Financial Audit
Office of Financial Stability (Troubled Asset Relief Program) Fiscal Year 2009 Financial Statements Gao ID: GAO-10-301 December 9, 2009On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA) was signed into law. EESA authorized the Secretary of the Treasury to implement the Troubled Asset Relief Program (TARP) and established the Office of Financial Stability (OFS) within the Department of the Treasury (Treasury) to do so. EESA requires the annual preparation of financial statements for TARP, and further requires GAO to audit these statements. GAO audited OFS's fiscal year 2009 financial statements for TARP to determine whether, in all material respects, (1) the financial statements were fairly stated, and (2) OFS management maintained effective internal control over financial reporting. GAO also tested OFS's compliance with selected provisions of laws and regulations. We will be separately reporting to OFS on additional details concerning the findings in this report along with recommendations for corrective actions. In commenting on a draft of this report, the Assistant Secretary, Office of Financial Stability, stated OFS concurred with the two significant deficiencies in its internal control over financial reporting GAO identified. He also stated that OFS is committed to correcting the deficiencies.
In GAO's opinion, OFS's fiscal year 2009 financial statements for TARP are fairly presented in all material respects. GAO also concluded that, although internal controls could be improved, OFS maintained, in all material respects, effective internal control over financial reporting as of September 30, 2009. GAO found no reportable instances of noncompliance with the provisions of laws and regulations it tested. Since its inception on October 3, 2008, OFS implemented numerous initiatives under TARP. As of September 30, 2009, net assets related to TARP direct loans, equity investments, and asset guarantees had an estimated value of about $239.7 billion. In addition, for the period ending September 30, 2009, OFS reported an estimated subsidy cost (estimated losses related to its direct loans, equity investments, and asset guarantees) of $41.4 billion and a net cost of operations of $41.6 billion for TARP, which includes the estimated subsidy costs. In valuing TARP direct loans, equity investments, and asset guarantees, OFS management considered and selected assumptions and data that it believed provided a reasonable basis for the estimated costs reported in the financial statements. However, these assumptions and estimates are inherently subject to substantial uncertainty arising from the likelihood of future changes in general economic, regulatory, and market conditions. The estimates have an added uncertainty arising from the uniqueness of transactions for the multiple TARP initiatives and the lack of historical information and program experience upon which to base the estimates. As such, there will be differences between the net estimated values of the direct loans, equity investments, and asset guarantees as of September 30, 2009, and the amounts that OFS will ultimately realize from these assets, and such differences may be material. These differences will also affect the ultimate cost of TARP to the taxpayer. GAO identified two significant deficiencies in OFS's internal control over financial reporting concerning (1) accounting and financial reporting processes, and (2) verification procedures over the data used for asset valuations. While these deficiencies are not considered material weaknesses, they are important enough to merit management's attention.
GAO-10-301, Financial Audit: Office of Financial Stability (Troubled Asset Relief Program) Fiscal Year 2009 Financial Statements
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
December 2009:
Financial Audit:
Office of Financial Stability (Troubled Asset Relief Program) Fiscal
Year 2009 Financial Statements:
GAO-10-301:
GAO Highlights:
Highlights of GAO-10-301, a report to congressional committees.
Why GAO Did This Study:
On October 3, 2008, the Emergency Economic Stabilization Act of 2008
(EESA) was signed into law. EESA authorized the Secretary of the
Treasury to implement the Troubled Asset Relief Program (TARP) and
established the Office of Financial Stability (OFS) within the
Department of the Treasury (Treasury) to do so. EESA requires the
annual preparation of financial statements for TARP, and further
requires GAO to audit these statements.
GAO audited OFS‘s fiscal year 2009 financial statements for TARP to
determine whether, in all material respects, (1) the financial
statements were fairly stated, and (2) OFS management maintained
effective internal control over financial reporting. GAO also tested
OFS‘s compliance with selected provisions of laws and regulations.
We will be separately reporting to OFS on additional details concerning
the findings in this report along with recommendations for corrective
actions. In commenting on a draft of this report, the Assistant
Secretary, Office of Financial Stability, stated OFS concurred with the
two significant deficiencies in its internal control over financial
reporting GAO identified. He also stated that OFS is committed to
correcting the deficiencies.
What GAO Found:
In GAO‘s opinion, OFS‘s fiscal year 2009 financial statements for TARP
are fairly presented in all material respects. GAO also concluded that,
although internal controls could be improved, OFS maintained, in all
material respects, effective internal control over financial reporting
as of September 30, 2009. GAO found no reportable instances of
noncompliance with the provisions of laws and regulations it tested.
Since its inception on October 3, 2008, OFS implemented numerous
initiatives under TARP. As of September 30, 2009, net assets related to
TARP direct loans, equity investments, and asset guarantees had an
estimated value of about $239.7 billion. In addition, for the period
ending September 30, 2009, OFS reported an estimated subsidy cost
(estimated losses related to its direct loans, equity investments, and
asset guarantees) of $41.4 billion and a net cost of operations of
$41.6 billion for TARP, which includes the estimated subsidy costs. In
valuing TARP direct loans, equity investments, and asset guarantees,
OFS management considered and selected assumptions and data that it
believed provided a reasonable basis for the estimated costs reported
in the financial statements. However, these assumptions and estimates
are inherently subject to substantial uncertainty arising from the
likelihood of future changes in general economic, regulatory, and
market conditions. The estimates have an added uncertainty arising from
the uniqueness of transactions for the multiple TARP initiatives and
the lack of historical information and program experience upon which to
base the estimates. As such, there will be differences between the net
estimated values of the direct loans, equity investments, and asset
guarantees as of September 30, 2009, and the amounts that OFS will
ultimately realize from these assets, and such differences may be
material. These differences will also affect the ultimate cost of TARP
to the taxpayer.
GAO identified two significant deficiencies in OFS‘s internal control
over financial reporting concerning (1) accounting and financial
reporting processes, and (2) verification procedures over the data used
for asset valuations. While these deficiencies are not considered
material weaknesses, they are important enough to merit management‘s
attention.
View [hyperlink, http://www.gao.gov/products/GAO-10-301] or key
components. For more information, contact Gary T. Engel at (202) 512-
3406 or engelg@gao.gov.
[End of section]
Contents:
Transmittal Letter:
Auditor's Report:
Opinion on Financial Statements:
Opinion on Internal Control:
Compliance with Laws and Regulations:
Consistency of Other Information:
Objectives, Scope, and Methodology:
Agency Comments:
Management's Discussion and Analysis:
Financial Statements:
Balance Sheet:
Statement of Net Cost:
Statement of Changes in Net Position:
Statement of Budgetary Resources:
Notes to the Financial Statements:
Appendixes:
Appendix I: Management's Report on Internal Control over Financial
Reporting:
Appendix II: Comments from the Office of Financial Stability:
Appendix III: GAO Contact and Staff Acknowledgments:
[End of section]
United States Government Accountability Office:
Washington, D.C. 20548:
December 9, 2009:
Congressional Committees:
The accompanying auditor's report presents the results of our audit of
the fiscal year 2009 financial statements of the Office of Financial
Stability (Troubled Asset Relief Program). The Emergency Economic
Stabilization Act (EESA) of 2008[Footnote 1] that authorized the
Troubled Asset Relief Program (TARP) on October 3, 2008, requires that
TARP, which is implemented by the Office of Financial Stability (OFS),
[Footnote 2] annually prepare and submit to Congress and the public
audited fiscal year financial statements that are prepared in
accordance with generally accepted accounting principles.[Footnote 3]
EESA further requires that GAO audit TARP's financial statements
annually.[Footnote 4] We also are required under EESA to report at
least every 60 days on the findings resulting from our oversight of the
actions taken under TARP.[Footnote 5] This report responds to both of
these requirements. Fiscal year 2009 was the first year that OFS
prepared and issued audited financial statements for TARP. This
accomplishment was made possible by the dedication of significant time
and effort from both OFS management and staff.
This report contains our (1) unqualified opinion on OFS's fiscal year
2009 financial statements for TARP; (2) opinion that, although certain
controls could be improved, OFS maintained, in all material respects,
effective internal control over financial reporting as of September 30,
2009; and (3) conclusion that OFS complied, during the period ended
September 30, 2009, with provisions of laws and regulations we tested.
The accompanying report also provides an overview of two significant
deficiencies[Footnote 6] in OFS's internal control over financial
reporting that we identified while performing our audit that we believe
merit the attention of OFS management and users of OFS's financial
statements. We will be reporting separately to OFS on more detailed
information concerning these significant deficiencies along with
recommended corrective actions.
Since its inception, OFS implemented numerous initiatives under TARP
including the (1) Capital Purchase Program, (2) Targeted Investment
Program, (3) Asset Guarantee Program, (4) Consumer and Business Lending
Initiative, (5) Public-Private Investment Program, (6) American
International Group, Inc. Investment Program (formerly known as the
Systemically Significant Failing Institutions Program), (7) Automotive
Industry Financing Program, and (8) Home Affordable Modification
Program. These initiatives are described in more detail in the
footnotes to OFS's financial statements and Management's Discussion and
Analysis (MD&A) included in this report.
As of September 30, 2009, OFS reported net assets related to TARP
direct loans, equity investments, and asset guarantees of about $239.7
billion, which is net of a subsidy cost allowance of about $53.1
billion. The subsidy cost allowance represents the difference between
the amounts paid by OFS for the direct loans, equity investments, and
asset guarantees and the reported value of such assets. In addition,
for the period ended September 30, 2009, OFS reported an estimated
subsidy cost[Footnote 7] of $41.4 billion and a net cost of operations
of $41.6 billion for TARP, which includes the estimated subsidy cost.
OFS management considered and selected assumptions and data that it
believed provided a reasonable basis for the estimated costs reported
in the financial statements. However, these assumptions and estimates
are inherently subject to substantial uncertainty arising from the
likelihood of future changes in general economic, regulatory, and
market conditions. The estimates have an added uncertainty arising from
the uniqueness of transactions for the multiple TARP initiatives and
the lack of historical information and program experience upon which to
base the estimates. As such, there will be differences between the net
estimated values of the direct loans, equity investments, and asset
guarantees as of September 30, 2009, and the amounts that OFS will
ultimately realize from these assets, and such differences may be
material. These differences will also affect the ultimate cost of TARP.
Further, the ultimate cost will change as OFS continues to purchase
additional assets and incur related subsidy costs as well as incur
costs under other TARP initiatives.[Footnote 8] OFS's authority to
purchase or insure additional troubled assets expires on December 31,
2009, but may be extended by the Secretary of the Treasury to up to
October 3, 2010.[Footnote 9]
We are sending copies of this report to the Secretary of the Treasury,
Assistant Secretary for Financial Stability, Congressional Oversight
Panel, Financial Stability Oversight Board, Special Inspector General
for TARP, Office of Management and Budget, interested congressional
committees and members, and others. The report is available at no
charge on GAO's Web site at [hyperlink, http://www.gao.gov].
If you have questions about this report, please contact me at (202) 512-
3406 or engelg@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 key contributions to this report are listed
in appendix III.
Sincerely yours,
Signed by:
Gary T. Engel:
Director:
Financial Management and Assurance:
List of Congressional 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]
United States Government Accountability Office:
Washington, D.C. 20548:
To the Assistant Secretary for Financial Stability:
In accordance with the Emergency Economic Stabilization Act of 2008
(EESA),[Footnote 10] we are required to audit the financial statements
of the Troubled Asset Relief Program (TARP), which is implemented by
the Office of Financial Stability (OFS).[Footnote 11] In our audit of
OFS's financial statements for TARP for the period from October 3,
2008, (date of OFS's inception) through September 30, 2009, we found:
* the financial statements are presented fairly, in all material
respects, in conformity with U.S. generally accepted accounting
principles;
* although internal controls could be improved, OFS maintained, in all
material respects, effective internal control over financial reporting
as of September 30, 2009; and:
* no reportable noncompliance in the period ended September 30, 2009,
with provisions of laws and regulations we tested.
The following sections discuss in more detail (1) these conclusions;
(2) our conclusion on Management's Discussion and Analysis (MD&A) and
other required supplementary and other accompanying information; (3)
our audit objectives, scope, and methodology; and (4) OFS's comments on
a draft of this report. In addition to our responsibility to audit
OFS's annual financial statements for TARP, we also are required under
EESA to report at least every 60 days on the findings resulting from
our oversight of the actions taken under TARP.[Footnote 12] This report
responds to both of these requirements. We have issued numerous other
reports on TARP in connection with this 60-day reporting responsibility
which can be found on GAO's Web site at [hyperlink,
http://www.gao.gov].
Opinion on Financial Statements:
OFS's financial statements for TARP, including the accompanying notes,
present fairly, in all material respects, in conformity with U.S.
generally accepted accounting principles, OFS's assets, liabilities,
and net position as of September 30, 2009, and its net cost, changes in
net position, and budgetary resources for the period from October 3,
2008, (date of OFS's inception) through September 30, 2009.
As discussed in notes 2 and 6 to OFS's financial statements for TARP,
the valuation of TARP direct loans, equity investments, and asset
guarantees is based on estimates using economic and financial credit
subsidy models. The estimates use entity-specific as well as relevant
market data as the basis for assumptions about future performance, and
incorporate an adjustment for market risk to reflect the variability
around any unexpected losses. In valuing the direct loans, equity
investments, and asset guarantees, OFS management considered and
selected assumptions and data that it believed provided a reasonable
basis for the estimated subsidy allowance and related subsidy costs
reported in the financial statements.[Footnote 13] However, there are a
large number of factors that affect these assumptions and estimates,
which are inherently subject to substantial uncertainty arising from
the likelihood of future changes in general economic, regulatory, and
market conditions. The estimates have an added uncertainty resulting
from the unique nature of transactions associated with the multiple
initiatives undertaken for TARP and the lack of historical program
experience upon which to base the estimates. As such, there will be
differences between the net estimated values of the direct loans,
equity investments, and asset guarantees as of September 30, 2009, that
totaled $239.7 billion, and the amounts that OFS will ultimately
realize from these assets, and such differences may be material. These
differences will also affect the ultimate cost of TARP. Further, the
ultimate cost will change as OFS continues to purchase troubled assets
and incur related subsidy costs as well as incur costs under other TARP
initiatives.[Footnote 14] OFS's authority to purchase or insure
additional troubled assets expires on December 31, 2009, but may be
extended by the Secretary of the Treasury to up to October 3, 2010.
[Footnote 15]
As discussed in note 1 to the financial statements, while OFS's
financial statements reflect activity of OFS in implementing TARP,
including providing resources to various entities to help stabilize the
financial markets, the statements do not include the assets,
liabilities, or results of operations of commercial entities in which
OFS has a significant equity interest. According to OFS officials,
OFS's investments were not made to engage in the business activities of
the respective entities and OFS has determined that none of these
entities meet the criteria for a federal entity.
Opinion on Internal Control:
Although certain internal controls could be improved, OFS maintained,
in all material respects, effective internal control over financial
reporting as of September 30, 2009, that provided reasonable assurance
that misstatements, losses, or noncompliance material in relation to
the financial statements would be prevented or detected and corrected
on a timely basis. Our opinion on internal control is based on criteria
established under 31 U.S.C. § 3512(c), (d), commonly known as the
Federal Managers' Financial Integrity Act (FMFIA).
We identified two significant deficiencies[Footnote 16] in OFS's
internal control over financial reporting, which although not material
weaknesses, are important enough to merit management's attention. These
deficiencies, described in more detail later in this report, concern
OFS's (1) accounting and financial reporting processes, and (2)
verification procedures for data used for asset valuations.
We will be reporting additional details concerning these significant
deficiencies separately to OFS management, along with recommendations
for corrective actions. We also identified other deficiencies in OFS's
system of internal control that we consider not to be material
weaknesses or significant deficiencies. We have communicated these
matters to management and, where appropriate, will report on them
separately.
Significant Deficiencies:
Since its creation on October 3, 2008, OFS has made significant
progress in building a financial reporting structure, including
developing an internal control system over TARP activities and
transactions and addressing key accounting and financial reporting
issues necessary to enable it to prepare financial statements, and
receive an audit opinion on those statements, for the period ended
September 30, 2009. However, OFS's financial reporting structure
continued to evolve throughout the year as new TARP programs were
implemented, which posed a challenge to OFS's ability to establish a
comprehensive system of internal control while simultaneously reacting
to market events and implementing TARP initiatives. This challenge
contributed to the following two significant deficiencies in OFS's
internal control that we identified.
Accounting and Financial Reporting Processes:
While OFS had developed and implemented controls over TARP transactions
and activities, we identified several control deficiencies that
collectively represented a significant deficiency in OFS's internal
control over its accounting and financial reporting processes.
Specifically, OFS did not effectively implement its review and approval
process for preparing its financial statements and related disclosures
for TARP. We identified incorrect amounts and inaccurate, inconsistent,
and incomplete disclosures in OFS's draft financial statements,
footnotes, and MD&A for TARP that were significant, but not material,
and that were not detected by OFS. OFS revised the financial
statements, footnotes, and MD&A to address the issues that we
identified. In addition, OFS had not finalized its procedures related
to its processes for accounting for certain program transactions,
preparing its September 30, 2009, financial statements, and its
oversight and monitoring of financial-related services provided to OFS
by asset managers and certain financial agents. Further, OFS did not
have proper segregation of duties over a significant accounting
database it uses in valuing its assets in that the same individual was
responsible for performing both the data entry and the reconciliation
of the data output. However, OFS had other controls over TARP
transactions and activities that reduced the risk of misstatements
resulting from these deficiencies. Properly designed and implemented
controls over the accounting and financial reporting processes are key
to providing reasonable assurance regarding the reliability of the
balances and disclosures reported in the financial statements and
related notes in conformity with generally accepted accounting
principles.
Verification Procedures for Data Input for Asset Valuations:
OFS did not effectively implement its verification procedures for
certain assumptions and related data that were input into the economic
and financial credit subsidy models used for the valuation of TARP
direct loans, equity investments, and asset guarantees. Specifically,
we identified data input errors to the estimation models, such as
incorrect dividend rates and maturity dates, that were not detected by
OFS's verification procedures. Significant errors that we identified
were corrected and amounts were properly reflected in the September 30,
2009, financial statements. OFS did perform procedures to assess the
reasonableness of the model outputs, including comparison of the asset
valuations calculated by the model with independently performed
valuations. We believe that these procedures reduced the risk of
misstatements resulting from the data input errors. Nonetheless, we
believe the ineffective implementation of data input verification
procedures represents a significant deficiency in OFS's internal
control warranting management's attention. Effective verification of
data inputs used in the subsidy models is key to providing reasonable
assurance that the asset valuations and related subsidy cost are
reliably reported in the financial statements.
Compliance with Laws and Regulations:
Our tests of OFS's compliance with selected provisions of laws and
regulations for the period ended September 30, 2009, disclosed no
instances of noncompliance that would be reportable under U.S.
generally accepted government auditing standards. The objective of our
audit was not to provide an opinion on overall compliance with laws and
regulations. Accordingly, we do not express such an opinion.
Consistency of Other Information:
OFS's MD&A, other required supplementary information, and other
accompanying information contain a wide range of information, some of
which is not directly related to the financial statements. We did not
audit and we do not express an opinion on this information. However, we
compared this information for consistency with the financial statements
and discussed the methods of measurement and presentation with OFS
officials. On the basis of this limited work, we found no material
inconsistencies with the financial statements, U.S. generally accepted
accounting principles, or the form and content guidance in Office of
Management and Budget Circular No. A-136, Financial Reporting
Requirements.
Objectives, Scope, and Methodology:
OFS management is responsible for (1) preparing the financial
statements in conformity with U.S. generally accepted accounting
principles; (2) establishing and maintaining effective internal control
over financial reporting, and evaluating its effectiveness; and (3)
complying with applicable laws and regulations. Management evaluated
the effectiveness of OFS's internal control over financial reporting as
of September 30, 2009, based on the criteria established under FMFIA.
OFS management's assertion based on its evaluation is included in
appendix I.
We are responsible for planning and performing the audit to obtain
reasonable assurance and provide our opinion about whether (1) OFS's
financial statements are presented fairly, in all material respects, in
conformity with U.S. generally accepted accounting principles; and (2)
OFS management maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2009. We are also
responsible for (1) testing compliance with selected provisions of laws
and regulations that have a direct and material effect on the financial
statements, and (2) performing limited procedures with respect to
certain other information accompanying the financial statements.
In order to fulfill these responsibilities, we:
* examined, on a test basis, evidence supporting the amounts and
disclosures in the financial statements;
* assessed the accounting principles used and significant estimates
made by management;
* evaluated the overall presentation of the financial statements;
* obtained an understanding of the entity and its operations, including
its internal control over financial reporting;
* considered OFS's process for evaluating and reporting on internal
control over financial reporting that OFS is required to perform by
FMFIA and Section 116(c) of EESA;
* assessed the risk that a material misstatement exists in the
financial statements and the risk that a material weakness exists in
internal control over financial reporting;
* evaluated the design and operating effectiveness of internal control
over financial reporting based on the assessed risk;
* tested relevant internal control over financial reporting;
* tested compliance with selected provisions of the following laws and
regulations: EESA, as amended; the Antideficiency Act, as amended; the
Federal Credit Reform Act of 1990; and the Purpose Statute; and:
* performed such other procedures as we considered necessary in the
circumstances.
An entity's internal control over financial reporting is a process
affected by those charged with governance, management, and other
personnel, the objectives of which are to provide reasonable assurance
that (1) transactions are properly recorded, processed, and summarized
to permit the preparation of financial statements in conformity with
U.S. generally accepted accounting principles, and assets are
safeguarded against loss from unauthorized acquisition, use, or
disposition; and (2) transactions are executed in accordance with the
laws governing the use of budget authority and other laws and
regulations that could have a direct and material effect on the
financial statements.
We did not evaluate all internal controls relevant to operating
objectives as broadly established under FMFIA, such as those controls
relevant to preparing statistical reports and ensuring efficient
operations. We limited our internal control testing to testing controls
over financial reporting. Because of inherent limitations, internal
control may not prevent or detect and correct misstatements due to
error or fraud, losses, or noncompliance. We also caution that
projecting any evaluation of effectiveness to future periods is subject
to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
We did not test compliance with all laws and regulations applicable to
OFS. We limited our tests of compliance to selected provisions of laws
and regulations that have a direct and material effect on the financial
statements for the period ended September 30, 2009. We caution that
noncompliance may occur and not be detected by these tests and that
such testing may not be sufficient for other purposes.
We performed our audit in accordance with U.S. generally accepted
government auditing standards. We believe our audit provides a
reasonable basis for our opinions and other conclusions.
Agency Comments:
In commenting on a draft of this report, the Assistant Secretary,
Office of Financial Stability, stated OFS concurred with the two
significant deficiencies in its internal control over financial
reporting that GAO identified. He also stated that OFS is committed to
correcting the deficiencies. The complete text of OFS's comments is
reprinted in appendix II.
Signed by:
Gary T. Engel:
Director:
Financial Management and Assurance:
December 4, 2009:
[End of section]
Management's Discussion and Analysis:
Executive Summary:
This report provides a summary of the activities of the Troubled Asset
Relief Program (TARP), which was established under the Emergency
Economic Stabilization Act (EESA) last year. The purpose of TARP was to
restore the liquidity and stability of the financial system. While we
will never know for certain what would have happened without TARP,
there is broad agreement today that because of TARP and other
governmental actions, the United States averted a potentially
catastrophic failure of the financial system.
This report also provides an update on the costs of TARP. While EESA
provided the Secretary of the Treasury with the authority to purchase
or guarantee $700 billion to meet the objectives of the Act, it is
clear today that TARP will not cost taxpayers $700 billion. First, the
Treasury‘s Office of Financial Stability (Treasury-OFS) is unlikely to
disburse the full $700 billion. In addition, many of the investments
under the program, particularly those aimed at stabilizing banks, are
expected to deliver returns for taxpayers. This combination of lower
spending and higher expected returns is expected to lower the projected
costs of TARP from the $341 billion estimate in the President‘s Mid-
session Budget in August 2009.
During the period ended September 30, 2009, the Treasury-OFS disbursed
$364 billion of the authorized $700 billion, most of it in the form of
investments, and $73 billion of those TARP funds have already been
repaid as of such date. In addition, for the period ended September 30,
2009, the investments generated $12.7 billion in cash received through
interest, dividends, and the proceeds from the sale of warrants. For
those TARP disbursements in FY 2009, the Treasury-OFS reported net cost
of operations of approximately $41.6 billion, including administrative
expenses. The reported net cost of operations includes the estimated
net cost related to loans, equity investments, and asset guarantees. As
additional funds are distributed, particularly for the housing
initiative, the total cost is likely to rise, although anticipated to
remain substantially below the $341 billion estimate in the August 2009
Midsession estimate.
Four TARP programs reported net income in FY 2009: the Capital Purchase
Program, the Targeted Investment Program, the Asset Guarantee Program,
and the Consumer and Business Lending Initiative. This net income was
offset by reported net cost of the investments in AIG and the
automotive companies, bringing the net cost for these programs during
FY 2009 to approximately $41.4 billion.
As further disbursements are made in FY 2010 and later, the costs of
the TARP program are likely to rise. In particular, the $50 billion
Home Affordable Modification Program or ’HAMP,“ is not designed to
recoup money spent on loan modifications to keep people in their homes.
In addition, the Treasury-OFS‘ assistance to AIG includes an equity
facility on which $27 billion remained undrawn at fiscal year end, and
$30 billion of investments and loans under the Public Private
Partnership Program will largely be recorded beginning in FY 2010.
The ultimate return on the outstanding TARP investments will depend on
how the economy and financial markets evolve. The general improvement
in economic and financial environment, early repayments of TARP funds,
and refinements to the valuation models have significantly lowered
expected costs for the program funds disbursed in FY 2009 by $110
billion below the estimates made when the programs were initiated.
About $10 billion of that decline in costs stems from early repayments
of TARP funds.
These estimates will change. The design and the precise amounts of
additional investments for small banks and to facilitate small business
lending have not yet been determined. In addition, the ultimate return
on TARP investments is subject to significant uncertainty as market
conditions evolve.
While this report provides updated information on TARP's costs, the
initiative should be evaluated primarily based on its impact on
stabilizing the financial system. These investments were not made to
make money but to help prevent a collapse of our financial system and
lay the foundation for economic recovery. Today, the financial system
and the economy are showing signs of stability. The cost of borrowing
has declined to pre-crisis levels for many businesses, states and local
governments, the government sponsored enterprises (GSEs), and the banks.
Housing markets have shown signs of stabilization, and home prices have
ticked up in recent months, after three straight years of declines. The
economy grew in the third quarter, and most private economists predict
it will grow for the remainder of this year and next.
That improvement in the economic and financial outlook since the spring
reflects a broad and aggressive policy response that included the
financial stability policies implemented under TARP, efforts to bolster
confidence in the housing and mortgage markets under the Housing and
Economic Reform Act (HERA), other financial stability policies
implemented by the Federal Deposit Insurance Corporation and the Board
of Governors of the Federal Reserve System (Federal Reserve),
accommodative monetary policy, and the Obama Administration‘s fiscal
stimulus package implemented under the American Recovery and
Reinvestment Act of 2009.
While TARP was necessary, it has put the federal government in the
unwelcome position of owning sizeable stakes in private sector
companies. Given that unusual position as a reluctant shareholder, the
Treasury-OFS has established a core set of principles to guide its
actions. First and foremost, the Treasury-OFS is seeking to protect
taxpayers by minimizing the long-term consequences of the current
economic and financial crisis with as little direct cost to the taxpayer
as possible. As economic and market conditions improve, Treasury-OFS
aims to dispose of its investments as quickly as practicable, in a
timely and orderly manner consistent with the duty to promote financial
stability and protect taxpayers‘ interests.
To administer the programs under TARP, the Secretary of the Treasury
has established the Treasury-OFS, which is designed to be temporary in
nature, but also highly skilled and well equipped to handle the
complexity of TARP initiatives. At the same time, Treasury-OFS' process
is designed to be highly transparent. Congress and taxpayers are kept
informed of TARP's actions, results, investments and costs through
frequent and timely public reports, daily communication with oversight
bodies, public responses to oversight reports, and direct outreach to
taxpayers through its websites: FinancialStability.gov and
MakingHomeAffordable.gov.
Because of the magnitude and importance of these programs, Congress
established a strong oversight structure to ensure accountability. The
Government Accountability Office (GAO), the Special Inspector General
for TARP (SIGTARP), the Congressional Oversight Panel (COP) and the
Financial Stability Oversight Board (FINSOB) engage in frequent reviews
of TARP activities and have contributed to making the programs stronger
and more effective.
Despite TARP's positive record to date, and the improving financial and
economic outlook, significant challenges remain for the financial
sector and our economy. While the economy is growing again, jobs are
still being lost and the unemployment situation continues to worsen.
The pace of bank failures, which tends to lag economic cycles, remains
elevated. Foreclosure rates also remain very high, and bank lending has
contracted, with credit standards tight. Commercial real estate losses
weigh heavily on many banks, especially on smaller banks, impairing
their ability to extend new loans. Small businesses have been
particularly affected because they rely heavily on bank lending and do
not have the ability to raise capital through the securities markets.
While a number of TARP initiatives, particularly those for large
institutions, have begun to wind down, Treasury-OFS continues to focus
on stabilizing the housing markets as well as improving access to
credit for small businesses. Treasury-OFS is also mindful of the fact
that risks remain, and history suggests that exiting too soon from
policies designed to contain a financial crisis can significantly
prolong an economic downturn. It is within this larger context that the
Secretary of the Treasury will evaluate and decide whether to extend
TARP authority past December 31, 2009.
Section One: Background and Creation of TARP:
Stresses in U.S. financial markets began to emerge in 2007 as the
performance of subprime mortgages deteriorated significantly, and
losses on related securities began to climb. With the extent and
distribution of losses quite uncertain, concerns surfaced about the
financial condition of banks and other financial institutions.
Pressures in short-term funding markets escalated and some off-balance
sheet funding vehicles were not able to renew their asset-backed
commercial paper, raising concerns about the ability of sponsoring
banks to meet funding needs. As a consequence, short-term credit
markets came under considerable pressure and risk spreads in interbank
funding markets and in some segments of the commercial paper (CP)
market rose sharply. Announcements of large asset write-downs and weak
financial reports for many large financial institutions in late 2007
raised additional concerns about the resilience and capital adequacy of
financial counterparties and the likelihood of further large losses.
Continuing declines in mortgage loan performance, market valuations of
mortgage-related assets, and the credit ratings of even so-called
"super-senior" tranches of structured finance securitizations
heightened the pressure on financial institutions with significant
known exposures in these areas. Market participants became increasingly
cautious and, in some cases, unwilling to extend funding to the most-
affected institutions, as in the case of Bear Stearns. In March 2008,
the Federal Reserve, with the full support of the Treasury, facilitated
a merger of Bear Stearns with JPMorgan Chase to prevent a disorderly
collapse of the firm and potentially severe spillover effects in the
financial markets. The condition of financial guarantors weakened,
calling into question the value of the insurance they had written,
leading to declines in the value of products insured by these entities.
In March 2008, the Federal Reserve introduced two new liquidity
facilities (the Primary Dealer Credit Facility and the Term Securities
Lending Facility), which increased the liquidity available to primary
dealers.
Pressures in financial markets initially appeared to ease somewhat as a
consequence of these actions. However, housing conditions and the
broader economy continued to deteriorate, and financial institutions
came under renewed stress in the summer of 2008. Capital market
dislocations and volatility combined with losses and expectations of
further losses on mortgage-related assets resulted in the debt spreads
of Fannie Mae and Freddie Mac widening and these two companies becoming
unable to raise new capital or long-term debt. In September, the
Federal Housing Finance Agency (FHFA) placed these firms into
conservatorship while obtaining backup capital and funding support from
Treasury under authority granted in July 2008 by the Housing and
Economic Recovery Act of 2008.
In mid-September, a series of events caused the crisis to escalate.
Lehman Brothers came under heightened funding pressures, and on
September 15, 2008, the parent company filed for bankruptcy protection.
American International Group, Inc. (AIG), a global insurance company,
experienced severe liquidity pressures, necessitating assistance from
the Federal Reserve, with the concurrence of Treasury, on September 16,
2008, to prevent the potential for severe systemic consequences from a
disorderly failure of the firm. In the wake of the bankruptcy of Lehman
Brothers and the near failure of AIG, spreads on interbank borrowing
jumped to a record high as banks sought to safeguard their own
liquidity and interbank lending volumes contracted sharply. Losses on
Lehman Brothers commercial paper caused a money market mutual fund to
experience Net Asset Valuations of less than $1 per share (i.e.,
"breaking the buck") and investors accelerated withdrawals from prime
money market funds, forcing sales of their CP holdings. Total CP
outstanding fell sharply, leaving many financial and nonfinancial
businesses with sharply reduced access to needed short-term funds. Many
such institutions tapped existing back-up lines of credit at banks,
adding to the pressure on liquidity funding needs of those banks. To
support the functioning of money market mutual funds, on September 19,
2008, the Treasury initiated an insurance program for existing balances
at money market mutual funds. In addition, the Federal Reserve
established the Asset-Backed Commercial Paper Money Market Mutual Fund
Liquidity Facility (AMLF) to provide liquidity to money market mutual
funds that were holding asset-backed commercial paper.
The loss of confidence in financial institutions also contributed to
the failure of Washington Mutual, the largest U.S. thrift institution
in September 2008. The FDIC sold the banking operations of the
institution to JPMorgan Chase. Wachovia Corporation subsequently came
under intense funding pressures, and ultimately was acquired by Wells
Fargo & Co. Moreover, as the financial crisis intensified in the U.S.
and abroad, risks to the stability of the international financial
system increased. To help ease liquidity pressures, the Federal Reserve
in coordination with other central banks around the globe provided
dollar liquidity to banking institutions through reciprocal currency
(or swap) lines.
Accompanying the pressures in interbank and other funding markets, and
in light of the weakening economy, banks continued to tighten their
credit terms and standards on loans to their customers. The tighter
terms and standards reduced credit availability, leaving its imprint on
economic activity. In the corporate bond market, borrowing costs
increased dramatically and the spread of corporate yields to comparable
maturity Treasury yields rose, reflecting financial market stresses and
a weakening economic outlook. Broad stock price indexes fell sharply,
nearly 15 percent in early October 2008, leaving them down about 40
percent from the beginning of 2008.
This accumulation and confluence of events placed severe financial
stresses on financial markets and institutions, and strong pressures on
institutions to deleverage and restrain lending. Because of the
dependence of our economy on the flow of credit, serious strains on
credit providers can impose disproportionately large costs on the
broader economy. Responding to these severe conditions, the Treasury,
Federal Reserve, Federal Housing Finance Agency (FHFA), Federal Deposit
Insurance Corporation (FDIC), and other U.S. government bodies
undertook an array of unprecedented actions in accordance with their
respective authorities. However, additional resources and authorities
were needed to help address the significant problems in the financial
markets and the dangers posed by such problems to consumers,
businesses, and the broader economy. To provide additional resources
and authorities, Congress passed the Emergency Economic Stabilization
Act of 2008 (EESA)[Footnote 17] which was signed into law by President
George W. Bush on October 3, 2008. The purposes of EESA were to provide
authority and facilities that the Secretary of the Treasury could use
to restore liquidity and stability to the financial system of the
United States, and to ensure that such authority and facilities were
used in a manner that protected home values, college funds, retirement
accounts, and life savings; preserved home ownership; promoted jobs and
economic growth; maximized overall returns to the taxpayers of the
United States; and provided public accountability for the exercise of
such authority.
Mission and Organizational Structure:
The EESA established the Office of Financial Stability (OFS) within the
Office of Domestic Finance of the Treasury Department to implement the
TARP. The mission of Treasury-OFS is to carry out the authorities given
to the Secretary of the Treasury to implement the Troubled Asset Relief
Program (TARP). Section 101 of EESA authorized the Secretary of the
Treasury to establish the TARP to "purchase, and to make and fund
commitments to purchase, troubled assets from any financial
institution, on terms and conditions as are determined by the
Secretary". EESA defines the terms "troubled assets" and "financial
institution" and provides other requirements that must be met for any
such purchase. The statute also provides authority for a guarantee
program for troubled assets.
EESA Section 101: Definitions
Troubled Assets are defined by EESA as residential or commercial
mortgages and any securities, obligations or other instruments that are
based on or related to such mortgages, that in each case was originated
or issued on or before March 14, 2008, the purchase of which the
Secretary of the Treasury determines promotes financial market
stability; and any other financial instrument that the Secretary of the
Treasury, after consultation with the Chairman of the Board of
Governors of the Federal Reserve System, determines the purchase of
which is necessary to promote financial market stability, but only upon
transmittal of such determination, in writing, to the appropriate
committees of Congress.
Financial Institutions are defined by EESA as any institution,
including, but not limited to, any bank, savings association, credit
union, security broker or dealer, or insurance company, established and
regulated under the laws of the United States or any State, territory,
or possession of the United States, the District of Columbia,
Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands,
Guam, American Samoa, or the United States Virgin Islands, and having
significant operations in the United States, but excluding any central
bank of, or institution owned by, a foreign government.
Treasury-OFS is headed by an Assistant Secretary of the Treasury,
appointed by the President with the advice and consent of the Senate.
Reporting to the Assistant Secretary for Financial Stability are seven
major divisions: the Offices of the Chief Investment Officer, the Chief
Financial Officer, the Chief for Investment Operations/Technology, the
Chief Homeownership Preservation Officer, the Chief Administrative
Officer, the Chief Reporting Officer, and the Chief for OFS Internal
Review. A Chief Counsel's Office reports to the Assistant Secretary and
to the Office of the General Counsel in the Department of Treasury.
The Treasury-OFS organization chart is shown below:
[Figure: Refer to PDF for image: Organization chart]
Office of Financial Stability:
Top level:
Assistant Secretary for Financial Stability;
* Financial Agents (OFA);
* Chief Counsel.
Second level, reporting to Assistant Secretary for Financial Stability:
* Chief Investment Officer;
* Chief Financial Officer;
* Chief Investment Operations/Technology;
* Chief Homeownership Preservation Officer;
* Chief Administrative Officer;
* Chief OFS Internal Review;
* Chief Reporting Officer.
Source: Draft - 12/1/2009.
[End of figure]
Additional information regarding the operations of these divisions and
other aspects of Treasury-OFS' operations can be found in Section Ten
[Other Management Information] of this report.
[End of Section One]
Section Two: Overview and Analysis of the Troubled Asset Relief
Program:
This section provides a broad overview of the TARP. It begins by
placing the program in context, explaining why it was a necessary
ingredient of a coordinated government response to contain and resolve
the financial crisis. This is followed by a discussion of Treasury-OFS'
strategic goals, and how particular programs and activities were
developed to meet each of these goals. Next, this section presents the
TARP financial summary for the period ended September 30, 2009.
Finally, this section concludes with a discussion of the aggregate
impact of TARP and other government financial policies on financial
markets and institutions. These are the metrics by which we evaluate
success or failure of government support policies.
TARP in Context: A Critical Pillar of a Coordinated Government
Response:
This crisis really began in August 2007. The Federal Reserve, and to a
lesser extent the FDIC, led the policy response during the first year
of the crisis. Before September 2008, the Federal Reserve was providing
sorely-needed liquidity to many financial institutions, which allowed
them to meet near-term obligations. The FDIC was insuring deposits,
which helped quell traditional bank runs, and it was resolving troubled
depository institutions, such as IndyMac.
But when stress in the system dramatically intensified in the wake of
the Lehman Brothers failure, investors began to question whether the
financial system was solvent and confidence collapsed. A different sort
of policy response was needed.
The Federal Reserve does not have the authority to directly inject
capital into banks and other financial institutions to address
potential capital shortfalls. Although it has expanded the scope of
eligible borrowers and collateral over the past few years, the Federal
Reserves liquidity provision is confined to secured lending against
good collateral. This is a powerful, but limited tool. The large amount
of troubled assets held by financial institutions heightened the
markets' fears.
The FDIC has a broader toolset in some respects--including the ability
to inject capital or to purchase or guarantee liabilities--but only for
depository institutions. This too proved a stabilizing factor. But in
the fall of last year the crisis spread well beyond traditional banks,
and threatened to exceed the limitations of the FDIC's capacity to
effectively respond. Investors feared that U.S. financial institutions
needed, in the aggregate, hundreds of billions of dollars to offset
potential credit losses.
In this context the passage of EESA was essential. It gave the
Secretary of the Treasury temporary authority to purchase and guarantee
assets in a wide range of financial institutions and markets. As
explained below, that step, combined with the actions of other
government agencies and the Federal Reserve, helped prevent the
potential collapse of the U.S. financial system. To date, the cost has
been considerably less than what was originally projected. Today, EESA
programs continue to stabilize and rehabilitate still fragile markets
and institutions, while repayments of the government's investments over
the past year have already begun.
