Troubled Asset Relief Program
Status of Efforts to Address Transparency and Accountability Issues Gao ID: GAO-09-484T March 19, 2009This testimony discusses 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 its Office of Financial Stability (OFS). As Congress may 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 actions taken under the program. We are also responsible for auditing OFS's annual financial statements and for producing special reports on any issues that emerge from our oversight. To carry out these oversight responsibilities, we have assembled interdisciplinary teams with a wide range of technical skills, including financial market and public policy analysts, accountants, lawyers, and economists who represent combined resources from across GAO. In addition, we are building on our in-house technical expertise with targeted new hires and experts. The act also created additional oversight entities--the Congressional Oversight Panel (COP) and the Special Inspector General for TARP (SIGTARP)--that also have reporting responsibilities. We are coordinating our work with COP and SIGTARP and are meeting with officials from both entities to share information and coordinate our oversight efforts. These meetings help to ensure that we are collaborating as appropriate and not duplicating efforts.
This testimony is based primarily on our January 30, 2009 report, the second under the act's mandate, which covers the actions taken as part of TARP through January 23, 2009, and follows up on the nine recommendations we made in our December 2, 2008 report.3 This statement also provides additional information on some recent program developments, including Treasury's new financial stability plan and, as you requested, provides some insights on our ongoing work on the implications of actions related to the financial crisis on federal debt management. Our oversight work under the act is ongoing, and our next report is due to be issued by March 31, 2009, as required. Specifically, this statement focuses on (1) the nature and purpose of activities that have been initiated under TARP; (2) the status of OFS's hiring efforts, use of contractors, and development of a system of internal control; (3) implications of TARP and other events on federal debt management, and (4) 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 eight of the first large institutions to receive disbursements. We plan to continue to monitor the issues highlighted in our prior reports, 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.
GAO-09-484T, Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues
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Testimony:
Before the Subcommittee on Oversight, Committee on Ways and Means,
House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 10:00 a.m. EST:
Thursday, March 19, 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-09-484T:
[End of section]
Mr. Chairman, Ranking Member Boustany, and Members of the Subcommittee:
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 its 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 actions taken under the program.[Footnote 2] We are also
responsible for auditing OFS's annual financial statements and for
producing special reports on any issues that emerge from our oversight.
To carry out these oversight responsibilities, we have assembled
interdisciplinary teams with a wide range of technical skills,
including financial market and public policy analysts, accountants,
lawyers, and economists who represent combined resources from across
GAO. In addition, we are building on our in-house technical expertise
with targeted new hires and experts. The act also created additional
oversight entities--the Congressional Oversight Panel (COP) and the
Special Inspector General for TARP (SIGTARP)--that also have reporting
responsibilities. We are coordinating our work with COP and SIGTARP and
are meeting with officials from both entities to share information and
coordinate our oversight efforts. These meetings help to ensure that we
are collaborating as appropriate and not duplicating efforts.
My statement today is based primarily on our January 30, 2009 report,
the second under the act's mandate, which covers the actions taken as
part of TARP through January 23, 2009, and follows up on the nine
recommendations we made in our December 2, 2008 report.[Footnote 3]
This statement also provides additional information on some recent
program developments, including Treasury's new financial stability plan
and, as you requested, provides some insights on our ongoing work on
the implications of actions related to the financial crisis on federal
debt management. Our oversight work under the act is ongoing, and our
next report is due to be issued by March 31, 2009, as required.
Specifically, this statement focuses on (1) the nature and purpose of
activities that have been initiated under TARP; (2) the status of OFS's
hiring efforts, use of contractors, and development of a system of
internal control; (3) implications of TARP and other events on federal
debt management, and (4) 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 eight of the
first large institutions to receive disbursements. We plan to continue
to monitor the issues highlighted in our prior reports, 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 between December 2008 and March
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 activities during this period have
continued to fall under its Capital Purchase Program (CPP). As of March
5, 2009, Treasury had disbursed approximately $300 billion in TARP
funds, about $197 billion of it for CPP. Treasury has recently
announced the Financial Stability Plan, which outlines a set of
measures to address the financial crisis and restore confidence in the
U.S. financial and housing markets, and the Making Home Affordable
program to mitigate foreclosures and preserve homeownership. Treasury
also has taken important steps since our first report to implement all
nine of our recommendations. However, due in part to the short time
that has elapsed since our first report, we continued to identify a
number of areas that warrant Treasury's ongoing attention. We
recommended in our latest report that Treasury continue to take action
to further improve the program's transparency and accountability and
more clearly articulate and communicate a strategic vision for TARP.
