Congressional Oversight Panel

DECEMBER 

OVERSIGHT REPORT

December 9,

2009

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

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

Taking Stock: What Has the Troubled Asset Relief 

Program Achieved? 
1

Table of Contents

Glossary of Terms................................................................................................................3

Executive Summary.............................................................................................................4

Section One: 

A. Overview..................................................................................................................7

B. Background on the Origins and Evolution of the TARP .........................................8

1. Chronology of the Financial Crisis.....................................................................8

2. The Initial Federal Response to the Crisis........................................................12

C. The TARP’s Evolution ..........................................................................................17

1. Capital Programs and Banking Sector Health ..................................................18

2. Credit for Consumers and Small Business........................................................47

3. Mortgage Foreclosure Relief ............................................................................60

4. Auto Industry Assistance ..................................................................................69

5. The TARP as a Whole ......................................................................................74

D. Expert Commentary on the TARP.........................................................................93

1. Consistency and Transparency .........................................................................95

2. Underlying Issues..............................................................................................97

3. Moral Hazard ....................................................................................................99

E. Accomplishments and Shortcomings: How Well Has the TARP Done in 

Meeting its Statutory Objectives?........................................................................100

1. The TARP’s Contribution to Financial Stabilization and Economic 

Recovery ........................................................................................................100

2. The TARP and the American Taxpayer..........................................................106

3. Treasury as TARP Steward and Manager.......................................................107

F. Conclusions..........................................................................................................112
2

Section Two: Additional Views.......................................................................................114

A. Damon Silvers......................................................................................................114

B. Richard Neiman ...................................................................................................117

C. Representative Jeb Hensarling.............................................................................121

D. Paul S. Atkins.......................................................................................................161

Section Three: Correspondence with Treasury Update ...................................................163

Section Four: TARP Updates Since Last Report.............................................................164

Section Five: Oversight Activities...................................................................................166

Section Six: About the Congressional Oversight Panel...................................................167

Appendices:

APPENDIX I: UNPAID DIVIDEND PAYMENTS UNDER CPP AS OF 

OCTOBER 31, 2009..................................................................................................168

APPENDIX II: LETTER FROM CHAIR ELIZABETH WARREN TO 

ASSISTANT SECRETARY HERB ALLISON, RE: WRITTEN 

RESPONSES FOR HEARING RECORD, DATED NOVEMBER 25, 2009 ..........170

APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO 

SECRETARY TIMOTHY GEITHNER, RE: STRESS TESTS, DATED 

NOVEMBER 25, 2009 ..............................................................................................172

APPENDIX IV: LETTER FROM CHAIR ELIZABETH WARREN TO 

SECRETARY TIMOTHY GEITHNER, RE: CIT GROUP, INC., DATED 

NOVEMBER 25, 2009 ..............................................................................................174

APPENDIX V: ENDNOTES TO FIGURE 27: FEDERAL 

GOVERNMENT’S FINANCIAL STABILIZATION PROGRAMS (AS OF 

NOVEMBER 25, 2009) – CURRENT MAXIMUM EXPOSURES ........................177
3

Glossary of Terms

ABS Asset-backed securities

AIFP Automotive Industry Financing Program

AIG American International Group, Inc.

AGP Asset Guarantee Program

ASSP Auto Supplier Support Program

CBO Congressional Budget Office

CDS Credit default swap

CIT CIT Group, Inc.

CMBS Commercial mortgage-backed securities

CPP Capital Purchase Program

CRE Commercial real estate

EESA Emergency Economic Stabilization Act of 2008

FDIC Federal Deposit Insurance Corporation

FRBNY Federal Reserve Bank of New York

GSE Government-sponsored enterprise

HAMP Home Affordable Modification Program

HARP Home Affordable Refinancing Program

IMF International Monetary Fund

IRR Internal rate of return

LIBOR London Interbank Offered Rate

LTV Loan-to-value ratio

MHA Making Home Affordable

OIS Overnight Indexed Swaps

OMB Office of Management and Budget

PPIP Public-Private Investment Program

SBA Small Business Administration

SEC U.S. Securities and Exchange Commission

SIGTARP Office of the Special Inspector General for the Troubled Asset Relief Program

SPA Securities purchase agreement

S-PPIP Legacy Securities PPIP

SSFI Systemically Significant Failing Institution Program

TALF Term Asset-Backed Securities Loan Facility

TARP Troubled Asset Relief Program

TIP Targeted Investment Program

TLGP Temporary Liquidity Guarantee Program
4

Executive Summary*

The financial crisis that gripped the United States last fall was unprecedented in type and 

magnitude. It began with an asset bubble in housing, expanded into the subprime mortgage 

crisis, escalated into a severe freeze-up of the interbank lending market, and culminated in 

intervention by the United States and other industrialized countries to rescue their banking 

systems.

The centerpiece of the federal government’s response to the financial crisis was the 

Emergency Economic Stabilization Act of 2008 (EESA), which authorized the Treasury 

Secretary to establish the $700 billion Troubled Asset Relief Program (TARP) and created the 

Congressional Oversight Panel to oversee the TARP. Now, at the end of the first full year of 

TARP’s existence, the Panel is taking stock of the TARP’s progress: reviewing what the TARP 

has accomplished to date, and exploring where it has fallen short.

Although the TARP was a key element of the federal government’s response to the 

financial crisis, it was only one part of a multi-pronged approach. The FDIC and the Federal 

Reserve undertook major initiatives that are also aimed at bolstering financial stability. In 

addition, Congress enacted a fiscal stimulus measure that was larger than the TARP. Foreign 

governments also acted to rescue their banking systems, with consequences that echoed through 

the U.S. system as well.

Because so many different forces and programs have influenced financial markets over 

the last year, TARP’s effects are impossible to isolate. Even so, there is broad consensus that the 

TARP was an important part of a broader government strategy that stabilized the U.S. financial 

system by renewing the flow of credit and averting a more acute crisis. Although the 

government’s response to the crisis was at first haphazard and uncertain, it eventually proved 

decisive enough to stop the panic and restore market confidence. Despite significant 

improvement in the financial markets, however, the broader economy is only beginning to 

recover from a deep recession, and the TARP’s impact on the underlying weaknesses in the 

financial system that led to last fall’s crisis is less clear.

Congress established broad goals for the Emergency Economic Stabilization Act. It is 

apparent that, after 14 months, many of the ongoing problems remain in the financial markets 

and the broader economy:

• The availability of credit, the lifeblood of the economy, remains low. Banks remain 

reluctant to lend, and many small businesses and consumers are reluctant to borrow. 

 * The Panel adopted this report with a 4-1 vote on December 8, 2009. Rep. Jeb Hensarling voted against 

the report. Additional views are available in Section Two of this report.
5

Even as new capital and earnings flow into banks, questions remain about whether this 

money is being used to repair damaged balance sheets rather than putting the money into 

lending.

• Bank failures continue at a nearly unprecedented rate. There have been 149 bank 

failures between January 1, 2008 and November 30, 2009. The FDIC, facing red ink for 

the first time in 17 years, must step in to repay depositors at a growing number of failed 

banks. This problem may worsen, as deep-seated problems in the commercial real estate 

sector are poised to inflict further damage on small and mid-sized banks.

• Toxic assets remain on the balance sheets of many large banks. Some major financial 

institutions continue to hold the toxic mortgage-related securities that contributed to the 

crisis, waiting for a rebound in asset values that may be years away. These banks may be 

considered “too big to fail,” but at the same time, they may be too weak to play a 

meaningful role in keeping credit flowing throughout the economy.

• The foreclosure crisis continues to grow. More than two million families have lost 

their homes to foreclosure since the start of this crisis, and countless more have lost their 

homes in short-sales or have turned their keys over to the lender. Foreclosure starts over 

the next five years are projected to range from 8 to 13 million, but more than a year after 

the TARP was passed, it appears that the TARP’s foreclosure mitigation programs have 

not yet achieved the scope, scale, and permanence necessary to address the crisis.

• Job losses continue to escalate. The unprecedented government actions taken since last 

September to bolster the faltering economy have not been enough to stem the rise of 

unemployment, which in October was at its highest level since June 1983. 

• Markets remain dependent on government support. The market stability that has 

emerged since last fall’s crisis has been in part the result of an extraordinary mix of 

government actions, some of which will likely be scaled back relatively soon, and few of 

which are likely to continue indefinitely. It is unclear whether the market can yet 

withstand the removal of this support.

• Government intervention signaled an implicit government guarantee of major 

financial institutions, and unwinding this guarantee poses a difficult long-term 

challenge. As yet, there is no consensus among experts or policymakers as to how to 

prevent financial institutions from taking risks that are so large as to threaten the 

functioning of the nation’s economy.

While the TARP, along with other strong government action, can be credited with 

stopping an economic panic, the program’s progress toward the other goals set by Congress –

goals that are necessary for reestablishing stability in the financial system and providing the tools 

for rebuilding the American economy – is less clear.
6

Since its inception, the TARP has gone through several different incarnations. It began 

as a program designed to purchase toxic assets from troubled banks, but it quickly morphed into 

a means of bolstering bank capital levels. It was later put to use as a source of funds to restart 

the securitization markets, rescue domestic automakers, and modify home mortgages. The 

evolving nature of the TARP, as well as Treasury’s failure to articulate clear goals or to provide 

specific measures of success for the program, make it hard to reach an overall evaluation. In its

report of December 2008, the Panel called on Treasury to make both its decision-making and its 

actions more transparent. The Panel renews that call, as it has done with every monthly report 

since then. 

Despite the difficult circumstances under which many decisions have been made, those 

decisions must be clearly explained to the American people, and the officials who make them 

must be held accountable for their actions. Transparency and accountability may be painful in 

the short run, but in the long run they will help restore market functions and earn the confidence 

of the American people.
7

Section One

A. Overview

Congress created the Congressional Oversight Panel to oversee the Executive Branch’s 

broad authority to use the $700 billion Troubled Asset Relief Program (TARP). In carrying out 

its responsibilities under the Emergency Economic Stabilization Act of 2008 (EESA), the Panel 

has published 12 monthly reports and two special reports on a wide range of the TARP and 

related financial stabilization initiatives.

This month the Panel assesses what the TARP has accomplished and where it has fallen 

short from various perspectives in the 14 months since its inception. The report describes the 

major elements of the TARP – capital assistance for financial institutions, small business and 

consumer lending initiatives, mortgage foreclosure programs and assistance to two U.S. 

automakers – and their status, including updates on particular issues since the Panel’s earlier 

reports on these same subjects. It looks at key economic indicators and their behavior over the 

course of the crisis and what they appear to be telling us now. The report also summarizes the 

views of academic and other experts whose analysis the Panel requested, as well as the Panel’s 

recent hearing with five prominent economists and experts on the subject of financial sector 

crises.

Congress stated that its purpose in passing EESA was “to immediately provide authority 

and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the 

financial system of the United States.” After reviewing the performance of the disparate 

initiatives that Treasury has carried out under the TARP’s authorizing legislation and the 

assessments of outside experts concerning that performance, this report concludes with a look at 

how well the TARP has done as measured against the stated objectives of the Act and the 

espoused goals of Treasury leadership across two administrations.

This report includes some discussion of financial stability efforts of both the Federal 

Reserve Board and the Federal Deposit Insurance Corporation (FDIC), but only inasmuch as 

those efforts augment or supplement Treasury’s actions under the TARP. The report does not 

include any detailed discussion of other government responses to the financial crisis, such as the 

Housing and Economic Recovery Act of 2008 and the American Recovery and Reinvestment 

Act of 2009, although the Panel is mindful of the difficulties in separating the impact of the 

various government responses on the overall U.S. economy. The report also does not attempt to 

bring to light new information about the factors that may have contributed to the decisionmaking by government officials at the height of the financial crisis, although such accounts by 

journalists and other oversight bodies have informed the Panel’s framework for assessing the 

TARP.
8

In reviewing the performance of the TARP after a little over one year, the Panel has 

benefitted from similar one-year assessments from others. Treasury published a summary of the 

Administration’s financial stabilization efforts in September, and it expects to release its formal 

accounting statements for the TARP for Federal fiscal year 2009 (running from October 1, 2008 

through September 30, 2009) in mid-December. Treasury policy officials have also testified and 

given public presentations in recent months providing their own review of the performance of the 

TARP. Assistant Secretary of the Treasury for Financial Stability Secretary Herb Allison 

testified before the Panel on October 22, 2009 and made several observations on the TARP and 

its impact after one year. Other oversight groups such as the Government Accountability Office 

have recently looked at the performance of the TARP.

The TARP is currently scheduled to expire on December 31, 2009. The Secretary of the 

Treasury is authorized under EESA to extend the program through October 3, 2010, upon 

notification of Congress. The Panel takes no position on the desirability of such an extension.

B. Background on the Origins and Evolution of the TARP

1. Chronology of the Financial Crisis 

The global financial crisis that culminated in intervention by the United States and other 

industrialized countries to rescue their banking systems was largely the result of an asset bubble 

in housing, driven in part by the relatively low cost of credit. U.S. housing prices reached their 

high point in mid-2006. At the market’s peak, the average cost of a home was more than twice 

what it had been just six and a half years earlier, a remarkable annual growth rate of nearly 12 

percent.1 Housing construction had likewise surged to an unsustainable annual rate of 2.15 

million new privately owned units, and by 2006 unsold inventory began to pile up.2 Then house 

prices began to ebb. The decline was initially not dramatic – prices fell by less than 3 percent 

over the next 12 months.3 But it was enough to undermine a key assumption behind the financial 

instruments that provided much of the support for the U.S. housing bubble – that housing prices 

never go down, at least not on a sustained nationwide basis.4

 1 See Standard & Poor’s, S&P/Case-Shiller Home Price Indices – Instrument: Seasonally Adjusted 

Composite 20 Index (online at www2.standardandpoors.com/spf/pdf/index/SA_CSHomePrice_History_092955.xls) 

(hereinafter “S&P/Case-Shiller Home Price Indices”) (accessed Dec. 7, 2009) (relating how the index rose from 

100.59 in January 2000 to 206.15 in May 2006, a rise of 11.99 percent, on average, per year).

2 See generally United States Census Bureau, New Privately Owned Housing Units Started in the United 

States by Purpose and Design (online at www.census.gov/const/www/quarterly_starts_completions.pdf) (accessed 

Dec. 7, 2009).

3 See S&P/Case-Shiller Home Price Indices, supra note 1.

4 See Bank of America, Remarks by Chairman and Chief Executive Officer Kenneth D. Lewis at Los 

Angeles Town Hall: Mending our Mortgage Markets (July 9, 2008) (online at 

newsroom.bankofamerica.com/index.php?s=63&item=205) (“Before this decade, we had a long history of relatively 
9

The impact of falling home prices was felt early on in the subprime mortgage market, 

where borrowers began defaulting on mortgages that proved unaffordable as soon as prices 

stopped climbing. Many of the mortgages that helped fuel the boom had been premised on the 

assumption that borrowers would be able to refinance before their mortgages reset to higher, 

unaffordable interest rates. But as soon as home prices stopped rising, it became impossible for 

such borrowers, who had little or no equity in their homes, to refinance.5

 In June 2007 two Bear 

Stearns-sponsored hedge funds that were heavily invested in subprime mortgages collapsed; 

Bear Stearns intervened with a private bailout.6 But the market was becoming more volatile, as 

credit-rating agencies were issuing more and more downgrades of bonds composed of souring 

subprime mortgages. By the end of June, the three biggest rating agencies had downgraded their 

ratings on 2,012 tranches, or slices, of residential mortgage-backed securities. Just 16 days later, 

that number had climbed to 3,079.7 Initially the downgrades were largely confined to the bonds’ 

lower-rated tranches.8 But investors feared the losses would spread,9 and they did. Soon even 

the safest pieces of these mortgage-backed bonds, those rated triple-A, were being downgraded.10

 

stable appreciation in home values, averaging about 3-4% a year for more than a century. But during that time, the 

conventional wisdom built that housing prices never go down, except for brief corrections in the march upward.”).

5 See, e.g., Kristopher Gerardi, Adam Hale Shapiro, and Paul S. Willen, Subprime Outcomes: Risky 

Mortgages, Homeownership Experiences, and Foreclosures, Federal Reserve Bank of Boston, Working Paper No. 

07-15 (May 4, 2008) (online at www.bos.frb.org/economic/wp/wp2007/wp0715.pdf) (“[H]ouse price depreciation 

plays an important role in generating foreclosures. In fact, we attribute much of the dramatic rise in Massachusetts 

foreclosures during 2006 and 2007 to the decline in house prices that began in the summer of 2005.”).

6 See Forest Asset Management, Hedge Funds: Don’t Bank On It, at 1-2 (Aug. 2008) (online at 

forestmgmt.lightport.com/727830.pdf); see also The Bear Stearns Companies Inc., Presentation, Merrill Lynch 

Banking & Financial Services Investor Conference, at 3 (Nov. 14, 2007) (online at 

www.bearstearns.com/includes/pdfs/investor_relations/presentations/merrill_lynch.pdf). 

7 Standard & Poor’s had 767 downgrades through June 2007 and 1,346 through July 16, 2007. For 

Moody’s, it was 479 through June and 933 through July 16. Fitch went from 766 downgrades to 800. See Fitch 

Ratings, U.S. Subprime Rating Surveillance Update, at 23-24 (July 2007) (online at 

www.fitchratings.com/web_content/sectors/subprime/Subprime_Presentation_07_2007.pdf).

8 Id. at 30.

9 See Markus K. Brunnermeir, Deciphering the 2007-08 Liquidity and Credit Crunch, 23 Journal of 

Economic Perspectives, no. 1, at 82-87 (Winter 2009) (online at 

www.princeton.edu/~markus/research/papers/liquidity_credit_crunch.pdf) (describing the “unnerve[ing]” effect of 

mortgage-backed securities (MBS) downgrades on the broader ABS market).

10 See Office of the Comptroller of the Currency, Remarks of Comptroller John C. Dugan before the Global 

Association of Risk Professionals (Feb. 27, 2008) (online at www.occ.treas.gov/ftp/release/2008-22a.pdf) (“These 

better-than-triple A tranches were supposed to be the least risky parts of the subprime securities pyramid. Instead 

they have generated the clear majority of reported subprime writedowns in capital markets, which in turn have been 

at the core of several of the worst episodes of the market’s disruptions: the seizing up of the asset-backed 

commercial paper market because of conduit and SIV investments in these instruments; the huge, surprising, and 

concentrated losses in commercial and investment banks that packaged and sold subprime ABS CDOs; the large 

losses in regulated firms that thought they had conservatively purchased ‘safe’ securities, including regional banks 

from as far away as Germany; and most recently in the news, the large losses projected for monoline insurance 

companies that sold credit protection on these super-senior tranches.”).
10

The first major casualty was Bear Stearns. In addition to its exposure to risky mortgages, 

the 85-year-old investment bank had come to rely heavily on short-term loans.11 These factors 

made Bear Stearns especially vulnerable to a run, which came in March 2008. As the firm lost 

assets, its ability to borrow deteriorated. On March 14, the Federal Reserve agreed to lend $29 

billion as part of a deal that allowed JPMorgan Chase to buy Bear Stearns.12 JPMorgan Chase 

ended up paying approximately $10 for each share of Bear Stearns stock, or about six percent of 

its peak share price.13 The government’s rescue of Bear Stearns established a new precedent. 

Previously, the government had allowed faltering investment banks, which are not insured by the 

federal government or regulated like commercial banks, to go bankrupt, as Drexel Burnham 

Lambert did in 1990.14

As 2008 wore on, conditions in the financial markets continued to deteriorate. U.S. 

securitization markets, which had provided the funding that fueled the housing boom, were 

severely contracting. The number of privately securitized mortgages plunged from 1.75 million 

in 2006 to a mere 27,296 in 2008.15 In the first two quarters of that year, U.S. issuance of assetbacked securities, which include car loans, student loans, credit card lending, as well as home 

equity loans, averaged about $58 billion, down from an average of $175 billion per quarter 

between 2005 and the first half of 2007.16 In addition, the effects of the weak financial sector 

were now being felt in the real economy, where unemployment had risen from a low of 4.4 

percent in March 2007 to 6.2 percent by August 2008.17 Foreclosure filings had more than 

doubled in just 16 months, from 147,708 in April 2007 to 303,879 in August 2008.18

 11 See U.S. Securities and Exchange Commission, Office of Inspector General, SEC’s Oversight of Bear 

Stearns and Related Entities: The Consolidated Supervised Entity Program at v (Sept. 25, 2008) (online at 

http://www.sec-oig.gov/Reports/AuditsInspections/2008/446-b.pdf).

12 Federal Reserve Bank of New York, Summary of Terms and Conditions Regarding the JPMorgan Chase 

Facility (Mar. 24, 2008) (online at www.newyorkfed.org/newsevents/news/markets/2008/rp080324b.html) 

(hereinafter “Summary of Terms and Conditions Regarding the JPMorgan Chase Facility”).

13 JPMorgan Chase, Bear Stearns Announce Amended Agreement (March 24, 2008) (online at 

www.jpmorgan.com/cm/cs?pagename=JPM_redesign/JPM_Content_C/Generic_Detail_Page_Template&cid=11593

39104093&c=JPM_Content_C); Ciovacco Capital Management, Forget the Spin, Bear Stearns Was Given Away To 

Calm Markets (Mar. 17, 2008) (online at ciovaccocapital.com/Article%20January%20Lows.pdf).

14 See Kenneth Ayotte and David A. Skeel, Jr., Bankruptcy or Bailouts?, Northwestern University School 

of Law Research Paper No. 09-05 (July 23, 2009) (online at 

papers.ssrn.com/sol3/papers.cfm?abstract_id=1362639##).

15 Federal Financial Institutions Examination Council, Home Mortgage Disclosure Act National Aggregate 

Report – Instrument: Loans Sold by Tract in 2006, 2008 (online at 

www.ffiec.gov/hmdaadwebreport/NatAggWelcome.aspx) (accessed Dec. 4, 2009).

16 Securities Industry and Financial Markets Association, US ABS Issuance (online at 

www.sifma.org/uploadedFiles/Research/Statistics/SIFMA_USABSIssuance.pdf) (hereinafter “US ABS Issuance”) 

(accessed Dec. 4, 2009).

17 United States Department of Labor, Bureau of Labor Statistics, Labor Force Statistics from the Current 

Population Survey (online at 
11

Fear in the financial markets, which had been building, evolved into a full-blown panic in 

September 2008. During a remarkable 19-day stretch, the federal government took over the two 

largest players in the mortgage market, allowed a large investment bank to go bankrupt, bailed 

out one of the world’s largest insurance companies, and steered a major financial institution 

through the largest bank failure in U.S. history. Treasury took Fannie Mae and Freddie Mac into 

conservatorship on September 7.19 Lehman Brothers failed on September 14.20 The next day, 

Bank of America announced it was buying Merrill Lynch.21 The day after that, the government 

announced its bailout of AIG.22 Also on September 16, the assets of a money-market mutual 

fund fell below $1 per share, exposing investors to losses, an occurrence known as “breaking the 

buck” that had not happened in the industry for 14 years.23 On September 20, the Federal 

Reserve announced that it was allowing Goldman Sachs and Morgan Stanley, the nation’s only 

two remaining large investment banks, to become bank holding companies, giving them access 

to a key source of low-cost borrowing from the Federal Reserve.24 On September 25, the FDIC 

took Washington Mutual, the nation’s largest savings and loan, into receivership and sold many 

of its assets to JPMorgan Chase.25

 

data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=LNS14000000) (hereinafter 

“Labor Force Statistics”) (accessed Dec. 7, 2009).

18 For April 2007 data see Bloomberg, Mortgage Defaults Rise 62 Percent, RealtyTrac Reports (May 15, 

2007) (online at www.bloomberg.com/apps/news?pid=20601087&sid=a8IPzXdjD06o&refer=home) (quoting the 

RealtyTrac press release which is no longer available online). For August 2008 data see RealtyTrac, Foreclosure 

Activity Increases 12 Percent in August (Sept. 12, 2008) (online at 

www.realtytrac.com/contentmanagement/pressrelease.aspx?channelid=9&accnt=0&itemid=5163). 

19 U.S. Department of the Treasury, Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal 

Housing Finance Agency Action to Protect Financial Markets and Taxpayers (Sept. 7, 2008) (online at 

www.ustreas.gov/press releases/hp1129.htm) (hereinafter “Secretary Paulson Statements on Action to Protect 

Financial Markets and Taxpayers”).

20 See United States Securities and Exchange Commission, Statement Regarding Recent Market Events and 

Lehman Brothers (Sept. 14, 2008) (online at www.sec.gov/news/press/2008/2008-197.htm).

21 See Bank of America, Bank of America Buys Merrill Lynch Creating Unique Financial Services Firm

(Sept. 15, 2008) (online at newsroom.bankofamerica.com/index.php?s=43&item=8255).

22 See Board of Governors of the Federal Reserve System, Press Release (Sept. 16, 2008) (online at 

www.federalreserve.gov/newsevents/press/other/20080916a.htm) (hereinafter “September 16 Press Release”).

23 See The Reserve, Important Notice Regarding Reserve Primary Fund’s Net Asset Value (Nov. 26, 2008) 

(online at www.reservefunds.com/pdfs/Press Release Prim NAV 2008_FINAL_112608.pdf); Christopher Condon, 

Reserve Primary Money Fund Falls Below $1 a Share, Bloomberg (Sept. 16, 2008) (online at 

www.bloomberg.com/apps/news?pid=20601087&sid=a5O2y1go1GRU).

24 Goldman Sachs’ and Morgan Stanley’s ability to borrow from the Federal Reserve dated back to March 

2008, when the Primary Dealer Credit Facility was established, but that initiative was meant to be temporary. As 

bank holding companies, Goldman Sachs and Morgan Stanley would have permanent access to funding from the 

Federal Reserve. See Board of Governors of the Federal Reserve System, Press Release (Sept. 21, 2008) (online at 

www.federalreserve.gov/newsevents/press/bcreg/20080921a.htm).

25 See Federal Deposit Insurance Corporation, JPMorgan Chase Acquires Banking Operations of 

Washington Mutual (Sept. 25, 2008) (online at www.fdic.gov/news/news/press/2008/pr08085.html). 
12

One particularly stark measure of the panic that had seized the markets was the spread 

between the three-month London Interbank Offered Rate (LIBOR), which shows quarterly 

borrowing costs for banks, and the Overnight Indexed Swaps (OIS) rate, which shows the cost of 

extremely short-term borrowing. The spread between these two rates reflects what the market 

believes to be the risk in lending money to a bank; it is therefore understood to be a measure of 

the banking sector’s overall health.26 Prior to the widespread market fears about subprime 

lending, this spread hovered at or below 10 basis points, or 0.1 percent. In late 2007, it rose as 

high as 105 basis points, reflecting a significantly heightened perception of risk. At the height of 

the financial crisis on October 10, 2008, the spread was 364 basis points.27 In the fall of 2008, 

many major banks had large amounts of bad loans on their books, leading to fears that they were 

insolvent.28 The problem was exacerbated by the big banks’ heavy use of leverage, their opaque 

balance sheets, and the complex structures of many of their holdings.29 As a result, lenders did

not know whom to trust. At the same time, the already impaired securitization markets were 

now on the verge of shutting down. Issuance in the United States of asset-backed securities fell 

from $63 billion in the second quarter of 2008 to just $3.5 billion in the fourth quarter.30

2. The Initial Federal Response to the Crisis

The federal government’s initial responses to the financial crisis were often ad hoc, with 

decisions made on an emergency basis.31

 26 See Federal Reserve Bank of St. Louis, Economic Synopses: What the Libor-OIS Spread Says (Number 

24) (May 11, 2009) (online at research.stlouisfed.org/publications/es/09/ES0924.pdf).

