Background

The federal government intervention and involvement in the financial  markets was created through a number of existing and recently enacted  laws. This legal framework provided the financial resources for assistance,  the federal government’s authorities, and the restrictions companies were  required to comply with in exchange for the financial assistance. In  assisting the public to understand its involvement in the companies, in  May 2009 the administration published a set of core principles that are to  guide the government’s management of ownership interests in private  firms. Most of the institutions that the government had or has an  ownership interest in are regulated by one of several financial regulators,  which have a role in overseeing the financial condition and operations of  its regulated entities.
The federal government’s efforts in late 2008 to stabilize the financial  markets are not its first intervention in private markets during economic  downturns. The government has previously undertaken large-scale  financial assistance efforts, including to private companies. For example,  in the 1970s and early 1980s Congress created separate financial assistance  programs totaling more than $12 billion to stabilize Conrail, Lockheed- Martin, and Chrysler, with most of the funds being distributed in the form  of loans or loan guarantees. Most recently, in response to the most severe  financial crisis since the Great Depression, Congress provided Treasury  additional authority to stabilize the financial system. In particular:  In July 2008, Congress passed the Housing and Economic Recovery Act of  2008 (HERA), which established FHFA—the agency responsible for the  monitoring of safety and soundness and the housing missions of the  Enterprises and the other housing government-sponsored enterprises,  namely, the Federal Home Loan Banks—and among other things, provided  for expanded authority to place the Enterprises in conservatorship or  receivership and provides Treasury with certain authorities to provide  financial support to the Enterprises. In accordance with HERA, on  September 6, 2008, FHFA placed the Enterprises into conservatorship  because of concern that their deteriorating financial condition ($5.4  trillion in outstanding obligations) would destabilize the financial system.  The goals of the conservatorships are to preserve and conserve the assets  and property of the Enterprises and enhance their ability to fulfill their  missions. FHFA has the authority to manage the Enterprises and maintains  the powers of the board of directors, officers, and shareholders. Treasury  agreed to provide substantial financial support so that Enterprises could  continue as going concerns to support mortgage financing, subsequently,  the Federal Reserve Board committed to a variety of activities, including  purchasing substantial amounts of their debt and securities to support  housing finance, housing markets, and the financial markets more  generally.
In October 2008, Congress passed EESA, which authorized the creation of  TARP to, among other things, buy up to $700 billion in troubled assets,  such as mortgage-backed securities and any other financial instrument  that the Secretary of the Treasury, in consultation with the Chairman of  the Federal Reserve Board, determined that it needed to purchase to help  stabilize the financial system. EESA created OFS within Treasury to  administer TARP, which comprises a number of programs that were  designed to address various aspects of the unfolding financial crisis. Early  in the program, Treasury determined that providing capital infusions  would be the fastest and most effective way to address the crisis. In return  for these capital infusions, Treasury received equity in the hundreds of  companies that have participated in the program. In return for receiving  these capital infusions, TARP-recipients were subject to certain  requirements and restrictions, such as dividend requirements and limits on  executive compensation.
The American Recovery and Reinvestment Act of 2009 (Recovery Act)  amended and expanded EESA’s executive compensation provisions and  directed Treasury to require appropriate standards for executive  compensation and corporate governance of TARP recipients. On June 10,  2009, Treasury adopted an interim final rule to implement the law for  executive compensation and corporate governance, including limits on  compensation, providing guidance on the executive compensation and  corporate governance provisions of EESA, and setting forth certain  additional standards pursuant to authority under EESA. The requirements  for executive compensation generally include: (1) limits on compensation  that exclude incentives for senior executive officers to take unnecessary  and excessive risks that threaten the value of TARP recipients; (2)  provision for the recovery of any bonus, retention award, or incentive  compensation paid to certain executives based on materially inaccurate  statements of earnings, revenues, gains, or other criteria; (3) prohibition  on “golden parachute” payments accrued to certain executives; (4)  prohibition on payment or accrual of bonuses, retention awards, or  incentive compensation to certain executives; and (5) prohibition on  employee compensation plans that would encourage manipulation of  earnings reported by TARP recipients to enhance employees’  compensation. The regulation required the establishment of Office of the  Special Master for TARP Executive Compensation (Special Master) to  review the compensation payments and structures of TARP recipients of  “exceptional financial assistance,” which includes all of the companies in  our study with the exception of the government-sponsored Enterprises.  The Senior Preferred Stock Agreements between Treasury and the  Enterprises negotiated prior to EESA and the Recovery Act included a  requirement that FHFA consult with Treasury relating to executive  compensation.

		Several TARP Programs Have Resulted in the Government’s Ownership Interest

A number of programs under TARP—designed to help stabilize institutions  and financial markets—have resulted in Treasury having an ownership  interest in such institutions.
The Capital Purchase Program (CPP) is the largest TARP program and at  its peak had more than 700 participants, including Bank of America and  Citigroup. Created in October 2008, it aimed to stabilize the financial  system by providing capital to viable banks through the purchase of  preferred shares and subordinated debentures. These transactions  generally provide that the banks pay fixed dividends on the preferred  shares, that the debentures accrue interest, and that the banks issue a  warrant to purchase common stock, preferred shares, or additional senior  debt instruments.
The Targeted Investment Program (TIP), established in December 2008,  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. Treasury  determined the forms, terms, and conditions of any investments made  under this program and considered the institutions for approval on a case- by-case basis. Treasury required participating institutions to provide  warrants or alternative considerations, as necessary, to minimize the long- term costs and maximize the benefits to the taxpayers, in accordance with  EESA. Only two institutions participated in TIP, Bank of America and  Citigroup, and both repurchased their preferred shares and trust preferred  shares, respectively, from Treasury in December 2009.  Treasury has  terminated the program.
The Asset Guarantee Program (AGP), was created in November 2008 to  provide a federal government guarantee for assets held by financial  institutions that had been deemed critical to the functioning of the U.S.  financial system. The goal of AGP was to encourage investors to keep  funds in the institutions. According to Treasury, placing guarantee  assurances against distressed or illiquid assets was viewed as another way  to help stabilize the financial system. In implementing AGP, Treasury  collected a premium on the risk assumed by the government that was paid  in preferred shares that were exchanged later for trust preferred shares.  Citigroup terminated its participation on December 23, 2009. Treasury has  since terminated AGP. While the asset guarantee was in place, no losses  were claimed by Citigroup and no federal funds were paid out.
The AIG Investment Program—originally called the Systemically  Significant Failing Institutions Program (SSFI)—was created in November  2008 to help avoid disruptions to financial markets from an institutional  failure that Treasury determined would have broad ramifications for other  institutions and market activities. AIG has been the only participant in this  program and was provided the assistance because of its systemic  importance to the financial system. The assistance provided under this  program is reflected in the securities purchase agreements, which required  Treasury to purchase preferred shares from AIG and entitles Treasury to  dividends declared by AIG on these preferred shares and provide warrants  to purchase common stock.
The Automotive Industry Financing Program (AIFP) was created in  December 2008 to prevent a significant disruption to the U.S. automotive  industry. Treasury determined that such a disruption would pose a  systemic risk to financial market stability and have a negative effect on the  U.S. economy. The program was authorized to provide funding to support  automakers during restructuring, to ensure that auto suppliers to Chrysler  and GM received compensation for their services and products, and to  support automotive finance companies. AIFP provided sizeable loans to  Chrysler and GM (including a loan to GM that was convertible into shares  of GMAC that were purchased with the proceeds).  Treasury loaned up to  $1.5 billion to Chrysler Financial, which was fully repaid on July 14, 2009.  Ultimately the government obtained an equity stake through the  restructurings and loan conversion.
The Capital Assistance Program (CAP), established in February 2009, was  designed to help ensure that qualified financial institutions have sufficient  capital to withstand severe economic challenges. These institutions were  required to meet eligibility requirements substantially similar to those used  for CPP. A key component of CAP was the Supervisory Capital  Assessment Program (SCAP), under which federal bank regulators, led by  the Federal Reserve, conducted capital assessments, or “stress tests,” of  large financial institutions. Participation in SCAP was mandatory for the  19 largest U.S. bank holding companies (those with risk-weighted assets of  $100 billion or more as of December 31, 2008). The tests were designed  to determine whether these companies had enough capital to absorb  losses and continue lending even if economic and market conditions were  worse than expected between December 2008 and December 2010.  Institutions deemed not to have sufficient capital were given 6 months to  raise private capital. In conjunction with the test, Treasury announced that  it would provide capital through CAP to banks that needed additional  capital but were unable to raise it through private sources. GMAC was the  only institution determined to need additional capital assistance from  Treasury. GMAC received the additional capital assistance through AIFP  on December 30, 2009. Treasury announced the closure of CAP, on  November 9, 2009.
In addition to loans and guarantees, Treasury purchased or received  various types of equity investments, ranging from common stock to  subordinated debentures and warrants.

		Four Core Principles Guide Treasury’s Management of Its Equity Interest

Recognizing the challenges associated with the federal government having  an ownership interest in the private market, the administration developed  several guiding principles for managing its TARP investments. According  to the principles issued in March 2009, the government will:    Act as a reluctant shareholder. The government has no desire to own  equity stakes in companies any longer than necessary and will seek to  dispose of its ownership interests as soon as practical. The goal is to  promote strong and viable companies that can quickly be profitable and  contribute to economic growth and jobs without government involvement.
Reserve the right to set up-front conditions. The government has the right  to set up-front conditions to protect taxpayers, promote financial stability,  and encourage growth. These conditions may include restructurings as  well as changes to ensure a strong board of directors that   selects management with a sound long-term vision to restore their  companies to profitability and to end the need for government support as  quickly as is practically feasible.
Not interfere in the day-to-day management decisions of a company in  which it is an investor. The government will not interfere with or exert  control over day-to-day company operations. No government employees  will serve on the boards or be employed by these companies.
Exercise limited voting rights. As a common shareholder, the  government will vote on only core governance issues, including the  selection of a company’s board of directors and major corporate events or  transactions. While protecting taxpayer resources, the government has  said that it intends to be extremely disciplined as to how it uses even these  limited rights.

		Regulators Play Key Role in Overseeing Regulated Institutions That Received Assistance

Federal financial regulators—Federal Reserve, FHFA, FDIC, OCC, and  Office of Thrift Supervision—play a key role in regulating and monitoring  financial institutions, including most of the institutions that received  exceptional amounts of financial assistance. Because Bank of America,  Citigroup, the Enterprises, and GMAC are all regulated financial  institutions, not only were they monitored by Treasury as an investor but  they continued to be regulated and overseen by their primary federal  regulator. Specifically, the Federal Reserve oversees bank holding  companies—including Bank of America, Citigroup, and GMAC—to help  ensure their financial solvency. As regulated institutions, Bank of  America, Citigroup, and GMAC were subject to ongoing oversight and  monitoring before they received any government financial assistance and  will continue to be regulated and supervised by their regulator after the  assistance has been repaid. FHFA regulates and supervises the Enterprises  and established their conservatorships in 2008.
The Federal Reserve’s program for supervising large, complex banking  organizations is based on a “continuous supervision” model that assigns a  team of examiners dedicated to each institution and headed by a central  point of contact. The Federal Reserve regularly rates the bank holding  company’s operations, including its governance structure. Throughout  the crisis, staff dedicated to the largest institutions have increased, as has  the oversight and involvement in supervising the financial condition and  operations of the institutions.
In addition to its bank holding company regulatory and supervisory  responsibilities, the Federal Reserve conducts the nation’s monetary  policy by influencing the monetary and credit condition in the economy in  pursuit of maximum employment, stable prices, and moderate long-term  interest rates. Also, under unusual and exigent circumstances, the Federal  Reserve has emergency authorization to assist a financial firm that is not a  depository institution. The Federal Reserve used this authority to help  address the recent financial crisis, which also resulted in the government  acquiring an ownership interest in AIG.
Subsidiary banks of Bank of America, Citigroup, and GMAC are supervised  by other federal regulators, including OCC and FDIC. For example, OCC  supervises Citibank—Citigroup’s national bank. In addition, FDIC  oversees the banks’ condition and operations to gauge their threat to the  deposit insurance fund. It also is the primary federal supervisor of GMAC’s  bank. These bank supervisors generally use the same framework to  examine banks for safety and soundness and compliance with applicable  laws and regulations. As described above, they examine most aspects of  the bank’s financial condition, including the bank’s management.
Finally, FHFA was created in 2008 to oversee the housing enterprises,  Fannie Mae and Freddie Mac. It replaced the Office of Federal Housing  Enterprise Oversight and the Federal Housing Finance Board, and the  Department of Housing and Urban Development’s mission authority was  transferred to FHFA. The Enterprises are chartered by Congress as for- profit, shareholder-owned corporations, now currently under federal  conservatorship. Using a risk-based supervisory approach, FHFA  examines the Enterprises, including their corporate governance and  financial condition.

	How the Federal Government Acquired Its Equity Interest Varies by Institution, but Resulted from Assistance Aimed at Stabilizing Financial Markets, Housing Markets, or Individual Market Segments

The federal government’s equity interest was acquired in a variety of ways  and resulted from assistance aimed at stabilizing markets or market  segments. Moreover, the government’s equity interest in the companies  varies from company to company—ranging from preferred shares to  common shares. In some cases, the government acquired an equity interest  when it cancelled outstanding loans in exchange for common shares of the  debtor. As of June 1, 2010, the government held an equity ownership  interest in the form of preferred or common shares in the five major  corporations—AIG, Chrysler, Citigroup, GM, GMAC—and the Enterprises.  As shown in figure 1, the government holds the largest share of common  stock in GM, but it also holds significant common stock in GMAC and  smaller amounts, in terms of percentage, of Citigroup and Chrysler. It  holds significant amounts of preferred shares, convertible preferred  shares, or warrants for common shares in AIG and the Enterprises, as a  result of the assistance provided.

		Treasury Provided Funds to Bank of America and the Enterprises in Exchange for Preferred Stock

Treasury provided funds to Bank of America and the Enterprises in  exchange for preferred stock with no voting rights except in limited  circumstances, giving the federal government an equity interest in these  companies. Specifically, the government’s $45 billion investment in Bank  of America—which participated in CPP and TIP—gave Treasury  ownership of nonvoting preferred shares in the company. Bank of America  received $25 billion in CPP funds and $20 billion in TIP funds. The  transactions were consummated pursuant to a securities purchase  agreement, and the terms of the preferred shares acquired by Treasury  included the right to payment of fixed dividends and no voting rights  except in limited circumstances. On December 9, 2009, Bank of America  repurchased all of its preferred shares previously issued to Treasury,  ending the company’s participation in TARP. The company, as required,  also paid over $2.7 billion in dividends to Treasury.  On March 3, 2010,  Treasury auctioned its Bank of America warrants for $1.54 billion.
On September 6, 2008, when FHFA placed the Enterprises into  conservatorships, Treasury provided financial assistance in consideration  of equity interest. Under the transaction agreements, the Enterprises  immediately issued to Treasury an aggregate of $1 billion of senior  preferred stock and warrants to purchase common stock. The warrants  allow Treasury to buy up to 79.9 percent of each entity’s common stock,  can be exercised at any time, and are intended to help the government  recover some of its investments if the Enterprises become financially  viable. Under the terms of the preferred shares, Treasury is to receive  dividends on the Enterprises’ senior preferred shares at 10 percent per  year and, beginning March 31, 2010, quarterly commitment fees from the  enterprises that have not yet been implemented. Further, the preferred  share terms include restrictions on the Enterprises’ authority to pay  dividends on junior classes of equity, issue new stock, or dispose of assets.  At the end of the first quarter 2010, Treasury had purchased approximately  $61.3 billion in Freddie Mac preferred stock and $83.6 billion in Fannie  Mae preferred stock to cover losses. Because of the continued  deteriorating financial condition of the Enterprises, the amount of  government assistance to them is likely to increase. The government’s  most substantive role is as conservator of the Enterprises, which is  discussed later.

