Troubled Asset Relief Program
Treasury's Framework for Deciding to Extend TARP Was Sufficient, but Could be Strengthened for Future Decisions Gao ID: GAO-10-531 June 30, 2010The Department of the Treasury's (Treasury) authority to purchase, commit to purchase, or commit to guarantee troubled assets was set to expire on December 31, 2009. This important authority has allowed Treasury to undertake a number of programs to help stabilize the financial system. In December 2009, the Secretary of the Treasury extended the authority to October 3, 2010. In our October 2009 report on the Troubled Asset Relief Program (TARP), GAO suggested as part of a framework for decision making that Treasury should coordinate with relevant federal agencies, communicate with Congress and the public, and link the decisions related to the next phase of the TARP program to quantitative analysis. This report discusses (1) the process Treasury used to decide to extend TARP and the extent of coordination with relevant agencies and (2) the analytical framework and quantitative indicators Treasury used to decide to extend TARP. To meet the report objectives, GAO reviewed key documents related to the decision to extend TARP, interviewed agency officials and analyzed financial data.
The extension of TARP involved winding down programs while extending others, transforming the program to one focused primarily on preserving homeownership, and improving financial conditions for small banks and businesses. While the extension of TARP was solely the Treasury's decision, it was taken after significant deliberation and involved interagency coordination. Although sufficient for the decision to extend, the extent of coordination could be enhanced and formalized for any upcoming decisions that would benefit from interagency collaboration, especially with the Federal Deposit Insurance Corporation (FDIC). Treasury considered a number qualitative and quantitative factors for key decisions associated with the TARP extension. Important factors considered for the extension of new commitments centered on ongoing weaknesses in key areas of the economy. Treasury underscored that while analysis was possible on the needs or success of individual programs, the fragile state of the economy and remaining downside risks were difficult to know with certainty. Considering this uncertainty, Treasury wanted to extend TARP through October 2010 in order to retain resources to respond to financial instability. Going forward, Treasury could strengthen its current analytical framework by identifying clear objectives for small business programs and providing explicit linkages between TARP program decisions and the quantitative analysis or indicators used to motivate those decisions. GAO recommends that the Secretary of the Treasury (1) formalize coordination with FDIC for future TARP decisions and (2) improve the transparency and analytical basis for TARP program decisions. Treasury generally agreed with our recommendations.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Orice Williams Brown Team: Government Accountability Office: Financial Markets and Community Investment Phone: No phone on recordGAO-10-531, Troubled Asset Relief Program: Treasury's Framework for Deciding to Extend TARP Was Sufficient, but Could be Strengthened for Future Decisions
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
June 2010:
Troubled Asset Relief Program:
Treasury's Framework for Deciding to Extend TARP Was Sufficient, but
Could be Strengthened for Future Decisions:
GAO-10-531:
GAO Highlights:
Highlights of GAO-10-531, a report to congressional committees.
Why GAO Did This Study:
The Department of the Treasury‘s (Treasury) authority to purchase,
commit to purchase, or commit to guarantee troubled assets was set to
expire on December 31, 2009. This important authority has allowed
Treasury to undertake a number of programs to help stabilize the
financial system. In December 2009, the Secretary of the Treasury
extended the authority to October 3, 2010. In our October 2009 report
on the Troubled Asset Relief Program (TARP), GAO suggested as part of
a framework for decision making that Treasury should coordinate with
relevant federal agencies, communicate with Congress and the public,
and link the decisions related to the next phase of the TARP program
to quantitative analysis. This report discusses (1) the process
Treasury used to decide to extend TARP and the extent of coordination
with relevant agencies and (2) the analytical framework and
quantitative indicators Treasury used to decide to extend TARP. To
meet the report objectives, GAO reviewed key documents related to the
decision to extend TARP, interviewed agency officials and analyzed
financial data.
What GAO Found:
The extension of TARP involved winding down programs while extending
others, transforming the program to one focused primarily on
preserving homeownership, and improving financial conditions for small
banks and businesses. While the extension of TARP was solely the
Treasury‘s decision, it was taken after significant deliberation and
involved interagency coordination. Although sufficient for the
decision to extend, the extent of coordination could be enhanced and
formalized for any upcoming decisions that would benefit from
interagency collaboration, especially with FDIC.
Treasury considered a number qualitative and quantitative factors for
key decisions associated with the TARP extension (see table).
Important factors considered for the extension of new commitments
centered on ongoing weaknesses in key areas of the economy. Treasury
underscored that while analysis was possible on the needs or success
of individual programs, the fragile state of the economy and remaining
downside risks were difficult to know with certainty. Considering this
uncertainty, Treasury wanted to extend TARP through October 2010 in
order to retain resources to respond to financial instability. Going
forward, Treasury could strengthen its current analytical framework by
identifying clear objectives for small business programs and providing
explicit linkages between TARP program decisions and the quantitative
analysis or indicators used to motivate those decisions.
Table: Status of select TARP Programs and Key Factors Driving
Treasury‘s Decisions:
Program type: Mortgage modification;
Treasury‘s decision: Program extended, $10 billion available for new
commitments;
Key factor driving Treasury‘s decision: Weakness in housing market and
recent implementation of the program;
Key indicators identified by Treasury: Foreclosures, delinquencies,
trial and permanent mortgage modifications, and housing prices.
Program type: Small business lending;
Treasury‘s decision: Programs extended, $32 billion available for new
commitments;
Key factor driving Treasury‘s decision: Contraction in bank lending
and multiple indicators pointing to tight conditions for small
business credit;
Key indicators identified by Treasury: Business and commercial real
estate loans, Senior Loan Officer Opinion Survey, and Small Business
Economic Trends.
Program type: Bank capital;
Treasury‘s decision: Programs closed;
Key factor driving Treasury‘s decision: Banks‘ ability to raise
capital on private markets;
Key indicators identified by Treasury: Common equity issuance.
Program type: Asset-backed security (ABS) markets;
Treasury‘s decision: Program closed;
Key factor driving Treasury‘s decision: Recovery in ABS markets;
Key indicators identified by Treasury: ABS pricing spreads, program
utilization, and ABS issuances.
Program type: Legacy (’troubled“) assets;
Treasury‘s decision: Program closed;
Key factor driving Treasury‘s decision: Recovery of mortgage-related
securities;
Key indicators identified by Treasury: Prices and spreads for certain
mortgage-related securities.
Source: GAO analysis of Treasury documents and interviews.
[End of table]
What GAO Recommends:
GAO recommends that the Secretary of the Treasury (1) formalize
coordination with FDIC for future TARP decisions and (2) improve the
transparency and analytical basis for TARP program decisions. Treasury
generally agreed with our recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-10-531] or key
components. For more information, contact Thomas J. McCool, 202-512-
2642 or mccoolt@gao.gov.
[End of section]
Contents:
Letter:
Background:
Although Treasury Undertook a Deliberative Process in Deciding to
Extend TARP, It Could Strengthen Coordination:
Treasury Considered a Number of Qualitative and Quantitative Factors
for Key Decisions Associated with the TARP Extension:
Conclusions:
Recommendations for Executive Actions:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Selected Interventions by Federal Financial Regulators in
the United States:
Appendix III: Comments from the Department of the Treasury:
Appendix VI: Contacts and Staff Acknowledgments:
Tables:
Table 1: Status of TARP Programs as of June 7, 2010:
Table 2: Status of Select TARP Programs and Key Factors Driving
Treasury's Decisions:
Table 3: Selected Interventions by the Federal Reserve, Treasury, and
other Federal Financial Regulators in the United States:
Figures:
Figure 1: Percentage of Loans 90 days Past Due, in Foreclosure and
Seriously Delinquent:
Figure 2: Cumulative GSE and Non-GSE HAMP Trial and Permanent
Modifications:
Figure 3: Interest Rate Spreads for Small Loans and Small Business
Borrowing Needs, Second Quarter 1993 through First Quarter 2010:
Figure 4: Gross Common Equity Issuance by Banks and Thrifts, 2000 to
2010:
Figure 5: TED Spread, 2000 to Present:
Figure 6: New Lending at Largest CPP Recipients, October 2008 to
November 2009:
Figure 7: TALF Eligible Asset Class ABS Spreads Since 2005:
Figure 8: Credit Card, Auto, and Student Loan ABS and CMBS Issuance
and TALF Utilization:
Figure 9: Jumbo and Alt-A RMBS Price Indices Since May 2008:
Figure 10: CMBS AAA Tranche Average Prices and Spreads Since 2005:
Abbreviations:
AGP: Asset Guarantee Program:
AIFP: Automotive Industry Financing Program:
AIG: American International Group:
CAP: Capital Assistance Program:
CBLI: Consumer & Business Lending Initiative:
CDFI: community development financial institutions:
C&I: commercial and industrial:
CMBS: commercial mortgage-backed securities:
CPP: Capital Purchase Program:
EESA: Emergency Economic Stabilization Act:
FDIC: Federal Deposit Insurance Corporation:
Federal Reserve: Board of Governors of the Federal Reserve System:
FinSOB: Financial Stability Oversight Board:
GM: General Motors:
HAMP: Home Affordable Modification Program:
HUD: Department of Housing and Urban Development:
MHA: Making Home Affordable Program:
NFIB: National Federation of Independent Business:
PPIP: Public Private Investment Program:
RMBS: residential mortgage-backed securities:
SCAP: Supervisory Capital Assessment Program:
SLOOS: Senior Loan Officer Opinion Survey:
TALF: Term Asset-Backed Securities Loan Facility:
TARP: Troubled Asset Relief Program:
TIP: Targeted Investment Program:
TLGP: Temporary Liquidity Guarantee Program:
Treasury: Department of the Treasury:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
June 30, 2010:
Congressional Committees:
In response to the recent financial crisis, the United States has
initiated extraordinary interventions aimed at moderating its impact.
The Board of Governors of the Federal Reserve System (Federal
Reserve), the Federal Deposit Insurance Corporation (FDIC), and the
Department of the Treasury (Treasury) have taken the lead in combating
the worst episode of financial instability since the Great Depression
and, by many measures, the most severe recession since the end of
World War II. Among the crisis-driven interventions was the Troubled
Asset Relief Program (TARP), which was authorized by the Emergency
Economic Stabilization Act (EESA) of 2008. EESA gave Treasury the
authority to purchase or guarantee "troubled assets" that were deemed
to be at the heart of the crisis--including mortgages and mortgage-
backed securities--and any other financial instrument Treasury
determined it needed to purchase to help stabilize the financial
system.[Footnote 1] Over the last 20 months, the activities initiated
under TARP have covered a broad range of activities including,
injecting capital into key financial intuitions, purchasing and
guaranteeing assets, providing credit protection, and providing
incentives for modifying residential mortgages, among other things.
Although the United States' financial system has become more stable
and economic conditions appear to be improving, the economy remains
fragile and potential threats remain. As a result Treasury, the
Federal Reserve, FDIC, and other government agencies continue to take
steps to stabilize financial markets and strengthen the economic
recovery. However, eventually the government plans to withdraw this
exceptional public support from the financial system. The termination
and winding down of many federal government programs is already under
way.
In response to the need to develop an exit strategy without
compromising the nascent recovery, on December 9, 2009, the Secretary
of the Treasury (Secretary) announced the next steps in TARP.
Specifically, the Secretary (1) extended the authority provided under
EESA to October 3, 2010; (2) announced that several TARP programs
would be terminated and additional commitments would be made with
respect to others; and (3) notified Congress that Treasury expected to
use no more than $550 billion out of the approximately $700 billion
authorized by EESA.
In addition to authorizing TARP, EESA also provided GAO with broad
oversight authorities for actions taken under TARP and requires GAO to
report at least every 60 days on TARP activities and performance.
[Footnote 2] To fulfill our statutorily mandated responsibilities, we
have been reviewing numerous TARP programs and monitoring and
providing updates on financial market and economic indicators. In our
October 2009 TARP report, we suggested as part of a credible and
robust framework for decision making that Treasury should coordinate
with relevant federal agencies, communicate with Congress and the
public, and link the decisions related to the next phase of the TARP
program to quantitative analysis.[Footnote 3] This report, which
expands on our October 2009 report, examines the process the Secretary
used in deciding to extend TARP. Specifically, this report discusses
(1) the process Treasury used to decide to extend TARP and the extent
of coordination with relevant agencies and (2) the analytical
framework and quantitative indicators Treasury used to decide to
extend TARP.
To meet the report objectives, we reviewed key documents related to
the decision to extend TARP, including reports issued by the Financial
Stability Oversight Board (FinSOB) and other documents that Treasury
identified as reflecting the analytical framework used. As part of our
review we analyzed data on the state of the economy and financial
markets and continued to monitor indicators that might be suggestive
of the performance and effectiveness of TARP. We also interviewed
Treasury and Federal Reserve officials and received official responses
to our questions from FDIC. Because Treasury is terminating and
winding down some programs and allocating additional resources to
others, we reviewed the indicators that Treasury officials used to
inform these decisions. We believe that these data, considered as a
whole, are sufficiently reliable for the purpose of summarizing TARP
activity and presenting and analyzing trends in the economy and
financial markets. However, we discuss some limitations about the data
on credit conditions for small businesses. For additional information
on the scope and methodology for this engagement, see appendix I.
We conducted this performance audit from March 2010 to June 2010 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
Background:
As the economy begins to recover from the financial crisis, the
extraordinary government interventions taken to stabilize the
financial system will need to be withdrawn. The consequences of
financial crises--specifically systemic bank-based crises--on economic
activity have been well documented.[Footnote 4] As a result,
governments and monetary authorities typically undertake
interventions, even though the resulting actions raise concerns about
moral hazard and can come at a significant expense to taxpayers. Given
its severity and systemic nature, the recent global financial crisis
prompted substantial interventions starting as early as September
2007, after the first signs of serious trouble in the subprime
mortgage market surfaced (see appendix II). In the early stages of the
financial crisis, the observable policy responses were a Department of
Housing and Urban Development (HUD)-initiated foreclosure prevention
program, a Federal Reserve lending facility for depository
institutions, and currency swap arrangements with various foreign
central banks.[Footnote 5] As the crisis intensified, additional
lending facilities were created, followed by separate actions by the
Federal Reserve, Treasury, and others that dealt with financial sector
issues on a case-by-case basis. These actions included facilitating
JPMorgan Chase & Co.'s purchase of Bear Stearns Companies, Inc.;
addressing problems at Fannie Mae and Freddie Mac by placing them into
conservatorship; working with market participants to prepare for the
failure of Lehman Brothers; and lending to American International
Group (AIG) to allow it to sell some of its assets in an orderly
manner.
Although Treasury had begun to take a number of broader steps,
including establishing a temporary guarantee program for money market
funds in the United States, it decided that additional and
comprehensive action was needed to address the root causes of the
financial system's stresses. The passage of EESA and authorization of
TARP provided Treasury with the framework it needed to begin its more
comprehensive and coordinated course of action that ultimately
resulted in several programs. Some TARP funds were utilized to launch
joint programs or to support efforts principally led by other
regulators.[Footnote 6] Concurrent with the announcement of the first
TARP program, the Federal Reserve and FDIC also announced other
actions that were intended to stabilize financial markets and increase
confidence in the U.S. financial system. This system-wide approach was
also coordinated with a number of foreign governments as part of a
global effort.