 On March 13, 2008, during the run on Bear Stearns, 

the Federal Reserve learned that, due to a large and sudden deterioration in liquidity, the firm 

was one day from filing for bankruptcy. As Chairman of the Board of Governors of the Federal 

Reserve System Ben S. Bernanke later told Congress, there were numerous systemic factors for 

27 Bloomberg, 3 Mo LIBOR-OIS Spread (online at 

www.bloomberg.com/apps/cbuilder?ticker1=.LOIS3%3AIND) (hereinafter “3 Mo LIBOR-OIS Spread”) (accessed 

Dec. 4, 2009).

28 For a more detailed view of which loans went bad and when, see Figure 9 in Section 1.C.1.c.i. See also 

Congressional Oversight Panel, Written Testimony of Center for Economic and Policy Research Co-Director Dean 

Baker, Taking Stock: Independent Views on TARP’s Effectiveness, at 4 (Nov. 19, 2009) (online at 

cop.senate.gov/documents/testimony-111909-baker.pdf) (hereinafter “Baker COP Testimony”).

29 See Bank of England, Remarks as Prepared for Delivery by Mervyn King, Governor of the Bank of 

England, to the Worshipful Company of International Bankers in London: Finance (Mar. 17, 2009) (online at 

www.bankofengland.co.uk/publications/speeches/2009/speech381.pdf).

30 US ABS Issuance, supra note 16.

31 See Steven M. Davidoff and David Zaring, Regulation by Deal: The Government’s Response to the 

Financial Crisis, 61 ADMIN. L. REV. 463, 467 (2009) (available online at 

papers.ssrn.com/sol3/papers.cfm?abstract_id=1306342) (characterizing the government’s role as “that of an 

extraordinarily vigorous dealmaker”); Richard A. Posner, A Failure of Capitalism: The Crisis of ’08 and the 

Descent Into Depression (2009) (excerpted online at www.finreg21.com/lombard-street/a-failure-capitalism-thecrisis-of-‘08-and-the-descent-into-depression) (writing that the government responded to the crisis with “a series of 

improvisations”).
13

the Federal Reserve to consider as it contemplated a possible bailout, including the effects that 

Bear Stearns’ failure would have on the firm’s counterparties, the effects it would have on 

confidence in the financial markets, and the effects that any resulting contraction in available 

credit would have on the U.S. economy.32 Within hours, the Federal Reserve decided to facilitate 

Bear Stearns’ acquisition by JPMorgan Chase by extending a $29 billion loan using its authority 

under Section 13(3) of the Federal Reserve Act,33 which allows the Federal Reserve to lend to 

“any individual, partnership, or corporation” under “unusual and exigent circumstances.”34

In March 2008, at the same time that it was dealing with the Bear Stearns collapse, the 

Federal Reserve also took further steps to bolster financial markets and the economy with the 

creation of two special liquidity facilities.35 These facilities served as backstops in the 

marketplace by ensuring that firms that held less liquid assets had access to the cash they needed

to fund their day-to-day operations. The government’s improvisations accelerated at a dizzying 

rate in September 2008, as market forces repeatedly overwhelmed whichever step the 

government had most recently taken. The decision by Treasury and the Federal Housing Finance 

Agency to take control of Fannie Mae and Freddie Mac was driven by the two firms’ thin 

capitalization, as well as the effects of falling home prices, rising delinquency rates, and 

instability in the financial markets.36 In addition, the firms’ enormous sizes – together they held 

$5.4 trillion in guaranteed securities and outstanding debt, on par with the federal government’s 

publicly held debt37

 32 Senate Banking Committee, Written Testimony of Ben S. Bernanke, chairman, Board of Governors of 

the Federal Reserve System, Turmoil in U.S. Credit Markets: Examining the Recent Actions of Federal Financial 

Regulators, 110th Cong., at 2-3 (Apr. 3, 2008) (online at 

banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=0a0ec016-ad61-4736-b6e3-

7eb61fbc0c69).

– raised the possibility that their failure would have systemic consequences. 

Then-Secretary of the Treasury Henry Paulson also cited Fannie Mae’s and Freddie Mac’s 

ambiguous relationships with the government as a motivating factor for the backstops. Investors 

worldwide had purchased Fannie and Freddie debt on the understanding that the U.S.

33 Summary of Terms and Conditions Regarding the JPMorgan Chase Facility, supra note 12.

34 12 U.S.C. § 343.

35 The new facilities were known as the Term Securities Lending Facility and the Primary Dealer Credit 

Facility. One additional Federal Reserve special liquidity facility pre-dated the market upheaval around the time of 

Bear Stearns’ collapse, though its size was expanded in March 2008. The Term Auction Facility, which provided 

short-term liquidity to depository institutions, was created in December 2007.

36 See Secretary Paulson Statements on Action to Protect Financial Markets and Taxpayers, supra note 19; 

see also Federal Housing Finance Agency, Statement of FHFA Director James B. Lockhart (Sept. 7, 2008) (online at 

www.ustreas.gov/press/releases/reports/fhfa_statement_090708hp1128.pdf) (hereinafter “Statement of FHFA 

Director James B. Lockhart”).

37 Statement of FHFA Director James B. Lockhart, supra note 36.
14

government implicitly stood behind it.38 Secretary Paulson stated that under these circumstances 

the United States was obliged to assist the firms.

39

The reasoning behind the decision not to bail out Lehman Brothers is less clear. ThenSecretary Paulson insisted that he never considered committing taxpayer funds to a Lehman 

rescue. Secretary Paulson cited “moral hazard,” the idea that firms will take greater risks if they 

believe the government is prepared to bail them out. 40 Government officials including Timothy 

Geithner, then President of the Federal Reserve Bank of New York (FRBNY), Chairman 

Bernanke, and Secretary Paulson, ultimately decided against a rescue.41 Treasury maintains that 

it doubted its legal authority to intervene in the collapse of Lehman, despite its role in the Bear 

Stearns rescue.

42

Subsequent media accounts present a more complicated picture – supporting the view 

that the key decision-makers hoped to send a message to the market by letting Lehman fail.

 

43 

Additionally, Treasury may have been leery of the popular reaction to a rescue that likely would 

have benefitted non-U.S. counterparties as much as U.S. interests – a real risk, as evidenced by 

the impact of the AIG rescue later.44

 38 Secretary Paulson Statements on Action to Protect Financial Markets and Taxpayers, supra note 

 In any case, it would appear that the reasons Chairman 

Bernanke cited for the bailout of Bear Stearns – the effects of a failure on counterparties, the 

19.

39 Secretary Paulson Statements on Action to Protect Financial Markets and Taxpayers, supra note 19.

40 White House, Press Briefing by Dana Perino and Secretary of the Treasury Henry Paulson (Sept. 15, 

2008) (online at georgewbush-whitehouse.archives.gov/news/releases/2008/09/20080915-8.html).

41 Carrick Mollenkamp et al., Lehman’s Demise Triggered Cash Crunch Around Globe, Wall Street Journal 

(Sept. 29, 2008) (online at online.wsj.com/article/SB122266132599384845.html).

42 See House Committee on Oversight and Government Reform, Testimony of Secretary Henry M. Paulson, 

Bank of America and Merrill Lynch: How Did a Private Deal Turn Into a Federal Bailout? Part III, 111th Cong., at 

6 (online at oversight.house.gov/index.php?option=com_content&task=view&id=3690&Itemid=2); see also U.S. 

Department of the Treasury, Letter from Assistant Secretary for Legislative Affairs Kevin I. Fromer to Senate 

Finance Committee staff (Mar. 28, 2008) (online at finance.senate.gov/press/Bpress/2008press/prb040108a.pdf) 

(describing Treasury’s role in the negotiations between the Federal Reserve Bank of New York (FRBNY), Bear 

Stearns, and JPMorgan Chase).

43 Simon Johnson and James Kwak, Lehman Brothers and the Persistence of Moral Hazard, Washington 

Post (Sept. 15, 2009) (online at www.washingtonpost.com/wpdyn/content/article/2009/09/15/AR2009091500943.html). 

44 Barclays PLC, a British firm, had been interested in buying parts of Lehman’s operations prior to 

Lehman’s failure, and eventually bought significant parts of the Lehman business as part of the bankruptcy. AIG’s 

biggest counterparties included Societe Generale, a French firm, and Deutsche Bank, a German firm. See Barclays 

PLC, Form 6-K (Sept. 15, 2008) (online at 

sec.gov/Archives/edgar/data/312069/000119163808001621/barc200809156k.htm); see also Lehman Brothers, 

Barclays to Acquire Lehman Brothers’ Businesses and Assets (Sept. 16, 2008) (online at 

www.lehman.com/press/pdf_2008/0916_barclays_acquisition.pdf); AIG, Counterparty Attachments (Mar. 18, 2009) 

(online at www.aig.com/aigweb/internet/en/files/CounterpartyAttachments031809_tcm385-155645.pdf). 
15

effects on financial markets, and the impact on credit availability – also applied in the case of 

Lehman Brothers.

45

If policymakers hoped that Lehman’s demise would end the cycle of bailouts, their 

strategy failed. Instead, the efforts to save the financial sector became more extensive and more 

frantic in the following days. One of the most urgent problems, AIG’s illiquidity, suddenly

emerged on the radar of top policymakers.46 With roughly 70 U.S. insurance companies, tens of 

billions of dollars of exposure to counterparties, and operations in 130 countries, AIG was 

another firm that was seen as posing a systemic risk.47 Within days, the Federal Reserve had 

agreed to lend the massive insurance company up to $85 billion.48

Even after Secretary Paulson and Chairman Bernanke decided that a more systematic 

response was needed, they continued to improvise in response to the rapidly changing landscape. 

On September 19, the day after they held an emergency meeting with Congressional leaders,

 In this atmosphere of panic, 

Chairman Bernanke and Secretary Paulson concluded that their only remaining option was to 

convince Congress to authorize an overwhelming fiscal response. This idea – that the 

government needed to respond to the crisis in a more comprehensive way – was the kernel of the 

Troubled Asset Relief Program, or the TARP.

49

 45 But see Peter Van Doren, Lehman Brothers and Bear Stearns: What’s the Difference? (Sept. 25, 2008) 

(online at www.cato.org/pub_display.php?pub_id=9665). This article notes that firms in market economies go 

bankrupt all the time, and it explores the issue of whether the failure of investment banks such as Lehman Brothers 

and Bear Stearns can lead to contagion to firms that have no direct relationship with those bankrupt firms. The 

article describes without endorsing the view that investment banks can pose a contagion threat because of their use 

of over-the-counter financial derivatives. The article also briefly discusses the possibility that Bear Stearns played a 

more important role in the derivatives market than Lehman Brothers, and therefore posed a greater threat of 

contagion, as well as the possibility that Bear Stearns did not pose a contagion threat and therefore should not have 

been rescued.

46 See U.S. Department of the Treasury, Letter from Assistant Secretary Herbert M. Allison, Jr. to Special 

Inspector General Neil M. Barofsky re: SIGTARP Official Draft Report, in Factors Affecting Efforts to Limit 

Payments to AIG Counterparties, at 41-42 (Nov. 16, 2009) (online at 

www.sigtarp.gov/reports/audit/2009/Factors_Affecting_Efforts_to_Limit_Payments_to_AIG_Counterparties.pdf) 

(“Literally overnight, government officials were faced with a difficult choice, and a choice that had to be made 

immediately: either let AIG go bankrupt or provide support.”).

47 AIG later revealed that after receiving government assistance, it paid more than $90 billion to 

counterparties, including $12.9 billion to Goldman Sachs, $11.9 billion to Societe Generale, and $11.8 billion to 

Deutsche Bank. American International Group, Counterparty Attachments (Mar. 18, 2009) (online at 

www.aig.com/aigweb/internet/en/files/CounterpartyAttachments031809_tcm385-155645.pdf); see also Scott E. 

Harrington, The Financial Crisis, Systemic Risk, and the Future of Insurance Regulation, Issue Analysis: A Public 

Policy Paper of the National Association of Mutual Insurance Companies, at 9 (Sept. 2009) (online at 

www.namic.org/advocatenews/pdfs/090922_harrington.pdf).

48 See September 16 Press Release, supra note 22.

49 See Speaker of the House of Representatives, Pelosi Comments on Bipartisan Congressional Leaders’ 

Meeting with Paulson, Bernanke, and Cox (Sept. 18, 2008) (online at 

speaker.house.gov/newsroom/pressreleases?id=0825).
16

Treasury announced a temporary government guarantee of holdings in money-market funds.50 

And in another effort to restore confidence in money-market funds, the Federal Reserve 

announced the creation of yet another special liquidity facility.51 Top officials at Treasury and 

the Federal Reserve also worked behind the scenes to encourage numerous potential bank 

mergers, including Citigroup-Goldman Sachs, Citigroup-Morgan Stanley, Citigroup-Wachovia, 

Wachovia-Goldman Sachs, Wachovia-Morgan Stanley, and JPMorgan Chase-Morgan Stanley.52 

In the end, none of those mergers happened. 53

The decision by Chairman Bernanke and Secretary Paulson on September 18 to enlist the 

help of Congress led to a three-page legislative proposal from Treasury on September 20. The 

plan would have given Treasury the authority to spend up to $700 billion to purchase “troubled 

assets,” namely “residential and commercial mortgage-related assets.”

 Then on September 21, the Federal Reserve 

announced that Goldman Sachs and Morgan Stanley would be allowed to become bank holding 

companies, which was interpreted as a signal that the government would not allow those two 

firms to fail.

54 Over the next two 

weeks, the administration’s proposal was significantly modified and expanded, and even 

defeated once in the House of Representatives, prior to being signed into law on October 3, 

2008. The law authorizes the Treasury Secretary to purchase not only mortgage-related 

securities under the TARP, but also “any other financial instrument” the purchase of which the 

Secretary determines to be “necessary to promote financial market stability.”55

What started as a contraction in the U.S. housing sector had now spread around the globe, 

prompting emergency responses by numerous countries in September-October 2008.56

 50 The guarantee was announced following the news that one money-market fund, the Reserve Fund, had 

broken the buck. The Reserve Fund held Lehman Brothers debt, which sparked fears in the marketplace following 

Lehman’s failure. U.S. Department of the Treasury, Treasury Announces Guaranty Program for Money Market 

Funds (Sept. 19, 2008) (online at www.treasury.gov/press/releases/hp1147.htm).

 Shortly 

51 This facility was called the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity 

Facility. See Board of Governors of the Federal Reserve System, Press Release (Sept. 19, 2008) (online at 

www.federalreserve.gov/monetarypolicy/20080919a.htm).

52 See Andrew Ross Sorkin, Too Big To Fail (2009).

53 Wachovia was soon bought by Wells Fargo and Morgan Stanley was stabilized by a capital infusion from 

a Japanese bank, Mitsubishi UFJ Financial Group.

54 See U.S. Department of the Treasury, Fact Sheet: Proposed Treasury Authority to Purchase Troubled 

Assets (Sept. 20, 2008) (online at www.ustreas.gov/press/releases/hp1150.htm).

55 The same law also establishes the Congressional Oversight Panel. Emergency Economic Stabilization 

Act of 2008 (EESA), Pub. L. No. 110-343.

56 Bans or restrictions on short selling were imposed from Australia to the Netherlands. Ireland stepped in 

to guarantee deposits at its six largest banks. The Russian government injected many billions of dollars into its 

banking system. Iceland nationalized its three largest banks. For a lengthier discussion of the international 

response, see the Panel’s April report. Congressional Oversight Panel, April Oversight Report: Assessing 

Treasury’s Strategy: Six Months of TARP at 60-70 (Apr. 7, 2009) (online at cop.senate.gov/documents/cop-040709-

report.pdf).
17

after the comprehensive fiscal response was adopted in the United States, European governments 

decided to respond in a similar fashion. On October 8, British Prime Minister Gordon Brown 

announced a financial stability plan that included £50 billion ($87.5 billion) in capital injections, 

£200 billion ($349.8 billion) in a special liquidity program, and £250 billion ($437.2 billion) in 

guarantees to encourage inter-bank lending.57 On October 13, France announced a plan that 

included €320 billion ($429.4 billion) in guarantees and €40 billion ($53.7 billion) in capital 

injections.58 On October 16, the Swiss government used a capital injection of 6 billion francs 

($5.3 billion) to take a 9.3 percent stake in UBS.59 And on October 17, Germany’s parliament 

approved a €480 billion ($645.6 billion) bank bailout package.60

For American families, the financial crisis caused a vast destruction of wealth. By 

September 2008, the bursting of the housing bubble sent home prices down by 22 percent from 

their peak in 2006.61 When the financial markets reached their low point, in the first quarter of 

2009, the value of households’ financial assets had also plummeted by about 20 percent from 

their 2007 peak.62 From peak to trough, the net worth of households and non-profit organizations 

fell by $12.7 trillion.63 As a point of comparison, the U.S. gross domestic product, which 

measures the market value of the country’s annual output of final goods and services in a year, is 

$14.3 trillion.64

C. The TARP’s Evolution

Although Secretary Paulson and Chairman Bernanke initially had proposed to use TARP 

funds to buy troubled assets on the books of the largest U.S. financial institutions, they soon 

realized that this was impractical given the need for quick action. On October 14, 2008, 

Secretary Paulson summoned the heads of the nine largest U.S. banks to Washington and told 

 57 See British Prime Minister’s Office, £50 Billion Banking Package (Oct. 8, 2008) (online at 

www.number10.gov.uk/Page17112).

58 Henry Samuel, Banking Bail-out: France Unveils €360bn Package, Telegraph (U.K.) (Oct. 13, 2008) 

(online at www.telegraph.co.uk/finance/financetopics/financialcrisis/3190311/Banking-bail-out-France-unveils360bn-package.html).

59 David Gow, Switzerland Unveils Bank Bail-out Plan, Guardian (U.K.) (Oct. 16, 2008) (online at 

www.guardian.co.uk/business/2008/oct/16/ubs-creditsuisse).

60 See Simon Morgan, Germany Adopts 480-bln-euro Bank Bail-out, Agence France-Presse (Oct. 17, 2008) 

(online at uk.biz.yahoo.com/17102008/323/germany-adopts-480-bln-euro-bank-bail.html).

61 See S&P/Case-Shiller Home Price Indices, supra note 1.

62 See Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Flow of 

Funds Accounts of the United States, Flows and Outstandings Second Quarter 2009, at 104 (Sept. 17, 2009) (online 

at www.federalreserve.gov/releases/z1/Current/z1.pdf) (hereinafter “Federal Reserve Statistical Release: Second 

Quarter 2009”).

63 Id. at 104.

64 U.S. Department of Commerce, Bureau of Economic Analysis, Gross Domestic Product: Third Quarter 

(Advance Estimate) (Oct. 29, 2009) (online at www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm).
18

them that Treasury was making direct capital injections into each of their institutions, using a 

total of $125 billion of TARP resources. Over the following weeks and months, under both 

Secretary Paulson and incoming Secretary Geithner, Treasury made further capital stock 

purchases65

1. Capital Programs and Banking Sector Health 

in another 692 banks and used the TARP in conjunction with Federal Reserve 

support to implement the extraordinary rescue of AIG. Treasury also used TARP resources to 

provide assistance to two major U.S. automobile companies and to fund a mortgage foreclosure 

relief grant program as part of the new Administration’s efforts to combat the unprecedented 

level of mortgage defaults and foreclosures in the United States. Finally, the TARP was used in 

conjunction with Treasury and Federal Reserve efforts to try to restart small business and 

consumer lending.

a. Background

The largest and most prominent use of TARP funding has been the government’s efforts 

to provide capital assistance to U.S. banks. The Capital Purchase Program (CPP), which 

provides capital injections into banks, was the first and largest TARP program. The Targeted 

Investment Program (TIP) and the Systemically Significant Failing Institution (SSFI) Program 

also provide capital injections, but they are narrower efforts aimed at providing exceptional 

assistance to large institutions considered critical to the functioning of the financial system. 

Another exceptional assistance program is the Asset Guarantee Program (AGP), under which the 

government has guaranteed approximately $301 billion in Citigroup assets, thereby insulating 

Citigroup from potential capital losses on those assets. The Public-Private Investment Program 

(PPIP) provides yet another form of capital assistance by attempting to restart the markets for 

troubled securities that are currently weighing down bank balance sheets. By removing these

troubled securities from bank balance sheets, or guaranteeing assets, the PPIP and AGP, 

respectively, alleviate some of the banks’ capital needs. Lastly, while the FDIC’s Temporary 

Liquidity Guarantee Program (TLGP) does not rely on TARP funds, it is another key part of the 

government’s support for the banking system. 

i. Capital Purchase Program66

Treasury used the CPP to provide capital to banks and other financial institutions, usually

by purchasing senior preferred stock.67

 65 These capital stock purchases, discussed in this section, were made through the TARP’s Capital Purchase 

Program, Targeted Investment Program, and Systemically Significant Failing Institution Program.

 Treasury has stated that it only provided CPP funds to 

66 For more detail on the CPP, see the Panel’s February and July Reports. Congressional Oversight Panel, 

February Oversight Report: Valuing Treasury’s Acquisitions, at 5-11 (Feb. 6, 2009) (online at 

cop.senate.gov/documents/cop-020609-report.pdf) (hereinafter “February Oversight Report”); Congressional 

Oversight Panel, July Oversight Report: TARP Repayments, Including the Repurchase of Stock Warrants, at 8-17 

(July 10, 2009) (online at cop.senate.gov/documents/cop-071009-report.pdf) (hereinafter “July Oversight Report”).
19

viable banks.68 In order to give taxpayers an opportunity to participate in the upside if a bank’s 

stock price rose, Treasury also received warrants to purchase common stock. The program has 

gone through several phases; the application period for the final phase closed on November 21, 

2009.69 Financial institutions that have already received CPP funds may keep their money 

according to the terms of the program, but Treasury will not disburse additional funds.70 Over 

the life of the program, the CPP has provided nearly $205 billion in capital to 692 financial 

institutions, including more than 300 small and community banks.71

Fifty financial institutions have redeemed their preferred stock, and 30 of them have also 

repurchased their warrants.72 CPP recipients may redeem their preferred stock only after 

receiving approval from the federal banking agency that serves as their primary regulator.

73 The 

redemption price of the preferred stock is set contractually, but Treasury repurchases the 

warrants at fair market value, which is determined through a negotiation and appraisal process 

between Treasury and the financial institution.74

 67 Treasury has stated that for every $100 Treasury invested, it received preferred stock and warrants worth 

about $100. However, in its February Report, the Panel performed a valuation of Treasury’s initial investments 

under the capital programs and found that Treasury received stock and warrants worth only approximately $66 for 

every $100 invested. 

 Treasury has determined that it will not hold

February Oversight Report, supra note 66, at 4.

68 U.S. Department of the Treasury, Capital Purchase Programs (updated Nov. 3, 2009) (online at 

www.financialstability.gov/roadtostability/capitalpurchaseprogram.html) (accessed Dec. 7, 2009). However, as 

discussed in Section (C)(1)(a), infra, there are questions as to whether Treasury adhered to this guideline.

69 U.S. Department of the Treasury, Frequently Asked Questions regarding the Capital Purchase Program 

(CPP) for Small Banks (online at www.financialstability.gov/docs/CPP/FAQonCPPforsmallbanks.pdf) (hereinafter 

“FAQs on CPP for Small Banks”) (accessed Dec. 7, 2009). 

70 The deadline for new commitments is December 31, 2009. See FAQs on CPP for Small Banks, supra

note 69, at 36.

71 See U.S. Department of Treasury, Troubled Asset Relief Program Transactions Report for Period Ending 

November 25, 2009 (Nov. 30, 2009) (online at www.financialstability.gov/docs/transaction-reports/11-30-

09%20Transactions%20Report%20as%20of%2011-25-09.pdf) (hereinafter “November 25 Transactions Report”); 

U.S. Department of the Treasury, Assistant Secretary Allison Written Testimony for Congressional Oversight Panel 

(Oct. 24, 2009) (online at www.financialstability.gov/latest/tg_10222009.html). The 20 top recipients of capital 

assistance under the CPP, the TIP, and the SSFI Program received 89 percent of the $319.5 billion total of these 

three programs’ funds. 

72 This is as of November 25, 2009. November 25 Transactions Report, supra note 71. Treasury has stated 

that it will not hold the warrants after the preferred stock has been redeemed. Three of these banks have agreed to 

allow Treasury to auction their warrants. Of the remaining banks, Treasury is either currently negotiating the 

repurchase price or, for those which declined to continue discussions, is preparing to auction the warrants. Treasury 

communications with Panel staff (Dec. 4, 2009).

73 For a full discussion of the history and legal aspects of CPP repayment, see the Panel’s July report. July 

Oversight Report, supra note 66, at 8-20.

74 U.S. Department of the Treasury, Securities Purchase Agreement: Standard Terms, at §§ 4.4, 4.9(c)(i) 

(online at www.financialstability.gov/docs/CPP/spa.pdf) (accessed Dec. 8, 2009); 12 U.S.C. § 5223(a)(2)(B). For a 

more complete discussion of this topic, please see the Panel’s July Oversight Report. See July Oversight Report, 

supra note 66, at 10-17. The process is different for private banks. Treasury immediately exercised the warrants of 

private banks. The redemption price of the shares received on exercise was set in the contracts. The process is 
20

warrants after a financial institution redeems its preferred stock.75 If a financial institution does 

not wish to repurchase the warrants or if Treasury and the financial institution cannot agree on a 

price through the appraisal process, Treasury will auction them to the public.76

In the first half of this year, Treasury and the bank supervisors engaged in the 

Supervisory Capital Assessment Program (SCAP), comprehensive stress tests of the nation’s 

largest banks. According to Treasury, these tests were a forward-looking exercise aimed at 

determining whether these institutions had sufficient capital to weather a longer and more severe 

economic downturn.77 The results showed that 10 of the 19 stress-tested institutions required 

additional capital.78 The other nine were allowed to redeem their preferred stock, subject to the 

approval of their primary federal regulator.79

 

different for private banks. Treasury immediately exercised the warrants of private banks. The redemption price of 

the shares received on exercise was set in the contracts.

 The 10 banks that required additional capital had to 

raise this money in the private markets before they could redeem their preferred stock. On June 

75 U.S. Department of the Treasury, Treasury Announces Warrant Repurchase and Disposition Process for 

the Capital Purchase Program (June 26, 2009) (online at www.financialstability.gov/docs/CPP/WarrantStatement.pdf ).

76 Treasury has announced it will auction the warrants of JPMorgan Chase, Capital One, and TCF Financial 

Corporation through a modified Dutch auction process. U.S. Department of the Treasury, Treasury Announces 

Intent to Sell Warrant Positions in Public Dutch Auction (Nov. 19, 2009) (online at 

www.financialstability.gov/latest/tg_11192009b.html). Treasury will allow the banks to bid on their own warrants. 

On December 3, 2009, Treasury held a public auction to sell Capital One’s warrants. At the auction, the warrants 

were priced at $146.5 million. U.S. Department of the Treasury, Treasury Department Announces Pricing of Public 

Offering of Warrants to Purchase Common Stock of Capital One Financial Corporation (Dec. 4, 2009) (online at 

www.financialstability.gov/latest/tg_12042009.html) (hereinafter “Capital One Warrant Purchase”).

77 For a discussion of the stress tests, see the Panel’s June report. Congressional Oversight Panel, June 

Oversight Report: Stress Testing and Shoring Up Bank Capital (June 9, 2009) (online at 

cop.senate.gov/documents/cop-060909-report.pdf) (hereinafter “June Oversight Report”). If a stress-tested 

institution required additional capital and could not raise it in the private markets, it could have access to additional 

TARP funds through the Capital Assistance Program (CAP). The terms of this program were less favorable to the 

banks than were the terms of the CPP.

78 Federal Reserve Board of Governors, The Supervisory Capital Assessment Program: Overview of 

Results, at 3 (May 7, 2009) (online at www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf). 

