Questions 

About the $700 Billion Emergency Economic

Stabilization Funds 

The First Report of the 

Congressional Oversight Panel for Economic Stabilization

December 10, 2008
Congressional Oversight Panel for Economic Stabilization

Panel Members

Elizabeth Warren, Chair

Rep. Jeb Hensarling1

Richard H. Neiman

Damon Silvers

1

 Rep. Hensarling did not approve this report. See Press Release, Hensarling Statement on First

Congressional Oversight Panel Report, Office of Representative Jeb Hensarling (R-TX), Dec. 9, 2008. 

2
3
TABLE OF CONTENTS

Introduction 4

Ten Questions from COP 8

Ten Questions from COP: Discussion 11

1. What is Treasury’s Strategy? 11

2. Is the Strategy Working to Stabilize Markets? 14

3. Is the Strategy Helping to Reduce Foreclosures? 15

4. What Have Financial Institutions Done With the Taxpayers’ 

Money Received So Far? 19

5. Is the Public Receiving a Fair Deal? 21

6. What is Treasury Doing to Help the American Family? 24

7. Is Treasury Imposing Reforms on Financial Institutions

that are taking Taxpayer Money? 26

8. How is Treasury Deciding Which Institutions Receive the Money? 28

9. What is the Scope of Treasury’s Statutory Authority? 30

10. Is Treasury Looking Ahead? 32

About COP 33

Future Oversight Activities 34

Appendix: Statutory Authority of the Congressional Oversight Panel 35

4
INTRODUCTION

The U.S. and the global economy have been in a steadily accelerating downward spiral

since the early spring of 2007. The American family is at the epicenter of this crisis. 

The headlines may belong to the financial markets and mega-institutions, but the

recession has visited every household in the country. The crisis affects Americans’ ability

to pay their bills, to secure their retirement, to continue their educations, and to provide

for their families. The unemployment rate is the highest it has been in fourteen years.2 In

the last three months, 1.2 million Americans lost their jobs; 533,000 in November, 2008

alone.3 Service sector employment levels, in particular, fell far faster than expected last

month.4 One in ten mortgage holders is now in default, unable to make payments on their

homes.5 More than 200,000 families and small businesses filed for bankruptcy protection

in the last two months.6 Middle and lower-income families have watched nervously as

reductions in state funding threaten college access and affordability.7 Retail sales

continue to fall,8 credit card defaults are rising,9 and savings rates hover at zero.10

Shrinking retirement funds have left millions of retired people to wonder how they will

pay basic expenses and millions more to wonder if they must continue working until they

die.11 

A short summary of the economic history of the past few months is grim. 

• Credit, when it is available, has become dramatically more expensive for all

borrowers, and some worry it will get even more expensive next year.12

2

 Peter S. Goodman, U.S. Jobless Rate Hits 14-Year High, N.Y. TIMES, Nov. 8, 2008, at A1.

3

 Sudeep Reddy et al., Job Losses Worst Since ’74: 533,000 Shed in November, WALL ST. J., Dec. 6, 2008,

at A1. 

4

 Ellen Simon, Service Sector Shrinks As New Orders Fall In Nov., ASSOCIATED PRESS, Dec. 3, 2008,

available at http://news.yahoo.com/s/ap/20081203/ap_on_bi_ge/economy_services.

5

 James R. Hagerty & Deborah Soloman, U.S. News: Rising Number of Homeowners in Trouble, WALL ST.

J., Dec. 6, 2008, at A2.

6

 Caroline Humer, Consumer Bankruptcy Filings Jump Vs Year Ago, REUTERS, Dec. 3, 2008, available at

http://www.reuters.com/article/domesticNews/idUSTRE4B25U620081203.

7

 Robert Tomsho, For College-Bound, New Barriers to Entry – Their Budgets Squeezed, State Schools Cap

Enrollment, Weight Tuition Increases; Fears for Lower-Income Students, WALL ST. J., Dec. 3, 2008, at D1.

8 Stephanie Rosenbloom, In November, Shoppers Cut Spending Even More, N.Y. TIMES, Dec. 3, 2008, at

B6.

9

 Kristina Dell, With Defaults Rising, Is a Credit-Card Crisis Looming, Nov. 14, 2008, TIME, available at

http://www.time.com/time/business/article/0,8599,1859224,00.html.

10 Henry Kaufman, How the Credit Crisis Will Change the Way America Does Business, WALL ST. J., Dec.

6, 2008, at A11.

11 Robert Powell, Crisis Forces About One-In-Five Savers To Tap Retirement Assets, MARKETWATCH, Dec.

4, 2008, available at http://www.marketwatch.com/news/story/crisis-forces-about-one-in-fivesavers/story.aspx?guid=B2F244D0-CC95-4906-AF0F-4B8CB7AC2220.

12 See John M. Berry, Borrowers Elbow for Position, BLOOMBERG.COM, Dec. 4, 2008, available at

http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_berry&sid=aohbHGXFYtKU.

5
• U.S. stock markets have lost more than 40% of their value over the past year, and

markets elsewhere in the world have also declined sharply.13 

• In September, the federal government took control of the two largest mortgage

financing intermediaries, generally known as Fannie Mae and Freddie Mac. 

• All three major U.S.-based auto companies have told Congress they face the

threat of imminent bankruptcy. 

• The largest U.S. commercial bank, Citigroup, and the largest U.S. insurance

company, AIG, have both received substantial infusions of capital from the U.S.

government, with AIG under threat of imminent bankruptcy. 

• Two major investment banks, Bear Stearns and Merrill Lynch, have disappeared

in mergers. One major investment bank, Lehman Brothers, has filed for protection

under the bankruptcy laws. The two largest remaining investment banks,

Goldman Sachs and Morgan Stanley, have transformed themselves into bank

holding companies. 

• The largest thrift savings banks, Washington Mutual and IndyMac, have been

taken over by their regulator. 

• The Federal Deposit Insurance Corporation has placed 171 banks, with combined

assets of $116 billion, on the problem list as of September 30, 2008.14

In response to the financial crisis, Congress passed the Emergency Economic

Stabilization Act of 2008, authorizing the Treasury Department to commit up to $250

billion in taxpayer dollars, to be followed by another $100 billion and another $350

billion if warranted.15 The statute also created a Congressional Oversight Panel.16 The

Act’s purposes are to “restore liquidity and stability to the financial system of the United

States . . . in a manner that (A) protects home values, college funds, retirement accounts,

and life savings; (B) preserves homeownership and promotes jobs and economic growth;

(C) promotes overall returns to the taxpayers of the United States; and (D) provides

public accountability.”17

From the passage of the Emergency Economic Stabilization Act of 2008 to the present

date, Treasury has used its authority under the Act to provide 87 banks with $165 billion

in exchange for preferred stock and warrants. Treasury further used its authority to

provide AIG with $40 billion in exchange for preferred stock and warrants, and to

provide Citigroup with a further $20 billion in preferred stock and warrants. As part of a

13 See, e.g., Dow Jones Industrial Average, MSN MONEY, available at

http://moneycentral.msn.com/investor/charts/chartdl.aspx?Symbol=%24indu.Dow.

14 Quarterly Banking Profile: Third Quarter 2008, FDIC 3 available at http://www2.fdic.gov/qbp/2008sep/

qbp.pdf.

15 Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343 §115 (Oct. 3, 2008).

16 Id., at § 125.

17 Id., at § 2.

6
program to guarantee approximately $306 billion in Citigroup’s troubled assets, Treasury

receives $4 billion of Citigroup preferred stock and warrants.18 Together, these

disbursements constitute approximately $1,900 per American family, or almost 3% of the

typical family’s pre-tax income.19

This is not the full extent of the federal government’s actions to date. Treasury has

worked in coordination with the Federal Deposit Insurance Corporation, the Board of

Governors of the Federal Reserve System and other financial regulators. The Federal

Reserve has injected trillions of dollars of liquidity into the financial system, dwarfing by

an order of magnitude expenditures by Treasury under the Act.20

This is the first report of the Congressional Oversight Panel. We are here to investigate,

to analyze and to review the expenditure of taxpayer funds. But most importantly, we are

here to ask the questions that we believe all Americans have a right to ask: who got the

money, what have they done with it, how has it helped the country, and how has it helped

ordinary people? 

These questions, in greater detail, form the heart of this report. 

This report, issued two weeks after the Oversight Panel’s first meeting, does not attempt

to answer the questions Congress and the American people have about the use of the

powers granted to Treasury under the Emergency Economic Stabilization Act of 2008.

Rather we seek to pose those questions clearly in the context of the events that have

occurred since the adoption of the Act in October. In doing so, we intend to set the

agenda for our future work and to advise the Congress as to the issues that it will need to

address in the next Administration.