OFS Strategic Goals:
The purpose of EESA is to provide the Secretary of the Treasury with
the authorities and facilities necessary to stabilize the U.S.
financial system. In addition, the Secretary is directed to ensure that
such authorities are used in a manner that protects home values,
college funds, retirement accounts, and life savings; preserves
homeownership; promotes jobs and economic growth; maximizes overall
returns to taxpayers; and provides public accountability. The EESA also
provided specific authority to take certain actions to prevent
avoidable foreclosures.
In light of this statutory direction, Treasury-OFS established the
following as its operational goals:
1. Ensure the overall stability and liquidity of the financial system:
a. Make capital available to viable institutions;
b. Provide targeted assistance as needed;
c. Increase liquidity and volume in securitization markets.
2. Prevent avoidable foreclosures and help preserve homeownership.
3. Protect taxpayer interests.
4. Promote transparency.
I. Ensure the Overall Stability and Liquidity of the Financial System:
To ensure the overall stability and liquidity of the financial system,
Treasury-OFS developed several programs under the TARP that were
broadly available to financial institutions. Under the Capital Purchase
Program (CPP), Treasury-OFS provided capital infusions directly to
banks and insurance companies deemed viable by their regulators but in
need of a stronger asset base to weather the crisis. The Capital
Assistance Program (CAP) was developed to supplement the Supervisory
Capital Assessment Program (SCAP), or "stress test" of the largest U.S.
financial institutions. If these institutions were unable to raise
adequate private funds to meet the SCAP requirements, Treasury-OFS
stood ready to provide additional capital.
In addition, Treasury-OFS provided direct aid to certain financial
industry participants through the Targeted Investment Program (TIP) and
the Asset Guarantee Program (AGP), as well as the program originally
known as the Systemically Significant Failing Institutions (SSFI)
program. These programs were designed to mitigate the potential risks
to the system as a whole from the difficulties facing these firms.
(Because SSFI was used only for investments in American International
Group, Inc. (AIG), such investments are now referred to as the AIG
Investment Program.)
Similarly, the Automotive Industry Financing Program (AIFP) provided
funding for General Motors Corporation (GM) and Chrysler LLC
(Chrysler), as well as their financing affiliates in order to prevent a
significant disruption of the automotive industry that would have posed
a systemic risk to financial markets and negatively affected the real
economy. Treasury-OFS' actions helped GM and Chrysler undertake massive
and orderly restructurings through the bankruptcy courts that have
resulted in leaner and stronger companies.
The Public-Private Investment Program (PPIP) was established to
facilitate price discovery and liquidity in the markets for troubled
real estate-related assets as well as the removal of such assets from
the balance sheets of financial institutions. In addition to these
initiatives, Treasury-OFS implemented the Consumer and Business Lending
Initiative (CBLI) to enhance liquidity and restore the flow of credit
to consumers and small businesses. The primary program through which
the CBLI operated in 2009 was the Term Asset-Backed Securities Loan
Facility (TALF). Through this combination of tools, the TARP helped
strengthen a broad set of financial institutions and markets.
Details on all of these efforts, including program-specific results,
can be found in Section Three [Ensuring Stability and Liquidity].
2: Prevent Avoidable Foreclosures and Preserve Homeownership:
To prevent avoidable foreclosures and preserve homeownership, Treasury
used authority granted under EESA to establish the Home Affordable
Modification Program (HAMP) in February 2009. Other government policies
have helped keep home mortgage rates at historic lows and allowed
millions of Americans to refinance and stay in their homes. But because
of falling housing prices, many responsible homeowners are unable to
refinance. Meanwhile, job losses and reductions in working hours and
benefits are making it harder for these Americans to pay their
mortgages. HAMP provides incentives to mortgage servicers, investors,
and homeowners to work together to reduce an eligible homeowner's
monthly payments to levels that are affordable in light of the
homeowner's current income. HAMP operations and program detail are
provided in Section Four [Preventing Foreclosures and Preserving
Homeownership].
3. Protect Taxpayer Interests:
Government financial programs, including TARP, helped prevent the U.S.
financial system from collapse, which could have resulted in a much
more severe contraction in employment and production. The manner in
which TARP was implemented is also designed to protect taxpayers and to
compensate them for risk. For example, in exchange for capital
injections, recipients of TARP funds have to adhere to corporate
governance standards, limit executive pay, and provide additional
reporting on lending activity. In addition, Treasury-OFS generally
received preferred equity, which provides dividends. The dividend rates
generally increase over time to encourage repayment.
Further, EESA stipulated that the taxpayer benefit as the institutions
which received TARP funds recovered. In connection with most
investments, Treasury-OFS also receives warrants for additional
securities in the institutions. Under the broad programs described
above, the Treasury-OFS has priority over existing shareholders of TARP
recipients for which TARP holds equity investments. This gives
taxpayers the ability to share in the potential upside along with
existing shareholders.
Finally, the Treasury-OFS seeks to achieve the goal of protecting the
taxpayer through the effective management and disposition of all TARP
investments, as detailed in Section Five [Protecting Taxpayer
Interests].
4: Promote Transparency:
EESA requires transparency and accountability. Specifically, EESA
requires Treasury-OFS to provide Congress with a variety of reports.
These include a monthly report to Congress on TARP activity, a
"tranche" report each time Treasury-OFS reaches a $50 billion spending
threshold, and transaction reports posted within two days detailing
every TARP transaction. In carrying out its operations, the Treasury-
OFS has sought to not only meet the statutory requirements but also to
be creative and flexible with respect to additional transparency
initiatives. The Treasury-OFS proactively provides to the public
monthly Dividends and Interest Reports reflecting dividends and
interest paid to Treasury-OFS from TARP investments, loans, and asset
guarantees, as well as monthly reports detailing the lending activity
of participants in the Capital Purchase Program. All of these reports
are publicly available on [hyperlink,
http://www.FinancialStability.gov].
EESA also provided for extensive oversight of the TARP, including by
the Congressional Oversight Panel, the Special Inspector General for
the TARP, and the Government Accountability Office. In addition,
Treasury-OFS officials frequently testify before Congress on the
progress of TARP programs, and Treasury-OFS staff provide briefings to
Congressional staff on programmatic developments.
Further details on these efforts are provided in Section Six [Promoting
Transparency].
TARP Timeline:
The following timeline illustrates major events in the implementation
of the TARP.
TARP Timeline:
Oct. 14, 2008:
Treasury announces the Capital Purchase Program (CPP) and intention to
purchase up to $250 billion in preferred stock from financial
institutions.
Oct. 3, 2008:
Congress passes EESA, which authorizes TARP.
Oct. 14, 2008:
Treasury announces executive compensation rules under TARP
Nov. 10, 2008:
Treasury announces that it will purchase $40 billion in senior
preferred stock from AIG.
Nov. 23, 2008:
Treasury announces the Targeted Investment Program (TIP) and Asset
Guarantee Program (AGP).
Nov. 25, 2008:
Treasury announces it will allocate $20 billion to back the Term Asset-
backed Securities Loan Facility (TALF).
Dec. 19, 2008:
Treasury announces the Automotive Industry Financing Program (AIFP) and
its plan for stabilizing the nation's automotive industry.
Jan. 16, 2009:
Treasury announces additional executive compensation rules under TARP.
Jan. 27, 2009:
Treasury announces new stepped up rules to limit the interests of
lobbyists and special interests in the EESA process.
Feb. 4, 2009:
Treasury issues new guidelines on executive compensation for firms
participating in TARP.
Feb. 10, 2009:
Treasury announces the Financial Stability Plan.
Feb. 17, 2009:
Treasury releases its first Monthly Lending and Intermediation
Snapshot.
Feb. 18, 2009:
Treasury announces the Homeowner Affordability and Stability Plan,
which includes the Home Affordable Program Modification Program.
Feb. 25, 2009:
Treasury announces the Capital Assistance Program.
Mar. 3, 2009:
Treasury and the Federal Reserve launch TALF.
Mar. 23, 2009:
Treasury and the Federal Reserve announce the Public-Private Investment
Program (PPIP).
May 15, 2009:
Treasury receives $2.8 billion in dividend payments from TARP
investments, the largest amount of dividends received in one day.
June 1, 2009:
Treasury releases its first CPP Monthly Lending Report.
June 17, 2009:
Ten of the largest banks repaid their CPP investments for over $68
billion in repayments to Treasury.
Sept. 30, 2009:
Treasury announces initial closings of Legacy Securities PPIP funds.
Oct 8, 2009:
Treasury announces a milestone of more than 500,000 trial loan
modifications in progress under the Making Home Affordable Program.
Oct. 21, 2009:
President Obama announces new initiatives to make it easier for
community banks to lend to small businesses.
Oct. 22, 2009:
Special Master for TARP Executive Compensation issues first rulings.
Nov. 9, 2009:
Treasury announces closure of Capital Assistance Program with no
investments having been made.
Nov. 19, 2009:
Treasury announces its intention to dispose of several warrant positions
received in consideration for investments made under the CPP
[End of timeline]
FY 2009 Financial Summary for TARP:
The EESA provided authority for the TARP to purchase or guarantee up to
$700 billion in troubled assets.[Footnote 18] Treasury-OFS used this
authority to help strengthen the U.S. financial system, restore health
and liquidity to credit markets to facilitate borrowing by consumers and
businesses, and prevent avoidable foreclosures in the housing market.
While the TARP should be evaluated primarily based on its impact on
stabilizing the financial system, a critical factor in the analysis is
cost. While EESA provided $700 billion in authority, the TARP has not
cost taxpayers $700 billion. Treasury-OFS used the authority to make
investments to stabilize the financial system and expects that much of
the funding will be repaid. While some of the TARP investments are
estimated to result in a cost, others are estimated to produce net
income.
Treasury-OFS tracks costs in accordance with Federal budget procedure.
First, amounts are allocated or budgeted to certain programs or needs
within the TARP. Allocations may change over time as needs are
reevaluated. Second, Treasury-OFS enters into legally binding
’obligations“ to invest or spend the funds. Third, funds are disbursed
over time pursuant to the obligations. In any given case, it is
possible that the full amount allocated will not be obligated, and that
the full amount obligated will not be disbursed.
Based on operations for the period ended September 30, 2009, Treasury-
OFS reports the following key results:
* Treasury-OFS entered into obligations with a face value of $454
billion in TARP authority during the fiscal year.
* In fiscal year 2009, Treasury-OFS disbursed $364 billion in TARP
funds to make loans and equity investments, and reported net cost of
operations of $41.6 billion.
* During fiscal year 2009, Treasury-OFS received $72.8 billion of
repayments on certain investments and loans made early in FY 2009.
* At September 30, 2009, Treasury-OFS reported $240 billion for the
value of loans, equity investments, and asset guarantees.
Treasury-OFS‘ FY 2009 net cost of operations of $41.6 billion includes
the estimated net cost related to loans, equity investments, and asset
guarantees. The total ultimate cost of the TARP is expected to be
higher because additional investments and disbursements have been made
or will be made after FY 2009. Due to its program structure, the $50
billion HAMP has delayed payments as well as a long disbursement cycle
so the FY 2009 amounts include only $2 million in cost. In addition,
AIG has drawn an additional $2.1 billion on its $29.8 billion equity
capital facility since September 30, 2009 and may draw down the
additional funds available to it, which may result in additional costs.
Including these costs as well as the Public-Private Investment Program
and other costs is likely to significantly increase the estimated
lifetime net cost for TARP. For programs where funds have been
obligated but not yet disbursed, the future outlays in some cases are
dependent on program subscription or other uncertain factors. In
addition, new commitments may be made under TARP prior to EESA‘s
expiration. As described further throughout this report, the valuation
of the TARP investments will naturally change based on many factors.
As of September 30, 2009, Treasury-OFS currently projects that four
programs will produce a net return to taxpayers. The Capital Purchase
Program, the Targeted Investment Program, the Asset Guarantee Program,
and the Consumer and Business Lending Initiative had reported net
income of $19.5 billion. Also, as of September 30, 2009, Treasury-OFS
reports that two programs -- the AIG Investment Program and the
Automotive Industry Financing Program – have net costs to taxpayers of
$60.9 billion. Taking into consideration the gains, the total net cost
for TARP to taxpayers, based on disbursements made as of September 30,
2009, is reported as $41.4 billion. Accrued expenses for the HAMP as of
September 30, 2009, of $2 million and administrative expenses for the
year of $167 million bring the total estimated net costs to $41.6
billion, as shown in Table 1.
Table 1: Net Income (Cost) of TARP Operations: For the period ended
September 30, 2009 (dollars in millions):
Programs with Estimated Subsidy Income:
Capital Purchase Program: $15,033;
Targeted Investment Program: $1,927;
Asset Guarantee Program: $2,201;
Consumer and Business Lending Initiative: $339;
Net Income (Cost) from Programs Above: $19,500.
Programs with Estimated Subsidy (Cost):
American International Group, Inc. Investments: ($30,427);
Automotive Industry Financing Program: ($30,477);
Net (Cost) of Two Programs Above: ($60,904);
Total Net Subsidy Income (Cost): ($41,404).
Additional TARP (Costs):
Home Affordable Modification Program: ($2);
Administrative Costs: ($167);
Total Net (Costs) of TARP Operations: ($41,573).
[End of table]
Over time the ultimate cost of the TARP programs may change. As
described later in this MD&A, and in the Treasury-OFS audited financial
statements, these estimates are based in part on currently projected
economic factors. Forecasts for these economic factors will likely
change, either increasing or decreasing the ultimate cost of the TARP.
HAMP expenses will increase significantly over time, as more
modifications of mortgage payments are finalized between mortgage
servicers and borrowers, resulting in increased incentive payments.
These payments are described in Section Four.
Table 2 provides a financial summary for TARP programs in FY 2009. For
each program, the table gives the face value of the amount obligated by
each program, the amount actually disbursed during the fiscal year,
repayments to Treasury-OFS during the period from program participants,
net outstanding balance (the amount on the original investment that is
due to be repaid to Treasury) on September 30, 2009, and cash inflows
on the investments for each program in the form of dividends, interest
or other fees. As of fiscal year end 2009, approximately $317 billion
of the $700 billion in purchase and guarantee authority remained
available, taking into account $72.8 billion in repayments. However,
this does not include the full planned amounts for the HAMP, Public
Private Investment Program (PPIP), Consumer and Business Lending
Initiative, and other programs.
Table 2: TARP Summary[A]: As of September 30, 2009 (dollars in
billions):
Capital Purchase Program:
Purchase Price or Guarantee Amounts: $204.6;
Total Disbursed: $204.6;
Investment Repayments: $70.7;
Outstanding Balance: $133.9;
Cash Received from Investments: $9.7.
Targeted Investment Program:
Purchase Price or Guarantee Amounts: $40.0;
Total Disbursed: $40.0;
Investment Repayments: $0.0;
Outstanding Balance: $40.0;
Cash Received from Investments: $1.9.
Asset Guarantee Program:
Purchase Price or Guarantee Amounts: $5.0;
Total Disbursed: $0.0;
Investment Repayments: $0.0;
Outstanding Balance: $0.0;
Cash Received from Investments: $0.5.
American International Group Investments[B]:
Purchase Price or Guarantee Amounts: $69.8;
Total Disbursed: $43.2;
Investment Repayments: $0.0;
Outstanding Balance: $43.2;
Cash Received from Investments: $0.0.
Term Asset-Backed Securities Loan Facility:
Purchase Price or Guarantee Amounts: $20.0;
Total Disbursed: $0.1;
Investment Repayments: $0.0;
Outstanding Balance: $0.1;
Cash Received from Investments: $0.0.
Public Private Investment Program[C]:
Purchase Price or Guarantee Amounts: $6.7;
Total Disbursed: $0.0;
Investment Repayments: $0.0;
Outstanding Balance: $0.0;
Cash Received from Investments: $0.0.
Automotive Industry Financing Program:
Purchase Price or Guarantee Amounts: $81.1;
Total Disbursed: $75.9;
Investment Repayments: $2.1;
Outstanding Balance: $73.8;
Cash Received from Investments: $0.7.
Home Affordable Modification Program[D]:
Purchase Price or Guarantee Amounts: $27.1;
Total Disbursed: $0.0;
Investment Repayments: NA;
Outstanding Balance: NA;
Cash Received from Investments: $0.0.
Totals:
Purchase Price or Guarantee Amounts: $454.3;
Total Disbursed: $363.8;
Investment Repayments: $72.8;
Outstanding Balance: $291.0;
Cash Received from Investments: $12.7.
[A] This table shows the TARP activity for the period ended September
30, 2009, on a cash basis. Cash received from investments includes
dividends and interest income reported in the Statement of Net Cost and
proceeds from repurchases of warrants and warrant preferred stock.
[B] The disbursed amount is lower than purchase price because of the
$29.8 billion facility available to AIG of which only $3.2 billion was
drawn at September 30, 2009. AIG drew an additional $2.1 billion from
the facility on November 13, 2009.
[C] Reflects the face value of obligations incurred as of September 30,
2009. As of that date, no fund managers had made any investments and
Treasury-OFS expects to provide a total of $30 billion in funding to
the nine fund managers selected for PPIP.
[D] Reflects legal commitments to servicers as of September 30, 2009.
Treasury-OFS has allocated $50 billion in total for the program.
Payments are made to servicers once temporary modifications are made
permanent.
[End of table]
Most of the TARP funds have been used to make investments in preferred
stock or make loans. Treasury-OFS has generally received dividend on
the preferred stock and interest payments on the loans from the
institutions participating in TARP programs. These payments are a
return on Treasury‘s TARP investments. For period ended September 30,
2009, Treasury-OFS received a total of $9.8 billion in dividends,
interest and fees. Table 3 shows the breakdown of receipts for the
period ended September 30, 2009 for all TARP programs combined.
Table 3: TARP FY 2009 Receipts and Repayments on Investments/Loans[A]:
For the period ended September 30, 2009 (dollars in billions):
Dividends, Interest, Fees and Warrants Repurchases:
Dividends and Fees: $9.6;
Interest: $0.2;
Repurchases of Warrants and Warrant Preferred Stock: $2.9;
Additional Notes: $0.0;
Subtotal: $12.7.
Investment/Loan Repayments:
Repurchases/Repayments on preferred stock: $70.7;
Loan Principal Repaid: $2.1;
Subtotal: $72.8.
Grand Total: $85.5.
[A] This table shows the TARP activity for the period ended September
30, 2009, on a cash basis. The table includes receipts and repayments
that do not result in revenue in the Statement of Net Cost.
[End of table]
Treasury-OFS also receives warrants in connection with most of its
investments, which provides an opportunity for taxpayers to realize an
upside on investments. Treasury-OFS has begun to dispose of some of its
warrants as institutions repay their preferred share investments. For
the period ended September 30, 2009, twenty-four institutions have
already repurchased their warrants which generated $2.9 billion in
receipts. Table 4 provides information on the institutions that have
fully repurchased the CPP preferred shares and repurchased warrants as
well as those that have fully repurchased their preferred shares but
not their warrants. (Treasury-OFS receives warrants for preferred stock
in the case of most private institutions, which are exercised
immediately. The receipts from warrants include receipts from the
repayment of such preferred shares, or ’warrant preferred stock“.)
Table 4: Repurchases of Preferred Shares (dollars in millions):
Institutions with fully repurchased preferred shares and repurchased
warrants or warrant preferred stock:
Institution: Alliance Financial Corporation;
Proceeds from Preferred Shares Redeemed: $26.9;
Total Dividends Received: $0.5;
Proceeds from Warrants Repurchased: $0.9.
Institution: American Express Company;
Proceeds from Preferred Shares Redeemed: $3,388.9;
Total Dividends Received: $74.4;
Proceeds from Warrants Repurchased: $340.0.
Institution: Bancorp Rhode Island, Inc.
Proceeds from Preferred Shares Redeemed: $30.0;
Total Dividends Received: $0.9;
Proceeds from Warrants Repurchased: $1.4.
Institution: Bank of New York Mellon;
Proceeds from Preferred Shares Redeemed: $3,000.0;
Total Dividends Received: $95.4;
Proceeds from Warrants Repurchased: $136.0.
Institution: BB&T Corporation;
Proceeds from Preferred Shares Redeemed: $3,133.6;
Total Dividends Received: $92.7;
Proceeds from Warrants Repurchased: $67.0.
Institution: Berkshire Hills Bancorp, Inc.
Proceeds from Preferred Shares Redeemed: $40.0;
Total Dividends Received: $0.9;
Proceeds from Warrants Repurchased: $1.0.
Institution: Centra Financial Holdings, Inc.
Proceeds from Preferred Shares Redeemed: $15.0;
Total Dividends Received: $0.2;
Proceeds from Warrants Repurchased: $0.8.
Institution: First Manitowoc Bancorp, Inc.
Proceeds from Preferred Shares Redeemed: $12.0;
Total Dividends Received: $0.2;
Proceeds from Warrants Repurchased: $0.6.
Institution: First Niagara Financial Group;
Proceeds from Preferred Shares Redeemed: $184.0;
Total Dividends Received: $4.8;
Proceeds from Warrants Repurchased: $2.7.
Institution: First ULB Corporation;
Proceeds from Preferred Shares Redeemed: $4.9;
Total Dividends Received: $0.1;
Proceeds from Warrants Repurchased: $0.2.
Institution: FirstMerit Corporation;
Proceeds from Preferred Shares Redeemed: $125.0;
Total Dividends Received: $1.8;
Proceeds from Warrants Repurchased: $5.0.
Institution: Goldman Sachs Group, Inc.
Proceeds from Preferred Shares Redeemed: $10,000.0;
Total Dividends Received: $318.1;
Proceeds from Warrants Repurchased: $1,100.0.
Institution: HF Financial Corporation;
Proceeds from Preferred Shares Redeemed: $25.0;
Total Dividends Received: $0.7;
Proceeds from Warrants Repurchased: $0.7.
Institution: IberiaBank Corporation;
Proceeds from Preferred Shares Redeemed: $90.0;
Total Dividends Received: $1.5;
Proceeds from Warrants Repurchased: $1.2.
Institution: Independent Bank Corporation;
Proceeds from Preferred Shares Redeemed: $78.2;
Total Dividends Received: $1.1;
Proceeds from Warrants Repurchased: $2.2.
Institution: Morgan Stanley;
Proceeds from Preferred Shares Redeemed: $10,000.0;
Total Dividends Received: $318.1;
Proceeds from Warrants Repurchased: $950.0.
Institution: Northern Trust Corporation;
Proceeds from Preferred Shares Redeemed: $1,576.0;
Total Dividends Received: $46.6;
Proceeds from Warrants Repurchased: $87.0.
Institution: Old Line Bancshares, Inc.
Proceeds from Preferred Shares Redeemed: $7.0;
Total Dividends Received: $0.2;
Proceeds from Warrants Repurchased: $0.2.
Institution: Old National Bancorp;
Proceeds from Preferred Shares Redeemed: $100.0;
Total Dividends Received: $1.5;
Proceeds from Warrants Repurchased: $1.2.
Institution: SCBT Financial Corporation;
Proceeds from Preferred Shares Redeemed: $64.8;
Total Dividends Received: $1.1;
Proceeds from Warrants Repurchased: $1.4.
Institution: Somerset Hills Bancorp;
Proceeds from Preferred Shares Redeemed: $7.4;
Total Dividends Received: $0.1;
Proceeds from Warrants Repurchased: $0.3.
Institution: State Street Corporation;
Proceeds from Preferred Shares Redeemed: $2,000.0;
Total Dividends Received: $63.6;
Proceeds from Warrants Repurchased: $60.0.
Institution: Sun Bancorp, Inc.
Proceeds from Preferred Shares Redeemed: $89.3;
Total Dividends Received: $1.1;
Proceeds from Warrants Repurchased: $2.1.
Institution: U.S. Bancorp;
Proceeds from Preferred Shares Redeemed: $6,599.0;
Total Dividends Received: $195.2;
Proceeds from Warrants Repurchased: $139.0.
Subtotal:
Proceeds from Preferred Shares Redeemed: $40,597.0;
Total Dividends Received: $1,220.7;
Proceeds from Warrants Repurchased: $2,900.9.
Institutions with fully repurchased preferred shares but warrants are
outstanding:
Institution: Bank of Marin Bancorp;
Proceeds from Preferred Shares Redeemed: $28.0;
Total Dividends Received: $0.5;
Proceeds from Warrants Repurchased: $0.
Institution: Capital One Financial Corporation;
Proceeds from Preferred Shares Redeemed: $3,555.2;
Total Dividends Received: $105.2;
Proceeds from Warrants Repurchased: $0.
Institution: Centerstate Banks of Florida Inc.
Proceeds from Preferred Shares Redeemed: $27.9;
Total Dividends Received: $1.2;
Proceeds from Warrants Repurchased: $0.
Institution: CVB Financial Corporation;
Proceeds from Preferred Shares Redeemed: $130.0;
Total Dividends Received: $4.7;
Proceeds from Warrants Repurchased: $0.
Institution: F.N.B. Corporation;
Proceeds from Preferred Shares Redeemed: $100.0;
Total Dividends Received: $3.3;
Proceeds from Warrants Repurchased: $0.
Institution: First Community Bancshares Inc.
Proceeds from Preferred Shares Redeemed: $41.5;
Total Dividends Received: $1.3;
Proceeds from Warrants Repurchased: $0.
Institution: JPMorgan Chase & Company;
Proceeds from Preferred Shares Redeemed: $25,000.0;
Total Dividends Received: $795.1;
Proceeds from Warrants Repurchased: $0.
Institution: Manhattan Bancorp;
Proceeds from Preferred Shares Redeemed: $1.7;
Total Dividends Received: $0.1;
Proceeds from Warrants Repurchased: $0.
Institution: Shore Bancshares, Inc.
Proceeds from Preferred Shares Redeemed: $25.0;
Total Dividends Received: $0.3;
Proceeds from Warrants Repurchased: $0.
Institution: Signature Bank;
Proceeds from Preferred Shares Redeemed: $120.0;
Total Dividends Received: $1.8;
Proceeds from Warrants Repurchased: $0.
Institution: Sterling Bancshares, Inc.
Proceeds from Preferred Shares Redeemed: $125.2;
Total Dividends Received: $2.5;
Proceeds from Warrants Repurchased: $0.
Institution: TCF Financial Corporation;
Proceeds from Preferred Shares Redeemed: $361.2;
Total Dividends Received: $7.9;
Proceeds from Warrants Repurchased: $0.
Institution: Texas Capital Bancshares, Inc.
Proceeds from Preferred Shares Redeemed: $75.0;
Total Dividends Received: $1.2;
Proceeds from Warrants Repurchased: $0.
Institution: Washington Federal S and L Association;
Proceeds from Preferred Shares Redeemed: $200.0;
Total Dividends Received: $5.4;
Proceeds from Warrants Repurchased: $0.
Institution: Wesbanco, Inc.
Proceeds from Preferred Shares Redeemed: $75.0;
Total Dividends Received: $2.9;
Proceeds from Warrants Repurchased: $0.
Subtotal:
Proceeds from Preferred Shares Redeemed: $29,865.6;
Total Dividends Received: $933.4;
Proceeds from Warrants Repurchased: $0.
Institutions making partial repurchases of preferred shares and
outstanding warrants:
Institution: State Bankshares, Inc.
Proceeds from Preferred Shares Redeemed: $12.5;
Total Dividends Received: $1.6;
Proceeds from Warrants Repurchased: $0.
Institution: Valley National Bancorp;
Proceeds from Preferred Shares Redeemed: $200.0;
Total Dividends Received: $11.2;
Proceeds from Warrants Repurchased: $0.
Institution: Westamerica Bancorporation;
Proceeds from Preferred Shares Redeemed: $41.9;
Total Dividends Received: $2.2;
Proceeds from Warrants Repurchased: $0.
Subtotal:
Proceeds from Preferred Shares Redeemed: $254.4;
Total Dividends Received: $15.0;
Proceeds from Warrants Repurchased: $0.
Total:
Proceeds from Preferred Shares Redeemed: $70,717.0;
Total Dividends Received: $2,169.1;
Proceeds from Warrants Repurchased: $2,900.9.
[End of table]
The ultimate cost of the TARP will not be known for some time. The
financial performance of the programs will depend on many factors such
as future economic and financial conditions, and the business prospects
of specific institutions. Table 5 provides information on the estimated
values of the TARP investments by program, as of the end of FY 2009.
(HAMP is excluded from the chart because no repayments are required).
The estimates in Table 5 are based on assumptions regarding future
events, which are inherently uncertain. The estimates are sensitive to
a number of factors, including changes in general economic conditions,
specific stock price volatility of the entities in which Treasury-OFS
has an equity interest, estimates of expected defaults, and
prepayments. If Treasury-OFS experiences higher than currently
projected early repayments, TARP‘s ultimate cost will decline further.
Sections Seven and Eight of this report describe the methods used to
determine the estimates.
Table 5 below, the Outstanding Balance column represents the amounts
paid by Treasury-OFS to acquire the loans and equity investments that
were outstanding as of fiscal year end. The Estimated Value of
Investment column represents the present value of net cash inflows that
Treasury-OFS estimates it will receive from the loans and equity
investments. For equity securities, this amount represents fair value.
The total difference of $53.1 billion between the two columns is
considered the ’subsidy cost allowance“ under the Federal Credit Reform
Act methods Treasury-OFS follows for budget and accounting purposes
(see Section Seven for further discussion).[Footnote 19]
Table 5: Summary of TARP Investments (dollars in billions):
Program: Capital Purchase Program:
Outstanding Balance[A]: $133.9;
Estimated Value of Investment, 9/30/09: $141.7.
Program: Targeted Investment Program:
Outstanding Balance[A]: $40.0;
Estimated Value of Investment, 9/30/09: $40.3.
Program: AIG Investment Program:
Outstanding Balance[A]: $43.2;
Estimated Value of Investment, 9/30/09: $13.2.
Program: Automotive Industry Financing Program:
Outstanding Balance[A]: $73.8;
Estimated Value of Investment, 9/30/09: $42.3.
Program: Term Asset-Backed Securities Loan Facility:
Outstanding Balance[A]: $0.1;
Estimated Value of Investment, 9/30/09: $0.4.
Program: Total:
Outstanding Balance[A]: $291.0;
Estimated Value of Investment, 9/30/09: $237.9.
[A] Before subsidy cost allowance.
[End of table]
Table 6 below shows the estimated net asset value for the top ten CPP
investments held as of September 30, 2009. The estimates shown below
include only estimates of the value of the preferred stock for each
institution. Treasury-OFS also holds warrants for each institution and
those warrants have additional value. As the Treasury-OFS will still
need to negotiate a sale price for the warrants, the estimated warrant
value of each institution cannot be disclosed without harming Treasury-
OFS' ability to secure the best return for taxpayers. Through an
exchange process, Treasury-OFS received common shares at $3.25 per
share for the originally issued preferred shares in Citigroup which had
an initial investment of $25 billion. The holdings of Citigroup common
shares had a market value of $37.23 billion ($4.84 per share) as of
September 30, 2009.
Table 6: Top Ten CPP Investments (dollars in billions)[A]:
Institution: Citigroup (Common Shares);
Original Investment: $25.00;
Estimated Net Asset Value (excluding warrants) as of 9/30/09: $37.23.
Institution: Bank of America;
Original Investment: $25.00;
Estimated Net Asset Value (excluding warrants) as of 9/30/09: $22.45.
Institution: Wells Fargo;
Original Investment: $25.00;
Estimated Net Asset Value (excluding warrants) as of 9/30/09: $23.47.
Institution: PNC Financial;
Original Investment: $7.58;
Estimated Net Asset Value (excluding warrants) as of 9/30/09: $7.17.
Institution: SunTrust Bank;
Original Investment: $4.85;
Estimated Net Asset Value (excluding warrants) as of 9/30/09: $4.14.
Institution: Regions Bank;
Original Investment: $3.50;
Estimated Net Asset Value (excluding warrants) as of 9/30/09: $3.01.
Institution: Fifth Third Bancorp;
Original Investment: $3.41;
Estimated Net Asset Value (excluding warrants) as of 9/30/09: $3.05.
Institution: Hartford Financial;
Original Investment: $3.40;
Estimated Net Asset Value (excluding warrants) as of 9/30/09: $3.11.
Institution: Keycorp;
Original Investment: $2.50;
Estimated Net Asset Value (excluding warrants) as of 9/30/09: $1.94.
Institution: CIT Group;
Original Investment: $2.33;
Estimated Net Asset Value (excluding warrants) as of 9/30/09: $0.
Institution: Total;
Original Investment: $102.57;
Estimated Net Asset Value (excluding warrants) as of 9/30/09: $105.57.
[A] Does not reflect the impact of management‘s expectation of an
additional $30 billion in early repayments.
[End of table]
Market conditions and the performance of specific financial
institutions will be critical determinants of the TARP‘s final cost.
The changes in the Treasury-OFS estimates during the period ended
September 30, 2009 provide a good illustration of this impact. The
estimated net cost of programs implemented to date declined by
approximately $110 billion as compared to the estimates made while the
programs were being initiated in the heart of the financial market
crisis last winter in large part due to market stabilization seen to
date and actual and forecast repayments occurring at a faster rate than
originally anticipated. In the CPP program for example, when the cost
of the program was first estimated by the Congressional Budget Office
and Treasury-OFS last winter, the expectation was that the program
would lose about 18-22 percent.[Footnote 20] In large part because of
the improved market conditions, Treasury-OFS reported net income of
about $15.0 billion for the period ended September 30, 2009. Based on
the repayments to date and current market conditions, the major bank
stabilization programs, including the CPP and the TIP, are currently
estimated to provide a net financial return to the taxpayer. The
outstanding $174 billion in CPP and TIP balances are estimated to be
worth approximately $182 billion. However, the outlook for repayments
from the auto industry investments and the AIG Investment Program is
less positive. Treasury-OFS estimates the $117 billion originally
invested in these programs is currently valued at approximately $56
billion. These programs may result in a net financial loss to
taxpayers.
Table 7 provides information as to how the estimated cost of the TARP
has changed during for the period ended September 30, 2009. The
positive amounts reflect an estimated income whereas negative amounts
reflect a cost or expense. For example, the $204.6 billion invested in
the CPP program was originally expected to cost about $57 billion (in
net present value cost). For the period ended September 30, 2009,
Treasury-OFS reported net income of about $15 billion for CPP. This
amount represents primarily the combination of actual dividends,
interest and realized fees, and the excess of estimated fair value as
of September 30, 2009 of the CPP investments over original cost.
Additional explanatory material on how these estimates were developed
can be found in Sections Seven [Financial Accounting Policy] and Eight
[TARP Valuation Methodology].
Table 7: Estimated Change in Net Cost for the TARP Programs (dollars in
billions):
Capital Purchase Program:
Original Estimate[A]: -57.4;
Current Estimate: +15.0;
Net Change: +72.4.
Targeted Investment Program:
Original Estimate[A]: -19.6;
Current Estimate: +1.9;
Net Change: +21.5.
Asset Guarantee Program:
Original Estimate[A]: +1.0;
Current Estimate: +2.2;
Net Change: +1.2.
AIG Investment Program:
Original Estimate[A]: -31.5;
Current Estimate: -30.4;
Net Change: +1.1.
Automotive Industry Financing Program:
Original Estimate[A]: -43.7;
Current Estimate: -30.4;
Net Change: +13.3.
Term Asset-Backed Securities Loan Facility:
Original Estimate[A]: +0.1;
Current Estimate: +0.3;
Net Change: +0.2.
Subtotal:
Original Estimate[A]: -151.1;
Current Estimate: -41.4;
Net Change: +109.7.
Home Affordable Modification Program:
Original Estimate[A]: -27.1;
Current Estimate: -27.1;
Net Change: 0.0.
Total:
Original Estimate[A]: -178.2;
Current Estimate: -68.5;
Net Change: +109.7.
[A] Original estimates completed on or near the initiation of each
program and adjusted for modifications. Amounts shown in both original
and current estimates are based on the same total program disbursements
through FY 2009.
[End of table]
The Impact of TARP:
Measuring the impact of the TARP in isolation is challenging. The
health of the overall system and its impact on the U.S. economy are the
most important metrics by which Treasury-OFS can measure the
effectiveness of these policies. However, the cost of the financial
system collapse that was likely averted by TARP and the other
government actions taken in the fall of 2008 and since then will never
be known. Moreover, it is difficult to measure separately the impact of
TARP as it was part of a coordinated government response to restore
confidence in our financial system. A few TARP programs were uniquely
targeted to specific markets and institutions. In those instances,
Treasury-OFS can measure performance more directly.
Confidence in the stability of our financial markets and institutions
has improved dramatically. Interbank lending rates, which reflect
stress in the banking system, have returned to levels associated with
more stable times. For example, the spread of one-month Libor to the
overnight index swap fell from a peak of about 340 basis points
[Footnote 21] last fall to roughly 10 basis points at the end of
October 2009, as shown in Figure 1. Credit-default swap spreads for
financial institutions, which measure investor confidence in their
health, have also fallen significantly. A measure of credit-default
swaps for the largest U.S. banks reached 450 basis points last fall as
shown in Figure 2, and just over 100 basis points today. The TARP was a
necessary step, but not the only step, to achieving this recovery.
Figure 1. Libor-OIS Spread (basis points):
[Refer to PDF for image: multiple line graph; contact Department of the
Treasury, Office of Financial Stability for graph data]
Source: Bloomberg.
[End of figure]
Figure 2. Credit Default Spreads for Financial Institutions (basis
points):
[Refer to PDF for image: multiple line graph; contact Department of the
Treasury, Department of the Treasury, Office of Financial Stability for
graph data]
Sources: Bloomberg.
Notes: Includes Bank of America, Citigroup, Goldman Sachs, JPMorgan,
Morgan Stanley, and Wells Fargo.
[End of figure]
At the same time, borrowing costs have declined for many businesses,
homeowners, and municipalities. Investment-grade corporate bond rates
have fallen by over 70 percent since last fall, and high-yield bond
rates have fallen by more than half. Fears of default on these bonds
have receded, providing further relief on prices. The CDX investment-
grade index (see Figure 3), an aggregate measure of credit-default
swaps for highly-rated companies, has fallen about 35 percent from its
October 2008 peak. Further, conventional 30-year mortgage rates (see
Figure 4) remain under five percent at historic lows. AAA municipal
bond rates are three percent, down from five percent last fall.
Figure 3. Corporate Bond Spreads (basis points):
[Refer to PDF for image: multiple line graph; contact Department of the
Treasury, Office of Financial Stability for graph data]
Source: Bloomberg.
[End of figure]
Figure 4. Conventional 30-Year Mortgage Rate (percent):
[Refer to PDF for image: multiple line graph; contact Department of the
Treasury, Office of Financial Stability for graph data]
Source: Federal Reserve.
[End of figure]
As borrowing costs have come down, businesses have raised about $900
billion in investment-grade debt and over $100 billion in high-yield
debt this year. While much of the new issuance early this year was
supported by the federal government, private investors have funded most
new corporate debt in recent months. In particular, banks have raised
substantial capital from private sources following the release of the
results from the federal government ’stress test“ of major U.S.
financial institutions. Since the results were released, banks have
raised $80 billion in new common equity and over $40 billion in debt
that is not guaranteed by the federal government.
Figure 5. Corporate Bond Issuance (US$ billions):
[Refer to PDF for image: vertical bar graph; contact Department of the
Treasury, Office of Financial Stability for graph data]
Source: JPMorgan.
[End of figure]
Figure 6. Net Common Issuance by U.S. Banks (US$, billions):
[Refer to PDF for image: vertical bar graph; contact Department of the
Treasury, Office of Financial Stability for graph data]
Source: SNL Financial.
Notes: Excludes equity generated through asset sales and preferred
conversions. Negative figures represent net repurchases of equity.
[End of figure]
Securitization markets that provide important channels of credit for
consumers and small businesses have also improved, in large part
because of programs launched under the TARP. Announcements about TALF
helped narrow spreads in these markets even before the program began
operating. This trend has continued, with spreads on TALF-eligible
asset-backed securities (ABS) back to pre-crisis levels today, and
spreads on non-TALF-eligible ABS more than 90 percent off their peaks
from last fall. Issuance of ABS backed by consumer and business loans
has averaged $14 billion per month since the government launched TALF
in March 2009, compared to about $1.6 billion per month in the six
months prior to the program‘s launch. Issuance not supported by the
federal government program accounted for about 40 percent of all such
issuance in October 2009. However, the overall size of securitization
markets remains small, relative to pre-crisis levels.
Figure 7. Spreads Between TALF-Eligible ABS and Treasury Securities
(basis points):
[Refer to PDF for image: multiple line graph; contact Department of the
Treasury, Office of Financial Stability for graph data]
Source: JPMorgan.
[End of figure]
Figure 8. Issuance of ABS Backed by Consumer and Small Business Loans
(US$, billions):
[Refer to PDF for image: vertical bar graph; contact Department of the
Treasury, Office of Financial Stability for graph data]
Source: Federal Reserve.