Nine of these 10 have raised the required capital in the private markets. To date, GMAC is the only institution that 

has returned to the government for more financial support. Treasury announced that it will provide any support to 

GMAC through the AIFP. U.S. Department of the Treasury, Treasury Announcement Regarding the Capital 

Assistance Program (Nov. 9, 2009) (online at www.financialstability.gov/latest/tg_11092009.html) (hereinafter 

“Treasury Announcement Regarding the CAP”). Treasury staff has told the Panel that GMAC will receive AIFP and 

not CAP funds because its previous injections had been through the AIFP. In addition, Treasury staff stated that the 

terms of the AIFP are substantially similar to the CAP. Treasury communications with Panel staff (Nov. 17, 2009).

79 U.S. Department of the Treasury, FAQs on Capital Purchase Program Repayment and Capital 

Assistance Program (online at www.financialstability.gov/docs/FAQ_CPP-CAP.pdf) (accessed Dec. 7, 2009). A 

stress tested institution seeking to repay was also required to “be able to demonstrate its financial strength by issuing 

senior unsecured debt for a term greater than five years not backed by FDIC guarantees, in amounts sufficient to 

demonstrate a capacity to meet funding needs independent of government guarantees.” U.S. Department of the 

Treasury, FAQs on Capital Purchase Program Repayment and Capital Assistance Program (online at 

www.financialstability.gov/docs/FAQ_CPP-CAP.pdf) (accessed Dec. 7, 2009).
21

17, 2009, 10 of the 19 stress-tested banks repurchased their preferred stock.80 Together, they 

repurchased approximately $70 billion in preferred stock. Figure 1 shows the total amount of 

CPP funds outstanding by month, with the drop-off in June 2009 resulting from the wave of 

stock repurchases. Though 10 of the 19 stress-tested banks have already repaid their CPP funds, 

three of the four largest banks still hold their TARP funds. Measured by assets, these three 

institutions constitute approximately 40 percent of the banking system.81 One of these three, 

Bank of America, announced on December 2, 2009 that it would repay all of its TARP funds 

after the completion of a securities offering.82

Figure 1: CPP Funds Outstanding by Month (as of November 30, 2009)83

 80 The 10 banks that repaid are JPMorgan Chase, Goldman Sachs, Morgan Stanley, U.S. Bancorp, Capital 

One, American Express, Bank of New York, State Street, Northern Trust, and BB&T. November 25 Transactions 

Report, supra note 71.

81 See National Information Center, Top 50 BHCs (online at 

www.ffiec.gov/nicpubweb/nicweb/Top50form.aspx) (accessed Dec. 7, 2009); Federal Reserve Board of Governors, 

Assets and Liabilities of Commercial Banks in the United States - H.8 (Dec. 4, 2009) (online at 

www.federalreserve.gov/releases/h8/current/default.htm).

82 Bank of America, Bank of America to Repay Entire $45 Billion in TARP to U.S. Taxpayers (Dec. 2, 

2009) (online at newsroom.bankofamerica.com/index.php?s=43&item=8583) (hereinafter “Bank of America

Repayment”).

83 November 25 Transactions Report, supra note 71.

$0 

$50 

$100 

$150 

$200 

$250 

Billions of Dollars
22

ii. Exceptional Assistance Programs

Treasury has used additional TARP funds to bolster the capital bases of financial 

institutions that were deemed “critical to the functioning of the financial system.”84 The three 

beneficiaries of this assistance have been AIG, Bank of America, and Citigroup. Because these 

institutions are deemed to have received “exceptional assistance,” they are subject to more 

stringent guidelines on executive compensation than other TARP recipients.

85

Systemically Significant Financial Institutions Program. The SSFI Program was 

“established to provide stability and prevent disruptions to financial markets from the failure of 

institutions that are critical to the functioning of the nation’s financial system.”86 AIG, which has 

received nearly $70 billion in capital under the SSFI Program,

87 is the only recipient of funds 

under the program. AIG can continue to draw on the SSFI Program through April 17, 2014. In 

exchange for each drawdown, Treasury will receive additional preferred AIG stock in the 

amount of the drawdown. The preferred stock carries a 10 percent dividend.88 Treasury has also 

received warrants to purchase common stock.89

Targeted Investment Program. Like the SSFI Program, the TIP was intended to “stabilize 

the financial system by making investments in institutions that are critical to the functioning of 

 84 See U.S. Department of the Treasury, Targeted Investment Program (online at 

www.financialstability.gov/roadtostability/targetedinvestmentprogram.html) (hereinafter “Targeted Investment 

Program”) (accessed Dec. 7, 2009) (the TIP “focuses on the complex relationships and reliance of institutions within 

the financial system. Investments made through the TIP seek to avoid significant market disruptions resulting from 

the deterioration of one financial institution that can threaten other financial institutions and impair broader financial 

markets and pose a threat to the overall economy”); U.S. Department of the Treasury, Programs (online at 

www.financialstability.gov/roadtostability/programs.htm) (hereinafter “Treasury Programs”) (accessed Dec. 7, 

2009) (the SSFI Program “was established to provide stability and prevent disruptions to financial markets from the 

failure of institutions that are critical to the functioning of the nation’s financial system.”).

85 See 31 C.F.R. §§ 30.0-30.17; U.S. Department of the Treasury, Interim Final Rule on TARP Standards 

for Compensation and Corporate Governance (online at 

www.treas.gov/press/releases/reports/ec%20ifr%20fr%20web%206.9.09tg164.pdf) (accessed Dec. 7, 2009).

86 Treasury Programs, supra note 84.

87 The first round came through a purchase of $40 billion in preferred stock, on November 25, 2008. The 

initial purchase was of cumulative preferred stock. In April 2009, this was exchanged for $41.6 billion of noncumulative preferred shares. This represented no change in Treasury’s initial investment. See U.S. Department of 

the Treasury, Transactions Report (Oct. 27, 2009) (online at www.financialstability.gov/docs/transaction-reports/10-

27-09%20Transactions%20Report%20as%20of%2010-23-09.pdf). The second was through the April 17, 2009 

creation of an equity capital facility of approximately $30 billion. See U.S. Department of the Treasury, 

Transactions Report (Oct. 27, 2009) (online at www.financialstability.gov/docs/transaction-reports/10-27-

09%20Transactions%20Report%20as%20of%2010-23-09.pdf). 

88 See U.S. Department of the Treasury, Term Sheet Exchange of Series D Fixed Rate Cumulative 

Perpetual Preferred Stock for Series E Fixed Rate Non-Cumulative Perpetual Preferred Stock (Mar. 2, 2009) 

(online at www.financialstability.gov/docs/agreements/030209_AIG_Term_Sheet.pdf). 

89 Treasury’s funding of AIG is not the only government assistance to the insurance giant. AIG has also 

received $96 billion in assistance from the Federal Reserve through a revolving credit facility and loans extended to 

special purpose vehicles to buy AIG assets.
23

the financial system.”90 Just two financial institutions have received TIP funds: Bank of America

and Citigroup. Treasury announced that it was providing a capital injection to Citigroup on 

November 23, 2008, and purchased $20 billion in preferred Citigroup stock on December 31, 

2008. The term sheet accompanying the announcement portrays the capital injection as a 

modified version of the CPP.91 It was not until January 2, 2009 that TIP was given a name and 

its guidelines were announced.92 Then on January 16, 2009, Treasury bought $20 billion in 

preferred stock from Bank of America.93 The assistance provided under this program was in 

addition to the $25 billion that Citigroup had already received, and the $15 billion that Bank of 

America (subsequently increased to $25 billion, with the inclusion of Merrill Lynch’s funds) has 

already received in CPP funds on October 28, 2008.94

Treasury required changes in senior management, and diluted the interests of 

shareholders when the government received a 79.9 percent equity interest in AIG.

 

95

Asset Guarantee Program.

 By contrast, 

despite providing Bank of America and Citigroup with exceptional assistance, Treasury did not 

require them to make changes in management. Furthermore, it did not dilute shareholder 

interests in Bank of America. Treasury has not explained the rationale behind the differences in 

treatment.

96 The AGP is an initiative by Treasury, along with the FDIC 

and the Federal Reserve, that initially guaranteed approximately $301 billion of Citigroup’s 

assets.97

 90

 After Citigroup received $25 billion in CPP funds in late October 2008, its financial 

Targeted Investment Program, supra note 84. 

91 See U.S. Department of the Treasury, Summary of Terms: Preferred Securities (Nov. 23, 2008) (online at 

www.treas.gov/press/releases/reports/cititermsheet_112308.pdf) (“Redemption: In stock or cash, as mutually agreed 

between UST and Citi. Otherwise, redemption terms of CPP preferred terms apply... Repurchases: Same terms as 

preferred issued in CPP.”).

92 U.S. Department of the Treasury, Treasury Releases Guidelines for Targeted Investment Program (Jan. 

2, 2009) (online at treasury.gov/press/releases/hp1338.htm); U.S. Department of the Treasury, Joint Statement by 

Treasury, Federal Reserve and the FDIC on Citigroup (Nov. 23, 2008) (online at 

www.treas.gov/press/releases/hp1287.htm). The announcement on November 23, 2008 did not specify under which 

program Citigroup’s second injection fell. In fact, at that time, the CPP was the only named program under the 

TARP. 

93 See November 25 Transactions Report, supra note 71.

94 See November 25 Transactions Report, supra note 71.

95 See U.S. Department of the Treasury, Monthly 105(a) Report (Nov. 10, 2009) (online at 

www.financialstability.gov/docs/105CongressionalReports/October%20105(a)_11.10.2009.pdf ) (“the FRBNY 

received convertible preferred shares representing approximately 79.8% of the current voting power of the AIG 

common shares. These preferred shares were deposited in a trust, created by the FRBNY. The U.S. Treasury (i.e., 

the general fund) is the beneficiary of this trust.”).

96 For a full discussion of the AGP, see the Panel’s November report. Congressional Oversight Panel, 

November Oversight Report: Guarantees and Contingent Payments in TARP and Related Programs, at 13-27 (Nov. 

6, 2009) (online at cop.senate.gov/documents/cop-110609-report.pdf) (hereinafter “November Oversight Report”).

97 Treasury had also entered into an agreement with Bank of America to provide a similar guarantee, but it 

was never finalized. For a full description of the Citigroup and Bank of America guarantees, see the Panel’s 
24

status continued to deteriorate. On November 23, 2008, Treasury, the FDIC and the Federal 

Reserve agreed to share with Citigroup potential losses on a pool of its assets that Citigroup 

identified as some of its riskiest.98 Treasury announced the aid in conjunction with its 

announcement of Citigroup’s second capital infusion, this one under TIP.99

iii. Public-Private Investment Program100

PPIP, which is aimed at removing troubled assets from the balance sheets of financial 

institutions, was announced on March 23, 2009.101 The program aims to aid the recapitalization 

of financial institutions and ultimately to support renewed lending by discovering prices in the 

illiquid market for troubled mortgage-related assets.102 It has two components: a program to be 

administered by the FDIC that would fund the purchase of troubled whole loans, and a program 

administered by Treasury that funds the purchase of troubled securities. The first component has 

yet to exit its trial phase,

103

 

November report. 

although Treasury recently stated that government officials are 

continuing to review applications from firms that would share the cost of funding whole-loan 

November Oversight Report, supra note 96, at 13-27. From the beginning, Treasury had stated 

that AGP assistance would not be “widely available.” U.S. Department of the Treasury, Report to Congress 

Pursuant to Section 102 of the Emergency Economic Stabilization Act, at 1 (Dec. 31, 2008) (online at 

www.financialstability.gov/docs/AGP/sec102ReportToCongress.pdf).

98 Board of Governors of the Federal Reserve System, Joint Statement by Treasury, Federal Reserve, and 

the FDIC on Citigroup (Nov. 23, 2008) (online at www.federalreserve.gov/newsevents/press/bcreg/20081123a.htm).

99 Overall, Treasury has provided $49 billion in capital assistance to Citigroup. Treasury’s initial CPP 

holdings of preferred stock were subsequently converted to 7.7 billion shares of common stock priced at $3.25 per 

share, for a total value of $25 billion at the time of the conversion. Treasury has also converted the form of its TIP 

and AGP holdings. On July 23, 2009, Treasury, along with both public and private Citigroup debt holders, 

participated in a $58 billion exchange. As of November 30, 2009, Treasury’s common stock investment in 

Citigroup had a market value of $31.6 billion and represented 34 percent of the value of Citigroup common stock 

outstanding.

100 For a complete discussion of the PPIP, see the Panel’s August report. Congressional Oversight Panel, 

August Oversight Report: The Continued Risk of Troubled Assets, at 48 (Aug. 11, 2009) (online at 

cop.senate.gov/documents/cop-081109-report.pdf) (hereinafter “August Oversight Report”).

101 The troubled assets, which Treasury refers to as legacy securities, include residential and commercial 

mortgage-backed securities issued before 2009. See U.S. Department of the Treasury, Legacy Securities Investment 

Program (Legacy Securities PPIP) Additional Frequently Asked Questions, at 13 (July 8, 2009) (online at 

www.treas.gov/press/releases/reports/legacy_securities_faqs.pdf); U.S. Department of the Treasury, Treasury 

Department Releases Details on Public Private Partnership Investment Program (Mar. 23, 2009) (online at 

www.ustreas.gov/press/releases/tg65.htm).

102 See U.S. Department of the Treasury, Troubled Assets Relief Program Eighth Tranche Report to 

Congress, at 8-9 (Oct. 7, 2009) (online at 

www.financialstability.gov/docs/Eighth%20Tranche%20Report_2009%2010%2007.pdf) (hereinafter “TARP Eighth 

Tranche Report”).

103 The FDIC recently announced a pilot sale of troubled whole loans, which it conducted as a test of the 

program’s funding mechanism. However, the pilot sale did not accomplish the program’s goal of removing toxic 

assets from bank balance sheets because the loans that were sold came from a failed bank that the FDIC had already 

taken into receivership. See Federal Deposit Insurance Corp., Legacy Loans Program – Winning Bidder Announced 

in Pilot Sale (Sept. 16, 2009) (online at www.fdic.gov/news/news/press/2009/pr09172.html).
25

purchases.104

As of November 30, Treasury had invested roughly $23.3 billion, which is slightly more 

than two-thirds of the funds designated for the program.

 Under the second component, known as the Legacy Securities PPIP (S-PPIP), 

Treasury has agreed to invest up to $30 billion in both equity and debt to buy troubled securities. 

105 Treasury’s current $30 billion 

commitment to PPIP is scaled down considerably from its initial plan of investing a total of $75-

$100 billion in the program’s two components.106 Eight of the nine fund managers closed their 

funds between September 30 and November 30, 2009.107 According to Treasury, these closed 

funds were able to begin purchasing securities within a few weeks of the closing.108

iv. Total Government Funding for Financial Institutions

Figure 2 shows how the government has used TARP funds in conjunction with funding 

from the Federal Reserve and FDIC to develop a package of capital programs. With a 

combination of direct outlays, loans, and guarantees, the government has committed $617.8 

billion to capital programs, well more than the $292.1 billion committed from the TARP. The 

Federal Reserve has committed $315.7 billion through guarantees and loans to AIG and 

Citigroup. In addition, the FDIC has $10 billion of exposure through its share of the Citigroup 

guarantee.

109

 104 See TARP Eighth Tranche Report, supra note 102, at 8.

105 See U.S. Department of the Treasury, Treasury Department Announces Additional Initial Closing of 

Legacy Securities Public-Private Investment Fund (Nov. 30, 2009) (online at 

www.financialstability.gov/latest/tg_11302009.html) (hereinafter “Treasury Announces Additional Initial Closing of 

Legacy Securities Public-Private Investment Fund”).

106 See U.S. Department of the Treasury, Joint Statement by Secretary of the Treasury Timothy F. Geithner, 

Chairman of the Board of Governors of the Federal Reserve System Ben S. Bernanke, and Chairman of the Federal 

Deposit Insurance Corporation Sheila Bair: Legacy Asset Program (July 8, 2009) (online at 

www.financialstability.gov/latest/tg_07082009.html).

107 Treasury Announces Additional Initial Closing of Legacy Securities Public-Private Investment Fund, 

supra note 105; U.S. Department of the Treasury, Treasury Department Announces Additional Initial Closing of 

Legacy Securities Public-Private Investment Fund (Nov. 5, 2009) (online at 

www.financialstability.gov/latest/tg_11052009.html).

108 Treasury communications with Panel staff (Sept. 29, 2009). 

109 The Panel has broadly classified the resources that the federal government has devoted to stabilizing the 

economy through a myriad of new programs and initiatives as outlays, loans, or guarantees. Although the Panel 

calculates the total value of these resources at over $3 trillion, this would translate into the ultimate “cost” of the 

stabilization effort only if: (1) assets do not appreciate; (2) no dividends are received, no warrants are exercised, and 

no TARP funds are repaid; (3) all loans default and are written off; and (4) all guarantees are exercised and 

subsequently written off.
26

Figure 2: Federal Government’s Capital Programs (as of November 30, 2009)110

Program

Treasury 

(TARP)

(billions of 

dollars)

Federal 

Reserve 

(billions of 

dollars)

FDIC111 Total

(billions of 

dollars)

(billions of 

dollars)

AIG:

 Outlays112 $69.8 $0 $0 $69.8

 Loans 0 95.3 0 95.3

 Guarantees 0 0 0 0

 AIG subtotal 69.8 95.3 0 165.1

PPIP (Securities):

 Outlays 10 0 0 10

 Loans 20 0 0 20

 Guarantees 0 0 0 0

 PPIP (securities) subtotal 30 0 0 30

PPIP (Loans):

 Outlays 0 0 0 0

 Loans 0 0 0 0

 Guarantees 0 0 0 0

 PPIP (loans) subtotal 0 0 0 0

Bank of America:

 Outlays 45 0 0 45

 Loans 0 0 0 0

 Guarantees 0

 Bank of America subtotal 45 0 0 45

Citigroup:

 Outlays 45 0 0 45

 Loans 0 0 0 0

 Guarantees 5 220.4 10 235.4

 Citigroup subtotal 50 220.4 10 280.4

Capital Purchase Program (Other 

than Citigroup, Bank of America):

 Outlays 97 0 0 97

 Loans 0 0 0 0

 Guarantees 0 0 0 0

 110 November 25 Transactions Report, supra note 71. The Panel’s methodology and source citations for 

these figures can be found in the corresponding endnotes for Figure 27.

111 This table does not include the FDIC’s Temporary Liquidity Guarantee Program.

112 The term “outlays” is used in this table as well as in Figure 27 to describe the disbursement of funds 

under the TARP, which are broadly classifiable as purchases of debt or equity securities (e.g., debentures, preferred 

stock, exercised warrants, etc.). The outlays figures are based on: (1) Treasury’s actual reported expenditures; and 

(2) Treasury’s anticipated funding levels as estimated by a variety of sources, including Treasury pronouncements 

and GAO estimates. Anticipated funding levels are set at Treasury’s discretion, have changed from initial 

announcements, and are subject to further change. Outlays as used here represent investments and assets purchases 

and commitments to make investments and asset purchases and are not the same as budget outlays, which under 

section 123 of EESA are recorded on a “credit reform” basis. Credit reform accounting is discussed in further detail 

in the Panel’s November report. November Oversight Report, supra note 96, at 11.
27

 CPP (other than Citigroup, Bank of 

 America) subtotal

 97 0 0 97

Capital Programs Total $291.8 $315.7 $10 $617.58

Return on Investment. It is not yet possible to calculate the amount of money that the 

capital programs as a whole will earn or lose, and it will not be for some time. However, certain 

sources of income and losses, such as the internal rate of return for banks that have repurchased 

all of their CPP funds, are already apparent. Financial institutions that received CPP assistance 

have bought back approximately $70 billion in preferred stock. As shown in Figure 29, those 

funds comprise most of the $86.9 billion in cash inflows that the TARP has generated through 

November 30, 2009. This includes $10.2 billion in dividends and interest payments. In addition, 

Treasury has collected $3.2 billion in payments for warrant repurchases. 

In its July Report, the Panel analyzed the prices at which Treasury was allowing the 

financial institutions to repurchase their warrants. The Panel was concerned that Treasury was 

undervaluing the warrants and/or not negotiating strongly enough.113

For banks that have fully repaid their TARP funds, the Panel has calculated an internal 

rate of return (IRR), as shown in Figure 4. Because the preferred stock under the CPP paid fixed 

dividends of 5 percent per year, the variation in this return comes from the price the bank paid 

Treasury to repurchase its warrants. The taxpayers’ return has ranged from a low of 5.9 percent 

for Centerstate Banks of Florida, which repurchased its warrants on October 28, 2009, to a high 

of 29.5 percent for American Express, which repurchased its warrants on July 29, 2009. Recent 

repurchases appear to trend lower. This may be because these are small- and medium-sized 

banks to which Treasury applies a liquidity discount in its valuation, while the Panel does not. 

This results in a lower price to estimate ratio for banks whose stock is either thinly traded or not 

traded at all. The overall return is 17.1 percent for the 25 banks that have repurchased both their 

preferred stock and warrants. Had the warrants all been repaid at the Panel’s estimated market 

value, the taxpayers would have received approximately $198 million more than the banks paid. 

It is important to note, however, that this return reflects only the healthiest banks, which were 

able to repay their TARP funds already. As of November 30, 2009, 642 banks still held their 

CPP funds. It is still unknown when they will repay and how much they will pay for their 

warrants. 

 After the July Report was 

released, several banks repurchased their warrants for prices very close to the Panel’s valuation: 

notably, Goldman Sachs, Morgan Stanley, and American Express. Figure 3 shows the Panel’s 

estimates for the values of warrants outstanding as of November 30, 2009.

 113 July Oversight Report, supra note 66, at 8-17. For example, Old National Bancorp of Evansville, 

Indiana, paid $1.2 million for warrants that analysts had valued at between $1.5 and $6.9 million.
28

Figure 3: Warrants Outstanding Valuation as of November 30, 2009

Institution

Investment 

Date

Low 

Estimate 

(millions of 

dollars)

High 

Estimate 

(millions of 

dollars)

Best 

Estimate

(millions of 

dollars)

Capital Purchase Program (CPP):

 JPMorgan Chase 10/28/2008 $798.7 $2,035.8 $1,115.7

 Wells Fargo 10/28/2008 300.9 1,734.9 857.0

 Hartford Financial 6/26/2009 695.3 1,068.2 813.4

 Bank of America 10/28/2008 86.9 1,135.3 381.2

 PNC 12/31/2008 91.4 530.8 249.0

 Capital One114 11/14/2008 179.0 343.7 232.0

 Discover Financial 3/13/2009 149.4 217.0 178.9

 Fifth Third Bancorp 12/31/2008 57.9 313.7 171.4

 Lincoln National 7/10/2009 130.9 225.0 163.7

 Comerica 11/14/2008 31.5 144.5 93.8

Targeted Investment Program (TIP):

 Bank of America 1/15/2009 487.4 1,465.2 811.9

 Citigroup 12/31/2008 13.4 454.5 112.7

Asset Guarantee Program (AGP):

 Citigroup 1/15/2009 4.8 160.6 40.0

Systemically Significant Failing Institutions

(SSFI) Program:

 AIG 11/25/2008 6.9 72.6 53.5

All Other Banks 313.1 2,038.4 1,089.3

Total $3,347.5 $11,940.3 $6,363.4

 114 Capital One TARP warrants were sold through a Dutch auction process. The secondary public offering 

of the warrants was auctioned on December 3, 2009 for $146.5 million. Capital One Warrant Purchase, supra note 

76.
Figure 4: Warrant Repurchases as of November 30, 2009

Institution

Investment 

Date QEO115

Repurchase 

Date

Repurchase 

Amount

Panel Valuation 

(Best Est.)

Price/

Estimate IRR

Old National Bancorp 12/12/08 No 5/8/09 $1,200,000 $2,150,000 56% 9.3%

Iberiabank Corporation 12/5/08 Yes 5/20/09 1,200,000 2,010,000 60% 9.4%

FirstMerit Corporation 1/9/09 No 5/27/09 5,025,000 4,260,000 118% 20.3%

Sun Bancorp, Inc. 1/9/09 No 5/27/09 2,100,000 5,580,000 38% 15.3%

Independent Bank Corp. 1/9/09 No 5/27/09 2,200,000 3,870,000 57% 15.6%

Alliance Financial Corporation 12/19/08 No 6/17/09 900,000 1,580,000 57% 13.8%

First Niagara Financial Group 11/21/08 Yes 6/24/09 2,700,000 3,050,000 89% 8.0%

SCBT Financial Corporation 1/16/09 No 6/24/09 1,400,000 2,290,000 61% 11.7%

Berkshire Hills Bancorp, Inc. 12/19/08 No 6/24/09 1,040,000 1,620,000 64% 11.3%

Somerset Hills Bancorp 1/16/09 No 6/24/09 275,000 580,000 47% 16.6%

HF Financial Corp. 11/21/08 No 6/30/09 650,000 1,240,000 52% 10.1%

State Street Corporation 10/28/08 Yes 7/8/09 60,000,000 54,200,000 111% 9.9%

U.S. Bancorp 11/14/08 No 7/15/09 139,000,000 135,100,000 103% 8.7%

Old Line Bancshares, Inc. 12/5/08 No 7/15/09 225,000 500,000 45% 10.4%

The Goldman Sachs Group, Inc. 10/28/08 No 7/22/09 1,100,000,000 1,128,400,000 97% 22.8%

BB&T Corp. 11/14/08 No 7/22/09 67,000,000 68,200,000 98% 8.7%

American Express Company 1/9/09 No 7/29/09 340,000,000 391,200,000 87% 29.5%

The Bank of New York Mellon Corp. 10/28/08 No 8/5/09 136,000,000 155,700,000 87% 12.3%

Morgan Stanley 10/28/08 No 8/12/09 950,000,000 1,039,800,000 91% 20.2%

Northern Trust Corporation 11/14/08 No 8/26/09 87,000,000 89,800,000 97% 14.5%

Bancorp Rhode Island, Inc. 12/19/08 No 9/30/09 1,400,000 1,400,000 100% 12.6%

 115 Some banks engaged in a qualified equity offering, or QEO. A QEO is defined in the Securities Purchase Agreement as a sale before 2010 of shares 

that qualify as tier 1 capital that raises an amount of cash equal to the value of the preferred shares issued to Treasury. A QEO would therefore lessen the value 

of the warrant.
30

Manhattan Bancorp 12/5/08 No 10/14/09 63,364 140,000 45% 9.8%

CVB Financial Corp 12/5/08 Yes 10/28/09 1,307,000 2,800,000 47% 6.4%

Centerstate Banks of Florida Inc. 11/21/08 Yes 10/28/09 212,000 440,000 48% 5.9%

Bank of Ozarks 12/12/08 No 11/24/09 2,650,000 3,500,000 76% 9.0%

Total $2,903,547,364 $3,099,410,000 94% 17.1%
31

The TARP recently incurred its first direct losses. The failures of three institutions – CIT 

Group, and two smaller banks – have resulted in a potential loss to taxpayers of up to $2.63 

billion.116 In addition, dozens of TARP recipients have missed dividend payments to Treasury.

As of October 31, 2009, 38 banks have missed dividend payments, and six additional banks have 

deferred November dividends.117 Banks have a variety of reasons for the missed payments. 

Some have reported that they have the funds to pay the dividends, but that safety and soundness 

laws restrict their ability to pay dividends to any investor if the bank does not meet certain levels 

of retained or cumulative earnings.118 A failure to pay dividends, however, can foretell larger 

problems for a bank. On November 5, Pacific Coast National Bancorp was the subject of an 

enforcement order from the Federal Reserve preventing it from paying dividends without prior 

approval from federal regulators.

119 A week later it failed.120

In addition to costing taxpayers, the recent bank failures call into question Treasury’s 

assertion that CPP funds were only available to “healthy” or “viable” banks.121

 116 On November 1, 2009, small business lender CIT filed for bankruptcy, probably resulting in a complete 

loss of the $2.3 billion in CPP funds that it had received in December 2008. CIT has announced that all existing 

common and preferred shares will be cancelled in the bankruptcy. See CIT Group, CIT Board of Directors 

Approves Proceeding with Prepackaged Plan of Reorganization with Overwhelming Support of Debtholders (Nov. 

