Troubled Asset Relief Program
Status of Efforts to Address Transparency and Accountability Issues Gao ID: GAO-09-359T February 5, 2009This testimony discusses GAO's work on the Troubled Asset Relief Program (TARP), under which the Department of the Treasury (Treasury) has the authority to purchase and insure up to $700 billion in troubled assets held by financial institutions through the Office of Financial Stability (OFS). As you know, Treasury was granted this authority in response to the financial crisis that has threatened the stability of the U.S. banking system and the solvency of numerous financial institutions. The Emergency Economic Stabilization Act (the act) that authorized TARP on October 3, 2008, requires GAO to report at least every 60 days on findings resulting from our oversight of the status of actions taken under the program. This testimony is based on our January 30, 2009, report, which is the second under the act's mandate, covers the actions taken as part of TARP through January 23, 2009, and follows up on the nine recommendations we made in our December 2008 report. Our oversight work under the act is ongoing, and our next report will be issued by March 31, 2009. Like the report, this testimony focuses on (1) the nature and purpose of activities that have been initiated under TARP as of January 23, 2009; (2) the status of the transition to the new administration at OFS and its hiring efforts, use of contractors, and development of a system of internal control; and (3) preliminary indicators of TARP's performance.
GAO-09-359T, Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues
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Testimony:
Before the Committee on Banking, Housing, and Urban Affairs, U.S.
Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 10:00 a.m. EST:
Thursday, February 5, 2009:
Troubled Asset Relief Program:
Status of Efforts to Address Transparency and Accountability Issues:
Statement of Gene L. Dodaro:
Acting Comptroller General of the United States:
GAO-09-359T:
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss our work on the Troubled Asset
Relief Program (TARP), under which the Department of the Treasury
(Treasury) has the authority to purchase and insure up to $700 billion
in troubled assets held by financial institutions through the Office of
Financial Stability (OFS).[Footnote 1] As you know, Treasury was
granted this authority in response to the financial crisis that has
threatened the stability of the U.S. banking system and the solvency of
numerous financial institutions. The Emergency Economic Stabilization
Act (the act) that authorized TARP on October 3, 2008, requires GAO to
report at least every 60 days on findings resulting from our oversight
of the status of actions taken under the program.[Footnote 2] My
statement today is based on our January 30, 2009, report, which is the
second under the act's mandate, covers the actions taken as part of
TARP through January 23, 2009, and follows up on the nine
recommendations we made in our December 2008 report.[Footnote 3] Our
oversight work under the act is ongoing, and our next report will be
issued by March 31, 2009.
Like the report, this statement focuses on (1) the nature and purpose
of activities that have been initiated under TARP as of January 23,
2009; (2) the status of the transition to the new administration at OFS
and its hiring efforts, use of contractors, and development of a system
of internal control; and (3) preliminary indicators of TARP's
performance.
To do this work, we reviewed documents related to TARP, including
contracts, agreements, guidance, and rules. We also met with OFS,
contractors, federal agencies, and officials from all 8 of the first
large institutions that had received disbursements. We plan to continue
to monitor the issues highlighted in the report, as well as future and
ongoing capital purchases, other more recent transactions undertaken as
part of TARP (for example, guarantees on assets of Citigroup and Bank
of America), and the status of other aspects of TARP. We conducted this
performance audit in December 2008 and January 2009 in accordance with
generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives.
Summary:
Treasury has announced a number of new programs to try to stabilize
financial markets but most of its activity during this period has
continued to be through its Capital Purchase Program (CPP). As of
January 23, Treasury had disbursed about $294 billion in TARP funds,
about $194 billion of which was for CPP. It also announced a new
Targeted Investment Program and an Automotive Industry Financing
Program. Treasury also has taken important steps since our last report
to implement all nine of our recommendations. However, due in part to
the short time frame since our last report, we continued to identify a
number of areas that warrant Treasury's ongoing attention concerning
TARP. Therefore, we recommended that Treasury continue to take action
to further improve the transparency and accountability of the program
and more clearly articulate and communicate a strategic vision.
Specifically, we recommended that Treasury:
* Expand the scope of planned monthly CPP surveys to include collecting
at least some information from all institutions participating in the
program.
* Ensure that future CPP agreements include a mechanism that will
better enable Treasury to track the use of the capital infusions and
seek to obtain similar information from existing CPP participants.
