CONGRESSIONAL OVERSIGHT PANEL 

FEBRUARY OVERSIGHT REPORT * 

VALUING TREASURY’S ACQUISITIONS 

FEBRUARY 6, 2009.—Ordered to be printed 

* Submitted under Section 125(b)(1) of Title I of the Emergency Economic 

Stabilization Act of 2008, Pub. L. No. 110–343 

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CONGRESSIONAL OVERSIGHT PANEL FEBRUARY OVERSIGHT REPORT 

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1 

47–178 2009

CONGRESSIONAL OVERSIGHT PANEL 

FEBRUARY OVERSIGHT REPORT * 

VALUING TREASURY’S ACQUISITIONS 

FEBRUARY 6, 2009.—Ordered to be printed 

* Submitted under Section 125(b)(1) of Title I of the Emergency Economic 

Stabilization Act of 2008, Pub. L. No. 110–343 

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E:\Seals\Congress.#13
(II) 

CONGRESSIONAL OVERSIGHT PANEL 

PANEL MEMBERS

ELIZABETH WARREN, Chair 

SEN. JOHN SUNUNU

REP. JEB HENSARLING

RICHARD H. NEIMAN

DAMON SILVERS

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(III) 

C O N T E N T S 

Page 

Executive Summary ................................................................................................. 1 

Valuing TARP Acquisitions .................................................................................... 4 

Treasury Department Updates Since Prior Report .............................................. 11 

Oversight Activities ................................................................................................. 14 

Future Oversight Activities .................................................................................... 15 

About the Congressional Oversight Panel ............................................................. 16 

Appendix I: Letter from Mr. Lawrence Summers to Congressional Leadership, 

dated January 15, 2009 ....................................................................................... 17 

Appendix II: Letter from Congressional Oversight Panel Chair Elizabeth Warren to Treasury Secretary Mr. Timothy Geithner, dated January 28, 2009 ... 20 

Appendix III: Report of the Advisory Committee on Finance and Valuation 

to the Congressional Oversight Panel ................................................................ 22 

Appendix IV: Summary of the Legal Report to the Congressional Oversight 

Panel for Economic Stabilization concerning the TARP Investments in Financial Institutions .............................................................................................. 34 

Appendix V: Link to Valuation Report of Duff & Phelps to the Congressional 

Oversight Panel .................................................................................................... 45 

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1 Congressional Oversight Panel (online at cop.senate.gov). 

2That policy includes creation of a uniform capital infusion program, acceptance of a limit on 

the marketability of the securities Treasury received, and terms that encourage institutions to 

replenish their private capital. 

FEBRUARY OVERSIGHT REPORT 

FEBRUARY 6, 2009.—Ordered to be printed 

EXECUTIVE SUMMARY 

A central question surrounding the Troubled Asset Relief Program (TARP) is whether the U.S. Department of the Treasury’s 

(Treasury) policy of injecting cash into financial institutions has resulted in a fair deal for taxpayers. The focus of this report is a financial valuation study of the terms of Treasury’s program to invest capital in financial institutions. The report was commissioned 

as part of the Congressional Oversight Panel’s continuing investigation into the terms of the TARP. The report was conducted for 

the Panel by its Advisory Committee on Finance and Valuation 

(Advisory Committee) and by the international valuation firm, Duff 

& Phelps Corporation; the Advisory Committee’s report is attached 

to this report and the longer complete Duff & Phelps valuation report is posted on the Panel’s website.1 The valuation report was enhanced by an accompanying legal analysis of the terms of the 

TARP transactions, which is also attached to this report. 

The valuation report concludes that Treasury paid substantially 

more for the assets it purchased under the TARP than their thencurrent market value. The use of a one-size-fits-all investment policy,2 rather than the use of risk-based pricing more commonly used 

in market transactions, underlies the magnitude of the discount. A 

number of reasons for this result have been suggested. The Panel 

has not determined whether these reasons are valid or whether 

they justify the large subsidy that was created. In addition, the 

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Panel has not made judgments about whether the decision-making 

underlying these investments was sound. The rationale for the 

Treasury’s approach and the impact of this disparity will be subjects for the Panel’s continued study and consideration. It is important, however, for the public to understand that in many cases 

Treasury received far less value in stocks and warrants than the 

money it injected into financial institutions. 

The legal analysis concludes that the documentation for the investments was standardized. The use of standardized documents 

likely contributed to Treasury’s ability to obtain speed of execution 

and wide participation, but it meant Treasury could not address 

differences in credit quality among various capital infusion recipients through variations in contractual terms governing the investments or impose specific requirements on a particular recipient 

that might help insure stability and soundness. 

The February report also provides an update on the Panel’s previous work, as well as a review of the key actions and changes at 

Treasury regarding the TARP since the Panel’s last report. In its 

initial report, on December 10, 2008, the Panel asked ten questions 

about the TARP and a series of sub-questions on the strategy, 

goals, methods, and operations of the program. In its next report, 

issued on January 9, 2009, the Panel analyzed Treasury’s response 

to the Panel’s questions and highlighted four specific areas where 

Treasury most needed to provide additional information: 

(1) Bank Accountability. The Panel pressed Treasury to collect 

and disclose additional information about how TARP-recipient 

banks are using taxpayer funds and to establish reporting requirements, formal usage guidelines, or additional benchmarks for the 

conduct of TARP recipients as a condition of taxpayer support. 

(2) Transparency and Asset Evaluation. The Panel emphasized 

the need for Treasury to ensure transparency both in the process 

of selecting TARP recipients and the relationship between an institution’s receipt of TARP funds and the value of its assets in order 

to increase TARP accountability and confidence in the markets. 

(3) Foreclosures. The Panel pressed Treasury to follow Congress’s 

express mandate in §§ 109–110 of the Emergency Economic Stabilization Act of 2008 (EESA) to increase federal assistance to 

homeowners in danger of losing their homes and make further efforts to reduce foreclosures. 

(4) Strategy. The Panel repeated its concern about Treasury’s 

shifting explanations of its strategy for using TARP funds and 

called for Treasury to develop and follow a coherent strategy for 

the future use of TARP funds. 

The Panel remains committed to its ongoing oversight role and 

will continue to seek answers to the questions presented in its previous reports. While the Panel recognizes that Treasury is in the 

midst of a transition of personnel and policies, it believes that the 

Panel’s initial questions and areas of concern maintain their importance and will help Treasury as it reshapes its policies and continues to administer the TARP. 

To that end, the Panel wrote a letter to Treasury on January 28, 

2009, reiterating its requests for answers and asking for further rewwoods2 on PROD1PC60 with HEARING

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3See Appendix II, infra. 

sponse by February 18, 2009.3 The Panel expects to discuss Treasury’s responses in its March report to Congress. 

In addition to following the issues raised thus far, the Panel will 

focus on home mortgage foreclosures in its next report. We will 

continue to engage the public through hearings and a public participation and comment process, as well as required monthly reports. 

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4 U.S. Department of the Treasury, Statement by Secretary Henry M. Paulson, Jr. on Actions 

to Protect the U.S. Economy (Oct. 14, 2008) (online at www.treasury.gov/press/releases/ 

hp1205.htm). 5This valuation analysis does not include the approximately $24 billion in loans to General 

Motors, Chrysler, Chrysler Financial, and GMAC made as part of the Automotive Industry Finance Program. 6 U.S. Department of the Treasury, Statement by Secretary Henry M. Paulson, Jr. on Capital 

Purchase Program (Oct. 20, 2008) (online at www.treas.gov/press/releases/hp1223.htm). 7 U.S. Department of the Treasury, Responses to Questions of the First Report of the Congressional Oversight Panel for Economic Stabilization (Dec. 30, 2008). 

VALUING TARP ACQUISITIONS 

In October 2008, Treasury abandoned its original strategy of purchasing ‘‘troubled’’ mortgage and other assets from the nation’s financial institutions, deciding instead to invest money directly into 

those institutions.4 The Panel made clear in its first report to Congress and the public, on December 10, 2008, that it wanted to know 

if ‘‘the public is receiving a fair deal’’ under the TARP in general 

and for those investments in particular. It explained that: 

[A] critical aspect of [the Panel’s] mission is to determine 

whether the United States government has received assets 

comparable to its expenditures under the Emergency Economic Stabilization Act of 2008. 

The Panel’s review of the ten largest TARP investments the 

Treasury made during 2008 raises substantial doubts about whether the government received assets comparable to its expenditures.5

The Panel’s analysis does not explore whether these investments 

were the best means of achieving broader policy goals. 

Valuation of the transactions is critical because then-Treasury 

Secretary Henry Paulson assured the public that the investments 

of TARP money were sound, given in return for full value: ‘‘This 

is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything.’’ 6 In December, he 

reiterated the point, ‘‘When measured on an accrual basis, the 

value of the preferred stock is at or near par.’’ 7 This means, in effect, that for every $100 Treasury invested in these companies, it 

received stock and warrants valued at about $100. 

As discussed in greater detail in the remainder of this section, 

an extensive valuation analysis of the ten transactions that was 

commissioned by the Panel concluded that: 

• In the eight transactions which were made under the investment program for healthy banks, for each $100 spent, Treasury received assets worth approximately $78. 

• In the two transactions which were made under programs for 

riskier banks, for each $100 spent, the Treasury received assets 

worth approximately $41. 

• Overall, in the ten transactions, for each $100 spent, the 

Treasury received assets worth approximately $66. 

• Extrapolating these results using appropriate weighting to all capital purchases made in 2008 under TARP, Treasury paid $254 

billion, for which it received assets worth approximately $176 billion, a shortfall of $78 billion. 

Three programs have been used by the Treasury to infuse capital 

directly into American financial institutions under TARP. The Capwwoods2 on PROD1PC60 with HEARING

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8 U.S. Department of the Treasury, Treasury Announces TARP Capital Purchase Program Description (Oct. 14, 2008) (online at www.treas.gov/press/releases/hp1207.htm). 9 U.S. Department of the Treasury, Treasury to Invest in AIG Restructuring Under the Emergency Economic Stabilization Act (Nov. 10, 2008) (online at www.treasury.gov/press/releases/ 

hp1261.htm). 10 U.S. Department of the Treasury, Treasury Releases Guidelines for Targeted Investment 

Program (Jan. 2, 2009) (online at www.treasury.gov/press/releases/hp1338.htm). 11 Id. Treasury made it clear retroactively when it announced the TIP guidelines that its November 23 investment in Citigroup fell under TIP. Id. See also U.S. Department of the Treasury, 

Joint Statement by Treasury, Federal Reserve and the FDIC on Citigroup (Nov. 23, 2008) (online at www.treasury.gov/press/releases/hp1287.htm). Treasury used TIP again in January 2009 

to make additional investments in Bank of America. U.S. Department of the Treasury, Treasury, 

Federal Reserve and the FDIC Provide Assistance to Bank of America (Jan. 16, 2008) (online 

at www.treas.gov/press/releases/hp1356.htm). 12The preferred stock in the CPP investments paid a dividend of 5 percent for five years and 

9 percent thereafter; it was so-called ‘‘perpetual preferred’’ (that is, it did not have a fixed term), 

although it could be redeemed by the issuer under certain conditions. Preferred stock is a form 

of security that lies halfway between a corporation’s common stock and its formal debt. The preferred stock bears a fixed dividend rate that is payable out of earnings, it must receive its dividend before any dividends can be paid to common shareholders, and its dividend rights are often 

cumulative (as was the case with the Treasury investments), which means that if a dividend 

is missed, the holder of the preferred stock has a right to receive the missed dividend as part 

of its payment in future years. In a liquidation, the preferred shareholders must be paid before 

any amount can be paid to the common shareholders, but preferred shareholders themselves 

cannot receive any funds if there is not enough first to pay all of the corporation’s creditors. 13The warrants allowed the Treasury to buy common stock of each institution for an additional amount—called the ‘‘exercise price’’—that was calculated so that Treasury benefit if the 

value of the common stock increased. The exercise price for the Treasury warrants is the average trading price of a share of the institution’s stock for the 20 days prior to the selection of 

the institution for the CPP, and the shares that could be purchased were set at 15 percent of 

the face value of the Treasury’s preferred stock investment. (So that if the Treasury made a 

$100 billion investment, the warrants would permit it to purchase $15 billion of common stock.) 

The warrant values differed for the other two programs, but the principle remained the same. 

ital Purchase Program (CPP), created in October 2008 has the most 

widespread bank participation.8 This program was intended for 

healthy banks: those that are sound and not in need of government 

subsidization. While a total of 317 financial institutions have received a total of $194 billion under the CPP as of January 23, 2009, 

eight large early investments represent $124 billion, or 64 percent 

of the total. The eight were: Bank of America Corporation, 

Citigroup, Inc., JPMorgan Chase & Co., Morgan Stanley, Goldman 

Sachs Group, Inc., PNC Financial Services Group, U.S. Bancorp, 

and Wells Fargo & Company. In addition, the Systemically Significant Failing Institutions Program (SSFI Program), launched in November 2008,9 and the Targeted Investment Program (TIP), 

launched in January 2009,10 were created to deal with financial institutions that were in financial distress. Only American International Group (AIG) received money under the SSFI Program. 

