (30-Year Fixed Rate, Conforming) and Treasury
Yields:
Figure 6: Mortgage Originations:
Figure 7: Percentage of Loans in Foreclosure:
Abbreviations:
ABS: asset-backed security:
AIG: American International Group:
CBO: Congressional Budget Office:
CBOE: Chicago Board of Options Exchange:
CDFI: Community Development Financial Institutions Fund:
CFO: chief financial officer:
COO: chief operating officer:
COSO: Committee of Sponsoring Organizations of the Treadway Commission:
CPP: Capital Purchase Program:
FAR: Federal Acquisition Regulation:
FDIC: Federal Deposit Insurance Corporation:
FHA: Federal Housing Administration:
FHFA: Federal Housing Finance Agency:
GSA: General Services Administration:
HUD: Department of Housing and Urban Development:
IMF: International Monetary Fund:
LIBOR: London Interbank Offered Rate:
MBS: mortgage-backed security:
OCC: Office of the Comptroller of Currency:
OFS: Office of Financial Stability:
OTS: Office of Thrift Supervision:
QFI: qualified financial institution:
SAS: Statement of Accounting Standards:
SEC: Securities and Exchange Commission:
SSFI: Systemically Significant Failing Institution:
TALF: Term Asset-backed Securities Loan Facility:
TARP: Troubled Asset Relief Program:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
December 2, 2008:
Congressional Committees:
The current financial crisis has threatened the stability of the U.S.
banking system and the solvency of numerous financial institutions at
home and abroad. On October 3, 2008, Congress passed and the President
signed the Emergency Economic Stabilization Act of 2008 (the act),
which established the Office of Financial Stability (OFS) within the
Department of the Treasury (Treasury) and authorized the Troubled Asset
Relief Program (TARP). Among other things, the act provides Treasury
with broad, flexible authorities to buy up to $700 billion in "troubled
assets" and allows Treasury to purchase and insure mortgages and
securities based on mortgages and, in consultation with the Chairman of
the Board of Governors of the Federal Reserve System (Federal Reserve),
purchase any other financial instrument (e.g., equities) deemed
necessary to stabilize financial markets.[Footnote 1]
Before the bill was passed, TARP's primary focus was expected to be the
purchase of mortgage-backed securities (MBS) and whole loans. Within 2
weeks of enactment, however, following similar action by several
foreign governments and central banks, Treasury announced that it would
make $250 billion of the $700 billion available to U.S. financial
institutions through purchases of preferred stock. The Federal Reserve
and the Federal Deposit Insurance Corporation (FDIC) also announced
concurrent coordinated actions that were intended to increase
confidence in the U.S. financial system. FDIC announced that it would
temporarily guarantee certain senior debt of all FDIC-insured
institutions and certain holding companies, as well as deposits in
noninterest bearing deposit transaction accounts at insured depository
institutions.[Footnote 2] The Federal Reserve announced the details of
its Commercial Paper Funding Facility program, which provides a broad
backstop to the commercial paper market by funding purchases of 3-month
commercial paper from high-quality issuers.[Footnote 3] The Federal
Reserve and FDIC, among others, have also announced a variety of other
initiatives aimed at addressing the current crisis, including the
Federal Reserve's creation of a funding facility to support a private-
sector initiative designed to provide liquidity to U.S. money market
investors and the temporary increase in FDIC deposit insurance
coverage.[Footnote 4]
The act requires the U.S. Comptroller General to report at least every
60 days, as appropriate, on findings resulting from oversight of TARP's
performance in meeting the purposes of the act; the financial condition
and internal controls of TARP, its representatives, and agents; the
characteristics of both asset purchases and the disposition of assets
acquired, including any related commitments that are entered into;
TARP's efficiency in using the funds appropriated for the program's
operation; TARP's compliance with applicable laws and regulations; and
TARP's efforts to prevent, identify, and minimize conflicts of interest
of those involved in its operations. In response to this mandate, this
report addresses (1) the nature and purpose of activities that have
been initiated under TARP as of November 25, 2008; (2) the structure of
OFS, its use of contractors, and its system of internal controls; and
(3) preliminary indicators of TARP performance.
Scope and Methodology:
To determine the nature and purpose of TARP activities since the
passage of the act on October 3, 2008, through November 25, 2008, we
reviewed documents from OFS that described the amounts, types, and
terms of Treasury's purchases of preferred stocks and equity warrants
under the Capital Purchase Program (CPP).[Footnote 5] We reviewed
documentation and interviewed officials from OFS and the four primary
banking regulators that are responsible for reviewing CPP applications-
-FDIC, Federal Reserve, Office of the Comptroller of Currency (OCC),
and Office of Thrift Supervision (OTS)--on the process for selecting
financial institutions to participate in CPP. We compared the
evaluation criteria used by each of the regulators to determine that
they were consistent with the criteria approved by Treasury and
reviewed additional guidelines provided by the banking regulators to
their regional offices. For the first eight institutions that received
CPP funds, we reviewed the individual case memorandums documenting
Treasury's decision to invest in these institutions.[Footnote 6] We are
in the process of reviewing the regulators' and Treasury's guidance. To
understand the requirements of CPP, we reviewed the standard agreements
signed by the participating institutions and interviewed senior
officials from OFS and the banking regulators. In addition, we reviewed
documentation from and interviewed senior officials at the eight
participating institutions on how their participation in the program
would affect their operations, including how they planned to use the
capital injection and whether they intended to report separately on
their activities associated with capital investments. Specifically, the
institutions included in this review are the Bank of America Corp.;
Bank of New York Mellon Corp.; Citigroup, Inc.; Goldman Sachs Group,
Inc.; JPMorgan Chase & Co.; Morgan Stanley; State Street Corp.; and
Wells Fargo & Co. We also met with OFS and regulatory officials to
discuss their plans for ensuring compliance with the requirements of
the agreements between Treasury and participants, including those
limiting executive compensation and restricting CPP participants from
increasing dividend payments or repurchasing common stock. We also
reviewed Treasury's interim final rule and notices implementing the
act's executive compensation rules. To determine the status of OFS's
progress in establishing a program to insure troubled assets--a program
that Treasury chose to implement through OFS in conjunction with TARP-
-we reviewed OFS's request for public comments on potential program
design and the comments Treasury received, and met with OFS officials.
For other approaches that Treasury was considering and had not fully
implemented, we met with officials from OFS and reviewed public
statements by Treasury officials to determine the status of their
efforts to address TARP requirements.
To determine how Treasury had structured OFS, we reviewed a draft
organizational chart and other planning documents to understand the
number and types of positions OFS was planning to fill. We also met
with Treasury and OFS officials regularly to discuss their approach to
staffing the office in the near and long terms. We also discussed with
them Treasury's plan for the transition to the next administration. As
part of our responsibility for monitoring internal controls for TARP
and its agents and representatives, we began regular meetings with OFS
officials to learn what the office was doing to develop such controls
for the office's operations and for programs such as CPP. We also
reviewed information provided by PricewaterhouseCoopers, the firm that
Treasury retained to help develop a system of internal control, and met
with PricewaterhouseCoopers officials to learn about the approach they
are taking. We also met with Ernst & Young officials who are helping
OFS develop accounting procedures for TARP. Because CPP is the first
TARP program to disburse funds, we reviewed documentation provided by
OFS and PricewaterhouseCoopers that described the controls established
for the initial disbursements and steps taken to implement these
controls. We also met with officials from the Bank of New York Mellon
to discuss the system of internal control for functions related to
services the bank plans to provide for TARP, as well as to review the
bank's internal audit process and recent reports. Our review included a
report by the Bank of New York Mellon's external auditor on the
internal controls over the Bank of New York Mellon's trust and
custodial services and selected internal audit reports on key functions
that will support TARP services.[Footnote 7]
To assess Treasury's approaches to acquiring services in support of
TARP, we reviewed the financial agency agreement Treasury entered into
and the contracts that Treasury awarded between October 3, 2008, and
November 25, 2008.[Footnote 8] We also reviewed Treasury's procurement
strategy, solicitations, and other agency documents related to those
agreements and contracts, as well as the statutes, regulations, and
guidance governing the award of financial agency agreements and
contracts. As part of this review, we examined documentation outlining
the steps Treasury had taken to promote the use of small business
concerns--including those owned and controlled by women, minorities,
veterans, and socially and economically disadvantaged individuals--in
carrying out TARP, such as Treasury guidance on small business
participation in procurements under the act. We reviewed the proposals
submitted by the firms that signed the financial agency agreement or
were awarded contracts in order to identify the approaches those firms
proposed for using small businesses. In addition, we examined
documentation outlining actual and potential conflicts of interest
identified by the financial agents and contractors, as well as their
proposed plans for mitigation of those conflicts. We also reviewed
Treasury's interim guidelines for conflicts of interest related to the
authorities granted under the act and the statutes and regulations
related to organizational and personal conflicts of interest,
postemployment restrictions, and standards of ethical conduct.
Finally, to identify a preliminary set of indicators on the state of
credit and financial markets that might be suggestive of the
performance and effectiveness of TARP, we consulted Treasury officials
and other experts and analyzed available data sources and the academic
literature. We selected a set of preliminary indicators that offered
perspectives on different facets of credit and financial markets,
including perceptions of risk, cost of credit, and flows of credit to
businesses and consumers.[Footnote 9] We assessed the reliability of
the preliminary indicators presented and found that despite certain
limitations and the fact that others could interpret these indicators
differently, they were sufficiently reliable for our purposes. The data
used to construct the indicators in this report came largely from the
Federal Reserve. As these data are widely used, including by GAO and
the Federal Reserve, and are considered to be a reliable and often
definitive source for banking sector data, we conducted only a limited
review of the data but ensured that the trends we found were consistent
with other research. We also relied on data from the Chicago Board
Options Exchange (CBOE), Inside Mortgage Finance, and Global Insight.
We have relied on CBOE and Global Insight data for past reports, and we
determined that considered together, these auxiliary data were
sufficiently reliable for the purpose of presenting and analyzing
trends in financial markets.
We conducted this performance audit in October 2008 and November 2008
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 provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Results in Brief:
As of November 25, 2008, Treasury's focus in implementing TARP has been
on investing directly in regulated financial institutions through CPP,
which is intended to provide financial institutions with additional
capital through purchases of senior preferred stock. Treasury stated
that it chose to implement CPP because it concluded that the worsening
conditions in the financial market required a more immediate response
than would have been possible through the purchase of mortgage-related
assets. This shift in the direction of the program heightened the need
for Treasury to proactively provide sufficient information to external
stakeholders about not only the change in strategy but also the
rationale for the new focus. As of November 25, 2008, Treasury had
allocated $250 billion to CPP and purchased $115 billion in senior
preferred shares of 8 national financial institutions and almost $36.5
billion in senior preferred shares of 44 financial institutions.
[Footnote 10] Treasury has stated that by building capital, CPP should
help increase the flow of financing to U.S. businesses and consumers
and support the U.S. economy. Treasury also has indicated that it
intends to use CPP to encourage financial institutions to work to
modify the terms of existing residential mortgages. Treasury has not
yet determined if it will impose reporting requirements on the
participating financial institutions. Such requirements would enable
Treasury to monitor, to some extent, how the infusions were being used.
Treasury and the banking regulators have taken important steps to
ensure consistency in evaluating applications, but the extent to which
regulators have provided guidance to their staff concerning denials of
applications has varied. Institutions participating in CPP must comply
with certain requirements regarding executive compensation--for example
certain senior executives must repay any incentive or bonus
compensation that was based on materially inaccurate financial
statements. Treasury has not yet determined how it will monitor
compliance with this or other requirements such as limitations on
dividend payments and stock repurchases. It is also unclear what other
approaches Treasury will pursue to meet the purposes of the act,
including insuring mortgage-related assets. Treasury recently stated
that it intends to purchase mortgage-related assets only on a targeted
basis. In addition, Treasury has taken initial steps to gather comments
on ways of using its authority to insure troubled assets and is
exploring approaches to supporting loan modification efforts. Without a
strong oversight and monitoring function, Treasury's ability to help
ensure an appropriate level of accountability and transparency will be
limited. Moreover, a strengthened communication strategy could help
avoid information gaps as market conditions and TARP continue to
evolve.
Treasury quickly established an overall organizational structure for
OFS, filled key leadership roles, and contracted for support services.
Currently, it is working to hire the full complement (perhaps as many
as 200 full-time-equivalent positions) of staff, and OFS officials said
that about 48 employees were assigned to TARP as of November 21, 2008,
including those from other Treasury offices, federal agencies, and
organizations who were providing assistance on a temporary basis and 5
permanent hires. Identifying and hiring the numbers and types of staff
needed to successfully operate TARP will be challenging because of the
evolving nature of the program and the transition to a new
administration. While Treasury has filled key positions on an interim
basis, these same issues may limit its ability to ensure that key
leadership positions at OFS remain filled both during and after the
transition, potentially creating uncertainty about the direction of the
program and impeding efforts to effectively implement TARP. In addition
to using permanent staff, OFS plans to rely on contractors and
financial agents in several key areas. Treasury used expedited
solicitation procedures and structured the agreements to allow for
flexibility in procuring the required services. For the most part, the
contracts awarded as of November 25, 2008, are priced on a time-and-
materials basis, which provides for payments to the contractors based
on a set labor rate for hours billed plus the cost of any materials.
This type of pricing arrangement requires enhanced oversight. Treasury
has also taken steps to help promote the use of small businesses in
carrying out TARP and issued interim guidelines to address potential
and actual conflicts of interest. As required by Treasury, the
financial agent and contractors selected have identified a variety of
potential and actual conflicts of interest and proposed a variety of
solutions to mitigate identified conflicts. However, the agent and
contractors have provided few written details on how they intend to
implement mitigation plans or communicate related issues to OFS, and
OFS has not yet developed a process for monitoring conflicts of
interest. Recognizing the importance of internal controls, Treasury
awarded one of the first contracts to PricewaterhouseCoopers to assist
OFS in developing and implementing a comprehensive system of internal
controls over TARP activities, including a risk-assessment framework.
However, the rapid pace of implementation and evolving nature of the
program have hampered efforts to put a comprehensive system of internal
control in place. Instead OFS has focused on specific transaction
controls as programs such as CPP are implemented. While OFS and
PricewaterhouseCoopers are working to implement a comprehensive system
of internal control, until such a system is fully developed and
implemented, there is heightened risk that the interests of the
government and taxpayers may not be adequately protected and that the
program objectives may not be achieved in an efficient and effective
manner.
It is too soon to determine whether the program is having the intended
effect on credit and other markets. While TARP's CPP could improve
confidence in participating financial institutions and may have
beneficial effects on credit markets, attributing any such improvement
solely to TARP is problematic because of the range of actions that have
been and are being taken to address the current crisis. These include
coordinated efforts by the global community and U.S. regulators--
namely, FDIC, the Federal Reserve, and the Federal Housing Finance
Agency (FHFA)--as well as actions by financial institutions to mitigate
foreclosures. We have identified a set of preliminary indicators that
we will monitor for indications of improvements in credit and financial
markets, such as the narrowing of various interest rate spreads that
signal perceptions about the level of risk associated with lending
among banks, in corporate debt markets, and throughout the general
economy and reductions in the cost of credit for banks, businesses, and
consumers. Over time, additional effects might be apparent in credit
flows that capture key developments in mortgage markets and the level
of defaults and foreclosures. While these indicators may be suggestive
of TARP's ongoing impact, which we will be monitoring, no single
indicator or set of indicators will provide a definitive determination
of the program's impact. Moreover, we plan to report on additional
indicators as more data become available and as economic and credit
conditions evolve.
We recognize that less than 60 days has passed since the program was
created and the inherent difficulty of setting up any new program,
especially during turbulent economic conditions. However, we have
identified a number of areas that warrant Treasury's ongoing attention.
Therefore, we are recommending that Treasury take a number of actions
aimed at improving the integrity, accountability, and transparency of
TARP. Specifically, Treasury should:
* work with the bank regulators to establish a systematic means of
determining and reporting in a timely manner whether financial
institutions' activities are generally consistent with the purposes of
CPP;
* develop a means to ensure that institutions participating in CPP
comply with key requirements of their agreements with Treasury,
including those covering limitations on executive compensation,
dividend payments, and the repurchase of stock;
* formalize the existing communication strategy to ensure that external
stakeholders, including Congress and the public, are informed about the
program's current strategy and activities as well as the rationale for
changes in this strategy to avoid information gaps and surprises;
* develop a definitive transition plan by building on and formalizing
ongoing activities to facilitate a smooth transition to the new
administration, including ensuring that key OFS leadership positions
are filled during and after the transition to the new administration;
* continue OFS hiring efforts in an expeditious manner to ensure that
Treasury has the personnel needed to carry out and oversee TARP;
* ensure that sufficient numbers of personnel are assigned and
appropriately trained to oversee the performance of all contractors,
especially those performing under contracts priced on a time and
materials basis, and move toward greater reliance on fixed-price
arrangements whenever possible as program requirements are better
defined over time;
* continue to develop a comprehensive system of internal controls over
TARP including policies, procedures, and guidance for program
activities that are robust enough to ensure that government's and
taxpayers' interests are protected and that the program objectives and
requirements are being met;
* issue final regulations on conflicts of interest concerning its
contractors and financial agents as expeditiously as possible and
review and renegotiate mitigation plans as necessary to enhance
specificity and compliance with the new regulations once they are
issued; and:
* institute a system to effectively manage and monitor the mitigation
of conflicts of interest.
We provided a draft of this report to Treasury for review and comment.