Specifically, we recommended that Treasury:
* expand the scope of the monthly CPP surveys for the 20 largest banks
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, which incorporates actions to preserve homeownership; and once
this vision is clearly articulated, document the skills and
competencies needed within the department to carry it out;
* 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 controls 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, which is essential to monitoring program status and
identifying any risks of potential inadequate funding of announced
programs; and:
* review and renegotiate existing conflict-of-interest mitigation
plans, as necessary, to enhance specificity and conformity with the new
interim conflict-of-interest regulation and take continued steps to
manage and monitor conflicts of interest and enforce mitigation plans.
Consistent with our recommendations, the recently announced Financial
Stability Plan outlined some steps Treasury is taking to improve the
transparency and accountability of new programs going forward. But
Treasury still faces several challenges. First, our December 2008
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 completed its initial survey of the 20 largest institutions to
monitor lending and other activities and announced plans to analyze
quarterly monitoring data (call reports) for all reporting
institutions.[Footnote 4] In addition, Treasury is developing a more
limited monthly survey of lending by smaller institutions participating
in the program. These efforts are important steps toward strengthening
CPP's transparency and accountability, and we will continue to examine
Treasury's effort to fully implement these monitoring efforts. 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 yet finalized its plans for
detecting noncompliance and taking enforcement actions. Third, we noted
that Treasury had made limited progress in articulating and
communicating an overall strategic vision for TARP and continued to
respond to institution-and industry-specific needs. This lack of
clarity has complicated Treasury's ability to effectively communicate
to Congress, the financial markets, and the public. As Treasury
provides more details on its new Financial Stability Plan, its
strategic approach to addressing the financial crisis may become
clearer.
Treasury had taken steps to help ensure a smooth transition to the new
administration 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 changes under the new administration,
Treasury needs 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. As we previously recommended,
Treasury needs to continue to identify and mitigate conflicts of
interest in contracting. Similarly, OFS has adopted a framework for
developing and implementing its system of internal control for TARP
activities that is consistent with our recommendation. However, as of
our January report, OFS had yet to implement a disciplined risk-
assessment process.
Given that TARP activities have only recently been implemented and that
time lags occur in the reporting of available data, it is too soon 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 between our December and
January reports, the cost of credit 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 appeared to have changed little in the corporate bond and
mortgage markets. However, 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 our
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.
Finally, these financial stability efforts, as well as the economic
slowdown and the government's policy response to the slowdown, all add
to the borrowing needs of the government. Treasury's outstanding debt
has increased significantly, and the share of it that is short-term has
grown. The drop in interest rates--especially for shorter-term debt--
has lowered Treasury's cost of borrowing, but having such a large share
of debt maturing in the short term presents challenges to Treasury.
Market experts believe Treasury would benefit from lengthening its
maturity profile. To support Congress' oversight of the use of TARP
funds we have work underway looking at how Treasury has financed
borrowing associated with the recent financial crisis and at additional
ideas for debt management that might make sense going forward.
Treasury Has Continued to Focus On CPP, but a Variety of Other Programs
Have Been Created or Are Being Planned:
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 March
5, 2009, Treasury had disbursed almost 80 percent of the $250 billion
it had allocated for CPP to purchase almost $197 billion in preferred
shares of 467 qualified financial institutions (table 1).[Footnote 5]
Treasury also has begun to receive dividend payments relating to
capital purchases under CPP and other programs. According to Treasury,
as of February 17, 2009, it had received about $2.4 billion.
Table 1: Status of TARP Funds as of March 5, 2009 (dollars in
billions):
Program: Capital Purchase Program;
Disbursed: $196.8.
Program: Systemically Significant Failing Institutions;
Disbursed: $40.0.
Program: Targeted Investment Program;
Disbursed: $40.0.
Program: Automotive Industry Financing Program;
Disbursed: $23.7.
Program: Citigroup Asset Guarantee;
Disbursed: $0.0.
Program: Bank of America Asset Guarantee;
Disbursed: $0.0.
Program: Making Home Affordable Program;
Disbursed: $0.0.