After receiving money as a ‘‘healthy bank,’’ six weeks later 

Citigroup received a second infusion of TARP funds, an infusion 

that was ultimately included as part of the as yet uncreated TIP.11

Under these three programs, Treasury made cash investments in 

designated financial institutions in return for a combination of preferred stock 12 and warrants 13 to purchase common stock of those 

institutions. The terms differed for each of the three programs— 

CPP, SSFI, and TIP—but they all involved the purchase of portions 

of the institutions. 

To determine whether the Treasury received its money’s worth 

in these transactions, the Panel commissioned a detailed valuation 

project in December 2008. The project and its methodology were designed by an Advisory Committee on Finance and Valuation, composed of Adam M. Blumenthal, a former First Deputy Comptroller 

of the City of New York, Professor William N. Goetzmann of Yale 

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14Mr. Blumenthal is now the Managing General Partner of Blue Wolf Capital Management 

in New York. Professor Goetzmann is Edwin J. Beinecke Professor of Finance and Management 

Studies and Director of the International Center for Finance at the Yale School of Management. 

Professor Lucas is Donald C. Clarke HSBC Professor of Consumer Finance at the Kellogg School 

of Management at Northwestern University. Both Professor Goetzmann and Professor Lucas are 

Research Associates of the National Bureau of Economic Research. 15 Adam M. Blumenthal, William N. Goetzmann, and Deborah J. Lucas, Report to the Congressional Oversight Panel on the Emergency Economic Stabilization Act of 2008, at 7 (Feb. 4, 

2009) (hereinafter ‘‘Advisory Committee Report’’). The Advisory Committee Report is attached 

as Appendix III to this report. 16The valuation methods are summarized on pages 7–10 of the Advisory Committee Report. 

The complete valuation report conducted by Duff & Phelps, which runs to some 697 pages, has 

been posted on the Panel’s web site, www.cop.senate.gov, and a link to the report is attached 

as Appendix V to this report. 17 Advisory Committee Report, supra note 15, at 2. 

versity.14 After a competitive bidding process, the Committee recommended the international valuation firm Duff & Phelps to work 

with it to implement the project design and to perform the actual 

valuation. 

To reach a conclusion about each of Treasury’s investments, it is 

necessary to compare the amount of the government investment 

with the value of the preferred stock and the warrants it received 

in return in each transaction. The task is made more difficult because none of the securities is publicly-traded. Instead, the valuation analysis assumed that ‘‘securities similar to those issued 

under the TARP were trading in the capital markets at fair values.’’ 15 The valuations employed multiple approaches in order to 

cross-check and validate the results.16 Value was estimated for 

each security as of the time immediately following the announcement by Treasury of its purchase. This valuation approach takes 

into account investors’ perceptions about how the TARP investment 

and other government programs announced concurrently affected 

the value of the institutions. The valuation report itself was based 

solely on publicly available information. 

The ten largest investment transactions made under the three 

programs through November 2008 are listed in the following 

table.17

SUMMARY OF ESTIMATED VALUE CONCLUSIONS 

[Dollars in billions] 

Purchase program participant Valuation 

date 

Face 

value 

Total estimated value 

Value 

Subsidy 

Percent $ 

Capital Purchase Program: 

Bank of America Corporation ....................................... 10/14/08 $15.0 $12.5 17 $2.6 

Citigroup, Inc ............................................................... 10/14/08 25.0 15.5 38 9.5 

JPMorgan Chase & Co ................................................. 10/14/08 25.0 20.6 18 4.4 

Morgan Stanley ............................................................ 10/14/08 10.0 5.8 42 4.2 

The Goldman Sachs Group, Inc ................................... 10/14/08 10.0 7.5 25 2.5 

The PNC Financial Services Group .............................. 10/24/08 7.6 5.5 27 2.1 

U.S. Bancorp ................................................................ 11/03/08 6.6 6.3 5 0.3 

Wells Fargo & Company ............................................... 10/14/08 25.0 23.2 7 1.8 

Subtotal ............................................................... .................... 124.2 96.9 22 27.3 

311 Other Transactions1 ..................................... .................... 70.0 54.6 22 15.4 

SSFI & TIP: 

American International Group, Inc ............................... 11/10/08 40.0 14.8 63 25.2 

Citigroup, Inc ............................................................... 11/24/08 20.0 10.0 50 10.0 

Subtotal ............................................................... .................... 60.0 24.8 59 35.2 

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18Like the Duff & Phelps report, the CBO report uses only publicly available information to 

value capital purchases. Advisory Committee Report, supra note 15, at 7–10; Congressional 

Budget Office, The Troubled Asset Relief Program: Report on Transactions Through December 

31, 2008, at 4–5 (Jan. 16, 2009). 19 Advisory Committee Report, supra note 15, at 10. 

SUMMARY OF ESTIMATED VALUE CONCLUSIONS—Continued 

[Dollars in billions] 

Purchase program participant Valuation 

date 

Face 

value 

Total estimated value 

Value 

Subsidy 

Percent $ 

Total ........................................................... .................... 254.2 176.2 31 78.0 

1 Extrapolates 22% subsidy rate from 8 studied CPP investments. See discussion in Part II. 

This valuation analysis bears some similarities to an earlier 

valuation by the Congressional Budget Office (CBO). The report, titled The Troubled Asset Relief Program: Report on Transactions 

Through December 31, 2008, was released in January 2009. The 

CBO report focused on utilizing procedures similar to the Federal 

Credit Reform Act (FCRA) to assess the budgetary impact of all 

TARP transactions on the federal debt and deficit, which can be interpreted as a cost and thus a subsidy rate. By comparison, the 

Duff & Phelps report provides extensive, detailed company-by-company information for all major CPP participants. While both reports conclude that the fair market value of the securities received 

by Treasury was less than what was paid, the much deeper focus 

in the Duff & Phelps report provides the detailed information necessary to inform the public policy debate surrounding the future of 

the TARP. The Duff & Phelps report includes multiple valuation 

methods, an evaluation of similar private transactions, and an exploration of some of the reasoning behind the varied subsidies, including between the different programs and even between CPP participants. While the report itself does not draw any conclusions as 

to the validity of Treasury’s decisions or any particular goals, the 

information will be extremely valuable to policy makers in drawing 

their own conclusions.18

In addition to a direct investigation of the market value of the 

transactions, the Panel’s earlier reports suggested that additional 

information about the value of the TARP transactions could be derived by comparing those transactions to three large transactions 

involving private sector investors that were undertaken in the 

same time period: the purchase by Berkshire Hathaway of an interest in Goldman Sachs, announced in September 2008, the investment by Mitsubishi in Morgan Stanley, also announced in September 2008, and an investment by Qatar Holding LLC and entities representing the beneficial interests of HH Sheik Mansour Bin 

Zayed Al Nahyan, a member of the Royal Family of Abu Dhabi 

(Abu Dhabi) in Barclays PLC, announced in late October 2008.19

The Advisory Committee and Duff & Phelps concluded that these 

transactions could not be used to make a direct comparison with 

the TARP investments. But by applying the same methodology to 

three major investments by private investors in financial institutions which occurred near the same time as the Treasury investments (the $5 billion investment by Berkshire Hathaway in Goldman Sachs, the $9 billion investment by Mitsubishi in Morgan 

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20The ability of a recipient of TARP assistance to call at par the preferred stock it has issued 

to Treasury accounts for slightly less than one-third of the total subsidy involved in the TARP 

transactions valued and slightly less than one-half of the subsidy in the CPP transactions alone. 

The liquidation costs associated with the preferred stock and warrants Treasury received accounted for about 20 percent of the total subsidy, or about a quarter of the subsidy in the CPP 

transactions alone. Looking at the benchmark transactions, private sector investors were, in 

those cases, able to offset this discount through a combination of higher interest rate, by taking 

more shares, or by insisting on other terms that balanced the impact of the market overhang. 21The legal analysis was prepared by Timothy G. Massad, Esq., a New York City corporate 

lawyer with close to 25 years’ experience, who took an unpaid leave of absence from his law 

firm to serve as special legal advisor to the Panel on a pro bono basis. Catherina Celosse, Esq. 

acted as counsel for the Panel in the development of the legal analysis. 

Stanley and the £7 billion investment by Qatar Holding and Abu 

Dhabi and in Barclays), the valuation report concludes that, unlike 

Treasury, private investors received securities with a fair market 

value as of the valuation dates of at least as much as they invested, and in some cases, worth substantially more. 

• For each $100 Berkshire Hathaway invested in Goldman Sachs, it received securities with a fair market value of $110. 

• For each $100 Qatar Holding and Abu Dhabi invested in Barclays, they received securities with a fair market value of $123. 

• For each $100 Mitsubishi invested in Morgan Stanley, it re- ceived securities with a fair market value of $91. 

The way Treasury structured the CPP, SSFI Program, and TIP 

transactions was certain to create significant subsidies. Treasury’s 

emphasis on uniformity, marketability, and use of call options in 

structuring TARP investments helped produce a situation in which 

Treasury paid substantially more for its TARP investments than 

their then-current market value. The decision to model the far 

riskier investments under the TIP and SSFI Program closely on 

the CPP transactions also effectively guaranteed that a substantial 

subsidy would exist for these riskier institutions. Because Treasury 

decided to make all healthy bank purchases on precisely the same 

terms, stronger institutions received a smaller subsidy, while weaker institutions received more substantial subsidies. 

Two other structural factors contributed to the discount factor. 

First, companies have the ability to call the preferred stock at par; 

this option, which is not typical of publicly traded preferreds, decreased the value of the securities received by Treasury, particularly in the stronger institutions; this call feature may have reflected an attempt to limit the amount of time taxpayer funds are 

outstanding.20 In addition, while the preferred stock and warrants 

could be registered for resale at the Treasury’s request, liquidating 

such a large position would entail substantial cost. The likely costs 

inherent in such a liquidation also contributed to the discount. 

In addition, the legal analysis 21 prepared for the Panel noted 

that for the CPP transactions: (i) Treasury will receive no premium 

if the issuer optionally redeems the preferred shares, (ii) the warrants and common stock held by Treasury can be repurchased, albeit at their then-fair market value, if the preferred stock is either 

redeemed or transferred, and (iii) the number of warrants held by 

Treasury are subject to an automatic 50 percent reduction if the 

subject institution sells equity equal in amount to Treasury’s investment and qualifying as Tier I capital. Treasury appears to have 

decided to be a passive investor in each of the institutions in which 

it invests, choosing not to receive either voting rights or seats on 

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22The lack of such reporting requirements is especially hard to understand. 23Timothy G. Massad, Summary of the Legal Report to the Congressional Oversight Panel 

for Economic Stabilization Concerning the TARP Investments in Financial Institutions, at 8 

(Feb. 4, 2009) (hereinafter ‘‘Legal Analysis’’). The Legal Analysis is attached as Appendix IV to 

this report. 24 Id. at 11. 

an institution’s board of directors if it converts its warrants to common stock, and with a few exceptions no special covenants are imposed on the institutions that receive capital infusions. This can be 

contrasted with the more activist approach taken by the U.K. government in its investments in banks. (The legal analysis does note 

that, in some respects, Treasury did obtain better terms than were 

reflected in the Berkshire Hathaway investment in Goldman 

Sachs, but that those more favorable terms did not affect value.) 

Additional observations in the legal analysis are also important. 

The analysis notes that the standard terms of the investments used 

in the CPP were generally within the range of what would be customary in a commercial transaction between a large financial institution and a large investor. The terms of the documents include a 

number of provisions that appear to be designed to encourage replacement of the Treasury investment with private capital quickly. 

In addition, there were no provisions in the CPP investment that 

restricted operations or business practices of the recipients, restricted or required reporting of use of funds,22 or were directed at 

specific public policy objectives of EESA.23 (The CPP, SSFI Program, and TIP forms do contain a ‘‘highly unusual provision . . . 

favorable to Treasury’’ that allow Treasury unilaterally to amend 

any provision of the relevant agreements if necessary to comply 

with any new or amended federal statutes; the impact of this provision is not included in the valuations in any way and is, in any 

event, extremely difficult to assess.) 24

By paying the same price, regardless of the financial condition of 

the bank, Treasury ensured that weaker institutions would necessarily be subsidized more heavily. It may have wished to avoid 

the risk that more stringent CPP terms for some institutions would 

signal Treasury knowledge of adverse circumstances at those institutions. It is also possible that Treasury wanted to avoid the risk 

that failure of a weak bank could bring down stronger banks. The 

Panel has not determined whether these objectives have been met 

or whether they justified the large subsidy that was created. The 

Panel expects to address these broader policy objectives in its future work. 