In framing these questions, the Oversight Panel has benefited from its consultations with

Treasury, Treasury’s Inspector General, the Government Accountability Office, and the

staff of the Federal Reserve Board. We intend to consult with the newly appointed

Special Inspector General as soon as possible.21 The Oversight Panel in particular has

benefited from the report of the Government Accountability Office on the

implementation of the Emergency Economic Stabilization Act of 2008, dated December

2, 2008.22

18 Capital Purchase Program Transaction Report, Nov. 25, 2008 available at

http://www.treas.gov/initiatives/eesa/docs/TransactionReport-11262008.pdf; id.; Summary of Terms, Nov.

23, 2008 available at http://www.treas.gov/press/releases/reports/cititermsheet_112308.pdf; see also

Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and

Transparency, GAO, 09-161, December 2008, at 16-20, 28.

19 See Current Population Survey, 2007 Social and Economic Supplement, Table HINC-06, U.S. Census

Bureau, available at http://pubdb3.census.gov/macro/032007/hhinc/new06_000.htm. 

20 The Fed's evolving liquidity toolkit, REUTERS, Dec. 2, 2008, available at

http://www.reuters.com/article/bondsNews/idUSN2635039920081202?sp=true.

21 Paul C. Light, Senate Confirms N.Y. Prosecutor As Inspector General for Bailout, WASH. POST, available

at http://www.washingtonpost.com/wp-dyn/content/article/2008/12/08/AR2008120803538.html

22 Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability,

and Transparency, GAO, 09-161, December 2008.

7
In the months to come the Congressional Oversight Panel – COP – will do its best to

guarantee that public actions are built on robust foundations that will strengthen the real

economy. The American people have an important role to play in this process. As we

continue our work on behalf of Congress and the American people, we will issue monthly

reports. But we will always return to the American people, searching for answers and

asking more questions.

8
TEN QUESTIONS FROM COP

1. What is Treasury’s Strategy? What does Treasury think the central

causes of the financial crisis are and how does its overall strategy for

using its authority and taxpayer funds address those causes? What

specific facts caused Treasury to change its strategy in the last two

months? What specific facts changed that made the purchase of

mortgage-backed assets a bad idea within days of the request and

what specific facts changed again to make guaranteeing such assets a

good idea a few weeks later?

2. Is the Strategy Working to Stabilize Markets? What specific

metrics can Treasury cite to show the effects of the $250B spent thus

far on the financial markets, on credit availability, or, most

importantly, on the economy? Have Treasury’s actions increased

lending and unfrozen the credit markets or simply bolstered the banks’

books? How does Treasury expect to achieve the goal of price

discovery for impaired assets? Why does Treasury believe that

providing capital to all viable banks, regardless of business profile, is

the most efficient use of funds?

3. Is the Strategy Helping to Reduce Foreclosures? What steps has

Treasury taken to reduce foreclosures? Have those steps been

effective? Why has Treasury not generally required financial

institutions to engage in specific mortgage foreclosure mitigation

plans as a condition of receiving taxpayer funds? Why has Treasury

required Citigroup to enact the FDIC mortgage modification program,

but not required any other bank receiving TARP funds to do so? Is

there a need for additional industry reporting on delinquency data,

foreclosures, and loss mitigations efforts in a standard format, with

appropriate analysis? Should Treasury be considering others models

and more innovative uses of its new authority under the Act to avoid

unnecessary foreclosures?

4. What Have Financial Institutions Done with the Taxpayers’

Money Received So Far? What have the companies who received

money from Treasury done with the money? Have the companies used

the funds in the way Treasury intended when it disbursed them? How

9
have institutions supported under the Capital Purchase Program used

their funds, and they have they leveraged the capital support to

increase lending activity? Is this different from the way funds were

utilized for institutions who received funds pursuant to the

Systemically Significant Failing Institutions plan? 

5. Is the Public Receiving a Fair Deal? What is the value of the

preferred stock Treasury has received in exchange for cash infusions

to financial institutions? Are the terms comparable to those received

in recent private transactions, such as those with Warren Buffett and

the Abu Dhabi Investment Authority? 

6. What is Treasury Doing to Help the American Family? Does

Treasury believe American families need to borrow more money?

Have Treasury’s actions preserved access to consumer credit,

including student loans and auto loans at reasonable rates? What

restrictions will Treasury put on credit issuers to assure that taxpayer

dollars are not used to subsidize lending practices that are exploitive,

predatory or otherwise harmful to customers? What is Treasury doing

to ensure that its spending is directed in ways that maximize the

impact on the American economy? 

7. Is Treasury Imposing Reforms on Financial Institutions that are

taking Taxpayer Money? Congress has told the auto industry to

reform its current practices before it could be considered for taxpayer

aid and the British are requiring reforms on their banks as a

precondition for capital infusions. Has Treasury required banks

receiving aid to: 

o Present a viable business plan;

o Replace failed executives and/or directors;

o Undertake internal reforms to prevent future crises, to increase

oversight, and to ensure better accounting and transparency;

o Undertake any other operational reforms?

8. How is Treasury Deciding Which Institutions Receive the Money?

What factors is Treasury using to determine which institutions receive

equity infusions, purchase of portfolio assets, or insurance of portfolio

10
assets? Is Treasury seeking to use TARP money to shape the future of

the American financial system, and if so, how? 

9. What is the Scope of Treasury’s Statutory Authority? What is

Treasury’s understanding of the statutory limits on its use of funds?

How does Treasury justify its decisions under the Act in relation to its

view of these limits? How is Treasury carrying out its statutory

mandate regarding credit insurance? 

10. Is Treasury Looking Ahead? What are the likely challenges the

implementation of the Emergency Economic Stabilization Act will

face in the weeks and months ahead? Can Treasury offer some

assurance that it has worked out contingency plans if the economy

suffers further disruptions?

11
TEN QUESTIONS FROM COP: DISCUSSION

1. What is Treasury’s Strategy? What does Treasury think the central

causes of the financial crisis are and how does its overall strategy for

using its authority and taxpayer funds address those causes? What

specific facts caused Treasury to change its strategy in the last two

months? What specific facts changed that made purchase of

mortgage-backed assets a bad idea within days of the request and

what specific facts changed again to make guaranteeing such assets a

good idea a few weeks later?

Treasury has pursued a number of strategies using its authority under the Emergency

Economic Stabilization Act: 

• Strategy 1: Buying Mortgage-Related Assets. In September 2008, Secretary

Paulson requested authority for Treasury to buy up to $700 billion in troubled

mortgage-related assets.23 According to the Secretary, purchasing the assets would

reduce systemic risk and increase confidence in institutions holding these “toxic

assets.” Although Congress granted Treasury the authority to execute this plan on

October 3, Treasury did not act on this authority.24 

• Strategy 2: Purchasing Preferred Stocks and Warrants to increase the capital base

of banks. On October 14, Treasury announced a plan to invest up to $250 billion

into financial institutions in exchange for preferred stocks and warrants in order to

“significantly strengthen financial institutions and improve their access to

funding, enabling them to increase financing of the consumption and business

investment that drive U.S. economic growth.”25 Treasury indicated that it still

intended to make purchases of mortgage-related assets from financial

institutions.26

• Strategy 3: On November 12, Treasury announced that it would not purchase

troubled mortgage-related assets, as it had asked for authority to do in

September.27 Instead, Secretary Paulson stated that Treasury was considering

23.Press Release, FACT SHEET: Proposed Treasury Authority to Purchase Troubled Assets, Sept. 20, 2008,

available at http://www.treas.gov/press/releases/hp1150.htm.

24 See GAO Report, supra note 17, at 1, 15-16.

25 Press Release, Statement by Secretary Henry M. Paulson, Jr., on Actions to Protect the U.S. Economy,

Department of Treasury, Oct. 14, 2008, available at http://www.treasury.gov/press/releases/hp1205.htm;

see also Mark Lander, U.S. Investing $250 Billion in Banks; Dow Surges 936 Points, N.Y. TIMES, Oct. 14,

2008, at A1.

26 GAO Report, supra note 17, at 16.

27 See Press Release, Statement by Secretary Henry M. Paulson on Financial Rescue Package and

Economic Update, Department of Treasury, Nov. 12, 2008, available at

http://www.treasury.gov/press/releases/hp1265.htm.