1, 2009) (online at phx.corporateir.net/External.File?item=UGFyZW50SUQ9MTkxNjh8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1). United 

Commercial Bank failed on November 7, 2009; it had received $298.7 million in CPP funds on November 14, 2008. 

Finally, on November 13, 2009, Pacific Coast National Bancorp, which received $4.1 million in TARP funds on 

January 16, 2009, failed.

Furthermore, The

117 See Appendix I for a list of banks that have missed dividend payments.

118 See Christine Mitchell, Regulatory Hurdles Hinder Ability to Make TARP Dividend Payments, SNL 

Financial (Nov. 5, 2009) (online at www.snl.com/interactivex/article.aspx?Id=10294060&KPLT=2). 

119 See Federal Reserve Bank of San Francisco, Written Agreement by and between Pacific Coast National 

Bancorp, San Clemente, California at 2 (Nov. 5, 2009) (online at 

www.federalreserve.gov/newsevents/press/enforcement/enf20091110a1.pdf). 

120 See Federal Deposit Insurance Corporation, Failed Bank Information for Pacific Coast National Bank,

San Clemente, CA (Nov. 13, 2009) (online at www.fdic.gov/bank/individual/failed/pacificcoastnatl.html).

121 See SIGTARP, Emergency Capital Injections Provided to Support the Viability of Bank of America, 

Other Major Banks, and the U.S. Financial System (Oct. 5, 2009) (online at 

sigtarp.gov/reports/audit/2009/Emergency_Capital_Injections_Provided_to_Support_the_Viability_of_Bank_of_A

merica..._100509.pdf) (determining that several of the initial CPP banks were not “healthy” at the time the 

investements were made); U.S. Department of the Treasury, Factsheet on Capital Purchase Program (Mar. 17, 

2009) (online at www.financialstability.gov/roadtostability/CPPfactsheet.htm) (hereinafter “Factsheet on CPP”) 

(“Participation is reserved for healthy, viable institutions”). CIT Group is an example of an institution of 

questionable health that received CPP funds. It is a leading lender to small businesses, and also has a depository 

bank. It suffered accelerating losses since 2Q 2007, and had difficulty accessing credit in short-term debt markets, 

on which its business model was heavily reliant. Treasury approved CIT’s application for CPP funds because it was 

the leading source of financing for small business, and it deemed it systemically significant – at least in the early 

days of the crisis. It received $2.3 billion of CPP funds in December 2008. Immediately following its receipt of 

TARP money, CIT sought to enter the TLGP. CIT’s TLGP application with the FDIC was pending for several 

months and was finally rejected in July 2009. Also in July, FRBNY completed a stress-test of CIT Group and 

concluded that it would need to raise up to $4 billion of funding. Treasury declined to make an additional CPP 

investment in CIT Group because it did not believe that CIT had presented a viable business plan. CIT filed for 
32

Wall Street Journal recently performed an analysis of regulatory enforcement actions against 

TARP-recipient banks; such actions are a sign that a bank’s health is deteriorating. The Journal

found that, in addition to the three banks that have failed, 24 other TARP-recipient banks have 

received regulatory sanctions in 2009. At least eight banks received TARP funds when 

regulators had already voiced concerns about the banks’ health.122 Citigroup’s need for TIP 

funds only five weeks after Treasury provided it with CPP funds further calls into question the 

assertion that CPP funds were only available to “healthy” banks.123

b. Health of Banking Sector

i. Bank Capital Levels

Capital levels are one measure of the banking sector’s health. The stress tests measured 

the capital levels of the 19 largest bank holding companies, requiring a capital buffer to protect 

them through a more severe downturn.124 Eighteen banks either already held capital that the 

supervisors considered adequate, or were subsequently able to raise additional capital in the 

private markets. Tier 1 capital – also called core capital – is the highest quality capital that a 

bank can hold.125 A bank’s tier 1 capital ratio is the ratio of its tier 1 capital to its risk-weighted 

assets.126

 

Chapter 11 bankruptcy protection on November 1, 2009. CIT’s inability to access credit outside of the TLGP calls 

into question whether other CPP institutions would be healthy without the government guarantee programs.

 Figure 5 shows the stress tested institutions’ tier 1 capital levels in 3Q 2008 and in 3Q 

2009. Most of these institutions have higher tier 1 capital levels than they did a year ago. A 

122 David Enrich, TARP Can’t Save Some Banks, Wall Street Journal (Nov. 17, 2009) (online at 

online.wsj.com/article/SB10001424052748704538404574539954068634242.html). 

123 See SIGTARP, supra note 121. In addition, Merrill Lynch was selected to receive CPP funds in 

October 2008, after Bank of America had agreed to acquire it in order to prevent Merrill’s dissolution. See

November 25 Transactions Report, supra note 71 (“This transaction was included in previous Transaction Reports 

with Merrill Lynch & Co., Inc. listed as the qualifying institution and a 10/28/2008 transaction date, footnoted to 

indicate that settlement was deferred pending merger. The purchase of Merrill Lynch by Bank of America was 

completed on 1/1/2009, and this transaction under the CPP was funded on 1/9/2009.”).

124 The Federal Reserve developed the metrics for the more adverse scenario in February 2009. The most 

recent figures for those three metrics are a 2.8 percent increase in annual GDP as of third quarter 2009, a 9.2 

annualized unemployment rate as of November 2009, and a 8.5 annualized percent decrease in housing prices as of 

the end of September 2009. Compare this to the more adverse scenario for calendar year 2009 having GDP falling 

3.5 percent, housing falling 22 percent, and unemployment at 8.9 percent.

125 Tier 1 capital is the sum of the following capital elements: (1) common stockholders’ equity; (2) 

perpetual preferred stock; (3) senior perpetual preferred stock issued by Treasury under the TARP; (4) certain 

minority interests in other banks; (5) qualifying trust preferred securities; and (6) a limited amount of other 

securities.

126 Calculating risk-weighted assets is a complex process, but the concept is as simple as it sounds. Assets 

are weighted based on their level of risk.
33

number of these have already repaid their CPP funds, making their higher capital levels due in 

part to capital raised in the private markets.127

Public confidence in the adequacy of bank capital levels would be enhanced through 

consistent financial reporting practices. The absence of consistent financial reporting practices 

and agreed upon interpretations of relevant accounting rules make it difficult to compare capital 

levels of different financial institutions.

128

Figure 5: Tier 1 Capital Ratios of Stress-Tested Institutions, Third Quarter 2008 v. 2009129

 127 These higher capital levels are also due in part to earnings, some of which are a result of various 

government guarantee programs and low-cost funds available to banks.

128 The Panel discussed this issue in depth in its August Report. August Oversight Report, supra note 100.

129 This figure excludes four stress-tested institutions: Goldman Sachs, Morgan Stanley, GMAC, and 

American Express. These institutions were excluded because data on their tier 1 capital levels for 3Q 2009 was not 

available. This is because they became bank holding companies at the end of or after the 3Q 2008. SNL Financial, 

Bank & Thrift Stress Test Tear Sheet (online at 

www.snl.com/interactivex/TemplateBrowser.aspx?V=V&Format=XLS&Doc=9676136&File=7970111&SaveFileA

s=Bank & Thrift Stress Test Tear Sheet) (accessed Dec. 7, 2009).

0 2 4 6 8 10 12 14 16

Wells Fargo & Company

U.S. Bancorp

SunTrust Banks, Inc.

State Street Corporation

Regions Financial Corporation

PNC Financial Services Group, Inc.

MetLife

KeyCorp

JPMorgan Chase & Co.

Fifth Third Bancorp

Citigroup Inc.

Capital One Financial Corporation

BB&T Corporation

Bank of New York Mellon Corporation

Bank of America Corporation

Tier 1 Common Capital Ratio (%) 3Q09 Tier 1 Common Capital Ratio (%) 3Q08
34

ii. Bank Capital Raising

Since the inception of the TARP, 211 banks, thrifts, and specialty lenders have raised a 

total of $264.3 billion in capital from the private markets.130

iii. Borrowing by Financial Institutions

One hundred and thirty of these 

institutions were TARP recipients. Banks’ ability to raise capital in the private markets shows 

that investors are regaining confidence in the banking sector. However, investor confidence may 

reflect the assumption of an implicit guarantee hanging over the financial system. Investors saw 

that the government stepped in to support institutions such as Bank of America without wiping 

out shareholder stakes. This may signal to the markets that shareholders in large institutions are 

protected from total loss of their investment.

Borrowing by banks is crucial to maintaining sufficient liquidity in the financial system. 

But at the height of the financial crisis, bank debt issuance ground nearly to a halt. In September 

2008, banks issued only $661 million in debt, as compared to $109 billion a year before. In 

October 2008, the FDIC announced that it would guarantee bank debt under the TLGP, a 

program designed to promote borrowing by financial institutions.131

In the last two months of 2008, participating institutions issued $108 billion in senior 

unsecured debt. At the height of the program, 101 institutions had $346 billion in debt 

outstanding.

 This voluntary FDIC 

program, which is not a part of the TARP, provided a full guarantee to senior unsecured debt 

issued by participating banks.

132 There is currently $315 billion in debt outstanding under the program, covering 

88 institutions.133

 130 This is through November 30, 2009. See SNL Financial, Capital Raises Among Banks and Thrifts

(online at www.snl.com/InteractiveX/doc.aspx?ID=10162420) (accessed Dec. 4, 2009). This includes common 

equity, perpetual preferred stock, and trust preferred stock. These three are all elements of tier 1 capital. Of the four 

largest banks, Citigroup is the only one that has not raised capital in the private markets. JPMorgan raised $5 billion 

in June, and Wells Fargo raised $11 billion in November 2008. SNL Financial. Bank of America raised $13.4 

billion in May 2009, and announced that it will raise additional capital before repaying its TARP funds. See

 Though the program ended on October 31, 2009, borrowing by financial 

institutions has continued. As of November 10, 2009, banks that had participated in the TLGP 

Bank of 

America RepaymentRepayment, supra note 82.

131 The TLGP has two programs: the debt guarantee program, and a second program that guarantees deposit 

accounts above the $250,000 FDIC insurance limit. The Panel will only discuss the debt guarantee program here. A 

third government guarantee program, Treasury’s Temporary Guarantee Program for Money Market Funds, 

guaranteed money market funds and not banks, so the Panel does not include it as a capital assistance program. The 

Panel discusses the TGPMMF, and has a full discussion of the TLGP, in its November Report. November Oversight 

Report, supra note 96. 

132 See Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary 

Liquidity Guarantee Program (May 31, 2009) (online at 

www.fdic.gov/regulations/resources/TLGP/total_issuance5-09.html). 

133 See Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary 

Liquidity Guarantee Program (Oct. 31, 2009) (online at 

www.fdic.gov/regulations/resources/TLGP/total_issuance10-09.html).
35

issued a total of $5.5 billion of non-guaranteed debt.134 Banks are continuing to issue debt 

without the support of the FDIC guarantee, though at lower amounts than they were issuing 

under the TLGP.

135 Figure 6 shows debt issued under the TLGP compared to non-TLGP senior 

debt issued by banks prior to and during the term of the TLGP. Bank borrowing increased 

during the first two quarters of the TLGP. This could be due to the availability of lower cost 

guaranteed debt,

136

Figure 6: Non-TLGP Senior Debt Since 4Q 2006, and TLGP Debt Since 4Q 2008

or could be attributed to restored confidence in the financial system. 

137

iv. Market Perception of Banks’ Health

The price of a credit default swap (CDS) contract on a specific bank trading in the market 

offers an indication of the market’s view of that bank’s health. Credit default swap contracts 

function in a similar manner to insurance contracts.

138

 134 Data provided under subscription by SNL Financial. 

 If a bank’s bondholders are worried about 

135 The $5.5 billion issued in November is lower than the $10.23 billion, a mixture of TLGP and non-TLGP 

debt, issued in October 2009.

136 As shown in the Panel’s November report, banks saved between $13.4 and $29 billion in borrowing 

costs by participating in the TLGP. November Oversight Report, supra note 96, at 69.

137 SNL Financial, Financial Institutions Offering Activity (online at 

www1.snl.com/interactivex/TemplateBrowser.aspx?V=V&Doc=10022881&File=8302325&Format=XLS&SaveFil

eAs=Financial Institutions Offering Activity) (accessed Dec. 7, 2009). SNL template modified to provide specific 

data necessary to conduct analysis. 

138 A credit default swap contract has a similar payoff structure to a put option.

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

Millions of Dollars

Non-TLGP Senior Debt TLGP Debt
36

the bank defaulting on its debt, they can buy default protection through a credit default swap to 

hedge their bets. Therefore, the less healthy a bank is perceived to be, the more expensive a 

CDS contract against that bank will be. As shown in Figure 7, the 5-year CDS spreads for 

institutions AIG, JPMorgan Chase, Wells Fargo, Goldman Sachs, Citigroup, Morgan Stanley, 

Bank of America, Capital One, and American Express skyrocketed in fall of 2008 and early 

2009.139 CDS spreads remained high in early 2009 because of continued uncertainty in the 

markets.140

On average, five-year CDS spreads on these institutions went up by 636 basis points at 

the height of the crisis, and have now fallen 532 basis points, to 104 basis points above the 

trough. Excluding AIG from the list, on average the five-year CDS spreads went up by 410 basis 

points at the height of the crisis, and have now fallen 371 basis points, to 39 basis points above 

the trough.

 

141 This decline in CDS spreads shows a clear increase in CDS market participants’ 

confidence in major bank creditworthiness. It is unclear the extent to which this decline in CDS 

spreads is due to confidence in major banks’ stand-alone creditworthiness and to what degree 

this decline reflects CDS market confidence in implicit government guarantees of large banks. 

While it is no doubt true that the perception of an implicit guarantee has grown in the wake of 

the government response to the crisis, market participants lack a clear understanding of the scope 

of any such guarantee and the circumstances under which it would be exercised.

 139 Five-year CDS spread refers to the difference between the price of a CDS contract maturing in five 

years and the price of Treasury bonds with a similar maturity. 

140 Even with the explicit and implicit guarantees of government support, U.S. banks remained exposed to 

overseas financial institutions.

141 Data provided under subscription by BLOOMBERG Data Services.
37

Figure 7: Five-Year CDS Spreads of Selected TARP Recipients142

 142 Data provided under subscription by BLOOMBERG Data Services, Credit Default Swap Spreads.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Basis Points

Bank of America Corp American International Group Inc 

Morgan Stanley Citigroup Inc 
38

c. Macro Indicators of the Health of the Banking Sector

While it is difficult to isolate the effects of the TARP on the banking sector, 

macroeconomic indicators provide some insight into the effectiveness of the program in 

promoting the liquidity and stability of the sector. These gauges – lending levels, bank failures, 

and bank consolidations – are relevant to assessing the impact of the TARP. But because of the 

influence of other external factors, they do not imply causation.

i. Lending by Financial Institutions143

Bank lending activities are an indicator of financial sector health, though it is important 

not to oversimplify the relationship between the two. Treasury has stated that it limited capital 

injections from the CPP to healthy banks in order to ensure that the funds were used for lending, 

and not merely to bolster recipient banks’ balance sheets.

144

Figure 8 shows loan originations of the top 20 CPP recipients through the life of the 

TARP. It includes all lending: consumer, real estate, and commercial.

 Even healthy banks, however, have 

a need to recapitalize after the losses of the past year. A bank looking to build its capital levels 

will allocate more funds to capital and less to lending. 

145 The chart shows the 

degree to which lending tightened for the period of October 2008 through September 2009. 

Since the enactment of EESA, loan originations by these 20 institutions have decreased by 13.7 

percent. Total average loan balances decreased by 1 percent.146

 143 The report discusses small business lending in section C2b infra at 57.

144 See Factsheet on CPP, supra note 121 (“Participation [in the CPP] is reserved for healthy, viable 

institutions that are recommended by their applicable federal banking regulator. Treasury’s intent is to provide 

immediate capital to stabilize the financial and banking system, and to support the economy.... A necessary 

precursor to lending and economic recovery is a stable, healthy financial system. Healthy banks, not weak banks, 

lend to their communities and the CPP is a program for healthy banks.”).

145 Specifically, it includes first mortgage, home equity lines of credit (HELOC), credit card, other 

consumer, commercial and industrial renewal, commercial and industrial new commitments, CRE renewal, CRE 

new commitments, and small business lending.

146 See U.S. Department of the Treasury, Treasury Department Monthly Lending and Intermediation 

Snapshot Data for April 2009 - September 2009 (Nov. 16, 2009) (online at 

www.financialstability.gov/docs/surveys/Snapshot_Data_September_2009.xls). Data manipulated in order to 

exclude PNC and Wells Fargo. For further explanation of Panel methodology see footnote 147.
39

Figure 8: Total Loan Originations of Selected CPP Recipients Since Inception of 

EESA147

Banks remain cautious with respect to lending, even as they become better capitalized.148

 147 The Panel uses Treasury’s “Monthly Lending and Intermediation Snapshot” of the top 22 CPP 

participants to track specific categories of lending levels of the financial institutions that benefitted the most from 

government assistance under the TARP. Two of these institutions, PNC Financial and Wells Fargo, purchased large 

banks at the end of 2008. PNC Financial purchased National City on October 24, 2008 and Wells Fargo completed 

its merger with Wachovia Corporation on January 1, 2009. The assets of National City and Wachovia are included 

as part of PNC and Wells Fargo, respectively, in Treasury’s January lending report but are not differentiated from 

the existing assets or the acquiring banks. As such, there were dramatic increases in the total average loan balances 

of PNC and Wells Fargo in January 2009. For example, PNC’s outstanding total average loan balance increased 

from $75.3 billion in December 2008 to $177.7 billion in January 2009. The same effect can be seen in Wells 

Fargo’s total average loan balance of $407.2 billion in December 2008 which increased to $813.8 billion in January 

2009. The Panel excludes PNC and Wells Fargo in order to have a more consistent basis of comparison across all 

institutions and lending categories.

In the Federal Reserve’s October 2009 survey of senior loan officers, 25 percent of respondents 

Unlike other lending categories, Treasury only began publishing small business lending information as of 

April 2009. U.S. Department of the Treasury, Treasury Department Monthly Lending and Intermediation Snapshot 

Data for April 2009 - September 2009 (Nov. 16, 2009) (online at 

www.financialstability.gov/impact/monthlyLendingandIntermediationSnapshot.htm) (hereinafter “Treasury 

Department Monthly Lending and Intermediation Snapshot Data for April 2009 - September 2009”).

148 Board of Governors of the Federal Reserve System, October 2009 Senior Loan Officer Opinion Survey 

on Bank Lending Practices at 3 (online at www.federalreserve.gov/boarddocs/snloansurvey/200911/fullreport.pdf) 

(hereinafter “Loan Officer Opinion Survey October 2009”) (accessed Dec. 7, 2009) (observing that “domestic banks 

indicated that they continued to tighten standards and terms over the past three months on all major types of loans to 

businesses and households”).

$0

$50,000

$100,000

$150,000

$200,000

$250,000

Dollars in Millions
40

reported tightening standards for prime residential real estate loans in the last three months, 

while 15 percent reported tightening standards for credit card loans in the last three months, and 

15 percent reported tightening lending to all size businesses in the past three months.

149 Banks 

continued to tighten lending, but less banks reported tightening than in late 2008.150

While it might be desirable for TARP recipients to increase lending to help the economy, 

banks may be reluctant to lend due to legitimate concern about increased default risks.

 Banks might 

be holding more capital in order to offset potential future losses on loans. The increases in 

delinquencies and charge-offs shown in Figures 9 and 10 support banks’ potential desire to hold 

cash to offset future losses on loans.

151 As 

discussed in Section 1.C.2.b, infra, Small Business Loans, for instance, carry added risk in

today’s economic climate. Chairman Bernanke recently noted that difficulties in obtaining credit 

may impede the creation and expansion of small- and medium-sized businesses.152

 149 Loan Officer Opinion Survey October 2009, supra note 148 (accessed Dec. 7, 2009).

150 Loan Officer Opinion Survey October 2009, supra note 148, at 3 (accessed Dec. 7, 2009). In October 

2008, 80 percent of banks reported tightening of lending to all size businesses, 70 percent reported tightening on 

prime residential real estate lending, and 60 percent reported tightening lending for credit cards. Board of Governors 

of the Federal Reserve System, October 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices

(online at www.federalreserve.gov/boarddocs/SnloanSurvey/200811/fullreport.pdf) (accessed Dec. 7, 2009). 

151 See Board of Governors of the Federal Reserve System, Remarks by Chairman Ben S. Bernanke at the 

Economic Club of New York (Nov. 16, 2009) (online at 

www.federalreserve.gov/newsevents/speech/bernanke20091116a.htm) (hereinafter “Remarks by Chairman Ben S. 

Bernanke”). Of course it is not clear how to define desired levels of lending. Few think that the United States 

should return to 2007 levels of consumer borrowing but there is no broad consensus as to what level of lending 

would support economic expansion at this time.

152 Remarks by Chairman Ben S. Bernanke, supra note 151. see also Federal Reserve Board of Governors, 

Minutes of the Federal Open Market Committee (Nov. 3-4, 2009) (online at 

www.federalreserve.gov/monetarypolicy/fomcminutes20091104.htm) (“Limited credit availability, along with weak 

aggregate demand, was viewed as likely to restrain hiring at small businesses, which are normally a source of 

employment growth in recoveries.”).
41

Total delinquencies have risen dramatically since the second half of 2007, as shown in 

Figure 9. While those secured by real estate have the highest levels, delinquencies on loans to 

consumers have also risen significantly.

Figure 9: Total Delinquencies at All Domestic Commercial Banks, by Type153

 153 Board of Governors of the Federal Reserve, Charge-off and Delinquency Rates – Instrument: 

Delinquencies/All Banks (online at www.federalreserve.gov/datadownload/Choose.aspx?rel=CHGDEL) (accessed 

Dec. 7, 2009).

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

Millions of Dollars

Delinquencies on all loans and leases

To finance agricultural production

Commercial and industrial

Secured by real estate

To consumers

Secured by real estate; Single-family residential mortgages; Booked in domestic offices

Lease financing receivables

To consumers; Credit cards

To consumers; Other

Secured by real estate; Commercial real estate loans (excluding farmland)
42

Bank charge-offs have seen a similar rise in 2008 and 2009. In general, a bank charges 

off a loan when it believes that it will not be able to recover payment on it. The actual and 

potential for future losses on existing loans goes some way toward explaining why banks, despite 

recapitalization, are reluctant to lend.

Figure 10: Net-Charge-Offs at All Domestic Commercial Banks, by Type154

 154 Id.

$0

$5,000

$10,000

$15,000

$20,000

$25,000

Millions of Dollars

To finance agricultural production

Commercial and industrial

Secured by real estate

To consumers

Secured by real estate; Single family residential mortgages; Booked in domestic offices

Lease financing receivables

To consumers; Credit cards

To consumers; Other

Secured by real estate; Commercial real estate loans (excl. farmland); Booked in domestic offices
43

A number of factors could cause banks to pull back on lending. A bank might decide to 

hold increased capital in the wake of the severe impairment of bank funding markets or

uncertainty regarding future changes in regulatory capital standards. Though they are regaining 

strength, the continued impairment of securitization markets reduces funding for bank loans. 

And banks might be concerned about upcoming changes to accounting rules that will require 

banks to move a large volume of securitized assets onto their balance sheets.155 Some 

commentators have explained that current credit tightening has followed historical patterns from 

recessions, when credit risk understandably increases.156 There is also considerable concern that 

some of this decrease in credit may arise – as in past banking crises – from the increased scrutiny 

given by bank examiners to loans, including credit determinations and documentation, and the 

reaction of bank management to the prospect of increased scrutiny.157

Banks’ willingness to lend is only one factor in the lending equation. A decline in 

lending levels may also reflect reduced demand from borrowers rather than tightened conditions 

from creditors. There is considerable evidence that demand for credit has fallen over the past 

year.158

The demand for credit also has fallen significantly: For example, households are 

spending less than they did last year on big-ticket durable goods typically purchased 

with credit, and businesses are reducing investment outlays and thus have less need to 

borrow. Because of weakened balance sheets, fewer potential borrowers are 

creditworthy, even if they are willing to take on more debt. Also, write-downs of bad 

debt show up on bank balance sheets as reductions in credit outstanding.

 As Chairman Bernanke has explained:

159

ii. Bank Failures

Banks of all sizes were affected by the shock to the financial sector. While many of the 

largest banks received unprecedented support, smaller banks have been allowed to fail and to be 

seized by regulators. There were 149 bank failures between January 1, 2008 and November 30, 

2009;

160 124 of these failures occured in 2009, with assets totaling $141.6 billion.161

 155

 This is the 

Remarks by Chairman Ben S. Bernanke, supra note 151.

156 See Baker COP Testimony, supra note 28, at 4-5 (contending that “[t]here is no reason to believe that 

the tightening of credit during this downturn is any greater than what should be expected given the severity of the 

recession” and “to insist that [banks] make loans [to small businesses] on which they expect to lose money” would 

“be questionable economic policy”). But see Remarks by Chairman Ben S. Bernanke, supra note 151, at 4-5 

(“Nevertheless, it appears that, since the outbreak of the financial crisis, banks have tightened lending standards by 

more than would have been predicted by the decline in economic activity alone.”).

157 See Congressional Oversight Panel, Testimony of Charles Calomiris, Taking Stock: Independent Views 

on TARP’s Effectiveness (Nov. 19, 2009) (online at cop.senate.gov/hearings/library/hearing-111909-

economists.cfm).

158 Loan Officer Opinion Survey October 2009, supra note 148, at 3.

159 Remarks by Chairman Ben S. Bernanke, supra note 151.

160 Data provided under subscription by SNL Financial.
44

most bank failures since 1992, when 181 banks failed. Two of these 124 banks were TARP 

recipients.162 Many of these failed banks were small- and medium-sized banks with higher 

proportions of commercial real estate loans.163 The FDIC’s Deposit Insurance Fund is feeling the 

stress of these failures – it now carries a balance of negative $8.2 billion.164

There are currently 552 banks on the FDIC’s watch list.

 This is only the 

second time in the FDIC’s history that the Fund balance has been below zero. 

165 This implies that while the 

TARP may have stabilized the elements of the banking sector that received TARP funds, there 

are still areas of weakness in the sector stemming from the ongoing problems of the general 

economy. FDIC Chairman Sheila Bair has predicted bank failures will peak in 2010 and then 

decline.166

Figure 11 shows numbers of failed banks, and total assets of failed banks since 1970. It 

shows that, although the number of failed banks was significantly higher in the late 1980s than it 

is now, the aggregate assets of failed banks during the current crisis far outweighs those from the 

 161 See Federal Deposit Insurance Corporation, Failures and Assistance Transactions (online at 

www2.fdic.gov/hsob/SelectRpt.asp?EntryTyp=30) (hereinafter “Failures and Assistance Transactions”) (accessed 

Dec. 7, 2009).

162 CIT Group is not an FDIC insured institution, so it is not included on failed bank lists.

163 See Federal Deposit Insurance Corporation, Failed Bank List (online at 

www.fdic.gov/bank/individual/failed/banklist.html) (accessed Dec. 7, 2009); see also Office of the Comptroller of 

the Currency, Comptroller Dugan Expresses Concern About Commercial Real Estate Concentrations (Jan. 31, 

2008) (online at www.occ.gov/ftp/release/2008-9.htm) (Describing that according to data from the Office of the 

Comptroller of the Currency, between 2002 and 2008, the ratio of commercial real estate loans to capital at 

community banks nearly doubled to a record 285 percent. By early 2008, nearly one-third of all community banks 

had commercial real estate concentrations that exceeded 300 percent of their capital.); Maurice Tamman and David 

Enrich, Local Banks Face Big Losses, Wall Street Journal (May 19, 2009) 

(online.wsj.com/article/SB124269114847832587.html) (analyzing the relationship between commercial real estate 

loans and small/medium-size banks, and concluding that many such banks could fail because of their commercial 

real estate loan portfolios). For a more complete discussion of this topic, please see the Panel’s August Oversight 

report. See August Oversight Report, supra note 100, at 4-5, 12, 18. 

