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67–812—PDF 2010

S. HRG. 111–1065 

AN UPDATE ON THE TARP PROGRAM 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

JULY 21, 2010 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

BLANCHE L. LINCOLN, Arkansas 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

CHUCK GRASSLEY, Iowa 

ORRIN G. HATCH, Utah 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

JOHN ENSIGN, Nevada 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

RUSSELL SULLIVAN, Staff Director 

KOLAN DAVIS, Republican Staff Director and Chief Counsel 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee 

on Finance ............................................................................................................ 1 

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 3 

WITNESSES 

Barofsky, Hon. Neil M., Special Inspector General for the Troubled Asset 

Relief Program (SIGTARP), Washington, DC .................................................... 5 

Warren, Elizabeth, Chair, Congressional Oversight Panel, Cambridge, MA ..... 7 

Hillman, Richard, Managing Director, Financial Markets and Community 

Investment Team, Government Accountability Office, Washington, DC ........ 8 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Barofsky, Hon. Neil M.: 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 37 

Responses to questions from committee members ......................................... 47 

Baucus, Hon. Max: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 59 

Grassley, Hon. Chuck: 

Opening statement ........................................................................................... 3 

Prepared statement with attachments ........................................................... 61 

Hillman, Richard: 

Testimony .......................................................................................................... 8 

Prepared statement .......................................................................................... 77 

Snowe, Hon. Olympia J.: 

Prepared statement .......................................................................................... 99 

Warren, Elizabeth: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 101 

(III) 

(1) 

AN UPDATE ON THE TARP PROGRAM 

WEDNESDAY, JULY 21, 2010 

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC. 

The hearing was convened, pursuant to notice, at 10:06 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Conrad, Nelson, Carper, Grassley, Bunning, 

and Crapo. 

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; John Angell, Senior Advisor; and Chris 

Law, Investigator. Republican Staff: Emilia DiSanto, Special Counsel and Chief Investigative Counsel; Jason Foster, Senior Investigative Counsel; and Preston Rutledge, Detailee. 

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR 

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The hearing will come to order. 

Walt Whitman wrote that, ‘‘to do the labor of a prudent watchman who prevents outrage is one of the proper duties of a government.’’ 

Our witnesses today are the sort of folks whom Walt Whitman 

had in mind. Their hard work and aggressive oversight have gone 

a long way toward keeping the TARP program relatively efficient 

and honest. 

That is no small task when you look at the size of TARP and the 

speed at which it was set up. TARP remains one of the largest and 

most complex programs that the Federal Government has ever created. And that means that it is all the more important that we 

have the three oversight teams before us today. 

I worked hard to create the Office of the Special Inspector General for the TARP back when Congress was developing the program. So I am especially pleased to welcome Mr. Barofsky back to 

the committee today. So far, the Special IG has done a great job. 

You are providing critical transparency to the program, developing 

important studies on specific aspects of the program, and even 

busting bad guys. 

I congratulate Mr. Barofsky and his team for their work on the 

Lee Farkas case. Mr. Farkas was the head of a private mortgage 

lending company. He was arrested on June 15 and charged with a 

$1.9-billion fraud. He and others were charged with scheming to 

steal $550 million in TARP money. That scheme was stopped dead 

in its tracks. 

2 

The Special IG has conducted independent analysis that has 

brought critical transparency to the TARP program. An example is 

the Special IG’s report on Monday. In that report, he concluded 

that the administration’s auto task force pressured GM and Chrysler to close many auto dealerships without adequately considering 

job losses. 

This news is quite troubling. In Montana and across the country, 

our auto dealers are local small businesses and often the heart of 

the community. I am disappointed to learn that many of the decisions by the auto task force were made without full consideration 

of the effects on these communities. Fortunately, some auto dealers 

have successfully restored their franchises, but many others have 

closed or have been forced to adjust to losing a franchise agreement 

during the most significant economic downturn since the Great Depression. 

Mr. Barofsky, I applaud you for bringing issues such as this to 

the attention of Congress and the American taxpayers. 

Elizabeth Warren of the Congressional Oversight Panel can bring 

us up-to-date on how small banks are fairing under the TARP program. Her most recent report raises concerns about how fast small 

banks would be able to pay TARP back. 

More than three-quarters of the large banks who received TARP 

money have already repaid the taxpayers. By contrast, only 10 percent of the small banks who received TARP funds have repaid their 

money. 

There is also interest in an update on the AIG/Goldman Sachs 

relationship that you reported on earlier this year. 

Oversight is sometimes a lonely job. It does not win too many 

popularity contests. We have all been pleased to witness the perseverance of your three teams for the last year and a half since Congress created the TARP program. 

In some respects, the end of the program is in sight, just over 

the horizon. The Wall Street reform bill that we passed last week 

bars any new TARP programs and initiatives. It also caps TARP 

disbursements at $475 billion. 

Treasury reported that the total amount repaid to the taxpayers 

for the government funds used to bail out U.S. companies has surpassed for the first time the amount of TARP’s outstanding debt. 

Losses from the TARP program are still projected to be high, but 

the government will not see a $700-billion loss for TARP, as some 

had said back in the fall of 2008. 

A year ago, the losses were projected to be $341 billion. Instead, 

current loss estimates look to be more in the range of $100 billion, 

and some are saying that figure could go lower, depending on repayments from AIG and the auto companies. 

The debate over the necessity for TARP and its effect on the U.S. 

economy will continue. I note that our colleague, Judd Gregg, said 

last week that, ‘‘TARP did what it was supposed to do. It basically 

saved the financial system on Main Street, too.’’ And Alan Blinder, 

the former Vice Chairman of the Federal Reserve, said TARP ‘‘was 

a necessary evil to save the economy. Think of it as collateral damage in a successful war against financial Armageddon.’’ 

What we do know today is that the hard work and sacrifice of 

our three oversight teams have given the American people a relVerDate Nov 24 2008 21:30 Sep 28, 2011 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 R:\DOCS\67812.000 TIMD
3 

atively clean, well-run program. I do believe that. I think it is the 

oversight of you three that is largely the reason why there have not 

been difficulties, scandals, problems, so forth, because you have 

worked very hard, all three of you, to exercise very vigorous oversight. I think the American taxpayers are very appreciative of that. 

We are grateful for your efforts. We stand ready to help you continue your good work as the TARP program comes to an end—we 

hope it comes to an end—and we hope that that will be in the very 

near future. 

Senator Grassley? 

OPENING STATEMENT OF HON. CHUCK GRASSLEY, 

A U.S. SENATOR FROM IOWA 

Senator GRASSLEY. I associate myself with the remarks that the 

chairman just made complimenting you on your oversight, each of 

you. 

We have this $700-billion program. It has been a focus of numerous audits, hearings, and reports; and, at every stage, each of you 

has brought more transparency and accountability to the activities 

of Treasury. In short, you have kept Treasury honest, a critical 

service with so much taxpayers’ money at stake. 

Each of your organizations has published numerous reports on 

different aspects of TARP. Just this morning, the Special Inspector 

General published its seventh quarterly report. 

With TARP scheduled to expire October 3, I look forward to hearing each of you update the committee on your activities. 

Mr. Barofsky, your office released a report this week describing 

the process by which the administration forced GM and Chrysler 

to accelerate the closure of 2,243 dealerships, putting at risk as 

many as 100,000 jobs, without first determining that the pace and 

scope of the closures was truly necessary. 

While your report is insightful, unfortunately, it comes too late 

for many car dealers, owners, and suppliers across the country that 

were forced out of business for very little reason. 

It’s frustrating to know that, at a time when small businesses 

are hurting and we are facing record unemployment, this administration was pushing to shut down these dealerships. And your new 

quarterly report contains a startling observation that, although 

TARP appears to be winding down, when non-TARP aid is included, the amount of overall government assistance actually grew 

during the last 12 months. 

Last year, you estimated the total amount of taxpayer’s money 

at risk through various programs would be $3 trillion. Your new 

estimate is $3.7 trillion, a $700-billion increase, and that’s as much 

as the original TARP program was ever expected to be. 

I also know that your office has been actively investigating excessive AIG executive compensation payments that have been largely 

ignored by the Treasury, and I have been continuing my inquiry 

into the severance package received by a former AIG executive. It 

seems that the executive received nearly 3 times her salary in severance bonuses, or about $1.4 million. Although she was terminated, her severance was increased, and Treasury could have 

stopped the payments, but did nothing. 

4 

Mr. Chairman, I have documentation on this I would like to put 

in the record. 

The CHAIRMAN. Without objection. 

[The information appears in the appendix on p. 64.] 

Senator GRASSLEY. For Ms. Warren, last month, your Congressional Oversight Panel reported on AIG bailouts, and we learned 

that among the ultimate beneficiaries of the tax-funded AIG bailout was not just AIG’s counter-party, Goldman Sachs, but also 

Goldman’s counter-parties. 

It is estimated that Goldman’s counter-parties may have benefitted from the taxpayer bailout of AIG by avoiding as much as $11 

billion in losses; and yet, incredibly, we don’t know who those 

counter-parties are. Goldman has refused to provide your panel 

with the names of those companies. 

Mr. Chairman, I have a summary that I would also like to include in the record, as I just asked you to on another matter. 

The CHAIRMAN. Without objection. 

[The summary appears in the appendix on p. 67.] 

Senator GRASSLEY. The Congressional Oversight Panel also 

issued a report this week about TARP’s Capital Purchase Program. 

It details how Treasury seems to have treated the Nation’s largest 

banks much more favorably than it treated the Nation’s smaller 

banks. Many of the smaller banks now are struggling, and their 

participation in TARP has neither stabilized the financial system 

nor increased lending activity. 

Let us look at GAO. Mr. Hillman’s office also released a report 

about AIG. One focus of the report is a status of AIG’s attempt to 

repay its debt to the American taxpayer. Over time, the government has exchanged much of AIG’s debt for stock, meaning that 

the government’s ability to recoup the billions advanced to AIG will 

depend, to a large degree, on AIG’s ability to sell its business assets as it restructures. 

The recent collapse of a $35-billion deal to sell an AIG life insurance subsidiary is an ominous sign that the taxpayers may not get 

back their money, or at least it may take a long time. 

One of the purposes of TARP, of course, was to preserve home 

ownership and protect home values. Treasury announced the $50- 

billion Home Affordable Modification Program (HAMP) in March 

2009, and all three of the watchdogs on the panel today have 

issued reports on the program’s progress, and that is not good— 

progress has not been good. 

In a program that Treasury said would result in 3 to 4 million 

modifications, there have been only 340,000 permanent. In fact, 

there have been 430,000 failed trial modifications, meaning failed 

modifications vastly outnumber successful ones. And just as I 

warned, re-defaults look like they will be a real problem. 

The debt-to-income ratio for borrowers who have received a mortgage modification is 64 percent, even after modification, a level 

that all but ensures high default rates. Moreover, Treasury still 

has not established performance goals or benchmarks for the program, meaning that there is no more effective way for us to know 

whether this $50-billion program is accomplishing its intended purposes. 

5 

* The SIGTARP Quarterly Report to Congress, dated July 21, 2010, can be found at http:// 

www.sigtarp.gov/reports/congress/2010/July2010lQuarterlylReportltolCongress.pdf. 