		Treasury Provided Funds and Other Financial Assistance to Citigroup, GMAC, GM, and Chrysler, in Exchange for Common Stock

Treasury has provided funds and other financial assistance to Citigroup,  GMAC, GM, and Chrysler in exchange for common shares with voting  rights, giving the federal government an equity stake in these companies.  For Citigroup and GMAC, the common stock strengthened their capital  structure, because the markets view common equity more favorably than  preferred shares. Initially, Treasury invested $25 billion in Citigroup under  CPP and an additional $20 billion under TIP.  Treasury also entered into a  loss sharing arrangement with Citigroup on approximately $301 billion of  assets under AGP under which Treasury assumed $5 billion of exposure  following Citigroup’s first losses of $39.5 billion. In exchange for this  assistance, Treasury received cumulative nonvoting preferred shares and  warrants to purchase common shares. FDIC also received nonvoting  preferred stock for its role in AGP. Citigroup subsequently requested that  Treasury exchange a portion of the preferred shares held by Treasury for  common shares to facilitate an exchange of privately held preferred shares  for common shares. Taken together, Treasury and private exchanges  improved the quality of Citigroup’s capital base and thereby strengthened  its financial position. From July 2009 to September 2009, Treasury  exchanged its preferred shares in Citigroup for a combination of shares of  common stock and trust preferred shares, giving the government a 33.6  percent ownership interest in Citigroup. Treasury now has voting rights by  virtue of its common stock ownership. On December 23, 2009, Citigroup  repurchased $20 billion of trust preferred shares issued to Treasury and  the Federal Reserve, FDIC, and Treasury terminated the AGP agreement.  FDIC and Treasury, collectively, kept approximately $5.3 billion in trust  preferred shares, including the warrants that were associated with this  assistance, as payment for the asset protection provided under AGP. As of  May 26, 2010, Treasury still owned almost 6.2 billion shares, or 21.4  percent, of Citigroup’s common shares and warrants.
Treasury’s AIFP assistance to GMAC, a bank holding company, resulted in  the government owning more than half of GMAC by the end of 2009. After  GMAC received approval from the Federal Reserve to become a bank  holding company in December 2008, Treasury initially purchased $5 billion  of GMAC’s preferred shares and received warrants to purchase an  additional $250 million in preferred shares. Treasury exercised those  warrants immediately. At the same time, Treasury also agreed to lend up  to $1 billion of TARP funds to GM (one of GMAC’s owners), to enable GM  to purchase additional equity in GMAC. On January 16, 2009, GM  borrowed $884 million under that commitment, to purchase an additional  interest in GMAC. Treasury terminated the loan on May 29, 2009, by  exercising its option to exchange amounts due under that loan for an  equity interest in GMAC.
The Federal Reserve required GMAC to raise additional capital by  November 2009 in connection with SCAP. On May 21, 2009, Treasury  purchased $7.5 billion of mandatory convertible preferred shares from  GMAC and received warrants that Treasury exercised at closing for an  additional $375 million in mandatory convertible preferred shares, which  enabled GMAC to partially meet the SCAP requirements. On May 29, 2009,  Treasury exercised its option to exchange its right to payment of the $884  million loan it had made to GM for 35.4 percent of the common  membership interests in GMAC. Treasury officials told us that exercising  the option prevented the loan from becoming part of the GM bankruptcy  process and therefore, was a measure intended to protect Treasury’s  investment. According to the Federal Reserve, the exercising of the option  strengthened GMAC’s capital structure. In November 2009, the Federal  Reserve announced that GMAC did not satisfy the SCAP requirements  because it was unable to raise additional capital in the private market and  was expected to meet its SCAP requirement by accessing the AIFP. On  December 30, 2009, Treasury purchased an additional $1.25 billion of  mandatory convertible preferred shares and received warrants that  Treasury exercised at closing for an additional $62.5 million in mandatory  convertible preferred shares, and further purchased $2.54 billion in GMAC  trust preferred securities and received warrants that Treasury exercised at  closing for an additional $127 million in GMAC trust preferred securities,  which were all investments under the AIFP. Also, in December 2009,  Treasury converted $3 billion of existing mandatory convertible preferred  shares into common stock, increasing its equity stake from 35 percent to  56.3 percent of GMAC common stock.  As of March 31, 2010, Treasury  owned $11.4 billion of GMAC mandatory convertible preferred shares and  almost $2.7 billion of its trust preferred securities.
Treasury’s equity stake in GM and Chrysler was an outgrowth of the $62  billion it loaned to the companies under AIFP before the companies filed  for bankruptcy in June and April 2009, respectively. Through the  bankruptcy process, these loans were restructured into a combination of  debt and equity ownership in the new companies. As a result, Treasury  owns 60.8 percent of the common equity and holds $2.1 billion in preferred  stock in “new GM.” Also, Treasury owns 9.9 percent of common equity in  the “new” Chrysler. As a common shareholder, Treasury has voting rights  in both companies.

		The Federal Reserve and Treasury Provided Funds to AIG in Exchange for Preferred Stock and a Warrant

The Federal Reserve and Treasury provided funds to AIG under a series of  transactions that ultimately resulted in the federal government owning  preferred stock and a warrant to purchase common stock. While the  Federal Reserve is not AIG’s regulator or supervisor, FRBNY assisted AIG  by using its emergency authority under Section 13(3) of the Federal  Reserve Act to support the government’s efforts to stabilize systemically  significant financial institutions. In the fall of 2008, the Federal Reserve  approved assistance to AIG by authorizing FRBNY to create a facility to  lend AIG up to $85 billion to address its liquidity needs. As part of this  agreement, AIG agreed to issue convertible preferred stock to a trust to be  created on behalf of the U.S. Treasury (the AIG Credit Facility Trust). This  was achieved through the establishment of an independent trust to  manage the U.S. Treasury’s beneficial interest in Series C preferred shares  that, as of April 2010, were convertible into approximately 79.9 percent of  the common stock of AIG that would be outstanding after the conversion  of the Series C preferred shares in full.  While the Series C preferred  shares initially represented 79.9 percent of the voting rights, after  Treasury’s November 2009 TARP investment, the amount of Series C  preferred shares voting rights to be acquired was reduced to 77.9 percent  to account for the warrant to purchase 2 percent of the common shares  that Treasury received in connection with that TARP investment.  A June  2009 20 to 1 reverse stock split adjusted the exercise price and number of  shares associated with the Treasury warrant, allowing warrants held by  Treasury to become convertible into 0.1 percent common equity.  Part of  the outstanding debt was restructured, when as noted above, Treasury  agreed to purchase $40 billion of cumulative perpetual preferred stock  (Series D) and received a warrant under TARP. The proceeds were used to  reduce the debt owed to FRBNY by $40 billion. To address rating agencies’  concerns about AIG’s debt-equity ratios, FRBNY and Treasury further  restructured AIG’s assistance in April 2009. Treasury exchanged its  outstanding cumulative perpetual preferred stock (Series D) for perpetual  preferred stock (Series E), which is noncumulative and thus, more closely  resembles common equity than does the Series D preferred stock.  Treasury has also provided a contingent $29.8 billion Equity Capital  Facility to AIG whereby AIG issued to Treasury 300,000 shares of fixed- rate, noncumulative perpetual preferred stock (Series F). As AIG draws on  the contingent capital facility, the liquidation preference of those shares  automatically increases by the amount drawn. AIG also issued to Treasury  a warrant to purchase up to 3,000 shares of AIG common stock. As of  March 2010, the government has a beneficial interest in the Series C  preferred shares held by the AIG trust, which is convertible into  approximately 79.8 percent of the ownership of the common shares and  the trustees have voting rights with respect to the Series C preferred  shares.

	Federal Government Has Involved Itself in the Corporate Governance of the Companies Receiving Exceptional Amounts of Assistance, but Its Involvement in the Companies Has Varied

The government decided early on that in managing its ownership interest  in private companies receiving exceptional TARP assistance, it would set  up certain conditions in order to protect taxpayers, promote financial  stability, and encourage growth. As noted in a recent SIGTARP report,  these conditions include requiring limits on or changes to the companies’  governance structure such as boards of directors, senior management,  executive compensation plans, lobbying and expense policies, dividend  distributions, and internal controls and submission of compliance  reports. Treasury also decided early on that it would not interfere with  the daily business of the companies that received exceptional assistance— that is, it would not be running these companies. However, the level of its  involvement in the companies has varied depending on the role it has  assumed—investor, creditor, or conservator—as a result of the assistance  it has provided.

		Government Involvement Has Prompted Changes to Some Boards of Directors and Senior Management at Companies Receiving Exceptional Assistance

Both Treasury and the federal regulators directed that strong boards of  directors and qualified senior management be in place to guide the  companies’ operations. Treasury designated new directors and requested  that some senior executives step down from their positions at some of the  companies. Using its authority as conservator, FHFA appointed new  members to the boards and senior management of the Enterprises. The  federal regulators requested reviews of the qualifications of senior  management at two of the companies.

			Government Involvement Has Prompted Changes to Some Boards of Directors

A significant number of new directors have been elected to the governing  boards of all companies that received federal assistance. Of the 92  directors currently serving on these boards, 73 were elected since  November 2008 (table 2). The board of Chrysler, for instance, is made up  entirely of new members, and more than half of current board members of  the other companies were designated after the government provided  assistance. Many of these new directors were nominated to their  respective boards because it was determined that a change in leadership  was required as a result of the financial crisis, while others were  designated by the government and other significant shareholders as a  result of their common share ownership. In addition, federal regulators  also asked the boards of directors at two of the companies to assess their  oversight and evaluate management depth. The assessments were  submitted to the regulators, and the board of directors subsequently made  changes to their composition.
The terms of Treasury’s agreements with AIG and Bank of America require  the expansion of the board of directors of the company, if the relevant  company fails to pay the dividends to Treasury for several quarters.  Treasury would then have the right to designate the directors to be elected  to fill the newly created vacancies on the board. While Bank of America  made the required dividend payments prior to exiting TARP, AIG did not  pay its required dividends. As a result, Treasury designated two new  directors for election to AIG’s board on April 1, 2010. They were  subsequently re-elected at the May 12, 2010, annual shareholders meeting.   The trust agreement between FRBNY and the AIG trustees also provides  the trustees with authority to vote the shares held in trust to elect or  remove the directors of the company. In cooperation with AIG’s board, the  AIG trustees were actively involved in the recruitment of six new directors  who have experience in corporate restructuring, retail branding, or  financial services, and believe that these new members will help see AIG  through its financial challenges. The board, in turn, has elected two  additional members to replace departing board members. The trustees  stated that they kept FRBNY and Treasury officials apprised of the  recruitment efforts.
Treasury’s common equity investment in Citigroup, GM, Chrysler, and  GMAC also gives it voting rights on the election or removal of the directors  of these governing boards, among other matters. In addition, the  agreements with GM, Chrysler, and GMAC specifically authorize Treasury  to designate directors to these companies’ boards.
As authorized in a July 10, 2009, shareholder agreement with GM,  Treasury, as the majority shareholder, designated 10 directors who were  elected to GM’s board, 5 of whom were former directors of “old GM.”  Based on the smaller number of common shares they owned in the  company, two other GM shareholders—Canada GEN Investment  Corporation (owned by the Canadian government) and a Voluntary  Employee Beneficiary Association composed of GM’s union retirees— each designated one director.
As authorized in a June 10, 2009, operating agreement with Chrysler,  Treasury designated three of nine directors, who in turn, collectively  elected an additional member to the board. Chrysler’s other shareholders  designated the other five board members, for a total of nine directors.  Chrysler’s Voluntary Employee Benefit Association appointed one  director, Fiat appointed three directors, and the Canadian government  appointed one director. Under the operating agreement, the number of  directors that Fiat has the right to designate increases as its ownership in  Chrysler increases, with a concomitant decrease in the number of  directors designated by Treasury.
As authorized in a May 21, 2009, governance agreement with GMAC,  Treasury appointed two new directors to the board because it held 35  percent of the company’s common stock. With the conversion of $3 billion  in mandatory convertible preferred shares of GMAC on December 30,  2009, Treasury’s common ownership interest increased to 56.3 percent,  authorizing it to appoint two more directors. On May 26, 2010, Treasury  appointed a new director to GMAC (Ally Financial Inc., formerly GMAC  Financial Services). The fourth director appointment is pending.
As conservator of the Enterprises, FHFA has appointed new members to  the boards of directors. The Director of FHFA has statutory authority  under HERA to appoint members of the board of directors for the  Enterprises based on certain criteria. FHFA’s former director, at the onset  of conservatorships, decided to keep three preconservatorship board  members at each Enterprise in order to provide continuity and chose the  remaining directors for each board. Initially, on September 16, 2008,  FHFA’s former director appointed Philip A. Laskawy and John A.  Koskinen to serve as new nonexecutive chairmen of the boards of  directors of the Enterprises. On November 24, 2008, FHFA reconstituted  the boards of directors for the Enterprises and directed their functions and  authorities. FHFA’s delegation of authority to the directors became  effective on December 18-19, 2008, when new board members were  appointed by FHFA. The directors exercise authority and serve on behalf  of the conservator, FHFA. The conservator retains the authority to  withdraw its delegations to the board and to management at any time.

			Government Involvement Has Prompted Changes to Senior Management

In addition to changes in the boards of directors, the companies receiving  exceptional assistance have also made a few changes to their senior  management (table 3). Some of these decisions were made by the  companies’ boards of directors without consultation with Treasury or  federal regulators. Specifically, Bank of America, Citigroup, and GMAC  executives stated that the decisions to replace their chief executive officer  (CEO) or chief financial officer (CFO) were made by the companies’  boards of directors without influence from Treasury or federal regulators.
However, federal regulators had directed the banks to assess their senior  management’s qualifications. After receiving government assistance, Bank  of America’s shareholders approved an amendment to the corporation’s  bylaws prohibiting any person from concurrently serving as both the  company’s chairman of the board and CEO. As a result, the shareholders  elected Walter Massey to replace Kenneth Lewis as chairman of the board  in April 2009. Citigroup’s board of directors also appointed a new CFO in  March 2009 and again in July 2009.
The AIG trustees stated that they and the Treasury officials monitoring  AIG’s investments were kept apprised of the selection of Robert  Benmosche to replace Edward Liddy—who was put in place as AIG’s CEO  on September 18, 2008, at the request of the government to help  rehabilitate the company and repay taxpayer funds—as the new CEO in  August 2009. Meeting minutes provided by the AIG trustees show that the  trustees and FRBNY and Treasury officials discussed the CEO search  process as it was occurring. The trustees and Treasury officials also met  with Benmosche before he was elected as AIG’s new CEO. According to  the trustees, they encouraged the AIG board to select the most qualified  CEO, but that the final decision to elect Benmosche rested with the AIG’s  board of directors.
GM’s selection of new senior managers during the restructuring process  was directly influenced by Treasury. For example, in March 2009,  Treasury’s Auto Team requested that Rick Wagoner, GM CEO at the time,  be replaced by Frederick “Fritz” Henderson, then the GM president.  According to a senior Treasury official, the Auto Team had determined  that the senior leadership in place at that time was resistant to change.  But, rather than appointing an individual outside GM to serve as CEO, the  team asked Fritz Henderson to serve as the CEO to provide some  continuity in the management team. Henderson resigned on December 1,  2009, but the same Treasury official said that the Auto Team did not  request his removal. The GM board of directors named Ed Whitacre to  replace Henderson. After the partnership between Chrysler and Fiat was  completed, Sergio Marchionne (CEO of Fiat) was elected as Chrysler’s  new CEO on June 10, 2009. Subsequent to his election, all changes to  Chrysler’s senior management were made by new company leadership  without Treasury’s involvement.
As the conservator, the FHFA director has the authority to appoint senior  level executives at both Enterprises. On September 7, 2008, FHFA’s former  director appointed Herbert M. Allison, Jr. as President and CEO for Fannie  Mae and David M. Moffett as President and CEO of Freddie Mac. Michael  Williams was promoted to CEO for Fannie Mae from his Chief Operation  Officer position to replace Herbert M. Allison, Jr., who became Treasury’s  Assistant Secretary for Financial Stability. On March 11, 2009, FHFA  appointed John A. Koskinen as Freddie Mac’s interim CEO and on July 21,  2009, Charles Haldeman was appointed CEO of Freddie Mac.