12
programs that would allow non-bank financial institutions to participate in the

CPP if they secure an equivalent amount of capital from private investors and

providing federal financing to allow private investors to purchase asset-backed

securities.28

• Strategy 4: On November 25, Treasury announced it would participate in the

Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF), a $200

billion program that would provide financing to investors of highly rated assetbacked securities, focused on student and auto loans, credit card debt, and small

business loans.29 According to Secretary Paulson's statement announcing the

program, “[b]y providing liquidity to issuers of consumer asset-backed paper, the

Federal Reserve facility will enable a broad range of institutions to step up their

lending, enabling borrowers to have access to lower cost consumer finance and

small business loans.”30

• Other Strategies: It has been widely reported that Treasury is considering a plan to

support the issuance of new mortgages at a 4.5% interest rate through mortgagebacked securities of Fannie Mae and Freddie Mac, which should enable some

consumers to purchase homes.31 In addition, Treasury has stated it is considering

other strategies, such as FDIC Chairman Sheila Bair’s proposal for restructuring

residential mortgages, streamlined loan modification programs for at-risk

borrowers, and guarantee of loan modifications by private lenders.32 

In empowering Treasury, Congress provided substantial flexibility in the use of funds so

Treasury could react to the fluid and changing nature of the financial markets. With these

powers goes a responsibility to explain the reasons for the uses made of them. With these

monies go a responsibility to ensure that the support to the economy from each dollar

spent is maximized consistent with the purposes of the Act. We ask Treasury to articulate

its vision of the problem, its overall strategy to address that problem, and how its

strategic shifts in since September 2008 fit into that overall strategy.

For example, efforts to increase the availability of credit assume that the fundamental

problem is a lack of liquidity. But if Americans are more worried about their own

economic security – their employment prospects, their current expenses, and their debt

levels – then increasing liquidity will have little impact on consumer spending. 

28 See Press Release, Statement by Secretary Henry M. Paulson on Financial Rescue Package and

Economic Update, Department of Treasury, Nov. 12, 2008, available at

http://www.treasury.gov/press/releases/hp1265.htm.

29 GAO Report, supra note 17, at 31; Press Release, Federal Reserve, Nov. 25, 2008, available at

http://www.federalreserve.gov/newsevents/press/monetary/20081125a.htm.

30 Press Release, Secretary Paulson Remarks on Consumer ABS Lending Facility, Department of Treasury, Nov. 25,

2008, available at http://www.treasury.gov/press/releases/hp1293.htm.

31 See, e.g., Edmund L. Andrews, Washington’s New Tack: Helping Home Buyers, N.Y. TIMES, Dec. 5,

2008, available at http://www.nytimes.com/2008/12/05/business/05housing.html; Robert Schmidt & Dawn

Kopecki, Paulson Considers New Plan to Resuscitate U.S. Housing Market, BLOOMBERG.COM, Dec. 4, 2008,

available at http://www.bloomberg.com/apps/news?pid=20601087&sid=aElD2EJR0B2k. 

32 Tami Luhby, FDIC’s Bair Pushes Aggressive Mortgage Plan, CNNMONEY.COM, Nov. 14, 2008, available

at http://money.cnn.com/2008/11/14/news/economy/fdic_bair; GAO Report, supra note 17, at 29-30.

13
Similarly, buying or guaranteeing some mortgage-backed assets could help place a floor

on the value of those assets and move those toxic assets off the books of financial

institutions, reducing systemic risk and leaving the institutions with higher-rated assets.

But if those toxic assets were over-valued across the board, due in part to failures in the

ratings systems,33 then it is not clear that once Treasury has bought or guaranteed some

securities that investors would want the remaining assets that Treasury had not

purchased. Instead, investors may believe those assets remain toxic. Uncertainty—or

skepticism—over the value of these assets would persist, making efforts to support the

market largely unsuccessful. 

In particular, Treasury needs to explain its understanding of the role played by each of the

following factors and by their interaction: (1) capital inadequacy in financial institutions;

(2) lack of reliable information in credit markets with respect to counterparty risk; (3)

temporary liquidity shortfalls in particular financial markets; (4) falling real estate prices

and rising foreclosure rates; (5) stagnant family incomes and rising unemployment; (6)

changes in consumer borrowing capacity; (7) business and financial focus on short-term

gains to the detriment of long-term growth; (8) effectiveness of regulatory oversight; (9)

CPP participants' involvement in and exposure to off balance sheet vehicles and

unregulated markets; and (10) broader long-term macroeconomic imbalances. 

If Treasury’s understanding of the relative importance of these issues and their interaction

with each other is changing, Treasury needs to explain how the dynamics of that process

and how their actions have changed in response. If other factors are central to Treasury’s

thinking, those factors should be identified and clearly explained.

The American people need to understand Treasury’s conception of the problems in the

economy and its comprehensive strategy to address those problems. 

33 See generally Gretchen Morgenson, Debt Watchdogs: Tamed or Caught Napping, N.Y. TIMES, Dec. 7,

2008, at A1.

14
2. Is the Strategy Working to Stabilize Markets? What specific

metrics can Treasury cite to show the effects of the $250B spent thus

far on the financial markets, on credit availability, or, most

importantly, on the economy? Have Treasury’s actions increased

lending and unfrozen the credit markets or simply bolstered the banks’

books? How does Treasury expect to achieve the goal of price

discovery for impaired assets? 

American taxpayers need to know that their money is having a tangible effect on

improving financial stability, credit availability, and the economy as a whole. As a first

step, Treasury needs to provide a detailed assessment of whether the funds it has spent so

far have had any effect – for better or worse – in these areas. 

It is difficult to disaggregate the effects of simultaneously-taken actions by the Federal

Reserve, FDIC, and other entities from Treasury’s actions. Nonetheless, the Oversight

Panel believes it is a critical aspect of its mission to attempt to assess the role that

Treasury’s actions under the Act have played in the recent history of our economy. 

The GAO has suggested a number of potential metrics for evaluation: The TED spread

(the difference between an average of interests rates offered in the London interbank

market and Treasury bills), corporate spreads based on Moody’s Aaa and Bbb bond rates,

mortgage rates, mortgage originations, mortgage foreclosures and defaults, in addition to

other metrics such as call report data, stock prices, and house prices.34

Treasury itself should respond to the GAO report in part by attempting to define what the

Department itself constitutes success. This is important in terms of assessing both

whether changes need to be made in the Act and in terms of assessing when direct

governmental participation in financial markets and financial institutions could be

reduced.

In recent days Treasury has commented favorably on developments in certain credit

spreads such as the TED spread. Treasury has not, however, explained the role it believes

interbank lending costs play compared to the importance of other factors in both the

credit markets and the economy that appear to have deteriorated over the same time

period, such as corporate bond spreads, Treasury default swap costs, and foreclosure data.

The Oversight Panel intends over time to make its own assessment of the effectiveness of

the TARP program in achieving the objectives set forth by Congress. The Oversight

Panel would be greatly assisted in its effort if Treasury did the same.

34 GAO, supra note 17, at 49-57.

15
3. Is the Strategy Helping to Reduce Foreclosures? What steps has

Treasury taken to reduce foreclosures? How effective have those

steps been? Why has Treasury not generally required financial

institutions to engage in specific mortgage foreclosure mitigation

plans as a condition of receiving taxpayer funds? Why has Treasury

required Citigroup to enact the FDIC mortgage modification program,

but not required any other bank receiving TARP funds to do so? Is

there a need for additional industry reporting on delinquency data,

foreclosures, and loss mitigations efforts in a standard format, with

appropriate analysis? Should Treasury be considering others models

and more innovative uses of its new authority under the Act to avoid

unnecessary foreclosures?

Federal Reserve Board Chairman Bernanke recently reported that foreclosures in 2008

will number approximately 2.25 million.35 Neighbors see their home prices decline from

blighted nearby properties, and foreclosure sales saturate the real estate market with lowpriced inventory, further pushing down home prices.36 Foreclosures also place a double

burden on local governments, as they impose direct costs from crime and fires while

eroding the local tax base. Global asset write downs and credit losses relating to home

mortgages currently exceed $590 billion and may eventually rise to $1.4 trillion by some

estimates.37 Moreover, foreclosure rates have continued to increase in recent months, and

one in ten American mortgage holders are now in default or foreclosure.38 Rapidly rising

unemployment is likely to increase mortgage defaults and drive foreclosure rates even

higher. Several economists have identified the unresolved foreclosure crisis as a key

causal factor in financial instability and economic decline.

As rising foreclosure rates continue to put downward pressure on home prices, financial

institutions will be forced to recognize even greater losses. Each time a family loses its

home due to foreclosure, the value of every home within one eighth of a mile declines

nearly 1%.39 In 2002, when home prices were rising, researchers estimated that the

35 Speech: Chairman Ben S. Bernanke At the Federal Reserve System Conference on Housing and

Mortgage Markets, Dec. 4, 2008, available at

http://www.federalreserve.gov/newsevents/speech/bernanke20081204a.htm. 

36 See Steve Matthews & Scott Lanman, Fed’s Kroszner Says Foreclosures Harming Middle-Income Areas,

BLOOMBERG.COM, Dec. 3, 2008, available at http://www.bloomberg.com/apps/news?

pid=20601213&sid=aSwRduPiiLjc.