[End of figure]
Legacy security prices have improved significantly this year. This is
due in part to general market improvement and in part to announcements
for the Securities PPIP. Most of the Public-Private Investment Funds
(PPIFs) have now been formed and are starting to purchase legacy assets
from banks. The PPIFs should continue to contribute to price
improvements in these markets.
Stock markets have recovered substantial ground since March, following
18 months of steep declines. The S&P 500 has risen over 60 percent over
the past six months, and share prices for financial companies in the
S&P 500 have doubled. At the same time, volatility in stock markets is
trending lower and approaching historical norms. The implied volatility
of the S&P 500, as measured by the Chicago Board Options Exchange‘s
Market Volatility (VIX), has fallen by over 70 percent since its peak
in October and is roughly at its average since 1990. These improvements
reflect broad-based confidence not only in the financial system, but
also the prospects for economic recovery.
Indeed, the American economy is growing again. It expanded at an annual
rate of 2.8 percent in the third quarter of 2009, snapping four
consecutive quarters of negative growth. And private economists
generally expect moderate growth over the next year.
Meanwhile, housing markets are showing some signs of stabilizing and
household wealth is recovering, which should stimulate consumer
spending -- vital to American economic growth. Thanks in part to
federal government financial policies, mortgage rates remain near
historic lows. Home prices have ticked up over the past six months,
after showing consistent declines since 2006. For example, the
seasonally adjusted S&P/Case-Shiller U.S. National Home Price Index
rose by 1.8 percent and 1.9 percent in the second and third quarters,
respectively. Since March, sales of existing single-family homes have
increased by 20 percent and over 2.7 million mortgages have been
refinanced. Since Treasury-OFS announced its Making Home Affordable
program, over 650,000 trial modifications under HAMP have been
initiated, with roughly a few hundred completing the trial period by
September 30, 2009. Household net worth increased by $2 trillion in the
second quarter, the first increase since the third quarter of 2007.
However, the financial and economic recovery faces significant
headwinds. Although the unemployment rate fell in November, it remains
high at 10 percent. This places enormous pressure on homeowners and
American families. Indeed, delinquencies of subprime residential
mortgages reached over 26 percent and conforming mortgages nearly seven
percent in the third quarter, as illustrated in Figure 9. And although
RealtyTrac‘s October report shows a third straight month of decreasing
foreclosure activity, foreclosures are still up nearly 19 percent since
October 2008. Moreover, according to First American CoreLogic, roughly
one in four homeowners owed more on their mortgages than the properties
were worth in the third quarter of 2009.
Bank lending also continues to contract, as shown in Figure 10. In the
third quarter, commercial and industrial (C&I) loans outstanding
contracted at an annual rate of 27 percent, and commercial real estate
(CRE) loans outstanding at 8 percent. Small businesses rely on banks
for 90 percent of their financing. Unlike large corporations, few can
substitute credit from securities issuances.
The contraction in bank lending reflects a combination of weak demand
for credit and tightening standards at the banks. The former is a
function of the recession preceded by a period of over expansion. The
latter is in part a function of the fact that many banks face continued
losses on outstanding exposures, in particular in commercial real
estate. FDIC-insured commercial banks reported that net charge-offs”
that is, losses that have occurred”increased to 2.9 percent as a share
of loans and leases in the third quarter, up from 0.6 percent before the
recession. And delinquencies of commercial real estate loans were nine
percent in the third quarter and increasing.
Figure 9. Mortgage Delinquencies (percent):
[Refer to PDF for image: multiple line graph; contact Department of the
Treasury, Office of Financial Stability for graph data]
Source: Mortgage Bankers Association.
Figure 10. Bank Loans, C&I and CRE (percent change, end of period):
[Refer to PDF for image: vertical bar graph; contact Department of the
Treasury, Office of Financial Stability for graph data]
Source: Federal Reserve.
Bank failures and the number of problem banks continue to increase.
There have been over 120 bank failures this year through November 20,
2009, compared with 41 over the decade that preceded the current
recession. And the number of banks that the FDIC classifies as ’problem
institutions“ has reached 552 this year, compared with 76 in 2007 and
252 in 2008.
Banks‘ willingness to lend also has a significant impact on consumer
spending and, consequently, economic growth. Macroeconomic Advisors, a
consulting firm, found that a 10-point increase in bank‘s willingness
to make consumer installment loans yields a 0.3 percentage point
increase in personal consumption expenditures.[Footnote 22] Figure 11
illustrates this relationship between bank lending attitudes and
consumer spending.
In this context, some federal government financial support is still
necessary. In particular, the TARP can help stimulate credit for small
businesses and assist responsible homeowners in avoiding foreclosures.
As discussed in more detail below, Treasury-OFS is redirecting the TARP
to meet these needs. Treasury-OFS recently launched initiatives to
provide capital to small and community banks, which are important
sources of credit for small businesses. Treasury-OFS is also working
with the Small Business Administration, Congress, and the small
business community to design other programs that will use TARP funds to
get credit flowing again to these important engines of economic growth.
Figure 11. Banks‘ Willingness to Lend and Personal Consumption
Expenditures (percent):
[Refer to PDF for image: multiple line graph; contact Department of the
Treasury, Office of Financial Stability for graph data]
Source: Federal Reserve, BEA.
[End of figure]
External Assessments of TARP Performance:
The United States Government Accountability Office (GAO) is one of four
oversight bodies explicitly designated by Congress to provide oversight
of the TARP. GAO‘s October 2009 anniversary report on the TARP provides
a comprehensive and independent assessment of various aspects of the
TARP.[Footnote 23] The GAO also acknowledges that isolating and
estimating the effect of TARP programs is challenging and that
improvements in credit markets cannot be attributed solely to TARP
programs. The indicators that the GAO has monitored over the past year
suggest that there have been broad improvements in credit markets since
the announcement of CPP, the first TARP program. The GAO notes,
specifically, 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;
* the institutions that received CPP funds in the first quarter of 2009
saw more improvement in their capital positions than banks outside the
program. Additional information on the assessments and activities of
the TARP oversight entities can be found in Section Nine [Systems,
Controls, and Legal Compliance].
[End of Section Two]
Section Three: Ensuring Stability and Liquidity:
This section provides a description of each of the programs established
under the TARP to ensure stability and liquidity, including results for
each program to date.
Capital Purchase Program:
EESA was originally proposed as a means to buy mortgage loans,
mortgage-backed securities and certain other assets from banks.
However, the authorities granted under EESA were broadened in the
legislative process to cover any financial instrument whose purchase
the Secretary of the Treasury, after consultation with the Chairman of
the Federal Reserve, determines necessary to promote financial market
stability. Shortly following passage of EESA, it became clear to the
leaders of many G-7 nations that rapid action was needed to provide
capital to the financial system as a whole. Lending even between banks
had practically stopped, credit markets had shut down, and many
financial institutions were facing severe stress. There was not
sufficient time to implement a program to buy mortgage related assets,
which posed difficulties related to valuing such assets and getting the
holders of such assets to sell them at current prices. In this context,
immediate capital injections into financial institutions were a
necessary step to avert a potential collapse of the system.
Given the high level of uncertainty in financial markets and the
economy, even strong financial institutions began to hoard capital.
Based on various market indicators, it became clear that financial
institutions needed additional capital to sustain a normal flow of
credit to businesses and consumers during the financial turmoil and
economic downturn. As a result, Treasury-OFS launched the Capital
Purchase Program (CPP), its largest and most significant program under
EESA, on October 14, 2008. Treasury-OFS initially committed over a
third of the total TARP funding, $250 billion, to the CPP, which it
lowered to $218 billion in March 2009.
The CPP was designed to bolster the capital position of viable
institutions and, in doing so, to build confidence in these
institutions and the financial system as a whole. With the additional
capital, CPP participants were better equipped to undertake new
lending, even while absorbing write downs and charge-offs on loans that
were not performing.
Of the $250 billion commitment, Treasury-OFS invested $125 billion in
eight of the country's largest financial institutions. The remaining
$125 billion was made available to qualifying financial institutions
(QFIs) of all sizes and types across the country, including banks,
savings associations, bank holding companies and savings and loan
holding companies. QFIs interested in participating in the program had
to submit an application to their primary federal banking regulator.
The minimum subscription amount available to a participating
institution was 1 percent of risk-weighted assets. The maximum
subscription amount was the lesser of $25 billion or 3 percent of risk-
weighted assets.
Over the weeks and months that followed the announcement of the CPP,
Treasury-OFS provided capital to 685 institutions in 48 states,
including more than 300 small and community banks, helping to enable
them to absorb losses from bad assets while continuing to lend to
consumers and businesses. The largest investment was $25 billion while
the smallest was $301,000. To encourage continued participation by
small and community banks, the application window for CPP was reopened
on May 13, 2009, for banks with less than $500 million in assets, with
an application deadline of November 21, 2009.
Most banks participating in the CPP are to pay Treasury-OFS a dividend
rate of 5 percent per year, increasing to 9 percent a year after the
first five years. In the case of S-corporations, Treasury-OFS acquires
subordinated debentures. Treasury-OFS has received $6.8 billion in CPP
dividend and interest payments for the period ended September 30, 2009.
As of September 30, 2009, 38 institutions had not paid full dividends
or interest payments. Under the CPP, Treasury-OFS has a right to elect
two directors to the board of directors of an institution that misses
six or more dividend payments.
One measure of the CPP's performance is the effect on lending by CPP
participants. Lending typically falls during a recession, and the
current cycle is no exception. The Federal Reserve Board's recent
article U.S. Credit Cycles: Past and Present examines how credit
volumes have evolved in the current economic downturn relative to
previous business cycle downturns using the Federal Reserve's Flow of
Funds data.[Footnote 24] Significant among the Federal Reserve's
findings is that despite many unprecedented aspects of the current
financial and economic turbulence, movements in credit volumes in the
current recession are similar to historical patterns. In terms of
looking more specifically at CPP bank lending, each month Treasury-OFS
asks CPP participants to provide information about their lending
activity. As illustrated by Treasury-OFS' Lending and Intermediation
Survey, the 22 largest CPP participants have been able to sustain their
lending activities during this crisis, despite the significant
headwinds posed by the recession, including increased bankruptcies,
higher unemployment and falling home prices. Details on the Bank
Lending Surveys can be found at [hyperlink,
http://www.financialstability.gov/impact/surveys.htm].
Capital Assistance Program and the Supervisory Capital Assessment
Program:
In early 2009, the Federal banking agencies conducted a one-time,
forward-looking assessment or "stress test" -- known as the Supervisory
Capital Assessment Program (SCAP) -- on the nineteen largest U.S. bank
holding companies (BHCs). The stress test assessed whether these BHCs
had the capital to continue lending and absorb all potential losses
resulting from a more severe decline in economic conditions than
projected by economic forecasters. After completion of the SCAP, the
banking agencies concluded that ten of these BHCs needed to raise a
total of an additional $75 billion in capital to establish a buffer for
more adverse conditions. The remaining nine BHCs were found to have
sufficient capital to weather more adverse market conditions.
In conjunction with this forward-looking test, Treasury-OFS announced
that it would provide capital through the Capital Assistance Program
(CAP) to banks that needed additional capital but were unable to raise
it through private sources. The capital provided by the CAP would take
the form of convertible preferred stock. This program was made
available to all QFIs, not solely to those banks that underwent the
SCAP.
The design of the tests and their results were made public, a highly
unusual step that was taken because of the unprecedented need to reduce
uncertainty and restore confidence. By identifying and quantifying
potential capital shortfalls and requiring that additional capital be
raised to eliminate any deficiencies, the SCAP ensured that these
financial institutions would have sufficient capital to sustain their
role as intermediaries and continue to provide loans to creditworthy
borrowers even if economic conditions suffered a severe and extended
deterioration.
Of the ten bank holding companies that were identified as needing to
raise more capital, nine have met or exceeded the capital raising
requirements through private efforts. In the aggregate, these firms
have increased requisite capital by over $77 billion since the results
of the SCAP were announced. Treasury-OFS may provide additional capital
to GMAC under the Auto Industry Financing Program to assist its
fundraising efforts to meet the requirements of the SCAP.
Since the stress test results were released in early May, banks of all
sizes have raised over $80 billion in common equity and $40 billion in
debt that is not guaranteed by the government. Importantly, that
capital raising has enabled more than 40 banks to repay the TARP
investments made by Treasury-OFS. Treasury-OFS has received over $70
billion in principal repayments, and $9.7 billion in dividends,
interest, warrants, and fees from CPP participants. In addition,
Treasury-OFS estimates that another $70 billion in repayments from all
TARP investments will occur over the next 12 to 18 months. Another
measure of the effectiveness of SCAP and the CPP, as well as other
government efforts, is that Treasury-OFS did not receive any
applications for CAP which terminated on November 9, 2009.
Targeted Investment Program:
Treasury-OFS established the Targeted Investment Program (TIP) under
the TARP in December 2008. The TIP gave the Treasury-OFS the necessary
flexibility to provide additional or new funding to financial
institutions that were critical to the functioning of the financial
system. Through TIP, Treasury-OFS sought to prevent a loss of
confidence in critical financial institutions, which could result in
significant financial market disruptions, threaten the financial
strength of similarly situated financial institutions, impair broader
financial markets, and undermine the overall economy.
Eligibility to participate in the TIP was determined on a case-by-case
basis, depending on a number of factors. Treasury-OFS considered, among
other things:
* The extent to which the failure of an institution could threaten the
viability of its creditors and counterparties because of their direct
exposures to the institution;
* The number and size of financial institutions that are perceived or
known by investors or counterparties as similarly situated to the
failing institution, or that would otherwise be likely to experience
indirect contagion effects from the failure of the institution;
* Whether the institution is sufficiently important to the nation's
financial and economic system that a disorderly failure would, with a
high probability, cause major disruptions to credit markets or payments
and settlement systems, seriously destabilize key asset prices, or
significantly increase uncertainty or loss of confidence, thereby
materially weakening overall economic performance; and;
* The extent and probability of the institution's ability to access
alternative sources of capital and liquidity, whether from the private
sector or other sources of government funds.
Treasury-OFS invested $20 billion in each of Bank of America (BofA) and
Citigroup under the TIP. These investments provide for annual dividends
of 8 percent. These investments also impose greater reporting
requirements and harsher restrictions on the companies than under the
CPP terms, including restricting dividends to $0.01 per share per
quarter, restrictions on executive compensation, restrictions on
corporate expenses, and other measures. Assistance under the TIP is
also considered "exceptional assistance", which means that the
recipient is also subject to greater restrictions under the executive
compensation rules.
American International Group. Inc. (AIG) Investment Program:
Since September 2008, the Federal Reserve and Treasury-OFS have taken a
series of actions related to AIG in order to prevent AIG's disorderly
failure and mitigate systemic risks. These actions addressed the
liquidity and capital needs of AIG, helping to stabilize the company.
Treasury-OFS provided this assistance by purchasing preferred shares in
AIG and also received warrants to purchase common shares in the
institution. The assistance provided to AIG was deemed "exceptional
assistance" which means that the recipient is subject to greater
restrictions under the rules relating to executive compensation.
Further details on the AIG Investment Program can be found in the AIG
box.
[Text box: AIG:
In September 2008, prior to the passage of EESA, AIG faced severe
liquidity pressures and potential insolvency. These pressures grew
acute the day after the bankruptcy filing of Lehman Brothers, as
financial and credit markets ceased to function. Treasury and Federal
Reserve officials feared that a disorderly failure of the company at
that time posed a systemic risk to the financial system and the U.S.
economy. The company had global operations and was a significant
participant in many financial markets. Through its subsidiaries, the
company provided insurance protection to more than 100,000 entities,
including small businesses, municipalities, 401(k) plans, and Fortune
500 companies who together employ over 100 million Americans. The
company was also a significant counterparty to a number of major
financial institutions. These commitments were reflected in tens of
thousands of contracts that touched millions of Americans and
businesses.
The complexity of these insurance contracts and the exposure of the
financial system and economy to their default required government
intervention. The Federal Reserve provided an $85 billion credit
facility in the form of secured loans to AIG on September 16, 2008 to
contain the financial panic at least cost to the American taxpayer. At
the time, the government was constrained by the tools at its disposal.
The Federal Reserve was not in a position to selectively impose
haircuts on AIG counterparties, or to know the long-term costs of its
liquidity provision. Time was of the essence and the Federal Reserve
faced a binary choice: allow AIG to default on tens of thousands of
contracts, further eroding confidence in U.S. financial institutions
and perpetuating market freezes, or provide secured credit to allow AIG
to meet its near-term contractual obligations with millions of
insurance holders. The Federal Reserve chose the latter option, and,
along with Treasury, has managed its investment in AIG to facilitate an
orderly restructuring of the company and to maximize repayments to
taxpayers.
In November 2008, this assistance was restructured so that the company
had more equity and less debt. Treasury-OFS purchased $40 billion in
cumulative preferred stock from AIG under the TARP, the proceeds of
which were used to repay the Federal Reserve loan in part. In April
2009, Treasury-OFS exchanged the $40 billion in cumulative preferred
stock for $41.6 billion in non-cumulative preferred stock and created
an equity capital facility, under which AIG may draw up to $29.8
billion as needed in exchange for issuing additional preferred stock to
Treasury-OFS. As of September 30, 2009, AIG had drawn approximately
$3.2 billion from the facility. The preferred stock pays a
noncumulative dividend, if declared, of 10 percent per annum. The
Federal Reserve Bank of New York (FRBNY) has also provided additional
assistance to AIG by funding special purpose entities which purchased
certain derivative contracts from AIG. In connection with its
assistance to AIG, the FRBNY received convertible preferred stock
representing approximately 79.8 percent of the fully diluted voting
power of the AIG common stock.
The preferred stock was deposited in a trust, which exists for the
benefit of the U.S. taxpayers. The FRBNY has appointed three
independent trustees who have the power to vote the stock and dispose
of the stock with prior approval of FRBNY and after consultation with
Treasury. The trust agreement provides that the trustees cannot be
employees of Treasury or the FRBNY. The Department of the Treasury does
not control the trust and cannot direct the trustees. Treasury-OFS,
through its TARP investment, owns other preferred stock that is not
held in the trust and does not have voting rights except in certain
limited circumstances. End of text box]
Asset Guarantee Program:
Pursuant to section 102 of EESA, Treasury-OFS established the Asset
Guarantee Program (AGP) with the same objective as the TIP of
preserving financial market stability. The AGP, like the TIP, is a
targeted program aimed at maintaining the stability of systemically
important financial institutions and, thereby, reducing the potential
for problems at such an institution to "spillover" to the broader
financial system and economy. More specifically, the AGP may be used to
provide protection against the risk of significant loss in a pool of
assets held by a systemically significant financial institution that
faces a risk of losing market confidence due in large part to its
holdings of distressed or illiquid assets. By helping limit the
institution's exposure to losses on illiquid or distressed assets, the
AGP can help the institution maintain the confidence of its depositors
and other funding sources and continue to meet the credit needs of
households and businesses.
The AGP has been applied with extreme discretion and Treasury-OFS does
not anticipate wider use of this program. To date, Treasury-OFS has
used this program to assist Citigroup and began negotiations with Bank
of America (BofA) under the AGP which BofA subsequently terminated.
Further details on this assistance can be found in the BofA and
Citigroup separate presentations.
[Text box: Bank of America:
Under the CPP, in October 2008, Treasury-OFS agreed to purchase $15
billion of preferred stock from Bank of America and $10 billion from
Merrill Lynch. When Bank of America completed its acquisition of
Merrill Lynch at the end of 2008, the Treasury-OFS held a total of $25
billion of preferred in Bank of America. This preferred stock has a
dividend rate of 5 percent per annum for the first five years and
increases to 9 percent thereafter. Under the TIP, Treasury-OFS
purchased an additional $20 billion in preferred stock from Bank of
America in January 2009, which pays a dividend of 8 percent per annum.
Treasury-OFS also received warrants in both transactions.
In January 2009, Treasury-OFS, the Federal Reserve and the FDIC entered
into a term sheet for a potential loss sharing arrangement under the
AGP on a $118 billion pool of financial instruments owned by Bank of
America. In May 2009, Bank of America announced its intention to
terminate negotiations with respect to the loss-sharing arrangement and
in September 2009, Treasury, the Federal Reserve, the FDIC and Bank of
America entered into a termination agreement pursuant to which (i) the
parties terminated the related term sheet and (ii) Bank of America
agreed to pay a termination fee of $425 million to the government
parties, with $276 million going to Treasury-OFS. The fee compensated
the government parties for the value that Bank of America had received
from the announcement of the negotiations with government parties to
guarantee and share losses on the pool of assets from and after the
date of the term sheet. The termination fee was determined by taking
the fee that would have been payable had the guarantee been finalized.
End of text box]
[Text box: Citigroup:
Under the CPP, Treasury-OFS purchased $25 billion in preferred stock
from Citigroup in October 2008. This preferred stock had a dividend
rate of 5 percent per annum. Under the TIP, Treasury-OFS purchased $20
billion in additional preferred stock from Citigroup, Inc. in December
2008. That preferred stock had a dividend rate of 8 percent per annum.
Treasury-OFS also received warrants in both transactions. As part of an
exchange offer designed to strengthen Citigroup's capital, Treasury-OFS
recently exchanged all of its preferred stock in Citigroup for a
combination of common stock and trust preferred securities.
In January 2009, Treasury-OFS and Citigroup entered into an agreement
for Citigroup's participation in the AGP. Treasury-OFS guaranteed up to
$5 billion of potential losses incurred on a $301 billion pool of
loans, mortgage-backed securities, and other financial assets held by
Citigroup. The Federal Reserve and the FDIC are also parties to this
arrangement. Treasury-OFS will not become obligated to pay on its
guarantee unless and until Citigroup has absorbed $39.5 billion of
losses on the covered pool. Treasury-OFS would then cover 90 percent of
all losses on the covered pool, up to a maximum of $5 billion. In
consideration for the guarantee, Treasury-OFS received $4.03 billion in
preferred stock that pays an annual dividend of 8 percent. Treasury-OFS
also received a warrant to purchase approximately 66 million shares of
common stock at a strike price of $10.61 per share.
As part of the exchange offer noted above, Treasury-OFS exchanged
preferred stock received under the AGP for an equivalent amount of
trust preferred securities paying interest at the same rate. End of
text box]
Consumer and Business Lending Initiative:
Treasury-OFS designed two initiatives to restore consumer and business
lending in the period ended September 30, 2009, the Term Asset-Backed
Securities Loan Facility (TALF) and the Unlocking Credit for Small
Business Initiative. Both programs are discussed in more detail below.
1. Term Asset-Backed Securities Loan Facility:
The asset-backed securities (ABS) and commercial mortgage-backed
securities (CMBS) markets over time have funded a substantial share of
credit to consumers, businesses and real estate owners. In the third
quarter of 2008, the ABS market and commercial mortgage-backed
securities markets came to nearly a complete halt. Interest rate
spreads on the most highly-rated AAA tranches of ABS and CMBS rose to
levels outside their historical range, in certain cases well over 7 to
15 times their average, respectively. CMBS had accounted for almost
half of all new commercial mortgage originations in 2007. The
disruption of these markets contributed to the lack of credit to
households and businesses of all sizes, impacting U.S. economic
activity.
In November 2008, the Federal Reserve and Treasury announced the
creation of the Term Asset-Backed Securities Loan Facility (TALF) and
launched TALF under the Financial Stability Plan on February 10, 2009.
The TALF's objective was to stimulate investor demand for certain types
of eligible ABS, specifically those backed by loans to consumers and
small businesses, and ultimately, bring down the cost and increase the
availability of new credit to consumers and businesses. Under the TALF,
the Federal Reserve extends up to $200 billion in three- and five-year
non-recourse loans to investors that agree to purchase eligible
consumer or small business ABS. Treasury-OFS provides up to $20 billion
of TARP monies in credit protection to the Federal Reserve for losses
arising under TALF loans.
The TALF was initially designed for newly or recently originated AAA-
rated ABS backed by student loans, auto loans, credit card loans, and
loans guaranteed by the SBA. On March 19, 2009, Treasury-OFS and the
Federal Reserve announced that the TALF would be expanded to include
newly or recently issued AAA-rated Asset Backed Securities (ABS) backed
by four additional types of consumer and business loans ” mortgage
servicing advances, loans or leases relating to business equipment,
leases of vehicle fleets, and floor plan loans. These new categories of
collateral were eligible for inclusion in the April 2009 TALF
subscription and funding process.
The Treasury-OFS and the Federal Reserve structured the TALF to
minimize credit risk to the U.S. government to the greatest extent
possible, consistent with achieving the program's purpose of
encouraging lending to consumers and businesses. Investors take risk by
providing some of the capital to purchase the securities. The amount of
private capital is measured in the form of haircuts, which represents
the investor's equity contribution. For example, if a borrower
purchases an ABS for $100 and that ABS has an assigned haircut of 15
percent, the borrower must put $15 at risk and can receive only $85 in
financing. The haircut level varies across asset class and maturity to
take into account any differences in risk. Finally, the borrower must
also make monthly or quarterly interest payments to the federal
government. The cost of the loan is 100 basis points over a fixed or
floating rate benchmark, such as the London Interbank Offered Rate
("LIBOR").
The Federal Reserve had originally authorized using the TALF to make
loans through December 31, 2009. To promote the flow of credit to
businesses and households and to facilitate the financing of commercial
properties, the Federal Reserve announced on August 17, 2009 that the
TALF will continue to make loans against newly issued ABS and
previously issued CMBS through March 31, 2010. In addition, TALF will
make loans against newly issued CMBS through June 30, 2010. The
inclusion of CMBS as eligible collateral helps prevent defaults on
economically viable commercial properties, increases the capacity of
current holders of maturing mortgages to make additional loans, and
facilitates the sale of distressed properties.
TALF Results:
TALF's impact on the securitization markets can be measured by a number
of indicators, including ABS issuance ” both TALF and non-TALF
eligible, the percentage decline in ABS and SMBS spreads from the
height of the financial crisis, and the number and composition of
investors in the securitization market.
ABS Issuance: The market for new issuance of ABS had shut down at the
end of 2008 and remained effectively closed until TALF became
operational. Since March 2009, offerings in the ABS markets have
gradually increased with nearly $86 billion of new ABS issuance through
October 2009. Of that amount, $49 billion of securities were purchased
with TALF loans.
These securities supported over 3.6 million consumer and small business
loans and leases, and over 132 million active credit card accounts.
TALF has also provided loans to purchase about $4.1 billion of legacy
CMBS securities (issued before January 1, 2009).
This re-starting of the securitization market translates into increased
consumer and small business lending and, in some cases, lower loan
rates for consumers. In addition, investors are gaining confidence in
the market‘s ability to function without federal government support. In
March 2009, approximately 60 percent of new ABS issuance was purchased
with the support of the TALF. By September 2009, that was down to 40
percent. The following chart (Figure 12) shows total consumer ABS
issuance and the portion backed by TALF.
Figure 12: Total Consumer ABS Issuance through September:
Credit Card, Auto, Equipment and Student Loan Issuance:
Date: 2007 average;
Standard: $18.5 billion.
Date: June 2008;
Standard: $18.2 billion.
Date: July 2008;
Standard: $8.2 billion.
Date: August 2008;
Standard: $8.1 billion.
Date: September 2008;
Standard: $3.6 billion.
Date: October 2008;
Standard: $0.4 billion.
Date: November 2008;
Standard: $0.5 billion.
Date: December 2008;
Standard: $1.9 billion.
Date: January 2009;
Standard: $1.3 billion.
Date: February 2009;
Standard: $1.6 billion.
Date: March 2009;
Standard: $2.0
TALF: $8.3
Total: $10.3 billion.
Date: April 2009;
Standard: $6.2 billion;
TALF: $2.9 billion;
Total: $9.1 billion.
Date: May 2009;
Standard: $1.2 billion;
TALF: $13.6 billion;
Total: $14.8 billion.
Date: June 2009;
Standard: $5.8 billion;
TALF: $16.5 billion;
Total: $22.3 billion.
Date: July 2009;
Standard: $2.4 billion;
TALF: $12.6 billion;
Total: $15.0 billion.
Date: August 2009;
Standard: $0.1 billion;
TALF: $9.1 billion;
Total: $9.2 billion.
Date: September 2009;
Standard: $4.4 billion;
TALF: $16.8 billion;
Total: $21.2 billion.
[End of figure]
Secondary market spreads: Since the peak of the credit crisis, spreads
for the asset classes eligible for the program have decreased by 60
percent or more. Spreads on credit card and auto loans have fallen from
a peak of 600 basis points to less than 100 basis points over their
benchmarks, the same levels that existed before Lehman Brothers'
bankruptcy filing in September 2008. Spreads in the secondary market
for CMBS have come in from 1500 basis points over its benchmark to 300
basis points today. Prior to the beginning of the crisis in August
2007, highly rated CMBS were priced on average approximately 100 basis
points over its benchmark.
Borrower Composition: At the peak of the credit crisis, there was
little confidence among institutional investors in the capital markets.
Investors effectively were standing on the sidelines. Since the
implementation of TALF, there has been renewed confidence in the
market. A range of institutional investors have become active
participants, including hedge funds, asset managers, pension funds, and
insurance companies.
With an increase in investor participation and thus investor demand,
required returns have fallen more than half, in some cases, suggesting
a return of risk premiums to more "normalized" levels. Cash
participation, specifically for TALF-eligible prime auto and equipment
transactions, has also increased, suggesting investors' decreasing
reliance on TALF support. Further, some transactions for specific asset
classes with shorter durations are being successfully completed without
TALF financing, suggesting investor confidence in shorter-duration
transactions.
TALF Loans to Date: As of September 30, 2009, no securities used as
collateral for TALF loans had been surrendered to the Federal Reserve.
In addition, as of September 30, 2009, 13.6 percent of the total amount
of TALF loans, or $6.3 billion, had been repaid. Given that the term of
the TALF loans is three to five years, this reflects the increasing
health of the securitization markets.
2. Unlocking Credit for Small Businesses Program:
To help restore the confidence needed for financial institutions to
increase lending to small businesses, Treasury announced a program to
unlock credit for small businesses on March 16, 2009. Under the
program, Treasury announced that it would make up to $15 billion in
TARP funds available to purchase securities backed by the Small
Business Administration (SBA)guaranteed portions of loans made under
the SBA's 7(a) loan program. The SBA's 7(a) program is the SBA's most
basic and widely used loan program.
Since Treasurys announcement of this program, the credit markets for
small businesses have improved somewhat. The secondary market for
guaranteed SBA loans, for example, had essentially ceased working last
fall and had only $86 million in January re-sales. That market improved
notably this spring in the wake of Treasury's announcement, with $399
million settled from lenders to broker-dealers in September 2009. As a
result of this improvement, as well as reluctance on the part of market
participants to accept TARP funds, Treasury-OFS found that demand for
its proposed program declined. As of September 30, 2009, no funds had
been disbursed under the program, although it remains available.
Public-Private Investment Program:
Treasury, in conjunction with the Federal Reserve and the FDIC,
announced the Public-Private Investment Program (PPIP) on March 23,
2009, as a part of the Financial Stability Plan. The PPIP is designed
to improve the condition of financial institutions by facilitating the
removal of legacy assets from their balance sheets. Legacy assets
include both real estate loans held on banks' balance sheets (legacy
loans) as well as securities backed by residential and commercial real
estate loans (legacy securities).
The PPIP should help restart the market and provide liquidity for
legacy assets, enabling financial institutions to make new loans
available to households and businesses. Legacy assets became a
stumbling block to the normal functioning of credit markets with the
bursting of the housing bubble. With the housing market in decline,
financial institutions and investors suffered significant losses on
these legacy assets. These losses drove financial institutions to
conserve capital, reduce leverage and minimize exposure to riskier
investments. Many institutions did so by selling assets, triggering a
wide-scale deleveraging in these markets. As the supply of assets being
sold increased, prices declined and many traditional investors exited
these markets, causing further declines in the demand and the liquidity
for these assets. This lack of liquidity created significant
uncertainty regarding the value of these legacy assets, which in turn
raised questions about the balance sheets of these financial
institutions, compromising their ability to raise capital and continue
lending.
The PPIP helps address this valuation concern. Through PPIP, Treasury-
OFS partners with experienced investment managers and private sector
investors to purchase legacy assets. Rather than resolving the
uncertainty by having the government set the price for these assets,
the private sector investors compete with one another to establish the
price of the legacy assets purchased under the PPIP. By drawing new
private sector capital into the market for legacy assets and
facilitating price discovery, the PPIP should increase the liquidity
for these legacy assets.
Treasury-OFS initially announced that it would provide up to $100
billion for the PPIP. Because of improvements in the market, this
amount was reduced to $30 billion. Under the PPIP, Treasury-OFS
provides equity and debt financing to newly-formed public-private
investment funds (PPIFs) established by private fund managers with
private investors for the purpose of purchasing legacy securities.
These securities are commercial mortgage-backed securities and non-
agency residential mortgage-backed securities. To qualify for purchase
by a Legacy Securities PPIP (S-PPIP), these securities must have been
issued prior to 2009 and have originally been rated AAA ” or an
equivalent rating by two or more nationally recognized statistical
rating organizations ” without ratings enhancement and must be secured
directly by the actual mortgage loans, leases, or other assets.
The S-PPIP allows the Treasury-OFS to partner with private investors in
a way that increases the flow of private capital into these markets
while maintaining equity "upside" for the taxpayers. Under the
principal terms of the S-PPIP, Treasury-OFS partners with pre-qualified
fund managers that raise a minimum amount of capital from private
sources. Each manager forms a Public Private Investment Fund or PPIF.
Treasury-OFS invests equity capital from the TARP in each PPIF on a
dollar-for-dollar basis, matching the funds raised by these managers.
In addition, Treasury-OFS also provides debt financing up to 100
percent of the PPIF's total equity capital, subject to certain
restrictions on leverage, withdrawal rights, disposition priorities and
other customary financing protections. Treasury-OFS not only
participates pro rata in any profits or losses of the PPIF but also
receives additional potential equity upside in the form of warrants, as
required by EESA. Each fund manager will seek to generate attractive
returns for the PPIF through a predominately long-term buy and hold
strategy.
On July 8, 2009, following a comprehensive two-month application,
evaluation and selection process, Treasury-OFS pre-qualified nine fund
managers to participate in the S-PPIP based, in part, on a demonstrated
ability to invest in legacy assets and to raise private capital for
such investments. On September 30, 2009, two PPIFs signed limited
partnership agreements and loan agreements with Treasury-OFS, resulting
in a $6.7 billion commitment for Treasury-OFS. As of September 30,
2009, these two PPIFs had approximately $1.13 billion in private sector
capital commitments, which were matched 100 percent by Treasury-OFS,
representing total equity capital commitments of $2.26 billion.
Treasury-OFS is providing debt financing up to 100 percent of the total
capital commitments of each PPIF, representing in the aggregate
approximately $4.52 billion of total equity and debt capital
commitments. As of November 30, 2009, eight PPIFs have signed
agreements with Treasury-OFS. Following signature of these agreements,
each fund manager has up to six months to raise additional private
capital to receive the full allocation of the $3.3 billion in matching
equity and debt capital from Treasury-OFS. Assuming that each of the
nine fund managers raises enough private capital to receive the full
allocation from Treasury-OFS, the total purchasing power of the PPIFs
will be $40 billion, including $10 billion in private capital and the
$30 billion Treasury-OFS commitment. As of September 30, 2009, no fund
managers had made any investments and Treasury-OFS had not disbursed
any funds.
PPM Results:
Although purchases of assets under the program are just beginning, the
announcement of the program itself helped reassure investors. Since the
announcement, prices for non-agency mortgage-backed securities have
gone up substantially. Prime fixed-rate securities issued in 2006 that
traded as low as $60 in March have increased in value by over 40
percent as markets have become more liquid. That improvement in
financial market conditions has created the positive backdrop that
caused Treasury-OFS to proceed with the program at a scale smaller than
initially envisioned.
Automotive Industry Financing Program:
Treasury-OFS established the Automotive Industry Financing Program
(AIFP) on December 19, 2008, to help prevent a significant disruption
to the American automotive industry, which would have posed a systemic
risk to financial market stability and had a negative effect on the
economy. Treasury-OFS announced a plan to make emergency loans
available from the TARP under the AIFP to General Motors Corporation
(GM) and Chrysler LLC (Chrysler) to provide a path for these companies
to go through orderly restructurings and achieve viability.
Treasury-OFS' investments in the auto companies were determined to be
consistent with both the purpose and specific requirements of EESA.
Treasury-OFS determined that the auto companies were and are
interrelated with entities extending credit to consumers and dealers
because of their financing subsidiaries and other operations, and that
a disruption in the industry or an uncontrolled liquidation would have
had serious effects on financial market stability, employment and the
economy as a whole. In addition, Congress provided the Secretary of the
Treasury broad authority by defining "financial institutions" in EESA
flexibly so as not to be limited to banks, savings institutions,
insurance companies and similar entities. The auto companies qualified
as "financial institutions" under EESA as they met the basic
requirements of the definition. In each case, they were organized under
Delaware law, had significant U.S. operations, were subject to
extensive federal and state regulation, and were not a central bank or
institution owned by a foreign government.
Treasury-OFS initially provided loans of $13.4 billion to GM and $4
billion to Chrysler under the AIFP to give the companies time to
negotiate with creditors and other stakeholders in order to prevent
disorderly bankruptcies. Under the terms of the loans, each company was
required to prepare a restructuring plan that included specific actions
aimed at assuring: (i) the repayment of the loan extended by TARP; (ii)
the ability of the company to comply with applicable federal fuel
efficiency and emissions requirements and commence the domestic
manufacturing of advanced technology vehicles in accordance with
federal law; (iii) achievement of a positive net present value; (iv)
rationalization of costs, capitalization, and capacity with respect to
the manufacturing workforce, suppliers and dealerships of the company;
and (v) a product mix and cost structure that is competitive in the
U.S. marketplace.
To oversee the federal financial assistance”including evaluating the
restructuring plans”and to make decisions about future assistance to
the automakers, the loan agreements provided for a presidential
designee. Under the terms of the loan agreements, because no
presidential designee has been appointed to date, the Secretary of the
Treasury makes decisions on all matters involving financial assistance
to the automakers, with input from the National Economic Council.
To date, the Treasury-OFS has provided approximately $76 billion in
loans and equity investments to GM, Chrysler, and their respective
financing entities. Further details on these loans and the valuation of
these investments can be found in Section Eight [Valuation
Methodology].
General Motors:
On December 31, 2008, Treasury-OFS agreed to make loans of $13.4
billion to General Motors Corporation to fund working capital. Under
the loan agreement, GM was required to implement a viable restructuring
plan by March 30, 2009. The Administration determined that the first
plan GM submitted failed to establish a credible path to viability, and
the deadline was extended to June 1, 2009. Treasury-OFS loaned an
additional $6 billion to fund GM during this period. To achieve an
orderly restructuring, GM filed bankruptcy proceedings on June 1, 2009.
Treasury-OFS provided $30.1 billion under a debtor-in-possession
financing agreement to assist GM through the restructuring period. The
new entity, General Motors Company (New GM) purchased most of Old GM's
assets and began operating on July 10, 2009.
Treasury-OFS converted most of its loans to the Old GM to $2.1 billion
of preferred stock and a 60.8 percent share of the common equity in the
New GM and a $7.1 billion debt security note. $380 million of Treasury-
OFS' debt in New GM was immediately repaid with the termination of the
Auto Warranty Program, leaving $6.7 billion of loans outstanding as of
September 30, 2009. The New GM currently has the following ownership:
Treasury-OFS (60.8 percent), GM Voluntary Employee Benefit Association
(17.5 percent), the Canadian Government (11.7 percent), and Old GM's
unsecured bondholders (10 percent).
Figure 13: New GM Ownership:
[Refer to PDF for image: pie-chart]
U.S. Government: 61%;
GM Voluntary Employee Benefit Association: 17%;
Canadian Government: 12%;
Old GM's Unsecured Bondholders: 10%.
[End of figure]
Chrysler:
On January 2, 2009, Treasury-OFS loaned $4 billion to Chrysler. On
March 30, 2009, the Administration determined that the business plan
submitted by Chrysler failed to demonstrate viability and announced
that in order for Chrysler to receive additional taxpayer funds, it
needed to find a partner with whom it could establish a successful
alliance. Chrysler made the determination that forming an alliance with
Fiat was the best course of action for its stakeholders. Treasury-OFS
continued to support Chrysler as it formed an alliance with Fiat. In
connection with Chrysler's bankruptcy proceedings filed on April 30,
2009, Treasury-OFS provided an additional $1.9 billion under a debtor-
in-possession financing agreement to assist Chrysler in an orderly
restructuring. On June 10, 2009, substantially all of Chrysler's assets
were sold to the newly formed entity, Chrysler Group LLC (New
Chrysler). Treasury-OFS committed to loan $6.6 billion to New Chrysler
in working capital funding, and as of September 30, 2009, New Chrysler
has drawn $4.6 billion of this amount.