Program: Term Asset-backed Securities Loan Facility;
Disbursed: $0.0.
Program: Consumer & Business Lending Initiative;
Disbursed: $0.0.
Program: Totals;
Disbursed: $300.5.
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 6] 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 we noted in our January
report, most of the institutions that received CPP capital were
publicly held institutions, although a limited number of privately held
institutions and community development financial institutions (CDFI)
also received funds.[Footnote 7]
Treasury has taken a number of important steps toward better reporting
on and monitoring of CPP. These steps are in keeping with our prior
recommendations that Treasury bolster its ability to determine whether
institutions are using CPP proceeds in ways that are consistent with
the act's purposes and establish mechanisms to monitor compliance with
program requirements. However, Treasury needs to take further steps in
this area. Treasury has done an initial survey of the largest
institutions to monitor their lending and other activities and
announced plans to analyze quarterly monitoring data (call reports) for
all reporting institutions. In addition, Treasury is developing a more
limited monthly survey of lending by smaller institutions participating
in the program. These efforts are important steps toward ensuring that
all participating institutions are held accountable for their use of
the funds and are consistent with our past recommendation that Treasury
seek 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.
Treasury has also continued to take steps to increase its planned
oversight of compliance with terms of the CPP agreements including
limitations on executive compensation, dividends, and stock
repurchases. Among these steps, Treasury has named an Interim Chief
Compliance Officer. However, Treasury has not finalized its plans for
detecting noncompliance with CPP requirements or for 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. In
its recently announced Financial Stability Plan, Treasury called for
banks receiving future government funds to be held responsible for
appropriate use of those funds through (1) stronger restrictions on
dividend payment and executive compensation, and (2) enhanced reporting
to the public, including reporting on lending activity. In addition,
Treasury is in the process of drafting new regulations to implement the
executive compensation requirements in the American Recovery and
Reinvestment Act of 2009 (the Recovery Act).[Footnote 8] We will also
continue to monitor the system that Treasury develops to ensure
compliance with the agreements and the implementation of additional
oversight and accountability efforts under its new plan.
Treasury has also continued to make some progress in improving the
transparency of TARP and a few weeks ago announced its plans for the
remaining TARP funds. In our December 2008 report, we first 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 COP's 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 remained unclear. For
example, Treasury initially outlined a strategy 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, it did not clearly articulate how the various programs--
such as CPP, the Systemically Significant Failing Institutions (SSFI)
program, 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. Further,
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, adding to the confusion about Treasury's
strategy and vision for implementing TARP. Other actions also have
raised additional questions about Treasury's strategy. For example,
Treasury announced the first institution under TIP weeks before the
program was established. Similarly, the Asset Guarantee Program was
established after Treasury announced that it would guarantee assets
under such a program, but many of the details of the program have yet
to be worked out.
Since our January report, Treasury has taken three key actions related
to our recommendation about the need for a clearly articulated vision
for the program. On February 10, Treasury announced the Financial
Stability Plan, which outlined a set of measures to address the
financial crisis and restore confidence in U.S. financial and housing
markets. The plan appears to be an approach designed to resolve the
credit crisis by restarting the flow of credit to consumers and
businesses, strengthening financial institutions, and providing aid to
homeowners and small businesses. On February 25, Treasury announced the
standardized terms and conditions for eligible financial institutions
participating in the Capital Assistance Program (CAP). Under CAP, an
eligible institution that is found by its federal banking regulator to
need additional capital to continue lending and absorb losses in a
severe economic downturn will be eligible to participate in
CAP.[Footnote 9] Such institutions will be eligible to receive a
capital investment from Treasury, with regulatory approval, in the form
of preferred securities that are convertible into common equity to help
absorb losses and serve as a bridge to receiving private capital. A key
element of Treasury's Financial Stability Plan, CAP is designed to
ensure that, in severe economic conditions, the largest U.S. bank
holding companies have sufficient capital to support lending to
creditworthy homeowners and businesses. As part of this effort, the
federal banking regulators--the Board of Governors of the Federal
Reserve System, Office of the Comptroller of the Currency, Federal
Deposit Insurance Corporation, and Office of Thrift Supervision--
announced that they will begin conducting a one-time forward-looking
capital assessment (or stress test) of the balance sheets of the 19
largest bank holding companies with assets exceeding $100 billion.