Investments in AIG under the SSFI Program and the second 

Citigroup investment involved significantly larger subsidy levels 

than were seen in the CPP institutions. The reason is that, despite 

the higher risk, Treasury modeled these investments closely on the 

CPP investments that had been designed for healthy banks. In the 

AIG transaction, Treasury already held warrants for 79.9 percent 

of the equity of AIG as the result of a loan provided to AIG by the 

Federal Reserve Bank of New York earlier in 2008; the proceeds 

of the TARP investment in AIG were used to repay part of that 

loan. The multiple loans and investments by parts of the federal 

government in AIG have helped keep it out of bankruptcy. The Advisory Committee and Duff & Phelps looked only at the discount 

to face value that the Treasury took as a result of its TARP investment, although they recognize that that investment was part of a 

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25 U.S. Department of the Treasury, Remarks by Secretary Henry M. Paulson, Jr. on Financial 

Rescue Package and Economic Update (Nov. 12, 2008) (online at www.treas.gov/press/releases/ 

hp1265.htm). 

broader strategy by the government to prop up the company. Even 

in the AIG case, however, the then-Treasury Secretary insisted 

that the transactions were accompanied by ‘‘significant taxpayer 

protections and conditions.’’ 25

Similarly, while the first investment in Citigroup was made as 

part of the CPP for healthy banks, the second investment was 

made after the markets recognized that Citigroup was subject to a 

significantly increased level of risk. The second investment was 

originally made outside any particular TARP program, on a freestanding basis; when the TIP was subsequently created, on January 2, 2009, the second Citigroup investment was reclassified as 

part of the TIP, aimed at riskier institutions, in connection with 

other government interventions. The analysis in the valuation report and its appendices does not evaluate those other interventions 

(i.e., interventions other than the purchase of preferred stock and 

warrants). It focuses only on the value gap between the amount of 

capital provided by the Treasury in the second Citigroup investment, and the value of the securities the Treasury received in exchange. 

It is possible that the value of the investments made by Treasury 

may someday be worth more than the amount Treasury paid. It is 

also possible that they may be worth much less. This assessment 

demonstrates that the value received—including the market’s estimate of its future worth—was considerably less at the time of the 

transaction than the amount paid by Treasury. It also demonstrates that the value on an institution-by-institution basis varied substantially. 

Treasury may have determined that granting the subsidies described above to a group of banks, regardless of their condition, on 

essentially the same terms was necessary, for one or more reasons, 

to preserve the integrity of the financial system. Whether the subsidy provided by Treasury to financial institutions represents a fair 

deal for the taxpayers is a subject for policy debate and judgment, 

not one that can be answered in a purely quantitative way. 

In its public statements about its TARP expenditures, Treasury 

did not describe the program in terms of subsidization, nor did it 

explain why some banks should be subsidized more than others. Instead, Treasury repeatedly described investments ‘‘at or near par.’’ 

The Panel recognizes that the prudence of spending taxpayer dollars in this way may be the subject of disagreement among both 

experts and the public, but the Panel believes that if TARP is to 

garner credibility and public support, a clear explanation of the 

economic transaction and the reasoning behind any such expenditure of funds must be made clear to the public. 

The Panel will continue to investigate how Treasury spends taxpayer funds and whether these expenditures are helping the economy. 

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26The Panel appreciates the new administration’s responsiveness to the concerns raised in its 

oversight reports as evidenced by National Economic Council Director Lawrence H. Summers’ 

January 15, 2009 letter to the Congressional leadership, see Appendix I infra, and its recent 

TARP initiatives discussed in this report. 27Lori Montgomery and Paul Kane, Senate Votes to Release Bailout Funds to Obama, Washington Post (Jan. 16, 2009) (online at www.washingtonpost.com/wp-dyn/content/article/2009/01/ 

15/AR2009011504253.html). 28 Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. No. 110–343 at § 115(a). 29TARP Conflicts of Interest, Interim Rule, 74 Fed. Reg. 3431–3436 (Jan. 21, 2009) (codified 

at 31 C.F.R. §§ 31.200–31.218). 30 Brady Dennis, Treasury Moves to Restrict Lobbyists from Influencing Bailout Program, 

Washington Post (Jan. 28, 2009) (online at www.washingtonpost.com/wp-dyn/content/article/ 

2009/01/27/AR2009012703500.html); U.S. Department of the Treasury, Treasury Secretary 

Opens Term with New Rules To Bolster Transparency, Limit Lobbyist Influence in Federal investment Decisions (Jan. 27, 2009) (online at www.ustreas.gov/press/releases/tg02.htm). 31 Id. 32 U.S. Department of the Treasury, Treasury Announces New Policy to Increase Transparency in Financial Stability Program (Jan. 28, 2009) (online at www.ustreas.gov/press/releases/ 

tg04.htm). 33See, e.g., David Enrich and Damian Paletta, Agreement Boosts Citi Oversight, Wall Street 

Journal (Jan. 29, 2009) (online at online.wsj.com/article/SB123318955291026821.html). 

TREASURY DEPARTMENT UPDATES SINCE PRIOR 

REPORT 

In the month since the Panel’s last report, the second half of the 

TARP funds have been released, a new Administration has taken 

office, and a new Treasury Secretary, Timothy Geithner, has been 

sworn in. Since the new Administration began, Treasury has also 

extended additional assistance to financial institutions and announced new rules governing the conduct of recipients of TARP 

money.26 The Panel will continue to evaluate the terms and conditions of the new programs and will provide updates on the effectiveness of these efforts. 

• Second Tranche of TARP Funds Released. On January 15, 

2009, Congress voted to approve the release of the second $350 billion available from the October 2008 Emergency Economic Stabilization Act.27 As such, Treasury now has access to the full $700 

billion spending authority contemplated in EESA.28

• New Transparency Initiatives. Treasury has announced new 

regulations governing disclosure and mitigation of conflicts of interest in its TARP contracting.29 In addition, Treasury has made public assurances that it will ‘‘publish a detailed description’’ of its criteria and process for selecting TARP recipients.30 Treasury has 

also issued new guidelines that restrict contact between lobbyists 

and the Treasury officials who decide how to allocate TARP 

funds.31 Finally, Treasury has announced a new policy of publishing investment contracts within five to ten business days of all future TARP transactions,32 in addition to publishing additional information about past TARP transactions with financial institutions.33

• Changing TARP Strategy. Secretary Geithner has indicated 

that future TARP strategy will incorporate additional conditions 

and an emphasis on homeowner assistance and unfreezing credit 

markets. New TARP funding will have ‘‘tough conditions to protect 

the taxpayer and the necessary transparency to allow the American 

people to see how and where their money is being spent and the 

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34Senate Committee on Finance, Testimony of Timothy F. Geithner, Hearing To Consider the 

Nomination of Timothy F. Geithner To Be Secretary of the Treasury, 111th Cong. (Jan. 21, 

2009) (online at finance.senate.gov/hearings/testimony/2009test/012109tgtest.pdf). 35 Id. See also Rebecca Christie, Summers Says TARP To Be ‘Very Different’ Under Obama, 

Bloomberg (Jan. 25, 2009) (online at www.bloomberg.com/apps/news?pid= 

20601068&sid=ayehJsUpnfGg); Andrew Ross Sorkin, Geithner Says TARP Would Force Banks 

To Lend More (Jan. 23, 2009) (online at dealbook.blogs.nytimes.com/2009/01/23/geithner-saystarp-will-force-banks-to-lend-more/). 36 U.S. Department of the Treasury, TARP Capital Purchase Program (Jan. 14, 2009) (online 

at www.treas.gov/initiatives/eesa/docs/scorp-term-sheet.pdf). 37 U.S. Department of the Treasury, Treasury Issues Additional Executive Compensation 

Rules Under TARP (Jan. 16, 2009) (online at www.treas.gov/press/releases/hp1364.htm). 38 U.S. Department of the Treasury, Treasury Announces New Restrictions On Executive Compensation (Feb. 4, 2009) (online at http://www.ustreas.gov/press/releases/tg15.htm). 39 U.S. Department of the Treasury, Treasury Announces TARP Investments in Chrysler Financial (Jan. 16, 2009) (online at www.treas.gov/press/releases/hp1362.htm); U.S. Department of 

the Treasury, Treasury Announces TARP Investment in GMAC (Dec. 29, 2008) (online at 

www.treasury.gov/press/releases/hp1335.htm); U.S. Department of the Treasury, Indicative 

Summary of Terms for Secured Term Loan Facility (Dec. 19, 2008) (Chrysler Term Sheet); U.S. 

Department of the Treasury, Indicative Summary of Terms for Secured Term Loan Facility (Dec. 

19, 2008) (GM Term Sheet). 

results those investments are delivering.’’ 34 Furthermore, Treasury 

will increase its emphasis on preventing foreclosures and freeing 

up credit for homeowners and small businesses.35

• Term Sheet for CPP investments in Subchapter S-Corporations. On January 14, 2009, Treasury released a Summary of 

Terms under which S-Corporation financial institutions—generally 

small, private banks—can apply for TARP capital infusions.36

Under these terms, Treasury limits dividend repayments and receives 7.7 percent interest for the first five years and then 13.8 percent interest for the next 25 years. In exchange for capital, Treasury will receive debt senior to any stock in the company. 

• Additional Executive Compensation Rules. On January 16, 

2009, Treasury issued interim final rules for reporting and recordkeeping requirements under the executive compensation standards 

of the CPP.37 Treasury originally published executive compensation 

standards for CPP in October 2008. The new rules require the 

CEOs of firms receiving funds under CPP to certify to TARP’s 

Chief Compliance Officer on a regular basis that the institutions 

are complying with the applicable TARP rules governing executive 

compensation. Financial institutions are also required to maintain 

records to substantiate these certifications for at least six years following each certification and provide these records to the TARP 

Chief Compliance Officer upon request. Treasury made similar revisions to the executive compensation guidelines applicable to financial institutions participating in the SSFI Program. On February 4, 2009, Treasury issued stringent new guidelines governing 

executive compensation for future TARP recipients.38

• Investment in Chrysler Financial. In addition to the $22.4 billion already loaned out as part of TARP’s Automotive Industry Financing Program (AIFP) in December 2008, on January 16, 2009, 

Treasury announced a plan to make a $1.5 billion loan under the 

AIFP to a special purpose entity created by Chrysler Financial.39

The money will provide liquidity to Chrysler Financial’s program to 

extend new consumer auto loans to Chrysler customers. The fiveyear loan will require Chrysler to pay Treasury interest equal to 

one month LIBOR plus 100 basis points in the first year, and then 

one month LIBOR plus 150 basis points in years two to five. The 

loan will be secured by a senior secured interest in a pool of newly 

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40 U.S. Department of the Treasury, U.S. Government Finalizes Terms of Citi Guarantee Announced in November (Jan. 16, 2009) (online at www.treas.gov/press/releases/hp1358.htm). 41 U.S. Department of the Treasury, Summary of Terms, (Nov. 23, 2008) (online at 

www.treasury.gov/press/releases/reports/cititermsheetl112308.pdf). 42 U.S. Department of the Treasury, Treasury, Federal Reserve and the FDIC Provide Assistance to Bank of America (Jan. 16, 2009) (online at www.treas.gov/press/releases/hp1356.htm). 

originated consumer auto loans, and Chrysler Holding will serve as 

a guarantor for certain covenants of Chrysler Financial. 

• Finalized Terms of Citigroup Guarantee Agreement. On January 16, 2009, Treasury, in conjunction with the Federal Reserve 

and the Federal Deposit Insurance Corporation (FDIC), finalized 

the terms of a guarantee agreement with Citigroup.40 The guarantee agreement was initially announced by Treasury on November 

23, 2008. The agreement guarantees Citigroup against unusually 

large losses on an asset pool of $301 billion of loans and securities 

backed by residential and commercial real estate assets, which will 

remain on Citigroup’s balance sheet. 

The guarantee is in place for ten years for residential assets and 

five years for nonresidential assets.41 Should there be losses on the 

pool, Citigroup will be responsible for up to the first $29 billion. 

Any additional losses will be split between Citigroup and the government, with Citigroup bearing 10 percent of the losses and the 

government bearing 90 percent. 

• Additional Assistance to Bank of America. On January 16, 

2009, Treasury announced an agreement to provide Bank of America with a package of assistance in the form of guarantees, liquidity 

access, and capital under the TARP.42 Treasury and FDIC agreed 

to provide Bank of America protection against the possibility of unusually large losses on an asset pool of approximately $118 billion 

primarily composed of securities backed by residential and commercial real estate loans. The majority of these assets, which will remain on Bank of America’s balance sheet, were acquired as the result of its merger with Merrill Lynch. 

In addition, Treasury announced it will invest $20 billion in 

Bank of America under the TIP. TIP was created to maintain investor confidence in financial institutions at risk of a loss due to 

market volatility. In exchange for its investment, Bank of America 

will issue Treasury preferred shares with an 8 percent dividend. 