		The Government Placed Restrictions on Executive Compensation and Other Activities

As a condition of receiving assistance under TARP, recipients must adhere  to the executive compensation and other requirements established under  EESA and under Treasury regulations (see table 4). In addition, Treasury’s  agreements with these companies included provisions requiring the  companies to adopt or maintain policies regarding expenses and lobbying,  report to Treasury on internal controls, certify their compliance with  agreement terms, restrict the amount of executive compensation  deductible for tax purposes, and limit dividend payments, among others.  In prior reports, GAO and SIGTARP had reviewed Treasury’s efforts in  ascertaining the companies’ compliance with the key requirements in  financial assistance programs, such as CPP. GAO had recommended to  Treasury that it develop a process to ensure that companies participating  in CPP comply with all the CPP requirements, including those associated  with limitations on dividends and stock repurchase restrictions.  Overtime, Treasury addressed these issues and established a structure to  better ensure compliance with the agreements.
Companies must adhere to the executive compensation and corporate  governance rules as a condition for receiving TARP assistance. Treasury  created the Office of the Special Master to, among other things, review  compensation payments and structures for certain senior executive  officers and most highly compensated employees at each company  receiving exceptional TARP assistance. The Special Master is charged with  determining whether these payments and structures under the plans are  inconsistent with the purposes of the EESA executive compensation  provisions and TARP or otherwise contrary to the public interest.
On October 22, 2009, the Special Master issued his first determinations  with respect to compensation structures and payments for the “top 25”  employees of companies receiving exceptional TARP assistance. In  reviewing the payment proposals the companies submitted for 2009, the  Special Master noted that the companies in some cases (1) requested  excessive cash salaries, (2) proposed issuance of stock that was  immediately redeemable, (3) did not sufficiently tie compensation to  performance-based benchmarks, (4) did not sufficiently restrict or limit  financial “perks” or curb excessive severance and executive retirement  benefits, and (5) did not make sufficient effort to fold guaranteed  compensation contracts into performance-based compensation. As a  result, he rejected most of these initial proposals and approved a modified  set of compensation structures and payments.
For the 2009 top 25 compensation structures and payments, table 5 shows  that the Special Master required that AIG, Bank of America, and Citigroup  reduce cash compensation for their top executives by more than 90  percent from the previous year. Although Bank of America repurchased  preferred shares on December 9, 2009, it agreed to remain subject to the  Special Master’s determination for its top 25 employees for 2009. Similarly,  Citigroup repurchased its TIP trust preferred shares on December 23,  2009, but also agreed to abide by all determinations that had been issued  for 2009, including the Special Master’s requirement that Citigroup reduce  its cash compensation by $244.9 million, or 96.4 percent from 2008. While  Citigroup had the largest percentage cash reduction, GMAC had the largest  overall reduction in total direct compensation (both cash and stock)— GMAC was required to reduce its total direct compensation by $413.3  million, or more than 85 percent of 2008 levels. Table 5 also shows that the  Special Master approved a compensation structure for the most highly  compensated executive at AIG that provides up to $10.5 million in total  direct compensation on an annual basis.
On December 11, 2009, the Special Master released his second round of  determinations on executive compensation packages for companies that  received exceptional TARP assistance. These determinations covered  compensation structures for the “next 75” most highly compensated  employees including executive officers who were not subject to the  October 22, 2009, decisions. Unlike the determination for the top 25  employees, which addressed the specific amounts paid to individuals, the  Special Master was required only to approve the compensation structure  for this second group of employees. The determination covered four   companies: AIG, Citigroup, GMAC, and GM. The Special Master also  rejected most of the submitted proposals and required that they be  modified to include the following features.
Cash salaries generally no greater than $500,000, except in exceptional  cases, as specifically certified by the company’s independent  compensation committee.
Limits on cash compensation in most cases to 45 percent of total  compensation, with all other pay in company stock in order to align  executives’ interests with long-term value creation and financial stability.
In most cases, at least 50 percent of each executive’s pay be held or  deferred for at least 3 years, aligning the pay each executive actually  receives with the long-term value of the company.
Payment of incentives only if the executive achieves objective  performance targets set by the company and reviewed by the Special  Master that align the executives’ interests with those of shareholders and  taxpayers.
Limits on total incentives for all covered executives to an aggregate fixed  pool that is based on a specified percentage of eligible earnings or other  metrics determined by the compensation committee and reviewed by the  Special Master.
A “clawback” provision covering incentive payments to covered  executives that will take effect if the achievements on which the payments  are based do not hold up in the long term or if an executive engages in  misconduct.
On March 23, 2010, the Special Master released his determinations of  compensation structures and payments (for 2010) for the top 25  employees at the five remaining firms that received exceptional TARP  assistance from taxpayers: AIG, Chrysler, Chrysler Financial, GM, and  GMAC. Examples of his determinations include a 63 percent decrease in  cash compensation from 2009 levels for AIG, 45 percent decrease for  GMAC, and 7.5 percent decrease for GM executives. Chrysler’s 2010 cash  salary rates for its executives remained at the same level as 2009. Similar  to the determination for 2009, the Special Master approved an annual  compensation structure for AIG’s highest compensated executive that  provides up to $10.5 million in total direct compensation on an annual  basis. Overall, the 2010 determinations included the following significant  changes.
On average, a 33 percent decrease in overall cash payments from 2009  levels for affected executives.
On average, a 15 percent decrease in total compensation from 2009 levels  for affected executives.
Cash salaries frozen at $500,000 or less, unless good cause is shown.
Eighteen percent of executives subject to the March 2010 determinations  (21 employees) were approved for cash salary rates greater than $500,000.
HERA provides the Director of FHFA, in a conservatorship, the authority  to establish executive compensation parameters for both the Enterprises.  On December 24, 2009, the FHFA director approved Fannie Mae and  Freddie Mac 2010 compensation packages. The compensation package for  each chief executive officer was established at $6 million with each  package consisting of a base pay amount of $900,000, deferred pay of $3.1  million, and a long-term incentive pay of $2 million. Twelve other Fannie  Mae executives and 14 other Freddie Mac executives are covered by the  same system, but will receive lesser amounts. The deferred pay will be  paid quarterly in 2011 to executives still at the Enterprises, and half will  vary based on corporate performance. The long-term incentive pay will  vary according to individual and corporate performance. Pursuant to the  preferred stock purchase agreements, FHFA consulted with the Special  Master for TARP Executive Compensation with regards to the 2010  compensation packages. Compensation of the executives at the  Enterprises is presented in the form of cash payments. According to the  Special Master and the FHFA Acting Director, compensation in the form of  stock was viewed as ineffective because of the questionable value of the  shares and the potential incentives stock compensation might generate to  take excessive risk in hopes of making the stock valuable.

			Restrictions on Other Company Activities

In addition to executive compensation, Treasury also placed requirements  pertaining to other business activities, including expense and luxury  expenditures, lobbying, dividends and stock repurchases, and internal  controls and compliance. For example, companies receiving exceptional  assistance are required to implement and maintain an expense policy that  covers the use of corporate aircraft, lease or acquisition of real estate,  expenses related to office or facility renovations or relocations, expenses  related to entertainment and holiday parties, hosting and sponsorship of  conferences and events, travel accommodations and expenditures, and  third-party consultations, among others. They are also required to  implement and maintain a lobbying policy that covers lobbying of U.S.  government officials, governmental ethics, and political activity.   Furthermore, until Treasury no longer owns company debt or equity  securities (e.g. common, preferred, and trust preferred stock), the  companies may not declare or pay any dividends; make any distribution on  the company’s common stock; or redeem, purchase, or acquire any of the  company’s equity securities. They are also prohibited from redeeming or  repurchasing any preferred or trust preferred stock from any holder unless  the company offers to repurchase a ratable portion of the preferred shares  then held by Treasury on the same terms and conditions, with limited  exceptions. Lastly, the companies agreed to establish appropriate internal  controls with respect to compliance with each of the requirements in  agreement. They are required to report to Treasury on a quarterly basis  regarding the implementation of those controls and their compliance with  the requirements (including any instances of noncompliance). They are  also required to provide signed certifications from a senior officer  attesting that, to the best of his or her knowledge, such report(s) are  accurate.

		The Government’s Involvement in the Companies Varied Depending on Its Role as Investor, Creditor, or Conservator

Treasury states that it does not interfere with or exert control over certain  activities of companies that received exceptional assistance. Nevertheless,  SIGTARP and GAO found that the level of government involvement in the  companies varied among the recipients, depending on whether Treasury  and other federal entities are investors, creditors, or conservators.
For example, Treasury’s involvement in Bank of America, Citigroup, and  GMAC has been limited because, in exchange for its investments,  Treasury—as an investor—initially received preferred shares that did not  have voting rights except in certain limited circumstances, such as  amendments to the company charter, in the case of certain mergers, and  the election of directors to the companies’ boards in the event that  dividends are not paid for several quarters. As of April 30, 2010, Treasury  still held an ownership interest in Citigroup because of the June 9, 2009,  agreement that exchanged Treasury’s preferred shares for common  shares.  Treasury’s initial investment in GMAC also came in the form of  preferred shares with limited voting rights. As an up-front condition to its  May 2009 investments in Chrysler and GMAC, Treasury played a central  role in establishing the agreement reached between GMAC and Chrysler in  April 2009 that made retail and wholesale financing available to Chrysler’s  dealer network. Specifically, Treasury provided GMAC with $7.5 billion  on May 21, 2009, of which $4 billion was to be used to support Chrysler’s  dealers and consumers. According to Treasury officials, this agreement  was part of the initial restructuring of the companies that was done under  the auspices of the bankruptcy court, a situation that is quite different  from the Bank of America and Citigroup investments.
Senior executive officers at Bank of America, Citigroup, and GMAC agreed  that Treasury was not involved in the daily operations of their companies,  but they noted that the federal regulators—the Federal Reserve, FDIC, and  OCC—had increased and intensified their bank examinations. The  executives explained that the closer scrutiny was the result of the financial  crisis, and was not directly tied to TARP assistance. GMAC’s senior  officers further explained that the Federal Reserve’s involvement with  their company had been due, in part, to its obtaining bank holding  company status upon conversion of Ally Bank (formerly known as GMAC  Bank) from an industrial loan company to a commercial bank. As a result  of the conversion, GMAC has had to work closely with the Federal  Reserve to establish policies, procedures, and risk management practices  to meet regulatory requirements of a bank holding company.
As both an investor in and creditor of AIG, GM, and Chrysler, the  government has been more involved in some aspects of the companies’  operations than it has been with other companies. Treasury, FRBNY, and  the AIG trustees closely interact with senior management to discuss  restructuring efforts, liquidity, capital structure, asset sales, staffing  concerns, management quality, and overall strategic plans for the  company. Members of Treasury’s AIG team meet regularly with AIG  management, attend board committee meetings, and provide input on  decisions that affect the direction of the company. Similarly, FRBNY (as  creditor) also attends board meetings as an observer, and FRBNY and the  AIG trustees (as overseers of the AIG Trust) receive various AIG financial  reports, review the quality of senior management, and provide their  opinions on company strategy and major business decisions.
Treasury officials continue to monitor GM and Chrysler’s strength through  monthly and quarterly financial, managerial, and operations-related  reports, and regular meetings with senior management, but stated that  they do not micro-manage the companies. However, the government’s  stated “hands-off” approach towards managing its equity interest applied  only after GM and Chrysler exited bankruptcy. In the period before and  during the bankruptcies, Treasury played a significant role in the  companies’ overall restructuring and certain overarching business  decisions. For example, Treasury issued viability determinations in which  it stated that GM needed to decrease its number of brands and nameplates,  and Chrysler needed to improve the quality of its vehicles. Treasury’s  credit agreements with the automakers established additional  requirements for the companies. For example, the companies are required  to maintain their domestic production at certain levels, abstain from  acquiring or leasing private passenger aircrafts, and provide quarterly  reports on internal controls. Treasury officials pointed out that another  reason for differences is that AIG, GM, and Chrysler are not subject to the  extensive federal regulations that Bank of America, Citigroup, and GMAC,  as bank holding companies, face. Moreover, officials believe that the path  to exit the investments in the case of AIG, GM, Chrysler, and GMAC is  more complex than in the case of Bank of America and Citigroup.
Under HERA, FHFA has broad authority over the Enterprises’ operations  while they are in conservatorship. The law authorizes FHFA to    appoint members of the board of directors for both Enterprises based on    prescribe appropriate regulations regarding the conduct of  immediately succeed to all powers, privileges, and assets of the regulated  Enterprises;   provide for the exercise of any functions of any stockholder, officer, or  director of the entity; and take any actions that may be necessary to put the entity into a solvent and  operationally sound state and conserve and preserve the assets of the  entity.
According to FHFA officials, the agency has generally delegated significant  day-to-day responsibility for running the Enterprises to the management  teams that the agency has put in place for two reasons: First, FHFA has  limited staff resources. Second, the Enterprises are better positioned with  the expertise and infrastructure necessary to carry out daily business  activities, such as the routine purchases of mortgages from lenders and  securitization of such loans. At the same time, FHFA maintains its fulltime  examination and supervisory programs for the Enterprises.  However, FHFA, as the Enterprises’ conservator and regulator, has  instituted a number of requirements, policies, and practices that involve  them in the Enterprises. For example:    Lobbying activities for both Enterprises have been dismantled and  prohibited, and FHFA directly reviews all the Enterprises’ responses to  congressional members.
Officials from FHFA’s Office of Conservatorship Operations attend the  board meetings and senior executive meetings at both of the Enterprises.
FHFA reviews and approves performance measures for both of the  Enterprises. Each Enterprise has developed scorecards with criteria that  focus on safety and soundness issues while at the same time aligning loan  modification goals.
FHFA reviews to confirm that they have no objections to SEC filings for  both of the Enterprises. The Division of Enterprise Regulation within  FHFA was established by a statutory mandate within HERA to examine all  functions of the Enterprises, with the exception of those explicit  accounting examinations that are handled by the Office of the Chief  Accountant.
FHFA and Treasury work closely with the Enterprises to implement a  variety of programs that respond to the dramatic downturn in housing  finance markets. FHFA monitors the Enterprises’ implementation of  Treasury’s Home Affordable Modification Program (HAMP). The  Enterprises are acting as Treasury’s agents in implementing the program  and ensuring that loan servicers comply with program requirements, with  Fannie Mae as the program’s administrator and Freddie Mac as Treasury’s  compliance agent for the program. FHFA has also provided advice and  resources to Treasury in designing the Making Home Affordable Program.  FHFA and Treasury stay in contact with the Enterprises on a daily basis  about HAMP. Executives for FHFA meet with executives of both of the  Enterprises on a weekly basis, and Treasury executives meet with the  Enterprises’ leadership monthly.