164 This negative balance includes a $38.9 billion contingent loss reserve that the FDIC has already set aside 

to cover losses in the next year. See Federal Deposit Insurance Corporation, FDIC-Insured Institutions Earned $2.8 

Billion in the Third Quarter of 2009 (Nov. 24, 2009) (online at www.fdic.gov/news/news/press/2009/pr09212.html) 

(hereinafter “FDIC-Insured Institutions Earned $2.8 Billion in the Third Quarter of 2009”). As the FDIC explains 

“[c]ombining the fund balance with this contingent loss reserve shows total DIF reserves with a positive balance of 

$30.7 billion.” See id.

165 Id.

166 Michael S. Derby, FDIC’s Bair: Bank Failures Will Peak In 2010, Wall Street Journal (Nov. 10, 2009) 

(online at online.wsj.com/article/BT-CO-20091110-715147.html).
45

1980s. At the high point in 1988 and 1989, 763 banks failed, with total assets of $309 billion.

167 

Compare this to 149 banks failing in 2008 and 2009, with total assets of $473 billion.

168

Figure 11: Bank Failures Through November 30, 2009 (in 2005 Dollars)169

 167 This is in 2005 inflation-adjusted numbers. Failures and Assistance Transactions, supra note 161

(accessed on Dec. 7, 2009). The number of bank failures from 1988 and 1989 includes the casualties of the savings 

and loan crisis. During these years regulatory changes forced closures of some institutions.

168 This is in 2005 inflation-adjusted numbers. Bank failures for 2009 are as of November 30, 2009. 

Failures and Assistance Transactions, supra note 161 (accessed on Dec. 7, 2009). This figure includes the failures 

of Washington Mutual and IndyMac, with assets of $307 billion and $32 billion, respectively.

169 Failures and Assistance Transactions, supra note 161. Data total assets are adjusted for inflation into 

2005 dollars using the GDP price deflator. U.S. Department of Commerce: Bureau of Economic Analysis, Gross 

Domestic Product: Implicit Price Deflator (online at research.stlouisfed.org/fred2/data/GDPDEF.txt) (accessed Dec. 

7, 2009). This chart does not include the six banks that failed on December 4, 2009. One of these, AmTrust Bank, 

had total assets of approximately $12.0 billion. Federal Deposit Insurance Company, Failed Bank List (online at 

www.fdic.gov/bank/individual/failed/banklist.html) (accessed Dec. 7, 2009).

0

100

200

300

400

500

600

$0

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

$300,000,000

$350,000,000

$400,000,000

Thousands of Dollars

Total Assets of Failed Institutions (Left Axis) Total Number of Failed Institutions (Right Axis)
46

iii. Bank Consolidation

While an increasing number of small banks have failed over the past year, the largest 

banks have grown larger. Figure 12 shows the increasing market share held by the four largest 

U.S. banks in the years 1998 through 2009.

Figure 12: Market Share of the Four U.S. Banks with the Most Deposits in Market Since 

1998170

Bank consolidation has worrisome implications for moral hazard, as long as there 

continues to be a perception in the market of an implicit guarantee. As a small number of banks 

acquire a larger share of the market and competition decreases, the systemic risk they pose 

rises.171

 170 SNL Financial, Deposit Market Share, 1998-2009 (online at 

www.snl.com/interactivex/InDepositMarketshareDetail.aspx?ID=US&Number=10&Refreshed=1&Year=2009&Ma

rket=0&Ownership=0) (accessed Dec. 7, 2009).

171 This does not imply that bank consolidation is an intended policy, but it can be a side effect of many 

bank failures. The FDIC is under a statutory mandate to achieve the “least cost resolution” of a failing or failed 

bank, and in the case of large failed banks such as Washington Mutual and Wachovia, the least cost solution requires 

them to be acquired by other large banks. The statute does provide an exception from the least cost resolution 

mandate in situations in which its application would cause “serious adverse effects on economic conditions or 

financial stability” and an alternative action “would avoid or mitigate such adverse effects.” 12 U.S.C. § 

1823(c)(4)(G)(i).

0

5

10

15

20

25

30

35

40

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Billions of Dollars Percent

Total U.S. Deposits for Top 4 Banks ($) Market Share (%)
47

d. Summary

As TARP capital assistance efforts wind down, the current condition of the banking 

sector is mixed. Treasury and regulators have stated that the stress tests show that large banks, 

most of them current or former TARP recipients, are in general adequately capitalized. That 

assertion is challenged by leading economists and experts on financial crises.172

2. Credit for Consumers and Small Business

 Many small and 

medium banks, however, are in a more precarious situation. 

Treasury has emphasized the use of the TARP “to restore the flow of credit to small 

businesses and consumers.”173 It has chosen to allocate TARP funds directly for these purposes 

(i) by launching a program with FRBNY to revive the loan securitization market and providing 

$20 billion as a credit backstop as part of that program, and (ii) by committing up to $15 billion 

to purchase directly securitized Small Business Administration loans. In addition, Treasury has 

recently announced the broad outlines of a program to provide capital assistance to small banks 

in return for commitments to lend to small business.174

a. Asset Securitization – The Term Asset-Backed Securities Loan Facility

Since the mid-1980s, banks have increasingly chosen to finance their consumer loans 

(primarily credit card, student, and auto loans) by packaging those loans into securities sold to 

investors through a process called securitization, creating an important channel for providing 

credit.175 The financial crisis froze the markets for these “asset-backed securities,” in part in 

reaction to the general credit crunch and in part in reaction to the crisis in the larger markets for 

securitized residential mortgages. Thus, Treasury and the Federal Reserve Board saw revival of 

the securitization market as the way to revive credit to consumers and created the Temporary 

Asset-Backed Securities Loan Facility (TALF) to produce that revival.

176

 172 See Section D of this report, infra.

173 U.S. Department of the Treasury, The Financial Stability Plan: Deploying our Full Arsenal to Attack the 

Credit Crisis on All Fronts (online at www.financialstability.gov/roadtostability) (hereinafter “Financial Stability

Plan”) (accessed Dec. 7, 2009). 

174 See White House, President Obama Announces New Efforts to Improve Access to Credit for Small 

Businesses (Oct. 21, 2009) (online at www.whitehouse.gov/assets/documents/small_business_final.pdf) (hereinafter 

“President Obama Announces Small Business Efforts”). The nature of the market for consumer and small business 

loans and the impact of the crisis on those markets are discussed in detail in the Panel’s May 2009 report. See 

Congressional Oversight Panel, May Oversight Report: Reviving Lending to Small Businesses and Families and the 

Impact of TALF (May 7, 2009) (online at cop.senate.gov/documents/cop-050709-report.pdf) (hereinafter “May 

Oversight Report”).

175 The securitization process is described in the Panel’s May oversight report. May Oversight Report, 

supra note 174, at 34-39.

176 According to the Federal Reserve Board and Treasury, “over the past few years around a quarter of all 

non-mortgage consumer credit” has been financed through securitization. U.S. Department of the Treasury, White 
48

The volume of asset-backed securities representing classes of consumer loans before the 

financial crisis, the drop in that volume during the crisis, and its movement upward beginning in 

March 2009 are shown in Figure 13:

Figure 13: Monthly Total SBA, Student Loan, Credit Card, and Auto ABS Issuances, 

2006-2009177

The TALF is a credit facility through which FRBNY originally committed up to $200 

billion to lend to investors for the purchase of securitized credit card, student, and automobile 

loans.178 The investors post the assets they purchase as collateral (security) for the loans; because 

the loans are made on a “non-recourse” basis,

179

 

Paper: Term Asset-Backed Securities Loan Facility (Mar. 3, 2009) (online at 

www.treas.gov/press/releases/reports/talf_white_paper.pdf) (hereinafter “TALF White Paper”).

FRBNY cannot recover more than the thenvalue of the assets if the loan is not paid. Thus, whatever the amount of the original loan, the 

risk that the loan will not be repaid lays with the government, not with the investors. The nonrecourse feature creates an economic subsidy – measured by the difference between the interest 

rates that would be required by investors to buy asset-backed securities with and without non177 Chart prepared by Panel staff using U.S. monthly ABS issuances data provided by Securities Industry 

and Financial Markets Association (SIFMA). As of the date of the report, data on small business ABS issuances is 

unavailable prior to January 2009.

178 As discussed below, infra pages 54-60, the program also included Small Business Administration loans.

179 A non-recourse loan is one in which the lender has no right to look to the borrower for repayment, but 

only to take control of the collateral, whatever its actual value.

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

Millions of Dollars

SBA Student Loans Credit Cards Auto
49

recourse loans. The subsidy is reduced somewhat because FRBNY will only make loans for 

something less than the full value of the asset-backed securities the loans are used to buy.180

The choice of non-recourse financing reflects the assessment of Treasury and FRBNY 

that the risk of high levels of default had made securitized loans largely unsalable during the 

financial crisis, due to the high interest rates investors required to offset what they perceived as 

increased risk; the ultimate result, in the agencies’ view, was reduction in the availability and an 

increase in the cost of consumer credit.181

Treasury’s economic commitment to the TALF is a relatively minor one in relation to the 

originally projected size of the program, but it has committed $20 billion of TARP funds to bear 

and is at risk for the first $20 billion of losses from TALF loans. At present, approximately $62 

billion in TALF loans has been requested,

The TALF subsidy is intended to reduce or eliminate 

that difference in two ways: (i) by creating competitive conditions to drive down interest rates 

for securitized products, and (ii) by funding a series of financings in which the feared level of 

defaults do not occur.

182

 180 See, e.g., Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: Terms and 

Conditions (Apr. 21, 2009) (online at www.newyorkfed.org/markets/talf_terms.html). As explained in the May 

report, this reduction is called a “haircut.” The haircut varies for the asset class against which a loan is made and the 

duration of that loan. For a more complete discussion of this topic, please see the Panel’s May Oversight Report. 

See Congressional Oversight Panel, May Oversight Report: Reviving Lending to Small Businesses and Families and 

the Impact of TALF, at 42 (May 7, 2009) (online at cop.senate.gov/documents/cop-050709-report.pdf). 

making the $20 billion Treasury backstop a 

significant figure; posted collateral would have to decline in value by more than 33 percent 

before the Treasury backstop would be exhausted and loan losses would begin to be borne by

FRBNY.

181 See TALF White Paper, supra note 176.

182 This figure includes both CMBS and non-CMBS loans requested as of December 3, 2009. Federal 

Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: Non-CMBS – Recent Operations (online 

at www.newyorkfed.org/markets/TALF_recent_operations.html) (hereinafter “Term Asset-Backed Securities Loan 

Facility: Non-CMBS – Recent Operations”) (accessed Dec. 7, 2009); Federal Reserve Bank of New York, Term 

Asset-Backed Securities Loan Facility: CMBS – Recent Operations (online at 

www.newyorkfed.org/markets/cmbs_operations.html) (accessed Dec. 4, 2009).
50

Figure 14: TALF v. Non-TALF ABS Issuance, March 2009-November 2009183

Three metrics can help evaluate the results of the TALF.

1. Changes in Amount of Securitizations. TALF’s direct contribution to credit for 

consumers is illustrated by Figure 14, which shows that since TALF’s March 2009 launch, 39

percent of the total amount of all credit card, student, and auto loan ABS has been funded 

through the program.

184 Over this period, total ABS origination, excluding commercial 

mortgage-backed securities, increased, ranging from a low of $11.3 billion in April 2009 to a 

high of $24.9 billion in June 2009, and averaging approximately $15.4 billion per month. While 

this represents an eightfold increase over the average monthly level of such securitizations from 

September 2008 to February 2009, securitization levels have not returned to pre-crisis levels.

185

 183 Chart prepared by Panel staff using U.S. monthly ABS issuances data provided by SIFMA and FRBNY. 

For FRBNY source data, see Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: 

Recent Operations (online at www.newyorkfed.org/markets/TALF_recent_operations.html) (hereinafter “TALF 

Recent Operations”) (accessed Dec. 3, 2009).

 

Figure 13 provides some sense of the historical base level against which the contribution of the 

TALF (illustrated in Figure 14) should be compared. A comparison of Figures 13 and 14

184 Compare Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: Non-CMBS 

– Recent Operations (online at www.newyorkfed.org/markets/TALF_recent_operations.html) (accessed Dec. 7, 

2009) with US ABS Issuance, supra note 16. The text does not mean that 39 percent of every class of loans was the 

subject of TALF financing.

185 Pre-crisis securitization levels may not be an accurate measure of healthy securitization practices; a 

portion of the growth of the ABS market was attributable to inflated demand for these products during the pre-crisis 

credit bubble.

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09

Millions of Dollars

Non-TALF Issuance TALF Issuance
51

provides some sense of the historical base level against which the contribution of the TALF, for 

the months TALF has been in existence, should be compared. Figure 15 below outlines the 

amount of loans for various types of ABS that the TALF has financed.

Figure 15: TALF Loan Facilities by Collateral Type, March 2009-November 2009186

It is less clear that the TALF has increased the relative volume of non-TALF 

securitizations. As seen in Figure 16, non-TALF consumer and small business ABS origination 

has yet to stabilize at 2008 levels. On average, during the first nine months of 2009, these types 

of securitizations were down 23.3 percent versus 2008. It is difficult to draw firm conclusions 

from these data, because without further data it is extremely difficult to separate out the various 

factors – continuing uncertainty about the risks of ABS, insufficient transparency in the ABS 

markets, and a general decline in demand in a severe recession – that contribute to ABS levels.

 186 Chart prepared by Panel staff using U.S. monthly non-CMBS ABS issuances data provided by FRBNY. 

See TALF Recent Operations, supra note 183.

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09

Millions of Dolalrs

Auto Student Loans Credit Cards SBA
52

Figure 16: ABS Issuance Without TALF, 2006-2009187

2. Changes in Interest Rate Spreads

 187 Chart prepared by Panel staff using U.S. monthly ABS issuances data provided by SIFMA and FRBNY. 

For FRBNY source data, see

. FRBNY and Treasury have pointed to the 

narrowing of interest rate spreads for privately-financed securitizations as a metric for judging 

the TALF’s success, because the closing of the spread indicates that investors are again willing 

to enter the market based on the TALF’s pricing bellwether. Figure 17 reflects both the widening 

of credit spreads during the crisis as well as tightening of spreads since the establishment of 

TALF.

TALF Recent Operations, supra note 183.

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

Millions of Dollars
53

Figure 17: ABS Spreads of Selected Indicators Since December 2006188

A comparison of Figure 17 above with Figure 16 on the previous page indicates that the 

narrowing of spreads is to some degree reflected in the volume of non-TALF ABS.

3. Changes in credit availability. The premise of the TALF is that increasing the volume 

of asset securitizations will increase the overall level of consumer credit. Figure 18, derived 

from statistics published by the Federal Reserve System, provides a general picture of the 

continuing decline in consumer credit. Statistical evidence is hard to evaluate, however, because 

it is impossible to disentangle the continuation of the credit crisis from bank deleveraging and 

the reduction of credit demand that reflects underlying difficulties in the economy.

 188 Chart prepared by Panel staff using data provided under subscription by BLOOMBERG Data Services.

-200

0

200

400

600

800

1,000

1,200

1,400

Credit Cards Autos Home Equipment
54

Figure 18: Percent Change in Consumer Credit Outstanding189

Two additional facts should be noted. First, although the TALF was originally to be 

devoted to consumer and small business loans, various ABS categories were added throughout 

the program and, on May 19, 2009, FRBNY announced that the TALF could also be used by 

investors in pools of certain commercial mortgages – expanding the program beyond its original 

purpose. To date, $7.5 billion has been borrowed for commercial mortgage-backed securities

(CMBS) investments.

Second, the TALF is scheduled to end on March 31, 2010 for ABS and legacy CMBS,

and on June 30, 2010 for newly issued CMBS. Given the small percentage of the $200 billion 

originally allocated for the TALF that has been used thus far, and the fact that loan requests have 

fallen off since their height in May ($10.6 billion requested) and June ($11.5 billion), it seems 

unlikely that the full $200 billion will be used. During a meeting with Panel staff in October, 

Treasury staff stated that the decline in requests was attributable to the increase in the availability 

of less expensive financing from private sources and therefore illustrated TALF’s success in its 

goal of re-opening the ABS markets.

b. Loans to Small Business

During the financial crisis, small business credit froze along with the rest of the lending 

markets.190

 189 Chart prepared by Panel staff using U.S. monthly non-CMBS ABS issuances data provided by FRBNY. 

See

 On March 17, 2009, Treasury outlined measures to “jumpstart credit markets for 

TALF Recent Operations, supra note 183.

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

2004 2005 2006 2007 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009

Percent

Revolving Non-revolving Total
55

small businesses.”191 Again, those measures were aimed at stimulating the market for securitized 

loans. One measure was the inclusion in the TALF of securities backed by the governmentguaranteed portion of Small Business Administration (SBA) 7(a) loans and the non-governmentguaranteed first-lien mortgage loans affiliated with the SBA’s 504 loan program in the TALF. 

The second was the direct purchase of up to $15 billion in securities backed by SBA loans; both 

measures were directed at the securitized loan market.192 (From 2006 through 2008, between 40 

and 45 percent of the SBA guaranteed portion of 7(a) loans were sold into the secondary 

market.)193

The TALF originally attracted no interest from investors in securitized 7(a) and 504 

loans. The first TALF borrowing for a pool of such loans, in the amount of approximately $86

million, occurred as part of the May 5 TALF facility. To date, TALF loans based on small 

business ABS originations represent only 2.98 percent of all non-CMBS TALF transactions.194

Treasury has not yet made any purchases under its direct purchase program although it 

has allocated approximately $3 billion for the program for 2009.195 It hopes to create its first 

actual pooling structure by year-end.196

 190 See

 It has noted that the lack of an earlier start to the 

May Oversight Report, supra note 174, at 52 (referring to the market freezing because of (1) the 

tightening of the Prime versus LIBOR spread, which reduced the attractiveness of investment in securitized 7(a) 

loans (indeed, the return for investors had disappeared); (2) the strained capacity of broker-dealers, who were unable 

to sell their current inventory and thereby free up capital to buy and pool additional loans; (3) the reduced access to 

and increased cost of credit for broker-dealers, who could not sell off inventory to pay off existing loans; and (4) 

general uncertainty and fear in the marketplace.)

191 Financial Stability Plan, supra note 173.

192Unable to shed the risk from their books, commercial lenders significantly curtailed their lending 

activities.

193 Government Accountability Office, Small Business Administration’s Implementation of Administrative 

Provisions in the American Recovery and Reinvestment Act of 2009, at 6 (Apr. 16, 2009) (online at 

www.gao.gov/new.items/d09507r.pdf).

194 Calculation based upon data provided by FRBNY. See Term Asset-Backed Securities Loan Facility: 

Non-CMBS – Recent Operations, supra note 182.

195 Government Accountability Office, Troubled Asset Relief Program: One Year Later, Actions are 

Needed to Address Remaining Transparency, and Accountability Challenges, at 80 (Oct. 8, 2009) (online at 

www.gao.gov/new.items/d1016.pdf) (hereinafter “GAO: TARP One Year”).

196 Treasury hired Earnest Partners, an independent investment manager with SBA-guaranteed loan 

experience, to guide its efforts to buy securitized SBA loans directly. U.S. Department of the Treasury, Financial 

Agency Agreement for Asset Management Services for SBA Related Loans and Securities (Mar. 16, 2009) (online at 

www.financialstability.gov/docs/ContractsAgreements/TARP%20FAA%20SBA%20Asset%20Manager%20-

%20Final%20to%20be%20posted.pdf) (updated Nov. 12, 2009); see also SIGTARP, Quarterly Report to Congress, 

at 112 (Apr. 21, 2009) (online at 

www.sigtarp.gov/reports/congress/2009/April2009_Quarterly_Report_to_Congress.pdf).
56

program reflects both the typical uncertainties investors in the TALF exhibited,197 as well as the 

fact that “the secondary market [has begun] to return to more normal conditions.”198

Unlike the TALF, Treasury’s program to purchase SBA-guaranteed securities does not 

utilize private-sector pricing. Rather, Treasury would purchase securities directly from “pool 

assemblers” and banks.199 Under the program, if Treasury engages in direct purchases, it plans 

either to sell the securities to private investors or pursue a buy-and-hold strategy, depending on 

market conditions.200 According to Treasury’s implementation documents, “Treasury and its 

investment manager will analyze the current and historical prices for these securities” in order to 

“identify opportunities to purchase the securities at reasonable prices.”201 Treasury defines such 

prices as those that fulfill the dual objective of “[providing] sufficient liquidity to encourage 

banks to increase their small business lending and [protecting] taxpayers’ interest.”202 To date, 

Treasury has not made any direct purchases under this program.203

On October 21, 2009, the White House announced a third small business lending 

initiative, part of which uses TARP funds. Under this initiative, Treasury will provide lower cost 

capital to community banks204 to be used in small business lending. 205 Participating banks must 

submit small business lending plans and will be required to submit quarterly reports describing 

their small business lending activities. If their lending plans are accepted, banks will have access 

to capital at a dividend rate of 3 percent, more attractive terms than the 5 percent rate under the 

Capital Purchase Program. These small banks will be able to receive capital totaling up to 2 

percent of their risk weighted assets.206 For community development financial institutions207

 197 See

that 

May Oversight Report, supra note 174, at 50.

198 U.S. Department of the Treasury, Unlocking Credit for Small Businesses: FAQ on Implementation (Mar. 

17, 2009) (online at www.financialstability.gov/docs/FAQ-Small-Business.pdf) (hereinafter “Unlocking Credit for 

Small Businesses: FAQ”).

199 Pursuant to EESA, Treasury expects to receive warrants from the pool assemblers as additional 

consideration for the purchase of 7(a) and 504 first-lien securities. The pricing and exact nature of the warrants is 

still under consideration by Treasury. Unlocking Credit for Small Businesses: FAQ, supra note 198.

200 Id.

201 Id.

202 Id.

203 According to Treasury’s FAQ on Implementation, purchases of securities backed by SBA 7(a) loans 

were to begin by the end of March 2009, while purchases of securities backed by first-lien 504 loans were to begin 

by May due to “Treasury’s need to conduct a thorough risk analysis, given that these securities are not government 

guaranteed.” Unlocking Credit for Small Businesses: FAQ, supra note 198; see also November 25 Transactions 

Report, supra note 71.

204 Community banks are banks with $1 billion or less in assets.

205 Small- and medium-sized banks are seen as effective vehicles for supporting small business lending 

because banks with less than $1 billion in assets hold greater proportions of small business loans to all business 

loans. See President Obama Announces Small Business Efforts, supra note 174.

206 See id. at 2.
57

can document that 60 percent of their small business lending targets low income communities or 

underserved populations, this dividend rate will be only two percent.208 As currently 

conceived,209 this capital will be available after the bank submits a small business lending plan, 

and may only be used to make qualifying small business loans.210

This program could be a more direct response to the problem of small business lending 

because over 90 percent of small business loans are not securitized.

 Further implementing details 

for this program have not been announced as of the date of this report.

211

c. Impact of Small Business Program

There is evidence that a rejuvenated secondary market for SBA loans may negate 

Treasury’s need for direct purchases. Between May and October, the total volume of loans 

settled from lenders to brokers averaged $345 million, exceeding pre-crisis levels.212

 207 Community development financial institutions, which are certified by the federal government, provide 

loans to underserved communities.

By 

comparison, in January total volume was $283.4 million. But it should be noted that the amount 

of SBA lending is small in relation to the overall number of loans to small business.

208 See President Obama Announces Small Business Efforts, supra note 174.

209 Id.

210 Id.

211 For a discussion of the relationship between small business lending and the securitization of small 

business loans, see the Panel’s May report. See May Oversight Report, supra note 174, at 50-52.

212 Calculation based on data provided by SIFMA.
58

Figure 19: Small Business Originations of Selected CPP Recipients Since March 2009 

(Without PNC or Wells Fargo)213

 213 Prior to February 2009, information on new bank loan originations was sparse, untimely, and 

incomplete. At Treasury’s request, the top 22 CPP banks began reporting this data in February 2009. See U.S. 

Department of the Treasury, Treasury Releases First Monthly Bank Lending Survey (Feb. 17, 2009) (online at 

www.financialstability.gov/latest/tg30.html). However, it was not until the April 2009 lending survey that these 

banks first specified their small business lending activities. Compare U.S. Department of the Treasury, Treasury 

Department Monthly Lending and Intermediation Snapshot: Summary Analysis for April 2009, at 5 (June 15, 2009) 

(online at www.financialstability.gov/docs/surveys/SnapshotAnalysisApril2009.pdf) with U.S. Department of the 

Treasury, Treasury Department Monthly Lending and Intermediation Snapshot: Summary Analysis for March 2009, 

at 5 (May 15, 2009) (online at www.financialstability.gov/docs/surveys/SnapshotAnalysisMarch2009.pdf). See

footnote 147 supra for an explanation of the exclusion from Figures 19 and 20 of lending by Wells Fargo and PNC.

Other CPP banks did not have the same monthly reporting requirement as the top 22 banks, and have not 

provided any data on their small business lending activities. As a whole, the CPP banks were only required to track 

average consumer loans outstanding, average commercial loans outstanding, and average total loans outstanding. 

See U.S. Department of the Treasury, About the Capital Purchase Program Monthly Lending Report, at 1 (online at 

www.financialstability.gov/docs/About%20the%20CPP%20Monthly%20Lending%20Report.pdf) (accessed Dec. 3, 

2009).

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09

Millions of Dollars
59

Figure 20: Small Business Average Total Loans of Selected CPP Recipients Since March 

2009 (Without PNC and Wells Fargo)214

Small business lending has not returned to its pre-crisis levels. And as seen in Figures 19

and 20, direct small business lending across the top 22 CPP recipients has fallen or remained 

stagnant since TALF’s inception. One explanation for this outcome is that the top 22 CPP 

recipient banks have not resumed lending at pre-crisis levels in any loan category, increasing 

further the competition smaller businesses face to obtain a part of the shrinking loan pool.215 

Another explanation is that small business loans are currently not as lucrative for large banks as 

other types of lending.216 In either case, small business loans remain difficult to obtain.217 TALF 

has not necessarily succeeded in encouraging a broader expansion of consumer and small 

business credit. In the face of continued economic stagnation, such inaction could have drastic 

consequences for banks, businesses, and consumers alike.218

 214 See id.

215 See Treasury Department Monthly Lending and Intermediation Snapshot Data for April 2009 -

September 2009, supra note 147.

216 Baker COP Testimony, supra note 28, at 4.

217 See Baker COP Testimony, supra note 28, at 4; Congressional Oversight Panel, Written Testimony of 

Chief Economist and Co-founder of Moody’s Economy.com Mark Zandi, Taking Stock: Independent Views on 

TARP’s Effectiveness, at 1 (Nov. 19, 2009) (online at cop.senate.gov/documents/testimony-111909-zandi.pdf) 

(hereinafter “Zandi COP Testimony”).

218 See Congressional Oversight Panel, Transcript of Hearing, Taking Stock: Independent Views on TARP’s 

Effectiveness (Nov. 19, 2009) (Testimony of Mark Zandi) (publication forthcoming Jan. 2010) (online at 

$170,000

$171,000

$172,000

$173,000

$174,000

$175,000

$176,000

$177,000

$178,000

$179,000

$180,000

Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09

Millions of Dollars
60

3. Mortgage Foreclosure Relief

a. Background

On February 18, 2009, Treasury launched two foreclosure mitigation programs under an 

initiative that became known as Making Home Affordable (MHA).219 These programs seek to 

refinance or restructure loans made during the housing boom in order to prevent foreclosures, 

which result in homeowners losing their homes, lenders incurring significant losses, and a wide 

range of costs imposed on communities.220

One of the MHA initiatives, the Home Affordable Refinancing Program (HARP), is 

designed to assist homeowners in refinancing mortgages owned or guaranteed by Fannie Mae or 

Freddie Mac (the government-sponsored enterprises, or GSEs). HARP refinances do not 

subsidize payment reductions or reduce principal; consequently, no government or GSE funds 

are used. The program permits borrowers who are current on their mortgages to refinance into 

more stable or affordable loans even if they have minimal or no equity in their homes. 