That is not accountability, it is not transparency, and it is just 

more taxpayers’ money flying out the window. American taxpayers’ 

investment in the TARP program is unprecedented, and, as good 

stewards of the taxpayers’ money, it is essential that we exercise 

the highest standard of oversight. 

As you present your findings today, panel, I ask that you specifically advise the committee, each of you, of any areas in which your 

oversight is being limited or constrained by a lack of cooperation 

from the administration, the Treasury Department, or others, and 

how best I and this committee can help you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

I want to thank our witnesses and their teams for their continuing hard work. 

Our first witness is Mr. Barofsky, Special Inspector General for 

the TARP program; the second witness is Elizabeth Warren, Chair 

of the Congressional Oversight Panel; and the third witness is Rick 

Hillman, Managing Director of the Financial Markets Community 

Investment Team at the Government Accountability Office. 

Thank you all for your hard work. You are working very hard on 

behalf of the American people, and thank you again. 

I urge you to summarize your statements, because they will automatically be included in the record. 

Elizabeth Warren has a commitment. So we are going to try to 

accommodate that obligation, Ms. Warren. 

So why don’t you first begin, Mr. Barofsky, and then we will go 

down the line there. 

STATEMENT OF HON. NEIL M. BAROFSKY, SPECIAL INSPECTOR GENERAL FOR THE TROUBLED ASSET RELIEF PROGRAM (SIGTARP), WASHINGTON, DC 

Mr. BAROFSKY. Thank you, Mr. Chairman. Chairman Baucus, 

Ranking Member Grassley, thank you for giving us an opportunity 

to come back. It is a privilege and honor to testify once again before 

this committee to release our most recent quarterly report.* 

I do want to thank you and this committee for your tremendous 

leadership in support of our office. Our ability to accomplish what 

we do derives directly from the support of this committee. And I 

am happy to report, Senator Grassley, that we do not have—have 

not had any issues or problems getting information, in large part, 

because I think those whom we deal with know that this committee 

is standing squarely behind us and that the repercussions would be 

severe. 

In our quarterly report, we give an update on this previous quarter, and it has been a noteworthy one, as the chairman and the 

ranking member have noted, for both TARP and for SIGTARP. 

For TARP, as the chairman noted, more money is back than is 

currently outstanding. The loss projections are going down, and, 

with Dodd-Frank, the cap is getting smaller. 

For SIGTARP, as the chairman noted, I think we have demonstrated this quarter that robust, proactive law enforcement is an 

6 

important part and a vital part of any oversight program. In the 

case the chairman described, our charges against Lee Farkas, that 

case was initiated in connection with an application for TARP 

funds from Colonial Bank, which was affiliated with Mr. Farkas, 

and received conditional approval from Treasury for $553 million 

in taxpayer funds. 

Through the hard work of SIGTARP’s agents and our law enforcement partners, we made sure that money did not go out the 

door, that that money did not get poured into the gaping abyss of 

fraud that was Colonial Bank. And as a result, we have assured 

that this agency, SIGTARP, will have paid for itself over the course 

of its life by those savings alone. 

As the ranking member noted, in our quarterly report we provided an update on what we had done last summer at the request 

of the chairman—the last time I testified before this committee— 

of the 50 or so programs in addition to TARP that address the 

scope of the financial crisis, the government’s response in support 

of the financial institutions and financial markets. 

In our report, we summarize each of those 50 programs, and we 

provide numbers, three key numbers for each one: the total or maximum amount that was pledged or committed by the Federal Government, by the agency, either explicitly or implicitly, for each of 

those programs; the high-water mark, the maximum amount of 

money that was out the door either in guaranty or explicit expenditure at any one period, given a time; and what the current outstanding is as of June 30 of this year. 

As the ranking member noted, when we compared that number 

to the same number a year ago, we found that, notwithstanding the 

reduction in TARP and a lot of the liquidity programs of the Federal Reserve, the increases in other programs designed to help the 

housing markets and the financial institutions that participate in 

them far outweighed that, to the tune of the current amount of 

$3.7 trillion, $700 billion more than the $3 trillion balance last 

year. 

Finally, in our report, we go over our previous audits and outstanding recommendations, including the one mentioned by the 

ranking member, one of the greatest failures in transparency and 

accountability in the current program, and that is Treasury’s refusal to identify meaningful benchmarks, goals, and expectations 

for the mortgage modification program. 

It is a simple recommendation that we made that Treasury put 

forth how many people it truly expects to help stay in their houses 

through permanent modifications. It is a recommendation that all 

three of us on this panel have made to Treasury and that Treasury 

has ignored. 

In this failure to adopt this recommendation, it fails to recognize 

the basic tenets of a good government program: clear goals, clear 

expectations, and clear description of performance against those 

benchmarks. Its failure to do so has essentially resulted in the Nation’s taxpayers having to shoulder an additional up to $50 billion 

in national debt without being told how many people it is expected 

are going to actually be helped by this program to stay in their 

homes; how many people are going to be helped in the various alVerDate Nov 24 2008 21:30 Sep 28, 2011 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 R:\DOCS\67812.000 TIMD
7 

phabet soup of supp programs; and how the money is going to be 

spent to achieve those benefits. 

Treasury’s continued indications that this is a successful program, without identifying these goals and benchmarks, is simply 

not credible, and I fear that the growing public suspicion that this 

program is an outright failure will continue unless and until Treasury adopts this recommendation and comes clean with what its 

goals and expectations are. 

Mr. Chairman, Ranking Member, members of the committee, 

again, I cannot thank you enough for your continued support of our 

office, of all of our efforts. And I look forward to answering any 

questions you may have about the quarterly report, about our audit 

that we issued earlier this week on the auto dealership terminations, or any other subject. 

Thank you. 

[The prepared statement of Mr. Barofsky appears in the appendix.] 

The CHAIRMAN. Thank you, Mr. Barofsky, very much. 

Ms. Warren, you are next. 

STATEMENT OF ELIZABETH WARREN, CHAIR, 

CONGRESSIONAL OVERSIGHT PANEL, CAMBRIDGE, MA 

Ms. WARREN. Thank you. Thank you, Chairman Baucus, Ranking Member Grassley, and committee. I want to start with a reminder that I am the Chair of a bipartisan, 5-member panel. So, 

while I will do my best to summarize the work of the Congressional 

Oversight Panel, any additional sentences are my own, and my colleagues may have different views, different nuances that they bring 

to things. So I want to make that disclaimer. 

Since we last met before this committee, much has changed in 

the financial markets and in TARP. A year ago, our country was 

in the midst of what seemed to be a deepening financial crisis, on 

the edge of economic collapse. 

It is easy now to forget the panic that gripped the markets in the 

fall of 2008; a very real threat that it would spread to the broader 

economy, devastating families, small businesses, and communities. 

TARP has had a profound effect as part of a coordinated government response to bring our economy back from the brink of collapse. And everything I say and the work we do in oversight is in 

that context. 

I also want to say at the beginning, we raised issues from our 

very first report, which was in December of 2008, about accountability and transparency. Difficulties we were having at the time 

with Treasury, and what we thought we brought to oversight by 

trying to bring these issues forward. 

After we met with this committee, things changed substantially. 

And so I come here, in part, on behalf of the Congressional Oversight Panel, to thank this committee for your ongoing support. 

I recall, in particular, a conversation in which Mr. Grassley said, 

‘‘If there is anything you cannot get, Professor Warren, you let me 

know, and the two of us will walk over to Treasury and see if we 

can find what we need.’’ 

Senator Baucus, your office has been enormously helpful. That 

has made a real difference in what has happened in our oversight 

8 

efforts. We have been tough on Treasury, but there really has been 

a great deal more transparency, a great deal more openness with 

Treasury about the information we need. 

Our oversight panel has been in effect for 20 months. We have 

issued 20 monthly reports and two special reports. We have hit the 

range from dollars-and-cents reports on the value of bank warrants 

that Treasury was selling under the Capital Purchase Program, to 

a review of the government’s investment in specific companies, 

such as GM, Chrysler, AIG, and GMAC. 

All of the reports, along with videos, summaries, backup documents, are available online at cop.senate.gov. We are part of the 

Senate website and glad for anyone to come and see what we have. 

I am going to just give a very brief summary of two of our most 

recent reports. The small banks program, you mentioned that, Senator Baucus, in your opening remarks. It reminds us that TARP 

money went to 707 banks. The 17 largest banks got 81 percent of 

the money, and they got it fast; 76 percent, as you noted, have now 

repaid and are reporting substantial profits. 

The 690 smaller banks had a very different experience. They got 

their money more slowly. Only 10 percent have repaid; and, more 

worrisome, 15 percent have already missed at least one of their 

dividend repayments. The small bank troubles are many. There is 

a coming crisis in commercial real estate. The value of assets held 

by these banks will decline by the end of this year by an estimated 

50 percent compared with the peak when many of these loans were 

made; and 1,688 smaller and intermediate-size banks have, by 

their own auditors’ admission, deep concentrations in commercial 

real estate. 

These banks also have limited access to capital, and, if they do 

not find a way to pull themselves out of the TARP program in a 

few years, their dividend will go up from 5 percent to 9 percent, 

which will put even further pressure on them. 

The reason I mentioned this report in particular is, it is both our 

most recent, but it is also because the health of the small banks 

is directly related to the health of small businesses. Small banks 

that are constrained, small banks that are under financial pressure, are not small banks that are able to support small business 

lending. So we have a problem that gets in the way of restarting 

the economy. 

We have also talked recently about AIG, about the small business credit crunch, and the foreclosure mitigation program. 

I am here to answer questions as best I can on any of our reports 

and to say, again, that the Congressional Oversight Panel very 

much appreciates the support we’ve gotten from this committee. 

[The prepared statement of Ms. Warren appears in the appendix.] 

The CHAIRMAN. Thank you, Ms. Warren. Mr. Hillman, you are 

our wrap-up here. 

STATEMENT OF RICHARD HILLMAN, MANAGING DIRECTOR, 

FINANCIAL MARKETS AND COMMUNITY INVESTMENT TEAM, 

GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC 

Mr. HILLMAN. Chairman Baucus, Ranking Member Grassley, 

members of the committee, I commend you for holding this hearing 

9 

today, and I am pleased to be here to discuss our work on the Troubled Asset Relief Program. 

My statement today draws primarily on seven reports that we 

issued since October 2009. Specifically, this statement focuses on 

the nature and the purpose of activities that have been initiated 

under TARP and their ongoing challenges, the process for making 

decisions related to unwinding TARP programs, and indicators of 

the credit conditions in markets targeted by TARP programs. 

Regarding our first objective, Treasury has initiated a number of 

programs under TARP, some of which have ended or are being 

unwound, others, especially those involving AIG, the automobile industry, preserving home ownership, and encouraging lending to 

small businesses, may continue for some time. 

Many participating institutions have repaid the funds they received, reducing the Federal Government’s exposure under TARP. 

Since TARP was authorized, Treasury has disbursed $385 billion in 

loans on equity investments. As of June 30, 2010, Treasury had received almost $25 billion in dividends and interest payments and 

warrant repurchase, as well as more than $198 billion in repayments. 