	Federal Government Continues to Take Steps to Monitor Its Investments and Develop Exit Strategies

As a shareholder with respect to TARP recipients, the government has  taken a variety of steps to monitor its investments in each company  receiving exceptional assistance, while at the same time considering  potential exit strategies. First, Treasury developed a set of guiding  principles that outline its approach for monitoring investments in the  companies. Second, OFS has hired asset managers to help monitor its  investments in certain institutions, namely Citigroup and Bank of  America. Third, Treasury’s Auto Team (or other Treasury investment  professionals) manages investments in GM, Chrysler, and GMAC made  under AIFP. Fourth, the Federal Reserve and FRBNY collaborate with  Treasury in monitoring the Federal Reserve’s outstanding loan to and the  government’s equity investments in AIG. Finally, because Treasury’s  ownership in the Enterprises is not part of TARP, staff outside of OFS is  responsible for monitoring these investments. Given the varied forms of  ownership interest and the complexity of many of the investments,  Treasury will likely have to develop a unique exit strategy for each  company. The divestment process, however, is heavily dependent on  company management successfully implementing strategies discussed  with their regulators and Treasury. Further, external factors, such as  investors demand for purchasing securities of these companies receiving  exceptional assistance and broader market conditions, must be considered  when implementing exit strategies. Because most of the shares are  expected to either be sold in a public offering or be redeemed or repaid  using funds raised in the public markets, the financial markets must be  receptive to government efforts. A public offering of shares, such as those  considered for AIG subsidiaries American International Assurance  Company, Ltd and American Life Insurance Company emphasizes the  importance of market demand. Congressional action will be needed to  determine the long-term structures and exit strategies for the Enterprises.

		Federal Government Has Developed Guidance for Monitoring Its Investment in Companies

Treasury has stated that it is a reluctant shareholder in the private  companies it has assisted and that it wants to divest itself of its interests as  soon as is practicable. In managing these assets, Treasury has developed  the following guiding principles.
Protect taxpayer investment and maximize overall investment returns  within competing constraints.
Promote the stability of financial markets and the economy by preventing  disruptions.
Bolster markets’ confidence to increase private capital investment.
Dispose of the investments as soon as it is practicable and in a manner  that minimizes the impact on financial markets and the economy.

		Treasury Monitored Its Investments in Bank of America and Citigroup with the Assistance of Asset Managers but the Decision of When to Divest Was Not Always Treasury’s

Treasury relied on its staff and asset managers to monitor its investments  in Bank of America and Citigroup. Treasury officials said that the asset  managers value the investments including the preferred securities and  warrants. This valuation process includes tracking the companies’  financial condition on a daily basis using credit spreads, bond prices, and  other financial market data that are publicly available. Treasury also uses a  number of performance indicators, including liquidity, capital levels, profit  and loss, and operating metrics to monitor their financial condition. The  asset managers report regularly to Treasury and provide scores that track  the overall credit quality of each company using publicly available  information. For the bank holding companies, Treasury monitors the  values of its investments, whereas, the Federal Reserve and other  regulators monitor the financial condition of these institutions as part of  their role as supervisory authorities.
While federal regulators routinely monitor the financial condition of the  financial institutions they supervise, this oversight is separate from the  monitoring Treasury engages in as an equity investor. This supervisory  monitoring is related to the regulatory authority of these agencies and not  to investments made under TARP. For example, bank regulators had daily  contact with Bank of America, Citigroup, and GMAC as they oversee the  banks activities and help ensure their safety and soundness and monitor  their financial condition. This daily interaction involves discussions about  the institutions’ financial condition and operations. Moreover, the Federal  Reserve and OCC officials said that they do not share supervisory  information with Treasury to avoid a potential conflict of interest.
Rather than requiring the development of an exit strategy by Treasury,  Bank of America and Citigroup, with the approval of their federal banking  regulators, repurchased preferred shares and trust preferred shares from  Treasury in December 2009. The holding companies and their regulators  share the duty of identifying the appropriate time to repay the assistance  provided through Treasury’s purchase of preferred equity. The regulators  leveraged their onsite examiners to provide information on the overall  health of the banks and their efforts to raise capital. In September 2009,  Bank of America and Citigroup initiated the process by informing the  Federal Reserve that they wanted to redeem their TARP funds. Federal  Reserve officials told us that in conjunction with FDIC and OCC, they  reviewed Bank of America’s and Citigroup’s capital positions and  approved the requests using primarily two criteria. First, the institutions  had to meet the TARP redemption requirements outlined under SCAP.  Second, they had to raise at least 50 percent of the redemption amount  from private capital markets. In December 2009, Bank of America and  Citigroup redeemed the preferred shares and the trust preferred shares,  respectively, that Treasury held.
In contrast to the process of unwinding trust preferred shares, in  developing a divestment strategy for the common stock held in Citigroup,  Treasury and its asset manager will evaluate market conditions and time  the sale in an attempt to maximize taxpayers return. On December 17,  2009, Treasury announced a plan to sell its Citigroup common stock over a  6- to 12-month time frame. Treasury plans to use independent investment  firms to assist in an orderly sale of these shares. A recent example of the  difficulties that could be encountered occurred when Treasury announced  plans to sell its Citigroup common shares in December 2009 following  share sales by Bank of America and Wells Fargo. Market participants said  at that time the supply of bank shares in the market exceeded demand and  thus lowered prices. Selling the Citigroup shares in that market  environment would have recouped less money for the taxpayers, so  Treasury postponed the proposed sales. In March 2010, Treasury  announced that it hired Morgan Stanley as its sales agent to sell its shares  under a pre-arranged written trading plan. In April 2010, Treasury further  announced that Citigroup had filed the necessary documents with SEC  covering Treasury’s plan sale. According to Treasury’s press release, it  began selling common shares in the market in an orderly fashion under a  prearranged written trading plan with Morgan Stanley. Initially, Treasury  provided Morgan Stanley with discretionary authority to sell up to   1.5 billion shares under certain parameters outlined in the trading plan.  However, Treasury said that it expects to provide Morgan Stanley with  authority to sell additional shares beyond this initial amount. According to  Treasury officials, Morgan Stanley is providing on-going advice and ideas  to Treasury regarding the disposition in order to assist Treasury in meeting  its objectives.

		Treasury Is Monitoring Its Assets and Is Responsible for Developing an Exit Strategy for Chrysler, GM, and GMAC, But the Strategy Depends on a Variety of External Factors

To manage its debt and equity investment in the automotive companies  that received assistance and determine when and how to exit, Treasury  monitors industry and broader economic data, as well as company-specific  financial metrics. The information is important both for Treasury’s  management of its equity in the companies and the repayment of the  companies’ term loans, because it enables Treasury to determine how  receptive the market will be to an equity sale—which affects the price at  which Treasury can sell—and how likely it is that the companies will have  sufficient liquidity to repay the loans. While the companies in the other  categories discussed in this section also rely on the economic well-being  of the country, consumer purchases of new cars are highly correlated with  the health of the overall economy, making these broader measures  especially relevant when discussing the automotive industry. In addition to  monitoring industry and broader economic data, Treasury reviews  financial, managerial, and operational information that the companies are  required to provide under the credit and equity agreements with Treasury.  Treasury will also be monitoring, as needed, information beyond that  which is delineated in these agreements with Treasury, for example  updates on current events such as the sale of the Saab brand. The  companies provide the information, as needed, and the items specified in  the agreements to Treasury in monthly reporting packages.
Treasury officials said that they reviewed and analyzed the reports they  received to identify issues, such as actual market share that lagged behind  the projected market share, excess inventory, or other signs that business  might be declining. While Treasury has maintained that it will not direct  the companies to take specific actions, it does notify the companies’  management and the Secretary of the Treasury if it sees any cause for  concern in the financial reports, such as actual market share lagging  behind projected market share. In addition to reviewing financial  information, Treasury officials meet quarterly in person with the  companies’ top management to discuss the companies’ progress against  their own projections and Treasury’s projections. Important findings that  result from the review of financial reports or management meetings are  conveyed to key staff in OFS and other Treasury offices with  responsibilities for managing TARP investments. This level of access was  the result of the various legal and other agreements with the companies.
Treasury will determine when and how to divest itself of its equity stake in  GM, Chrysler, and GMAC. Treasury officials said that they would consider  indicators such as profitability and prospects, cash flow, market share,  and market conditions to determine the optimal time and method of sale.  However, these efforts are complicated by the fact that Treasury shares  ownership of GM and Chrysler with the Canadian government and other  third parties. Treasury has yet to announce a formal exit plan but has  publicly stated that a public offering of its shares in GM is likely, and, in  June 2010, provided guidance on its role in the exploration of a possible  initial public offering of the common stock of GM. Treasury is still  considering both a public offering and a private sale of the common stock  it owns in Chrysler. The companies’ term loans—the other component of  Treasury’s investment—were scheduled to be repaid by July 2015 for GM  and by June 2017 for Chrysler. In April 2010, GM repaid the remaining  balance on the $6.7 billion loan from Treasury. GM made this payment  using funds that remained from the $30.1 billion Treasury had provided in  June 2009 to assist with its restructuring.
Our November 2009 report on the auto industry noted that the value of GM  and Chrysler would have to grow tremendously for Treasury to approach  breaking even on its investment, requiring that Treasury temper any desire  to exit as quickly as possible with the need to maintain its equity stake  long enough for the companies to demonstrate sufficient financial  progress. This report also included three recommendations related to  Treasury’s approach to managing its assets and divesting itself of its equity  stake in Chrysler and GM. First, we recommended that Treasury ensure  that it has the expertise needed to adequately monitor and divest the  government’s investment in Chrysler and GM, and obtain needed expertise  where gaps are identified. Following this recommendation, Treasury hired  two additional staff to work on the Auto Team, which is composed of  analysts dedicated solely to monitoring Treasury’s investments in the  companies. Treasury also hired Lazard LLC in May 2010 to act as an  advisor on the disposition of Treasury’s investment in GM. Second, we  recommended that Treasury should report to Congress on its plans to  assess and monitor the companies’ performance to help ensure that they  are on track to repay their loans and to return to profitability. In response  to this recommendation, Treasury stated that it already provides updates  to TARP oversight bodies including the Congressional Oversight Panel and  SIGTARP, concerning the status of its investments and its role in  monitoring the financial condition of Chrysler and GM and that it will  provide additional reports as circumstances warrant. Third, we  recommended that Treasury develop criteria for evaluating the optimal  method and timing for divesting the government’s ownership stake in  Chrysler and GM. In response to this recommendation, Treasury stated  that members of the Auto Team are experienced in selling stakes in private  and public companies and are committed to maximizing taxpayer returns  on Treasury’s investment. Treasury also stated that private majority  shareholders typically do not reveal their long-term exit strategies in order  to prevent other market participants from taking advantage of such  information. However, we note that because Treasury’s stakes in the  companies represent billions of taxpayer dollars, Treasury should balance  the need for transparency about its approach with the need to protect  certain proprietary information, the release of which could put the  companies at a competitive disadvantage or negatively affect Treasury’s  ability to recover the taxpayers’ investment. Moreover, Treasury could  provide criteria for an exit strategy without revealing the precise strategy.
Although GMAC is a bank holding company, it received assistance under  AIFP. While investment in GMAC was previously managed by Treasury’s  Auto Team, the investment in GMAC is currently managed by other  Treasury officials. This team uses many of the same indicators that are  used for bank holding companies. For instance, to monitor GMAC’s  condition, the Treasury’s team views liquidity and capital levels at the  company and observes management’s strategic decision making. Due to it  not being publicly traded and the challenges it faces in its transition to a  more traditional bank holding company model, Treasury is more actively  involved in managing and valuing its investment in the company.
As of January 27, 2010, Treasury had not decided how it would divest its  GMAC preferred shares or recommended a time frame for the divestment.  The Federal Reserve and FDIC will be involved in the approval process  that would allow GMAC to exit TARP by repurchasing its preferred shares.  Treasury could recover its investment in GMAC preferred shares through  the same process used to exit its preferred equity investments in Citigroup  and Bank of America, but other options exist. For example, Treasury  could sell its preferred shares to a third party, convert its preferred shares  into common equity and sell those shares, or hold the preferred shares to  maturity.  Throughout 2009, the company continued to experience  significant losses as it attempted to follow through on its strategies as a  relatively new, independent company. As we have seen, Treasury  purchased $3.8 billion in preferred shares ($2.54 billion of trust preferred  shares and $1.25 billion of mandatory convertible preferred shares) from  GMAC on December 30, 2009, because the company could not raise capital  in the private markets to meet its SCAP requirements.
According to Treasury officials, for its common stock in GMAC, Treasury  is continuing to explore many options to exit its investment, including an  initial public offering or other alternatives. Divesting itself of GMAC’s  common stock will be more difficult because the shares are not currently  publicly traded. Treasury could divest its GMAC common stock through  multiple methods, including by making a public offering of its shares as  company officials have suggested, selling the stock to a buyer or buyers  through a private sale, or selling the stock back to the company as the  company builds up capital.

		The Federal Reserve, FRBNY, and Treasury Monitor AIG, But the Trustees and Treasury Are To Determine Their Exit Strategy Once AIG Repays Its Debt

The Federal Reserve, FRBNY, and Treasury share responsibility for  managing the government’s loan to and investment in AIG, but the trustees  and Treasury must develop exit strategies for divesting their interest in  AIG. The Federal Reserve and FRBNY have different roles than they do  in overseeing the bank holding companies, because their relationship with  AIG is not a supervisory one but a relationship between creditor and  borrower. The Federal Reserve and FRBNY have acted to ensure that AIG  maintains adequate capital levels after it suffered a severe loss of capital in  2008 that compromised its ability to sell certain businesses and maintain  its primary insurance subsidiaries as viable businesses. A strengthened  balance sheet, access to new capital, profitability, and lower risk levels are  important in tracking AIG’s progress in returning to financial health. In  order to monitor this progress, the Federal Reserve, FRBNY, and Treasury  use various indicators, including liquidity, capital levels, profit and loss,  and credit ratings. Although each of these entities monitors AIG  independently, they share information on such indicators as cash position,  liquidity, regulatory reports, and other reports as necessary. AIG is also  responsible for regularly providing periodic internal reports as specified in  the FRBNY credit agreement and the Treasury securities purchase  agreements. According to the AIG trustees, in monitoring AIG, they rely on  information gathered by the FRBNY, Treasury, and AIG, and their  respective outside consultants, to avoid, to the extent possible, redoing  work that has already been done at unnecessary cost. The AIG trustees are  responsible for voting the trust stock, working with AIG and its board of  directors to ensure corporate governance procedures are satisfactory, and  developing a divestiture plan for the sale or other disposition of the trust  stock.
As we have seen, government assistance to AIG was provided by or is held  by FRBNY, the AIG Trust, and Treasury, which are independently  responsible for developing and implementing a divestment plan and must  coordinate their actions. Over time, more of the government’s credit  exposure has been converted to equity that potentially poses greater risk  to the federal government. For example, Treasury purchased $40 billion of  preferred shares and the proceeds were used to pay down the balance of  the FRBNY Revolving Credit Facility. More recently, in December 2009,  FRBNY accepted preferred equity interest in two AIG-created special  purpose vehicles that own American International Assurance Company,  Ltd and American Life Insurance Company—AIG’s leading foreign life  insurance companies. In exchange, FRBNY reduced the amount AIG  owed on the Revolving Credit Facility by $25 billion. Repayment of AIG’s  remaining $27 billion debt will depend, in part, on the markets’ willingness  to finance the company with new funds following its return to financial  health.
According to officials at Treasury and the Federal Reserve, AIG must  repay the FRBNY credit facility before the AIG Trust can, as a practical  matter, divest its equity shares. As a result, the AIG trustees said that they  would begin developing an exit strategy once AIG had repaid its debt to  FRBNY, which is due no later than September 13, 2013. According to the  AIG trustees and Treasury officials, while Treasury and the AIG Trust are  responsible for developing independent exit strategies, they plan to  coordinate their efforts. The Treasury team that manages the AIG  investment has been running scenarios of possible exit strategies but has  not decided which strategy to employ. A number of options are being  considered by the AIG trust for divesting the Series C Preferred Stock, one  of which is to convert the Series C Preferred Stock to common stock and  divest such common stock through a public offering or a private sale.  Treasury has multiple options available for divesting its preferred shares,  including having AIG redeem Treasury’s shares, converting the shares to  common stock that would subsequently be sold in a public offering, or  selling the shares to an institutional buyer or buyers in a private sale.  According to Treasury officials, Treasury is devoting significant resources  to planning the eventual exit strategy from its AIG investments.
When AIG will be able to pay the government completely back for its  assistance is currently unknown because the federal government’s  exposure to AIG is increasingly tied to the future health of AIG, its  restructuring efforts, and its ongoing performance as more debt is  exchanged for equity. Therefore, as we noted in our April 2010 report on  AIG, the government’s ability to fully recoup the federal assistance will be  determined by the long-term health of AIG, the company’s success in  selling businesses as it restructures, and other market factors such as the  performance of the insurance sectors and the credit derivatives markets  that are beyond the control of AIG or the government. In March 2010, the  Congressional Budget Office estimated that the financial assistance to AIG  may cost Treasury as much as $36 billion compared to the $30 billion  estimated in September 2009 by Treasury. While AIG is making progress in  reducing the amount of debt that it owes, this is primarily due to the  restructuring of the composition of government assistance from debt to  equity.