Borrowers are eligible for this program if the amount owed on their mortgage is up to 125 

percent of the home’s current value.221 Delinquent homeowners and those with non-GSE 

mortgages are ineligible.222

The other major MHA initiative, the Home Affordable Modification Program (HAMP), 

uses TARP dollars to facilitate the modification of delinquent mortgages. All loans under the 

conforming loan limit, which is the amount above which the GSEs cannot purchase mortgages,

 To the extent that default losses avoided due to HARP refinancings 

exceed the reduced yield on the refinanced mortgages owned by the GSEs, the program will 

improve the long-term financial outlook for the GSEs, thereby reducing their need for federal 

government support. 

 

cop.senate.gov/hearings/library/hearing-111909-economists.cfm) (hereinafter “COP November Hearing 

Transcript”).

219 Prior foreclosure mitigation initiatives include the private sector HOPE NOW Alliance, created in 

October 2007 and the Hope for Homeowners program within the Federal Housing Administration, signed into law in 

July 2008, as part of the Housing and Economic Recovery Act of 2008.

220 See U.S. Department of the Treasury, Making Home Affordable Summary of Guidelines (Mar. 4, 2009)

(online at www.treas.gov/press/releases/reports/guidelines_summary.pdf) (hereinafter “Making Home Affordable 

Summary of Guidelines”); see also Congressional Oversight Panel, October Oversight Report: An Assessment of 

Foreclosure Mitigation Efforts After Six Months, at 6-7 (Oct. 9, 2009) (online at cop.senate.gov/documents/cop100909-report.pdf) (hereinafter “October Oversight Report”).

221 The decision to accept loans with a loan-to-value ratio of up to 125 percent was announced in July 2009, 

but implementation did not begin until September 1 at Fannie Mae and until October 1 at Freddie Mac. The 

minimum loan-to-value ratio for HARP loans is 80 percent.

222 U.S. Department of the Treasury, Making Home Affordable Borrower Frequently Asked Questions (July 

16, 2009) (online at makinghomeaffordable.gov/borrower-faqs.html#a2) (hereinafter “Making Home Affordable 

Borrower FAQs”).
61

are HAMP-eligible; GSE ownership or guarantee is not required. HAMP modifications are 

available for delinquent borrowers.223

HAMP facilitates modifications by making incentive payments: to loan servicers, 

homeowners, and lenders. Unlike the capital assistance programs and the assistance to the auto 

industry, HAMP incentive payments are grants, so Treasury will not recover any of the funds 

paid out.

 

224 Altogether, Treasury has designated $75 billion for HAMP, including $50 billion in 

TARP funds.225 Using that $50 billion pool of funds, which is for modifying loans that are not 

owned or guaranteed by Fannie Mae or Freddie Mac, Treasury has signed agreements with 79

servicers (representing over 85 percent of all mortgages serviced in the United States under the 

agreements signed so far); under the current contracts, the maximum payout of TARP funds 

from Treasury is $27.4 billion. 226

HAMP’s goal is to make mortgage payments more affordable and thus avert defaults. 

HAMP does so by requiring participating servicers and lenders to offer modifications to all 

eligible borrowers in their portfolios where the net present value of the modified loan would 

exceed the net present value of the unmodified loan.227

HAMP modifications follow a standard template. The servicer or lender is to offer to 

reduce the monthly mortgage payment to 31 percent of the borrower’s monthly income.

 Servicers are expected to comply with 

any private contractual restrictions on loan modifications, however. 

228 This 

is done by first capitalizing all arrearages, then reducing interest rates incrementally to as low as 

2 percent, then stretching out the loan’s term if possible, and then stretching out the loan’s 

amortization period (forbearing on principal).229

 223 Borrowers must be at least 60 days delinquent before they can seek a loan modification. See Making 

Home Affordable Summary of Guidelines, supra note 220; see also Making Home Affordable Borrower FAQs

supra note 222.

224 See Congressional Budget Office, The Troubled Asset Relief Program: Report on Transactions

Through June 17, 2009 (June 2009) (online at www.cbo.gov/ftpdocs/100xx/doc10056/06-29-TARP.pdf).

225 The remaining $25 billion, which is being used to perform HAMP modifications on loans owned or 

guaranteed by Fannie Mae and Freddie Mac, comes from the Housing and Economic Recovery Act of 2008

(HERA). 

226 See November 25 Transactions Report, supra note 71.

227 The formula that is used to determine eligibility is known as a net present value test, or NPV test. See

Jordan D. Dorchuck, Net Present Value Analysis and Loan Modifications (Sept. 15, 2008) (online at

www.mortgagebankers.org/files/Conferences/2008/RegulatoryComplianceConference08/RC08SEPT24ServicingJor

danDorchuck.pdf).

228 This ratio, a measure of loan affordability, is known as debt-to-income ratio or DTI.

229 U.S. Department of the Treasury, Home Affordable Modification Program Guidelines at 6-7 (March 4, 

2009) (online at www.treas.gov/press/releases/reports/modification_program_guidelines.pdf) (hereinafter “HAMP 

Guidelines”). 
62

HAMP modifications begin with a three-month trial modification. If the borrower is 

current on payments at the end of the three-month trial period and has provided full supporting 

documentation, such as proof of income, then the modification becomes “permanent.”230 

Permanent modifications, however, only have fixed monthly payments for five years. After five 

years, interest rates on the modified loans are increased up to a cap.231 In addition, Treasury 

contributes cash toward interest-rate reductions, and it also provides a variety of incentive 

payments to the defaulted homeowner, servicer, and lender. Treasury does not make any 

incentive payments unless a modification becomes permanent.232

As of October 31, 2009, Treasury has expended $2,307,776 of the $50 billion in TARP 

funding set aside for modification of non-GSE loans. Of the money expended, $1,828,000 was 

used for servicer incentives; $82,500 went to servicers as a bonus for modifying current loans; 

$238,500 went to investors as a bonus for modifying current loans; and $158,776 was expended 

for investor cost sharing subsidies.233 Payments only occur for loans that have achieved 

permanent modification status. In total, 10 servicers have received payments under HAMP. 234

b. Impact

The refinancing of loans under HARP began in April 2009.235 According to data from 

Treasury, 136,271 loans have been refinanced under the program as of October 31, 2009.236 

HARP accounted for about 5 percent of the Fannie Mae and Freddie Mac loans that were 

refinanced from April 1-September 30.237 Additional data from Treasury show that 12.5 percent

of HARP refinancings (17,091 mortgages) have involved mortgages where the homeowner has 

negative equity, but only .2 percent (272 mortgages) have been for properties with a loan-tovalue ratio (LTV) over 105 percent.

238

 230

 These numbers should increase, however, as the 

program’s maximum LTV was only recently increased from 105 percent to 125 percent. While 

Making Home Affordable Summary of Guidelines, supra note 220; October Oversight Report, supra

note 220.

231 See U.S. Department of the Treasury, Making Home Affordable Updated Detailed Program Description, 

at 4 (Mar. 4, 2009) (online at www.treas.gov/press/releases/reports/housing_fact_sheet.pdf).

232 HAMP Guidelines, supra note 229.

233 In response to Panel requests, Treasury provided a broad range of data related to the mortgage market. 

Although not all of the data are confidential, portions are. These data are cited in numerous places throughout the 

report, and are hereinafter cited as “Treasury Mortgage Market Data.”

234 Treasury Mortgage Market Data, id.

235 See Federal Housing Finance Agency, FHFA Refinance Report Shows Refinance Volumes Dropped in 

September; Mortgage Rates Still Higher than the Spring, at 3 (Nov. 2, 2009) (online at 

www.fhfa.gov/webfiles/15153/Sept_Refinance_Final_report_and_release_11_2_09.pdf) (hereinafter “FHFA 

Refinance Report”).

236 Treasury Mortgage Market Data, supra note 233.

237 FHFA Refinance Report, supra note 235.

238 Treasury Mortgage Market Data, supra note 233.
63

more information is needed to evaluate HARP fully, the data that are currently available raise 

questions about whether the program, as currently configured, will have a substantial impact on 

the foreclosure problem.

Over the next several years, Treasury aims to modify up to three million to four million 

mortgages under the HAMP program.239 Yet, projections for foreclosure range from 8.1 million

over the next four years to as high as 13 million over the next five-plus years.

240 Under the 

HAMP program between March 1 and October 31, 2009, 919,965 offers of trial modifications 

were extended to borrowers.241 From the offers extended, the program commenced 600,739 

cumulative trial modifications, including restarts on duplicate borrowers. In total, the program 

has started 595,536 trial modifications on unique borrowers for the same time period.

242 

Although trial modifications started each month held steady or increased from February through 

September, no doubt due to the ramp up of the program, trials dropped off sharply in October, 

dropping from 155,875 trials started the previous month to 99,183.243

It is important to note two points regarding the trial modifications initiated so far under 

HAMP. First, many trial modifications may fail to convert to permanent modifications. At the 

Panel’s October 22 hearing, Assistant Secretary Allison stated that Treasury’s internal estimate 

before the program was launched was that 50-75 percent of the trial modifications would be 

converted into longer-term modifications.

 It is unclear why the 

number of trials dropped and whether or not this trend will continue into the future.

244 As of October 31, 2009, there were only 10,187 

permanent modifications, with a conversion rate, or roll rate, of 4.69 percent for trial 

modifications commenced at least three months ago.245

 239 U.S. Department of the Treasury, Making Home Affordable: Updated Detailed Program Description

(March 4, 2009) (online at www.treas.gov/press/releases/reports/housing_fact_sheet.pdf).

 While this does not mean that the other 

95.31 percent of trial modifications begun three months ago are failures, it does mean that the 

240 Goldman Sachs Global ECS Research, Home Prices and Credit Losses: Projections and Policy Options, 

at 16 (Jan. 13 2009) (available online at garygreene.mediaroom.com/file.php/216/Global+Paper+No++177.pdf);

Rod Dubitsky et al., Foreclosure Update: Over 8 Million Foreclosures Expected, Credit Suisse Fixed Income 

Research (Dec. 8, 2008) (online at www.nhc.org/Credit%20Suisse%20Update%2004%20Dec%2008.doc).

241 U.S. Department of the Treasury, Making Home Affordable Program: Servicer Performance Report 

Through October 2009, at 3 (online at 

www.makinghomeaffordable.gov/docs/MHA%20Public%20111009%20FINAL.PDF) (hereinafter “MHA Servicer 

Performance Report Through October 2009”).

242 Treasury Mortgage Market Data, supra note 233.

243 Id.

244 See Congressional Oversight Panel, Testimony of Treasury Assistant Secretary for Financial Stability 

Herbert M. Allison, Jr., Congressional Oversight Panel Hearing with Assistant Treasury Secretary Herbert M. 

Allison, Jr. (Oct. 22, 2009) (publication forthcoming January 2010) (online at

cop.senate.gov/hearings/library/hearing-102209-allison.cfm).

245 Treasury Mortgage Market Data, supra note 233.
64

vast majority of trial modifications have failed to convert to permanent modifications on the 

three-month timeline originally announced by Treasury. 

These rates are not necessarily indicative of future HAMP performance, but Treasury has 

not provided the Panel with sufficient information to determine fully why there have been so few 

conversions from trial to permanent modifications. Treasury has stated that it will not be able to 

produce a more statistically accurate roll rate until the first quarter of next year.246

One factor contributing to the paucity of permanent modifications is issues in gathering 

borrower documentation. HAMP trial modifications can be initiated before homeowners provide 

any documentation of their income and assets,247 and that documentation, which in many cases 

borrowers did not have to show in order to get their original loans, is required to be produced 

before a loan modification can exit the trial period. Because of difficulties in compiling 

documentation, Treasury has granted a two-month extension to the trial periods of trial 

modifications commenced before September 1, 2009. The roll rate for loans made five months 

ago is more encouraging at 38.24 percent,248

A second major concern about HAMP is that many homeowners who receive permanent 

modifications may redefault and ultimately lose their homes in foreclosure sales.

although the success of the program over the long 

term will certainly require a much higher rate. 

249 Data on 

loans modified during the first quarter of 2008, prior to the launch of HAMP, show that within 

one year of modification, 54 percent of the borrowers were again delinquent by at least 60 

days.250 As the Panel noted in its October report, redefault rates are lower for modifications that 

reduce monthly payments, with greater percentage decreases in payments resulting in lower 

subsequent redefault rates. Nonetheless, redefault rates, even on modifications reducing 

payments by 20 percent or more, were still a very high 34.1 percent.251

 246 See Congressional Oversight Panel, Testimony of Treasury Assistant Secretary for Financial Stability 

Herbert M. Allison, Jr., Congressional Oversight Panel Hearing with Assistant Treasury Secretary Herbert M. 

Allison, Jr. (Oct. 22, 2009) (publication forthcoming Jan. 2010) (online at cop.senate.gov/hearings/library/hearing102209-allison.cfm).

 At the Panel’s Oct. 22 

hearing, Assistant Secretary Allison noted that HAMP results in material reductions in 

247 See U.S. Department of Treasury, Obama Administration Kicks Off Mortgage Modification Conversion 

Drive (Nov. 30, 2009) (online at www.ustreas.gov/press/releases/tg421.htm).

248 Treasury Mortgage Market Data, supra note 233.

249 See Manuel Adelino, Kristopher Gerardi, & Paul S. Willen, Why Don’t Lenders Renegotiate More 

Home Mortgages? Redefaults, Self-Cures, and Securitization, Federal Reserve Bank of Boston Working Paper 09-4 

(July 6, 2009) (online at www.bos.frb.org/economic/ppdp/2009/ppdp0904.pdf). See also October Oversight Report, 

supra note 220.

250 These data only cover about two-thirds of the mortgage market. See Office of the Comptroller of the 

Currency and Office of Thrift Supervision, OCC and OTS Mortgage Metrics Report, Second Quarter 2009 at 29 

(online at www.occ.treas.gov/ftp/release/2009-118a.pdf) (hereinafter “OCC and OTS Mortgage Metrics Second 

Quarter 2009”) (accessed Dec. 7, 2009).

251 Id.
65

borrowers’ payments.252 He later noted that Treasury’s baseline assumption for redefault rates is 

40 percent over the next five years.253

HAMP is still too new to have conclusive data regarding redefaults. HAMP only began 

converting trials to permanent modifications in July, and 94 percent of the conversions to 

permanent status happened in September and October. This means that only 580 permanent 

modifications have been in place for more than two months. For the four months during which

permanent modifications have been in place, the program has already seen eight re-defaults.

 This assumption is not based on the actual characteristics 

of HAMP modified loans; adjusting for the actual characteristics of the loans, the predicted 

redefault rate could be substantially higher. 

254 

The causes of those redefaults are not known. If the 40 percent redefault estimate offered by 

Assistant Secretary Allison holds true, approximately 4,075 of the current 10,187 permanent 

modifications could be expected to redefault. It should also be noted here that although HAMP 

is structured to protect taxpayers against losses in cases where homeowners redefault on their 

modified loans, that protection is limited.255

The combination of failure to convert trial modifications to permanent modifications and 

redefaults on permanent modifications means that HAMP’s ultimate impact may be significantly 

less than the number of trial modifications initiated. The Panel emphasizes that it is the number 

of foreclosures averted, not the number of trial modifications offered or even trial modifications 

commenced, that is the proper metric for evaluating HAMP.

 Redefaults during the five-year modification period 

mean that taxpayer funds will be paid out for modifications that nevertheless end in foreclosure.

The Panel has other serious concerns about the impact of Treasury’s efforts to reduce 

foreclosures. While many of the foreclosures earlier in the financial crisis were the result of 

mortgages resetting to higher rates, an issue that HAMP is designed to combat, an increasingly 

pressing problem involves foreclosures caused by unemployment, as the Panel showed in its 

October report.256 Since that report was released, the U.S. unemployment rate has reached 10 

percent for the first time in 26 years.257

 252 See Congressional Oversight Panel, Testimony of Treasury Assistant Secretary for Financial Stability 

Herbert M. Allison, Jr., Congressional Oversight Panel Hearing with Assistant Treasury Secretary Herbert M. 

Allison, Jr. (Oct. 22, 2009) (publication forthcoming Jan. 2010) (online at cop.senate.gov/hearings/library/hearing102209-allison.cfm).

 By comparison, when the financial markets seized up in 

September 2008, the U.S. unemployment rate was at 6.2 percent, and when HAMP was 

253 See U.S. Department of the Treasury, Questions for the Record for U.S. Department of the Treasury 

Assistant Secretary Herbert M. Allison Jr., at 3 (Oct. 22, 2009) (online at cop.senate.gov/documents/testimony102209-allison-qfr.pdf) (hereinafter “Questions for the Record for Assistant Secretary Allison”).

254 Treasury Mortgage Market Data, supra note 233.

255 See HAMP Guidelines, supra note 229.

256 See October Oversight Report, supra note 220, at 9-21.

257 Labor Force Statistics, supra note 17.
66

announced in February, unemployment had risen, but only to 8.1 percent.258 Furthermore, 

between September 2008 and November 2009, the more expansive unemployment rate, which 

includes people who are working less than they want to and those who have stopped looking for 

a job, rose from 11.2 percent to 17.2 percent.259 HAMP was simply not designed to address 

foreclosures caused by unemployment, a point that Assistant Secretary Allison acknowledged at 

the Panel’s Oct. 22 hearing, when he said that people with extremely low incomes will not 

qualify for the program.260 Assistant Secretary Allison said that Treasury is actively looking at 

ways to address unemployment-related foreclosures.261

Treasury’s foreclosure prevention efforts thus far also do not counteract the problem of 

negative equity. As the Panel’s October report stated, there is a correlation between owing more 

than one’s home is worth and defaulting on the mortgage – a higher correlation, in fact, than any 

other factor that has been identified, besides the mortgage’s affordability.262 In the third quarter 

of 2009, 23 percent of U.S. single-family homes with mortgages had negative equity, and 11 

percent owed more than 120 percent of their homes’ value, according to FirstAmerican 

CoreLogic, an increase from the previous quarter.263 Another methodology calculates that nearly 

34 percent of U.S. single-family homes with mortgages have negative equity.264 This means that 

somewhere between one in four and one in three mortgage holders have no home equity cushion 

in the event of a major change in life circumstances, such as a divorce or job relocation.265

 258 Id.

 And 

259 U.S. Department of Labor, Bureau of Labor Statistics, Data Retrieval: Labor Force Statistics –

Instrument: U-6, seasonally adjusted (online at www.bls.gov/webapps/legacy/cpsatab12.htm) (accessed Dec. 7, 

2009).

260 Assistant Secretary Allison did point out that that the Administration has taken other steps to address 

unemployment. In addition, as Allison suggested, people who have the prospect of getting unemployment insurance 

payments for at least nine months can count those payments as income when applying for a HAMP modification. 

See Congressional Oversight Panel, Testimony of Treasury Assistant Secretary for Financial Stability Herbert M. 

Allison, Jr., Congressional Oversight Panel Hearing with Assistant Treasury Secretary Herbert M. Allison, Jr. (Oct. 

22, 2009) (publication forthcoming Jan. 2010) (online at cop.senate.gov/hearings/library/hearing-102209-

allison.cfm) (hereinafter “COP Hearing with Assistant Secretary Allison”). See also U.S. Department of the 

Treasury, Supplemental Documentation – Frequently Asked Questions Home Affordable Modification Program, at 

20 (Nov. 12, 2009) (online at www.hmpadmin.com/portal/docs/hamp_servicer/hampfaqs.pdf).

261 See First American CoreLogic, Negative Equity Report as of September 30, 2009 (Nov. 24, 2009) 

(online at www.facorelogic.com/newsroom/marketstudies/negative-equity-report.jsp) (subscription required). See 

also COP Hearing with Assistant Secretary Allison, supra note 260, at 54, 55.

262 October Oversight Report, supra note 220, at 97.

263 See First American CoreLogic, Negative Equity Report as of September 30, 2009 (Nov. 24, 2009) 

(online at www.facorelogic.com/newsroom/marketstudies/negative-equity-report.jsp) (subscription required). See 

also Ruth Simon and James R. Hagerty, One in Four Borrowers Is Underwater, Wall Street Journal (Nov. 24, 2009) 

(online at online.wsj.com/article/SB125903489722661849.html).

264 Id.

265 Nearly 10.7 million mortgages were in negative equity as of September 2009, out of 75.6 million owneroccupied residences. Nearly 13.0 million mortgages were in or near negative equity. See First American 

CoreLogic, Media Alert: First American CoreLogic Releases Q3 Negative Equity Data (available with registration 
67

while Treasury’s programs have made mortgages more affordable, they have not significantly 

reduced the amount of negative equity in modified and refinanced loans.266

Perhaps the most important way to evaluate the mortgage foreclosure relief efforts under 

the TARP is in relation to the number of foreclosures. Are foreclosures rising or declining? Are 

Treasury’s programs making a major dent in the problem? There has been a small downturn in 

the number of new foreclosure filings since July, but the data also show that foreclosures easily 

continue to outpace HAMP modifications, as Figure 21 shows.

 Reducing loan 

principal is the only way to eliminate negative equity, so Treasury should consider how its 

existing programs might be adapted in ways that result in principal reductions.

Figure 21: Foreclosure Starts v. Trial Modifications Started267

In October 2009, there were 222,107 foreclosure starts, significantly more than the 

99,183 HAMP trial modifications initiated in the same month.

268

 

online at www.facorelogic.com/newsroom/marketstudies/negative-equity-report.jsp) (accessed Dec. 7, 2009); see 

also U.S. Census Bureau, American Housing Survey – Frequently Asked Questions (online at 

www.census.gov/hhess/www/housing/ahs/ahsfaq.html) (accessed Dec. 4, 2009).

In October there were also 

266 Treasury Mortgage Market Data, supra note 233.

267 MHA Servicer Performance Report Through October 2009, supra note 241, at 3; HOPE NOW, Latest 

HOPE NOW Data Shows Workout Solutions Outpace Foreclosures More than 3 to 1 (Dec. 2, 2009) (online at 

www.hopenow.com/press_release/files/October%202009%20Data%20Release.pdf); Workout Plans (Repayment 

Plans + Modifications) and Foreclosure Sales, July 2007- September 2009 (online at www.hopenow.com/industrydata/HOPE%20NOW%20National%20Data%20July07%20to%20Sep09%20v2.pdf) (accessed Dec. 7, 2009).

0

50,000

100,000

150,000

200,000

250,000

300,000

Mar Apr May Jun Jul Aug Sep Oct

Foreclosure Starts Trial Modifications Started
68

94,450 completed foreclosure sales. To keep pace, 95 percent of trial modifications in October 

would have to convert to permanent modifications with no redefaults on the modifications. 

In addition, as Figures 22 and 23 show, both mortgage delinquencies and homes in 

foreclosure are substantially above their level in February, when Treasury unveiled its 

foreclosure mitigation plans. According to the Mortgage Bankers Association’s National 

Delinquency Survey, 14.41 percent of all mortgages are delinquent or currently in foreclosure, an 

all-time high in the survey’s 37-year history.269 Cumulatively, since July 2007, there have been 

more than two million foreclosure sales completed, and five and a half million foreclosure starts, 

with prime foreclosures now surpassing subprime.270

Figure 22: Percentage of 1-4 Family Mortgages in 30-90 Days Delinquent

 As currently structured, HAMP appears 

capable of preventing only a fraction of foreclosures. 

271

 268 Treasury Mortgage Market Data, supra note 233. Mortgage Bankers Association, Delinquencies 

Continue to Climb in Latest MBA National Delinquency Survey (Nov. 19, 2009) (online at 

www.mortgagebankers.org/NewsandMedia/PressCenter/71112.htm).

269 Mortgage Bankers Association, Delinquencies Continue to Climb in Latest MBA National Delinquency 

Survey (Nov. 19, 2009) (online at www.mortgagebankers.org/NewsandMedia/PressCenter/71112.htm).

270 HOPE NOW, Workout Plans (Repayment Plans + Modifications) and Foreclosure Sales, July 2007-

September 2009 (online at www.hopenow.com/industrydata/HOPE%20NOW%20National%20Data%20July07%20to%20Sep09%20v2.pdf) (accessed Dec. 7, 2009).

271 Mortgage Bankers Association, National Delinquency Survey.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1-4 Family Mortgages 30+ Days Delinquent
69

Figure 23: Percentage of 1-4 Family Mortgages in Foreclosure272

4. Auto Industry Assistance

a. Background

Apart from its efforts to use the TARP to help stabilize the financial system, Treasury has 

deployed more than $80 billion in TARP funds to assist two U.S. auto manufacturers and their 

finance affiliates. With the onset of the financial crisis in the fall of 2008, the challenges facing 

the auto industry – including rising gas prices, tightening credit markets, declining consumer 

confidence, and rising unemployment – had become acute. By December, two major domestic 

auto makers – Chrysler and GM – faced a sharp downturn in income and a crippling lack of 

access to credit.273

On December 19, 2008, Chrysler and GM received bridge loans totaling $17.4 billion.274

 272

 

The government funding, which did not end with those initial loans, came from a new TARP 

Mortgage Bankers Association, National Delinquency Survey.

273 Robert Nardelli, Written Testimony before the United States Senate Committee on Banking, Housing 

and Urban Affairs Committee, Hearing Examining the State of the Domestic Automobile Industry (Dec. 4, 2008) 

(online at banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=c41857b2-7253-4253-95e3-

5cfd7ea81393).

274 See U.S. Department of the Treasury, Loan and Security Agreement [GM] (Dec. 31, 2008) (online at 

www.financialstability.gov/docs/agreements/GM%20Agreement%20Dated%2031%20December%202008.pdf); 

U.S. Department of the Treasury, Loan and Security Agreement [Chrysler] (Dec. 31, 2008) (online at 

www.financialstability.gov/docs/agreements/Chysler_12312008.pdf). 

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1-4 Family Mortgages in Foreclosure
70

initiative called the Automotive Industry Financing Program (AIFP). The terms of the loans 

required both Chrysler and GM to demonstrate their ability to achieve financial viability,275 and 

both companies submitted their viability plans on February 17, 2009. The results of the Obama 

Administration’s review of those plans, announced on March 30, were not encouraging with 

respect to either automaker. The Administration concluded that Chrysler could not achieve 

viability as a stand-alone company and that it would have to develop a partnership with another 

automotive company or face bankruptcy.276 As for GM, the Administration concluded that the 

automaker’s financial viability plan relied on overly optimistic assumptions about the company 

and future economic developments.277

Both companies ultimately entered bankruptcy and, with the active involvement of the 

federal government, underwent radical restructurings.

278 Following those restructurings, 

American taxpayers owned about 10 percent of what is now known as New Chrysler and 61 

percent of New GM.279 The Administration has stated that it intends to divest of its equity stakes 

in these companies as soon as practicable, and that it intends to manage those stakes in a “handsoff” manner.280 Nevertheless, the federal government has exercised some initial influence over 

the companies’ corporate governance by appointing 10 members of GM’s 13-member board and 

four members of Chrysler’s nine-member board.281

 275 See White House, Fact Sheet: Financing Assistance to Facilitate the Restructuring of Auto 

Manufacturers to Attain Financial Viability (Dec. 19, 2008) (online at georgewbushwhitehouse.archives.gov/news/releases/2008/12/20081219-6.html). The loans also imposed conditions related to 

operations, expenditures, and reporting.

276 See U.S. Department of the Treasury, Chrysler February 17 Plan: Determination of Viability, at 1 (Mar. 

30, 2009) (online at www.financialstability.gov/docs/AIFP/Chrysler-Viability-Assessment.pdf).

277 See U.S. Department of the Treasury, GM February 17 Plan: Determination of Viability, at 1 (Mar. 30, 

2009) (online at www.financialstability.gov/docs/AIFP/GM-Viability-Assessment.pdf).