The various initiatives under TARP are detailed below.
* Capital Purchase Program (CPP). CPP was intended to restore
confidence in the banking system by increasing the amount of capital
in the system. Treasury provided capital to qualifying financial
institutions by purchasing preferred shares and warrants or
subordinated debentures.
* Capital Assistance Program (CAP). CAP was designed to further
improve confidence in the banking system by helping ensure that the
nation's largest banking institutions had sufficient capital to
cushion themselves against larger than expected future losses, as
determined by the Supervisory Capital Assessment Program (SCAP)--or
"stress test"--conducted by federal regulators.
* Consumer & Business Lending Initiative (CBLI). CBLI was designed to
support new securitizations in consumer and business credit markets,
especially for auto, student, and small business loans; credit cards;
and new and legacy securitizations of commercial mortgages to increase
credit availability in these markets and now includes small business
lending programs as well. A portion of the CBLI funds were used to
support the Federal Reserve's Term Asset-Backed Securities Loan
Facility (TALF). Under TALF, the Federal Reserve provided loans to
private investors who pledged securitizations as collateral and
Treasury provided a government backstop against certain losses.
* Public Private Investment Program (PPIP). PPIP was designed to
facilitate the purchase of "legacy assets" as part of Treasury's
efforts to facilitate price discovery in markets for these assets,
repair balance sheets throughout the financial system, and increase
the availability of credit to households and businesses. The legacy
securities program, or "S-PPIP," partnered Treasury and private sector
equity funding leveraged by Treasury loans to purchase and hold legacy
residential mortgage-backed securities (RMBS) and commercial mortgage-
backed securities (CMBS). In the original plan, PPIP was to also
include a partnership between Treasury and FDIC to purchase and hold
legacy loans, through the legacy loans program, or "L-PPIP," but it
was never implemented as a joint venture using TARP funds.[Footnote 7]
* Making Home Affordable Program (MHA). MHA was launched to offer
assistance to homeowners through a loss-sharing arrangement with
mortgage investors and an incentive-based system for borrowers and
servicers in order to prevent avoidable foreclosures. Under MHA,
Treasury developed the Home Affordable Modification Program (HAMP) as
its cornerstone effort to meet EESA's goal of protecting home values
and preserving homeownership by helping at-risk homeowners avoid
potential foreclosure, primarily by reducing their monthly mortgage
payments.
* Targeted Investment Program (TIP). The stated purpose of TIP was to
foster market stability and thereby strengthen the economy by making
case-by-case investments in institutions that Treasury deemed critical
to the functioning of the financial system. TIP was designed to
prevent a loss of confidence in financial institutions that could (1)
result in significant market disruptions, (2) threaten the financial
strength of similarly situated financial institutions, (3) impair
broader financial markets, and (4) undermine the overall economy.
* The AIG Investment Program. Formerly the Systemically Significant
Failing Institutions program, the goal of the AIG Investment Program
was to provide stability in financial markets and avoid disruptions to
the markets from the failure of a systemically significant
institution. Treasury has purchased preferred shares and warrants in
AIG and provided a facility for additional investment as needed up to
a limit.
* Asset Guarantee Program (AGP). AGP provided government assurances
for certain assets held by financial institutions that are viewed as
critical to the functioning of the nation's financial system. The goal
of AGP was to encourage investors to keep funds in the institutions.
According to Treasury, placing guarantees, or assurances, against
distressed or illiquid assets was viewed as another way to help
stabilize the financial system.
* Automotive Industry Financing Program (AIFP). The goal of AIFP was
to help stabilize the American automotive industry and avoid
disruptions that would pose systemic risk to the nation's economy.
Under this program, Treasury has authorized TARP funds to help support
automakers, automotive suppliers, consumers, and automobile finance
companies. A sizeable amount of funding has been to support the
restructuring of Chrysler Group LLC (Chrysler) and General Motors
Company (GM).
Taken together, the concerted actions by Treasury and others have been
credited by many market observers with averting a more severe
financial crisis, although there are critics who believe that markets
would have recovered without government support. Particular programs
have been reported to have had the desired effects, especially if
stabilizing the financial system and restoring confidence was
considered to be the principal goal of the intervention. In our
October 2009 and February 2010 reports we noted that some of the
anticipated effects on credit markets and the economy had materialized
while some securitization markets had experienced a tentative
recovery.[Footnote 8] Yet, experience with past financial crises,
coupled with analysis of the specifics of the current situation, has
led the Congressional Budget Office to predict a modest recovery that
will not be robust enough to appreciably improve weak labor markets
through 2011. Full recovery will likely take some time given years of
excesses, including imprudent use of leverage at financial
institutions, overvalued asset prices, and major imbalances in the
fiscal and household sectors. Negative shocks like the recent turmoil
in international capital markets stemming from European sovereign debt
issues have the potential to delay the recovery as well.
Because markets have stabilized, private markets have reopened, and
economic growth has resumed, the federal government has begun to move
into the exit phase of its financial stabilization initiatives. The
winding down of government support is made more pressing by the need
to exit market distorting interventions as quickly as possible and to
begin shifting focus from the financial crisis to stabilizing the
government debt-to-gross domestic product ratio. Crisis-driven
interventions are designed to be temporary because they distort the
normal functioning of markets and involve public capital when, under
normal conditions, private capital is more desirable.[Footnote 9]
Moreover, as we have pointed out in previous reports, the U.S.
government faces an unsustainable long-term fiscal path. While these
fiscal imbalances predate the financial crisis, the government's
response to the crisis has exacerbated an already challenging fiscal
environment.[Footnote 10] As a result, even as some programs have
ramped up to address specific issues, many others have either expired
or are already winding down--including those utilizing TARP funds (see
appendix II). Many programs were designed to wind down naturally,
force financial institutions to raise private capital, or become
unattractive to participants once markets recovered.
Treasury's authority under EESA to purchase, commit to purchase, or
commit to guarantee troubled assets was set to expire on December 31,
2009, unless the Secretary submitted a written certification to
Congress extending these authorities.[Footnote 11] In anticipation of
the upcoming decisions on the future of TARP, the need to unwind the
extraordinary federal support across the board, and the fragile state
of the economy we made recommendations to Treasury in our October 2009
report. Specifically, we suggested that any decision to extend TARP be
made in coordination with relevant policymakers. We also suggested
that Treasury make use of quantitative analysis wherever possible to
support the rationale and communicate its determinations to Congress
and the American people. We noted that without a robust analytic
framework, Treasury may be challenged in effectively carrying out the
next stages of its programs. Treasury responded that in deciding
whether to extend TARP authority beyond December 31, 2009, the
Secretary would "coordinate with appropriate officials to ensure that
the determination is considered in a broad market context that takes
account of relevant objectives, costs, and measures" and would
communicate the rationale for the decision.
Although Treasury Undertook a Deliberative Process in Deciding to
Extend TARP, It Could Strengthen Coordination:
The extension of TARP involves the winding down of some programs while
making additional funds available for commitment under other programs,
transforming the primary focus of TARP to that of preserving
homeownership, and improving financial conditions for small banks and
businesses. While the decision to extend TARP was solely Treasury's
decision, it was taken after significant deliberation and involved
interagency coordination and consultation. Although sufficient for the
decision to extend, the extent of coordination could be enhanced and
formalized for any upcoming decisions that would benefit from
interagency collaboration.
The Decision to Extend TARP Involved Terminating and Winding Down Some
Programs and Making New Commitments in Select Areas:
On December 9, 2009, the Secretary announced that he was extending
Treasury's authority under EESA to purchase, commit to purchase, or
commit to guarantee troubled assets until October 3, 2010 (TARP
expiration date). After the expiration date, no TARP funds can be
committed, but there may be expenditures to fund commitments entered
into prior to the expiration date. The extension of TARP permits
Treasury to reallocate existing commitments and make additional funds
available for some programs. As is shown in table 1, according to
Treasury, new commitments through October 3, 2010, will be limited to
MHA and small business lending programs through CBLI.[Footnote 12] The
funds allocated to MHA have not been increased beyond the initial $50
billion Treasury estimated would be committed under the TARP-funded
program. At time of the decision to extend, Treasury had committed $40
billion under existing MHA programs; however, according to Treasury,
they had always contemplated additional MHA programs, such as programs
to address negative equity. Treasury indicated that the extension of
TARP gave them more time and flexibility to build out those programs
as well as more time to decide how best to allocate the remaining $10
billion in order to prevent avoidable foreclosures. All other
programs, including TIP, have closed or will close by June 30, 2010,
and no additional funds will be committed under those programs.
[Footnote 13] However, additional expenditures, which have already
been apportioned and accounted for, could occur after the TARP
termination date for TALF, PPIP, and the AIG Investment Program to
fund commitments made prior to December 2009, and investments acquired
through a variety of TARP actions remain under Treasury's management.
Nevertheless, the extension has formally moved TARP from a program
with a heavy focus on capitalizing institutions and stabilizing
securitization markets to one focused primarily on mitigating
preventable foreclosures and improving financial conditions for small
banks and small businesses.
Table 1: Status of TARP Programs as of June 7, 2010:
Program: CPP;
Status: Closed;
warrants and preferred shares held;
Projected Use of funds: $204.89 billion;
Disbursements: $204.89 billion.
Program: CAP;
Status: Closed;
no investments made;
Projected Use of funds: n/a;
Disbursements: n/a.
Program: TIP;
Status: Closed;
warrants held;
Projected Use of funds: $40.00 billion;
Disbursements: $40.00 billion.
Program: AIG Investments Program;
Status: Closed;
equity held;
Projected Use of funds: $69.84 billion;
Disbursements: $47.54 billion.
Program: AGP (Citigroup);
Status: Closed;
trust preferred securities with warrants held;
Projected Use of funds: $5.00 billion;
Disbursements: $0.
Program: AIFP;
Status: Closed;
loans outstanding, investments held;
Projected Use of funds: $84.84 billion;
Disbursements: $79.69 billion.
Program: MHA[A];
Status: Extended;
$10 billion available for new commitments[B];
Projected Use of funds: $50.00 billion;
Disbursements: $1.45 billion.
Program: CBLI: TALF;
Status: Closed for ABS and MBS;
closes June 30, 2010, for new CMBS;
investments held;
Projected Use of funds: $20.00 billion;
Disbursements: $0.10 billion.
Program: CBLI: Reserve for programs to support small business[C];
Status: Extended;
$30 billion available for new commitments;
Projected Use of funds: $30.00 billion;
Disbursements: $0.
Program: CBLI: Community Development Capital;
Initiative (CDCI);
Status: Extended;
$1 billion available for new commitments;
Projected Use of funds: $1.00 billion;
Disbursements: $0.
Program: CBLI: Unlocking Credit for Small;
Businesses;
Status: Extended, $1 billion available for new commitments;
Projected Use of funds: $1.00 billion;
Disbursements: $0.6 billion.
Program: CBLI: Subtotal;
Status: [Empty];
Projected Use of funds: $52.00 billion;
Disbursements: $0.16 billion.
Program: PPIP;
Status: Closed;
loans outstanding, equity and debt held;
Projected Use of funds: $30.00 billion;
Disbursements: $11.44 billion.
Source: GAO analysis of Treasury documents.
Note: For a detailed description of selected programs see GAO-10-16
and GAO-10-25.
[A] Includes HAMP.
[B] Since the decision to extend was announced $1 billion of the
remaining $10 billion has been committed.
[C] Pending legislation the Small Business Lending Fund (SBLF) will
operate outside of TARP.
[End of table]
Treasury estimates that new commitments under MHA and CBLI could
increase the costs of TARP by $25 billion. Even with these additional
costs, Treasury expects that TARP will ultimately cost taxpayers
$105.4 billion, more than $200 billon less than initially estimated.
[Footnote 14] The Secretary also notified Congress that Treasury
expected to use no more than $550 billion of the approximately $700
billion authorized by EESA but reserved the authority to use the
remaining funds to respond "to an immediate and substantial" threat to
the economy "stemming from financial instability." In the absence of
such threats, Treasury indicated that those resources would be used to
pay down the federal debt over time. In his letter to Congress
communicating the decision, the Secretary also expressed a desire to
expedite both the liquidation of the equity investments and the
repayment of funds extended to TARP recipients.[Footnote 15] As of
June 7, 2010, total TARP repayments were roughly $195 billion. Pending
legislation, if enacted, would require the Secretary to use any
amounts repaid by financial institutions for debt reduction.[Footnote
16]
The decision to extend TARP followed months of deliberation and
internal discussions that began in August 2009. Treasury officials
told us that while the decision to extend TARP could have been made
earlier, it was not made until December to be certain that extension
was necessary and so that the Secretary would be able to consider what
conditions to place on the extension to balance the need to minimize
the cost to taxpayers while ensuring that the program met its core
objectives. According to Treasury officials, this decision was made at
the highest levels within the agency. Discussions centered on how to
phase out TARP and other government programs adopted in response to
the financial crisis generally, as well as what limits to place on an
extension, and what programs would not need to be continued beyond the
original expiration date of December 31, 2009. Treasury officials
indicated this discussion generally did not take place at the program
level, but included a range of officials from various Treasury
offices. Internal memos and briefing documents suggest considerable
deliberation took place on the effectiveness of existing government
actions as well as the likely effectiveness of potential policy
options to address remaining threats to financial stability. Other
programs operated by Treasury and other government agencies were
important parts of these deliberations. According to Treasury, the
modest pace of the economic recovery and concern about exiting TARP
prematurely meant that the likelihood of not extending was low, but
programs that were no longer needed were to be terminated. In
addition, Treasury believed that while the decision could have been
made at an earlier date, officials decided it was better to wait until
closer to the certification deadline in order to have a more targeted
response. Treasury also considered not extending TARP and instead
making up front commitments to problem areas based on available
information, but ultimately decided that the additional flexibility
and better information that would come from the extension would be
preferable.
Treasury Could Strengthen Its Interagency Coordination and
Consultation:
As part of a robust analytic framework for decision making, we
recommended that the Secretary coordinate with the Federal Reserve and
FDIC to help ensure that the decision to extend or terminate TARP was
considered in a broader market context. Treasury officials said that
it had external discussions and consultations in the months prior to
the decision to help ensure that the decision-making process
incorporated the actions of key financial regulators. Treasury
officials also said that the Secretary had discussions with the
Chairmen of the Federal Reserve and the FDIC regarding TARP and the
status of crisis programs instituted at each respective agency.
Treasury officials noted that EESA required additional coordination
with the Federal Reserve because it required the Secretary to consult
with the Chairman of the Federal Reserve in order to purchase
financial instruments other than those related to residential and
commercial real estate.[Footnote 17] This consultation, which included
communication among principals and staff of the two agencies, is
represented in several letters by the Chairman to the Secretary
reflecting the required consultations prior to the initiation of
several TARP programs unrelated to residential and commercial real
estate. In addition, Federal Reserve officials stated that the
Chairman and Vice Chairman of the Federal Reserve were broadly
supportive of the decision to extend TARP. The officials said that the
Chairman was consulted by the Secretary on multiple occasions. The
Federal Reserve noted that there was consistent coordination at the
staff level regarding the TALF program, primarily due to the joint
nature of the program. Another forum for coordination around the
decision to extend TARP was FinSOB.[Footnote 18] FinSOB meeting
minutes detailed discussions of the decision to extend TARP and the
general economic situation.[Footnote 19] While there was discussion of
the decision, FinSOB did not, nor was it required to, authorize or
approve the Secretary's action.