		FHFA and Treasury are Monitoring the Enterprises’ Financial Performance and Mission Achievement, but Any Exit Strategy Will Need Congressional Action

FHFA, in its roles as conservator, safety and soundness supervisor, and  housing mission regulator for the Enterprises, has adopted several  approaches to monitoring their financial performance and operations.  FHFA officials said that they have monitored the Enterprises’ financial  performance in meeting the standards established in the scorecards and  will continue to do so. Further, FHFA monitors, analyzes, and reports on  the Enterprises’ historical and projected performance on a monthly basis.  FHFA provides information based on public and nonpublic management  reports, and the fair value of net assets is defined in accordance with  generally accepted accounting principles. In addition, FHFA officials said  that the agency’s safety and soundness examiners are located at the  Enterprises on a full-time basis, and also monitor their financial  performance, operations, and compliance with laws and regulations  through conducting examinations, holding periodic meetings with  officials, and reviewing financial data, among others things.
FHFA is significantly involved as conservator with the Enterprises when it  comes to reporting financial information and requesting funding from  Treasury. FHFA puts together a quarterly request package that is reviewed  through several levels of management, and it is ultimately signed off on by  the Acting Director of FHFA before it is sent to the Under Secretary for  Domestic Finance at Treasury for approval as the official request for  funding.
Although the structure of the assistance to the Enterprises has remained  constant, the amount of assistance has steadily increased. Treasury  increased the initial funding commitment cap from $100 billion to $200  billion per Enterprise in February 2009, and the decision was made in  December 2009 to lift the caps to include losses from 2010 through 2012.  Treasury stated it raised the caps when it did because its authority to  purchase preferred shares under HERA expired on December 31, 2009.  While Treasury did not believe the Enterprises would require the full $200  billion authorized per Enterprise prior to December 31, 2009, it lifted the  caps to reassure the markets that the government would stand behind  them going forward. At the end of first quarter 2010, Treasury had  purchased approximately $61.3 billion in Freddie Mac preferred stock and  $83.6 billion in Fannie Mae preferred stock under the agreements.
While FHFA and Treasury are monitoring the Enterprises’ financial  performance and mission achievement through a variety of means, exit  strategies for the Enterprises differ from those for the other companies  that have also received substantial government assistance. Given the  ongoing and significant financial deterioration of the Enterprises—the  Congressional Budget Office projected that the operations of the  Enterprises would have a total budgetary cost of $389 billion over the next  10 years—FHFA and other federal officials have said that the Enterprises  will probably not be able to return to their previous organizational  structure as publicly-owned private corporations with government  sponsorship. Many observers have stated that Congress will have to re- evaluate the roles, structures, and performance of the Enterprises and to  consider options to facilitate mortgage financing while mitigating safety  and soundness and systemic risk concerns.
In a September 2009 report, we identified and analyzed several options for  Congress to consider in revising the Enterprises’ long-term structures.  These options generally fall along a continuum, with some overlap in key  areas.
Establishing the Enterprises as government corporations or agencies.
Under this option, the Enterprises would focus on purchasing qualifying  mortgages and issuing mortgage-backed securities but eliminate their  mortgage portfolios. FHA, which insures mortgages for low-income and  first-time borrowers, could assume additional responsibilities for  promoting homeownership for targeted groups.
Reconstituting the Enterprises as for-profit corporations with  government sponsorship but placing additional restrictions on them.  While restoring the Enterprises to their previous status, this option would  add controls to minimize risk. For example, it would eliminate or reduce  mortgage portfolios, establish executive compensation limits, or convert  the Enterprises from shareholder-owned corporations to associations  owned by lenders.
Privatize or terminate them. This option would abolish the Enterprises in  their current form and disperse mortgage lending and risk management  throughout the private sector. Some proposals involve the establishment  of a federal mortgage insurer to help protect mortgage lenders against  catastrophic mortgage losses.
While there is no consensus on what the next steps should be, whatever  actions Congress takes will have profound impacts on the structure of the  U.S. housing finance system. The Enterprises’ still-dominant position in  housing finance is an important consideration for any decision to establish  a new structure.

		Exit Strategy Likely to Depend on the Company Involved and Type of Assistance Provided

Finally, some of the companies receiving exceptional assistance have  taken a number of steps to repay the financial assistance owed the  government and to repurchase their preferred shares in light of the  significant restrictions put in place to encourage companies to begin to  repaying and exiting the programs as soon as practicable. At the same  time, the government continues to take steps to establish exit strategies  for the remaining companies and in some cases the federal government’s  financial exposure to these companies may exist for years before the  assistance is fully repaid. In other cases, the federal government may not  recover all of the assistance provided. For example, where the government  has an equity interest, its ability to recover what has been invested  depends on a variety of external factors that are beyond the control of the  institution and the government. Moreover, as of June 1, 2010, the  Enterprises have continued to borrow from Treasury. However, ongoing  monitoring of the institutions and the government’s role continues to be  important and other additional insights may continue to emerge as aspects  of the crisis continue to evolve, including mortgage foreclosures and how  best to continue to stabilize housing markets.

	The Government’s Recent Involvement in Private Markets Provides Important Lessons

Assistance that the federal government provided in response to the recent  financial crisis highlights the challenges associated with government  intervention in private markets. Building on lessons learned from the  financial crises of the 1970s and 1980s, we identified guiding principles at  that time that help to serve as a framework for evaluating large-scale  federal assistance efforts and provided guidelines for assisting failing  companies, including the government’s actions during the most recent  crisis. These principles include (1) identifying and defining the problem,  (2) determining national interests and setting clear goals and objectives  that reflect them, and (3) protecting the government’s interests. The  government generally adhered to these principles during this recent crisis.  But because of its sheer size and scope, the crisis presented unique  challenges and underscored a number of lessons to consider when the  government provides broad-based assistance. First, widespread financial  problems, such as those that occurred in this crisis, require  comprehensive, global actions that must be closely coordinated. For  example, Treasury’s decision to provide capital investments in financial  institutions was driven in part by similar actions in other countries.  Second, the government’s strategy for managing its investments must  include plans to mitigate perceived or potential conflicts that arise from  the government’s newly acquired role as shareholder or creditor and its  existing role as regulator, supervisor, or policymaker. Acquiring an  ownership interest in private companies can help protect taxpayers by  enabling the government to earn returns when it sells its shares and the  institutions repurchase their shares or redeem their warrants. But this  scenario can also create the potential for conflict if, for example, public  policy goals are at odds with the financial interests of the firm receiving  assistance. Further, the federal government’s intervention in private  markets requires that those efforts be transparent and effectively  communicated so that citizens understand policy goals, public  expenditures, and expected results. The government’s actions in the  recent crisis have highlighted the challenges associated with achieving  both. The government also needs to establish an adequate oversight  structure to help ensure accountability. Finally, the government must take  steps to mitigate the moral hazard that can arise when it provides support  to certain entities that it deems too big or too systemically significant to  fail. Such assistance may encourage risk-taking behavior in other market  participants by encouraging the belief that the federal government will  always be there to bail them out.

		The Government Generally Adhered to Key Principles When Providing Federal Assistance during the Recent Financial Crisis

Building on lessons learned from the financial crises of the 1970s and  1980s, we identified guiding principles to help serve as a framework for  evaluating large-scale federal assistance efforts and provided guidelines  for assisting failing companies.
Identifying and defining the problem, including separating issues that  require immediate response from longer-term structure issues.
Determining national interests and setting clear goals and objectives that  reflect them.
Protecting the government’s, and thus the taxpayer’s, interests by working  to ensure not only that financial markets continue to function effectively,  but also that any investments made provide the highest possible return.  This includes requiring concessions from all parties, placing controls over  management, obtaining collateral when feasible, and being compensated  for risk.
During the recent financial crisis, the government faced a number of  challenges in adhering to these three principles—which we identified  during earlier government interventions in the private markets—when it  provided financial assistance to troubled companies. First, the scope and  rapid evolution of this crisis complicated the process of identifying and  defining the problems that needed to be addressed. Unlike past crises that  involved a single institution or industry, the recent crisis involved  problems across global financial markets, multiple industries, and large,  complex companies and financial institutions. For example, problems in  mortgage markets quickly spread to other financial markets and ultimately  to the broader economy. As the problems spread and new ones emerged,  the program goals Treasury initially identified often seemed vague, overly  broad, and conflicted. Further, because the crisis affected many  institutions and industries, Treasury’s initial responses to each affected  institution often appeared ad hoc and uneven, leading to questions about  its strategic focus and the transparency of its efforts.
During a financial crisis, identifying and defining problems involves  separating out those issues that require an immediate response from  structural challenges that will take longer to resolve. The most recent  crisis evolved as the crisis unfolded and required that the government’s  approach change in tandem. Treasury created several new programs under  TARP to address immediate issues, working to stabilize bank capital in  order to spur lending and restart capital markets and seeking ways to help  homeowners facing foreclosure. While banks have increased their capital  levels and these companies have begun repaying the government  assistance, constructing relevant solutions to address the foreclosure  crisis has proved to be a long-term challenge.  The recently enacted  financial services reform legislation requires that systemically important  financial companies be subject to enhanced standards, including risk- based capital requirements, liquidity requirements, and leverage limits that  are stricter than the standards applicable to companies that do not pose  similar risk to financial stability. Also, the law creates a procedure for the  orderly liquidation of financial companies if the Secretary of the Treasury  makes certain determinations including a determination that the failure of  the company and its resolution under otherwise applicable law would  have serious adverse effect on financial stability.
Second, determining national interests and setting clear goals and  objectives that reflect them requires choosing whether a legislative  solution or other government intervention best serves the national  interest. During the recent crisis the federal government determined that  stabilizing financial markets, housing markets, and individual market  segments required intervening to support institutions it deemed to be  systemically significant. It also limited its intervention, stating that it  would act only as a reluctant shareholder and not interfere in the day-to- day management decisions of any company, would exercise only limited  voting rights, and would ensure that the assistance provided would not  continue indefinitely. Further, Treasury emphasized the importance of  having strong boards of directors to guide these companies, as discussed  earlier. While the U.S. government developed goals or principles for  holding large equity interest in private companies, its goals for managing  its investment have at times appeared to conflict with each other.  Specifically, Treasury announced that it intended to protect the taxpayer  investment, maximize overall investment returns and that it also intended  to dispose of the investments as soon it was practicable to do so.  However, protecting the taxpayer investment may be at odds with  divesting as soon as possible. For example, holding on to certain  investments may bring taxpayers a higher return than rapid divestment.  Recognizing the tension among these goals, Treasury has tried to balance  these competing interests but ultimately, it will have to decide which  among them is most important by evaluating the trade-offs.
Finally, protecting the government’s and taxpayers’ interest is an essential  objective when creating large-scale financial assistance programs that put  government funds and taxpayer dollars at risk of loss. Generally consistent  with this principle, the government took four primary actions that were  designed to minimize this risk.
First, a priority was gaining concessions from others with a stake in the  outcome—for example, from management, labor, and creditors—in order  to ensure cooperation in securing a successful outcome. As we have  pointed out previously, as a condition of receiving federal financial  assistance, TARP recipients (AIG, Bank of America, Citigroup, GMAC,  Chrysler, and GM) had to agree to limits on executive compensation and  dividend payments, among other things. Moreover, GM and Chrysler had  to use their “best efforts” to reduce their employees’ compensation to  levels similar to those at other major automakers that build vehicles in the  United States, which resulted in concessions from the United Auto  Workers on wages and work rules.
Second, exerting control over management became necessary in some  cases—including approving financial and operating plans and new major  contracts—so that any restructuring plans would have realistic objectives  and hold management accountable for achieving results and protecting  taxpayer interests. For example, under AIFP, Chrysler and GM were  required to develop restructuring plans that outlined their path to financial  viability. The government initially rejected both companies’ plans as not  being aggressive enough but approved revised plans that included  restructuring the companies through bankruptcy. The Federal Reserve has  also reviewed AIG’s divestiture plan and routinely monitors its progress  and financial condition. Finally, as conservator FHFA maintains  substantial control over the business activities of the Enterprises.
Third, the government sought to ensure that it was in a first-lien position  with AIG, GM, and Chrysler, which received direct government loans, in  order to recoup the maximum amounts of taxpayer funds. Treasury was  not able to fully achieve this goal in the Chrysler initial loans because the  company had already pledged most of its collateral, leaving little to secure  the federal government’s loans. Treasury was however able to obtain a  priority lien position with respect to its loan to Chrysler post-restructuring.  FRBNY was able to obtain collateral against its loans to AIG.
Fourth, the government sought compensation for risk through fees and  equity participation, routinely requiring dividends on the preferred shares  it purchased, charging fees and interest on the loans, and acquiring  preferred shares and warrants that provided equity. For example, the  government required Bank of America and Citigroup to provide warrants  to purchase either common stock or additional senior debt instruments,  such as preferred shares, under their financial agreements. As a condition  for providing a $85 billion revolving loan commitment, for example,  FRBNY initially required that AIG pay an initial gross commitment fee of 2  percent (approximately $1.7 billion) and interest on the outstanding  balance, plus a fee on the unused commitment, and in exchange, issue  preferred shares (convertible to approximately 79.8 percent of issued and  outstanding shares of common stock) into a trust for the benefit of the  U.S. Treasury. Treasury’s contractual agreements with the Enterprises  detail the terms of the preferred shares, and require them to pay  commitment fees, but Treasury has not implemented these fees due to the  Enterprises’ financial condition.

		The Recent Crisis Presented Challenges and Underscored Additional Principles When Providing Assistance

The size and scope of the recent crisis were unprecedented and created  challenges that highlighted principles beyond those based upon the  lessons learned from the 1970s and 1980s. These include ensuring that  actions are strategic and coordinated both nationally and internationally,  addressing conflicts that arise from the government’s often competing  roles and the likelihood of external influences, ensuring transparency of  and communicating effectively with the Congress and the public, ensuring  that a system of accountability exists for actions taken, and taking  measures to reduce moral hazard.