We also provided excerpts of the draft report to the Federal Reserve,
FDIC, OCC and OTS for review and comment. In written comments, Treasury
generally agreed with the report and eight of the nine recommendations
(see app. I). Treasury had a different perspective on what should be
done to evaluate how institutions were using funds received under CPP,
opting for development of general metrics for evaluating the overall
success of CPP rather than working with bank regulators to establish a
systematic means for determining whether financial institutions' uses
of CPP funds were consistent with the purposes of the program, as we
recommended. In technical comments, the Federal Reserve also expressed
concern about whether Treasury needed to monitor individual
institutions' use of CPP funds. As discussed in the draft, we agree
that it will be important to develop a range of metrics to evaluate the
overall success of CPP and we welcome continued discussions with
Treasury and the bank regulators on general metrics to achieve this
purpose. However, given the magnitude of funds provided to this
program, these types of metrics alone will not provide the necessary
transparency and accountability needed to ensure that participating
institutions are using the funds in a manner that is consistent with
the purposes of the act. As stated in the report, Treasury should build
on the existing oversight mechanisms of the banking regulators to
minimize any additional regulatory burden and develop a means of
reviewing and reporting on planned and actual actions taken by
participating financial institutions resulting from the additional
funding received through CPP. Obtaining such information could help
Treasury better monitor participating institutions' activities and
provide an appropriate level of accountability and transparency.
Moreover, such information aggregated across the participants would
also provide an alternative basis to assess the effect of TARP in
restoring liquidity and stability to the financial system. Treasury,
the Federal Reserve, FDIC, OCC, and OTS also provided technical
comments that we incorporated in the report, as appropriate.
Background:
The dramatic correction in the U.S. housing market precipitated a
decline in the price of financial assets that were associated with
housing, in particular mortgage assets based on subprime loans that
lost value as the housing boom ended and the market underwent a
dramatic correction. Some institutions found themselves so exposed that
they were threatened with failure--and some failed--because they were
unable to raise the necessary capital as the value of their portfolios
declined. Other institutions, ranging from government-sponsored
enterprises such as Fannie Mae and Freddie Mac to Wall Street firms,
were left holding "toxic" mortgages that became increasingly difficult
to value, were illiquid, and potentially had little worth. Moreover,
investors not only stopped buying securities backed by mortgages but
also became reluctant to buy securities backed by many types of assets.
Because of uncertainty about the financial condition and solvency of
financial entities, the prices banks charged each other for funds rose
dramatically, and interbank lending effectively came to a halt. The
resulting credit crunch made the financing on which businesses and
individuals depend increasingly difficult to obtain as cash-strapped
banks held onto their assets. By late summer of 2008, the potential
ramifications of the financial crisis ranged from the continued failure
of financial institutions to increased losses of individual savings and
corporate investments and further tightening of credit that would
exacerbate the emerging global economic slowdown that was beginning to
take shape.
In September 2008, the Secretary of the Treasury announced that he was
working with the chairmen of the Federal Reserve and the Securities and
Exchange Commission (SEC) and congressional leaders to develop a
comprehensive approach to the crisis facing financial institutions and
markets. Until that time, the administration had responded to the
ongoing problems in the financial sector on a case-by-case basis,
facilitating JPMorgan Chase's purchase of Bear Stearns, addressing
problems at Fannie Mae and Freddie Mac, working with market
participants to prepare for the failure of Lehman Brothers, and lending
to American International Group (AIG) to allow it to sell some of its
assets in an orderly manner. Although Treasury had begun to take a
number of broader steps, including establishing a temporary guarantee
program for money market funds in the United States, it decided that
additional and comprehensive action was needed to address the root
cause of the financial system's stresses. On September 20, 2008,
Treasury proposed draft legislation to allow it to purchase up to $700
billion in troubled mortgage-related assets. Although the legislation
was initially rejected by the House of Representatives on September 29,
the Senate passed an expanded version of the legislation on October 1,
and on October 3, the act was passed by the House of Representatives
and signed into law by the President.
The act, as it relates to TARP, provides Treasury with the authority to
purchase and insure certain types of troubled assets for the purposes
of providing stability to and preventing disruptions in the economy and
financial system and protecting taxpayers. The purposes of the act are
to immediately provide authority and facilities that Treasury can use
to restore liquidity and stability to the U.S. financial system and to
ensure that these activities are consistent with protecting home
values, college funds, retirement accounts, and life savings;
preserving homeownership and promoting jobs and economic growth;
maximizing overall returns to U.S. taxpayers; and providing public
accountability for the exercise of authority under the act.
In exercising its authorities, the act further states that Treasury
must consider a variety of additional factors, including the following:
* minimizing the impact on the national debt;
* providing stability for and preventing disruption to financial
markets;
* considering the long-term viability of financial institution in
determining whether a direct purchase represents the most efficient use
of funds under the act;
* ensuring that all financial institutions are eligible to participate
in the program, regardless of size, geographic location, form of
organization, or amount of assets eligible for purchase under the act;
* providing financial assistance to financial institutions--including
those serving low-and moderate-income populations and other underserved
communities, and that have assets of less than $1 billion; that were
well or adequately capitalized as of June 30, 2008; and that as a
result of the devaluation of the preferred government-sponsored
enterprises, will see their stock drop one or more capital levels--in a
manner sufficient to restore the financial institutions to at least an
adequately capitalized level;
* ensuring stability for U.S. public instrumentalities, such as
counties and cities, that may have suffered significant increased costs
or losses in the current market turmoil;
* considering the retirement security of Americans by purchasing
troubled assets held by or on behalf of an eligible retirement plan;
[Footnote 11] and:
* considering the utility of purchasing other real estate owned and
instruments backed by mortgages on multifamily properties.
The act also requires several new and existing entities, in addition to
the U.S. Comptroller General, to oversee the activities of OFS and
TARP. For example, the legislation created the Financial Stability
Oversight Board, which includes the Chairman of the Federal Reserve;
the Secretary of the Treasury; the Director of FHFA; the Chairman of
SEC, and the Secretary of Housing and Urban Development (HUD).[Footnote
12] Moreover, it created a Special Inspector General for the program as
well as a Congressional Oversight Panel.[Footnote 13]
Treasury and federal and state regulators all play a role in regulating
and monitoring the financial system. Historically, Treasury's mission
has been to act as steward of U.S. economic and financial systems and
to participate in and influence the global economy. As such, Treasury
is responsible for a wide range of activities, helping to frame
economic and financial policies and encourage sustainable economic
growth. Among its many activities is working to predict and prevent
economic and financial crises, positioning Treasury to take a leading
role in addressing underlying issues such as those currently facing the
U.S. financial system. The key federal banking regulators include the
following:
* Federal Reserve, which is responsible for (among other things)
conducting the nation's monetary policy by influencing the monetary and
credit conditions in the economy in pursuit of maximum employment,
stable prices, and moderate long-term interest rates; supervising and
regulating bank holding companies and banks that are members of the
Federal Reserve System; and maintaining the stability of the financial
system and containing systemic risk that may arise in financial
markets;
* FDIC, an independent agency created to help maintain stability and
public confidence in the nation's financial system by insuring
deposits, examining and supervising state-chartered banks that are not
members of the Federal Reserve System, and managing receiverships;
* OCC, which charters and supervises national banks; and:
* OTS, which supervises savings associations (thrifts) and savings
association holding companies.
As discussed in the next section of this report, these bank regulators
have a role in reviewing the applications of financial institutions
applying for CPP.
Treasury Has Moved Quickly to Establish CPP, but Plans for Other
Approaches for Strengthening Financial Markets Are Ongoing:
Treasury's focus on implementing TARP thus far has been on directly
investing in regulated financial institutions through CPP, with federal
banking regulators playing a role in evaluating potential participants.
Treasury had purchased more than $150 billion in senior preferred
shares of 52 financial institutions as of November 25, 2008. Treasury
has stated that it intends to use CPP to encourage U.S. financial
institutions to increase the flow of financing to U.S. businesses and
consumers and to support the U.S. economy. Treasury has also indicated
that it intends to use CPP to encourage financial institutions to work
to modify the terms of existing residential mortgages. OFS has not yet
determined if it will impose reporting requirements on the
participating financial institutions that could enable OFS to monitor,
to some extent, how the financial institutions are using capital
infusions. Institutions participating in CPP have agreed to comply with
certain requirements, such as limitations on executive compensation,
dividend payments, and repurchases of stock. However, Treasury has not
yet determined how it will ensure compliance with these requirements.
The extent to which Treasury will pursue other approaches to
strengthening financial markets, including insuring troubled assets, to
meet the purposes of the act also remains uncertain. But without
effective oversight, Treasury cannot ensure that those receiving funds
are complying with CPP requirements.
Treasury's Focus Has Shifted Away from the Purchase of Mortgage-related
Assets:
The act authorized the Secretary of the Treasury to purchase mortgages
and MBS, and, in consultation with the Chairman of the Federal Reserve,
to purchase other financial instruments if such purchases were deemed
necessary to promote financial market stability. On October 13, 2008,
consistent with conditions prescribed by the act, Treasury notified
Congress that Treasury officials had determined that it would be
necessary under TARP to purchase preferred stocks and warrants issued
by certain financial institutions.[Footnote 14] On October 14, Treasury
announced that it would make direct capital investments in financial
institutions in exchange for preferred stocks and warrants through CPP.
[Footnote 15] Treasury stated that strengthening capital via
investments under this program was the swiftest mechanism to stabilize
the financial markets, encourage interbank lending, and increase
confidence in lenders and investors. Further, at the time Treasury
stated that it planned to continue developing a program to purchase
mortgages and MBS and would seek public comments on structuring a
program to insure these assets. On November 12, Treasury announced that
it would move away from purchasing mortgages and MBS as originally
planned because it believed that such purchases were not the best use
of TARP funds, although targeted purchases of such assets were still
under consideration. Instead, Treasury planned to focus on extending
capital investments to nonbank financial institutions and providing
federal financing to investors of highly rated asset-backed securities
(ABS) to lower the cost of and increase the availability of credit for
consumers. The ABS market provides liquidity to financial institutions
that provide small business loans and consumer lending such as auto
loans, student loans, and credit cards. In addition, Treasury stated
that it would develop strategies to stabilize the real estate market by
encouraging loan modifications. While Treasury has used a variety of
mechanisms to make sure the program is transparent, the shift in the
direction of the program to CPP highlighted the need for Treasury to
more actively provide sufficient information to external stakeholders
(e.g., Congress and the public) about changes in its planned strategy
and activities as well as the rationale for any shift to avoid future
information gaps and surprises.
Treasury Has Invested More than $150 Billion in 52 Financial
Institutions:
Treasury had made more than $150 billion in capital investments in 52
financial institutions as of November 25, 2008. On October 14, 2008, in
conjunction with similar actions by foreign governments and coordinated
actions by the Federal Reserve and FDIC, Treasury announced that it
planned to use $250 billion to purchase senior preferred shares in a
broad array of qualifying financial institutions.[Footnote 16] Treasury
approved $125 billion in capital purchases for nine of the largest
public financial institutions considered by the federal banking
regulators and Treasury to be systemically significant to the operation
of the financial system. Together, these institutions hold about 55
percent of U.S. banking assets. These nine institutions provide a
variety of services, including retail and wholesale banking, investment
banking, and custodial/processing services. According to Treasury
officials, the nine financial institutions agreed to participate in
part to signal the importance of the program to the stability of the
financial system. On October 28, 2008, Treasury settled the capital
purchase transactions with eight of these institutions for a total of
$115 billion.[Footnote 17] According to Treasury, the remaining $10
billion will be settled when the merger of Bank of America Corporation
and Merrill Lynch & Co., Inc. is complete, sometime before January 31,
2009. Table 1 provides information about the first eight institutions
selected for capital investment as well as other investments.[Footnote
18]
Table 1: Amount of Capital Investment and Characteristics of the
Qualified Financial Institutions Participating in the Capital Purchase
Program, as of November 25, 2008:
Purchases on October 28, 2008:
Name of qualified financial institution: (Location of qualified
financial institution): Bank of America Corp.; (Charlotte, N.C.);
Capital purchased by Treasury (in millions): $15,000;
Total company assets as of September 2008 (in millions): $1,831,000.
Name of qualified financial institution: (Location of qualified
financial institution): Bank of New York Mellon Corp.; (New York City,
N.Y.);
Capital purchased by Treasury (in millions): $3,000;
Total company assets as of September 2008 (in millions): $268,000.
Name of qualified financial institution: (Location of qualified
financial institution): Citigroup, Inc.; (New York City, N.Y.);
Capital purchased by Treasury (in millions): $25,000[A];
Total company assets as of September 2008 (in millions): $2,050,000.
Name of qualified financial institution: (Location of qualified
financial institution): Goldman Sachs Group, Inc.; (New York City,
N.Y.);
Capital purchased by Treasury (in millions): $10,000;
Total company assets as of September 2008 (in millions): $1,082,000[B].
Name of qualified financial institution: (Location of qualified
financial institution): JPMorgan Chase & Co.; (New York City, N.Y.);
Capital purchased by Treasury (in millions): $25,000;
Total company assets as of September 2008 (in millions): $2,251,000.
Name of qualified financial institution: (Location of qualified
financial institution): Morgan Stanley; (New York City, N.Y.);
Capital purchased by Treasury (in millions): $10,000;
Total company assets as of September 2008 (in millions): $987,000[C].
Name of qualified financial institution: (Location of qualified
financial institution): State Street Corp.; (Boston, Mass.);
Capital purchased by Treasury (in millions): $2,000;
Total company assets as of September 2008 (in millions): $286,000.
Name of qualified financial institution: (Location of qualified
financial institution): Wells Fargo & Co.; (San Francisco, Calif.);
Capital purchased by Treasury (in millions): $25,000;
Total company assets as of September 2008 (in millions): $1,371,000[D].
Subtotal:
Capital purchased by Treasury (in millions): $115,000;
Total company assets as of September 2008 (in millions): $10,126,000.
Purchases on November 14, 2008:
Name of qualified financial institution: (Location of qualified
financial institution): Bank of Commerce Holdings; (Redding, Calif.);
Capital purchased by Treasury (in millions): $17;
Total company assets as of September 2008 (in millions): $651.
Name of qualified financial institution: (Location of qualified
financial institution): 1st FS Corporation; (Hendersonville, N.C.);
Capital purchased by Treasury (in millions): $16;
Total company assets as of September 2008 (in millions): $670.
Name of qualified financial institution: (Location of qualified
financial institution): UCBH Holdings, Inc.; (San Francisco, Calif.);
Capital purchased by Treasury (in millions): $299;
Total company assets as of September 2008 (in millions): $13,044.
Name of qualified financial institution: (Location of qualified
financial institution): Northern Trust Corporation; (Chicago, Ill.);
Capital purchased by Treasury (in millions): $1,576;
Total company assets as of September 2008 (in millions): $79,244.
Name of qualified financial institution: (Location of qualified
financial institution): SunTrust Banks, Inc.; (Atlanta, Ga.);
Capital purchased by Treasury (in millions): $3,500;
Total company assets as of September 2008 (in millions): $174,777.
Name of qualified financial institution: (Location of qualified
financial institution): Broadway Financial Corporation; (Los Angeles,
Calif.);
Capital purchased by Treasury (in millions): $9;
Total company assets as of September 2008 (in millions): $404.
Name of qualified financial institution: (Location of qualified
financial institution): Washington Federal Inc.; (Seattle, Wash.);
Capital purchased by Treasury (in millions): $200; Total company assets
as of September 2008 (in millions): $11,795.
Name of qualified financial institution: (Location of qualified
financial institution): BB&T Corp.; (Winston-Salem, N.C.);
Capital purchased by Treasury (in millions): $3,134;
Total company assets as of September 2008 (in millions): $137.
Name of qualified financial institution: (Location of qualified
financial institution): Provident Bancshares Corp.; (Baltimore, Md.);
Capital purchased by Treasury (in millions): $152;
Total company assets as of September 2008 (in millions): $6,410.
Name of qualified financial institution: (Location of qualified
financial institution): Umpqua Holdings Corp.; (Portland, Ore.);
Capital purchased by Treasury (in millions): $214;
Total company assets as of September 2008 (in millions): $8,328.
Name of qualified financial institution: (Location of qualified
financial institution): Comerica Inc.; (Dallas, Tex.);
Capital purchased by Treasury (in millions): $2,250;
Total company assets as of September 2008 (in millions): $65,153.
Name of qualified financial institution: (Location of qualified
financial institution): Regions Financial Corp.; (Birmingham, Ala.);
Capital purchased by Treasury (in millions): 3,500;
Total company assets as of September 2008 (in millions): 144,292.
Name of qualified financial institution: (Location of qualified
financial institution): Capital One Financial Corporation; (McLean,
Va,);
Capital purchased by Treasury (in millions): $3,555;
Total company assets as of September 2008 (in millions): $154,803.
Name of qualified financial institution: (Location of qualified
financial institution): First Horizon National Corporation; (Memphis,
Tenn.);
Capital purchased by Treasury (in millions): $867;
Total company assets as of September 2008 (in millions): $32,804.
Name of qualified financial institution: (Location of qualified
financial institution): Huntington Bancshares; (Columbus, Ohio);
Capital purchased by Treasury (in millions): $1,398;
Total company assets as of September 2008 (in millions): $54,661.
Name of qualified financial institution: (Location of qualified
financial institution): KeyCorp; (Cleveland, Ohio);
Capital purchased by Treasury (in millions): $2,500;
Total company assets as of September 2008 (in millions): $101,290.
Name of qualified financial institution: (Location of qualified
financial institution): Valley National Bancorp; (Wayne, N.J.); Capital
purchased by Treasury (in millions): $300;
Total company assets as of September 2008 (in millions): $14,288.