The Secretary also discussed the extension of TARP with the Chairman
of FDIC. In particular, both agencies told us that they discussed the
timing of FDIC's exit from programs designed to support the banking
system. According to Treasury officials, Treasury took into
consideration the winding down of FDIC's Temporary Liquidity Guarantee
Program (TLGP), which was designed to support bank debt and
transaction accounts, in deciding to extend TARP. At the time Treasury
made the decision to extend TARP, TLGP was scheduled to end June 30,
2010. FDIC subsequently extended TLGP to December 31, 2010.[Footnote
20]
As Treasury shifts into the exit phase of TARP, it faces upcoming
decisions that would benefit from continued collaboration and
communication with other agencies including:
* decisions about allocating any additional funds to MHA and CBLI,
* decisions about scaling back various programs , and:
* ongoing decisions related to the general exit strategy, including
unwinding the equity investments held as a result of actions taken
under TARP.
Similar to the need for a coordinated course of action to stabilize
the financial system and re-establish investor confidence, the general
exit from the government interventions will require coordination to
develop a unified disengagement strategy. As mentioned previously,
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
(see also appendix II).[Footnote 21]
In general, the extent of coordination with the Federal Reserve was
consistent with our recommendation and represented the type of
collaboration necessary for the next stage of the government response
to the crisis. However, the extent of Treasury's coordination with
FDIC, while sufficient for the decision to extend TARP, should be
enhanced and formalized for any upcoming decisions that would benefit
from interagency collaboration. FinSOB, which was established to help
oversee TARP and other emergency authorities and facilities granted to
the Secretary under EESA, is composed of the Secretary, the Chairman
of the Board of Governors of the Federal Reserve, the Director of
FHFA, the Chairman of the Securities Exchange Commission, and the
Secretary of HUD. Therefore many of the regulators who led the federal
response to the financial crisis are already part of a collaborative
body. As a result, FinSOB has been a vehicle for formal consultations
over TARP decisions among the agencies that are represented on FINSOB
under EESA. By adding future program decisions to the agenda,
including decisions on future TARP commitments, FinSOB can continue to
serve a role in the next phase of the TARP program as well as in the
consideration of exit strategies. Because FINSOB membership is set by
statute, Treasury should seek to conduct similar consultations with
other agencies that are not represented on FinSOB, such as the FDIC,
or these agencies could be invited occasionally to discuss specific
issues.
Treasury Considered a Number of Qualitative and Quantitative Factors
for Key Decisions Associated with the TARP Extension:
Treasury considered a number of qualitative and quantitative factors
for key decisions associated with the TARP extension. Important
factors considered for the extension of TARP centered on ongoing
weaknesses in key areas of the economy. Treasury officials noted that
housing market indicators, despite previously announced initiatives,
and financial conditions for small businesses necessitated further
commitments under MHA and small business lending programs. Treasury
underscored that while analysis was possible on the need for or
success of individual programs, the fragile state of the economy and
remaining downside risks were an ongoing source of uncertainty.
Considering this uncertainty, Treasury wanted to extend TARP through
October 2010 in order to retain resources to respond to financial
instability. On the other hand, Treasury noted that some programs had
accomplished their goals and would be terminated. Treasury cited
renewed ability of banks to access capital markets, improvements in
securitization markets, and stabilization of certain legacy asset
prices as motivating the closing of bank capital programs, TALF, and
PPIP, respectively. Treasury could strengthen its analytical framework
by identifying clear objectives for small business programs and
explaining how relevant indicators motivated TARP program decisions.
Treasury officials identified four documents that were central to its
efforts to describe and communicate to Congress and the public the
framework it used to make decisions related to the extension of TARP,
the expansion of some efforts, and the termination of others. Those
four documents were (1) the September 2009 report "The Next Phase of
Government Financial Stabilization and Rehabilitation Policies"; (2)
the December 9, 2009, letter to Congressional leadership certifying
the extension of TARP; (3) Secretary Geithner's December 10, 2009,
testimony to the Congressional Oversight Panel; and (4) the
"Management Discussion and Analysis" portion of the fiscal year 2009
Office of Financial Stability Agency Financial Report. Based on our
analysis of these documents and interviews with Treasury officials,
table 2 summarizes the key factors that contributed to Treasury's
program-level decisions associated with the extension of TARP. In
addition, we note a number of quantitative indicators identified by
Treasury that to some extent measure the key factors that influenced
the decisions. We elaborate on the nature of these decisions and the
indicators below. AGP, TIP, AIFP, and the AIG Investment Program
amounted to exceptional assistance to key institutions on a case-by-
case basis, and therefore, the expectation was that these targeted
programs would be exited as soon as practical and would not be
considered for additional commitments.
Table 2: Status of Select TARP Programs and Key Factors Driving
Treasury's Decisions:
Program: MHA;
Treasury's decision: Program extended, $10 billion available for new
commitments;
Key factor driving Treasury's decision: Weakness in housing market and
rolling out of new MHA programs;
Key indicators identified by Treasury:
* Foreclosures;
* Delinquencies (figure 1);
* HAMP trial and permanent modifications (figure 2);
* Housing prices.
Program: CDCI, Unlocking Credit for Small Business, and additional
programs for small business;
Treasury's decision: Programs extended, $32 billion available for new
commitments;
Key factor driving Treasury's decision: Contraction in bank lending
and multiple indicators pointing to tight conditions for small
business credit;
Key indicators identified by Treasury:
* Business and commercial real estate loans;
* Federal Reserve Senior Loan Officer Opinion Survey;
* National Federation of Independent Business's Small Business
Economic Trends (figure 3).
Program: CPP and CAP;
Treasury's decision: Programs closed;
Key factor driving Treasury's decision: Banks' ability to raise
capital on private markets;
Key indicators identified by Treasury:
* Common equity issuance (figure 4).
Program: TALF;
Treasury's decision: Program closed;
Key factor driving Treasury's decision: Recovery in ABS markets;
Key indicators identified by Treasury:
* ABS pricing spreads (figure 7) and TALF utilization (figure 8);
* ABS issuances.
Program: PPIP;
Treasury's decision: Program closed;
Key factor driving Treasury's decision: Recovery in legacy mortgage-
related security markets;
Key indicators identified by Treasury:
* Prices and spreads for legacy securities, including certain RMBS and
CMBS (figures 9 and 10).
Source: GAO analysis of Treasury documents and interviews.
Note: The table highlights several critical indicators that motivated
Treasury's decisions to extend or close a program, but is not intended
to be an exhaustive list of indicators Treasury considered or
identified. Other indicators are discussed below.
[End of table]
Key Factors Considered Were Ongoing Weaknesses in Key Areas of the
Economy:
Housing. Rather than allow the program to expire with $10 billion of
the original $50 billion allocated to MHA remaining uncommitted,
Treasury extended the program so that those funds could be used to
address continued weaknesses in housing markets and roll out several
additional programs that Treasury had not yet had the opportunity to
design and implement. Treasury officials noted that various metrics
they were monitoring indicated that the recovery had not successfully
reached particular areas of the economy (see table 3). Specifically,
housing market indicators, such as foreclosures and mortgage
delinquencies, remained elevated around the time the decision to
extend TARP was made, despite initiatives--like MHA--that were
designed to preserve homeownership by directly modifying mortgages for
qualified homeowners.[Footnote 22] The percentage of loans in
foreclosure (foreclosure inventory) reached 4.58 percent at the end of
the fourth quarter of 2009 and continued to increase to an
unprecedented high of 4.63 percent in the first quarter of 2010 (see
figure 1). Over the same period the serious delinquency rate--defined
as the percentage of mortgages 90 days or more past due plus those in
foreclosure--fell only slightly from 9.67 to 9.54 percent. Although
not shown, the serious delinquency rate for subprime loans exceeded 30
percent in the most recent two quarters, indicating the large
proportion of subprime loans in trouble. Foreclosure starts, which
reflect new foreclosures filings, peaked at 1.42 percent in the third
quarter of 2009 before declining over the next two periods to roughly
1.2 percent. By any measure however, foreclosure and delinquency
statistics for housing remain well above their historical averages.
Moreover, although not explicitly mentioned by Treasury, a comparison
of trends in delinquent mortgages and new foreclosure starts indicate
that more foreclosures are looming. While the foreclosure start rate
grew 36 percent from the last quarter of 2007 to the last quarter of
2009, the rate for delinquencies of 90 days or more grew by 222
percent over the same period (see figure 1).[Footnote 23] This
suggests mortgages are not rolling from delinquency to foreclosure as
expected and that lenders are not initiating foreclosures on many
loans normally subject to such actions. To the extent that foreclosure
mitigation programs are ineffective, or a large number of the trial
modifications represent unavoidable foreclosures, the resulting
foreclosures will continue to weigh on the housing market.
Figure 1: Percentage of Loans 90 days Past Due, in Foreclosure and
Seriously Delinquent:
[Refer to PDF for image: multiple line graph]
This figure contains two multiple line graphs depicting the following
data:
The following periods of economic recession are indicated on the
graphs:
1980;
1982-83;
1991;
2001-2002;
Late 2007-2010.
Q1 1979:
Seriously delinquent: 0.78%;
90+ days delinquent: 0.47%;
Foreclosures started: 0.17%;
Foreclosure Inventory: 0.31%.
Q1 1980:
Seriously delinquent: 0.86%;
90+ days delinquent: 0.54%;
Foreclosures started: 0.14%;
Foreclosure Inventory: 0.32%.
Q1 1981:
Seriously delinquent: 1.1%;
90+ days delinquent: 0.66%;
Foreclosures started: 0.18%;
Foreclosure Inventory: 0.44%.
Q1 1982:
Seriously delinquent: 1.25%;
90+ days delinquent: 0.72%;
Foreclosures started: 0.22%;
Foreclosure Inventory: 0.53%.
Q1 1983:
Seriously delinquent: 1.57%;
90+ days delinquent: 0.86%;
Foreclosures started: 0.22%;
Foreclosure Inventory: 0.71%.
Q1 1984:
Seriously delinquent: 1.57%
90+ days delinquent: 0.89%;
Foreclosures started: 0.2%;
Foreclosure Inventory: 0.68%.
Q1 1985:
Seriously delinquent: 1.77%;
90+ days delinquent: 0.98%;
Foreclosures started: 0.25%;
Foreclosure Inventory: 0.79%.
Q1 1986:
Seriously delinquent: 1.88%;
90+ days delinquent: 1.01%;
Foreclosures started: 0.25%;
Foreclosure Inventory: 0.87%.
Q1 1987:
Seriously delinquent: 2.13%;
90+ days delinquent: 1.04%;
Foreclosures started: 0.28%;
Foreclosure Inventory: 1.09%.
Q1 1988:
Seriously delinquent: 1.96%;
90+ days delinquent: 0.89%;
Foreclosures started: 0.29%;
Foreclosure Inventory: 1.07%.
Q1 1989:
Seriously delinquent: 1.78;
90+ days delinquent: 0.83%;
Foreclosures started: 0.31%;
Foreclosure Inventory: 0.95%.
Q1 1990:
Seriously delinquent: 1.67%;
90+ days delinquent: 0.7%;
Foreclosures started: 0.33%;
Foreclosure Inventory: 0.97%.
Q1 1991:
Seriously delinquent: 1.75%;
90+ days delinquent: 0.78%;
Foreclosures started: 0.33%;
Foreclosure Inventory: 0.97%.
Q1 1992:
Seriously delinquent: 1.84%;
90+ days delinquent: 0.8%;
Foreclosures started: 0.34%;
Foreclosure Inventory: 1.04%.
Q1 1993:
Seriously delinquent: 1.77%;
90+ days delinquent: 0.77%;
Foreclosures started: 0.32%;
Foreclosure Inventory: 1%.
Q1 1994:
Seriously delinquent: 1.69%;
90+ days delinquent: 0.75%;
Foreclosures started: 0.31%;
Foreclosure Inventory: 0.94%.
Q1 1995:
Seriously delinquent: 1.56%;
90+ days delinquent: 0.7%;
Foreclosures started: 0.32%;
Foreclosure Inventory: 0.86%.
Q1 1996:
Seriously delinquent: 1.63%;
90+ days delinquent: 0.68%;
Foreclosures started: 0.37%;
Foreclosure Inventory: 0.95%.
Q1 1997:
Seriously delinquent: 1.63%;
90+ days delinquent: 0.55%;
Foreclosures started: 0.36%;
Foreclosure Inventory: 1.08%.
Q1 1998:
Seriously delinquent: 1.77%;
90+ days delinquent: 0.6%;
Foreclosures started: 0.37%;
Foreclosure Inventory: 1.17%.
Q1 1999:
Seriously delinquent: 1.82%;
90+ days delinquent: 0.6%;
Foreclosures started: 0.36%;
Foreclosure Inventory: 1.22%.
Q1 2000:
Seriously delinquent: 1.72%;
90+ days delinquent: 0.55%;
Foreclosures started: 0.36%;
Foreclosure Inventory: 1.17%.
Q1 2001:
Seriously delinquent: 1.9%;
90+ days delinquent: 0.66%;
Foreclosures started: 0.4%;
Foreclosure Inventory: 1.24%.
Q1 2002:
Seriously delinquent: 2.31%;
90+ days delinquent: 0.8%;
Foreclosures started: 0.45%;
Foreclosure Inventory: 1.51%.
Q1 2003:
Seriously delinquent: 2.26%;
90+ days delinquent: 0.83%;
Foreclosures started: 0.41%;
Foreclosure Inventory: 1.43%.
Q1 2004:
Seriously delinquent: 2.14%;
90+ days delinquent: 0.85%;
Foreclosures started: 0.46%;
Foreclosure Inventory: 1.29%.
Q1 2005:
Seriously delinquent: 1.89%;
90+ days delinquent: 0.81%;
Foreclosures started: 0.42%;
Foreclosure Inventory: 1.08%.
Q1 2006:
Seriously delinquent: 1.93%;
90+ days delinquent: 0.95%;
Foreclosures started: 0.42%;
Foreclosure Inventory: 0.98%.
Q1 2007:
Seriously delinquent: 2.23%;
90+ days delinquent: 0.95%;
Foreclosures started: 0.59%;
Foreclosure Inventory: 1.28%.
Q1 2008:
Seriously delinquent: 4.03%;
90+ days delinquent: 1.56%;
Foreclosures started: 1.01%;
Foreclosure Inventory: 2.47%.
Q2 2008:
Seriously delinquent: 4.5%;
90+ days delinquent: 1.75%;
Foreclosures started: 1.08%;
Foreclosure Inventory: 2.75%.
Q3 2008:
Seriously delinquent: 5.17%;
90+ days delinquent: 2.2%;
Foreclosures started: 1.07%;
Foreclosure Inventory: 2.97%.