			Challenges Faced by the Federal Government Stemmed From the Global Nature of the Crisis Highlighting the Need for Coordination of Global Actions during Times of Crisis

Financial crises that are international in scope require comprehensive,  global actions and government interventions that must be closely  coordinated by the parties providing assistance—including agencies of the  U.S. government as well as foreign governments—to help ensure that  limited resources are used effectively. In prior work, we reported that  overseeing large financial conglomerates has proven challenging,  particularly in regulating their consolidated risk management practices  and identifying and mitigating the systemic risks they pose. Although the  activities of these large firms often cross traditional sector boundaries,  financial regulators under the current U.S. regulatory system have not  always had full authority or sufficient tools and capabilities to adequately  oversee the risks that these financial institutions posed to themselves and  other institutions. We have laid out several elements that should be  included in a strengthened regulatory framework, including using  international coordination to address the interconnectedness of  institutions, operating cross borders, and helping ensure regulatory  consistency to reduce negative, competitive effects. Initial actions during  the crisis were taken and coordinated by the Federal Reserve, Treasury,  and FDIC, and some were made in conjunction with similar actions by  foreign governments. For example, the United States and several foreign  governments took a variety of actions including providing liquidity and  capital infusions and temporarily banning the short selling of financial  institution stock.
On September 6, 2008, initial government actions that were taken to  support the Enterprises were due to their deteriorating financial condition,  with worldwide debt and other financial obligations totaling $5.4 trillion,  and their default on those obligations would have significantly disrupted  the U.S. financial system and the global system.
Shortly afterwards, as several other large financial firms came under heavy  pressure from creditors, counterparties, and customers, the Federal  Reserve used its authority under Section 13(3) to create several facilities  to support the financial system and institutions that the government would  not have been able to assist without triggering this authority, prior to the  creation of TARP.
The global nature of these companies added to the challenges for the  federal government and international community as it resolved these  issues. Concerted federal government attempts to find a buyer for the  company or to develop an industry solution for Lehman Brothers failed to  address its financing needs. According to Federal Reserve officials, the  company’s available collateral was insufficient to obtain a Federal Reserve  secured loan of sufficient size to meet its funding needs. In the case of  AIG, after contacting the FRBNY on September 12, 2008, the U.S.  government took action because of its relationships with other global  financial institutions and coordinated with regulators in a number of  countries. According to AIG’s 2008 10-K, AIG had operations in more than  130 countries and conducted a substantial portion of its general insurance  business and a majority of its life insurance business outside the United  States. Because of its global reach, the company was subject to a broad  range of regulatory and supervisory jurisdictions, making assisting the  company with its divestment plans extremely difficult. In light of AIG’s  liquidity problems, AIG and its regulated subsidiaries were subject to  intense review, with multiple foreign regulators taking supervisory actions  against AIG. On September 16, 2008, the Federal Reserve and Treasury  determined that the company’s financial and business assets were  adequate to secure an $85 billion line of credit, enough to avert its  imminent failure.
In October 2008, in an unprecedented display of coordination, six central  banks—the Federal Reserve, European Central Bank, Bank of England,  Swiss National Bank, Bank of Canada, and the central bank of Sweden— acted together to cut short-term interest rates. In a coordinated response,  the Group of Seven finance ministers and central bank governors  announced comprehensive plans to stabilize their banking systems— making a critical promise not to let systemically important institutions fail  by offering debt guarantees and capital infusions, and increasing deposit  insurance coverage.
Within 2 weeks of enacting TARP, consistent with similar actions by  several foreign governments and central banks, Treasury—through the  newly established Office of Financial Stability—announced that it would  make available $250 billion to purchase senior preferred shares in a broad  array of qualifying institutions to provide additional capital that would  help enable the U.S. institutions to continue lending. Treasury provided  $125 billion in capital purchases for nine of the largest public financial  institutions, including Bank of America and Citigroup, considered by the  federal banking regulators and Treasury to be systemically significant to  the operation of the financial system. Together these nine financial  institutions held about 55 percent of the U.S. banking assets and had  significant global operations—including retail and wholesale banking,  investment banking, and custodial and processing services—requiring  coordinated action with a number of foreign governments.

			Recent Federal Government Assistance to the Private Sector Highlights the Need to Address Conflicts and Manage External Influences That Can Arise from the Federal Government’s At Times Competing Roles and Policy Actions

The government’s ownership of common shares in private companies can  create various conflicts and competing goals that must be managed. First,  having an ownership interest in a private company gives the government  voting rights that can influence the firm’s business activities. However,  Treasury has limited its voting rights to only matters that directly pertain  to its responsibility under EESA to manage its investments in a manner  that protects the taxpayer. For example, Treasury used its voting rights  elect directors to Citigroup’s board, approve the issuance of common  shares, and a reverse stock split. Likewise, Treasury has designated  directors to serve on Chrysler, GM, and GMAC’s boards of directors.
Second, when the government is both investor and regulator for the same  company, federal agencies may find themselves in conflicting roles. For  instance, as noted in our April 2010 report on Chrysler and GM pensions,  until Treasury either sells or liquidates the equity it acquired in each  company, the government’s role as shareholder creates potential tensions  with its roles as pension regulator and insurer. This can be illustrated by  the conflicting pressures that would likely arise in two critical and  interrelated scenarios: (1) how to decide when to sell the government’s  shares of stock and (2) how to respond to a decline in pension funding. If  either or both companies return to profitability then the government’s  multiple roles are less likely to result in any perceived conflicts. However,  if either company had to be liquidated, the government would face these  perceived conflicts, because Treasury would have to make decisions  relating to the value of its investments and the Pension Benefit Guaranty  Corporation would need to make decisions related to the companies’  pensions.
Additionally, on December 11, 2009, the Internal Revenue Service, a  bureau within Treasury, issued a notice stating that under certain  circumstances selling stock that Treasury received under any TARP  program would not trigger an ownership change. As a result, when  Treasury sells such shares there is no change in ownership for tax  purposes, and the companies would not be required to make changes that  limit net operating losses after a change in ownership. Some in Congress  have argued that this action created an additional subsidy to the financial  institutions that received federal assistance and by reducing potential  revenue from taxes, it conflicts with Treasury’s duty to take actions that  are in the best interest of the taxpayers.
The assistance to the Enterprises illustrates the potential challenges that  can arise when the government uses its assistance to further its public  policy goals—in this case, managing support for the home mortgage  markets and efforts to preserve and conserve assets. Specifically, Treasury  is pursuing public policy goals to address mortgage foreclosures through  the Enterprises, but these actions could also potentially negatively affect  the Enterprises’ financial condition. For example, the Enterprises are  participating in the administration’s foreclosure prevention programs by  modifying the terms of mortgages insured or owned by the Enterprises to  prevent avoidable foreclosures by lowering the borrower’s monthly  mortgage payments. Treasury and FHFA have argued that such programs,  by improving borrowers’ financial condition, will also benefit the  Enterprises, which have large holdings of delinquent mortgages. However,  the Enterprises have stated in their financial disclosures that these  programs may result in significant costs over time, such as incentive  payments made to servicers and borrowers over the life of the  modification and losses associated with borrower redefaults on modified  mortgages. Whether loan modifications would benefit both borrowers and  the Enterprises or further jeopardize the Enterprises’ financial condition is  unknown and may depend in part on how the program is implemented and  overseen by FHFA and Treasury over time. Overseeing the programs  aimed at reducing costs to taxpayers remains a challenge.
Being both a creditor and a shareholder in private companies creates  another conflict for the government. As a major creditor, the government  is more likely to be involved in an entity’s operations than it is if it is acting  only as a shareholder, and operational decisions that it imposes could  affect returns on taxpayer investments. For example, the government is  currently both a creditor and shareholder in Chrysler and was both a  creditor and shareholder in GM until GM repaid its $6.7 billion loan on  April 20, 2010. Treasury made initial loans to the companies to help them  avert bankruptcy, then provided financing that was converted to equity to  help them through the bankruptcy and restructuring process. As a  creditor, the government obtained rights to impose requirements on the  companies’ business, including requiring them to produce a certain  portion of their total production in the United States. These requirements  established by Treasury as creditor, could negatively affect the companies’  stock price, which in turn could negatively affect the return on investment  earned by Treasury, as a shareholder.
To manage its different investments, the government has used different  strategies—direct management and a trust arrangement—which have  different implications for the government and the private companies that  may affect how easily it can address conflicts of interest. Directly  managing the investments offers two significant advantages. First, it  affords the government the greatest amount of control over the  investment. Second, having direct control over investments better enables  the government to manage them as a portfolio, as Treasury has done under  CPP. However, such a structure also has disadvantages. For example, as  we have seen, having the government both regulate a company and hold  an ownership interest in it can create a real or perceived conflict of  interest. A direct investment also requires that the government have staff  with the requisite skills to manage it. For instance, as long as Treasury  maintains direct control of its equity investment in Citigroup, Chrysler,  and GM, among others, it must have staff or hire contractors with the  necessary expertise in these specific types of companies. In previous  work, we raised concerns about Treasury’s ability to retain the needed  expertise to assess the financial condition of the auto companies and  develop strategies to divest the government’s interests given the  substantial decline in its staff resources and lack of dedicated staff  providing oversight of its investments in the automakers.
In contrast, the government has used a trust arrangement to manage its  investment in AIG. Such an arrangement puts the government’s interest in  the hands of an independent third party and helps to avoid potential  conflicts that could stem from the government having both regulatory  responsibilities for and ownership interests in a company. A trust also  helps mitigate perceptions that actions taken with respect to TARP  recipients are politically motivated or based on any “inside information”  received from the regulators. While Treasury has interpreted TARP as  prohibiting placing TARP assets in a trust structure, FRBNY created a trust  to manage the government’s ownership interest in AIG before TARP was  established.
Finally, the varied and sometimes conflicting roles of the government as  an owner, creditor, regulator, and policymaker also potentially subject  private companies to greater government scrutiny and pressure than they  might have otherwise experienced. In particular, the government’s  investments in these companies increases the level of government and  public oversight and scrutiny these companies receive, as policymakers,  elected officials, and regulators work to ensure that taxpayer interests are  protected. The companies may also be subject to pressure from  government officials to reconsider or alter business decisions that affect  the companies’ bottom lines. For example, Chrysler and GM faced  pressure to reinstate many of the auto dealerships that had been slated for  closure.
Government involvement could come from many different sources and in  many different forms, including legislative actions and direct  communications. To gauge the nature and scope of external influences, we  interviewed officials from the six companies that received exceptional  financial assistance and reviewed legislation that would place  requirements or restrictions on these companies. We also reviewed  letters sent to Chrysler and GM officials from legislative and executive  branch officials and selected state government officials. We found that the  issues receiving the most congressional scrutiny were executive  compensation, transparency and accountability, mortgage modifications,  and closures of automobile dealerships.
Executive compensation. We identified 24 bills that members of Congress  introduced in calendar years 2008 and 2009 involving restrictions on  executive compensation or additional taxation of executive compensation  at companies receiving TARP assistance. Also, AIG officials stated that the  majority of congressional contacts they received related to executive  compensation and bonuses.
Transparency and accountability. We identified 16 bills introduced in  calendar years 2008 and 2009 that would require the companies to take  steps that would result in increased transparency or accountability, such  as reporting on how TARP funds were used. For example, the TARP  Transparency Reporting Act would require TARP recipients to report to  Treasury on their use of TARP funds.
Mortgage modifications. Officials from the companies whose business  includes mortgage financing told us that one of the most common subjects  of congressional correspondence was requests for modifications to  specific constituents’ mortgages.
Automobile dealerships. About 60 percent of the bills we identified that  specifically targeted the auto industry sought to curtail or prevent the  closure of automobile dealerships. One of these bills, which established an  arbitration process for dealerships that want to appeal a closure decision,  became public law. Furthermore, according to letters from members of  Congress that Chrysler and GM provided to us, dealership closure was the  most common subject. The letters usually either asked for an explanation  of how the closure decisions had been made or for reconsideration of the  closure of a particular dealership. (See appendix III for more information  on the nature and scope of communication with the auto industry.)
Company officials we interviewed told us that the level of government  involvement—from requests for appearances at congressional hearings to  letters from elected officials—had increased since their companies had  requested and received financial assistance from the government.  Company officials told us that this involvement was to be expected and  did not cause them to make decisions that were in conflict with their  respective companies’ best interests. However, these officials also stated  that addressing the government’s involvement, such as responding to  letters or requests for information, required increased company resources.

			Recent Federal Intervention into Private Markets Illustrates the Need for Transparency and an Effective Communication Strategy

Federal government intervention in private markets not only requires that  these efforts be transparent but also requires that the action include a  strategy to help ensure open and effective communication with  stakeholders, including Congress and taxpayers. The government’s actions  in the recent crisis have highlighted the challenges associated with  achieving both of these objectives. Throughout the crisis, Congress and  the public often stated that the government actions appeared vague, overly  broad, and conflicted. For example, Treasury’s initial response to the crisis  focused on providing assistance to individual institutions and appeared ad  hoc and uneven, leading to questions about its strategic focus and the  transparency of its efforts. Specifically, questions about the government’s  decision to assist Bear Stearns and AIG, but not Lehman Brothers,  continued months after the decisions were made. Moreover, while TARP  was created to provide a comprehensive approach to addressing the  unfolding crisis, Treasury’s decision to change the focus of the program  weeks after the passage of EESA from purchasing mortgage-backed  securities and whole loans to injecting capital into financial institutions  caught many in Congress, the markets, and the public by surprise and  adversely affected these parties understanding of the program’s goals and  priorities which may have undermined the initial effectiveness of the  program.
In general, transparency means more than simply reporting available  information to interested parties, it involves such things as providing  clearly articulated guidelines, decision points, and feedback mechanisms  to help ensure an adequate understanding of the matters at hand. For the  recent actions, transparency would include providing information on how  the companies were to be monitored and the results of those activities.  However, when considering any federal intervention, part of this decision- making process includes identifying what information can and should be  made public and balancing concerns about the public’s “need to know”  against disclosing proprietary information in a competitive market. For  example, while disclosing detailed information about Treasury’s plans to  sell shares of company stock may not be appropriate, the government  should communicate its purpose in intervening in the private market and  approach for evaluating the success of any federal action. Specifically,  making information available to the public on the purpose of federal  intervention and the decision to intervene could help ensure that the  public understands the implications of not intervening and the expected  results from the government’s actions.
While EESA required Treasury to report information about TARP  activities, Treasury’s failure to adequately communicate the rationale for  its actions and decisions early on caused confusion about the motivations  behind these actions and decisions and long plagued the program.  Treasury’s lack of an effective communication strategy was, in part, the  result of the unfolding nature of the crisis but even so, the nature of the  unfolding crisis was not effectively communicated. For example, the  multifaceted nature of the crisis resulted in numerous TARP programs to  address specific problems in the markets; however, Treasury did not  establish or adequately explain some of the programs until after assistance  had already been announced. Specifically, Treasury announced assistance  to Citigroup, Bank of America, and AIG before TIP and SSFI—now called  the AIG Assistance Program—were established and announced in January  2009 and November 2008, respectively. Since the inception of TARP, we  have recommended that Treasury take a number of actions aimed at  developing a coherent communication strategy for TARP. In our previous  reports, we have recommended that Treasury develop a communication  strategy that included building an understanding and support for the  various components of the TARP program. While the actions we  suggested were intended to address challenges associated with TARP— such as hiring a communications officer, integrating communications into  TARP operations, scheduling regular and ongoing contact with  congressional committees and members, holding town hall meetings with  the public across the country, establishing a counsel of advisors, and  leveraging available technology—most of these suggestions would be  applicable when considering a communication strategy for any federal  intervention. An effective communication strategy is especially important  during rapidly changing market events and could help the public  understand the policy goals that the government was trying to achieve and  its rationale for spending public funds.

			Strong System for Accountability Necessary to Help Ensure Taxpayer Funds Are Used Appropriately

When considering government assistance to private companies, providing  accountability for taxpayer funds is imperative. The absence of a system  for accountability increases the risk that the interests of the government  and taxpayers may not be adequately protected and that the programs’  objectives may not be achieved efficiently and effectively. We first  highlighted the importance of accountability in implementing TARP in  December 2008, which has been reiterated by Congressional Oversight  Panel and SIGTARP. Specifically, we noted the importance of establishing  oversight structures, including monitoring and other internal controls that  can help prevent and detect fraud. Federal action in the midst of a crisis  will undoubtedly require that actions be taken at the same time that  programs are being established. In December 2008, we reported that a  robust oversight system with internal controls specifically designed to deal  with the unique and complex aspects of TARP would be key to helping  OFS management achieve the desired results. For example, OFS faced  the challenge that it needed to develop a comprehensive system of internal  controls at the same time that it was reacting quickly to changing financial  market events and establishing the program. One area that took time to  develop was establishing a plan to help ensure that participating  institutions adhered to program requirements or to monitor companies’  compliance with certain requirements, such as executive compensation  and dividend restrictions. Therefore, when making any decision to  intervene in private markets, Congress and the government must take  efforts to provide an appropriate oversight structure.

