Troubled Asset Relief Program
Status of Efforts to Address Transparency and Accountability Issues Gao ID: GAO-09-1048T September 24, 2009This testimony discusses our work on the Troubled Asset Relief Program (TARP), under which the Department of the Treasury (Treasury), through the Office of Financial Stability (OFS), has the authority to purchase or insure almost $700 billion in troubled assets held by financial institutions. It focuses on (1) the nature and purpose of activities that have been initiated under TARP over the past year and ongoing challenges; (2) Treasury's efforts to establish a management infrastructure for TARP; and (3) outcomes measured by indicators of TARP's performance.
TARP is one of many programs and activities the federal government has put in place over the past year to respond to the financial crisis. It represents a significant government commitment to stabilizing the financial system. For example, as of September 11, 2009, it had disbursed $363 billion to participating institutions. At the same time, TARP's Capital Purchase Program (CPP) has shown evidence of some success in returning funds to the federal government. Treasury has received almost $7 billion in dividend payments, about $2.9 billion in warrant liquidations, and over $70 billion in repurchases from institutions participating in CPP, as of August 31, 2009. But TARP still faces a variety of challenges. For example, CPP, the largest of the TARP programs, has hundreds of participating institutions. Because of its size, this program requires ongoing strong oversight to ensure that participants comply with the program's requirements as we have recommended in prior reports. In addition, most of the other investment-based TARP programs that have provided assistance to a few large individual institutions present Treasury with the challenge of determining when assistance is no longer needed. Further, amid concerns about the strategic direction of the program and lack of transparency, the new administration has attempted to provide a more strategic plan for using the remaining funds and has created a number of programs aimed at stabilizing the securitization markets and preserving homeownership. While some programs, such as the Term Asset-backed Securities Loan Facility (TALF), are fully operational, others including the Home Affordable Modification Program (HAMP) and the Public-Private Investment Program (PPIP), are still new and face ongoing implementation and operational challenges. Finally, even though substantial investments have been made to avert the collapse of American International Group, Inc. (AIG), General Motors Corporation (GM), and Chrysler LLC (Chrysler), the ultimate outcomes of these investments are unclear and will be influenced by the long-term viability of these entities. Certain of these TARP investments were made with Treasury's expectation that the disbursements would be returned to the federal government. HAMP funds, however, are direct expenditures which are not expected to be repaid. But given the many challenges and uncertainties facing TARP programs, the total cost to the government of these programs remains unclear at this time.
GAO-09-1048T, 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 9:30 a.m. EDT:
Thursday, September 24, 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-09-1048T:
[End of section]
Chairman Dodd, Ranking Member Shelby, 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), through the Office of Financial Stability (OFS), has the
authority to purchase or insure almost $700 billion in troubled assets
held by financial institutions.[Footnote 1] As you know, about 1 year
ago, 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 actions taken under the program.[Footnote 2] Our
statement today draws on the 7 reports we have issued to date under
this mandate and on ongoing work.[Footnote 3] Our next report, planned
to be issued early next month, will include a detailed progress report
of TARP programs and activities over the past year.
Specifically, this statement focuses on (1) the nature and purpose of
activities that have been initiated under TARP over the past year and
ongoing challenges; (2) Treasury's efforts to establish a management
infrastructure for TARP; and (3) outcomes measured by indicators of
TARP's performance. To do this work, we reviewed documents provided by
OFS and conducted interviews with Treasury and OFS officials. In
addition, we have updated the program's receipts and disbursements
through September 11, 2009. We plan to continue to monitor the issues
highlighted in this statement, as well as future and ongoing capital
purchases and ongoing repurchases. We conducted this performance audit
between June 2009 and September 2009 in accordance with generally
accepted government auditing standards.