Although Treasury has received significant repayments of the 

funds that it provided to the financial institutions, some institutions and loans could still result in substantial losses to the government. We have been monitoring TARP programs since their inception, including the financial condition of those institutions that 

have received significant assistance. In particular, Chrysler and 

General Motors Company have shown some indications of progress 

toward returning to profitability, such as doing better than they 

had initially projected in terms of revenue, operating earnings, and 

cash flow. 

However, the extent to which the Federal Government will fully 

recoup its investment in the auto industry is uncertain, and the 

companies face several challenges in the coming years, including 

returning to and sustaining strong growth and profitability. 

Since early 2009, we have also been monitoring the status of the 

Federal assistance to AIG and its financial condition, using indicators we developed. 

In April 2010, we reported that our indicators showed that AIG’s 

financial condition had remained relatively stable, largely due to 

the Federal assistance provided by the Federal Reserve and Treasury. But the extent to which the Federal Government will recoup 

its investment remains uncertain and will not only depend on the 

long-term health of AIG, but also on the company’s success in selling businesses as it restructures, and other market factors, such as 

the performance of the insurance companies and the insurance sector, and the credit derivatives markets, that are beyond the control 

of AIG or the government. 

Many of our reports have also highlighted the challenges facing 

TARP programs, and we have made recommendations to enhance 

the transparency and accountability of programs. For example, in 

a recent report on the Home Affordable Modification Program, we 

stated that the program has made limited progress in preserving 

home ownership, has suffered from inconsistent program implementation, and continues to confront additional challenges. This inVerDate Nov 24 2008 21:30 Sep 28, 2011 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 R:\DOCS\67812.000 TIMD
10 

cludes converting trial modifications to permanent status and ensuring program stability and effective program management. 

We reported that, while Treasury has taken some steps to address these challenges, it is urgently needed for Treasury to finalize and implement the various components of the HAMP program, 

and ensure the transparency and accountability of these efforts. 

We will continue to monitor these programs, and have ongoing 

work on several facets of TARP, including those initiatives that 

have a small business focus. 

We have also received and reviewed Treasury’s framework for deciding to extend TARP beyond December 31, 2009 and found that 

the process was sufficient, but could be strengthened for similar decision that will need to be made in the future. 

Specifically, we found that the extent of coordination could be enhanced and formalized between Treasury and the Federal Deposit 

Insurance Corporation, and recommended that Treasury formalize 

coordination with FDIC for future decisions. Going forward, Treasury will continue to face decisions on winding down programs, and 

many of these decisions will require interagency coordination, because TARP will be unwinding concurrently with other important 

regulatory interventions. Decisions about the sequencing of the 

exits from the programs will require regulators to work closely together. 

We also noted that Treasury could strengthen its analytical 

framework for identifying clear objectives for small business initiatives and explaining how relevant indicators motivated TARP program decisions. 

Regarding our last objective on the indicators of credit conditions 

in markets targeted by TARP programs, we have noted in the past 

that some of our anticipated effects of TARP on credit markets and 

the economy had materialized and that some securitization markets had experienced a tentative recovery. 

Indicators we have been monitoring suggest that the credit markets have been able to sustain their recovery, despite the winding 

down of key programs initiated by the Federal Reserve, Treasury, 

FDIC, and others. For example, the cost of credit and perceptions 

of risk, as measured by premiums over Treasury securities, have 

fallen in interbank lending, mortgage lending, and corporate debt 

markets. 

Further, the volume of credit as measured by new mortgage 

loans and asset-backed securities has improved since the first 

TARP program. Unfortunately, by any measure, foreclosures and 

delinquency statistics for residential housing remain well above the 

historical averages, despite programs such as HAMP. Full recovery 

will take some time, given the buildup of imbalances in the real estate, fiscal, and household sectors over several years. 

Finally, because any new TARP activity will be limited to home 

ownership preservation and small business lending programs, we 

will also be continuing to monitor indicators, such as the foreclosures and delinquency rates, as potential measures of the TARP 

program’s success. 

Mr. Chairman and members of the committee, I appreciate the 

opportunity to discuss these issues. I would be happy to respond 

to any questions. 

11 

[The prepared statement of Mr. Hillman appears in the appendix.] 

The CHAIRMAN. Thank you very much, Mr. Hillman. 

I might say to my colleagues here that Ms. Warren does have to 

leave soon, in about 10–15 minutes. So I am going to confine my 

questions to her so that she can leave early, and so we will then 

ask other questions of other witnesses, if the committee does not 

mind. 

Senator GRASSLEY. If we do not use up our 5 minutes and we can 

reserve the time. 

The CHAIRMAN. Yes, that is correct. 

Ms. Warren, I would just like your thoughts on the HAMP program, why it is not working very well. Mr. Barofsky suggests some 

better benchmarks, more standards, and so forth. 

The front page, as I recall, of the Wall Street Journal today is 

about housing markets not doing too well. 

So if you could just tell me, what are your thoughts and what 

is your advice for small banks, community banks; what needs to be 

done here? 

Ms. WARREN. Thank you, Senator. We have now written three reports about the home ownership mortgage foreclosure program, and 

we said in our second report, which was 9 months ago, that the 

program was too small, it was too slow, and it was not putting 

enough people into permanent modifications. 

We said at the time and we urged Treasury to design a program 

that could be ramped up quickly and get ahead of the problem. Instead, the position we are in now is that we continue to trail the 

problem. 

Fifteen months into this program, for every one family that appears to have made it to a permanent modification that is likely 

to stabilize that family in that home, 10 more have been moved out 

through foreclosure. 

This is a program that is just behind the curve. 

The CHAIRMAN. Why is it not working well? 

Ms. WARREN. It is too small, it is too slow. The program is based 

on the assumption that we will get the servicers, we will pay the 

servicers a bribe to make a deal that works between the home 

owner and the investor, who is still holding the paper. And it has 

not worked well. 

In many cases, the servicers can continue to make more money 

if the family goes through foreclosure. It is just not a program that 

is working for home owners. It is not a program, in some cases, 

that is working for investors. And most importantly, it is not a program that is working for the economy overall. 

The CHAIRMAN. Mr. Barofsky, your thoughts on this program and 

what needs to be done? And, if you could amplify a little more on 

your statement that we need more benchmarks. 

Mr. BAROFSKY. I think that is absolutely essential, though that 

does not ultimately get to the heart of why more people are being 

helped. The numbers that Treasury has put out, as dismal as they 

seem, when you dig deep behind them, in a way, it gets almost 

worse. 

12 

What we have done in this quarterly report for the first time, 

and what is not reported in Treasury’s number, is we actually disaggregate two aspects of the HAMP program. 

So part of it is done by TARP-funded modifications. The other parts are done by Fannie and Freddie. And the $50 billion of TARP 

money is only for those TARP modifications. 

When it was originally announced, I think it was—basically, you could just go by the numbers, $50 billion for TARP, $25 billion for 

Fannie and Freddie. It was anticipated that there would be probably a roughly 2-to-1 ratio. 

Well, when you break out the most recent numbers of about 

390,000 permanent mods, only 165,000 of those have come from 

TARP. So, if you look at it over the last 16 months, that is about 

10,000 permanent mods a month that are being funded through 

TARP. This is part of the transparency that we try to bring by 

breaking these numbers out so we can really look at the TARP 

piece of the program. 

The problems, as Professor Warren has noted, are all valid. Part 

of it is we have made some recommendations on vulnerability to redefault and to make these programs more effective and more attractive. 

One thing the Treasury has done, which I think is a step in the 

right direction, is to finally address the issue of principal reduction, 

which is, I think, a vital issue. All the predictors of re-default, 

whether it is the Federal Reserve or Moody’s or S&P, we cite a 

bunch of studies, all point to negative equity as being a major 

issue. 

So they roll out some significant programs, but even those are 

somewhat flawed. 

The CHAIRMAN. What do you want the Treasury to do? 

Mr. BAROFSKY. Well, I think one thing that we point out is that 

they should make the principal reduction program mandatory. As 

it is now, the servicers basically get to pick and choose and decide 

whether or not they want to give home owners the benefit of principal reduction. 

We have been in a back-and-forth, which is laid out in our report. We have asked them, preliminarily, what are your arguments; why are you doing this? We found them to be completely 

unconvincing. And I think as it currently is planned to be, it could 

end up in random—— 

The CHAIRMAN. Professor Warren, what would you have Treasury do? 

Ms. WARREN. I think that Special Inspector General Barofsky is 

in the right direction. We cannot have a program in which, in effect, we put incentives on the table paid for by the taxpayer to say, 

‘‘Please do the right thing here.’’ 

We have a crisis, and the consequences of not having cooperation 

from the servicers are not just felt by the investors who are 

harmed and by the home owners who are harmed; they are felt by 

this entire economy. 

We need a program with far more urgency and some real teeth 

in it. 

The CHAIRMAN. Thank you. 

Senator Grassley? 

13 

Senator GRASSLEY. I am just going to ask one question now of 

Professor Warren. And then, if my colleagues want to ask her, I 

will not use up other people’s time or keep her from going. 

In your report on the AIG bailout, you indicated that Goldman 

declined to provide the panel with the names of the entities that 

insured Goldman against AIG bankruptcy. You call these unnamed 

insurers ‘‘indirect beneficiaries of the government’s rescue.’’ 

Earlier I placed in the record a summary of your attempts to get 

information from Goldman that would explain who these indirect 

beneficiaries were, and, as I understand it, about $11 billion of taxpayers’ money provided to AIG ultimately benefitted companies or 

individuals who remain unknown. 

So to you, Professor Warren, can you explain why Goldman will 

not provide this information, and why should the public not know 

who these ultimate beneficiaries of taxpayer support actually are? 

Ms. WARREN. Thank you, Senator. I assume that the reason that 

Goldman will not provide this information is it does not want the 

public to know. 

Let me make it clear. We are looking for information about both 

the counter-parties to the financial transactions and, also, information about who the alleged insurers were. 

That is, when Goldman says, ‘‘We had no exposure in this, we 

were completely neutral,’’ it was because they claimed to have 

bought, in effect, insurance policies from third parties. Obviously, 

when AIG was rescued, they did not have to pay off. 

We want to know the identity of those parties, partly just to 

know where American taxpayer dollars went, but partly to assess 

Goldman’s claim. If we cannot see who the parties are and cannot 

see what the transactions are, we cannot evaluate the credibility 

of their claim that they had nothing at stake one way or the other 

in the AIG bailout. 

Senator GRASSLEY. Mr. Chairman, since the Congressional Oversight Panel has been unable to get this information, I would like 

to suggest to you that we consider the committee asking for it, and, 

if Goldman Sachs does not respond, then we should consider 

issuing a subpoena to require that the information be provided. 

The CHAIRMAN. Well, Senator, I think you make a good case, as 

does Professor Warren, that this information should be available. 

So why don’t you and I talk about that and find a way to proceed? 

Senator Bunning? 

Senator BUNNING. Thank you. This is a follow-up to Chuck’s 

question. 