As of September 30, 2009, Treasury-OFS had a $7.1 billion debt security
from New Chrysler and held 9.9 percent of the equity in New Chrysler.
The original loans to Chrysler remain outstanding, but have been
reduced by $500 million of debt that was assumed by New Chrysler.
Current equity ownership in New Chrysler is as follows: the Chrysler
Voluntary Employee Benefit Association (67.7 percent), Fiat (20
percent), Treasury-OFS (9.9 percent) and the Government of Canada (2.5
percent).
Figure 14: New Chrysler Ownership:
[Refer to PDF for image: pie-chart]
The Chrysler Voluntary Employee Benefit Association: 68%;
Fiat: 20%;
U.S. Government: 10%;
Canadian Government: 2%.
[End of figure]
In addition to the AIFP funds committed to the two auto manufacturers,
Treasury-OFS determined that TARP assistance was also needed for the
financing companies affiliated with these manufacturers. The vast
majority of automobile purchases in the U.S. are financed, including an
estimated 80 to 90 percent of consumer purchases and substantially all
dealer inventory purchases. Without the TARP'S assistance, it is
unlikely that the tightened credit markets would have been able to
provide the critical financing needed for consumers to purchase autos.
A description of the assistance provided to GMAC and Chrysler Financial
is provided below.
GMAC:
GMAC is an important source of auto-related credit for consumers and
dealers and, through a subsidiary, is the country's fifth largest
mortgage servicer. It is also one of the largest U.S. bank holding
companies. On December 29, 2008, Treasury-OFS purchased $5 billion in
preferred equity from GMAC, and received an additional $250 million in
preferred equity through warrants that Treasury-OFS exercised at
closing. At the same time, Treasury-OFS also agreed to lend up to $1
billion of TARP funds to GM (one of GMAC's owners), to enable GM to
participate in GMAC's rights offering. GM drew $884 million under that
commitment on January 16, 2009.
In May 2009, banking regulators required GMAC to raise additional
capital by November 2009 in connection with the SCAP or stress test. On
May 21, 2009, Treasury-OFS purchased $7.5 billion more of convertible
preferred shares from GMAC and received warrants that Treasury-OFS
exercised at closing for an additional $375 million in convertible
preferred shares. GMAC is in discussions with the Treasury-OFS
regarding additional financing to complete GMAC's post-SCAP capital
needs up to the amount of $5.6 billion, as previously discussed in May.
On May 29, 2009, Treasury-OFS exercised its option to exchange the $884
million loan for the ownership interest that GM had purchased,
amounting to about 35 percent of the common membership interests in
GMAC. As of September 30, 2009, Treasury-OFS owns $13.1 billion in
preferred shares in GMAC, through purchases and the exercise of
warrants, in addition to 35 percent of the common equity in GMAC.
Chrysler Financial:
On January 16, 2009, Treasury-OFS announced that it would lend up to
$1.5 billion to a special purpose vehicle created by Chrysler Financial
to enable Chrysler Financial to finance the purchase of Chrysler
vehicles by consumers. To satisfy the EESA warrant requirement, the
Chrysler Financial special purpose vehicle issued additional notes
entitling Treasury-OFS to an amount equal to 5 percent of the maximum
loan amount. Twenty percent of those notes vested upon the closing of
the transaction, and additional notes were to vest on each anniversary
of the transaction closing date. The loan was fully drawn by April 9,
2009. On July 14, 2009, Chrysler Financial fully repaid the loan,
including the vested additional notes and interest.
Auto Supplier Support Program:
Because of the credit crisis and the rapid decline in auto sales, many
of the nation's auto parts suppliers were struggling to access credit
and faced uncertainty about the prospects for their businesses.
Suppliers that ship parts to auto companies generally receive payment
approximately 45-60 days after shipment. In a normal credit
environment, suppliers can either sell or borrow against those
commitments, or receivables, in the interim period to pay their workers
and fund their ongoing operations. However, due to the uncertainty
about the ability of the auto companies to honor their obligations,
banks were unwilling to extend credit against these receivables. On
March 19, 2009, Treasury-OFS announced the Auto Supplier Support
Program (ASSP) to help address this problem by providing up to $5
billion to domestic auto manufacturers to purchase supplier
receivables. With the emergence of New GM and New Chrysler from
bankruptcy proceedings and with the threat of liquidation greatly
reduced, credit market access for suppliers has improved. As of July 1,
2009, the base commitment under the ASSP was decreased to $3.5 billion.
As of September 30, 2009, Treasury-OFS has funded $413 million under
the ASSP. The loans used to finance the program must be repaid within a
year, unless extended. Treasury-OFS expects these loans to be fully
repaid by or before April 2010. The companies may still draw on the
loans but they are not expected to.
Auto Warranty Program:
On March 30, 2009, Treasury-OFS announced an Auto Warranty Program
designed to give consumers considering new car purchases from domestic
manufacturers the confidence that warranties on those cars would be
honored regardless of the outcome of the restructuring process. As of
July 10, 2009, the program was terminated after New GM and New Chrysler
completed the purchase of substantially all of the assets of GM and
Chrysler from their respective bankruptcies. The $640 million advanced
to GM and Chrysler under the program has been repaid to Treasury-OFS;
Chrysler repaid the full amount with interest while GM repaid only
principal.
[End of Section Three]
Section Four: Preventing Foreclosures and Preserving Homeownership:
To mitigate foreclosures and help ensure homeownership preservation,
Treasury announced a comprehensive $75 billion program, the Home
Affordable Modification Program (HAMP), in February 2009. Treasury-OFS
will provide up to $50 billion in funding through the TARP, while
Fannie Mae and Freddie Mac agreed to provide up to $25 billion of
additional funding. HAMP focuses on creating sustainably affordable
mortgage payments for responsible home owners who are making a good
faith effort to make their mortgage payments, while mitigating the
spillover effects of preventable foreclosures on neighborhoods,
communities, the financial system and the economy.
HAMP is built around three core concepts. First, the program focuses on
affordability. Every modification under the program must lower the
borrower's monthly mortgage payment to no more than 31 percent of the
borrower's monthly gross income, the "target monthly mortgage payment
ratio". Second, the HAMP's pay-for-success structure aligns the
interests of servicers, investors and borrowers in ways that encourage
loan modifications that will be both affordable for borrowers over the
long term and cost-effective for investors and taxpayers. Third, the
HAMP establishes detailed guidelines for the industry to use in making
loan modifications with the goal of encouraging the mortgage industry
to adopt a sustainably affordable standard, both within and outside of
the HAMP.
HAMP operates through the combined efforts of the Treasury Department,
Fannie Mae, Freddie Mac, mortgage loan servicers, investors and
borrowers to help qualifying homeowners who commit to making modified
monthly mortgage payments to stay in their homes. In addition, the
federal bank, thrift, and credit union regulatory agencies have
encouraged all federally regulated financial institutions that service
or hold residential mortgage loans to participate in the HAMP.
The following highlights some of the key terms and conditions of HAMP:
* Eligible Homeowners: The modification plan was designed to be
inclusive, with a loan limit of $729,750 for single-unit properties,
and higher limits for multi-unit properties. Over 97 percent of the
mortgages in the country have a principal balance within these limits.
* Servicers' Obligation to Extend Modification Offer: Servicers
participating in HAMP are required to apply a standardized net present
value (NPV) test to each loan that is at risk of foreclosure -- defined
as either at risk of imminent default or in default. The NPV test
compares the net present value of cash flows from the mortgage if
modified under HAMP and the net present value of the cash flows from
the mortgage without modification. If the NPV test is positive ”
meaning that the net present value of expected cash flows is greater if
modified under the HAMP than if the loan is not modified ” the servicer
must extend an offer to modify the loan in accordance with HAMP
guidelines, absent fraud or a contractual prohibition limiting
modification of the mortgage.
* Reductions in Monthly Payments: Servicers are required to follow the
waterfall outlined in the program contracts in reducing the borrower's
monthly payment to no more than 31 percent of their monthly gross
income. The interest rate floor under HAMP is 2 percent. Further
flexibility is provided if reducing the loan rate to 2 percent, by
itself, does not achieve the 31 percent threshold. In that case, the
servicers can extend the term of the loan, up to 480 months, in order
to achieve the 31 percent payment threshold. The HAMP also provides the
servicer the option to reduce principal on a stand-alone basis to help
reduce the borrower's monthly payment.
The HAMP includes a standardized set of procedures that servicers must
follow in modifying eligible loans under the program and in estimating
the expected cash flows of modified mortgages. The borrower must remain
current on their modified mortgage payments for at least 90 days in
order for a HAMP loan modification to become permanent.
To increase participation in HAMP and encourage borrowers to remain
current on loan modifications under the program, Treasury-OFS provides
targeted incentives to borrowers, investors, and servicers that
participate in the program. These incentives include an up-front
payment of $1,000 to the servicer for each successful modification
after completion of the trial period, and "pay for success" fees of up
to $1,000 per year for three years, provided the borrower remains
current. Additional one-time incentives of $500 to the servicers and
$1,500 to the investors are paid if loans are modified for borrowers
who are current but are in danger of imminent default are successfully
modified. Homeowners will also earn up to $1,000 towards principal
balance reduction each year for five years if they remain current and
pay on time. Investors are entitled to payment reduction cost-share
compensation for up to five years for half the cost of reducing the
borrower's payment from a 38 percent to 31 percent threshold, provided
the borrower remains current. Investors must pay for reducing the
borrower's payment down to the 38 percent threshold before they are
able to benefit from the cost-share incentive. This requires investors
to take the first loss for unaffordable and unsustainable loans that
were extended to borrowers.
HAMP Results:
The incentives offered under HAMP have had a substantial impact in
helping American homeowners and stabilizing the housing market, as
detailed below:
* As of October 31, 2009, 71 servicers have signed up for the HAMP.
Between loans covered by these servicers and loans owned or guaranteed
by the GSEs, approximately 85 percent of first-lien residential
mortgage loans in the country are now covered by the program. As of
September 30, 2009, Treasury-OFS has made commitments to fund up to
$27.1 billion in HAMP payments.
* As of October 31, 2009, these participating servicers have extended
offers on over 919,665 trial modifications.
* Over 650,994 trial modifications are already underway, as of October
31, 2009.
HAMP Snapshot through October 2009:
Number of Trial Modifications Started[A]: 650,994;
Number of Trial Period Plan Offers Extended to
Borrowers[B]: 919,665;
Number of Requests for Financial Information Sent to Borrowers[B]:
2,776,740.
[A] Active trial and permanent modifications as of October 31; based on
numbers reported by servicers to the RAMP system of record.
[B] Source: Survey data provided by servicers, through October 29.
[End of Section Five]
Section Five: Protecting Taxpayer Interests:
The government's response to the financial crisis including the actions
taken under TARP, were necessary to avoid an even greater deterioration
or collapse of the U.S. and global financial systems , which would have
resulted in a far worse recession or even depression. TARP provided a
form of taxpayer protection by helping to achieve that basic objective.
Treasury-OFS is committed to ensuring that taxpayers are also protected
with respect to how the TARP is implemented. The taxpayers clearly
assumed downside risk in the TARP purchases and guarantees of troubled
assets, thus Treasury-OFS also seeks to protect the taxpayer through
the effective management and disposition of all TARP investments. EESA
also stipulated that the taxpayer benefit from any potential upside on
any assistance transaction by requiring that Treasury receive warrants
in most investments. This section addresses portfolio management topics
such as:
1) Portfolio Overview;
2) Guiding Principles;
3) Portfolio Management Approach;
4) Exchange Offers and Restructurings;
5) Treasury-OFS' Actions as a Shareholder;
6) Compliance;
7) Program Specific Considerations.
Portfolio Overview:
Treasury-OFS' TARP investments include:
1) Preferred stock: a majority of the TARP investments are in nonvoting
perpetual preferred stock;
2) Common stock: currently, Treasury-OFS holds common stock in GM,
GMAC, Chrysler and Citigroup;
3) Warrants and senior debt instruments: in connection with its
investments in publicly traded companies, Treasury-OFS has received,
pursuant to Section 113 of EESA, warrants to purchase common stock at
market price as of the time of the investment. In the case of
investments in privately held companies, Treasury-OFS has received
warrants to purchase preferred stock at a nominal price, which it
exercised at closing, or debt instruments issued by the TARP recipient;
4) Loans: Treasury-OFS has made loans to GM, Chrysler, and the special
purpose vehicles under TALF, AIFP, ASSP, and WCP as well as signed
definitive loan agreements for the Public Private Investment Funds
(PPIFs); and;
5) Fund investments: Treasury-OFS has signed limited partnership
agreements to make equity investments in the PPIFs.
Guiding Principles:
Pursuant to Section 2 of EESA, Treasury-OFS has made investments and
entered into guarantee agreements to "restore liquidity and stability
to the financial system of the United States" in a manner which
"maximizes overall returns to the taxpayers of the United States".
Consistent with the statutory requirements, Treasury-OFS' four
overarching portfolio management guiding principles are as follows:
* Protect taxpayer investments and maximize overall investment returns
within competing constraints,
* Promote stability for and prevent disruption of financial markets and
the economy,
* Bolster market confidence to increase private capital investment,
and,
* Dispose of investments as soon as practicable, in a timely and
orderly manner that minimizes financial market and economic impact.
Treasury-OFS' asset management approach is designed to implement the
guiding principles. Treasury-OFS protects taxpayer investments and
promotes stability through evaluating systemic and individual risk from
standardized reporting and proactive monitoring and ensuring adherence
to EESA and compliance with contractual agreements. By avoiding
involvement in day to day company management decisions and exercising
its rights as a common shareholder only on core governance issues,
Treasury-OFS seeks to bolster market confidence to increase private
capital investment. Treasury-OFS also adheres to certain principles in
connection with restructurings or exchange offers involving TARP
recipients, including minimizing taxpayer loss, enhancing and
preserving institutional viability, treating like investments across
programs consistently, and minimizing negative governmental impact.
Such efforts help to prevent disruption of financial markets and the
economy.
Treasury-OFS seeks to exit investments as soon as practicable to remove
Treasury-OFS as a shareholder, eliminate or reduce Treasury-OFS
downside tail risk exposure, return TARP funds to reduce the federal
debt, and encourage private capital formation to replace federal
government investment. The desire to achieve such objectives must be
balanced against a variety of other objectives, including avoiding
further financial market and/or economic disruption, and the
potentially negative impact to the issuer's health and/or capital
raising plans from Treasury-OFS' disposition. Treasury-OFS must also
consider the limited ability to sell an investment to a third party due
to the absence of a trading market or lack of investor demand, and the
possibility of achieving potentially higher returns through a later
disposition. An issuer typically needs the approval of its primary
federal regulator in order to repay Treasury-OFS and therefore
regulatory approvals also affect how quickly an institution can repay.
Because of the size of certain positions as well as the overall
portfolio, successful disposition will take time, as well as expertise.
In addition, information about Treasury-OFS' intentions with respect to
its investments could be material information and premature release of
such information could adversely affect the ability of Treasury-OFS to
achieve its objectives. Therefore, Treasury-OFS will make public
announcements of its disposition plans when it is appropriate to do so
in light of these objectives and constraints.
Portfolio Management Approach:
In managing the TARP investments, Treasury-OFS takes a disciplined
portfolio approach with a review down to the individual investment
level. Treasury-OFS aims to monitor risk and performance at both the
overall portfolio level and the individual investment level. Given the
unique nature and the size of the portfolio, risk and performance are
linked to the overall financial system and the economy. Therefore,
Treasury-OFS conducts sensitivity analyses to contextualize the
results. Such analyses by their very nature are based upon significant
assumptions.
In conducting the portfolio management activities, Treasury-OFS employs
a mix of dedicated professionals and external asset managers. These
external asset managers provide market specific information such as
market prices and valuations as well as detailed credit analysis using
public information on a periodic basis. A portfolio management
leadership team oversees the work of asset management employees
organized on a program basis, under which investment and asset managers
may follow individual investments.
Treasury-OFS tracks the fair market value of the assets in the TARP
portfolio on a regular basis. The value of publicly traded common stock
can be measured by market quotations. Most of Treasury-OFS'
investments, however, consist of securities and instruments for which
no market exists. Such securities include preferred stocks, warrants,
loans and other debt securities, as well as common stock of private
companies. As a result, Treasury-OFS has developed internal, market-
based valuation models in consultation with Treasury-OFS' external
asset managers and in compliance with EESA. For purposes of its
financial statements, Treasury-OFS calculates valuations in accordance
with the Federal Credit Reform Act of 1990, as well as OMB guidelines.
The methodology is discussed further in Section Eight [Valuation
Methodology].
Risk Assessment:
Treasury-OFS has developed procedures to identify and mitigate
investment risk. These procedures are designed to identify TARP
recipients that are in a significantly challenged financial condition
to ensure heightened monitoring and additional diligence and to
determine appropriate responses by Treasury-OFS to preserve the
taxpayers' investment and minimize loss as well as to maintain
financial stability. Specifically, Treasury-OFS' external asset
managers review publicly available information to identify recipients
for which pre-tax, pre-provision earnings and capital may be
insufficient to offset future losses and maintain required capital. For
certain institutions Treasury-OFS and its external asset managers
engage in heightened monitoring and due diligence that reflects the
severity and timing of the challenges.
Although Treasury-OFS relies on the recommendations of federal banking
regulators in connection with reviewing and approving applications for
assistance, Treasury-OFS does not have access to non-public information
collected by federal banking regulators on the financial condition of
TARP recipients. To the contrary, there is a separation between the
responsibilities of Treasury-OFS as an investor and the duties of the
government as regulator.
The data gathered through this process is used by Treasury-OFS in
consultation with its external managers and legal advisors to determine
a proper course of action. This may include making recommendations to
management or working with management and other security holders to
improve the financial condition of the company, including through
recapitalizations or other restructurings. These actions are similar to
those taken by large private investors in dealing with troubled
investments. Treasury-OFS does not seek to influence the management of
TARP recipients for non-financial purposes.
Exchange Offers and Restructurings:
TARP recipients may also seek Treasury-OFS' approval for exchange
offers, recapitalizations or other restructuring actions to improve
their financial condition. Treasury-OFS evaluates each such proposal
based on its unique facts and circumstances, and takes into account the
following principles in all cases:
* Pro forma capital position of the institution,
* Pro forma position of Treasury-OFS investment in the capital
structure,
* Overall economic impact of the transaction to the government,
* Guidance of the institution's primary federal supervisor, and,
* Consistent pricing with comparable marketplace transactions.
Treasury-OFS' Actions as a Shareholder:
Treasury-OFS' role as a shareholder is to manage the government's
investment and not to manage the related company. Most of Treasury-OFS'
equity investments have been in the form of preferred stock. As is
typical for a preferred stock investor, Treasury-OFS does not have
voting rights except on certain limited issues such as amendments to
the charter and certain transactions that could adversely affect
Treasury-OFS' rights as an investor. In the event preferred dividends
are unpaid for six quarters (or four quarters in the case of AIG
preferred stock), Treasury-OFS has the right to elect two directors to
the board. Treasury-OFS holds common shares in GM, GMAC, Chrysler and
Citigroup. In addition, the taxpayers are the beneficiaries of a trust
that exercises 80 percent of the voting rights of the outstanding AIG
common stock. This trust is controlled by three independent trustees
who exercise voting rights on behalf of the taxpayers and do not report
to Treasury-OFS.
Treasury-OFS has established the following four principles to guide its
actions as a common shareholder:
* Reluctant shareholder: The government is a reluctant owner as a
consequence of the financial crisis and the current recession. Treasury-
OFS intends to dispose of its investments as soon as practicable and in
conformity with the aforementioned portfolio management principles;
* Treasury-OFS will not interfere in the day-to-day management
decisions of a company in which it is an investor. Such interference
might actually reduce the value of those investments, impede the
companies' successful transition to the private sector, expose
taxpayers to third party lawsuits, and frustrate the federal
government's broader economic policy goals;
* Strong board of directors: Establishing an effective board of
directors that selects management with a sound, long-term vision should
restore a company to profitability and end the need for government
support expeditiously. In cases where Treasury-OFS has the ability to
establish strong upfront conditions at the time of investment, these
may include changes to the existing board of directors and management;
and;
* Limited voting rights: The government intends to exercise its voting
rights as a common shareholder only with respect to core shareholder
matters such as board membership; amendments to corporate charters or
bylaws; mergers, liquidations, substantial asset sales; and significant
common stock issuances.
Compliance:
Treasury-OFS also takes steps to ensure that TARP recipients comply
with their TARP-related statutory and contractual obligations.
Statutory obligations include executive compensation restrictions.
Contractual obligations vary by investment type. For most of Treasury-
OFS' preferred stock investments, TARP recipients must comply with
restrictions on payment of dividends and on repurchases of junior
securities, so that funds are not distributed to junior security
holders prior to repayment of the government. Recipients of exceptional
assistance must comply with additional restrictions on executive
compensation, lobbying, corporate expenses and internal controls and
must provide quarterly compliance reports. For AIFP loans, additional
restrictions and enhanced reporting requirements are imposed, which is
typical with debt investments compared to equity investments. Such
enhanced reporting requirements include bi-weekly status reports
(rolling 13-week cash forecast), monthly liquidity analysis reports,
and monthly budget reports covering the current fiscal year.
Program Specific Considerations:
The following briefly describes key contractual terms and other
characteristics of each program that affect how Treasury-OFS will
recover the TARP funds invested in each institution.
Capital Purchase Program (CPP):
The majority of Treasury's investments under TARP were made under the
CPP program. Treasury-OFS received preferred stock and warrants in
return for the capital it provided each institution. The preferred
stock is redeemable at the option of the issuer at any time, subject to
the approval of the primary federal bank regulator. This means that the
primary federal bank regulator, such as the Federal Reserve Bank or the
FDIC, must determine that the issuer has sufficient capital to repay
Treasury-OFS. If permitted to repay Treasury-OFS, the issuer must repay
the full amount of the investment plus any accrued dividends. As of
September 30, 2009, 42 issuers have repaid a total of $70.7 billion of
CPP investments. Treasury-OFS did not require issuers to repay the
preferred stock by a particular date, because the preferred stock would
not have met the requirements for Tier 1 capital had such a fixed date
been imposed. However, there are incentives for issuers to repay.
First, issuers are subject to restrictions on executive compensation
for as long as the preferred stock is outstanding. In addition, they
are restricted in their ability to pay dividends to common stockholders
and to make other distributions and repurchases. In addition, the
dividend rate on the preferred stock increases from five percent to
nine percent after five years.
Treasury-OFS also has the right to sell the preferred stock to a third
party. Treasury-OFS also has registration rights, which are rights to
require the issuer to assist Treasury-OFS in making a public sale of
the securities which can facilitate transfer. Although Treasury-OFS has
not exercised these rights, it may do so in the future. In the case of
Citigroup, Treasury-OFS exchanged the CPP preferred shares for common
stock of Citigroup. Because the common stock is not redeemable and
because there is a large trading market for Citigroup common stock, one
potential manner in which Treasury-OFS may exit this investment would
be by selling the stock in the market.
Much of Treasury-OFS' warrant portfolio pertains to CPP investments.
Pursuant to the requirements of EESA, Treasury receives warrants from
TARP recipients in order to give the taxpayers an opportunity to
participate in any increase in shareholder value that follows the
investment. In the case of a CPP investment in a company that is
publicly traded, Treasury-OFS receives warrants to acquire common stock
with a price equal to 15 percent of the senior preferred investment.
The exercise price on the warrants is the market price of the
participating institution's common stock at the time of preliminary
approval calculated on a 20-trading day trailing average. In the case
of an investment in a privately-held company, Treasury-OFS receives
warrants to purchase, at a nominal cost, additional preferred stock
equivalent to 5 percent of the senior preferred investment. Treasury-
OFS exercises the latter kind of warrants at closing of the senior
preferred investment.
CPP Sale of Warrants:
Issuers have a contractual right to repurchase the warrants upon
redemption of the preferred stock issued to Treasury-OFS. In the event
they do not repurchase, Treasury-OFS will sell the warrants to third
parties.
If an issuer wishes to repurchase its warrants, the issuer and Treasury-
OFS must agree on a price. The contract provides for an independent
appraisal procedure that can be invoked by either party to determine
this price. Treasury-OFS has established a methodology for valuing
warrants for purposes of this process that it uses for all banks,
regardless of the size of the bank or the warrant position. Treasury-
OFS' determination of the value of any warrant is based on three
categories of input: market prices, financial modeling, and outside
consultants. Further details on this valuation approach are provided in
Section Eight. If the bank and Treasury-OFS do not agree on price and
the appraisal procedure is invoked by either party, then each party
selects an independent appraiser. These independent appraisers will
conduct their own valuations and attempt to agree upon the fair market
value. If they agree on a price, that price becomes the basis for
repurchase of the warrants by the bank. If these appraisers fail to
agree, a third appraiser is hired, and subject to some limitations, a
composite valuation of the three appraisals is used to establish the
sale price.
Even if agreement is not reached within the aforementioned timeframe,
an institution that has redeemed its preferred stock can always bid to
repurchase its warrants at any time, and Treasury-OFS can choose
whether to accept a bid. Similarly, Treasury-OFS retains the right to
sell the warrants to a third party at a mutually agreed price. If
following repayment of the preferred stock, an institution notifies
Treasury-OFS that it does not intend to repurchase its warrants, or if
an agreement is not reached, Treasury-OFS intends to dispose of the
warrants through public auctions. Treasury-OFS has announced that the
first such auctions would take place in early December. These auctions
are conducted as modified "Dutch" auctions which are registered under
the Securities Act of 1933. Only one issuer's warrants will be
auctioned in each auction. In this format, qualified bidders may submit
one or more independent bids at different price-quantity combinations
and the warrants will be sold at a uniform price that clears the
market.
Targeted Investment Program (TIP):
Treasury-OFS invested $20.0 billion in each of Citigroup and Bank of
America under TIP and acquired preferred stock. In the case of
Citigroup, Treasury-OFS exchanged the preferred stock for trust
preferred securities, which are senior in right of repayment to
preferred stock but otherwise have many similar terms. Both the
Citigroup trust preferred securities and the Bank of America preferred
stock pay dividends at 8 percent per year. Treasury-OFS also received
warrants in connection with both investments. The disposition
considerations are similar to those for CPP, including the fact that
the issuers need the approval of the primary banking regulators to
repay the trust preferred securities and preferred stock.
Automotive Industry Investments (AIFP/ASSP):
Treasury-OFS' auto industry investments consist of equity investments,
largely in the form of common stock, as well as loans. The loans must
be repaid by certain dates. The GM loan was recently amended to require
quarterly mandatory prepayments of $1 billion from existing escrow
amounts in addition to the obligation for such funds to be applied to
repay the loan by June 30, 2010, unless extended. In addition, the loan
matures in July 2015. A portion of the Chrysler loan also matures in
December 2011 and the balance in June 2017. Chrysler has recently
announced that it plans to repay the loan fully prior to maturity.
In the case of the equity investments, Treasury-OFS holds primarily
common stock in GM, Chrysler, and GMAC. Because the companies are not
publicly traded at this time, there is no market for the common stock.
Treasury-OFS also holds preferred stock in GM and GMAC. Of the $13.1
billion in preferred shares in GMAC held by Treasury-OFS, $7.875
billion is convertible at the option of GMAC subject to certain
conditions.
Contractual agreements govern disposition options and timetables, and
participants in AIFP are subject to enhanced reporting requirements
relative other TARP recipients (discussed under "Compliance"). Treasury-
OFS will periodically evaluate both public and private options to exit
the equity investments under the AIFP. For GM the most likely exit
strategy is a gradual sell off of shares following a public offering.
Pursuant to its operating agreement, General Motors will attempt a
reasonable best efforts initial public offering by July 10, 2010. This
date marks the one-year anniversary of the automaker's exit from
bankruptcy. For Chrysler and GMAC, the exit strategy may involve either
a private sale or a gradual sell off of shares following a public
offering. In each case, Treasury-OFS' goal is to dispose of the
government's interests as soon as practicable consistent with EESA
goals. As described below, Treasury will sell down, and ultimately sell
off completely its interests in a timely and orderly manner that
minimizes financial market and economic impact. At the same time,
Treasury cannot control market conditions and have an obligation to
protect taxpayer investments and maximize overall investment returns
within competing constraints.
Treasury-OFS has reduced the Automotive Supplier Support Program (ASSP)
aggregate commitment from $5.0 billion to $3.5 billion. Treasury-OFS'
current funding equates to $0.4 billion, with GM and Chrysler
accounting for $0.3 billion and $0.1 billion, respectively. Treasury-
OFS does not anticipate increased participation prior to the program's
April 2010 expiration.
American International Group (AIG):
Treasury-OFS holds preferred stock in AIG. As with the CPP preferred,
there is no mandatory repayment date. AIG has replaced most of its
board of directors, as well as its chief executive officer since
September 2008, and is presently engaged in a variety of restructuring
initiatives, including the divestment of assets to enable repayment of
loans made by the FRBNY, as well as Treasury-OFS' investment and the
wind-down of exposure to certain financial product and derivative
trading activities to reduce excessive risk taking.
Term Asset Backed Loan Facility (TALF):
Although Treasury-OFS has committed to provide up to $20 billion in
credit protection to the TALF special purpose vehicle, Treasury-OFS has
only funded $0.1 billion as of September 30, 2009. Additional funding
will be required only if borrowers default on their non-recourse loans
and surrender the collateral for such loans, which consists of asset-
backed securities to the FRBNY), which made the loans. In that event,
Treasury-OFS' funds are used to reimburse the Federal Reserve Bank, and
the asset-backed securities would then be sold to repay Treasury-OFS.
Asset Guarantee Program (AGP):
This program, which currently includes only Citigroup differs from
other TARP financial institution support programs in that Treasury-OFS,
does not invest TARP funds in the institution directly. Rather, TARP
funds are reserved to cover a portion of the possible losses in the
selected assets. In conjunction with the transaction, Treasury-OFS
received $4.0 billion of preferred stock with identical terms as
Citigroup's agreement under TIP. This investment is managed and
monitored in conjunction with TIP. As of September 30, 2009, no payment
had been made to Citigroup related to the covered asset pool. The
preferred stock can be redeemed or sold in the same manner as CPP and
TIP preferred stocks. Treasury-OFS also received warrants in connection
with this investment.
Treasury-OFS has a cross functional team of staff overseeing and
monitoring the covered asset pool under the Citigroup AGP. Given the
nature of the transaction, the Treasury-OFS, FRBNY and FDIC work
collaboratively on overseeing the Citigroup AGP. Additionally, U.S.
Federal Parties have engaged outside independent service providers to
perform various business, compliances/audit activities with respect to
the covered asset pool.
Public-Private Investment Program (PPIP):
Treasury-OFS' investments in Public-Private Investment Funds (PPIFs)
are subject to different disposition considerations given the nature of
the investments. Treasury-OFS provides funds which are used by the PPIF
managers, together with private capital, to purchase asset-backed
securities. These asset-backed securities then yield principal,
interest and dividend payments to the PPIFs which are used to repay
Treasury-OFS for its loans, and provide distributions to Treasury and
the private investors for their equity investments.
Treasury-OFS' management of these investments is therefore focused on
ensuring that the asset managers comply with the requirements of the
program, including the detailed compliance rules that govern matters
such as conflicts of interest. Fund managers are required to disclose
to and seek the approval of Treasury-OFS with respect to certain
fundamental corporate policies that could impact the PPIFs. In
addition, there are restrictions on dealings with affiliates and other
interested parties, which will help ensure that the PPIFs only enter
into arm's-length transactions.
[End of Section Five]
Section Six: Promoting Transparency:
Treasury-OFS is committed to providing full disclosure regarding the
TARP. This includes information on how the money has been spent, who
has received it, and the results of those investments. Providing such
information promotes transparency and insures accountability. In order
to meet these objectives, Treasury-OFS operates under a core set of
principles. First, Treasury-OFS will provide detailed information on
its programs on a timely basis, including information on specific
institutions. Second, Treasury-OFS will provide that information in
accessible and usable formats. Finally, Treasury-OFS will focus on
answering the questions that are most important to the public, the
Congress or the oversight bodies.
1. Providing detailed and timely information:
Treasury-OFS publishes a variety of reports that provide information
about TARP programs and transactions, and Treasury-OFS activities. For
the period ended September 30 2009, Treasury-OFS published the
following reports and information, which are available publicly at:
* 86 transaction reports, in accordance with section 114 of EESA, which
include details on every investment in every institution under every
program, including dates and amounts invested, as well as payments
received with respect to TARP investments.
* 10 Section 105(a) monthly congressional reports which provide
qualitative program updates and detailed financial information on all
programs.
* 7 Tranche Reports in accordance with section 105(b) of EESA, which
outline the details of the transactions related to each $50 billion
increment of TARP investments.
* 3 Dividend and interest reports.
* 2 Making Home Affordable program reports.
* 7 Monthly Lending and Intermediation Snapshot reports and 7 CPP
Monthly Lending Reports and;
* 2 Section 104(g) Financial Stability Oversight Board quarterly
reports to the Congress.
All program descriptions, including term sheets and forms of contracts,
are also posted. Treasury-OFS has used standard forms of contracts and
thus within a program there is little variation among the contracts for
all institutions. Treasury-OFS has also posted investment contracts on
the Treasury-OFS' website within two business days of each transaction's
closing.
The monthly report to Congress, also known as the Section 105(a)
report, provides one of the most useful ways to track the activities of
TARP. It contains easy-to-read charts showing how much money has been
spent and where the money is going by program. It also contains charts
on how much money has been repaid or returned to Treasury-OFS,
descriptions of each TARP program as well as highlights of new
developments. For those who want more detail, the transaction reports
give details on each investment.
2. Making information usable and accessible:
A key element in the Treasury-OFS public outreach effort is providing
user-friendly resources online. Earlier this year, Treasury-OFS
launched a new website -- [hyperlink,
http://www.FinancialStability.gov] -- that provides a wealth of
information about the TARP. FinancialStability.gov provides all of the
TARP reports, lists the institutions participating in the Treasury-OFS'
programs, and makes available detailed contracts defining those
investments. As of today, Treasury-OFS has posted nearly 700 investment
contracts, in addition to terms and program guidelines for all programs
under EESA. Treasury-OFS also launched the website [hyperlink,
http://www.MakingHomeAffordable.gov] to provide specific information to
homeowners on the Making Home Affordable Program and efforts to
mitigate the foreclosure crisis. In addition, Treasury-OFS has launched
an initiative to ensure that its website meets the needs of all its
users to provide easily accessible data and information.
[Sidebar: HAMP Reporting:
Treasury-OFS is improving performance and enhancing transparency on the
HAMP.
1. Servicer-specific results are now reported on a monthly basis. These
reports provide a transparent and public accounting of individual
servicer performance by detailing the number of trial modification
offers extended.
2. Treasury-OFS is establishing specific operational metrics. These
metrics will measure the performance of each servicer, such as average
borrower wait time in response to inquiries, and the response time for
completed applications; and servicer performance will be included in
our monthly public report.
3. Treasury-OFS directed that Freddie Mac review declined
modifications. In its role as compliance agent, Freddie Mac has
developed a "second look" process by auditing samples of HAMP
modification applications that have been declined. This will minimize
the likelihood that borrower applications are overlooked or that
applicants are inadvertently or incorrectly denied a modification. In
addition, the "second look" program is examining servicer non-
performing loan (NPL) portfolios to identify eligible borrowers that
should have been solicited for a modification, but were not. End of
sidebar]
3. Answering the right questions:
In being transparent with information, Treasury-OFS has designed
reports not only to be detailed and timely, but also to answer the
questions that observers most frequently ask. For example, Treasury-OFS
is often asked about what banks are doing with their TARP funds. So, in
January 2009, Treasury-OFS launched an important initiative to help the
public easily assess the lending and intermediation activities of the
largest CPP participants and more limited information for smaller CPP
participants. Treasury-OFS now publishes monthly and quarterly lending
surveys that contain information on the lending and other activities of
over 670 institutions that have received TARP funds.
Performance Metrics for FY 2010:
Treasury-OFS has developed performance measures related to each of its
strategic goals for FY 2010.
* Additional performance measures will evaluate the change in the
capital ratios and lending of CPP participants by comparing them to a
control set of banks with similar characteristics.
* Treasury-OFS will continue to evaluate performance of the SCAP bank
holding companies (BHCs). Performance measures will includes changes in
capital ratios and lending of the SCAP BHCs versus control banks with
similar characteristics.
* Treasury-OFS will continue to track various performance measures for
the TALF. These measures will include the TALF-eligible ABS issuance,
spreads in the secondary markets of RMBS, and CMBS securities, as well
as the spread between secondary ABS and benchmarks.
* Performance measures of the number of RAMP modifications (trial and
permanent) entered into, the redefault rate, and the change in average
borrower payments will be tracked.
* Several specific measures will address taxpayer protection. First,
Treasury-OFS will seek to have a clean audit opinion on its financial
statements. In addition, the financial return for each program will be
evaluated against its benchmark (subsidy rate). Finally, Treasury-OFS
will report performance data on how oversight issues are addressed and
resolved.
* Several indicators will measure performance on promoting
transparency. First, Treasury-OFS will track on-time reporting
performance. Second, Treasury-OFS will measure the degree of user
satisfaction with the TARP'S website, [hyperlink,
http://www.financialstability.gov], to determine areas for improvement.
Finally, a request response index will be created to provide the public
with a clear measure of timely performance.
[End of Section Six]
Section Seven: Financial Accounting Policy:
Under TARP, Treasury-OFS has made equity investments, loans and asset
guarantees in a range of financial institutions. In exchange for these
investments, loans, and asset guarantees, Treasury-OFS, on behalf of
the taxpayer, has received financial instruments ” equity, debt and
warrants ” from these companies. In this report, Treasury-OFS is
presenting a transparent accounting of the current estimated cost of
TARP, which reflects estimates of the value of those investments, loans
and asset guarantees. Treasury-OFS has developed and presented the
estimates in a way that is consistent with the statutory reporting
requirements.
The statutory reporting requirements for TARP in this area are in some
respects unique. Under EESA,Treasury-OFS is required to determine the
budgetary cost of TARP under the general framework of credit reform.
Treasury-OFS has determined it was appropriate to also use the credit
reform framework for financial reporting purposes. EESA also requires
that the budgetary cost of TARP programs be determined using a
methodology that incorporates market risk. This requirement means that
TARP equity investments similar to those that are publicly traded are
valued in a way that is analogous to the "fair value" standard that
private sector firms are required to use.
This section explains the applicable reporting requirements, discusses
how Treasury-OFS has met the requirements, and describes how this
reporting methodology relates to commercial reporting concepts.
Applicable Budget and Accounting Standards:
The Emergency Economic Stabilization Act of 2008 (EESA) requires that
the cost of troubled assets purchased or guaranteed be determined for
budgetary accounting purposes in accordance with the Federal Credit
Reform Act of 1990 (FCRA). EESA also requires that the cost
calculations be adjusted for market risk.
FCRA established a methodology for budgeting for loans or loan
guarantees issued by the federal government. Under the FCRA, the
budgets for loans and loan guarantee programs reflect the expected cost
of these financial arrangements, rather than just the cash flows as is
typically the case for federal budgeting. For example, when a federal
agency enters into a loan guarantee, no actual cash outflow from the
government typically occurs, however, the cash outflows and the
expected cost over the life of the guarantee may be substantial. In
contrast, when a federal agency provides a loan, there is a substantial
cash outflow at loan origination, but the ultimate cost of that loan to
the government will depend on future repayments.
Rather than using a cash basis for credit programs, which can be
misleading, the FCRA calls for agencies to record the "subsidy" cost of
a loan or loan guarantee at the time of the disbursement of the loan or
loan. The subsidy cost is the net present value of all cash flows
associated with the credit transaction, usually calculated by
discounting all payments back to the current period at the appropriate
Treasury rate. Subsidy estimates reflect both the terms of the
underlying instrument and the likelihood of repayment. For example, if
a loan carries a rate below the comparable Treasury rate, that loan
will generate a subsidy cost even if the loan is expected to be fully
repaid. The subsidy calculation also reflects the risk that the
borrower may not repay the entire amount of the loan. The potential for
less than full repayment is reflected in the expected cash flows, which
should reflect historical defaults on similar instruments, and
assumptions about possible future economic performance.
The original subsidy cost estimate made at the time the transaction
occurs is updated each year to reflect the actual cash flows that
occurred as well as any changes in the expected future repayments from
the borrower.
EESA mandated that the FCRA be used to determine the cost of all TARP
investments for budgetary purposes, although the FCRA as originally
designed did not cover equity investments. Treasury-OFS concluded that
it was appropriate to apply FCRA to its preferred stock purchases since
preferred stock has a dividend rate and regularly scheduled dividend
payments, similar to debt instruments.