Summary:
TARP is one of many programs and activities the federal government has
put in place over the past year to respond to the financial crisis. It
represents a significant government commitment to stabilizing the
financial system. For example, as of September 11, 2009, it had
disbursed $363 billion to participating institutions. At the same time,
TARP's Capital Purchase Program (CPP) has shown evidence of some
success in returning funds to the federal government. Treasury has
received almost $7 billion in dividend payments, about $2.9 billion in
warrant liquidations, and over $70 billion in repurchases from
institutions participating in CPP, as of August 31, 2009. But TARP
still faces a variety of challenges. For example, CPP, the largest of
the TARP programs, has hundreds of participating institutions. Because
of its size, this program requires ongoing strong oversight to ensure
that participants comply with the program's requirements as we have
recommended in prior reports. In addition, most of the other investment-
based TARP programs that have provided assistance to a few large
individual institutions present Treasury with the challenge of
determining when assistance is no longer needed. Further, amid concerns
about the strategic direction of the program and lack of transparency,
the new administration has attempted to provide a more strategic plan
for using the remaining funds and has created a number of programs
aimed at stabilizing the securitization markets and preserving
homeownership. While some programs, such as the Term Asset-backed
Securities Loan Facility (TALF), are fully operational, others
including the Home Affordable Modification Program (HAMP) and the
Public-Private Investment Program (PPIP), are still new and face
ongoing implementation and operational challenges. Finally, even though
substantial investments have been made to avert the collapse of
American International Group, Inc. (AIG), General Motors Corporation
(GM), and Chrysler LLC (Chrysler), the ultimate outcomes of these
investments are unclear and will be influenced by the long-term
viability of these entities. Certain of these TARP investments were
made with Treasury's expectation that the disbursements would be
returned to the federal government. HAMP funds, however, are direct
expenditures which are not expected to be repaid. But given the many
challenges and uncertainties facing TARP programs, the total cost to
the government of these programs remains unclear at this time.
OFS has continued to make progress in establishing a management
infrastructure to administer TARP and oversee contractors and financial
agents, but some challenges also remain in this area. Though OFS now
has close to 200 staff, some key senior positions remain unfilled on a
permanent basis, such as the Chief Homeownership Preservation Officer
and Chief Investment Officer. Bringing on board permanent staff for
these key positions is important in helping Treasury effectively
administer TARP activities and ensuring accountability for program
outcomes. Treasury has strengthened its management and oversight of its
contractors as its reliance on them to support TARP grew over the past
year. OFS continues to make progress in developing a comprehensive
system of internal control. As we complete our first audit of OFS's
annual financial statements for TARP, we will be able to provide a more
definitive view of TARP's internal controls over financial reporting.
Over the past year, OFS has also started to take steps to formalize its
communication strategy and improve how it communicates with Congress
and the public about TARP activities and the strategy for using TARP
funds. Consistent and timely communication will continue to be an
important function for Treasury as it continues to make important
decisions on the use of TARP funds.
While isolating and estimating the effect of TARP programs continues to
present a number of challenges, indicators that we have been following
of the cost of credit and perceptions of risk in credit markets suggest
broad improvement since the announcement of CPP in October 2008. In
particular, a significant improvement in the interbank market has been
associated with the announcement of CPP and other programs outside
TARP. Treasury has recently released a report that begins to discuss
the next phase of its stabilization and rehabilitation efforts that
also includes a range of indicators.[Footnote 4] Treasury's authority
to purchase or insure additional troubled assets will expire on
December 31, 2009, unless the Secretary submits a written certification
to Congress. Thus, Treasury will need to make decisions about providing
new funding for TARP programs in the next few months. A set of
indicators could serve as part of an analytical basis for such a
determination.