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OVERSIGHT ACTIVITIES 

The Congressional Oversight Panel was established as part of 

EESA and formed on November 26, 2008. Since its establishment, 

the Panel has issued two oversight reports, as well as its Special 

Report on Regulatory Reform, which was issued on January 29, 

2009. 

Since the release of the Panel’s January oversight report, the following developments pertaining to the Panel’s oversight of the 

TARP took place: 

• In late January, the Panel received reports from experts it engaged to estimate the fair market value of the securities purchased 

by Treasury in its eight largest purchases under the CPP, and its 

investments in AIG and Citigroup outside the CPP. This report includes a discussion of their findings above and a more detailed 

summary in Appendix III and on the Panel’s website. 

• On January 28, 2009, Elizabeth Warren, Chair of the Panel, 

sent a letter to newly sworn-in Treasury Secretary Timothy Geithner requesting more complete answers to the questions the Panel 

posed regarding Treasury’s TARP strategy and implementation. 

• The Panel has received and reviewed more than 3,500 messages with stories, comments, or suggestions through 

cop.senate.gov. 

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FUTURE OVERSIGHT ACTIVITIES 

PUBLIC HEARINGS

Following two successful public hearings, one in Clark County, 

Nevada in December on the housing crisis and one in Washington, 

DC in January on regulatory reform, the Panel will continue to 

hold hearings to shine light on the causes of the financial crisis, 

the administration of TARP, and the anxieties and challenges of ordinary Americans. 

UPCOMING REPORTS

In March 2009, the Panel will release its fourth TARP oversight 

report. The EESA aimed to stabilize the economy both through direct support of financial institutions and through encouraging foreclosure mitigation efforts. In the March report, the Panel will examine existing foreclosure mitigation efforts. The report will consider key areas including: the need for more detailed and comprehensive information about mortgage loan performance and loss 

mitigation efforts; the primary drivers in loan default, including affordability, negative equity and mortgage fraud; impediments to 

successful foreclosure mitigation efforts; and existing foreclosure 

programs and alternative approaches. 

That report will also update the public on the status of its TARP 

oversight activities. The Panel will continue to release oversight reports every 30 days. 

The Panel notes with great interest the release by the Government Accountability Office (GAO), on January 30, 2009, of a report 

titled Troubled Asset Relief Program: Status of Effort to Address 

Transparency and Accountability Issues. Independently agreeing 

with the Panel’s unresolved concerns, GAO highlighted Treasury’s 

continued need for action both to improve transparency and accountability in the TARP and to articulate and communicate a coherent overall strategy. The Panel intends to pursue these issues 

closely and to address them in future reports. 

The Panel also notes with approval the efforts of TARP Special 

Inspector General (SIG) Neil Barofsky to prompt TARP recipients 

to account for their use of taxpayer funds and satisfy the conditions 

and reporting requirements already in place. The Panel strongly 

calls on Treasury and the Office of Management and Budget to aid, 

rather than hinder, SIG Barofsky’s investigation. 

PUBLIC PARTICIPATION AND COMMENT PROCESS

The Panel encourages members of the public to visit its website 

at cop.senate.gov. The website provides information about the 

Panel and the text of the Panel’s reports. In addition, concerned 

citizens can share their stories, concerns, and suggestions with the 

Panel through the website’s comment feature. To date, the Panel 

has received more than 3,500 comments, and the Panel looks forward to hearing more from the American people. By engaging in 

this dialogue, the Panel aims to enhance the quality of its ideas 

and advocacy. 

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ABOUT THE CONGRESSIONAL OVERSIGHT PANEL 

In response to the escalating crisis, on October 3, 2008, Congress 

provided the U.S. Department of the Treasury with the authority 

to spend $700 billion to stabilize the U.S. economy, preserve home 

ownership, and promote economic growth. Congress created the Office of Financial Stabilization (OFS) within Treasury to implement 

a Troubled Asset Relief Program. At the same time, Congress created the Congressional Oversight Panel to ‘‘review the current 

state of financial markets and the regulatory system.’’ The Panel 

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, the Panel 

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 interests of the American people. In addition, Congress has instructed the Panel 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, 2008, 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 Panel. With the appointment on November 19 

of Congressman Jeb Hensarling to the Panel by House Minority 

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

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

chair. On December 16, 2008, Senate Minority Leader Mitch 

McConnell named Senator John E. Sununu to the Panel, completing the Panel’s membership. 

In the production of this report, the Panel owes special thanks 

to our Advisory Committee of Adam M. Blumenthal, Professor William N. Goetzmann, and Professor Deborah J. Lucas, to Tim 

Massad and Catherina Celosse for their legal analysis, as well as 

to the hardworking staff at Duff & Phelps. The Panel also thanks 

Ting Yeh for his careful research support on this report. 

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APPENDIX I: LETTER FROM MR. LAWRENCE SUMMERS 

TO CONGRESSIONAL LEADERSHIP, DATED JANUARY 

15, 2009 

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APPENDIX II: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED 

JANUARY 28, 2009 

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1The investments chosen represent the largest investments made in non-automotive financial 

institutions other than the second and third investments in Bank of America (of $10 billion and 

$20 billion) which occurred in January 2009, too recently to be included. 

APPENDIX III: REPORT OF THE ADVISORY COMMITTEE 

ON FINANCE AND VALUATION TO THE CONGRESSIONAL OVERSIGHT PANEL 

Report to Congressional Oversight Panel on the Emergency 

Economic Stablization Act of 2008 

Adam M. Blumenthal, Managing General Partner, Blue Wolf 

Capital Management. 

William N. Goetzmann, Edwin J. Beinecke, Professor of Finance 

and Management Studies and Director of the International Center 

for Finance at the Yale School of Management, and Research Associate of the National Bureau of Economic Research. 

Deborah J. Lucas, Donald C. Clarke, HSBC Professor of Consumer Finance at the Kellogg School of Management at Northwestern University, and Research Associate of the National Bureau 

of Economic Research. 

SUMMARY

A key question posed by the Congressional Oversight Panel for 

the Emergency Economic Stabilization Act of 2008 (‘‘EESA’’) is 

whether or not the investments in financial institutions made by 

the U.S. Department of the Treasury (‘‘Treasury’’) under the Troubled Asset Relief Program (‘‘TARP’’) represent a fair deal to taxpayers. To provide insight into that question, we compared the 

price paid by Treasury for these securities with the values implied 

by the open market for some of the largest investments made 

under the TARP.1

SUMMARY OF ESTIMATED VALUE CONCLUSIONS 

[Dollars in billions] 

Purchase program participant Valuation 

date 

Face 

value 

Total estimated value 

Value 

Subsidy 

Percent $ 

Capital Purchase Program: 

Bank of America Corporation ....................................... 10/14/08 $15.0 $12.5 17 $2.6 

Citigroup, Inc ............................................................... 10/14/08 25.0 15.5 38 9.5 

JPMorgan Chase & Co ................................................. 10/14/08 25.0 20.6 18 4.4 

Morgan Stanley ............................................................ 10/14/08 10.0 5.8 42 4.2 

The Goldman Sachs Group, Inc ................................... 10/14/08 10.0 7.5 25 2.5 

The PNC Financial Services Group .............................. 10/24/08 7.6 5.5 27 2.1 

U.S. Bancorp ................................................................ 11/03/08 6.6 6.3 5 0.3 

Wells Fargo & Company ............................................... 10/14/08 25.0 23.2 7 1.8 

Subtotal ............................................................... 124.2 96.9 22 27.3 

311 Other Transactions* ..................................... 70.0 54.6 22 15.4 

SSFI & TIP: 

American International Group, Inc ............................... 11/10/08 40.0 14.8 63 25.2 

Citigroup, Inc ............................................................... 11/24/08 20.0 10.0 50 10.0 

Subtotal ............................................................... 60.0 24.8 59 35.2 

Total ........................................................... 254.2 176.2 31 78.0 

* Extrapolates 22 subsidy rate from 8 studied CPP investments. See discussion below. 

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2Treasury’s subsequent investments under the CPP were to institutions that differed from 

those analyzed by Duff & Phelps in several important respects such as size and scope of activities, and the transactions took place under different market conditions. In extrapolating the 

costs, we did not attempt to evaluate the effect of these differences. 

• Of the $184 billion of TARP funds analyzed, we estimate the 

securities received would have a fair market value of approximately $122 billion when Treasury announced its agreement to buy 

them. 

• The eight purchases made under the TARP Capital Purchase 

Program, aimed at healthier banks, had a subsidy rate to those 

banks of 22%. The securities subsequently purchased from AIG and 

Citigroup under the Systemically Significant Failing Institutions 

Program and the Targeted Investment Program had a significantly 

higher subsidy rate of 59%. 

• If one takes this discount for the investments made under the 

CPP and applies it to the entire $194 billion committed to capital 

purchases in financial institutions participating in that program, 

the total subsidy under the CPP would be approximately $43 billion.2 When added to the $35 billion discount on $60 billion invested in AIG and in Citigroup outside of the CPP, we estimate 

that of the $254 billion invested to date in securities of non-automotive financial institutions, and exclusive of the most recent Bank 

of America investment, the amount that represents a subsidy to 

those institutions is $78 billion. 

A value was estimated for each security as of the time immediately following the announcement by Treasury of its purchase. 

This valuation approach takes into account investors’ perceptions 

about how the TARP investment itself, and other government programs announced concurrently, affected value. 

Whether the subsidy provided by Treasury to financial institutions represents a fair deal for the taxpayers is a question for policy debate and judgment, not one that can be answered in a purely 

quantitative way. The Treasury Department has pointed out that 

the loss of wealth and diminution in asset values that would accompany failure of one or more major financial institutions could 

represent a far larger sum. 

A substantial portion of the subsidy under the CPP program can 

be attributed to the decision by Treasury to provide capital on the 

same terms to all participants. Treasury chose to offer ‘‘one size fits 

all’’ pricing in order to encourage all institutions to participate, and 

in so doing disregarded apparent differences in their financial condition. A consequence is that Treasury effectively offered weaker 

participants greater subsidies than it offered to stronger participants. For example, the analysis in the report suggests that Treasury received securities from Wells Fargo worth an estimated $23.2 

billion as of the valuation date for its investment of $25.0 billion, 

or 93% of face value, while from Morgan Stanley, it received securities worth an estimated $5.8 billion as of the valuation date for its 

investment of $10.0 billion, or 58% of face value. 

The TIP and SSFI programs were intended to assist institutions 

under more stress than those participating in the CPP. Under 

these programs AIG and Citigroup received funds on terms that 

were only slightly more stringent than those offered to CPP participants, and the resulting subsidy rates were much higher in these 

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two transactions. It is worth noting that at the time of these two 

investments, there were numerous government commitments to 

these institutions; we focused only on the value of the TARP investments. 

By applying the same methodology to three major investments by 

private investors in financial institutions which occurred in the 

same time frame as the Treasury investments (the $5 billion investment by Berkshire Hathaway in The Goldman Sachs Group, 

the $9 billion investment by Mitsubishi in Morgan Stanley and the 

£7 billion investment by Abu Dhabi and Qatar Holding in Barclays 

plc), it was estimated that the private investors received securities 

with a fair market value as of the valuation dates of at least as 

much as they invested, and in some cases worth substantially 

more. (Berkshire Hathaway received Goldman Sachs securities 

with a fair market value of 110% of the amount paid, Abu Dhabi 

and Qatar Holding received securities with a fair market value of 

123% of the amount paid, and Mitsubishi received securities with 

a fair market value of 91% of the amount paid.) 

Such comparisons are offered only as a benchmark. The question 

of whether Treasury could have negotiated investments that had 

comparable pricing and satisfied its public policy objectives at the 

same time is not one that the report can answer. 

A. Introduction 

The U.S. Department of the Treasury (‘‘Treasury’’) used almost all of the $350 billion of taxpayer dollars provided to it to in the 

first installment of the the Troubled Asset Relief Program (‘‘TARP’’) 

created by the Emergency Economic Stabilization Act of 2008 

(‘‘EESA’’). Of this amount, Treasury has spent, or committed to 

spend, approximately $310 billion to purchase preferred stock and 

warrants of financial institutions. 

Most of these purchases were made pursuant to a program developed by Treasury called the Capital Purchase Program (‘‘CPP’’). In 

addition, outside of the CPP, Treasury had invested an additional 

$60 billion in two financial institutions, Citigroup and AIG, 

through other programs as of the date of our study (an additional 

investment in Bank of America has since been announced, but we 

did not review it). The CPP, announced on October 14, 2008, was 

implemented through a series of Treasury cash investments in exchange for preferred shares and warrants from a broad range of financial companies. All participating institutions obtained essentially the same terms on the preferred shares (a 5% dividend, increasing to 9% after five years) and warrants to purchase common 

stock equal to 15% of the face value of the preferred investment, 

with the companies having the right to cancel half of these warrants under certain circumstances. Terms differed somewhat for 

non-publicly traded institutions and for the investments outside of 

the CPP. 