Q4 2008:
Seriously delinquent: 6.3%;
90+ days delinquent: 3%;
Foreclosures started: 1.08%;
Foreclosure Inventory: 3.3%.
Q1 2009:
Seriously delinquent: 7.24%;
90+ days delinquent: 3.39%;
Foreclosures started: 1.37%;
Foreclosure Inventory: 3.85%.
Q2 2009:
Seriously delinquent: 7.97%;
90+ days delinquent: 3.67%;
Foreclosures started: 1.36%;
Foreclosure Inventory: 4.3%.
Q3 2009:
Seriously delinquent: 8.85%;
90+ days delinquent: 4.38%;
Foreclosures started: 1.42%;
Foreclosure Inventory: 4.47%.
Q4 2009:
Seriously delinquent: 9.67%;
90+ days delinquent: 5.09%;
Foreclosures started: 1.2%;
Foreclosure Inventory: 4.59%.
Q1 2010:
Seriously delinquent: 9.54%;
90+ days delinquent: 4.91%;
Foreclosures started: 1.23%;
Foreclosure Inventory: 4.63%.
Source: Thomson Reuters Datastream.
Note: "90 plus days delinquent" refers to loans that are 90 days or
more past due. "Seriously delinquent" refers to loans that are 90 days
or more delinquent plus those in foreclosure.
[End of figure]
Treasury also noted that extending TARP provides the flexibility to
modify MHA to respond to the changing dynamics of the foreclosure
crisis. Treasury noted early in the crisis that many foreclosures were
the result of subprime, predatory, and fraudulent lending activity;
however, as the financial crisis progressed, Treasury has modified and
expanded its efforts because unemployment and negative equity have
become the primary drivers of foreclosures, calling for a different
approach to homeownership preservation. Treasury has modified MHA to
deal with these issues by allowing more borrowers to qualify for
modification--including borrowers with Federal Housing Administration
(FHA) loans, who are currently in bankruptcy proceedings or who owe
more than the current value of their home. Moreover, Treasury also
plans to increase the incentives provided to servicers for writing
down mortgage debt, and has included incentives for writing down
second liens. Treasury is also implementing programs in addition to
existing MHA programs that will address these issues, such as the HFA
Hardest-Hit fund and a refinance program with FHA, and expects to use
the full $50 billion for all these combined efforts. Treasury
officials acknowledged that the consequences of interventions may
prevent the housing market from fully correcting and may also increase
moral hazard by writing down mortgages for borrowers with negative
equity. However, Treasury officials and others have identified
reducing the number of unnecessary foreclosures as critical to the
economic recovery. Because not all homeowners are expected to qualify
for a HAMP modification or other mortgage relief programs under MHA,
enhancements to the program are to include relocation assistance to
some borrowers that use foreclosure alternatives such as a short sale
or a deed-in-lieu of foreclosure.[Footnote 24]
In addition to continued weakness in the housing markets and the need
for flexibility, Treasury noted that when the decision to extend the
program was made, HAMP had only recently been implemented and needed
time to ramp up to its full potential and build out all program
components. In our July 2009 report and March 2010 testimony on HAMP,
we noted that the program faced implementation challenges and that
Treasury's projection that three to four million borrowers could be
helped by offering loan modifications was based on several uncertain
assumptions and might be overly optimistic. Treasury cited the slow
pace of conversions of homeowners from trial modifications to
permanent modifications as an important reason to extend its ability
to have funds available for commitments related to foreclosure
mitigation and housing market stabilization. Total trials versus
permanent modifications continued to track the initial slow pace (see
figure 2). In October 2009, permanent modifications started totaled an
estimated 2 percent of the total cumulative government-sponsored
enterprise (GSE) and non-GSE HAMP trials started, before increasing to
just 4 percent and 7 percent for November and December 2009,
respectively. Treasury believed that the extension would allow the
program the necessary time to reach its full potential by providing
more time to complete the significant backlog of modifications, as
well as giving the servicers the opportunity to build up their
capacity, and finally allowing the public and investors time to better
understand the requirements and opportunity presented by the HAMP
process. The latest trial-to-permanent modification conversion rate
has now reached an estimated 28 percent of total cumulative HAMP
trials (see figure 2). It should be noted that there is a 3-month wait
time during the trial period. Therefore, contemporaneous comparison of
trial versus permanent modifications is not the most meaningful, since
trials entered into within the last 3 months are not eligible for
conversion into payments.
Figure 2: Cumulative GSE and Non-GSE HAMP Trial and Permanent
Modifications:
[Refer to PDF for image: multiple line graph]
May 2009 and prior:
Trial modification started: 54,562;
Permanent modification started: 0.
June 2009:
Trial modification started: 155,108;
Permanent modification started: 0.
July 2009:
Trial modification started: 274,116;
Permanent modification started: 0.
August 2009:
Trial modification started: 419,163;
Permanent modification started: 0.
September 2009:
Trial modification started: 554,293;
Permanent modification started: 4,742.
October 2009:
Trial modification started: 712,969;
Permanent modification started: 15,649.
November 2009:
Trial modification started: 825,188;
Permanent modification started: 31,424.
December 2009:
Trial modification started: 939,949;
Permanent modification started: 66,938.
January 2010:
Trial modification started: 1,028,887;
Permanent modification started: 117,302.
February 2010:
Trial modification started: 1,109,588;
Permanent modification started: 170,207.
March 2010:
Trial modification started: 1,166,925;
Permanent modification started: 230,801.
Source: GAO analysis of Treasury data.
[End of figure]
Our June 2010 report on Treasury's implementation of HAMP is an update
of our prior July 2009 report and March 2010 testimony findings.
[Footnote 25] Specifically, it addressed (1) the extent to which HAMP
servicers have treated borrowers consistently and (2) the actions that
Treasury has taken to address certain challenges, including the
conversion of trial modifications, negative equity, redefaults, and
program stability. While one of Treasury's stated goals for HAMP was
to standardize the loan modification process across the servicing
industry, we found inconsistencies in how servicers were treating
borrowers under HAMP that could lead to inequitable treatment.
Specifically, the servicers we contacted varied in the timing of HAMP
outreach to delinquent borrowers, the criteria used to determine if
borrowers were in imminent danger of default, and the tracking of
borrower complaints about servicer's implementation of HAMP.
Additionally we found that while Treasury had taken some steps to
address the challenges we had previously reported on, it urgently
needed to finalize and implement remaining program components and
ensure the transparency and accountability of these efforts. In
particular, we reported that Treasury had been slow to implement
previously announced programs it identified as needed to address the
housing problems hindering the current economic recovery, including
its second-lien modification and foreclosure alternatives programs. We
noted that Treasury recently announced additional HAMP components to
help deal with the high number of foreclosures such as programs to
help borrowers with high levels of negative equity and unemployed
borrowers, which needed to be prudently designed and implemented as
expeditiously as possible. Going forward, as Treasury continues to
design and implement new HAMP-funded programs, we reported that it
will be important that Treasury develop sufficient capacity--including
staffing resources--to plan and implement programs, establish
meaningful performance measures, and make appropriate risk assessments.
Treasury indicated that it plans to track performance measures of the
number of HAMP modifications (trial and permanent) entered into, the
redefault rate, and the change in average borrower payments to
evaluate the program going forward. However, foreclosure and
delinquency data used to motivate the decision to allocate the full
budgeted resources to MHA and other housing programs, although also
influenced by general market forces such as falling housing prices and
unemployment, should provide an indication of the effectiveness of
these efforts.[Footnote 26]
Small business lending. Treasury decided to allocate new resources to
small business lending based on the contraction in bank lending and
other indicators of small business credit conditions. However,
Treasury has yet to set explicit objectives for its small business
lending programs. Treasury wants to support lending to creditworthy
small businesses by providing capital to small banks. A drop in the
volume of lending could be explained by a combination of reduced
demand for loans, higher credit standards, or banks' lack of capital
to make new loans. Demand for business loans, including small business
loans, has dropped considerably since 2008, and credit standards have
risen, according to Federal Reserve data. At the time of the
extension, Treasury set aside $30 billion for programs to support
small business lending. Since that time, Treasury has decided to try
to create a Small Business Lending Fund through legislation outside of
TARP, due to concerns that many banks would not participate in a TARP
program. In addition, Treasury expects to make up to $1 billion in new
capital investments in community development financial institutions
(CDFI) and purchase up to $1 billion in Small Business Administration
loan securitizations, to improve access to credit for small
businesses.[Footnote 27] Relative to larger corporations, small
businesses generally have difficulty directly accessing capital
markets as an alternative source of financing and are therefore
largely reliant on bank lending.[Footnote 28] While Treasury has
stated that bank lending has contracted, Treasury refers to data on
outstanding bank loans (loan balances) of all sizes that reflect a
number of economic conditions that may not be related to new lending
and may not capture potentially divergent conditions for large and
small firms. We found in previous work that changes in loan balances
may not be a good proxy for new lending.[Footnote 29] In particular,
while outstanding commercial and industrial loans and commercial real
estate loans have fallen, losses on a loan portfolio and loan
repayments may help explain this drop.[Footnote 30]
For firms of all sizes, lack of comprehensive data on new lending
makes assessing business credit conditions particularly difficult. For
example, interest rates, on their own, may not be a good indicator of
the availability of credit. Specifically, financial institutions may
ration credit based on the quality of the borrower, rather than
continuing to lend, but charging a wider distribution of interest
rates to customers of varying credit quality. As a result, the volume
of new lending (loan originations) would be a valuable indicator of
credit availability; however, only limited data on loan originations
exist. For example, origination data exist only for certain kinds of
loans (e.g., mortgages) or only for a small subset of banks (e.g., the
largest CPP participants). Moreover, there are no consistent
historical data on lending to small businesses. Treasury officials and
others have acknowledged the limitations of data in this area, which
Treasury officials have noted, making determining when enough has been
done difficult.[Footnote 31]
While the availability of small business credit is difficult to
quantify definitively, Treasury officials noted that a number of
indicators of small business lending point to reduced access to
credit. Officials identified the Federal Reserve's Senior Loan Officer
Opinion Survey (SLOOS) and the National Federation of Independent
Business (NFIB) survey, among other sources. Taken together, these
indicators, although imperfect, generally point to a tight credit
environment for small firms. SLOOS surveys loan officers on, among
other things, lending standards for commercial and industrial loans,
and features responses by borrower size (small versus large and
medium). The survey responses show significant tightening of lending
standards for firms of all sizes, although conditions have tightened
more in the last year for small firms than for larger firms. The NFIB
Small Business Economic Trends survey contains a number of questions
on access to credit. Respondents are NFIB members, with nearly half of
all respondents from firms with five or fewer employees.[Footnote 32]
A question on borrowing needs ("During the last three months, was your
firm able to satisfy its borrowing needs?") may be indicative of
changes in access to credit for firms of this size. We compared
responses to this question to interest rate spreads for loans of less
than $1 million (a proxy for loans to small businesses) from the
Federal Reserve's Survey of Terms of Business Lending. These spreads
are premiums over the federal funds rate and indicate the risk banks
perceive in making small loans. We found that the percentage of
respondents reporting that their borrowing needs had not been
satisfied showed the same broad pattern as spreads for loans of less
than $1 million (see figure 3). In particular, both show a spike in
recent years, with increases in risk premiums for small loans and the
proportion of small businesses reporting that their borrowing needs
had not been met.[Footnote 33]
Figure 3: Interest Rate Spreads for Small Loans and Small Business
Borrowing Needs, Second Quarter 1993 through First Quarter 2010:
[Refer to PDF for image: multiple line graph]
Loan interest rates (spread over federal funds rate):
Borrowing needs not satisfied (percentage responding):
1993 Q2;
Loans $100,000 to $1 million: 3.77%;
Loans less than $100,000: 4.71%;
Borrowing needs not satisfied: 10%.
1994 Q1;
Loans $100,000 to $1 million: 3.41%;
Loans less than $100,000: 4.44%;
Borrowing needs not satisfied: 6.67%.
1995 Q1;
Loans $100,000 to $1 million: 3.47%;
Loans less than $100,000: 4.17%;
Borrowing needs not satisfied: 6%.
1996 Q1;
Loans $100,000 to $1 million: 3.4%;
Loans less than $100,000: 4.39%;
Borrowing needs not satisfied: 6%.
1997 Q1;
Loans $100,000 to $1 million: 3.45%;
Loans less than $100,000: 4.33%;
Borrowing needs not satisfied: 6%.
1998 Q1;
Loans $100,000 to $1 million: 3.32%;
Loans less than $100,000: 4.23%;
Borrowing needs not satisfied: 5%.
1999 Q1;
Loans $100,000 to $1 million: 3.31%;
Loans less than $100,000: 4.12%;
Borrowing needs not satisfied: 4.67%.
2000 Q1;
Loans $100,000 to $1 million: 3.22%;
Loans less than $100,000: 3.89%;
Borrowing needs not satisfied: 4.67%.
2001 Q1;
Loans $100,000 to $1 million: 3.26%;
Loans less than $100,000: 3.95%;
Borrowing needs not satisfied: 5.67%.
2002 Q1;
Loans $100,000 to $1 million: 3.4%;
Loans less than $100,000: 4.16%;
Borrowing needs not satisfied: 5.33%.
2003 Q1;
Loans $100,000 to $1 million: 3.31%;
Loans less than $100,000: 4.09%;
Borrowing needs not satisfied: 6%.
2004 Q1;
Loans $100,000 to $1 million: 3.27%;
Loans less than $100,000: 4.08%;
Borrowing needs not satisfied: 6.67%.
2005 Q1;
Loans $100,000 to $1 million: 3.09%;
Loans less than $100,000: 3.57%;
Borrowing needs not satisfied: 4.33%.
2006 Q1;
Loans $100,000 to $1 million: 3.01%;
Loans less than $100,000: 3.52%;
Borrowing needs not satisfied: 6%.
2007 Q1;
Loans $100,000 to $1 million: 2.96%;
Loans less than $100,000: 3.41%;
Borrowing needs not satisfied: 5%.
2008 Q1;
Loans $100,000 to $1 million: 2.92%;
Loans less than $100,000: 3.48%;
Borrowing needs not satisfied: 5%.
2009 Q1;
Loans $100,000 to $1 million: 3.5%;
Loans less than $100,000: 4.04%;
Borrowing needs not satisfied: 8.67%.
2010 Q1;
Loans $100,000 to $1 million: 3.94%;
Loans less than $100,000: 4.5%;
Borrowing needs not satisfied: 10.33%.
Source: GAO analysis of data from the Federal Reserve and National
Federation of Independent Business.
[End of figure]
Another Important Factor Was the Ability to Respond to Financial
Instability:
Because the economy was still fragile and downside risks remained,
Treasury identified the need to retain resources to respond to threats
to financial stability as an important consideration in deciding to
extend TARP. According to Treasury officials, if the economic recovery
were in jeopardy, the TARP extension gave Treasury the capability to
react should financial markets need further assistance. Treasury noted
several continued areas of weakness that supported the need to retain
resources, without making them available for commitment under specific
programs. Areas of weakness included the elevated pace of bank
failures, high unemployment, and commercial real estate losses.