We recognize the challenges associated with implementing a program
during a crisis and concurrently establishing a comprehensive system of
internal control. In the last year, we have made 36 recommendations to
Treasury aimed at helping to improve the accountability, integrity, and
transparency of TARP. Treasury has taken actions to address almost all
of them and we continue to monitor those recommendations that may
require additional action. We have continued to coordinate our work
with entities created under the act that also were assigned oversight
responsibilities for TARP, including the Congressional Oversight Panel,
the Financial Stability Oversight Board, and the Special Inspector
General for TARP (SIGTARP). We are currently conducting a coordinated
review with SIGTARP on U.S. government oversight over and interaction
with the management of institutions, where the government is
approaching or in effect has majority owner status.[Footnote 5] We also
have ongoing engagements reviewing the operations and activities of
several TARP programs, including CPP, HAMP, PPIP, TALF, the Supervisory
Capital Assessment Program ("stress tests"), AIG, and the Automobile
Industry Financing Program (AIFP).
TARP Strategy Has Evolved From Capitalizing Institutions to Stabilizing
Securitization Markets and Preserving Homeownership:
In the past year, Treasury has implemented a range of TARP programs to
stabilize the financial system. As of September 11, 2009, it had
disbursed just over $363 billion for TARP loans and equity investments
(table 1). In addition to disbursements, participating institutions
have paid Treasury billions of dollars in repurchases of preferred
shares and warrants, dividend payments, and loan repayments. In
particular, Treasury has received almost $7 billion in dividend
payments, about $2.9 billion in warrant liquidations, and over $70
billion in repurchases from institutions participating in CPP, as of
August 31, 2009.
Table 1: TARP Program Description and Total Disbursements, as of
September 11, 2009 (dollars in billions):
Program and Purpose: Capital Purchase Program. To provide capital to
viable banks through the purchase of preferred shares and subordinated
debentures;
Total Disbursed[A]: $204.5.
Program and Purpose: Targeted Investment Program. To foster market
stability and thereby strengthen the economy by making case-by-case
investments in institutions that Treasury deems are critical to the
functioning of the financial system;
Total Disbursed[A]: $40.0.
Program and Purpose: Capital Assistance Program. To restore confidence
throughout the financial system that the nation's largest banking
institutions have sufficient capital to cushion themselves against
larger-than-expected future losses, and to support lending to
creditworthy borrowers;
Total Disbursed[A]: TBD.
Program and Purpose: Systemically Significant Failing Institutions. To
provide stability in financial markets and avoid disruptions to the
markets from the failure of a systemically significant institution.
Treasury determines participation in this program on a case-by-case
basis;
Total Disbursed[A]: $43.2.
Program and Purpose: Asset Guarantee Program. To provide government
assurances for assets held by financial institutions that are viewed as
critical to the functioning of the nation's financial system;
Total Disbursed[A]: $0.0.
Program and Purpose: Automotive Industry Financing Program. To prevent
a significant disruption of the American automotive industry;
Total Disbursed[A]: $75.9.
Program and Purpose: Home Affordable Modification Program. To offer
assistance to an estimated 3 to 4 million homeowners through a cost-
sharing arrangement with mortgage holders and investors to reduce the
monthly mortgage payment amounts of homeowners at risk of foreclosure
to affordable levels;
Total Disbursed[A]: $0.0[B].
Program and Purpose: Consumer & Business Lending Initiative.[C] To
support consumer and business credit markets by providing financing to
private investors to issue new securitizations to help unfreeze and
lower interest rates for auto, student, and small business loans;
credit cards; commercial mortgages; and other consumer and business
credit;
Total Disbursed[A]: $0.1.
Program and Purpose: Public-Private Investment Program. To address the
challenge of "legacy assets" as part of Treasury's efforts to repair
balance sheets throughout the financial system and increase the
availability of credit to households and businesses;
Total Disbursed[A]: $0.0.
Total:
Total Disbursed[A]: $363.7.
Source: Treasury OFS, unaudited.
[A] Disbursement amounts do not reflect repurchases, dividend payments,
and other receipts.
[B] Treasury has disbursed $276,000 in HAMP incentive payments to
participating servicers.
[C] The Consumer & Business Lending Initiative includes TALF and the
former Small Business and Community Lending Program.