These institutions are required to participate in the coordinated
supervisory capital assessment and may obtain additional capital from
CAP if necessary.[Footnote 10] Regulators noted that the capital
assessment process for all eligible institutions is expected to be
completed by April 30, 2009.
On March 4, 2009, Treasury unveiled its Making Home Affordable program,
which is based in part on the use of TARP funds. Among other things,
the plan is designed to do the following:
* It will use $75 billion ($50 billion from TARP funds) to modify the
loans of up to 3-4 million homeowners to avoid potential foreclosure.
The goal of modifying the mortgages of these homeowners is to reduce
the amount owed per month to sustainable levels (a mortgage debt-to-
income ratio of 31 percent). Treasury will share the cost of
restructuring the mortgages with the other stakeholders (e.g.,
financial institutions holding whole loans or investors if loans have
been securitized). Treasury announced a series of financial incentives
for the loan servicers, mortgage holders/investors, and borrowers that
are intended to "pay for success," encourage borrowers to continue
paying on time under the modified loan, and encourage servicers and
mortgage holders/investors to modify at-risk loans before the borrower
falls behind on a payment.
* It includes an initiative to help up to 4-5 million homeowners to
refinance loans owned or guaranteed by Freddie Mac and Fannie Mae at
current market rates. According to Treasury, these homeowners would not
otherwise be able to refinance their loans at the conforming loan rates
because the declining value of their homes has left them with little or
no equity. Refinancing at current mortgage rates could help homeowners
save thousands of dollars on their annual mortgage payments.
* It increases Treasury's funding commitment to Fannie Mae and Freddie
Mac to ensure the strength and security of the mortgage market and to
help maintain mortgage affordability. The $200 billion funding
commitment is based on authority granted to Treasury under the Housing
and Economic Recovery Act of 2008.[Footnote 11]
We will continue to monitor the development and implementation of
Treasury's plan, including how its actions address the challenges we
have previously identified.[Footnote 12]
Treasury also established the Auto Industry Financing Program (AIFP) in
December 2008 to prevent a disruption of the domestic automotive
industry that would pose systemic risk to the nation's economy. Under
this program, Treasury has lent $13.4 billion to GM and $4 billion to
Chrysler to allow the automakers to continue operating while working
out details of their plans to become solvent, such as achieving
concessions with stakeholders. The loans were designed to allow the
automakers to operate through the first quarter of 2009 with
recognition that after that point GM and Chrysler would need additional
funds or have to take other steps, such as an orderly bankruptcy.
[Footnote 13] As required by the terms of their loan agreements, GM and
Chrysler submitted restructuring plans to Treasury in February that
describe the actions the automakers will take to become financially
solvent. Because of the continued sluggish economy and lower than
expected revenues, GM and Chrysler are requesting an additional $16.6
billion and $5 billion in federal financial assistance, respectively.
Treasury is currently assessing the automakers' restructuring plans and
determining what the government's role will be in future assistance. By
March 31, 2009, GM and Chrysler must report to the Secretary of the
Treasury on their progress in implementing these restructuring plans.
The Secretary will then determine whether the companies have made
sufficient progress in implementing the restructuring plans; if they
have not, the loans are automatically accelerated and become due 30
days later. As part of our oversight responsibilities for TARP, we are
monitoring Treasury's implementation of AIFP, including the auto
manufacturers' use of federal funds and development of the required
restructuring plans.
Efforts to Establish OFS Are Ongoing:
Treasury has made progress in establishing its management
infrastructure for TARP, including in hiring, overseeing contracts, and
establishing internal controls. However, hiring for OFS is still
ongoing, Treasury is working to improve its oversight of contractors,
and its development of a system of internal control is still evolving.
* In the hiring area--one that we highlighted in our first report--
Treasury took steps to help maintain continuity of leadership within
OFS during and after the transition to the new administration.
Specifically, Treasury ensured that interim chief positions would be
filled to ensure a smooth transition and used direct-hire authority 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. Treasury officials recently
told us that the number of permanent staff had increased to 60. 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 are changing
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 that
government dollars will be wasted unless adequate mechanisms are in
place to oversee contractor performance. In this regard, Treasury has
improved its oversight of contractors, including those using time-and-
materials pricing. 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 existing
contracts or agreements to ensure conformity with the new regulation.
We believe this step is a necessary component of a comprehensive and
complete system to ensure that all conflicts are fully identified and
appropriately addressed.