Treasury allocated $250 billion of the funds under EESA to CPP. 

To date, it has spent or committed to spend $194 billion of that 

amount to purchase preferred stock and warrants of 319 financial 

institutions under this program. 

In this report, we focus on the value of Treasury’s investments 

in a set of the largest participants in the CPP program, and the 

value of Treasury’s investments in Citigroup and AIG made under 

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related programs. In order to provide information helpful in assessing whether the public is receiving a fair deal under the TARP program, we asked two questions in particular: (i) what was the fair 

market value of the preferred stock and warrants Treasury received in exchange for these cash infusions to financial institutions 

and (ii) how do these values compare to what was received in several privately negotiated transactions, including the earlier investment made by Warren Buffett’s Berkshire Hathaway Inc. (‘‘Berkshire Hathaway’’) in The Goldman Sachs Group (‘‘Goldman’’) and 

the investment made by Mitsubishi UFJ Financial Group 

(‘‘Mitsubishi’’) in Morgan Stanley, two of the institutions that received TARP funds, and by Qatar Holdings and other middle eastern entities in Barclays plc (‘‘Barclays’’) at the end of October 2008. 

To answer these questions, on the Panel’s behalf, we designed 

the scope and methodology for a valuation project and selected Duff 

& Phelps (‘‘D&P’’), one of the largest valuation firms in the world, 

to conduct a rigorous valuation study implementing that plan. D&P 

frequently conducts arm’s-length, independent valuations of securities like the TARP investments for which no active trading market 

exists. We directed D&P to provide an analysis of the likely fair 

market value of the securities received by Treasury in the ten largest investments made under the TARP. Given the particular details of Treasury’s investments and the desire to comprehensively 

review how they relate to publicly traded securities as well as to 

comparable private investments, we judged that the professional 

experience and judgment of a major firm such as D&P would most 

effectively interpret market information and yield reliable, quantitative answers. In the sections that follow, we describe the scope, 

methodology and conditions of the D&P analysis, and summarize 

their basic findings. We then apply the estimates made by D&P to 

the question posed by the Panel. 

B. Process 

Immediately after the Congressional Oversight Panel was 

formed, the Panel created an Advisory Committee on Finance and 

Valuation to create a valuation study. The members of the Advisory Committee are: Adam M. Blumenthal, Managing General 

Partner of Blue Wolf Capital Management and Former First Deputy Comptroller of the City of New York; Professor William N. 

Goetzmann, Edwin J. Beinecke Professor of Finance and Management Studies and Director of the International Center for Finance 

at the Yale School of Management, and Research Associate of the 

National Bureau of Economic Research; and Professor Deborah J. 

Lucas, Donald C. Clarke HSBC Professor of Consumer Finance at 

the Kellogg School of Management at Northwestern University, 

and Research Associate of the National Bureau of Economic Research, and the former Chief Economist of the Congressional Budget Office. 

Members of the Advisory Committee created a detailed scope for 

the valuation project, and identified and interviewed or had discussions with five firms who were considered as candidates to perform 

the valuation work. The Advisory Committee recommended the selection of Duff & Phelps, LLC (D&P), one of the largest valuation 

firms in the world, based on a number of factors. D&P and the Advisory Committee then designed a methodology to be used to implewwoods2 on PROD1PC60 with HEARING

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3The additional $20 billion investment in Bank of America on January 16, 2009 occurred too 

late to be included in the valuation report. 

ment the project design. The Advisory Committee periodically reviewed with D&P their application of the valuation methodologies 

and the assumptions underlying them. 

C. Scope 

The valuation project was designed to provide an estimate of the 

fair market value of the securities purchased by Treasury in its 

eight largest purchases under the CPP, and its investments in AIG 

and Citigroup outside the CPP. The Panel focused on these investments because they were among the largest commitments made 

under the TARP.3 Collectively, they represent a total expenditure 

of $184 billion, or 53% of the first $350 billion authorized by Congress for the TARP. 

The scope called for D&P to take into account in its analysis only 

information that was publicly available. They were asked what an 

arm’s-length investor would pay for the securities. This presupposed that an investor would not have access to material nonpublic information, but would have comprehensive access to public 

filings, analyst reports, and trading information on all of the publicly traded securities issued by the companies. Importantly, by 

basing estimates on the market price immediately following the announcement by Treasury of a purchase, the valuation takes into account investors’ perceptions about how the intervention itself affects value going forward. 

The scope also called for the firm to take into account major privately negotiated investments that occurred around the same time 

as the TARP investments under consideration, in particular, investments by Warren Buffet’s Berkshire Hathaway in Goldman 

Sachs, by Mitsubishi in Morgan Stanley, and by Qatar Holding and 

Abu Dhabi in Barclays, all of which occurred in September and October of 2008. 

The scope specifically excludes any effort to place a value on the 

policy objectives of Treasury in making these investments, apart 

from those reflected directly in security prices. It also excludes consideration of any indirect effects of the purchases on other governmental or private interests. For instance, interdependencies between institutions may mean that helping one enhances the value 

of others, as was thought to be important with AIG. Those objectives, as well as the broader implications for the financial system 

and the economy, obviously must be considered in the policy debate 

on whether the TARP investments were a good use of public funds, 

but they are outside the scope of the valuation analysis, which addresses only the subsidies to the institutions as measured by the 

difference between the prices paid for the securities and estimated 

fair market values. 

We do not attempt to value other broad financial interventions 

which Treasury, the Federal Reserve Bank, the FDIC, or other government affiliated entities made in the financial markets, in some 

cases simultaneously or in close proximity to the TARP investments. We also do not value other government investments in the 

same companies. For example, at the time of the TARP investment, 

Treasury already owned 79.9% of AIG, as the result of a prior loan 

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to AIG by the Federal Reserve Bank of New York, and the proceeds 

of the AIG loan were used to repay part of the Fed’s loan to AIG. 

In this case, we valued the TARP securities, not the Fed’s loan, or 

the government’s pre-existing equity interest in AIG. 

The scope includes only the value of the securities at the time 

of the announcement of the investment. As such, it does not consider their current market value, which may be considerably different than the values reported. 

Finally, the scope provides for an estimate of the subsidy received by each institution as a whole, but it does not cover how the 

subsidy will be divided among different classes of stakeholders 

(e.g., stock holders, bond holders, employees, suppliers and customers). 

D. Methodology 

The methodology used in the valuation report is discussed below 

and is described at much greater length in D&P’s report. The Advisory Committee and D&P developed a general approach, which was 

to evaluate the preferred shares and the warrants obtained by 

Treasury separately, company by company. Recognizing that any 

single valuation approach might provide a limited perspective on 

the factors influencing the value of the securities, the Advisory 

Committee asked D&P to consider multiple methods that offered a 

means to cross-validate their estimates. All of these approaches 

rely on some basic assumptions, the most important of which is 

that the prices for securities similar to those issued under the 

TARP were trading in the capital markets at fair values, which as 

defined by D&P is ‘‘the price at which they would change hands between a willing buyer and a willing seller when neither is acting 

under compulsion and when both have a reasonable knowledge of 

the relevant facts.’’ Despite the turmoil in the capital markets, the 

Advisory Committee believes, and D&P confirmed through analysis, that there was sufficient liquidity and market volume in the 

trading of securities at that time to rely on market pricing for analysis. D&P was not asked to consider whether these market prices 

were consistent with other notions of fundamental economic value. 

D&P’s results are provided as a range of values. The midpoints of 

those ranges were selected as representative values for this report. 

E. Preferred stock valuation 

Preferred shares are legally a type of equity, but they have several characteristics that are similar to bonds. They are senior in 

priority to the common shares of a company, but junior to the debt 

of the firm. The preferred shares issued under CPP are non-voting 

securities which provide for a 5% dividend for a five-year period 

and a 9% dividend in perpetuity thereafter. A company can choose 

not to pay a preferred dividend without declaring bankruptcy, but 

the dividends on the preferred shares issued by bank holding companies under CPP are cumulative, meaning that any missed dividends must be paid in full before common stockholders can receive 

dividends. The preferred shares are callable under certain conditions described in full in D&P’s report. 

As a check on the robustness of the estimates, D&P used several 

methodologies to value the preferred stock issued in the investments: two based on the market values of different types of comwwoods2 on PROD1PC60 with HEARING

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parable publicly traded securities and one using a contingent 

claims analysis approach. 

(i) Discounted Cash Flow Analysis Using Market Yields 

(‘‘Yield-Based Discounted Cash Flow Approach’’) 

This approach involves estimating the future expected cash flows 

(dividend payments and return of principal) on the preferred securities, and discounting those projected cash flows at a market yield 

derived from the prices of comparable securities. Finding the appropriate discount rate involved analyzing the yields of the publicly 

traded preferred stock and debt securities of each institution based 

on transaction prices in the days following Treasury’s announcement of the investments. In those instances where sufficiently liquid preferred securities were available for comparison, D&P used 

them as the primary basis for determining a discount rate. In either case, D&P then systematically adjusted yields to take into account the differences between the terms of the CPP preferred 

shares and the terms of the publicly traded securities. Adjustments 

were made for the call options, the cumulative dividend, and other 

factors. 

(ii) Discounted Cash Flow Analysis Using Risk Adjusted Survival Probabilities Derived from CDS Spreads (‘‘CDSBased Discounted Cash Flow Approach’’) 

Like the yield-based method, this approach is based on future 

contractual cash flows adjusted for expected losses, a risk premium, 

and the time value of money. In this case, the adjustments are 

based on information about default and the price of credit risk implied by the premiums charged on credit default swaps (‘‘CDS’’). 

Values estimated in this manner were compared to those derived 

from the Yield-Based Discounted Cash Flow Approach. An advantage of the CDS prices is that they are generally determined in a 

more liquid market, and thus they may better capture the market 

assessment of risk. However, CDS prices reflect the market’s required return on debt securities, not on preferred shares, and thus 

valuation requires an adjustment for the differences between the 

two types of securities. Because of the difficulty of determining the 

appropriate adjustment, this method was used primarily as a check 

on whether the other two approaches were generating reasonable 

estimates of value. 

(iii) Contingent Claims Analysis 

This methodology is distinctly different from the yield-based approaches. It relies on a probabilistic model of how the firm’s asset 

value, and therefore, its ability to pay claimants, evolves over time. 

The model is calibrated using data on stock prices and their volatility, and on the book value of debt. Preferred shares are assumed 

to receive dividend payments as long as the solvency condition is 

satisfied, but to recover little or nothing in bankruptcy. Default occurs when assets drop below a trigger point based on debt outstanding. The value of the preferred shares is based on the discounted present value of dividends and any return of principal, 

averaged over simulations of a large number of possible time paths 

of a firm’s asset value. 

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This mathematical framework is used in the private sector for 

credit risk modeling and has also been used in a government context for the valuation of government guarantees. This approach allows for sensitivity analysis of the quantitative importance of various assumptions. The results of the contingent claims analysis are 

consistent with the yield-based approaches, and in addition, make 

apparent the sensitivity of estimated value to assumptions about 

the volatility of the firm’s underlying assets and the events that 

trigger bankruptcy. 

F. Warrant valuation 

A warrant confers the right to acquire a share of stock from a 

company within a specified time period for a predetermined price, 

called the exercise price. Warrants allow an investor to participate 

in potential stock price increases since they generate a gain whenever share prices rise above the exercise price of the warrant. 

Treasury required each publicly held institution receiving an investment to issue warrants at an exercise price equal to the average trading price for the 20 days prior to the day of Treasury’s approval of the institution’s participation in the CPP. The number of 

common shares to be acquired was set at a number which, when 

multiplied by the exercise price, was equal to 15% of the total 

amount of Treasury’s investment in the preferred shares. Thus, if 

Treasury invested $10 billion in the institution, Treasury would receive warrants for $1.5 billion of common stock. If the exercise 

price of the warrants was $15 per share, then Treasury would receive warrants for 100 million shares. The warrants are subject to 

a reduction feature whereby half of the warrants may be cancelled 

by the issuing institution if it meets certain conditions involving 

sale of common stock to investors in private sector transactions 

prior to year-end 2009, a feature which should reduce the upside 

to Treasury. These warrants have a value independent of the preferred shares themselves. D&P valued the warrants using a widely 

used option pricing methodology, a Monte Carlo model, which allowed them to take into account the conditions of the warrant contract. 

Warrant values depend on a number of inputs, including the current stock price, the exercise price, the risk free rate of return, the 

expected future volatility of the stock price, the dividend yield on 

common stock, and the number of warrants issued in relation to 

the outstanding shares of stock and other features specific to the 

TARP offerings. The D&P valuation used the stock price of the 

company on the chosen date of valuation, a forward-looking set of 

short-term discount rates based upon the current Treasury yield 

curve, an estimation of volatility drawn from historical stock price 

fluctuations, as well as a comparison to volatilities implied by prevailing market prices of long-dated equity options and the appropriate ratio of exercised warrants to outstanding shares. 