[End of table]
CPP continues to be the largest and most widely used program under
Treasury's TARP authority for stabilizing the financial system. Over
the last year, CPP has made significant capital investments in
financial institutions, and although Treasury has made progress in
monitoring the activities of CPP participants, challenges remain in
ensuring that participants comply with program requirements. As of
September 11, 2009, CPP had provided more than $204 billion in capital
to more than 670 institutions, about 56 percent of total TARP
disbursements. The amount of disbursements has slowed significantly, in
part, because the institutions receiving CPP capital in recent months
are generally smaller than those that received capital in the beginning
of the program. Also, many CPP applicants have withdrawn their
applications from consideration because of uncertainties about program
requirements and improving economic conditions.
Consistent with our recommendations, Treasury began to collect detailed
information for the largest institutions in February 2009 and basic
information through monthly lending surveys from all CPP participating
institutions later in June. These monthly surveys are an important step
toward greater transparency and accountability for institutions of all
sizes. We have also made recommendations that Treasury strengthen its
oversight of participants' compliance with the act's program
requirements (e.g., restrictions on executive compensation, dividend
payments, and stock repurchases), and Treasury continues to make
progress in these areas. For example, Treasury has hired three asset
management firms to provide market advice about its portfolio of
investments and to oversee compliance with the terms of CPP agreements.
However, Treasury has yet to finalize the specific guidance and
performance measures for the asset managers' oversight responsibilities
and has not established a process for monitoring asset managers'
performance.
Early in the implementation of TARP, Treasury provided what it now
refers to as "exceptional assistance" to three institutions--AIG,
Citigroup and Bank of America. For example, Treasury, along with the
Board of Governors of the Federal Reserve System (Federal Reserve), and
the Federal Reserve Bank of New York (FRBNY), provided assistance to
AIG, the sole participant in TARP's Systemically Significant Failing
Institutions (SSFI) program. As discussed in our recently issued
report, Treasury committed $70 billion in TARP funds to AIG and,
together with the Federal Reserve, had made over $182 billion available
to assist the company between September 2008 and April 2009.[Footnote
6] As of September 2, 2009, the outstanding balance of federal
government assistance used by AIG was $120.7 billion. In providing the
assistance, Treasury and the Federal Reserve have taken several steps
intended to protect the federal government's interest. These include
making loans that are secured with collateral, instituting certain
controls over management, and obtaining compensation for risks such as
charging interest, requiring dividend payments, and obtaining warrants.
Moreover, Treasury and the FRBNY staff routinely monitor AIG's
operations and receive reports on AIG's condition and restructuring.
While these efforts are being made, however, the government remains
exposed to risks, including credit and investment risk. As a result,
Treasury and FRNYB may not be repaid in full. We recently reported
that, as of September 21, 2009, AIG had not declared and paid the three
scheduled dividend payments since the inception of the preferred equity
investments.[Footnote 7] According to Treasury, if AIG fails to make
its next dividend payment due on November 1, Treasury will be able to
directly elect at least two board members. GAO-developed indicators of
AIG's repayment of federal assistance show some progress in AIG's
ability to repay the federal assistance; however, any improvement in
the stability of AIG's business depends on the long-term health of the
company, market conditions, and continued federal government support.
For this reason, the ultimate success of federal efforts to aid AIG's
restructuring and the scope of possible repayments remain unclear at
this point.
Also during the early phase of TARP (December 2008), Treasury
established the Automotive Industry Financing Program (AIFP) to help
stabilize the U.S. automotive industry and avoid disruptions that would
pose systemic risk to the nation's economy. Under this program,
Treasury has committed a total of about $82.6 billion to help support
automakers, automotive suppliers, consumers, and auto finance
companies.[Footnote 8] Chrysler and GM have received a sizeable amount
of funding to support their reorganization.[Footnote 9] In exchange,
Treasury received a substantial ownership interest in the companies and
debt obligations. Over the last year, Chrysler and GM filed for
bankruptcy and streamlined their operations by closing factories and
reducing the number of dealerships. However, whether the new Chrysler
and new GM will achieve long-term financial viability remains unclear.