Name of qualified financial institution: (Location of qualified
financial institution): Zions Bancorporation; (Salt Lake City, Utah);
Capital purchased by Treasury (in millions): $1,400;
Total company assets as of September 2008 (in millions): $53,974.
Name of qualified financial institution: (Location of qualified
financial institution): Marshall & Ilsley Corporation; (Milwaukee,
Wisc.);
Capital purchased by Treasury (in millions): $1,715;
Total company assets as of September 2008 (in millions): $63,501.
Name of qualified financial institution: (Location of qualified
financial institution): U.S. Bancorp; (Minneapolis, Minn.);
Capital purchased by Treasury (in millions): $6,599;
Total company assets as of September 2008 (in millions): $247,055.
Name of qualified financial institution: (Location of qualified
financial institution): TCF Financial Corporation; (Wayzata, Minn.);
Capital purchased by Treasury (in millions): $361;
Total company assets as of September 2008 (in millions): $16,511.
Subtotal:
Capital purchased by Treasury (in millions): $33,562;
Total company assets as of September 2008 (in millions): $1,235,464.
Purchases on November 21, 2008:
Name of qualified financial institution: (Location of qualified
financial institution): Ameris Bancorp; (Moultrie, Ga.);
Capital purchased by Treasury (in millions): $52;
Total company assets as of September 2008 (in millions): $2,258.
Name of qualified financial institution: (Location of qualified
financial institution): Associated Banc-Corp; (Green Bay, Wisc.);
Capital purchased by Treasury (in millions): $525;
Total company assets as of September 2008 (in millions): $22,487.
Name of qualified financial institution: (Location of qualified
financial institution): Banner Corporation/Banner Bank; (Walla Walla,
Wash);
Capital purchased by Treasury (in millions): $124;
Total company assets as of September 2008 (in millions): $4,650.
Name of qualified financial institution: (Location of qualified
financial institution): Boston Private Financial; (Boston, Mass.);
Capital purchased by Treasury (in millions): $154;
Total company assets as of September 2008 (in millions): $7,022.
Name of qualified financial institution: (Location of qualified
financial institution): Cascade Financial Corporation; (Everett,
Wash.);
Capital purchased by Treasury (in millions): $39;
Total company assets as of September 2008 (in millions): $1,552.
Name of qualified financial institution: (Location of qualified
financial institution): Centerstate Banks Of Florida Inc.; (Davenport,
Fla.);
Capital purchased by Treasury (in millions): $28;
Total company assets as of September 2008 (in millions): $1,235.
Name of qualified financial institution: (Location of qualified
financial institution): City National Corporation; (Beverly Hills,
Calif.);
Capital purchased by Treasury (in millions): $400;
Total company assets as of September 2008 (in millions): $16,331.
Name of qualified financial institution: (Location of qualified
financial institution): Columbia Banking System, Inc.; (Tacoma, Wash.);
Capital purchased by Treasury (in millions): $77;
Total company assets as of September 2008 (in millions): $3,105.
Name of qualified financial institution: (Location of qualified
financial institution): First Community Bancshares Inc.; (Bluefield,
Va.);
Capital purchased by Treasury (in millions): $42;
Total company assets as of September 2008 (in millions): $1,967.
Name of qualified financial institution: (Location of qualified
financial institution): First Community Corporation; (Lexington, S.C.);
Capital purchased by Treasury (in millions): $11;
Total company assets as of September 2008 (in millions): $634.
Name of qualified financial institution: (Location of qualified
financial institution): First Niagra Financial Group; (Rockport, N.Y.);
Capital purchased by Treasury (in millions): $184;
Total company assets as of September 2008 (in millions): $9,008.
Name of qualified financial institution: (Location of qualified
financial institution): First Pactrust Bancorp, Inc.; (Chula Vista,
Calif.);
Capital purchased by Treasury (in millions): $19;
Total company assets as of September 2008 (in millions): $846.
Name of qualified financial institution: (Location of qualified
financial institution): Heritage Commerce Corp; (San Jose, Calif.);
Capital purchased by Treasury (in millions): $40;
Total company assets as of September 2008 (in millions): $1,512.
Name of qualified financial institution: (Location of qualified
financial institution): Heritage Financial Corporation; (Olympia,
Wash.);
Capital purchased by Treasury (in millions): $24;
Total company assets as of September 2008 (in millions): $905.
Name of qualified financial institution: (Location of qualified
financial institution): Hf Financial Corp.; (Sioux Falls, S. Dak.);
Capital purchased by Treasury (in millions): $25;
Total company assets as of September 2008 (in millions): $1,128.
Name of qualified financial institution: (Location of qualified
financial institution): Nara Bancorp, Inc.; (Los Angeles, Calf.);
Capital purchased by Treasury (in millions): $67;
Total company assets as of September 2008 (in millions): $2,598.
Name of qualified financial institution: (Location of qualified
financial institution): Pacific Capital Bancorp; (Santa Barbara,
Calif.);
Capital purchased by Treasury (in millions): $181;
Total company assets as of September 2008 (in millions): $7,689.
Name of qualified financial institution: (Location of qualified
financial institution): Porter Bancorp Inc; (Louisville, Ky.);
Capital purchased by Treasury (in millions): $35;
Total company assets as of September 2008 (in millions): $1,596.
Name of qualified financial institution: (Location of qualified
financial institution): Severn Bancorp, Inc.; (Annapolis, Md.);
Capital purchased by Treasury (in millions): $23;
Total company assets as of September 2008 (in millions): $964.
Name of qualified financial institution: (Location of qualified
financial institution): Taylor Capital Group; (Rosemont, Ill.);
Capital purchased by Treasury (in millions): $105;
Total company assets as of September 2008 (in millions): $4,075.
Name of qualified financial institution: (Location of qualified
financial institution): Trustmark Corporation; (Jackson, Miss.);
Capital purchased by Treasury (in millions): $215;
Total company assets as of September 2008 (in millions): $9,086.
Name of qualified financial institution: (Location of qualified
financial institution): Webster Financial Corporation; (Waterbury,
Conn.);
Capital purchased by Treasury (in millions): $400;
Total company assets as of September 2008 (in millions): $17,516.
Name of qualified financial institution: (Location of qualified
financial institution): Western Alliance Bancorporation; (Las Vegas,
Nev.);
Capital purchased by Treasury (in millions): $140;
Total company assets as of September 2008 (in millions): $5,229.
Subtotal:
Capital purchased by Treasury (in millions): $2,910;
Total company assets as of September 2008 (in millions): $123,393.
Grand Total:
Capital purchased by Treasury (in millions): $151,472;
Total company assets as of September 2008 (in millions): $11,484,857.
Sources: Treasury and SEC (Form 10-Q).
Note: Table does not include the $10 billion purchase of Merrill Lynch
& Co. preferred stock because the settlement of this purchase is
pending completion of its merger with Bank of America.
[A] On November 23, 2008, Treasury announced that it was purchasing an
additional $20 billion in preferred shares from Citigroup, Inc. TARP
funds were used, but this additional purchase was not part of CPP.
[B] Data as of August 29, 2008.
[C] Data as of August 31, 2008.
[D] Based on estimated 12-31-08 Pro Forma financial statements to
reflect the purchase of Wachovia Corporation.
[End of table]
Treasury made the remaining $125 billion available for additional
qualified financial institutions. The period for public financial
institutions to apply for the capital purchase ended on November 14,
2008. As shown in table 1, Treasury purchased almost $33.6 billion of
senior preferred stock in 21 financial institutions on November 14,
2008 and an additional $2.9 billion in 23 financial institutions on
November 21, 2008. The institutions varied in size, and purchases
ranged from $9 million to $6.6 billion per institution. According to
Treasury, it intends to make final eligibility and purchase decisions
for qualifying financial institutions by the end of 2008.
Terms of the Capital Purchase Program Agreements:
Under CPP, a qualified financial institution can receive a minimum
investment of 1 percent of its risk-weighted assets, up to the lesser
of $25 billion or 3 percent of those risk-weighted assets.[Footnote 19]
In exchange for the investment, Treasury receives shares of senior
preferred stock that will pay dividends at a rate of 5 percent annually
for the first 5 years and 9 percent annually thereafter. Such shares
are nonvoting, except with respect to protecting investors' rights. The
financial institutions can redeem their shares at their face value
after 3 years. At any time before that time, however, the shares can be
redeemed if the financial institution has received a minimum amount
from "qualified equity offerings" of any Tier 1 perpetual preferred or
common stock.[Footnote 20] Treasury may also transfer the senior
preferred shares to a third party at any time.
Treasury will also receive warrants to purchase a number of shares of
common stock with a total market value equal to 15 percent of the
senior preferred investment for publicly traded securities and 5
percent for privately held securities. The exercise price on the
warrants will generally be based on the market price of the
participating institution's common stock at the date of the Treasury's
acceptance of the financial institution's application to participate in
CPP. The exercise price is reduced by 15 percent of the original
exercise price on each 6-month anniversary of the issue date of the
warrants if certain shareholder approvals are not obtained, subject to
a maximum reduction of 45 percent of the original exercise price.
[Footnote 21] In addition, the number of shares of common stock
underlying the warrant held by Treasury are reduced by half if the
qualified financial institution completes one or more "qualified equity
offerings" and receives proceeds equal to the amount of the preferred
shares prior to December 31, 2009. Bank officials we spoke with said
that the option to reduce the number of shares underlying the warrants
provided a powerful incentive to replace public capital with private
capital before this date.
The standardized terms require that dividends on the senior preferred
stock be payable quarterly in arrears. According to a Treasury
official, the first dividend payments will be due in December 2008 for
some financial institutions, with the dividend accrual period beginning
on October 28, 2008. These institutions are expected to pay a rate of 5
percent of the capital investment per annum. As custodian, the Bank of
New York Mellon will receive the dividends and wire the proceeds to the
general fund of Treasury.[Footnote 22]
Treasury also plans to make capital investments in privately held
financial institutions and on November 17, 2008, issued new program
terms for investing in these institutions. The deadline for privately
held institutions to submit applications is December 8, 2008. Treasury
is also developing program terms for S Corporations and mutual
organizations (mutuals) but OFS officials noted that there were a
number of challenges associated with structuring terms for these types
of organizations.[Footnote 23] As of November 21, 2008, no final
decisions had been made about the timing of any such program.
Treasury Is Relying on Recommendations from the Bank Regulators to
Select Qualified Financial Institutions for CPP:
Treasury officials stated that they were relying extensively on the
primary federal banking regulators in determining which institutions
would be allowed to participate in CPP. Because the program is intended
to provide capital to those institutions that can demonstrate their
overall financial strength and long-term viability, OFS is relying on
the banking regulators' examinations and experience with these
institutions when it makes a final determination regarding their
financial condition. The final decision regarding the selection of
institutions to participate in CPP is made by OFS. Qualified financial
institutions seeking capital to participate in the program were to send
their applications directly to their primary federal banking
regulators.[Footnote 24]
Treasury, in consultation with the banking regulators, has developed a
standardized process for evaluating the financial strength and
viability of applicants. Specifically, financial institutions are
encouraged to consult with their primary regulators for help about
deciding whether to apply. For those institutions that decide to apply,
the federal banking regulators evaluate applications based on certain
factors, such as examination ratings, selected performance ratios.
Federal banking regulators may also consider information on the
intended deployment of capital injections, although guidance on this
possibility varied across regulators. Institutions with the highest
examination ratings are to receive presumptive approval from the
banking regulators, and the regulators' recommendations are to be
forwarded to OFS's Investment Committee for its advice and
recommendation.[Footnote 25] Institutions with lower examination
ratings or other considerations require further review and are to be
referred to the CPP Council, which is made up of representatives from
the four federal banking regulators, with Treasury officials as
observers. Regulators and the CPP Council may consider other factors,
such as the existence of a signed merger agreement involving the
institution, confirmed private equity investment in the institution,
and other factors that may offset the effect of lower examination
ratings. Finally, those institutions with the lowest examination
ratings are to receive a presumptive denial recommendation from the
banking regulators. In these instances, the primary bank regulators may
have further discussions with the applicants and encourage the
institution to withdraw its application. The banking regulator or the
CPP Council is to forward approval recommendations to OFS's Investment
Committee, which further reviews the applications and may request
additional analysis or information from the regulators or the CPP
Council. Figure 1 provides an overview of the process for assessing and
approving applications for capital purchases.
Figure 1: Process for Accepting and Approving CPP Applications, as of
November 21, 2008:
[Refer to PDF for image]
This figure is an illustration of the process for accepting and
approving CPP applications, as of November 21, 2008:
Intake:
Qualified Financial Institution (QFI):
(A) Application submitted to one of the PFRs[A]; (Primary Federal
Regulators are: Federal Reserve; OCC; FDIC; OTS)
Evaluation:
(B) Application reviewed and decision memo sent;
Presumptive approval recommendation;
Recommendation[A] (through Capital Purchase Program Council, which is
made up of representatives from the primary federal regulators (PFRs),
with Treasury officials as observers);
Presumptive denial recommendation[A] (through Capital Purchase Program
Council);
All recommendations are sent to the Investment Committee (Treasury
officials).
Final decisions:
(C) Final decision made;
Assistant Secretary for Financial Stability, Treasury approves or
denies.
[A] Stages where followup and/or reconsideration are possible. QFIs may
contact regulators informally to inquire about their chances of getting
recommended for approval. Treasury may encourage QFIs to withdrawal
applications before they are denied.
Sources: GAO analysis; Treasury; Art Explosion (images).
[End of figure]
Once its review is complete, the Investment Committee is to make
recommendations to the Assistant Secretary for Financial Stability for
final approval. According to OFS officials, denied applicants will not
be publicly announced, and as of November 21, 2008, the primary
regulators also told us that they had not recommended denial for any
financial institutions. However, regulatory officials stated that
institutions could withdraw their applications at any point in the
process if it was unlikely that their applications would be approved.
And according to bank regulators, some institutions have withdrawn
their applications. The extent to which regulators provided additional
internal guidance on processing applications that might not be approved
varied. For example, three bank regulators provided additional written
guidance to staff on how to handle applications that were not likely to
be recommended for approval, while one bank regulator did not provide
any additional guidance. We are also examining the reasonableness of
steps taken to ensure that CPP and regulators' procedures are being
consistently followed and will report our results in subsequent
reports.
OFS and the Regulators Have Not Decided How to Monitor Banks' Use of
CPP Funds or How to Ensure Compliance with Purchase Agreements:
It is unclear how OFS and the regulators will monitor participating
institutions' use of the capital investments. The standard agreement
between Treasury and the participating institutions includes a number
of provisions, some in the "recitals" section at the beginning of the
agreement and others that are detailed in the body of the agreement.
The recitals refer to the participating institutions' future actions in
general terms--for example, that "the Company agrees to expand the flow
of credit to U.S. consumers and businesses on competitive terms" and
"agrees to work diligently, under existing programs, to modify the
terms of residential mortgages." Treasury and the regulators have
publicly stated that they expect these institutions to use the funds in
a manner consistent with the goals of the program, which include both
the expansion of the flow of credit and the modification of the terms
of residential mortgages. But it is unclear how OFS and the banking
regulators will monitor how participating institutions are using the
capital investments and whether these goals are being met. The standard
agreement between Treasury and the participating institutions does not
require that these institutions track or report how they plan to use,
or do use, their capital investments.
We spoke with representatives of the eight large institutions that
initially received funds under CPP, and they told us that their
institutions intended to use the funds in a manner consistent with the
goals of CPP. Generally, the institutions stated that CPP capital would
not be viewed any differently from their other capital--that is, the
additional capital would be used to strengthen their capital bases,
make business investments and acquisitions, and lend to individuals and
businesses. With the exception of two institutions, institution
officials noted that money is fungible and that they did not intend to
track or report CPP capital separately. We will continue to monitor the
activities of these institutions as well as the plans of others in
future reports as well as any oversight provided by Treasury and its
agents or the regulators. The banking regulators indicated that they
had not yet developed any additional supervisory steps, such as
requiring more frequent provision of certain call report data for
participating institutions, to monitor participating institutions'
activities.[Footnote 26] For example, it is unclear whether Treasury
plans to leverage bank regulators, which in the case of the largest
institutions have bank examiners on site, to conduct any oversight or
monitoring related to CPP requirements. However, unless Treasury does
additional monitoring and regular reporting, Treasury's ability to help
ensure an appropriate level of accountability and transparency will be
limited.
In addition to the general recitals, the standard terms of the
securities purchase agreements include specific requirements.
Participating institutions' dividend payments are restricted for as
long as Treasury's senior preferred shares are outstanding, and the
institutions cannot redeem these senior preferred shares for 3 years
except with proceeds from new capital obtained from the market.
Treasury is in the early stages of determining how it plans to monitor
compliance with these requirements. The agreements require that the
financial institutions' benefit plans comply with the requirements for
executive compensation contained in the act and guidance issued by
Treasury before the date of Treasury's purchase of the preferred
shares. On October 20, 2008, Treasury published in the Federal Register
an interim final rule to provide guidance on the executive compensation
provisions in the act applicable to participants in CPP. The interim
final rule outlines four executive compensation requirements that apply
to senior executive officers of institutions while Treasury holds
equity or debt in the institution. Senior executive officers are
generally the chief executive officer, the chief financial officer, and
the three most highly compensated officers. A participating financial
institution must meet the following requirements:
* The institution's compensation committee must (1) review the senior
executive officers' incentive and bonus compensation arrangements
within 90 days of the CPP purchase to ensure the arrangements do not
encourage unnecessary or excessive risk taking, (2) the compensation
committee must meet at least annually with senior risk officers to
review the relationship between the institutions' risk-management
policies and the senior executive officer incentive arrangements, and
(3) certify that it has completed the reviews.