The Federal Accounting Standards Advisory Board (FASAB) has promulgated
extensive accounting guidance that establish Federal accounting
practices for loans and guarantees consistent with the FCRA method of
budgeting for credit programs. TARP investments in direct loans, such
as those to the auto industry, and asset guarantees are covered by
existing accounting standards. Specifically Statement of Federal
Financial Accounting Standards 2, Accounting for Direct Loans and Loan
Guarantees (SFFAS 2) provides relevant accounting guidance for direct
loans and loan guarantees issued by federal entities and closely
parallels the FCRA provisions. Federal entities must record loans
disbursed as an asset, valued at the net present value of expected
future cash inflows. The difference between the amount disbursed and
the net present value of expected cash inflows for loans is recorded as
a subsidy cost at the time of the loan disbursement. Federal entities
must book outstanding guarantees as an asset or a liability, valued at
the net present value of the expected future cash flows, with the
corresponding amount reflected in subsidy cost. Estimates of future
cash flows are revised on an annual basis with changes reflected as an
increase or decrease in the subsidy allowance and reflected in the
Statement of Net Costs.
FASAB standards do not cover equity investments by federal entities in
private enterprises as the Federal government generally does not make
these types of investments. Consistent with the accounting policy for
equity investments made by Treasury in private entities, Treasury-OFS
accounts for its equity investments at fair value, defined as the
estimated amount of proceeds Treasury-OFS would receive if the equity
investments were sold to a market participant. Treasury-OFS uses the
present value accounting concepts embedded in SFFAS No. 2 to derive
fair value measurements. Treasury-OFS concluded that the equity
investments were similar to direct loans in that there is a stated
interest rate and a redemption feature which, if elected, requires
repayment of the amount invested. Furthermore, the EESA requirement to
consider market risk provides a basis to arrive at a fair value
measurement. Therefore, Treasury-OFS uses SFFAS No. 2 for reporting and
disclosure requirements of it equity investments. Treasury-OFS accounts
for the warrants received under Section 113 of EESA as fees under SFFAS
No. 2, as such the value of the warrants is a reduction of the subsidy
allowance.
Market Risk:
EESA departed from the FCRA by requiring that an adjustment for market
risk be made to the interest rate used to discount future expected cash
flows rather than using the interest rate on comparable maturity
Treasury debt as the FCRA requires. This distinction values the TARP
equity investments as closely as possible to how they would be priced
in private markets. The incorporation of market risk is a departure
from the standard FCRA methodology and is an important factor in the
valuations included in the Treasury-OFS financial statements. The loan
and asset guarantee models include an adjustment for market risk which
is intended to capture the risk of unexpected losses, but is not
intended to represent fair value.
TARP holds a variety of investments. The Citigroup common stock is a
standard financial instrument that trades in public markets and has a
market price that can be directly observed. Certain other TARP
investments are closely related to tradable securities. Wherever
possible, Treasury-OFS has sought to use market prices of traded equity
securities in estimating the fair value of TARP equity investments.
Most TARP equity investments do not have direct analogs in private
markets so Treasury-OFS uses internal market-based models to estimate
the fair value of these investments. These models have been benchmarked
to actual securities with observable market prices to try and ensure,
to the maximum extent possible, that the model's results actually
reflect how the private markets are pricing risk. As described in
Section Eight [Valuation], the valuation of the Treasury-OFS' equity
investments comes as close as possible to how private financial markets
would price those instruments.
Comparison to Commercial Reporting Concepts:
While commercial reporting standards vary, fair value is the most
common valuation approach for reporting relatively liquid equity
investments like preferred stock. For Treasury-OFS, adjusting our
estimates to reflect market risk ensures that the asset values reflect
a reasonable assessment of fair value, which can be readily compared
and evaluated based on commercial investment information.
[End of Section Seven]
Section Eight: TARP Valuation Methodology:
This section describes the methodologies used to estimate the value of
the diverse set of TARP investments made under EESA. Wherever possible,
Treasury-OFS has sought to use market prices of tradable securities to
make direct estimates of the market value of TARP investments. Use of
market prices was possible for TARP investments that are standard
financial instruments that trade in public markets or are closely
related to tradable securities. For those TARP investments that do not
have direct analogs in private markets, Treasury-OFS uses internal
market-based models to estimate the market value of these investments
as detailed below.
Incorporating "Market Risk" in Valuation Models:
Risk can be taken into account in a number of ways when estimating the
value of an asset. EESA requires that the budgetary cost and risk of
troubled assets acquired under TARP be estimated in accordance with the
Federal Credit Reform Act of 1990 (FCRA) and using a market adjusted
discount rate. Where possible, market prices are used to benchmark the
values of TARP investments.
The standard methodology under FCRA is to estimate asset values as the
net present value of expected cash flows, using Treasury rates for
discounting. In that approach, risk is reflected in the expected cash
flows. For example, default risk on a loan would be reflected in the
fact that the expected cash flows are less than the contractual
obligations.
EESA also requires for budgetary purposes that the FCRA methodology be
modified to include an adjustment for market risk. Specifically, EESA
requires that instead of discounting future expected cash flows at the
interest rate on comparable maturity Treasury debt, an additional
adjustment for market risk must be made. For financial reporting
purposes, the market risk is incorporated in the future expected cash
flows.
In effect, the requirement to adjust the standard FCRA methodology to
reflect "market risk" means that for the purposes of budget and
accounting, TARP equity investments are valued as closely as possible
to how they would be priced in private markets. This requirement is
relatively easy to implement for TARP investments that are closely
related to securities with observable market prices. However, where
empirical models are needed to estimate the value of non-standard TARP
investments those models must be benchmarked to ensure, to the extent
possible, that their results reflect the way public markets price risk.
This benchmarking is an important part of valuation methodology.
The adjustment for "market risk" can be reflected in either expected
cash flows or the discount rate used to calculate net present values.
Regardless of where the adjustment is made, it should not have a
material impact on the results as long as those models are benchmarked
to suitable measures of market risk in an appropriate manner.
CPP Investments:
Under the CPP as detailed in Section Three [Ensuring Stability],
Treasury-OFS has provided capital to 685 qualified financial
institutions and received preferred stock and warrants in return. To
estimate the value of these investments, Treasury-OFS has built two
separate statistical models: one to value the preferred stock and one
to value the warrants. Both valuation models use standard methods
employed in academe and the financial sector. An important aspect of
these models is the treatment of the implicit options embedded in the
assets; i.e., the financial institution's decision to repurchase the
asset and Treasury-OFS' decision to exercise the warrants. These models
make use of a variety of information, including historical and current
information on the institution's balance sheets, the term-structure of
interest rates, and equity prices and dividends.
The estimated values of CPP preferred equity investments are the net
present values of the expected dividend payments and repurchases. The
model is used to estimate the likely distribution of dividend payments
over time. Estimates of the ultimate cost of TARP will decline further
if early repayments are higher than those currently built into the
models. It is assumed that the key decisions that affect whether or not
banks pay their preferred dividends are made by each bank based on the
strength of their balance sheet. The model assumes a probabilistic
evolution of each bank's asset to liability ratio. Each institution's
assets are subject to uncertain returns and institutions are assumed to
manage their asset to liability ratio in such a way that it reverts
over time to a target level. Historical volatility is used to scale the
likely evolution of each banks' assets-to-liabilities ratio.
In the model, when equity decreases, i.e. the asset-to-liability ratio
falls; institutions are increasingly likely to default, either because
they enter bankruptcy or are closed by regulators. The probability of
default is estimated based on the performance of a large sample of US
banks over the period 1990-2008. At the other end of the spectrum,
institutions call their preferred shares when the present value of
expected future dividends exceeds the call price; which occurs when
equity is high and interest rates are low.
The warrants for the purchase of common stock are priced using an
option-pricing model augmented for the fact that exercising warrants
infuses cash into an institution and also dilutes current stockholders.
The model assumes optimal warrant exercise by Treasury-OFS; that is,
the warrants are exercised if the expected present value of income from
future optimal warrant exercise is less than the current in-the-money
value. The key input to the model -- the future volatility of bank
stock prices -- is derived from the model for preferred stock.
The basic preferred equity model is benchmarked to the market pricing
of risk. The model was used to estimate the value of preferred equity
instruments issued by 18 of the CPP banks that trade actively in public
markets. These particular instruments were chosen because they share
important characteristics with the CPP instruments. In particular,
these traded instruments have very long maturities and are callable.
The stochastic assumptions that drive the evolution of bank balance
sheets in the model were then adjusted so the model's valuation of this
portfolio of tradable securities matched the observed market prices.
The only other adjustment to the model relates to the banks'
repurchases of preferred securities from Treasury-OFS. Treasury-OFS
management, based on public statements by individual banks, believes
that a significant volume of CPP and TIP preferred shares is likely to
be repaid earlier than the model predicts. To reflect this judgment,
the model is adjusted to generate approximately $70 billion in CPP and
TIP repurchases over the next twelve to eighteen months.[Footnote 25]
Treasury-OFS exchanged the CPP preferred shares purchased from
Citigroup for common stock. The exchange rate was $3.25 per share
resulting in Treasury-OFS obtaining approximately 7.7 billion shares.
The value of these shares is the amount of shares held times its market
price.
TIP:
Treasury-OFS provided funds to both Citigroup and Bank of America under
the Targeted Investment Program through the purchase of additional
preferred shares. These investments are valued in the same manner that
Treasury-OFS uses to value CPP investments in large institutions. As
noted above, the model assumes $70 billion in CPP and TIP repurchases.
AIG Investment Program:
The method used to value AIG preferred shares is broadly analogous to
the approach used to value CPP investments. However, greater
uncertainty exists for the valuation of preferred shares for AIG.
First, the size of Treasury-OFS' holding of preferred shares relative
to AIG's total balance sheet makes the valuation extremely sensitive to
assumptions about the recovery ratio for preferred shares should AIG
enter default. Second, no comparable traded preferred shares exist.
Therefore, Treasury-OFS based the AIG valuation on the observed market
values of publicly traded assets on either side of the liquidation
preference of the preferred stock; common stock (paid after preferred
stock), and the most junior subordinated debt (paid before preferred
stock). Further, based on certain publicly available third party
sources, assumptions about payouts in different outcomes and the
probability of some outcomes were made. Finally, external asset
managers provided estimated fair value amounts, premised on public
information, which also assisted Treasury-OFS in its valuation. These
different factors were all used in determining the best estimate of the
fair value of AIG assets. The AIG Investment Program also includes an
equity capital facility that can be drawn upon at the discretion of
AIG.
AIFP:
The valuation of equity-type investments was performed in a manner that
is broadly analogous to the methodology used for CPP investments, with
reliance on publicly traded securities to benchmark the assumptions of
the valuation exercise. Debt with potential value is valued using
rating agency default probabilities.
As part of the General Motors (GM) bankruptcy proceedings, Treasury-OFS
received a 60.8 percent stake in the common equity of General Motors
Company (New GM). Because the unsecured bond holders in General Motors
Corporation (Old GM) received 10 percent of the common equity ownership
and warrants in New GM, the expected recovery rate implied by the
current trading prices of the Old GM bonds provides the implied value
of the New GM equity. Treasury-OFS used this implied equity value to
account for its equity stake in New GM.
For the GMAC equity instruments, Treasury-OFS used the model to
estimate the value of GMAC subordinated debt that trades actively in
public markets. The stochastic assumptions that drive the evolution of
the institution's balance sheet in the model were then adjusted so the
model's valuation of this security matched the observed market price.
Treasury-OFS values direct loans using an analytical model that
estimates the net present value of the expected principal, interest,
and other scheduled payments taking into account potential defaults. In
the event of a financial institution's default, these models include
estimates of recoveries, incorporating the effects of any collateral
provided by the contract. The probability of default and losses given
default are estimated by using historical data when available, or
publicly available proxy data, including credit rating agencies
historical performance data.
Treasury-OFS also benchmarks the valuation of its holdings of auto
securities against the assumptions about the dynamics of future
revenues and costs provided by an inter-agency working group dealing
with the automotive industry.
TALF:
Under the TALF program, Treasury-OFS will provide funding of up to $20
billion as necessary for the purchase of TALF collateral through a
direct loan to a Special Purpose Vehicle (SPV). The SPV collects
monthly interest spreads on all outstanding TALF loans, as well as any
income or sale proceeds from purchased collateral. When the program is
wound down, Treasury-OFS will be repaid principal and interest on the
loan if funds are available, and will collect 90 percent of any
proceeds remaining in the SPV. The value of the Treasury-OFS' loan to
the TALF SPV is the estimated net present value of the expected
principal, interest, and additional proceeds.
To derive the cash flows to the SPV, and ultimately, Treasury-OFS, the
model simulates the performance of underlying collateral. Loss
probabilities on the underlying collateral are calculated based on
analysis of historical loan loss and charge off experience by credit
sector and subsector. Historical mean loss rates and volatilities are
significantly stressed to reflect recent and projected performance.
Simulated losses are run through cash flow models to project impairment
to the TALF eligible securities. Impaired securities are projected to
be purchased by the SPV, requiring additional Treasury-OFS funding.
Simulation outcomes consisting of a range of loss scenarios are
probability-weighted to generate the expected net present value of
future cash flows.
AGP:
Under the AGP, Treasury-OFS received preferred shares and warrants in
exchange for providing a guarantee on a pool of Citigroup's assets. The
value of the AGP preferred shares and warrants is determined in exactly
the same manner that Treasury-OFS uses to value CPP investments in
large institutions. The cost that Treasury-OFS expects to incur is
based on projected losses on the asset pool under a weighted average of
different possible loss scenarios.
The value of the AGP is the discounted expected cash inflows from the
preferred shares and warrants less the expected costs of the TARP
expenditures to make good on the asset pool guarantees and adjusted for
market risk.
Sensitivity Analysis:
The ultimate value of TARP investments will only be known in time.
Realized values will vary from current estimates in part because
economic and financial conditions will change. Many TARP investments do
not have readily observable values and their values can only be
estimated by Treasury-OFS.
Sensitivity analysis is one way to get some feel for the degree of
uncertainty around the Treasury-OFS estimates. In the analysis reported
here, Treasury-OFS focuses on the largest components of the TARP, the
assets held under the Capital Purchase Program (CPP), as well as
preferred stock investments made under the Targeted Investment Program
(TIP). Second, the Treasury-OFS focuses on two of the most important
inputs to the valuation: i) whether and when the banks repay the
preferred stock, and whether there are changes in the market price of
publicly-traded preferred stock used as a benchmark for valuing the
preferred stock held in the TARP.
Prepayments: The CPP preferred stock carries a 5 percent dividend,
which increases to 9 percent after 5 years. Banks able to repay would
be likely to do so at the 5-year point. However, some banks have repaid
early. Over $70 billion of the $204 billion of preferred stock has
already been repaid. The model forecasts additional repayments over the
next 18 months of $19.5 billion. Treasury-OFS increased that forecast
by $50 billion for CPP and TIP combined to reflect additional
anticipated repayments over the next 12 months. As a sensitivity
analysis, Treasury-OFS computed the CPP and TIP values without the
additional $50 billion of anticipated repayments. The result is shown
in Scenario 1 of Table 1.
Benchmark Preferred Stock: The valuation procedure entails observing
the market price of publicly-traded preferred stock and calibrating the
model (in particular the risk premium) to match those prices. The
calibrated model is then used to price the non-publicly traded
preferred stock held by the TARP. The benchmark preferred stock
consists of a portfolio of claims issued by some of the same
institutions with TARP preferred stock. It is generally the larger
institutions that have issued preferred stock. The TARP preferred stock
for smaller institutions may not be exactly comparable, but the bulk of
TARP investments, as measured on a dollar basis, are in large
institutions.
The preferred stock calibration procedure imposes a strict discipline
on the model. If one parameter in the model is changed, calibration to
the market benchmark will induce an offsetting change in other
parameters, with the result that the final valuation is not altered
much. Changes in the price of the benchmark, however, have the
potential to significantly alter the valuations. As a sensitivity
analysis, Treasury-OFS increases and decreases the value of the
benchmark preferred stock in the CPP and TIP by 10 percent. The result
is shown in Scenarios 2 and 3 of the following table.
To put this sensitivity analysis in perspective it is useful to
consider the range over which actual preferred shares have moved in
this crisis. Figure 15 shows the prices of callable preferred shares of
those CPP banks that have such instruments outstanding. Since their
troughs in early March, these shares have recovered substantially.
Currently the basket of callable preferred shares for CPP banks is
trading at about 76 percent of their call prices which leaves
opportunity for further improvement. Of course just last March these
instruments were trading for less than half their current value. This
considerable volatility, along with the sensitivity analysis presented
here, gives a good sense of the degree of unavoidable uncertainty
around the estimates of the valuation of TARP investments presented
here.
Figure 15: Prices of Callable Preferred Shares Issues by CPP Banks,
(Percent of Call Price) Percent Percent:
[Refer to PDF for image: multiple line graph]
[Refer to PDF for image: multiple line graph; contact Department of the
Treasury, Office of Financial Stability for graph data]
Source: Bloomberg.
Note: Weighted averages of prices of callable preferred shares issued
by three CPP banks that have already repaid their TARP capital
injections and 14 CPP banks that have not. Prices are expressed as a
percent of the call price.
[End of figure]
Table: Market Value Sensitivity (Dollars in Billions):
Program: CPP;
Current Market Value[A]: Additional Repayments[B]: $133.0; change from
current: N/A;
Scenario 1: No Additional Repayments: $127.7; change from current:
-4.03%;
Scenario 2: 10% Financial Stock Price Increase: $141.8; change from
current: 6.58%;
Scenario 3: 10% Financial Stock Price Decrease: $123.7; change from
current: -7.01%.
Program: TIP;
Current Market Value[A]: Additional Repayments[B]: $38.6; change from
current: N/A;
Scenario 1: No Additional Repayments: $36.3; change from current:
-5.96%;
Scenario 2: 10% Financial Stock Price Increase: $39.8; change from
current: 3.05%;
Scenario 3: 10% Financial Stock Price Decrease: $37.4; change from
current: -2.98%.
Program: Total;
Current Market Value[A]: Additional Repayments[B]: $171.6; change from
current: N/A;
Scenario 1: No Additional Repayments: $164.0; change from current:
-4.46%;
Scenario 2: 10% Financial Stock Price Increase: $181.5; change from
current: 5.78%;
Scenario 3: 10% Financial Stock Price Decrease: $161.1; change from
current: -6.10%.
[A] The difference between the values contained in this table and the
financial statements is that the financial statement values include the
warrants.
[B] Assumes $70 billion in repayments over the next 12 to 18 months.
[End of table]
Other Sources of Sensitivity:
Wherever possible, Treasury-OFS has used direct market proxies to
estimate the value of TARP investments. The volatility of the market
prices of the related securities is an important indicator of the
uncertainty of our estimates of what the returns on TARP investments
ultimately will be. For example, the price of Citigroup common shares
has fluctuated in a range from $2.6 to $5.2 per share just since the
SCAP results were announced in early May.
[End of Section Eight]
Section Nine: Systems, Controls, and Legal Compliance:
Management Assurance Statement:
The Treasury Office of Financial Stability's (Treasury-OFS) management
is responsible for establishing and maintaining effective internal
control and financial management systems that meet the objectives of
the Federal Managers' Financial Integrity Act (FMFIA), 31 U.S.C.
Section 3512(c), (d). Treasury-OFS has evaluated its management
controls, internal controls over financial reporting, and compliance
with the federal financial systems standards. As part of the evaluation
process, Treasury-OFS considered the results of extensive
documentation, assessment and testing of controls across Treasury-OFS,
as well as the results of independent audits. Treasury-OFS conducted
its reviews of internal controls in accordance with the FMFIA and the
Office of Management and Budget (OMB's) Circular A-123, Management's
Responsibility for Internal Control.
As a result of its reviews, Treasury-OFS management concludes that the
management control objectives described below, taken as a whole, were
achieved as of September 30, 2009. Specifically, this assurance is
provided relative to Sections 2 (internal controls) and 4 (systems
controls) of FMFIA. Treasury-OFS further assures that the financial
management systems relied upon by Treasury-OFS are in substantial
compliance with the requirements imposed by the Federal Financial
Management Improvement Act (FFMIA). Treasury-OFS does not rely on any
financial systems beyond those maintained by the Department of the
Treasury and Fannie Mae.
Treasury-OFS' internal controls are designed to meet the management
objectives established by Treasury and listed below:
a) Programs achieve their intended results effectively and efficiently;
b) Resources are used consistent with the overall mission;
c) Programs and resources are free from waste, fraud, and mismanagement;
d) Laws and regulations are followed;
e) Controls are sufficient to minimize any improper or erroneous
payments;
f) Performance information is reliable;
g) Systems security is in substantial compliance with all relevant
requirements;
h) Continuity of operations planning in critical areas is sufficient to
reduce risk to reasonable levels; and;
i) Financial management systems are in compliance with federal
financial systems standards, i.e., FMFIA Section 4/FFMIA.
In addition, Treasury-OFS management conducted its assessment of the
effectiveness of internal control over financial reporting, which
includes safeguarding of assets and compliance with applicable laws and
regulations, in accordance with OMB Circular A-123, Management's
Responsibility for Internal Control, Appendix A, Internal Control over
Financial Reporting.
Based on the results of this evaluation, Treasury-OFS provides
unqualified assurance that internal control over financial reporting is
appropriately designed and operating effectively as of September 30,
2009, with no related material weaknesses noted.
Sincerely,
Signed by:
Herbert M. Allison, Jr.
Assistant Secretary for Financial Stability:
Internal Control Program:
The Emergency Economic Stabilization Act (EESA) established the Office
of Financial Stability (Treasury-OFS) on October 3, 2008. Shortly
thereafter, Treasury-OFS funded $115 billion to eight financial
institutions as part of the Capital Purchase Program. From the
inception of that initial program to the current day, the importance of
effective internal controls in safeguarding the use of taxpayer dollars
to provide financial stability through the Troubled Asset Relief
Program (TARP) has remained a top priority of Treasury-OFS management.
Whether deploying operational processes to support new TARP programs or
implementing complex budget and financial reporting processes to
support its first year of operations, Treasury-OFS endeavors to
establish an effective initial operating capability for internal
controls that are first and foremost effective at mitigating risk.
Then, Treasury-OFS enhances the initial operating capability to a
sustainable level that is effective and efficient, and designed to meet
the long-term needs of its programs.
Treasury-OFS is committed to implementing an effective internal control
program and has established a Senior Assessment Team (SAT) to guide the
office's efforts to meet the statutory and regulatory requirements
surrounding a sound system of internal control. The SAT is chaired by
the Deputy Chief Financial Officer (DCFO) and includes representatives
from all Treasury-OFS functional areas. Further, Treasury-OFS has
defined an Internal Control Framework that is based on the principles
of The Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The SAT leverages this framework in communicating control
objectives across the organization and its third party service
providers.
Treasury-OFS established an Internal Control Program Office (ICPO)
under the Office of the Chief Financial Officer that is guided by the
SAT and focuses on managing the offices internal control efforts. The
ICPO monitors the implementation of the Internal Control Framework and
ensures the achievement of management control objectives. The ICPO
monitors Treasury-OFS activities to ensure management control
objectives are achieved by:
* Integrating management controls into Treasury-OFS business processes
through:
- Developing internal control documentation,
- Reviewing internal control responsibilities with process owners
before major program execution events, and,
- Real-time monitoring of key control effectiveness during and after
significant program execution events;
* Conducting "lessons learned" sessions to identify and remediate areas
requiring improvement;
* Periodic testing of key controls; and,
* Monitoring feedback from third party oversight bodies.
In addition, the internal control environment supporting TARP programs
and Treasury-OFS activities undergoes continuous improvement to remain
effective and is subject to significant third party oversight by the
Government Accountability Office (GAO) and the Special Inspector
General for the Troubled Asset Relief Program (SIGTARP).
The Assistant Secretary for Financial Stability must report annually to
the Under Secretary for Domestic Finance on the adequacy of the various
internal controls throughout the Office of Financial Stability, to
include financial management systems compliance. The Assurance
Statement is required by the Federal Managers' Financial Integrity Act
(FMFIA). In order to support the Assistant Secretary's letter of
assurance, the respective Treasury-OFS divisions prepare individual
statements of assurance. These individual statements of assurance
provide evidence supporting the achievement of Treasury-OFS-wide
internal control objectives and disclose any noted weaknesses.
Information Technology Systems:
For fiscal year 2009, Treasury-OFS did not directly support any
Information Technology (IT) systems. Significant IT systems used by
TARP are supported by various Departmental Offices or bureaus that are
part of Treasury.
Other IT systems are supported by Financial Agents which provide
services to the U.S. Treasury. The Financial Agency Agreements
maintained by the Treasury Office of the Fiscal Assistant Secretary in
support of Treasury-OFS require the Financial Agents to design and
implement suitably robust IT security plans and internal control
programs, to be reviewed and approved by the Treasury at least
annually.
Compliance with the Improper Payments Information Act (IPIA):
The elimination of improper payments is a major focus of Treasury-OFS
executive management. Managers are held accountable for developing and
strengthening financial management controls to detect and prevent
improper payments, and thereby better safeguard taxpayer dollars.
Treasury-OFS carried out its fiscal year 2009 IPIA assessment per
Treasury-wide guidance and did not identify any programs or activities
susceptible to significant erroneous payments. Treasury-OFS did not
identify any payments to incorrect payees or ineligible recipients.
Management will continue to monitor disbursements and re-assess IPIA
compliance as new programs are initiated.
Areas for Improvement:
Over the next year, Treasury-OFS management is focused on enhancing the
maturity of its internal control environment in several key areas as
follows:
* Because of limited staffing and competing priorities among the
various compliance activities and TARP programs, independent monitoring
of contract requirements for TARP programs has been constrained.
Treasury-OFS has been challenged to develop sufficient resources to
respond to the number of requirements imposed by TARP programs, the
large number of participants in those programs, and recommendations by
the oversight entities. Management is building the personnel resources
to aggressively address a number of compliance priorities, including,
for example, monitoring the Treasury-OFS contract compliance status of
CPP recipients' compliance.
* The system of record used to manage the Home Affordable Modification
Program (HAMP) requires increased functionality to meet the control
requirements of the program. Weaknesses in these systems are currently
mitigated by our detective internal controls. However, management
recognizes that these system shortfalls must be addressed in the near
term, as the volume and complexity of these system functions increase.
* EESA required the preparation of stand-alone financial statements
that would be audited by the GAO. As a new entity, neither Treasury-OFS
nor our GAO auditors had previously been through the statement
preparation and auditing process for this complicated entity. An
additional complication resulted from EESA and OMB's interpretation of
the statute to require the application of complex accounting required
by the Federal Credit Reform Act of 1990 (FCRA) to all of the Treasury-
OFS acquisitions (i.e. equities, loans and asset guarantees).
Given these facts, Treasury-OFS faced a number of challenges, including
a shortage of experienced credit reform staff and evolving and untested
financial reporting processes and controls. Given the pace and
evolution of the TARP programs throughout the year and subsequent
impact on the accounting and financial reporting areas, certain
accounting practices continued to evolve throughout the period ended
September 30, 2009. In an effort to keep pace with these changes,
management continues to focus its attention on the development of
robust processes that meet business needs and internal control
requirements. In developing its accounting processes and controls,
management has sought to balance effective risk mitigation, flexibility
to respond to new programs, and efficiency through shared resources.
Accordingly, the maturation and formalization of financial capabilities
and controls will continue into fiscal year 2010.
* As noted in Section Seven, EESA mandated that the FCRA be used to
determine the cost of all TARP investments for budgetary purposes. The
FCRA calls for agencies to record the "subsidy" cost of an investment
at the time of the disbursement, which requires the use of detailed
models following the methodology described in Section Eight. Due to a
compressed timeframe, management was not able to execute the planned
controls around manual data inputs in the credit subsidy models in such
a manner so as to prevent non-material errors from occurring in the
final re-estimate production process. Significant errors identified
were corrected and amounts were properly reflected in the financial
statements. In year one, our internal controls over data inputs were
intended to provide full coverage of the models, but of necessity our
resources focused more on the high risk programs and items. In fiscal
year 2010, we will focus more attention on improving internal control
effectiveness in mitigating the risk of errors in data inputs for all
models.
Oversight Entities:
Per the EESA requirements, Treasury-OFS has four oversight entities
with specific responsibilities with regard to TARP, which are the
Financial Stability Oversight Board, the GAO, the Special Inspector
General for TARP, and the Congressional Oversight Panel. A summary of
the responsibilities and activities of each of these entities is
provided below.
Financial Stability Oversight Board:
The Oversight Board was established by section 104 of the EESA to help
oversee the Troubled Asset Relief Program and other emergency
authorities and facilities granted to the Secretary of the Treasury
under the EESA. The Oversight Board is composed of the Secretary of the
Treasury, the Chairman of the Board of Governors of the Federal Reserve
System, the Director of the Federal Housing Finance Agency, the
Chairman of the Securities and Exchange Commission, and the Secretary
of the Department of Housing and Urban Development. Through Oversight
Board meetings and consultations between the staffs of the agencies
represented by each Member of the Oversight Board, the Oversight Board
reviews and monitors the development and ongoing implementation of the
policies and programs under TARP to restore liquidity and stability to
the U.S. financial system. The Oversight Board meets each month, and
receives presentations and briefings from Treasury officials and, where
appropriate, other government officials, including officials from the
other agencies represented on the Oversight Board, concerning the
implementation and the effects of the programs established under TARP.
The Oversight Board also monitors Treasury's responses to the
recommendations made by SIGTARP and the GAO. Throughout FY 2009, the
Oversight Board received updates on Treasury's progress in addressing
the issues raised by these oversight bodies with respect to
transparency, the establishment of internal controls, compliance and
risk monitoring, staffing and Treasury's communication strategy. In
addition, staff of the Oversight Board and of the agencies represented
by each Member of the Oversight Board continued to have regular
discussions with representatives from the SIGTARP and GAO to discuss
recent and upcoming activities of the oversight bodies. These efforts
continued to help facilitate coordinated oversight and minimize the
potential for duplication.
The Oversight Board issues a Quarterly Report for each three-month
period. Copies of approved minutes of the Oversight Board's meetings
and the Quarterly Reports are made available on the internet at
[hyperlink, http://www.financialstability.gov/about/oversight.html].
GAO:
Section 116(a)(3) of EESA stipulates that "the Comptroller General [who
heads the GAO] shall submit reports of findings...regularly and no less
frequently than once every 60 days, to the appropriate committees of
Congress." "The Comptroller may also submit special reports...as
warranted by the findings of its oversight activities."
Treasury-OFS has a statutory obligation under Section 116(b)(3) of EESA
to take corrective actions in response to audit deficiencies identified
by the Comptroller General or other auditor engaged by the TARP or
certify to the appropriate committees of Congress that no action is
necessary or appropriate. In addition, under Section 236 of the
Legislative Reorganization Act of 1970, Treasury is required to respond
in writing to Congress within 60 days of the issuance date of a GAO
report.
Currently, the GAO is engaged in eight audits related to TARP. Treasury-
OFS responds to information requests from the GAO by providing
responsive documents and other information and facilitating
comprehensive briefings on TARP programs with senior Treasury staff. In
addition, Treasury-OFS apprises the GAO of key developments in current
and proposed programs and policies under EESA.
To date, the GAO has issued 41 recommendations in its reports issued in
December 2008 and January, March, June, July, October, and November
2009. The recommendations have focused on the following themes: (1)
transparency, reporting, and accountability; (2) management
infrastructure; and (3) communication. In response to the
recommendations, the Treasury-OFS has developed remediation plans and
actively communicates the status of its remediation efforts to the GAO
and will continue to do so in FY 2010. Treasury-OFS has fully or
partially implemented 32 of the recommendations and has responded or is
in the process of responding to six recommendations; the remaining
recommendations have been deemed closed by the GAO and/or Treasury-OFS
has taken no action.
Treasury-OFS' actions in response to GAO recommendations include:
* Treasury-OFS delivered draft internal controls policies and
procedures to GAO on June 30, 2009. Many of the final policies and
procedures were delivered to GAO on September 30, 2009. The bulk of the
remainder of the Treasury-OFS policies and procedures will be delivered
by December 31, 2009.
* Treasury-OFS has completed draft risk assessments of TALF, CPP, RAMP,
contracting and human resources. Plans have been developed for high
risk areas.
* Treasury-OFS continues to expeditiously hire personnel to carry out
and oversee RAMP as well as finalizing a comprehensive system of RAMP
internal controls.
Additional detail regarding Treasury-OFS's progress on the GAO's
recommendations can be found at [hyperlink,
http://www.financialstability.gov/docs/SummaryResponseGAO-10-8-
2009.pdf].
SIGTARP:
SIGTARP was created by section 121 of EESA. The objectives of SIGTARP
are to investigate and prevent fraud, waste and abuse in TARP programs,
while trying to promote transparency in TARP programs.
SIGTARP must report to Congress each quarter certain information about
TARP over the preceding quarter. As of September 30, 2009, SIGTARP has
issued three quarterly reports in February 2009, April 2009 and July
2009. SIGTARP also has a duty under EESA to conduct audits and
investigations of the purchase, management, and sale of assets under
any TARP program, and with certain limitations, any other action under
EESA. As of September 30, 2009, SIGTARP has completed four audits and
is currently conducting eleven audits that are at various stages.
Treasury-OFS has worked closely with SIGTARP and maintains regular
lines of communications with the personnel conducting audits and
investigations of TARP programs. Treasury-OFS staff also regularly
provides updates to SIGTARP about program design and implementation
issues. Treasury-OFS has benefited from their involvement in the
development of TARP programs and policies as we pursue our common goal
of carrying out the objectives of EESA, which are to promote financial
stability and protect the interests of the taxpayers.
As of September 30, 2009, SIGTARP has issued 41 individual
recommendations in their reports. General topics covered by SIGTARP's
recommendations include reporting on use of TARP funds, valuation of
the TARP portfolio, and potential fraud vulnerabilities associated with
PPIP, TALF and HAMP. Treasury-OFS has given careful consideration to
the recommendations in SIGTARP's prior reports, and has submitted
responses detailing what actions that Treasury-OFS has taken or will
take to address SIGTARP's recommendations. Treasury-OFS' policies and
programs currently address many of the issues raised by SIGTARP in
their recommendations, and in other cases Treasury-OFS took specific
action to implement SIGTARP's recommendations. Treasury-OFS also has or
will execute alternative approaches that we believe address some of the
issues raised by SIGTARP in their recommendations. SIGTARP has closed
29 of its recommendations based on Treasury-OFS' response to the
SIGTARP recommendations.
Congressional Oversight Panel:
The Congressional Oversight Panel (COP)'s mandate includes assessing
the impact of Treasury-OFS' spending to stabilize the economy,
evaluating market transparency, ensuring effective foreclosure
mitigation efforts, and guaranteeing that Treasury-OFS' actions are in
the best interest of the American people.
The COP consists of five panel members appointed as follows: 1 member
appointed by the Speaker of the House of Representatives; 1 member
appointed by the minority leader of the House of Representatives; 1
member appointed by the majority leader of the Senate; 1 member
appointed by the minority leader of the Senate; and 1 member appointed
by the Speaker of the House of Representatives and the majority leader
of the Senate, after consultation with the minority leader of the
Senate and the minority leader of the House of Representatives. The COP
also employs a professional staff, numbering approximately 27, who are
responsible for carrying out the day-to-day work of the Panel. The COP
also reaches out to experts, primarily academics, to conduct analysis
in support of their work.
EESA requires the COP to produce a report every 30 days examining
Treasurys efforts and the impact on the economy of those efforts. The
statute grants the COP the authority to hold hearings, review official
data, and write reports on actions taken by Treasury and financial
institutions and their effect on the economy. Generally, the COP
focuses on one program or topic each month and produces a report that
describes the program, assesses its design and implementation and
presents recommendations. Many of their recommendations have focused on
issues of transparency and what they see as the need to operate the
programs in a way that the public can understand exactly how their
taxpayer dollars are being used.
The COP staff work in a fairly independent fashion, using publicly
available documents and information to develop the outlines of their
reports. They also request information, documents, and data from
Treasury-OFS. Treasury-OFS regularly briefs COP staff on the topic of
their current focus, as well as any new initiatives or changes in
Treasury-OFS programs.
The COP also convenes regular hearings on Capitol Hill, usually timed
to coincide with the issuance of their reports. Treasury makes its
senior staff available to appear before the COP as witnesses; the
Secretary appears before the COP on a quarterly basis, and Assistant
Secretary for Financial Stability Herb Allison is made available as
requested for other hearings. Other Treasury officials have also
appeared before the COP as requested.
To date, the COP has issued the following reports:
* Questions About the $700 Billion Emergency Economic Stabilization
Funds;
* Accountability for the Troubled Asset Relief Program;
* Special Report on Regulatory Reform;
* February Oversight Report: Valuing Treasury's Acquisitions;
* Foreclosure Crisis: Working Toward a Solution;
* Assessing Treasury's Strategy: Six Months of TARP;
* Stress Testing and Shoring Up Bank Capital;
* Lending to Small Businesses and Families and the Impact of the TALF;
* TARP Repayments, Including the Repurchase of Stock Warrants;
* Special Report on Farm Loan Restructuring;
* The Continued Risk of Troubled Assets;
* The Use of TARP Funds in Support and Reorganization of the Domestic
Automotive Industry;
* An Assessment of Foreclosure Mitigation Efforts After Six Months;
* Guarantees and Contingent Payments in TARP and Related Programs
[End of Section Nine]
Section Ten: Other Management Information:
Over the past year, Treasury-OFS has grown into an organization of 198
full-time employees (101 career civil servants, 85 term appointments,
and 12 detailees) who support the TARP. These employees include 18
employees who report through the Department of the Treasury's Office of
General Counsel and approximately 40 others outside of Treasury-OFS who
continue to provide support to the office on an as-needed basis.
Treasury-OFS continues to use direct-hire and other appointments to
expedite hiring of highly-qualified candidates, which has enabled the
Treasury-OFS to reduce the number of temporary and contract staff and
strengthen the continuity and institutional knowledge of the workforce.
The FY 2009 Administrative budget obligations totaled $248 million
split between salaries and benefits of approximately $14 million and
non-personnel services, generally contracts, of approximately $234
million.
As noted in Section One, Treasury-OFS is made up of seven divisions.
The Chief Investment Office (CIO) is responsible for program
development and the execution and management of all investments made
pursuant to EESA. Investments can be made by either purchasing or
insuring "troubled assets" (as defined in EESA). The CIO relies on
contracted asset managers and a custodian to assist in the management
of acquired or insured assets. The CIO also manages a contract with an
investment advisor who provides guidance on the selection of asset
managers.
The Office of the Chief Financial Officer (CFO) has lead responsibility
within Treasury-OFS for budget formulation and execution, cash
management, accounting, financial systems, financial reporting, and
internal controls. In each of these areas the CFO works closely with
the appropriate offices within main Treasury. The CFO manages Treasury-
OFS budget, cash flow requirements and accounting support activities
for all of Treasury-OFS concentrating on accounting and reporting
activities required by the Federal Credit Reform Act to include
modeling of cash flow and all required re-estimates. The Office serves
as liaison with Government Accountability Office (GAO) staff for
financial statement reporting and internal controls. For the FY 2009
reporting cycle, the OCFO led the implementation of the OMB Circular A-
123 internal controls requirements for Treasury-OFS.
The Office of the Chief of Homeownership Preservation is responsible
for identifying opportunities to help homeowners while also protecting
taxpayers. The key policy goals of the Office are to reduce the number
of principal residences lost to foreclosure and to stabilize the value
of homeownership in surrounding communities through polices which
impact homeowners, home mortgage loans, lenders, servicers and their
communities. The priorities of the Office are to: implement the
Administration's loss mitigation program; develop and implement a
robust outreach program targeted to at-risk homeowners; outline and
implement strategies to regularly update the Administration, Congress,
the public, and other key stakeholders, on results; and monitor,
analyze and report on the results of the loan modification program.
The Office of the Chief Administrative Officer (OCAO) is responsible
for developing an office infrastructure and managing internal
operations in Treasury-OFS. The OCAO works to integrate Treasury-OFS
investments, program, compliance, risk, finance, and legal functions
and facilitates communication across the organization. The OCAO
supports the execution of TARP programs and the management of the
Treasury-OFS employees and contractual resources. The OCAO works with
the Assistant Secretary for Financial Stability to set and execute
goals and objectives. The OCAO works with each Treasury-OFS
organizational entity to effectively manage the budget, facilities,
information technology (IT), acquisition management oversight, document
flows, physical security and privacy, and workforce planning.