As we have previously reported, Treasury should have a plan for ending
its financial involvement with Chrysler and GM that indicates how it
will divest itself of its ownership shares. In developing and
implementing such a plan, Treasury should weigh the objective of
expeditiously ending the federal government's financial involvement in
the companies with the objective of recovering an acceptable amount of
the funding provided to them. We will report later this fall on
Treasury's approach to managing its ownership interests in the
companies, how it plans to divest itself of these interests, and the
progress the companies have made in restructuring since receiving
federal government assistance. We also plan to report this winter on
how Chrysler and GM's restructuring efforts have affected their pension
plan assets and what the federal government's potential exposure will
be should the companies terminate their plans.
Following the early months of TARP implementation, which largely
focused on capital investments and amid concerns about the overall
strategic direction of the program and lack of transparency, the new
administration has attempted to provide a more strategic direction for
using the remaining funds and creating a number of programs aimed at
stabilizing the securitization markets and preserving homeownership.
For example, TALF, a program launched by Treasury and the Federal
Reserve, has been mostly used for credit card and auto loan
securitization and was extended through March 2010 for more asset
classes.[Footnote 10] As of September 17, 2009, TALF loan requests are
only about a quarter of the $200 billion maximum that Treasury
currently anticipates being made by FRBNY, which is much less than the
$1 trillion potential expansion that the Federal Reserve and Treasury
initially announced.[Footnote 11] The relatively low loan volume could
be attributed to recent improvements in securitization and credit
markets that make the financing terms of TALF loans less attractive,
according to agency officials and certain market participants. Because
the Banking Agency Audit Act (31 U.S.C. § 714) prohibits GAO from
auditing certain Federal Reserve activities, we are limited in our
ability to review the Federal Reserve's actions with respect to TALF.
In May 2009, legislation was passed that gave GAO authority to audit
Federal Reserve actions taken with respect to three entities also
assisted under TARP--AIG, Citigroup and Bank of America--but not TALF.
To enable us to audit TARP support for TALF most effectively, we would
support legislation to provide GAO with audit authority over Federal
Reserve actions taken with respect to TALF, together with appropriate
access.
While TALF has been implemented, HAMP and PPIP face ongoing
implementation and operational challenges. For example,
* HAMP faces a significant challenge that centers on uncertainty over
the number of homeowners it will ultimately help. Residential mortgage
defaults and foreclosures are at historical highs and Treasury
officials and others have identified reducing the number of unnecessary
foreclosures as critical to the current economic recovery. In our July
2009 report, we noted that Treasury's estimate of the 3 to 4 million
homeowners who would likely be helped under the HAMP loan modification
program may have been overstated.[Footnote 12] Further, concerns have
been raised about the capacity and consistency of servicers
participating in HAMP in offering loan modifications to qualified
homeowners facing potential foreclosure. Treasury has taken some
actions to encourage servicers to increase the number of modifications
made, including sending a letter to participating HAMP servicers and
meeting with them to discuss challenges to making modifications.
However, the ultimate result of Treasury's actions to increase the
number of HAMP loan modifications and the corresponding impact on
stabilizing the housing market remains to be seen. Treasury faces other
challenges in implementing HAMP, including ensuring that decisions to
deny or approve a loan modification are transparent to borrowers and
establishing an effective system of operational controls to oversee the
compliance of participating servicers with HAMP guidelines. In July
2009, we made six recommendations to Treasury to help improve the
transparency and accountability of HAMP, which included recommending
actions to monitor particular program requirements, reevaluate and
review certain program components and assumptions, and strengthen
internal controls over HAMP. Treasury noted that it will take various
actions in response to our recommendations, such as exploring options
to monitor counseling requirements and working to refine its internal
controls over HAMP. We plan to continue to monitor Treasury's responses
to our recommendations as part of our ongoing work on HAMP.