* Payments of bonus or incentive compensation that are made based on
materially inaccurate earnings must be refunded to the institution by
the senior executive officers.
* No golden parachute payments will be made.[Footnote 27]
* The institution must agree not to deduct for tax purposes executive
compensation in excess of $500,000 per executive.
Treasury officials said that they intended to develop a plan to ensure
that participating institutions adhere to these requirements, including
having Treasury's equity asset managers (yet to be selected) monitor
financial institutions' compliance with certain requirements such as
executive compensation and dividend restrictions. As discussed later in
this report, internal controls are a major part of efficiently and
effectively managing a program, and developing a process for monitoring
participating financial institutions will be critical to identifying
and addressing any potential problems in these institutions' compliance
with program requirements. Treasury officials noted that once they have
examined all public comments, they might add clauses or other
components to the executive compensation rules to strengthen oversight
of the executive compensation requirements. But at this point, the
officials have not determined how Treasury will monitor executive
compensation compliance. Bank regulators varied in their views about
their oversight responsibilities related to compliance with executive
compensation requirements and other required terms of CPP. For example,
one regulator noted that it would rely on the institution's board of
directors to assess compliance, and another regulator stated that it
was Treasury's responsibility to provide such oversight. Without a
consistent process for monitoring participating institutions,
Treasury's ability to identify and address any potential problems in
these institutions' compliance with program requirements will be
limited.
The Extent to Which Treasury Will Pursue Other Programs under TARP
Remains Uncertain:
The TARP legislation provides Treasury with broad authorities to
establish programs that can purchase or insure "troubled assets." As
previously mentioned, these assets can include mortgage-related assets
and other financial instruments that Treasury, after consultation with
the Federal Reserve, determines to be necessary to promote financial
stability. Treasury has established a Systemically Significant Failing
Institutions (SSFI) program under TARP. According to Treasury, unlike
CPP, which is broad-based, a financial institution's participation in
SSFI will be considered on a case-by-case basis. Moreover, there is no
deadline for participation in this program. For example, on November
10, 2008, Treasury announced that it would purchase $40 billion in
senior preferred stock from AIG as part of a comprehensive plan to
restructure federal assistance to this company, which Treasury views as
systemically significant.[Footnote 28] These funds were disbursed on
November 25, 2008.
Treasury has also taken other targeted action. On November 23, Treasury
announced that it would invest an additional $20 billion in Citigroup
from TARP in exchange for preferred stock, with an 8 percent dividend
to Treasury. Citigroup is to comply with enhanced executive
compensation restrictions and implement FDIC's mortgage modification
program. Treasury and FDIC will provide protection against unusually
large losses on a pool of loans and securities on the books of
Citigroup. The Federal Reserve will backstop residual risk in the asset
pool through a nonrecourse loan.
We plan to continue to monitor activities associated with both of these
transactions in future reports.
Treasury Decided Not to Pursue Further Development of the Mortgage-
related Assets Purchase Programs:
On November 12, 2008, Treasury announced that it had examined the
benefits of purchasing troubled mortgage-related assets, including
mortgage-backed securities and whole loans, and concluded that this
approach would not be the best use of TARP funds at this time. Prior to
this announcement, despite the creation of CPP, purchases of these
assets were considered a key part of Treasury's planned strategy for
stabilizing financial markets. Treasury had worked with the financial
agent it had selected to provide custodian services to TARP (Bank of
New York Mellon), bank regulators, and others to develop mechanisms for
identifying and pricing mortgage-backed securities and whole loans. In
addition, OFS started to identify asset managers to oversee acquired
mortgage-backed securities and whole loans, but given that it would not
be purchasing these mortgage-related assets, OFS officials said that it
would not be seeking the services of these asset managers at this time.
Treasury Has Taken Preliminary Steps to Establish a Program to Insure
Troubled Assets:
Under the act, Treasury is required to establish a program that insures
troubled assets and protects investors from losses.[Footnote 29] On
October 16, 2008, Treasury published in the Federal Register a request
for public comment to identify potential approaches to structuring such
an insurance program.[Footnote 30] In the notice, Treasury solicited
comments on how to structure the program, identify institutions and
assets for inclusion, and calculate premiums. In addition, Treasury
requested comments on the types of events that should lead to an
insurance payout and on approaches to setting a value for the payout.
When the comment period closed, on October 28, Treasury had received 66
comment letters from, among others, holding companies and financial
services firms, consulting firms, and trade industry groups on how to
structure the program. Treasury, as of November 21, 2008, had made no
final decision regarding the design of the program. The comments
suggested a range of program options. Recommendations focused on
insuring asset-backed securities, in particular securities backed by
consumer loans; providing insurance for guarantors' losses on their
portfolios; and insuring loans to small businesses to facilitate
lending. Many comments targeted securitized assets, and some comments
indicated that the program should encompass a variety of assets and not
just those related to mortgages.
Treasury Is Examining Strategies to Mitigate Mortgage Foreclosures:
Having decided against large purchases of troubled mortgage assets
under TARP, Treasury stated that the agency was considering other ways
to meet Congress' expectation that Treasury would work with lenders "to
achieve aggressive loan modification standards" to mitigate
foreclosures. As of November 25, 2008, it had not yet announced any
specific programs. OFS has established and hired a chief for the Office
of the Chief of Homeownership Preservation within OFS. The Director of
Treasury's Community Development Financial Institutions Fund (CDFI) is
serving as the interim chief for homeownership until a permanent chief
is hired. According to OFS officials, the effort to staff this office
with housing policy, community development, and economic research
experts is ongoing. As of November 21, 2008, seven positions had been
filled with federal government detailees, according to the Chief, and
the recruitment and hiring process had begun for permanent positions.
OFS has stated that it is working with other federal agencies,
including FDIC, HUD, and FHFA, to explore alternatives to help
homeowners under TARP. As OFS reviews foreclosure mitigation program
options, it is considering a number of factors, including the cost of
the program, the extent to which the program minimizes the recidivism
of borrowers helped out of default, and the number of homeowners the
program has helped or is projected to help remain in their homes,
according to a senior official. A senior OFS official stated that the
agency had considered loan modification strategies such as the program
FDIC developed to convert nonperforming mortgages owned or serviced by
IndyMac Federal Bank into affordable loans. Possible loan modification
measures under such programs include interest rate reductions, extended
loan terms, and deferred principal.
Other similar programs under review, according to OFS, include
strategies to guarantee loan modifications by private lenders. The HOPE
for Homeowners program at the Federal Housing Administration (FHA) is
one such program.[Footnote 31] According to FHA, lenders benefit by
turning failing mortgages into performing loans. Other loan
modification programs include those announced by FHFA in partnership
with Treasury, such as a streamlined loan modification program for at-
risk borrowers, to prevent foreclosures and mitigate losses. According
to an OFS official, OFS is also considering what policy actions might
be taken under CPP to encourage participating institutions to modify
mortgages that are at risk of or in default. Although OFS has stated
that it is contemplating these and other foreclosure mitigation
strategies, including strategies that involve TARP funds and strategies
that do not involve TARP funds, it has not announced a specific program
structure.
Treasury's Strategy Continues to Evolve and Will Focus More on Consumer
Credit:
In addition to CPP, the insurance program, and potential foreclosure
mitigation programs, Treasury is considering additional strategies
under TARP. According to the Treasury Secretary, the agency is
evaluating a program to leverage TARP funds with matching capital from
private investors. This type of program could address the needs of
nonbank financial institutions that are not eligible to participate in
CPP. However, OFS acknowledged that many nonbank credit providers were
not directly regulated, possibly making taxpayer protection, a key goal
of the act, more difficult to achieve. OFS is also considering
strategies to increase the availability of consumer financing by
improving the liquidity of the asset-backed securitization market.
According to Treasury, a freezing of credit in this market has limited
financing options for consumers for car loans, student loans, and
credit card borrowing. According to the Secretary, Treasury has been
looking for strategies to use its authority and funds under TARP to
encourage private investors to purchase highly rated ABS to expand the
flow of consumer credit. Treasury and the Federal Reserve Bank of New
York announced on November 25, 2008, the creation of the Term Asset-
Backed Securities Loan Facility (TALF), under which the Federal Reserve
Bank of New York will lend up to $200 billion to holders of newly
issued ABS for a term of at least 1-year. This credit facility is
intended to create consumer credit by providing liquidity to ABS
holders to issue new consumer credit-driven bonds. Using the funds
available under TARP, Treasury will provide $20 billion in credit
protection to the Federal Reserve for loans. This credit facility may
expand to include other asset classes, such as commercial and certain
residential mortgage-backed assets.
Efforts to Establish the Office of Financial Stability Are Ongoing:
Treasury has taken a number of major steps to set up OFS, including (1)
establishing an organizational structure and filling key leadership
positions and a number of staff positions within that structure, (2)
selecting contractors and a financial agent to support TARP activities,
and (3) beginning to develop an overall system of internal control for
the program. However, OFS faces a number of challenges in completing
its organizational activities. First, hiring the number and type of
staff needed to successfully operate TARP, as well as ensuring that key
leadership positions remain filled, will be challenging due to the
rapid evolution of program activities and the fact that the office will
soon be transitioning to a new administration. Further, Treasury has
used contractors and a financial agent to play key roles in supporting
the program, and it is taking initial steps to address conflicts of
interest posed by their roles. But Treasury is still developing an
oversight process for conflicts of interest involving its contractors
and financial agents. These and other gaps in internal controls have
resulted from the need to begin program activities before policies and
procedures have been fully developed and implemented. While OFS
recognizes the need to quickly develop and implement a comprehensive
system of internal control for all TARP activities, these efforts have
also been challenged by recent changes in the strategic direction of
the program and uncertainties about further changes that may result
once the new administration is in place. Successfully meeting all of
these challenges is key to ensuring the efficient and effective
operation of TARP now and in the future.
An Organizational Structure Has Been Established for OFS:
On October 6, 2008, in order to implement TARP and address growing
concerns about the stability of the financial markets and the
functioning of credit markets, Treasury established OFS and appointed
an Interim Assistant Secretary of Financial Stability as its head. OFS
is organized within Treasury's Office of Domestic Finance and reports
to the Under Secretary for Domestic Finance. Soon after establishing
OFS, Treasury created several functional areas within the office and
hired interim chiefs to manage each of the major OFS functions (fig.
2). According to OFS's current organizational outline, these interim
chiefs and their major areas of responsibility are as follows:
* Chief Investment Officer is responsible for administering TARP
programs, such as CPP, and approving and managing all TARP investments.
* Chief Risk Officer is responsible for identifying and assessing risks
that TARP faces and for tracking and reporting measurements of those
risks.
* Chief Financial Officer (CFO) is responsible for the budget,
financial statement reporting, accounting, and internal controls.
* Chief Compliance Officer is responsible for ensuring program
compliance with laws and regulations, including the executive
compensation and conflicts of interest requirements under TARP.
* Chief of Homeownership Preservation is responsible for overseeing
efforts to reduce foreclosures and identify opportunities to help
homeowners keep and protect their homes while also protecting
taxpayers.
In addition, OFS has a Chief Operating Officer (COO), who is
responsible for helping to develop the infrastructure to support TARP,
coordinating communications among the various units, and working with
Treasury's administrative resources unit to ensure efficient and
effective TARP operations. In addition, the COO is responsible for
working with the CFO to manage the TARP budget.[Footnote 32] The OFS
organizational structure also includes a Chief Counsel who is
responsible for providing legal and policy advice to OFS on
implementing TARP and complying with the provisions of the act, and a
Senior Advisor, who provides direct support to the Assistant Secretary
for Financial Stability in overseeing the implementation of TARP.
Figure 2: Organization of the Office of Financial Stability, as of
November 21, 2008:
[Refer to PDF for image]
This figure is an illustration of the organization of the Office of
Financial Stability, as of November 21, 2008:
Assistant Secretary for Financial Stability:
- Senior Advisor;
- Executive Assistant;
- Chief Counsel;
* Chief Operating Officer;
- Executive Secretariat;
* Chief Compliance Officer;
* Chief Risk Officer;
* Chief Investment Officer;
* Chief Homeownership;
* Chief Financial Officer.
Source: Treasury.
Note: The Chief Counsel reports directly to Treasury's Office of
General Counsel.
[End of figure]
Treasury recognized that it needed to move quickly to fill the interim
chief positions, for several reasons. First, the escalating financial
crisis called for TARP to become operational as soon as Congress passed
legislation to establish the program. Second, even before OFS was
established, Treasury had contemplated engaging in various strategies
to address the credit crisis and conducting a large number of financial
transactions. Third, Treasury anticipated that a variety of factors
could affect the timing, nature, and extent of the activities that OFS
would administer. According to Treasury, its short-term strategy for
staffing high-level OFS positions was to identify government employees
inside Treasury and other federal agencies with the necessary skills
and knowledge who could fill leadership positions on a temporary basis
and establish a structure for administering the program going forward.
The five interim chiefs have come from across government and beyond,
including from OCC, the Federal Reserve, CDFI, the Export-Import Bank,
and the International Monetary Fund (IMF), an international
organization whose mission is to foster global monetary cooperation and
secure financial stability. According to Treasury officials, the
overall structure of OFS will remain appropriate for continuing to
administer TARP regardless of the program's overall strategic
direction.
Effective Implementation of OFS's Organizational Structure Depends on
Timely Hiring and Well-Coordinated Transition Planning Efforts:
Treasury is in the process of recruiting and hiring well-qualified
career staff who will be able to stay on in their positions on a long-
term basis. OFS officials said that it had about 48 employees assigned
to TARP as of November 21, 2008, including those from other Treasury
offices, federal agencies, and organizations, who are providing
assistance on a temporary basis. OFS's interim chiefs have each
developed a needs assessment for their areas and have submitted these
assessments to the COO, who is working with Treasury's human resources
department to meet those needs. The chiefs identified about 130
positions, although OFS officials have said that the office may require
more (up to 200 full time equivalent employees) or less staff depending
on the type and complexity of the various activities that OFS initiates
under TARP and that hiring could be adjusted accordingly. Treasury is
making efforts to meet the current estimate of needed staff by the end
of December and is prioritizing its hiring process by filling senior
career positions first. Consistent with the need to fill a large number
of positions, Treasury officials said that they were reviewing a number
of résumés from within and outside of the federal government to staff
the organization as quickly as possible. As of November 21, 2008,
Treasury had filled five permanent positions.
OFS is also taking steps to help ensure that the key positions remain
filled during and after the transition to the new administration. While
Treasury officials said that some interim chiefs might be asked to stay
to serve under the new administration, at present it is unclear how
many of them ultimately will continue in their existing roles or for
how long. Consequently, the interim chiefs have been tasked with
developing a description of their current roles and responsibilities
and helping identify their potential replacements. While Treasury
expects that there will be many qualified candidates interested in
chief officer positions, uncertainty over leadership and the strategic
direction of the program may inhibit some of OFS's efforts to fill
these key positions. OFS officials said that they planned to meet
frequently with the incoming administration's transition team and that
they planned to hire senior career staff who could effectively manage
TARP activities during and after the transition. Filling needed
positions will be a key step in the successful transition of the
program to the new administration, and we plan to continue to monitor
these activities as the transition to the new administration continues.
Contractors and Financial Agents Will Provide Key Services for TARP:
Treasury has used a financial agency agreement and a variety of
contracts to acquire a range of services in support of TARP. To promote
a timely and flexible approach to implementing the program, Treasury
used expedited procedures to enter into the agreement and award the
contracts and structured these arrangements to allow for flexibility in
ordering the services required. Treasury has also taken steps to help
promote the inclusion of small businesses in carrying out TARP.
Contracts and Other Agreements Entered into by Treasury Provide for a
Range of Services to Support TARP:
Treasury has used two approaches to acquire the necessary services to
support TARP. First, Treasury exercised its authority under the act to
retain financial agents to provide services on its behalf. Treasury
said that it would use financial agents when the required services
involved managing public assets. Second, Treasury has entered into a
variety of contracts and blanket purchase agreements under the Federal
Acquisition Regulation (FAR) for legal, investment consulting,
accounting, and other services that are generally available in the
commercial sector. While the financial agency agreement and certain
contracts were awarded primarily to assist with the purchase of
troubled assets, Treasury officials explained that they were
redirecting requirements within the scope of the contracts to support
TARP's shift to CPP and made similar modifications to the financial
agency agreement.
Between October 3 and November 25, 2008, Treasury entered into one
financial agent agreement and seven contractual arrangements in support
of TARP, the details of which are summarized in table 2. In addition,
we have preliminary information on three other contracts ranging from
about $8,500 to $2.2 million for a budget model, legal services, and
leased office space. We are continuing to review all contracts and
agreements, including these three additional contracts.
Table 2: Financial Agency Agreement and Contracts Awarded, as of
November 25, 2008:
Financial Agency Agreement:
Bank of New York Mellon;
Purpose: To provide custodian and cash management services;
Date signed: 10/14/2008;
Value: To be calculated based on percentage of value of assets managed;
Agreement structure: Financial agency agreement;
Pricing structure: Percentage of value of assets managed;
Competition: Open competition: Submissions; received: 70; Submissions
meeting qualifications: 10; Responses considered: 3.
Contracts:
Simpson, Thacher & Bartlett, LLP;
Purpose: To serve as a legal adviser for implementing the Emergency
Economic Stabilization Act;
Date signed: 10/10/2008;
Value: $5,000-$500,000;
Agreement structure:Indefinite delivery/indefinite quantity contract;
Pricing structure: Time and materials or firm-fixed price task orders;
Competition: Other than full and open based on unusual and compelling
urgency exception. Offerors solicited: 6; Offers received: 2.