37 Yalman Onaran & Dave Pierson, Banks’ Subprime-Related Losses Surge to $591 Billion,

BLOOMBERG.COM, Sep. 29, 2008, available at http://www.bloomberg.com/apps/news?

pid=newsarchive&sid=aSlW.imTKzY8; IMF Urges Collective Central Bank Action, SYDNEY MORNING

HERALD, Oct. 7, 2008, available at http://news.smh.com.au/business/imf-urges-collective-central-bankaction-20081008-4w01.html.

38 Hagerty & Soloman, supra note 4.

39 Dan Immergluck & Geoff Smith, The External Costs of Foreclosure: The Impact of Single-Family

Mortgage Foreclosures on Property Values, 17 HOUS. POL’Y DEBATE 57, 69, 72, 75 (2006), available at

16
holders of a loan are forced to recognize an average loss of $58,792 each time they

foreclose on a home.40 Losses are much greater, however, when home prices are

declining.

Standard & Poor’s, a ratings service, estimates that for subprime mortgages originated in

2006, servicers will only be able to recover 55% of the total value of the loan on a

foreclosed home. Total losses include direct costs, such as legal fees and maintenance

that average around 26% of the value of a loan, as well losses from missed mortgage

payments and declines in resale values.41 These losses are exacerbated by the fact that the

resale value for a foreclosed home is often 5% to 15% lower than the resale value of a

comparable home sold by the homeowner.42

While Treasury has promoted voluntary mortgage assistance through its HOPE NOW

program, it is unclear what effect this activity has had. Although there are data on the

number of people who have contacted HOPE Now, there appear to be no systematic data

on the number of people who have negotiated reductions in either the principal amounts

of their mortgages or in their monthly payments. 

Preserving homeownership is an explicit purpose of the Act. Under Section 109, the

Treasury Secretary has the authority to “use loan guarantees and credit enhancements to

facilitate loan modifications to prevent avoidable foreclosures.” When the Act was

passed, Congress expected the primary use of the authority under the Act to be to

purchase troubled assets from financial institutions. In that context, Treasury is required

to “implement a plan to maximize assistance to homeowners” and to encourage mortgage

servicers to use the HOPE for Homeowners Program or loan guarantees and credit

enhancements to facilitate loan modifications and prevent foreclosures “[t]o the extent

that the Secretary acquires mortgages, mortgage-backed securities, and other assets

secured by residential real estate.”43 Given Treasury’s shift to direct equity investments

in financial institutions, the Department should explain how its broad authority still

reflects the purposes of the act. 

http://www.fanniemaefoundation.org/programs/hpd/pdf/hpd_1701_immergluck.pdf.

40 Amy C. Cutts & Richard K. Green, Innovative Servicing Technology: Smart Enough to Keep People in

Their Houses? (Freddie Mac, Working Paper No. 04–03, 2004), available at

http://www.freddiemac.com/news/pdf/fmwp_0403_servicing.pdf (citing 

Craig Focardi, Servicing Default Management: An Overview of the Process and

Underlying Technology (TowerGroup, Research Note No. 033-13C, 2002)).

41 Francis Parisi, The Anatomy of Loss Severity Assumptions In U.S. Subprime RMBS, STANDARD &

POOR’S, available at

http://www2.standardandpoors.com/portal/site/sp/en/us/page.article/4,5,5,1,1204835910066.html.

42 Deep Dive into Subprime Mortgage Severity, Fixed Income Research Report, Credit Suisse, June 19,

2008.

43 Emergency Economic Stabilization Act, supra note 14, § 109(a) (“the Secretary shall implement a plan

that seeks to maximize assistance for homeowners and use the authority of the Secretary to encourage the

servicers of the underlying mortgages, considering net present value to the taxpayer, to take advantage of

the HOPE for Homeowners Program under section 257 of the National Housing Act or other available

programs to minimize foreclosures.”)

17
Treasury is reported to be considering a possible new proposal for reducing rates on fixed

30-year mortgage to as low as 4.5% by directing Fannie Mae and Freddie Mac to

guarantee and purchase these low-rate mortgages.44 The low mortgage rate would be

available only to those purchasing homes, not those who hope to refinance.45 The goal of

such a program would be to encourage new buyers to enter the housing market. The

program does not appear to offer any help to already distressed homeowners. Even if it

were expanded to permit refinancing, the nearly 20% of homeowners who have negative

equity in their homes will remain unable to refinance their mortgages.46

If Treasury believes that offering low interest rates on purchase-money mortgages to new

homebuyers will help stem foreclosures among existing homeowners, then Treasury

should articulate more clearly the process by which this will occur. Is there a substantial

body of potential homeowners who could take advantage of these low rates, but who did

not purchase homes on easy credit during the mortgage bubble? Will lower rates create a

large enough pool of new home buyers to lead to a general increase in home prices? As

importantly, are the assumptions underlying Treasury’s plan still valid in a time of great

economic uncertainty for the households that would be expected to take advantage of the

lower mortgage rates? Will lower interest rates induce demand for home ownership in the

face of falling housing prices, consumer uncertainty about the future of the economy and

employment, and the reasonable expectation that an even better deal might be available in

the future? 

Additionally, Treasury should explain what if any steps it is taking to encourage

mortgage servicers, including affiliates of financial institutions that have received CPP or

TALF funding, to engage in loan modifications, participate in the HOPE for

Homeowners Program (in which none of the institutions receiving CPP funds have

participated), or take other steps to minimize foreclosures. In particular, Treasury should

explain why foreclosure relief was not a condition of CPP funds. Treasury should also

consider the need for additional industry reporting on delinquency data, foreclosures, and

loss mitigation in a standard format. Such data should be analyzed by an appropriate bank

regulatory agency, to assess the effectiveness of each institution’s efforts.

As part of its aid to Citigroup, Treasury required Citigroup to implement the FDIC’s

mortgage modification program.47 Separately and not in connection with Citigroup,

FDIC Chairman Sheila Bair has proposed a program that would provide additional

incentives for loan modifications by paying servicers $1,000 to cover related expenses

and by sharing up to 50% of the losses on modified loans that subsequently re-default.

The FDIC estimates that such as plan could avoid 1.5 million foreclosures at a cost of

$24.4 billion.48

44 Edmund L. Andrews, Washington’s New Tack: Helping Home Buyers, N.Y. TIMES, Dec. 5, 2008,

available at http://www.nytimes.com/2008/12/05/business/05housing.html.

45 Id.

46 See Dan Levy, More U.S. Homeowners Have Mortgage Higher Than House Is Worth, BLOOMBERG.COM,

Oct. 31, 2008, available at http://www.bloomberg.com/apps/news?

pid=20601213&refer=home&sid=aYyk2_TLjGao.

47 GAO Report, supra note 17, at 28.

18
The Oversight Panel believes Treasury has an obligation to explain its objection to the

FDIC proposal and why its objection to the FDIC proposal is not also relevant to

Citigroup.

48 Federal Deposit Insurance Corporation, FDIC Loss Sharing Proposal to Promote Affordable Loan

Modifications, Nov. 20, 2008, available at www.fdic.gov/consumers/loans/loanmod/.

19
4. What Have Financial Institutions Done with the Taxpayers’

Money Received So Far? What have the companies who received

money from Treasury done with the money? Have the companies used

the funds in the way Treasury intended when it disbursed them? How

have institutions supported under the Capital Purchase Program used

their funds, and they have they leveraged the capital support to

increase lending activity? Is this different from the way funds were

utilized for institutions who received funds pursuant to the

Systemically Significant Failing Institutions plan? Is Treasury

seeking to use TARP money to shape the future of the American

financial system, and if so, how?

In the course of its meetings with Treasury, the Inspector General of Treasury, and the

staff of the Federal Reserve, the Oversight Panel has confirmed that the Office of

Financial Stabilization has administered the TARP program without seeking to monitor

the use of funds provided to specific financial institutions.49 Interim Assistant Secretary

for Financial Stability Neel Kashkari has said that Treasury favors monitoring through

“general metrics” that look at the overall economic effects of the disbursed funds.50

The decision to measure the efficacy of TARP through general economic metrics presents

a difficult challenge. In the short run, it is impossible because systemic economic effects

take time to manifest themselves. In the long run, such metrics are problematic because

other actors such as the Federal Reserve, FDIC, and foreign governments are also taking

aggressive action to address the crisis. Using general metrics could be a substitute for

using no metrics at all, thus committing taxpayer resources with no meaningful oversight.

If the funds committed under TARP have an intended purpose and are not merely nostrings-attached subsidies to financial institutions, then it seems essential for Treasury to

monitor whether the funds are used for those intended purposes. Without that oversight, it

is impossible to determine whether taxpayer money is used in accordance with Treasury’s

overall economic stabilization strategy. Treasury cannot simply trust that the financial

institutions will act in the desired ways; it must verify. 