Although banks in the United States had made progress in raising
capital and recognizing losses on legacy assets and loans, substantial
asset deterioration is expected across some loan classes, such as
commercial real estate and consumer and corporate loans.[Footnote 34]
Because banks will likely continue to take steps to reduce leverage,
credit conditions are expected to remain tight while high unemployment
continues to weigh on residential real estate markets and consumer
spending. As indicated above, uncommitted funds up to the total amount
authorized by EESA could be used to respond to financial instability
or growing weakness that would threaten the recovery. As of June 7,
2010, this amount is roughly $163 billion and remains available for
commitment, assuming repayments are not deployed in other efforts.
Treasury noted that, among other reasons, it extended TARP to maintain
the capacity to respond to unforeseen threats or unanticipated shocks.
Federal Reserve officials similarly noted that unanticipated events,
not foreshadowed by market data, have been the hallmark of the crisis.
The failure, or near failure, of a systemically important financial
institution would be a critical threat to financial stability.
Treasury, FDIC and the Federal Reserve responded to the failure, or
near failure, of large financial institutions during the crisis with
programs to provide assistance, such as guarantees and capital, to
keep institutions solvent, including AGP for Citigroup and AIG
Financial Assistance. According to Federal Reserve officials, one of
the reasons they supported the extension of TARP was the inadequacy of
available statutory tools to deal with threats to financial stability,
such as the failure of a large financial institution. One proposed
tool is an authority for the orderly resolution of large, nonbank
financial institutions. In previous work, we have noted that some
interventions to support failing institutions can undermine market
discipline and increase moral hazard.[Footnote 35] For example, in the
presence of a government back-stop, firms anticipate government
assistance in the future and thus have less incentive to properly
manage risk. Regulatory reforms that enhance oversight and capital
requirements at large financial institutions--in essence making it
more costly to be a large financial institution--would help to counter
some erosion of market discipline. Similarly, an effective resolution
authority could impose losses on managers, shareholders, and some
creditors, but must also properly balance the need to encourage market
discipline with the need to maintain financial stability. Treasury
officials noted the importance of having financial regulatory reform
in place before TARP expires in October 2010.
According to Treasury, Programs That Had Accomplished Their Goals Were
Terminated:
Bank capital programs. Treasury has ended broad programs, such as CPP
and CAP, established to improve the solvency of financial institutions
to support their ability to lend, based on banks' renewed ability to
access private capital markets and issue new equity. Treasury has
stated that by building capital, CPP was expected to increase lending
to U.S. businesses and consumers. Treasury has disbursed more than
$200 billion for the CPP, and has received $142 billion in repayments
as of May 28, 2010. CAP was designed to help ensure that certain large
financial institutions had sufficient capital to withstand severe
economic challenges. It was supported by SCAP which assessed capital
needs at the 19 largest bank holding companies in the United States.
Banks that needed additional capital as a result of SCAP raised $80
billion from private sources, while GMAC received additional capital
from Treasury under AIFP. No CAP investments were made as a result and
the program closed on November 9, 2009. Treasury has indicated that
the renewed ability of banks to raise capital on private markets was a
key measure of success for CPP and CAP and a key consideration in
ending these programs. From 2000 to 2007, banks largely did not need
to raise capital by issuing common equity, averaging only $1.3 billion
per quarter. Banks and thrifts raised significant amounts of common
equity in 2008, averaging $56 billion per quarter, before issuance
dropped precipitously in the first quarter of 2009 to $200 million--a
99 percent drop from the previous quarter and a 63 percent drop from
the year before. Banks and thrifts raised $63 billion in common equity
in the second quarter of 2009, an increase of 28,000 percent from the
previous quarter and 236 percent over the year before (see figure 4).
Figure 4: Gross Common Equity Issuance by Banks and Thrifts, 2000 to
2010:
[Refer to PDF for image: vertical bar graph]
Year: 2000: 1.4 billion.
Year: 2001: 2 billion.
Year: 2002: 2.5 billion.
Year: 2003: $6 billion.
Year: 2004: $6.1 billion.
Year: 2005: $9.7 billion.
Year: 2006: $3.9 billion.
Year: 2007: $9 billion;
Q1: $1.3 billion;
Q2: $5 billion;
Q3: $1.2 billion;
Q4: $1.4 billion.
Year: 2008: $56 billion;
Q1: $0.6 billion;
Q2: $18.7 billion;
Q3: $13.2 billion;
Q4: $23.5 billion.
Year: 2009: $107.4 billion;
Q1: $0.2 billion;
Q2: $62.9 billion;
Q3: $6.8 billion;
Q4: $37.5 billion.
Year: 2010;
Q1: $9.6 billion.
Source: GAO analysis of data from SNL Financial.
[End of figure]
Banks' renewed ability to raise capital on private markets reflects
improvements in perceptions of the financial condition of banks. The 3-
month TED spread--the premium of the London interbank offered rate
(LIBOR) over the Treasury interest rate of comparable maturity--
indicates the perceived risk of lending among banks. The TED spread
peaked at more than 450 basis points in October 2008 before falling to
less than 15 basis points at the end of the third quarter of 2009 (see
figure 5).[Footnote 36] In previous work, we found that the decline in
perceptions of risk in the interbank market could be attributed in
part to several federal programs aimed at stabilizing markets that
were announced on October 14, 2008, including CPP.[Footnote 37]
Nevertheless, the associated improvement in the TED spread cannot be
attributed solely to TARP because the announcement of CPP was a joint
announcement that also introduced the Federal Reserve's Commercial
Paper Funding Facility program and FDIC's TLGP. Financial stress re-
emerged in the interbank market in May 2010, highlighting the fragile
nature of the recovery in the financial system. The TED spread has
increased moderately from a low of less than 10 basis points in March
2010 to more than 40 basis points as of mid-June 2010, as concerns
about sovereign debt in the European Union has increased. U.S. banks'
exposure to credit risk in Europe and the sensitivity to the global
economy has heightened risk premiums among banks lending to each
other. While fluctuations in perceived risk in the banking system are
natural, and necessary, if risk is to be priced and allocated
efficiently, this re-emergence of risk offers some support for
Treasury's decision to retain resources to combat financial
instability, especially in light of the limitations of the current
financial regulatory system.
Figure 5: TED Spread, 2000 to Present:
[Refer to PDF for image: line graph]
The graph depicts daily spreads from 2000 through 2010. Depicted below
are spreads on the first day of each month in that time period.
2000:
January: 0.52375%;
February: 0.38125%;
March: 0.35%;
April: 0.42%;
May: 0.5025%;
June: 1.12875%;
July: 0.77%;
August: 0.47%;
September: 0.4025%;
October: 0.53438%;
November: 0.38875%;
December: 0.45625%.
2001:
January: 0.50875%;
February: 0.39%;
March: 0.24875%;
April: 0.62%;
May: 0.42%;
June: 0.2725%;
July: 0.16%;
August: 0.12625%;
September: 0.09563%;
October: 0.23%;
November: 0.15%;
December: 0.2275%.
2002:
January: 0.14125%;
February: 0.16%;
March: 0.13125%;
April: 0.24%;
May: 0.15%;
June: 0.12625%;
July: 0.14%;
August: 0.1325%;
September: 0.11875%;
October: 0.17188%;
November: 0.22875%;
December: 0.1825%.
2003:
January: 0.16%;
February: 0.17%;
March: 0.14%;
April: 0.1575%;
May: 0.2%;
June: 0.14%;
July: 0.22%;
August: 0.19125%;
September: 0.16%;
October: 0.2%;
November: 0.21%;
December: 0.22813%.
2004:
January: 0.20188%;
February: 0.19%;
March: 0.15%;
April: 0.18%;
May: 0.18%;
June: 0.15688%;
July: 0.38%;
August: 0.19%;
September: 0.22%;
October: 0.3175%;
November: 0.19%;
December: 0.19875%.
2005:
January: 0.24438%;
February: 0.24%;
March: 0.18%;
April: 0.32%;
May: 0.28%;
June: 0.38%;
July: 0.35875%;
August: 0.23%;
September: 0.375%;
October: 0.46%;
November: 0.30063%;
December: 0.47%.
2006:
January: 0.45625%;
February: 0.22%;
March: 0.23%;
April: 0.33%;
May: 0.31%;
June: 0.44063%;
July: 0.4%;
August: 0.3475%;
September: 0.37063%;
October: 0.49%;
November: 0.3%;
December: 0.33563%.
2007:
January: 0.34%;
February: 0.23%;
March: 0.1975%;
April: 0.31%;
May: 0.455%;
June: 0.57%;
July: 0.41%;
August: 0.46953%;
September: 1.65875%;
October: 1.31%;
November: 1.0675%;
December: 2.08063%.
2008:
January: 1.3425%;
February: 0.995%;
March: 1.31438%;
April: 1.28375%;
May: 1.33438%;
June: 0.82625%;
July: 0.9175%;
August: 1.13438%;
September: 1.09%;
October: 3.3%;
November: 2.36875%;
December: 2.15%.
2009:
January: 1.315%;
February: 0.955%;
March: 0.98625%;
April: 0.95688%;
May: 0.84688%;
June: 0.52%;
July: 0.4175%;
August: 0.28188%;
September: 0.19438%;
October: 0.18438%;
November: 0.21938%;
December: 0.19531%.
2010:
January: 0.19063%;
February: 0.14906%;
March: 0.12169%;
April: 0.1315%;
May: 0.17656%;
June: 0.37625%;
mid-June: 0.43894%.
Source: GAO analysis of data from Thomson Reuters.
[End of figure]
The impact of CPP on lending is difficult to determine because data on
loan originations are limited, and how much lending would have
occurred in the absence of CPP is not known.[Footnote 38] We have
noted in previous reports that some tension exists between the goals
of improving banks' capital positions and promoting lending--that is,
the more capital banks use for lending, the less their overall capital
positions will improve.[Footnote 39] Treasury collects data monthly on
new lending from the largest participants in CPP, which included for a
time as many as 22 institutions.[Footnote 40] As a result, more is
known about recent loan originations by large banks than small banks.
Ten institutions that repaid CPP in June 2009 stopped submitting data
after November 2009. New lending by the largest CPP recipients was
$244 billion in November 2009, up 2 percent from the prior month and
17 percent from the year before. However, lending in the third quarter
of 2009 was down 12 percent from the second quarter (see figure 6).
Figure 6: New Lending at Largest CPP Recipients, October 2008 to
November 2009:
[Refer to PDF for image: line graph]
October 2008: $264.517 billion;
November 2008: $209.089 billion;
December 2008: $246.056 billion;
January 2009: $244.212 billion;
February 2009: $232.359 billion;
March 2009: $294.799 billion;
April 2009: $273.252 billion;
May 2009: $276.987 billion;
June 2009: $312.059 billion;
July 2009: $282.379 billion;
August 2009: $234.653 billion;
September 2009: $239.355 billion;
October 2009: $240.225 billion;
November 2009: $244.383 billion.
Source: GAO analysis of Treasury loan survey.
[End of figure]
Support to securitization markets through TALF. With underwriters
finding increasing success in bringing issuances to the ABS market and
decreasing their utilization of TALF, Federal Reserve and Treasury
decided not to extend TALF further. TALF expired on March 31, 2010,
for loans backed by ABS and legacy CMBS, and is scheduled to terminate
at the end of June 2010 for loans backed by newly-issued CMBS.
[Footnote 41] The program was designed to increase liquidity and
reopen the asset-backed securitization markets in an effort to improve
access to credit for consumers and small businesses after the decrease
in issuances and the refusal of market participants to purchase
potential offerings at rates that were acceptable to issuers. TALF-
assisted issuances began in March 2009 after an initial announcement
in late 2008. Officials from the Federal Reserve and Treasury
highlighted that TALF was designed to attract investors when market
conditions were stressful, but lose its appeal as conditions improved
and spreads tightened to the point that the rate on ABS bonds were
lower than the cost of borrowing from the program.
Federal Reserve and Treasury officials have also cited declining asset
spreads in the ABS market as justification for not making new
commitments under TALF (see figure 7).[Footnote 42] While not at
precrisis levels, spreads have tightened significantly from their
heights at the beginning of 2009. Considering the excesses during the
recent credit expansion, the desirability of a return to precrisis
levels in many areas of the securitization markets is debatable.
However, for most TALF-eligible assets, spreads have tightened
significantly. For instance, average auto ABS spreads peaked at more
than 400 basis points over the benchmark in late 2009, but have since
returned to less than 100 basis points over the benchmark in early
2010. Private student loans ABS, however, have maintained spreads
above precrisis levels. According to Federal Reserve officials this is
partly due to the performance of the underlying student loans and
because some of the securities were not structured well. Nevertheless,
the contraction in spreads for most TALF-eligible ABS can be seen as
normalization of the securitization markets as participants view new
and existing issuances as less risky. Some of the decline in spreads
and the perceptions of risk in recent securitizations may be
attributable to the products themselves. Since the crisis, new
securitizations have generally been structured with more credit
protections through enhancements such as greater levels of
subordination and overcollateralization.[Footnote 43]
Figure 7: TALF Eligible Asset Class ABS Spreads Since 2005:
[Refer to PDF for image: multiple line graph]
The graph depicts daily spreads from 2005 through 2010. Depicted below
are spreads on the representative days in that time period.
Spreads over benchmark in basis points:
2005:
Private student loan ABS average: 5.16667;
Credit card average: 3.25;
Equipment ABS average: 10;
Auto ABS average: 7.
2006:
Private student loan ABS average: 4.5;
Credit card average: -0.25;
Equipment ABS average: 14;
Auto ABS average: 6.5.
2007:
Private student loan ABS average: 2.16667;
Credit card average: 1.5;
Equipment ABS average: 7;
Auto ABS average: 5.25.
2008:
Private student loan ABS average: 57.1667;
Credit card average: 61.25;
Equipment ABS average: 100;
Auto ABS average: 85.
Private student loan ABS average: 67.1667;
Credit card average: 61.25;
Equipment ABS average: 125;
Auto ABS average: 96.25.
Private student loan ABS average: 78.3333;
Credit card average: 68.75;
Equipment ABS average: 125;
Auto ABS average: 98.75.
Private student loan ABS average: 90;
Credit card average: 82.75;
Equipment ABS average: 175;
Auto ABS average: 112.5.
Private student loan ABS average: 102.5;
Credit card average: 101.25;
Equipment ABS average: 212.5;
Auto ABS average: 131.25.
Private student loan ABS average: 130;
Credit card average: 115;
Equipment ABS average: 300;
Auto ABS average: 138.75.
Private student loan ABS average: 120;
Credit card average: 94.5;
Equipment ABS average: 300;
Auto ABS average: 101.25.
Private student loan ABS average: 90.8333;
Credit card average: 82;
Equipment ABS average: 300;
Auto ABS average: 101.25.
Private student loan ABS average: 83.3333;
Credit card average: 55.25;
Equipment ABS average: 300;
Auto ABS average: 79.5.
Private student loan ABS average: 100.833;
Credit card average: 68.25;
Equipment ABS average: 350;
Auto ABS average: 83.25.