EnnisKnupp & Associates, Inc.;
Purpose: To support development and maintenance of investment policies
and guidelines and assist with the oversight of asset managers;
Date signed: 10/11/2008;
Value: $25,000 - $2,500,000;
Agreement structure: Indefinite delivery/indefinite quantity contract;
Pricing structure: Firm-fixed price task orders;
Competition: Other than full and open based on unusual and compelling
urgency exception. Offerors solicited: 6; Offers received: 3.
Pricewaterhouse Coopers, LLP;
Purpose: To help establish internal controls;
Date signed: 10/16/2008;
Value: Total amount of services ordered to date: $191,469;
Agreement structure: Blanket purchase agreement;
Pricing structure: Time and materials or firm-fixed price task orders;
Competition: Request for quotes from 6 firms on the General Services
Administration's (GSA) Federal Supply Schedules (the Schedule); Quotes
received: 6.
Ernst & Young, LLP;
Purpose: To provide general accounting support and expert accounting
advice;
Date signed: 10/18/2008;
Value: Total amount of services ordered to date: $492,007;
Agreement structure: Blanket purchase agreement;
Pricing structure: Time and& materials or firm-fixed price task orders;
Competition: Request for quotes from 7 firms on the GSA Schedule;
Quotes received: 6.
Hughes Hubbard & Reed, LLP;
Purpose: To provide legal services in connection with the capital
purchase program;
Date signed: 10/29/2008;
Value: Total amount of services ordered to date: $1,411,300;
Agreement structure: Blanket purchase agreement;
Pricing structure: Time and materials or firm-fixed price task orders;
Competition: Request for quotes from 5 firms on the GSA Schedule;
Quotes received: 4.
Squire Sanders & Dempsey, LLP;
Purpose: To provide legal services in connection with the capital
purchase program;
Date signed: 10/29/2008;
Value: Total amount of services ordered to date: $1,380,000;
Agreement structure: Blanket purchase agreement;
Pricing structure: Time & materials or firm-fixed price task orders;
Competition: Request for quotes from 5 firms on the GSA Schedule;
Quotes received: 4.
Lindholm & Associates;
Purpose: To provide Human Resources Support;
Date signed: 10/31/2008;
Value: $174,720 for base period of 6 months. Total value of base period
plus all options is $710,528;
Agreement structure: Order under the GSA Schedule;
Pricing structure: Time and materials task orders;
Competition: Quotes sought and received from 3 small businesses.
Source: GAO analysis of Treasury documents.
[End of table]
Treasury Used Expedited Procedures to Award the Agreement and
Contracts:
Treasury used a variety of methods to expedite the process for entering
into its agreement and awarding contracts for TARP. For the financial
agency agreement, Treasury posted notices on its Web site on October 6
seeking proposals to provide asset management and custodian services.
Proposals were due by October 8. Although Treasury had not selected
asset managers as of November 21, it moved quickly to complete the
custodian agreement. Treasury said that of the 70 custodian proposals
it received, 10 met minimum eligibility requirements, and 3
institutions were invited to submit formal proposals and make face-to-
face presentations. Treasury evaluated the three proposals and on
October 14, 2008, selected Bank of New York Mellon to be the custodian
for the asset purchase program for a term of 3 years. The parties later
amended the agreement to provide for services under CPP.
Treasury also used other than full and open competition to expedite the
award of two contracts for services. To obtain legal services and the
expertise of an investment consultant firm, Treasury used existing
statutory authority as the basis to award contracts using other than
full and open competition procedures. The specific exception Treasury
used under this authority was unusual and compelling urgency.[Footnote
33] Using market research that it had conducted, Treasury invited
several firms to submit proposals on an expedited basis. Treasury
received two proposals for legal services and three for investment
services and was able to make awards in accordance with its announced
criteria. Treasury also made five awards under schedules maintained by
the General Services Administration (GSA). In all cases, Treasury
solicited and awarded the contracts within a matter of days.
Contracts Have Been Structured to Accommodate Treasury's Need for
Flexibility:
Treasury used contract structures and pricing arrangements designed to
allow for flexibility in ordering the services required. Specifically,
Treasury established blanket purchase agreements with several firms
based on contracts previously awarded to those firms by the GSA. These
blanket purchase agreements contain the basic terms and conditions
governing the types of services the firms will provide to Treasury in
support of TARP. As specific needs arise, the blanket purchase
agreements allow Treasury to issue task orders to the firms describing
the specific services required, establishing time frames, and setting
pricing arrangements. Treasury established two 3-year agreements; other
agreements were established for periods ranging from 6 to 24 months. In
other instances, Treasury awarded new indefinite delivery/indefinite
quantity contracts that, like the blanket purchase agreements, contain
all necessary contract terms and conditions. As specific needs arise,
Treasury issues a task order under the indefinite delivery/indefinite
quantity contract. These contracts were established for 1 year or less.
In general, the task orders under these contracts were awarded for
periods of performance ranging from 2 weeks to 6 months.
For the most part, the contracts and task orders awarded as of November
25, 2008, including the blanket purchase agreements, are priced on a
time and materials basis. This pricing mechanism provides for payments
to the contractors based on set labor rates and the number of hours
worked, plus the cost of any materials. Our prior work on such
contracts recognized both the inherent flexibility of such arrangements
and the highlighted need for close government supervision to ensure
that costs are contained. Specifically, time and materials contracts
are considered high risk for the government because they provide no
positive incentive to the contractor for cost control or labor
efficiency. Thus, the onus is on the government to monitor contractors
to ensure that they are performing the work efficiently and controlling
costs.[Footnote 34]
A Treasury procurement official stated that time and materials pricing
for its task orders had been necessary because of the uncertain nature
of the work that would be required. As TARP requirements become more
established, Treasury may award future task orders using fixed-price
arrangements. Furthermore, the official outlined several steps his
office was taking to ensure appropriate management and oversight of the
time and materials contracts awarded as of November 25, 2008, including
assigning additional oversight personnel to TARP procurements, ensuring
that training requirements were met, and providing specific training on
the tracking of billable costs. However, Treasury has not yet
established a specific timetable for completing these steps.
Treasury Has Taken Some Steps to Promote the Use of Small Businesses in
TARP Activities:
In a memo issued through its Web site, Treasury provided guidelines to
small businesses for pursuing procurement opportunities. Treasury noted
that while there were no requirements under its financial agent
authority to set aside work for various designations of small
businesses--including small business concerns owned and controlled by
women, minorities, veterans, and socially and economically
disadvantaged individuals--use of these groups was an evaluation factor
during the selection process. Treasury further noted that any small
businesses that did not meet the minimum requirements for award of the
financial agency agreement could participate as subcontractors.
For services obtained through procurement contracts, Treasury
considered offerors' efforts to promote small business participation as
part of its selection criteria. Specifically, for three of the
contractual agreements it has awarded, Treasury evaluated the proposals
received based in part on the offerors' approach to ensuring that small
businesses had opportunities to participate. One of the contracted
firms is a small business, while other awardees offered the following
approaches to using small businesses:
* One vendor has teamed with a minority small business firm as a
subcontractor.
* Another vendor plans to utilize two subcontractors: one woman-owned
small business and one other small business. However, Treasury noted
that the subcontractors' combined participation would amount to less
than 1 percent of the contract's total value.
* One other company stated that it intends to use a minority-and woman-
owned small business enterprise as a subcontractor.
Three contract proposals did not contain a plan for utilizing small
businesses.
Treasury Has Taken Initial Steps to Address Conflicts of Interest but
Specific Policies and Procedures Have Yet to Be Established:
Treasury's reliance on private sector resources to assist with
implementing TARP has underscored the importance of addressing
conflicts of interest issues. Treasury has taken some steps to address
actual and potential conflicts of interest involving its financial
agent and contractors, such as issuing interim guidelines and requiring
that all those responding to solicitations provide a plan to mitigate
any actual or potential conflicts of interest they or their proposed
subcontractors may have. The financial agent and contractors that
Treasury selected identified a variety of potential or actual conflicts
of interest and proposed a variety of solutions to mitigate these
conflicts. We plan to monitor closely the implementation of these
mitigation plans.
Treasury Has Issued Interim Guidelines and Plans to Issue Regulations
on Conflicts of Interest:
On October 6, 2008, Treasury issued interim conflict of interest
guidelines. The guidelines identify conflict of interest issues for
contractors to consider when submitting their proposals to assist with
the act's implementation. Treasury's interim guidelines:
* contemplate that Treasury could obtain nondisclosure and conflict of
interest agreements before supplying an offeror with a solicitation;
* encourage contractors to disclose all actual or potential conflicts
of interest and develop mitigation plans;
* note that Treasury's solicitations could include evaluation factors
and criteria to assess contractors' conflict of interest mitigation
plans;
* restate Treasury's statutory authority and duty to oversee, evaluate,
waive, negotiate, and mitigate conflicts of interest related to its
contracts; and:
* provide that a mitigation plan submitted in a proposal will become a
binding contractual obligation.
The guidelines will remain in effect until Treasury issues the
regulations that are currently being drafted.
Employees of Treasury's contractors and financial agents are not
subject to the conflict of interest laws and regulations that govern
the conduct of government employees. In prior work on defense
contracting, GAO recommended that the Department of Defense
contractually require its contractors to impose conflict of interest
restrictions similar to those for federal employees on employees who
were providing advice or assistance in mission-critical or in certain
contracting matters.[Footnote 35]
Treasury officials said that the agency intended to use existing
statutory and regulatory postemployment restrictions to guide the
actions of Treasury employees who might leave the agency. In addition,
because these rules do not apply to employees of Treasury's
contractors, Treasury's contracts awarded under TARP provide some
postemployment limitations for contractors and their employees. For
example, one solicitation for legal services prohibits attorneys
assigned to work on the contract from representing other parties on
issues related to the services performed both during the term of the
contract and for 6 months thereafter.
Contractors and Agents Have Identified Potential and Actual Conflicts
of Interest:
For each solicitation, Treasury required respondents to identify any
actual or potential conflicts of interest that they would encounter in
providing the services described and to explain how they would avoid,
mitigate, or neutralize any conflicts concerning the company, its
corporate parents, subsidiaries, affiliates, and proposed
subcontractors. Among other situations, Treasury identified areas of
possible conflict for respondents to consider, including personal,
business, or financial interests related to the requested services and
participation in TARP. In their responses to Treasury's requirements,
six of the eight service providers selected as of November 25, 2008,
identified potential or actual sources of conflict. According to our
review, the identified conflicts generally involve organizational
conflicts of interest, though some also involve personal conflicts of
interest:
* Five contractors indicated that they either already had clients or
could have clients who were receiving TARP assistance.
* One contractor indicated that a potential conflict of interest would
arise if it received information proprietary to multiple clients with
competing investment interests.
* One company identified conflicts regarding troubled assets owned
either directly by the company or by clients that were eligible for
assistance under TARP.
Contractors and Agents Have Proposed Plans to Mitigate Conflicts of
Interest but Have Provided Few Details on Implementing Them:
The financial agent and contractors have proposed various approaches to
mitigating any actual or potential conflicts of interest. Awardees
indicated that they would use their codes of conduct, company policies
and procedures, senior executive meetings, confidentiality agreements,
specialized information security methods, and open communication with
Treasury to mitigate conflicts of interest. For example, two
contractors indicated that their companies would create a secure
information environment, provide training to relevant employees, and
monitor their compliance with requirements. Another contractor said
that it would execute nondisclosure agreements, develop a mitigation
plan, provide oversight and training, and conduct regular monitoring of
compliance for any conflicts of interest involving its personnel. One
company proposed using a third-party agent to facilitate the sale of
its troubled assets and an independent accounting firm to oversee the
transfer of those assets.
The submitted plans provided few details, however, on how the companies
would notify and communicate with Treasury if conflicts were identified
during the course of performance:[Footnote 36]
* Two firms' plans indicated that they would either maintain an "open
dialog" or would "work in good faith" with Treasury should conflicts of
interest emerge.
* Two other plans did not describe how the firms would address
conflicts of interest or how they would notify Treasury.
* By comparison, one plan indicated that the company would provide
information on conflicts of interest to Treasury in its weekly reports
and offer recommendations for addressing each issue.
Treasury relies on its financial agents and contractors to disclose
conflicts of interest. Treasury officials stated that while under
current procedures, they might not know if an agent or contractor did
not disclose a conflict, they believed that the consequences for
nondisclosure were sufficiently severe to deter such behavior. Finally,
Treasury has noted in its solicitations that it intends to oversee and
enforce compliance with conflict of interest mitigation plans. For
example, Treasury noted in one of its solicitations for legal services
that it would incorporate the offeror's final negotiated conflict of
interest mitigation plan into the contract and then oversee and enforce
the contractor's compliance with the plan. At the time we conducted our
work, however, Treasury was still in the process of developing an
oversight mechanism for enforcing financial agents' and contractors'
mitigation plans.
OFS's Internal Control Structure Is Evolving As Program Activities Are
Implemented:
A key challenge facing OFS is the need to develop a comprehensive
system of internal controls at the same time that it must react quickly
to financial market events. Effective internal control is a major part
of managing any organization to achieve desired outcomes and manage
risk. As shown in table 3, GAO's Standards for Internal Control include
five key elements.[Footnote 37] Internal controls include the program's
policies, procedures, and guidance that help management ensure
effective and efficient use of resources; compliance with laws and
regulations; prevention and detection of fraud, waste, and abuse; and
the reliability of financial reporting. OFS has hired
PricewaterhouseCoopers to assist in the design and implementation of a
system of internal control for TARP.[Footnote 38] Because of the rapid
evolution of TARP, controls are being developed as various aspects of
the program become operational. For example, once CPP became active,
OFS and PricewaterhouseCoopers focused on developing and implementing
internal controls related to the capital purchase transactions and
documenting the control activities as they occurred. However, many key
controls remain to be developed. Specific examples, which we noted
earlier, are that OFS has not yet developed sufficient policies and
processes for overseeing its contractors or overseeing whether
participating institutions are adhering to the executive compensation
requirements under CPP.
Table 3: GAO's Standards for Internal Control in the Federal
Government:
(1) Control environment: creating a culture of accountability by
establishing a positive and supportive attitude toward improvement and
the achievement of established program outcomes.
(2) Risk assessment: performing comprehensive reviews and analyses of
program operations to determine if risks exist and the nature and
extent of risks have been identified.
(3) Control activities: taking actions to address identified risk areas
and help ensure that management's decisions and plans are carried out
and program objectives met.
(4) Information and communication: using and sharing relevant,
reliable, and timely financial and nonfinancial information in managing
programs.
(5) Monitoring: tracking improvement initiatives over time and
identifying additional actions needed to further improve program
efficiency and effectiveness.
Source: GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
[End of table]
Going forward, it will be essential that OFS continue developing a
comprehensive internal control structure that addresses all five
standards.
* A strong control environment will depend on OFS's management's
ability to set and maintain an environment based on integrity and core
values and on the competence of staff hired to manage and perform
program operations. As noted earlier, OFS has taken the first steps by
developing an organizational structure that defines lines of authority
and has begun to hire permanent staff, but OFS may need to adjust these
initial steps as the focus of TARP evolves.
* A risk assessment for TARP will include consideration of all
significant interactions between OFS and other parties, including banks
receiving funds under CPP and the custodian for TARP activities, as
well as internal factors that increase risk. This assessment is
important, but again OFS will be challenged as the strategies developed
to achieve TARP's objectives continue to evolve, a fact that could also
affect the risks facing the program. Because TARP is a new and unique
program dealing with unusual circumstances, the program will likely be
faced with unique and complex risks.
* Control activities for TARP will consist of the policies, procedures,
and guidance that enforce management's directives and achieve effective
internal control over specific program activities. Examples of such
policies and procedures particularly relevant to TARP are (1) proper
execution and accurate and timely recording of transactions and events,
(2) controls to ensure compliance with program requirements, (3)
establishment and review of performance measures and indicators, and
(4) management reviews of performance and agency achievements. As noted
earlier, the development of policies and procedures is occurring
concurrently with program execution, thereby increasing the risk that
the programs will not be implemented as intended or that transactions
will not be processed properly. Further, documented policies,
procedures and guidance will be critical tools for OFS staff, many of
whom have yet to be hired and were not involved in the initial
transactions.
* Information and communication will be important to OFS managers in
helping them achieve their responsibilities and goals within an
effective internal control structure. Communication is particularly
important because of the dynamic environment in which OFS is currently
operating. OFS has begun to address external communication issues by
posting information on Treasury's Web site as it becomes available,
holding press conferences, speaking at industry events, and testifying
at congressional hearings.
* Monitoring activities include the systemic process of reviewing the
effectiveness of the operation of the internal control system. These
activities are conducted by management, oversight boards and entities,
and internal and external auditors. Monitoring enables stakeholders to
determine whether the internal control system continues to operate
effectively over time. It also improves the organization's overall
effectiveness and efficiency by providing timely evidence of changes
that have occurred, or might need to occur, in the way the internal
control system addresses evolving or changing risks.
A robust system of internal control specifically designed to deal with
the unique and complex aspects of TARP will be key to helping OFS
management achieve the desired results from TARP. While OFS plans to
implement such a system, there is heightened risk that without it the
interests of the government and taxpayers may not be adequately
protected and that the programs' objectives may not be achieved in an
efficient and effective manner. Our ongoing monitoring efforts will
continue to focus on the steps OFS is taking to develop and implement
an effective internal control structure.