278 For a discussion of the details of the bankruptcy, see the Panel’s September report. See Congressional 

Oversight Panel, September Oversight Report: The Use of TARP Funds in the Support and Reorganization of the 

Domestic Automotive Industry, at 7-8 (Sept. 9, 2009) (online at cop.senate.gov/documents/cop-090909-report.pdf) 

(hereinafter “September Oversight Report”).

279 General Motors, The New General Motors Company Launches Today (July 10, 2009) (online at 

www.sec.gov/Archives/edgar/data/1467858/000119312509150199/dex991.htm); First Lien Credit Agreement 

(Chrysler) at §2.17(a) (June 10, 2009) (online at www.financialstability.gov/docs/AIFP/newChrysler.pdf).

280 Congressional Oversight Panel, Written Testimony of Treasury Senior Advisor Ron Bloom, 

Congressional Oversight Panel Field Hearing on the Auto Industry, at 10 (July 27, 2009) (online at 

cop.senate.gov/documents/testimony-072709-bloom.pdf).

281 See Chrysler Group LLC, Formation of Chrysler Group LLC Board is Completed (July 5, 2009) (online 

at www.chryslergroupllc.com/en/news/article/?lid=formation_board&year=2009&month=7); General Motors 

Company, Form 8-K (Aug. 7, 2009) (online at 

www.sec.gov/Archives/edgar/data/1467858/000119312509169233/d8k.htm)
71

Auto lender GMAC has been another large beneficiary of AIFP, receiving $12.5 billion 

from the program between December 2008 and May 2009.282 Last month, Treasury announced 

that it expected to provide additional AIFP funds to GMAC.283 The firm requested more money 

because it has been unable to meet the capital requirements imposed by the stress tests.284 The 

government has not yet formally announced its rationale for granting GMAC’s request, nor has it

finalized the size, form, or structure of GMAC’s latest round of federal assistance.285

The AIFP includes two additional initiatives. The Auto Supplier Support Program 

(ASSP), under which the government agreed to guarantee payment for products shipped by 

participating suppliers, even if the buyers went out of business, has committed $1 billion to 

Chrysler and $2.5 billion to GM.286 Treasury also lent Chrysler $280 million and GM $361 

million to backstop their new vehicle warranties. Both Chrysler and GM have since repaid those 

loans.287

Figure 24 shows the current state of TARP funds used to support the auto industry. 

Taking into account repayments and de-obligations, United States taxpayers have spent $49.5

billion of TARP funds in support of GM and New GM, and about $12.5 billion of TARP funds 

in support of Chrysler and New Chrysler. Investments in GMAC, assistance to automotive 

suppliers, and other miscellaneous funds account for approximately $17 billion of TARP 

spending, bringing the TARP net support for the U.S. domestic automotive industry to 

approximately $79 billion as of November 30, 2009.

 282 November 25 Transactions Report, supra note 71, at 16 GMAC was the former financing arm of prebankruptcy GM, but is now an independent company.

283 See Treasury Announcement Regarding the CAP, supra note 78.

284 See Treasury Announcement Regarding the CAP, supra note 78. 

285 Treasury communications with Panel staff (Nov. 17, 2009). In answers to questions posed by members 

of the Panel, Assistant Secretary Herb Allison has suggested that Treasury decided to provide further aid to GMAC 

to ensure that GMAC to ensure that GMAC is adequately capitalized to “provide a reliable source of financing to 

both auto dealers and customers seeking to buy cars” to help “stabilize our auto financing market,” and to contribute 

“to the overall economic recovery.” Questions for the Record for Assistant Secretary Allison, supra note 253, at 9.

286 See November 25 Transactions Report, supra note 71, at 16.

287 See November 25 Transactions Report, supra note 71, at 16.
72

Figure 24: TARP Funds Used in Support of the Auto Industry (as of November 30, 2009)

Cumulative 

Obligations288

Total Amounts 

Repaid and 

De-obligated

Amounts 

Invested289

Chrysler $15,222,130,642 290$2,691,977,062 $12,530,153,580

General Motors 49,860,624,198 360,624,198 29149,500,000,000

GMAC 12,500,000,000 – 12,500,000,000

Chrysler Financial292 1,500,000,000 1,500,000,000 –

Loan for GMAC rights offering293 884,024,131 – 884,024,131

Auto Supplier Supports 3,500,000,000 – 2943,500,000,000

Total $83,466,778,971 $4,552,601,260 $78,914,177,711

b. Impact

The government’s investments in Chrysler and GM will ultimately be judged based on 

the long-term viability of the companies, as well as on the profits or losses the government 

incurs. Some preliminary information is now available on the recent performance and future 

plans of the restructured automakers. It is important to note, though, that many factors besides 

the government’s investments, most notably the Cash for Clunkers program, contributed to the 

two firms’ financial results over the last several months.

On November 16, 2009, GM released preliminary results for the third quarter of 2009, 

providing a first glimpse of the company’s post-bankruptcy performance.295

 288 This column represents Treasury’s total obligation, or maximum exposure, to the automotive industry 

under the AIFP. The figure does not reflect repayments, de-obligations or committed funds that have not been used.

 Indicators were 

mixed. On one hand, GM lost about $1.2 billion in the third quarter of 2009, its revenues were 

down significantly from a year earlier, and it continued to be burdened with restructuring 

289 The Amounts Invested are decreased by commitments that were not funded but includes amounts that 

are no longer owed such as the amounts that were credit bid in the GM bankruptcy. For a more complete discussion, 

see September Oversight Report, supra note 273.

290 This figure reflects de-obligations ($2.4 billion) and repayments ($280 million). See November 25 

Transactions Report, supra note 71, at 16.

291 This number reflects the $8.8 billion in loans and preferred stock outstanding as well as the original loan 

amounts that are now in the form of equity.

292 Chrysler Financial completed its repayment of this obligation on July 14, 2009. 

293 Represents loans to GM that have been converted to shares of GMAC and are currently not obligations 

of GM or GMAC. The GM loan was terminated.

294 This figure does not reflect the amount outstanding under the program, but instead is the total amount 

available under the cap. 

295 These preliminary results were not calculated in accordance with Generally Accepted Accounting 

Principles (GAAP). GM voluntarily filed the results with the SEC in a Form 8-K, in which the company stated that 

in 2010 it will file financial statements with the SEC that comply with GAAP.
73

costs.296 On the other hand, the results “showed a healthier balance sheet, ample cash, and 

factory production much more in line with consumer demand[.]”297 GM has said that it plans to 

repay $1 billion in federal loans by December 2009, and that it hopes to repay an additional $6.7 

billion by June 2010.298 Chrysler has not announced its third-quarter results.299 It recently 

announced a five-year business plan under which it predicts it will break even in 2010, make 

money in 2011, and generate enough operating profit to pay back its government loans by 

2014.300

The most recent monthly U.S. sales data are more positive for GM than for Chrysler. 

GM’s sales of cars and light trucks were up by 4.7 percent between October 2008 and October 

2009. Chrysler’s sales in October, on the other hand, were down 30.4 percent from a year 

earlier. Industry-wide sales were unchanged in October, when compared to sales 12 months 

prior. Meanwhile, the sales data from January to October 2009 are gloomy for both companies. 

GM’s sales were down 33.6 percent compared with the same 10-month period in 2008. 

Chrysler’s sales dropped 38.9 percent for the first 10 months of the year. Across the auto 

industry, U.S. sales were down 25.4 percent.301

Although it may be too early to render a comprehensive verdict on the government’s 

intervention in the auto industry, the assistance almost certainly prevented Chrysler and GM 

from failing and liquidating. Both the manufacturing sector and the broader economy may have 

suffered severe harm if the government had allowed Chrysler and GM to disintegrate.302

 296 See General Motors, General Motors Announces the New Company’s July 10-September 30 Preliminary 

Managerial Results (Nov. 16, 2009) (online at 

media.gm.com/content/media/us/en/news/news_detail.html/content/Pages/news/us/en/2009/Nov/1116_earnings)

(hereinafter “General Motors Announces Preliminary Results”).

 On the 

297 Bill Vlasic, G.M. Shows Signs of Recovery Despite New Loss, New York Times (Nov. 16, 2009) (online 

at www.nytimes.com/2009/11/17/business/17auto.html?_r=2&hp) (hereinafter “G.M. Shows Signs of Recovery 

Despite New Loss”).

298 See G.M. Shows Signs of Recovery Despite New Loss, supra note 296.

299 New Chrysler and New GM are not public companies and are not required to file reports with the 

Securities and Exchange Commission (SEC). Nevertheless, Ron Bloom, one of the leaders of Treasury’s auto team, 

has stated that both companies agreed to provide public “quarterly report card[s].” See “Oversight of TARP 

Assistance to the Automobile Industry,” Transcript of Hearing before the Congressional Oversight Panel, at 37-38 

(July 27, 2009) (online at cop.senate.gov/documents/transcript-072709-detroithearing.pdf ) (explaining that the 

companies’ reports would not rise to the level of “fully SEC-style” reports in the “near future,” but that the 

companies would attempt to provide SEC-style reporting as soon as practicable and likely even before undertaking 

IPOs). It is not clear whether the auto companies have met all of Treasury’s expectations with respect to reporting. 

300 See Chrysler Group LLC, Our Plan Presentation (Nov. 4, 2009) (online at 

www.chryslergroupllc.com/business/).

301 See Autodata, U.S. Light Vehicle Retail Sales (Oct. 2009) (online at 

www.motorintelligence.com/fileopen.asp?File=SR_Sales-3.xls).

302 The Government Accountability Office estimates that the automotive industry, including automakers, 

dealerships, and automotive parts suppliers, directly employs about 1.7 million people. See Government 

Accountability Office, Troubled Asset Relief Program: Continued Stewardship Needed as Treasury Develops
74

cost side of the ledger, it is unlikely that Treasury will recoup the full amount of its investment in 

Chrysler and GM even if the companies remain viable and dramatically increase their market 

capitalization.303 In addition, as was discussed in the Panel’s September report, the government 

has incurred competing responsibilities by taking a significant ownership interest in private 

firms.304

5. The TARP as a Whole

a. Background

This report has heretofore analyzed Treasury’s actions within separate parts of the TARP 

and drawn conclusions about the costs and impacts of those targeted programs, while also 

studying broad macroeconomic indicators that may shed additional light on individual programs’ 

successes and shortcomings. In this section, the Panel undertakes a similar exercise with respect 

to the TARP as a whole. This section also places the TARP within the broader context of the 

financial stabilization efforts of the Federal Reserve and the FDIC by looking at how the Panel 

counts the money that has been flowing out of and into TARP and the federal government’s 

other financial stabilization programs, and discussing what has happened to numerous 

macroeconomic indices since the TARP’s enactment in October 2008 and what conclusions we 

can draw from the movements in those economic indicators.

b. Accounting for the TARP and Other Financial Stabilization Programs

i. TARP’s Balance Sheet

Treasury is currently committed or obligated to spend $528.9 billion of TARP funds 

through an array of programs described earlier in this report.305

 

Strategies for Monitoring and Divesting Financial Interests in Chrysler and GM, GAO-10-151, at 5 (Nov. 2, 2009) 

(online at www.gao.gov/new.items/d10151.pdf) (hereinafter “GAO: Continued Stewardship Needed”). According 

to Steven Rattner, previously one of the leaders of Treasury’s auto team, “the short-term effect of a Chrysler 

shutdown [alone] could [have been] 300,000 more unemployed, similar to what was lost across the entire economy 

in the month of July [2009].” Steven Rattner, The Auto Bailout: How We Did It, CNN.com (Oct. 21, 2009) (online 

at money.cnn.com/2009/10/21/autos/auto_bailout_rattner.fortune/index.htm?postversion=2009102104).

 Of this total, $401.5 billion is the 

net disbursement currently outstanding under the $698.7 billion statutory limit for TARP 

expenditures. That leaves $297.2 billion, or 43 percent of the statutory limit, available for 

fulfillment of funding commitments under existing programs and, potentially, for funding new 

303 See September Oversight Report, supra note 273, at 55-58; GAO: Continued Stewardship Needed, 

supra note 302, at 55-58; Government Accountability Office, Troubled Asset Relief Program: Continued 

Stewardship Needed as Treasury Develops Strategies for Monitoring and Divesting Financial Interests in Chrysler 

and GM, GAO-10-151, at 25-28.

304 See September Oversight Report, supra note 273, at 79-83.

305 Treasury is scheduled to release detailed accounting statements for TARP in December. For purposes of 

this report, the Panel must rely upon its own analysis of the financial status of the TARP, and those of the 

Government Accountability Office (GAO), the Congressional Budget Office (CBO), and the Special Inspector 

General for the Troubled Asset Relief Program (SIGTARP).
75

programs and initiatives.306

Figure 25: TARP Accounting (as of November 30, 2009)

 For each TARP initiative, Figure 25 shows how much money 

Treasury anticipated spending, how much actually has been spent to date, how much has been 

returned, how much is currently outstanding, and how much is available for future use.

TARP Initiative

Anticipated 

Funding 

(billions of 

dollars)

Actual 

Funding 

(billions of 

dollars)

Total

Repayments 

(billions of 

dollars)

Net 

Funding 

Outstanding

(billions of 

dollars)

Net 

Funding

Available 

(billions of 

dollars)

Capital Purchase Program 

(CPP)

$218.0 $204.7 $71.0 $133.7 307$13.3

Targeted Investment 

Program (TIP)

40.0 40.0 0 40.0 0

Systemically Significant 

Financial Institutions 

Program (SSFI)

69.8 69.8 0 69.8 0

Automobile Industry 

Financing Program (AIFP)

77.6 77.6 2.2 75.4 0

Asset Guarantee Program 

(AGP)

5.0 5.0 0 5.0 0

Capital Assistance Program 

(CAP)

Term Asset-Back Securities 

Lending Facility (TALF)

20.0 20.0 0 20.0 0

Public-Private Investment 

Partnership (PPIP)

30.0 26.7 0 26.7 3.3

Supplier Support Program 

(SSP)

3083.5 3.5 0 3.5 0

Unlocking SBA Lending 15.0 0 N/A 0 15.0

Home Affordable 50.0 30927.4 0 27.4 22.7

 306 The calculation that $300.5 billion is available under the TARP is based on Treasury’s interpretation of 

EESA. According to Treasury, repaid TARP funds go into the U.S. Treasury’s General Fund for the reduction of 

the public debt, and those repayments also create additional headroom under the $698.7 billion statutory limit for 

Treasury’s use under TARP. The Panel takes no position on Treasury’s interpretation of the law. U.S. Department 

of the Treasury, Treasury Announces $68 Billion in Expected CPP Repayments (June 9, 2009) (online at 

www.treas.gov/press/releases/tg162.htm).

307 This figure excludes the repayment of $71 billion in CPP funds. These funds are accounted for as 

uncommitted. 

308 On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5 

billion, reducing GM’s portion from $3.5 billion to $2.5 billion and Chrysler’s portion from $1.5 billion to $1 

billion. See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period 

Ending October 28, 2009, at 17 (Oct. 30, 2009) (online at financialstability.gov/docs/transaction-reports/10-30-

09%20Transactions%20Report%20as%20of%2010-28-09.pdf).

309 This figure reflects the total of all the caps set on payments to each mortgage servicer. See November 

25 Transactions Report, supra note 71.
76

Modification Program 

(HAMP)

Total Committed 528.9 471.3 – 401.5 54.3

Total Uncommitted 169.8 N/A 73.2 N/A 310243.0

TOTAL $698.7 $474.7 $73.2 $401.5 $297.2

Based on the amount of money spent to date, the biggest part of the TARP consists of the 

programs that provide capital assistance to financial institutions. Five such programs – the CPP, 

the SSFI, the TIP, the PPIP and the AGP – comprise a total of 68 percent of the net current 

investments of TARP funds, as Figure 26 shows. By contrast, efforts to help the auto industry 

make up 20 percent of the total; foreclosure prevention efforts make up 7 percent; and efforts 

targeted at small business and consumer lending make up just 5 percent of the total money 

outstanding.

Figure 26: Net Current Investment of TARP Funds311

 310 This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($169.8 billion) 

and the repayments ($73.2 billion).

311 See November 25 Transactions Report, supra note 71.

CPP

33%

AIFP

19%

ASSP

1%

TIP

10%

AGP

1%

TALF

5%

SSFI

17%

PPIP

7%

HAMP

7%
77

c. The TARP in the Context of Other Federal Government Stabilization Efforts

As was stated above, Treasury’s actions under the TARP have been part of a larger 

stabilization effort that has included programs run by the Federal Reserve and the FDIC. In fact, 

since the onset of the stabilization effort, both the Federal Reserve and the FDIC have been 

exposed on a nominal basis to substantially higher losses than Treasury has under the TARP. 

The nature of the three agencies’ exposures, however, has differed based on the structure and 

risk profile of each specific agency initiative.

The Panel has classified the agencies’ stabilization efforts into three broad categories: 

outlays, loans, and guarantees.312 As Figure 27 shows, currently the vast majority of Treasury’s 

net current investments of $401.5 billion is in the form of outlays,313 which reflects the fact that 

the majority of TARP initiatives have been structured as equity investments or have eventually 

taken that form. The Federal Reserve currently has a maximum possible exposure of $1.73

trillion, which includes loans, principally in the form of programs to enhance liquidity, as well as 

substantial purchases of GSE mortgage-backed securities and its guarantee of certain Citigroup 

assets,314 which exposes the Federal Reserve to potential losses of up to $220.4 billion.

315 The 

FDIC’s maximum possible exposure is $666.7 billion, and 93 percent of that exposure is through 

the TLGP, with the remaining amount representing the FDIC’s provision for losses under its 

Deposit Insurance Fund.

316 Altogether, the current estimate of the federal government’s 

maximum possible exposure is $3.1 trillion,317 including uncommitted TARP funds.

318

 312 Outlays represent disbursements made with TARP funds, such as to purchase debt or equity securities. 

A guarantee is a promise to stand behind another’s obligation to a third party. A guarantee, unlike a loan, requires 

no transfer of funds or assets. Outlays here do not technically correspond to outlays as measured in the federal 

budget.

 However, 

this would translate into the ultimate “cost” of the stabilization effort only if: (1) all uncommitted 

balances are fully utilized; (2) assets do not appreciate; (3) all loans default and are written off; 

313 See November 25 Transactions Report, supra note 71.

314 See Figure 27 infra. 

315 See Appendix V footnote iv infra.

316 See Figure 27 infra. 

317 See Figure 27 infra. 

318 The federal government has significantly reduced its economic stabilization-related exposure in recent 

months. Since the Panel started tracking maximum possible exposure beginning in its April 2009 report (reflecting 

data from March 2009), maximum exposure peaked at about $4.5 trillion in May 2009 before gradually declining to 

its current level of about $3 trillion. The decline in exposure over the last several months is largely attributable to 

the scaling back of the Federal Reserve’s liquidity programs, most notably discount window lending and Term 

Auction Facility, and the retrenchment of certain guarantee programs. These figures do not include further recent 

reductions in exposure due to the termination of Treasury’s Temporary Guarantee Program for Money Market 

Mutual Funds, which extended from September 19, 2008 to September 18, 2009 and reflected a maximum potential 

exposure of about $3.2 trillion in its initial phase, and the AGP’s never fully consummated guarantee of certain 

Bank of America assets under the Asset Guarantee Program that was terminated in September 2009. See November 

Oversight Report, supra note 96, at 35, 40-52.
78

and (4) all guarantees are exercised and subsequently written off. As many of these programs 

are phased out and scaled back, it is clear that, while the scale and the attendant risks of the 

government’s various initiatives were unprecedented, the direct financial cost to the government, 

measured in terms of losses under the programs, will likely be a fraction of the maximum 

possible exposure.
79

Figure 27: Federal Government’s Financial Stabilization Programs (as of November 25, 

2009) – Current Maximum Exposures (Associated footnotes are located in Appendix V)

Program

Treasury 

(TARP)

(billions of 

dollars)

Federal 

Reserve

(billions of 

dollars)

FDIC

(billions of 

dollars)

Total

(billions of 

dollars)

AIG

Outlays

Loans

Guarantees

$69.8

i

0

69.8

0

$94.6

0

ii

0

94.6

$0

0

0

0

$164.4

69.8

94.6

0

Bank of America

Outlays

Loans

Guarantees

45

iii

0

45

0

0 

0

0

0

0 

0

0

0

45

45

0

0

Citigroup

Outlays

Loans

Guaranteesiv

50

v

0

45

5

220.4

0

0

220.4

10

0

0

10

280.4

45

0

235.4 

Capital Purchase Program (Other)

Outlays

Loans

Guarantees

97

vi

0

97

0

0

0

0

0

0

0

0

0

97

97 

0

0

Capital Assistance Program TBD TBD TBD viiTBD

TALF

Outlays

Loans

Guarantees

20

0

0

viii

180

20

0

ix

0

180

0

0

0

0

200

0

180

20

PPIF (Loans)x

Outlays

Loans

Guarantees

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

PPIF (Securities)

Outlays

Loans

Guarantees

xi

10

30

20

0

0

0

0

0

0

0

0

0

30

10

20

0

Home Affordable Modification Program

Outlays

Loans

Guarantees

50

xii

0

50

0

0

0

0

0

0

0

0

0

xiii

50

50

0

0

Automotive Industry Financing Program 

Outlays

Loans

Guarantees

75.4

xiv

20.2

55.2

0

0

0

0

0

0

0

0

0

75.4

55.2

20.2

0

Auto Supplier Support Program

Outlays

Loans

Guarantees

3.5

0 xv

0

3.5

0

0

0

0

0

0

0

0

3.5

0

3.5

0

Unlocking Credit for Small Businesses 15 0 0 15.0
80

Outlays

Loans

Guarantees

xvi

0

15

0

0

0

0

0

0

0

15

0

0

Temporary Liquidity Guarantee Program

Outlays 

Loans

Guarantees

0

0

0

0

0

0

0

0

609

0

0

xvii609

609

0

0

609

Deposit Insurance Fund

Outlays

Loans

Guarantees

0

0

0

0

0

0

0

0

47.7

xviii47.7

0

0

47.7

47.7

0

0

Other Federal Reserve Credit Expansion

Outlays 

Loans

Guarantees

0

0

0

0

1,237.9

1,008.5

xix

0

229.4

0

0

0

0

1,237.9

1,008.5229.4

0

Uncommitted TARP Funds

Outlays 

Loans

Guarantees

243

TBA

TBA

TBA

0

0

0

0

0

0

0

0

24

TBA

TBA

TBA

Total

Outlaysxx

Loans

Guaranteesxxi

Uncommitted TARP Funds

$698.7 

387

43.7

25.0

243

$1,732.9

1,008.5

504

220.4

0

$666.7

47.7

0

619.0

0

xxii

1,443.2

$3,054.7

547.7

864.4

243

With respect to the Federal Reserve and FDIC’s financial stabilization programs, the risk 

of loss varies significantly across the programs listed here, as do the mechanisms for protecting 

taxpayers against such risk. The Federal Reserve’s liquidity programs have generally included 

mechanisms designed to protect taxpayers against program losses, most notably the use of loans 

with recourse to collateral.319

 319 The Federal Reserve’s loans are over-collateralized and with recourse to other assets of the borrower. If 

the assets securing a Federal Reserve loan realize a decline in value greater than the “haircut” or excess collateral 

pledged to support the loan, the Federal Reserve is able to demand more collateral from the borrower. Similarly, 

should a borrower default on a recourse loan, the Federal Reserve can turn to the borrower’s other assets to make the 

Federal Reserve whole.

 The use of recourse loans limits the risk of losses to taxpayers to 

the event of the borrower entering bankruptcy, and losses under the Federal Reserve liquidity 

programs have not materialized. The Federal Reserve did take on substantial risk in creating 

three special purpose vehicles to purchase Bear Stearns and AIG assets. However, in aggregate, 

the current principal on the loans to these facilities is roughly equal to the market value of the 

purchased real estate assets, which have rebounded from previous lows. For the TLGP, the 

FDIC assesses a premium of up to one percent on debt guarantees. While potential exposure 

under the TLGP has been enormous, the premiums collected from participants have so far been 

more than adequate to protect against program losses.
81

Furthermore, the federal government’s total stabilization-related exposure has been 

significantly reduced in recent months. Figure 28 shows the Federal Reserve’s and FDIC’s 

exposure as it has changed since January 2007. The general trend shows the Federal Reserve 

phasing out its liquidity programs and continuing to expand its portfolio of GSE mortgagebacked securities through new purchases. Exposure attributable to the TLGP and the Federal 

Reserve’s support of Bear Stearns and AIG has been more stable in recent months.

Figure 28: Federal Reserve and FDIC Assistance Since January 2007320

 320 Federal Reserve Liquidity Facilities include: Primary credit, Secondary credit, Central Bank Liquidity 

Swaps: Primary dealer and other broker-dealer credit, Asset-Backed Commercial Paper Money Market Mutual Fund 

Liquidity Facility, Net portfolio holdings of Commercial Paper Funding Facility LLC, Seasonal credit, Term auction 

credit, Net Portfolio Holdings of TALF LLC. Federal Reserve Mortgage Related Facilities Include: Federal agency 

debt securities and Mortgage-backed securities held by the Federal Reserve. Institution Specific Facilities include: 

Credit extended to American International Group, Inc., and the net portfolio holdings of Maiden Lanes I, II, and III. 

All Federal Reserve figures reflect the weekly average outstanding under the specific programs during the last week 

of the specified month. Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances 

(H.4.1) (online at www.federalreserve.gov/datadownload/Choose.aspx?rel=H41) (accessed Nov. 25, 2009). For 

related presentations of Federal Reserve data, see Board of Governors of the Federal Reserve System, Credit and 

Liquidity Programs and the Balance Sheet, at 2 (Nov. 2009) (online at 

www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200911.pdf). The TLGP figure reflects the 

monthly amount of debt outstanding under the program. Federal Deposit Insurance Corporation, Monthly Reports 

on Debt Issuance Under the Temporary Liquidity Guarantee Program (Dec. 2008-Oct. 2009) (online at 

www.fdic.gov/regulations/resources/TLGP/reports.html).

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

Fed Liquidity Facilities Fed Mortgage Related Facilities TLGP Institution Specific
82

d. TARP Repayments and Income

As of November 30, 2009, a total of 50 banks have fully repaid their preferred stock 

investments under the Capital Purchase Program.321 Of these banks, 30 have repurchased their 

CPP warrants as well.322 The rate of repayments being made by CPP participants has greatly 

slowed since June 2009, when twelve banks paid $68.4 billion to redeem their preferred shares. 

Three institutions, Goldman Sachs, JPMorgan Chase, and Morgan Stanley are responsible for 

over 60 percent of all TARP repayments.323

Figure 29 shows that more than 85 percent of the money that has flowed back to the 

TARP has been repayments under the CPP. An additional 15 percent of the money has come 

from CPP dividends and warrant repurchases. The TARP’s other sources of income so far have 

been quite small by comparison.

 As noted in Section 1(C), as of October 30, 2009, 

the rate of return on TARP investments in financial institutions that have completely exited the 

program is 17 percent, including preferred shares, dividends, and warrants.

Figure 29: TARP Income (as of October 31, 2009)324

TARP Initiative 

Repayments

(billions of 

dollars)

Dividends

(billions of 

dollars)

Interest

(billions of 

dollars)

Warrant 

Repurchases

(billions of 

dollars)

Total

(billions of 

dollars)

CPP $71 $6.8 $.01 $3.2 $81

TIP 2.3 N/A 0 2.3

Auto Initiatives 2.2 0.5 .3 N/A 3.0

AGP – .3 – – .3

Bank of America Guarantee – – – – 0.3

Total $73.2 $9.9 $.43 $3.2 $86.9

e. The TARP’s Impact on the Federal Budget and the Deficit

While most federal expenditures are recorded in the federal budget on a cash basis, credit 

programs are treated differently. For credit programs, the discounted present value of the cash 

flows is calculated and only this net gain or loss amount is recorded in the budget. The 

relationship of this net gain or loss to the government and the total cash disbursed produces a 

“subsidy rate.” EESA requires that TARP expenditures be treated as credit programs and 

 321 See November 25 Transactions Report, supra note 71.

322 See Figure 4 supra. The five privately owned banks that repurchased its warrants are omitted from the 

chart. 