In late June, the New York Times reported on the latest AIG outrage. As part of an agreement to cancel its derivatives deals and 

pay the counter-parties off at par, AIG also waived all legal rights 

to sue Goldman Sachs, Merrill Lynch, and others for fraud or other 

reasons on the mortgage-backed securities they issued and AIG 

issued. 

Since that deal was partly funded with TARP money, have any 

of you looked into this latest giveaway to the big banks at the taxpayers’ expense? 

Ms. WARREN. Senator, it is not part of our AIG report, because 

our AIG report came out before some of those documents. 

Senator BUNNING. But is it now being looked at? 

14 

Ms. WARREN. We are looking into it, Senator. Yes, we are. Thank 

you. 

Senator BUNNING. If you are, do you have any idea how much 

money each of you expects the taxpayer to lose on that TARP investment? 

Ms. WARREN. That is a very difficult question, Senator. The consequence of giving up one’s right to pursue legal remedies when the 

other party to the transaction may have made misrepresentations, 

may have otherwise misbehaved, it is very difficult to assess, and 

I do not want to be in the position of over-promising. 

Senator BUNNING. I do not want you to, either. I mean, is there 

a reasonable chance of us finding out, without getting the papers 

that Chuck and the chairman have talked about, to know exactly 

how much TARP money is at risk? 

Ms. WARREN. I am going to say this the other way. The consequence of waiving the right to pursue remedies, so that AIG 

would have at least potentially been able to sue other parties and 

draw more funds back into AIG, which, in turn, could be used to 

repay the taxpayer, that is the transaction we are talking about. 

I want to be honest, Senator. I am not sure we would ever be 

able to put a dollar figure on that. What we will try to do, what 

we can try to do is at least track down where the waivers are and 

get some assessment of what their value might have been. 

But we cannot promise beyond that because, when the lawsuit 

does not go forward, the data are never discovered, the facts never 

come forward to know exactly what happened. 

Senator BUNNING. You pointed out in your testimony the different effects TARP had on the large banks and the small banks. 

As it has played out, the large banks have benefitted the most 

and gotten larger at the expense of the small banks. 

Have any of you found that Treasury or anyone else is worried 

about that impact or that it was even considered when TARP funds 

were being handed out? 

Ms. WARREN. Senator, there is no doubt that there has been increased concentration in the banking industry since TARP dollars 

were put into the system, and we are very concerned that the numbers indicate that there will be even more concentration as smaller 

banks under great economic stress either fail or are gobbled up by 

larger banks. 

We can find no evidence that at the time the initial TARP program was designed and money was put into these banks that the 

Treasury was concerned about the increasing concentration. No, 

sir. 

Senator BUNNING. All right. Go ahead. 

The CHAIRMAN. Thank you, Senator Bunning. 

Senator Carper? 

Senator CARPER. Thanks, Mr. Chairman. 

To our witnesses, thank you all for joining us today. I have a 

question, Ms. Warren. I want to go back to something that I—— 

The CHAIRMAN. Senator, if you might just suspend briefly. 

Professor Warren, do you have to leave? I have been told that 

you had to leave at quarter of to go to the White House. So just 

for a couple, 3 minutes, could you let Senator Carper ask a couple, 

3 questions? 

15 

Senator CARPER. Are you able to do that? 

Ms. WARREN. Of course. 

Senator CARPER. Thanks. First, before I ask about the small 

bank situation, with respect to the Home Affordable Mortgage Program, I think you used the word ‘‘bribe’’ in conjunction with 

servicers. 

I sat through hearings when I was on the Banking Committee. 

We were trying to figure out why the mortgage modification programs were not working, and part of the testimony that we heard 

was that, of all the key stakeholders we need cooperation from, one 

is we needed the cooperation of the servicers. 

They were being asked to do work in conjunction with modifying 

these mortgages. They were in danger of being sued by investors 

for the work that they were doing, and they were not getting any 

compensation for it. So here they were being asked to do work and 

they were in some jeopardy, they felt, of being sued for their involvement. 

If you want to incentivize them to be part of the solution, compensate them for the work they are being asked to do. 

So I do not know that I would use the term ‘‘bribe.’’ That is 

where we ended up—and then, again, it was Treasury and a number of other folks who thought that they deserved some kind of 

compensation in order to participate. 

Let me ask you a question about the small banks, if I can. And 

thank you for bearing with us here. 

I think you have expressed here, maybe just before I arrived, 

concern about the small banks’ ability to repay their TARP obligations, and, in fact, as you note, a number of small banks have 

missed the required dividend payments. 

Let me just ask. What is your recommended solution to that 

problem? 

Ms. WARREN. Well, I always want to be modest. We can go as 

far as our data take us and try to point out where the problems 

are. 

I will say, in the case of small banks, we have been urging Treasury for, I think, more than half a year now to get ahead of the 

coming problems with commercial real estate. They are disproportionately—those loans are disproportionately concentrated in 

intermediate-size and smaller banks, and they are not evenly 

spread among those banks. They concentrate within that in certain 

banks, and that is going to create additional profound stresses on 

the financial system. 

So I am afraid I am going to have to go back to our role that 

we are not policymakers, but where we have urged Treasury to 

move is in that direction, to try to start wrestling now before the 

crisis is upon us with commercial real estate loans. 

Senator CARPER. Can you just summarize your answer in like 

one or two sentences in terms of what is your recommendation for 

solving this problem? Summarize just very briefly. 

Ms. WARREN. Fair enough. I am sorry, sir. It is that we acknowledge and deal with the obvious coming problem in commercial real 

estate, that Treasury work with the small financial institutions to 

develop a plan for how they are going to pay their way out of 

TARP, and that Treasury establish a program to deal with the 

16 

number of small banks who are not able to make their TARP repayments. 

Senator CARPER. All right. Thanks very much. 

Ms. WARREN. Thank you, sir. 

The CHAIRMAN. Thank you, Senator. 

Thank you, Professor Warren, very, very much. We deeply appreciate your service. We understand your other obligations, and the 

committee will continue hearing from Mr. Barofsky and Mr. 

Hillman. Thank you very much. 

Ms. WARREN. I apologize for leaving, and thank you all very 

much. 

The CHAIRMAN. Mr. Barofsky, if you could elaborate a little bit 

more on your report about the GM/Chrysler dealership dismissals 

by the administration and the resultant job loss and other consequences, if you felt they acted too speedily. And I do not want 

to put words in your mouth, but you felt that there was—it is not 

as appropriate as it should have been. 

Could you expand on that, please? 

Mr. BAROFSKY. Sure. And I would also note that I think that as 

a result of the—based on the White House’s reaction to our report, 

there is little chance that I will be called away by an invitation to 

the White House anytime soon to have to miss this hearing. 

[Laughter.] 

Essentially, what we tried to do in this audit report is, with respect to—— 

The CHAIRMAN. What I like about you is, you call them as you 

see them. 

Mr. BAROFSKY. With respect to the Treasury piece of this report, 

what we tried to do was, we looked at the process. What was the 

process that the auto team used in making its ultimate decision to 

reject the pitch by GM that they were going to terminate their 

dealerships over the course of 5 years, and its response and its viability determination that it needed to accelerate that process, which 

ultimately resulted with Treasury’s encouragement of using the 

bankruptcy process to basically get around the State franchise laws 

to terminate them all at once? 

What GM did was, they actually terminated the ability of those 

dealers to get new cars for about 18 months and allowed them to 

wind down. Well, Chrysler, also taking the queue, just within 3 

weeks, knocked them out with immediate terminations. 

What we found was that, when engaging in this process, there 

were several flaws in that process, that decision-making process. 

First of all, the diligence that you would expect in making a decision of this consequence, particularly given the timing—we are obviously in the midst of the greatest recession in generations. They 

did not do any of the modeling that you would expect, the analytical review that you would expect. 

Essentially, they talked to a number of industry experts, mostly 

Wall Street analysts, and asked them their opinion, and the opinion that came back was generally, yes, it is important to reduce the 

dealer networks, that there is some degree of competition, too much 

competition, particularly in metro areas and city areas. 

But basically, that opinion was not universal. There is at least 

one expert whom Treasury spoke to and others whom we spoke to 

17 

who dissented from that opinion. But there really wasn’t, until 

after the decision was made, any other diligence or work done. 

Second, there was no consideration of the projected cost savings 

to the dealerships. It was not a factor at all, and, again, that was 

not done until afterwards in response to an inquiry from Congress. 

Then third, which I think we found was the biggest flaw in this 

decision-making process, there was apparently no consideration 

given whatsoever to the fact that those decisions were going to involve potentially shuttering thousands of small businesses, putting 

tens of thousands of jobs in jeopardy, given the timing, at the very 

time when we had such a jobless epidemic. We were looking, in 

early last year, at 700,000 jobs lost per month, and that, I think, 

is one of the big flaws of this process. 

Now, it may very well have been that, having analyzed all of that 

data and looked at the benefits to GM and Chrysler versus the job 

losses and the broader economic impact, perhaps they may have 

come to the same decision. But from what we saw, we did not see 

the evidence to support the idea that these dealers—that GM and 

Chrysler would have foundered or gone out of business had they 

not accelerated termination. We saw no evidence to support that, 

and we certainly did not see any evidence of the necessary balancing that the government must do, we believe, before making a 

decision like this. 

The CHAIRMAN. The good news is the TARP losses are less and 

less. But still that implies that there are going to be some resultant 

losses. And the question is, where are the losses going to be coming 

from, and what can be done to minimize them? 

Mr. BAROFSKY. Treasury’s most recent estimate put the losses at 

a total of $105 billion. Again, this is their estimate: $45 billion from 

AIG; $25 billion from the auto industry, including their auto financing arms; and the modification program, that is $50 billion. 

Now, nothing can be done about that, because that program is 

a subsidy. There is no intention, there is no way to recoup any 

money from there. 

For the auto companies and AIG, the horse has probably left the 

barn. Our ability to—the decisions that were made, the terms that 

were provided, the amount of money that was provided, is essentially money that is out the door. 

The best that we can do is hope that, given the restructuring of 

these companies, that they return to profitability, that their market capitalization increases. 

There certainly are plans with respect to GM for an IPO. It has 

been announced, hopefully in the fourth quarter. That will hopefully get the ball rolling. AIG can successfully liquidate its assets. 

There are plans now for an IPO for one of its subsidiaries. 

Hopefully, if the economy continues to improve and market conditions continue to improve, hopefully these numbers will come 

down even further. 

But the bottom line is that, if people get more jobs, if housing 

markets rebound, and the economy improves, we are going to really 

improve our ability to get this money back. 

The CHAIRMAN. All right. My time is expiring. But there are conditions that require the money be repaid—what, conditions where 

18 

the economy is doing better, they are having greater sales? Under 

what conditions? 

Mr. BAROFSKY. We are just about down to equity investments in 

the auto companies and in AIG. There is some outstanding debt 

that is associated with it, as well, but the lion’s share is equity. 

So basically, we are going to have to liquidate our ownership interest at some point, and that only is going to happen if these companies go public or—AIG is public, but if it has and is able to shed 

enough assets to be able to pay off its Federal Reserve obligations 

first, because, again, Treasury does not get a nickel until all the 

various Federal Reserve support for AIG is taken care of, and only 

at that point. 