In most instances, the value of the warrants was small relative 

to the value of the preferred stock itself. 

G. Reduced marketability discount 

Under all of the methodologies, and for both preferred stocks and 

warrants, D&P applied a ‘‘reduced marketability discount factor’’ to 

reflect the fact that the large size of Treasury positions made them 

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potentially costly to liquidate and hence less valuable. Based on 

academic and industry studies, they estimated this factor to be between 5% and 10% for the preferred stocks and between 5% and 

20% for the warrants. 

H. Comparable transactions 

Utilizing similar methodologies, D&P also analyzed three transactions which were concluded around the time of the TARP investments: the $5 billion Berkshire Hathaway investment in Goldman 

Sachs announced on September 23, 2008 and closed on October 1, 

2008; the $9 billion Mitsubishi investment in Morgan Stanley, 

which was announced on September 22, 2008, amended, and then 

closed on October 13, 2008; and the £7 billion investment by Abu 

Dhabi and Qatar Holding in Barclays plc which was announced on 

October 31, 2008 and completed on November 27, 2008. D&P estimated that Berkshire Hathaway received securities with a fair 

market value between 108% and 112% of the actual amount paid, 

based on prevailing market prices for similar securities; that 

Mitsubishi received securities with a fair market value between 

88% to 94% of the amount paid; and that Qatar Holdings and Abu 

Dhabi received securities with a fair market value of between 122% 

to 125% of the amount paid. 

Stated differently, Berkshire Hathaway, Qatar Holding and Abu 

Dhabi paid less for their securities than what one would expect 

other investors to pay; all of the private investors received relatively more valuable securities for their investments than did 

Treasury. 

D&P concluded that this broad range of outcomes reflects unique 

circumstances at individual financial institutions, and in some 

cases contractual terms that severely limited marketability. In 

addition, there may also be some value accruing from Warren Buffett’s reputation as a canny investor which enabled him sufficient 

leverage to purchase securities in Goldman Sachs at a significant 

discount to the prevailing market value of similar securities. Because of such special circumstances, they concluded that the individual transactions should not be taken as a benchmark for valuation of the TARP securities but rather as an indicator of the potential for investors to extract price concessions below prevailing 

market values in certain circumstances. 

The issue of whether the government could have obtained similar 

discounts from prevailing market values on similar securities remains a question for Treasury. The question also remains of whether, even if it could have negotiated a transaction benchmarked to 

these transactions, such a deal would have met policy objectives, 

but this question is outside of the scope of the valuation report. As 

a result, the D&P analysis uses public market trading data that assumes no positive strategic advantage that might accrue to a large 

shareholder. The analysis of comparable transactions does, however, provide information about the relative discounts that accrued 

to some other major private actors so that the Panel may understand their magnitude. 

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I. Conclusions of the valuation analysis 

The table below lists the TARP investments reviewed in the 

valuation showing institution, amount, date announced and the 

Treasury program under which the investment was made. 

[Dollars in billions] 

Purchase program participant Date Amount 

Capital Purchase Program: 

Bank of America Corporation ..................................................................................................... 10/14/08 $15.0 

Citigroup, Inc .............................................................................................................................. 10/14/08 25.0 

JPMorgan Chase & Co ................................................................................................................ 10/14/08 25.0 

Morgan Stanley ........................................................................................................................... 10/14/08 10.0 

The Goldman Sachs Group, Inc .................................................................................................. 10/14/08 10.0 

The PNC Financial Services Group ............................................................................................. 10/24/08 7.6 

U.S. Bancorp ............................................................................................................................... 11/03/08 6.6 

Wells Fargo & Company ............................................................................................................. 10/14/08 25.0 

Subtotal ............................................................................................................................. .................... 124.2 

SSFI & TIP: 

American International Group, Inc ............................................................................................. 11/10/08 40.0 

Citigroup, Inc .............................................................................................................................. 11/24/08 20.0 

Subtotal ............................................................................................................................. .................... 60.0 

Total .......................................................................................................................... .................... 184.2 

The next table shows D&P’s estimates of the fair market value 

of each of the investments, in each case as of the respective dates 

the investments were announced. Taken as a whole, D&P concluded that the fair market value of the investments as of such 

dates, in the aggregate, was between $112 and $132 billion, or between 61% and 71% of the amount Treasury paid for them. Thus, 

of the total $184 billion invested in these transactions, between $53 

and $73 billion represented overpayment relative to the estimated 

fair market value of the securities. 

(a) In the case of two of the eight largest investments under the 

CPP, U.S. Bancorp and Wells Fargo & Company, which the market 

deemed least risky, and for which Treasury paid $31.6 billion in 

the aggregate, D&P concluded that the fair market value of the investments was at or somewhat below the amount paid for them by 

Treasury, with a range of 87% to 99% of Treasury’s cost. That is, 

D&P believes that a third party buyer would have paid between 

$27.6 billion and $31.3 billion for securities for which Treasury 

paid $31.6 billion. 

(b) In the case of the other six CPP investments, in Bank of 

America, JP Morgan Chase & Co., Goldman Sachs, the PNC Financial Services Group, Citigroup, and Morgan Stanley, which the 

market deemed riskier, D&P concluded that the fair market value 

of the investments was significantly below the price paid by Treasury, with a value range of 47% to 68% of face for Morgan Stanley, 

which bore the greatest discount, to 77% to 89% of face at Bank 

of America. In the aggregate for these six investments, for which 

Treasury paid $92.6 billion, D&P estimated a value range of $61.6 

to $73.2 billion. 

(c) In the case of the $60 billion in investments outside the CPP 

program, consisting of the November investments in AIG under the 

SSFI program and in Citigroup under the TIP, D&P concluded that 

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the government received value equal to between $22.5 and $27.1 

billion, or 37% to 45% of the amount invested. 

SUMMARY OF ESTIMATED VALUE CONCLUSIONS 

[Dollars in billions. All values are after applicable discounts due to reduced marketability] 

Purchase program participant Valuation 

date 

Face 

value Midpoint 

Total estimated 

value*

Duff & Phelps value range 

Discount to face 

Values Percent of face 

Percent $ Low High Low High 

Capital Purchase Program: 

Bank of America Corporation ................................ 10/14/08 $15.0 12.5 17 $2.6 $11.6 $13.3 77 89 

Citigroup, Inc ..................... 10/14/08 25.0 15.5 38 9.5 14.2 16.8 57 67 

JPMorgan Chase & Co ....... 10/14/08 25.0 20.6 18 4.4 19.0 22.2 76 89 

Morgan Stanley .................. 10/14/08 10.0 5.8 42 4.2 4.7 6.8 47 68 

The Goldman Sachs Group, 

Inc ................................. 10/14/08 10.0 7.5 25 2.5 6.8 8.2 68 82 

The PNC Financial Services 

Group ............................. 10/24/08 7.6 5.5 27 2.1 5.2 5.8 69 77 

U.S. Bancorp ...................... 11/03/08 6.6 6.3 5 0.3 5.9 6.7 89 102 

Wells Fargo & Company .... 10/14/08 25.0 23.2 7 1.8 21.7 24.6 87 99 

Subtotal .................... 124.2 96.9 22 27.3 89.2 104.5 72 84 

SSFI & TIP: 

American International 

Group, Inc ..................... 11/10/08 40.0 14.8 63 25.2 14.2 15.4 36 38 

Citigroup, Inc ..................... 11/24/08 20.0 10.0 50 10.0 8.3 11.7 41 59 

Subtotal ............................. .................... 60.0 24.8 59 35.2 22.5 27.1 37 45 

Total ................................... .................... 184.2 121.6 34 62.6 111.7 131.6 61 71 

* As of the respective valuation dates. Midpoint is midpoint of Duff & Phelps range. 

J. Discussion 

There were significant differences in the risk of the institutions 

that received funds under the TARP, as evidenced by the very different yields on their securities that investors demanded in the 

capital markets and documented by D&P. In financial institutions 

which the markets judged to be relatively less risky, Treasury received securities with values slightly below what was paid for 

them. In institutions which the market viewed to have greater risk, 

the value of securities received by Treasury was further below fair 

market value. 

The Advisory Committee believes that this result is a consequence of the policy decision by Treasury to offer uniform terms 

under the CPP to all financial institutions irrespective of their relative financial condition. For firms with a relatively high probability of default, the 5% dividend rate on the preferred shares was 

substantially below their market cost of capital, whereas for the 

healthier firms, it offered a smaller advantage over market rates. 

Further, the option for an institution to extend the financing beyond the fifth year at a 9% rate only had substantial value to the 

weaker institutions. 

A further benchmark for understanding the results of the valuation exercise is that the CPP facility was structured to be voluntary. To induce the relatively healthy financial institutions to 

participate, the terms for them had to be set so that they did not 

surrender more value than they received. The decision by Treasury 

to treat everyone equally led to the best institutions more or less 

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breaking even and weaker entities benefiting from receiving financing on the same terms as their stronger peers. 

A potential reason to refrain from discriminating among TARP 

borrowers is the potential adverse effect on public expectations 

about particular institutions. Put simply, if the public thinks that 

Treasury knows something about a bank that the public does not 

know, the markets may interpret any signal from Treasury as a 

positive or negative indication about the health of the firm. Avoiding this type of signaling may have been a concern in crafting the 

program. On the other hand, as the report illustrates, the market 

was aware of the differential risk profile of these banks at the time 

the investments were made. To the extent that adverse signaling 

was a concern, risk-based pricing based only on public information 

may have been possible. However, proposing alternative mechanisms ex post is outside of the scope of this report. 

K. Conclusion 

Our report concludes, based on analysis set forth in great detail 

in D&P’s report, that the fair market value of the securities received was, in most cases, significantly less than what Treasury 

paid; and we identify the structural reasons in the program that 

led this to be true. We are not attempting in this report to answer 

the question of whether the investments were good or bad from a 

policy perspective, or whether Treasury will eventually recover its 

investment or even come out ahead. Whether they were of positive 

benefit to the nation requires an assessment of their effects on the 

functioning of the U.S. economy. Consequently, this involves a policy debate and requires an assessment as to whether these investments are part of a coherent strategy to achieve the objectives of 

EESA. The fundamental question is whether the actions taken by 

Treasury are working to stabilize financial markets and institutions and helping American families. This report provides information on the value conveyed to these institutions at the time of the 

intervention, which should be a useful input into a broader costbenefit analysis of the TARP. We hope that by quantifying the cost 

of the initial largest investments made to date, we have made a 

contribution to that debate. 

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APPENDIX IV: SUMMARY OF THE LEGAL REPORT TO 

THE CONGRESSIONAL OVERSIGHT PANEL FOR ECONOMIC STABILIZATION CONCERNING THE TARP INVESTMENTS IN FINANCIAL INSTITUTIONS 

TIMOTHY G. MASSAD

A. Scope and methodology of legal report 

The Panel asked Timothy G. Massad, a corporate lawyer with a 

New York-based law firm for almost 25 years, including 17 as a 

partner, to prepare a legal analysis of the TARP investments. He 

specializes in corporate finance. Mr. Massad took a leave of absence 

from his firm in late December in order to serve as special legal 

advisor to the Panel on a pro bono basis and to prepare the report. 

Catherina Celosse acted as counsel for the Panel in the development of the legal report. 

The legal analysis focuses on the Capital Purchase Program 

(‘‘CPP’’) created by Treasury as a whole and the largest investments thereunder, as well as the AIG, second Citigroup and most 

recent Bank of America investment made outside of the CPP. The 

CPP was for healthy banks. The AIG investment in November 2008 

was made under the Systemically Significant Failing Institutions 

(‘‘SSFI’’) program and the Citigroup and Bank of America investments were made under the Targeted Investment Program (‘‘TIP’’), 

which were programs for institutions in greater difficulty or at risk 

of failure. 

The legal analysis provides an explanation of the structure and 

terms of these investments. It also considers whether the terms received by Treasury were customary and consistent with market 

practice from a legal (but not a valuation) standpoint. There is a 

wide range of market practice, and terms vary depending on many 

factors including in particular the credit-worthiness of the issuer, 

the relative strength of the parties and the preferences of investors. 

Opinions also vary as to what is customary, and the analysis cannot be reduced to a quantitative assessment as with the valuation 

analysis. While the legal analysis reviews the material terms of the 

agreements individually, an investment decision by a private investor to purchase securities of this type is usually made on the basis 

of the terms as a whole, and an investor’s willingness to agree to 

a particular set of non-economic terms usually is greatly influenced 

by the attractiveness of the economic terms. 