* OFS has adopted a framework for developing and implementing 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 that it 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 controls, develop and implement a well-defined and
disciplined risk-assessment process, because such a process is
essential to monitoring the status of TARP programs and identifying any
risks that announced programs will not be adequately funded. We will
continue to monitor OFS's hiring and contracting practices and
implementation of the internal control framework, which is vital to
TARP's effectiveness.
Measuring the Impact of TARP on the Credit Markets and the Economy
Continues to Be Challenging:
It is still too early in TARP's implementation to see measurable
results in many areas given that program actions have only recently
occurred and there are time lags in the reporting of data. 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
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 its 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 Board of Governors of the Federal
Reserve System, 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 the fact that policies outside
of TARP may have important effects on credit markets. We will continue
to refine and monitor the indicators. Additionally, we plan to use the
Treasury survey data in our efforts to evaluate changes in lending
activity resulting from CPP. We recognize that the data has certain
limitations primarily that it is self-reported and difficult to
benchmark because it is unique. Nonetheless, we think it will prove
valuable in future analyses.
Federal Debt Management Challenges:
You also asked that I discuss the impact of TARP and related activities
on the national debt and borrowing. Congress has assigned to the
Treasury Department the responsibility to borrow the funds necessary to
finance the gap between cash in and cash out subject to a statutory
limit. Since the onset of the current recession in December 2007, the
gap between revenues and outlays has grown. Because the Treasury must
borrow the funds disbursed, TARP and other actions taken to stabilize
the financial markets increase the need to borrow so adding to the
federal debt. Also, federal borrowing needs typically increase during
an economic downturn--largely because tax revenues decline while
expenditures increase for programs to assist those affected by the
downturn. In addition, the American Recovery and Reinvestment Act
enacted on February 17, 2009 contains both decreases in revenues and
increases in spending. Further, all of this takes place in the context
of the longer-term fiscal outlook, which will present Treasury with
continued financing challenges even after the return of financial
stability and economic growth.
Treasury's primary debt management goal is to finance the government's
borrowing needs at the lowest cost over time. Issuing debt through
regularly scheduled auctions lowers borrowing costs because investors
and dealers value liquidity and certainty of supply. Treasury issues
marketable securities that range in maturity from one month to 30 years
and sells them at auction on a pre-announced schedule.[Footnote 14] The
mix of securities that Treasury has outstanding changes regularly as
new debt is issued. The mix of securities is important because it can
have a significant influence on the federal government's interest
payments. Longer-term securities typically carry higher interest rates-
-or cost to the government--primarily due to concerns about future
inflation. However, these longer-term securities offer the government
the certainty of knowing what the Treasury's payments will be over a
longer period.
At the end of February 2009, Treasury's outstanding marketable
securities stood at just under $6 trillion--an increase of $1.476
trillion since December 31, 2007. As shown in figure 1, a large portion
of this debt increase was in the form of short-term cash management
bills (CM bills). Between October 1, 2008 and February 28, 2009
Treasury issued $1.035 trillion in CM bills, of which $510 billion were
outstanding at the end of February.
Figure 1: Changes in Outstanding Marketable Treasury Securities from
Dec. 31, 2007 to Feb. 28, 2009 (Total Outstanding as of February 28,
2009 = $5,989 billion):
[Refer to PDF for image: stacked vertical bar graph]
Treasury notes:
Outstanding marketable Treasury securities as of 12/31/2007: $2488
billion;
Increase in marketable Treasury securities from 12/31/2007 to
2/28/2009: $403 billion.
Treasury bills:
Outstanding marketable Treasury securities as of 12/31/2007: $1004
billion;
Increase in marketable Treasury securities from 12/31/2007 to
2/28/2009: $472 billion.
Treasury bonds:
Outstanding marketable Treasury securities as of 12/31/2007: $559
billion;
Increase in marketable Treasury securities from 12/31/2007 to
2/28/2009: $51 billion.
Treasury inflation protected securities:
Outstanding marketable Treasury securities as of 12/31/2007: $472
billion;
Increase in marketable Treasury securities from 12/31/2007 to
2/28/2009: $40 billion.
Cash management bills:
Outstanding marketable Treasury securities as of 12/31/2007: 0;
Increase in marketable Treasury securities from 12/31/2007 to
2/28/2009: $510 billion.