* Establish a process to ensure compliance with all CPP requirements,
including those associated with limitations on dividends and stock
repurchase restrictions.
* Communicate a clearly articulated vision for TARP and how all
individual programs are intended to work in concert to achieve that
vision. This vision should incorporate actions to preserve
homeownership. Once this vision is clearly articulated, document skills
and competencies needed within Treasury.
* Continue to expeditiously hire personnel needed to carry out and
oversee TARP.
* Expedite efforts to ensure that sufficient personnel are assigned and
properly trained to oversee the performance of all contractors,
especially for contracts priced on a time-and-materials basis, and move
toward fixed-price arrangements whenever possible as program
requirements are better defined over time.
* Develop a comprehensive system of internal control over TARP,
including policies, procedures, and guidance for program activities
that are robust enough to ensure that the program's objectives and
requirements are met.
* Develop and implement a well-defined and disciplined risk-assessment
process, as such a process is essential to monitoring program status
and identifying any risks of potential inadequate funding of announced
programs.
* Review and renegotiate existing conflict of interest mitigation
plans, as necessary, to enhance specificity and conformity with the new
interim conflicts of interest regulation, and take continued steps to
manage and monitor conflicts of interest and enforce mitigation plans.
Treasury has taken steps to address our recommendations, but still
faces several challenges. First, our previous report emphasized the
lack of monitoring and reporting for CPP investments and recommended
stronger measures for ensuring that participating institutions use the
funds to meet the program's purpose and comply with CPP requirements
on, for example, executive compensation and dividend payments. In
response to our recommendation, Treasury began monthly surveys of the
largest 20 institutions to monitor lending and other activities and
analyze quarterly monitoring data (call reports) for all institutions.
[Footnote 4] While the monthly survey is a step toward greater
transparency and accountability for the largest institutions, we
continue to believe that additional action is needed to better ensure
that all participating institutions are accountable for their use of
program funds. Second, Treasury has continued to develop a system to
ensure compliance with CPP requirements, including executive
compensation, dividend payments, and repurchase of stocks, but it has
not finalized its plans for detecting noncompliance and taking
enforcement actions. Third, Treasury has made limited progress in
articulating and communicating an overall strategic vision for TARP,
while continuing to respond to institution-and industry-specific needs.
It has yet to develop a strategic approach to explain how its various
programs work together to fulfill TARP's purposes or how it will use
the remaining funds. This lack of clarity has complicated Treasury's
ability to effectively communicate to Congress, the financial markets,
and the public.
Treasury has taken proactive steps to help ensure a smooth transition
by keeping positions filled and using an expedited hiring process.
However, it continues to face difficulty providing competitive salaries
to attract skilled employees. Also, given the program's evolving nature
and the likelihood of changes under the new administration, Treasury
will need to identify OFS's long-term organizational needs.
Additionally, consistent with our recommendation about contracting
oversight, Treasury has enhanced such oversight by tracking costs,
schedules, and performance and addressing the training requirements of
personnel who oversee the contracts. However, as we previously
recommended, Treasury needs to continue to identify and mitigate
conflicts of interest in contracting. Similarly, OFS has adopted a
framework for organizing the development and implementation of its
system of internal control for TARP activities, which is consistent
with our recommendation. However, it has yet to implement a disciplined
risk-assessment process.
Finally, given the fact that program actions have only recently
occurred and that there are time lags in the reporting of available
data, GAO continues to believe that it is too early in the program's
implementation to see measurable results in many areas. Even with more
time and better data, it will remain difficult to separate the impact
of TARP activities from the effects of other economic forces. Credit
market indicators we have identified demonstrate that since our last
report, the cost of credit has declined in interbank, mortgage, and
corporate debt markets. Conversely, while perceptions of risk (as
measured by premiums over Treasury bonds) have declined in interbank
markets, they appear to have changed little in the corporate bond and
mortgage markets. Attributing any of these changes directly to TARP
continues to be problematic because of the range of actions that have
been and are being taken to address the current crisis. While these
indicators may be suggestive of TARP's ongoing impact, no single
indicator or set of indicators can provide a definitive determination
of the program's impact.