Such efforts to measure the impact of public funds on specific financial institutions have

been underway in Great Britain. Chancellor of the Exchequer Alastair Darling and Lord

Peter Mandelson, the Secretary for Business, Enterprise, and Regulatory Reform, have

required recapitalized banks to lend to small and medium size enterprises.51 To

49 See also GAO Report, supra note 17, at 25.

50 Id., at 10.

51 Jenny Booth, Darling to Order Recapitalised Banks to Lend to Small Businesses, TIMES (LONDON), Oct.

21, 2008, available at http://www.timesonline.co.uk/tol/news/politics/article4985470.ece; Press Release,

Financial Support to the Banking Industry, HM Treasury, available at http://www.hmtreasury.gov.uk/press_100_08.htm.

20
demonstrate compliance with the intended purpose of recapitalization, Chancellor

Darling and Lord Mandelson are using 2007 levels of lending as a comparison.52

Treasury should consider metrics it can use to measure compliance with the intended

purposes of its funds.

The Oversight Panel believes the public has the right to know how financial institutions

that have received public money are using that money. It also believes that Treasury

should be responsible for holding individual institutions accountable for how they use the

public’s money.

52 Press Release, Treasury statement on financial support to the banking industry, HM Treasury, Oct. 13,

2008, available at http://www.hm-treasury.gov.uk/press_105_08.htm.

21
5. Is the Public Receiving a Fair Deal? What is the value of the

preferred stock Treasury has received in exchange for cash infusions

to financial institutions? Are the terms comparable to those received

in recent private transactions, such as those with Warren Buffett and

the Abu Dhabi Investment Authority? 

The Oversight Panel believes that a critical aspect of its mission is to determine whether

the United States government has received assets comparable to its expenditures under

the Emergency Economic Stabilization Act of 2008. To date, Treasury has made two

types of expenditures under the Act. The majority of its expenditures have been cash

infusions for which the Department has received preferred stock with associated warrants

to purchase common stock. In the case of Citigroup, however, Treasury has participated,

together with the Federal Deposit Insurance Corporation and the Federal Reserve Board,

in a guarantee supporting a pool of assets held by Citigroup.

Several major TARP recipient companies have received major capital investments

recently, including Mitsubishi’s investment in Morgan Stanley, Warren Buffett’s

investment in Goldman Sachs, and the Abu Dhabi Investment Group’s investment in

Citigroup. 

On October 14, 2008, Mitsubishi UFJ (MUFJ) Financial Group of Japan invested $9

billion in Morgan Stanley.53 In exchange, MUFJ received a 21% stake in the company

through perpetual preferred shares with a 10% annual dividend.54

Warren Buffett announced on September 23, 2008 that he would invest $5 billion into

Goldman Sachs.55 In return, Buffett’s company, Berkshire Hathaway, received perpetual

preferred shares with a 10% annual dividend. If Goldman Sachs wishes to buy back the

preferred stock, it can do so at a premium of 10%. Berkshire Hathaway also received

warrants to purchase common stock at $115 per share, up to $5 billion within the next

five years.56

In November 2007, the Abu Dhabi Investment Authority invested $7.5 billion in

Citigroup, amounting to 4.9% of Citigroup’s equity.57 The Abu Dhabi Investment

Authority received equity units that pay an 11% annual dividend and will be converted

into common stock in 2010 or 2011 at a price between $31.83 and $37.24.58 

53 Aaron Lucchetti, Propped Up, Morgan Stanley Now Sets Forth to Right Itself, WALL ST. J., Oct. 14, 2008,

at C1.

54 Id.

55 Ben White, Buffett Deal at Goldman Seen as a Sign of Confidence, N.Y.TIMES, Sep. 24, 2008, at A1.

56 Id.

57Eric Dash & Andrew R. Sorkin, Citigroup Sells Abu Dhabi Fund $7.5 Billion Stake, N.Y. TIMES, Nov. 27,

2007, available at http://www.nytimes.com/2007/11/27/business/27citi.html?hp.

58 Id.

22
Under the CPP terms, Treasury receives senior preferred shares paying annual dividends

of 5% for five years and 9% thereafter, and the shares can be redeemed at face value after

three years or, if the institution receives a minimum amount from “qualified equity

offerings,” prior to three years.59 In addition, Treasury receives warrants to purchase

common stock up to a market value of 15% of senior preferred investment for public

securities or 5% for private securities.60 The exercise price is the financial institution’s

market price of common stock on the day it is accepted into the Capital Purchase

Program.61 The exercise price of the common stock warrants is reduced each six months

if shareholder approvals are not obtained or if the institution completes a qualified equity

offering prior to December 31, 2009.62

The Oversight Panel intends to work with Treasury, the GAO, and the Congressional

Budget Office to determine the value of the preferred stock acquired by Treasury at the

time of acquisition, particularly in light of these comparable transactions, and to

understand how these terms were negotiated and determined. The Oversight Panel will

also seek to understand Treasury’s plans for the terms of future capital investments

through the Capital Purchase Program in private financial institutions, S-Corporations,

and mutual organizations.63

Under Section 102(c), the Secretary of the Treasury must collect premiums from

financial institutions whose financial assets are insured, and those premiums must

provide sufficient reserves to meet any anticipated claims and to ensure that taxpayer

funds are safeguarded.

Treasury, the Federal Reserve, and the FDIC announced on November 23 a plan to insure

against the loss of $306 billion in loans and mortgage-related securities held by

Citigroup.64 Under the plan, Citigroup will take the first $29 billion in potential losses,

plus 10% of any additional losses.65 Treasury, the FDIC, and the Federal Reserve are

responsible for any additional losses, which could be up to nearly $250 billion.66

Citigroup will issue $4 billion in preferred stock to Treasury Department and $3 billion in

preferred stock to the FDIC as a fee in exchange for the guarantee.67

In relation to the asset guarantees provided to Citigroup, Section 102 of the Emergency

Economic Stabilization Act appears to govern all insurance policies and other guarantees

of the value of financial institution assets. Section 102(c) requires that the Secretary of

59 TARP Capital Purchase Program, Summary of Senior Preferred Terms available at http://www.treas.gov/

press/releases/reports/document5hp1207.pdf. 

60 Id.

61 Id.

62 Id., at 21-22.

63 See id..

64 Press Release, Joint Statement by Treasury, Federal Reserve and the FDIC on Citigroup, Department of

Treasury, Nov. 23, 2008, available at http://www.ustreas.gov/press/releases/hp1287.htm.

65 Dan Wilchins & Jonathan Stempel, Citigroup Gets Massive Government Bailout, REUTERS, Nov. 24,

2008, available at http://news.yahoo.com/s/nm/20081124/bs_nm/us_citigroup.

66 Id.

67 Summary of Terms, Department of Treasury, Nov. 23, 2008, available at

http://www.ustreas.gov/press/releases/reports/cititermsheet_112308.pdf.

23
the Treasury collect premiums from financial institutions whose financial assets are

insured through this program. The premiums must provide sufficient reserves to meet any

anticipated claims and to ensure that taxpayer funds are safeguarded. The Oversight

Panel will seek to understand whether the Citigroup guarantee falls under the

requirements of Section 102, and if so, whether it conforms with these requirements.

24
6. What is Treasury Doing to Help the American Family? Does

Treasury believe American families need to borrow more money?

Have Treasury’s actions preserved access to consumer credit,

including student loans and auto loans at reasonable rates? What

restrictions will Treasury put on credit issuers to assure that taxpayer

dollars are not used to subsidize lending practices that are exploitive,

predatory or otherwise harmful to customers? What is Treasury doing

to ensure that its spending is directed in ways that maximize the

impact on the American economy? 

On November 25, 2008, Treasury announced that it would provide $20 billion of credit

protection for the Federal Reserve’s Term Asset-Backed Securities Loan Facility

(TALF), which will finance investments in securities backed by automobile loans, credit

card loans, student loans, and small business loans.68 In addition, since the beginning of

the CPP, American Express became a bank holding company, allowing it to apply for a

capital infusion of over $3 billion.69

American families are already loaded with debt. According to Federal Reserve Board

calculations, total U.S. consumer debt, excluding loans secured by real estate, increased

at an average annual rate of 5.0% between 2003 and 2007, growing from approximately

$2.1 trillion to approximately $2.55 trillion.70 Total household debt outstanding in the

U.S. now exceeds annual national personal income.71 According to the 2004 Survey of

Consumer Finances, 46% of American families carry monthly credit card balances, and

the average level of credit card debt for those families is $5,100.72 

The Oversight Panel believes that as the Treasury moves toward using public money to

support the secondary market for credit card and other consumer debt, the Treasury, the

public, and Congress need to understand better the financial strains affecting American

families. While increased consumer spending is an important part of economic

stimulation and recovery, for many families, incurring additional debt would only add to

their financial stress. There is evidence that relying on borrowing by individuals as a

form of economic stimulus has proved destructive. In addition, there are questions about

the extent to which increased consumer spending stimulates the U.S. economy when

68 Press Release: Treasury Provides TARP Funds to Federal Reserve Consumer ABS Lending Facility,

Nov. 25, 2008 available at http://www.treas.gov/press/releases/hp1292.htm.