Private student loan ABS average: 125.833;
Credit card average: 92;
Equipment ABS average: 375;
Auto ABS average: 106.
Private student loan ABS average: 150.833;
Credit card average: 95.75;
Equipment ABS average: 375;
Auto ABS average: 117.25.
Private student loan ABS average: 186.667;
Credit card average: 156.25;
Equipment ABS average: 500;
Auto ABS average: 171.25.
Private student loan ABS average: 318.333;
Credit card average: 250;
Equipment ABS average: 600;
Auto ABS average: 268.75.
Private student loan ABS average: 410;
Credit card average: 325;
Equipment ABS average: 625;
Auto ABS average: 331.25.
Private student loan ABS average: 512.5;
Credit card average: 425;
Equipment ABS average: 675;
Auto ABS average: 431.25.
Private student loan ABS average: 580.833;
Credit card average: 431.25;
Equipment ABS average: 800;
Auto ABS average: 431.25.
2009:
Private student loan ABS average: 560;
Credit card average: 431.25;
Equipment ABS average: 950;
Auto ABS average: 431.25.
Private student loan ABS average: 348.333;
Credit card average: 275;
Equipment ABS average: 1200;
Auto ABS average: 320.
Private student loan ABS average: 346.667;
Credit card average: 196.25;
Equipment ABS average: 1000;
Auto ABS average: 301.25.
Private student loan ABS average: 251.667;
Credit card average: 106.25;
Equipment ABS average: 750;
Auto ABS average: 188.75.
Private student loan ABS average: 165;
Credit card average: 106.25;
Equipment ABS average: 750;
Auto ABS average: 188.75.
Private student loan ABS average: 115.833;
Credit card average: 56.25;
Equipment ABS average: 550;
Auto ABS average: 83.75.
Private student loan ABS average: 87.5;
Credit card average: 40;
Equipment ABS average: 550;
Auto ABS average: 68.75.
2010:
Private student loan ABS average: 74.1667;
Credit card average: 32.5;
Equipment ABS average: 500;
Auto ABS average: 60.
Private student loan ABS average: 47.5;
Credit card average: 20;
Equipment ABS average: 475;
Auto ABS average: 45.
Private student loan ABS average: 35;
Credit card average: 12.5;
Equipment ABS average: 337.5;
Auto ABS average: 25.
Source: GAO analysis of independent broker dealer data.
[End of figure]
The Federal Reserve structured TALF to reduce the rate of utilization
of the facility as the market returned to normalcy through relatively
high pricing of TALF loans. As we noted in a previous GAO report,
during 2009, returns generally decreased for select classes of TALF-
eligible collateral between the first TALF operation in March 2009 and
the latter part of the year, with limited exceptions.[Footnote 44] The
report notes that as these returns generally became increasingly
negative through the year, participants would have essentially locked
in losses with certain issuances. To avoid this, many participants
instead chose to forego TALF financing for these issuances and instead
finance their own investments.
ABS markets began to show signs of health as 2009 quarterly issuances
were above their lows in 2008 and utilization of TALF began decreasing
in mid-2009. ABS issuances experienced a significant decline in 2008,
but stabilized in 2009 (see figure 8). TALF issuance dollar volume
peaked in the third quarter of 2009, but by the fourth quarter TALF
volume decreased significantly and at a faster rate than the total
decrease in ABS volume. Further, there has been one CMBS new issuance
that utilized TALF financing although the commercial real estate
market continues to experience stresses and there has been little
activity in the sector as a whole. Partly as a result of the
continuing difficulties in this market, TALF loans backed by newly
issued CMBS will be allowed through June 2010 even though the rest of
the program closed at the end of March.
Figure 8: Credit Card, Auto, and Student Loan ABS and CMBS Issuance
and TALF Utilization:
[Refer to PDF for image: multiple line graph]
2008, Q1;
Total issuance volume: $51.8 billion;
TALF issuance volume: 0.
2008, Q2;
Total issuance volume: $58.8 billion;
TALF issuance volume: 0.
2008, Q3;
Total issuance volume: $23.1 billion;
TALF issuance volume: 0.
2008, Q4;
Total issuance volume: $1.6 billion;
TALF issuance volume: 0.
2009, Q1;
Total issuance volume: $16.1 billion;
TALF issuance volume: $8.2 billion.
2009, Q2;
Total issuance volume: $44.0 billion;
TALF issuance volume: $29.9 billion.
2009, Q3;
Total issuance volume: $40.9 billion;
TALF issuance volume: $33.3 billion.
2009, Q4;
Total issuance volume: $19.9 billion;
TALF issuance volume: $11.0 billion.
2010, Q1;
Total issuance volume: $20.9 billion;
TALF issuance volume: $4.8 billion.
2010, Q2;
Total issuance volume: $18.1 billion;
TALF issuance volume: 0.
Source: GAO analysis of Thomson Reuters data.
[End of figure]
Addressing "troubled" (legacy) securities through PPIP. Initially
announced at up to $100 billion, Treasury reduced the amount available
for commitment under PPIP based on improvements in the prices for
certain legacy assets. Announced in March 2009, Treasury offered
equity and debt financing to nine private fund managers, however, no
further commitments to new funds are planned. The Legacy Securities
Public-Private Investment Program (S-PPIP) is a program whereby
Treasury and private sector fund managers and investors partnered to
purchase eligible securities from banks, insurance companies, mutual
funds, pension funds, and other sellers defined as eligible under
EESA.[Footnote 45] Treasury indicated that this process was designed
to allow financial institutions to repair their balance sheets by
removing troubled assets and allow for renewed lending to households.
Treasury participates by providing matching equity financing and debt
financing up to 100 percent of the total equity of the fund. A related
program, L-PPIP, was also announced at the same time by Treasury and
FDIC but never operated as a TARP program. This program, however,
suspended its planned sale of legacy assets held by banks in order to
focus its use in the sale of receivership assets in bank
failures.[Footnote 46] Treasury did not include PPIP in its plans for
new commitments in 2010, but has tracked the performance of each
individual fund since inception.
Treasury stated that a recovery in asset prices in the RMBS and CMBS
markets was one indicator that PPIP was effective and achieved its
stated purpose. The return of market confidence can be seen in the
general recovery or stabilization of asset prices. PPIP and the TARP
programs to support bank capital were both intended to improve bank
balance sheets. As we noted previously, banks have already been able
to raise large amounts of private capital and perceptions of risk in
the banking system have declined markedly since the onset of the
crisis. PPIP and various other programs and initiatives may have to
some extent addressed concerns about bank balance sheets.[Footnote 47]
An indication of the reduction in perceptions of risk is the general
recovery in prices of legacy securities is the pricing of Jumbo and
Alt-A RMBS securities (see figure 9).[Footnote 48]
Figure 9: Jumbo and Alt-A RMBS Price Indices Since May 2008:
[Refer to PDF for image: multiple line graph]
The graph depicts price indices from 2008 through 2010. Depicted below
are indices on representative days in that time period.
Price as a percentage of par value of MBS:
2008:
Hybrid alt-a average: 80%;
Jumbo average: 92.625%.
Hybrid alt-a average: 76.5%;
Jumbo average: 91.3647%.
Hybrid alt-a average: 67.619%;
Jumbo average: 85.6667%.
Hybrid alt-a average: 60.5%;
Jumbo average: 75.7143%.
Hybrid alt-a average: 51.6667%;
Jumbo average: 63.5%.
Hybrid alt-a average: 35.5%;
Jumbo average: 58%.
Hybrid alt-a average: 44.3333%;
Jumbo average: 65.5%.
2009:
Hybrid alt-a average: 44.3333%;
Jumbo average: 65.5%.
Hybrid alt-a average: 40.0238%;
Jumbo average: 65.0952%.
Hybrid alt-a average: 50.381%;
Jumbo average: 76.8571%.
Hybrid alt-a average: 60.3333%;
Jumbo average: 84.6667%.
2010:
Hybrid alt-a average: 63.1667%;
Jumbo average: 89.8333%.
Hybrid alt-a average: 56.6667%;
Jumbo average: 86%.
Hybrid alt-a average: 64.5238%;
Jumbo average: 87.4286%.
Hybrid alt-a average: 62.6667%;
Jumbo average: 87.3333%.
Source: GAO analysis of independent broker dealer data.
[End of figure]
Highly-rated CMBS prices also confirm that parts of the ABS and MBS
markets have stabilized since PPIP was announced. Specifically, highly-
rated CMBS prices have rebounded from their lows in late-2008, and we
note that average spreads have also tightened in the same time period
(see figure 10). This, however, does not reflect the continuing
troubles in the broader commercial real estate market as delinquencies
have continued to increase.
Figure 10: CMBS AAA Tranche Average Prices and Spreads Since 2005:
[Refer to PDF for image: multiple line graph]
The graph depicts prices and spreads from 2005 through 2010. Depicted
below are prices and spreads on representative days in that time
period.
Spread in bps over Treasury yields:
2005:
Average spread: 66.7249.
2006:
Average spread: 76.8918.
2007:
Average spread: 66.0568.
2008:
Average spread: 175.006.
Average spread: 380.402.
Average spread: 451.603.
Average spread: 300.309.
Average spread: 250.146.
Average spread: 392.659.
Average spread: 460.664.
Average spread: 577.689.
Average spread: 813.95.
Average spread: 1634.79.
Average spread: 1296.54.
2009:
Announcement of PPIP in March 2009 coincided with significant
tightening.
Average spread: 1228.63.
Average spread: 1006.43.
Average spread: 895.532.
Average spread: 795.65.
Average spread: 683.2.
Average spread: 501.472.
2010:
Average spread: 471.467.
Average spread: 434.317.
Average spread: 397.119.
Average spread: 375.284.
Price as a percentage of par:
2005:
Average price: 103.646%.
2006:
Average price: 101.985%.
2007:
Average price: 100.117%.
2008:
Average price: 101.352%.
Average price: 86.4355%.
Average price: 80.4986%.
Average price: 93.1023%.
Average price: 77.419%.
Average price: 56.547%.
Average price: 41.0462%.
2009:
Average price: 46.3937%.
Average price: 40.0912%.
Average price: 50.6333%.
Average price: 60%.
Average price: 70.5667%.
Average price: 70.0667%.
2010:
CMBS prices have continued to improve following the December 2009 TARP
extension.
Average price: 72.0428%.
Average price: 74.1%.
Average price: 79.1%.
Source: GAO analysis of independent broker dealer data.
[End of figure]
Treasury Can Strengthen Its Analytical Framework to Improve Its
Usefulness for Future Decisions:
Figure 29: Treasury could strengthen its analytical framework by
identifying clear objectives for small business programs and
explaining how relevant indicators motivated TARP program decisions.
As noted above, Treasury identified four public documents that
represented its rationale and decision-making process for the decision
to extend TARP. Our understanding of Treasury's decision-making
process was also informed by reading FinSOB quarterly reports and
through our interviews with Treasury and other officials. Treasury
often directly or indirectly linked program decisions to a variety of
quantitative indicators, including surveys, financial market prices
and quantities, and measures of program utilization, among others. As
discussed previously, all of these factors played an important role in
the decision to extend TARP, expand some programs, and end others. As
noted in our October 2009 report, indicators are an important step
toward providing a credible foundation for TARP decision making.
However, how the performance of an indicator affected a program
decision, or if and when that indicator would signal a program had or
had not met its goals was not always clear. Balancing the costs and
benefits of TARP programs effectively will require making objectives
explicit, assessing the impact of any commitments under TARP programs,
and accounting for the fiscal and other costs of continuing to support
markets. Again, a set of indicators, although imperfect, might inform
the proper timing for winding down the remaining programs and
liquidating of investments.[Footnote 49]
Treasury has yet to identify clear program objectives for small
business lending, which raises questions about when Treasury will know
that government assistance can be removed. Without a strong analytic
framework that includes clear objectives and meaningful measures,
Treasury will be challenged in determining whether the program is
achieving its desired goals. Given the scale of TARP and importance of
the government's entry and exit from financial market interventions,
decisions to allocate remaining resources should be subject to
rigorous analysis. Because Treasury may decide to commit additional
resources to problem areas before the expiration of TARP, or scale
back commitments in others, it needs to be able to estimate the effect
of program resources on meeting its objectives. Wherever possible
Treasury should use quantitative factors in its decision making, but
we recognize that qualitative factors are also important. While HAMP
continues to face implementation challenges, the small business
initiatives are challenged by a lack of data needed to clarify the
root of the problem which may limit Treasury's ability to effectively
address it. For example, without data and analysis to determine the
extent to which access to small business credit is being restricted by
limited capital at institutions engaged in small business lending,
Treasury will not have a sufficient basis to address the underlying
issues that may be affecting small business lending. With a better
understanding of the problem, Treasury can set clear, achievable goals
to address it.
Conclusions:
The crisis and consequent interventions temporarily changed the U.S.
financial system from one primarily reliant on markets and market
discipline to one more reliant on government assistance and public
capital. With the recovery underway, financial regulators in the
United States have begun to shift focus from stabilizing the economy
to exiting from crisis-driven interventions and transferring risk back
into the hands of the private sector. Many TARP recipients have repaid
loans and repurchased shares and warrants. A recent Federal Open
Market Committee meeting focused on how the Federal Reserve should
sell off assets acquired during the financial crisis. However,
weaknesses in residential housing, commercial real estate, and labor
markets, as well as risk from more global economic forces, limit the
ability to withdraw rapidly and completely. For example, the Federal
Reserve dollar liquidity swap lines were re-established with some
central banks in response to the re-emergence of strains in short-term
U.S. dollar funding markets as a result of European debt and currency
issues.
While the Secretary, in consultation with the Federal Reserve and
FDIC, elected to extend TARP to address perceived weaknesses in the
economy and respond to unanticipated shocks, Treasury still faces
remaining decisions about allocating any additional funds to MHA and
CBLI before its ability to take actions authorized by EESA expires on
October 3, 2010. Moreover, ongoing decisions will need to be made
related to the general exit strategy, including unwinding the equity
investments and scaling back commitments in an environment where (1)
other regulators are unwinding their programs, (2) the economy is
still coping with the legacy of the crisis, (3) market distortion and
moral hazard concerns are pressing, and (4) the long-term fiscal
challenges facing the United States have become more urgent. While the
level of consultation with the Federal Reserve was generally robust,
broad coordination could be enhanced and formalized for future
judgments. Similarly, decisions to allocate remaining resources and
the timing of exits should be subject to rigorous analysis. By
strengthening its framework for decision making, Treasury can better
ensure that competing priorities are properly weighed and the next
phase of the program is effectively executed.
Although the economy is still fragile, a key priority will be to
develop, coordinate, and communicate exit strategies to unwind the
remaining programs and investments resulting from the extraordinary
crisis-driven interventions. Because TARP will be unwinding
concurrently with other important interventions by federal regulators,
decisions about the sequencing of the exits from various federal
programs will require bringing a larger body of regulators to the
table to plan and sequence the continued unwinding of federal support.