Treasury Has Continued to Focus on CPP, but a Variety of Other Programs
Have Been Created or Are in Progress:
Treasury has continued to focus on CPP, but a variety of other programs
have been created or are in progress, as shown in table 1. As of
January 23, 2009, Treasury had disbursed more than 75 percent of the
$250 billion it had allocated for CPP to purchase more than $194
billion in preferred shares of 317 qualified financial institutions.
About $42.7 billion in preferred stock shares of 265 financial
institutions has been purchased since our December report.
Table 1: Status of TARP Funds as of January 23, 2009 (dollars in
billions):
Program: Capital Purchase Program;
Disbursed: $194.2.
Program: Systemically Significant Failing Institutions;
Disbursed: $40.0.
Program: Targeted Investment Program;
Disbursed: $40.0.
Program: Term Asset-backed Securities Loan Facility;
Disbursed: 0.0.
Program: Automotive Industry Financing Program;
Disbursed: $19.5.
Program: Citigroup Asset Guarantee;
Disbursed: 0.0.
Program: Bank of America Asset Guarantee;
Disbursed: 0.0.
Program: Totals;
Disbursed: $293.7.
Source: Treasury OFS, unaudited.
[End of table]
Initially, Treasury approved $125 billion in capital purchases for nine
of the largest public financial institutions that federal banking
regulators and Treasury considered to be systemically significant to
the operation of the financial system.[Footnote 5] At the time, these
nine institutions held about 55 percent of U.S. banking assets.
Subsequent purchases were made in qualified institutions of various
sizes (in terms of total assets) and types. As of January 23, 2009, the
types of institutions that received CPP capital included 226 publicly
held institutions, 83 privately held institutions, and 8 community
development financial institutions (CDFI).[Footnote 6]
Treasury has taken a number of important steps toward better reporting
on and monitoring of CPP, in accordance with our prior recommendations
that it bolster its ability to determine whether institutions were
using the proceeds consistent with the purposes of the act and that it
establish mechanisms to monitor compliance with program requirements.
However, more needs to be done. First, while Treasury has begun monthly
survey of the largest institutions to monitor their lending and other
activities, Treasury plans to rely on quarterly call report data from
the other participating institutions. While the monthly survey is a
step toward greater transparency and accountability for the largest
institutions, we continue to believe that additional actions are needed
to better ensure that all participating institutions are accountable
for their use of the funds. Without more frequent information on all
participants, Treasury will have little timely information about the
changing condition of the institutions, which may limit the ability of
its newly created team of analysts to understand how the institutions
used the funds and the effectiveness of the program. In addition,
without ensuring that future CPP agreements include a mechanism that
will enable Treasury to track the use of capital infusions and by not
seeking to obtain similar information from existing CPP participants,
Treasury may have difficulty determining that an institution had not
used the funds in a manner consistent with the intent of the program.
Therefore, we recommended that Treasury expand the scope of planned
monthly CPP surveys to include collecting at least some information
from all participating institutions. We also recommended that it ensure
that future CPP agreements include a mechanism that will enable
Treasury to track the use of capital infusions and seek to obtain
similar information from existing CPP participants. We will continue to
monitor Treasury's oversight efforts as well as the consistency of the
approval process in future work.
Second, Treasury has continued to take steps to increase its planned
oversight of compliance with terms of agreements such as limitations on
executive compensation, dividends, and stock repurchases. These steps
include plans to implement new interim final rules that amend and
clarify the past interim rules on executive compensation and naming an
Interim Chief Compliance Officer. However, Treasury has not finalized
its plans for detecting noncompliance with these requirements and
taking enforcement actions. Without a more structured mechanism in
place to ensure compliance with all CPP requirements--and as more
institutions continue to participate in the program--ensuring
compliance with these aspects of the program will become increasingly
important and challenging. We will also continue to monitor the system
that Treasury develops to ensure compliance with their agreements.
Treasury has made less progress in improving the transparency of the
program and has not yet articulated a clear strategic vision for TARP.