69 Eric Dash, American Express to Be Bank Holding Company, N.Y. TIMES, Nov. 11, 2008, at B2.

70 Statistical Release, Consumer Credit G.19, Federal Reserve, available at

http://www.federalreserve.gov/releases/g19/current/.

71 See Credit Cards and Bankruptcy: Opportunities for Reform, Hearing Before the Senate Comm. on the

Judiciary, 110th Cong. (Dec. 4 2008) (testimony of Prof. Robert M. Lawless), available at

http://judiciary.senate.gov/pdf/08-12-04LawlessTestimony.pdf.

72 2004 Survey of Consumer Finances, Federal Reserve, available at http://www.federalreserve.gov/PUBS/

oss/oss2/2004/scf2004home_modify.html.

25
marginal consumer dollars are spent on imports. Ultimately, sustainable consumer

spending must depend upon rising incomes and broadly shared prosperity, not debt.

In addition to the massive amounts of debt, the complexity of individual credit products

has made it impossible for even the most sophisticated consumers to understand the

implications of debt for their future payment obligations.73 The proliferation of intricate

mortgage products – including hybrid ARMs, option ARMs, and other exotic species

featuring teaser periods and balloon payments – contributed to the pattern of home buyers

taking on mortgages that were initially affordable but that quickly became unmanageable.

The Government Accountability Office reported that credit card issuers charge

consumers up to three different interest rates depending on the transaction and high

punitive rates (some in excess of 30%); in addition, average late payment fees have more

than doubled between 1995 and 2005.74 From the onset of the financial crisis, credit card

issuers have been accused of increasing interest, accelerating fees and penalties and using

more aggressive debt collection practices.75

In the context of consumer credit, it is also important to ask what restrictions Treasury

will put on credit issuers to assure that taxpayer dollars are not used to subsidize lending

practices that are exploitive, predatory, or otherwise harmful to customers.

In response to similar trends in the United Kingdom, the U.K. government has required

credit card companies to work with consumers as a condition of receiving public funds.

The U.K. has required credit card issuers to suspend payments for 60 days in many cases

of financial hardship.76

Households that are struggling with debts – mortgages, student loans, credit cards, car

loans, payday loans, and other credit devices – are at the center of the current crisis. Their

defaults have driven the losses on asset-backed securities that have weakened balance

sheets of financial institutions, and their reduction in purchasing has contributed to the

contraction in economic activity. For Treasury’s disbursements to be effective in the

context of the broader economic downward spiral, Treasury must have a strategy that

addresses this underlying problem.

73 See generally GAO, Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More

Effective Disclosures to Consumers, GAO-06-929, September 2006, available at

http://www.gao.gov/new.items/d06929.pdf. 

74 Id., at 5, 14, 18.

75 See, e.g., Liz Moyer, Holiday Surprise: More Credit Card Fees, FORBES, Dec. 5, 2008, available at http://

www.forbes.com/business/2008/12/05/credit-card-fees-biz-wall-cx_lm_1205badcards.html; Abigail

Bassett, As Debt Grows, Collections Boom, CNNMONEY.COM, Nov. 26, 2008, available at

http://money.cnn.com/2008/11/25/pf/debt_collections/?postversion=2008112611.

76 U.K. Credit Cards to Give Borrowers Extra 60 Days to Pay, WALL ST. J., Nov. 26, 2008,

http://online.wsj.com/article/SB122773056319560653.html.

26
7. Is Treasury Imposing Reforms on Financial Institutions that Are

Taking Taxpayer Money? Congress has told the auto industry to

reform its current practices before it could be considered for taxpayer

aid and the British are requiring reforms on their banks as a

precondition for capital infusions. Has Treasury required banks

receiving aid to: 

i. Present a viable business plan;

ii. Replace failed executives and/or directors;

iii. Undertake internal reforms to prevent future crises, to

increase oversight, and to ensure better accounting and

transparency;

iv. Undertake any other operational reforms?

Treasury has provided capital to financial institutions under two programs, the CCP and

SSFI. In general, the Act provides the Secretary of the Treasury with broad authority to

set the conditions under which companies may receive aid. In particular, Congress

required that the Secretary determine whether the public disclosure requirements for each

financial institution are sufficient to provide the public with an accurate picture of that

institution’s true financial position.77

It is unclear whether there have been any efforts to assess the business plans, the

management, or the accounting and general transparency of firms receiving aid from the

CPP.78 In order for the Big Three auto companies – Ford, Chrysler, and GM – to be

considered for any taxpayer aid, however, Congress has proposed considerable reforms

and presentation of viable business plans.79 The British have imposed significant reforms

on their banks in the context of government aid during the financial crisis. In exchange

for recapitalization, the British Treasury has required that Banks maintain 2007 levels of

lending to homeowners and small businesses, develop an effective scheme for people to

stay in their homes, reform their compensation policies going forward, include the

Government in decisions on dividend policy, and provide the Government with influence

on the appointment of new independent non-executive directors.80

77 Emergency Economic Stabilization Act, supra note 14, § 114(b) (“the Secretary shall determine whether

the public disclosure required for such financial institutions with respect to off-balance sheet transactions,

derivatives instruments, contingent liabilities, and similar sources of potential exposure is adequate to

provide to the public sufficient information as to the true financial position of the institutions. If such

disclosure is not adequate for that purpose, the Secretary shall make recommendations for additional

disclosure requirements to the relevant regulators.”)

78 See GAO Report, supra note 17, at 15.

79 See David M. Herszenhorn, Big Bailout for Detroit Fails for Now, N.Y. TIMES, Nov. 21, 2008, at B1.

Speaker Nancy Pelosi stated, “Until we see a plan where the auto industry is held accountable and a plan

for viability on how they go into the future – until we see the plan, until they show us the plan, we cannot

show them the money.” Id.

80 Press release, HM Treasury supra note 50; see also Steven Erlanger & Katrin Bennhold, Governments on

Both Sides of the Atlantic Push to Get Banks to Lend, N.Y. TIMES, Nov. 7, 2008, at A6.

27
The Oversight Panel believes the public has a right to know to what extent conditions

have been imposed on financial institutions receiving public funds, and if not, why not.

28
8. How is Treasury Deciding Which Institutions Receive the Money?

What factors is Treasury using to determine which institutions receive

equity infusions, purchase of portfolio assets, or insurance of portfolio

assets? Is Treasury seeking to use TARP money to shape the future of

the American financial system, and if so, how? Why does Treasury

believe that providing capital to all viable banks, regardless of

business profile, is the most efficient use of funds?

Treasury has informed both the Oversight Panel and the GAO that its process for

determining which banks receive aid from TARP under the CPP is based on one criterion

– the financial viability of the institution. In doing so, Treasury relies on

recommendations from banking regulators to determine which institutions will receive

equity infusions.81 Bank regulators consider bank examination ratings, selected

performance ratios, and, in some cases, the intended use of capital injections.82 Treasury

has stated that the process is consistent for all banks. Those with higher bank examination

ratings are presumptively approved by the regulators, while those with low examination

ratings are sent to the CPP Council, which may consider additional factors such as the

existence of a signed merger agreement and private equity investment.83 Although no

bank has been denied, some institutions have withdrawn their applications.84 As of

December 9, Treasury had invested in 87 institutions.85 Of these capital infusions, $115

billion has gone to 8 lenders.86

Some commentators are concerned that Treasury actions are designed to drive

consolidation in the banking industry by directing funds to financial institutions that are

willing to purchase weaker banks.87 Opponents of concentration worry about the too-bigto-fail dynamic encouraging excessive risk taking by surviving institutions. 

Others are concerned about too little thought about over-supply in banking and the need

to concentrate taxpayer resources on backing up a more limited number of stronger

banks.88 Still others have expressed concern that with Treasury intervention, the banks

that behaved prudently and whose balance sheets are strong are now losing their

81 Press Release: Interim Assistant Secretary for Financial Stability Neel Kashkari Testimony before the

Senate Committee on Banking, Housing and Urban Affairs, Oct. 23, 2008 available at

http://www.treas.gov/press/releases/hp1234.htm. 

82 Id., 

83

 Id.