The Office of the Chief Counsel provides legal advice to the Assistant
Secretary. The Chief Counsel reports to the Assistant General Counsel
(Banking and Finance) in Treasury's Legal Division. The Office of the
Chief Counsel is responsible for the legal affairs of Treasury-OFS. The
Office is involved in the structuring of Treasury-OFS programs and
activities to ensure compliance with EESA and with other laws and
regulations and to insure the programs and activities are well designed
from a legal point of view. The Office assists in responding to FOIA
requests, the inquiries of oversight bodies such as the GAO and the
Congressional Oversight Panel (COP) and any litigation concerning EESA
or Treasury-OFS activities. The Office also works on a variety of other
legal matters pertaining to Treasury-OFS operations.
The Office of Reporting is responsible for coordinating Treasury-OFS'
work with the external oversight entities including the GAO, Special
Inspector General for TARP, Financial Stability Oversight Board and the
Congressional Oversight Panel. The Office also prepares periodic
reports to the Congress under EESA.
The Office of Internal Review (OIR) was recently established within
Treasury-OFS to ensure that proper management controls are developed,
in place, and operating as intended. Management controls include
organization, policies, and procedures, all of which are designed to
help program and financial managers achieve results and safeguard the
integrity of their programs. The OW also works with the other program
offices to identify the most significant risks that the TARP faces
including operational risk, credit risk, market risk, and reputational
risk. The office assesses those risks (either quantitatively or
qualitatively) and works to ensure that the assessments are integrated
into the decision making processes of each business line of the TARP
and that risks are managed in a consistent fashion across business
lines. The OIR scope of responsibilities also covers the compliance
oversight area including developing and implementing, in conjunction
with the relevant program offices, processes and procedures to provide
for overall program compliance with EESA. These include the HAMP
program requirements, executive compensation, statutory reporting, and
conflict of interest requirements.
Treasury-OFS is not envisioned as a permanent organization, so to the
maximum extent possible and appropriate, Treasury-OFS utilizes private
sector expertise in support of the execution of TARP programs Fannie
Mae and Freddie Mac accounted for almost thirty percent of the non-
personnel services to assist in the administration and compliance,
respectively, of the Home Affordable Modification Program.
Additionally, asset managers were hired to serve as financial agents in
managing the portfolio of assets associated with several TARP programs.
The balance of the non-personnel private sector firms were engaged to
assist with the significant volume of work associated with the TARP in
the areas of accounting and internal controls, administrative support,
facilities, legal advisory, financial advisory, and information
technology.
[End of Section Ten]
Section Eleven: Limitations of the Financial Statements:
The principal financial statements have been prepared to report the
financial position and results of operations of the Treasury-OFS'
Troubled Asset Relief Program, consistent with the requirements of 31
U.S.C. 3515(b). While the statements have been prepared from the books
and records of the Office of Financial Stability and the Department of
the Treasury in accordance with section 116 of EESA and GAAP for
Federal entities and the formats prescribed by OMB, the statements are
in addition to the financial reports used to monitor and control
budgetary resources which are prepared from the same books and records.
The statements should be read with the realization that they are for a
component of the U.S. Government, a sovereign entity.
[End of Section Eleven]
[End of Management's Discussion and Analysis]
Financial Statements:
Message from the Chief Financial Officer:
I am very pleased to submit the Office of Financial Stability's (OFS)
Annual Financial Report for FY 2009. This report provides our
stakeholders with meaningful financial results and program performance
as required by the Emergency Economic Stabilization Act (EESA) and the
Reports Consolidation Act. The unqualified audit opinion provided by
our auditor, the Government Accountability Office (GAO), on these
financial statements represents an extraordinary achievement by OFS and
Treasury staff. The support of our contractors, staff at the Office of
Management and Budget and the GAO audit team was invaluable to this
success. I am exceptionally proud and appreciative of the effort and
commitment made by everyone involved.
Under the EESA authority as described throughout this report, the
government made unprecedented investments in private entities through
the Troubled Asset Relief Program (TARP). The unique features of the
EESA programs, as well as the statutory requirement that the budgetary
cost of the programs be determined under the standards of the Federal
Credit Reform Act (FCRA), adjusted for market risk, meant that OFS had
to navigate unchartered ground in Federal budget and accounting
concepts. For these and related reasons, creating the accounting and
reporting infrastructure and internal control environment to support
the development of the first year financial statements for the TARP,
was an extraordinary challenge.
As a start up organization with an unprecedented emergency mission to
stabilize the nation's financial system, OFS moved swiftly to develop
and implement eight new programs. The face value of the amounts
obligated for these programs in FY 2009 totaled $454 billion, nearly as
much as the entire combined FY 2008 Federal non-defense discretionary
outlays. OFS's budget, accounting, and financial reporting policies and
operations had to be designed and executed simultaneously with the
establishment of the new programs. OFS was able to leverage a number of
Treasury's existing financial management systems and resources, but
also had to develop procedures, reports, models, and methodologies from
scratch.
All of the TARP initiatives except for the housing program are loans,
guarantees or investments and are accounted for using FCRA methods of
net present value for budgeting and financial reporting. Cost models
(or "subsidy" models as they are called under FCRA) had to be developed
for all of the programs and unique transactions. Never before has a
Federal entity created as many subsidy cost models in such a short
period made even more difficult by the vastness and complexity of
TARP's programs. While we and GAO identified some non-material errors
and opportunities for improvements in the models and processes, overall
the results were outstanding, given the magnitude of the effort
required this year. Because the credit and investment programs
constitute the vast majority of OFS's financial activity, continuing to
build a very strong internal control process and high quality, state of
the art subsidy cost models is a top priority for us.
A consistent focus on internal control was a mainstay of OFS's efforts.
From the first transactions in October, 2008, 23 days after passage of
EESA, OFS instituted comprehensive controls around the highest risk
elements of the transaction lifecycle ” for example the disbursement
and receipt of funds and receipt of appropriate consideration such as
preferred shares and warrants associated with a transaction. OFS
aggressively used prototyping to establish an effective process design,
cross-functional meetings to ensure cohesion across areas, and real
time control monitoring of all transactions to improve accuracy in
execution. We focused on core controls such as appropriate levels of
authorization and reconciliation of critical transaction information.
Over the course of the year, we were able to maturate much of our
internal control capacity from heavily monitored, individual
transactions, to documented, repeated processes with embedded control
monitoring, automated control evidence collection, and ongoing control
testing.
Finally, OFS implemented the internal control requirements for
financial reporting under Appendix A of OMB Circular A-123. OFS staff
within the Office of the Chief Financial Officer worked closely with
the program and other support offices to develop a comprehensive sub-
certification and review process supporting management's interim and
final assurance statements.
Looking ahead, we plan to continue improving our financial management
capacity, including strengthening our financial reporting processes,
developing additional or enhancing existing documentation supporting
our policies, and formalizing our financial data management approach.
We will be actively addressing GAO's audit findings and look forward to
building on our successes this year to resolve the outstanding issues
identified in this audit.
Successfully preparing the first year financial statements for the
programs developed under the EESA required extraordinary dedication and
commitment. It has been a privilege to lead this effort and I want to
extend my thanks to the many people who contributed to making this
endeavor successful.
Thank you for your interest in our FY 2009 Annual Financial Report.
Signed by:
Jennifer E. Main:
Chief Financial Officer:
Financial Statements and Notes:
The OFS prepares financial statements for the Troubled Asset Relief
Program as a critical aspect of ensuring the accountability and
stewardship for the public resources entrusted to it and as required by
Section 116 of EESA. Preparation of these statements is also an
important part of the OFS' financial management goal of providing
accurate and reliable information that may be used to assess
performance and allocate resources. The OFS management is responsible
for the accuracy and propriety of the information contained in the
financial statements and the quality of internal controls. The
statements are, in addition to other financial reports, used to monitor
and control budgetary resources. The OFS prepares these financial
statements from its books and records in conformity with the accounting
principles generally accepted in the United States for federal entities
and the formats prescribed by the Office of Management and Budget.
While these financial statements reflect activity of the OFS in
executing its programs, including providing resources to various
entities to help stabilize the financial markets, they do not include,
as more fully discussed in Note 1, the assets, liabilities, or results
of operations of commercial entities in which the OFS has a significant
equity interest. In addition, comparative information is not available
because OFS began operations on October 3, 2008.
The Balance Sheet summarizes the OFS assets, liabilities and net
position as of the reporting date. Intergovernmental assets and
liabilities resulting from transactions between federal agencies are
presented separately from assets and liabilities from transactions with
the public.
The Statement of Net Cost shows the net cost of operations for the
reporting period.
The Statement of Changes in Net Position presents the OFS ending net
position by two components - Cumulative Results of Operations and
Unexpended Appropriations. It summarizes the change in net position.
The ending balances of both components of net position are also
reported on the Balance Sheet.
The Statement of Budgetary Resources provides information about funding
and availability of budgetary resources and the status of those
resources at the end of the reporting period.
Balance Sheet:
Office of Financial Stability (Troubled Asset Relief Program):
Balance Sheet:
As of September 30, 2009:
Dollars in Millions:
Assets:
Intragovernmental Assets:
Fund Balance with Treasury (Note 4): $97,733;
Troubled Asset Relief Program:
Direct Loans and Equity Investments, Net (Note 6): $237,892;
Asset Guarantee Program (Note 6): $1,765;
Total Assets: $337,390.
Liabilities:
Intragovernmental Liabilities:
Accounts Payable and Other Liabilities: $5;
Principal Payable to the Bureau of the Public Debt (Note 8): $143,335;
Due to the General Fund (Note 3): $109,748;
Total Intragovernmental Liabilities: $253,088;
Accounts Payable and Other Liabilities: $73;
Liability for Home Affordable Modification Program (Note 5): $1;
Total Liabilities: $253,162.
Commitments and Contingencies (Note 7):
Net Position:
Unexpended Appropriations: $84,229;
Cumulative Results of Operations: ($1);
Total Net Position: $84,228;
Total Liabilities and Net Position: $337,390.
The accompanying notes are an integral part of these financial
statements.
[End of Balance Sheet]
Statement of Net Cost:
Office of Financial Stability (Troubled Asset Relief Program):
Statement Of Net Cost:
For the Period Ended September 30, 2009:
Dollars in Millions:
Gross Cost:
Subsidy Cost (Note 6):
Direct Loan and Equity Investment Programs: $43,605; ;
Asset Guarantee Program: ($2,201);
Total Program Subsidy Cost: $41,404;
Interest Expense on Borrowings from the Bureau of the Public Debt (Note
8): $6,436;
Home Affordable Modification Program (Note 5): $2;
Administrative Cost: $167;
Total Gross Cost: $48,009.
Less Earned Revenue:
Dividend and Interest Income - Programs (Note 6): ($9,503);
Interest Income on Financing Account: ($3,649);
Subsidy Allowance Amortized (Note 9): $6,716;
Net Earned Revenue: ($6,436);
Total Net Cost of Operations: $41,573.
The accompanying notes are an integral part of these financial
statements.
[End of Statement of Net Cost]
Statement of Changes in Net Position:
Office of Financial Stability (Troubled Asset Relief Program):
Statement of Changes in Net Position:
For the Period Ended September 30, 2009:
Dollars in Millions:
Beginning Balances, at Inception
Budgetary Financing Sources:
Appropriations Received:
Unexpended Appropriations: $238,268;
Cumulative Results of Operations: [Empty].
Appropriations Used:
Unexpended Appropriations: ($154,039);
Cumulative Results of Operations: $154,039.
Other Financing Sources:
Unexpended Appropriations: [Empty];
Cumulative Results of Operations: ($112,467).
Total Financing Sources:
Unexpended Appropriations: $84,229;
Cumulative Results of Operations: $41,572.
Net Cost of Operations:
Unexpended Appropriations: [Empty];
Cumulative Results of Operations: ($41,573).
Ending Balances:
Unexpended Appropriations: $84,229;
Cumulative Results of Operations: ($1).
The accompanying notes are an integral part of these financial
statements.
[End of Statement of Changes in Net Position]
Statement of Budgetary Resources:
Office of Financial Stability (Troubled Asset Relief Program):
Statement Of Budgetary Resources:
For the Period Ended September 30, 2009:
Dollars in Millions:
Budgetary Resources:
Unobligated Balances Brought Forward, Inception:
Budgetary Accounts: [Empty];
Nonbudgetary Financing Accounts: [Empty].
Budget Authority:
Appropriations:
Budgetary Accounts: $238,268;
Nonbudgetary Financing Accounts: [Empty].
Borrowing Authority:
Budgetary Accounts: [Empty];
Nonbudgetary Financing Accounts: $309,971.
Spending Authority from Offsetting Collections Earned: Collected:
Budgetary Accounts: [Empty];
Nonbudgetary Financing Accounts: $243,072.
Change in Unfilled Orders Without Advance:
Budgetary Accounts: [Empty];
Nonbudgetary Financing Accounts: $28,927.
Total Budget Authority:
Budgetary Accounts: $238,268;
Nonbudgetary Financing Accounts: $581,970.
Permanently Not Available:
Budgetary Accounts: [Empty];
Nonbudgetary Financing Accounts: ($120,841).
Total Budgetary Resources (Note 10):
Budgetary Accounts: $238,268;
Nonbudgetary Financing Accounts: $461,129.
Status Of Budgetary Resources:
Obligations Incurred:
Direct:
Budgetary Accounts: $210,112;
Nonbudgetary Financing Accounts: $452,184.
Unobligated Balance:
Apportioned and Available:
Budgetary Accounts: $28,156;
Nonbudgetary Financing Accounts: $7,009.
Not Available:
Budgetary Accounts: [Empty];
Nonbudgetary Financing Accounts: $1,936.
Total Status Of Budgetary Resources:
Budgetary Accounts: $238,268;
Nonbudgetary Financing Accounts: $461,129.
Change In Obligated Balances:
Obligated Balance Brought Forward, Inception:
Budgetary Accounts: [Empty];
Nonbudgetary Financing Accounts: [Empty].
Obligations Incurred:
Budgetary Accounts: $210,112;
Nonbudgetary Financing Accounts: $452,184.
Gross Outlays:
Budgetary Accounts: ($153,961);
Nonbudgetary Financing Accounts: ($372,982).
Change in Uncollected Customer Payments from Federal Sources:
Budgetary Accounts: [Empty];
Nonbudgetary Financing Accounts: ($28,927).
Obligated Balance, Net, End of Period:
Unpaid Obligations:
Budgetary Accounts: $56,151;
Nonbudgetary Financing Accounts: $79,202.
Uncollected Customer Payments from Federal Sources:
Budgetary Accounts: [Empty];
Nonbudgetary Financing Accounts: ($28,927).
Obligated Balance, Net, End of Period:
Budgetary Accounts: $56,151;
Nonbudgetary Financing Accounts: $50,275.
Net Outlays:
Gross Outlays:
Budgetary Accounts: $153,961;
Nonbudgetary Financing Accounts: $372,982.
Offsetting Collections:
Budgetary Accounts: [Empty];
Nonbudgetary Financing Accounts: ($243,072).
Distributed Offsetting Receipts:
Budgetary Accounts: ($2,720);
Nonbudgetary Financing Accounts: [Empty].
Net Outlays:
Budgetary Accounts: $151,241;
Nonbudgetary Financing Accounts: $129,910.
The accompanying notes are an integral part of these financial
statements.
[End of Statement of Budgetary Resources:
Notes to the Financial Statements:
Note 1. Reporting Entity:
The Troubled Asset Relief Program (TARP) was authorized by the
Emergency Economic Stabilization Act of 2008 (EESA or "The Act"). The
Act gave the Secretary of the Treasury (the Secretary) broad and
flexible authority to establish the TARP to purchase and insure
mortgages and other troubled assets, which permits the Secretary to
inject capital into banks and other commercial companies by taking
equity positions in those entities, if needed, to stabilize the
financial markets.
The EESA established certain criteria under which the TARP would
operate, including provisions that impact the budgeting, accounting,
and reporting of troubled assets acquired under the Act. Section 101(a)
of the EESA provided the authority for the Secretary to purchase
troubled assets, and Section 101(a)(3) of the EESA established the
Office of Financial Stability (OFS) to implement the TARP. Section 102
of the EESA required the Secretary to establish a program to guarantee
troubled assets originated or issued prior to March 14, 2008, including
mortgage-backed securities. Section 115 of the EESA limits the
authority of the Secretary to purchase troubled assets up to $700
billion[Footnote 26] outstanding at any one time, calculated at the
aggregate purchase prices of all troubled assets held. There was
approximately $381.3 billion outstanding against the Section 115
authority as of September 30, 2009. Section 120 of the EESA established
that the authorities under Sections 101(a), excluding Section 101(a)(3)
and Section 102 of the EESA, shall terminate on December 31, 2009.
Section 120 of the EESA further established that the Secretary, upon
submission of a written certification to Congress, may extend the
authority provided under the Act to expire no later than 2 years from
the date of the enactment of the Act (October 3, 2008).
Under the provisions of the EESA, the OFS implemented the TARP which
resulted in the development of the following programs: the Capital
Purchase Program; the Targeted Investment Program; the Asset Guarantee
Program; the Consumer and Business Lending Initiative; the Public-
Private Investment Program; the American International Group, Inc.
Investment Program (formerly known as the Systemically Significant
Failing Institutions Program); and the Automotive Industry Financing
Program (see Note 6); as well as the Home Affordable Modification
Program (see Note 5).
While these financial statements reflect the activity of the OFS in
executing its programs, including providing resources to various
entities to help stabilize the financial markets, they do not include
the assets, liabilities, or results of operations of commercial
entities in which the OFS has a significant equity interest. Through
the purchase of troubled assets, the OFS has entered into several
different types of direct loan, equity investment, and asset guarantee
arrangements with private entities. These direct loans, equity
investments, and asset guarantees were made with the intent of helping
to stabilize the financial markets and mitigating, as best as possible,
any adverse impact on the economy. These direct loans, equity
investments, and asset guarantees were not made to engage in the
business activities of the respective private entities. Based on this
intent, the OFS has concluded that such direct loans, equity
investments, and asset guarantees are considered "bail outs", under the
provisions of paragraph 50 of Statement of Federal Financial Accounting
Concepts (SFFAC) No. 2, Entity and Display. In addition, these entities
do not meet the conclusive criteria in SFFAC No. 2. As such, OFS
determined that none of these entities meet the criteria to be
classified as a federal entity. Consequently, their assets,
liabilities, and results of operations are not consolidated in these
OFS financial statements.
In addition, the OFS has made investments in certain Special Purpose
Vehicles[Footnote 27] (SPV). SFFAC No. 2, paragraphs 43 and 44,
reference indicative criteria such as ownership and control over an SPV
to carry out government powers and missions, as criteria in the
determination of consolidation. The OFS has concluded that the lack of
control over the SPVs is the primary basis for determining that none of
the SPVs meet the criteria to be classified as a federal entity. As a
result, the assets, liabilities and results of operations of the SPVs
are not included in these OFS financial statements. The OFS has
recorded the investments in private entities and investments in SPVs in
accordance with Credit Reform Accounting, as discussed below.
Additional disclosures regarding these SPV investments are included in
these Notes.
The EESA established the OFS within the Office of Domestic Finance of
the Department of the Treasury (Treasury). The OFS prepares stand-alone
financial statements to satisfy EESA's requirement for the TARP to
prepare annual financial statements. Additionally, as an office of the
Treasury, its financial statements are consolidated into Treasury's
department-wide financial statements and Agency Financial Report.
Note 2. Summary of Significant Accounting Policies Basis of Accounting
and Presentation:
The accompanying financial statements include the operations of the OFS
and have been prepared from the accounting records of the OFS in
conformity with accounting principles generally accepted in the United
States for federal entities (Federal GAAP), and the Office of
Management and Budget (OMB) Circular A-136, Financial Reporting
Requirements, as amended. Federal GAAP includes the standards issued by
the Federal Accounting Standards Advisory Board (FASAB). The FASAB is
recognized by the American Institute of Certified Public Accountants
(AICPA) as the official accounting standards-setting body for the U.S.
Government. As such, the FASAB is responsible for establishing Federal
GAAP for Federal reporting entities.
In July 2009, the FASAB issued the Statement of Federal Financial
Accounting Standards (SFFAS) No. 34, The Hierarchy of Generally
Accepted Accounting Principles, Including the Application of Standards
Issued by the Financial Accounting Standards Board. SFFAS No. 34
identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of general purpose
financial reports of federal reporting entities that are presented in
conformity with Federal GAAP.
In addition to the above, Section 123(a) of the EESA requires that the
budgetary cost of purchases of troubled assets and guarantees of
troubled assets, and any cash flows associated with authorized
activities, be determined in accordance with the Federal Credit Reform
Act of 1990 (FCRA). Section 123(b) (1) of the EESA requires that the
budgetary costs of troubled assets and guarantees of troubled assets be
calculated by adjusting the discount rate for market risks. As a result
of this requirement, the OFS considered market risk in its calculation
and determination of the estimated net present value of its direct
loans, asset guarantees, and equity investments for budgetary purposes.
Similarly, market risk is considered in valuations for financial
reporting purposes (see Note 6 for further discussion).
Consistent with the accounting policy for equity investments made by
Treasury in private entities, the OFS accounts for its equity
investments at fair value, defined as the estimated amount of proceeds
the OFS would receive if the equity investments were sold to a market
participant. The OFS uses the present value accounting concepts
embedded in SFFAS No. 2, Accounting for Direct Loans and Loan
Guarantees, to derive fair value measurements. The OFS concluded that
the equity investments were similar to direct loans in that there is a
stated rate and a redemption feature which, if elected, requires
repayment of the amount invested. Furthermore, consideration of market
risk provides a basis to arrive at a fair value measurement. Therefore,
the OFS uses SFFAS No. 2 (as more fully discussed below) for reporting
and disclosure requirements of it equity investments.
Federal loans and loan guarantees are governed by FCRA for budgetary
accounting and the associated FASAB accounting standard SFFAS No. 2, as
amended for financial reporting. The OFS applies the provisions of the
SFFAS No. 2, as amended, when accounting for direct loans, equity
investments, and asset guarantees. Direct loans and equity investments
disbursed and outstanding are recognized as assets at the net present
value of their estimated future cash flows and outstanding asset
guarantees are recognized as liabilities or assets at the net present
value of their estimated future cash flows. The subsidy allowance
account represents the difference between the face value of the
outstanding direct loan and equity investment balance and the net
present value of the expected future cash flows, and is reported as an
adjustment to the face value of the direct loan or equity investment.
Consequently, direct loans, asset guarantees, and equity investments,
including investments in preferred and common stock and warrants of
public companies, are accounted for and reported by the OFS using
credit reform accounting in accordance with SFFAS No. 2, as amended.
The OFS recognizes dividend revenue associated with equity investments
when declared by the entity in which OFS has invested and when received
in relation to any repurchases and restructuring. The OFS reflects
changes in the value of direct loans, equity investments, and asset
guarantees in the subsidy cost on the Statement of Net Cost annually.
The OFS has received common stock warrants, additional preferred stock
(referred to as warrant preferred stock) or additional notes, as
additional consideration for direct loans and equity investments made
and asset guarantees entered into. The OFS accounts for the warrants
and warrant preferred stock received under Section 113 of EESA as fees
under SFFAS No. 2, and, as such, the value of the warrants and warrant
preferred stock is a reduction of the subsidy allowance.
Use of Estimates:
The OFS has made certain estimates and assumptions relating to the
reporting of assets, liabilities, revenues, and cost to prepare these
financial statements. Actual results could significantly differ from
these estimates. Major financial statement line items subject to
estimates include Troubled Asset Relief Program Direct Loans and Equity
Investments, Net, Asset Guarantee Program, and related subsidy cost
(see Note 6).
The most significant differences between actual results and estimates
may occur in the valuation of direct loans, equity investments, and
asset guarantees. The forecasted future cash flows used to determine
these amounts as of September 30, 2009, are sensitive to slight changes
in model assumptions, such as general economic conditions, specific
stock price volatility of the entities which the OFS has an equity
interest, estimates of expected default, and prepayment rates.
Forecasts of future financial results have inherent uncertainty and the
OFS's Troubled Asset Relief Program Direct Loans and Equity
Investments, Net and Asset Guarantee Program line items as of September
30, 2009, are reflective of relatively illiquid, troubled assets whose
values are particularly sensitive to future economic conditions and
other assumptions. Additional discussion related to sensitivity
analysis can be found in the Management Discussion and Analysis section
of the Agency Financial Report.
Credit Reform Accounting:
The FCRA provided for the use of program, financing, and general fund
receipt accounts to separately account for activity related to loans
and guarantees. These accounts are classified as either budgetary or
non-budgetary in the Statement of Budgetary Resources. The budgetary
accounts include the program and general fund receipt accounts, and the
non-budgetary accounts consist of the credit reform financing accounts.
As discussed previously, the OFS accounts for the cost of purchases of
troubled assets and guarantees of troubled assets, and any cash flows
associated with authorized activities, including direct loans, in
accordance with Section 123(a) of the EESA and the FCRA for budgetary
accounting and SFFAS No. 2 for financial reporting, except for the Home
Affordable Modification Program (HAMP) (see Note 5).
The authoritative guidance for financial reporting is primarily
contained in the SFFAS No. 2, as amended by the SFFAS No. 18,
Amendments to Accounting Standards for Direct Loans and Loan
Guarantees, and the SFFAS No. 19, Technical Amendments to Accounting
Standards for Direct Loans and Loan Guarantees.
In accordance with SFFAS No. 2, the OFS maintains program accounts
which receive appropriations and obligate funds to cover the subsidy
cost of direct loans, equity investments and asset guarantees, and
disburses the subsidy cost to the OFS financing accounts. The financing
accounts are non-budgetary accounts that are used to record all of the
cash flows resulting from the OFS direct loans, equity investments and
asset guarantees.[Footnote 28] Cash flows include disbursements,
repayments, repurchases, fees, recoveries, borrowings from the
Treasury, interest, negative subsidy and the subsidy cost received from
the program accounts.
The financing arrangements specifically for the TARP activities are
provided for in the EESA as follows: (1) Borrowing for program funds
under Section 118 that constitute appropriations when obligated or
spent, which are reported as "appropriations" in these financial
statements; (2) borrowing by financing accounts for non-subsidy cost
under the FCRA and Section 123; and (3) the Troubled Assets Insurance
Financing Fund (TAIFF) under Section 102(d).
The OFS has general fund receipt accounts which are used to record the
receipt of amounts paid from the financing accounts when there is a
negative subsidy or negative modification from the original estimate or
a downward reestimate. Amounts in the general fund receipt accounts are
available for appropriations only in the sense that all general fund
receipts are available for appropriations. Any assets in these accounts
are non-entity assets and are offset by intragovernmental liabilities.
At the end of the fiscal year, the fund balance transferred to the U.S.
Treasury through the general fund receipt account is no longer included
in the OFS's fund balance reporting.
The SFFAS No. 2 requires that the actual and expected costs of federal
credit programs be fully recognized in financial reporting. The OFS
calculated and recorded an initial estimate of the future performance
of direct loans, equity investments, and asset guarantees. The data
used for these estimates were reestimated at the fiscal year-end to
reflect adjustments for market risk, asset performance, and other key
variables and economic factors. The reestimate data was then used to
estimate and report the "Subsidy Cost" in the Statement of Net Cost. A
detailed discussion of the OFS subsidy calculation and reestimate
assumptions, process and results is provided in Note 6.
Fund Balance with Treasury:
The Fund Balance with Treasury includes general, financing and other
funds available to pay current liabilities and finance authorized
purchases. Cash receipts and disbursements are processed by the
Treasury, and the OFS's records are reconciled with those of the
Treasury on a regular basis.
Available unobligated balances represent amounts that are apportioned
for obligation in the current fiscal year. Unavailable unobligated
balances represent unanticipated collections in excess of the amounts
apportioned which are unavailable. Obligated balances not yet disbursed
include undelivered orders and unpaid expended authority.
Troubled Asset Relief Program Direct Loans and Equity Investments, Net:
Troubled Asset Relief Program Direct Loans and Equity Investments, Net
represents the estimated net outstanding amount of the OFS direct loans
and equity investments, exclusive of the HAMP. The direct loan and
equity investment balances have been determined in accordance with the
provisions of SFFAS No. 2 (see Note 6).
Asset Guarantee Program:
The Asset Guarantee Program represents the asset resulting from the net
present value of the estimated cash inflows that are in excess of the
estimated future claim payments (see Note 6).
Liabilities for Home Affordable Modification Program:
Liabilities for Home Affordable Modification Program (HAMP) represent
the liability for payments to servicers and investors, and principal
balance reduction payments for the account of borrowers under the HAMP
are accounted for in accordance with SFFAS No. 5, Accounting for
Liabilities of the Federal Government. Under SFFAS No. 5, a liability
is recognized for any unpaid amounts due as of the reporting date. This
liability includes amounts due from the OFS to pay for benefits and
services provided under the terms of the HAMP as of the OFS's reporting
date regardless of whether such payments have been reported to the OFS.
The liability estimate is calculated based on information reported by
participating servicers.
The OFS has determined that credit reform accounting, is not applicable
to HAMP since there are no incoming cash flows to be valued.
General Property and Equipment:
Equipment with a cost of $50 thousand or more per unit and a useful
life of two years or more is capitalized at full cost and depreciated
using the straight-line method over the equipment's useful life. Other
equipment not meeting the capitalization criteria is expensed when
purchased. Under this policy, the OFS had no capitalized general
property and equipment at September 30, 2009.
Accounts Payable and Other Liabilities:
Accounts Payable and Other Liabilities are amounts due to
intragovernmental or public entities that will generally be liquidated
during the next operating cycle (within one year from the balance sheet
date).
Principal Payable to the Bureau of the Public Debt:
Principal Payable to the Bureau of the Public Debt (BPD) represents the
net amount due to the BPD for equity investments, direct loans, and
asset guarantees funded by borrowings from the BPD as of September 30,
2009 (see Note 8).
Due to the General Fund:
Due to the General Fund represents the amount of downward reestimates
as of September 30, 2009, related to direct loans, equity investments,
and asset guarantees as of September 30, 2009 (see Notes 3 and 6).
Unexpended Appropriations:
Unexpended Appropriations represents the OFS undelivered orders and
unobligated balances as of September 30, 2009.
Cumulative Results of Operations:
Cumulative Results of Operations, presented on the Balance Sheet and on
the Statement of Changes in Net Position, represents the net results of
the OFS operations since inception, through September 30, 2009. The
Other Financing Sources in the Statement of Changes in Net Position
consist primarily of transfers due to the Treasury General Fund as of
September 30, 2009, relating to the downward reestimates.
Leave:
A liability for OFS employees' annual leave is accrued as it is earned
and reduced as leave is taken. Each year the balance of accrued annual
leave is adjusted to reflect current pay rates as well as forfeited
"use or lose" leave. Amounts are unfunded to the extent current or
prior year appropriations are not available to fund annual leave earned
but not taken. Sick leave and other types of non-vested leave are
expensed as taken.
Employee Health and Life Insurance and Workers' Compensation Benefits:
The OFS employees may choose to participate in the contributory Federal
Employees Health Benefit and the Federal Employees Group Life Insurance
Programs. The OFS matches a portion of the employee contributions to
each program. Matching contributions are recognized as current
operating expenses.
The Federal Employees' Compensation Act (FECA) provides income and
medical cost protection to covered Federal civilian employees injured
on the job, and employees who have incurred a work-related injury or
occupational disease. Future workers' compensation estimates are
generated from an application of actuarial procedures developed to
estimate the liability for FECA benefits. The actuarial liability
estimates for FECA benefits include the expected liability for death,
disability, medical, and miscellaneous costs for approved compensation
cases.
Employee Pension Benefits:
The OFS employees participate in either the Civil Service Retirement
System (CSRS) or the Federal Employees' Retirement System (FERS) and
Social Security. These systems provide benefits upon retirement and in
the event of death, disability or other termination of employment and
may also provide pre-retirement benefits. They may also include
benefits to survivors and their dependents, and may contain early
retirement or other special features. The OFS contributions to both
retirement plans and Social Security, as well as imputed costs for
pension and other retirement benefit costs administered by the Office
of Personnel Management, are recognized on the Statement of Net Cost as
Administrative Costs. Federal employee benefits also include the Thrift
Savings Plan (TSP). For FERS employees, a TSP account is automatically
established and the OFS matches employee contributions to the plan,
subject to limitations. The matching contributions are also recognized
as Administrative Costs on the Statement of Net Cost.
Note 3. Non-Entity Liabilities:
The OFS had approximately $109.7 billion in downward reestimates
related to its Troubled Asset Relief Program Direct Loans and Equity
Investments, Net and Asset Guarantee program which is a non-entity
liability payable due to the Treasury General Fund as of September 30,
2009 (see Note 6).
Note 4. Fund Balances with Treasury:
As of September 30, 2009, Fund Balances with Treasury, by fund type and
status, consisted of the following:
(Dollars in Millions)
Fund Balances:
General Funds: $45,650;
Program Funds: $38,658;
Financing Funds: $13,425;
Total Fund Balances: $97,733.
Status of Fund Balances:
Unobligated Balances:
Available: $35,165;
Unavailable: $$1,936.
Obligated Balances Not Yet Disbursed: $60,632.
Total Status of Fund Balances: $97,733.
Included in the OFS Financing Funds is the premium collections of
approximately $174.8 million related to the Asset Guarantee Program
(AGP) that are required by the EESA Section 102(d) to be maintained in
the TAIFF (see Note 6).
Note 5. The Home Affordable Modification Program:
The Home Affordable Modification Program (HAMP) is designed to assist
eligible homeowners who are experiencing financial hardships to remain
in their homes by providing reductions in their monthly mortgage
payments for up to five years. The HAMP provides for one-time, monthly,
and annual incentives to servicers, borrowers, and investors who
participate in the program. On an ongoing basis, beyond such
incentives, the OFS shares equally in the cost of the reductions with
the mortgage investors. Lastly, investors are paid a Home Price Decline
Protection payment to partially offset losses from home price declines.
For the HAMP, Fannie Mae provides direct programmatic support as a
third party agent on behalf of the OFS, Freddie Mac provides compliance
oversight as a third party agent on behalf of the OFS, and the
servicers work directly with the borrowers to modify and service the
borrowers' loans.
As of September 30, 2009, the OFS had entered into agreements with 63
servicers to provide up to approximately $27.1 billion in payments and
incentives to borrowers, servicers and investors. As of September 30,
2009, this $27.1 billion was included in Obligations Incurred in the
Statement of Budgetary Resources. All HAMP payments are made to
servicers either for themselves or for the benefit of borrowers and
investors. Furthermore, all payments are contingent on borrowers
remaining current on their mortgage payments. As of September 30, 2009,
approximately $946.5 thousand in incentive payments had been paid to
three servicers in incentive payments for 743 borrowers who had
completed official loan modifications.
Servicers have until December 31, 2012, to enter into mortgage
modifications with borrowers.
As of September 30, 2009, the OFS had accrued approximately $1.4
million of first lien incentive for modifications under the HAMP
program.
Note 6. Troubled Asset Relief Program Direct Loans and Equity
Investments, Net and Asset Guarantee Program:
The OFS applies the provisions of SFFAS No. 2 to account for direct
loans, equity investments and asset guarantees. This standard requires
measurement of the asset or liability at the net present value of the
estimated future cash flows. The cash-flow estimates for each
transaction reflect the actual structure of the instruments. For each
of these instruments, analytical cash flow models generate estimated
cash flows to and from the OFS over the estimated term of the
instrument. Further, each cash-flow model reflects the specific terms
and conditions of the program, technical assumptions regarding the
underlying assets, risk of default or other losses, and other factors
as appropriate. The models also incorporate an adjustment for market
risk to reflect the additional return required by the market to
compensate for variability around the expected losses reflected in the
cash flows (the "unexpected loss"). The basic methods for each of these
models are outlined below.
Direct Loans:
The estimated future cash flows for direct loans are derived using
analytical models that estimate the cash flows to and from the OFS over
the life of the loan. These cash flows include the scheduled principal,
interest, and other payments to the OFS, including estimated proceeds
from equity interest obtained or additional notes. These models also
include estimates of default and recoveries, incorporating the value of
any collateral provided by the contract. The probability and timing of
default and losses relating to a default are estimated by using
applicable historical data when available, or publicly available proxy
data, including credit rating agency historical performance data.
In the case of the Term Asset-backed Securities Loan Facility (TALF),
the OFS uses an analytical model to project cash flows to and from the
OFS based on the estimated loan collateral performance, the estimated
mix of collateral funded through the TALF and the terms of the
contracts.
The models include an adjustment for market risk which is intended to
capture the risk of unexpected losses, but are not intended to
represent fair value, i.e. the proceeds that would be expected to be
received if the loans were sold to a market participant.
Equity Investments:
Preferred stock cash flows are projected using an analytical model
developed to incorporate the risk of losses associated with adverse
events, such as failure of the institution or increases in market
interest rates. The model estimates how cash flows vary depending on:
1) current interest rates, which may affect the decision whether to
repay the preferred stock; and 2) the strength of a financial
institution's assets. Inputs to the model include institution specific
accounting data obtained from regulatory filings, an institution's
stock price volatility, historical bank failure information, as well as
market prices of comparable securities trading in the market. OFS
estimates the values and projects the cash flows of warrants using an
option-pricing approach based on the current stock price and its
volatility. Investments in common stock which are exchange traded are
valued at the market price. The result of using market prices, either
quoted prices for the identical asset or quoted prices for comparable
assets, is that the equity investments are recorded at estimated fair
value.
Asset Guarantees:
The value of the asset guarantee reflects the net present value of
estimated default-claim payments by the OFS, net of income from
recoveries on defaults, fees, or other income. Guarantee fees to date
have been paid in the form of preferred stock, subsequently converted
to trust preferred stock, and a warrant to purchase common stock of the
financial institution, whose value is modeled using the same
methodology for other equity purchase programs, discussed above.
Default-claim payments are based on estimated losses on the guaranteed
assets. Key inputs into these estimates are forecasted gross domestic
product, unemployment rates and home price depreciation, in a base
scenario and a stress scenario.
Subsidy Cost:
The recorded subsidy cost of a direct loan, equity investment or asset
guarantee is based on a set of estimated future cash flows. OFS actions
that change these estimated future cash flows change subsidy costs and
are recorded as a modification. The cost of a modification is
recognized as a modification expense, included in subsidy cost, when
the direct loan, equity investment, or asset guarantee is modified.
During fiscal year 2009, modifications occurred within the Capital
Purchase Program, Consumer and Business Lending Initiative, the
American International Group, Inc. Investment Program, and the
Automotive Industry Financing Program. See detailed discussion related
to each program and related modifications below. Total net modification
costs for the period ended September 30, 2009, approximated $412.1
million.
Equity Investments, Direct Loan and Asset Guarantee Programs:
The OFS administers a number of programs designed to help stabilize the
financial system and restore the flow of credit to consumers and
businesses. The OFS has purchased direct loans and made equity
investments and entered into asset guarantees. The table below is a
list and type of the OFS programs:
Program: Capital Purchase Program;
Program Type: Equity Investment/Subordinated Debentures.
Program: Targeted Investment Program;
Program Type: Equity Investment.
Program: Asset Guarantee Program;
Program Type: Guarantee.
Program: Consumer and Business Lending Initiative;
Program Type: Direct Loan.
Program: Public-Private Investment Program;
Program Type: Equity Investment and Direct Loan.
Program: American International Group, Inc. Investment Program (*);
Program Type: Equity Investment.
Program: Automotive Industry Financing Program;
Program Type: Equity Investment and Direct Loan.
(*) Formerly known as the Systemically Significant Failing Institutions
Program.
[End of table]
A description of each of these programs is provided below, and certain
financial data by program is provided in the table at the end of this
footnote.
Capital Purchase Program:
In October 2008, the OFS began implementation of the TARP with the
Capital Purchase Program (CPP), designed to help stabilize the
financial system by assisting in building the capital base of certain
viable U.S. financial institutions to increase the capacity of those
institutions to lend to businesses and consumers and support the
economy. Under this program, the OFS purchases senior perpetual
preferred stock from qualifying U.S. controlled banks, savings
associations, and certain bank and savings and loan holding companies
(Qualified Financial Institution or QFI). The senior preferred stock
has a stated dividend rate of 5.0% through year five, increasing to
9.0% in subsequent years. The dividends are cumulative for bank holding
companies and subsidiaries of bank holding companies and non-cumulative
for others and payable when and if declared by the institution's board
of directors. Under the original terms of the senior preferred stock
the QFI may not redeem the shares within the first three years of the
date of the investment, unless it has received the proceeds of one or
more Qualified Equity Offerings (QEO)[Footnote 29] which results in
aggregate gross proceeds to the QFI of not less than 25.0% of the issue
price of the senior preferred stock. QFIs that are Sub-chapter S
corporations issued subordinated debentures in order to maintain
compliance with the Internal Revenue Code. The maturity of the
subordinated debentures is 30 years and interest rates are 7.7% for the
first 5 years and 13.8% for the remaining years.