* Treasury announced PPIP in March 2009, but as of September 2009 many
elements of the program remain unimplemented and some have questioned
whether the program is actually needed.[Footnote 13] While Treasury
continues to take steps to implement the legacy securities program, the
legacy loans program has been on hold since early June.[Footnote 14]
Some market participants and observers we spoke with questioned the
necessity and timing of PPIP, noting that while the problem of toxic
assets remains, the program is less important now than when the crisis
first began, for several reasons. One main reason cited by these
individuals and by Treasury and the FDIC is that rising investor
confidence following the stress test results and successful capital-
raising by financial institutions reduced the need for the legacy loans
portion of PPIP. In addition, banks have increasing incentives to hold
troubled assets in the hopes that such assets will perform better in
the future, rather than taking losses now.
Treasury Has Made Progress in Developing OFS's Management
Infrastructure, but Effective Communication Has Been an Ongoing
Challenge:
Treasury has continued to make progress in establishing OFS's
management infrastructure, overseeing of contractors and financial
agents, and developing a system of internal control for financial
reporting. However, some challenges remain--for example, in staffing
some key positions.
* In accordance with our prior recommendation that it expeditiously
hire personnel to OFS, Treasury continued to use direct-hire and
various other appointments to bring a number of staff on board quickly
and has 197 staff as of September 15, 2009. However, it has yet to fill
several key senior positions. For example, in our July 2009 report we
recommended that Treasury give high priority to filling the Chief
Homeownership Preservation Officer position. Treasury has also been
seeking to fill the Chief Investment Officer position since June 2009.
Neither position has been filled with permanent staff as of September
15, 2009.
* Treasury has strengthened management and oversight as reliance on
contractors to support TARP grew over the past year. Treasury is using
contracts and financial agency agreements with several private sector
firms to obtain a wide range of professional services and other
support. In starting up TARP a year ago, OFS's management
infrastructure lacked many of the necessary oversight procedures and
internal controls for its growing number of contractors and financial
agents, including a comprehensive and complete compliance system to
monitor and appropriately address vendor-related conflicts of interest.
However, Treasury has taken a number of steps toward overcoming a
challenging contracting environment and has implemented or
substantially implemented all of our contracting-and conflicts-of-
interest recommendations we have made over the past year.
* OFS has also made progress in developing a comprehensive system of
internal control, as we recommended. As required by section 116(b) of
the act, we are currently performing the audit of TARP's financial
statements and the related internal controls. Our objectives are to
render opinions on (1) the financial statements as of and for the
period ending September 30, 2009, and (2) internal control over
financial reporting and compliance with applicable laws and regulations
as of September 30, 2009. We will also be reporting on the results of
our tests of TARP's compliance with selected provisions of laws and
regulations related to financial reporting. The results of our
financial statement audit will be published in a separate report.
We also made a series of recommendations aimed at improving the
transparency of TARP including that Treasury establish more effective
communication with Congress and the public and develop a clearly
articulated strategy for the program, among other things. Consistent
with our recommendations, OFS has taken steps over the last year to
formalize its communication strategy and improve its communications
with Congress and the public about TARP activities and the strategy for
using TARP funds. Consistent and timely communication will continue to
be an important focus for Treasury as it makes key decisions on the
remaining use of TARP funds.