Similar to the need for a coordinated course of action to stabilize
the financial system and re-establish investor confidence, the general
exit from the government interventions will require careful
coordination to avoid upsetting the recovery and help ensure the
proper sequencing of the exits.[Footnote 50] Beyond the immediate
costs of financial crises, these episodes can have longer term
consequences for fiscal balances and government debt especially if the
policy responses exacerbate the situation, lack coherency and
effectiveness, or the exit strategy undermines the recovery because it
occurs too soon or not soon enough. Moreover, as we discussed earlier
in this report, the financial crisis and response has contributed to
an already challenging fiscal legacy. As a result, the administration
and Congress will need to apply the same level of intensity to the
nation's long-term fiscal challenge as they have to the recent
economic and financial market issues.[Footnote 51] Coherent and
effectively carried out exit strategies are the first step in
beginning to address these challenges.
Recommendations for Executive Actions:
We are making two recommendations to the Secretary of the Treasury:
1. To effectively conduct a coordinated exit from TARP and other
government financial assistance, we recommend that the Secretary of
Treasury formalize and document coordination with the Chairman of the
FDIC for decisions associated with the expiration of TARP (1) by
including the Chairman at relevant FinSOB meetings, (2) through formal
bilateral meetings, or (3) by utilizing other forums that accommodate
more structured dialogue.
2. To improve the transparency and analytical basis for program
decisions made before TARP's expiration, we recommend that the
Secretary of the Treasury publicly identify clear program objectives,
the expected impact of programs, and the level of additional resources
needed to meet those objectives. In particular, Treasury should set
quantitative program objectives for its small business lending
programs and identify any additional data needed to make program
decisions.
Agency Comments and Our Evaluation:
We provided a draft of this report to Treasury for its review and
comment. We also provided the draft report to the Federal Reserve and
FDIC for their review. Treasury provided written comments that we have
reprinted in appendix III. Treasury, the Federal Reserve, and the FDIC
also provided technical comments that have been incorporated as
appropriate.
In its comments, Treasury generally agreed with our recommendations
and noted that it would continue to consult extensively with the
Federal Reserve and FDIC. Treasury agreed that publicly identifying
clear program objectives was important and pledged to continue its
efforts to do so.
In commenting, the Federal Reserve questioned the use of FinSOB as a
coordination mechanism for the next phase of the TARP program. We have
amended our recommendation to clarify that we are not advocating an
expansion of FinSOB membership or to otherwise change its structure or
purpose. We continue to believe FinSOB is a potential forum for more
formal interaction between agencies by including nonmembers at
relevant meetings, not by expanding membership. Moreover, leveraging
FinSOB is just one option for formalizing and documenting coordination
between Treasury and FDIC. Bilateral meetings or using other forums
that accommodate structured dialogue would be consistent with our
recommendation.
We are sending copies of this report to the Congressional Oversight
Panel, Financial Stability Oversight Board, Special Inspector General
for TARP, interested congressional committees and members, Treasury,
the federal banking regulators, and others. In addition, the report
will be available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staff have any questions about this report, please
contact Richard J. Hillman at (202) 512-8678 or hillmanr@gao.gov;
Thomas J. McCool at (202) 512-2642 or mccoolt@gao.gov; or Orice
Williams Brown at (202) 512-8678 or williamso@gao.gov. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this report. GAO staff who made major
contributions to this report are listed in appendix IV.
Signed by:
Gene L. Dodaro:
Acting Comptroller General of the United States:
List of Committees:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Thad Cochran:
Vice Chairman:
Committee on Appropriations:
United States Senate:
The Honorable Christopher J. Dodd:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Kent Conrad:
Chairman:
The Honorable Judd Gregg:
Ranking Member:
Committee on the Budget:
United States Senate:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable David R. Obey:
Chairman:
The Honorable Jerry Lewis:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable John M. Spratt, Jr.
Chairman:
The Honorable Paul Ryan:
Ranking Member:
Committee on the Budget:
House of Representatives:
The Honorable Barney Frank:
Chairman:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Sander M. Levin:
Acting Chairman:
The Honorable Dave Camp:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
The objectives of this report are to determine (1) the process the
Department of the Treasury (Treasury) used to decide to extend the
Troubled Asset Relief Program (TARP) and the extent of coordination
with relevant agencies and (2) the analytical framework and
quantitative indicators Treasury used to decide to extend TARP.
To determine the process Treasury used to decide to extend TARP and
the extent of coordination with relevant agencies, we interviewed
officials from Treasury and the Board of Governors of the Federal
Reserve System (Federal Reserve), and received official responses to
our questions from the Federal Deposit Insurance Corporation (FDIC).
In addition, we reviewed Treasury documents and analyses, Financial
Stability Oversight Board (FinSOB) reports, and previous GAO reports.
In particular, we reviewed four public documents Treasury identified
as central to its efforts to describe and communicate the framework it
used to make decisions related to the extension of TARP to Congress
and the public (1) the September 2009 report "The Next Phase of
Government Financial Stabilization and Rehabilitation Policies"; (2)
the December 9, 2009, letter to Congressional leadership certifying
the extension of TARP; (3) Secretary Geithner's December 10 testimony
to the Congressional Oversight Panel; and (4) the "Management
Discussion and Analysis" portion of the fiscal year 2009 Office
Financial Stability Agency Financial Report.
To determine the analytical framework and quantitative indicators
Treasury used to decide to extend TARP, we similarly interviewed
Treasury and the Federal Reserve and received official responses to
our questions from FDIC. We also reviewed Treasury documents and
analyses, FinSOB reports, and previous GAO reports. Based on the four
key documents that Treasury identified and interviews with Treasury
officials, we determined the key factors that motivated Treasury's
program-specific decisions associated with the extension of TARP and
quantitative indicators that to some extent captured those factors. We
furthermore analyzed data from Thomson Reuters, Treasury, the Federal
Reserve, the National Federation of Independent Businesses, SNL
Financial, and a broker-dealer to assess the state of the economy and
financial markets. These data may also be suggestive of the
performance and effectiveness of TARP. We believe that these data,
considered as a whole, are sufficiently reliable for the purpose of
summarizing TARP activity and Treasury's decision-making process, and
presenting and analyzing trends in the economy and financial markets.
We identified some limitations of the data on credit conditions for
small businesses, including the fact that the National Federation of
Independent Business survey over-represents certain industries, and
therefore may not represent the credit experiences of all small firms.
Moreover, there are no consistent historical data on lending to small
businesses. In addition, the data from Treasury's survey of lending by
the largest Capital Purchase Program (CPP) recipients (as of November
30, 2009, the last month in which all of the largest CPP recipients
participated) are based on internal reporting from participating
institutions, and the definitions of loan categories may vary across
banks. Because these data are unique, we are not able to benchmark the
origination levels against historical lending or seasonal patterns at
the institutions.
We conducted our audit from March 2010 through June 2010 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.
[End of section]
Appendix II: Selected Interventions by Federal Financial Regulators in
the United States:
The financial crisis prompted an extraordinary response from financial
regulators in the United States. As table 3 shows, the crisis-driven
interventions--both within and outside of TARP--can be roughly
categorized into programs that: 1) provided capital directly to
financial institutions, 2) enhanced financial institution's access to
liquid assets through collateralized lending or other credit
facilities to 3) purchased nonperforming or illiquid assets, 4)
guaranteed liabilities, 5) intervened in specific financial markets,
and 6) mitigated home foreclosures. Some programs involved exceptional
assistance to particular institutions, such as American International
Group (AIG), because of its systemic importance or supported
particular markets while others involved assistance to individuals
through refinance or loan modification programs. Table 3 does not
include interventions or programs that existed prior to the financial
crisis, such as the Federal Reserve's loan program through the
discount window, FDIC receivership of failed banks, or interventions
that did not expose the intervening bodies to risks or involve federal
outlays such as the Securities and Exchange Commission's temporary ban
on short selling in financial stocks.
Table 3: Selected Interventions by the Federal Reserve, Treasury, and
other Federal Financial Regulators in the United States:
Federal Reserve:
Program or intervention: Term Auction Facility;
Type of support: Short-term liquidity to financial institutions;
Announcement date: December 2007;
Status: No auctions announced since March 8, 2010.
Program or intervention: Swap Lines[A];
Type of support: Short-term liquidity to financial institutions
through central banks;
Announcement date: December 2007;
Status: Closed on February 1, 2010;
reopened May 2010 until 2011.
Program or intervention: Term Securities Lending Facility;
Type of support: Short-term liquidity to financial institutions;
Announcement date: March 2008;
Status: Closed on February 1, 2010.
Program or intervention: Exceptional Assistance Bear Stearns;
Type of support: Loan;
purchases of troubled assets;
Announcement date: March 2008;
Status: Securities Held Long-term.
Program or intervention: Primary Dealer Credit Facility;
Type of support: Short-term liquidity to financial institutions;
Announcement date: March 2008;
Status: Closed on February 1, 2010.
Program or intervention: Asset-Backed Commercial Paper Money Market
Mutual Fund Liquidity Facility;
Type of support: Liquidity directly to borrowers and investors;
Announcement date: September 2008;
Status: Closed on February 1, 2010.
Program or intervention: Commercial Paper Funding Facility;
Type of support: Liquidity directly to borrowers and investors;
Announcement date: October 2008;
Status: Closed on February 1, 2010.
Program or intervention: Money Market Investor Funding Facility;
Type of support: Liquidity directly to borrowers and investors;
Announcement date: October 2008;
Status: Closed October 30, 2009.
Program or intervention: Long-term securities purchases;
Type of support: Direct purchases of Fannie Mae and Freddie Mac
mortgage-backed securities (MBS) and debt;
Announcement date: November 2008;
Status: Closed March 2010.
Program or intervention: Long-term securities purchases;
Type of support: Direct purchases of Treasury securities;
Announcement date: March 2009;
Status: Closed October 2009.
Federal Reserve and Treasury:
Program or intervention: Term Asset-Backed Securities Loan Facility[B];
Type of support: Liquidity directly to borrowers and investors;
support to securitization markets;
Announcement date: November 2009;
Status: Closed March 31, 2010 for ABS and MBS. Extended to June 30,
2010 for CMBS.
Program or intervention: Exceptional Assistance AIG[B];
Type of support: Liquidity and capital;
purchases of troubled assets;
Announcement date: September 2008;
November 2008;
Status: TARP portion Closed October 2009;
Loan from Federal Reserve expires September 2013.
Treasury:
Program or intervention: Long-term securities purchases;
Type of support: Direct purchases of Fannie Mae and Freddie Mac MBS;
Announcement date: September 2008;
Status: Closed December 31, 2009.
Program or intervention: Supplementary Financing Program;
Type of support: Treasury bill issuance to finance Federal Reserve
initiatives;
Announcement date: September 2008;
Status: Ongoing.
Program or intervention: Temporary Guarantee Program for Money Market
Mutual Funds;
Type of support: Guarantees;
Announcement date: September 2008;
Status: Closed September 18, 2009.
Program or intervention: TARP;
Type of support: Liquidity and capital to institutions;
stress tests for large banks;
direct loans;
asset purchases;
loan modifications;
guarantees;
Announcement date: October 2008;
Status: Ongoing for some programs;
Extended to October 3, 2010 (see table 1).
Treasury, FDIC, and Federal Reserve:
Program or intervention: Exceptional Assistance to Citigroup[B];
Type of support: Guarantees, liquidity and capital;
Announcement date: November 2008;
Status: Closed December 2009.
Program or intervention: Exceptional Assistance to Bank of America[B];
Type of support: Guarantees, liquidity and capital;
Announcement date: January 2009;
Status: Closed December 2009.
Treasury and FDIC:
Program or intervention: Public Private Investment Partnership[BC];
Type of support: Equity and debt investment to facilitate purchases of
troubled-assets (loans and MBS);
Announcement date: March 2009 (July 2009);
Status: Closed December 2009 for program using TARP funds.
Treasury and FHFA:
Program or intervention: Preferred Stock Purchase Agreements;
Type of support: Equity Investments in the GSEs (Fannie Mae, Freddie
Mac, and Federal Home Loan Banks);
lending facility;
Announcement date: September 2008;
Status: Ongoing.
Program or intervention: Increasing Size of Fannie Mae and Freddie Mac
Portfolios;
Type of support: Mortgage Purchases;
Liquidity to Secondary Market;
Announcement date: February 2009;
Status: Ongoing.
FDIC:
Program or intervention: Deposit Insurance Increase;
Type of support: Guarantee of deposits;
Announcement date: October 2008;
Status: Closes on January 1, 2014.
Program or intervention: Temporary Liquidity Guarantee Program;
Type of support: Debt Guarantee;
Transaction Account Guarantee;
Announcement date: October 2008;
Status: Closed on October 31, 2010 for debt;
Extended to December 31, 2010 for transaction accounts.
Department of Housing and Urban Development and Federal Housing
Administration (FHA):
Program or intervention: FHA Secure;
Type of support: Refinance program;
Announcement date: September 2007;
Status: Closed December 31, 2008.
Program or intervention: HOPE for Homeowners;
Type of support: Loan modification;
Announcement date: October 2008;
Status: Closes September 30, 2011.
FHFA:
Program or intervention: GSE Conservatorship;
Type of support: Various actions to promote solvency;
Announcement date: September 2008;
Status: Ongoing.
Program or intervention: Home Affordable Refinance Program;
Type of support: Refinance program;
Announcement date: February 2009;
Status: Closes June 30, 2011.
Program or intervention: Streamlined Modification Program (with GSEs
and Hope Now);
Type of support: Loan modification;
Announcement date: November 2008;
Status: Closed March 4, 2009.
Source: GAO analysis, Treasury, the Federal Reserve Bank of St. Louis,
and the Congressional Research Service.
Notes: Includes new programs launched in response to the crisis and
does not include programs that existed prior to the financial crisis
or those that involved no outlays by, or risk to, the intervening
agencies. Also, some initiatives that were announced but never used
are not included.
Closed means no new agreements to undertake transactions occurred or
will occur through the program after the expiration date, but does not
necessarily imply no activity is occurring.
As we discussed, many of the programs have resulted in equity
investments, loans, and lines of credit that remain outstanding.
[A] A currency swap is a transaction where two parties exchange an
agreed amount of two currencies while at the same time agreeing to
unwind the currency exchange at a future date.
[B] Programs using TARP funds through the Asset Guarantee Program, the
Systemically Significant Failing Institutions Program, the Consumer &
Business Lending Initiative, the Home Affordable Modification Program,
and the Public Private Investment Program (PPIP).
[C] Since announcing PPIP as a joint partnership, the Legacy Loans
Public-Private Investment Program was developed by FDIC while Treasury
operated the legacy security portion of the program. Neither component
of PPIP operated jointly.
[End of table]
[End of section]
Appendix III: Comments from the Department of the Treasury:
Department Of The Treasury:
Washington, D.C. 20220:
June 25, 2010:
Thomas I. McCool:
Director, Center for Economics Applied Research and Methods:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. McCool:
The Department of the Treasury ("Treasury") appreciates the
opportunity to review the GAO's latest report on the Troubled Asset
Relief Program ("TARP"), titled Treasury's Framework for Deciding to
Extend TARP Was Sufficient, but Could be Strengthened for Future
Decisions ("Draft Report"). As Assistant Secretary Allison is
traveling, he has asked me to respond on his behalf.