84 Id.

85 Capital Purchase Program Transaction Report, Dec. 9, 2008 available at http://www.treas.gov/initiatives/

eesa/docs/CPPTransaction%20ReportDec%209.pdf.

86 Id.,.

87 Mark Landler, U.S. Is Said to Be Urging New Mergers in Banking, N.Y. TIMES, Oct. 21, 2008, at B1.

88 See, e.g., Peter Cohan, Washington Likely to Put Capital Into Banks: A Great Idea if Done Right,

BLOGGINGSTOCKS, available at http://www.bloggingstocks.com/2008/10/09/washington-likely-to-put-capitalinto-banks-a-great-idea-if-don.

29
comparative advantage in a crisis.89 Finally, concerns have been expressed by some

banks that their decision not to seek TARP money has been perceived as a sign of

weakness by investors and business partners. 

The Citigroup experience and the AIG experience raise questions about assessments of

institutional health and need by Treasury and bank regulators. In assessing the health of

financial institutions, the Oversight Panel is interested in the extent to which Treasury

and bank regulators involved in funding decisions have assessed future likely losses in

derivatives and troubled assets, and the implications for funding levels necessary to

restore specific institutions to the point where they can resume normal lending practices.

The Oversight Panel believes it is critical for Congress and the public, including

participants in the banking industry, to understand exactly what the criteria are for

receiving money under the TARP programs, what the strategic intentions of the criteria

are, if any, what the strategic effects of the criteria are, and how the criteria advance the

purposes of the Act.

89 See, e.g., E. Scott Reckard, Which Banks Live or Die? Wielding $250 Billion, U.S. May Decide, L.A.

TIMES, Oct. 15, 2008, at A1; Nicole Gelinas, Storm Proofing the Economy, WALL ST. J., Oct. 28, 2008,

available at http://online.wsj.com/article/SB122513954599373277.html; Evan Greenberg, The Insurance

Industry Doesn’t Need Subsidies, WALL ST. J., Oct. 31, 2008, available at

http://online.wsj.com/article/SB122541594014986703.html. 

30
9. What is the Scope of Treasury’s Statutory Authority? What is

Treasury’s understanding of the statutory limits on its use of funds?

How does Treasury justify its decisions under the Act in relation to its

view of these limits? How is Treasury carrying out its statutory

mandate regarding credit insurance? 

The Emergency Economic Stabilization Act of 2008 granted the Secretary of the

Treasury the authority both to purchase and to insure “troubled assets” held by “financial

institutions.”90 Moreover, the Act defines “troubled asset” as any residential or

commercial mortgage-backed security and related assets issued before March 14, 2008,

and “any other financial instrument that the Secretary, after consultation with the

Chairman of the Board of Governors of the Federal Reserve System . . . determines the

purchase of which is necessary to promote financial market stability” so long as that

determination is transmitted to Congress.91

The term “financial institution” is defined as “any institution, including but not limited to

any bank, savings association, credit union, security broker or dealer, or insurance

company.”92 The remainder of the definition limits the definition to U.S. institutions not

owned by a foreign government. Treasury has purchased the preferred stock of banks

relying upon these definitions.

Some have raised concerns that these purchases appear not to be contemplated by the

overall language of the Act, and have questioned whether Treasury’s interpretation of its

authority in fact places any substantive limits on the assets it could buy, and from whom.

On the other hand, others, contemplating Treasury’s refusal to date to provide aid to U.S.

automakers, have asked whether in light of Treasury’s generally broad interpretation of

its mandate, the refusal to aid the automakers, given their significant role in the financial

markets and the economy, is arbitrary and not supported by the statute’s broad definition

of both “troubled asset” and financial institution.”93

The Term Asset-Backed Securities Loan Facility (TALF) program, authorized by the

Federal Reserve Act, features $20 billion in TARP funds used to finance purchases of

assets backed by auto, student, credit card, and small business loans, with any additional

funding coming from the Federal Reserve Bank of New York (FRBNY).94 This program

will provide up to $200 billion on a non-recourse basis to holders of assets backed by

90 Emergency Economic Stabilization Act, supra note 14, at § 101(a).

91 Id., at § 3(9).

92 Id., at §3(5) (emphasis added).

93 See generally Greg Hitt, Auto Makers Force Bailout Issue – Government Finds It Difficult to Deny Aid

to Detroit in Wake of Wall Street Rescue, WALL ST. J., Nov. 10, 2008, at A3.

94 Press Release, Federal Reserve, supra note 28.

31
new and recent loans.95 Under the TALF terms, the first $20 billion comes from TARP

and is subordinated to any additional funds provided by FRBNY.96

The Citigroup loan guarantee discussed above similarly commits the TARP to a $20

billion investment in conjunction with guarantees offered by the FDIC and the Federal

Reserve.97

It is unclear what Treasury believes its authority and obligations are surrounding

guarantees in the context of the limits placed on insurance in Section 102 of the Act. It is

also unclear what Treasury believes its limits are, if any, in working with other regulators

and government bodies to jointly finance stabilization efforts. Lastly, it is unclear how

Treasury intends to fulfill its obligation under Section 114 of the Act to ensure

transparency when FRBNY is responsible for implementing the TALF.

The Oversight Panel believes Congress and the public have a vital interest in

understanding how far Treasury sees its authority under the TARP extending. 

95 Id.

96 TALF Terms and Conditions, Federal Reserve, available at

http://www.federalreserve.gov/newsevents/press/monetary/monetary20081125a1.pdf.

97 Press Release, Joint Statement by Treasury, Federal Reserve and the FDIC on Citigroup, Department of

Treasury, Nov. 23, 2008, available at http://www.ustreas.gov/press/releases/hp1287.htm.

32
10. Is Treasury Looking Ahead? What are the likely challenges the

implementation of the Emergency Economic Stabilization Act will

face in the weeks and months ahead? Can Treasury offer some

assurance that it has worked out contingency plans if the economy

suffers further disruptions?

While there has been much discussion about the speed with which the financial system

seemed to deteriorate, there were many signs of serious problems. Defaults rates on home

mortgages had been rising, concerns had been raised about the quality of the commercial

rating systems, distrust in the valuations of asset-backed securities had surfaced, and the

extraordinary risks associated with unregulated (and unmonitored) credit default swaps

indicated that our financial system was not unshakeable.98 While investors might be

forgiven their focus on short-term profits, it is the job of our financial experts in the

government to take the longer perspective, to be alert to the possibilities of shocks, and to

have some thoughts about how those shocks might be addressed if they arose.

Even in the context of a massive crisis, we cannot manage one battle at a time. As we

noted at the outset of this series of questions, we need to hear a coherent strategy for

managing us out of this crisis. We note at the end of this series that we also need to think

ahead, both to where the next failures may occur and to some principles which the

government may follow by way of response.

The Oversight Panel is very interested in the thinking of Treasury and the other agencies

with which it coordinates, such as the FDIC and the Board of Governors of the Federal

Reserve, as to what the implications for the TARP program are of possible future events

such as the resetting of Alt-A loans, a possible bankruptcy of one or more major auto

makers, or a change in the environment for financing TARP funding.99

This question connects to the first of our questions. Planning for the future requires an

overall strategic approach to trying to address our financial and economic crisis. The

Oversight Panel does not expect Treasury to predict the future. We are interested in

learning more about how our government is planning for it. 

98 See generally Matt Apuzzo, They Warned Us: US Was Told To ‘Expect Foreclosures, Expect Horror

Stories’, ASSOCIATED PRESS, Dec. 1, 2008, available at

http://www.baltimoresun.com/business/nationworld/sns-ap-meltdown-ignored-warnings,0,1683858.story.

99 See e.g. Charles Feldman, Alt-A Loans: The Crisis Yet to Come, BIGGERPOCKETS, available at

http://www.biggerpockets.com/renewsblog/2008/05/20/alt-a-loans-the-crisis-yet-to-come; Bill Vlasic,

G.M., Teering on Bankruptcy, Pleads for a Federal Bailout, N.Y. TIMES, Nov. 12, 2008; Nouriel Roubini,

Desperate Measures by Desperate Policy Makers in Desperate Times: the Fed Moves to Radically

Unorthodox Policies as Economy Is in Free Fall and Stag-Deflation Deepens, RGE MONITOR, Nov. 26,

2008, available at http://www.rgemonitor.com/roubinimonitor/254591/desperate_measures_by_desperate_policy_makers_in_desperate_times_the_fed_moves_to

_radically_unorthodox_policies_as_economy_is_in_free_fall_and_stag-deflation_deepens.

33
ABOUT COP

In response to the escalating crisis, on October 3, 2008, Congress provided the U.S.