And for the auto companies, it really is a question of how successful and profitable they are and how Treasury can liquidate its 

investment. 

The CHAIRMAN. Senator Grassley, you have 5 minutes, plus 2 

minutes, 21⁄2 minutes. You have a lot of time. 

Senator GRASSLEY. Thank you very much. I probably will not 

take it, because I have to go over to Agriculture to ask questions 

over there. 

First of all, I am glad that Senator Baucus asked the question 

that he did about car dealerships. I would have asked a similar 

question. But let me follow-up about a specific inference you made 

about General Motors not consistently following its stated criteria 

and that there was little documentation of the decision-making 

process to terminate or retain dealerships. 

I heard from dealerships that strongly believed that there was 

little rhyme or reason to their termination notices. 

Some believed that the rationale was always evolving, meaning 

that the criteria were very subjective. 

Could you elaborate on this point and tell us what you learned 

by looking at General Motors’ data? 

Mr. BAROFSKY. What General Motors originally said, and originally said to Congress, was that it was going to pursue an objective 

criterion. They actually made comments to Congress that they did 

not want to have the dangers of a subjective process, of case-bycase basis, but they wanted it to be an objective process. 

So they put out some metrics, and they described those metrics 

to us, different scoring, the internal scoring method that they used, 

and other types of objective data. 

The problem is, when we reach behind that data, they did not 

always follow it. In fact, in some cases, there were some pretty significant variances from what the objective data indicated versus 

the actual decision-making process. 

So in phase one, the first phase of their termination, they said 

that certain criteria—if the score was below 70, then that meant 

that dealership was going to be terminated. 

But 40 percent of the dealerships that were below that number 

were actually retained. So that suggests that it was done on a more 

case-by-case basis. 

So we went back and we asked GM for explanations, and the explanations we got were general. 

19 

They acknowledged, first of all, that it was, in fact, that the objective criteria were more of a guideline and that there was some 

degree of case-by-case looking at it. 

So one of the things they came back to us with was, well, when 

we looked at this number, we decided to keep some of the dealers 

in our rural networks because our dissenting experts on the whole 

auto team’s theory pointed to the fact that the American auto dealerships and manufacturing companies have a competitive advantage in rural areas. 

So again they told us that. But then when we looked at what the 

ultimate number of determinations were, nearly half of them were 

in rural areas, which was in contrast to GM’s original pitch. 

So we asked for documentation. We asked for, all right, let us see 

the backup, and there was not any. 

Basically, the explanations that we received were after the fact, 

reconstructed. At times, it took them weeks to get back to us to try 

to reconstruct and give us an explanation why a particular dealership was terminated. 

So basically, we had a process that lacked transparency, it lacked 

accountability. And one of the things that we fought the auto team 

for is having put the wheels in motion for these terminations, these 

accelerated terminations within the chaos of a bankruptcy, that 

they had some obligation to then oversee that process, and we 

think that they abdicated that responsibility, and it resulted in 

what we saw with GM. 

And in Chrysler, which was a much more subjective process up 

front, and they were upfront by saying, hey, we used a very subjective process, but they didn’t have the basic process of an appeal 

process. 

And we fought the auto team for not following up and providing 

that oversight once they set the wheels in motion. 

Senator GRASSLEY. Last week, the Securities and Exchange Commission announced that it settled with Goldman for $550 million. 

The SEC alleged that Goldman misled investors by telling them 

that the pool of mortgages were put together by an independent advisor, when, in fact, both the hedge fund manager who created the 

security and Goldman itself were secretly betting that the investment would go bad. 

While these particular transactions did not involve AIG, there 

were reports that similar deals did. At our last hearing, I asked 

you if you were examining whether AIG may have been similarly 

misled by Goldman. 

Since AIG is a TARP recipient, losses on the securities may have 

contributed to the need for taxpayer bailout of AIG. 

Could you explain or could you give an update on your independent assessment of whether any AIG taxpayer-subsidized payments to Goldman were based on this kind of fraud and, if so, 

whether any of the fraud can be recovered from Goldman? 

Mr. BAROFSKY. We have opened a broader investigation looking 

into exactly these issues. We have actually assembled an internal 

mini-task force which combines elements from our investigations, 

as well as our audit division. 

I put my chief of staff in charge of it, because I think it is an 

important priority for our organization, and we are looking at preVerDate Nov 24 2008 21:30 Sep 28, 2011 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 R:\DOCS\67812.000 TIMD
20 

cisely these issues. Whether or not the taxpayer has a remedy, potential civil remedy, either through AIG or through the Federal Reserve and through its Maiden Lane facilities, because to the extent 

that—I am sorry, not through its Maiden Lane facilities—but 

through its credit line, and as well as the TARP money backstop 

to see whether there are any potential civil remedies here. 

And we are also looking at Maiden Lane II. We started taking 

a look at that and seeing if there were any potential civil remedies 

on behalf of the Federal reserve or on behalf of the taxpayer, if 

there is, in fact, fraud underling these. 

Our investigation is in its pretty initial stages. It is a lot of information and a lot of documents, but we are working on it. 

Senator GRASSLEY. Thank you, Mr. Chairman. I am going to 

yield back my time. 

The CHAIRMAN. Thank you, Senator. 

Senator Bunning? 

Senator BUNNING. Thank you, Mr. Chairman. 

Mr. Barofsky, I have a few questions about the auto bailouts and 

the report you issued on Monday. 

First, were you able to tell if dealership closures will do anything 

to increase the profitability of GM or Chrysler? 

Mr. BAROFSKY. All I can tell you, Senator, is that is the basis of 

the theory that the auto team was working under. It is a theory 

that is shared by a number of financial analysts on Wall Street. 

Generally speaking, even those experts whom we spoke to who 

dissented from the auto team’s overall strategy did believe that it 

was important overall for some of the dealerships in metro areas, 

where there might be oversaturation. 

The reason being basically, if two dealers are close to each other 

and competing with one another, that drives prices down. So the 

idea is that prices will go up, the consumer will pay more for a car, 

and that where GM and Chrysler will save money is that they will 

have to have fewer incentive payments to the dealerships. That is 

the theory. We have not done any work to test that theory going 

forward and to see what happens. 

Senator BUNNING. Second, when looking at the dealership closing 

plans, in general, or at any individual closures, did you find anything to suggest that either the car companies or Treasury gave 

any consideration to the fact that many of the dealerships that 

were closed were profitable for themselves and for GM and Chrysler? 

Mr. BAROFSKY. For Treasury, it was not a consideration at all. 

For the companies themselves, they acknowledged that they closed 

profitable dealerships. 

Senator BUNNING. I am going to give two examples that are right 

in my backyard. And I am in a Cincinnati metro—being on the 

short side of the Cincinnati metro area, being over in northern 

Kentucky. 

I went to high school with a young man by the name of Zimmer. 

They had Zimmer Chrysler-Plymouth, but they did not have Jeep. 

Zimmer Chrysler-Plymouth, and they had it for 90 years. 

Robke Chevrolet, they had just invested $8 million in a new 

plant—I mean, a new showroom, and they had been profitable for 

21 

the 60 years of their existence. Zimmer had been profitable for all 

90 years of their existence. 

Both of those places were closed, because they had to compete 

with all of the other major Chrysler dealerships and General Motors dealerships in the metro area of Cincinnati, and they were on 

the wrong side of the river. 

Now that, to me, is kind of the most unfair thing I’ve ever witnessed in American business. When you are running a profit, and, 

no, it was not a small profit, they just were not selling enough cars, 

450 cars in one and 600 in another. 

When you consider the big picture of the metropolitan area, they 

were at the lower end, as you were saying, they were 70 percent. 

And I cannot understand that. How is that going to help Chrysler 

and General Motors make a profit? 

Mr. BAROFSKY. Senator, it is entirely counterintuitive and, indeed, in our report, we cite—we took a sample market for a Chrysler dealership, and the dealership that got eliminated was the dealership that sold the most cars in that market. They sold the most— 

it was a Jeep dealer. 

They sold the most cars, more cars than any other Chrysler-JeepDodge dealership in that entire market. Their scores, by every objective criterion, were the highest. It was the best performing dealer. And Chrysler was upfront, they said that the reason that they 

got rid of them was that he had in his franchise agreement the 

ability to prevent other Chrysler dealerships from selling Jeeps 

within a certain radius. He did not play ball, so they got rid of him. 

This is a story that we have heard, and we have heard it over 

and over again, and, to a certain extent, on the GM side, lack of 

documentation of the process; on the Chrysler side, the lack of an 

ability to appeal. That has been remedied somewhat by Congress’s 

action, by giving them the right to arbitrate. 

Senator BUNNING. Let me ask the last question. I want to get 

Mr. Hillman in. This is a follow-up on the AIG lawsuit waiver earlier that I asked Professor Warren. 

But do either of you—have you looked at this latest giveaway in 

the form of AIG’s legal rights to sue? 

Mr. HILLMAN. All our work on AIG has really looked at the indicators of financial performance for itself, its companies, and its 

ability to restructure itself, sell off its businesses and the like. 

We do have an ongoing engagement, though, Senator, that we 

will be looking into issues associated with decisions that were made 

with the credit default swaps risk at the AIG Financial Products 

Division, which was the major cause for the downfall of AIG. 

Senator BUNNING. Also, were they returned 100 percent on 

the—— 

Mr. HILLMAN. Yes. We are looking at the whole affair, the extent 

to which the—which parties were in the room when decisions were 

made, what was the basis for the decisions, what criteria were followed and evaluated. 

Senator BUNNING. Thank you both for your questions. 

The CHAIRMAN. Senator Carper? 

Senator CARPER. Thank you, Mr. Chairman. 

Gentlemen, again, welcome and thank you for joining us today 

and for your testimony and for your responses. 

22 

Some of the questions I wanted to ask, particularly with the auto 

dealers, have been responded to, and I am going to set those aside 

for now. 

I just want to go back up to 30,000 feet and look again at the 

TARP program, and ask you each for some comments on it. 

With respect to, if you will, the capital infusion that we made 

from the TARP program into the larger financial institutions, their 

ability to meet their dividends requirements on preferred stock, 

their ability to buy back their preferred stock, their ability to make 

payments as we exercised our warrants—how is that going? 

Mr. BAROFSKY. I think overall, especially with the larger financial institutions, it is going very well. There has been more money 

paid back now than is currently outstanding. A lot of the larger 

players, through the warrants, repurchase an option process. 

Treasury has seen nice returns. 

Our recent report that we did on that process, although we saw 

some issues about the process that gave us some very serious concerns, as far as the results, they are getting the prices close to the 

internal estimates, which we all believe are reasonable. And we 

worked with Professor Warren in looking at that issue. 

So I think there is some good news. The problem is, going forward, the strongest have paid back. The most profitable have paid 

back. Now we are dealing with, in the Capital Purchase Program, 

those institutions that have not yet been able to pay back. 

In our report, we list about 105 institutions that missed dividend 

payments. We have seen a handful of failures. 

Senator CARPER. When you say 105 have missed their dividend 

payment—— 

Mr. BAROFSKY. That have missed a dividend. 