In our December 2008 report, we raised questions about the
effectiveness of Treasury's communication strategy for TARP with
Congress, the financial markets, and the public. These questions were
further heightened in the Congressional Oversight Panel's (COP) January
report, which raised similar questions about Treasury's strategy for
TARP. In response to our recommendation about its communication
strategy, Treasury noted numerous publicly available reports,
testimonies, and speeches. However, even after reviewing these items
collectively, we found that Treasury's strategic vision for TARP
remains unclear. For example, early on Treasury outlined a strategy and
approach to purchase whole loans and mortgage-backed securities from
financial institutions, but changed direction to make capital
investments in qualifying financial institutions as the global
community opted to move in this direction. However, once Treasury
determined that capital infusions were preferable to purchasing whole
mortgages and mortgage-backed securities, Treasury did not clearly
articulate how the various programs--such as CPP, the Systemically
Significant Failing Institutions Program (SSFI) , and the Targeted
Investment Program (TIP)--would work collectively to help stabilize
financial markets. For instance, Treasury has used similar approaches-
-capital infusions--to stabilize healthy institutions under CPP as well
as SSFI and TIP, albeit with more stringent requirements. Moreover,
with the exception of institutions selected for TIP being viewed as
able to raise private capital, both SSFI and TIP share similar
selection criteria. Treasury also created the Auto Industry Financing
Program in December 2008 to prevent a disruption of the domestic
automotive industry that would pose systemic risk to the nation's
economy and provided loans to two auto companies and two financing
companies that, among other business lines, provide consumer automotive
loans. Finally, the same institution may be eligible for multiple
programs--at least two institutions (Citigroup and Bank of America)
currently participate in more than one program--and this has added to
confusion about Treasury's strategy and vision for the implementation
of TARP.
Other actions have raised additional questions about Treasury's
strategy. First, Treasury announced the first institution under TIP
weeks before the program was established. Similarly, the Asset
Guarantee Program was established only after Treasury announced that it
would guarantee assets under such a program, and many of the details of
the program have yet to be worked out. Second, Treasury's efforts to
mitigate residential foreclosures, which have contributed to increased
volatility in financial markets, remain in the design phase with no
clearly articulated strategy. Finally, while Treasury has continued to
publicly report on individual issues, testify, and make speeches about
the program, it continues to struggle to convey a clearly articulated
and overarching message about its efforts, potentially hampering TARP's
effectiveness and underscoring ongoing questions about its
communication strategy. Without a clearly articulated strategic vision,
Treasury's effectiveness in stabilizing markets may be hampered. We
recommended that Treasury communicate a clearly articulated vision for
TARP and explain how the individual programs are intended to work in
concert to achieve that vision. This is another area that we will
continue to monitor.
Efforts to Establish the Office of Financial Stability Are Ongoing:
Treasury has made progress in establishing its management
infrastructure, which included hiring, contracting oversight, and
internal controls. However, hiring for the Office of Financial
Stability is still ongoing and Treasury is still developing an
oversight structure for contractors and its development of a system of
internal control is still evolving.
* In the hiring area, Treasury took steps to help maintain continuity
of leadership within OFS during and after the transition to the new
administration, one of the areas we highlighted in our first report.
Specifically, Treasury ensured that interim chief positions would be
filled to ensure a smooth transition and used direct-hire and various
other appointments to bring a number of career staff on board quickly.
OFS has increased its overall staff since our December 2008 report from
48 to 90 employees as of January 26, which includes an increase of
permanent staff from 5 to 38. While progress has been made since our
last report, the number of temporary and contract staff who will be
needed to serve long-term organizational needs remains unknown. Because
TARP has added many new programs since it was first established in
October and program activities may expand or change under the new
administration, we recognize that Treasury may find it difficult to
determine OFS's long-term organizational needs at this time. However,
such considerations will be vital to retaining institutional knowledge
in the organization.
* Treasury's use of existing contract flexibilities has enabled it to
enter into agreements and award contracts quickly in support of TARP.
However, Treasury's use of time-and-materials contracts, although
authorized when flexibility is needed, can increase the risk of wasted
government dollars without adequate oversight of contractor
performance. Although Treasury has improved its oversight of
contractors, the department itself has identified certification of its
Contracting Officer Technical Representatives and the use of time-and-
materials pricing to be high-risk issues that still need attention. In
addition, while Treasury has taken the important step of recently
issuing an interim regulation outlining the process for reviewing and
addressing conflicts of interest among new contractors and financial
agents, it is still reviewing contracts or agreements that existed
prior to issuance to ensure conformity with the new regulation. We
believe this is a necessary component of a comprehensive and complete
system to ensure that all conflicts are fully identified and
appropriately addressed.