Treasury with the authority to spend $700 billion to stabilize the U.S. economy. Congress

created the Office of Financial Stabilization (OFS) within Treasury to implement a

Troubled Asset Relief Program (TARP). At the same time, Congress created a

Congressional Oversight Panel (COP) to “review the current state of financial markets

and the regulatory system.” COP is empowered to hold hearings, review official data, and

write reports on actions taken by Treasury and financial institutions and their effect on

the economy. Through regular reports, COP must oversee Treasury’s actions, assess the

impact of spending to stabilize the economy, evaluate market transparency, ensure

effective foreclosure mitigation efforts, and guarantee that Treasury’s actions are in the

best interest of the American people. In addition, Congress has instructed COP to

produce a special report on regulatory reform that will analyze “the current state of the

regulatory system and its effectiveness at overseeing the participants in the financial

system and protecting consumers.” 

On November 14, Senate Majority Leader Harry Reid and the Speaker of the House

Nancy Pelosi appointed Richard H. Neiman, Superintendent of Banks for the State of

New York, Damon Silvers, Associate General Counsel of the American Federation of

Labor and Congress of Industrial Organizations (AFL-CIO), and Elizabeth Warren, Leo

Gottlieb Professor of Law at Harvard Law School to the Oversight Panel. With the

appointment on November 19 of Congressman Jeb Hensarling to the Oversight Panel by

House Minority Leader John Boehner, the Oversight Panel had a quorum and met for the

first time on November 26, 2008, electing Professor Warren as its chair. 

This report was prepared under very tight time constraints. COP owes special thanks to

Ganesh Sitaraman, Dan Geldon, John Beshears, and Cassie Walbrodt who helped with

drafting, and Heather Slavkin and Catherina Celosse, who were careful editors. Students

from the Harvard Law School provided critical research under tight deadlines; COP

offers thanks to Neal Desai, Faisal Mohammed, Eric Nguyen, Jeff Pauker, Adam Pollet,

Walter Rahmey, Saritha Tice and Ting Yeh for their service.

34
FUTURE OVERSIGHT ACTIVITIES

Public Hearings

In the weeks ahead, COP will hold a series of field hearings to shine light on the causes

of the financial crisis, the administration of TARP, and the anxieties and challenges of

ordinary Americans. The first of these hearings will occur next week in Las Vegas,

Nevada. At each hearing, COP members will conduct a thorough investigatory process on

behalf of American taxpayers, consumers, and workers.

Upcoming reports

Next month, COP will release two public reports. On Jan. 10, it will release a report that

examines the administration of the TARP program, including the impact thereof on the

economy to date. On Jan. 20, COP will release a report providing recommendations for

reforms to the financial regulatory structure. This report will provide a roadmap for a

regulatory system that would revitalize Wall Street, protect consumers, and ensure future

stability in our financial markets. Through these reports, the Oversight Panel will reveal

the results of its investigations to the American people.

Public Participation and Comment Process

COP will soon release a public website, which will provide resources pertaining to the

financial crisis, the TARP program, and COP’s ongoing efforts. The website will also

offer opportunities for concerned citizens to share their stories, concerns, and suggestions

with the Oversight Panel. By engaging in this dialogue, COP aims to enhance the quality

of its ideas and advocacy on behalf of the American public.

35
APPENDIX: STATUTORY AUTHORITY OF THE

CONGRESSIONAL OVERSIGHT PANEL

Emergency Economic Stabilization Act of 2008

Public Law No: 110-343

SEC. 125. CONGRESSIONAL OVERSIGHT PANEL.

(a) Establishment- There is hereby established the Congressional Oversight Panel

(hereafter in this section referred to as the `Oversight Panel') as an establishment

in the legislative branch.

(b) Duties- The Oversight Panel shall review the current state of the financial

markets and the regulatory system and submit the following reports to Congress:

(1) REGULAR REPORTS-

(A) IN GENERAL- Regular reports of the Oversight Panel shall

include the following:

(i) The use by the Secretary of authority under this Act,

including with respect to the use of contracting authority

and administration of the program.

(ii) The impact of purchases made under the Act on the

financial markets and financial institutions.

(iii) The extent to which the information made available on

transactions under the program has contributed to market

transparency.

(iv) The effectiveness of foreclosure mitigation efforts, and

the effectiveness of the program from the standpoint of

minimizing long-term costs to the taxpayers and

maximizing the benefits for taxpayers.

(B) TIMING- The reports required under this paragraph shall be

submitted not later than 30 days after the first exercise by the

Secretary of the authority under section 101(a) or 102, and every

30 days thereafter.

(2) SPECIAL REPORT ON REGULATORY REFORM- The Oversight

Panel shall submit a special report on regulatory reform not later than

January 20, 2009, analyzing the current state of the regulatory system and

its effectiveness at overseeing the participants in the financial system and

protecting consumers, and providing recommendations for improvement,

including recommendations regarding whether any participants in the

financial markets that are currently outside the regulatory system should

become subject to the regulatory system, the rationale underlying such

recommendation, and whether there are any gaps in existing consumer

protections.

(c) Membership36
(1) IN GENERAL- The Oversight Panel shall consist of 5 members, as

follows:

(A) 1 member appointed by the Speaker of the House of

Representatives.

(B) 1 member appointed by the minority leader of the House of

Representatives.

(C) 1 member appointed by the majority leader of the Senate.

(D) 1 member appointed by the minority leader of the Senate.

(E) 1 member appointed by the Speaker of the House of

Representatives and the majority leader of the Senate, after

consultation with the minority leader of the Senate and the

minority leader of the House of Representatives.

(2) PAY- Each member of the Oversight Panel shall each be paid at a rate

equal to the daily equivalent of the annual rate of basic pay for level I of

the Executive Schedule for each day (including travel time) during which

such member is engaged in the actual performance of duties vested in the

Commission.

(3) PROHIBITION OF COMPENSATION OF FEDERAL

EMPLOYEES- Members of the Oversight Panel who are full-time officers

or employees of the United States or Members of Congress may not

receive additional pay, allowances, or benefits by reason of their service

on the Oversight Panel.

(4) TRAVEL EXPENSES- Each member shall receive travel expenses,

including per diem in lieu of subsistence, in accordance with applicable

provisions under subchapter I of chapter 57 of title 5, United States Code.

(5) QUORUM- Four members of the Oversight Panel shall constitute a

quorum but a lesser number may hold hearings.

(6) VACANCIES- A vacancy on the Oversight Panel shall be filled in the

manner in which the original appointment was made.

(7) MEETINGS- The Oversight Panel shall meet at the call of the

Chairperson or a majority of its members.

(d) Staff-

(1) IN GENERAL- The Oversight Panel may appoint and fix the pay of

any personnel as the Commission considers appropriate.

(2) EXPERTS AND CONSULTANTS- The Oversight Panel may procure

temporary and intermittent services under section 3109(b) of title 5,

United States Code.

(3) STAFF OF AGENCIES- Upon request of the Oversight Panel, the

head of any Federal department or agency may detail, on a reimbursable

basis, any of the personnel of that department or agency to the Oversight

Panel to assist it in carrying out its duties under this Act.

(e) Powers-

(1) HEARINGS AND SESSIONS- The Oversight Panel may, for the

purpose of carrying out this section, hold hearings, sit and act at times and

37
places, take testimony, and receive evidence as the Panel considers

appropriate and may administer oaths or affirmations to witnesses

appearing before it.

(2) POWERS OF MEMBERS AND AGENTS- Any member or agent of

the Oversight Panel may, if authorized by the Oversight Panel, take any

action which the Oversight Panel is authorized to take by this section.

(3) OBTAINING OFFICIAL DATA- The Oversight Panel may secure

directly from any department or agency of the United States information

necessary to enable it to carry out this section. Upon request of the

Chairperson of the Oversight Panel, the head of that department or agency

shall furnish that information to the Oversight Panel.

(4) REPORTS- The Oversight Panel shall receive and consider all reports

required to be submitted to the Oversight Panel under this Act.

(f) Termination- The Oversight Panel shall terminate 6 months after the

termination date specified in section 120.

(g) Funding for Expenses-

(1) AUTHORIZATION OF APPROPRIATIONS- There is authorized to

be appropriated to the Oversight Panel such sums as may be necessary for

any fiscal year, half of which shall be derived from the applicable account

of the House of Representatives, and half of which shall be derived from

the contingent fund of the Senate.

(2) REIMBURSEMENT OF AMOUNTS- An amount equal to the

expenses of the Oversight Panel shall be promptly transferred by the

Secretary, from time to time upon the presentment of a statement of such

expenses by the Chairperson of the Oversight Panel, from funds made

available to the Secretary under this Act to the applicable fund of the

House of Representatives and the contingent fund of the Senate, as

appropriate, as reimbursement for amounts expended from such account

and fund under paragraph (1).

38