Indicators Suggest Positive Developments in Credit Markets, but
Isolating TARP's Impact Continues to Present Challenges:
While isolating and estimating the effect of TARP programs continues to
present a number of challenges, indicators of the cost of credit and
perceptions of risk in credit markets suggest broad improvement since
the announcement of CPP in October 2008. As we have noted in prior
reports, if TARP is having its intended effect, a number of
developments might be observed in credit and other markets over time,
such as reduced risk spreads, declining borrowing costs, and more
lending activity than there would have been in its absence. However, a
slow recovery does not necessarily mean that TARP is failing, because
it is not clear what would have happened without the programs. In
particular, several market factors helping to explain slow growth in
lending include weaknesses in securitization markets and the balance
sheets of financial intermediaries, a decline in the demand for credit,
and the reduced creditworthiness among borrowers. Nevertheless, as
shown in table 2, credit market indicators we have been monitoring
suggest there has been broad improvement in interbank, mortgage, and
corporate debt markets in terms of the cost of credit and perceptions
of risk (as measured by premiums over Treasury securities). In
addition, empirical analysis of the interbank market, which showed
signs of significant stress in 2008, suggests that CPP and other
programs outside TARP that were announced in October 2008 have resulted
in a statistically significant improvement in risk spreads even in the
presence of other important factors. Although rising foreclosures
continue to highlight the challenges facing the U.S. economy, total
mortgage originations in the second quarter of 2009 have more than
doubled since the fourth quarter of 2008.
Table 2: Select Credit Market Indicators as of September 15, 2009:
Credit market rates and spreads:
Indicator: LIBOR;
Description: 3-month London interbank offered rate (an average of
interest rates offered on dollar-denominated loans);
Basis point change since October 13, 2008: Down 446.
Indicator: TED Spread;
Description: Spread between 3-month LIBOR and 3-month Treasury yield;
Basis point change since October 13, 2008: Down 434.
Indicator: Aaa bond rate;
Description: Rate on highest quality corporate bonds;
Basis point change since October 13, 2008: Down 130.
Indicator: Aaa bond spread;
Description: Spread between Aaa bond rate and 10-year Treasury yield;
Basis point change since October 13, 2008: Down 83.
Indicator: Baa bond rate;
Description: Rate on corporate bonds subject to moderate credit risk;
Basis point change since October 13, 2008: Down 239.
Indicator: Baa bond spread;
Description: Spread between Baa bond rate and 10-year Treasury yield;
Basis point change since October 13, 2008: Down 192.
Indicator: Mortgage rates;
Description: 30-year conforming loans rate;
Basis point change since October 13, 2008: Down 139.
Indicator: Mortgage spread;
Description: Spread between 30-year conforming loans rate and 10-year
Treasury yield;
Basis point change since October 13, 2008: Down 78.
Quarterly mortgage volume and defaults:
Indicator: Mortgage originations;
Description: New mortgage loans;
Change from December 31, 2008 to June 20, 2009: Up $290 billion to $550
billion.
Indicator: Foreclosure rate;
Description: Percentage of homes in foreclosure;
Change from December 31, 2008 to June 20, 2009: Up 100 basis points to
4.30 percent.
Sources: GAO analysis of data from Global Insight, the Federal Reserve,
Thomson Reuters Datastream, and Inside Mortgage Finance.
Note: Rates and yields are daily except mortgage rates, which are
weekly. Higher spreads (measured as premiums over Treasury securities
of comparable maturity) represent higher perceived risk in lending to
certain borrowers. Higher rates represent increases in the cost of
borrowing for relevant borrowers. As a result, "Down" suggests
improvement in market conditions for credit market rates and spreads.
Foreclosure rate and mortgage origination data are quarterly. See
previous TARP reports for a more detailed discussion (GAO-09-161 and
GAO-09-296).
[End of table]
Though it is difficult to isolate the impact of TARP, economic and
credit market indicators will provide important information as Treasury
makes decisions about the future of the program. Treasury has recently
released a report that begins to discuss the next phase of its
stabilization and rehabilitation efforts and includes several
indicators. Treasury's authority to purchase or insure additional
troubled assets will expire on December 31, 2009, unless the Secretary
submits a written certification to Congress describing "why the
extension is necessary to assist American families and stabilize
financial markets, as well as the expected cost to the taxpayers for
such an extension." In the next few months, Treasury will need to make
decisions about providing new funding for TARP programs. A set of
indicators could serve as part of an analytical basis for such a
determination.