Measuring the Impact of TARP on Credit Markets and the Economy Will Be
Challenging:
TARP's activities could improve market confidence in banks that choose
to participate and have beneficial effects on credit markets, but
several factors will complicate efforts to measure any impact. If TARP
is having its intended effect, a number of developments might be
observed in credit and other markets over time, such as reduced risk
spreads, declining borrowing costs, and increased lending. However,
several factors will make isolating and measuring the impact of TARP
challenging, including simultaneous changes in economic conditions,
changes in monetary and fiscal policy, and other programs introduced by
the Treasury, the Federal Reserve, FDIC, and FHFA to support banks,
credit markets, and other struggling institutions. As a result, any
improvement in capital markets cannot be attributed solely to TARP nor
will a slow recovery necessarily reflect its failure because of the
effects of market forces and economic conditions outside of the control
of TARP. Nevertheless, we have preliminarily identified some indicators
that may be suggestive of TARP's impact over time. These indicators
include measures of the perception of risk in interbank lending,
consumer lending, corporate debt markets, and the overall economy. We
have also identified a number of other indicators that we are also
monitoring and may include in future reports.
TARP Could Have a Number of Effects on Credit Markets and the Economy,
but Several Factors Complicate Measuring the Impact:
TARP activities as of November 25, 2008--specifically CPP--could
improve market confidence in participating banks by improving their
balance sheet, cash flow, and capital positions; reducing their
perceived risk; and allowing them to borrow and raise capital at more
favorable rates. To the extent that confidence in participating banks
improves, the banks should be able to increase lending at lower rates
and pass on some of their lower funding costs to their own customers.
Moreover, the capital infusions could also increase the confidence of
participating banks so that the banks increase business, interbank, and
consumer lending rather than hoarding the capital or using it to
purchase low-risk assets. However, some tension exists between the
goals of improving banks' capital position and promoting lending--that
is, the more capital banks use for lending, the less their overall
capital position will improve.
If TARP does have its intended impact, a number of these effects should
appear in credit and other markets over time. Since the first eight
banks received capital injections on October 28, 2008, it may well be
too early to expect noticeable changes. However, if confidence in banks
improves, the perceived risk of lending to banks should decline, and
this development would be observed in declining risk premiums (the
difference between risky and risk-free interest rates, such as rates on
U.S. Treasury securities) for interbank lending and bank debt. With an
improved capital position and lower funding costs, over time banks
should be able to increase lending and pass some of their lower
borrowing costs on to their customers. Further, improved market
conditions may permit some borrowers to avoid foreclosures by enhancing
the capacity and willingness of banks to refinance certain loans or
modify others.[Footnote 39] Potentially, this development would lower
risk premiums for and raise volumes of consumer and business lending.
Because bank financing and capital markets are close substitutes for
large businesses, declines in borrowing costs from banks could also
reduce borrowing costs in capital markets.[Footnote 40] Over the long
term, improvements in credit markets should have effects on real
economic activity as lower borrowing costs boost demand for goods and
services. Asset prices, such as stock prices, and risk premiums,
although imperfect, are also important leading indicators of real
economic activity.[Footnote 41]
Changes in credit market conditions may not provide conclusive evidence
of TARP's effectiveness, however, as other important policies and
interventions can influence these markets. A number of government
agencies, including FHFA, FDIC, Treasury (through approaches other than
TARP), and the Federal Reserve have worked in a collaborative manner to
attempt to restore financial stability. For example, FDIC announced
that it would temporarily guarantee the senior debt of all FDIC-insured
institutions and their holding companies. This guarantee may affect the
interest rates on bank-issued debt and improve confidence in banks. In
addition to lowering the federal funds rate and providing liquidity
facilities for a range of assets and institutions, the Federal Reserve
has begun intervening in the market for commercial paper, a move that
is also intended to reduce the cost of borrowing in those markets.
Moreover, as of November 21, the Federal Reserve had almost $900
billion in loans outstanding to financial institutions. FHFA placed
Fannie Mae and Freddie Mac in conservatorship in response to their
deteriorating financial condition.
In addition, Treasury announced that, under authority provided by the
Housing and Economic Recovery Act of 2008, it planned to purchase
mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac on
the open market. As of September 30, 2008, Treasury reported that it
had purchased about $3.3 billion in Fannie and Freddie MBS and intended
to purchase additional securities.[Footnote 42] Moreover, on November
25, 2008, the Federal Reserve announced that it was initiating a
program to purchase up to $500 billion in mortgage-backed securities
guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae and up to $100
billion in direct obligations of Fannie Mae, Freddie Mac, and the
Federal Home Loan Banks. According to the Federal Reserve, the action
was intended to support housing markets and foster improved conditions
in financial markets more generally. Because banks hold a significant
amount of securities guaranteed by these institutions, which are
central to liquid secondary mortgage markets, these actions may also
affect investor and bank confidence and interest rates. Moreover, FHFA,
in partnership with Treasury, has implemented a supplemental loan
modification program for at-risk borrowers to prevent foreclosures and
mitigate losses.
General market forces will also complicate a determination of TARP's
effectiveness. For example:
* Recent and expected declines in general economic activity are likely
to reduce lending and heighten perceived credit risk despite a host of
U.S. government interventions.
* Further declines in housing prices are possible as values fall to
levels consistent with incomes and rents in local areas, possibly
leading to additional foreclosures, asset write-downs, and an increase
in the perceived risk of banks and other financial institutions with
exposure to mortgage assets.[Footnote 43]
* In the face of increased risk, banks may not raise interest rates
much (if at all) but instead ration credit so that only borrowers with
pristine credit receive loans. Furthermore, changes in both the supply
of and demand for credit can influence interest rates, and interest
rates charged by banks may also reflect the customers they choose
rather than the cost of bank credit for all borrowers.
Finally, any changes attributed to TARP may well be changes that (1)
would have occurred anyway, (2) are enhanced or counteracted by other
market fundamentals, or (3) can be attributed to other policy
interventions, such as the actions of FDIC, the Federal Reserve, or
other financial regulators. For these and other reasons, we will not
know what would have happened in the absence of TARP. As a result,
determining the effect of TARP as it is being implemented will be a
challenge.
Changes in Select Indicators over Time May Provide Insights about CPP's
Impact:
We considered a number of indicators that, although imperfect, may be
suggestive of TARP's impact on credit and other markets. Currently, we
have identified a number of preliminary indicators that are likely to
capture interbank, mortgage, and nonbank lending activity as well as
financial market risk perceptions and variables that are predictive of
future real economic activity. At the very least, improvements in these
measures would indicate improving conditions in credit markets.
Further, given that CPP's goal is to improve the capital position of
banks and promote lending, going forward we expect to monitor
indicators that can provide some insight into the potential effects of
the plan on capital ratios, the structure of liabilities, and net
changes in lending at participating institutions. We continue to
consider a variety of additional indicators, and as more data become
available and as economic and credit conditions evolve, we plan to
include them in future reports.
Treasury-London Interbank Offered Rate (LIBOR) Spread (TED Spread):
The TED Spread is the difference between an average of interest rates
offered in the London interbank market for 3-month, dollar-denominated
loans (known as LIBOR) and the interest rate on U.S Treasury bills with
the same maturity. It is considered a key indicator of credit risk that
gauges the willingness of banks to lend to other banks. Increases in
the TED spread imply a bigger aversion to risk. That is, investors have
a preference for safe investments (e.g., Treasuries) and charge a
higher premium for loans to other institutions to compensate for
greater perceived default risk. Figure 3 shows both the historical TED
spread as well as an inset that focuses on the TED spread since 2006.
The figure shows that the weekly TED spread increased to roughly 2
percentage points (or 200 basis points) in early December 2007 and
peaked at over 400 basis points for the week including October 17,
2008.[Footnote 44] Between the announcement of the creation of CPP the
week of October 14 and the week before Treasury disbursed capital
injections to the eight banks initially participating in CPP (week of
October 20), the spread declined 146 basis points. Decreases in the TED
spread could reflect the fact that banks are more willing to lend to
lend to other banks on terms that reflect greater confidence in the
banking system (i.e., without demanding a large interest rate premium).
From the date of the initial capital injections on October 28 to
November 14, the TED spread declined by about 60 basis points. The
LIBOR itself has declined, but so has the Treasury yield. However,
during the week ending November 21, 2008, the LIBOR rate and the TED
spread began to rise.
Figure 3: Three-Month LIBOR and 3-Month Treasury Bill Yield, as of
November 21, 2008:
[Refer to PDF for image]
This figure is a multiple line graph depicting the Three-Month LIBOR
and 3-Month Treasury Bill Yield for the time period of 1982 through
November 21, 2008. The vertical axis of the graph represents interest
rates from 0 to 20%. The horizontal axis of the graph represents each
week of the year from 1982 through November 21, 2008. In addition, an
inset graph depicts the TED spread for the time period of 2006 through
November 21, 2008. The data depicted in the inset graph follows:
Year: 2006; Weekly TED spread:
0.36;
0.29;
0.25;
0.22;
0.21;
0.23;
0.21;
0.21;
0.21;
0.28;
0.3;
0.28;
0.35;
0.33;
0.36;
0.35;
0.34;
0.34;
0.31;
0.35;
0.39;
0.41;
0.42;
0.47;
0.52;
0.48;
0.46;
0.44;
0.39;
0.39;
0.38;
0.34;
0.31;
0.3;
0.34;
0.42;
0.46;
0.46;
0.49;
0.45;
0.34;
0.28;
0.26;
0.29;
0.29;
0.28;
0.31;
0.33;
0.36;
0.43;
0.39;
0.36.
Year: 2007; Weekly TED spread:
0.31;
0.27;
0.24;
0.23;
0.23;
0.21;
0.19;
0.17;
0.2;
0.23;
0.28;
0.29;
0.29;
0.3;
0.32;
0.36;
0.39;
0.46;
0.48;
0.54;
0.46;
0.54
0.56;
0.7;
0.67;
0.56;
0.41;
0.4;
0.39;
0.4;
0.45;
0.6;
1.29;
1.8;
1.39;
1.41;
1.65;
1.45;
1.43;
1.28;
1.13;
1.15;
1.1;
1.03;
1.37;
1.49;
1.77;
1.99;
2.07;
2.13;
1.91;
1.55.
Year: 2008: Weekly TED spread:
1.39;
1.22;
0.87;
1.18;
1.01;
0.93;
0.79;
0.85;
1.07;
1.44;
1.47;
1.76;
1.39;
1.32;
1.38;
1.6;
1.63;
1.39;
1.08;
0.88;
0.8;
0.77;
0.83;
0.8;
0.86;
1.01;
0.93;
1.02;
1.35;
1.2;
1.1;
1.1;
0.95;
1.06;
1.09;
1.11;
1.2;
2.41;
2.64;
3.36;
3.96;
4.11;
2.65;
2.7;
2.15;
1.98;
2.12.
[End of figure]
Source: Global Insight and Federal Reserve Bank of St. Louis.
Note: Rates and yields are weekly percentages. Area between LIBOR and
Treasury yield is the TED spread.
[End of figure]
Corporate Spreads:
The economywide risk premium is measured in a number of ways, most
commonly as the difference (spread) between Moody's Investors Service
(Moody's) Baa bond rate and Moody's Aaa rate or between these rates and
the relevant government bond yield.[Footnote 45] These spreads
represent a premium lenders demand for taking on risk--that is, when
spreads are high, market participants perceive more risk, warranting a
higher rate of return. When credit market conditions improve, some
narrowing of these spreads would be expected.[Footnote 46] Moody's
describes Aaa bonds as "of the highest quality, with minimal credit
risk" and Baa bonds as "subject to moderate credit risk" that "may
possess certain speculative characteristics." As shown in figure 4, the
various interest rate spreads show a common pattern--an increase in
negative perceptions about risk, resulting in increasing spreads as
seen over the past year (as shown in the inset) and at various points
in the past 25 years, including the mid-1980s and early 2000s. Declines
in these spreads would be indicative of improving credit conditions,
but because these spreads may have been too narrow during the period
leading up to the credit market turmoil (risk was underpriced), it is
not clear how much these premiums should decline. Treasury has noted
that although interbank lending rates have improved, U.S. companies
continue to experience difficulties in issuing long-term debt at
attractive rates. As of November 21, 2008, both corporate spreads were
higher than they were the week prior to the initial capital injections.
Figure 4: Yields on Corporate Bonds (Aaa and Baa) Relative to 10-year
Treasury:
[Refer to PDF for image]
This figure is a multiple line graph depicting the yields on corporate
bonds (Aaa and Baa) relative to 10-year Treasury during the time period
1982 through 2008. The vertical axis of the graph represents interest
rates from 0 to 18 percent. The horizontal axis of the graph represents
the time period of 1982 through 2008. Represented on the graph are
yields for:
Moody's Baa;
Moody's Aaa;
10-year Treasury;
Aaa/Baa-Treasury spread.
Also depicted on the figure are inset graphs representing the Aaa-
Treasury spread and the Baa-Treasury spread on a weekly basis for the
time period of 2006 though November 21, 2008. The data depicted in the
inset graphs follows:
Year: 2006; Weekly Aaa-Treasury spread:
0.89;
0.88;
0.88;
0.87;
0.84;
0.78;
0.78;
0.76;
0.77;
0.79;
0.82;
0.82;
0.81;
0.83;
0.86;
0.86;
0.86;
0.85;
0.83;
0.85;
0.85;
0.83;
0.8;
0.78;
0.76;
0.76;
0.76;
0.75;
0.75;
0.77;
0.8;
0.82;
0.8;
0.81;
0.81;
0.8;
0.79;
0.78;
0.79;
0.8;
0.78;
0.78;
0.78;
0.77;
0.75;
0.73;
0.72;
0.74;
0.76;
0.75;
0.76;
0.76.
Year: 2007; Weekly Aaa-Treasury spread:
0.65;
0.64;
0.64;
0.64;
0.64;
0.65;
0.66;
0.67;
0.7;
0.72;
0.73;
0.74;
0.77;
0.8;
0.79;
0.75;
0.76;
0.75;
0.77;
0.72;
0.71;
0.68;
0.65;
0.69;
0.71;
0.71;
0.7;
0.71;
0.71;
0.76;
0.86;
0.99;
1.15;
1.23;
1.22;
1.25;
1.24;
1.2;
1.18;
1.15;
1.11;
1.11;
1.15;
1.15;
1.21;
1.27;
1.36;
1.35;
1.4;
1.43;
1.39;
1.36.
2008; Weekly Aaa-Treasury spread:
1.41;
1.51;
1.57;
1.72;
1.71;
1.74;
1.82;
1.77;
1.82;
1.93;
2.02;
2.05;
1.99;
1.98;
1.93;
1.93;
1.77;
1.73;
1.72;
1.7;
1.69;
1.64;
1.65;
1.53;
1.54;
1.58;
1.6;
1.63;
1.69;
1.67;
1.69;
1.75;
1.77;
1.75;
1.75;
1.8;
1.8;
2.09;
2.07;
2.26;
2.43;
2.45;
2.58;
2.5;
2.55;
2.59;
2.61.
Year 2006; Weekly Baa-Treasury spread:
1.84;
1.83;
1.83;
1.8;
1.76;
1.72;
1.71;
1.67;
1.66;
1.67;
1.7;
1.7;
1.7;
1.7;
1.71;
1.7;
1.66;
1.61;
1.6;
1.65;
1.67;
1.67;
1.66;
1.66;
1.68;
1.68;
1.67;
1.66;
1.68;
1.67;
1.69;
1.71;
1.71;
1.72;
1.74;
1.73;
1.7;
1.69;
1.72;
1.74;
1.72;
1.71;
1.65;
1.63;
1.61;
1.6;
1.6;
1.63;
1.65;
1.65;
1.66;
1.65.
Year: 2007; Weekly Baa-Treasury spread:
1.61;
1.59;
1.58;
1.56;
1.56v
1.55;
1.55;
1.54;
1.6;
1.66;
1.69;
1.73;
1.75;
1.74;
1.72;
1.68;
1.68;
1.66;
1.66;
1.64;
1.63;
1.61;
1.6;
1.59;
1.59;
1.59;
1.59;
1.59;
1.59;
1.73;
1.85;
1.87;
2;
2.06;
2.05;
2.07;
2.12;
2.08;
2.02;
1.98;
1.9;
1.92;
1.98;
2;
2.09;
2.2;
2.35;
2.43;
2.56;
2.6;
2.53;
2.51.
Year: 2008; Weekly Baa-Treasury spread:
2.55;
2.68;
2.8;
2.96;
2.96;
3.03;
3.11;
3.08;
3.13;
3.28;
3.4;
3.43;
3.41;
3.41;
3.37;
3.36;
3.17;
3.07;
3.04;
3.06;
3.07;
3.03;
3.03;
2.93;
2.94;
2.99;
3.06;
3.13;
3.2;
3.16;
3.17;
3.23;
3.26;
3.28;
3.3;
3.35;
3.39;
3.74;
3.82;
4.16;
4.56;
5.07;
5.55;
5.57;
5.51;
5.48;
5.76.
Source: Federal Reserve Bank of St. Louis.
Note: Rates and yields are weekly percentages. The average for the week
of November 21, 2008, is a midweek estimate.
[End of figure]
Mortgage Rates:
The credit turmoil has raised concern about consumers' abilities to
obtain funds, including mortgages, at rates consistent with economic
fundamentals and individual risk characteristics. One of TARP's
explicit goals is to enhance liquidity and promote lending to
consumers, but high spreads between mortgage rates and Treasury yields
indicate relatively high risk and low liquidity. Therefore, to the
extent that credit and economic conditions improve, these spreads would
narrow. Figure 5 shows that the weekly spread between conforming
mortgage rates and Treasuries has widened significantly since 2004.