In February 2009 and May 2009, the United States Congress passed the
American Recovery and Reinvestment Act of 2009 and the Helping Families
Save Their Homes Act of 2009, respectively. These acts contained
amendments to the EESA (EESA Amendments) which require the Secretary to
allow QFIs to repay at any time, subject to regulatory approval,
regardless of whether the 25.0% or greater QEO was accomplished. The
ability of a QFI to repay the OFS investment prior to year 3 or a 25.0%
QEO was not considered in the original subsidy cost estimate.
Therefore, a modification cost of $77.7 million was recorded as a
result of these amendments.
In addition to the senior preferred stock, the OFS received warrants,
as required by section 113(d) of EESA, from public QFIs to purchase a
number of shares of common stock. The warrants have an aggregate market
price equal to 15.0% of the total senior preferred stock investment.
The exercise price and market value used to determine the number of
shares of common stock subject to the warrant was calculated based on
the average of closing prices of the common stock on the 20 trading
days ending on the last day prior to the date the QFIs application was
preliminarily approved for participation in the program. The warrants
include customary anti-dilution provisions. In the event that a public
QFI completes, prior to December 31, 2009, one or more QEOs with
aggregate gross proceeds of not less than 100.0% (100.0% QEO) of the
senior perpetual preferred stock investment, the number of shares
subject to the warrants will be reduced by 50.0%. As of September 30,
2009, 19 QFIs reduced the number of shares available under the warrants
as a result of this provision. The warrants have a 10 year term. The
OFS may exercise one half of the warrants prior to the earlier of a
100.0% QEO, or December 31, 2009. Subsequent to December 31, 2009, OFS
may exercise any warrants held in whole or in part. The OFS considers
the impact of potential future QEOs in the valuation process.
The OFS received warrants from non-public QFIs for the purchase of
additional senior preferred stock (or subordinated debentures if
appropriate) with a stated dividend rate of 9.0% (13.8% interest rate
for subordinate debentures) and a liquidation value equal to 5.0% of
the total senior preferred stock (additional subordinate debenture)
investment. These warrants were immediately exercised and resulted in
the OFS holding additional senior preferred stock (subordinated
debentures) (collectively referred to as "warrant preferred stock") of
non-public QFIs. The OFS did not receive warrants from banks considered
Community Development Financial Institutions (CDFIs). As of September
30, 2009, the OFS has invested in 20 institutions considered CDFIs.
The EESA Amendments previously discussed also allow the Secretary to
liquidate warrants associated with repurchased senior preferred stock
at the market price. In addition, a QFI, upon the repurchase of its
senior preferred stock, also has the contractual right to repurchase
the common stock warrants at the market price.
In June 2009, the OFS entered into an exchange agreement with
Citigroup. Under the terms of the agreement the OFS exchanged $25.0
billion of its investment in senior preferred stock for a new series
(Series M) of mandatorily convertible preferred stock.
The initial conversion price was $3.25 per share. In July 2009, the OFS
received the Series M shares, which were subsequently converted in
September 2009 to approximately 7.7 billion common shares of Citigroup.
This exchange transaction was not considered in the original subsidy
cost estimate for CPP. As a result, the OFS recorded a modification
cost of approximately $1.8 billion for the fiscal year ended 2009. The
OFS also has investments in Citigroup through the TIP and AGP.
During the period ended September 30, 2009, the OFS invested
approximately $204.6 billion in 685 institutions, including small,
community, regional, and national banks, as well as CDFIs, in 48
states, the District of Columbia, and Puerto Rico. Approximately $70.7
billion of the OFS investments have been repurchased or redeemed
bringing the total gross investment balance as of September 30, 2009 to
approximately $133.9 billion. In addition, during the period ended
September 30, 2009, the OFS received under CPP approximately $6.8
billion in dividends on senior preferred and warrant preferred stock
and approximately $2.9 billion in proceeds from the repurchase of
warrants and warrant preferred stock. 38 QFIs have not declared and
paid one or more dividends to OFS under CPP as of September 30, 2009.
On November 1, 2009, a CPP participant, CIT Group, filed for Chapter 11
Bankruptcy. The OFS had invested $2.3 billion in senior preferred stock
of CIT Group and received a warrant for the purchase of common stock.
The OFS does not expect a significant recovery of its preferred stock
investment. As such, this investment has been reduced to zero in these
financial statements. The ultimate amount received, if any, from this
investment will depend on the outcome of the bankruptcy proceedings.
On November 6, 2009, a subsidiary of UCBH Holdings, Inc. (a CPP
participant), United Commercial Bank, was closed by its regulators. The
OFS had invested approximately $298.7 million in senior preferred stock
and received a warrant for the purchase of common shares. The value of
these shares, including the warrant, reflected in these financial
statements is approximately $22.5 million as of September 30, 2009. The
ultimate amount received, if any, from this investment will depend on
the outcome of the receivership.
On November 13, 2009, a subsidiary of Pacific Coast National Bancorp.
(a CPP participant), Pacific Coast National Bank, was closed by its
regulators. The OFS had invested approximately $4.1 million in senior
preferred stock and received warrant preferred stock in the amount of
$206 thousand. The value of the shares, including the warrant preferred
stock, reflected in these financial statements is approximately $154
thousand as of September 30, 2009. The ultimate amount received, if
any, from this investment will depend on the outcome of the
receivership.
Further details on the outstanding senior preferred share investments
and subordinated debentures under CPP and the net investment amount
including estimated cash flows associated with the sale or exercise of
the warrants, as of September 30, 2009, are presented in the table at
the end of this section.
Targeted Investment Program:
The Targeted Investment Program (TIP) was designed to prevent a loss of
confidence in financial institutions that could result in significant
market disruptions, threatening the financial strength of similarly
situated financial institutions, impairing broader financial markets,
and undermining the overall economy. The OFS considers institutions as
candidates for the TIP on a case-by-case basis, based on a number of
factors described in the program guidelines. These factors include the
threats posed by destabilization of the institution, the risks caused
by a loss of confidence in the institution, and the institution's
importance to the nation's economy.
The OFS completed the first transaction under the TIP in December 2008,
when it invested $20.0 billion in Citigroup cumulative perpetual
preferred stock and received a warrant for the purchase of Citigroup
common stock. Under the agreement with Citigroup, the OFS receives an
8.0% annual dividend, payable quarterly, if and when declared by
Citigroups' Board of Directors. As part of this agreement, Citigroup
must implement rigorous compensation standards and other restrictions
on corporate expenditures. In June 2009, the OFS and Citigroup agreed
to an exchange of the cumulative perpetual preferred stock issued under
the TIP for a new series of trust preferred securities. Citigroup
issued subordinated debentures to a trust established by Citigroup, and
the trust issued trust preferred securities to OFS. Interest and
principal payments on the subordinated debentures are passed-through to
the trust preferred security holders. The trust preferred securities
pay a quarterly distribution at an annual rate of 8.0% to OFS. The
subordinated debentures contain an interest deferral provision allowing
Citigroup to defer payment of interest for up to 5 years. The OFS will
not receive distributions from the trust preferred securities during a
deferral period. Deferred interest is required to be paid upon
termination of the deferral period. As of September 30, 2009, Citigroup
has not exercised its option to defer interest payments. The
subordinated debentures mature in 2039. As a result, the trust is
scheduled to pay out the proceeds to the holders of the trust preferred
securities. In addition, the subordinated debentures can be prepaid by
Citigroup at any time prior to maturity, subject to consultation with
the Federal Reserve, as long as the U.S. Government holds the trust
preferred securities. The terms of the new securities are substantially
the same as the preferred stock originally received by the OFS and
therefore the exchange transaction did not result in a modification.
The OFS also has investments in Citigroup through the CPP and the AGP.
In January 2009, the OFS completed its second transaction under the
TIP, investing $20.0 billion in Bank of America. Under the agreement
with Bank of America, the OFS purchased $20.0 billion of cumulative
perpetual preferred stock and received a warrant for the purchase of
Bank of America common stock. The preferred stock purchased from Bank
of America contains a stated annual dividend rate of 8.0%, payable
quarterly, if declared. Bank of America's agreement under the TIP
stipulated that the institution must implement rigorous executive
compensation standards and other restrictions on corporate
expenditures. The OFS also has investments in Bank of America through
the CPP.
During the period ended September 30, 2009, OFS received approximately
$1.9 billion in dividends under the TIP. See the table presented at the
end of this section for further details.
Asset Guarantee Program:
The Asset Guarantee Program (AGP) provides guarantees for assets held
by systemically significant financial institutions that face a risk of
losing market confidence due in large part to a portfolio of distressed
or illiquid assets. The AGP is applied with extreme discretion in order
to improve market confidence in the systemically significant
institution and in financial markets broadly.
Section 102 of the EESA established the AGP to guarantee troubled
assets originated or issued prior to March 14, 2008, including mortgage-
backed securities, and established the Troubled Assets Insurance
Financing Fund (TAIFF). In accordance with Section 102(c) and (d) of
the EESA, premiums from financial institutions, are collected and all
fees are recorded by the OFS in the TAIFF. In addition, Section
102(c)(3) of the EESA requires that the original premiums assessed are
"set" at a minimum level necessary to create reserves sufficient to
meet anticipated claims. In the event there are insufficient funds
within the TAIFF for the payment of claims, amounts are borrowed from
the Treasury until sufficient funds are received into the TAIFF. In the
event that the estimate of claims exceeds the estimated future cash
inflows, an upward reestimate would be recorded and amounts would be
transferred to the TAIFF as a subsidy expense.
The OFS completed its first transaction under the AGP in January 2009,
when it finalized the terms of a guarantee agreement with Citigroup.
Under the agreement, the OFS, the Federal Deposit Insurance Corporation
(FDIC), and the Federal Reserve Bank of New York (FRBNY) provided
protection against the possibility of large losses on an asset
pool of approximately $301.0 billion of loans and securities backed by
residential and commercial real estate and other such assets, which
remain on Citigroup's balance sheet. The following loss-sharing terms
apply to the transaction: Citigroup absorbs the first $39.5 billion in
losses, and losses over the $39.5 billion are shared by the U.S.
government (90.0%) and Citigroup (10.0%) (the "second loss"). For the
second loss, the OFS absorbs up to $5.0 billion, then the FDIC absorbs
up to $10.0 billion, and lastly the FRBNY funds any U.S. government
losses above the OFS and the FDIC commitments through a non-recourse
loan. The guarantee is in place for ten years for residential assets
and five years for non-residential assets.
As a premium for the guarantee, Citigroup issued $7.0 billion of
cumulative perpetual preferred stock with an 8.0 % stated dividend rate
and a warrant for the purchase of common stock; approximately $4.0
billion and the warrant were issued to the OFS, and approximately $3.0
billion was issued to the FDIC. As part of the agreement, Citigroup
submitted an executive compensation plan to the OFS and the FDIC for
approval and must comply with certain common stock dividend
restrictions. The OFS has received approximately $174.8 million in
dividends on the preferred stock received as compensation for this
arrangement. These dividends have been deposited into the TAIFF. The
preferred stock originally issued to the OFS and the FDIC were
exchanged for the trust preferred securities discussed above under the
TIP. The OFS has also invested in Citigroup through the CPP and the
TIP.
The net present value of the estimated cash inflows from the preferred
stock and warrant received by the OFS from Citigroup as a premium is
greater than the estimated net present value of future claim payments,
resulting in an asset of approximately $1.8 billion, after reestimates,
as of September 30, 2009.
In January 2009, the OFS, FDIC, FRBNY (together the USG Parties) and
Bank of America signed a Summary of Terms (Term Sheet) pursuant to
which the USG Parties agreed to guarantee or lend against a pool of up
to $118.0 billion of financial instruments consisting of securities
backed by residential and commercial real estate loans and corporate
debt and related derivatives. In May 2009, prior to completing
definitive documentation, Bank of America notified the USG Parties of
its desire to terminate negotiations with respect to the guarantee
contemplated in the Term Sheet. All parties agreed that Bank of America
received value for entering into the Term Sheet with the USG Parties
and that the USG Parties should be compensated for out-of-pocket
expenses and a fee equal to the amount Bank of America would have paid
for the guarantee from the date of the signing of the Term Sheet
through the termination date. Under the terms of the settlement, the
U.S. Treasury received $276.0 million for its role in the guarantee
agreement through the OFS, the FRBNY received $57.0 million, and the
FDIC received $92.0 million. All the OFS funds received for the
settlement were deposited in the TAIFF and subsequently paid to the
Treasury General Fund. The $276 million received by OFS pursuant to the
settlement is reflected in the OFS Statement of Net Cost as a reduction
of the AGP subsidy cost.
Consumer and Business Lending Initiative (CBLI):
Term Asset-Backed Securities Loan Facility:
The Term Asset-Backed Securities Loan Facility (TALF) was created by
the Federal Reserve Board (FRB) to provide low cost funding to
investors in certain classes of Asset Backed Securities (ABS). The OFS
agreed to participate in the program by providing liquidity and credit
protection to the FRB.
Under the TALF, the FRBNY, as implementer of the TALF program,
originated loans on a non-recourse basis to holders of certain AAA
rated ABS secured by recently originated consumer and commercial loans
and commercial mortgage backed securities (New Issue CMBS). In addition
to securities secured by recently originated loans, CMBS issued prior
to January 2009 and originally AAA rated (Legacy CMBS) are eligible
collateral. TALF loans have a term of 3 or 5 years and are secured
solely by eligible collateral. Haircuts (a percentage reduction used
for collateral valuation) are determined based on the riskiness of each
type of eligible collateral and the maturity of the eligible collateral
pledged to the FRBNY. The "haircuts" provide additional protection to
OFS by exposing the TALF borrowers to some risk of loss. Interest rates
charged on the TALF loans depend on the weighted average maturity of
the pledged collateral, the collateral type and whether the collateral
pays a fixed or variable coupon.
As part of the program, the FRBNY has entered into a put agreement with
the TALF, LLC, a special purpose vehicle created by the FRBNY. In the
event of a TALF borrower default, the FRBNY will seize the collateral
and sell it to the TALF, LLC under this agreement. The TALF, LLC
receives a monthly fee equal to the difference between the TALF loan
rate and the FRBNY's fee (spread) as compensation for entering into the
put agreement. The accumulation of this fee will be used to fund
purchases. In the event there are insufficient funds to purchase the
collateral, the OFS has committed to invest up to $20.0 billion in non-
recourse subordinate notes issued by the TALF, LLC. The subordinate
notes bear interest at 1 Month LIBOR plus 3.0% and mature 10 years from
the closing date, subject to extension. The OFS disbursed $100.0
million upon creation of the TALF, LLC and the remainder can be drawn
to purchase collateral in the event the spread is not sufficient to
cover purchases. Any amounts needed in excess of the OFS commitment and
the fee would be provided through a loan from the FRBNY. Upon wind-down
of the TALF, LLC (collateral defaults, reaches final maturity or is
sold), the cash balance will be disbursed according to the following
payment priority:
1. FRBNY principal balance;
2. OFS principal balance;
3. FRBNY interest;
4. OFS interest;
5. Remaining cash balance ” 90.0% to the OFS, 10.0% to the FRBNY.
Subsequent to the initial cost estimates prepared for the TALF, certain
changes were made to the terms of the program, including increasing the
term to 5 years and the addition of different types of acceptable
collateral. These program changes resulted in a modification,
increasing the original cost estimate by $8.0 million.
The TALF, LLC is owned and controlled by the FRBNY. The credit
agreement between the OFS and the TALF, LLC provides the OFS with
certain rights consistent with a creditor but would not constitute
control. As such TALF, LLC is not a federal entity and the assets,
liabilities, revenue and cost of TALF, LLC are not included in the OFS
financial statements. The discussion below provides information on 1)
the amount of TALF loans issued by the FRBNY, by collateral class, and
2) the assets, liabilities, income and expense of the TALF, LLC.
The FRBNY has originated $50.9 billion in TALF loans[Footnote 30], of
which about $42.7 billion is outstanding as of September 30, 2009. The
average "haircut" was approximately 9.92% of the originated balance. As
of September 30, 2009, all of the TALF loans performed as agreed. The
table below shows the outstanding balance of the FRBNY TALF loans as of
September 30, 2009, by collateral type:
Collateral Type: Auto;
Loan Amount (Dollars in Billions): $7.43;
Percent of Total: 17.3%.
Collateral Type: Credit Cards;
Loan Amount (Dollars in Billions): $21.61;
Percent of Total: 50.6%.
Collateral Type: Equipment;
Loan Amount (Dollars in Billions): $0.89;
Percent of Total: 2.1%.
Collateral Type: Floor Plan;
Loan Amount (Dollars in Billions): $1.01;
Percent of Total: 2.4%.
Collateral Type: Premium Finance;
Loan Amount (Dollars in Billions): $0.99;
Percent of Total: 2.3%.
Collateral Type: Servicing Advances;
Loan Amount (Dollars in Billions): $0.58;
Percent of Total: 1.4%.
Collateral Type: Small Business;
Loan Amount (Dollars in Billions): $0.46;
Percent of Total: 1.1%.
Collateral Type: Student Loan;
Loan Amount (Dollars in Billions): $5.63;
Percent of Total: 13.1%.
Collateral Type: New Issue CMBS;
Loan Amount (Dollars in Billions): $0.0;
Percent of Total: 0.0%.
Collateral Type: Legacy CMBS;
Loan Amount (Dollars in Billions): $4.13;
Percent of Total: 9.7%.
Collateral Type: Total;
Loan Amount (Dollars in Billions): $42.73;
Percent of Total: 100.0%.
[End of table]
As of September 30, 2009, the TALF, LLC has assets of approximately
$198.9 million consisting primarily of investments in U.S. Treasury and
Agency securities.[Footnote 31] Total liabilities of the TALF, LLC are
$101.8 million consisting of the OFS subordinated note plus accrued
interest. During the period ended September 30, 2009, the TALF, LLC
collected $99.1 million in fees and investment income and incurred $2.3
million in expenses, $1.8 million of which is accrued interest on the
OFS subordinated note. As of September 30, 2009 there were no TALF
borrower defaults and consequently no purchases of collateral by the
TALF, LLC.
American International Group, Inc. Investment Program (AIG):
The OFS provides assistance to certain systemically significant
financial institutions on a case by case basis in order to provide
stability to institutions that are critical to a functioning financial
system and are at substantial risk of failure as well as to prevent
broader disruption to financial markets.
In November 2008, the OFS invested $40.0 billion in AIG's cumulative
Series D perpetual cumulative preferred stock with a dividend rate of
10.0% compounded quarterly. On April 17, 2009, AIG and the OFS
restructured their November 2008 agreement. Under the restructuring,
the OFS exchanged $40.0 billion of cumulative Series D preferred stock
for $41.6 billion of non-cumulative 10.0% Series E preferred stock. The
amount of Series E preferred stock is equal to the original $40.0
billion, plus approximately $733.0 million in undeclared dividends as
of the February 1, 2009, scheduled quarterly dividend payment date,
$15.0 million in dividends compounded on the undeclared dividends, and
an additional $855.0 million in dividends from February 1, 2009, but
not paid as of April 17, 2009. AIG's restructured agreement kept the
quarterly dividend payment dates of May 1, August 1, November 1, and
February 1, as established by the original November 2008 agreement. The
original subsidy cost estimate did not consider this restructuring
which resulted in a modification cost of $127.2 million.
In addition to the exchange, the OFS agreed to make available an
additional $29.8 billion capital facility to allow AIG to draw
additional funds if needed to assist in AIG's restructuring. The OFS
investment consists of Series F non-cumulative perpetual preferred
stock with an initial liquidation amount of $0.0. This liquidation
amount increases with any draw down by AIG on the facility. The
dividend rate applicable to these shares is 10.0% and is payable
quarterly, if declared, on the outstanding liquidation amount. As of
September 30, 2009, approximately $3.2 billion has been funded by the
OFS to AIG under this additional capital facility. Consistent with
SSFAS No.2, the unused portion of the AIG capital facility is not
recognized as an asset as of September 30, 2009.
As of September 30, 2009, AIG has not made any dividend payments on any
of the perpetual preferred stock. Subsequently, AIG failed to make a
dividend payment on November 2, 2009. Per the terms of the preferred
stock, if AIG misses 4 dividend payments, the OFS may appoint to the
AIG board of directors, the greater of two members or 20.0% of the
total number of directors of the Company.
Automotive Industry Financing Program:
The objective of the Automotive Industry Financing Program (AIFP) was
to help prevent a significant disruption of the American automotive
industry, which could have a negative effect on the economy of the
United States. The discussion below details the various investments and
loans made by the OFS in the automotive industry, generally provided in
chronological order.
The table below illustrates amounts originally disbursed and collected
under AIFP. These amounts are shown before conversions, exchanges, or
valuation. For a detailed discussion on the current status of the loans
see the narrative below the table.
Dollars in millions:
GM General Purpose Loan including Working Capital Advances:
Amounts Disbursed as of September 30, 2009: $19,400;
Collection of Interest, Dividends, and Additional Notes: $134;
Principal Repayments: [Empty];
Amount Outstanding before Conversions, Exchanges, and Valuation:
$19,400.
GMAC LLC Rights Offering:
Amounts Disbursed as of September 30, 2009: $884;
Collection of Interest, Dividends, and Additional Notes: $9;
Principal Repayments: [Empty];
Amount Outstanding before Conversions, Exchanges, and Valuation: $884.
Chrysler Holding LLC General Purpose:
Amounts Disbursed as of September 30, 2009: $4,000;
Collection of Interest, Dividends, and Additional Notes: $53;
Principal Repayments: [Empty];
Amount Outstanding before Conversions, Exchanges, and Valuation:
$4,000.
Chrysler Financial:
Amounts Disbursed as of September 30, 2009: $1,500;
Collection of Interest, Dividends, and Additional Notes: $22;
Principal Repayments: $1,500;
Amount Outstanding before Conversions, Exchanges, and Valuation:
[Empty].
Auto Supplier Support Program:
Amounts Disbursed as of September 30, 2009: $413;
Collection of Interest, Dividends, and Additional Notes: $6;
Principal Repayments: [Empty];
Amount Outstanding before Conversions, Exchanges, and Valuation: $413.
Auto Warranty Program:
Amounts Disbursed as of September 30, 2009: $640;
Collection of Interest, Dividends, and Additional Notes: $4;
Principal Repayments: $640;
Amount Outstanding before Conversions, Exchanges, and Valuation:
[Empty].
Chrysler Debtor-In-Possession:
Amounts Disbursed as of September 30, 2009: $1,888;
Collection of Interest, Dividends, and Additional Notes: [Empty];
Principal Repayments: [Empty];
Amount Outstanding before Conversions, Exchanges, and Valuation:
$1,888.
Chrysler Exit:
Amounts Disbursed as of September 30, 2009: $4,577;
Collection of Interest, Dividends, and Additional Notes: [Empty];
Principal Repayments: [Empty];
Amount Outstanding before Conversions, Exchanges, and Valuation:
$4,577.
GM Debtor-In-Possession:
Amounts Disbursed as of September 30, 2009: $30,100;
Collection of Interest, Dividends, and Additional Notes: $34;
Principal Repayments: [Empty];
Amount Outstanding before Conversions, Exchanges, and Valuation:
$30,100.
GMAC Preferred stock:
Amounts Disbursed as of September 30, 2009: $5,000;
Collection of Interest, Dividends, and Additional Notes: $265;
Principal Repayments: [Empty];
Amount Outstanding before Conversions, Exchanges, and Valuation:
$5,000.
GMAC Mandatorily Convertible Preferred stock:
Amounts Disbursed as of September 30, 2009: $7,500;
Collection of Interest, Dividends, and Additional Notes: $165;
Principal Repayments: [Empty];
Amount Outstanding before Conversions, Exchanges, and Valuation:
$7,500.
Total:
Amounts Disbursed as of September 30, 2009: $75,902;
Collection of Interest, Dividends, and Additional Notes: $692;
Principal Repayments: $2,140;
Amount Outstanding before Conversions, Exchanges, and Valuation:
$73,762.
[End of table]
General Motors (GM or old GM) General Purpose Loan including Working
Capital Advances:
The OFS provided GM with a total of $13.4 billion in a three-year
direct loan bearing interest at 3 Month LIBOR (subject to a 2.0%
floor), plus 3.0% and secured by various types of collateral. $4.0
billion of this loan was funded in December 2008, an additional $5.4
billion in January, 2009, and an additional $4.0 billion in February
2009. In April 2009, the OFS and GM amended this loan agreement to
increase the maximum loan amount from $13.4 billion to $15.4 billion,
and on May 20, 2009 to increase the maximum loan amount from $15.4
billion to $19.4 billion (these amendments are referred to as the
Working Capital Advances) to provide GM with adequate working capital
to assist in the restructuring effort. The additional amounts were
funded upon amendment, bringing the total funded under this loan to
$19.4 billion. The agreement required GM to develop and implement a
restructuring plan to achieve long-term financial viability and
required compliance with certain enhanced executive compensation and
expense control requirements.
Furthermore, the OFS received warrants for shares of GM common stock
and an additional senior unsecured note in the principal amount of
$748.6 million. The purpose of this loan was to enhance the ability of
GM and its subsidiaries to pursue timely and aggressive production of
energy-efficient advanced technology vehicles; preserve and promote the
jobs of American workers employed directly by GM and its subsidiaries;
safeguard the ability of GM and its subsidiaries to provide retirement
and health care benefits for retirees and their dependents; and
stimulate manufacturing and sales of automobiles produced by GM. On
June 1, 2009, GM filed for Chapter 11 bankruptcy. All rights under this
loan were transferred to a newly created entity (GM NewCo) and
subsequently extinguished in connection with a successful credit bid
for the assets of old GM. In addition, the OFS received $134.4 million
in interest while the loan was outstanding. See further discussion
below under GM Debtor-In-Possession.
GMAC LLC Rights Offering:
In December 2008, the OFS agreed, in principal, to lend up to $1.0
billion to GM for participation in a rights offering by GMAC in support
of GMAC's reorganization as a bank holding company. The loan was
secured by the GMAC common interest acquired in the rights offering.
The loan agreement specified that at any time, at the option of the
lender (OFS), the unpaid principal and accrued interest was
exchangeable for the membership interest purchased, by GM, during the
rights offering. The note was funded for $884.0 million. In May 2009,
the OFS exercised its exchange option under the loan and received
190,921 membership interests, representing approximately 35.36% of the
voting interest, in GMAC in full satisfaction of the loan. In addition,
OFS received $9.1 million in interest while the loan was outstanding.
The conversion to GMAC shares was not considered in the original
subsidy cost. As a result, a modification was recorded reducing the
estimated subsidy cost by approximately $1.6 billion.
Chrysler Holding LLC General Purpose:
The OFS provided a three-year, $4.0 billion loan to Chrysler in January
2009, bearing interest at 3 Month LIBOR (subject to a 2.0% floor) plus
3.0%. The loan was secured by various collateral including parts
inventory, real estate, and certain equity interests held by Chrysler.
This agreement required Chrysler to submit a restructuring plan to
achieve long-term viability and required compliance with certain
enhanced executive compensation and expense-control requirements.
Furthermore, the OFS received a senior unsecured note from Chrysler in
the principal amount of approximately $266.8 million, containing the
same terms as the General Purpose loan. The purpose of this loan was
to: enhance the ability of Chrysler and its subsidiaries to pursue
timely and aggressive production of energy-efficient advanced
technology vehicles; preserve and promote the jobs of American workers
employed directly by Chrysler and its subsidiaries; safeguard the
ability of Chrysler and its subsidiaries to provide retirement and
health care benefits for retirees and their dependents; and stimulate
manufacturing and sales of automobiles produced by Chrysler.
On April 30, 2009, Chrysler filed for Chapter 11 bankruptcy. Upon
entering bankruptcy, a portion of Chrysler was sold to a newly created
entity (New Chrysler). Under the terms of the bankruptcy agreement,
$500.0 million of this loan was assumed by New Chrysler (see discussion
under Chrysler Exit for discussion of note terms). The balance remains
outstanding and is in default. Any recovery of the remainder of this
loan will depend on: (a) Chrysler Holding's obligation to pay the
greater of $1.375 billion or 40.0% of the equity value of Chrysler
Financial to OFS should Chrysler Holding receive certain distributions
from Chrysler Financial and, (b) proceeds received from the sale of
assets remaining in the bankrupt company. In addition, OFS received
$52.1 million in interest payments on this note.
Chrysler Financial:
In January, 2009, the OFS loaned $1.5 billion to Chrysler LB
Receivables Trust (Chrysler Trust), a special purpose entity created by
Chrysler Financial, to finance the extension of new consumer auto
loans. The five-year loan bore interest at 1 Month LIBOR plus 1.0% for
the first year, 1.5% for the remaining term and was secured by a senior
secured interest in a pool of newly originated consumer automotive
loans, and Chrysler served as a guarantor for certain covenants of
Chrysler Financial. Under the agreement, Chrysler Financial was
required to comply with the executive compensation and corporate
governance requirements of Section 111(b) of the EESA, as well as
enhanced restrictions on executive compensation including the need to
reduce by 40.0% its bonus pool for Senior Executive Officers and Senior
Employees. In lieu of warrants, the OFS received additional notes in an
amount equal to 5.0% of the maximum loan amount. The additional notes
would vest 20.0% on the closing date and 20.0% on each anniversary of
the closing date and had other terms similar to the loan. The purpose
of this loan was to assist Chrysler Financial in providing retail
financing to purchasers of automobiles, light duty trucks and
recreational vehicles; to stimulate manufacturing and sales of
automobiles produced by Chrysler's affiliates; preserve and promote the
jobs of American workers employed directly by Chrysler's affiliates and
in related industries; and safeguard the ability of Chrysler to provide
retirement and health care benefits for their retirees and their
dependents. On July 14, 2009, the loan and additional note of $15.0
million were paid in full. In addition, the OFS received $7.4 million
in interest payments while this loan was outstanding.
Auto Supplier Support Program:
In April 2009, the OFS committed $5.0 billion in financing for the Auto
Supplier Support Program, as follows: $3.5 billion for GM suppliers and
$1.5 billion for Chrysler suppliers. These commitments were
subsequently reduced to $2.5 billion for GM suppliers and $1.0 billion
for Chrysler suppliers per the loan agreement. Under the program,
suppliers are able to sell their receivable to a SPV, created by the
respective automaker, at a discount. The purchases of the receivables
are funded by equity investments made by the automaker, cash payments
made by the automaker on previously purchased receivables or from draws
on the OFS funding commitment. The duration of the program is 12
months, extendable at the option of the OFS. Interest is charged on
advances under the facility at a rate of 3 Month LIBOR (subject to a
2.0% floor) plus 3.5%. In addition, the OFS received a contingent
payment note comprised of an exit fee equal to 4.0% of the adjusted
commitment amount and 50.0% of the residual equity in the SPV after the
program's end date. This program provides suppliers with access to
government backed protection ensuring that money owed to them for the
products they ship will be paid regardless of what happens to the
recipient car company. This provided suppliers with needed funding to
operate their businesses and help unlock credit more broadly in the
supplier industry. Purchases of receivables and collection of amounts
due from GM and Chrysler is performed by a third party service
provider. Suppliers must maintain qualifying commercial terms with the
automakers to participate in the program. The OFS has provided
approximately $413.1 million of funding to this program. The bankruptcy
of Chrysler and GM did not impact this program, as both companies were
allowed to continue paying suppliers while in bankruptcy. As of
September 30, 2009, the OFS had received $5.9 million in interest under
the Auto Supplier Support Program.
Auto Warranty Program:
In April 2009 and May 2009, the OFS loaned approximately $280.0 million
to Chrysler and $360.6 million to GM , respectively, to capitalize SPVs
created by Chrysler and GM to finance participation in the Warranty
Commitment Program (warranty program). The OFS also received additional
notes as consideration for its loans in an amount equal to 6.67% of the
funded amounts. The warranty program covered all warranties on new
vehicles purchased from Chrysler and GM during the period in which
Chrysler and GM were restructuring. The program was run by a third
party program administrator with the backing of financial resources
allocated by the OFS, Chrysler and GM. Chrysler and GM contributed
15.0% of the projected cost for warranty service on each covered
vehicle, with the OFS providing additional funds to cover 110.0% of the
projected cost. The SPVs holding the funds operated separately from
Chrysler and GM and would transfer the necessary funds to a third-party
to handle all warranty claims even if Chrysler and GM entered into
bankruptcy or went out of business. Both Chrysler and GM have completed
the Section 363[Footnote 32] sales in June 2009 and July 2009,
respectively. Upon completion of the sale, the OFS received principal
amounts due from both GM and Chrysler and terminated the warranty
program. Interest in the amount of $3.1 million was received by the OFS
from Chrysler. No interest was received in connection with the GM
repayment. The GM additional note was assigned to the New GM as part of
the bankruptcy proceedings and extinguished as part of the credit bid
for the assets of old GM. The Chrysler additional note is still
outstanding.
Chrysler Debtor-In-Possession:
In May 2009, the OFS and the Canadian government jointly agreed to make
a loan in the total amount of $4.1 billion ($3.0 billion by the OFS and
$1.1 billion by Canada) to Chrysler LLC in its capacity as debtor-in-
possession (DIP) in its bankruptcy case. In May 2009, the OFS increased
its loan commitment in the DIP credit agreement to $3.8 billion, and
the Canadian government increased its commitment to $1.2 billion,
bringing the maximum loan amount to $5.0 billion. The loan interest
rate was the 3 Month Eurodollar rate plus 3.0%. The stated maturity was
September 2009, with earlier maturity depending on the bankruptcy
proceedings. Of the $3.8 billion committed by the OFS, approximately
$1.9 billion was funded during the bankruptcy. This DIP loan provided
the necessary liquidity to sustain Chrysler during the bankruptcy
period. Upon the Section 363 sale of the Chrysler assets, the funding
commitment was reduced to amounts previously drawn. As such, no
additional amounts were drawn from this facility. Recovery of the DIP
loan is subject to the bankruptcy process associated with the Chrysler
assets remaining after the sale to New Chrysler.
Chrysler Exit:
In May 2009, the OFS committed to make a loan to New CarCo Acquisition
LLC (New Chrysler or Chrysler Group LLC), the company that purchased
the assets of Chrysler.
The final terms of the credit agreement resulted in a loan to New
Chrysler for approximately $7.1 billion. This amount consists of $6.6
billion of new funding and $500.0 million of assumed debt[Footnote 33]
from the OFS January 2, 2009 credit agreement with Chrysler Holding
LLC. The loan was secured by a first priority lien on the assets of
Chrysler Group LLC. Funding of the loan was available in two
installments or tranches (B and C), each with varying availability and
terms. The following describes the terms of Tranches B and C.
The maximum funding under Tranche B was $2.0 billion and was funded on
the closing date of the agreement. Interest on Tranche B is 3 Month
Eurodollar plus 5.0% margin (in certain situations, defined in the
agreement, a rate other than the 3 Month Eurodollar rate will be
applied. This rate, referred to as the Alternative Base Rate, will be
the greater of the Prime Rate, the Federal Funds Effective rate plus
0.5% or the 3 Month Eurodollar rate plus 1.0%. If this Alternative Base
Rate is applied, the margin will be 4.0% versus the 5.0% if the 3 Month
Eurodollar Rate is used). Tranche B is due and payable on December 10,
2011, provided that the Chrysler Group LLC may elect to extend the
maturity of up to $400.0 million of Tranche B to the Tranche C maturity
date. If so elected, the applicable margin will increase to 6.5% for
Eurodollar and 5.5% for ABR loans, respectively.
The maximum funding under Tranche C is approximately $4.64 billion, of
which approximately $2.58 billion was funded on the closing date.
Interest on Tranche B is 3 Month Eurodollar plus 7.91% margin (in
certain situations, defined in the agreement, a rate other than the 3
Month Eurodollar rate will be applied. This rate, referred to as the
Alternative Base Rate, will be the greater of the Prime Rate, the
Federal Funds Effective rate plus 0.5% or the 3 Month Eurodollar rate
plus 1.0%. If this Alternative Base Rate is applied, the margin will be
6.91% versus the 7.91% if the 3 Month Eurodollar Rate is used). On June
10, 2016, the Tranche C loan shall be prepaid to the extent the funded
amount is greater than 50.0% of the closing date commitment amount,
taking into consideration amounts previously prepaid as a voluntary
prepayment. The remaining balance of the Tranche C loan is due and
payable on June 10, 2017.
Interest on both the Tranche B and Tranche C will be payable in-kind
through December 2009 and will be added to the principal balance of the
respective Tranche. In addition, additional in-kind interest will
accrue in the amount of $17.0 million per quarter. Such amount will be
added to the Tranche C loan balance subject to interest at the
appropriate rate.
The OFS also obtained other consideration, including a 9.85% equity
interest in Chrysler Group LLC and additional notes[Footnote 34] with
principal balances of $288.0 million and $100.0 million.[Footnote 35]
As of September 30, 2009, the OFS has funded approximately $4.6 billion
under this facility.
GM Debtor-In-Possession:
On June 1, 2009, GM filed for Chapter 11 bankruptcy. As part of the
filing the OFS and the Canadian government agreed to lend up to $33.3
billion under the terms of the DIP credit agreement; the OFS's
commitment amount was $30.1 billion. The OFS funded the $30.1 billion
of which approximately $986.0 million remains outstanding as of
September 30, 2009. In July 2009, the DIP credit agreement was amended
to reflect the fact that the amounts there under (other than
approximately $986.0 million that remained with GM for wind-down in
bankruptcy and $7.1 billion that was assumed by GM NewCo) were
extinguished in connection with a successful credit bid for the assets
of old GM.
The OFS has assigned its rights in this loan as well as the General
Purpose and Working Capital loans and previously received common stock
warrants to a newly created entity (GM NewCo or General Motors
Company). The purpose of this GM NewCo was to obtain sufficient assets
of GM out of bankruptcy to satisfy the original loans disbursed to GM
and discussed above, which it accomplished through a successful credit
bid for the assets in a sale pursuant to Section 363 of the Bankruptcy
Code. Upon closing of the Section 363 sale, the General Motors Company
has assumed $7.1 billion of the DIP loan, simultaneously paying $0.4
billion (return of warranty program funds), resulting in a balance of
$6.7 billion. The loan has a term of 6 years and bears interest at 3
Month Eurodollar (subject to a 2.0% floor) plus 5.0% and has a first
lien security interest in the assets of General Motors Company. The OFS
also received $2.1 billion in 9.0% cumulative perpetual preferred stock
and 60.8% of the common equity interest in General Motors Company. The
assets received by the OFS as a result of the assignment and Section
363 sale are considered recoveries of the original loans for subsidy
cost estimation purposes. As of September 30, 2009, the OFS had
received $34.1 million in dividends on GM preferred stock.
GMAC Preferred Stock:
In December 2008, the OFS purchased preferred membership interests for
$5.0 billion which were converted to senior preferred stock with an
8.0% annual distribution right (dividends) from GMAC. Under the
agreement, GMAC issued warrants to the OFS to purchase, for a nominal
price, additional preferred equity in an amount equal to 5.0% of the
preferred equity purchased. These warrants were exercised at closing of
the investment transaction. The additional preferred stock provided for
a 9.0% annual distribution right. The purpose of this investment was to
enable GMAC to restore liquidity to its finance businesses and restore
stability to the domestic automobile industry in the United States. As
of September 30, 2009, the OFS has received $265.2 million in dividends
associated with these preferred and warrant preferred stock.
GMAC Mandatorily Convertible Preferred Stock:
In May 2009, the OFS published a non-binding term sheet to invest $13.1
billion to support GMAC, subject to definitive documentation and GMAC's
capital needs. The OFS has invested $7.5 billion (of the $13.1 billion)
in 9.0% Mandatorily Convertible Preferred Stock in GMAC to support its
ability to originate new loans to Chrysler dealers and consumers, and
help address GMAC's capital needs. The preferred stock have a
liquidation amount of $50 per share and are convertible in whole or in
part, at any time, at the option of GMAC, subject to the approval of
the Federal Reserve. Furthermore, GMAC shall not convert any of the
stock to the extent such conversion would result in the OFS owning in
excess of 49% of GMAC's common equity except (1) with the prior written
consent of the OFS, (2) pursuant to GMAC's Capital Plan, or (3)
pursuant to an order of the Federal Reserve compelling such a
conversion. The determination of the percentage of common equity owned
by the OFS would take into account the common stock currently owned by
the OFS as a result of the conversion of the GMAC Rights Offering,
previously discussed. Absent a previous conversion, the preferred stock
will automatically convert after 7 years. The conversion rate is
0.00432 units of common stock per unit of convertible preferred stock.
The remaining $5.6 billion (per the nonbinding term sheet) is subject
to the FRB's review of GMAC's capital plan assessment of whether
additional capital is needed. As of September 30, 2009, the remaining
$5.6 billion has not been funded. The OFS had received approximately
$165.4 million in dividends associated with these preferred and warrant
preferred stock.