Senator CARPER. Out of a universe how large, and are these generally smaller institutions? 

Mr. BAROFSKY. These are generally smaller. We have the total 

number of the dollar value. It is not an insignificant amount, about 

$150 million. But compared to the amount of repay, that has been 

repaid by the larger institutions, it is somewhat less. 

We are also seeing restructuring and recapitalizations, which we 

go through in this report. And that is when a bank is struggling— 

a bank that has received TARP funds is struggling and frequently 

on the verge of failure, and Treasury is on the verge of basically 

getting wiped out with a complete loss to the taxpayer, they have 

been agreeing to restructure, often by taking a haircut on the value 

of a taxpayer investment to help the bank draw and attract more 

private capital, to changing the ratios, usually dropping from preferred status, dropping down the ladder to common or mandatory 

convertible stock. 

That is another area where we are seeing some losses, but Treasury is trying to get some value out of it, and I think that is a process that is a complicated process and one we are going to be looking at more closely through our audit process. 

Senator CARPER. With respect to the auto companies, GM and 

Chrysler, my recollection was that GM made some repayments of, 

I want to say, $6 billion or $7 billion. There was some assertion 

that I heard, they were like taking money out of one pocket and 

sort of like paying Peter with Paul’s money. 

23 

Can you just refresh my memory on that? But, also, talk with us 

about the IPO process, which I think is going to begin at least with 

GM later this year, and hopefully with Chrysler next year. 

Mr. BAROFSKY. Essentially, with respect to debt repayment, 

Treasury provided GM with about $49.5 billion. It was done in a 

number of different payments through it bankruptcy process. But 

a chunk of that was put into an escrow account. It was GM’s escrow account, and it was part of that support. 

And for a while, GM could not access money from that escrow account without Treasury’s permission. 

They would have to send a memo and say, ‘‘Dear Treasury, we 

want to access this money, and we want to use it for X or for Y.’’ 

Part of that $49.5 billion, we received equity in return, part of 

it was preferred shares, and part of it was approximately a $7- 

billion loan. That loan was repaid by money that came out of that 

TARP escrow account. 

So the money had gone over to GM, so it was in GM’s possession 

as part of the bailout, but it was a segregated account of TARP 

funds. 

So GM sent a series of memos over to Treasury which said, 

‘‘Dear Treasury, we would like to take money out of the escrow account of TARP funds and use it to pay back the TARP loan.’’ The 

Treasury said all right. 

Senator CARPER. Talk to us about the initial public offerings. GM 

has suggested that they hope to have at least one later this year 

to begin, I think, buying out the Federal Government, the taxpayers, for our 60–61 percent equity position. 

I met with the CEO of Chrysler a month or two ago, and he indicated the hope to return to profitability by the end of this year and 

to be able to conduct the first of a series of IPOs. I think we have 

maybe a 10-percent or a 20-percent equity position in Chrysler. 

Can you just give us an update on those two, please? 

Mr. BAROFSKY. Sure. Our information is largely from information 

announcements by Treasury and the companies, but Treasury has 

hired—they have contracted with Lazard Fre`res to advise them in 

the IPO. It is contemplated that there potentially will be an IPO 

in the fourth quarter of this year of General Motors. There are a 

lot of variables for that, of course. 

I do not think that in that IPO, Treasury will liquidate its entire 

investment. I think what is being discussed is that it would bring 

it down so—Treasury right now has a 61-percent equity ownership 

in GM—that they would sell a portion that would bring them down 

below majority ownership. 

But I think a lot of it is very dependent on a lot of different factors. But I think that they are looking towards—GM and Treasury 

are looking towards an IPO in the fourth quarter of this year. 

Chrysler, I think, Senator, your information is more up-to-date 

than mine. 

Senator CARPER. Mr. Chairman, I would just note, with respect 

to this IPO, particularly with GM, I am pleased to hear that we 

are not going to try to recoup the entire 61 percent all at once, but 

the idea of being a patient investor and hopefully, over time, as the 

market returns, and GM, which has, frankly, a bunch of good prodVerDate Nov 24 2008 21:30 Sep 28, 2011 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 R:\DOCS\67812.000 TIMD
24 

ucts in the pipeline, including I think the launch of the Volt, that 

maybe we can recover all that money. 

Thanks. 

The CHAIRMAN. I have one more question and then I am going 

to have to leave, and, Senator Carper, if you want to take over, 

that would be fine. 

Mr. Barofsky, I want to explore where we are on the total Federal effort to support the economy. You have done a new calculation of the total Federal effort to support the economy, and you 

found that the total has actually gone up from, I think, about 

$3 trillion to $3.7 trillion since last year. That is a new number. 

I guess that is the total expended or guaranteed with respect to 

the Fed, Treasury, and the TARP agencies, like FDIC and FHA. 

If you could just expand on that and delineate, frankly, what the 

components are and why it has grown in the last year. 

Mr. BAROFSKY. Sure. The areas that we saw are mostly related 

to the housing market, really Fannie and Freddie, either direct 

support of them or support of their product. 

So a breakdown—the biggest number is the Federal Reserve’s 

purchase of Freddie and Fannie mortgage-backed securities. That 

went up about $650 billion in the past year. The Federal Reserve 

has also purchased directly debt of Fannie and Freddie. That went 

up about $70 billion. And its program of buying Treasuries, the 

U.S. Government, that increased about $125 billion. 

For HUD, increases in FHA loan guarantees and Ginnie Mae 

guarantees on mortgage-backed securities, that increased about 

$500 billion. Again, that is sort of direct support to the housing 

market, as well as the institutions, obviously, that are receiving 

those guarantees. 

And on the Treasury side, we saw increases in, again, its backstop of Fannie and Freddie, about $85 billion more in purchases of 

preferred shares in those two entities; about $50 billion more in response to the Euro debt crisis by a commitment to the IMF with 

respect to the bailout of Greece; and about a $65-billion increase 

in support of student loans, purchases of student loans, and assetbacked securities involving student loans. Obviously, those numbers add up to a lot more than $700 billion, 

and that is because those are offset by the reductions in TARP and 

in a lot of the Federal Reserve’s liquidity programs, which have 

been closed down entirely. 

The CHAIRMAN. That is a big number. So how much of that is 

real? In the sense of net. 

Mr. BAROFSKY. It is all real. The $700-billion increase is all—it 

is all actually our expenditures and guarantees. 

It is not—as we make clear in here, that does not mean that the 

U.S. Government is at risk of loss of $3.7 trillion. 

The CHAIRMAN. That is my question. 

The Federal Reserve programs are almost entirely securitized— 

I am sorry—collateralized. Most of these programs are collateralized, and sometimes there is even some double-counting. 

My example is that the Fed buys an agency mortgage-backed security that is guaranteed by Fannie and Freddie. Well, it is guaranteed by Fannie and Freddie, so the Federal Reserve is not necessarily at risk of loss there. Now, of course, if there was a loss at 

25 

Fannie and Freddie, then Treasury would come in and increase it 

or purchase more preferred stock to backstop that loss if those securities go back. 

Then, of course, standing behind that is the house, which is collateral. That is the protection that Treasury has, and FHFA, which 

oversees Fannie and Freddie. If there is a default under one of 

those mortgages that backs the mortgage-backed security, again, 

there is recourse to collateral. 

Similarly, for the asset-backed security program with student 

loans, there are loans that underlie those, and there would be recourse to that. And, of course, FHA and the Ginnie Mae programs, 

again, those are all securitized by the actual houses, and there is 

some overlap in those numbers, because generally Ginnie Mae buys 

pools and securitizes FHA loans. 

The CHAIRMAN. But still the number is up from 3 to 3.7, which 

indicates greater financial Federal support for the economy, because we are not out of the woods. 

Mr. BAROFSKY. No, no, absolutely. And even when it is 

collateralized and even when there is some double-counting, each 

of these agencies has felt compelled to increase their amounts and 

their commitments to these programs by what is a staggering 

amount of money. 

The CHAIRMAN. I am going to have to leave. What is kind of the 

one thing that you want to leave with this committee at this point 

in time? I think you have done a great job, but I want to let you 

say what you want to say, tell us what you think we should know, 

this committee, at this point. 

Mr. BAROFSKY. I think that one of the enduring frustrations that 

we have is, although Treasury has come a long way in a lot of different areas for transparency and accountability, it still has some 

ways to go. And I think that transparency is not just for transparency’s sake. 

And as I said in my opening comments regarding the housing 

program, it makes the programs better. It makes them more credible. And I think where Treasury falls down on transparency, 

whether it is in the housing program or its warrant disposition 

process, by not documenting conversations or having formal processes in those negotiations, or in many other areas, it hurts the 

credibility of the program in ways that are entirely unnecessary. 

The CHAIRMAN. Thank you very much. 

Senator Nelson, you are next, and you are in charge. 

Senator NELSON [presiding]. Senator, have you been called on? 

Senator BUNNING. Twice. We have had two rounds before you 

showed up. 

Senator NELSON. I will call on you in just a minute. Good morning. 

Would you tell me, of the $36 or $34 billion that we expect to 

lose on the automobile bailout, do we expect to get any of that back 

when GM goes out with an initial offering? 

Mr. BAROFSKY. I think the projection for that loss assumes the 

paying back through the initial public offering. I think the reason 

why the number is not much higher than that is that these are the 

estimates that either CBO or OMB or Treasury—they all have different estimates out there, but this is their estimate, assuming that 

26 

there is an IPO, assuming that payments are made as a result of 

what will be left over. 

Senator NELSON. How do you break that $34 billion down between Chrysler and GM? 

Mr. BAROFSKY. I do not have those numbers. We go off the aggregate numbers that we were provided. Senator, I could go back and 

ask Treasury for that breakdown and provide it to you. 

Senator NELSON. And with regard to the $36 billion that we are 

going to lose with regard to AIG, can you give any kind of breakdown on that? 

Mr. BAROFSKY. Sure. That projection is based on—as AIG 

liquidates some of its larger holdings and gets cash money back for 

those holdings—and AIA and Alico have been the ones that have 

been prominent in the news; we indicate some others in the quarterly report—the first thing that happens is the Federal Reserve 

gets paid back. 

The Federal Reserve has a number of different facilities. For example, when those foreign subsidies are sold, the Federal Reserve 

owns preferred shares in special purpose vehicles. So that gets paid 

off first. 

Once that gets paid off, then its extended line of credit that it 

has, that has to get paid off. Then, after all that occurs and the 

Federal Reserve is made whole, then Treasury gets in line. And our 

interest right now is in preferred shares, which would presumably 

get redeemed at that point. 

But basically, it is going to only happen through increased profitability and really increased asset sales. 

Since the Treasury money really went in in two tranches, both 

equity tranches, the first one, $40 billion, really went directly to 

pay down the Federal Reserve’s credit line. I don’t even know if it 

actually even passed through AIG. 

So it had to tie that to any particular business. And then the additional $30 billion has not been fully drawn. They actually have 

not taken a drawdown on that since mid-March. 

That you could tie to individual activities, because AIG is required to identify how they are planning to use the money each 

time they come to the till on that. 

Senator NELSON. The $36-billion loss is a figure that you are projecting in the future, but conceivably, it could be less if AIG is getting more profitable. 