* In the area of internal controls, OFS has adopted a framework for
organizing the development and implementation of its system of internal
control for TARP activities. OFS plans to use this framework to develop
specific policies, drive communications on expectations, and measure
compliance with internal control standards and policies. However, it
has yet to develop comprehensive written policies and procedures
governing TARP activities or implement a disciplined risk assessment
process.
In each of these areas, we made additional recommendations.
Specifically, we recommended that Treasury continue to expeditiously
hire personnel needed to carry out and oversee TARP. For contracting
oversight, we recommended that Treasury expedite efforts to ensure that
sufficient personnel are assigned and properly trained to oversee the
performance of all contractors, especially for contracts priced on a
time-and-materials basis, and move toward fixed-price arrangements
whenever possible as program requirements are better defined over time.
We also recommended that Treasury review and renegotiate existing
conflict-of-interest mitigation plans, as necessary, to enhance
specificity and conformity with the new interim conflicts of interest
regulation, and take continued steps to manage and monitor conflicts of
interest and enforce mitigation plans. Finally, we recommended that
Treasury, in addition to developing a comprehensive system of internal
control, develop and implement a well-defined and disciplined risk
assessment process, as such a process is essential to monitoring
program status and identifying any risks of potential inadequate
funding of announced programs. We will continue to monitoring OFS's
hiring and contracting practices as well as its implementation of the
internal control framework, which is vital to the effectiveness of the
program.
Measuring the Impact of TARP on Credit Markets and the Economy
Continues to Be Challenging:
Given the fact that program actions have only recently occurred and
that there are time lags in the reporting of available data, GAO
continues to believe that it is too early in the program's
implementation to see measurable results in many areas. Even with more
time and better data, it will remain difficult to separate the impact
of TARP activities from the effects of other economic forces. Some
indicators suggest that the cost of credit has declined in interbank,
mortgage, and corporate debt markets since the December report.
However, while perceptions of risk (as measured by premiums over
Treasury securities) have declined in interbank markets, they have
changed very little in corporate bond and mortgage markets. Finally, as
GAO also noted in December, these indicators may be suggestive of
TARP's ongoing impact, but no single indicator or set of indicators can
provide a definitive determination of the program's effects because of
the range of actions that have been and are being taken to address the
current crisis. These include coordinated efforts by U.S. regulators--
namely, the Federal Deposit Insurance Corporation, the Federal Reserve,
and the Federal Housing Finance Agency--as well as actions by financial
institutions to mitigate foreclosures. For example, a large drop in
mortgage rates occurred shortly after the Federal Reserve announced it
would purchase up to $500 billion in mortgage-backed securities,
highlighting that policies outside of TARP may have important effects
on credit markets. We will continue to refine and monitor the
indicators.
Mr. Chairman and Members of the Committee, I appreciate the opportunity
to discuss this critically important issue and would be happy to answer
any questions that you may have. Thank you.
[End of section]
Footnotes:
[1] GAO, Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-296] (Washington D.C.: Jan. 30, 2009) and Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency, [hyperlink,
http://www.gao.gov/products/GAO-09-161] (Washington, D.C.: Dec. 2, 2008).
[2] The Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-
343, 122 Stat. 3765 (2008). The act requires the U.S. Comptroller
General to report at least every 60 days, as appropriate, on findings
resulting from oversight of TARP's performance in meeting the 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.
[3] All information is as of January 23, 2009, unless otherwise noted
in the statement.
[4] Call reports are quarterly reports that collect basic financial
data of commercial banks in the form of a balance sheet and income
statement (formally known as Report of Condition and Income).
[5] While Treasury approved $125 billion to the nine largest
institutions, as table 2 shows, it initially disbursed funds to eight
of the nine institutions. The $10 billion to Merrill Lynch was not
disbursed until January 9, 2009, after its merger with Bank of America
was completed.
[6] A CDFI is a specialized financial institution that works in market
niches that are underserved by traditional financial institutions.
CDFIs provide a range of financial products and services such as
mortgage financing for low-income and first-time homebuyers and not-
for-profit developers; flexible underwriting and risk capital for
needed community facilities; and technical assistance, commercial loans
and investments to small start-up or expanding businesses in low-income
areas.
[End of section]
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