			Providing Federal Assistance to the Private Sector Creates Moral Hazard, which Has to be Mitigated

While the federal government’s assistance may have helped to contain a  more severe crisis by mitigating potential adverse systemic effects, it also  created moral hazard—that is, it may encourage market participants to  expect similar emergency actions, thus weakening private or market-based  incentives to properly manage risks and creating the perception that some  firms are too big to fail.
We recently reported that while assisting systemically significant failing  institutions may have helped to contain the crisis by stabilizing these  institutions and limiting potentially systemic problems, it also may have  exacerbated moral hazard. According to regulators and market  observers, such assistance may weaken the incentives for large uninsured  depositors, creditors, and investors to discipline large complex firms that  are deemed too big to fail. In March 2009, Federal Reserve Chairman  Bernanke told the Council on Foreign Relations that market perceptions  that a particular institution is considered too big to fail has many  undesirable effects. He explained that such perceptions reduce market  discipline, encourage excessive risk-taking by the firm, and provide  artificial incentives for firms to grow. He also noted these beliefs do not  create a level playing field, because smaller firms may not be regarded as  having implicit government support. Similarly, others have noted how  such perceptions may encourage risk-taking. For example, some large  financial institutions may be given access to the credit markets at  favorable terms without consideration of their risk profile.
Before a financial crisis, the financial regulatory framework could serve an  important role in restricting the extent to which institutions engage in  excessive risk-taking activities resulting from weakened market discipline.  For instance, regulators can take pre-emptive steps to mitigate moral  hazard by taking the necessary regulatory actions to help ensure that  companies have adequate systems in place to monitor and manage risk  taking. Any regulatory actions that the government takes to help ensure  strong risk management systems at companies of all sizes would help to  lessen the need for government intervention.
In general, mitigating moral hazard requires ensuring that any government  assistance includes terms that make it a last resort and undesirable except  in the most dire circumstances and specifying when the government  assistance will end. During the recent crisis, the government has included  provisions that attached such costs to the provision of assistance,  including limiting executive compensation, requiring dividends, and  acquiring an ownership interest. Further, while uncertainty about the  duration of the crisis makes it difficult to specify timetables for phasing  out assistance and investments, it is important to provide a credible “exit  strategy” to prevent further disruption in the financial markets when  withdrawing government guarantees. While Treasury has articulated its  exit strategy for some of the companies we reviewed, the government’s  plans for divesting itself of investments in AIG and the Enterprises are less  clear. Because the government’s involvement in the private sector creates  moral hazard and perpetuates the belief that some institutions are too big  or interconnected to fail, critics expressed concern that it can encourage  risk-taking.
While the debate about whether the government should intervene in  private markets to avert a systemic crisis continues, only the future will  reveal whether the government will again be faced with the prospect of  having to intervene in private markets to avert a systemic crisis. As with  other past crises, experience from the most recent crisis offers additional  insights to guide government action, should it ever be warranted.  Specifically, the government could protect the taxpayer’s interest in any  crisis by not only continuing to follow the principles that we have  discussed earlier (i.e., identifying and defining the problem, determining a  national interest and setting clear goals, and protecting the government’s  and taxpayer’s interests) but also by adhering to five additional principles  based on the federal government’s experience with the current crisis.
Develop a strategic and coordinated approach when comprehensive and  global governmental action is required.
Take actions to ensure the government has a strategy for managing any  investments resulting from its intervention in order to help mitigate  perceived or potential conflicts and manage external influence.
Ensure that actions are transparent and effectively communicated to help  ensure that the public understands what actions are being taken and for  what purpose.
Establish an adequate oversight structure to ensure accountability.
Take steps to mitigate moral hazard by not only ensuring that regulatory  and market-based structures limit risk taking before a crisis occurs, but  also by creating strong disincentives to seek federal assistance through  utilization of stringent requirements.

	Agency Comments and Our Evaluation

We provided a draft of this report to FHFA, the Federal Reserve, OFS,  OCC, and FDIC for their review and comment. In addition, we provided  excerpts of the draft of this report to the companies receiving exceptional  assistance—AIG, AIG Trust, Bank of America, Chrysler, Citigroup, and  GMAC—to help ensure the accuracy of our report.
Treasury and FHFA provided us with written comments which are  reprinted in appendices IV and V, respectively. Treasury agreed with the  report’s overall findings. In its letter, Treasury acknowledged that the  additional guiding principles for providing large-scale federal assistance  should be considered in any future broad-based government assistance  and agreed to weigh these new principles going forward. FHFA, in its  letter, acknowledged, as we pointed out in our report, the financial  assistance provided to the Enterprises illustrates the potential challenges  that can arise when the government uses its assistance to further its public  policy goals, particularly the Enterprises’ participation in the  administration’s loan modification efforts, such as HAMP. However, the  letter noted that the loan modification efforts are central to the goals of  the conservatorships and EESA. The letter further explained that efforts  like HAMP may help to mitigate the credit losses of the Enterprises  because a loan modification is often a lower cost resolution to a  delinquent mortgage than foreclosure.
The Federal Reserve, FHFA, and Treasury provided us with technical  comments that we incorporated as appropriate. In addition, AIG, the AIG  Trust, Bank of America, Chrysler, Citigroup, and GMAC also provided us  with technical comments that we incorporated as appropriate.
We are sending copies of this report to interested congressional  committees and members. In addition, we are sending copies FHFA, the  Federal Reserve, Treasury, OCC, FDIC, financial industry participants, and  other interested parties. The report also is available at no charge on the  GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  Orice Williams Brown at (202) 512-8678 or williamso@gao.gov. Contact  points for GAO’s Office of Congressional Relations and Public Affairs may  be found on the last page of this report. Staff who made major  contributions to this report are listed in appendix VI.

Appendix I: Objectives, Scope, and Methodology

The objectives of our report were to (1) describe how and why the  government obtained an ownership interest in the companies, (2) evaluate  the extent of government involvement in companies receiving exceptional  assistance, (3) describe the government’s monitoring of the companies’  financial viability and exit strategies, and (4) discuss the implications of  the government’s ongoing involvement in the companies. The report  focused on companies receiving exceptional assistance from the federal  government, including American Insurance Group (AIG), Bank of America  Corporation (Bank of America), Chrysler Group LLC (Chrysler), Citigroup,  Inc. (Citigroup), General Motors Company (GM), and GMAC, Inc. (GMAC),  as well as its involvement in Fannie Mae and Freddie Mac (Enterprises).
To address the first objective, we reviewed the monthly transactions  reports produced Department of Treasury’s (Treasury) Office of Financial  Stability (OFS) that lists the structure of federal assistance provided by  Treasury to the companies considered receiving exceptional assistance  (AIG, Bank of America, Chrysler, Citigroup, and GM) and documentation  from Federal Housing Finance Agency (FHFA) to determine the financing  structure for the Enterprises. In addition, we reviewed the Board of  Governors of the Federal Reserve System’s (Federal Reserve) “Factors  Affecting Reserve Balances” H.4.1 documents to determine the assistance  provided by Federal Reserve Bank of New York (FRBNY) to AIG. We  reviewed the contractual agreements between the government and the  companies that governed the assistance. In addition, we reviewed selected  Securities Exchange Commission (SEC) filings, Treasury’s Section 105 (a)  reports, and other GAO reports on the Troubled Asset Relief Program  (TARP).
To address the second objective, we reviewed the Emergency Economic  Stabilization Act of 2008 (EESA) and the Housing and Economic Recovery  Act of 2008 (HERA) to understand the legal framework for any potential  government involvement in the companies receiving exceptional  assistance, including the establishment of the conservatorship and the  contractual agreements established between the government and the  companies. We reviewed the credit agreements, securities purchase  agreements; assets purchase agreements, and master agreements. To  understand the trust structure established for AIG we reviewed the AIG  Credit Trust Facility agreement between FRBNY and the AIG trustees. We  conducted interviews with officials and staff from the Federal Reserve  Board, FHFA, FRBNY, Federal Reserve Bank of Chicago, (FRB-Chicago),  Federal Reserve Bank of Richmond, (FRB-Richmond), OFS, the Office of  the Comptroller of the Currency (OCC), Federal Deposit Insurance  Corporation (FDIC), and SEC. In addition, we interviewed senior  management—primarily the Chief Executive Officers and the Chief  Financial Officers—for most of the companies in our study, including the  Enterprises, and interviewed the AIG trustees to understand their role in  the governance of AIG.
To address the third objective on evaluating the government’s monitoring  of the companies’ financial viability and exit strategies, we interviewed  officials from FDIC, Federal Reserve, FHFA, FRBNY, FRB-Chicago, FRB- Richmond, OCC, and OFS. We also interviewed the asset managers who  are responsible for monitoring and valuing the equity shares held by  Treasury under the Capital Purchase Program, the Targeted Investment  Program and the Asset Guarantee Program. We reviewed Treasury  documents, such as asset manager reports, TARP transaction reports, and  press releases; Treasury testimonies; and press releases from the  companies.  We also reviewed the contractual agreements between the  government and the companies including credit agreements, securities  purchase agreements, asset purchase agreements, and master agreements  in order to understand the companies’ responsibilities in reporting  financial information and the government’s responsibility for monitoring  and divesting its interests. Finally, we reviewed a Congressional Oversight  Panel report relating to Treasury’s approach on exiting TARP and  unwinding its impact on the financial markets.
To address the fourth objective relating to the implications of the  government’s ongoing involvement in the companies, we reviewed prior  GAO work on principles for providing large-scale government assistance  and assessed the degree to which the government’s activities under TARP  adhered to these principles. To identify actions the government is taking  with the potential to influence the companies’ business decisions, we  reviewed legislation that would affect TARP recipients and determined  what, if any action the legislation would require the companies to take. To  identify the nature and scope of contacts TARP recipients received from  executive branch agencies, members of Congress, and state government  officials, we interviewed government relations staff at AIG, Bank of  America, Chrysler, Citigroup, GM, and GMAC. These interviews also  provided us with information on the extent of government involvement  and influence in the companies’ business operations. For Chrysler and  GM, we obtained 277 letters that the companies received from members of  Congress, which was the number of letters the companies received during  calendar year 2009 and kept on file. We reviewed each of the letters to  determine their topic and whether they sought to influence the companies’  business decisions. We also obtained more than 2,300 e-mails that certain  senior executives of Chrysler and GM received from congressional and  state government officials during calendar year 2009, including 1,221 from  Chrysler and 1,098 from GM. Due to the large number of these e-mails, we  reviewed a random probability sample of 251 from the 2,319 e-mails the  companies provided us with to create estimates about the population of all  the e-mails. Because we followed a probability procedure based on  random selections, our sample is only one of a large number of samples  that we might have drawn. Since each sample could have provided  different estimates, we express our confidence in the precision of our  particular sample’s results as having a margin of error at the 95 percent  confidence level of plus or minus 8 percentage points or less. This is the  interval that would contain the actual population value for 95 percent of  the samples we could have drawn. With this probability sample, each  member of the study population had a nonzero probability of being  included, and that probability could be computed for any member. Finally,  we obtained 264 e-mails that certain senior executives at the companies  received from White House and Treasury officials in calendar year 2009.  After removing e-mails that were out of scope and duplicates, we were left  with 109 e-mails, including 89 sent to Chrysler and 20 sent to GM. We  reviewed these e-mails to determine their purpose and topic and whether  they sought to influence the companies’ business decisions.
We provided a draft of this report to FHFA, the Federal Reserve, OFS,  OCC, and FDIC for their review and comment.  In addition, we provided  excerpts of the draft of this report to the companies receiving exceptional  assistance—AIG, AIG Trust, Bank of America, Chrysler, Citigroup, and  GMAC—to help ensure the accuracy of our report.
We conducted this performance audit from August 2009 to August 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 provided a reasonable basis for our findings and conclusions  based on our audit objectives.

Appendix II: Government Assistance and Outstanding Balances of the Companies

Since the fall of 2008, a number of large financial institutions and  companies have received more than $447 billion in financial assistance  leaving the government with a significant ownership interest in a number  of companies. The government provided assistance or funds to American  International Group (AIG); Bank of America Corporation (Bank of  America); Chrysler; Citigroup, Inc (Citigroup); Fannie Mae and Freddie  Mac (Enterprises); General Motors (GM); and GMAC, Inc (GMAC). As of  March 31, 2010, the government owned substantial amounts of preferred  or common shares in seven companies—AIG, Chrysler, Citigroup, GM,  GMAC, and the Enterprises. The total amounts of assistance disbursed to  each company are shown in figure 2. The federal government assisted  these companies by infusing capital through the purchase of preferred  shares, direct loans, guarantees, stock exchanges, or lines of credit that  led to the government owning preferred and common shares.
Figure 3 shows the variation in the amount of government ownership  interest in the companies and the outstanding balance that is owed to the  government. The financial institutions and the companies have begun to  pay down some of the assistance. GM has repaid the entirety of the debt  owed to Treasury under its post-bankruptcy credit agreement, and  Chrysler has repaid a portion of its loan from Treasury. As previously  noted, whether the government will be recovering all its investment or  assistance to Chrysler and GM is unknown. For companies where the  government has an ownership stake, the amount of recovery depends on a  number of external factors, including the financial health of the companies  and the market value of their stock as well as the companies’ ability to  repay loans or repurchase preferred shares. Similarly, Treasury still holds  common shares in Citigroup. The Enterprises have not repaid any portion  of the assistance Treasury has provided and as of June 2010 continued to  borrow from Treasury.
To provide some additional protection for the taxpayer, Treasury required  the companies to commit to certain financial terms and actions. For  example, in exchange for the capital infusions in the form of preferred  shares, Treasury required AIG, Bank of America, Citigroup, the  Enterprises, GM, and GMAC to pay dividends. The dividend rate varied  across the seven companies ranging from less than 5 percent to 10 percent  for AIG and the Enterprises. As shown in table 6, as of March 31, 2010,  Treasury had collected a total of more than $16.2 billion in dividends from  Bank of America, Citigroup, the Enterprises, GM, and GMAC. AIG was  required to pay dividends at an annual rate of 10 percent on series D  cumulative preferred shares prior to when they were exchanged for seri E noncumulative preferred shares, but it had not paid any dividends to  Treasury as of March 31, 2010. Series D unpaid dividends were capitaliz thereby increasing the liquida tion preference of the Series E shares for  which they were exchanged.
The government or, in the case of AIG, FRBNY requires that AIG and  Chrysler pay interest on the loans provided. Moreover, Treasury currently  holds warrants obtained in connection with the preferred shares that it  holds for AIG, Citigroup, and the Enterprises. Because GMAC is a privately held company, Treasury exercised its warrants immediately. On March 3,  2010, Treasury received more than $1.5 billion from its auction of Bank of  America’s warrants.

Appendix III: Legislation and Government Communication with GM and Chrysler

To further examine the extent of government involvement in companies  receiving Troubled Asset Relief Program (TARP) assistance, we reviewed  legislative proposals and government communications with General  Motors Company (GM) and Chrysler Group LLC (Chrysler). We examined  the following: (1) proposed legislation that would place requirements or  restrictions on the companies due to their status as TARP recipients, (2)  letters from members of Congress to the companies, and (3) e-mails from  congressional offices, state government, White House, and Department of  the Treasury (Treasury) officials sent to certain company officials whom  we designated.
Chrysler and GM officials told us that the level of government  involvement—from requests for appearances at congressional hearings to  letters from elected officials—had increased since their companies had  requested and received financial assistance from the government. They  emphasized that the congressional letters and e-mails did not cause them  to make decisions that were in conflict with their best interests. However,  these officials stated that addressing the government’s involvement, such  as responding to letters, audits, or other requests for information, required  increased company resources.