Mr. BAROFSKY. To be clear, the $36 billion is CBO’s most recent 

estimate. Treasury actually has a higher loss of $45 billion in its 

most recent estimate. 

But the projection is that, after all is said and done, after the 

Federal Reserve is paid off, after Treasury’s ownership, which is in 

preferred, as well as potentially in common, 8 percent of the stock, 

after all that liquidation is left over, that we are still going to be— 

that Treasury is still $45 billion in the hole. And to put that in context, I think there’s about $47 billion outstanding. 

So basically they are looking at what is currently outstanding as 

potentially a near complete loss. 

Senator NELSON. Originally, TARP was looked upon as a program to keep the country from going into financial meltdown. Later 

27 

on, it was a program thought to be an assistance to resuscitate 

back to life the housing market, and that has not worked too well. 

Would you give us your comments on that? 

Mr. BAROFSKY. I do think that your perception is widely held, 

and I think that the housing program has been a great disappointment. The numbers just came out officially yesterday, and they are 

contained in our report. During the 16–17 months since the program was announced, there have been fewer than 400,000 permanent modifications. Of those, only 165,000 are actually resulting 

from the TARP portion of the program. The rest are being done by 

Fannie and Freddie, which have slightly different standards, more 

forgiving standards. 

So the numbers have been very disappointing. One of the problems that I highlighted earlier, Senator, is that Treasury still refuses—this is one of the most basic frustrations we have—to give 

benchmarks. 

What are its goals? What is it actually trying to accomplish with 

this $50 billion that it has asked for? How many people do they 

really hope to keep in their homes. All they are offering are, frankly, quite meaningless metrics of offers to help 3 to 4 million people. 

So I think that, unfortunately, until Treasury comes clean and 

really acknowledges what its goals and expectations are, it is inevitable that there are going to be perceptions that the program is 

just an outright failure. 

Senator NELSON. Mr. Hillman? 

Mr. HILLMAN. We have looked at the Home Affordable Modification Program, as well, as part of our oversight of the TARP program. And one of the major points that we have made is that the 

program that is up and standing and running today is the first lien 

modification program, and there are many other programs that 

Treasury has announced but have yet to be fully designed and implemented. 

The first lien program, for example, was announced a year before 

it was ultimately implemented. That level of urgency contrasts very 

sharply to the activities of the TARP program as it related to supporting the banking environment. 

With the foreclosure issues, it seems that the urgency has not 

been as similar to what has taken place on the banking side. 

One of the issues that we have raised has to do with the level 

of resources that Treasury has devoted to this area, and we have 

recommended that Treasury reevaluate the resources that it needs 

to both design and successfully implement that program. 

To date, those efforts have resulted in Treasury reducing its 

workload in certain areas within the Home Affordable Modification 

Program, and we think that needs to be revisited. 

Senator NELSON. And your estimate is, or someone’s estimate is, 

there is going to be a $20-billion loss on the HAMP program, the 

Home Affordable Modification Program. Is that right, a $20-billion 

loss? 

Mr. HILLMAN. The amount of expenditures by the HAMP program, up to a commitment of $50 billion, is a total expenditure to 

the program, with no expectation that there would be any dollars 

that would be returned. 

28 

So whatever is ultimately spent will be considered a loss to the 

program. 

Senator NELSON. Well, I must say that this Senator voted 

against the first round of TARP. I was persuaded to vote for the 

reduced tranche of TARP in anticipation that it was going to help 

the housing crisis, which, in my State of Florida, over 310,000 

properties have gone into foreclosure. And in June alone of this 

year, 51,000 new foreclosures were filed. 

So needless to say, I am not very happy with this part of TARP. 

Senator Bunning? 

Senator BUNNING. Thank you, Mr. Chairman. I want to followup on the chairman’s questioning of Mr. Barofsky. 

Mr. Barofsky, there is a similar pattern in your testimony when 

you talk about Treasury’s handling of different TARP programs. In 

the HAMP program for modified mortgages, Treasury refuses, as 

you say, to set benchmarks for success. 

When it sold warrants for companies that received TARP funds, 

Treasury did not document important parts of the negotiations well 

enough. 

Fully 1 year after your office recommended an evaluation system 

and internal controls for the public-private investment program, 

Treasury has refused to do so, despite claims that it would, and the 

list goes on and on. 

Mr. Barofsky, why do you feel and why do you think Treasury 

is so afraid of real transparency and accountability in the handling 

of TARP money? 

Mr. BAROFSKY. Senator, there are some questions I can answer 

and some that are, frankly, beyond me, and I do not really understand—— 

Senator BUNNING. I just want you to answer the ones you can. 

Mr. BAROFSKY. I do not really understand why it is that they will 

not provide basic benchmarks. I do not understand why—— 

Senator BUNNING. Can you not demand that? 

Mr. BAROFSKY. All I can do is make recommendations. I have no 

ability to compel them to do so. I have no idea why they will not 

commit to fully document every conversation that they have when 

they are negotiating on behalf of the American taxpayer in the 

warrant program, where they are providing information inconsistently to different banks. 

Some banks get the benefit of knowing what price Treasury is 

likely to accept. Other banks do not. 

I cannot imagine—I truly cannot imagine why they would not 

immediately come forth and say, ‘‘You know what, SIGTARP? You 

guys are right, we made a mistake.’’ But I will tell you, those are 

words that we do not hear. We did not hear it with respect to the 

automobile warrant. We did not hear it when we talked about the 

negotiations that led to payment of 100 cents on the dollar for AIG. 

We never hear any acknowledgement that they are fallible, that 

they are human. There is a lot of pressure that Treasury has been 

under. 

Senator BUNNING. Let me just remind you that the only thing 

they need to do to renew TARP to $700 billion, for one, is for the 

Secretary of the Treasury to write a letter to himself. 

29 

There should be more accountability for a $700-billion slush fund 

that is not being used, as Senator Nelson said, for the purpose for 

which it was created. 

Do you think in one instance that this panel and other Senators 

would have voted for TARP had they known it was going to the 

major bankers in New York City? 

If Secretary Paulson would have come to this Congress and said, 

‘‘By the way, we are not going to go after bad assets or toxic assets 

in the system. We are going to give this money to the bankers and 

let them work it out.’’ Do you think for one minute that they would 

have gotten permission for $700 billion? 

Mr. BAROFSKY. I certainly understand what your view is on that, 

Senator. 

Senator BUNNING. But the frustration level with the members of 

Congress at the use of the TARP funds is just so outraged about 

what they did and how they did it, and the misuse of language 

when they sold the program to the Congress of the United States. 

We want you to do everything in your power to make them accountable. That is why we voted you into that position. And so far, 

we are pretty pleased with what you are doing, but you can go farther. 

You can make them accountable for every penny they spend. 

Mr. BAROFSKY. And we will continue to strive to do so, Senator. 

Senator BUNNING. Well, thank you very much. 

Senator NELSON. Senator Carper? 

Senator CARPER. Let me just say to Mr. Barofsky, I have known 

Senator Bunning for a long time, and that is some of the highest 

praise I have ever heard him give to a witness. 

Mr. BAROFSKY. I do appreciate it. 

Senator CARPER. I think his words were ‘‘pretty pleased.’’ This is 

a good day. 

Mr. BAROFSKY. Every day I have my job, I consider to be a good 

day, Senator. 

Senator CARPER. I feel that way, too, about mine. I have been 

talking with Amy Overton, who is my staff person, right behind 

me, and trying to just look at this again from 30,000 feet. 

My recollection is, when the last administration came to us and 

asked us to fund the troubled asset program, they explained that 

this was to buy toxic assets thought illiquid, untradeable, and that 

was a good way to help strengthen the balance sheet of financial 

institutions that were at risk. 

My recollection was that they decided to take this different approach after we provided the approval for the money, because I 

think some other countries, maybe in Europe, maybe England, had 

decided to take this approach and thought that it was a smarter 

approach. Is my recollection faulty or is that true? Either of you, 

please. 

Mr. BAROFSKY. That is consistent. We did a report on the Capital 

Purchase Program, I think, in November of last year where we 

talked about the initial decision-making process that led to the 

Capital Purchase Program and the equity investments. 

And one of the things that we found was, that was a factor, what 

the Europeans were doing. I think another significant factor was 

the conclusion that setting up the mechanisms for the purchase of 

30 

toxic assets was going to take a lot longer, and they felt that the 

situation—there was a sense of immediacy. 

I think Chairman Bernanke thought it would take 3 or 4 months 

to set up that process, and that there just was not enough time because of the continuing spiraling down of the financial crisis. That 

is my understanding of part of their explanation. 

Senator CARPER. Let me ask Mr. Hillman and you. All of us are 

better quarterbacks on Monday morning than we usually are on 

Saturday or Sunday when we are playing the game. 

But looking at the decision that was made to not use these funds 

to purchase these illiquid assets, did we make the right decision? 

Mr. HILLMAN. In our view, there are a lot of tradeoffs associated 

with whether or not you are taking away toxic assets off the balance sheets or putting capital injections into the institutions. 

However, in looking at those two options, the option of taking 

those toxic assets off the balance sheets was an enormous exercise 

fraught with a lot of problems in valuing those illiquid assets, having those assets be maintained within Treasury for a long period 

of time to sustain their profitability, and then returning them back 

to the marketplace. 

It would have been an enormous undertaking, fraught with many 

risks. Providing for capital injections into the institutions, hopefully, increasing their stability, hopefully increasing their ability to 

lend to businesses and consumers, has, in hindsight, turned out to 

be a program which has resulted in some profitability thus far for 

the Treasury and the Federal Government, at least as it relates to 

the larger institutions that have paid back those purchases of securities. 

Whether it turns out to be a positive result for the small banking 

institutions is something that has yet to be determined. Right now, 

there are four bank failures within small institutions that received 

TARP funds. There are 74 institutions that are on the high risk list 

of the FDIC. 

Senator CARPER. Those 74, can you quantify for us, just roughly, 

how much TARP money is involved with those? Are we talking billions of dollars, tens of billions, hundreds of millions? Just very 

roughly, for 1 year. 

Mr. HILLMAN. Absolutely. It is tens of billions of dollars. The majority of the funding had gone to the larger institutions and is 

based upon the asset sizes as to what types of capital injections 

that were made. 

Treasury has received back 72 percent of its $204 billion in 

TARP investments to date, and, if you add the amounts received 

from interest and dividends and warrants, they have received 80 

percent of what they paid out to date. But that remaining 20 percent that the smaller banks are holding is going to be a much more 

complicated task, in returning those funds, because of the concerns 

associated with the profitability of those institutions. 

Senator CARPER. Can you roughly quantify that 20 percent in terms of how much money we are talking? Is it $20 billion, is it 

30? Just give us a ballpark. 

Mr. HILLMAN. It is in the $30- to $40-billion range. 

Senator CARPER. I think what Mr. Barofsky was saying earlier 

with respect to—I want to say it was AIG, the amount that we 

31 

were on the hook with AIG, I heard it is somewhere maybe between $35 and $45 billion, and we are hearing that we probably 

will not see that money recovered, at least Treasury does not believe so. 