Source: GAO analysis of Treasury data.
Note (1): Does not include $14 billion in marketable securities
outstanding for the Federal Financing Bank.
Note (2): Treasury bills have maturities of 1 year or less. Notes have
maturities of a year or more to 10 years and bonds have maturities of
greater than 10 years. Currently Treasury issues Treasury Inflation
Protected Securities with maturities ranging from 5 to 20 years.
[End of figure]
Interest rates have decreased dramatically since the start of the
financial crisis, particularly for short-term debt. Figure 2 below
illustrates the size of that drop.
Figure 2: Interest Rates on Treasury Securities:
[Refer to PDF for image: multiple line graph]
Treasury security: 1-month bills;
Daily average Treasury rate in 2007: 4.41%;
Daily average Treasury rate January 1 - March 5, 2009: 0.13%.
Treasury security: 3-month bills;
Daily average Treasury rate in 2007: 4.48
Daily average Treasury rate January 1 - March 5, 2009: 0.21%.
Treasury security: 6-month bills;
Daily average Treasury rate in 2007: 4.62%;
Daily average Treasury rate January 1 - March 5, 2009: 0.38%.
Treasury security: 1-year bills;
Daily average Treasury rate in 2007: 4.53%;
Daily average Treasury rate January 1 - March 5, 2009: 0.55%.
Treasury security: 2-year notes;
Daily average Treasury rate in 2007: 4.36%;
Daily average Treasury rate January 1 - March 5, 2009: 0.89%.
Treasury security: 3-year notes;
Daily average Treasury rate in 2007: 4.35%;
Daily average Treasury rate January 1 - March 5, 2009: 1.26%.
Treasury security: 5-year notes;
Daily average Treasury rate in 2007: 4.43%;
Daily average Treasury rate January 1 - March 5, 2009: 1.74%.
Treasury security: 7-year notes;
Daily average Treasury rate in 2007: 4.51%;
Daily average Treasury rate January 1 - March 5, 2009: 2.18%.
Treasury security: 10-year notes;
Daily average Treasury rate in 2007: 4.63%;
Daily average Treasury rate January 1 - March 5, 2009: 2.71%.
Treasury security: 20-year bond;
Daily average Treasury rate in 2007: 4.91%;
Daily average Treasury rate January 1 - March 5, 2009: 3.66%.
Treasury security: 30-year bond;
Daily average Treasury rate in 2007: 4.84%;
Daily average Treasury rate January 1 - March 5, 2009: 3.38%.
Source: GAO analysis of Federal Reserve data.
[End of figure]
The impact of this drop can be seen in lower borrowing costs--indeed,
the budget shows net interest declining in fiscal year 2009. Although
these relatively low interest rates have reduced Treasury's borrowing
costs, the increasing amount of short-term debt that needs to be rolled
over does present challenges. As shown in figure 3, approximately $2.5
trillion--or 41 percent of total outstanding marketable securities will
mature in 2009--and will have to be refinanced. As Treasury borrows to
meet its current needs, Treasury must also plan for rolling over large
amounts of debt in the short term.
Figure 3: Marketable Securities by Year of Maturity, as of February 28,
2009 (Total Outstanding - $5,989 billion):
[Refer to PDF for image: vertical bar graph]
Year of maturity: 2009:
Amount: $2464 billion;
Percentage: 41%.
Year of maturity: 2010-2014:
Amount: $2111 billion;
Percentage: 35%.
Year of maturity: 2015-2019;
Amount: $794 billion;
Percentage: 13%.
Year of maturity: 2020-2029;
Amount: $439 billion;
Percentage: 7%;
Year of maturity: 2030-2039;
Amount: $167 billion;
Percentage: 3%.
Source: GAO analysis of Treasury data.
Note: Does not include $14 billion in marketable securities outstanding
for the Federal Financing Bank.
[End of figure]
Treasury has said that it "recognizes the need to monitor short-term
issuance versus longer dated issuance." Market experts generally
believe that Treasury needs to increase the average maturity of its
debt portfolio in part to lock in relatively low long-term rates and to
ensure adequate borrowing capacity in the coming years. To support
Congress' oversight of the use of TARP funds we have work underway
looking at how Treasury has financed borrowing associated with the
recent financial crisis and at additional ideas for debt management
that might make sense going forward.