	Proposed Federal Legislation That Would Affect TARP Recipients in the Auto Industry Focuses on Dealership Closures and Executive Compensation

We identified 38 bills introduced from October 2008, when the Emergency  Economic Stabilization Act of 2008 (EESA) was enacted, through January  2010 that would impose requirements or restrictions on GM and Chrysler  as TARP recipients. Action on the majority of these bills has been limited  since their introduction in Congress, with two having become law.  Although the bills cover a range of topics, those among the most  commonly addressed by the legislation were dealership closures and  executive compensation and bonuses.

		Dealerships

We identified eight bills that addressed, among other issues, the closure of  auto dealerships, a topic specifically directed at automakers accepting  TARP funds. Closing dealerships was a way for the companies to reduce  their operating costs in an attempt to return to profitability, but since  these closures would occur in communities across the country, they  prompted considerable congressional interest. The bills generally aimed to  curtail or prevent the closure of auto dealerships, as well as plants and  suppliers. One of the bills that became public law requires Chrysler and  GM to provide to the dealers specific criteria for the closures and gives  dealers the right to pursue binding arbitration concerning their closures.  The Automobile Dealer Economic Rights Restoration Act of 2009, as  introduced in the House and Senate, would require the automakers to  restore a dealership based on the dealer’s request. As of July 30, 2010, this  bill has not been enacted.

		Executive Compensation

We identified 17 bills affecting executive compensation and bonuses for  TARP recipients in both the auto and financial industries. Most of these  bills would require restrictions on or repeals of executive compensation  and bonuses for TARP recipients. For example, the American Recovery  and Reinvestment Act, which became law in February 2009, calls for,  among other things, limits on compensation to the highest paid executives  and employees at firms receiving TARP funding.

		Other Topics

Other less commonly addressed topics and an example of a bill related to  each category are shown in table 7. As of July 30, 2010, these bills have not  been enacted.

	Chrysler and GM Have Received Numerous Letters from Members of Congress

Between May and December 2009, Chrysler and GM received 277 letters  from members of Congress, including 65 sent to Chrysler and 212 to GM.  Company officials told us that the volume of congressional letters they  received sharply increased in the spring of 2009, after the companies  received TARP assistance and when many operational changes that were  part of their restructuring—such as plant and dealership closures—were  being made. In total, 188 individual members of Congress sent letters to  the companies over this time period.
In terms of the content of the letters, many dealt with specific constituent  concerns, with the closing of auto dealerships being the most common  topic. Of the letters sent to Chrysler and GM, 68 percent pertained to  dealership closures, and the majority of these requested information on  specific dealerships in the member’s district or state or provided  information for the companies’ consideration when determining whether  or not to close specific dealerships. For example, one letter stated that  closing a particular dealership would result in customers having to drive  up to 120 miles round trip to service their existing vehicle or purchase a  new one. Other topics most commonly discussed in the letters included  the renegotiation of union contracts with companies that haul cars from  manufacturing plants to dealerships (17 percent) and the closure of  manufacturing plants (5 percent). None of the letters pertained to  executive compensation.
Across all letters, 56 percent either explicitly requested a change to the  companies’ operations or stated a desired change. Just as dealerships were  the focus of most of the letters, dealerships were the focus of the majority  of requests for changes as well, with 62 percent suggesting that the  companies reconsider the decision to close a particular dealership. The  remainder of letters that requested changes pertained to car-hauling  contracts (16 percent), plant closures (5 percent), or other business  decisions and operations such as the sale of brands (21 percent).

	Chrysler and GM Senior Executives Received E- mails from Federal and State Officials about the Companies’ Business Operations and Other Topics

We also reviewed e-mails that the companies’ chief executive officers and  most senior state and federal government relations officers had received  from federal and state officials during calendar year 2009. Our review  included e-mails sent by White House officials, the Treasury Department’s  chief advisors to the Presidential Task Force on the Auto Industry,   members of Congress or their staff, and officials from the five states with  the highest proportion of manufacturing in the auto sector. For the  purpose of analysis, we grouped the e-mails into federal executive branch  officials—Treasury and White House—because these individuals had a  defined role in the assistance to the companies, and federal legislative and  state officials. For each group, we recorded information on the purpose  and topic of each e-mail.

		White House and Treasury Department E-mails

According to the documentation the companies provided to us, the  designated officials at Chrysler received 89 e-mails from White House and  Treasury officials. The designated officials at GM received 20 e-mails.  About 60 percent of the e-mails were from Treasury officials and about 40  percent were from White House officials. Sixty-six percent of the e-mails  were sent for the purpose of either arranging a call or a meeting between  company and government officials (35 percent) or requesting information  or input from the companies (31 percent). About 26 percent of the e-mails  were sent to provide information to the companies. The topic of more than  33 percent of the e-mails was unclear and more than 60 percent of the e- mails with an unclear topic were sent for the purpose of arranging a call or  meeting. Of the e-mails with identifiable topics, the highest number  pertained to bankruptcy or restructuring (29 percent of all e-mails)  followed by manufacturing plants (12 percent), and dealerships (7  percent). Most of the e-mails that pertained to bankruptcy or restructuring  were sent for the purpose of either providing information to or requesting  information from the companies (34 percent each). For example, one e- mail requested that Chrysler review and provide comments on a set of  talking points on Chrysler’s restructuring. Two of the e-mails—less than 2  percent—requested a change to the companies’ operations or stated a  desired change, such as an e-mail concerning GM’s negotiations in a  proposed sale of a company asset.

		Congressional and State E- mails

Chrysler identified 1,221 e-mails it had received from congressional offices  of both parties, mostly from staff, and state officials; GM identified 1,098.  Due to the number of e-mails, we reviewed a random probability sample of  them in order to develop estimates about the entire group of e-mails.  Based on this review, we estimate that 86 percent of these e-mails came  from congressional offices and the remaining 14 percent from government  officials in the five states included in our analysis. The records in the  sample showed that most of the congressional e-mails were sent from staff  rather than from members of Congress.
The purpose of the vast majority of congressional and state e-mails varied  from requesting information to arranging a call or meeting to simply  thanking the recipient. Most common were e-mails sent to provide  information to the recipient (38 percent), followed by e-mails sent to  request information (31 percent), and e-mails to arrange a call or meeting  between government and company officials (22 percent). We estimate that  13 percent of the e-mails were sent for other reasons, such as to thank the  recipient, or for reasons that could not be determined based on the  content of the e-mail. Roughly 1 percent of the congressional and state e- mails—either explicitly requested or stated a desired change to the  companies’ operations. The topics of the e-mails varied, with 27 percent  focusing on dealerships and 11 percent on manufacturing plants.  Thirty- six percent—the largest group—did not reference a specific topic. For  example, many of the e-mails sent for the purpose of arranging a call or  meeting did not indicate the reason for the requested call or meeting.

Appendix IV: Comments from the Department of the Treasury

Appendix V: Comments from the Federal Housing Finance Agency

Appendix VI: GAO Contacts and Staff Acknowledgments

	Staff Acknowledgments

In addition to the contacts named above, Heather Halliwell, Debra  Johnson, Wes Phillips, and Raymond Sendejas (lead Assistant Directors);  Carl Barden; Emily Chalmers; Philip Curtin; Rachel DeMarcus; Nancy  Eibeck; Sarah Farkas; Cheryl Harris; Grace Haskins; Damian Kudelka;  Ying Long; Matthew McDonald; Sarah M. McGrath; Michael Mikota; Susan  Michal-Smith; SaraAnn Moessbauer; Marc Molino; Omyra Ramsingh;  Christopher Ross; Andrew Stavisky; and Cynthia Taylor have made  significant contributions to this report.

Related GAO Products

Troubled Asset Relief Program:  Continued Attention Needed to Ensure  the Transparency and Accountability of Ongoing Programs. GAO-10- 933T. Washington, D.C.:  July 21, 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.  Washington, D.C.:  June 30, 2010.
Troubled Asset Relief Program:  Further Actions Needed to Fully and  Equitably Implement Foreclosure Mitigation Program. GAO-10-634.  Washington, D.C.:  June 24, 2010.
Debt Management: Treasury Was Able to Fund Economic Stabilization  and Recovery Expenditures in a Short Period of Time, but Debt  Management Challenges Remain. GAO-10-498. Washington, D.C.: May 18,  2010.
Financial Markets Regulation: Financial Crisis Highlights Need to  Improve Oversight of Leverage at Financial Institutions and across  System. GAO-10-555T. Washington, D.C.: May 6, 2010.
Troubled Asset Relief Program: Update of Government Assistance  Provided to AIG. GAO-10-475. Washington, D.C.: April 27, 2010.
Troubled Asset Relief Program: Automaker Pension Funding and  Multiple Federal Roles Pose Challenges for the Future. GAO-10-492.  Washington, D.C.: April 6, 2010.
Troubled Asset Relief Program: Home Affordable Modification Program  Continues to Face Implementation Challenges. GAO-10-556T.  Washington, D.C.: March 25, 2010.
Troubled Asset Relief Program: Treasury Needs to Strengthen Its  Decision-Making Process on the Term Asset-Backed Securities Loan  Facility. GAO-10-25. Washington, D.C.: February 5, 2010.
Troubled Asset Relief Program: The U.S. Government Role as Shareholder  in AIG, Citigroup, Chrysler, and General Motors and Preliminary Views  on its Investment Management Activities. GAO-10-325T. Washington,  D.C: December 16, 2009.
Financial Audit: Office of Financial Stability (Troubled Asset Relief  Program) Fiscal Year 2009 Financial Statements. GAO-10-301.  Washington, D.C.: December 9, 2009.
Troubled Asset Relief Program: Continued Stewardship Needed as  Treasury Develops Strategies for Monitoring and Divesting Financial  Interests in Chrysler and GM. GAO-10-151. Washington, D.C.: November  2, 2009.
Troubled Asset Relief Program: One Year Later, Actions Are Needed to  Address Remaining Transparency and Accountability Challenges.  GAO-10-16. Washington, D.C.: October 8, 2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions  for October 28, 2008, through September 25, 2009, and Information on  Financial Agency Agreements, Contracts, Blanket Purchase Agreements,  and Interagency Agreements Awarded as of September 18, 2009.  GAO-10-24SP. Washington, D.C.: October 8, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-1048T. Washington,  D.C.: September 24, 2009.
Troubled Asset Relief Program: Status of Government Assistance  Provided to AIG. GAO-09-975. Washington, D.C.: September 21, 2009.
Troubled Asset Relief Program: Treasury Actions Needed to Make the  Home Affordable Modification Program More Transparent and  Accountable. GAO-09-837. Washington, D.C.: July 23, 2009.
Troubled Asset Relief Program: Status of Participants’ Dividend  Payments and Repurchases of Preferred Stock and Warrants.  GAO-09-889T. Washington, D.C.: July 9, 2009.
Troubled Asset Relief Program: June 2009 Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-658. Washington, D.C.:  June 17, 2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions  for October 28, 2008, through May 29, 2009, and Information on  Financial Agency Agreements, Contracts, Blanket Purchase Agreements,  and Interagency Agreements Awarded as of June 1, 2009. GAO-09-707SP.  Washington, D.C.: June 17, 2009.
Auto Industry: Summary of Government Efforts and Automakers’  Restructuring to Date. GAO-09-553. Washington, D.C.: April 23, 2009.
Small Business Administration’s Implementation of Administrative  Provisions in the American Recovery and Reinvestment Act.  GAO-09-507R. Washington, D.C.: April 16, 2009.
Troubled Asset Relief Program: March 2009 Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-504. Washington, D.C.:  March 31, 2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions  for the Period October 28, 2008 through March 20, 2009 and  Information on Financial Agency Agreements, Contracts, and Blanket  Purchase Agreements Awarded as of March 13, 2009. GAO-09-522SP.  Washington, D.C.: March 31, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-539T. Washington,  D.C.: March 31, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-484T. Washington,  D.C.: March 19, 2009.
Federal Financial Assistance: Preliminary Observations on Assistance  Provided to AIG. GAO-09-490T. Washington, D.C.: March 18, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-474T. Washington,  D.C.: March, 11, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-417T. Washington,  D.C.: February 24, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-359T. Washington,  D.C.: February 5, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-296. Washington, D.C.:  January 30, 2009.
High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 22,  2009.
Troubled Asset Relief Program: Additional Actions Needed to Better  Ensure Integrity, Accountability, and Transparency. GAO-09-266T.  Washington, D.C.: December 10, 2008.
Auto Industry: A Framework for Considering Federal Financial  Assistance. GAO-09-247T. Washington, D.C.: December, 5, 2008.
Auto Industry: A Framework for Considering Federal Financial  Assistance. GAO-09-242T. Washington, D.C.: December 4, 2008.
Troubled Asset Relief Program: Status of Efforts to Address Defaults and  Foreclosures on Home Mortgages. GAO-09-231T. Washington, D.C.:  December 4, 2008.
Troubled Asset Relief Program: Additional Actions Needed to Better  Ensure Integrity, Accountability, and Transparency. GAO-09-161.  Washington, D.C.: December 2, 2008.
Guidelines for Rescuing Large Failing Firms and Municipalities.  GAO/GGD-84-34. Washington, D.C.: March 29, 1984.

Summary:
Why GAO Did This Study

The recent financial crisis resulted in a wide-ranging federal response that included providing extraordinary assistance to several major corporations. As a result of actions under the Troubled Asset Relief Program (TARP) and others, the government was a shareholder in the American International Group Inc. (AIG); Bank of America; Citigroup, Inc. (Citigroup); Chrysler Group LLC (Chrysler); General Motors Company (GM); Ally Financial/GMAC, Inc. (GMAC); and Fannie Mae and Freddie Mac (Enterprises). The government ownership interest in these companies resulted from financial assistance that was aimed at stabilizing the financial markets, housing finance, or specific market segments. This report (1) describes the government's ownership interest and evaluates the extent of government involvement in these companies, (2) discusses the government's management and monitoring of its investments and exit strategies, and (3) identifies lessons learned from the federal actions. This work was done in part with the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) and involved reviewing relevant documentation related to these companies and the federal assistance provided. GAO interviewed officials at Treasury, Federal Reserve, Federal Housing Finance Agency (FHFA), and the banking regulators, as well as the senior executives and relevant officials at the companies that received exceptional assistance.

What GAO Found

The extent of government equity interest in companies receiving exceptional assistance varied and ranged from owning preferred shares with no voting rights except in limited circumstances (Bank of America until it repurchased its shares in 2009) to owning common shares with voting rights (Chrysler, Citigroup, GM, and GMAC) to acting as a conservator (the Enterprises). In each case, the government required changes to the companies' corporate governance structures and executive compensation. For example, of the 92 directors currently serving on boards of these companies, 73 were elected since November 2008. Many of these new directors were nominated by their respective boards, while others were designated by the government and other significant shareholders as a result of their common share ownership. The level of involvement in the companies varied depending on whether the government served as an investor, creditor, or conservator. For example, as an investor in Bank of America, Citigroup, and GMAC, the Department of the Treasury (Treasury) had minimal or no involvement in their activities. As both an investor in and a creditor of AIG, Chrysler, and GM--as a condition of receiving assistance--the government has required some combination of the restructuring of their companies, the submission of periodic financial reports, and greater interaction with company personnel. FHFA--using its broad authority as a conservator--has instituted a number of requirements and practices that involve them in the Enterprises.