In examining whether the terms were consistent with market 

practice, the analysis considers in particular the terms of a set of 

recent transactions agreed upon with the Panel. These include the 

investments by Berkshire Hathaway Inc. in The Goldman Sachs 

Group, Inc. (‘‘Goldman Sachs’’) and by Mitsubishi UFJ Financial 

Group (‘‘Mitsubishi’’) in Morgan Stanley in the fall of 2008, as well 

as four other investments in Citigroup, Merrill Lynch and Morgan 

Stanley that were made between late 2007 and the fall of 2008 (the 

‘‘U.S. comparative transactions’’). In addition, these transactions include the investments by the government of the United Kingdom 

in Royal Bank of Scotland and Lloyds TSB—HBOS in October 2008 

(the ‘‘U.K. government investments’’) and the investment in 

Barclays Bank PLC by Qatar Holdings and Sheikh Mansour of Abu 

Dhabi. 

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The scope and methodology of the report was agreed upon with 

the Panel, including that the report would be based solely on review of publicly available information concerning the investments. 

As with the valuation analysis, the legal analysis does not address whether the investments were good or bad investments. Because they were investments by the government seeking to fulfill 

certain public policy purposes, that conclusion requires not only a 

consideration of the terms of the investments but also an evaluation of the public policy objectives and whether the investments 

contributed to achieving those objectives, matters which are beyond 

the scope of the legal report. The assessment of whether the terms 

were consistent with market practice is only intended to provide a 

benchmark. It is not intended to judge whether Treasury made the 

right public policy choices or suggest that public policy objectives 

should not influence those terms. 

The legal report does not consider the other actions that were 

taken by the U.S. government in response to the financial crisis 

concurrently with the making of these investments, including specific arrangements made with particular institutions that received 

TARP funds. Although these actions are relevant to evaluating the 

effectiveness of the investments from a policy standpoint, they are 

beyond the scope of the report. 

B. Findings 

The summary below highlights some of the findings of the legal 

report. 

(i) Documentation of TARP Investments—Use of Standard Forms. Treasury created standard documentation for the CPP investments. 

In the transactions reviewed, there were no variations in terms 

from the standard forms other than those contemplated by the 

forms themselves, such as those related to size of the investment, 

number of shares issued and strike price of the warrants. 

Treasury created two sets of forms, one for publicly held qualified 

financial institutions or ‘‘QFIs’’ (the Public QFI forms) and one for 

non-publicly held qualified financial institutions excluding S corporations and mutual organizations (the Non-Public QFI forms). Of 

the total $194.2 billion invested as of January 23, 2009, approximately $1.7 billion has been invested in 90 institutions that are 

privately held or are community development institutions. 

Similarity to Berkshire Hathaway Papers. The CPP standard 

forms are quite similar to, and appear to have been based on, the 

papers used by Berkshire Hathaway for its investment in Goldman 

Sachs. The pricing-related terms (such as dividend rate, number 

and exercise price of warrants (including the warrant reduction 

feature discussed below) and optional redemption premium) of the 

Treasury agreements are not nearly as favorable to Treasury as 

the terms that Berkshire Hathaway received, as discussed in the 

valuation report. In most other areas the terms obtained by Treasury are as good as, and in some cases better than, those in the 

Berkshire Hathaway agreements (such as voting rights of the preferred stock, restrictions on dividends and stock repurchases, warrant anti-dilution protection and exercise period, transfer restrictions, representations and warranties and amendments), although 

such other provisions generally are not as important to the average 

investor. One other area where the terms obtained by Treasury are 

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not as good, though it could be thought of as a pricing-related term, 

is the issuer’s right to repurchase the warrants and underlying 

common shares at fair market value following redemption or transfer by Treasury of the preferred. 

Incentives to Replace Treasury Investment. In order to meet regulatory requirements, Treasury could not require the issuer to redeem the securities (that is, repay Treasury) at a fixed date. However, Treasury included a number of provisions, as discussed below, 

that appear to be designed to encourage the QFI to replace the 

Treasury investment with private capital, which was presumably 

one of Treasury’s objectives. These include the dividend step-up 

provision, the lack of a premium on optional redemption and (in 

the Public QFI form) the QFI’s right to reduce the number of warrants in certain circumstances and to repurchase the warrants and 

underlying common shares at fair market value once the preferred 

stock is redeemed or transferred. (The common stock dividend restrictions may also encourage replacement of the Treasury investment.) Some of these provisions have a negative impact on valuation as indicated by the valuation report; that is, they make the 

security less attractive to an average investor. 

Passive Investor Philosophy. The contracts generally provide for 

Treasury to be a passive investor. This is evidenced by providing 

for only limited voting rights, not having any board seats or board 

observers, agreeing not to exercise voting rights on common shares 

acquired under the warrants and (in the CPP investments) not imposing any covenants other than those that are customary for passive preferred stock investments. There are, for example, few covenants that restrict operations or that are directed at the public 

policy objectives of EESA. This approach can be contrasted with 

the more activist approach of the U.K. government as well as the 

approach taken by Treasury in the TARP loans made to the automotive companies, as discussed in the report. 

Consequences of Using Standard Forms. The legal analysis also 

considered the implications of Treasury’s decision to structure the 

program by creating standard forms that were used for all transactions, which implications are relevant to the debate as to whether the investments were good policy choices. First, the design of the 

program enabled Treasury to avoid having to negotiate any of the 

terms with any institution, which would have required substantially more Treasury resources and many policy or credit choices. 

That would have made it difficult to complete as many transactions 

as quickly as Treasury did. The program design also may have contributed to a perception that the program was fair at least as 

among financial institutions that were deemed eligible. That may 

have encouraged participation. Speed of execution and wide participation were important Treasury objectives in October 2008 when 

the program was launched. The absence of individually negotiated 

terms meant also that completed transactions did not suggest to 

the marketplace that, because of the inclusion of more restrictive 

terms in one case versus another, Treasury had determined that 

one institution was weaker than another; such signals could have 

in turn affected confidence in, or market prices of the securities of, 

particular institutions. Treasury also avoided subjecting itself to 

criticism for why it required or did not require particular terms for 

an institution. On the other hand, the program design meant that 

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1 In customary market practice, there are often differences in pricing-related terms as well as 

non-economic terms depending on the credit-worthiness of the issuer. In theory, Treasury could 

have incorporated a customized, risk-based approach to setting the dividend rate at least for 

large public companies, for example by reference to the yields on other publicly traded securities 

or credit default swap rates (or perhaps they could have varied the number of warrants taken), 

and still have maintained the general standardized terms of the documents. But this would have 

left the question of how to price the securities for less widely-traded institutions, and its effects 

on speed of execution and participation rates are impossible to know. 

Treasury could not address differences in credit quality or risk 

among institutions, or in their need for capital, by varying the 

terms of each investment.1 Insofar as the standard terms were set 

for strong institutions, they may have been too lenient for weaker 

institutions. The program design also meant that Treasury could 

not impose specific requirements on a recipient to take certain actions that it deemed necessary for the stability or soundness of an 

institution (The Treasury view may have been that the government 

could use its power as a regulator to do so). It meant Treasury’s 

only choice was to decide whether an institution was eligible and 

what the size of the investment would be within the range of 1– 

3% of risk-weighted assets. A determination that an institution was 

not eligible had potentially harsh consequences for the institution. 

A major question for the policy debate is therefore whether the 

basic design of the program—provide capital to a large number of 

institutions by using standard terms designed for ‘‘healthy’’ 

banks—made sense, because so many issues follow from the answer to that question. 

TIP/SSFI Investments. Treasury used the CPP forms with modifications for the TIP/SSFI investments. The CPP was a voluntary 

program for healthy banks; TIP and SSFI are for institutions experiencing more difficulty or at risk of failure. The two institutions 

funded under the TIP also received funds under CPP, and the TIP 

program was not created until months after the first investment 

now grouped under that program was announced. The Panel may 

wish to consider whether these various programs fit together into 

a coherent overall strategy. 

(ii) Basic Structure of the Investments. Treasury acquired preferred stock and warrants. In the CPP investments, Treasury purchased senior preferred stock in an amount equal to 1–3% of risk 

weighted assets of the institution but not more than $25 billion. 

Risk-weighted assets are the total assets weighted for credit risk 

and are a measure used to determine adequacy of capital. The preferred stock qualified as Tier 1 capital, which is a core measure of 

capital for a financial institution, as a result of a contemporaneous 

regulatory change by the Federal Reserve Board. The structure of 

the investment was consistent with Treasury’s goal of bolstering 

the capital of institutions, which had been depleted by, among 

other things, losses on mortgage-related assets. 

Priority of Preferred Stock. Preferred stock provides Treasury 

with priority over common stock as to payment of dividends and in 

liquidation. The TARP preferred stock pays dividends at a fixed 

rate, and the dividends are cumulative (except for banks that are 

not subsidiaries of bank holding companies), which means the dividends, even if not declared by the board of directors in a particular 

period, continue to accrue, thus enhancing the investor’s return. 

Unpaid cumulative dividends also compound at the dividend rate 

then in effect, which is favorable to the investor. The preferred 

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stock is senior, which insures that no other preferred stock can 

have a higher priority as to payment of dividends or in liquidation. 

Blank Check Preferred. Another reason preferred stock may have 

been attractive to Treasury and to the financial institutions seeking CPP funds is that many public corporations have what is 

known as ‘‘blank-check preferred’’ which allows the board of directors to issue preferred stock having the desired terms without having to obtain approval (in most cases) from common stockholders, 

thus facilitating a quick transaction. 

Stockholder approval can nevertheless be necessary pursuant to 

the rules of the national securities exchanges if the common shares 

underlying the warrants equal 20% or more of the total outstanding common shares. Treasury provided that in this case, the 

institution was not only required to get approval, but the exercise 

price of the warrants would decline if approval was not obtained 

quickly. 

Warrants—Basic Terms. In the CPP investments, Treasury received warrants to acquire common shares equal to 15% of the 

value of the preferred investment, which give it an opportunity to 

realize upside, without giving up its fixed return, if the common 

stock price of the institution increases. The exercise or strike price 

of the warrants was set at the current market price of the common 

stock. Sometimes, warrant exercise prices are set at a premium to 

current market price of the common stock, which would be less favorable to Treasury as it would require greater price appreciation 

in order to realize a gain. The warrants were immediately exercisable (subject to a reduction feature) and had a term of ten years, 

which potentially gives Treasury a long time to realize any gain. 

The Non-Public QFI form for the CPP program differs in that 

Treasury acquires a warrant for a preferred stock that pays a 9% 

dividend, which it exercises immediately. There is no provision for 

reduction of warrants. 

Warrant Reduction. One unusual feature of the Public QFI forms 

is that the issuer is entitled to reduce the number of common 

shares which may be acquired on exercise of the warrants by 50% 

if it sells equity that qualifies as Tier 1 capital in an amount equal 

to Treasury’s investment before December 31, 2009. This feature 

could eliminate much of Treasury’s upside with respect to the warrants. However, it may serve a public policy goal of creating an incentive for the issuer to raise capital which could be used to replace 

the Treasury investment (although actual redemption of the preferred is not required in order to reduce the warrants). 

Structure of TIP/SSFI Investments. The basic structures of the 

TIP/SSFI investments were similar to the CPP forms—Treasury 

acquired nonconvertible senior preferred stock paying cumulative 

dividends as well as warrants. There were differences in pricingrelated terms (such as dividend rates, numbers and exercise prices 

of warrants and absence of the warrant reduction feature found in 

the CPP investments) as well as in non-pricing terms as described 

below. Treasury has the unilateral power to change the dividend 

rate in the AIG transaction, which is highly unusual. 

Structures of Comparative Transactions. The basic structure of 

the CPP investments was quite similar to the Berkshire Hathaway 

investment in Goldman Sachs. Berkshire Hathaway purchased cumulative perpetual preferred stock paying a fixed dividend, plus 

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warrants to acquire common stock that were exercisable for five 

years. The structures used in the other U.S. comparative transactions were somewhat different. Mitsubishi purchased noncumulative convertible preferred stock. Noncumulative dividends do not 

accrue if not paid. However, noncumulative perpetual preferred 

stock can be treated as Tier 1 capital without limit. Convertible 

preferred stock gives the holder the right to convert into common 

stock at a price (and thus realize an upside that is tied to common 

stock price appreciation as with the warrant), although it must 

give up the fixed return of the preferred stock to do so. Two of the 

other U.S. comparative transactions also involved purchases of 

noncumulative convertible preferred stock. The other two U.S. comparative transactions involved sales of units in which the investor 

acquired common stock and trust preferred securities. These latter 

two investments are more complex transactions that have certain 

tax advantages for the issuers, although they also involve acquiring 

a combination of a fixed return and a potential to realize upside in 

the common stock price. 

The U.K. government transactions are quite different in structure. The U.K. banks made open offers to their existing shareholders to purchase ordinary shares (the equivalent of common 

shares), and the U.K. government agreed to purchase the ordinary 

shares to the extent existing shareholders did not take them up, 

and to buy preference shares that pay noncumulative dividends. 