Public-Private Investment Program:
The Public-Private Investment Program (PPIP) is part of the OFS's
efforts to help restart the market and provide liquidity for legacy
assets. Under this program, the OFS will make equity and debt
investments in investment vehicles (referred to as Public Private
Investment Funds or "PPIFs") established by private investment
managers. The equity investment will be used to match private capital
and will equal not more than 50.0% of the total equity invested. The
debt investment will be, at the option of the investment manager, equal
to 50.0% or 100.0% of the total equity (including private equity). The
PPIFs are only allowed to purchase commercial mortgage-backed
securities and non-agency residential mortgage-backed securities issued
prior to January 1, 2009 that were originally rated AAA or an
equivalent rating by two or more nationally recognized statistical
rating organizations without external credit enhancement and that are
secured directly by the actual mortgage loans, leases or other assets
and not other securities. The PPIFs are also permitted to invest in
certain temporary securities, including bank deposits, U.S. Treasury
securities, and certain money market mutual funds. At least 90 percent
of the assets underlying any eligible asset must be situated in the
United States. On September 30, 2009, the OFS signed definitive limited
partnership and loan agreements with two investment managers,
committing to potentially disburse up to $6.7 billion. As of September
30, 2009, no private fund managers had made any investments and the OFS
had not disbursed any funds.
Subsidy Reestimates:
The purpose of reestimates is to update original program subsidy cost
estimates to reflect actual cash flow experience as well as changes in
forecasts of future cash flows. Forecasts of future cash flows are
updated based on actual program performance to date, additional
publicly available relevant historical market data on securities
performance, revised expectations for future economic conditions, and
enhancements to cash flow projection methods. Financial statement
reestimates for all programs were performed using actual financial
transaction data through September 30, 2009. In accordance with credit
reform guidance and to ensure the timely completion of the credit
reform reestimate process, market and security specific data publicly
available as of September 30, 2009, was used for the CPP, AGP, TIP and
direct loan AIFP and data through August 31, 2009 was used for the
equity portion of AIFP, AIG and TALF in the reestimate calculations.
The OFS assessed the key inputs of the reestimates using data publicly
available as of September 30, 2009, and in its determination, there
were no significant changes to the key inputs for the three programs
for which August 31, 2009, data was used that would require a revision
to the reestimates.
Downward Reestimates for the fiscal year ended September 30, 2009, are
as follows:
(Dollars in Millions)
Downward Reestimate Amounts:
Program: AGP:
Subsidy: ($1,097);
Interest: ($77);
Total: ($1,174).
Program: Direct Loan:
AIFP:
Subsidy: ($9,039);
Interest: ($1,571);
Total: ($10,610).
CBLI/TALF:
Subsidy: ($222);
Interest: ($21);
Total: ($243).
Subtotal, Direct:
Subsidy: ($9,261);
Interest: ($1,592);
Total: ($10,853).
Program: Equity Investment:
CPP:
Subsidy: ($68,558);
Interest: ($3,861);
Total: ($72,419).
TIP:
Subsidy: ($20,366);
Interest: ($1,101);
Total: ($21,467).
AIG:
Subsidy: ($845);
Interest: ($280);
Total: ($1,125).
AIFP:
Subsidy: ($2,331);
Interest: ($379);
Total: ($2,710).
Subtotal, Equity:
Subsidy: ($92,100);
Interest: ($5,621);
Total: ($97,721).
Program: Total:
Subsidy: ($102,458);
Interest: ($7,290);
Total: ($109,748).
[End of table]
Descriptions of the reestimates, by OFS Program, are as follows:
The approximately $1.2 billion in downward reestimates for the AGP is
primarily due to improvements in market conditions from when the
guarantee was committed in January 2009. The improved market conditions
resulted in an increase in the projected AGP asset due to the net
present value of the estimated cash inflows from the preferred stock
and warrants received by OFS from Citigroup as a premium being greater
than the estimated value of future claim payments associated with the
$5.0 billion asset guarantee.
The approximately $10.6 billion in downward reestimates for the direct
loans-AIFP is primarily the result of the post bankruptcy improved
financial position of one of the major companies participating in the
program. The $0.2 billion in downward reestimates for the TALF is
entirely due to projected improved performance of the securities within
the program versus the original estimate.
The $70.7 billion in repurchases during fiscal year 2009 accounts for
$9.7 billion of the $72.4 billion in downward reestimates in the CPP.
Projected repurchases of $30.0 billion in the next 12 months accounts
for approximately $5.4 billion, with the $57.3 billion balance in
downward reestimates in the CPP primarily due to improved market
conditions from when the original estimate was made in December 2008.
The $21.5 billion in downward reestimates in the TIP is mostly due to
improved market conditions from when the original estimates were made
in December 2008 and January 2009. Approximately $2.3 billion is due to
a $20.0 billion repurchase forecast within 12 months following
September 30, 2009.
The $1.1 billion in downward reestimates for the AIG Investment Program
and $2.7 billion in downward reestimates for the AIFP equity programs
are primarily due to improvements in market conditions from when the
equities were purchased resulting in a reduction in the projected costs
of the programs.
Key financial data for the Troubled Asset Relief Program Loans and
Equity Investments and Asset Guarantee Program are included in the
following two tables:
1. Direct Loans and Equity Investments Outstanding, Gross, represent
amounts paid by OFS to acquire the loans and equity investments.
Repurchases, redemptions, and repayments have been deducted from these
balances.
2. Net Direct Loans and Equity Investments represent the present value
of net cash flows that OFS estimates it will receive from the loans and
equity investments. For equity securities, this amount represents fair
value.
3. Subsidy Expense by component, subsidy cost allowance and a
reconciliation of the subsidy cost allowance illustrate the
relationship between subsidy cost and asset value.
4. Reconciliation of subsidy cost by program is also incorporated in
the tables.
Office of Financial Stability (Troubled Asset Relief Program):
Notes To The Financial Statements:
For the Period Ended September 30, 2009:
Dollars in Millions:
CPP: Capital Purchase Program;
AIG: American International Group, Inc. Investment Program;
TIP: Targeted Investment Program;
AIFP: Automotive Industry Financing Program;
CBLI: Consumer and Business Lending Initiative.
Troubled Asset Relief Program Direct Loans and Equity Investments:
Direct Loans and Equity Investment Programs:
Direct Loans and Equity Investments Outstanding, Gross:
Total: $290,969;
CPP: $133,901;
AIG: $43,206;
TIP: $40,000;
AIFP: $73,762;
CBLI: $100.
Subsidy Cost Allowance:
Total: ($53,077);
CPP: $7,770;
AIG: ($30,054);
TIP: $341;
AIFP: ($31,478);
CBLI: $344.
Net Direct Loans and Equity Investments:
Total: $237,892;
CPP: $141,671;
AIG: $13,152;
TIP: $40,341;
AIFP: $42,284;
CBLI: $444.
New Loans or Investments Disbursed:
Total: $363,826;
CPP: $204,618;
AIG: $43,206;
TIP: $40,000;
AIFP: $75,902;
CBLI: $100.
Obligations for Loans and Investments not yet Disbursed:
Total: $51,681;
CPP: [Empty];
AIG: $26,629;
TIP: [Empty];
AIFP: $5,152;
CBLI: $19,900.
Budget Subsidy Rate, Excluding Modifications and Reestimates: (See Note
1 below):
Interest Differential:
CPP: 5.97%;
AIG: -45.52%;
TIP: 9.31%;
AIFP: 6.97%;
CBLI: 5.87%.
Defaults:
CPP: 25.60%;
AIG: 123.56%;
TIP: 48.38%;
AIFP: 54.21%;
CBLI: 0.00%.
Other:
CPP: -4.58%;
AIG: 4.74%;
TIP: -8.84%;
AIFP: -3.13%;
CBLI: -110.10%.
Total Budget Subsidy Rate:
CPP: 26.99%;
AIG: 82.78%;
TIP: 48.85%;
AIFP: 58.05%;
CBLI: -104.23%.
Subsidy Cost by Component:
Interest Differential:
Total: $4,175;
CPP: $12,279;
AIG: ($17,280);
TIP: $3,724;
AIFP: $5,446;
CBLI: $6.
Defaults:
Total: $161,297;
CPP: $52,655;
AIG: $46,906;
TIP: $19,352;
AIFP: $42,384;
CBLI: [Empty].
Other:
Total: ($13,705);
CPP: ($9,414);
AIG: $1,799;
TIP: ($3,536);
AIFP: ($2,444);
CBLI: ($110).
Total Subsidy Cost, Excluding Modifications and Reestimates:
Total: $151,767;
CPP: $55,520;
AIG: $31,425;
TIP: $19,540;
AIFP: $45,386;
CBLI: ($104).
Reconciliation of Subsidy Cost Allowance:
Balance, inception:
Total: [Empty];
CPP: [Empty];
AIG: [Empty];
TIP: [Empty];
AIFP: [Empty];
CBLI: [Empty].
Subsidy cost for disbursements:
Total: $151,767;
CPP: $55,520;
AIG: $31,425;
TIP: $19,540;
AIFP: $45,386;
CBLI: ($104).
Subsidy cost for modifications:
Total: $412;
CPP: $1,866;
AIG: $127;
TIP: [Empty];
AIFP: ($1,589);
CBLI: $8.
Interest and Dividend Collections:
Total: $9,329;
CPP: $6,790;
AIG: [Empty];
TIP: $1,862;
AIFP: $677;
CBLI: [Empty].
Warrants and additional notes:
Total: $2,916;
CPP: $2,901;
TIP: ;
AIG: [Empty];
AIFP: $15;
CBLI: [Empty].
Net Interest (to)/from Treasury on Borrowings and Financing Account
Balance:
Total: ($2,773);
CPP: ($2,428);
AIG: ($373);
TIP: ($276);
AIFP: $309;
CBLI: ($5).
Balance, End of Period, Before Reestimates:
Total: $161,651;
CPP: $64,649;
AIG: $31,179;
TIP: $21,126;
AIFP: $44,798;
CBLI: ($101).
Subsidy Reestimates:
Total: ($108,574);
CPP: ($72,419);
AIG: ($1,125);
TIP: ($21,467);
AIFP: ($13,320);
CBLI: ($243).
Balance, End of Period:
Total: $53,077;
CPP: ($7,770);
AIG: $30,054;
TIP: ($341);
AIFP: $31,478;
CBLI: ($344).
Reestimates:
Interest on Reestimate:
Total: ($7,213);
CPP: ($3,861);
AIG: ($280);
TIP: ($1,101);
AIFP: ($1,950);
CBLI: ($21).
Subsidy:
Total: ($101,361);
CPP: ($68,558);
AIG: ($845);
TIP: ($20,366);
AIFP: ($11,370);
CBLI: ($222).
Total Reestimates - ($Decrease) in Subsidy Cost:
Total: ($108,574);
CPP: ($72,419);
AIG: ($1,125);
TIP: ($21,467);
AIFP: ($13,320);
CBLI: ($243).
Reconciliation of Subsidy Cost:
Subsidy cost for disbursements:
Total: $151,767;
CPP: $55,520;
AIG: $31,425;
TIP: $19,540;
AIFP: $45,386;
CBLI: ($104).
Subsidy cost for modifications:
Total: $412;
CPP: $1,866;
AIG: $127;
TIP: [Empty];
AIFP: ($1,589);
CBLI: $8.
Subsidy Reestimates:
Total: ($108,574);
CPP: ($72,419);
AIG: ($1,125;)
TIP: ($21,467);
AIFP: ($13,320);
CBLI: ($243).
Total Direct Loan and Equity Investment Programs Subsidy Cost:
Total: $43,605;
CPP: ($15,033);
AIG: $30,427;
TIP: ($1,927);
AIFP: $30,477;
CBLI: ($339).
Note 1: The rates reflected in the "Budget Subsidy Rate" table above
are weighted rates for the program. To compensate for the weighting of
the various risk category subsidy rates, the "by component" dollar
amounts reflected were computed as a ratio of the component rate to the
total weighted subsidy rate multiplied by the subsidy expense for the
program. Therefore, the Total Subsidy Cost excluding modifications and
reestimates will not equal the New Loans or Investments Disbursed
multiplied by the Budget Subsidy Rate.
[End of table]
Office of Financial Stability (Troubled Asset Relief Program):
Notes To The Financial Statements:
For the Period Ended September 30, 2009:
Dollars in Millions:
AGP: Asset Guarantee Program:
Asset Guarantees Outstanding:
Outstanding Principal Amount of Guaranteed Assets, Face Value:
$301,000;
Amount of Outstanding Principal Guaranteed: $5,000;
Asset for Asset Guarantee Program: $1,765.
Budget Subsidy Rate, Excluding Modifications and Reestimates:
Defaults: 43.62%;
Fees and Other Collections: -53.23%;
Other: -5.37%;
Total Budget Subsidy Rate: -14.98%.
Subsidy Cost by Component:
Defaults: 2,181;
Fees and Other Collections: ($2,662);
Other: ($270);
Total Subsidy Cost, Excluding Modifications and Reestimates: ($751).
Reconciliation of Asset Guarantee Program:
Balance, Inception: [Empty];
Subsidy Cost: ($751);
Dividend Collections on Preferred Stock: 175;
Net Interest from Treasury on Borrowings and Financing Account Balance:
($15);
Balance, End of Period, Before Reestimate: ($591);
Subsidy Reestimate: ($1,174);
Balance, End of Period: ($1,765).
Reestimates:
Interest on Reestimate: ($77);
Subsidy: ($1,097);
Total Reestimates - (Decrease) in Subsidy Cost: ($1,174).
Reconciliation of Subsidy Cost:
Subsidy cost: ($751);
Subsidy reestimate: ($1,174);
Cancellation fees collected: ($276);
Total Asset Guarantee Program Subsidy Cost: ($2,201).
[End of table]
Note 7. Commitments and Contingencies:
The OFS is party to various legal actions and claims brought by or
against it. In the opinion of management and General Counsel, the
ultimate resolution of these legal actions and claims will not have a
material effect on the OFS financial statements as of September 30,
2009. The OFS has not incurred any loss contingencies that would be
considered probable or reasonably possible for these cases. Refer to
Note 6 for additional commitments.
Note 8. Principal Payable to the Bureau of the Public Debt:
Equity investments, direct loans, and asset guarantees accounted for
under credit reform accounting are funded by subsidy appropriations and
borrowings from the BPD. The OFS also borrows funds to pay the Treasury
General Fund for negative subsidy costs and downward reestimates. The
OFS makes periodic principal repayments to the BPD based on the
analysis of its cash balances and future disbursement needs. All debt
is intragovernmental and covered by budgetary resources. See additional
details on borrowing authority in Note 10, Statement of Budgetary
Resources. Debt transactions for the period ending September 30, 2009,
are:
(Dollars in Millions)
Beginning Balance, Principal Payable to the BPD: [Empty];
New Borrowings: $215,593;
Repayments: ($72,258);
Ending Balance, Principal Payable to the BPD: $143,335.
[End of table]
Borrowings from the BPD by TARP Program that are outstanding as of
September 30, 2009, are as follows:
(Dollars in Millions)
Capital Purchase Program: $77,232;
American International Group, Inc. Investment Program: $12,531;
Targeted Investment Program: $20,460;
Automotive Industry Financing Program: $32,134;
Consumer & Business Lending Initiative: $204;
Asset Guarantee Program: $774;
Total Borrowings Outstanding: $143,335.
[End of table]
Borrowings are payable to the BPD as collections are available and
carry terms ranging from 2 to 30 years. Interest rates on borrowings
range from 1.0% to 4.5%. Interest expense for the period ended
September 30, 2009, was $6.4 billion.
Note 9. Statement of Net Cost:
The Statement of Net Cost (SNC) presents the net cost of operations for
the OFS for the Department of the Treasury strategic goal of ensuring
that U.S. and World economies perform at full economic potential. The
OFS has determined that all initiatives and programs under the TARP
fall within this strategic goal.
The OFS SNC reports the accumulated full cost of the TARP‘s output,
including both direct and indirect costs of the program services and
output identifiable to TARP, in accordance with SFFAS No. 4, Managerial
Cost Accounting Concepts and Standards.
The OFS SNC includes approximately $6.4 billion of intragovernmental
costs relating to interest expense on borrowings from the BPD and
approximately $3.6 billion in intragovernmental revenues relating to
interest income on financing account balances for the period ended
September 30, 2009.
Subsidy Allowance Amortized on the SNC is the difference between
interest income on financing fund account balances, dividends and
interest income on direct loans, equity investments, and asset
guarantees from TARP participants, and interest expense on borrowings
from the BPD. Credit reform accounting requires all costs on the SNC for
programs to be reflected only in the subsidy cost. The subsidy
allowance account is used to present the loan or equity investment at
the estimated net present value of future cash flows.
Note 10. Statement of Budgetary Resources:
The Statement of Budgetary Resources (SBR) presents information about
total budgetary resources available to the OFS and the status of those
resources for the period ended September 30, 2009. The OFS‘s total
budgetary resources were approximately $238.3 billion for the period
ended September 30, 2009. Additionally, non-budgetary resources
including borrowing authority and spending authority from collections
of loan principal, liquidation of equity investments, interest and fees
in financing funds were approximately $461.1 billion for the period
ended September 30, 2009.
Permanent Indefinite Appropriations:
The OFS receives permanent indefinite appropriations annually to fund
increases in the projected subsidy costs of loans and the OFS
investment programs as determined by the reestimation process required
by the FCRA. The initial funding as a result of the reestimation
process will occur in 2010.
Additionally, Section 118 of the EESA states that the Secretary may
issue public debt securities and use the resulting funds to carry out
the Act and that any such funds expended or obligated by the Secretary
for actions authorized by this Act, including the payment of
administrative expenses, shall be deemed appropriated at the time of
such expenditure or obligation.
Borrowing Authority:
The OFS is authorized to borrow from the BPD when funds needed to
disburse direct loans and investments, and to enter into asset
guarantee arrangements exceed subsidy costs and collections in the non-
budgetary financing accounts. As of September 30, 2009, the OFS had
available approximately $45.8 billion of borrowing authority.
The OFS uses dividends and interest received as well as principal
repayments on direct loans and liquidation of equity investments to
repay debt in the non-budgetary loan and investment financing accounts.
These receipts are not available for any other use per credit reform
accounting guidance.
Apportionment Categories of Obligations Incurred: Direct vs.
Reimbursable Obligations:
All of the OFS apportionments are Direct and are Category B. Category B
apportionments typically distribute budgetary resources on a basis
other than calendar quarters, such as by activities, projects, objects
or a combination of these categories. The OFS obligations incurred are
direct obligations (obligations not financed from reimbursements).
Undelivered Orders:
Undelivered orders as of September 30, 2009, were approximately $56.1
billion in budgetary accounts, and approximately $79.2 billion in non-
budgetary financing accounts.
Explanation of Differences Between the Statement of Budgetary Resources
and the Budget of the United States Government:
Federal agencies are required to explain material differences between
amounts reported in the SBR and the actual amounts reported in the
Budget of the U.S. Government (President‘s Budget). However, the
President‘s Budget, which will include the FY 2009 actual amounts for
OFS, has not yet been published. The President‘s Budget is expected to
be published in February 2010 and will be made available from the U.S.
Government Printing Office. Since the financial statements are
published before the President‘s Budget, a reconciliation is to be
performed between the prior year‘s SBR and the actual amounts for that
year published in the prior year‘s President‘s Budget. Any significant
differences identified from this reconciliation are to be explained in
the federal agency‘s notes to its financial statements. Given that FY
2009 is the OFS‘s first year of operations, no prior year data was
available to perform a comparison.
Note 11. Reconciliation of Obligations Incurred to Net Cost of
Operations:
The OFS presents the SNC using the accrual basis of accounting. This
differs from the obligation-based measurement of total resources
supplied, both budgetary and from other sources, on the SBR. The
reconciliation of obligations incurred to net cost of operations shown
below categorizes the differences between the two, and illustrates that
the OFS maintains reconcilable consistency between the two types of
reporting.
The Reconciliation of Obligations Incurred to Net Cost of Operations
for the period ended September 30, 2009 is as follows:
(Dollars in Millions)
Resources Used to Finance Activities:
Obligations Incurred: $662,296;
Spending Authority from Offsetting Collections: ($271,999);
Offsetting Receipts: ($2,720);
Total Resources Used to Finance Activities: $387,577.
Resources Used to Finance Items Not Part of Net Cost:
Net Obligations in Loan and Investment Financing Funds: ($180,185);
Increase in Resources Obligated for Items Ordered but not yet Provided:
($56,073);
Total Resources Used to Finance Items Not Part of Net Cost: ($236,258);
Resources Used to Finance Net Cost: $151,319.
Components of Net Cost That Will Not Require or Generate Resources in
the Current Period:
Downward Reestimate of Subsidy Cost: ($109,748);
Other: $2.
Total Components of Net Cost Not Requiring or Generating Resources in
the Current Period: ($109,746);
Net Cost of Operations: $41,573.
[End of table]
Required Supplementary Information:
Office of Financial Stability (Troubled Asset Relief Program):
Combined Statement Of Budgetary Resources:
For the Period Ended September 30, 2009:
Dollars in Millions:
Budgetary Resources:
Unobligated Balances Brought Forward, Inception:
Combined, Budgetary Accounts: [Empty];
Combined, Nonbudgetary Financing Accounts: [Empty];
TARP Programs, Budgetary Accounts: [Empty];
TARP Programs, Nonbudgetary Financing Accounts: [Empty];
TARP Administrative Fund, Budgetary Accounts: [Empty];
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Budget Authority:
Appropriations
Combined, Budgetary Accounts: $238,268;
Combined, Nonbudgetary Financing Accounts: [Empty];
TARP Programs, Budgetary Accounts: $237,989;
TARP Programs, Nonbudgetary Financing Accounts: [Empty];
TARP Administrative Fund, Budgetary Accounts: $279;
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Borrowing Authority
Combined, Budgetary Accounts: [Empty]
Combined, Nonbudgetary Financing Accounts: $309,971;
TARP Programs, Budgetary Accounts: [Empty];
TARP Programs, Nonbudgetary Financing Accounts: $309,971;
TARP Administrative Fund, Budgetary Accounts: [Empty];
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Spending Authority from Offsetting Collections Earned: Collected:
Combined, Budgetary Accounts: [Empty];
Combined, Nonbudgetary Financing Accounts: $243,072;
TARP Programs, Budgetary Accounts: [Empty];
TARP Programs, Nonbudgetary Financing Accounts: $243,072;
TARP Administrative Fund, Budgetary Accounts: [Empty];
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Change in Unfilled Orders Without Advance:
Combined, Budgetary Accounts: [Empty];
Combined, Nonbudgetary Financing Accounts: $28,927;
TARP Programs, Budgetary Accounts: [Empty];
TARP Programs, Nonbudgetary Financing Accounts: $28,927;
TARP Administrative Fund, Budgetary Accounts: [Empty];
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Total Budget Authority
Combined, Budgetary Accounts: $238,268;
Combined, Nonbudgetary Financing Accounts: $581,970;
TARP Programs, Budgetary Accounts: $237,989;
TARP Programs, Nonbudgetary Financing Accounts: $581,970;
TARP Administrative Fund, Budgetary Accounts: $279;
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Permanently Not Available
Combined, Budgetary Accounts: [Empty];
Combined, Nonbudgetary Financing Accounts: ($120,841);
TARP Programs, Budgetary Accounts: [Empty];
TARP Programs, Nonbudgetary Financing Accounts: ($120,841);
TARP Administrative Fund, Budgetary Accounts: [Empty];
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Total Budgetary Resources:
Combined, Budgetary Accounts: $238,268;
Combined, Nonbudgetary Financing Accounts: $461,129;
TARP Programs, Budgetary Accounts: $237,989;
TARP Programs, Nonbudgetary Financing Accounts: $461,129;
TARP Administrative Fund, Budgetary Accounts: $279;
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Status Of Budgetary Resources:
Obligations Incurred: Direct:
Combined, Budgetary Accounts: $210,112;
Combined, Nonbudgetary Financing Accounts: 452,184;
TARP Programs, Budgetary Accounts: $209,863;
TARP Programs, Nonbudgetary Financing Accounts: 452,184;
TARP Administrative Fund, Budgetary Accounts: $249;
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Unobligated Balance:
Apportioned and Available:
Combined, Budgetary Accounts: $28,156;
Combined, Nonbudgetary Financing Accounts: $7,009;
TARP Programs, Budgetary Accounts: $28,126;
TARP Programs, Nonbudgetary Financing Accounts: $7,009;
TARP Administrative Fund, Budgetary Accounts: $30;
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Not Available:
Combined, Budgetary Accounts: [Empty];
Combined, Nonbudgetary Financing Accounts: $1,936;
TARP Programs, Budgetary Accounts: [Empty];
TARP Programs, Nonbudgetary Financing Accounts: $1,936;
TARP Administrative Fund, Budgetary Accounts: [Empty];
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Total Status Of Budgetary Resources:
Combined, Budgetary Accounts: $238,268;
Combined, Nonbudgetary Financing Accounts: $461,129;
TARP Programs, Budgetary Accounts: $237,989;
TARP Programs, Nonbudgetary Financing Accounts: $461,129;
TARP Administrative Fund, Budgetary Accounts: $279;
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Change In Obligated Balances:
Obligated Balance Brought Forward, Inception:
Combined, Budgetary Accounts: [Empty];
Combined, Nonbudgetary Financing Accounts: [Empty];
TARP Programs, Budgetary Accounts: [Empty];
TARP Programs, Nonbudgetary Financing Accounts: [Empty];
TARP Administrative Fund, Budgetary Accounts: [Empty];
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Obligations Incurred:
Combined, Budgetary Accounts: $210,112;
Combined, Nonbudgetary Financing Accounts: $452,184;
TARP Programs, Budgetary Accounts: $209,863;
TARP Programs, Nonbudgetary Financing Accounts: $452,184;
TARP Administrative Fund, Budgetary Accounts: $249;
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Gross Outlays:
Combined, Budgetary Accounts: ($153,961);
Combined, Nonbudgetary Financing Accounts: ($372,982);
TARP Programs, Budgetary Accounts: ($153,871);
TARP Programs, Nonbudgetary Financing Accounts: ($372,982);
TARP Administrative Fund, Budgetary Accounts: ($90);
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Change in Uncollected Customer Payments from Federal Sources:
Combined, Budgetary Accounts: [Empty];
Combined, Nonbudgetary Financing Accounts: ($28,927);
TARP Programs, Budgetary Accounts: [Empty];
TARP Programs, Nonbudgetary Financing Accounts: ($28,927);
TARP Administrative Fund, Budgetary Accounts: [Empty];
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Obligated Balance, Net, End of Period:
Unpaid Obligations:
Combined, Budgetary Accounts: $56,151;
Combined, Nonbudgetary Financing Accounts: $79,202;
TARP Programs, Budgetary Accounts: $55,992;
TARP Programs, Nonbudgetary Financing Accounts: $79,202;
TARP Administrative Fund, Budgetary Accounts: $159;
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Uncollected Customer Payments from Federal Sources:
Combined, Budgetary Accounts: [Empty];
Combined, Nonbudgetary Financing Accounts: ($28,927);
TARP Programs, Budgetary Accounts: [Empty];
TARP Programs, Nonbudgetary Financing Accounts: ($28,927);
TARP Administrative Fund, Budgetary Accounts: [Empty];
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Obligated Balance, Net, End of Period:
Combined, Budgetary Accounts: $56,151;
Combined, Nonbudgetary Financing Accounts: $50,275;
TARP Programs, Budgetary Accounts: $55,992;
TARP Programs, Nonbudgetary Financing Accounts: $50,275;
TARP Administrative Fund, Budgetary Accounts: $159;
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Net Outlays:
Gross Outlays:
Combined, Budgetary Accounts: $153,961;
Combined, Nonbudgetary Financing Accounts: $372,982;
TARP Programs, Budgetary Accounts: $153,871;
TARP Programs, Nonbudgetary Financing Accounts: $372,982;
TARP Administrative Fund, Budgetary Accounts: $90;
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Offsetting Collections:
Combined, Budgetary Accounts: [Empty];
Combined, Nonbudgetary Financing Accounts: ($243,072);
TARP Programs, Budgetary Accounts: [Empty];
TARP Programs, Nonbudgetary Financing Accounts: ($243,072);
TARP Administrative Fund, Budgetary Accounts: [Empty];
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Distributed Offsetting Receipts:
Combined, Budgetary Accounts: ($2,720);
Combined, Nonbudgetary Financing Accounts: [Empty];
TARP Programs, Budgetary Accounts: ($2,720);
TARP Programs, Nonbudgetary Financing Accounts: [Empty];
TARP Administrative Fund, Budgetary Accounts: [Empty];
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
Net Outlays:
Combined, Budgetary Accounts: $151,241;
Combined, Nonbudgetary Financing Accounts: $129,910;
TARP Programs, Budgetary Accounts: $151,151;
TARP Programs, Nonbudgetary Financing Accounts: $129,910;
TARP Administrative Fund, Budgetary Accounts: $90;
TARP Administrative Fund, Nonbudgetary Financing Accounts: [Empty].
[End of table]
[End of section]
Appendix I: Management's Report on Internal Control over Financial
Reporting:
Department of the Treasury:
Washington, DC 20220:
Management's Report on Internal Control over Financial Reporting:
The Office of Financial Stability's (OFS) internal control over
financial reporting is a process effected by those charged with
governance, management, and other personnel, the objectives of which
are to provide reasonable assurance that (1) transactions are properly
recorded, processed, and summarized to permit the preparation of
financial statements in accordance with U.S. generally accepted
accounting principles, and assets arc safeguarded against loss from
unauthorized acquisition, use, or disposition; and (2) transactions are
executed in accordance with the laws governing the use of budget
authority and other laws and regulations that could have a direct and
material effect on the financial statements.
OFS management is responsible for establishing and maintaining
effective internal control over financial reporting. OFS management
evaluated the effectiveness of OFS' internal control over financial
reporting as of September 30, 2009, based on the criteria established
under 31 U.S.C. 3512(c), (d) (commonly known as the Federal Managers'
Financial Integrity Act).
Based on that evaluation, we conclude that, as of September 30, 2009,
OFS' internal control over financial reporting was effective.
Office of Financial Stability:
Signed by:
Herbert M. Allison Jr.
Assistant Secretary for Financial Stability:
Signed by:
Jennifer E. Main:
Chief Financial Officer:
December 4, 2009:
[End of section]
Appendix II: Comments from the Office of Financial Stability:
Department Of The Treasury:
Assistant Secretary:
Washington, D.C. 20220:
December 7, 2009:
Mr. Gary T. Engel:
Director, Financial Management and Assurance:
U.S. Government Accountability Office:
Dear Mr. Engel:
We have reviewed the draft Independent Auditor's Report concerning your
audit of the Office of Financial Stability's fiscal year 2009 financial
statements. As an organization in its first year executing complex
programs unique in the Federal government, OFS is very proud to receive
an unqualified opinion on our financial statements and an unqualified
opinion on management's assertion that our internal controls were
operating effectively. We are also proud that there were no reportable
instances of noncompliance with laws or regulations.
Your audit report did identify two significant deficiencies in internal
control in the areas of 1) accounting and financial reporting
processes, and 2) verification procedures for data input into the
credit subsidy models used for valuing loans, equity investments, and
asset guarantees. We concur with these findings and are committed to
pursuing remediation plans until the deficiencies are corrected.
We know that your audit team faced many of the same challenges we did
in preparing these first year financial statements. We appreciated the
professionalism and commitment demonstrated by your staff throughout
the audit process. The audit process was valuable for us and resulted
in concrete improvements in our operations and financial management
efforts.
OFS is committed to maintaining the high standards and transparency
reflected in these audit results as we carry out our responsibilities
for managing the Troubled Asset Relief Program (TARP).
Signed by:
Herb Allison:
Assistant Secretary:
Office of Financial Stability:
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Gary T. Engel, (202) 512-3406 or engelg@gao.gov.
Acknowledgments:
The following individuals made key contributions to this report: Marcia
L. Carlsen, Lynda E. Downing, Paul F. Foderaro, Joseph P. O'Neill (lead
Assistant Directors); and Serena Agoro-Menyang, Cheryl E. Clark,
Francis L. Dymond, Tony J. Eason, Lawrance L. Evans, Cynthia L. Grant,
Natasha F. Guerra, Cole D. Haase, Brian S. Harechmak, Tyrone D.
Hutchins, Arthur L. James, Jr., Charles E. Jones, Jason Scott Kirwan,
Jeffrey L. Knott, Steven M. Koons, Damian Kudelka, Judy Lee, Robert E.
Lee, John A. Long, Dragan Matic, Diane M. Monticchio, Tim Mooney, Mary
V. Orsorno, Rebecca A. Riklin, Grant L. Simmons, Anne Y. Sit-Williams,
John A. Spence, Monique B. Williams, Chris G. Yfantis, and Heneng Yu.
[End of section]
Footnotes:
[1] Pub. L. No. 110-343, Div. A, 122 Stat. 3765 (Oct. 3, 2008),
codified in part, as amended, at 12 U.S.C. §§ 5201-5261.
[2] Section 101 of EESA, 12 U.S.C. § 5211, established OFS within
Treasury to implement TARP.
[3] Section 116(b) of EESA, 12 U.S.C. § 5226(b).
[4] Section 116(b) of EESA, 12 U.S.C. § 5226(b).
[5] Section 116 of EESA, 12 U.S.C. § 5226, requires the U.S.
Comptroller General to report at least every 60 days, as appropriate,
on findings resulting from oversight of TARP's performance in meeting
the act's purposes; the financial condition and internal controls of
TARP, its representatives, and agents; the characteristics of asset
purchases and the disposition of acquired assets, including any related
commitments entered into; TARP's efficiency in using the funds
appropriated for its operations; its compliance with applicable laws
and regulations; and its efforts to prevent, identify, and minimize
conflicts of interest among those involved in its operations.
[6] A significant deficiency is a deficiency, or combination of
deficiencies, in internal control that is less severe than a material
weakness, yet important enough to merit attention by those charged with
governance. A material weakness is a deficiency, or combination of
deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the entity's financial
statements will not be prevented, or detected and corrected on a timely
basis. A deficiency in internal control exists when the design or
operation of a control does not allow management or employees, in the
normal course of performing their assigned functions, to prevent, or
detect and correct misstatements on a timely basis.
[7] The subsidy cost is composed of (1) the subsidy cost allowance, (2)
net intragovernmental interest cost, (3) certain inflows from the
direct loans and equity investments (e.g., dividends, interest,
proceeds from repurchase of warrants by financial institutions, and
other realized fees), and (4) the estimated discounted net cash flows
related to the Asset Guarantee Program.
[8] Under EESA, as amended, OFS is authorized to purchase or insure up
to almost $700 billion in troubled assets.
[9] Section 120 of EESA, 12 U.S.C. § 5230, established that the
authorities under Sections 101(a), excluding Section 101(a)(3), and
Section 102, shall terminate on December 31, 2009. Section 120 of EESA
further established that the Secretary of the Treasury, upon submission
of a written certification to Congress, may extend the authority
provided under these sections of EESA to expire no later than 2 years
from the date of the enactment of EESA (Oct. 3, 2008).
[10] Section 116(b) of EESA, 12 U.S.C. § 5226(b), requires that the
Department of the Treasury (Treasury) annually prepare and submit to
Congress and the public audited fiscal year financial statements for
that are prepared in accordance with generally accepted accounting
principles. Section 116(b) further requires that GAO audit TARP's
financial statements annually in accordance with generally accepted
auditing standards.
[11] Section 101 of EESA, 12 U.S.C. § 5211, established OFS within
Treasury to implement TARP.
[12] Section 116 of EESA, 12 U.S.C. § 5226, requires the U.S.
Comptroller General to report at least every 60 days, as appropriate,
on findings resulting from oversight of TARP's performance in meeting
the act's purposes; the financial condition and internal controls of
TARP, its representatives, and agents; the characteristics of asset
purchases and the disposition of acquired assets, including any related
commitments entered into; TARP's efficiency in using the funds
appropriated for its operations; its compliance with applicable laws
and regulations; and its efforts to prevent, identify, and minimize
conflicts of interest among those involved in its operations.
[13] The subsidy allowance represents the difference between the
amounts paid by OFS to acquire the direct loans and equity investments
and the reported value of such assets. The subsidy cost is composed of
(1) the subsidy cost allowance, (2) net intragovernmental interest
cost, (3) certain inflows from the direct loans and equity investments
(e.g., dividends, interest, proceeds from repurchase of warrants by
financial institutions, and other realized fees), and (4) the estimated
discounted net cash flows related to the Asset Guarantee Program.
[14] Under EESA, as amended, OFS is authorized to purchase or insure up
to almost $700 billion in troubled assets.
[15] Section 120 of EESA, 12 U.S.C. § 5230, established that the
authorities under Sections 101(a), excluding Section 101(a)(3), and
Section 102, shall terminate on December 31, 2009. Section 120 of EESA
further established that the Secretary of the Treasury, upon submission
of a written certification to Congress, may extend the authority
provided under these sections of EESA to expire no later than 2 years
from the date of the enactment of EESA (Oct. 3, 2008).
[16] A significant deficiency is a deficiency, or a combination of
deficiencies, in internal control that is less severe than a material
weakness, yet important enough to merit attention by those charged with
governance. A material weakness is a deficiency, or a combination of
deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the entity's financial
statements will not be prevented, or detected and corrected on a timely
basis. A deficiency in internal control exists when the design or
operation of a control does not allow management or employees, in the
normal course of performing their assigned functions, to prevent or
detect and correct misstatements on a timely basis.
[17] The Emergency Economic Stabilization Act of 2008 (EESA), Pub. L.
No. 110-343, 122 Stat.3765 (2008), codified at 12 U.S.C. §§ 5201 et
seq.
[18] The Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-
22, Div. A, amended the act and reduced the maximum allowable amount of
outstanding troubled assets under the act by almost $1.3 billion, from
$700 billion to $698.7 billion.
[19] To reconcile the subsidy cost allowance to the total subsidy cost
amount of $41.4 billion shown in Table 1 and on the Statement of Net
Cost, the $53.1 billion is adjusted by intragovernmental interest cost,
the net present value of the Asset Guarantee Program, and certain
inflows from the loans and equity investments (e.g., dividends,
interest, proceeds from repurchase of warrants by financial
institutions, and other realized fees).
[20] "The Troubled Asset Relief Program: Report on Transactions Through
December 31, 2008." Congressional Budget Office. January 2009.
[21] A basis point is one hundredth of a percentage point or 0.01
percent so 100 basis points equals 1 percent. Basis points are often
used to measure small changes in interest rates or yields on financial
instruments.
[22] Macroeconomic Advisers, ’Banks‘ Willingness to Lend and PCE
Growth,“ Oct. 8, 2008.
[23] Troubled Asset Relief Program: One Year Later, Actions Are Needed
to Address Remaining Transparency and Accountability Challenges.
Government Accountability Office. [hyperlink,
http://www.gao.gov/products/GAO-10-16]. October 8, 2009.
[24] The article "U.S. Credit Cycles: Past and Present" can be found at
the following link: [hyperlink,
http://www.financialstability.govidocs/CPP/Report/Fed%2OUS%20Credit%20Cy
cles%20072409.pdf].
[25] Without this adjustment the CPP preferred equity model predicts
roughly $20 billion in repurchases over the next year. The valuation
model is altered both by directly imposing the repurchases of those
institutions that have stated plans to repurchase soon, and by adding a
small additional benefit for any institution that repays its TARP funds
and exits the CPP. This adjustment increases rates slightly to be
consistent with a reasonable forecast of future repurchases.
[26] The Helping Families Save Their Homes Act of 2009 (PubL.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 $698.7 billion. As
required under section 102 of EESA, the $381.3 billion does not include
a subtraction from the outstanding guarantee amount to reflect the
balance in the Troubled Assets Insurance Financing Fund.
[27] The OFS has invested in SPV's under the Consumer and Business
Lending Initiative and the Automotive Industry Financing Program.
[28] For the Asset Guarantee Program, OFS has established the Troubled
Assets Insurance Financing Fund, as required by section 102(d) of the
EESA which is the financing account under FCRA for the Asset Guarantee
Program.
[29] A Qualified Equity Offering is defined as the sale by the QFI
after the date of the senior preferred stock investment of Tier 1
perpetual preferred stock or common stock for cash.
[30] These represent loans originated by the FRBNY and not the OFS. The
intention of this disclosure is to show the activity in the program and
the types of collateral that could eventually be purchased by the TALF,
LLC with funding provided by the OFS.
[31] Agency securities refer to securities issued by either Ginnie Mae,
Fannie Mae, Freddie Mac, or the Federal Home Loan Banks.
[32] Section 363 refers to Section 363 of the Federal Bankruptcy Code,
which allows companies in bankruptcy to sell assets in reorganization.
[33] The assumed debt contains the same terms as the Tranche C loan
with respect to mandatory prepayment, interest and maturity.
[34] The additional notes bear the same interest rate and maturity as
the Tranche C loan.
[35] Interest begins to accrue on this note after certain events,
defined in the credit agreement, have taken place.
[End of section]
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