[Footnote 47] As shown in the inset to the figure, from October 2007
through October 2008, there was some improvement in this measure since
peaking in early September 2008, however, the spread increased for the
week ending November 21.
Figure 5: Mortgage Rates (30-Year Fixed Rate, Conforming) and Treasury
Yields, as of November 20, 2008:
[Refer to PDF for image]
This figure is a multiple line graph depicting the Mortgage Rates (30-
Year Fixed Rate, Conforming) and Treasury Yields, from 2004 through
November 20, 2008. The horizontal axis of the graph represents interest
rates from 0 to 8 percent. The horizontal axis of the graph represents
the time period of 2004 through November 21, 2008. On the graph, lines
represent the following:
30-year fixed rate mortgage;
10-year Treasury;
Mortgage-Treasury spread.
Also included in the figure is an inset graph depicting the Mortgage-
Treasury spread from 2007 through November 21, 2008, as follows:
Year: 2007; Weekly Mortgage-Treasury spread;
1.52;
1.51;
1.46;
1.42;
1.48;
1.51;
1.55;
1.52;
1.63;
1.61;
1.6;
1.58;
1.53;
1.49;
1.48;
1.48;
1.49;
1.51;
1.5;
1.47;
1.53;
1.52;
1.51;
1.54;
1.55;
1.58;
1.53;
1.63;
1.7;
1.81;
1.91;
1.8;
1.92;
1.9;
1.9;
1.98;
1.89;
1.77;
1.81;
1.8;
1.73;
1.83;
1.94v
1.87;
1.92;
2.02;
2.16;
2.16;
1.99;
1.99;
2.02;
1.96.
Year: 2008; Weekly Mortgage-Treasury spread;
2.13;
2.02;
1.97;
1.9;
2.01;
2.01;
2;
2.19;
2.46;
2.42;
2.62;
2.48;
2.33;
2.33;
2.34;
2.21;
2.22;
2.23;
2.2;
2.15;
2.14;
2.05;
2.11;
2.17;
2.22;
2.36;
2.35;
2.47;
2.28;
2.52;
2.48;
2.53;
2.61;
2.64;
2.61;
2.66;
2.27;
2.24;
2.25;
2.4;
2.25;
2.44;
2.3;
2.54;
2.38;
2.36.
Source: Federal Reserve Bank of St. Louis.
Note: Rates and yields are weekly percentages.
[End of figure]
Mortgage Originations:
Like other bank interest rates, mortgage rates may reflect the
customers banks choose to lend to rather than the cost of credit for
all potential customers. As such, the volume of new mortgage lending
may also indicate the availability of credit, changes in credit risk,
or demand for credit. As shown in figure 6, quarterly mortgage
originations in the United States have fallen by over 50 percent since
2005.[Footnote 48] While increases in mortgage interest rates have
remained moderate, mortgage lending has decreased. To the extent that
credit and economic conditions improve over time and interest rates
remain stable, we would expect mortgage originations to stop declining
and eventually rise, although it is not clear that this measure would
or should return to the level seen in the period leading up to the
credit market turmoil.
Figure 6: Mortgage Originations, as of September 2008:
[Refer to PDF for image]
This figure is a line graph depicting Mortgage Originations from 2004
through September 2008, as follows:
Date: 2004, Q1;
Amount: $647 billion.
Date: 2004, Q2;
Amount: $847 billion.
Date: 2004, Q3;
Amount: $707 billion.
Date: 2004, Q4;
Amount: $718 billion.
Date: 2005, Q1;
Amount: $665 billion.
Date: 2005, Q2;
Amount: $790 billion.
Date: 2005, Q3;
Amount: $875 billion.
Date: 2005, Q4;
Amount: $790 billion.
Date: 2006, Q1;
Amount: $705 billion.
Date: 2006, Q2;
Amount: $800 billion.
Date: 2006, Q3;
Amount: $755 billion.
Date: 2006, Q4;
Amount: $720 billion.
Date: 2007, Q1;
Amount: $680 billion.
Date: 2007, Q2;
Amount: $730 billion.
Date: 2007, Q3;
Amount: $570 billion.
Date: 2007, Q4;
Amount: $450 billion.
Date: 2008, Q1;
Amount: $490 billion.
Date: 2008, Q2;
Amount: $445 billion.
Date: 2008, Q3;
Amount: $300 billion.
Source: Inside Mortgage Finance estimates.
Note: Estimates of originations are based on information from FHA, VA,
mortgage-backed securities and lenders and include refinances.
[End of figure]
Mortgage Foreclosures and Defaults:
Going forward, we also plan to report on trends in foreclosures and
delinquencies. Treasury officials have urged banks to work to modify
and restructure loans whenever reasonable to avoid preventable
foreclosures.[Footnote 49] Moreover, if CPP is effective, banks may be
more able to refinance mortgage loans for creditworthy borrowers to
keep monthly payments affordable. While it is too early to expect
material changes in foreclosures and the most recent data preclude an
assessment of trends since September 30, figure 7 establishes the
historical context for continued monitoring. As the figure shows, the
percentage of total loans foreclosures has reached 2.75--a level unseen
in recent history. As noted earlier, outside of TARP a variety of
parties are taking a number of actions to address the rising
foreclosure rate.
Figure 7: Percentage of Loans in Foreclosure, as of June 30, 2008:
[Refer to PDF for image]
This figure contains two graphs. The first is a line graph depicting
the percentage of loans in foreclosure from 1979 through June 30, 2008.
The vertical axis of the graph represents percentage from 0 to 3.00.
The horizontal axis of the graph represents the time period from 1979
through 2008, Q2. The line depicting the foreclosure rate shows a
fairly steady increase from a rate of about 0.31% in 1979 to 1.08% in
2005 Q1, then a steep increase until 2008 Q2. That steep increase is
depicted on the second graph, as follows:
Date: Q2, 2005;
Foreclosure rate: 1%.
Date: Q3, 2005;
Foreclosure rate: 0.97%.
Date: Q4, 2005;
Foreclosure rate: 0.99%.
Date: Q1, 2006;
Foreclosure rate: 0.98%.
Date: Q2, 2006;
Foreclosure rate: 0.99%.
Date: Q3, 2006;
Foreclosure rate: 1.05%.
Date: Q4, 2006;
Foreclosure rate: 1.19%.
Date: Q1, 2007;
Foreclosure rate: 1.28%.
Date: Q2, 2007;
Foreclosure rate: 1.4%.
Date: Q3, 2007;
Foreclosure rate: 1.67%.
Date: Q4, 2007;
Foreclosure rate: 2.04%.
Date: Q1, 2008;
Foreclosure rate: 2.47%.
Date: Q2, 2008;
Foreclosure rate: 2.75%.
Source: GAO analysis of Global Insight data.
[End of figure]
Other Financial and Credit Market Indicators May Be Useful as TARP
Evolves:
In addition to the preliminary indicators previously identified, we are
evaluating the potential usefulness of a number of other indicators.
This list is not definitive or exhaustive, and we expect to add new
indicators and modify or drop others as we engage with Treasury,
Federal Reserve, and other informed market participants. Moreover, some
measures included may become more appropriate indicators as time
progresses.
* Prime lending rate (Federal Reserve). The prime lending rate is an
interest rate banks charge to their most creditworthy customers and
usually moves with the target Fed funds rate--an overnight interbank
lending rate. Many variable rate consumer loans such as credit cards
are linked to the prime rate. Like mortgage rates, the prime lending
rate does not necessarily indicate the cost of credit to all potential
borrowers.
* Survey of lending standards (Federal Reserve). This survey asks
senior loan officers at U.S. banks whether lending standards have
tightened or eased. The most recent survey suggests a tightening in
credit standards for approving applications for commercial and
industrial loans. It also shows increased spreads of loan rates over
banks' cost of funds, especially for riskier loans, in part because of
the uncertain economic outlook, reduced tolerance for risk, and
liquidity issues.
* Commercial paper interest rates (Federal Reserve). Interest rates on
financial and nonfinancial commercial paper should be indicative of
liquidity and perceptions of risk in short-term debt markets. The
spread between financial commercial paper and nonfinancial commercial
paper indicates the cost of raising capital for financial institutions
relative to their nonfinancial counterparts.
* Changes in assets held by commercial banks (Call Report Data). Banks
provide quarterly call report information to their regulators,
including information on loan assets, among other things. This
information could provide information about the quality and flow of
credit.
* Changes in household and business debt (Federal Reserve). These are
indicators of the quantity and flow of credit.
* Stock prices (Lexis Nexis Historical Quotes). Stock prices represent
an important component of the cost of capital for publicly traded
companies and impact the ability to secure loans. Stabilization of
stock prices for banks participating in CPP and the financial sector in
general would indicate a rebuilding of investor confidence and improve
the ability of these companies to raise capital on the public market.
Stock prices are also a leading indicator of real economic activity.
* House prices (S&P/Case-Shiller, Office of Federal Housing Enterprise
Oversight). By increasing liquidity, rebuilding confidence, and
lowering borrowing costs, CPP may lead to improvements in both housing
prices and foreclosure rates.[Footnote 50] The stabilization of housing
markets is important to the valuation of MBS and other financial
instruments central to current market conditions.
* VIX (Chicago Board Options Exchange). The VIX is a measure of
expected stock market volatility over the next 30 days, calculated as
an index of the prices of options on the Standard & Poor's 500 Index.
It is an indicator of uncertainty about the future price of stocks and
general uncertainty about the economy.
Conclusions:
TARP is a new program that involves taking a number of steps to help
revive the U.S. and global economies as they struggle through the
current economic crisis. Given changing market conditions and the need
to coordinate efforts both domestically and globally, Treasury must
continue to strengthen its communication with external stakeholders,
including Congress and the public, to ensure that members and the
public understand Treasury's rationale for shifts in OFS's strategic
direction. Because TARP is relatively new, and because the crisis makes
immediate action imperative, Treasury is operating on a number of
fronts concurrently. It is setting up programs and establishing
oversight policies and procedures at the same time. As a result, we are
seeing some lag in administrative efforts--for example, in internal
controls--as the programs proceed. Treasury and the banking regulators
have publicly stated that they expect participating institutions to use
CPP funds in a manner consistent with the goals of the program by
working to expand the flow of credit to promote sustained economic
growth and modifying the terms of residential mortgages to strengthen
the housing market. But Treasury has not yet set up policies and
procedures to help ensure that CPP funds are being used as intended.
Similarly, institutions participating in CPP are subject to specific
restrictions on dividend payments or repurchasing shares as long as
Treasury has preferred shares outstanding. But Treasury also has no
policies and procedures in place for ensuring that the institutions are
complying with these requirements or that they are using the capital
investments in a manner that helps meet the purposes of the act.
Although Treasury has hired a third party to help establish a system of
internal controls, until control are in place to ensure that specific
program requirements are met, Treasury cannot effectively hold
participating institutions accountable for how they use the capital
injections or provide strong oversight of compliance with the
requirements under the act.
Further, while Treasury has made progress in setting up OFS, it faces a
number of ongoing challenges that must be addressed. First, timely
completion of hiring efforts to bring OFS up to its full complement of
staff, as well as effective succession planning for likely changes in
key OFS leadership positions, is critical to ensuring the integrity of
TARP both during and after the transition to the new administration.
Second, Treasury has not yet finalized necessary oversight procedures
for its growing number of contractors and financial agents, even though
the use of time and materials contracts requires enhanced oversight of
contractor performance. Third, while the financial agent and contractor
arrangements will enhance Treasury's capabilities to administer TARP,
the substantial reliance on the private sector raises issues related to
the potential for conflicts of interest. Lacking a comprehensive and
complete system to monitor conflicts of interest, Treasury runs the
risk that it may not be able to ensure that conflicts are fully
identified and appropriately addressed. This area is just one of
several in which internal controls have yet to be established for TARP
activities. While OFS is in the process of developing a comprehensive
system of internal control, there is heightened risk that the interests
of the government and taxpayers may not be adequately protected and
that OFS may not achieve its mission in an effective and efficient
manner.
Finally, evaluating the impact of Treasury's efforts under TARP, which
are intended to improve conditions in credit and other markets, will be
challenging for a number of reasons. As we have noted, little time has
passed since the initial infusion of capital into the institutions, and
a variety of other programs and efforts directed at bolstering the
economy and helping homeowners are still being considered. Further, in
addition to TARP, U.S. regulators as well as foreign governments
continue to take a variety of actions, including many coordinated
efforts, aimed at stabilizing markets and the economy. Moreover, a
number of other interventions and market forces themselves will affect
future developments and make it difficult to isolate the effects of any
program or action, not just TARP. To facilitate our assessment of
TARP's activities going forward, we have identified a number of
preliminary indicators that, when viewed collectively, should signal
whether TARP as well as other programs are functioning as intended.
Among these preliminary indicators are interest rate spreads, mortgage
rates, and mortgage originations. We also have identified other
indicators that may prove useful as TARP evolves. Together, these
indicators should provide additional information to policymakers and
others on the overall stability of our financial markets.
Recommendations for Executive Action:
We recognize that less than 60 days has passed since the program was
created and the inherent difficulty of setting up any new program,
especially during turbulent economic conditions. However, we have
identified a number of areas that warrant Treasury's ongoing attention.
Therefore, we are recommending that Treasury take a number of actions
aimed at improving the integrity, accountability, and transparency of
TARP. Specifically, Treasury should:
* work with the bank regulators to establish a systematic means of
monitoring and reporting on whether financial institutions' activities
are consistent with the purposes of CPP and help ensure an appropriate
level of accountability and transparency;
* develop a means to ensure that institutions participating in CPP
comply with key requirements of program agreements, including those
covering limitations on executive compensation, dividend payments, and
the repurchase of stock;
* formalize the existing communication strategy to ensure that external
stakeholders, including Congress and the public, are informed about the
program's current strategy and activities as well as the rationale for
changes in this strategy to avoid information gaps and shocks;
* develop a definitive transition plan by building on and formalizing
ongoing activities to facilitate a smooth transition to the new
administration, including ensuring that key OFS leadership positions
are filled during and after the transition to the new administration;
* continue OFS hiring efforts in an expeditious manner to ensure that
Treasury has the personnel needed to carry out and oversee TARP;
* ensure that sufficient personnel are assigned and appropriately
trained to oversee the performance of all contractors, especially those
performing under contracts priced on a time and materials basis, and
move toward greater reliance on fixed-price arrangements, whenever
possible, as program requirements are better defined over time;
* continue to develop a comprehensive system of internal control over
TARP, including policies, procedures, and guidance for program
activities that are robust enough to ensure that program's objectives
and requirements are being met;
* issue final regulations on conflicts of interest involving Treasury's
agents, contractors, and their employees and related entities as
expeditiously as possible, and review and renegotiate mitigation plans,
as necessary, to enhance specificity and compliance with the new
regulations once they are issued; and:
* institute a system to effectively manage and monitor the mitigation
of conflicts of interest going forward.
Agency Comments and Our Analysis:
We provided a draft of this report to the Department of the Treasury
for review and comment. We also provided segments of the draft report
to the Federal Reserve, FDIC, OCC and OTS for review and comment. In
written comments, Treasury generally agreed with the report and eight
of the nine recommendations (see app. I). Treasury stated that it had
taken aggressive measures to stabilize credit markets, such as
investing over $150 billion in financial institutions through CPP.
Treasury also said that it had made significant progress in building an
infrastructure to carry out its ongoing responsibilities to develop
other programs, measure risk, monitor compliance, and ensure robust
internal financial controls and that our report's recommendations would
be helpful in implementing the work that remained to be done in these
areas. Treasury stated that it had made significant efforts to ensure
transparency and good communication with external stakeholders but
acknowledged that more could and would be done in these areas. Treasury
agreed that it needed to develop procedures to determine whether
financial institutions were complying with the requirements explicitly
imposed on them in the CPP agreements and under the statute but had a
different perspective from our recommendation on what should be done to
evaluate how institutions were using funds received under CPP. Treasury
said that it would welcome further discussion on general metrics for
evaluating the overall success of CPP in addressing the purposes of the
act. In technical comments, the Federal Reserve also expressed concern
about whether Treasury needed to monitor individual institutions' use
of CPP funds, because data from any single institution would not
indicate that the program's goals had been achieved. Instead,
achievement of the goals would be reflected in the level of functioning
of the financial marketplace as a whole.
As discussed in the draft, we agree that it will be important to
develop a range of metrics to evaluate the overall success of CPP, and
we welcome continued discussions with Treasury and the regulators on
general metrics to achieve this purpose. However, given the magnitude
of funds provided to this program, these types of metrics alone will
not provide the necessary transparency and accountability needed to
ensure that participating institutions are using the funds in a manner
that is consistent with the purposes of the act. As stated in the
report, Treasury should build on the existing oversight mechanisms of
the banking regulators to minimize any additional regulatory burden and
develop a means for reviewing and reporting on planned and actual
actions taken by participating financial institutions that result from
the additional funding received through CPP. Obtaining such information
could help Treasury better monitor participating institutions'
activities and provide an appropriate level of accountability and
transparency. Moreover, the information could also feed into an overall
assessment of the effect of TARP in restoring liquidity and stability
to the financial system. Treasury, the Federal Reserve, FDIC, OCC, and
OTS also provided technical comments that we incorporated in the
report, as appropriate.
We are sending copies of this report to other interested congressional
committees and members, Treasury, the federal banking regulators, and
others. 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 Richard J. Hillman at (202) 512-8678 or hillmanr@gao.gov,
Thomas J. McCool at (202) 512-2642 or mccoolt@gao.gov, or Orice M.
Williams at (202) 512-8678 or williamso@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made major contributions to
this report are listed in appendix II.