Total borrowing will increase by trillions of dollars this year, not
solely due to TARP and other activities aimed at stabilizing the
financial system. Debt also grows in response to the economic slowdown
as revenues fall and spending for some programs grows. Further, both
the tax and spending provisions of the Recovery Act will also increase
debt. All of this contributes to the borrowing challenge faced by the
Treasury. As this Committee well knows, debt is also held in
governmental accounts--such as the Social Security Trust Fund. This
debt is included in the total debt subject to limit.[Footnote 15] The
debt limit was increased by the Emergency Economic Stabilization Act of
2008 and the Recovery Act, but with only $1.2 trillion remaining under
the limit, it will have to be raised again.
The combination of slower growth and greater debt lead to increases in
publicly-held debt as a share of our economy--The President's budget
projects debt reaching 65 percent of gross domestic product in 2010 and
remaining at that level for the rest of the decade. Today Congress, the
executive branch and the American people are understandably focused on
restoring financial stability and economic growth. At some point,
however, the nation's leaders will need to apply the same level of
intensity to the serious long-term fiscal challenges facing the federal
government.
Mr. Chairman and Members of the Subcommittee, I appreciate the
opportunity to discuss this critically important issue and would be
happy to answer any questions that you may have. Thank you.
Contact:
For further information on this testimony, please contact Thomas J.
McCool on (202) 512-2642 or mccoolt@gao.gov.
[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] 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] Information is current 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] Through December 31, 2008, TARP capital purchases and loans totaled
$247 billion. Congressional Budget Office (CBO) estimated the subsidy
cost for these transactions at $64 billion, or 26 percent, using
valuation procedures similar to those specified in the Federal Credit
Reform Act and adjusted for market risk as specified in the Emergency
Economic Stabilization Act. See Congressional Budget Office, The
Troubled Asset Relief Program: Report on Transactions Through December
31, 2008 (Jan. 2009). COP estimated the subsidy cost at $78 billion, or
31 percent, using multiple valuation methods and an evaluation of
similar private transactions. See Congressional Oversight Panel,
February Oversight Report: Valuing Treasury's Acquisitions (Feb. 6,
2009). In connection with our audit of TARP's financial statements, we
will be evaluating and testing the credit subsidy model that TARP uses
to value capital purchases and loans for financial reporting purposes.
[6] While Treasury approved $125 billion to the nine largest
institutions, it initially disbursed funds to eight. The $10 billion to
Merrill Lynch was not disbursed until January 9, 2009, after its merger
with Bank of America was completed.
[7] CDFIs are specialized financial institution working 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.
[8] Pub. L. No. 111-5, div. B, title VII, § 7001 (Feb. 17, 2009)
(amending section 111 of EESA).
[9] According to Treasury and the federal banking regulators,
eligibility will be consistent with the criteria and deliberative
process established for identifying qualified financial institutions in
the existing Capital Purchase Program.
[10] Eligible institutions with less than $100 billion in risk-weighted
assets are also eligible to participate in CAP. Risk-weighted assets
are the total of all assets held by the bank that are weighted for
credit risk according to a formula established in regulation by the
Federal Reserve.
[11] Pub. L. No. 110-289, 122 Stat. 2654 (2008).
[12] See GAO, Troubled Asset Relief Program, Status of Efforts to
Address Defaults and Foreclosures on Home Mortgages, [hyperlink,
http://www.gao.gov/products/GAO-09-231T] (Washington, D.C.: Dec. 4,
2008) for a discussion of challenges facing loan modification programs.
[13] Under AIFP, Treasury also lent $884 million to GM to enable it to
participate in GMAC's--a financing company owned in part by GM--new
rights offering related to its reorganization as a bank holding
company--and bought $5 billion in preferred stock investment plus
warrants from GMAC. In addition, Treasury agreed to lend $1.5 billion
to a special purpose entity created by Chrysler Financial Services
Americas LLC (Chrysler Financial) to finance the extension of new
consumer automotive loans, of which $0.4 billion been disbursed to
Chrysler Financial.
[14] Cash management bills are not auctioned on a regular schedule,
rather they are announced, auctioned, and have maturity dates based on
the Treasury's immediate cash needs.
[15] Debt held by the public--and the interest paid on it--represents a
burden on current taxpayers; debt held in government accounts
represents a claim on future resources. Together they equal total debt.
[End of section]
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