Mr. Chairman, Ranking Member Shelby, and Members of the Committee, I
appreciate the opportunity to discuss these critically important issues
and would be happy to answer any questions that you may have. Thank
you.
For further information on this testimony, please contact Thomas J.
McCool on (202) 512-2642 or mccoolt@gao.gov.
[End of section]
Footnotes:
[1] The Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-
343, 122 Stat. 3765 (2008) originally authorized Treasury to buy or
guarantee up to $700 billion in troubled assets. The Helping Families
Save Their Homes Act of 2009, Pub. L. No. 111-22, Div. A, 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
$698.741 billion.
[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] See GAO, Troubled Asset Relief Program: Additional Actions Needed
to Better Ensure Integrity, Accountability, and Transparency,
[hyperlink, http://www.gao.gov/products/GAO-09-161] (Washington, D.C.:
Dec. 2, 2008); Troubled Asset Relief Program: Status of Efforts to
Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-296] (Washington, D.C.: Jan. 30,
2009); Troubled Asset Relief Program: March 2009 Status of Efforts to
Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-504] (Washington, D.C.: Mar. 31,
2009); Auto Industry: Summary of Government Efforts and Automakers'
Restructuring to Date, [hyperlink,
http://www.gao.gov/products/GAO-09-553] (Washington, D.C.: Apr. 23,
2009); Troubled Asset Relief Program: June 2009 Status of Efforts to
Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-658] (Washington, D.C.: June 17,
2009); Troubled Asset Relief Program: Treasury Actions Needed to Make
the Home Affordable Modification Program More Transparent and
Accountable, [hyperlink, http://www.gao.gov/products/GAO-09-837]
(Washington, D.C.: July 23, 2009); and Troubled Asset Relief Program:
Status of Government Assistance to AIG, [hyperlink,
http://www.gao.gov/products/GAO-09-975] (Washington, D.C.: Sept. 21,
2009).
[4] Department of the Treasury, The Next Phase of Government Financial
Stabilization and Rehabilitation Policies (Washington, D.C.: September
2009).
[5] This coordinated effort with SIGTARP will cover organizations
receiving TARP funds, such as AIG, General Motors, Chrysler, GMAC, Bank
of America, and Citigroup. It will also review the federal government's
involvement in Fannie Mae and Freddie Mac.
[6] [hyperlink, http://www.gao.gov/products/GAO-09-975].
[7] AIG only has to make dividend payments when it declares dividends.
[8] We reported previously on this program. See [hyperlink,
http://www.gao.gov/products/GAO-09-553].
[9] Ford Motor Company did not seek assistance from AIFP.
[10] The TALF extension is through March 2010 for all asset classes
except new commercial mortgage-backed securities (CMBS), which will be
accepted through July 2010.
[11] FRBNY currently plans to provide up to $200 billion in TALF loans
using non-TARP funds, and Treasury currently plans to provide up to $20
billion in TARP funds to purchase collateral surrendered in the event
TALF loans are not repaid.
[12] [hyperlink, http://www.gao.gov/products/GAO-09-837].
[13] PPIP was created to help restart the market for legacy assets
(both securities and loans), to allow banks and other financial
institutions to free up capital, and to stimulate the extension of new
credit.
[14] For the legacy securities program, Treasury publicly named 9 fund
managers for the public-private investment funds (PPIFs) in July 2009,
but the selections are preliminary, awaiting final agreements between
Treasury and the managers. Until the final agreements are in place, the
PPIFs cannot receive firm investor commitments, begin investing, or
receive funding from Treasury. For legacy loans, FDIC has tested a
pilot program on assets it acquired through a bank failure that could
form the basis of a fully implemented legacy loans program. For FDIC to
fully implement the legacy loan program, however, Treasury (with a
recommendation from the Federal Reserve Board) needs to make a systemic
risk determination, and FDIC officials think this is unlikely unless
economic conditions deteriorate significantly.
[End of section]
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