Signed by:
Gene L. Dodaro:
Acting Comptroller General of the United States:
[End of section]
List of Congressional Addresses:
The Honorable Robert C. Byrd:
Chairman:
The Honorable Thad Cochran:
Ranking Member:
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 Charles B. Rangel:
Chairman:
The Honorable Jim McCrery:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Comments from the Department of the Treasury:
Department of The Treasury:
Assistant Secretary:
Washington, D.C.
November 28, 2008:
Mr. 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:
Thank you for the opportunity to review the draft report entitled
Troubled Assets Relief Program: Additional Actions Needed to Better
Ensure Integrity, Accountability, and Transparency. The draft report
fairly summarizes Treasury's progress in implementing the Emergency
Economic Stabilization Act of 2008 (EESA), and we agree with the draft
report's recommendations, except as noted below.
Less than 60 days have elapsed since Congress passed and the President
signed EESA into law. During this short time, Treasury has taken
aggressive measures to stabilize credit markets. We designed and
implemented the Capital Purchase Program (CPP) to inject equity into
healthy financial institutions, drawing upon the judgment and expertise
of hank regulators. To date, we have invested over $150 billion in
financial institutions (banks and savings institutions and their
holding companies). Treasury also instituted a program to address the
risks posed by systemically significant failing institutions. At the
same time, Treasury has made significant progress building an
infrastructure that will carry out our ongoing responsibility to
develop other programs, measure risk, monitor compliance, and ensure
robust internal financial controls. The draft report acknowledges
Treasury's progress in these areas and makes helpful recommendations
about the work that remains to be done.
We agree with the recommendations directed at building an Office of
Financial Stability that is well-staffed and well-trained. We also
agree that Treasury must continue to develop its internal controls,
procedures, and policies for program activities. We believe that
Treasury has made significant efforts to ensure transparency and good
communication with our external stakeholders, but more can and will be
done in these areas.
Treasury also agrees with the recommendation that it should develop
means to determine whether financial institutions are complying with
the requirements explicitly imposed on them in our purchase agreements
and under the statute. We have a different perspective, however, on
what is needed to evaluate how individual institutions participating in
the CPP are spending the funds they receive under the program. Treasury
designed the capital purchase program to further the goals of EESA,
which included a number of requirements applicable to individual
financial institutions. Treasury is developing compliance programs for
these requirements, and welcomes further discussion on general metrics
for evaluating the overall success of the capital purchase program in
addressing the purposes of EESA.
Thank you again for the work that went into this draft report and the
opportunity to comment on it. We appreciate the cooperation you have
extended to us in implementing this important legislation.
Signed by:
Neel Kashkari:
Interim Assistant Secretary:
Office of Financial Stability:
[End of section]
Appendix II: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Richard J. Hillman, (202) 512-8678:
Thomas J. McCool, (202) 512-2642:
Orice M. Williams, (202) 512-8678:
Staff Acknowledgments:
In addition to the contacts named above, Linda Calbom, Mathew Scire,
and William Woods (Lead Directors); Daniel Garcia-Diaz, Lawrence Evans,
Jr., Kay Kuhlman, Harry Medina, and Carol Dawn Petersen (Lead Assistant
Directors); and Allison Abrams, Marianne Anderson, Sonya Bensen,
Patrick Breiding, Steven Brown, Angela Burriesci, Mason Calhoun,
Timothy Carr, Tara Carter, Emily Chalmers, Rachel DeMarcus, Heather
Digna, Lynda Downing, Matt Drerup, Abe Dymond, Katherine Eikel, Nancy
Eibeck, Gary Engel, Paul Foderaro, Jeanette Franzel, Leon Gill, Daniel
Gordon, Michael Hoffman, Joe Hunter, Ron Ito, Elizabeth Jimenez, John
A. Krump, James Lager, Robert Lunsford, Stephanie May, Kimberly
McGatlin, Jay R. McTigue, Marc Molino, Susan Offutt, Jose Oyola,
Kenneth Patton, Jasminee Persaud, Susan Poling, Anthony Pordes, Barbara
Roesmann, Susan Sawtelle, Jeremy Sebest, John Treanor, Karen Tremba,
Katherine Trimble, Julie Trinder,and James Vitarello made contributions
to this report.
[End of section]
Footnotes:
[1] Pub. L. No. 110-343, sec. 3(9)(Oct. 3, 2008). The act requires that
the appropriate committees of Congress be notified in writing that the
Secretary of the Treasury, after consultation with the Federal Reserve
Chairman, has determined that purchase of other financial instruments
is necessary to promote financial market stability.
[2] The FDIC established the two guarantee programs after a
determination of systemic risk by the Secretary of the Treasury. FDIC
may bypass the least cost method of resolving banks in extraordinary
circumstances if the least cost method would have "serious adverse
effects on economic conditions and financial stability" and if
bypassing the least cost method would "avoid or mitigate such adverse
effects." The systemic risk exception requires the approval of the FDIC
Board of Directors, the Federal Reserve Board and the Secretary of the
Treasury in consultation with the President. 12 U.S.C. §1823(c)(4)(G).
FDIC believes that the guarantee programs promote financial stability
by preserving confidence in the banking system and encourage liquidity
in order to ease lending to creditworthy businesses and consumers. GAO
is required to review the systemic risk determination and report to
Congress on (1) the basis for the determination; (2) the purpose for
the action; and (3) the likely effect of the determination and the
action on the incentives and conduct of insured depository institutions
and uninsured depositors. GAO's work on this mandate is ongoing.
[3] Commercial paper is an unsecured, short-term debt instrument issued
by a corporation, typically for the financing of accounts receivable,
inventories, and meeting short-term liabilities. Maturities on
commercial paper rarely range any longer than 270 days.
[4] The Federal Reserve Bank of New York will provide senior secured
funding to a series of special purpose vehicles to facilitate an
industry-supported private sector initiative to finance the purchase of
eligible assets from eligible investors. Eligible assets are to include
U.S. dollar-denominated certificates of deposit, bank notes, and
commercial paper issued by highly rated financial institutions and
having remaining maturities of 90 days or less. Eligible investors
include U.S. money market mutual funds and over time may include other
U.S. money market investors. Congress has also temporarily increased
FDIC deposit insurance from $100,000 to $250,000 per depositor through
December 31, 2009.
[5] An equity warrant is an option to buy the common stock of the debt
issuer at a predetermined price on or before a specified expiration
date.
[6] Treasury has announced a $10 billion capital purchase for Merrill
Lynch & Co., pending completion of its merger with Bank of America.
[7] "Reports on the Processing of Transactions by Service
Organizations" (Statement of Auditing Standards [SAS 70]) provides
guidance on the factors an independent auditor should consider when
auditing the financial statements of an entity that uses a service
organization to process certain transactions.
[8] A financial agency agreement is the document that establishes and
governs the relationship between Treasury and its financial agent. A
financial agent is a financial institution that has authority to hold
deposits of public money and perform related services. See 31 U.S.C.
pt. 202. A financial agent has a principal-agent relationship with
Treasury and owes a fiduciary duty of loyalty and fair dealing to the
United States.
[9] No indicator on its own provides a definitive perspective on the
state of markets; collectively, the indicators should provide a broad
sense of stability and liquidity in the financial system and could be
suggestive of the program's impact. However, it is difficult to draw
conclusions about actual causality.
[10] One additional purchase of $10 billion is pending until a merger
is complete.
[11] As described in clause (iii), (iv), (v), or (vi) of section
402(c)(8)(B) of the Internal Revenue Code of 1986 (IRC), except that
such authority shall not extend to any compensation arrangements
subject to section 409A of the IRC.
[12] The Chairman of the Federal Reserve was selected as the Chairman
of the Oversight Board.
[13] The Congressional Oversight Panel consists of five members, with
the Speaker of the House, the House Republican Leader, the Senate
Majority Leader, and the Senate Republican Leader each selecting one
member. The fifth member is a joint selection by the Speaker of the
House and the Senate Majority Leader. Its members are Richard H.
Neiman, Superintendent of Banks in New York (appointed by the Speaker
of the House); Representative Jeb Hensarling (appointed by the House
Republican Leader); Elizabeth Warren, Harvard Law School (appointed by
the Senate Majority Leader); Senator Judd Gregg (appointed by the
Senate Republican Leader); and Damon Silvers, of the AFL-CIO Associate
General Counsel, (jointly appointed by the Speaker of the House and the
Senate Majority Leader). Others with oversight responsibilities include
the Congressional Budget Office and the Office of Management and
Budget.
[14] See Section 3(9)(B) of the act. Treasury transmitted its
determination to the appropriate committees of Congress on October 13,
2008.
[15] Generally, financial institutions include qualifying U.S.-
controlled banks, savings associations, and certain bank and savings
and loan holding companies.
[16] The act authorized Treasury to draw up to $250 billion for
immediate use and provided for an additional $100 billion if the
President certifies that the additional funds are needed. A written
certification that the additional $100 billion was necessary has been
submitted. A final $350 billion is available under the act but is
subject to congressional review.
[17] In its October 2008 Monthly Treasury Statement of Receipts and
Outlays of the United States Government, Treasury reported the $115
billion it paid for the senior preferred shares as cash outlays. The
Congressional Budget Office (CBO), in its Monthly Budget Review dated
November 7, 2008, reported that, in its view, these stock purchases
"should not be recorded on a cash basis but on a net present value
basis, accounting for market risk, as specified in the Emergency
Economic Stabilization Act." CBO's preliminary estimate for the present
value cost of the stock purchases is $17 billion as compared to the
$115 billion cash basis amount reported by Treasury. This cost reflects
the estimated net amount of payments made and received by Treasury
under the agreements, discounted for market risk and for interest in
future years. The treatment of these stock purchases is being reviewed
as part of our ongoing work.
[18] As required under the act, Treasury publicly disclosed a
description of the assets purchased, and the amounts and pricing of
those assets for the capital purchases within 2 business days of
completion. See section 114(a) of the act.
[19] Risk-weighted assets are the total of all assets held by the bank
that are weighted for credit risk according to a formula established in
regulation by the Federal Reserve.
[20] Tier 1 capital is the core measure of a bank's financial strength
from a regulator's point of view. It consists of the types of capital
considered the most reliable and liquid, primarily common stock and
preferred stock. A "qualified offering" is the sale and issuance of
Tier 1 qualifying perpetual preferred stock, common stock, or a
combination of such stock for cash. Senior preferred may only be
redeemed prior to 3 years from the date of investment if the proceeds
of "qualified enquity offerings" result in aggregate gross proceeds to
the financial institution of not less than 25 percent of the issue
price of the senior preferred. Banks are required to hold 8 percent
capital for regulatory purposes and historically, on average hold
closer to 10 percent. Therefore, in terms of total capital, Treasury's
capital infusions could equal about one-quarter to one-third of an
institution's capital.
[21] The issue date is the date that Treasury made the capital purchase
of preferred stocks and warrants. In the case of the initial eight
financial institutions that have reached settlement, this date is
October 28, 2008.
[22] Bank of New York Mellon is also a participant in CPP. We plan to
review how OFS intends to mitigate and manage the conflict between Bank
of New York Mellon's role as custodian and its participation in the
program.
[23] An S Corporation is a corporation that makes a valid election to
be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code
and thus does not pay any income taxes. Instead, the corporation's
income or losses are divided among and passed through to its
shareholders. A mutual organization is a company that is owned by its
customers rather than by a separate group of stockholders. Many thrifts
and insurance companies (for example, Metropolitan and Prudential) are
mutual companies.
[24] The primary federal regulator is generally the regulator
overseeing the lead bank of the institution. Where the institution is a
bank holding company, the primary federal regulator also consults with
the Federal Reserve.
[25] The committee membership includes the OFS's Chief Investment
Officer (committee chair) and the assistant secretaries for Financial
Markets, Economic Policy, Financial Institutions, and Financial
Stability at Treasury.
[26] A call report is a bank/thrift regulatory quarterly report that
allows a regulator to monitor institution's financial condition.
[27] A golden parachute is defined as any payment in the nature of
compensation to a senior executive officer made on account of
involuntary termination or in connection with any bankruptcy filing,
receivership, or insolvency of the institution to the extent that the
present value of the payment equals or exceeds three times the
executive's average annual compensation over the preceding 5 years.
[28] The restructuring plan also includes actions by the Federal
Reserve aimed at restructuring the terms of its previous agreement.
[29] The act specifies that the program would insure only troubled
assets originated or issued prior to March 14, 2008.
[30] 73 Fed. Reg. 61452 (Oct. 16, 2008), Department of the Treasury:
Development of a Guarantee Program for Troubled Assets (Notice and
Request for Comments).
[31] Under the new FHA program, lenders can have loans in their
portfolios refinanced into FHA-insured 40-year loans with fixed
interest rates. The new insured mortgages cannot exceed 96.5 percent of
the current appraised value of the homes, a provision that could
require lenders to write down the existing mortgage amounts. Borrowers
must also share a portion of the equity resulting from the new mortgage
and the value of future appreciation.
[32] In our prior work, we have reported that top leadership must set
the direction, pace, and tone for agencies undergoing significant
transformation and that the appointment of a chief operating officer is
among the key practices available to help elevate attention on
management issues and transformational change. See GAO, Results-
Oriented Cultures: Implementation Steps to Assist Mergers and
Organizational Transformations, [hyperlink,
http://www.gao.gov/products/GAO-03-669] (Washington, D.C.: July 2,
2003).
[33] The Competition in Contracting Act authorizes agencies to limit
competition when an unusual and compelling urgency precludes the use of
full and open competition and delaying the contract would result in
serious financial or other harm to the government. 41 U.S.C. § 253(c)
[34] GAO, Defense Contracting: Improved Insight and Controls Needed
over DOD's Time-and-Materials Contracts, [hyperlink,
http://www.gao.gov/products/GAO-07-273] (Washington, D.C.: Sept. 17,
2007).
[35] GAO, Defense Contracting: Additional Personal Conflicts of
Interest Safeguards Needed for Certain DOD Contractor Employees,
[hyperlink, http://www.gao.gov/products/GAO-08-169] (Washington, D.C.:
Mar. 7, 2008).
[36] A recent FAR amendment, effective December 12, 2008, will require
contractors to disclose promptly credible evidence of fraud and
conflicts of interest to the appropriate inspector general and
contracting officer. 73 Fed. Reg. 67064 (Nov. 12 2008) (to be codified
at 41 C.F.R. §52-203-13(b)(3)).
[37] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: November 1999).
[38] According to PricewaterhouseCoopers, it plans to use the Committee
of Sponsoring Organizations of the Treadway Commission's (COSO)-
Enterprise Risk Management-Integrated Framework as the basis for
providing assistance in developing the internal control model. COSO is
a voluntary private sector organization whose purpose is to help
businesses and other entities assess and enhance their internal control
systems. This framework is consistent with GAO's Standards for Internal
Control.
[39] In an interagency statement, Treasury, FDIC, and the Federal
Reserve encouraged banks and their regulators to work collectively to
meet the needs of creditworthy borrowers and work with existing
borrowers to avoid preventable foreclosures.
[40] Capital markets are a larger source of business borrowing than
banks, but consumers and small businesses do not generally have access
to capital markets.
[41] Real economic activity generally refers to measures of national
income and the production of goods and services, such as gross domestic
product and industrial production.
[42] Treasury agreed to commit only up to $100 billion per government-
sponsored enterprise to cover the enterprises' negative net worth.
[43] Some changes in financial markets could occur because market
participants may alter their behavior based on the announcement of a
program in anticipation that specific action will be taken. In other
words, if market participants believe risk will decline in the future,
they will charge less for that risk in the present, assuming that the
announcement is credible and the program is viewed as effective.
[44] A basis point is a common measure used in quoting yield on bills,
notes, and bonds and represents 1/100 of a percent of yield. It should
be noted that while the spread is large, the actual LIBOR rate is lower
than the average rate for 2005 through mid-2007.
[45] Moody's Investors Service performs financial research and analysis
on commercial and government entities. It also ranks the
creditworthiness of borrowers using a standardized ratings scale. These
spreads can also reflect a liquidity and/or prepayment premium.
Moreover, some economic research also suggests that such interest rate
spreads have predictive power for the real economy, although the
inferences to be drawn vary across time and instruments and may send
false signals.
[46] Moreover, economic research also suggests that such interest rate
spreads have predictive power for several real economy variables, such
as industrial production, durable orders, the unemployment rate,
personal income, capacity utilization, and consumption.
[47] Conforming mortgages are mortgage loans that can be purchased by
Fannie Mae and Freddie Mac.
[48] This dropoff is consistent with the change in household mortgage
debt as measured by the Federal Reserve's flow of funds data.
[49] FDIC, Treasury, and the Federal Reserve have stated that lenders
and servicers should (1) determine whether a loan modification would
enhance the net present value of the loan before proceeding to
foreclosure and (2) ensure that loans currently in foreclosure have
been subject to such analysis.
[50] While dominant causal effect may run from housing prices to
foreclosures, foreclosures can also affect prices. To the extent that
at-risk borrowers are able to refinance or restructure mortgages,
prices may stabilize. Similarly, price stabilization can reduce
foreclosure rates. However, independent of foreclosures, housing prices
may simply be returning to their fundamental values after a long period
of overvaluation.
[End of section]
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of newly
posted products every afternoon, go to [hyperlink, http://www.gao.gov]
and select "E-mail Updates."
Order by Phone:
The price of each GAO publication reflects GAO‘s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black and
white. Pricing and ordering information is posted on GAO‘s Web site,
[hyperlink, http://www.gao.gov/ordering.htm].
Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537.
Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional
information.
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Ralph Dawn, Managing Director, dawnr@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548: