Troubled Asset Relief Program
One Year Later, Actions Are Needed to Address Remaining Transparency and Accountability Challenges Gao ID: GAO-10-16 October 8, 2009GAO's eighth report assesses the Troubled Asset Relief Program's (TARP) impact over the last year. Specifically, it addresses (1) the evolution of TARP's strategy and the status of TARP programs as of September 25, 2009; (2) the Department of the Treasury's (Treasury) progress in creating an effective management structure, including hiring for the Office of Financial Stability (OFS), overseeing contractors, and establishing a comprehensive system of internal control; and (3) indicators of TARP's performance that could help Treasury decide whether to extend the program. GAO reviewed relevant documentation and met with officials from OFS, contractors, and financial regulators.
Over the last year, TARP in general, and the Capital Purchase Program (CPP) in particular, along with other efforts by the Board of Governors of the Federal Reserve System (Federal Reserve) and Federal Deposit Insurance Corporation (FDIC), have made important contributions to helping stabilize credit markets. TARP is still a work in progress, and many uncertainties and challenges remain. For example, while some CPP participants had repurchased over $70 billion in preferred shares and warrants as of September 25, 2009, whether Treasury will fully recoup TARP assistance to the automobile industry and American International Group Inc., among others, remains uncertain. Moreover, other programs, such as the Public-Private Investment Program and the Home Affordable Modification Program (HAMP) are still in varying stages of implementation. As of September 25, 2009, Treasury had disbursed almost $364 billion in TARP funds; however, Treasury has yet to update its projected use of funds for most programs in light of current market conditions, program participation rates, and repurchases. Without more current estimates about expected uses of the remaining funds, Treasury's ability to plan for and effectively execute the next steps of the program will be limited. Amid concerns about the direction and transparency of TARP, the new administration has attempted to provide a more strategic direction for using the remaining funds. TARP has moved from investment-based initiatives to programs aimed at stabilizing the securitization markets and preserving homeownership, and most recently at providing assistance to community banks and small businesses. While some programs, such as the Term Asset-Backed Securities Loan Facility, appear to have generated market interest, others, such as HAMP, face ongoing implementation and operational challenges. Related to transparency, Treasury has taken a number of steps to improve communication with the public and Congress, including launching a Web site and preparing to hire a communications director for OFS to support these efforts. Treasury has also made significant progress in establishing and staffing OFS; however, it must continue to focus on filling critical leadership positions, including the Chief Homeownership Preservation Officer and Chief Investment Officer, with permanent staff. Treasury's network of contractors and financial agents that support TARP administration and operations has grown from 11 to 52. While Treasury has an appropriate infrastructure in place, it must remain vigilant in managing and monitoring conflicts of interests that may arise with the use of private sector sources.
RecommendationsOur 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-10-16, Troubled Asset Relief Program: One Year Later, Actions Are Needed to Address Remaining Transparency and Accountability Challenges
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
October 2009:
Troubled Asset Relief Program:
One Year Later, Actions Are Needed to Address Remaining Transparency
and Accountability Challenges:
GAO-10-16:
GAO Highlights:
Highlights of GAO-10-16, a report to congressional committees.
Why GAO Did This Study:
GAO‘s eighth report assesses the Troubled Asset Relief Program‘s (TARP)
impact over the last year. Specifically, it addresses (1) the evolution
of TARP‘s strategy and the status of TARP programs as of September 25,
2009; (2) the Department of the Treasury‘s (Treasury) progress in
creating an effective management structure, including hiring for the
Office of Financial Stability (OFS), overseeing contractors, and
establishing a comprehensive system of internal control; and (3)
indicators of TARP‘s performance that could help Treasury decide
whether to extend the program. GAO reviewed relevant documentation and
met with officials from OFS, contractors, and financial regulators.
What GAO Found:
Over the last year, TARP in general, and the Capital Purchase Program
(CPP) in particular, along with other efforts by the Board of Governors
of the Federal Reserve System (Federal Reserve) and Federal Deposit
Insurance Corporation (FDIC), have made important contributions to
helping stabilize credit markets. To illustrate, figure 1 shows that
while it is difficult to isolate the impact of TARP, the TED spread”a
key indicator of credit risk that gauges the willingness of banks to
lend to other banks”has narrowed to levels not seen since market
turmoil began in late 2007. However, TARP is still a work in progress,
and many uncertainties and challenges remain. For example, while some
CPP participants had repurchased over $70 billion in preferred shares
and warrants as of September 25, 2009, whether Treasury will fully
recoup TARP assistance to the automobile industry and American
International Group Inc., among others, remains uncertain. Moreover,
other programs, such as the Public-Private Investment Program and the
Home Affordable Modification Program (HAMP) are still in varying stages
of implementation.
Figure 1: TED Spread, 3-Month LIBOR, and 3-Month Treasury Bill Yield,
as of September 29, 2009:
[Refer to PDF for image: financial line graph]
The graph plots interest rates against a three-year period, 2007-2009.
The following are indicated on the graph:
LIBOR yield;
3-month Treasury yield;
TED Spread.
Additionally, the following events are indicated on the graph to
illustrated their effect on interest rates:
BNP Paribas freezes three investment funds;
Major banks begin to write down subprime mortgage losses;
Bear Stearns receives emergency loan from Federal Reserve through
JPMorgan;
FDIC takes over IndyMac;
Lehman bankruptcy; Merrill Lynch purchase announced;
Fannie Mae and Freddie Mac placed into conservatorship;
Washington Mutual closed by Office of Thrift Supervision;
CPP announced along with Federal Reserve and FDIC programs;
Citigroup receives additional government assistance;
Bank of America receives additional government assistance;
Capital Assistance Program Stress Test results released.
Source: GAO analysis of data from Thomson Reuters Datastream.
Note: Rates and yields are daily percentages. The area between the
LIBOR and Treasury yield is the TED spread.
[End of figure]
As of September 25, 2009, Treasury had disbursed almost $364 billion in
TARP funds; however, Treasury has yet to update its projected use of
funds for most programs in light of current market conditions, program
participation rates, and repurchases. Without more current estimates
about expected uses of the remaining funds, Treasury‘s ability to plan
for and effectively execute the next steps of the program will be
limited. Amid concerns about the direction and transparency of TARP,
the new administration has attempted to provide a more strategic
direction for using the remaining funds. TARP has moved from investment-
based initiatives to programs aimed at stabilizing the securitization
markets and preserving homeownership, and most recently at providing
assistance to community banks and small businesses. While some
programs, such as the Term Asset-Backed Securities Loan Facility,
appear to have generated market interest, others, such as HAMP, face
ongoing implementation and operational challenges. Related to
transparency, Treasury has taken a number of steps to improve
communication with the public and Congress, including launching a Web
site and preparing to hire a communications director for OFS to support
these efforts.
Treasury has also made significant progress in establishing and
staffing OFS; however, it must continue to focus on filling critical
leadership positions, including the Chief Homeownership Preservation
Officer and Chief Investment Officer, with permanent staff. Treasury‘s
network of contractors and financial agents that support TARP
administration and operations has grown from 11 to 52. While Treasury
has an appropriate infrastructure in place, it must remain vigilant in
managing and monitoring conflicts of interests that may arise with the
use of private sector sources.
GAO again notes that isolating and estimating the effect of TARP
programs remains a challenging endeavor. As shown in table below, the
indicators that GAO has been monitoring over the last year suggest that
there have been broad improvements in credit markets since the
announcement of the first TARP program (CPP) and that a number of
anticipated effects of TARP have materialized, although not necessarily
due to TARP actions alone. Specifically, the cost of credit and
perceptions of risk (as measured by premiums over Treasury securities)
have declined significantly in interbank, corporate debt, and mortgage
markets. Further, our analysis of Treasury‘s loan survey results over
most of the past year shows that collectively the largest CPP
participants have reported extending almost $2.3 trillion in new loans
since receiving $160 billion in CPP capital. While Treasury has not
fully developed a comprehensive framework for assessing the need for
additional actions and evaluating program results in a transparent
manner, in a recent report Treasury began to lay the foundation for
such a framework and provided a number of financial indicators. A
framework that utilizes indicators or measures of program effectiveness
would help in weighing the benefits of TARP programs against the cost
of employing additional taxpayer resources. Also, as Treasury considers
further action under TARP and considers whether to extend the program
beyond December 31, 2009, it will need to evaluate TARP in the broader
context of efforts by the Federal Reserve and FDIC to stabilize the
financial system. Finally, Treasury will need to document its analysis
and effectively communicate its reasoning to Congress and the American
people for its decisions to be viewed as credible.
Table: Changes in Select Credit Market Indicators, October 13, 2008, to
September 30, 2009:
Credit market rates and spreads:
Indicator: LIBOR;
Description: 3-month London interbank offered rate (an average of
interest rates offered on dollar-denominated loans);
Basis point change from October 13, 2008, to September 30, 2009: Down
446.
Indicator: TED Spread;
Description: Spread between 3-month LIBOR and 3-month Treasury yield;
Basis point change from October 13, 2008, to September 30, 2009: Down
443.
Indicator: Aaa bond rate;
Description: Rate on highest-quality corporate bonds;
Basis point change from October 13, 2008, to September 30, 2009: Down
143.
Indicator: Aaa bond spread;
Description: Spread between Aaa bond rate and 10-year Treasury yield;
Basis point change from October 13, 2008, to September 30, 2009: Down
85.
Indicator: Baa bond rate;
Description: Rate on corporate bonds subject to moderate credit risk:
Basis point change from October 13, 2008, to September 30, 2009: Down
263.
Indicator: Baa bond spread:
Description: Spread between Baa bond rate and 10-year Treasury yield;
Basis point change from October 13, 2008, to September 30, 2009: Down
205.
Indicator: Mortgage rates;
Description: 30-year conforming loans rate;
Basis point change from October 13, 2008, to September 30, 2009: Down
142.
Indicator: Mortgage spread;
Description: Spread between 30-year conforming loans rate and 10-year
Treasury yield;
Basis point change from October 13, 2008, to September 30, 2009: Down
83.
Quarterly mortgage volume and defaults:
Indicator: Mortgage originations;
Description: New mortgage loans;
Change from December 31, 2008 to June 30, 2009: Up $290 billion to $550
billion.
Indicator: Foreclosure rate;
Description: Percentage of homes in foreclosure;
Change from December 31, 2008 to June 30, 2009: Up 100 basis points to
4.30 percent.
Source: GAO analysis of data from Global Insight, the Federal Reserve,
Thomson Reuters Datastream, and Inside Mortgage Finance.
Note: Rates and yields are daily except mortgage rates, which are
weekly. Higher spreads (measured as premiums over Treasury securities
of comparable maturity) represent higher perceived risk in lending to
certain borrowers. Higher rates represent increases in the cost of
borrowing for relevant borrowers. As a result, ’Down“ suggests
improvement in market conditions for credit market rates and spreads.
Foreclosure rate and mortgage origination data are quarterly. See GAO-
09-161, GAO-09-296, GAO-09-504, and GAO-09-658.
[End of table]
What GAO Recommends:
While Treasury has been generally responsive to GAO‘s prior 35
recommendations, GAO reiterates the importance of fully implementing
several previous recommendations. GAO also makes three new
recommendations. Specifically, the Secretary should (1) coordinate with
the Federal Reserve and FDIC to help ensure that the decision to extend
or terminate TARP is considered in a broader market context, (2)
document and communicate the results of its determination, and (3)
update its projected use of funds. Treasury agreed with the first two
recommendations. With the third, it stated that Treasury regularly re-
evaluates its funding needs. However, GAO found that a thorough review
of its estimates is warranted.
View [hyperlink, http://www.gao.gov/products/GAO-10-16] or key
components. For more information, contact Thomas J. McCool, 202-512-
2642, mccoolt@gao.gov.
[End of section]
Contents:
Letter:
Scope and Methodology:
Background:
TARP Has Moved from Capitalizing Institutions to Stabilizing
Securitization Markets and Preserving Homeownership, but Effective
Communication Remains a Challenge:
The Office of Financial Stability Has Made Progress in Developing a
Management Infrastructure and a Comprehensive System of Internal
Control:
Conditions in Credit Markets Have Improved Since TARP Was Implemented,
but Treasury Needs to Establish a Basis for Future TARP Actions:
Conclusions and Recommendations:
New Recommendations for Executive Action:
Agency Comments and Our Analysis:
Appendix I: Status of GAO Recommendations, as of September 25, 2009:
Appendix II: Capital Purchase Program:
Appendix III: Capital Assistance Program:
Appendix IV: Targeted Investment Program:
Appendix V: Systemically Significant Failing Institutions Program:
Appendix VI: Asset Guarantee Program:
Appendix VII: Consumer and Business Lending Initiative:
Appendix VIII: The Public-Private Investment Program:
Appendix IX: Auto Industry Financing Program:
Appendix X: Home Affordable Modification Program:
Appendix XI: Comments from the Department of the Treasury:
Appendix XII: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Status of TARP Funds, as of September 25, 2009:
Table 2: Capital Purchase Program Repurchases, from TARP's Inception
through September 25, 2009:
Table 3: TARP Dividend Payments Received, as of September 25, 2009:
Table 4: TARP Contracts, Financial Agency Agreements, and Subcontracts
with Minority-Owned, Women-Owned, and Small Businesses, as of September
18, 2009:
Table 5: Status of Treasury's Actions to Renegotiate Existing Vendor
Mitigation Plans That Predated the January 2009 TARP Conflict-of-
Interest Regulation, as of September 18, 2009:
Table 6: Changes in Select Credit Market Indicators, October 13, 2008,
to September 30, 2009:
Table 7: Increase in Capital Adequacy among CPP Participants and
Nonparticipants (in percentage points), Fourth Quarter 2008 to First
Quarter 2009:
Table 8: New Lending at the 21 Largest Recipients of CPP, as of July
31, 2009:
Table 9: Capital Investments Made through the Capital Purchase Program,
as of September 25, 2009:
Table 10: Treasury's Actions in Response to GAO Recommendations, as of
September 25, 2009:
Table 11: Federal Reserve's Response to GAO's Recommendation, as of
September 25, 2009:
Table 12: Status of TIP Funds as of September 25, 2009:
Table 13: Status of SSFI Funds, as of September 25, 2009:
Table 14: Treasury's Response to GAO's Recommendation, as of September
25, 2009:
Table15: Status of Asset Guarantee Program Funding, as of September 25,
2009:
Table 16: Status of TARP Funds for the Consumer and Business Lending
Initiative, as of September 25, 2009:
Table 17: Amount of TALF Loans Requested by Asset Class, from March
through September 2009:
Table 18: Status of TARP Funds, as of September 25, 2009:
Table 19: TARP Funding Authorized for the Auto Industry and Payments
Made, as of September 25, 2009:
Table 20: Treasury's Actions in Response to GAO Recommendations:
Figures:
Figure 1: Timeline for the Implementation of TARP, October 3, 2008,
through September 30, 2009:
Figure 2: Number of Permanent Staff and Detailees, November 21, 2008,
through September 15, 2009:
Figure 3: TED Spread, 3-Month LIBOR, and 3-Month Treasury Bill Yield,
from January 1, 2007, to September 29, 2009:
Figure 4: New Lending at the 21 Largest Recipients of CPP Capital, from
October 2008 to July 2009:
Figure 5: Annual and Quarterly Asset-Backed Security Issuance:
Abbreviations:
ABS: asset-backed securities:
AGP: Asset Guarantee Program:
AIFP: Automotive Industry Financing Program:
AIG: American International Group, Inc.
ARRA: American Recovery and Reinvestment Act of 2009:
CAP: Capital Assistance Program:
CDFI: Community Development Financial Institutions:
CDS: credit default swap:
CMBS: commercial mortgage-backed securities:
COP: Congressional Oversight Panel:
CPP: Capital Purchase Program:
FAR: Federal Acquisition Regulation:
FDIC: Federal Deposit Insurance Corporation:
FinSOB: Financial Stability Oversight Board:
FRBNY: Federal Reserve Bank of New York:
GM: General Motors Company:
GMAC: GMAC LLP:
GSE: government-sponsored enterprise:
HAMP: Home Affordable Modification Program:
HPDP: Home Price Decline Protection:
HPO: Homeownership Preservation Office:
HUD: Department of Housing and Urban Development:
IAA: interagency agreements:
LIBOR: London Interbank Offered Rate:
MBS: mortgage-backed securities:
MHA: Making Home Affordable:
MLSA: Master Loan and Security Agreement:
OCC: Office of the Comptroller of the Currency:
OFS: Office of Financial Stability:
OGE: Office of Government Ethics:
OMB: Office of Management and Budget:
OTS: Office of Thrift Supervision:
PPIP: Public-Private Investment Program:
SBA: Small Business Administration:
SCAP: Supervisory Capital Assessment Program:
SIGTARP: Special Inspector General for TARP:
SSFI: Systemically Significant Failing Institutions Program:
TALF: Term Asset-backed Securities Loan Facility:
TARP: Troubled Asset Relief Program:
TIP: Targeted Investment Program:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
October 8, 2009:
Congressional Committees:
About a year ago, when the Emergency Economic Stabilization Act of 2008
(the act) that authorized the Troubled Asset Relief Program (TARP) was
enacted, the U.S. financial system was facing the most severe financial
crisis since the Great Depression.[Footnote 1] The crisis, which
threatened the stability of the financial system and the solvency of
many financial institutions, prompted the Department of the Treasury
(Treasury) to request and Congress to authorize Treasury to buy or
guarantee up to $700 billion of the "troubled assets" that were deemed
to be at the heart of the crisis, including mortgages and mortgage-
based securities, and any other financial instrument Treasury
determined it needed to purchase to help stabilize the financial
system.[Footnote 2]
When the act was signed on October 3, 2008, financial markets were in
significant turmoil. The dramatic correction in the U.S. housing market
had precipitated a decline in the price of financial assets 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 (GSE) such as Fannie Mae and Freddie Mac to Wall Street
firms, were left holding "toxic" or "legacy" assets 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 other 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 on to 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.
The act requires GAO to report at least every 60 days on the status of
TARP. As the act required, our reports have focused on (1) findings
resulting from our oversight of TARP's performance in meeting the
purposes of the act; (2) the financial condition and internal controls
of TARP, its representatives, and agents; (3) the characteristics of
both asset purchases and the disposition of assets acquired, including
any related commitments that are entered into; (4) TARP's efficiency in
using the funds appropriated for the program's operation; (5) TARP's
compliance with applicable laws and regulations; (6) efforts to
prevent, identify, and minimize conflicts of interest of those involved
in TARP's operations; and (7) the efficacy of contracting procedures.
[Footnote 3]
This report assesses the program's impact over the last year.
Specifically, it addresses (1) the evolution of the TARP strategy and
the status of TARP programs as of September 25, 2009; (2) the
Department of the Treasury's (Treasury) progress in creating an
effective management structure, including hiring for the Office of
Financial Stability (OFS), overseeing contractors, and establishing a
comprehensive system of internal control; and (3) changes in the
condition of financial markets as measured by indicators of TARP's
performance that could help Treasury decide whether to extend the
program.
Scope and Methodology:
We took several steps to update information on the status of TARP
funds, including disbursements, dividend payments, repurchases, and
warrant liquidations, from October 3, 2008, through September 25, 2009
(unless otherwise noted), and the status of Treasury's actions taken in
response to recommendations from our TARP reports, including its
progress in developing a comprehensive system of internal control.
[Footnote 4] We reviewed documents provided by OFS and conducted
interviews with officials from OFS, including the Chief Financial
Officer, Deputy Chief Financial Officer, Cash Management Officer,
Director of Internal Controls, and their representatives.
For the Capital Purchase Program (CPP), we reviewed documents from OFS
that described the amounts, types, and terms of Treasury's purchases of
senior preferred stocks, subordinated debt, and warrants under CPP. We
also reviewed documentation and interviewed officials from OFS who were
responsible for approving financial institutions' participation in CPP
and overseeing the repurchase process for CPP preferred stock and
warrants. Additionally, we contacted officials from the four federal
banking regulators--the Federal Deposit Insurance Corporation (FDIC),
the Office of the Comptroller of the Currency (OCC), the Board of
Governors of the Federal Reserve System and Federal Reserve Banks
(Federal Reserve), and the Office of Thrift Supervision (OTS)--to
obtain information on their processes for reviewing CPP applications,
the status of pending applications, their processes for reviewing
preferred stock and warrant repurchase requests, and their examination
processes for reviewing recipients' lending activities and compliance
with TARP requirements.
To update the status of the Capital Assistance Program (CAP), we
reviewed relevant documents and interviewed OFS officials about the
program. We also met with Federal Reserve officials to discuss the
stress test methodology and results for the 19 largest U.S. bank
holding companies and reviewed related documents relevant to CAP.
To update our work on the Targeted Investment Program (TIP) and the
Asset Guarantee Program (AGP), we reviewed the Securities Purchase
Agreements that Citigroup Inc. (Citigroup) and Bank of America
Corporation (Bank of America) entered into with Treasury and the Master
Agreement signed by Citigroup, Treasury, FDIC, and the Federal Reserve
Bank of New York (FRBNY). In addition, we interviewed OFS officials,
including the acting Chief Investment Officer and the General Counsel,
to obtain information on the current status of TIP and AGP in terms of
new applicants for the programs, compliance with their requirements,
and possible exit strategies for unwinding the TIP investments.
For the Systemically Significant Failing Institutions (SSFI) program,
we reviewed relevant documents from Treasury, the Federal Reserve, and
American International Group, Inc. (AIG), including securities purchase
agreements, periodic reports provided to Treasury, and other relevant
documentation. We also met with officials from each organization and
relevant state insurance regulators.
To meet the report's objectives with respect to the Consumer and
Business Lending Initiative, we reviewed announcements and other
publicly available information on the Term Asset-Backed Securities Loan
Facility (TALF) that were available on the FRBNY's Web site, in OFS
internal reports, and in program design documents from Treasury and
FRBNY. We also interviewed officials from OFS, FRBNY, and the Federal
Reserve, as well as TALF investors, a securitization attorney, three
underwriters, two major credit rating agencies, an academic, a policy
analyst, and TALF issuers for commercial mortgage-backed securities
(CMBS) and asset-backed securities (ABS) backed by credit cards, auto
loans, student loans, and Small Business Administration (SBA) loans.
To meet the report's objectives with respect to the Public-Private
Investment Program (PPIP), we reviewed PPIP-related announcements, OFS
internal reports, and program operation and design documents published
by Treasury and FDIC. We also interviewed officials from Treasury and
FDIC, as well as a policy analyst and an economist.
To determine the status of TARP assistance provided through the
Automotive Industry Financing Program (AIFP), we reviewed documents
related to the restructuring of General Motors Company (GM) and
Chrysler Group LLC (Chrysler), including the automakers' bankruptcy
filings, credit agreements between the automakers and the federal
government, and TARP disbursements to the automakers. We also
interviewed Treasury officials, including officials from Treasury's
auto team, and representatives from GM and Chrysler.
To determine the program status of the Home Affordable Modification
Program (HAMP) and the status of our previous recommendations related
to the program, we reviewed Treasury's guidelines for each HAMP
component, published reports on servicer performance, and Treasury's
written response to our July recommendations. In addition, we
interviewed Treasury officials and officials at Fannie Mae and Freddie
Mac--financial agents of Treasury for HAMP--about the status of program
implementation, including a comprehensive system of internal control.
We also reviewed documentation of Treasury's recent communications with
servicers, such as draft servicer guidelines and letters sent to
participating servicers. Finally, we spoke with representatives of
consumer groups, housing counselors, and servicer associations to
obtain their views on the implementation of HAMP to date.
To determine Treasury's progress in developing an overall
communications strategy for TARP, we interviewed individuals from OFS
and Treasury's Office of Public Affairs and Office of Legislative
Affairs to determine what steps Treasury had taken to improve and
coordinate communications with the public and Congress.
To assess Treasury's progress in hiring permanent staff for OFS, we met
with officials from the Human Resources Office and OFS to discuss
hiring efforts and reviewed various documents that OFS provided to us.
In the interviews, officials discussed their processes for recruiting
individuals with the skill sets and competencies needed to administer
TARP, including steps taken to find permanent replacements to fill key
leadership positions. To examine changes in the composition of staff
since the office was established, we reviewed past GAO reports on TARP
and various documents that OFS provided to us, including OFS's updated
organizational chart. To gauge OFS's mix of permanent and temporary
staff and the number of vacancies, we reviewed the totals for each type
of staff over time and within each OFS office.
To assess OFS's use of contractors and financial agents to support TARP
administration and operations, we obtained information from Treasury on
contracting activity as of September 18, 2009--including task orders
and modifications--for the OFS-support financial agency agreements,
contracts, blanket purchase agreements, and interagency agreements
(IAA). We analyzed this information to identify each contract's and
agreement's purpose, period of performance, and potential value. To
assess OFS's processes for (1) management and oversight of contractors'
and financial agents' performance, and (2) managing conflicts of
interest of contractors and financial agents supporting TARP
administration and operations, we reviewed applicable documents that
had become available from OFS since our June 2009 report. We also
communicated with Treasury compliance officials and reviewed applicable
documentation concerning OFS's progress in (1) completing reviews of
vendor conflicts-of-interest mitigation plans to conform with
applicable TARP requirements and (2) issuing guidance on OFS
requirements and procedures for documenting and resolving conflicts of
interest.
As we noted in our initial report under the mandate, we identified a
preliminary set of indicators on the state of credit and financial
markets that might be suggestive of the performance and effectiveness
of TARP.[Footnote 5] We consulted Treasury officials and other experts
and analyzed available data sources and the academic literature. We
selected a set of 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 6] We assessed the reliability of the data upon
which the indicators were based and found that, despite certain
limitations, they were sufficiently reliable for our purposes. To
update the indicators in this report, we primarily used data from
Thomson Reuters Datastream, a financial statistics database. As these
data are widely used, we conducted only a limited review of the
information but ensured that the trends we found were consistent with
other research. We also relied on data from Inside Mortgage Finance,
Treasury, the Federal Reserve, the Chicago Board Options Exchange, the
Securities Industry and Financial Markets Association, and Global
Insight. We have relied on data from these sources for past reports and
determined that, considered together, they are sufficiently reliable
for the purpose of presenting and analyzing trends in financial
markets. The data from Treasury's survey of lending by the largest CPP
recipients (as of July 31, 2009, the latest available survey) are based
on internal reporting from participating institutions, and the
definitions of loan categories may vary across banks. Because these
data are unique, we are not able to benchmark the origination levels
against historical lending or seasonal patterns at the institutions.
Based on discussions with Treasury and our review, we found that the
data were sufficiently reliable for the purpose of documenting trends
in lending. Lastly, we collected data on loan balances from the
Consolidated Financial Statements for Bank Holding Companies Y-9C
Report Forms, the primary analytical tool that regulators use to
monitor financial institutions. We verified that the input process did
not result in data entry errors. Because the Y-9C is the primary source
for balance sheet data and can be corroborated to some extent by
audited financial statements, we conducted only a limited review of
this data.
We conducted this performance audit from July 2009 to October 2009 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.
Background:
TARP Is A Key Part of the United States' Response to the Recent
Financial Crisis:
Before the act was passed, TARP was expected to be a program to
purchase mortgage-backed securities (MBS) and whole loans from
financial institutions to stabilize the financial system. Within 2
weeks of enactment, however, following similar action by several
foreign governments and central banks, Treasury--through the newly
established OFS--announced that it would make $250 billion available to
U.S. financial institutions through purchases of preferred stock to
provide additional capital that would help enable the institutions to
continue lending. This effort was coordinated with a number of foreign
governments as part of a global effort to stabilize financial markets.
In the United States, the Federal Reserve and FDIC also announced
concurrent coordinated actions that were intended to increase
confidence in the U.S. financial system. Treasury's decision to change
its strategy raised questions about TARP's transparency, and the fact
that the funds were disbursed before a comprehensive system of internal
control had been established raised issues of accountability. Figure 1
provides an overview of key dates for TARP implementation.
Figure 1: Timeline for the Implementation of TARP, October 3, 2008,
through September 30, 2009:
[Refer to PDF for image: timeline]
2008:
10/3: Congress passes P.L. 110-343, EESA (the act), which authorized
TARP.
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).
10/28: Under CPP, Treasury purchases $115 billion in preferred stock and
warrants from eight financial institutions.
11/10: Treasury announces that it will purchase $40 billion in senior
preferred stock from AIG under SSFI.
11/23: Treasury, FDIC, and the Federal Reserve enter into an agreement
with Citigroup to provide a package of guarantees, liquidity access,
and capital, including equity investment of $20 billion in Citigroup
under newly created Targeted Investment Program (TIP).
11/25: Treasury announces allocation of $20 billion to back Term Asset-
backed Securities Loan Facility (TALF), a $200 billion lending facility
for the consumer asset-backed securities market established by the
Federal Reserve Bank of New York.
12/19: Treasury announces plan for stabilizing the automotive industry
under the Automotive Industry Financing Program (AIFP), including loans
to Chrysler and General Motors (GM).
12/29: Treasury announces purchase of $5 billion in senior preferred
equity from GMAC LLC and agrees to loan $1 billion to support its
reorganization as a bank holding company.
2009:
1/16: Treasury, the Federal Reserve, and FDIC enter into an agreement
with Bank of America to provide guarantees, liquidity access, and
capital, including protection against possible losses on approximately
$118 billion in assets and the purchase of $20 billion in preferred
stock under TIP.
2/10: Treasury announces the Financial Stability Plan.
2/18: Treasury announces the Homeowner Affordability and Stability
Plan.
2/25: Treasury announces the terms and conditions for the Capital
Assistance Program.
3/3: Treasury and the Federal Reserve announce the launch of TALF.
3/23: Treasury, FDIC, and the Federal Reserve announce the details of
the Public-Private Investment Program (PPIP).
5/7: Stress test results are announced.
6/1: Treasury releases its first CPP Monthly Lending Report for all CPP
participants.
6/17: Five of the eight largest financial institutions to first
participate in CPP repurchase their preferred stock from Treasury.
8/17: Treasury and the Federal Reserve announce extension of TALF
through March 2010 for all asset classes except for new-issue CMBS,
which is extended through June 2010.
9/14: Treasury issues report on status and next phase of financial
stabilization efforts.
9/30: Treasury announces that two PPIP funds have raised at least the
minimum $500 million to invest in legacy securities.
Source: GAO.
[End of figure]
Overview of GAO Recommendations:
In the last year, GAO has made 35 recommendations to Treasury and one
to the Federal Reserve on a number of issues surrounding the
implementation of TARP and the need to improve its operations and
transparency.[Footnote 7] Some of our recommendations applied to TARP
in general, while others, such as CPP and HAMP, were program specific.
Our recommendations to Treasury generally fell into three broad
categories: (1) transparency, reporting, and accountability; (2)
management infrastructure; and (3) communication. Other TARP oversight
entities, such as the Special Inspector General for TARP (SIGTARP) and
the Congressional Oversight Panel, have also made numerous
recommendations aimed at improving the implementation and oversight of
TARP.
Transparency, reporting, and accountability. We made a series of
recommendations aimed at improving the transparency and accountability
of TARP and its programs. Initially, we made a series of
recommendations aimed at improving the transparency of CPP. As a
result, OFS now requires all CPP participants to participate in some
form of monthly lending survey. We recommended that OFS report publicly
the monies, such as dividends, paid to Treasury by TARP participants,
something OFS started doing in June 2009. Similarly, Treasury took
steps to implement our recommendations aimed at making the warrant
repurchase process more transparent. Finally, we made a number of
recommendations addressing the basis and design of HAMP's Home Price
Decline Protection program and the need to routinely review and update
the key assumptions that underlie Treasury's projection of the number
of borrowers likely to be assisted. Treasury has started to address
many of these recommendations.
Management infrastructure. To ensure that OFS established a robust
management structure, comprehensive system of internal control, and
risk assessment process, we made a series of recommendations aimed at
addressing challenges associated with establishing a federal program in
a short period of time including challenges associated with staffing,
contractor oversight, and internal controls. For example:
* We recommended that Treasury expedite its hiring efforts to help
ensure that OFS had the needed personnel throughout the implementation
phase of the program and that key OFS leadership positions were filled
during and after the transition to the new administration. In certain
areas, challenges remain, and most recently we recommended that
Treasury fully staff vacant positions in the Homeownership Preservation
Office--including filling the position of Chief Homeownership
Preservation Officer with a permanent placement--and evaluate staffing
levels and competencies.
* We recommended that OFS take a number of actions to ensure an
appropriate oversight infrastructure to manage contractors and address
conflicts of interest, including ensuring that sufficient personnel
were assigned and properly trained to oversee the performance of all
contractors. We recommended that OFS issue regulations on conflicts of
interest involving Treasury's agents, contractors, and their employees
and related entities as expeditiously as possible. We also recommended
issuing guidance requiring that key communications and decisions
concerning potential or actual vendor-related conflicts of interest be
documented.
* More broadly, we recommended that Treasury continue to develop a
comprehensive system of internal control over TARP, including policies,
procedures, and guidance that were robust enough to protect taxpayers'
interests and ensure that the program objectives were being met. For
example, we recommended improvements in documenting certain internal
control procedures and in updating the guidance available to the public
on determining warrant exercise prices so that it was consistent with
OFS's actual practices. Finally, we recommended that OFS expeditiously
finalize a comprehensive system of internal control over HAMP.
* We also recommended that Treasury develop a process to monitor the
status of programs and identify any potential risk that announced
programs would not have adequate funding. Most recently, we also
recommended that OFS develop a means of systematically assessing
servicers' capacity to meet HAMP requirements during program admission.
Communication. In light of the backlash from Congress and others
regarding Treasury's initial shift in the program from purchases of
mortgages and mortgage-backed securities to capitalization of financial
institutions, we made a series of recommendations over the past year
aimed at improving OFS's communication with Congress and the public.
While the theme has been constant, the recommendations have attempted
to help ensure that Treasury develops a comprehensive communication
strategy and clearly articulated vision for the program that goes
beyond just providing information. We have recommended, for instance,
that Treasury develop a communication strategy that includes building
an understanding and support for the various components of the program.
Treasury continues to take steps to address these recommendations,
including hiring a communications officer, integrating communications
into TARP operations, scheduling regular and ongoing contact with
congressional committees and members, and attempting to leverage
technology.
We made one recommendation that was not directed to Treasury. To help
improve the transparency of CAP--in particular the stress test results--
we recommended that the Director of Supervision and Regulation of the
Federal Reserve consider periodically disclosing to the public the
aggregate performance of the 19 bank holding companies against the more
adverse scenario forecast for the duration of the 2-year forecast
period and decide whether the scenario needs to be revised. At a
minimum, the Federal Reserve should provide the aggregate performance
data to OFS program staff for the 19 institutions participating in CAP
or CPP. We are addressing these issues in ongoing work.
TARP Has Moved from Capitalizing Institutions to Stabilizing
Securitization Markets and Preserving Homeownership, but Effective
Communication Remains a Challenge:
TARP is one of many programs and activities the federal government has
put in place over the past year to respond to the financial crisis. As
of September 25, 2009, it had disbursed almost $364 billion to
participating institutions. Participating institutions have in turn
made billions in dividends, interest, and principal payments on loans
and some have started to repurchase their preferred shares and
warrants. With the exception of CPP, which has hundreds of participants
of various types and sizes, most of the other investment-based programs
have provided substantial amounts of assistance to individual
institutions. For example, AIG has received assistance under SSFI and
GM and Chrysler have received support through AIFP. Amid concerns about
the direction of the program and lack of transparency, the new
administration has attempted to provide a more strategic direction for
using the remaining funds and has created a number of programs aimed at
stabilizing the securitization markets, preserving homeownership, and
most recently at providing assistance to community banks and small
businesses. Some programs, such as TALF--which is operated by FRBNY,
with Treasury providing a backstop against losses--appear to be
achieving the intended results, if on a reduced scale. Others, such as
HAMP and PPIP, face ongoing implementation or operational challenges.
Finally, over the past year OFS has also started to take steps to
formalize its communication strategy and improve the way it
communicates with Congress and the public.
Over the Last Year, Treasury Has Disbursed Almost $364 Billion and Had
More Than $70 Billion Returned From Participants:
In the past year, Treasury has implemented a range of TARP programs to
stabilize the financial system. As of September 25, 2009, OFS had
disbursed almost $364 billion for TARP loans and equity investments
(table 1). Disbursements represent amounts actually paid to make
troubled asset purchases or loans. Participating institutions have also
paid Treasury billions of dollars in repurchases of preferred shares
and warrants, dividend payments, and loan repayments. In general,
Treasury's authority to purchase, commit to purchase, or commit to
guarantee troubled assets will expire on December 31, 2009. However,
the Secretary of the Treasury, upon submission of a written
certification to Congress, may extend these authorities to no later
than October 3, 2010--2 years from the date of enactment.[Footnote 8]
Based on the total prices of outstanding troubled asset purchases and
outstanding commitments to purchase and the total face amount of
outstanding guarantees as of September 25, 2009, almost $329 billion
remains available under the almost $700 billion limit on Treasury's
authority to purchase or insure troubled assets; however, while
Treasury has updated its projected use of funds for AGP and AIFP, it
has not modified any of its estimates for the others despite changes in
current market conditions, program participation rates, and repurchases
since March 2009. For example, when Treasury updated its estimates in
March 2009, it estimated that CPP participants' repurchases would total
about $25 billion but almost three times that amount has been
repurchased as of September 25, 2009. Moreover, questions remain about
the projected use of funds associated with consumer and business
lending initiatives and PPIP. While Treasury officials acknowledge they
are currently reviewing potential changes to the projections for the
future, they continue to believe that these estimates are appropriate
program funding allocations given current market conditions. Without
more meaningful estimates about projected uses of the remaining funds,
Treasury's ability to plan for and effectively execute the next phase
of the program will be limited.
Table 1: Status of TARP Funds, as of September 25, 2009 (Dollars in
billions):
Program and purpose: Capital Purchase Program. To provide capital to
viable banks through the purchase of preferred shares and subordinated
debentures;
Cash disbursed and received: $204.6;
Asset purchase price[A]: $204.6.
Program and purpose: Targeted Investment Program. To foster market
stability and thereby strengthen the economy by making case-by-case
investments in institutions that Treasury deems are critical to the
functioning of the financial system;
Cash disbursed and received: $40.0;
Asset purchase price[A]: $40.0.
Program and purpose: Capital Assistance Program. To restore confidence
throughout the financial system that the nation's largest banking
institutions have sufficient capital to cushion themselves against
larger-than-expected future losses, and to support lending to
creditworthy borrowers;
Cash disbursed and received: $0.0;
Asset purchase price[A]: $0.0.
Program and purpose: Systemically Significant Failing Institutions. To
provide stability in financial markets and avoid disruptions to the
markets from the failure of a systemically significant institution.
Treasury determines participation in this program on a case-by-case
basis;
Cash disbursed and received: $43.2;
Asset purchase price[A]: $69.8.
Program and purpose: Asset Guarantee Program. To provide federal
government assurances for assets held by financial institutions that
are viewed as critical to the functioning of the nation's financial
system;
Cash disbursed and received: $0.0;
Asset purchase price[A]: $5.0.
Program and purpose: Automotive Industry Financing Program. To prevent
a significant disruption of the American automotive industry;
Cash disbursed and received: $75.9;
Asset purchase price[A]: $81.1.
Program and purpose: Home Affordable Modification Program. To offer
assistance to homeowners through a cost-sharing arrangement with
mortgage holders and investors to reduce the monthly mortgage payment
amounts of homeowners at risk of foreclosure to affordable levels;
Cash disbursed and received: $0.0[B];
Asset purchase price[A]: $22.3.
Program and purpose: Consumer and Business Lending Initiative.[C] To
support consumer and business credit markets by providing financing to
private investors to issue new securitizations to help unfreeze markets
and lower interest rates for auto, student, and small business loans;
credit cards; commercial mortgages; and other consumer and business
credit;
Cash disbursed and received:$0.1;
Asset purchase price[A]: $20.0.
Program and purpose: Public-Private Investment Program. To address the
challenge of "legacy assets" as part of Treasury's efforts to repair
balance sheets throughout the financial system and increase the
availability of credit to households and businesses;
Cash disbursed and received: 0.0;
Asset purchase price[A]: 0.0.
Program and purpose: Total;
Cash disbursed and received: $363.8;
Asset purchase price[A]: $442.8.
Less repurchases[D]:
Cash disbursed and received: $70.7;
Asset purchase price[A]: $70.7.
Less loan principal repayments:
Cash disbursed and received: $2.1;
Asset purchase price[A]: $2.1.
Less dividends and interest received:
Cash disbursed and received: $9.5;
Asset purchase price[A]: n/a[E].
Less repurchased warrants and preferred stock obtained through the
exercise of warrants:
Cash disbursed and received: $2.9;
Asset purchase price[A]: n/a[E].
Net disbursements and total troubled assets outstanding:
Cash disbursed and received: $278.6;
Asset purchase price[A]: $370.0.
Source: GAO presentation of OFS, Treasury, data (unaudited).
[A] The Asset Purchase Price reflects the aggregate amount Treasury
agreed to pay to purchase outstanding troubled assets that are subject
to the almost $700 billion purchase limit in section 115 of the
Emergency Economic Stabilization Act (the act). This amount includes
signed contract amounts not yet disbursed and the aggregate amount of
outstanding guarantees made by Treasury, even though Treasury has not
disbursed any cash to honor a guarantee. For example, AGP's asset
purchase price includes the $5 billion Citigroup guarantee, even though
no cash has been disbursed to Citigroup through this program. However,
as required under section 102 of the act, it does not include a
subtraction from the outstanding guarantee amount to reflect the
balance in the Troubled Assets Insurance Financing Fund.
[B] As of September 25, 2009, Treasury had disbursed almost $1 million
in HAMP investor subsidies and incentive payments to participating
servicers.
[C] The Consumer and Business Lending Initiative includes TALF and the
former Small Business and Community Lending Program.
[D] Repurchases represent the amounts received from CPP participant
institutions that bought back their preferred shares from Treasury.
Repurchases exclude any amounts relating to private institutions'
buybacks of their preferred shares obtained through the exercise of
warrants and public institutions' buybacks of their warrants.
[E] Dividend payments and the amounts received from the repurchases of
warrants and preferred stock issued through the exercise of the
warrants are not to be used to reduce the outstanding balance under the
almost $700 billion TARP limit. However, these amounts are deposited in
the general fund of the U.S. Treasury or the Troubled Asset Insurance
Financing Fund, and they offset the amount of Treasury's disbursements.
[End of table]
As shown in table 1, repurchases of preferred stock and repayments of
loan principal have reduced the outstanding balance of the program.
Specifically, 41 institutions, including 10 of the largest bank holding
companies participating in TARP, had repurchased all or a portion of
their preferred stock from Treasury for a total of about $70.7 billion
as of September 25, 2009 (table 2).[Footnote 9] While the decision to
allow an institution to repurchase its preferred shares rests with its
primary federal regulator, we continue to believe that Treasury, as
administrator of CPP, has a responsibility to help ensure that
institutions are being treated consistently and that the regulators are
applying generally consistent criteria when reviewing TARP
participants' requests to repurchase their preferred shares.[Footnote
10]
Table 2: Capital Purchase Program Repurchases, from TARP's Inception
through September 25, 2009 (Dollars in millions):
Institution type: Private Institutions;
Repurchase amount for preferred stock initially issued to Treasury:
$44.4;
Repurchase amount for preferred stock issued through exercise of
warrants: $1.6;
Repurchase amount for warrants: n/a.
Institution type: Publicly held Institutions;
Repurchase amount for preferred stock initially issued to Treasury:
$70,644.8;
Repurchase amount for preferred stock issued through exercise of
warrants: n/a;
Repurchase amount for warrants: $2,897.9.
Institution type: Total;
Repurchase amount for preferred stock initially issued to Treasury:
$70,689.2;
Repurchase amount for preferred stock issued through exercise of
warrants: $1.6;
Repurchase amount for warrants: $2,897.9.
Source: GAO presentation of OFS, Treasury, data (unaudited).
[End of table]
A number of participants have also started to repurchase their warrants
and preferred stock obtained through the exercise of warrants.[Footnote
11] However, unlike preferred stock, these amounts are deposited in the
general fund of the U.S. Treasury and are not to be used to reduce the
outstanding troubled assets counted against the almost $700 billion
limit, as required by the act (see table 2). Specifically, as of
September 25, 2009, 20 financial institutions had repurchased their
warrants, and 3 had repurchased their warrant preferred stock from
Treasury, at an aggregate cost of about $2.9 billion.
While the first warrants repurchased were valued using a valuation
process agreed to by Treasury, some in the industry have suggested that
an auction process may represent the best method for Treasury to
realize the market value of the warrants and provide a more transparent
process. Treasury announced in June 2009 that it would auction certain
warrants but has yet to establish guidelines for how the auction
process will work. Treasury and others have noted that an auction
method may not necessarily yield the best price for the federal
government. As of September 25, 2009, Treasury had not yet auctioned
any securities.
As of September 25, 2009, Treasury had received approximately $9.2
billion in dividend payments on shares of preferred stock acquired
through CPP, TIP, AIFP, and AGP (table 3). Treasury's agreements under
these programs entitled it to receive dividend payments on varying
terms and at varying rates.[Footnote 12] The dividend payments to
Treasury are contingent on each institution declaring dividends.
However, AIG--the sole participant in SSFI--had not declared dividends
and therefore had not made any of its three scheduled dividend payments
as of September 25, 2009.[Footnote 13]
Table 3: TARP Dividend Payments Received, as of September 25, 2009
(Dollars in millions):
Program: Capital Purchase Program[A];
Dividend payments received: $6,733.9;
Cumulative dividends not declared and not paid: $74.1;
Noncumulative dividends not declared and not paid: $1.6.
Program: Targeted Investment Program;
Dividend payments received: $1,862.2;
Cumulative dividends not declared and not paid: [Empty];
Noncumulative dividends not declared and not paid: [Empty].
Program: Automotive Industry Financing Program[B];
Dividend payments received: $430.6;
Cumulative dividends not declared and not paid: [Empty];
Noncumulative dividends not declared and not paid: [Empty].
Program: Asset Guarantee Program;
Dividend payments received: $174.8;
Cumulative dividends not declared and not paid: [Empty];
Noncumulative dividends not declared and not paid: [Empty].
Program: Systemically Significant Failing Institutions Program[C];
Dividend payments received: [Empty];
Cumulative dividends not declared and not paid: [Empty];
Noncumulative dividends not declared and not paid: $1,226.8.
Program: Total;
Dividend payments received: $9,201.5;
Cumulative dividends not declared and not paid: $74.1;
Noncumulative dividends not declared and not paid: $1,228.4.
Source: GAO presentation of OFS, Treasury, data (unaudited).
[A] Dividend payments received includes interest received on
subordinated debentures received under the program.
[B] AIFP participants that issued debt instruments to Treasury are not
reflected on this table.
[C] On April 17, 2009, AIG and Treasury restructured their November 25,
2008, agreement. Under the restructuring, Treasury exchanged $40
billion of cumulative Series D preferred shares for $41.6 billion of
noncumulative Series E preferred shares. The amount of Series E
preferred shares is equal to the original $40 billion plus
approximately $733 million in undeclared dividends as of February 1,
2009--the scheduled quarterly dividend payment date--$15 million in
dividends compounded on the undeclared dividends, and an additional
$855 million in dividends accrued from February 1, 2009, but not paid
as of April 17, 2009. The amount of dividends not declared and not paid
in the table represents unpaid dividends since the April 17, 2009,
restructuring. The last scheduled dividend payment date was August 1,
2009, and the next payment date is November 1, 2009.
[End of table]
Treasury borrows funds to finance the gap between the federal
government's revenues and outlays and is subject to a statutory debt
limit. Because Treasury must borrow the funds disbursed, TARP and other
actions taken to stabilize the financial markets increase the federal
debt and result in related borrowing costs in the form of interest.
Because Treasury manages its cash position and debt issuances from a
governmentwide perspective, it is generally not possible to match TARP
disbursements with specific debt securities issued by Treasury and the
related borrowing costs. Moreover, Treasury typically does not
calculate the federal government's borrowing cost related to specific
disbursements, including the net disbursements for TARP. However,
Treasury provided us with an unaudited estimate of approximately $2.3
billion in borrowing costs based on certain assumptions relating to the
net disbursements for TARP from TARP's inception through September 30,
2009.[Footnote 14] Using different assumptions would result in
different estimated borrowing costs. Treasury's estimation of the
federal government's borrowing costs for TARP does not represent the
ultimate costs of TARP and does not consider, among other things, the
intra-governmental interest that TARP incurs.
CPP Is Treasury's Largest Program for Capitalizing Institutions and
Stabilizing the Financial System:
Over the past year, CPP--the largest and most widely used program under
Treasury's TARP authority for stabilizing the financial markets--made
investments in large publicly held financial institutions quickly but
faced challenges and delays in developing standard terms for investing
in smaller, nonpublic institutions.[Footnote 15] As of September 25,
2009, Treasury had provided capital to 685 financial institutions
through CPP. Treasury has extended the CPP application deadline for
small banks and increased the amount of investment they can receive to
encourage participation, but the number of CPP disbursements has
decreased dramatically. Investments that are being made are going to
relatively small banks. For example, the average investment size for
the 9 institutions funded in August 2009 was $14.4 million, compared
with the average investment size of $121 million for the 147
institutions funded in January 2009.
According to Treasury, over 430 institutions have withdrawn their
applications to CPP after receiving approval for funding. Also, federal
banking regulators' data show that over 1,800 applications have been
withdrawn since the start of the program. The number of approved
institutions withdrawing increased earlier this year, in part because
of uncertainties about program requirements (e.g., changes to executive
compensation). Anecdotally, some of the reasons cited have included
increased confidence in the financial condition of banks and, for
smaller institutions, the relatively high cost of closing CPP
transactions. We are continuing to review the process used to assess
applications for CPP funding to determine the extent to which Treasury
consistently applied established criteria and adequately documented the
regulators' recommendations and its final decisions. The results of
this review will be discussed in a subsequent report.
Over the last year, and consistent with our recommendation that
Treasury bolster its ability to determine whether institutions'
activities are generally consistent with the act's purposes, Treasury
and federal banking regulators have made progress in monitoring the
activities of CPP participants. Specifically:
* Using its new monthly lending surveys, in February 2009 Treasury
began to publish detailed information for the 20 largest CPP
institutions. In April 2009, it added questions addressing their small
business lending activity to the survey.[Footnote 16] In June Treasury
began to publish basic information from all CPP participating
institutions.[Footnote 17] The monthly surveys are an important step
toward greater transparency and accountability for institutions of all
sizes. In August 2009, Treasury and the bank regulators began
publishing a quarterly analysis of regulatory financial data for CPP
and non-CPP institutions that focuses on three broad categories: on-and
off-balance sheet items, performance ratios, and asset quality
measures.[Footnote 18] Moreover, the largest CPP institutions that have
repurchased their preferred shares and warrants have agreed to
voluntarily provide lending information through 2009. These data will
enable Treasury and others to monitor the institutions' lending
activities following the repurchase of their shares.
* In the past year, the federal banking regulators have taken steps to
help ensure compliance with the CPP agreements and other TARP
requirements, as we recommended. All of the federal banking regulators
have issued or are finalizing examiner guidance and procedures for
assessing institutions' compliance with CPP and other TARP
requirements.[Footnote 19] For example, in March 2009 OCC issued a
supervisory memorandum to all examination staff that provided specific
forms, checklists, and guidance for assessing compliance with CPP and
TARP requirements. They plan to examine institutions' compliance with
TARP requirements on executive compensation, dividend payments, and
stock repurchases as part of routine examinations. Three of the four
banking regulators had conducted 351 examinations as of September 2009,
that included checking for compliance with CPP and TARP requirements.
According to these regulators, the institutions examined were generally
in compliance with the requirements.
* Treasury also has hired three asset management firms to provide
market advice about its portfolio of investments in financial
institutions participating in various TARP programs. Consistent with
our recommendation that Treasury increase its oversight of compliance
with terms of the CPP agreements, including limits on dividends and
stock repurchases, these managers are responsible for helping OFS
monitor compliance with these terms. However, Treasury has yet to
finalize the specific guidance and performance measures for the asset
managers' oversight responsibilities or identify the process for
monitoring the asset managers' performance. We plan to continue
monitoring this area.
The Level of Participation in the Capital Assistance Program Remains
Uncertain:
As of September 25, 2009, no funds had been expended under
CAP.[Footnote 20] The Federal Reserve's stress tests of the 19 largest
bank holding companies in May 2009 identified 10 bank holding companies
that needed to raise approximately $75 billion in additional capital.
According to FinSOB, this result was better than the markets
anticipated and helped boost the markets' confidence in the largest
banks.[Footnote 21] By September 25, 2009, these 10 institutions had
raised about $79 billion in capital, and 9 institutions had
successfully raised the full amount required by the stress test. While
the program is open to other institutions that did not participate in
the stress test, the extent to which these other institutions will
choose to participate in the program appears limited. Treasury extended
the CAP application deadline from May 25, 2009, to November 9, 2009. As
of September 25, 2009, Treasury had not received any CAP applications.
However, regulators said that they had begun to receive CAP
applications.
Overseeing Investments in Programs That Targeted Certain Critically
Important Institutions Presents Challenges:
Early in the implementation of TARP, Treasury announced that it was
providing what it refers to as "exceptional assistance" to three
institutions deemed to be critically important to financial markets and
subsequently created three programs--TIP, SSFI, and AGP--to provide
that assistance.[Footnote 22] TIP investments in Bank of America and
Citigroup, Inc. in January 2009 and December 2008, respectively,
followed the institutions' participation in CPP. In addition, OFS
provided assistance to AIG under SSFI. Treasury officials said that
they did not expect to have to use these programs again if economic
conditions and market stability continued to improve.
Treasury has yet to develop exit strategies for unwinding these
investments but has said that it intends to sell the federal
government's ownership interest as soon as practicable. Bank of America
and Citigroup have yet to announce any plans to repurchase outstanding
shares or warrants under CPP or TIP in the near term. Treasury, the
Federal Reserve, FDIC, and Citigroup have yet to finalize the
segregation of assets or the valuation process for the assets that will
remain on Citigroup's books but will be guaranteed by the government
under AGP. Conversely, Bank of America withdrew from AGP before an
agreement was finalized and recently negotiated and paid FDIC, the
Federal Reserve, and Treasury a total of $425 million in termination
fees to cover the benefit it received from the announcement of the
federal government guarantee. AIG continues to rely on federal
assistance to maintain its investment grade rating, and whether the
federal government will fully recoup its investment in AIG in the long
term remains unclear.[Footnote 23]
Treasury's capital investments in these three companies totaled more
than $100 billion as of September 25, 2009, and are a significant
portion of TARP disbursements. Given the three financial institutions'
ongoing participation in TARP, oversight and management of these large
investments continues to be a challenge, especially managing the
government's investment and developing an appropriate exit strategy.
According to OFS, TIP investments in Citigroup and Bank of America are
monitored through the same process as CPP investments, as the interests
are incremental to the CPP investments in these institutions. OFS has
also put in place dedicated teams charged with monitoring and managing
its investments in AIG and the Citigroup asset guarantee. These
investments also raise broader questions about how Treasury is managing
its investments in institutions that have received what Treasury refers
to as an exceptional level of assistance. To respond to these concerns,
we and SIGTARP are conducting a coordinated review of how the federal
government is monitoring and managing its investments.
Programs Aimed at Restarting Secondary Markets Have Had Mixed Success:
The Consumer and Business Lending Initiative announced in February as
part of the Financial Stability Plan consists of two programs,
including the Federal Reserve's TALF, operated primarily by FRBNY, and
a program to directly purchase securities backed by SBA-guaranteed
small business loans that has yet to materialize. A separate program,
PPIP, which is being implemented in cooperation with the Federal
Reserve and FDIC, is intended to invest in funds that provide a market
for the legacy loans and securities that currently burden the financial
system.
Term Asset-Backed Securities Loan Facility. The Federal Reserve
extended TALF into 2010. This program has been used to finance a
variety of ABS, but as of September 17, 2009, the bulk of the loans
have been collateralized by credit card and auto ABS--the largest asset
classes historically according to Federal Reserve officials.[Footnote
24] Some market participants for SBA-related securities noted that
TALF, even without high transaction volumes of SBA-backed securities,
had benefited small businesses by helping to restore confidence in the
SBA market, and some thought that it had helped unfreeze the market.
Overall, participation has been lower than expected for all assets, and
officials cite recent improvements in securitization and credit markets
as a reason. Some TALF participants and market observers also told us
that TALF financing terms had become less favorable as credit markets
stabilized, making TALF less appealing.
Small Business Lending. Treasury has yet to begin purchasing securities
backed by SBA-guaranteed small business loans as part of the Consumer
and Business Lending Initiative. Initially, Treasury anticipated
purchasing securities backed by SBA section 7(a) guaranteed loans by
the end of March 2009 and securities backed by SBA section 504 loan
guarantees by the end of May 2009; however, no purchases had been made
as of September 21, 2009. Several factors have been cited to explain
this delay. First, a Treasury official told us that some participants
in the SBA loan markets said they did not want to sell SBA-guaranteed
securities to Treasury if doing so would require them to provide
warrants to Treasury and to comply with executive compensation
restrictions.[Footnote 25] Second, some market participants said that
this program might not be as helpful to the SBA loan market as
initiatives by SBA, because SBA efforts included reductions in fees and
increases in guarantees for the 7(a) program that had been helpful. One
major market participant also noted that high participation in
Treasury's direct purchase program was unlikely, in part because of the
requirements of the act noted above.
Public-Private Investment Program. Treasury announced PPIP in March
2009 to help add liquidity to the market for legacy assets (both
securities and loans), to allow banks and other financial institutions
to free up capital, and to stimulate the extension of new credit.
[Footnote 26] Treasury continues to take steps to implement the Legacy
Securities Program, and FDIC has continued to develop the Legacy Loans
Program by conducting a pilot sale of receivership assets to test the
funding mechanism contemplated for this program. Some market
participants and observers we spoke with in the summer of 2009 told us
that while the problem of toxic assets remained, there have been delays
in launching PPIP. These individuals, Treasury, and FDIC cited rising
investor confidence following the stress test results and successful
capital-raising by financial institutions as one of the main reasons.
In addition, banks have had increasing incentives to hold troubled
assets in the short term, rather than selling them and taking losses
now, in the hopes that such assets will perform better in the future.
Treasury officials also noted the difficulty of measuring the impact of
the program announcement on markets. Nevertheless, Treasury officials
noted the financial market's positive reaction when the program was
announced and said that they continued to believe that the program is
important to further bolstering financial markets. Treasury officials
stated that as of October 5, 2009, five of the nine pre-qualified funds
have raised at least the minimum $500 million to qualify to invest in
two legacy securities. The first two legacy securities PPIP funds
closed on September 30, 2009.
The Automotive Industry Benefited from about $80 Billion in TARP
Funding, but the Future Viability of Chrysler and GM Remains Uncertain:
AIFP has provided assistance to Chrysler, GM, auto suppliers, and auto
finance companies in an effort to assist the failing domestic
automotive industry. Over the past year, Chrysler and GM underwent
bankruptcy reorganization and streamlined their operations by closing
factories and reducing the number of dealerships. However, whether the
reorganized Chrysler and GM will achieve long-term financial viability
remains unclear. In addition to funding provided under AIFP, the
federal government has launched other programs to help the automotive
industry. In particular, the Department of Transportation's Car
Allowance Rebate System program ("Cash for Clunkers") provided nearly
$3 billion in rebates to consumers who purchased more fuel-efficient
vehicles, and the Department of Energy's Advanced Technology Vehicles
Manufacturing Incentive Program has provided loans for the development
of motors and components that use advanced technologies.[Footnote 27]
Automotive and financial experts we spoke with as part of our ongoing
monitoring of AIFP agree that the federal government-provided funding
likely increased Chrysler's and GM's odds of attaining financial
success but said that other factors would affect the outcome, including
consumer preferences, the strength of the economy, and the success of
the companies in continuing to increase their profitability.[Footnote
28] We are continuing to evaluate Treasury's exit strategy for AIFP and
the impact of the assistance on pensions and plan to report on these
issues in future reports.
Home Affordable Modification Program Continues to Face Ongoing
Challenges:
HAMP faces a significant challenge that centers on uncertainty over the
number of homeowners it will ultimately help. Residential mortgage
defaults and foreclosures are at historic highs, and Treasury officials
and others have identified reducing the number of unnecessary
foreclosures as critical to the current economic recovery. In our July
2009 report, we noted that Treasury's estimate that it would likely
help 3 to 4 million homeowners under the HAMP loan modification program
may have been overstated.[Footnote 29] Further, we and others have
raised concerns about the capacity and consistency of servicers
participating in HAMP in offering loan modifications to qualified
homeowners facing potential foreclosure. Treasury has taken some
actions to encourage servicers to increase the number of modifications
made, including sending a letter to participating HAMP servicers and
meeting with them to discuss challenges to making modifications.
However, the ultimate result of Treasury's actions to increase the
number of HAMP loan modifications and the corresponding impact on
stabilizing the housing market remains to be seen.[Footnote 30]
Treasury faces a number of other challenges in implementing HAMP,
including ensuring that decisions to deny or approve a loan
modification are transparent to borrowers and establishing an effective
system of operational controls to oversee the compliance of
participating servicers with HAMP guidelines. In July 2009, we made
several recommendations to Treasury concerning HAMP. Among other
things, we recommended actions to monitor particular program
requirements, re-evaluate and review certain program components and
assumptions, and finalize a comprehensive system of internal control
over HAMP. Treasury noted that it would take various actions in
response to our recommendations, such as exploring options to monitor
counseling requirements and working to refine its internal controls
over the program. We plan to continue to monitor Treasury's responses
to our recommendations as part of our ongoing work on HAMP.
In our July report, we also noted that Treasury lacked a way to assess,
during the admission process, the capacity of servicers to meet program
requirements. Recently, Treasury reported significant variations across
participating servicers in the number of trial modifications started as
a percent of estimated eligible loans (those delinquent by at least 60
days). To encourage servicers to increase the number of modifications
they were making, Treasury and the Department of Housing and Urban
Development sent a letter to participating HAMP servicers in July 2009
asking them to expand their capacity to make modifications. Treasury
also subsequently held a meeting with servicers to discuss challenges
to making modifications and strategies to improve the program's
effectiveness.
Treasury Has Taken Steps to Improve Communication with the Public and
Congress:
Since Treasury's unexpected shift soon after the act was passed toward
making capital investments in financial institutions rather than
purchasing the mortgages and mortgage-related assets on their books,
Treasury has struggled to improve the transparency of the program and
effectively communicate a strategic vision for TARP. Over the last
year, Treasury has posted information on its Web site; announced
decisions in press releases, press conferences, and speeches; and
testified at congressional hearings. But these efforts, although
intended to help ensure that TARP programs and decisions are
transparent, have not always been effective in communicating Treasury's
rationale for certain decisions or in addressing confusion and concerns
about the program. As discussed previously, we made a series of
recommendations aimed at improving the transparency of TARP, including
establishing more effective communication with Congress and the public
and developing a clearly articulated strategy for the program, among
other things.
Over the last several months, Treasury has taken steps to improve its
communication efforts, including releasing the Financial Stability Plan
in February 2009; launching its FinancialStability.gov Web site in
March 2009; and, in August 2009, adding a usability survey on its
FinancialStability.gov Web site to gauge user satisfaction and gather
input on the quality of users' experience navigating the site.
Moreover, OFS has formed a working group to help ensure that Treasury's
communication strategy addresses both internal and external
communications and that appropriate staff are being hired to support
the strategy. Treasury officials told us that key components of the
strategy included (1) coordinating communication among OFS and
Treasury's Office of Public Affairs and Office of Legislative Affairs
to help ensure that congressional and other external stakeholders
received timely information, (2) continuously improving the financial
stability Web site, and (3) conducting outreach across the country on
the homeownership preservation programs. To support these efforts,
Treasury is planning to hire a communications director for OFS once it
completes a position description of duties and responsibilities.
Treasury has already hired a communications director and four staff
members to support its efforts to communicate with the public and
Congress on the homeownership programs. These ongoing efforts should
help address the concerns about Treasury's communication on TARP issues
that we noted in earlier reports.
The Office of Financial Stability Has Made Progress in Developing a
Management Infrastructure and a Comprehensive System of Internal
Control:
As we recommended in our December 2008 report, Treasury has
expeditiously hired OFS staff to administer TARP duties. Over the last
year, the total number of OFS staff has quadrupled, rising from 48 in
November 2008 to 196 as of September 15, 2009 (see figure 2). Moreover,
OFS has relied increasingly on permanent staff rather than detailees.
For example, OFS increased the number of permanent staff from 5 in
November 2008 to 184 as of September 15, 2009, while the number of
detailees fell from 43 in November 2008 to 12 as of September 15, 2009.
Figure 2: Number of Permanent Staff and Detailees, November 21, 2008,
through September 15, 2009:
[Refer to PDF for image: stacked vertical bar graph]
Date: November 21, 2008;
Permanent staff (including limited-term appointments): 5;
Staff detailed to OFS from other areas of Treasury and other federal
agencies (temporary): 43;
Total: 48.
Date: January 26, 2009;
Permanent staff (including limited-term appointments): 38;
Staff detailed to OFS from other areas of Treasury and other federal
agencies (temporary): 52;
Total: 90.
Date: March 16, 2009;
Permanent staff (including limited-term appointments): 77;
Staff detailed to OFS from other areas of Treasury and other federal
agencies (temporary): 36;
Total: 113.
Date: June 8, 2009;
Permanent staff (including limited-term appointments): 137;
Staff detailed to OFS from other areas of Treasury and other federal
agencies (temporary): 29;
Total: 166.
Date: September 15, 2009;
Permanent staff (including limited-term appointments): 184;
Staff detailed to OFS from other areas of Treasury and other federal
agencies (temporary): 12;
Total: 196.
Source: GAO analysis of Treasury data.
[End of figure]
While Treasury has made progress in establishing OFS and filling many
positions, it continues to face hiring challenges. Treasury officials
said that the direct-hire authority authorized by TARP had been helpful
in bringing staff on board expeditiously. OFS has increased its
estimate of the number of full-time staff that it needs based on
changes to TARP and currently estimates that it will need 283 full-time
equivalents for fiscal year 2010 to operate at full capacity. Most of
the increase in the estimate of full capacity is attributable to
anticipated needs in the Homeownership Preservation, Investment, and
Compliance offices and staff for the Director of Internal Review. In
addition, the Assistant Secretary for Financial Stability has continued
to develop OFS's organizational structure. For example, the Assistant
Secretary is considering establishing a Director of OFS Internal Review
who will help oversee internal control and compliance procedures and
liaise with oversight entities.
OFS has experienced challenges finding permanent staff for some of its
key senior positions, specifically the Chief Homeownership Preservation
Officer and the Chief Investment Officer. The Chief Homeownership
Preservation Officer position has been filled by two successive interim
appointments, and the Director of Operations is currently serving as
the acting chief. Similarly, the Director of Investments has been
serving as the acting Chief Investment Officer since the interim chief
left in June 2009. In our July report, we emphasized that the lack of a
permanent head of the Homeownership Preservation Office (along with the
number of vacancies in the office itself) could impact Treasury's
ability to effectively monitor HAMP and recommended that these staffing
needs be given high priority.[Footnote 31] Treasury has hired an
executive search firm to recruit candidates for these leadership
positions, potentially facilitating the process of identifying
qualified applicants but also adding additional time to the hiring
process. The Assistant Secretary is reassessing the duties of the Chief
Operating Officer and the need for the position, which is currently
vacant, to bring them in line with TARP's current needs before filling
the position.
Treasury Has Strengthened Management and Oversight of Contracting and
Vendor-Related Conflicts of Interest:
After nearly a year, the number of private contracts and financial
agency agreements Treasury uses as part of OFS's management
infrastructure has grown from 11 to 52. Treasury has primarily used two
mechanisms for engaging private sector firms. First, as of September
18, 2009, Treasury has exercised its statutory authority to retain
seven financial agents to provide services such as managing TARP's
public assets.[Footnote 32] Second, Treasury has entered into contracts
and blanket purchase agreements under the Federal Acquisition
Regulation (FAR) for a variety of legal and accounting services,
investment consulting, and other services and supplies. In some cases,
interagency agreements (IAA) are also used in support of OFS's
administration and operations for TARP to engage vendors that have
existing contracts with other Treasury offices or bureaus or other
federal agencies. As of September 18, 2009, Treasury had 39 contracts
and blanket purchase agreements and six IAAs. Legal services contracts
and financial agency agreements accounted for 57 percent of the service
providers directly supporting OFS's administration of TARP. For
contracts and agreements in place through August 31, 2009, Treasury
reports incurring a total of $110.2 million in expenses. The potential
value of all 52 TARP support agreements and contracts--some completed
and some scheduled to run until June 2014--totals about $601.6 million.
[Footnote 33]
The share of work by small businesses--including minority-and women-
owned businesses--under TARP contracts and financial agency agreements
has grown substantially since November 2008, when only one of
Treasury's prime contracts was with a small business and only one
minority small business firm was a subcontractor with a large business
contractor. From the outset, Treasury has encouraged small businesses
to pursue procurement opportunities for TARP contracts and financial
agency agreements. As shown in table 4, eight of Treasury's prime
contracts and financial agency agreements are with small and/or
minority-and women-owned businesses. The majority of these businesses
are subcontractors to TARP prime contractors.
Table 4: TARP Contracts, Financial Agency Agreements, and Subcontracts
with Minority-Owned, Women-Owned, and Small Businesses, as of September
18, 2009:
Socioeconomic business category: Minority-owned[B];
Prime contracts and financial agency agreements: 3[C];
Subcontracts[A]: 9;
Total: 12.
Socioeconomic business category: Women-owned;
Prime contracts and financial agency agreements: 2;
Subcontracts[A]: 14;
Total: 16.
Socioeconomic business category: Other small;
Prime contracts and financial agency agreements: 3;
Subcontracts[A]: 15;
Total: 18.
Socioeconomic business category: Total;
Prime contracts and financial agency agreements: 8;
Subcontracts[A]: 38;
Total: 46.
Source: GAO presentation of OFS, Treasury, data (unaudited).
[A] As of September 18, 2009, TARP prime contractors and financial
agents had awarded 80 subcontracts.
[B] Includes both small and non-small minority-owned businesses and
minority/women-owned businesses.
[C] Since our June 2009 report, Treasury has reclassified one reported
minority-owned contract as an interagency agreement, reducing the
number of reported minority-owned prime contracts for this report.
Treasury does not provide the socioeconomic status of entities
contracted through interagency agreements.
[End of table]
Treasury's Processes for Managing and Monitoring Conflicts of Interest
among Contractors and Financial Agents Continue to Mature:
Treasury's reliance on private sector resources to assist OFS with
implementing TARP underscores the importance of addressing conflicts-
of-interest issues. As required by the act, in January 2009 Treasury
issued an interim regulation on TARP conflicts of interest, which was
effective immediately.[Footnote 34] With this action, Treasury put in
place a set of clear requirements to address actual or potential
conflicts that may arise during the selection of retained entities
seeking a contract or financial agency agreement with the Treasury,
particularly those involved in the acquisition, valuation, management,
and disposition of troubled assets.[Footnote 35]
Since January 2009, OFS's Chief Risk and Compliance Office has been
actively renegotiating several contracts that predated the TARP
conflicts-of-interest rulemaking to enhance specificity and conformity
with the regulations. To date, conflicts-of-interest provisions and
approved mitigation plans have been renegotiated for three of the six
contracts, as shown in table 5. According to Treasury, the complex
nature of these contracts and business relations with other firms means
that significant time is required to develop mitigation plans that
appropriately meet the provisions of the regulations, and as a result
these plans are in various stages of renegotiation.
Table 5: Status of Treasury's Actions to Renegotiate Existing Vendor
Mitigation Plans That Predated the January 2009 TARP Conflict-of-
Interest Regulation, as of September 18, 2009:
Contractor or financial agent: Bank of New York Mellon;
Status of renegotiated conflict-of-interest mitigation plan[A]:
Pending.
Contractor or financial agent: Ennis Knupp & Associates, Inc.;
Status of renegotiated conflict-of-interest mitigation plan[A]:
Completed April 2009.
Contractor or financial agent: Ernst & Young, LLP;
Status of renegotiated conflict-of-interest mitigation plan[A]:
Pending.
Contractor or financial agent: Hughes, Hubbard, & Reed, LLP;
Status of renegotiated conflict-of-interest mitigation plan[A]:
Completed May 2009.
Contractor or financial agent: PricewaterhouseCoopers, LLP;
Status of renegotiated conflict-of-interest mitigation plan[A]:
Pending.
Contractor or financial agent: Squire Sanders & Dempsey, LLP;
Status of renegotiated conflict-of-interest mitigation plan[A]:
Completed July 2009.
Source: GAO analysis of Treasury information.
[A] As of March 2009, Treasury was also reviewing for renegotiation
mitigation plans for two more contractors---Simpson Thacher & Bartlett
(I) and Sonnenschein Nath & Rosenthal (II). According to Treasury
however, the renegotiations stopped when these contracts were found to
be close to completion and the performance of services was ending.
Separate ongoing contracts awarded to both companies after January 2009
for other services have contract provisions and mitigation plans in
conformance with the TARP conflict of interest regulations.
[End of table]
Since March 2009, and consistent with our recommendation, Treasury has
strengthened guidance and procedures requiring that key communications
and decisions concerning potential or actual vendor-related conflicts
of interest be documented. In an effort to improve the monitoring of
contracts and formally document conflict-of-interest processes,
Treasury has taken several steps. For example, it has developed and
implemented conflicts-of-interest procedures and distributed guidance
documents to Treasury contracting staff and TARP contractors and
financial agents that include detailed workflow charts depicting the
standardized processes for the review and disposition of conflict-of-
interest inquiries.[Footnote 36] Also, Treasury has finished
implementing an improved internal reporting database for documenting
and tracking all conflict-of-interest inquiries and requests for
conflicts-of-interest waivers.[Footnote 37] Treasury's guidance was
sent to contractors and financial agents in early July, along with a
request that all inquiries related to conflicts of interest be
submitted via email to the "TARP.COI" mailbox created in April 2009 for
contractors and financial agents to document communications to
Treasury. Although Treasury has an appropriate management
infrastructure in place, it must remain vigilant in managing and
monitoring conflicts of interest that may arise with the use of private
sector resources.
OFS Has Continued Developing a Financial Reporting System and Related
Internal Controls:
As required by the act, Treasury must annually prepare and submit to
Congress and the public audited fiscal year financial statements for
TARP that are prepared in accordance with generally accepted accounting
principles.[Footnote 38] Moreover, the act requires Treasury to
establish and maintain an effective system of internal control over
TARP that provides reasonable assurance of achieving three objectives:
(1) reliable financial reporting, including financial statements and
other reports for internal and external use;[Footnote 39] (2)
compliance with applicable laws and regulations;[Footnote 40] and (3)
effective and efficient operations, including the use of TARP
resources.[Footnote 41] Accordingly, OFS continues to develop a
comprehensive system of internal control for TARP.[Footnote 42]
The fiscal year ending September 30, 2009, will be the first period for
which Treasury prepares financial statements for TARP.[Footnote 43] The
act requires that Treasury assess and report annually on the
effectiveness of TARP's internal controls over financial reporting.
[Footnote 44] The act also requires GAO to audit TARP's financial
statements annually in accordance with generally accepted auditing
standards.[Footnote 45]
We are currently performing an audit of TARP's financial statements and
the related internal controls. Our objectives are to render opinions on
(1) the financial statements as of and for the period ending September
30, 2009; and (2) internal controls over both financial reporting and
compliance with applicable laws and regulations as of September 30,
2009. We will also be reporting on the results of our tests of TARP's
compliance with selected provisions of laws and regulations related to
financial reporting. The results of our financial statement audit will
be published in a separate report.
Conditions in Credit Markets Have Improved Since TARP Was Implemented,
but Treasury Needs to Establish a Basis for Future TARP Actions:
Although isolating and estimating the effect of TARP programs remains a
challenging endeavor, the indicators that we have been monitoring over
the last year suggest that there have been broad improvements in credit
markets since the announcement of CPP, the first TARP program.
Specifically, we found that:
* the cost of credit and perceptions of risk declined significantly in
interbank, corporate debt, and mortgage markets;
* the decline in perceptions of risk (as measured by premiums over
Treasury securities) in the interbank market could be attributed in
part to several federal programs aimed at stabilizing markets that were
announced on October 14, 2008, including CPP; and:
* institutions that received CPP funds in the first quarter of 2009 saw
more improvement in their capital positions than banks outside the
program.
Acting on GAO's recommendation that Treasury collect information about
the impact of its investments on participants' lending activities,
Treasury implemented a monthly survey. Our analysis of the surveys,
which cover October 2008 through July 2009, show that collectively the
21 largest participants reported extending almost $2.3 trillion in new
loans since receiving $160 billion in CPP capital from the Treasury.
Although lending standards remained tight, new lending by these
institutions increased from $240 billion a month during the fourth
quarter of 2008 to roughly $287 billion a month in the second quarter
of 2009. Because loan origination data is not available for most
banking institutions--including CPP recipients outside of the largest
institutions--the ability to perform more rigorous analysis to
determine the extent to which the increased lending could be attributed
to TARP is limited.[Footnote 46] Consistent with the intent of TALF,
asset-backed security issuance has recently shown signs of a slight
recovery. While foreclosures continued to increase, it is too soon to
judge the effects of the HAMP program. Treasury recently released a
report that discusses the next phase of its stabilization and
rehabilitation efforts. Treasury's report also begins to establish a
framework that could provide a basis for deciding whether any further
actions will be necessary to assist in financial stabilization after
its authority to purchase or insure additional troubled assets expires
on December 31, 2009 (unless it is extended through October 3, 2010).
As it decides the future of TARP, Treasury will need to document and
communicate its reasoning to Congress and the American people in order
for its decisions to be viewed as credible. Continuing to develop its
quantitative indicators of market conditions to benchmark TARP programs
and its measures of program effectiveness would support Treasury in
this process.
Some Anticipated Effects of TARP on Credit Markets and the Economy Have
Materialized, but Not Necessarily Due to TARP Actions Alone:
In our reports since December 2008, we have highlighted the intended
effects of several broad-based TARP programs, including CPP, CAP, TALF,
PPIP, and HAMP. Chief among these intended effects was to stabilize and
return confidence to the financial system. We paid particular attention
to developments in the interbank market by monitoring the London
Interbank Offered Rate (LIBOR), which is the cost of interbank credit,
and the TED spread, which captures the risk perceived in interbank
markets and gauges the willingness of banks to lend to other banks (see
figure 3).[Footnote 47] As figure 3 shows, LIBOR increased
significantly in September 2008, and more importantly banks began to
pay an even higher premium for loans to compensate for the perceived
increase in default risk. After widening somewhat after the first major
subprime mortgage write-down and the Bear Stearns rescue, the TED
spread increased significantly in the days following the bankruptcy of
Lehman Brothers and other adverse events, exceeding 4.5 percent at its
highest point (450 basis points). However, since the announcement of
CPP and other interventions in October 2008, the 3-month LIBOR and TED
spread have fallen by more than 430 basis points.[Footnote 48] About 60
basis points of that decline occurred after the announcement of the
stress test results associated with CAP in May 2009.
Figure 3: TED Spread, 3-Month LIBOR, and 3-Month Treasury Bill Yield,
from January 1, 2007, to September 29, 2009:
[Refer to PDF for image: financial line graph]
The graph plots interest rates against a three-year period, 2007-2009.
The following are indicated on the graph:
LIBOR yield;
3-month Treasury yield;
TED Spread.
Additionally, the following events are indicated on the graph to
illustrated their effect on interest rates:
BNP Paribas freezes three investment funds;
Major banks begin to write down subprime mortgage losses;
Bear Stearns receives emergency loan from Federal Reserve through
JPMorgan;
FDIC takes over IndyMac;
Lehman bankruptcy; Merrill Lynch purchase announced;
Fannie Mae and Freddie Mac placed into conservatorship;
Washington Mutual closed by Office of Thrift Supervision;
CPP announced along with Federal Reserve and FDIC programs;
Citigroup receives additional government assistance;
Bank of America receives additional government assistance;
Capital Assistance Program Stress Test results released.
Source: GAO analysis of data from Thomson Reuters Datastream.
Note: Rates and yields are daily percentages. The area between the
LIBOR and Treasury yield is the TED spread.
[End of figure]
To examine whether the decline in the TED spread could be attributed in
part to TARP, we conducted additional analysis using a simple
econometric model, which took into account the possibility that the
spread would have narrowed without the intervention.[Footnote 49] We
did not attempt to account for all the important factors that might
influence the TED spread.[Footnote 50] Because the TED spread reached
extreme values leading up to the CPP announcement (more than 450 basis
points), it could have declined even in the absence of CPP, simply
because extreme values have a tendency to return to normal
levels.[Footnote 51] Even when we accounted for this possibility and
for other factors that might influence the interbank market, we found
that the October 14, 2008, announcement of the CPP had a statistically
significant impact on changes in the TED spread. Nevertheless, the
associated improvement in the TED spread (or LIBOR) cannot be
attributed solely to TARP because the October 14, 2008, announcement
was a joint announcement that also introduced the Federal Reserve's
Commercial Paper Funding Facility program and FDIC's Temporary
Liquidity Guarantee Program.
More broadly, the programs established under TARP, if effective, should
have jointly resulted in improvements in general credit market
conditions, including declining risk premiums and lower borrowing costs
for nonbank businesses and consumers. In the month leading up to the
CPP announcement, market interest rates and spreads reflected a
significant tightening in credit conditions as investors, worried about
the health of the economy, became increasingly risk averse. The
indicators that we have been monitoring illustrate that since mid-
October 2008 the cost of credit and perceptions of risk (measured by
premiums over Treasury securities) have declined significantly, not
only in interbank markets but also in corporate debt and mortgage
markets (see table 6).[Footnote 52] Recent trends in these measures are
consistent with those for other indicators that we and other
researchers have monitored. For example, stock market volatility has
fallen considerably, and the credit default swap index for the banking
sector has declined significantly since TARP actions began.[Footnote
53] Even taken collectively, though, changes in these indicators are an
imperfect way to measure TARP's impact, as they may also be influenced
by general market forces and cannot be exclusively linked to any one
program or action.[Footnote 54]
Table 6: Changes in Select Credit Market Indicators, October 13, 2008,
to September 30, 2009:
Credit market rates and spreads:
Indicator: LIBOR;
Description: 3-month London interbank offered rate (an average of
interest rates offered on dollar-denominated loans);
Basis point change from October 13, 2008 to September 30, 2009: Down
446.
Indicator: TED spread;
Description: Spread between 3-month LIBOR and 3-month Treasury yield;
Basis point change from October 13, 2008 to September 30, 2009: Down
434.
Indicator: Aaa bond rate;
Description: Rate on highest-quality corporate bonds;
Basis point change from October 13, 2008 to September 30, 2009: Down
143.
Indicator: Aaa bond spread;
Description: Spread between Aaa bond rate and 10-year Treasury yield;
Basis point change from October 13, 2008 to September 30, 2009: Down
85.
Indicator: Baa bond rate;
Description: Rate on corporate bonds subject to moderate credit risk;
Basis point change from October 13, 2008 to September 30, 2009: Down
263.
Indicator: Baa bond spread;
Description: Spread between Baa bond rate and 10-year Treasury yield;
Basis point change from October 13, 2008 to September 30, 2009: Down
205.
Indicator: Mortgage rates;
Description: 30-year conforming loans rate;
Basis point change from October 13, 2008 to September 30, 2009: Down
142.
Indicator: Mortgage spread;
Description: Spread between 30-year conforming loans rate and 10-year
Treasury yield;
Basis point change from October 13, 2008 to September 30, 2009: Down
83.
Indicator: [Empty]; Description: [Empty]; Basis point change from
October 13, 2008 to September 30, 2009: [Empty].
Quarterly mortgage volume and defaults:
Indicator: Mortgage originations;
Description: New mortgage loans;
Basis point change from October 13, 2008 to September 30, 2009: Up $290
billion to $550 billion.
Indicator: Foreclosure rate;
Description: Percentage of homes in foreclosure;
Basis point change from October 13, 2008 to September 30, 2009: Up 100
basis points to 4.30 percent.
Source: GAO analysis of data from Global Insight, the Federal Reserve,
Thomson Reuters Datastream, and Inside Mortgage Finance.
Note: Rates and yields are daily except mortgage rates, which are
weekly. Higher spreads (measured as premiums over Treasury securities
of comparable maturity) represent higher perceived risk in lending to
certain borrowers. Higher rates represent increases in the cost of
borrowing for relevant borrowers. As a result, "down" suggests
improvement in market conditions for credit market rates and spreads.
Foreclosure rate and mortgage origination data are quarterly. See GAO-
09-161, GAO-09-296, GAO-09-504, and GAO-09-658.
[End of table]
Changes in Capital Ratios and Bank Lending are Consistent with the
Intended Effects of TARP but Cannot Be Attributed Solely to TARP
Programs:
One of the intentions of TARP, and specifically of CPP, was to improve
banks' balance sheets, enhance lenders' ability to borrow, raise
capital, and lend to creditworthy borrowers. Capital ratios at
institutions that received CPP capital in the first quarter of 2009
rose more than capital ratios at non-CPP institutions between December
31, 2008, and March 31, 2009. This difference holds across several
measures of capital adequacy (see table 7). Improved confidence in the
interbank market may to some degree reflect the increased capital
ratios at institutions that received CPP funding, as these ratios are
important indicators of solvency--that is, the higher the ratio, the
more solvent the institution. As we have discussed in previous reports,
tension exists between promoting lending and improving banks' capital
position. We noted that some institutions likely would use CPP capital
to improve their capital ratios by holding the additional capital as
treasuries or other safe assets rather than leveraging it to support
additional lending. Using the capital in this manner could allow
institutions to absorb losses or write down troubled assets.
Table 7: Increase in Capital Adequacy among CPP Participants and
Nonparticipants (in percentage points), Fourth Quarter 2008 to First
Quarter 2009:
Tier 1 leverage ratio: [Empty].
Measure of capital adequacy: Tier 1 leverage ratio;
Increase in capital adequacy, fourth quarter 2008 to first quarter
2009: Bank holding companies receiving CPP in first quarter 2009: 2.9;
Increase in capital adequacy, fourth quarter 2008 to first quarter
2009: Bank holding companies not participating in CPP: 0.6.
Measure of capital adequacy: Tier 1 risk-based capital ratio;
Increase in capital adequacy, fourth quarter 2008 to first quarter
2009: Bank holding companies receiving CPP in first quarter 2009: 3;
Increase in capital adequacy, fourth quarter 2008 to first quarter
2009: Bank holding companies not participating in CPP: 0.4.
Measure of capital adequacy: Total risk-based capital ratio;
Increase in capital adequacy, fourth quarter 2008 to first quarter
2009: Bank holding companies receiving CPP in first quarter 2009: 2.9;
Increase in capital adequacy, fourth quarter 2008 to first quarter
2009: Bank holding companies not participating in CPP: 0.4.
Source: GAO analysis of Federal Reserve data.
Note: The tier 1 leverage ratio is defined as tier 1 capital--what
regulators consider to be the highest-quality capital--over total
average on balance sheet assets. The tier 1 risk-based capital ratio is
defined as tier 1 capital over risk-weighted assets, where risk-
weighted assets is a measure of assets adjusted for risk. The total
risk-based capital ratio is defined as total capital (including tier 1
and other sources of capital) over risk-weighted assets.
[End of table]
Recent trends in lending suggest that CPP capital infusions may have
made participating banks somewhat more willing and able to increase
lending to creditworthy businesses and consumers, although lending
standards for consumer and business credit remain tight.[Footnote 55]
Our analysis of Treasury's loan surveys showed that these CPP
recipients reported an increase in new lending to consumers and
businesses to, on average, $287 billion a month in the second quarter
of 2009, up $47 billion from $240 billion a month in the fourth quarter
of 2008 (see figure 4).[Footnote 56] These findings are consistent with
the trends in aggregate mortgage originations, which more than doubled
between the fourth quarter of 2008 and the end of the second quarter of
2009 to $550 billion.
Figure 4: New Lending at the 21 Largest Recipients of CPP Capital, from
October 2008 to July 2009:
[Refer to PDF for image: line graph]
Month: October;
New lending: $264.5 billion.
Month: November;
New lending: $209.1 billion.
Month: December;
New lending: $246.1 billion.
Month: January;
New lending: $244.2 billion.
Month: February;
New lending: $232.4 billion.
Month: March;
New lending: $294.8 billion.
Month: April;
New lending: $273.3 billion.
Month: May;
New lending: $277.0 billion.
Month: June;
New lending: $312.1 billion.
Month: July;
New lending: $282.4 billion.
Source: GAO analysis of Treasury loan survey.
Note: Lending levels may be affected by merger activity. Hartford is
not included in the totals because Treasury's loan survey includes data
for Hartford starting in April of 2009.
[End of figure]
Table 8 documents the total amount of new consumer and business lending
for each institution that received CPP funds. Despite tight lending
standards and the usual drop in credit flows during recessions,
collectively the top 21 institutions participating in CPP have reported
extending almost $2.3 trillion in new loans since receiving CPP capital
totaling $160 billion. While lending typically falls during a
recession, recent research by the Federal Reserve concluded that
through the first quarter of 2009, the contraction in commercial
mortgages, nonfinancial business credit, and consumer credit did not
appear to be particularly severe relative to contractions in these
types of lending in other downturns. However, the contraction in
residential mortgage lending has exceeded past downturns.
Table 8: New Lending at the 21 Largest Recipients of CPP, as of July
31, 2009 (Dollars in billions):
Institution: Citigroup;
Date of CPP: 10/28/2008;
Size of CPP: $25.0;
New lending since receiving CPP: $173.1.
Institution: JPMorgan Chase[A];
Date of CPP: 10/28/2008;
Size of CPP: $25.0;
New lending since receiving CPP: $449.9.
Institution: Wells Fargo Bank;
Date of CPP: 10/28/2008;
Size of CPP: $25.0;
New lending since receiving CPP: $502.4.
Institution: Bank of America;
Date of CPP: 10/28/2008;
Size of CPP: $15.0;
New lending since receiving CPP: $579.0.
Institution: Goldman Sachs[A];
Date of CPP: 10/28/2008;
Size of CPP: $10.0;
New lending since receiving CPP: $20.8.
Institution: Morgan Stanley[A];
Date of CPP: 10/28/2008;
Size of CPP: $10.0;
New lending since receiving CPP: $32.9.
Institution: Bank of New York Mellon[A];
Date of CPP: 10/28/2008;
Size of CPP: 3.0;
New lending since receiving CPP: 5.2.
Institution: State Street[A];
Date of CPP: 10/28/2008;
Size of CPP: $2.0;
New lending since receiving CPP: $9.8.
Institution: U.S. Bancorp[A];
Date of CPP: 11/14/2008;
Size of CPP: $6.6;
New lending since receiving CPP: $127.4.
Institution: Capital One[A];
Date of CPP: 11/14/2008;
Size of CPP: $3.6;
New lending since receiving CPP: $18.3.
Institution: Regions;
Date of CPP: 11/14/2008;
Size of CPP: $3.5;
New lending since receiving CPP: $45.6.
Institution: SunTrust;
Date of CPP: 11/14/2008;
Size of CPP: $3.5;
New lending since receiving CPP: $66.1.
Institution: BB&T[A];
Date of CPP: 11/14/2008;
Size of CPP: $3.1;
New lending since receiving CPP: $54.8.
Institution: KeyCorp;
Date of CPP: 11/14/2008;
Size of CPP: 2.5;
New lending since receiving CPP: 23.6.
Institution: Comerica;
Date of CPP: 11/14/2008;
Size of CPP: $2.3;
New lending since receiving CPP: $23.2.
Institution: Marshall & Ilsley;
Date of CPP: 11/14/2008;
Size of CPP: $1.7;
New lending since receiving CPP: $8.4.
Institution: Northern Trust[A];
Date of CPP: 11/14/2008;
Size of CPP: $1.6;
New lending since receiving CPP: $12.2.
Institution: PNC;
Date of CPP: 12/31/2008;
Size of CPP: $7.6;
New lending since receiving CPP: $65.8.
Institution: Fifth Third Bancorp;
Date of CPP: 12/31/2008;
Size of CPP: $3.4;
New lending since receiving CPP: $45.1.
Institution: CIT;
Date of CPP: 12/31/2008;
Size of CPP: $2.3;
New lending since receiving CPP: $24.3.
Institution: American Express[A];
Date of CPP: 1/9/2009;
Size of CPP: $3.4;
New lending since receiving CPP: $6.8.
Institution: Total;
Size of CPP: $160.0;
New lending since receiving CPP: $2,294.6.
Source: GAO analysis of Treasury loan survey.
Note: The table features the 21 largest of the 22 recipients of CPP
funds as of July 31, 2009. We did not include Hartford, which received
CPP funds on June 26, 2009. New lending begins with the month after the
institution received CPP capital (e.g., December for institutions
receiving CPP on Nov. 14, 2008). As such, the measure is likely to
understate the amount of new lending. In addition, lending levels may
be affected by merger activity during the time period presented. Date
and size of CPP refer to the initial infusion of CPP funds. Citigroup
and Bank of America have received additional TARP funds.
[A] These institutions repaid CPP capital on June 17, 2009, but have
voluntarily agreed to continue to provide information through the end
of 2009.
[End of table]
Data limitations may prevent a reliable comparison of lending volumes
across institutions of different sizes and between CPP and non-CPP
participants. For the hundreds of smaller financial institutions
receiving CPP funds, the only lending information provided was based on
the value of loan balances and thus was not comparable to the more
detailed data for large CPP recipients. Similarly, only comparative
balance sheet data is available for non-CPP institutions. Although
balance sheet data--which is available for all banking institutions--
could be useful for comparing capital ratios, our quantitative work
suggests that loan balances may not be a good proxy for lending
activity, at least for the third quarter of 2008 to the first quarter
of 2009. Specifically, we found the correlations between new lending
and changes in loan balances to be relatively low over this period.
[Footnote 57] A number of factors can affect loan balances that are
unrelated to new lending, including merger activity, changes in the
value of existing loans (e.g., realizing losses on a loan portfolio),
and loan payoffs as borrowers attempt to reduce debt burdens. Banks
could, for example, undertake significant origination activity and
still see a drop in the total value of loans that they held. As a
result, it is difficult to determine CPP's specific impact on lending
activity in a more rigorous way.
Securitization Markets Have Shown Some Signs of Recovery for TALF-
Eligible Securities:
The primary goal of TALF, as designed and operated by the Federal
Reserve, is to make credit more readily available to households and
small businesses by increasing liquidity and improving conditions in
ABS markets. Investors requested $51.7 billion in TALF loans between
the start of the program in March of 2009 and September 2009. As figure
5 indicates, ABS activity has begun to rebound somewhat after reaching
zero for several types of issuances in the fourth quarter of 2008.
While aggregate issuance is still down significantly from 2007, non-
mortgage-related ABS issuance rose to $47.9 billion in the second
quarter of 2009 from $3.3 billion in the fourth quarter of 2008. ABS
backed by home equity loans, which are not eligible for TALF
assistance, increased to just $71 million from $17 million over the
same period, although whether a significant increase would be expected
given the turmoil in mortgage markets is not clear.
Figure 5: Annual and Quarterly Asset-Backed Security Issuance (Dollars
in billions):
[Refer to PDF for image: line graph]
Year: 1990;
Auto: $17,856;
Credit cards: $33,923;
Home equity: $8,314;
Student loans: $0.
Year: 1991;
Auto: $21,979
Credit cards: $31,663
Home equity: $14,934
Student loans: $0
Year: 1992;
Auto: $34,898;
Credit cards: $24,660;
Home equity: $9,419;
Student loans: $0.
Year: 1993;
Auto: $33,227;
Credit cards: $27,193;
Home equity: $11,451;
Student loans: $471.
Year: 1994;
Auto: $23,097;
Credit cards: $42,816;
Home equity: $14,340;
Student loans: $3,264.
Year: 1995;
Auto: $37,402;
Credit cards: $63,046;
Home equity: $20,369;
Student loans: $3,808.
Year: 1996;
Auto: $43,379;
Credit cards: $63,635;
Home equity: $47,211;
Student loans: $10,508.
Year: 1997;
Auto: $46,754;
Credit cards: $52,051;
Home equity: $84,322;
Student loans: $16,119.
Year: 1998;
Auto: $50,118;
Credit cards: $54,641;
Home equity: $106,508;
Student loans: $12,977.
Year: 1999;
Auto: $53,762;
Credit cards: $50,857;
Home equity: $93,539;
Student loans: $13,869.
Year: 2000;
Auto: $82,562;
Credit cards: $69,927;
Home equity: $91,048;
Student loans: $22,715.
Year: 2001;
Auto: $83,976;
Credit cards: $82,112;
Home equity: $134,275;
Student loans: $17,811.
Year: 2002;
Auto: $104,537;
Credit cards: $82,835;
Home equity: $177,566;
Student loans: $32,669.
Year: 2003;
Auto: $87,602;
Credit cards: $76,929;
Home equity: $264,084;
Student loans: $49,564.
Year: 2004;
Auto: $75,007;
Credit cards: $60,247;
Home equity: $476,469;
Student loans: $53,857.
Year: 2005;
Auto: $92,150;
Credit cards: $73,586;
Home equity: $499,549;
Student loans: $68,603.
Year: 2006;
Auto: $86,066;
Credit cards: $70,279;
Home equity: $508,365;
Student loans: $70,521.
Year: 2007;
Auto: $75,680;
Credit cards: $101,644;
Home equity: $221,504;
Student loans: $62,676.
Year: 2008;
Auto: $35,487;
Credit cards: $59,060;
Home equity: $3,816;
Student loans: $28,204.
Year: 2008, Q2;
Auto: $21.1;
Credit cards: $20.5;
Home equity: $5.1;
Student loans: $14.4.
Year: 2008, Q3;
Auto: $2.9;
Credit cards: $9.8;
Home equity: $0.6;
Student loans: $5.6.
Year: 2008, Q4;
Auto: $2.4;
Credit cards: $0;
Home equity: $1.7;
Student loans: $0.
Year: 2009, Q1;
Auto: $7.6;
Credit cards: $3.0;
Home equity: $0.7;
Student loans: $1.9.
Year: 2009, Q2;
Auto: $12.0;
Credit cards: $19.2;
Home equity: $0.7;
Student loans: $7.6.
Source: GAO presentation of Securities Industry and Financial Markets
Association data.
Note: Annual figures are adjusted for inflation.
[End of figure]
As we discussed in previous reports, TALF support to securitization
markets should, if effective, increase the availability of new credit
to consumers and businesses, lowering rates on credit card, automobile,
small business, student, commercial mortgage, and other types of loans
traditionally facilitated by securitization. From November 2008 to May
2009, the average rate on automobile loans from finance companies
declined significantly (296 basis points) to 3.5 percent, well below
the bank rate, which fell only 26 basis points to 6.8 percent.[Footnote
58] While these declines correlate with the launching of TALF, the
federal government's support of GM and Chrysler also likely played a
role in alleviating liquidity constraints at finance companies. Because
stand-alone auto finance companies rely more heavily on securitization
than commercial banks, the differences in the trends in their
automobile loan rates could partially reflect the issues in
securitization markets that TALF was intended to address. After
initially providing funding to certain holders of AAA-rated ABS backed
by newly and recently originated consumer and small business loans,
TALF has been expanded to other assets, including commercial MBS. We
will continue to monitor ABS activity, interest rates on consumer and
business loans and other TALF-eligible securities, as well as ABS
spreads.
It Is Too Soon to Expect Results from More Recently Implemented TARP
Programs:
In future reports, we will address the effectiveness of the more
recently initiated financial stability programs, using indicators and
auxiliary quantitative work. These programs are intended to address
rising foreclosures and the condition of the housing market (HAMP) as
well as the legacy loans and securities that are widely held to be the
root cause of the deteriorating conditions of many financial
institutions (PPIP). Foreclosure data, although also influenced by
general market forces such as falling housing prices and unemployment,
should provide an indication of the effectiveness of HAMP. Although it
is too soon to expect any HAMP-related improvements, because HAMP was
only recently implemented, we have monitored foreclosure rates over the
past year. While the average foreclosure rate from 1979 to 2006 was
less than 1 percent, the percentage of loans in foreclosure reached an
unprecedented high of 4.3 percent at the end of the second quarter of
2009, up from 3.3 percent in the fourth quarter of 2008 (see table 6).
Over the same period, the foreclosure rate on subprime loans rose to
15.1 percent from 13.7 percent (the rate for adjustable-rate subprime
loans is now more than 24 percent).
As discussed in our March 2009 report, Treasury introduced PPIP to
facilitate the purchase of legacy loans and securities. PPIP's impact
will depend largely on the pricing of the purchased assets.
Sufficiently high prices will allow financial institutions to sell
assets, deleverage, and improve their capital adequacy, but overpaying
for these assets could have negative implications for
taxpayers.[Footnote 59] In addition to providing more transparent
pricing for assets, PPIP--if it is effective--should improve solvency
at participating institutions and others holding those assets, reduce
uncertainty about their balance sheets, and improve investor
confidence. If it does, the institutions will be able to borrow and
lend at lower rates and raise additional capital from the private
sector. But PPIP is in the initial stages of implementation, and it is
too early to expect effects on related markets.
Challenges to Assessing TARP's Effect on the Economy Remain:
While TARP's activities could improve market confidence in
participating banks and have other beneficial effects on credit
markets, we have also noted in our previous reports that several
factors will complicate efforts to measure any impact. For example, any
changes attributed to TARP could well be changes that:
* would have occurred anyway;
* can be attributed to other policy interventions, such as the actions
of FDIC, the Federal Reserve, or other financial regulators; or:
* were enhanced or counteracted by other market forces, such as the
correction in housing markets and revaluation of mortgage-related
assets.
Consideration of market forces is particularly important when using
bank lending as a measure of CPP's and CAP's success, because it is not
clear what would have happened in the absence of TARP. Weaknesses in
the balance sheets of financial intermediaries, a decline in the demand
for credit, reduced creditworthiness among borrowers, and other market
fundamentals suggest lower lending activity than would be expected.
Similarly, nonbank financial institutions, which have accounted for a
significant portion of lending activity over the last two decades, have
been constrained due to weak securitization markets. Lastly, because
the extension of credit to less-than-creditworthy borrowers appears to
have been an important factor in the current financial crisis, it is
not clear that lending should return to pre-crisis levels. Similar
difficulties arise in using foreclosure data as a measure of HAMP's
success, especially given the rising unemployment rate and the number
of homeowners who may have taken on mortgage-related debt beyond
prudent levels.
Treasury Should Consider a Number of Indicators and Measures to Provide
a Basis for Future TARP Actions:
While Treasury is beginning to establish a case for exiting from some
emergency programs and maintaining others, it has not fully established
a comprehensive framework that will provide a basis for making
transparent decisions about which TARP-specific actions are necessary
or how those programs will be evaluated. Treasury's authority to
purchase or insure additional troubled assets will expire on December
31, 2009, unless the Secretary submits a written certification to
Congress explaining why an extension is necessary and how much it is
expected to cost. For this reason, Treasury will need to make decisions
about providing new funding and maintaining existing funding for TARP
programs in the next few months. It will need to do this in light of
current and expected market conditions, and it will need to communicate
its determinations to Congress and the American people.
Treasury has recently released a report that begins to discuss the next
phase of its stabilization and rehabilitation efforts--a discussion
that may be a starting point for deciding whether any further actions
are necessary to stabilize financial markets and the first step in
establishing a framework for such actions.[Footnote 60] The report
describes the drop in utilization of some programs as financial
conditions normalize and confidence in financial markets improves and
identifies a number of financial market indicators. Treasury also notes
that it will need to ensure the continuation of some policies and
programs that it believes are needed for financial and economic
recovery. However, Treasury has yet to take all the steps needed to
provide a basis for deciding whether or not to provide new funding for
TARP. For example, while some rationale is provided for continued HAMP
and TALF action, none is provided for PPIP. Without a robust analytic
framework, Treasury may be challenged in effectively carrying out the
next phase of its programs.
For the decision-making process to be viewed as credible, Treasury will
need to document and communicate the basis for its decisions. Although
qualitative factors should be given serious consideration, to the
extent that Treasury can relate its decision making to a set of
quantitative measures or indicators, its case can be more convincing.
In addition, Treasury would add further credibility to the process by
announcing ahead of time the indicators or measures it plans to use.
Doing so would help to disarm potential criticism that it had
selectively chosen indicators or measures to justify its decisions
after the fact. While indicators of credit market conditions can
suggest the extent to which, for example, credit costs and lending have
returned to levels consistent with the stability of financial markets,
measures of program effectiveness can offer insight into the potential
benefits of additional TARP expenditures. The Office of Management and
Budget (OMB) guidance for cost-benefit and regulatory analyses
suggests, among other things, making assumptions explicit,
characterizing the uncertainties involved, varying assumptions to
determine the sensitivity of estimated outcomes (sensitivity analysis),
and considering alternative approaches.[Footnote 61] If Treasury adopts
a more formal cost-benefit framework, additional principles may also be
applicable, including the use of net present value measures, an
enumeration of benefits and costs, and the quantifying of benefits and
costs whenever possible.
Conclusions and Recommendations:
In establishing this new program, Treasury faced a number of
operational challenges. Not only did it have to implement the program
in the midst of the greatest financial crisis since the Great
Depression, but Treasury also had to adjust the program as events
continued to unfold. As TARP's focus shifted from making a number of
capital purchases as investments in individual institutions to one
geared toward restarting securitization markets and preserving
homeownership, its management infrastructure had to change as well.
While progress has been made in establishing TARP, much remains
uncertain about the program, including whether it will pay for itself
or prove to be a cost to the taxpayers. The reasons for the uncertainty
include the following:
* Some programs remain in their infancy, while others are winding down.
Therefore, determining the overall impact and costs of the programs
will take time.
* TARP funds were invested in a variety of institutions, some of which
were less risky than others.
* Some TARP programs may generate some returns for Treasury through
interest and dividend payments and sales of warrants, while others--
such as HAMP--are expenditure programs aimed at helping homeowners
modify their mortgages.
To help Treasury meet the challenges associated with implementing a
program while concurrently establishing a comprehensive system of
internal control, we have made 35 recommendations to Treasury aimed at
improving the accountability, integrity, and transparency of TARP. As
discussed in appendix I, Treasury has taken action to address most of
them. And while much important progress has been made, a number of
areas warrant ongoing attention as Treasury moves into the next phase
of the program and contemplates a possible extension.
* First, we continue to believe that Treasury should work with the
Chairmen of the FDIC and Federal Reserve, the Comptroller of the
Currency, and the Acting Director of OTS to help ensure that the
primary federal regulators use generally consistent criteria when
considering repurchase decisions under TARP. While we understand that
the final repurchase decision rests with a participant's primary
federal regulator, Treasury has a responsibility to ensure that these
regulators are applying generally consistent criteria when reviewing
TARP participants' requests to repurchase their preferred shares.
* Second, Treasury has yet to finalize its implementation of an
oversight program for asset managers covering CPP and the other capital-
based programs, such as TIP and AGP. While Treasury now has asset
managers to help manage its equity investments, it must also ensure
that the federal government's interests are protected and that the
asset managers are performing as agreed.
* Third, Treasury has yet to implement our recommendation aimed at
strengthening its efforts to help preserve homeownership and protect
home values. As we previously recommended, Treasury should routinely
update projections of the number of homeowners who can be helped under
HAMP by reviewing key assumptions about the housing market and the
behavior of mortgage holders, borrowers, and servicers. In addition,
Treasury should develop a means of systematically assessing servicers'
capacity to make HAMP modifications and meet program requirements, so
that Treasury can understand and address any risks associated with
individual servicers' ability to fulfill program requirements.
* Fourth, in the area of management infrastructure, OFS has continued
to make progress in establishing a management infrastructure to
administer TARP and oversee contractors and financial agents, but some
challenges remain. Though OFS now has close to 200 staff, some key
senior positions have not been permanently filled, such as the Chief
Homeownership Preservation Officer and Chief Investment Officer.
Bringing on board permanent staff for these key positions is important
in helping Treasury effectively administer TARP activities and ensuring
accountability for program outcomes. Treasury has strengthened its
management and oversight of contractors as its reliance on them to
support TARP has grown over the past year. OFS continues to make
progress in developing a comprehensive system of internal control. As
we complete our first audit of OFS's annual financial statements for
TARP, we will be able to provide a more definitive view of TARP's
internal controls over financial reporting.
* Fifth, in the area of communication, the program has evolved and
continues to evolve. Treasury viewed its initial shift toward capital
investments in the first weeks of the program as a more effective way
to stabilize fragile financial markets. This shift in strategy,
however, caught Congress and the public by surprise, and has created
long-term challenges for the program, and, some would argue, ultimately
impacted the effectiveness of the program. Concerns about this shift in
structure highlight the communication challenges that continue to
confront the program. And as Treasury continues to improve its
communication efforts and formalize its communication strategy,
Treasury must ensure that its ongoing efforts include keeping Congress
adequately informed about TARP and its strategy, including its exit
strategy for the various programs created under TARP. Furthermore,
formalizing the communication strategy and hiring a communications
director will help ensure that communication is given sufficient
attention on an ongoing basis.
* Finally, because TARP has been part of a broader effort that has
included the Federal Reserve and FDIC, measuring the effectiveness of
TARP's programs has been an ongoing challenge. We developed a set of
indicators that we used to track conditions of financial markets over
the past year. These indicators show that a number of the anticipated
effects of TARP have materialized. However, changes in these metrics
are an imperfect way to measure TARP's impact, as they may also be
influenced by general market forces and cannot be exclusively linked to
any one program or action. As a result, isolating and assessing TARP's
effect on the economy remains a challenging endeavor.
Treasury has not fully established a comprehensive analytic framework
for assessing the need for additional actions and evaluating program
results in a transparent manner. In a recent report on the next phase
of the federal government's stabilization efforts, Treasury began to
lay the foundation for an analytic framework for determining whether to
extend TARP and also provided a number of financial indicators.
Although TARP expires on December 31, 2009, the Secretary of the
Treasury may extend the program to October 3, 2010, and Treasury will
need to make a determination regarding such an extension. As Treasury
considers whether to extend the program, the Secretary's determination
must be made in light of actions taken and planned by the Federal
Reserve and FDIC and their winding down of certain programs and
continuation of others that were also established to help stabilize
markets. In addition, any continued action under TARP should be based
in part on quantitative measures of program effectiveness, such as
performance indicators, in order to weigh the benefits of TARP programs
against the cost of using additional taxpayer resources. However,
Treasury has not fully established a comprehensive analytic framework
for assessing the future direction of the programs or determining
whether additional actions are warranted. Moreover, as it finalizes the
next phase of the program, Treasury will need to document its decision-
making process and communicate its reasoning to Congress and the
American people in order for its decisions to be viewed as credible.
Finally, with the exception of AGP and AIFP, Treasury has not updated
its projected use of funds for the TARP programs in light of current
market conditions and program participation rates since March 2009.
Based on changes in the markets, repurchases, participation levels in
certain programs, and the implementation status of others, a thorough
review of Treasury's existing estimates of its projected use of TARP
funds is warranted in light of the need to make a determination about
whether to extend the program. Without more current and meaningful
estimates about projected uses of the remaining funds, Treasury's
ability to plan for and effectively execute the next phase of the
program will be limited.
New Recommendations for Executive Action:
As it enters the next phase of the program, Treasury will likely face
ongoing challenges. Building on our prior recommendations, we are
making three new recommendations aimed at improving Treasury's ability
to effectively manage the next phase of the program. Specifically, we
recommend that the Secretary of the Treasury:
* Consider TARP in a broad market context and as part of determining
whether to extend TARP, work with the Chairmen of the Federal Reserve
and FDIC to develop a coordinated framework and analytical basis to
determine whether an extension is needed. If it is, the Secretary
should clearly spell out what the objectives and measures of any
extended programs would be, along with anticipated costs and
safeguards;
* Document its analytical decision-making process and clearly
communicate the results to Congress and the American people for
determining whether an extension is needed; and:
* Update its projected use of funds and, if the program is extended,
continue to re-evaluate them on a periodic basis.
Agency Comments and Our Analysis:
We provided a draft of this report to Treasury for its review and
comment. We also provided excerpts of the draft report to the Federal
Reserve and FDIC for their review. Treasury provided written comments
that we have reprinted in appendix XI. Treasury, the Federal Reserve,
and FDIC also provided technical comments that have been incorporated
as appropriate.
In its comments, Treasury noted that "there is important work ahead"
and that our recommendations were constructive as Treasury works to
implement its financial stability programs and enhance OFS's
performance. In particular, the Assistant Secretary noted in response
to our recommendations that the Secretary in deciding whether to extend
TARP authority beyond December 31, 2009, "will coordinate with
appropriate officials to ensure that the determination is considered in
a broad market context that takes account of relevant objectives,
costs, and measures" and that Treasury will communicate the reasons for
the decision when it is made. Concerning our recommendation that
Treasury update its projected use of funds estimates and if the program
is extended, regularly re-evaluate them, Treasury commented that it
regularly evaluates funding needs for TARP programs and announces
revisions as decisions are made. However, with the exception of AGP and
AIFP, Treasury had not publicly affirmed its projected use estimates
since March 2009. As it continues to evaluate these estimates, Treasury
should disclose this information periodically, including reconciling
estimates to actual results. For example, in March Treasury estimated
that it had $135 billion remaining under TARP. This included $25
billion in estimated repurchases, yet as of September 25, 2009, actual
repurchases totaled almost three times that amount.
We are sending copies of this report to the Congressional Oversight
Panel, Financial Stability Oversight Board, Special Inspector General
for TARP, 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 staffs 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
Williams Brown 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 XII.
Signed by:
Gene L. Dodaro:
Acting Comptroller General of the United States:
List of Committees:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Thad Cochran:
Vice Chairman:
Committee on Appropriations:
United States Senate:
The Honorable Christopher J. Dodd:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Kent Conrad:
Chairman:
The Honorable Judd Gregg:
Ranking Member:
Committee on the Budget:
United States Senate:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable David R. Obey:
Chairman:
The Honorable Jerry Lewis:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable John M. Spratt, Jr.
Chairman:
The Honorable Paul Ryan:
Ranking Member:
Committee on the Budget:
House of Representatives:
The Honorable Barney Frank:
Chairman:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Charles B. Rangel:
Chairman:
The Honorable Dave Camp:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Status of GAO Recommendations, as of September 25, 2009:
December 2, 2008, report:
GAO recommendations: 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 Capital Purchase Program (CPP) and help ensure an
appropriate level of accountability and transparency;
Status: Implemented.
GAO recommendations: Develop a means to ensure that institutions
participating in CPP comply with key program requirements (for example,
executive compensation, dividend payments, and the repurchase of
stock);
Status: Partially implemented.
GAO recommendations: 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;
Status: Partially implemented.
GAO recommendations: Facilitate a smooth transition to the new
administration by building on and formalizing ongoing activities,
including ensuring that key Office of Financial Stability (OFS)
leadership positions are filled during and after the transition;
Status: Implemented.
GAO recommendations: Expedite OFS's hiring efforts to ensure that the
Department of the Treasury (Treasury) has the personnel needed to carry
out and oversee the Troubled Asset Relief Program (TARP);
Status: Implemented.
GAO recommendations: 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;
Status: Implemented.
GAO recommendations: 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 program objectives are being met;
Status: Partially implemented.
GAO recommendations: Issue 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;
Status: Implemented.
GAO recommendations: Institute a system to effectively manage and
monitor the mitigation of conflicts of interest;
Status: Implemented.
January 30, 2009, report:
GAO recommendations: Expand the scope of planned monthly CPP surveys to
include collecting at least some information from all institutions
participating in the program;
Status: Implemented.
GAO recommendations: Ensure that future CPP agreements include a
mechanism that will better enable Treasury to track the use of the
capital infusions and seek to obtain similar information from existing
CPP participants;
Status: Implemented.
GAO recommendations: Establish a process to ensure compliance with all
CPP requirements, including those associated with limitations on
dividends and stock repurchase restrictions;
Status: Partially implemented.
GAO recommendations: Communicate a clearly articulated vision for TARP
and show how all individual programs are intended to work in concert to
achieve that vision. This vision should incorporate actions to preserve
homeownership. Once this vision is clearly articulated, Treasury should
document needed skills and competencies;
Status: Implemented.
GAO recommendations: Continue to expeditiously hire personnel needed to
carry out and oversee TARP;
Status: Implemented.
GAO recommendations: Expedite efforts to 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 as program requirements are better defined over time;
Status: Implemented.
GAO recommendations: Develop a comprehensive system of internal control
over TARP activities, including policies, procedures, and guidance that
are robust enough to ensure that the program's objectives and
requirements are met;
Status: Partially implemented.
GAO recommendations: Develop and implement a well-defined and
disciplined risk-assessment process, as such a process is essential to
monitoring program status and identifying any risks of potential
inadequate funding of announced programs;
Status: Implemented.
GAO recommendations: Review and renegotiate existing conflict-of-
interest mitigation plans, as necessary, to enhance specificity and
conformity with the new interim conflicts-of-interest regulation and
take continued steps to manage and monitor conflicts of interest and
enforce mitigation plans;
Status: Partially implemented.
March 31, 2009, report:
GAO recommendations: Develop a communication strategy that includes
building an understanding and support for the various components of the
program. Specific actions could include hiring a communications
officer, integrating communications into TARP operations, scheduling
regular and ongoing contact with congressional committees and members,
holding town hall meetings with the public across the country,
establishing a counsel of advisors, and leveraging available
technology;
Status: Partially implemented.
GAO recommendations: Require that American International Group, Inc.
(AIG) seek concessions from stakeholders, such as management,
employees, and counterparties, including seeking to renegotiate
existing contracts, as appropriate, as it finalizes the agreement for
additional assistance;
Status: Closed, not implemented.
GAO recommendations: Update OFS documentation of certain internal
control procedures and the guidance available to the public on
determining warrant exercise prices to be consistent with actual
practices applied by OFS;
Status: Partially implemented.
GAO recommendations: Improve transparency pertaining to TARP program
activities by reporting publicly the monies, such as dividends, paid to
Treasury by TARP participants;
Status: Implemented.
GAO recommendations: Complete the review of, and as necessary
renegotiate, the four existing vendor conflicts-of-interest mitigation
plans to enhance specificity and conformity with the new interim
conflicts-of-interest rule;
Status: Partially implemented.
GAO recommendations: Issue guidance requiring that key communications
and decisions concerning potential or actual vendor-related conflicts
of interest be documented;
Status: Implemented.
June 17, 2009, report:
GAO recommendations: Ensure that the warrant valuation process
maximizes benefits to taxpayers and consider publicly disclosing
additional details regarding the warrant repurchase process, such as
the initial price offered by the issuing entity and Treasury's
independent valuations, to demonstrate Treasury's attempts to maximize
the benefit received for the warrants on behalf of the taxpayer;
Status: Partially implemented.
GAO recommendations: In consultation with the Chairmen of the Federal
Deposit Insurance Corporation and the Board of Governors of the Federal
Reserve System, the Comptroller of the Currency, and the Acting
Director of the Office of Thrift Supervision, ensure consideration of
generally consistent criteria by the primary federal regulators when
considering repurchase decisions under TARP;
Status: Not implemented.
GAO recommendations: Fully implement a communication strategy that
ensures that all key congressional stakeholders are adequately informed
and kept up to date about TARP;
Status: Partially implemented.
GAO recommendations: Expedite efforts to conduct usability testing to
measure the quality of users' experiences with the financial stability
Web site and measure customer satisfaction with the site, using
appropriate tools such as online surveys, focus groups, and e-mail
feedback forms;
Status: Implemented.
GAO recommendations: Explore options for providing the public with more
detailed information on the costs of TARP contracts and agreements,
such as a dollar breakdown of obligations and/or expenses;
Status: Implemented.
GAO recommendations: Finally, to help improve the transparency of
Capital Assistance Program (CAP)--in particular the stress tests
results--we recommend that the Director of Supervision and Regulation
of the Federal Reserve consider periodically disclosing to the public
the aggregate performance of the 19 bank holding companies against the
more adverse scenario forecast numbers for the duration of the 2-year
forecast period and whether or not the scenario needs to be revised. At
a minimum, the Federal Reserve should provide the aggregate performance
data to OFS program staff for any of the 19 institutions participating
in CAP or CPP;
Status: Not implemented.
July 23, 2009, report:
GAO recommendations: Consider methods of (1) monitoring whether
borrowers with total household debt of more than 55 percent of their
income who have been told that they must obtain HUD-approved housing
counseling do so, and (2) assessing how this counseling affects the
performance of modified loans to see if the requirement is having its
intended effect of limiting redefaults;
Status: (1) Partially implemented; (2) Not implemented.
GAO recommendations: Reevaluate the basis and design of Home Price
Decline Protection (HPDP) program to ensure that the Home Affordable
Modification Program (HAMP) funds are being used efficiently to
maximize the number of borrowers who are helped under HAMP and to
maximize overall benefits of utilizing taxpayer dollars;
Status: Partially implemented.
GAO recommendations: Institute a system to routinely review and update
key assumptions and projections about the housing market and the
behavior of mortgage holders, borrowers, and servicers that underlie
Treasury's projection of the number of borrowers whose loans are likely
to be modified under HAMP and revise the projection as necessary in
order to assess the program's effectiveness and structure;
Status: Partially implemented.
GAO recommendations: Place a high priority on fully staffing vacant
positions in Homeownership Preservation Office (HPO)--including filling
the position of Chief Homeownership Preservation Officer with a
permanent placement--and evaluate HPO's staffing levels and
competencies to determine whether they are sufficient and appropriate
to effectively fulfill its HAMP governance responsibilities;
Status: Partially implemented.
GAO recommendations: Expeditiously finalize a comprehensive system of
internal control over HAMP--including policies, procedures, and
guidance for program Activities--to ensure that the interests of both
the government and taxpayer are protected and that the program
objectives and requirements are being met once loan modifications and
incentive payments begin;
Status: Partially implemented.
GAO recommendations: Expeditiously develop a means of systematically
assessing servicers' capacity to meet program requirements during
program admission so that Treasury can understand and address any risks
associated with individual servicers' abilities to fulfill program
requirements, including those related to data reporting and collection;
Status: Not implemented.
Source: GAO and analysis of OFS, Treasury information.
[End of table]
[End of section]
Appendix II: Capital Purchase Program:
Program Overview:
The Capital Purchase Program (CPP) has been the primary initiative
under the Troubled Asset Relief Program (TARP) for stabilizing the
financial markets and banking system. The Department of the Treasury
(Treasury) created CPP in October 2008 to stabilize the financial
system by providing capital to qualifying regulated financial
institutions through the purchase of senior preferred shares and
subordinated debentures.[Footnote 62] In return for its investment,
Treasury was to receive dividend or interest payments and warrants.
[Footnote 63] 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. At the time of the program's announced
establishment, nine major financial institutions--considered by federal
banking regulators and Treasury to be essential to the operation of the
financial system--agreed to participate in CPP.[Footnote 64] Together,
these institutions held about 55 percent of U.S. banking assets.
Banking regulators recommend program participants, which Treasury
selects, based on examination ratings and performance and may accept or
reject applications based on these factors and on mitigating
circumstances, such as confirmed private investment.
Funding:
On October 14, 2008, Treasury allocated $250 billion of the almost $700
billion for CPP but adjusted its allocation to $218 billion in March
2009. According to Treasury officials, this downward adjustment
reflected the estimated funding needs of the program based on
participation to date and the money it expected to receive from
participants repurchasing their preferred shares and subordinated debt.
As of September 25, 2009, Treasury had disbursed more than $204.6
billion (see table 9) and had received about $70.7 billion from
repurchases of preferred shares leaving $84.1 billion available for
future CPP funding, according to Treasury.
Table 9: Capital Investments Made through the Capital Purchase Program,
as of September 25, 2009:
Closing date of transaction: 10/28/2008;
Amount of CPP capital investment: $115,000,000,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 52.75%;
Number of qualified financial institutions receiving CPP capital: 8.
Closing date of transaction: 11/14/2008;
Amount of CPP capital investment: v33,561,409,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 68.15%;
Number of qualified financial institutions receiving CPP capital: 21.
Closing date of transaction: 11/21/2008;
Amount of CPP capital investment: $2,909,754,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 69.48%;
Number of qualified financial institutions receiving CPP capital: 23.
Closing date of transaction: 12/5/2008;
Amount of CPP capital investment: $3,835,635,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 71.24%;
Number of qualified financial institutions receiving CPP capital: 35.
Closing date of transaction: 12/12/2008;
Amount of CPP capital investment: $2,450,054,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 72.37%;
Number of qualified financial institutions receiving CPP capital: 28.
Closing date of transaction: 12/19/2008;
Amount of CPP capital investment: $2,791,950,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 73.65%;
Number of qualified financial institutions receiving CPP capital: 49.
Closing date of transaction: 12/23/2008;
Amount of CPP capital investment: $1,911,751,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 74.52%;
Number of qualified financial institutions receiving CPP capital: 43.
Closing date of transaction: 12/31/2008;
Amount of CPP capital investment: $15,078,947,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 81.44%;
Number of qualified financial institutions receiving CPP capital: 7.
Closing date of transaction: 1/9/2009;
Amount of CPP capital investment: $14,771,598,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 88.22%;
Number of qualified financial institutions receiving CPP capital: 43.
Closing date of transaction: 1/16/2009;
Amount of CPP capital investment: $1,479,938,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 88.89%;
Number of qualified financial institutions receiving CPP capital: 39.
Closing date of transaction: 1/23/2009;
Amount of CPP capital investment: $385,965,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 89.07%;
Number of qualified financial institutions receiving CPP capital: 23.
Closing date of transaction: 1/30/2009;
Amount of CPP capital investment: $1,151,218,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 89.6%;
Number of qualified financial institutions receiving CPP capital: 42.
Closing date of transaction: 2/6/2009;
Amount of CPP capital investment: $238,555,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 89.71%;
Number of qualified financial institutions receiving CPP capital: 28.
Closing date of transaction: 2/13/2009;
Amount of CPP capital investment: $429,069,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 89.91%;
Number of qualified financial institutions receiving CPP capital: 29.
Closing date of transaction: 2/20/2009;
Amount of CPP capital investment: $365,397,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 90.07%;
Number of qualified financial institutions receiving CPP capital: 23.
Closing date of transaction: 2/27/2009;
Amount of CPP capital investment: $394,906,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 90.26%;
Number of qualified financial institutions receiving CPP capital: 28.
Closing date of transaction: 3/6/2009;
Amount of CPP capital investment: $284,675,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 90.39%;
Number of qualified financial institutions receiving CPP capital: 22.
Closing date of transaction: 3/13/2009;
Amount of CPP capital investment: $1,455,160,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.05%;
Number of qualified financial institutions receiving CPP capital: 19.
Closing date of transaction: 3/20/2009;
Amount of CPP capital investment: $80,748,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.09%;
Number of qualified financial institutions receiving CPP capital: 10.
Closing date of transaction: 3/27/2009;
Amount of CPP capital investment: $192,958,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.18%;
Number of qualified financial institutions receiving CPP capital: 14.
Closing date of transaction: 4/3/2009;
Amount of CPP capital investment: $54,826,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.2%;
Number of qualified financial institutions receiving CPP capital: 10.
Closing date of transaction: 4/10/2009;
Amount of CPP capital investment: $22,790,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.21%;
Number of qualified financial institutions receiving CPP capital: 5.
Closing date of transaction: 4/17/2009;
Amount of CPP capital investment: $40,945,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.23%;
Number of qualified financial institutions receiving CPP capital: 6.
Closing date of transaction: 4/24/2009;
Amount of CPP capital investment: $121,846,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.29%;
Number of qualified financial institutions receiving CPP capital: 12.
Closing date of transaction: 5/1/2009;
Amount of CPP capital investment: $45,532,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.31%;
Number of qualified financial institutions receiving CPP capital: 7.
Closing date of transaction: 5/8/2009;
Amount of CPP capital investment: $42,019,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.33%;
Number of qualified financial institutions receiving CPP capital: 7.
Closing date of transaction: 5/15/2009;
Amount of CPP capital investment: $107,623,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.38%;
Number of qualified financial institutions receiving CPP capital: 14.
Closing date of transaction: 5/22/2009;
Amount of CPP capital investment: $108,333,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.43%;
Number of qualified financial institutions receiving CPP capital: 12.
Closing date of transaction: 5/29/2009;
Amount of CPP capital investment: $89,207,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.47%;
Number of qualified financial institutions receiving CPP capital: 8.
Closing date of transaction: 6/5/2009;
Amount of CPP capital investment: $40,269,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.49%;
Number of qualified financial institutions receiving CPP capital: 3.
Closing date of transaction: 6/12/2009;
Amount of CPP capital investment: $39,108,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.51%;
Number of qualified financial institutions receiving CPP capital: 7.
Closing date of transaction: 6/19/2009;
Amount of CPP capital investment: $84,705,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.54%;
Number of qualified financial institutions receiving CPP capital: 10.
Closing date of transaction: 6/26/2009;
Amount of CPP capital investment: $3,626,311,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 93.21%;
Number of qualified financial institutions receiving CPP capital: 16.
Closing date of transaction: 7/3/2009;
Amount of CPP capital investment: $0;
Cumulative percentage of allocated funds used for CPP capital
investment: 93.21%;
Number of qualified financial institutions receiving CPP capital: 0.
Closing date of transaction: 7/10/2009;
Amount of CPP capital investment: $963,669,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 93.65%;
Number of qualified financial institutions receiving CPP capital: 2.
Closing date of transaction: 7/17/2009;
Amount of CPP capital investment: $91,600,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 93.69%;
Number of qualified financial institutions receiving CPP capital: 6.
Closing date of transaction: 7/24/2009;
Amount of CPP capital investment: $87,655,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 93.73%;
Number of qualified financial institutions receiving CPP capital: 4.
Closing date of transaction: 7/31/2009;
Amount of CPP capital investment: $10,742,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 93.74%;
Number of qualified financial institutions receiving CPP capital: 2.
Closing date of transaction: 8/7/2009;
Amount of CPP capital investment: $70,236,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 93.77%;
Number of qualified financial institutions receiving CPP capital: 2.
Closing date of transaction: 8/14/2009;
Amount of CPP capital investment: $1,004,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 93.77%;
Number of qualified financial institutions receiving CPP capital: 1.
Closing date of transaction: 8/21/2009;
Amount of CPP capital investment: $9,000,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 93.77%;
Number of qualified financial institutions receiving CPP capital: 2.
Closing date of transaction: 8/28/2009;
Amount of CPP capital investment: $49,657,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 93.8%;
Number of qualified financial institutions receiving CPP capital: 4.
Closing date of transaction: 9/4/2009;
Amount of CPP capital investment: $1,697,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 93.8%;
Number of qualified financial institutions receiving CPP capital: 1.
Closing date of transaction: 9/11/2009;
Amount of CPP capital investment: $74,771,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 93.83%;
Number of qualified financial institutions receiving CPP capital: 5.
Closing date of transaction: 9/18/2009;
Amount of CPP capital investment: $15,976,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 93.84%;
Number of qualified financial institutions receiving CPP capital: 2.
Closing date of transaction: 9/25/2009;
Amount of CPP capital investment: $48,365,320;
Cumulative percentage of allocated funds used for CPP capital
investment: 93.86%;
Number of qualified financial institutions receiving CPP capital: 6.
Closing date of transaction: Total;
Amount of CPP capital investment: $204,617,573,320;
Cumulative percentage of allocated funds used for CPP capital
investment: 93.86%;
Number of qualified financial institutions receiving CPP capital:
685[A].
Sources: GAO analysis of Treasury and SEC (10Q) data.
[A] The total number of financial institutions was reduced by three
because SunTrust Banks, Inc. (SunTrust), Bank of America Corporation,
and Yadkin Valley Financial Corporation received two capital
investments under CPP. SunTrust received a partial capital investment
of $3.5 billion on November 14, 2008, and another of $1.35 billion on
December 31, 2008. Bank of America Corporation received $15 billion on
October 28, 2008, and, after merging with Merrill Lynch & Co., Inc. on
January 1, 2009, an additional $10 billion on January 9, 2008. Yadkin
Valley Financial Corporation received $36 million on January 16, 2009,
and another $13.3 million on July 24, 2009, after merging with American
Community Bancshares, Inc on April 17, 2009.
[End of table]
Status of Efforts:
Through CPP, Treasury had provided more than $204 billion in capital to
685 institutions as of September 25, 2009. These purchases ranged from
$301,000 to $25 billion per institution and represented about 94
percent of the $218 billion Treasury allocated for CPP. As of September
25, 2009, the types of institutions that received CPP capital varied in
size and included 280 publicly held institutions, 337 privately held
institutions, 1 mutual institution, 45 S-corporations, and 22 community
development financial institutions.[Footnote 65] These purchases
represented investments in state-chartered and national banks and bank
holding companies located in the District of Columbia, Puerto Rico, and
every state except Montana and Vermont. For a detailed listing of
financial institutions that received CPP funds as of September 25,
2009, see GAO-10-24SP.[Footnote 66] While the last application deadline
was May 14, 2009, for mutual institutions, on May 13, 2009, the
Secretary of the Treasury extended the CPP program to November 21,
2009, for all types of small banks. The program is starting to wind
down, with fewer than 115 applications under consideration by
regulators and fewer than 30 applications by Treasury as of September
18, 2009.
Treasury and the federal bank regulators continue to review
applications for CPP. According to Treasury, as of September 25, 2009,
it had received over 1,300 CPP applications (including approximately 10
under the small bank program) from the banking regulators, with fewer
than 30 awaiting decision by OFS's Investment Committee. For many
applications in this category, Treasury is awaiting updated information
from the regulators before taking the application to the Investment
Committee for a vote. The bank regulators also reported that they were
reviewing applications of fewer than 115 institutions plus more than 50
under the small bank program that had not yet been forwarded to
Treasury. Qualified financial institutions generally have 30 calendar
days after Treasury notifies them of preliminary approval for CPP
funding to submit investment agreements and related documentation. OFS
officials stated that more than 430 financial institutions that
received preliminary approval had withdrawn their CPP applications as
of September 25, 2009. Institutions withdrew their applications for a
variety of reasons, including the uncertainty surrounding future
program requirements, the legal cost to close transactions (for small
institutions), cost of warrants, and improving confidence in the
banking system that allowed them to raise capital in the private
markets.
In addition to outflows, Treasury had received about $6.7 billion in
dividend payments and interest payments from CPP participants as of
September 25, 2009. CPP participants repurchased about $70.7 billion in
preferred shares and paid another $2.9 billion to repurchase their
warrants and preferred stock received through the exercise of warrants.
Key Activities Under CPP:
* October 13, 2008: Consistent with conditions prescribed by the
Emergency Economic Stabilization Act of 2008 (the act), Treasury
notifies Congress that Treasury officials have determined that it would
be more efficient to purchase preferred shares issued by certain
financial institutions instead of purchasing mortgage-related assets.
* October 14, 2008: Treasury announces that it will make direct capital
investments in a broad array of qualifying financial institutions in
exchange for preferred stock and warrants through CPP. Also, Treasury
allocates $125 billion in purchases for the first nine financial
institutions deemed systemically significant by federal bank regulators
and Treasury. The nine large financial institutions agree to
participate in CPP, in part, to signal the importance of the program
for the system.
* October 14, 2008: Treasury provides a description of CPP terms for
investments in public financial institutions and issues the term sheet
for public institutions. The deadline for public institutions to submit
applications to their primary federal bank regulator is November 14,
2008.
* October 20, 2008: Treasury published in the Federal Register an
interim final rule to provide guidance on the executive compensation
provisions applicable to CPP participants.
* October 20, 2008: Treasury and the four federal banking agencies--the
Board of Governors of the Federal Reserve System, the Office of the
Comptroller of the Currency, the Office of Thrift Supervision, and the
Federal Deposit Insurance Corporation--issue application guidelines,
frequently asked questions, and standardized terms for making capital
investments in public financial institutions. The deadline for public
institutions to submit applications to their primary federal bank
regulator is November 14, 2008.
* October 28, 2008: Treasury settles the capital purchase transactions
with eight of the nine institutions participating in the first round of
CPP for a total of $115 billion.[Footnote 67]
* November 17, 2008: Treasury issues standardized terms for making
capital investments in privately held financial institutions. December
8, 2008, is the deadline for privately held institution to submit
applications to their primary federal bank regulator for CPP funds.
* January 14, 2009: Treasury issues standardized terms for making
capital investments in S-corporations and answers to frequently asked
questions for qualified financial institutions applying to CPP that are
S-corporations. The term sheet provides for issuances of debt instead
of preferred stock issued by certain other CPP participants. The
deadline for S-corporations to submit applications to their primary
federal bank regulator is February 17, 2009.
* February 17, 2009: Treasury publishes its first Monthly Lending and
Intermediation Snapshot with information from the top 21 financial
institutions participating in CPP.
* February 17, 2009: The American Recovery and Reinvestment Act of 2009
(ARRA) amends the Emergency Economic Stabilization Act of 2008 by
allowing financial institutions to repurchase or buy back their
preferred shares and warrants from Treasury at any time with the
approval of their primary federal regulator. Under the original terms
of CPP, financial institutions are prohibited from repurchasing in the
first 3 years unless they had completed a qualified equity offering.
* February 26, 2009: Treasury publishes frequently asked questions
addressing changes to CPP under ARRA.
* March 31, 2009: The first financial institutions begin repaying their
CPP capital investments (that is, repurchasing preferred shares) after
receiving approval from their primary federal banking regulator. Five
institutions pay $353 million to Treasury.
* April 7, 2009: Treasury issues three term sheets for qualifying
financial institutions applying to CPP that are mutual holding
companies. The deadline for mutual institutions to submit applications
to their primary federal bank regulator is May 7, 2009.
* April 14, 2009: Treasury releases term sheet for mutual banks
applying to CPP that do not have holding companies. The deadline for
mutual institutions to submit applications to their primary federal
bank regulator is May 14, 2009.
* April 22, 2009: Treasury announces the selection of three firms
(AllianceBernstein LP; FSI Group, LLC; and Piedmont Investment
Advisors, LLC) to serve as asset managers for CPP and other programs.
Treasury officials state that these managers would have a role in
helping ensure that institutions are honoring dividend payments and
stock repurchases requirements.
* May 13, 2009: The Treasury Secretary announces in a speech that
Treasury has taken additional actions under CPP to ensure that small
community banks and holding companies (qualifying financial
institutions with total assets less than $500 million) will have the
capital they needed to lend to creditworthy borrowers. Small banks have
until November 21, 2009, to apply to CPP under all term sheets.
* May 14, 2009: Treasury notifies six insurance companies that they
have received preliminary CPP funding approval. All insurance companies
complied with the requirements to participate in CPP under existing
term sheets, as these companies are organized as bank or thrift holding
companies and filed their CPP applications by the deadline date. As of
September 25, 2009, two of the six had been funded.
* June 1, 2009: Treasury releases its first CPP Monthly Lending Report,
which includes information on outstanding balances on consumer loans,
commercial loans, and total loans of all CPP participants.
* June 9, 2009: Treasury announces that 10 of the largest U.S.
financial institutions participating in CPP are eligible to complete
the repurchase process and repay about $68 billion, having obtained
regulatory consent to their repayment requests.
* June 10, 2009: Treasury adopts an interim rule to implement the
executive compensation and corporate governance provisions of the act,
as amended by ARRA.
* June 17, 2009: Ten of the largest U.S. bank holding companies--all
but one of which participated in the Supervisory Capital Assessment
Program exercise--repay about $68 billion in CPP capital investments to
Treasury.
* June 26, 2009: Treasury announces its policy with respect to warrant
repurchases and the disposition of warrants received in connection with
investments made under CPP. Also, frequently asked questions about
warrants and CPP are published.
* August 17, 2009: Treasury, in conjunction with bank regulators,
publishes the first Quarterly Capital Purchase Report of regulatory
financial data for CPP and non-CPP banks, thrifts, and bank holding
companies. It focuses on three broad categories: on-and off-balance
sheet items, performance ratios, and asset quality measures.
* December 31, 2009: Deadline for Treasury to end the approval process
for the additional funding of institutions under CPP and TARP unless
the Treasury Secretary extends it.
GAO's Recommendations and Treasury's Response:
Table 10: Treasury's Actions in Response to GAO Recommendations, as of
September 25, 2009:
Recommendations from the December 2, 2008, report:
GAO recommendations: 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;
Treasury actions responding to recommendations: Recommendations from
the December 2, 2008, report:
* Publishes a monthly bank lending survey of the 22 largest CPP
institutions to monitor their lending (including small business) and
intermediation activities; includes both financial data and
commentaries;
* In conjunction with federal bank regulators, Treasury publishes a
quarterly analysis of regulatory data for banks (call reports), thrifts
(thrift financial reports) and bank holding companies (Y-9C) for all
CPP reporting institutions;
* All federal bank regulators, except the Federal Reserve, have
developed examination polices and procedures to monitor CPP
participants for compliance with CPP agreements and TARP requirements;
* All reports are posted on Treasury's FinancialStability.gov Web site;
GAO assessment of Treasury's response: Implemented.
GAO recommendations: 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);
Treasury actions responding to recommendations: Recommendations from
the December 2, 2008, report:
* Named a permanent Chief Risk and Compliance Officer and uses
information sources such as Bloomberg, Securities and Exchange
Commission filings, press releases, and other information sources to
monitor dividend payments and stock repurchases;
* Hired three asset management firms to provide market advice about
investments in financial institutions and corporations participating in
TARP programs, and help monitor compliance with limitations on dividend
payments and stock repurchases; is also exploring software solutions
and other data resources to improve compliance monitoring;
* Publishes a monthly dividends and interest report detailing monthly
and cumulative dividends and interest payments received on TARP
investments, including CPP;
GAO assessment of Treasury's response: Partially implemented.
Recommendations from the January 30, 2009, report:
GAO recommendations: Expand the scope of planned monthly CPP surveys to
include collecting at least some information from all institutions
participating in the program;
Treasury actions responding to recommendations: Recommendations from
the December 2, 2008, report:
* Publishes a monthly survey of lending at all CPP institutions
includes data on loans outstanding to consumers and commercial entities
and total loans outstanding;
GAO assessment of Treasury's response: Implemented.
GAO recommendations: Ensure that future CPP agreements include a
mechanism that will better enable Treasury to track the use of the
capital infusions and seek to obtain similar information from existing
CPP participants;
Treasury actions responding to recommendations: Recommendations from
the December 2, 2008, report: See responses above to implemented
recommendations;
GAO assessment of Treasury's response: Implemented.
GAO recommendations: Establish a process to ensure compliance with all
CPP requirements, including those associated with limitations on
dividends and stock repurchase restrictions;
Treasury actions responding to recommendations: Recommendations from
the December 2, 2008, report:
* Treasury uses its custodian bank--Bank of New York Mellon--to collect
information from a variety of informal sources, such as Securities and
Exchange Commission filings and press releases, Bloomberg, and
information provided by CPP participants and refer instances of
noncompliance to the Chief Risk and Compliance Office for action;
* New executive compensation rule requires the establishment of the
Office of the Special Master for TARP Executive Compensation (Special
Master) to review compensation plans for the most highly compensated
employees of recipients of exceptional assistance under TARP and review
payments of bonuses, retention awards, and other compensation for the
senior executive officers and 20 next highly compensated employees of
TARP recipients before February 17, 2009, and where applicable,
negotiate reimbursements (interim rule);
* The interim rule also establishes compliance reporting and record-
keeping requirements for executive compensation and corporate
governance standards;
* All federal bank regulators, except the Federal Reserve, have
developed examination polices and procedures to monitor CPP
participants for compliance with CPP and TARP requirements;
GAO assessment of Treasury's response: Partially implemented.
Recommendations from June 17, 2009, report:
GAO recommendations: In consultation with the Chairmen of the Federal
Deposit Insurance Corporation and the Federal Reserve, the Comptroller
of the Currency, and the Acting Director of the Office of Thrift
Supervision, ensure consideration of generally consistent criteria by
the primary federal regulators when considering repurchase decisions
under TARP;
Treasury actions responding to recommendations: Believes it is unable
to implement recommendation because Treasury cannot dictate criteria
that federal bank regulators should apply in making repurchase
decisions under TARP;
GAO assessment of Treasury's response: Not implemented, we continue to
believe that Treasury should work with the Chairmen of the FDIC and
Federal Reserve, the Comptroller of the Currency, and the Acting
Director of the OTS to ensure consideration of generally consistent
criteria by the primary federal regulators when considering repurchase
decisions under TARP. While we understand that the final repurchase
decision rests with a participant's primary federal regulator, Treasury
has a responsibility to ensure that these regulators are applying
generally consistent criteria when reviewing TARP participants requests
to repurchase their preferred shares. Rather than dictating criteria,
we are recommending that Treasury engage in a dialogue to help ensure
that the criteria being used are generally consistent.
Source: GAO and analysis of OFS, Treasury, information.
[End of table]
[End of section]
Appendix III: Capital Assistance Program:
Program Overview:
In February 2009, the Department of the Treasury (Treasury) announced
the Financial Stability Plan, which outlined a set of measures to help
address the financial crisis and restore confidence in our financial
and housing markets by restarting the flow of credit to consumers and
businesses, strengthening financial institutions, and providing aid to
homeowners and small businesses. The plan announced six key components,
one of which was the Capital Assistance Program (CAP). CAP is designed
to help ensure that qualified financial institutions have sufficient
capital to withstand severe economic challenges. These institutions
must meet eligibility requirements that will be substantially similar
to those used for Capital Purchase Program (CPP). A key component of
CAP is the Supervisory Capital Assessment Program (SCAP), which the 19
largest U.S. bank holding companies (those with risk-weighted assets of
$100 billion or more as of December 31, 2008) were required to
participate in.[Footnote 68] Specifically, federal bank regulators, led
by the Board of Governors of the Federal Reserve System, conducted
capital assessments or "stress tests" to determine whether the largest
bank holding companies have enough capital to absorb losses and
continue lending even if conditions were worse than expected between
December 2008 and December 2010.[Footnote 69] Institutions deemed not
to have sufficient capital were given 6 months to raise private capital
or to access capital through CAP. Institutions with less than $100
billion in risk-weighted assets were not required to complete a stress
test but are also eligible to obtain capital under CAP. In a process
similar to the one used for CPP, institutions interested in CAP must
submit applications to their primary federal banking regulators by
November 9, 2009.[Footnote 70] The regulators are to submit
recommendations to Treasury regarding an applicant's viability.
In addition, as part of the application process, institutions must
submit a plan showing how they intend to use this capital to support
their lending activities and how the assistance will impact their
lending compared to what would have been possible without it.
Participating institutions under CAP will be required to submit to
Treasury monthly reports--similar to those for CPP--on their lending
activities.
Funding:
To date, Treasury has not allocated any funding to CAP.
Status of Efforts:
The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC),
and the Office of the Comptroller of the Currency (OCC) conducted the
stress test in the spring of 2009. More than 150 examiners,
supervisors, accountants, economists, and other specialists from these
banking agencies participated in the supervisory process. On May 7,
2009, the Federal Reserve announced the results of SCAP. SCAP results
showed that 10 of the 19 bank holding companies needed to raise
approximately $75 billion in additional capital. The 10 institutions
that needed to raise additional capital filed their capital plans with
the Federal Reserve by the June 8, 2009, deadline.
Federal banking regulators said that as of September 18, 2009, they had
received 6 CAP applications from institutions wanting to participate in
the program. Regulators noted that they had forwarded no applications
to Treasury for funding consideration. Therefore, no funds have been
disbursed under CAP, according to Treasury officials.
Key Activities under CAP:
* February 10, 2009: CAP was announced as a key component of Treasury's
Financial Stability Plan.
* February 25, 2009: Treasury announces the terms and conditions for
CAP.
* February 25, 2009: Federal bank regulatory agencies announce that
they would start conducting forward-looking economic assessments of
large U.S. banking holding companies. Also, the three economic
assumptions underlying the stress test are published.
* April 24, 2009: The Federal Reserve publishes details of the stress
test process and methodologies employed by the federal banking
supervisors in their forward-looking capital assessment of large U.S.
bank holding companies.
* May 7, 2009: The Federal Reserve and Treasury announce the results of
the stress test under CAP. Also, the Treasury Secretary releases a
statement announcing his hopes that the release of the results will
lead to increased bank lending.
* May 7, 2009: Treasury publishes frequently asked questions on CPP
repayment and CAP.
* June 1, 2009: The Federal Reserve announces the criteria it plans to
use to evaluate applications to repurchase Treasury's capital
investments of the 19 institutions that underwent stress tests.
* June 8, 2009: The deadline for bank holding companies that need to
raise capital under the stress test to file their capital plan with the
Federal Reserve.
* November 9, 2009: The deadline for bank holding companies to
implement their capital plans and to apply for and fund transactions.
GAO's Recommendation and the Federal Reserve's Response:
Table 11: Federal Reserve's Response to GAO's Recommendation, as of
September 25, 2009:
Recommendations from June 17, 2009, report:
GAO recommendation: To help improve the transparency of CAP--in
particular the stress tests results--we recommend that the Director of
Supervision and Regulation of the Federal Reserve consider periodically
disclosing to the public the aggregate performance of the 19 bank
holding companies against the more adverse scenario forecast numbers
for the duration of the 2-year forecast period and whether or not the
scenario needs to be revised. At a minimum, the Federal Reserve should
provide the aggregate performance data to the Office of Financial
Stability (OFS) program staff for any of the 19 institutions
participating in CAP or CPP;
Federal Reserve's response to recommendation: Recommendations from June
17, 2009, report: The Senior Advisor to the Director of the Division of
Banking Supervision and Regulation expressed concern that our
recommendation to consider periodically disclosing aggregate
information to the public on the performance of the 19 U.S. bank
holding companies against the more adverse scenario would be
operationally difficult and potentially misleading. Specifically, the
official said the SCAP loss estimates were developed as aggregate 2-
year estimates, without attempting to forecast the quarter-to-quarter
path of such losses over the 2009 to 2010 period. Further, the official
expressed concern that the size and character of the bank holding
companies' on-and off-balance sheet exposures may change materially
over the 2-year period and that the Federal Reserve never intended that
the one-time SCAP estimates be used as a tool for measuring U.S. bank
holding company performance during the 2009 to 2010 period;
GAO assessment of Federal Reserve's response: Recommendations from June
17, 2009, report: Not implemented. We recognize that updating the
capital assessment would pose some operational challenges for the
Federal Reserve. Nonetheless, given the dynamic economic environment,
we see great value in periodically measuring and reporting U.S. bank
holding company performance against the adverse scenario and the extent
to which actual economic conditions compared to assumptions made under
the assessment's "adverse scenario." Although this would periodically
require additional calculations, we believe this analysis would provide
useful trend information on the aggregate health of these important
institutions. As we previously stated, without such analysis, the
public will not have reliable information that can be used to gauge the
accuracy of the stress test projections on a more detailed basis than
what has been disclosed in the SCAP papers. Further, it could counter
any adverse affect of any selective reporting by individual
institutions. Finally, such periodic reporting would be useful in the
measurement of the effectiveness of SCAP and CAP.
Source: GAO and analysis of OFS, Treasury, information.
[End of table]
[End of section]
Appendix IV: Targeted Investment Program:
Program Overview:
The Targeted Investment Program (TIP) was designed to prevent a loss of
confidence in financial institutions that could (1) result in
significant market disruptions, (2) threatened the financial strength
of similarly situated financial institutions, (3) impair broader
financial markets, and (4) undermine the overall economy. The
Department of the Treasury (Treasury) determines the forms, terms, and
conditions of any investments made under this program and considers
institutions for approval on a case-by-case basis based on the threats
posed by the potential destabilization of the institution, the risk
caused by a loss of confidence in the institutions, and the
institution's importance to the nation's economy. Treasury may, on a
case-by-case basis, use this program in coordination with a broader
guarantee involving other agencies of the federal government. Treasury
requires any institution participating in this program to provide
Treasury with warrants or alternative considerations, as necessary, to
minimize the long-term costs and maximize the benefits to the taxpayers
in accordance with the Emergency Economic Stabilization Act of 2008
(the act). Institutions that participate in TIP are subject to
stringent regulations regarding executive compensation, lobbying
expenses, and other corporate governance requirements. Only two
institutions have participated in the TIP program: Bank of America and
Citigroup.
Funding:
Table 12: Status of TIP Funds as of September 25, 2009 (Dollars in
billions):
Institution: Bank of America;
Apportioned: $20;
Amount disbursed: $20.
Institution: Citigroup;
Apportioned: $20;
Amount disbursed: $20.
Institution: Total;
Apportioned: $40;
Amount disbursed: $40.
Source: GAO presentation of OFS, Treasury, data (unaudited).
[End of table]
Status of Efforts:
No new applicants have applied for TIP assistance since Bank of America
received TIP assistance in early 2009. As of September 25, 2009, Bank
of America and Citigroup have not repurchased their preferred shares or
warrants. On July 30, 2009, Citigroup exchanged its fixed-rate
cumulative perpetual stock ($20 billion) for trust preferred
securities. This exchange was part of Citigroup's overall agreement
with Treasury to exchange all of Treasury's investments in Citigroup.
It included the exchange of the Capital Purchase Program's preferred
shares of $25 billion for common stock in Citigroup, which essentially
gave Treasury a common equity interest in the bank holding company.
Key Activities:
* December 31, 2008: Treasury enters into an agreement with Citigroup
to purchase $20 billion in Fixed Rate Cumulative Perpetual Preferred
Stock and a warrant to purchase common stock.
* January 15, 2009: Treasury enters into an agreement with Bank of
America Corporation to purchase $20 billion in preferred stock and a
warrant to purchase common stock.
* February 27, 2009: Citigroup announces plans to undertake a series of
transactions, involving the exchange of privately and publicly held
preferred securities and trust securities for common stock and the
exchange of up to $25 billion of Treasury CPP senior preferred.
* May 7, 2009: Citigroup announces that it would expand its planned
exchange of preferred securities and trust preferred securities held by
public and private investors (other than Treasury) for common stock
from $27.5 billon to $33 billion following the results of the stress
test.
* June 9, 2009: Treasury and Citigroup finalize their exchange
agreement and Treasury agree to convert up to $25 billion of the
Treasury CPP senior preferred shares for interim securities and
warrants and its remaining preferred securities acquired in connection
with assistance provided to Citigroup under the TIP and AGP programs
for trust preferred securities so that the institution could strengthen
its capital structure by increasing tangible common equity.
* July 23, 2009: Citigroup announces completion of the exchange of
$12.5 billion of the Treasury CPP senior preferred and $12.5 billion of
privately held convertible preferred securities for interim securities
and warrants.
* July 30, 2009: Treasury announces the final results of its offer to
exchange publicly held preferred securities and trust securities, as
well as the exchange by Treasury of its remaining $12.5 billion of
Treasury CPP senior preferred shares outstanding for interim securities
and warrants.
* September 3, 2009: Citigroup announces the mandatory conservation of
the interim securities issued in the exchange offers into common stock,
and cancellation of the warrants, in accordance with the terms of the
exchange offers.
[End of section]
Appendix V: Systemically Significant Failing Institutions Program:
Program Overview:
The Systemically Significant Failing Institutions (SSFI) program was
established to provide stability and prevent disruptions to financial
markets from the failure of institutions that are critical to the
functioning of the U.S. financial system.
Funding:
Table 13: Status of SSFI Funds, as of September 25, 2009 (Dollars in
billions):
Institution: American International Group, Inc.;
Apportioned: $70;
Amount disbursed: $43.
Source: GAO presentation of OFS, Treasury, data (unaudited).
[End of table]
Status of Efforts:
The only participating institution was American International Group,
Inc. (AIG). Federal assistance to AIG is a joint effort by the
Department of the Treasury (Treasury) and the Board of Governors of the
Federal Reserve System and Federal Reserve Banks (Federal Reserve). We
recently issued a report on the status of this assistance.[Footnote 71]
Key Activities under SSFI:
* November 10, 2008: Treasury announces plans to use its SSFI program
to purchase $40 billion in AIG preferred shares.
* November 25, 2008: AIG enters into an agreement with Treasury, which
agrees to purchase $40 billion of AIG's fixed-rate cumulative perpetual
preferred stock (Series D) and a warrant to purchase approximately 2
percent of the then issued shares of AIG's common stock to Treasury.
* April 17, 2009: AIG and Treasury enter into an agreement in which
Treasury agrees to exchange its $40 billion of AIG's Series D fixed-
rate cumulative perpetual preferred stock for $41.6 billion of AIG's
Series E fixed-rate noncumulative perpetual preferred shares. Also,
Treasury provided a $29.8 billion equity capital facility to AIG, which
then issued to Treasury 300,000 shares of fixed-rate noncumulative
perpetual preferred stock (Series F) and a warrant to purchase up to
3,000 shares of AIG's common stock.
GAO's Recommendations and Treasury's Response:
Table 14: Treasury's Response to GAO's Recommendation, as of September
25, 2009:
Recommendations from March 31, 2009, report:
GAO recommendation: Require that American International Group, Inc.
(AIG) seek concessions from stakeholders, such as management,
employees, and counterparties, including seeking to renegotiate
existing contracts, as appropriate, as it finalizes the agreement for
additional assistance;
Treasury's response to recommendation: [Empty];
GAO assessment of Treasury's response: Closed, not implemented.
Source: GAO and analysis of OFS, Treasury, information.
[End of table]
[End of section]
Appendix VI: Asset Guarantee Program:
Program Overview:
Under the Asset Guarantee Program (AGP), the Department of the Treasury
(Treasury) provides federal government assurances for assets held by
financial institutions that are deemed critical to the functioning of
the U.S. financial system. The goal of AGP is to encourage investors to
keep funds in the institutions. According to Treasury, placing
guarantees, or assurances, against distressed or illiquid assets was
viewed as another way to help stabilize the financial system.
In implementing AGP, Treasury collects a premium, deliverable in a form
deemed appropriate by the Treasury Secretary. As required by the
statute, an actuarial analysis is used to ensure that the expected
value of the premium is no less than the expected value of the losses
to TARP from the guarantee. The U.S. government would also provide a
set of portfolio management guidelines to which the institution must
adhere for the guaranteed portfolio.
Funding:
Table 15: Status of Asset Guarantee Program Funding, as of September
25, 2009:
Institution: Citigroup;
Apportioned: n/a;
Guarantee Limit: $5 billion.
Source: GAO presentation of OFS, Treasury, data (unaudited).
[End of table]
Status of Efforts:
The set of insured assets was first designated by Citigroup and
submitted to Treasury for approval. In accordance with section 102(a),
assets to be guaranteed must have been originated before March 14,
2008. The program is meant only for systemically significant
institutions and can be used in coordination with other programs.
Since early 2009, no new participants have applied to the AGP program.
Bank of America withdrew from the program and in September 2009
negotiated a termination fee of $425 million that was paid to the
Federal Reserve, the Federal Deposit Insurance Corporation, and
Treasury. Thus, as of October 1, 2009, Citigroup is the only
institution participating in AGP. On January 15, 2009, Citigroup issued
preferred shares to the Treasury and the Federal Deposit Insurance
Corporation (FDIC), and a warrant to Treasury in exchange for $301
billion of loss protection on a specified pool of Citigroup assets. As
a result of receipt of principal repayments and charge-offs, the total
asset pool has declined by approximately $35 billion from the original
$301 billion to approximately $266.4 billion. As part of a series of
exchange offers undertaken by Citigroup in July 2009, the preferred
shares issued to Treasury and FDIC for Citigroup's participation in AGP
were exchanged for new Citigroup trust preferred securities.
Key Activities under AGP:
* January 15, 2009: Citigroup enters into an agreement with the
Treasury, FDIC and the FRBNY to guarantee losses arising on a $301
billion portfolio of Citigroup assets. As consideration for the loss-
sharing agreement, Citigroup issues non-voting perpetual, cumulative
preferred stock and a warrant to the Treasury.
* January 16, 2009: Bank of America Corporation enters into a term
sheet (Term Sheet) with the Treasury, FDIC, and the Board of Governors
of the Federal Reserve System, in which the agencies agreed in
principle to guarantee losses arising on a $118 billion portfolio of
Bank of America Corporation assets.
* May 6, 2009: Bank of America Corporation notifies the Treasury, FDIC,
and the Federal Reserve of its plan to terminate negotiations with
respect to the loss sharing guarantee program.
* July 30, 2009: Treasury exchanges all of its Fixed Rate Cumulative
Perpetual Stock received as premium under the Citigroup AGP agreement,
"dollar for dollar' for Trust Preferred Securities.
* September 21, 2009: Bank of America announces that it has reached an
agreement to pay a total of $425 million to the USG in connection with
the termination of the Term Sheet, which is equal to: (a) the out-of-
pocket expenses of the USG in negotiating and entering into the Term
Sheet and the negotiations concerning the definitive documentation,
consisting of the expenses of its advisors; and (b) the fee that would
have been payable under the Term Sheet but pro-rated for the period
commencing on January 16, 2009, and ending on May 6, 2009, and adjusted
for certain exclusions from the asset pool.
[End of section]
Appendix VII: Consumer and Business Lending Initiative:
Program Overview:
The Consumer and Business Lending Initiative includes the Department of
the Treasury's (Treasury) role in the Board of Governors of the Federal
Reserve System's and the Federal Reserve Bank of New York's (Federal
Reserve) Term Asset-Backed Securities Loan Facility (TALF) and
Treasury's plan to directly purchase securities backed by SBA-
guaranteed small business loans.[Footnote 72] TALF--a Federal Reserve
Bank of New York (FRBNY) credit facility supported by a backstop of $20
billion in the Troubled Asset Relief Program (TARP) funds from
Treasury--was announced by the Federal Reserve in November 2008.
[Footnote 73] The goal of the program is to provide up to $200 billion
in low-cost financing for investors to purchase a variety of consumer,
small business, and commercial mortgage securitizations with the goal
of unfreezing securitization markets and increasing credit access for
consumers and small businesses. [Footnote 74] Also under the
initiative, Treasury anticipates purchasing securities backed by SBA
7(a) guaranteed loans and securities backed by SBA 504 loan guarantees
to jumpstart securitization and credit markets for small businesses
though it had not purchased any SBA-backed securities as of September
2009.[Footnote 75]
Funding:
Table 16: Status of TARP Funds for the Consumer and Business Lending
Initiative, as of September 25, 2009:
Program: TALF;
Apportioned: $20.00;
Disbursed: $0.10[A].
Program: Small Business 7(a) loans[B];
Apportioned: $3.09;
Disbursed: $0.00.
Program: Small Business 504 loans;
Apportioned: $0;
Disbursed: $0.
Program: Total;
Apportioned: $23.09;
Disbursed: $0.1.
Source: GAO presentation of OFS, Treasury, data (unaudited).
[A] Initial funding of $100 million on March 25, 2009.
[B] Treasury allocated $15 billion of TARP funds to directly purchase
securities based on 7(a) and 504 small business loans guaranteed by
SBA.
[End of table]
Status of Efforts:
Between March 2009 and September 2009, approximately $51.7 billion in
TALF funds were requested. Table 17 provides a summary of monthly loan
requests by asset class.
Table 17: Amount of TALF Loans Requested by Asset Class, from March
through September 2009 (Dollars in millions):
Loan Type: Auto;
March: $1,902;
April: $811;
May: $2,185;
June: $3,307;
July: $2,831;
August: $555;
September: $1,160;
Total by loan type: $12,751.
Loan Type: Credit card;
March: $2,805;
April: $897;
May: $5,525;
June: $6,223;
July: $1,459;
August: $2,575;
September: $4,399;
Total by loan type: $23,882.
Loan Type: Student loan;
March: 0;
April: 0;
May: $2,347;
June: $228;
July: $987;
August: $2,450;
September: $180;
Total by loan type: $6,192.
Loan Type: Small business;
March: 0;
April: 0;
May: $86;
June: $81;
July: $102;
August: $149;
September: $162;
Total by loan type: $581.
Loan Type: Equipment;
March: 0;
April: 0;
May: $456;
June: $591;
July: 0;
August: 0;
September: $111;
Total by loan type: $1,157.
Loan Type: Insurance premium finance;
March: 0;
April: 0;
May: 0;
June: $529;
July: 0;
August: 0;
September: $530;
Total by loan type: $1,058.
Loan Type: Floorplan;
March: 0;
April: 0;
May: 0;
June: 0;
July: 0;
August: $1,039;
September: 0;
Total by loan type: $1,039.
Loan Type: Servicing advances;
March: 0;
April: 0;
May: 0;
June: $495;
July: $34;
August: $107;
September: 0;
Total by loan type: $636.
Loan Type: Commercial mortgage-backed securities[A];
March: [Empty];
April: [Empty];
May: [Empty];
June: 0;
July: $668;
August: $2,283;
September: $1402;
Total by loan type: $4,354.
Loan Type: Total;
March: $4,707;
April: $1,708;
May: $10,600;
June: $11,453;
July: $6,081;
August: $9,160;
September: $7,943;
Total by loan type: $51,652.
Source: GAO analysis of information available on FRBNY's Web site.
Note: Numbers may not add due to rounding.
[A] This total reflects loan requests against legacy CMBS collateral,
no newly issued CMBS collateral has yet been pledged.
[End of table]
Key Activities under Consumer and Business Lending Initiative:
* November 25, 2008: The Federal Reserve announces TALF, agreeing to
lend up to $200 billion on a nonrecourse basis to holders of newly
issued AAA-rated asset-backed securities (ABS) backed by credit cards,
auto loans, student loans, and small business loans guaranteed by the
SBA.
* February 10, 2009: As part of the Financial Stability Plan, the
Federal Reserve, FRBNY, and Treasury announce a willingness to consider
expanding the size of the TALF to $1 trillion over the life of the
program.
* March 3, 2009: The agencies launch the TALF program, and the first
subscription occurs.
* March 19, 2009: The agencies expand the range of eligible collateral
to include asset-backed securities backed by mortgage servicing
advances, business equipment loans or leases, floorplan loans, and
leases of vehicle fleets. They also announce an intention to expand the
list of eligible collateral to include previously issued securities--so
called "legacy securities"--as a complement to the Public-Private
Investment Program (PPIP).
* May 1, 2009: The Federal Reserve announces that two new asset classes
are eligible for TALF funding: newly-issued commercial mortgage-backed
securities (CMBS) and ABS backed by insurance premium finance loans.
* May 19, 2009: The Federal Reserve announces that certain high-quality
legacy CMBS are eligible for TALF funding.
* June 2, 2009: Aggregate loan requests for the program reach peak
levels for consumer and business ABS.
* July 16, 2009: The first legacy CMBS loan requests are submitted to
TALF.
* August 17, 2009: The Federal Reserve and Treasury jointly announce
TALF's extension for ABS and legacy CMBS collateral through March 2010,
and through June 2010 for newly-issued CMBS collateral. Also, the
Federal Reserve states that it does not anticipate further additions to
the eligible asset classes.
* September 1, 2009: FRBNY approves four non-primary dealers to
supplement the 18 primary dealers that interface between FRBNY and TALF
borrowers.[Footnote 76]
[End of section]
Appendix VIII: The Public-Private Investment Program:
Program Overview:
The Department of the Treasury (Treasury)--with assistance from the
Board of Governors of the Federal Reserve System and the Federal
Reserve Bank of New York (Federal Reserve) and the Federal Deposit
Insurance Corporation (FDIC)--designed the Public-Private Investment
Program (PPIP) to lessen the impact of legacy assets on balance sheets
and thereby improve consumer and business lending. PPIP has two
distinct components: the Legacy Securities Program and the Legacy Loans
Program. Under the Legacy Securities Program, commercial mortgage-
backed securities and non-agency residential mortgage-backed securities
will be purchased and managed by fund managers overseeing public-
private investment funds. According to Treasury, in the course of
prequalifying nine fund managers, Treasury vetted each of them for
their investment strategy--primarily long-term buy and hold. Public-
private investment funds will raise equity capital from private sector
investors and receive matching equity funds and secured nonrecourse
loans from Treasury.[Footnote 77] The Legacy Loans Program is designed
to encourage the purchase of troubled and illiquid loans from FDIC-
insured banks and thrifts. FDIC will provide debt guarantees and
Treasury will provide equity co-investment to private funds purchasing
such loans through an auction. FDIC will oversee the new funds. FDIC
held a pilot sale of receivership assets to test the funding mechanism
contemplated by the Legacy Loans Program, and continues to develop the
program should it be needed in the future.
Funding:
PPIP has not disbursed any of its $100 billion TARP allocation as of
September 25, 2009, (see table 18).
Table 18: Status of TARP Funds, as of September 25, 2009 (Dollars in
billions):
Program: Public-Private Investment Program;
Apportioned: $32.0;
Disbursed: $0.0.
Program: Total;
Apportioned: $32.0;
Disbursed: $0.0.
Source: GAO presentation of OFS, Treasury, data (unaudited).
[End of table]
Status of Efforts:
For the Legacy Securities Program, nine fund managers have been
prequalified, and as of October 5, 2009, Treasury officials stated that
five fund mangers had raised the requisite capital to receive matching
funds and leverage from Treasury--though no investments have yet been
made. FDIC recently tested a funding mechanism based on the legacy loan
program model, but agency officials are still assessing the outcome.
Treasury, in consultation with the Federal Reserve, needs to make a
systemic risk determination for the legacy loans program to be
implemented, according to FDIC officials.
Key Activities:
* March 23, 2009: Treasury and FDIC officials release the initial
outlines of PPIP.
* March 26, 2009: FDIC announces a comment period for the Legacy Loan
Program.
* April 24, 2009: Private asset managers submit applications to
Treasury as part of the Legacy Securities Program selection process.
* June 3, 2009: FDIC announces that the Legacy Loan Program is put on
hold. FDIC officials state that financial institutions have been able
to raise capital without selling troubled assets through the Legacy
Loan Program.
* July 8, 2009: Treasury preapproves nine fund managers to operate
public-private investment funds for the Legacy Securities Program. Fund
managers select ten small-, veteran-, minority-, and women-owned
businesses as partners.
* July 31, 2009: FDIC announces a model funding mechanism based on the
Legacy Loan Program for a test sale of receivership assets.
* September 25, 2009: Treasury officials state that two of the nine
prequalified fund managers have raised at least the required minimum of
$500 million each to begin investing in legacy securities, though no
investments have yet been made.
* October 5, 2009: Treasury officials state that an additional three of
the nine prequalified fund managers have raised at least the required
minimum of $500 million each to begin investing in legacy securities,
though no investments have yet been made.
[End of section]
Appendix IX: Auto Industry Financing Program:
Program Overview:
The Department of the Treasury (Treasury) established the Automotive
Industry Financing Program (AIFP) in December 2008 to help stabilize
the U.S. automotive industry and avoid disruptions that would pose
systemic risk to the nation's economy. Under this program, Treasury has
authorized a total of about $81.1 billion of Troubled Asset Relief
Program (TARP) funds to help support automakers, automotive suppliers,
consumers, and automobile finance companies as of September 25, 2009.
[Footnote 78] A sizeable amount of funding has been to support the
restructuring of Chrysler Group LLC (Chrysler) and General Motors
Company (GM).[Footnote 79] The AIFP consists of the following four
components:
* Funding to Support Automakers during Restructuring. Treasury has
provided financial assistance to Chrysler and GM to support their
restructuring in an attempt to return to profitability. The assistance
was provided in loans and equity investments in the companies.
* Auto Supplier Support Program. Under this component of the program,
Chrysler and GM received funding for the purpose of ensuring payment to
suppliers. The program is designed to ensure that automakers receive
the parts and components they need to manufacture vehicles and that
suppliers have access to credit from lenders. The funding provided to
Chrysler and GM in this program is in the form of a debt obligation.
* Warranty Commitment Program. The program was designed to mitigate
consumer uncertainty about purchasing vehicles from the restructuring
automakers by providing funding to guarantee the warranties on new
vehicles purchased from participating manufacturers that were
undergoing restructuring. The funds provided to the companies
ultimately were not needed, because both companies were able to
continue to honor consumer warranties.
* Funding to Support Automotive Finance Companies. Treasury has
provided funding to support Chrysler Financial and GMAC Inc. (GMAC),
financial services companies whose business includes providing consumer
financing for vehicle purchases and dealer financing for inventory.
Treasury provided Chrysler Financial with a term loan to support retail
loan originations. Chrysler Financial is essentially winding down its
operations, and GMAC has agreed to provide Chrysler customers and
dealers with financing for retail and wholesale purchases. Treasury
purchased preferred membership stock with warrants and common equity
interest in GMAC--which includes funding to help support retail and
wholesale purchases for Chrysler. To provide strategic guidance for
AIFP and to advise the President and the Secretary of the Treasury on
issues impacting the financial health of the industry, the White House
established the Presidential Task Force on the Auto Industry. Treasury
also hired staff with expertise in the financial industry to help
oversee the assistance.
Funding:
Table 19: TARP Funding Authorized for the Auto Industry and Payments
Made, as of September 25, 2009 (Dollars in billions):
Company: Chrysler;
Description of funding: Loans to Chrysler for general business
purposes;
Authorized amount: $12.5;
Payments: $0.055[A];
Amount and form of future repayments: $7.1 billion will be repaid as a
term loan, including $5.1 billion to be repaid within 8 years and $2
billion to be repaid within 2.5 years. Treasury also received a 9.85
percent equity share in the new company.
Company: Chrysler;
Description of funding: Supplier Support Program;
Authorized amount: $1.0;
Payments: $0.002[B];
Amount and form of future repayments: Amounts provided to Chrysler are
due to be repaid by April 2010.
Company: Chrysler;
Description of funding: Warranty Commitment Program;
Authorized amount: $0.3;
Payments: $0.3;
Amount and form of future repayments: All funds have been repaid.
Company: Chrysler;
Subtotals;
Authorized amount: $13.8;
Payments: $0.36.
Company: General Motors;
Description of funding: Loans to GM for general business purposes;
Authorized amount: $49.5;
Payments: $0.144[C];
Amount and form of future repayments: $6.7 will be repaid as a term
loan. Treasury also received $2.1 billion in preferred stock, and 61
percent equity in the new company. Treasury also has $986 million debt
in the old GM (Motors Liquidation Corp.), which it does not expect to
be repaid.
Company: General Motors;
Description of funding: Supplier Support Program;
Authorized amount: $2.5;
Payments: $0.001[D];
Amount and form of future repayments: Amounts provided to GM are due to
be repaid by April 2010.
Company: General Motors;
Description of funding: Warranty Commitment Program;
Authorized amount: $0.4;
Payments: $0.4;
Amount and form of future repayments: All funds have been repaid.
Company: General Motors;
Description of funding: Loan to participate in GMAC rights offering;
Authorized amount:$ 0.884;
Payments: 0;
Amount and form of future repayments: Treasury exchanged this loan for
a portion of GM's equity in GMAC. As a result, Treasury holds a 35.4
percent common equity interest in GMAC. The GM loan was terminated.
Company: General Motors;
Subtotals;
Authorized amount: $53.3;
Payments: $0.55.
Company: Chrysler Financial;
Description of funding: Loan funded through Chrysler LB Receivables
Trust;
Authorized amount: $1.5;
Payments: $1.51;
Amount and form of future repayments: Loan repaid in full plus $7.4
million in interest.
Company: GMAC;
Description of funding: Preferred stock with exercised warrants;
Authorized amount: $12.5;
Payments: $0.16[E];
Amount and form of future repayments: Treasury may convert its
preferred shares to common shares upon specific events such as public
offerings.
Totals:
Authorized amount: $81.1;
Payments: $2.57.
Source: GAO presentation of OFS, Treasury, data (unaudited).
[A] Chrysler has paid $55.2 million in interest on the loans.
[B] Chrysler has paid $2.3 million in interest on the amount it
borrowed under the Supplier Support Program.
[C] GM has paid $144 million in interest on the loans.
[D] GM has paid $1 million in interest on the amount it borrowed under
the Supplier Support Program.
[E] GMAC has paid $160 million in dividends.
[End of table]
Key Activities under AIFP:
Since December 2008, about $81.1 billion in AIFP funds have been
authorized.[Footnote 80] Below are key developments in the program.
* December 19, 2008: Treasury announces the creation of AIFP using TARP
funds to stabilize the U.S. automotive industry and avoid disruptions
that would pose systemic risk to the nation's economy.
* December 29, 2008: Treasury purchases $5 billion in preferred stock
with exercised warrants in GMAC LLC.
* December 31, 2008: Treasury provides a $13.4 billion loan to GM to
assist the company's restructuring.
* January 2, 2009: Treasury provides a $4 billion loan to Chrysler and
a $1.5 billion loan to Chrysler Financial Services Americas LLC.
* February 17, 2009: Chrysler and GM submit restructuring plans to
Treasury as required by the terms of their loan agreements.
* March 19, 2009: Treasury announces the Auto Supplier Support Program
to ensure payments to automotive suppliers.
* March 30, 2009: The White House announces that Chrysler and GM's
restructuring plans do not establish a credible path to viability or
merit additional federal government investment. The companies are given
additional time to show greater progress.
* March 30, 2009: Treasury announces the Warranty Commitment Program to
guarantee the warranties on new vehicles purchased from participating
auto manufacturers.
* April 3, 2009: GM receives loans of $2.5 billion, under the Auto
Supplier Support Program.[Footnote 81]
* April 7, 2009: Chrysler receives loans of $1 billion, under the Auto
Supplier Support Program.[Footnote 82]
* April 29, 2009: Treasury commits to providing a loan of up to $500
million to Chrysler under the Warranty Commitment Program.
* April 30, 2009: The White House announces it will provide an
additional $8.5 billion to support Chrysler's restructuring.
* May 20, 2009: Treasury provides GM with an additional $4 billion for
restructuring.
* May 21, 2009: Treasury purchases $7.5 billion in preferred stock with
exercised warrants in GMAC LLC.
* May 27, 2009: Treasury provides a $360 million loan for the Warranty
Commitment Program.
* June 1, 2009: Treasury announces it will provide GM with up to an
additional $30.1 billion to support the company's bankruptcy proceeding
and transition through restructuring.
After emerging from bankruptcy in June 2009, Chrysler has seen the
appointment of several new senior officials, including its chief
executive officer and chief financial officer, as well as a newly
constituted board of directors, which Chrysler officials said met for
the first time in July 2009.[Footnote 83] When we met with Chrysler in
September 2009, officials told us that the company was focused on
developing a new business plan, with assistance from Fiat in the areas
of product development, distribution, and sales and marketing.
GM has continued to take steps to restructure, funded by the $30.1
billion in financing that Treasury provided in June. On July 5, 2009, a
bankruptcy judge approved GM's motion to sell its assets to a new
company in which the federal government would have a majority share. On
July 10, 2009, the asset sale was finalized, and Treasury executed a
loan agreement with the restructured GM, under which the company is
required to repay Treasury $7.1 billion. The remainder of the funding
that Treasury provided to GM was converted to 60.8 percent ownership in
the new company and $2.1 billion in preferred stock. Other stakeholders
also received equity in GM. In consideration of their ownership stakes,
GM's shareholders--including Treasury--received the right to appoint
directors to GM's board. The new members of GM's board have been
appointed, and the board held its first in-person meeting in August.
[End of section]
Appendix X: Home Affordable Modification Program:
Program Overview:
The Department of the Treasury's (Treasury) Office of Financial
Stability (OFS) developed the Home Affordable Modification Program
(HAMP) to address two of the stated purposes of the Emergency Economic
Stabilization Act (the act)--preserving homeownership and protecting
home values. According to Treasury, HAMP's primary goal is to help up
to three to four million borrowers who are struggling to make their
mortgage payments by reducing their monthly payments to an affordable
level (loan modification), thereby preventing unnecessary foreclosures
and helping to stabilize home prices in the neighborhoods hit hardest
by foreclosures. To implement the program, Treasury has delegated
significant responsibilities to its financial agents, Fannie Mae and
Freddie Mac, to act as the program administrator and compliance agent
for HAMP, respectively. Under HAMP, Treasury will use Troubled Asset
Relief Program (TARP) funds to share the cost of reducing monthly
payments on first-lien mortgages with mortgage holders and investors,
and provide financial incentives to servicers, borrowers, and mortgage
holders and investors for loans modified under the program.[Footnote
84] Under HAMP, Treasury also plans to (1) provide additional
incentives to mortgage holders/investors to modify, rather than
foreclose on, loans in areas where home price declines have been most
severe; (2) provide incentives to modify or pay off second-lien loans
of borrowers whose first mortgages were modified under HAMP; and (3)
provide incentives to servicers and borrowers to pursue alternatives to
foreclosure (short sales and deeds-in-lieu) to homeowners who do not
qualify for a HAMP modification or cannot maintain payments during the
trial period or modification. As of September 25, 2009, 63 servicers
have signed up to participate in the program, covering approximately 85
percent of U.S. mortgage loans.[Footnote 85]
Funding:
Treasury has announced that up to $50 billion of funds from TARP may be
used for HAMP. Most of these funds are directed to the modification of
first-lien mortgages held by borrowers in danger of foreclosure (first-
lien modification program). To monitor HAMP's funding needs, Treasury
has estimated the funding requirements, or caps, for each participating
servicer based on the number of modifications they are expected to
perform during the entire duration of the program. The caps include
maximum payable incentives associated with modifying borrowers' first-
lien mortgages, including incentive payments to borrowers, servicers,
and mortgage holders and investors. According to Treasury, cap
allocations are initially set based on publicly available information
and are updated using more complete data on the servicers' mortgage
portfolios. Treasury has been reassessing each servicer's cap on a
quarterly basis, using data on the actual number of modifications made
by the servicer under the program. As of September 25, 2009, Treasury
had allocated a total of $22.3 billion through the caps on its 63
participating servicers, of which about $946,000 has been paid out in
servicer and investor incentive payments.
Status of Efforts:
Most of Treasury's efforts to develop HAMP have been directed to the
first-lien modification program. Treasury has designed the first-lien
program to target borrowers in default (defined as 60 days or more
delinquent on their mortgage payments) or in imminent danger of default
(borrowers that are current on their mortgages but facing hardships
such as job loss or interest rate increases on their adjustable rate
mortgages). Treasury has established several eligibility requirements
for borrower participation in HAMP, including that the property be an
owner-occupied, single-family residence (one to four units) that is the
borrower's primary residence and that the mortgage loan amount not
exceed specified dollar thresholds. Additionally, borrowers cannot
participate in HAMP if they have non-GSE loans unless their servicers
have signed participation agreements with Fannie Mae--Treasury's
administrator for the program. According to Treasury, as of September
25, 2009, the following HAMP progress has been made related to loans
not owned or guaranteed by Fannie Mae and Freddie Mac:
* 63 servicers had signed participation agreements for the first-lien
modification program;
* More than 1.3 million solicitation letters for HAMP loan
modifications to borrowers;
* More than 328,000 HAMP trial modification offers to borrowers;
* More than 209,000 HAMP trial modifications had started; and:
* 1,080 borrowers had successfully completed the trial period and
received HAMP modifications.
Of the three other subprograms that were announced as part of HAMP in
the March 4, 2009, program guidelines, Treasury has recently begun to
implement the Home Price Decline Prevention (HPDP) program but has not
implemented the other two. Treasury issued official guidance on HPDP in
late July 2009 and began implementing the program on September 1, 2009.
As of that date, the net present value model used to calculate
borrowers' eligibility for HAMP took into account the additional
incentive payments available through HPDP to investors in areas of the
country where price declines had been large. However, the extent to
which HPDP will increase the number of modifications made remains
unclear. In our July 2009 report, we recommended that Treasury re-
evaluate the basis and design of the HPDP program to ensure that HAMP
funds are being used effectively.[Footnote 86] Treasury released
detailed guidelines on the second-lien modification component of HAMP
on August 13, 2009. However, these guidelines require that servicers
sign participation agreements with Fannie Mae on or before December 31,
2009, to be eligible for the program. As of September 25, 2009, no
servicers have signed such participation agreements. Finally, Treasury
had not released any detailed guidelines on the foreclosure
alternatives component of HAMP.
We previously reported that although the central program--the first-
lien modification program--had been implemented, many of its
administrative processes and its internal control policies and
procedures were not yet finalized. Fannie Mae, as HAMP administrator,
has mapped operational processes and identified points of control for
multiple aspects of HAMP, such as servicer registration and servicer
set-up in HAMP's electronic system, servicer data reporting, trial and
official modifications, and the steps of the payment process
administered by Fannie Mae. Fannie Mae has also drafted procedures to
carry out many of these processes and internal controls. According to
Fannie Mae, processes, controls and procedures have not been finalized
for a planned servicer call center, and the budgeting and billing of
Fannie Mae's work under the HAMP financial agent agreement. Processes
and controls designed by Fannie Mae to date were to be tested by
September 30, 2009, according to Fannie Mae officials. In addition,
Freddie Mac, as HAMP compliance agent, has mapped out the overall
compliance program, working with OFS and PricewaterhouseCoopers LLP,
and is developing policies and procedures to carry it out. In a related
effort, Freddie Mac has described to us its methods for testing
compliance for 233 program requirements. In addition, according to
Treasury, Treasury and its financial agents have formalized a charter
for a HAMP Compliance Committee. Treasury also noted that the Committee
is finalizing a policy for addressing remedies for identified instances
of noncompliance among servicers. However, while Treasury has drafted
performance measures to evaluate HAMP, these measures have not been
fully developed and have yet to be implemented.
On August 4, 2009, Treasury released its first report on the
performance of participating servicers under HAMP. The Monthly Servicer
Performance Report showed significant variations among the servicers in
the percentage of delinquent borrowers in their servicing portfolios
that had been offered or received trial modifications. For example, for
servicers that had signed up to participate in the program before May
31, 2009, the percentage of delinquent borrowers who had been offered
HAMP trial modifications ranged from 0 percent to 45 percent, and the
percentage of their delinquent borrowers who had started HAMP trial
modifications ranged from 0 percent to 25 percent. Such variations have
highlighted potential issues with servicers' capacity to implement
HAMP. In our July 2009 report, we expressed concern that Treasury was
not fully vetting servicers signing HAMP loan modification
participation agreements and recommended that Treasury develop a means
of systematically assessing servicers' capacity to meet program
requirements during program admission.[Footnote 87] As compliance agent
for HAMP, Freddie Mac has developed several different types of reviews
intended to be conducted after a servicer has signed up to participate
in the program that touch on issues of servicer capacity. Freddie Mac
is currently working with Treasury to refine these procedures, which
include:
* "full" on-site reviews, which are 1-week reviews that include a
detailed management interview about all HAMP processes, walk-throughs
of each of these processes, and file reviews of a sample of the
servicer's loan files;
* walk-through reviews, which are 1-to 2-day reviews that can occur
sooner than a "full" review and that go into less detail on loss
mitigation, collections, and investor accounting processes; and:
* "second look" reviews, which are off-site loan file reviews that look
for servicer errors in evaluating borrowers for HAMP.
Key activities under HAMP:
* February 18, 2009: Treasury announced HAMP, a national loan
modification program intended to offer assistance to up to three to
four million homeowners by reducing monthly payments to sustainable
levels.
* March 4, 2009: Treasury issued official guidance for loan
modifications under HAMP and announced that servicers could begin
conducting modifications that conform to the guidelines. These initial
guidelines largely focused on the first-lien modification subprogram.
Treasury also issued updated guidance on completing first-lien
modifications on April 6, 2009.
* March 19, 2009: Treasury launched its Making Home Affordable (MHA)
Web site for borrowers to provide information on the program, including
eligibility requirements and housing counseling options, among other
things.
* April 13, 2009: The first six servicers signed participation
agreements under HAMP.
* April 15, 2009: Treasury launched an administrative Web site for
mortgage servicers to provide them with the information and tools
needed to participate in HAMP.
* July 28, 2009: Treasury and the Department of Housing and Urban
Development (HUD) officials held a meeting with all participating
servicers at which they asked the servicers to ramp up their efforts to
increase trial modifications, with a goal of starting 500,000 trial
modifications by November 1, 2009.
* July 31, 2009: Treasury issued official guidance on the HPDP
component of HAMP.
* August 4, 2009: Treasury released its first monthly Servicer
Performance Report detailing servicers' progress to date with HAMP.
According to Treasury, the purpose of the report is to document the
number of struggling homeowners already helped under the program,
provide information on servicer performance, and increase the program's
transparency.
* August 13, 2009: Treasury announced details of the second-lien
modification component of HAMP, which allows second liens with
corresponding first liens that have been modified under HAMP to be
modified or extinguished. While Treasury estimates that between one and
one-and-a-half million borrowers may be eligible to receive a second-
lien modification, servicer participation in the second-lien
modification subprogram is unclear, as servicers who had previously
signed participation agreements must sign amended agreements in order
to participate in the program. As of September 25, 2009, no servicers
had signed participation agreements for the second-lien program.
* August 27, 2009: Treasury conducted its first disbursement of
$276,000 to one servicer for payment of servicer incentives related to
276 non-GSE loans modified under HAMP. No payments were disbursed for
monthly mortgage payment reductions or associated incentive payments to
investors or borrowers, and no payments were made to other servicers.
* September 25, 2009: Treasury conducted its second disbursement of
about $670,000 to three servicers for payment of servicer incentives
and investor subsidies.
GAO's Recommendations and Treasury's Response:
Table 20: Treasury's Actions in Response to GAO Recommendations:
Recommendations from the July 23, 2009, report:
GAO recommendations: Consider methods of (1) monitoring whether
borrowers with total household debt of more than 55 percent of their
income who have been told that they must obtain HUD-approved housing
counseling do so, and (2) assessing how this counseling affects the
performance of modified loans to see if the requirement is having its
intended effect of limiting redefaults;
Treasury actions responding to recommendations to date:
* According to Treasury, it is exploring options for monitoring what
proportion of such borrowers is obtaining counseling;
* To date, Treasury has not specified if it plans to use information
from monitoring borrowers with total household debt of more than 55
percent of their income to assess how required counseling affects the
performance of modified loans;
GAO assessment of Treasury's response: 1) Partially implemented; 2) Not
implemented.
GAO recommendations: Re-evaluate the basis and design of the HPDP
program to ensure that HAMP funds are being used efficiently to
maximize the number of borrowers who are helped under HAMP and to
maximize overall benefits of utilizing taxpayer dollars;
Treasury actions responding to recommendations to date:
* On July 31, 2009, Treasury announced detailed guidance on HPDP that
included changes to the program's design that, according to Treasury,
improve the targeting of incentive payments to mortgages that are at
greater risk because of home price declines. GAO is in the process of
determining if these changes to the program have helped to maximize
overall benefits of utilizing taxpayer dollars;
GAO assessment of Treasury's response: Partially Implemented.
GAO recommendations: Institute a system to routinely review and update
key assumptions and projections about the housing market and the
behavior of mortgage-holders, borrowers, and servicers that underlie
Treasury's projection of the number of borrowers whose loans are likely
to be modified under HAMP and revise the projection as necessary in
order to assess the program's effectiveness and structure;
Treasury actions responding to recommendations to date:
* According to Treasury, it plans to actively evaluate the program as
it progresses, including testing key assumptions and updating
participation estimates. Treasury has not stated, however, when it
plans to perform such evaluations or updates to its HAMP participation
estimates;
* Treasury is gathering data on servicer performance in HAMP and
housing market conditions in order to improve and build upon the
assumptions underlying projections about mortgage market behavior;
GAO assessment of Treasury's response: Partially implemented.
GAO recommendations: Place a high priority on fully staffing vacant
positions in the Homeownership Preservation Office (HPO)--including
filling the position of Chief Homeownership Preservation Officer with a
permanent placement--and evaluate HPO's staffing levels and
competencies to determine whether they are sufficient and appropriate
to effectively fulfill its HAMP governance responsibilities;
Treasury actions responding to recommendations to date:
* Between July 16, 2009, and September 21, 2009, HPO increased its
permanent staff by twelve. According to Treasury, 7 positions remain
vacant out of 31;
* According to Treasury, it is making progress in filling the position
including interviewing prospective candidates;
* According to Treasury, it will conduct the first bimonthly workforce
needs assessment for HPO at the end of October 2009;
GAO assessment of Treasury's response: Partially implemented.
GAO recommendations: Expeditiously finalize a comprehensive system of
internal control over HAMP, including policies, procedures, and
guidance for program activities, to ensure that the interests of both
the government and taxpayer are protected and that the program
objectives and requirements are being met once loan modifications and
incentive payments begin;
Treasury actions responding to recommendations to date:
* Treasury continues to refine the internal control environment for
HAMP. Fannie Mae, as HAMP administrator, has mapped operational
processes and identified points of control for multiple steps in its
HAMP operations, including servicer set-up in HAMP's electronic system,
servicer data reporting, trial modification, and the steps of the
payment process administered by Fannie Mae. However, controls and
procedures have not been completed for all areas of the program;
* According to Treasury, it will work with Fannie Mae and Freddie Mac
to build and refine the internal controls within these financial
agents' operations as new program components are implemented;
GAO assessment of Treasury's response: Partially implemented.
GAO recommendations: Expeditiously develop a means of systematically
assessing servicers' capacity to meet program requirements during
program admission so that Treasury can understand and address any risks
associated with individual servicers' abilities to fulfill program
requirements, including those related to data reporting and collection;
Treasury actions responding to recommendations to date:
* Treasury has stated that it does not believe that assessments of
servicers' capacity need to occur during program admission. According
to Treasury, such assessments are unnecessary because, upon admission,
a servicer becomes contractually obligated to review a borrower for
eligibility for HAMP before beginning any foreclosure actions;
GAO assessment of Treasury's response: Not implemented.
Source: GAO and analysis of OFS, Treasury, information.
[End of table]
[End of section]
Appendix XI: Comments from the Department of the Treasury:
Department Of The Treasury:
Assistant Secretary:
Washington, D.C. 20220:
October 5, 2009:
Thomas 3. McCool:
Director, Center for Economics Applied Research and Methods:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. McCool:
The Treasury Department (Treasury) appreciates the opportunity to
review the GAO's latest report on Treasury's Troubled Asset Relief
Program (TARP), entitled One Year Later, Actions Needed to Address
Remaining Transparency and Accountability Challenges. Treasury welcomes
the recognition by the GAO that Treasury, through TARP and along with
other efforts by the Federal Reserve Board of Governors and the Federal
Deposit Insurance Corporation, has "made important contributions to
help to stabilize credit markets". There is important work ahead and
the GAO's recommendations are constructive as Treasury continues to
implement its financial stability programs and enhance the performance
of the Office of Financial Stability.