And we are looking at a similar exposure, really fairly similar 

with respect to the small banks and the question of whether or not 

we will be able to get recovered. That money is still, I think, up 

in the air. Is that right? 

Mr. HILLMAN. Absolutely. 

Senator CARPER. I want to go back to GM and Chrysler. Like 

some of my colleagues who actually follow the auto industry, Delaware was the last State that had any auto assembly operations on 

the east coast between Maine and Florida. We lost both our Chrysler plant and our GM plant within the last 18 months. We have 

worked closely with the auto industry for years. 

I am encouraged with GM, with its lineup, and I mentioned the 

Volt. I call it the most advertised car that has never been sold. But 

it is about to be sold here in a couple of months, and we will see 

how it does. 

But we have been working with an auto industry—we have an 

auto industry that historically sold between 15, 16, 17 million units 

a year. Last year, I think they sold about 10. I think this year, they 

may be on track to do about 11. 

The quality of our cars has improved, and I think the perception 

that that quality has improved has finally sunk in on the consumer. So I tend to be more optimistic than not with respect—particularly with GM. And Chrysler, I am told, is about to launch— 

and they have not had a whole lot in the pipeline for the last couple of years—a lot of new products that we should see in the year 

to come. So we will keep our fingers crossed there. 

A last question I want to ask you, if I may. I want to go back 

to the issue of really compelling financial institutions to modify the 

principal. Let us just say everybody in this room, we all live in, we 

will say, the same neighborhood. Those of you at this table and 

those of us who are privileged to sit on this side of the dais, we 

have—our mortgages are under water, and we would like for our 

lender to forgive part of our principal. 

Maybe we are working too hard, maybe we are not working hard 

in order to come up with the money to meet our mortgage payments. Say everybody else in the audience here is doing their dead 

level best, even though their mortgages might be under water, to 

meet their obligations. 

And there is a concern—I have heard it voiced from others—that 

if some kind of preference is given in terms of principal forgiveness 

for those who either are unable or maybe unwilling to do what it 

takes to meet their obligation, it acts as an incentive to those who 

are working hard to play by the rules to say, ‘‘Well, why shouldn’t 

I just walk away from my obligations, too?’’ Would you all comment 

on that? 

Mr. BAROFSKY. Sure. This is the classic moral hazard issue with 

any mortgage modification program—and to be clear, it is not just 

principal reduction. It is really HAMP as it exists with interest 

rate reductions. It is all sort of based on the idea that, if someone 

is in default or in imminent default, they are going to get a benefit, 

32 

whereas someone who is continuing to make the payments does not 

have that, and then that also creates a moral hazard. 

I think in a certain way, we have to appreciate the fact that, as 

a whole, TARP has jumped into the deep end of the moral hazard 

pool. When we are looking at the bailout for the financial institutions or the home owners, there is going to be a degree of moral 

hazard that is at play with all of these programs. 

Specifically, though, with principal reduction, first of all, based 

on our recommendation and our discussion back and forth with 

Treasury that is reflected in our report, principal reduction, basically, as we are discussing it, would only occur if it was in the best 

interest of the investor. They run the net present value test, and 

it indicates that the investor will be better off to have a higher return with the principal reduction modification versus an interestonly modification. 

For someone to take advantage of this, for the moral hazard 

issue, in other words, ‘‘I am going to intentionally default so I can 

take advantage of this program,’’ there are a number of roadblocks 

that would be there in the existing program and with this. 

First of all, they have to file a hardship affidavit that shows that 

there is a legitimate reason why they are defaulting. They have to 

verify third-party income. So somebody is going out and checking 

this income. 

That would mean that someone who wants to do this is not only 

willing to scrap their credit history to do that, but they would have 

to be willing to commit a Federal crime by signing a false affidavit. 

Secondly, the payoff is not immediate. It is over the course of 3 

years. And third, they would have to have such an intimate knowledge of the net present value test and how it interplays, and the 

fact that that net present value test would be more positive for 

them with a principal reduction versus a regular modification. 

Now, these tests are not made public. They are complex. 

The servicers themselves had a tremendous difficulty implementing them. We are doing an audit just on that process. 

So I think, while there is always a moral hazard whenever we 

are giving benefits to people who basically have been unable or are 

unwilling to make the required payments, I think the difference between voluntary and mandatory principal reduction is so incremental compared to the broader moral hazard that already exists, 

and I do think that there are some pretty good safeguards. 

And I would say to Treasury, if they are willing to go with us 

on this and continue to explore this, we will sit down and brainstorm and try to come up with some more protections for moral 

hazard. 

Senator CARPER. Mr. Hillman, closing comment? 

Mr. HILLMAN. I think that the description that you provided as 

to what is happening across the States here in the United States 

is an accurate one, and it all comes down to an issue of fairness. 

Is it fair to provide a reduction in a principal payment for one 

when another is working very hard to maintain the mortgage payment that they have? 

I do not think that we would dispute Treasury for the actions 

that it is taking to develop a Home Affordable Modification Program for its first lien mortgagers. Our view is, though, that there 

33 

are a number of other initiatives that Treasury has announced, but 

they have yet to design and implement, including a second lien 

mortgage program, alternative to foreclosures, looking at underwater borrowers, and our recommendation is that Treasury urgently needs to complete the design and implementation of those 

programs to provide the relief that is needed in the market. 

Mr. BAROFSKY. I would just add, there is an inherent unfairness 

in a voluntary program versus mandatory, because the two home 

owners who make their application to their servicer, if it is in the 

best interest of the investor and it is not NPV-positive, they should 

be treated the same. Under voluntary, it is basically up to the discretion of the servicer and, as we know, servicers have a disincentive to reducing principal, because they are paid on the outstanding 

principal balance of their portfolio. 

So I think that mandatory would actually be potentially a much 

fairer system than a voluntary one. 

Senator CARPER. Mr. Chairman, you have been very generous 

with the time. You are more generous than the other chairman. So 

thank you for coming in to chair the end of this hearing. 

And to our witnesses, thank you so much. 

Senator NELSON. Then to summarize on that Home Affordable 

Modification Program, Mr. Hillman, why don’t you comment on 

why so many borrowers fail to complete the trial modification? 

Mr. HILLMAN. One of the major reasons why borrowers are not 

completing their trial modifications has to do with the level of documentation that was required by Treasury initially in the program. 

In order to get individuals into these trial modifications quickly, 

they did not ask for the level of documentation that is normally anticipated on income and other levels of assets of an individual. 

As a result, they would not ask for that information until they 

were in the trial mod and going into a permanent modification. 

Upon checking for those permanent mods, a lot of that information has shown that they were not qualified to be included in the 

program and, therefore, had to exit the program. 

Today, the initial modifications that are being undertaken are requiring this up-front documentation. So you should not be seeing 

as many trial mods not performing as when the program began. 

Senator NELSON. And how about in the whole pipeline, where 

many of the advisors do not have the wherewithal to demand the 

transparency of the lenders in the review process? 

Mr. BAROFSKY. In our last report, we noted that there really was 

no effective appeals process for borrowers interested in appealing 

the decision associated with their joining in with the HAMP program. And the only available recourse was the hotline, and that 

hotline was not aggressively advertised so that borrowers knew of 

its existence, and we recommended greater attention being provided to ensuring that all borrowers were aware of that possibility. 

Senator NELSON. Either one of you, and we will adjourn this session just momentarily. We are getting ready to consider some legislation that has derisively been designated as TARP Jr. It is about 

$30 billion that would be anticipated to expand to $300 billion of 

loans through the small business jobs bill. 

34 

What do you think about this capital investment by the Treasury? Does it present different considerations and risks than those 

of the capital investment made by TARP? 

Mr. BAROFSKY. I think one of the concerns, and we have raised 

this concern in letters to this committee, is that there is a potential 

increased vulnerability to loss through fraud in the design of this 

program. I think that vulnerability can be addressed by vigorous 

oversight. 

It is very rare that I look for work, Senator, but we have advocated and we believe that, in the current format of the bill, we are 

not granted oversight authority over this fund, and I think that 

would be a mistake. 

The program is very similar to the TARP’s Capital Purchase Program. There are some differences. But the lessons that we have 

learned providing oversight, lessons that have resulted already in 

more than $553 million of savings to the taxpayer, are borne from 

the experience that we have had in monitoring and providing oversight to this program. 

The incentive structure of the program does leave it open for the 

potential of gaming of the system of financial numbers so that they 

pay a lower dividend rate as a result. And we do believe that, while 

this program may have the ability to do some very good and encourage small business lending, if it does not have the proper oversight, it could be all for naught. 

So we will continue to encourage the Senate, as it considers this 

bill, to have us involved in the oversight of the program. 

Senator NELSON. Have we learned something from TARP as we 

approach the small business lending bill that certain regions of the 

country, namely, an example, my State of Florida—weak real estate market, weak banks, because of bad loans—has TARP had the 

effect of penalizing those regions of the country? And should we 

make the modifications on this small business lending bill to address that? 

Mr. BAROFSKY. I do think that some of the original goals of 

TARP to increase lending were not met. In part, that was because 

there were absolutely no incentives or penalties for banks that did 

not go out and actually lend the money. And the result is that lending has continued to go down since the original infusion of TARP 

capital. 

Now, Treasury will say, and the banks have told us that that is 

because the reduction would have been even greater had there not 

been TARP funding. But there were neither carrots nor sticks with 

that money. 

I think the proposed bill of SBLF has some carrots and has some 

sticks. I do not want to speak for Professor Warren, because she 

is not here, but they put out a report that looked at the program 

and questioned whether the carrots and the sticks, either one of 

them, are sufficient enough to really compel small business lending. 

I recommend that portion of her report, because I think it is very 

informative and discusses some other issues that the Congressional 

Oversight Panel has with the structure of this program. 

Mr. HILLMAN. Treasury designed its Capital Purchase Program 

to treat large institutions and small institutions on the same basis. 

35 

That was one of their premises in the beginning, and the idea there 

was to provide fairness across all of our institutions. 

However, it is also the case that the larger institutions have been 

able to repay their TARP funds because they have access to the 

capital markets and can, therefore, through their shareholders, obtain sufficient funds to repay the TARP program. 

The smaller banks do not have that same access to the capital 

market. They are making profits through lending activities, and 

there are many local lending issues that are prohibiting smaller 

banks from making a profitable return. 

So the situation for smaller institutions is different than the situation for larger institutions. This lending fund that is being debated within the Senate would provide additional funding to smaller institutions similar to what was done with the Capital Purchase 

Program, with the intent of enhancing their capital position to 

allow them hopefully then to lend to more small businesses. 

In our view, one of the things that needs to be considered as part 

of the debate of this legislation is the quality of data that are available to make those decisions as to whether or not an increase in 

small business lending would actually occur or not. 

It is difficult to ascertain whether or not the concerns that we 

have in today’s small business sector are a supply-side weakness 

or a demand-side weakness, and further exploration of what is 

really occurring would help inform what the right decision ought 

to be. 

Senator NELSON. Thank you, gentlemen, for your enlightening 

testimony. 

The meeting is adjourned. 

[Whereupon, at 11:56 a.m., the hearing was concluded.] 

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