Because few shareholders took up the offers, the U.K. government 

purchased almost all the ordinary shares offered. As a result, it 

owns 57.9% of one of the banks and 43.4% of the other. The 

Barclays transaction involved the sale of three securities: perpetual 

reserve capital instruments which pay a fixed return in cash or 

common shares, warrants for common stock and mandatorily convertible notes. 

(iii) Dividends. The dividend rate on the CPP investments increases from 5% to 9% per annum after five years. This creates the 

potential for higher returns, and it may also create an incentive for 

the issuer to redeem the preferred stock. The dividend rates in the 

TIP/SSFI investments are higher to begin with and do not increase. 

(iv) Redemption and Repurchase. In order for the preferred stock 

to be treated as Tier 1 capital for regulatory purposes, it must be 

perpetual; the issuer cannot be required to redeem it (that is, repay 

Treasury) at a fixed date or upon the occurrence of certain events. 

However, the CPP forms provide for redemption at the option of 

the issuer in the first three years if the issuer receives proceeds 

from a qualified equity offering (essentially a sale of equity securities constituting Tier 1 capital for cash) equaling at least 25% of 

the investment price. After three years, the issuer can redeem at 

any time. Redemption is at par (without a premium). The absence 

of a premium, and the fact that the issuer can redeem so early, is 

not advantageous to an investor who wishes to lock in a rate of return (and negatively impacts the valuation of the securities), but 

it may serve a public policy objective of encouraging institutions to 

replace Treasury investment with private capital. 

The CPP forms also give the issuer the right to repurchase the 

warrants and any common shares acquired upon exercise of the 

warrants at fair market value once the preferred shares are rewwoods2 on PROD1PC60 with HEARING

40 

deemed or transferred by Treasury. (Fair market value is determined initially by the issuer’s board of directors but is subject to 

an appraisal process if Treasury disagrees.) This provision is very 

unusual and again negatively affects valuation, but it may serve 

the public policy objective of encouraging replacement of the Treasury investment. It may also reflect past experience in U.S. government bailouts, such as in the Chrysler bailout when, after Chrysler 

recovered and paid off the government loans, there was debate over 

whether the government should realize a profit on the warrants it 

received or give them back to Chrysler. The repurchase right sets 

up a procedure that may avoid a similar controversy. 

The TIP/SSFI investments contain redemption provisions at par 

and a repurchase right that are similar to the CPP forms. 

(v) Covenants. The Panel requested that the legal analysis review 

the covenants included in the TARP investments from the standpoint of not only what was found in the comparative transactions, 

but also from the standpoint of whether there were provisions that 

addressed the public policy purposes of the investments. The analysis noted that that there is a wide range of market practice in 

commercial transactions when it comes to covenants. Wellknown, 

seasoned investment grade issuers generally face lighter covenants 

when raising funds in normal circumstances than do less creditworthy companies. Covenants may also vary depending on, among 

other things, the form of the investment, the context of the transaction and the leverage of the investor. There are generally fewer 

covenants in purchase agreements for equity securities as compared to loans and other debt financing arrangements, in part because there is a more practical remedy for a covenant violation in 

a debt financing (the investor can call a default and accelerate the 

debt) than in an equity investment. 

The analysis summarized the covenants in the TARP investments as follows. Whether the covenants in any particular area, including those pertaining to dividends, executive compensation, 

lending and use of proceeds, are appropriate or adequate is a matter for the policy debate. That debate should consider in particular 

whether covenants should be more restrictive if the economics of 

the investments provide less than fair value to Treasury, and 

whether the use of standard forms created an inherent risk of covenants that were too lenient for some, as discussed earlier. 

(a) Dividend Restrictions and Stock Repurchases. The TARP investments include restrictions which insure the priority of dividends on the preferred stock that are similar to those in the comparative transactions. This is a standard covenant in a preferred 

stock transaction. They also include a covenant that prohibits increases in the dividends on common stock, which is not as common 

(none of the U.S. comparative transactions or the Barclays transaction has such a restriction). By contrast, the U.K. government 

transactions and the TARP investments in the automotive companies prohibit all dividends on common shares. The TARP investments also restrict repurchases of common stock, which can be 

thought of as economically equivalent to a dividend payment in 

terms of the interests of the preferred stock investor. These covenants are subject to exceptions. The covenants regarding dividends and stock repurchases are more restrictive in the TIP/SSFI 

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investments than in the CPP forms, in that dividends are prohibited in AIG’s case for five years and limited to $0.01 per share per 

quarter for up to three years in the case of Bank of America and 

Citigroup. 

(b) Executive Compensation. The CPP forms contain a covenant 

implementing the executive compensation provisions of EESA but 

do not contain more detailed restrictions or any reporting requirements, though Treasury has recently published rules to require certain reports and certifications. The TIP/SSFI investments contain 

slightly more restrictive executive compensation covenants (which 

apply to a larger group of executives and cover more payments) 

and related reporting requirements. 

(c) Lending/Foreclosure Mitigation/Use of Proceeds. Because the 

TARP investments were made with public funds to achieve certain 

policy objectives, one must consider whether there were covenants 

directed at those policy objectives. The CPP forms contain recitals—introductory language—that state that the QFI ‘‘agrees to expand the flow of credit to U.S. consumers and businesses’’ and 

agrees to work to ‘‘modify the terms of residential mortgages to 

strengthen the health of the U.S. housing market.’’ However, no 

specific covenants concerning these issues were included in the 

CPP investments. There are also no covenants in the CPP investments restricting use of the proceeds nor any requirements to report how the funds are used. There are no covenants requiring the 

issuer to take actions with respect to the problems that may have 

led to the need for the Treasury investment, such as covenants to 

develop a restructuring plan (as in the U.K. transactions and the 

automotive investments), to sell certain assets, to not engage in or 

limit particular types of business, etc. 

Except for the other matters noted below, there were generally 

no other covenants or provisions in the CPP investments that imposed restrictions on, or required changes to, operations or business 

practices or that were directed at the specific public policy objectives cited by Treasury for making the investments. The legal report notes that the use of standard forms meant Treasury could not 

include customized covenants that required particular institutions 

to take particular actions that Treasury felt were desirable to improve strength and stability. The legal report also speculates as to 

why Treasury chose not to include general covenants directed at 

policy objectives, which may have been because Treasury believed 

that it was more important to get large numbers of institutions to 

participate in the program and such covenants would have discouraged participation. It could also be because Treasury wished to be 

a passive investor and exercise its authority as a regulator rather 

than an investor (which passive approach, as noted earlier, was 

also evidenced by having only limited voting rights, not voting the 

warrant shares, and not having board seats or board observers). It 

could also be that Treasury believed contractual covenants cannot 

address the policy objectives effectively. 

The TIP/SSFI investments contain a few more restrictions. In the 

case of the AIG investment, the proceeds were applied directly to 

pay down loans provided by the Federal Reserve Board of New 

York. In the case of the second Citigroup and third Bank of America investments, there are no restrictions on use of the proceeds but 

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there are reporting requirements concerning use of the proceeds. 

Citigroup also agreed to implement the FDIC’s mortgage modification program with respect to certain assets. All three TIP/SSFI investments contain covenants that pertain to policies on lobbying, 

governmental ethics, political activity and corporate expenses. 

There are no covenants on lending. Although there are no other 

significant restrictions, the analysis noted that the credit agreement between the Federal Reserve Bank of New York and AIG imposes more restrictive covenants on AIG with respect to operation 

of its business. In addition, a trust for the benefit of Treasury holds 

almost 80% of the voting equity of AIG, which gives the trust the 

ability to direct management. 

The approach taken by Treasury can be contrasted with that 

taken by the U.K. government. The U.K. banks are required to 

maintain lending to the mortgage market and to small and medium 

enterprises at their respective 2007 levels, although this is subject 

to a caveat that appears to relieve them of any obligation to engage 

in uncommercial practices. The U.K. banks are also required to 

submit restructuring plans. 

Treasury’s approach can also be contrasted with what Treasury 

did in the case of the loans to the automotive companies, where extensive covenants restricting the companies were included. These 

included prohibitions on all dividends, restrictions on executive 

compensation, restrictions on material transactions outside the ordinary course of business, a requirement to divest corporate aircraft, reporting requirements, and a requirement to develop a restructuring plan meeting certain public policy objectives. 

While it is more common to see restrictions of this sort in debt 

financings than in preferred stock investments, one could take the 

view that the use of preferred stock for the banking institution investments was driven by the need to satisfy capital requirements, 

not to realize higher equity returns, and should not dictate the covenant package. The differences between the covenants in the automotive loans (and AIG credit facility) on the one hand versus the 

banking institution investments on the other may have been driven 

more by the overall design of the program—that is, it was a voluntary program intended for large numbers of ‘‘healthy’’ banks, not 

a rescue of a single institution, and it was for institutions which 

the government already regulates. 

(d) Other. The CPP forms contain a limited right of access to information that relies on the information received by the U.S. government in its capacity as regulator. The Non-Public QFI forms 

contain restrictions on affiliate transactions. 

(vi) Voting and Control Rights. All the investments provide that 

the holders of the preferred stock have the right to vote on amendments to the charter and certain material transactions if their interests could be adversely affected. These are customary voting 

rights for preferred stock, and are contained in the four U.S. comparative transactions in which preferred stock was issued as well 

as in the U.K. government investments. In addition, the investments provide that if dividends are not paid for six quarterly periods (in the case of the CPP) or four quarterly periods (in the case 

of the TIP/SSFI investments), the holders of preferred stock have 

the right to elect two directors. This is a provision that is very frewwoods2 on PROD1PC60 with HEARING

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quently, but not always, included in preferred stock investments. 

For example, Mitsubishi obtained such right but Berkshire Hathaway did not, and it was included in one of the other two U.S. comparative transactions in which preferred stock was issued. In the 

U.K. government transactions, the preference shares also obtained 

additional voting rights upon a failure to pay dividends. 

Treasury agreed not to exercise voting rights with respect to any 

common shares acquired on exercise of the warrants. This is a very 

unusual term. However, it does not apply to any person to whom 

Treasury transfers the warrants (or underlying shares) and thus 

does not affect resale value of the warrants or underlying shares. 

In the U.K. government transactions, the government obtained 

the contractual right to designate two or three directors. Because 

the U.K. government ended up acquiring 58% and 43% of the common equity of the two banks in the open offers, it has the practical 

ability to designate the entire board of directors without the benefit 

of these contractual provisions. In one of the U.S. comparative 

transactions the investor acquired the right to designate a director. 

The legal analysis notes that although the voting rights obtained 

by Treasury in the TARP investments are customary for preferred 

stock investments, the issue of what type of voting rights, or influence over management, Treasury should have in an investment 

made with taxpayer funds raises public policy concerns that the 

Panel may wish to consider. Treasury may not have sought greater 

contractual rights of influence because of a view that the government should exercise influence as a regulator but not as a shareholder. 

(vii) Transfer Restrictions. Treasury did not agree to any contractual restrictions on its ability to transfer the preferred stock or the 

warrants, other than agreeing not to transfer more than 50% of the 

warrants during the warrant reduction period. There were transfer 

restrictions in all the U.S. comparative transactions, including a 

five year restriction in the case of the Berkshire Hathaway investment in Goldman Sachs. Treasury also received registration rights 

for public QFIs, which facilitates its ability to resell the securities 

because such rights enable it to do so in a public offering, and it 

can require the issuer to list the preferred stock on a national securities exchange. Registration rights were granted in only three of 

the U.S. comparative transactions. 

(viii) Representations and Warranties and Conditions to Closing. 

Treasury required the issuers to make far more extensive representations and warranties in the purchase agreements than was the 

case in the Berkshire Hathaway deal or the other U.S. comparative 

transactions. (Representations and warranties assist the parties to 

a transaction in performing due diligence and in allocating risk. If 

an inaccuracy is discovered prior to closing, Treasury would have 

a right not to purchase the securities; once the securities are purchased, Treasury may have a claim for damages but the value of 

this is limited since it would reduce the value of the issuer.) The 

Treasury forms also impose conditions to closing including receipt 

of legal opinions and officers certificates. Although these are not 

unusual and should not be difficult to meet, they are not always 

obtained by an investor and were not included in the GoldmanBerkshire Hathaway transaction, for example. 

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(ix) Other. The CPP forms provide that Treasury has the unilateral right to amend any provision of the purchase agreement to the 

extent required to comply with any changes after the signing date 

in federal statutes. This is a highly unusual provision that is favorable to Treasury and could be used, for example, to remedy deficiencies in reporting requirements. It is also included in the TIP/ 

SSFI investments. 

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APPENDIX V: LINK TO VALUATION REPORT OF DUFF & 

PHELPS TO THE CONGRESSIONAL OVERSIGHT PANEL 

Visit: http://COP.Senate.gov 

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