In deciding whether to extend the TARP authority beyond December 31,
2009, the Secretary will coordinate with appropriate officials to
ensure that the determination is considered in a broad market context
that takes account of relevant objectives, costs and measures. When the
decision is made, Treasury will communicate the reasons for the
Secretary's decision to Congress and the taxpayers. With respect to
your third recommendation, Treasury regularly evaluates funding needs
for TARP programs and announces revisions as those decisions are made.
Once again, Treasury appreciates the opportunity to review this report
and the GAO's thoughtful recommendations. Treasury appreciates the
GAO's close oversight of TARP as Treasury develops and implements its
policies to stabilize the financial system. We look forward to
demonstrating further progress in your next report.
Sincerely,
Signed by:
Herbert M. Allison, Jr.
Assistant Secretary for Financial Stability:
[End of section]
Appendix XII: GAO Contact and Staff Acknowledgments:
GAO Contact:
Richard J. Hillman, (202) 512-8678 or hillmanr@gao.gov:
Thomas J. McCool, (202) 512-2642 or mccoolt@gao.gov:
Orice Williams Brown, (202) 512-8678 or williamso@gao.gov:
Staff Acknowledgments:
In addition to the contacts named above, A. Nicole Clowers, Gary Engel,
Mathew Scirč, and William T. Woods (lead Directors); Cheryl Clark,
Lawrance Evans Jr., Dan Garcia-Diaz, Carolyn Kirby, Barbara Keller, Kay
Kuhlman, Harry Medina, Raymond Sendejas, Karen Tremba (lead Assistant
Directors); Judith Ambrose, Timothy Carr, Tania Calhoun, Emily
Chalmers, Brent Corby, Rachel DeMarcus, M'Baye Diagne, Nancy Eibeck,
Sarah Farkas, Alice Feldesman, Heather Halliwell, Michael Hoffman, Joe
Hunter, Tyrone Hutchins, John Karikari, Amber Keyser, Steven Koons,
Robert Lee, Sarah McGrath, Joseph O'Neill, Rebecca Riklin, Susan Michal-
Smith, Maria Soriano, Cynthia Taylor, Angela D. Thomas, Julie Trinder,
Marc Molino, Winnie Tsen , Jim Vitarello, Yun Wang, and Heather
Whitehead have made significant contributions to this report.
[End of section]
Related GAO Products:
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-1048T]. Washington, D.C.: September
24, 2009.
Troubled Asset Relief Program: Status of Government Assistance Provided
to AIG. [hyperlink, http://www.gao.gov/products/GAO-09-975].
Washington, D.C.: September 21, 2009.
Troubled Asset Relief Program: Treasury Actions Needed to Make the Home
Affordable Modification Program More Transparent and Accountable.
[hyperlink, http://www.gao.gov/products/GAO-09-837]. Washington, D.C.:
July 23, 2009.
Troubled Asset Relief Program: Status of Participants' Dividend
Payments and Repurchases of Preferred Stock and Warrants. [hyperlink,
http://www.gao.gov/products/GAO-09-889T]. Washington, D.C.: July 9,
2009.
Troubled Asset Relief Program: June 2009 Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-658]. Washington, D.C.: June 17,
2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions
for October 28, 2008, through May 29, 2009, and Information on
Financial Agency Agreements, Contracts, Blanket Purchase Agreements,
and Interagency Agreements Awarded as of June 1, 2009. [hyperlink,
http://www.gao.gov/products/GAO-09-707SP]. Washington, D.C.: June 17,
2009.
Auto Industry: Summary of Government Efforts and Automakers'
Restructuring to Date. [hyperlink,
http://www.gao.gov/products/GAO-09-553]. Washington, D.C.: April 23,
2009.
Small Business Administration's Implementation of Administrative
Provisions in the American Recovery and Reinvestment Act. [hyperlink,
http://www.gao.gov/products/GAO-09-507R]. Washington, D.C.: April 16,
2009.
Troubled Asset Relief Program: March 2009 Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-504]. Washington, D.C.: March 31,
2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions
for the Period October 28, 2008 through March 20, 2009 and Information
on Financial Agency Agreements, Contracts, and Blanket Purchase
Agreements Awarded as of March 13, 2009. [hyperlink,
http://www.gao.gov/products/GAO-09-522SP]. Washington, D.C.: March 31,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-539T]. Washington, D.C.: March 31,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-484T]. Washington, D.C.: March 19,
2009.
Federal Financial Assistance: Preliminary Observations on Assistance
Provided to AIG. [hyperlink, http://www.gao.gov/products/GAO-09-490T].
Washington, D.C.: March 18, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-474T]. Washington, D.C.: March, 11,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-417T]. Washington, D.C.: February
24, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-359T]. Washington, D.C.: February 5,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-296]. Washington, D.C.: January 30,
2009.
High-Risk Series: An Update. [hyperlink,
http://www.gao.gov/products/GAO-09-271]. Washington, D.C.: January 22,
2009.
Troubled Asset Relief Program: Additional Actions Needed to Better
Ensure Integrity, Accountability, and Transparency. [hyperlink,
http://www.gao.gov/products/GAO-09-266T. Washington, D.C.: December 10,
2008.
Auto Industry: A Framework for Considering Federal Financial
Assistance. [hyperlink, http://www.gao.gov/products/GAO-09-247T].
Washington, D.C.: December, 5, 2008.
Auto Industry: A Framework for Considering Federal Financial
Assistance. [hyperlink, http://www.gao.gov/products/GAO-09-242T].
Washington, D.C.: December 4, 2008.
Troubled Asset Relief Program: Status of Efforts to Address Defaults
and Foreclosures on Home Mortgages. [hyperlink,
http://www.gao.gov/products/GAO-09-231T]. Washington, D.C.: December 4,
2008.
Troubled Asset Relief Program: Additional Actions Needed to Better
Ensure Integrity, Accountability, and Transparency. [hyperlink,
http://www.gao.gov/products/GAO-09-161]. Washington, D.C.: December 2,
2008.
[End of section]
Footnotes:
[1] The Emergency Economic Stabilization Act of 2008 (the act), Pub. L.
No. 110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C. §§ 5201 et
seq. The act originally authorized the Department of the Treasury
(Treasury) to purchase or guarantee up to $700 billion in troubled
assets. The Helping Families Save Their Homes Act of 2009, Pub. L. No.
111-22, Div. A, 123 Stat. 1632 (2009), amended the act to reduce the
maximum allowable amount of outstanding troubled assets under the act
by almost $1.3 billion, from $700 billion to $698.741 billion.
[2] Section 3(9) of the act, 12 U.S.C. § 5202(9). 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 it is necessary to purchase other
financial instruments to promote financial market stability.
[3] Section 116 of the act, 12 U.S.C. § 5226.
[4] For our past 60-day reports, see GAO, Troubled Asset Relief
Program: Additional Actions Needed to Better Ensure Integrity,
Accountability, and Transparency, [hyperlink,
http://www.gao.gov/products/GAO-09-161] (Washington, D.C.: Dec. 2,
2008); Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-296] (Washington, D.C.: Jan. 30,
2009); Troubled Asset Relief Program: March 2009 Status of Efforts to
Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-504] (Washington, D.C.: Mar. 31,
2009); Auto Industry: Summary of Government Efforts and Automakers'
Restructuring to Date, [hyperlink,
http://www.gao.gov/products/GAO-09-553] (Washington, D.C.: Apr. 23,
2009); Troubled Asset Relief Program: June 2009 Status of Efforts to
Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-658] (Washington, D.C.: June 17,
2009); Troubled Asset Relief Program: Treasury Actions Needed to Make
the Home Affordable Modification Program More Transparent and
Accountable, [hyperlink, http://www.gao.gov/products/GAO-09-837]
(Washington D.C.: July 23, 2009); and Troubled Asset Relief Program:
Status of Federal Assistance to AIG, [hyperlink,
http://www.gao.gov/products/GAO-09-975] (Washington, D.C.: Sept. 21,
2009).
[5] See [hyperlink, http://www.gao.gov/products/GAO-09-161].
[6] No indicator on its own provides a definitive perspective on the
state of markets; collectively, the indicators should provide a broad
sense of the stability and liquidity of the financial system and could
be suggestive of the program's impact. However, it is difficult to draw
conclusions about causality, because a variety of actions have been
taken to address the economic downturn.
[7] Appendix I provides a complete list of the recommendations by
report and their status as of September 25, 2009.
[8] Sections 106(e) and 120 of the act, 12 U.S.C. §§ 5216(e), 5230.
[9] Under the terms of the CPP securities purchase agreement, CPP
participants have a right to repurchase their preferred or debt
securities and warrants from Treasury. Our use of the term
"repurchases" is general and does not differentiate between repurchases
and redemptions of senior preferred stock. A redemption of senior
preferred stock occurs when an institution completes a qualified equity
offering per the standard terms of the preferred stock and subsequently
exchanges cash for the senior preferred stock it previously issued to
Treasury. A repurchase occurs when the institution buys back its senior
preferred shares without having completed a qualified equity offering,
as permitted by American Recovery and Reinvestment Act, Pub. L. No. 111-
5, div. B, § 7001, 123 Stat, 516 (2009), or another authority.
[10] The primary federal regulators are FDIC, the Federal Reserve, OCC,
and OTS.
[11] In addition to preferred stock, Treasury also received from the
privately held institutions warrants to purchase a specified number of
shares of preferred stock--called warrant preferred stock--that pay
quarterly dividends at a rate of 9 percent per year. The exercise price
for the warrant preferred stock is $0.01 per share unless the financial
institution's charter requires otherwise. Treasury exercised these
warrants immediately for privately held institutions.
[12] For example, according to the CPP terms for publicly held
institutions, participating institutions pay quarterly dividends at a
rate of 5 percent per year for the first 5 years on the initial
preferred shares acquired by Treasury. After the first 5 years, the
preferred shares pay quarterly dividends at a rate of 9 percent per
year. Any preferred shares acquired through Treasury's exercise of
warrants pay quarterly dividends at a rate of 9 percent per year.
[13] See GAO-09-975. Treasury officials stated that, in accordance with
the securities purchase agreement, if AIG fails to make one more
dividend payment, Treasury will be able to elect at least three members
to its board of directors.
[14] According to Treasury, it estimated the borrowing costs for TARP
as a proportion of total monthly borrowing costs on a rolling basis
since TARP's inception. These borrowing costs included refinancing TARP
when initial financing matured as well as the reduction of financing
costs due to repurchases.
[15] For a detailed discussion of CPP, see appendix II.
[16] The name of the survey report is Monthly Lending and
Intermediation Snapshot. The original 20 institutions were expanded to
22 when American Express Company was added in March 2009, and Hartford
Financial Services Group, Inc. was added in July 2009.
[17] The CPP Monthly Lending Report.
[18] The Quarterly Capital Purchase Program Report.
[19] OTS, Monitoring and Documenting the Use of Funds from Federal
Financial Stability and Guaranty Programs (Mar. 18, 2009). OCC,
Examination Guidance for Institutions Participating in the Treasury's
TARP Capital Purchase Program, (Mar. 26, 2009). FDIC, Monitoring the
Use of Funding from Federal Financial Stability and Guaranty Programs,
(Jan. 12, 2009). FDIC, Examination Guidelines for Financial
Institutions Receiving Subscriptions from U.S. Department of the
Treasury's TARP CPP Program, (Feb. 9, 2009). Federal Reserve, Applying
Supervisory Guidance and Regulations on the Payment of Dividends, Stock
Redemptions, and Stock Repurchases at Bank Holding Companies, (Mar. 27,
2009).
[20] For a detailed discussion of this program, see appendix III.
[21] Financial Stability Oversight Board, Financial Stability Oversight
Board Quarterly Report to Congress for the quarter ending June 30,
2009.
[22] For a detailed discussion of TIP, AGP, and SSFI, see appendixes IV
through VI, respectively.
[23] [hyperlink, http://www.gao.gov/products/GAO-09-975].
[24] For a detailed discussion of the Federal Reserve's TALF and
Treasury's role, see appendix VII.
[25] Conversely, CPP participants may be willing to participate in the
program, because they already must comply with the requirements of the
act.
[26] For a detailed discussion of PPIP, see appendix VIII.
[27] GAO plans to report separately on this program in 2010.
[28] For additional information on AIFP see appendix IX.
[29] [hyperlink, http://www.gao.gov/products/GAO-09-837].
[30] For additional information about HAMP see appendix X.
[31] [hyperlink, http://www.gao.gov/products/GAO-09-837].
[32] To implement TARP, Treasury is using its authorities to enter into
agreements that designate financial institutions as financial agents
for Treasury. Section 101(c)(3) of the act; see also 31 C.F.R. pt 202.
The financial agency agreements, which are completed through Treasury's
Office of the Fiscal Assistant Secretary and are not subject to the
Federal Acquisition Regulation, are used to hire asset managers,
custodial agents, and financial advisors, among others, and to manage
troubled assets purchased under TARP, including revenues and portfolio
risks.
[33] The total for Treasury's reported incurred expenses as of August
31, 2009, is for 40 contracts and agreements. As of September 18, 2009,
13 of the 52 TARP support contracts and IAAs were completed. For
detailed information on all TARP financial agency agreements,
contracts, and blanket purchase agreements, and services obtained
through IAAs, see GAO-10-24SP.
[34] TARP Conflicts of Interest, 74 Fed. Reg. 3431-3436 (Jan. 21, 2009)
(codified at 31 C.F.R. Part 31). Treasury issued this regulation as an
interim rule pursuant to 41 U.S.C. § 418b and 5 U.S.C. § 553(b)(3)(B)
based on a determination that urgent and compelling circumstances and
good cause existed that justified the promulgation of the interim rule
without public comment. Treasury found it essential to issue conflict-
of-interest regulations without delay so that anyone participating in
the TARP program would have clear information as soon as possible on
avoiding conflicts of interest. 74 Fed. Reg. 3432. Treasury received
public comments on the interim rule and anticipates that the process of
developing a final rule will take more time. Treasury's action to issue
this regulation as an interim rule, effective immediately, is
responsive to our December 2008 recommendation to issue regulations as
expeditiously as possible.
[35] Under Treasury's regulations, retained entities are contractors,
financial agents, and their subcontractors. Treasury's regulations also
address conflicts and other matters that may arise in the course of
TARP services. The scope of the regulation does not include
administrative services identified by the TARP Chief Risk and
Compliance Officer. 31 C.F.R. § 31.200(b). OFS determined that because
some administrative services (e.g., temporary services for document
production) do not have substantial decision-making authority, those
contractors are unlikely to have conflicts of interest and do not
warrant the burden imposed by the regulatory requirements. 74 Fed. Reg.
3432. See our e-Supplement at GAO-10-24SP, which identifies the
contractors and financial agents covered by TARP conflict-of-interest
requirements under 31 C.F.R. Part 31.
[36] As part of issuing guidance requiring that key conflict-of-
interest communications and decisions be documented, in July 2009 OFS e-
mailed a complete set of workflow charts to Treasury contracting staff
and officials from TARP contractors and financial agents. The conflicts-
of-interest workflow charts reflect standard procedures for reviews of
conflicts of interest raised by (1) new solicitations or competitive
task orders, (2) work done under existing contracts, (3) financial
agent selection, (4) work done under existing financial agency
agreements, (5) initial and reviews of initial and subsequent conflict-
of-interest certifications, (6) conflicts-of-interest inquiries from
TARP contractors and financial agents, and (7) conflict-of-interest
waiver requests from TARP contractors and financial agents.
[37] Treasury also developed a separate internal reporting system for
documenting and tracking all conflicts-of-interest certifications
required of TARP contractors and financial agents. According to
Treasury, an improved internal conflicts-of-interest certification
database will be implemented in the near future.
[38] Section 116(b) of the act, 12 U.S.C. § 5226(b).
[39] An entity's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and disposition of the assets of the entity; (2) provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles and that receipts and expenditures of
the entity are being made only in accordance with authorizations of
management and those charged with governance; and (3) provide
reasonable assurance regarding prevention or timely detection and
correction of any unauthorized acquisition, use, or disposition of the
entity's assets that could have a material effect on the financial
statements.
[40] Internal controls over compliance with laws and regulations should
provide reasonable assurance that transactions are executed in
accordance with laws governing the use of budget authority and with
other laws and regulations that could have a direct and material effect
on the financial statements and, as applicable, any other laws,
regulations, and governmentwide policies identified in the Office of
Management and Budget's audit guidance.
[41] Section 116(c) of the act, 12 U.S.C. § 5226(c).
[42] Section 101 of the act, 12 U.S.C. § 5211, established OFS within
the Department of the Treasury to implement TARP.
[43] The TARP financial statements will include an estimate of the
value of the TARP's investments as of September 30, 2009.
[44] Section 116(c) of the act, 12 U.S.C. § 5226 (c).
[45] Section 116(b) of the act, 12 U.S.C. § 5226(b).
[46] Loan originations are new loans by banks. Some analysts have
argued for using changes in loan balances to compare banks, but our
analysis suggests that using such measures as a proxy for originations
may lead to invalid conclusions.
[47] In our reports, the TED-spread is the spread between the 3-month
LIBOR and 3-month Treasury yield. Increases in the TED spread imply a
greater aversion to risk.
[48] A basis point is a common measure used in quoting yields on bills,
notes, and bonds and represents 1/100 of a percent of yield. An
increase from 4.35 percent to 4.45 would be an increase of 10 basis
points.
[49] The model used changes in the TED spread as the dependent variable
regressed on a CPP indicator variable, a time trend, lagged values of
changes in the S&P 500, the term spread (structure), and the default
risk premium, an indicator variable that denoted whether the TED spread
exceeded 200 basis points, as well as a counter variable that indicated
the number of consecutive days (including the day in question) that the
TED spread had taken on an extreme value. However, the results were
robust to a number of different econometric specifications, including a
two-stage approach that first generated the unexpected value of the TED
spread (as well as the other spreads) by extracting the predictable
component from the variables using an autoregression model fit to each
series. Similar to our primary regressions modeling changes in the TED
spread, the CPP indicator variable had a statistically significant
impact on the unexpected level of the TED spread, even when we
controlled for other potentially confounding factors.
[50] See our June 2009 report [hyperlink,
http://www.gao.gov/products/GAO-09-658] for additional information on
the model and the limitations.
[51] This phenomenon is often referred to as "regression to the mean"
or "regression artifacts." Failure to acknowledge this phenomenon can
lead to invalid inferences about a program's impact when analyzing time
series data. We found that since 1982 the TED spread had exceeded 200
basis points only 3.2 percent of the time, underscoring the fact that
450 basis points is quite extreme and indicating that significant
stress was present in the interbank market at the time of the CPP
announcement.
[52] Our December 2008 and January 2009 reports [hyperlink,
http://www.gao.gov/products/GAO-09-161] and [hyperlink,
http://www.gao.gov/products/GAO-09-296] provide a more detailed
description of the indicators.
[53] The credit default swap (CDS) index provides an indicator of the
credit risk associated with U.S. banks, as judged by the market.
Therefore, declines in this index suggest lower perceived risk in the
U.S. banking sector. Thomson Reuters Datastream data shows that the 5-
year CDS index dropped significantly after the initial passage of the
Emergency Economic Stabilization Act and again after the announcement
of the CPP before trending up again. However, from the end of March
2009 to September 15, 2009, the bank CDS index fell by roughly 69
percent. Similarly, the Chicago Board of Option Exchange VIX index,
which measures expected stock market volatility, has fallen
considerably since late November 2008.
[54] For example, a significant drop in mortgage rates occurred shortly
after the Federal Reserve's announcement in November 2008 that it would
purchase mortgage-backed securities.
[55] According to the Federal Reserve's Senior Loan Officer Survey,
commercial bank lending standards for consumer and business loans
dramatically tightened in the year leading up to the fourth quarter of
2008. Although the net percentages of banks reporting that they had
tightened their business lending policies declined over the first two
quarters of 2009, standards remain elevated.
[56] New lending includes new home equity lines of credit; mortgage,
credit card, and other consumer originations; new or renewed commercial
and industrial loans; and commercial real estate loans, but not other
important activities that these institutions may undertake to
facilitate credit intermediation, including underwriting and purchasing
MBS and ABS. Because the origination data collected by Treasury are
unique, we were not able to benchmark the origination levels against
historical lending or seasonal patterns at these institutions. New
lending in July for the top CPP recipients was similar to the second
quarter, at $282 billion.
[57] We collected data on quarterly loan balances for the top 21 CPP
recipients from third quarter of 2008 to the first quarter of 2009 and
compared it to the data on originations from the Treasury's loan
survey. Data on loan balances are from the Consolidated Financial
Statements for Bank Holding Companies Y-9C Report Form. We aggregated
the monthly loan origination figures up to the quarterly level in order
to compare the data to changes in quarterly loan balances for each
institution. The correlation between total originations and changes in
total loan balances was just 0.14. Across the various disaggregated
loan categories, the correlations ranged from 0.29 for mortgages to
negative 0.21 for credit cards, suggesting that any attempt to gauge
the effectiveness of CPP on lending activity using changes in loan
balances would likely lead to invalid conclusions. Correlations are
somewhat higher for the change in loan balances for the quarter ending
December 31, 2008, to the quarter ending March 31, 2009. Nevertheless,
they are still relatively low.
[58] The bank rate reflects 48-month loans, while the average maturity
for the finance rate was roughly 63 months for November 2008 and May
2009.
[59] Prices at or below the values financial institutions are currently
assigning to these loans or securities would provide a limited
incentive to sell. To the extent that nonrecourse funding and FDIC-
guaranteed debt provide an implicit subsidy (e.g., through offering
below-market loan terms) to potential buyers of legacy loans and
securities, buyers would likely be willing to pay higher prices for
these assets. To the extent that markets are underpricing such assets
or prices are suppressed due to illiquidity, higher prices may be more
reflective of the underlying value or cash flows associated with the
assets (and therefore aid in price discovery). However, all other
things being equal, higher prices impose certain risks on Treasury,
FDIC, and the Federal Reserve if prices paid are too high, as these
agencies will absorb losses beyond the equity supplied by investors.
[60] "The Next Phase of Government Financial Stabilization and
Rehabilitation Policies," Department of the Treasury (September 2009).
[61] The Office of Management and Budget (OMB) guidance includes
circulars A-4 "Regulatory Analysis" and A-94 "Guidelines and Discount
Rates for Benefit-Cost Analysis of Federal Programs."
[62] For purposes of CPP, qualifying financial institutions generally
include stand-alone U.S.-controlled banks and savings associations, as
well as bank holding companies and most savings and loan holding
companies.
[63] A warrant is an option to buy shares of common stock or preferred
stock at a predetermined price on or before a specified date.
[64] The nine major financial institutions were Bank of American
Corporation; Citigroup, Inc.; JP Morgan Chase & Co.; Wells Fargo &
Company; Morgan Stanley; The Goldman Sachs Group, Inc.; The Bank of New
York Mellon Corporation; State Street Corporation; and Merrill Lynch &
Co., Inc.
[65] An S-corporation 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, Boston Mutual and New York Life) are mutuals. A Community
Development Financial Institutions (CDFI) is a specialized financial
institution that works in market niches that are underserved by
traditional financial institutions. CDFIs provide a range of financial
products and services, such as mortgage financing for low-income and
first-time homebuyers and not-for-profit developers; flexible
underwriting and risk capital for needed community facilities; and
technical assistance, commercial loans, and investments to small start-
up or expanding businesses in low-income areas.
[66] GAO, Troubled Asset Relief Program: Capital Purchase Program
Transactions for October 28, 2008, through September 25, 2009, and
Information on Financial Agency Agreement, Contract, Blanket Purchase
Agreements, and Interagency Agreements Awarded as of September 18,
2009, [hyperlink, http://www.gao.gov/products/GAO-10-24SP] (Washington,
D.C.: October 8, 2009).
[67] According to Treasury, the remaining $10 billion would be settled
by the end of January 2009, by which time the merger of Bank of America
Corporation and Merrill Lynch & Co., Inc. would be complete.
[68] Risk-weighted assets are the total assets and off-balance sheet
items held by an institution that are weighted for risk according to
Federal Reserve regulations.
[69] Federal bank regulators that conducted the stress test included
the Board of Governors of the Federal Reserve System and Federal
Reserve Banks (Federal Reserve), the Federal Deposit Insurance
Corporation (FDIC), and the Office of the Comptroller of the Currency
(OCC).
[70] The application deadline was extended by Treasury from May 25,
2009, to November 9, 2009.
[71] See GAO, Troubled Asset Relief Program: Status of Government
Assistance to AIG, [hyperlink, http://www.gao.gov/products/GAO-09-975]
(Washington, D.C.: Sept. 21, 2009)
[72] Treasury folded the SBA securities initiative (formerly known as
the Small Business and Community Lending Initiative) into the Consumer
and Business Lending Initiative, as originally reported in [hyperlink,
http://www.gao.gov/products/GAO-09-658].
[73] In February 2009, the Federal Reserve announced that it would
consider expanding the size of TALF to as much as $1 trillion. Although
Treasury and Federal Reserve officials suggest that such an expansion
is unlikely, any expansion of the facility's limits would include an
increased commitment from Treasury from the current $20 billion limit
to as much as $100 billion.
[74] The Federal Banking Agency Audit Act limits GAO's authority to
audit actions taken by the Federal Reserve with respect to TALF. TALF
is included in the TARP because Treasury provides $20 billion in
support to TALF and, under the new administration, TALF is included in
the Consumer and Business Lending Initiative category in Treasury's
Financial Stability Plan.
[75] SBA has two principal loan guarantee programs, the 7(a) and 504
programs, which aim to facilitate the accessibility and affordability
of financing to small businesses. Under the 7(a) program, SBA generally
provides lenders guarantees on up to 85 percent of the value of loans
to qualifying small businesses in exchange for fees to help offset the
costs of the program. Under the 504 program, which generally applies to
small business real estate and other fixed assets, SBA also provides
certified development companies with a guarantee on up to 40 percent of
the financing of the projects' costs in exchange for fees, while the
small business borrowers and other lenders provide the remaining 60
percent of the financing with no guarantee. For additional information,
see [hyperlink, http://www.gao.gov/products/GAO-09-507R].
[76] The roles and responsibilities of TALF agents are governed by the
Master Loan and Security Agreement (MLSA), which is available on the
FRBNY Web site.
[77] As we detailed in previous TARP reports, Treasury's Legacy
Securities Program debt financing will range from 50 to 100 percent of
a fund's total equity capital. The financing will be secured by the
eligible assets of the public-private investment funds, and each loan
will accrue interest at an annual rate to be determined by Treasury,
fully payable at termination. As required by the Emergency Economic
Stabilization Act of 2008, Treasury will take warrants, the terms and
amounts of which will be determined by the amount of Treasury debt
financing. Additionally, fund managers may charge private investor fees
at their discretion, and Treasury will accept proposals for fixed
management fees to apply as a percentage of equity capital
contributions for invested equity capital.
[78] We reported previously on this program. See [hyperlink,
http://www.gao.gov/products/GAO-09-553].
[79] Ford Motor Company did not seek assistance from AIFP.
[80] For details on the total funds committed, see table 19.
[81] GM is initially awarded $3.5 billion, but this amount was
subsequently reduced.
[82] Chrysler is initially awarded $1.5 billion, but this amount was
subsequently reduced.
[83] See [hyperlink, http://www.gao.gov/products/GAO-09-658].
[84] According to program guidelines, payment of these matching and
incentive payments is contingent on completion of a 3-month trial
modification period.
[85] Loans covered under HAMP include privately held loans that are
serviced by HAMP participating servicers and all loans held by Fannie
Mae or Freddie Mac, both government-sponsored enterprises (GSE). For
loans held by Fannie Mae and Freddie Mac, the GSEs are expected to
provide up to an additional $25 billion to encourage servicers and
borrowers to modify eligible loans.
[86] See [hyperlink, http://www.gao.gov/products/GAO-09-837].
[87] [hyperlink, http://www.gao.gov/products/GAO-09-837].
[End of section]
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