We are pleased that the Draft Report finds that Treasury acted in a
manner that largely fulfilled the recommendations made by the GAO in
October 2009 regarding the decision to extend TARP. We appreciate the
GAO's general approval of the process followed by Treasury in deciding
whether to extend. As the GAO notes, the process involved "significant
deliberation and interagency coordination and consultation" and was
coupled with an extensive effort to explain the decision and rationale
to the Congress and the public.
The Draft Report makes two recommendations. First, the Draft Report
suggests that upcoming decisions regarding the exit phase of TARP
"would benefit from continued collaboration and communication with
other agencies." In this regard, the Draft Report praises Treasury's
consultation with the Federal Reserve as "the type of collaboration
necessary for the next stage of the government response to the
crisis." The Draft Report also notes that the Financial Stability
Oversight Board ("FinSOB") has been an effective vehicle for
formalized consultations among agencies and suggests that the Chairman
of the FDIC be included in FinSOB meetings.
While the membership of FinSOB was set by statute and is chaired by
the Chairman of the Board of Governors of the Federal Reserve System,
Treasury has consulted and will continue to consult extensively on
TARP matters with the FDIC as well as with other agencies where
appropriate. Among other things, Treasury has consulted with the FDIC
in designing the structure and process for approval in the bank
assistance programs, the stress tests and standards for exiting
TARP, as well as situations involving particular institutions that
have received assistance. This consultation will continue.
We also agree with GAO on the importance of publicly identifying clear
program objectives. which was the substance of the second
recommendation. We will continue to publicly identify clear program
objectives and to address the related suggestions made in this
recommendation.
Treasury appreciates the opportunity to review the Draft Report. We
will review the final audit report and provide any further comments
regarding the GAO's recommendations within the statutory period. We
look forward to continuing this constructive dialogue.
Sincerely,
Signed by:
Timothy G. Massad:
Chief Reporting Officer:
Office of Financial Stability:
[End of section]
Appendix IV: Contacts and Staff Acknowledgments:
Contacts:
Richard J. Hillman, (202) 512-8678 or hillmanr@gao.gov Thomas J.
McCool, (202) 512-2642 or mccoolt@gao.gov Orice Williams Brown, (202)
512-8678 or williamso@gao.gov:
Staff Acknowledgments:
In addition to the contacts named above, Lawrance Evans Jr. (lead
Assistant Director), Benjamin Bolitzer, Timothy Carr, Emily Chalmers,
William Chatlos, Rachel DeMarcus, Michael Hoffman, Steven Koons,
Matthew Keeler, Robert Lee, Matt McDonald, Sarah McGrath, Harry
Medina, Marc Molino, Joseph O'Neill, Jose Oyola, Rhiannon Patterson,
Omyra Ramsingh, Matt Scire, Karen Tremba, and Winnie Tsen have made
significant contributions to this report.
[End of section]
Footnotes:
[1] EESA, Pub. L. No. 110-343, 122 Stat. 3765 (2008), (codified, as
amended, at 12 U.S.C. §§ 5201 et seq.). EESA originally authorized
Treasury to purchase or guarantee up to $700 billion in troubled
assets. The Helping Families Save Their Homes Act of 2009, Pub. L. No.
111-22, Div. A, 123 Stat. 1632 (2009), amended EESA to reduce the
maximum allowable amount of outstanding troubled assets under EESA by
almost $1.3 billion, from $700 billion to $698.741 billion. The act
requires that the appropriate committees of Congress be notified in
writing that the Secretary of the Treasury, after consultation with
the Federal Reserve Chairman, has determined that it is necessary to
purchase other financial instruments to promote financial market
stability. Section 3(9) of the act (codified at12 U.S.C. § 5202(9)).
[2] Section 116 of EESA, 122 Stat. at 3783 (codified at 12 U.S.C. §
5226).
[3] GAO, Troubled Asset Relief Program: One Year Later, Actions Are
Needed to Address Remaining Transparency and Accountability
Challenges, [hyperlink, http://www.gao.gov/products/GAO-10-16]
(Washington, D.C.: Oct. 8, 2009).
[4] Although varying in terms of their type and intensity, financial
crises can result in costly interruptions to economic growth and the
road to recovery can be long. Empirical work exploring commonalities
in banking crises in advanced economies finds that the average cost,
in terms of annual output lost, is about 2 percent, with a recovery
time of about 2 years. However, some financial crises have resulted in
more significant output declines with growth remaining at lower levels
for years after the initial decline in economic activity. See
Reinhardt, C. and K. Rogoff, "Is the 2007 U.S. Subprime Crisis So
Different? An International Historical Comparison," American Economic
Review 98, no. 2 (2008).
[5] A currency swap is a transaction involving two parties that
exchange an agreed amount of two currencies and at the same time agree
to unwind the exchange at a future date. These swap lines were
designed to increase central banks' ability to provide liquidity to
banks requiring nondomestic currency and as an alternative to
interbank markets, which were showing signs of significant stress.
[6] Some programs involved exceptional assistance to particular
institutions, such as AIG, because of their systemic importance or
supported particular markets. For a full exploration of these programs
see Congressional Research Service, Government Intervention in
Response to Financial Turmoil (February 2010).
[7] FDIC now uses the program concept in the sale of receivership
assets.
[8] See GAO, Troubled Asset Relief Program: Treasury Needs to
Strengthen Its Decision-Making Process on the Term Asset-Backed
Securities Loan Facility, [hyperlink,
http://www.gao.gov/products/GAO-10-25] (Washington, D.C.: Feb. 5,
2010) and [hyperlink, http://www.gao.gov/products/GAO-10-16].
[9] For example, even when they are seen as necessary, the
interventions provide support to market participants in ways that can
influence resource allocation and impede prices from reverting to more
appropriate values. Additionally, the willingness to provide support
to systemically important institutions can distort private incentives
leading to activities that would not occur in the absence of a
perceived government backstop. See Claessens, Stijn, Giovanni
Dell'Ariccia, Deniz Igan, and Luc Laeven, "Lessons and Policy
Implications from the Global Financial Crisis," IMF Working Paper,
February 2010.
[10] Even before the financial crisis, the nation's finances were not
sustainable over the long term. See GAO, U.S. Government Financial
Statements: Fiscal Year 2009 Audit Highlights Financial Management
Challenges and Unsustainable Long-Term Fiscal Path, [hyperlink,
http://www.gao.gov/products/GAO-10-483T] (Washington, D.C.: Apr. 14,
2010) and GAO, Debt Management: Treasury Was Able to Fund Economic
Stabilization and Recovery Expenditures in a Short Period of Time, but
Debt Management Challenges Remain, [hyperlink,
http://www.gao.gov/products/GAO-10-498] (Washington, D.C.: May 18,
2010).
[11] EESA § 120, 122 Stat. at 3788 (codified at 12 U.S.C. § 5230). As
used in this report, the term "commitment" (and variants thereof)
means a legally enforceable obligation against the government.
[12] Consideration was originally given to the extension of TALF.
[13] For the purposes of this report "closed" means no new agreements
to undertake transactions will occur through the program after the
expiration date, but does not necessarily imply no activity is
occurring. As we discuss, many of the programs have resulted in equity
investments, loans, and lines of credit that remain outstanding.
[14] GAO will be reviewing the cost estimate as part of the audit of
the Office of Financial Stability Fiscal Year 2010 Financial
Statements.
[15] The government now holds significant equity interests in several
companies including AIG, Citigroup, GMAC Inc. and GM, and smaller
investments in several financial institutions through CPP.
[16] See Debt Reduction Priority Act, S. 862, 111th Cong. § 3 (2009);
Debt Reduction Priority Act, S. 869, 111th Cong. § 3 (2009).
[17] EESA § 3(9), 122 Stat. at 3767 (codified at 12 U.S.C. § 5202(9)).
[18] FinSOB was established by section 104 of EESA to help oversee
TARP and other emergency authorities and facilities granted to the
Secretary under EESA. 12 U.S.C. § 5214.
[19] This dialogue included financial statistics that are provided to
FinSOB on a periodic basis detailing the state of the credit markets
and the state of sectors of the economy. The statistics produced for
these meetings generally were used to assist monitoring activity and
effectiveness for each program under TARP.
[20] TLGP comprised two distinct components: the Debt Guarantee
Program, whereby FDIC guarantees certain senior unsecured debt issued
by entities participating in the TLGP, and the Transaction Account
Guarantee (TAG) program, where FDIC guarantees all funds held at
participating insured depositary institutions in qualifying
noninterest-bearing transaction accounts. TAG is the component of TLGP
that is being extended from a June 30, 2010, termination date until
December 31, 2010.
[21] Some programs fulfill similar purposes but may involve greater
risk to the government while others may distort markets to a greater
degree.
[22] As Treasury notes, not all foreclosures are preventable given
that many homeowners overextended themselves and purchased homes that
were not affordable to them in the long run, or suffered unanticipated
life events that cause them to be unable to continue paying their
mortgages.
[23] From the fourth quarter of 2009 to the first quarter of 2010
delinquencies have fallen somewhat, while the foreclosure starts has
remained fairly constant.
[24] A short sale allows a borrower to avoid foreclosure by selling
the home for less than value of the outstanding loan. A deed-in-lieu
involves the deeding the property to the servicer prior to a completed
foreclosure sale.
[25] GAO, Troubled Asset Relief Program: Further Actions Needed to
Fully and Equitably Implement Foreclosure Mitigation Programs, GAO-10-
634 (Washington, D.C.: June 24, 2010).
[26] While the foreclosure rate stands at a record high, the rate of
increase has slowed since the first quarter of 2009, increasing just
1.1 percent from the fourth quarter of 2009 to the first quarter of
2010. It is too early to say whether the leveling off of the
foreclosure inventory is an indicator of the effectiveness of
foreclosure mitigation programs or due to other factors that may delay
the completion of the foreclosure process. It is also possible that in
the absence of HAMP and programs designed to preserve homeownership,
the foreclosure rate would be higher.
[27] CDFIs are financial institutions that provide financing and
related services to communities and populations that lack access to
credit, capital, and financial services. To become certified, an
organization must: be a legal entity, have an eligible primary
mission, be a financing entity, serve an eligible target market, be
accountable to the target market, provide corresponding development
services, and not be controlled by a government entity.
[28] According to the 2003 Federal Reserve Survey of Small Business
Finances, more than 5 percent of small businesses accessed alternative
forms of financing, including venture capital.
[29] This analysis was limited to a specific time period, the third
quarter of 2008 to the first quarter of 2009. See GAO-10-16.
[30] For example, a Federal Reserve Bank of Atlanta analysis argues
that drop in consumer credit outstanding since the financial crisis
began is largely due to charge-offs. Legislative proposals for a Small
Business Lending Fund take such charge-offs into account.
[31] Congressional Oversight Panel, May Oversight Report: The Small
Business Credit Crunch and the Impact of the TARP. This report notes
the absence of high quality data on small business lending.
[32] Our analysis of the composition of NFIB survey respondents found
that the firm size distribution is broadly representative of the
distribution of firms in the United States. However, we found that the
survey over-represents some industries, including manufacturing and
construction, while under-representing some skilled service
industries. As such, respondents may not reflect the credit
experiences of all firms in the economy.
[33] Spreads on large loans have risen more than small loans since
their trough (156 basis points verses 109 to 118 basis points), but
spreads on small loans have risen more since the financial crisis
began (estimated at third quarter 2008) by 86 to 88 basis points
verses 68 basis points for larger loans.
[34] Although subject to considerable uncertainty and range of error,
recent estimates of legacy loan losses for the United States were
revised from $1.03 trillion to $885 billion, with more than half of
those losses already recognized by the banking sector. See
International Monetary Fund's Global Financial Stability Report
(October 2009 and April 2010).
[35] GAO, Federal Deposit Insurance Act: Regulators' Use of Systemic
Risk Exception Raises Moral Hazard Concerns and Opportunities Exist to
Clarify the Provision, [hyperlink,
http://www.gao.gov/products/GAO-10-100] (Washington, D.C.: Apr. 15,
2010).
[36] A basis point is a common measure used in quoting yields on
bills, notes, and bonds and represents 1/100 of a percent of yield. An
increase from 4.35 percent to 4.45 would be an increase of 10 basis
points.
[37] See [hyperlink, http://www.gao.gov/products/GAO-10-16].
[38] In identifying performance metrics for fiscal year 2010, Treasury
noted that it will evaluate changes in capital ratios and lending of
the SCAP BHCs versus control banks with similar characteristics.
[39] See 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).
[40] New lending includes new home equity lines of credit; mortgage,
credit card, and other consumer originations; new or renewed
commercial and industrial loans; and commercial real estate loans, but
not other important activities that these institutions may undertake
to facilitate credit intermediation, including underwriting and
purchasing MBS and ABS. Because the origination data collected by
Treasury are unique, we were not able to benchmark the origination
levels against historical lending or seasonal patterns at these
institutions.
[41] Eligible TALF ABS includes credit cards; auto, student, and
equipment loans and leases; insurance premiums finance loans; mortgage
servicer advance; and floorplan loans, as well as SBA 7a and SBA 504
securities.
[42] Asset spreads are the difference between the yield on an asset
and a benchmark yield. Asset spreads are expressed in basis points or
percentage points.
[43] Subordination helps ensure that highly rated tranches in a
security receive priority of payment and overcollateralization
provides better assurance that sufficient funds are available even
when some of the underlying loans default because the securities are
issued in an amount that are more than covered by the collateral.
[44] See [hyperlink, http://www.gao.gov/products/GAO-10-25].
[45] Eligible securities are defined as troubled real estate-related
securities issued prior to January 1, 2009, and originally rated AAA--
or an equivalent rating by two or more nationally recognized
statistical rating organizations--without rating enhancement, such as
RMBS and CMBS, and in which at least 90 percent of the assets
underlying the security must be situated in the United States.
[46] L-PPIP was suspended and the FDIC now uses the program concept in
the sale of receivership assets, which draws upon concepts employed in
the 1990s by the Resolution Trust Corporation. L-PPIP will now offer
financing when a receivership transfers a portfolio of loans to a
limited liability company in exchange for an ownership interest. An
equity ownership interest will be sold to a qualified investor, who
will be responsible for managing the portfolio of loans.
[47] The SCAP results were announced subsequent to PPIP and required
participant banks that needed to augment their capital to design a
detailed plan to raise sufficient amounts of new equity capital in
order to prevent failure in the event of further economic distress.
[48] Jumbo refers to loans made to borrowers with an original balance
larger than the conforming limits. Alt-A refers to borrow with good
credit but include more aggressive underwriting than conforming or
jumbo loans.
[49] In general, timing of the exit from TARP should be determined by
the efficacy of the various programs, the degree to which they distort
markets, and by the fiscal costs--including the contingent liabilities
to the government. Although the presence of a program alone can
improve market conditions, in general, ineffective, underutilized, or
highly distortionary programs should be exited early along with those
that have reached their intended goals or are longer necessary.
[50] These points were emphasized in a recent IMF report. See Global
Financial Stability Report, October 2009.
[51] [hyperlink, http://www.gao.gov/products/GAO-10-483T].
[End of section]
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