323 November 25 Transactions Report, supra note 71.

324 U.S. Department of the Treasury, Cumulative Dividends Report as of Oct. 31, 2009 (Dec. 1, 2009) 

(online at www.financialstability.gov/docs/dividends-interest-reports/August2009_DividendsInterestReport.pdf); 

November 25 Transactions Report, supra note 71.
83

therefore a subsidy rate is calculated for them and only the net loss or gain is recorded in the 

budget.

325

In May 2009, the Administration projected that the TARP would disburse $704 billion in 

federal fiscal year 2009, although TARP outlays and its deficit impact were $261 billion, 

implying a weighted average subsidy rate of 37 percent. When the Administration closed the 

books on fiscal year 2009 on September 30, the $261 billion outlay figure had fallen to $151 

billion and this was, in effect, TARP’s contribution to the federal deficit in 2009. According to 

recent press accounts, this net cost figure is likely to decline further to approximately $42 

billion326 and the overall subsidy rate to 12 percent.327

Because TARP outlays reflect the discounted present value of TARP cash flows, the 

resulting net cost that is recorded as an outlay in the federal budget provides a good measure of 

the economic cost of the program. Consequently, the sum of the final outlay figures for each 

fiscal year provides a good measure of the current projection of the ultimate economic cost of the 

program to the American taxpayer. The published estimates in the latest budget documents from 

the OMB show this total cost to be $341 billion for the period 2009 through 2016; the latest 

estimate from the CBO for the period 2009-2013 puts the total cost at $241 billion. Hence, 

notwithstanding Treasury’s asserted authority to have $698.7 billion in cash disbursed at any 

point in time, the net cost of the TARP program will in all likelihood be substantially less than 

$700 billion. This reflects both the fact that (1) the economic cost or subsidy rate has declined 

from the initial estimate and (2) as seen in Figure 25 above, a large amount of the TARP’s 

authorized disbursement level is currently unutilized. 

 The declining net cost to the federal 

government for the TARP investments and loan guarantees undertaken in 2009 largely reflects 

the fact that Treasury now estimates higher returns on its CPP investments due largely to lower 

losses on, and faster repayments of, those investments, as well as the increased value of the stock 

warrants Treasury holds.

f. Relevant Macroeconomic Indicators

The TARP was created during a period of severe global financial disruption. In October

2009, the International Monetary Fund (IMF) projected worldwide losses of $3.4 trillion 

 325 Section 123 of EESA requires that TARP be treated on a credit reform basis.

326 The difference between the amount recorded in the Administration’s end of year budget report ($151 

billion) and the final amount recorded on the Treasury’s books for FY 2009 (now reported at $42 billion) is $109 

billion; this implies that an adjustment (outlay reduction) of approximately that amount in the 2010 federal budget 

will be forthcoming. 

327 See Jackie Calmes, U.S. Forecasts Smaller Loss From Bailout of Banks, New York Times (Dec. 6, 

2009) (online at www.nytimes.com/2009/12/07/business/07tarp.html). Treasury has confirmed the accuracy of this 

report.
84

stemming from the crisis.

328 By way of comparison, that is more money than the entire federal 

government spent – $3.1 trillion – in fiscal year 2009.329 The IMF estimates that $1.5 trillion in 

global bank write-downs have yet to be recognized, with most of the losses coming from U.S., 

UK, and Euro area banks.330 The expected loss of wealth, though lower than earlier estimates, 

poses a challenge to governments seeking to reinvigorate their economies. The United States has 

sought to support its banking sector so that it is able to weather the downtown, and many banks 

have seen increasing success in raising capital since the stress test results were released. As of 

November 30, U.S. banks, including both those that did and did not receive government 

assistance, had raised $72.4 billion in common equity and $49.7 billion in preferred equity in 

2009.331

While conditions in the banking sector have improved, the overall shape of the recovery 

remains unclear. Economic contractions that have their source in a banking crisis tend to be 

prolonged,332 and the current experience is no exception. There is a risk that a new asset bubble 

will form, leading to another crash.333

i. Credit Risk

 There are also risks that prices for homes and in the 

commercial real estate sector will fall further, which would reduce the value of assets held by 

banks. The economy has begun to expand once again, but unemployment remains high, and 

millions of American households continue to live with the prospect of imminent foreclosure and 

the loss of their homes.

Credit spreads measure the differences in yields between different bonds. At the height 

of the financial crisis in the fall of 2008, spreads between the safest bonds and those that carried 

greater risk skyrocketed, reflecting instability in the financial markets, as investors panicked and 

sought refuge in safer investments. Credit spreads have fallen significantly since the creation of 

the TARP. Treasury cites the improvement as a sign of TARP’s success, noting that the largest 

 328 International Monetary Fund, Global Financial System Shows Signs of Recovery, IMF Says (Sept. 30, 

2009) (online at www.imf.org/external/pubs/ft/survey/so/2009/RES093009A.htm).

329 Office of Management and Budget, Table S-1. Budget Totals (online at 

www.whitehouse.gov/omb/rewrite/budget/fy2009/summarytables.html) (accessed Dec. 7, 2009).

330 International Monetary Fund, World Economic Outlook October 2009, at 5 (online at 

www.imf.org/external/pubs/ft/weo/2009/02/pdf/text.pdf) (accessed Dec. 7, 2009).

331 SNL Financial, Bank and Thrift Capital Raises (online at 

www.snl.com/InteractiveX/article.aspx?CDID=A-9619028-11615&KPLT=4) (accessed Dec. 7, 2009).

332 See International Monetary Fund, World Economic Outlook, at 103-138 (Apr. 2009) (online at 

www.imf.org/external/pubs/ft/weo/2009/01/pdf/text.pdf) (finding that recessions that are associated with financial 

crises have historically been longer and deeper, and featured weak recoveries). 

333 See, e.g., Congressional Oversight Panel, Written Testimony of MIT Sloan School of Management 

Professor Simon Johnson, Taking Stock: Independent Views on TARP’s Effectiveness (Nov. 19, 2009) (online at 

cop.senate.gov/documents/testimony-111909-johnson.pdf) (hereinafter “Johnson COP Testimony”).
85

declines occurred in markets receiving direct government support, such as asset-backed 

securities and debt by government-supported enterprises such as Fannie Mae and Freddie Mac.334

The closely watched LIBOR-OIS spread provides another example of how credit 

conditions have improved.

335 This spread measures the difference between the London Interbank 

Offered Rate (LIBOR), which shows quarterly borrowing costs for banks, and the Overnight 

Indexed Swaps rate (OIS), which measures the cost of extremely short-term borrowing by 

financial institutions. As the spread increases, market participants have greater fears about 

whether counterparties will be able to deliver on their obligations. After reaching a record high 

of 364 basis points, or 3.64 percent, in October 2008, the spread fell to around 100 basis points in 

early 2009. It stood at 13 basis points on Nov. 17, 2009.336

The TED spread, which is the difference between LIBOR and short-term Treasury bill 

interest rates, is another indicator of perceived credit risk. A high TED spread shows an 

unwillingness by investors to hold securities other than Treasury bills. After peaking in late 

2008, the TED spread has fallen to pre-crisis levels, as Figure 30 illustrates. A report by the 

Government Accountability Office (GAO) found that the announcement of the Capital Purchase 

Program under the TARP had a statistically significant effect on the TED spread, although the 

decline was not due solely to the TARP.

 The lower spread means that the 

banking sector now has a significantly lower cost of short-term capital than it did at the height of 

the crisis.

337

 334 See U.S. Department of the Treasury, The Next Phase of Government Financial Stabilization and 

Rehabilitation Policies, at 8 (Sept. 14, 2009) (online at 

www.treas.gov/press/releases/docs/Next%20Phase%20of%20Financial%20Policy,%20Final,%202009-09-14.pdf) 

(hereinafter “Next Phase of Government Financial Stabilization”).

 The GAO analysis supports Treasury’s claim that the 

TARP had a positive effect on credit markets. 

335 Next Phase of Government Financial Stabilization, supra note 334, at 8.

336 Bloomberg, Fed to Cut Maximum Maturity of Discount Window Loans (Nov. 17, 2009) (online at 

www.bloomberg.com/apps/news?pid=20601068&sid=akC02cF4YHC4).

337 GAO: TARP One Year, supra note 195, at 36.
86

Figure 30: TED Spread Since December 1999 (in basis points)338

ii. Credit to Businesses

While banks now have a lower short-term cost of capital, putting them in a better position 

to lend, many borrowers have yet to see a return to pre-crisis levels of credit availability. 

Commercial paper is a form of debt that companies use to meet various short-term financial 

obligations, such as meeting their payrolls. Commercial paper outstanding, a rough measure of 

short-term business debt, is an indicator of the availability of credit for businesses. Since 

January 2007, total commercial paper outstanding has decreased by almost 37 percent, and it has 

fallen by more than 20 percent since the enactment of EESA. The value of commercial paper 

outstanding reached a peak of $2.22 trillion in August 2007, fell to $1.61 trillion by early 

October 2008, and fell further to $1.24 trillion in November 2009, as Figure 31 indicates. Figure 

31 shows that the declines have happened not just in the overall market, but also in its various 

segments. These declines reflect not only a contraction of available credit to businesses, but also 

a drop in demand for loans due to poor economic conditions.

 338 SNL Financial, Historical Yields – Instruments: 3-month LIBOR, 3-month Treasury Bills (online at 

www.snl.com/interactivex/dividendyields.aspx?Refreshed=1&YieldViewType=1&Industry=0%2c18%2c3%2c1%2

c2%2c8%2c7%2c22%2c10%2c21%2c5%2c4) (accessed Dec. 7, 2009).
87

Figure 31: Commercial Paper Outstanding339

iii. Housing Sector

The health of the residential real estate market is an important economic indicator, both 

because of the housing sector’s vast size – U.S. households held real estate worth $18.3 trillion 

in the second quarter of 2009340

The financial crisis began in the U.S. housing sector, which has seen large nationwide 

declines in home values. There are two major indices of residential housing prices nationwide:

the Federal Housing Finance Agency House Price Index and the S&P/Case-Shiller index. The 

2009 data from both indices show signs of housing price stabilization, and prices are currently 

– and because families often have a great deal of their wealth 

invested in their homes. It is important not to overstate the connection between the TARP and 

the state of the U.S. housing market. Other government policies aimed at supporting the housing 

sector, including historically low interest rates, the Federal Reserve’s purchases of mortgagerelated securities, the enactment of a tax credit for first-time homebuyers, and policies enacted at 

the Federal Housing Administration and at Fannie Mae and Freddie Mac, which are currently in 

government conservatorship, have a more direct link to the state of the housing market than the 

TARP does.

 339 Board of Governors of the Federal Reserve System, Commercial Paper – Instrument: Commercial 

Paper, Monthly Outstanding; seasonally adjusted (online at 

www.federalreserve.gov/datadownload/Choose.aspx?rel=CP) (accessed Dec. 7, 2009). 

340 See Board of Governors of the Federal Reserve System, B.100 Balance Sheet of Households and 

Nonprofit Organizations (Sept. 17, 2009) (online at www.federalreserve.gov/releases/z1/Current/z1r-5.pdf).

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

Commercial Paper Outstanding

Financial Commercial Paper Outstanding

Asset-backed Commercial Paper Outstanding
88

near their 2004-2005 levels, as Figure 32 shows. However, Treasury recently cautioned that the 

residential real estate market had not reached a firm bottom.341

Figure 32: Case Shiller and FHFA Home Price Indexes

 To the extent the peak 2006 

values were the result of a bubble, a return to those levels is neither desirable nor anticipated. 

However, the drop in housing prices represents a real loss in wealth to homeowners and 

investors. 

342

 341 See U.S. Department of the Treasury, The Next Phase of Government Financial Stabilization and 

Rehabilitation Policies, at 12 (online at 

treas.gov/press/releases/docs/Next%20Phase%20of%20Financial%20Policy,%20Final,%202009-09-14.pdf) 

(accessed Dec. 7, 2009).

342 Standard & Poor’s, S&P/Case-Shiller Home Price Indices – Instrument: Seasonally Adjusted 

Composite20 Index (online at www2.standardandpoors.com/spf/pdf/index/SA_CSHomePrice_History_102706.xls) 

(accessed Dec. 7, 2009); Federal Housing Finance Agency, U.S. and Census Division Monthly Purchase Only Index 

(Instrument: USA, Seasonally Adjusted) (online at www.fhfa.gov/Default.aspx?Page=87) (accessed Dec. 7, 2009). 

Most recent data available for both measures are from September 2009.

0

50

100

150

200

250

S&P/Case-Shiller Composite 20 Index 

Federal Housing Finance Agency House Price Index (Monthly, Seasonally-adjusted)
89

The current inventory of unsold homes offers another indicator of the housing sector’s 

health. Too large an inventory puts downward pressure on prices; a six-month inventory is 

generally considered healthy. Inventories have been declining in recent months, as Figure 33

shows, the result of declining construction levels and improving sales, although inventory 

remains well above historic norms. At the end of October 2009, the inventory of unsold homes 

stood at 3.57 million homes, which constitutes a seven-month supply. This was the first time in 

more than two years that the inventory of unsold homes fell as low as a seven-month supply.343

Figure 33: Housing Inventory344

Mortgage interest rates are yet another indicator of the housing market’s current state. 

Low rates make home purchases more affordable, and they allow homeowners to refinance their 

mortgages on favorable terms. Completely apart from the TARP, the federal government has 

undertaken various efforts aimed at keeping mortgage rates low. These actions include the 

Federal Reserve’s decision to hold large volumes mortgage backed securities on its balance sheet 

and the government’s decision to serve as a backstop for Fannie Mae and Freddie Mac. As 

Figure 34 shows, rates for 30-year conventional mortgages rose somewhat earlier this year, but 

are currently back to near historically low levels.

 343 National Association of Realtors, Existing-Home Sales Record Another Big Gain, Inventories Contiune 

to Shrink (Nov. 23, 2009) (online at http://www.realtor.org/press_room/news_releases/2009/11/record_big).

344 National Association of Realtors, Housing Inventory Data. Information provided in response to Panel 

request. Shaded areas represent periods of recession.
90

Figure 34: Mortgage Rates345

 345 Board of Governors of the Federal Reserve System, Selected Interest Rates – Instruments: Contract 

Rate on 30-Year Fixed Rate Conventional Home Mortgage, Market Yield on U.S. Treasury Securities at 10-Year 

Constant Maturity (online at www.federalreserve.gov/datadownload/Choose.aspx?rel=H.15) (accessed Dec. 7, 

2009). Shaded areas represent periods of recession.
91

Finally, as Figure 35 shows, home sales, of both new and existing homes, are beginning 

to recover, although new home sales remain well below historic averages.

Figure 35: New and Existing Home Sales346

While not directly tied to the TARP and its foreclosure mitigation programs, there is a 

relationship between foreclosures and key housing indicators. Foreclosures, especially on the 

scale of the 8 to 13 million projected over the next five years, can directly affect home prices and

inventory. Foreclosures increase inventory by flooding the market with bank-owned properties 

and drive down home prices by an average of $7,200 per home.347

iv. Commercial Real Estate

The commercial real estate (CRE) sector is also an important indicator of economic 

health. Unfortunately, like the residential real estate sector, the CRE sector is faring poorly. 

The Federal Reserve estimates that approximately $3.5 trillion of CRE debt is currently 

outstanding, and that nearly $500 billion of CRE loans will mature during each of the next few 

 346 National Association of Realtors, New and Existing Home Sales. Information provided in response to 

Panel request. Shaded areas represent periods of recession.

347 Center for Responsible Lending, Soaring Spillover: Accelerating Foreclosures to Cost Neighbors $502 

Billion in 2009 Alone; 69.5 Million Homes Lose $7,200 on Average (May 7, 2009) (online at 

www.responsiblelending.org/mortgage-lending/research-analysis/soaring-spillover-3-09.pdf).
92

years.348 For various reasons, however, commercial property values have declined sharply since 

2007 and continue to fall.349 Meanwhile, banks have become increasingly hesitant to extend new 

CRE credit or refinance existing debt,350 while another major source of CRE financing – the

market for commercial mortgage-backed securities – has largely shut down since the financial 

crisis began.351 Given these trends, as well as high vacancy rates and weak rent growth, 

Deutsche Bank estimates that banks’ aggregate losses on recent-vintage core CRE, construction, 

and multi-family loans could fall within the $200 billion to $300 billion range, with the biggest 

losses involving construction loans.352

As Figure 36 illustrates, smaller banks are disproportionately exposed to the CRE threat.

 

 348 See House Oversight and Government Reform, Subcommittee on Domestic Policy, Written Testimony 

of Jon D. Greenlee, Associate Director of the Division of Banking Supervision and Regulation for the Federal 

Reserve Board, Residential and Commercial Real Estate, (Nov. 2, 2009) (online at 

federalreserve.gov/newsevents/testimony/greenlee20091102a.htm) (hereinafter “Residential and Commercial Real 

Estate”).

349 See Deutsche Bank, The Future Refinancing Crisis in Commercial Real Estate, at 3 (Apr. 23, 2009) 

(online at cop.senate.gov/documents/report-042309-parkus.pdf) (“Purely as a result of the enormous changes in the 

available financing terms . . . , we estimate that commercial real estate prices have declined 25-30% from their 2007 

peak. On top of this, the impact of the worst economic recession in decades on property cash flows will likely push 

them down [an] additional 15-20%...”).

350 See Congressional Oversight Panel, Written Testimony of Jeffrey DeBoer, Chief Executive Officer of 

the Real Estate Roundtable, Congressional Oversight Panel Field Hearing in New York City on Corporate and 

Commercial Real Estate Lending, at 2 (May 28, 2009) (online at cop.senate.gov/documents/testimony-052809-

deboer.pdf).

351 See Residential and Commercial Real Estate, supra note 348 (“The current fundamental weakness in 

CRE markets is exacerbated by the fact that the CMBS market, which previously had financed about 30 percent of 

originations and completed construction projects, has remained closed since the start of the crisis.”).

352 Deutsche Bank, Q4 2009 CRE Outlook: Searching for a Bottom (Dec. 1, 2009); see also Goldman 

Sachs, U.S. Commercial Real Estate Take III: Re-constructing Estimates for Losses, Timing, at 11-13 (Sept. 29, 

2009) (hereinafter “2009 CRE Outlook”) (estimating $287 billion in losses from core CRE and construction loans); 

Congressional Oversight Panel, August Oversight Report: The Continued Risk of Troubled Assets, at 56 (Aug. 11, 

2009) (noting that “the Panel’s model of whole loan losses estimates potential core CRE and construction loan 

losses through 2010 of $81.1 billion at 701 banks with assets between $600 million and $80 billion”).
93

Figure 36: Bank Exposure to Core CRE Loans353

D. Expert Commentary on the TARP

To date, only a handful of studies have attempted to evaluate, in a comprehensive way, 

the effectiveness of the TARP. Thus, in October 2009, the Panel solicited the views of a broad 

range of economists and other academics. A number responded to the Panel’s solicitations. In 

addition, on November 19, 2009, the Panel held a hearing to solicit expert views on the strengths 

and weaknesses of the TARP. That hearing – titled “Taking Stock: Independent Views on

TARP’s Effectiveness” – featured testimony from a distinguished group of economists.354

Several themes run throughout this body of commentary. Most generally, commentators 

tend to agree that some sort of government intervention was necessary to stabilize the financial 

 3532009 CRE Outlook, supra note 352. The “Banks 1-4” group includes banks with total assets between 

$1.28 trillion and $2.25 trillion; the “Banks 5-19” group includes banks with total assets between $130 billion and 

$890 billion; the “Banks 20-50” group includes banks with total assets between $25 billion and $130 billion; the 

“Banks 50-97” group includes banks with total assets between $10 billion and $25 billion; and the “Banks > 98” 

group includes banks with total assets less than $10 billion. “Core” CRE does not include construction, multifamily, or farm loans. See June Oversight Report, supra note 77.

354 Testifying before the Panel were Dean Baker, Co-Director of the Center for Economic and Policy 

Research; Charles Calomiris, Henry Kaufman Professor of Financial Institutions at the Columbia Business School; 

Simon Johnson, Professor of Global Economics and Management at the MIT Sloan School of Management and 

Senior Fellow at the Peterson Institute for International Economics; Alex Pollock, Resident Fellow at the American 

Enterprise Institute; and Mark Zandi, Chief Economist and Co-Founder of Moody’s Economy.com. Written 

testimony and a video of the hearing are available on the Panel’s website (cop.senate.gov). An official transcript of 

the hearing will be available online in January 2010.

0

2

4

6

8

10

12

14

16

18

20

CRE Loans as Percent of Total Assets

Banks 1-4

Banks 5-19

Banks 20-50 

Banks 50-97

Banks >= 98
94

system, and that the TARP has contributed materially to that project, at least in the short term.

355 

As evidence, these commentators point primarily to the easing of panic in the financial sector, as 

well as various indicators of financial health – such as credit spreads, CDS spreads for financial 

firms, and stock prices of financial firms – which have improved demonstrably since the TARP’s 

inception.356

In a different but related vein, Professors Pietro Veronesi and Luigi Zingales argue that 

Treasury’s capital injections program – likely the most well-known aspect of the TARP – was 

both effective and (relatively) efficient.

 

357 In one of the few in-depth studies on the topic, 

Professors Veronesi and Zingales examine the combined impact of Treasury’s purchase of $125 

billion in equity in the ten largest banks and the FDIC’s provision of a three-year guarantee of 

these banks’ new debt issuances – i.e., the “first” bailout (or the “Revised Paulson Plan”). After 

factoring in costs to the taxpayers, they conclude that this action generated $71 to $89 billion in 

total economic value (accounting for a 30 percent deadweight taxation cost).358 They further 

conclude that the Revised Paulson Plan was the most cost effective of the three plans seriously 

considered by the Bush Administration.359

 355 See, e.g., Congressional Oversight Panel, Written Testimony of Columbia Business school Henry 

Kaufman Professor of Financial Institutions Charles Calomiris, Taking Stock: Independent Views on TARP’s 

Effectiveness, at 4 (Nov. 19, 2009) (online at cop.senate.gov/documents/testimony-111909-calomiris.pdf) 

(hereinafter “Calomiris COP Testimony”) (“In my view, there is no question that the recent crisis qualified as a state 

of the world in which government assistance to financial institutions was warranted.”); 

 Nevertheless, they argue that an even more costeffective method was never considered: namely, enacting legislation to permit failing firms to 

enter special, pre-packaged bankruptcies (i.e., with terms set by the government) wherein those 

firms’ long-term debt would be converted into equity and current equity holders would be wiped 

Johnson COP Testimony, 

supra note 333, at 4 (“There is no question that passing the TARP was the right thing to do.”); Zandi COP 

Testimony, supra note 217, at 4 (“The Troubled Asset Relief Program has contributed significantly to restoring 

stability to the financial system. In turn, this financial stability has been instrumental to ending the Great 

Recession.”); see also COP November Hearing Transcript, supra note 218, (Testimony of Simon Johnson) (“[I]f the 

Congress had not passed TARP, you would have had a much bigger disaster, irrespective of how the money had 

been used.”).

These views generally accord with the views of international institutions that have reviewed the TARP. 

See International Monetary Fund, World Economic Outlook: Sustaining the Recovery, at 67-71 (Oct. 2009) (online 

at imf.org/external/pubs/ft/weo/2009/02/pdf/text.pdf); Fabio Panetta et al., An Assessment of Financial Sector 

Rescue Programmes, at 2-3 (July 2009) (online at bis.org/publ/bppdf/bispap48.pdf). 

356 See, e.g., Takeo Hoshi, Letter to Panel Staff, at 1 (Nov. 8, 2009).

357 See Pietro Veronesi & Luigi Zingales, Paulson’s Gift, NBER Working Paper, at 5 (Oct. 2009) (online at 

faculty.chicagobooth.edu/brian.barry/igm/P_gift.pdf ) (hereinafter “Paulson’s Gift”). For a different but related 

analysis, see Dinara Bayazitova & Anil Shivdasani, Assessing TARP (University of North Carolina Kenan-Flagler 

Business School Working Paper) (Aug. 25, 2009) (online at papers.ssrn.com/sol3/papers.cfm?abstract_id=1461884).

358 See Paulson’s Gift, supra note 357, at 3.

359 See Paulson’s Gift, supra note 357, at 32-36.
95

out unless they chose to exercise a statutory option to purchase existing long-term debt at face 

value.360

Those who acknowledge that TARP was necessary and reasonably effective recognize 

nevertheless that improvements in key financial and economic indicators cannot be attributed 

solely to the TARP. Obviously, it remains difficult to disentangle the effects of Treasury’s 

efforts under the TARP from the effects of the government’s other financial stability programs, 

including programs run by the FDIC and the Federal Reserve. It is also difficult to isolate the 

effects of the TARP – both on the financial sector and on the broader economy – from the effects 

of increasing public confidence and other macroeconomic factors. 361 In general, however, most 

commentators seem to accept the proposition that the TARP has played a substantial role in 

calming and stabilizing the financial system.

362

Commentators also agree, however, that the TARP has suffered from serious flaws, both 

in its design and its execution. Though there are as many criticisms of the TARP as there are 

TARP commentators, these complaints fall into three main categories. First, some commentators 

argue that the TARP has been implemented in an ad hoc, opaque fashion, and that this lack of 

consistency and transparency has undermined its effectiveness. Second, most agree that the 

TARP has failed to address many of the underlying issues plaguing the financial sector, 

including thin bank capitalization, risky bank activity, and toxic assets on banks’ balance sheets. 

Third, many agree that the TARP has failed to address the so-called “too big to fail” problem and 

its related moral hazards.

1. Consistency and Transparency

One of the most common criticisms of the TARP is that it has been implemented in an ad 

hoc fashion that lacks consistency and transparency.363 Transparency problems plagued the 

program from the beginning according to November hearing witness Dean Baker, co-director of 

the Center of Economic and Policy Research. He argues that the TARP was articulated to the 

public largely as a means to restart the commercial paper markets, stem foreclosures, rein in 

executive compensation, and stimulate lending to small businesses. Unfortunately, in his view, 

the TARP has failed to achieve or even seriously pursue any of these goals.364

 360 See

 Thus, Dr. Baker 

Paulson’s Gift, supra note 357, at 36.

361 A lack of certainty as to how much credit the TARP deserves for stabilizing the financial system 

constitutes yet another important theme in the expert commentary. See, e.g., Baker COP Testimony, supra note 28, 

at 1 (“There are many factors that make it difficult to assess the effectiveness of the TARP, [the] most important one 

being the fact that the TARP was carried through in conjunction with rescue efforts by the [FDIC] and the Federal 

Reserve Board.”); Roy C. Smith, Letter to Panel Staff, at 1 (Oct. 23, 2009).

362 See, e.g., Martin Neil Baily and Douglas J. Elliott, Letter to Panel Staff, at 2 (Nov. 9, 2009); William 

Poole, Letter to Panel Staff, at 1 (Oct. 23, 2009).

363 See, e.g., Lawrence White, Letter to Panel Staff, at 1 (Nov. 20, 2009).

364 See COP November Hearing Transcript, supra note 218.
96

argues that public confidence in the TARP and the government’s other stabilization efforts has 

been undermined.365

A different but related criticism is leveled by November hearing witness Charles 

Calomiris, Henry Kaufman Professor of Financial Institutions at the Columbia Business School. 

He maintains that Treasury has never clearly and comprehensively articulated goals and 

principles to guide its TARP activities. Rather, it has employed “ad hoc interventions, justified 

as they go along, which are inconsistent with one another and follow no clear set of discernible 

principles.”366 As a result, he argues, the implementation of the program has been and will 

continue to be susceptible to “errors of logic” and behind-the-scenes political dealmaking which 

tends to benefit well-connected but not necessarily deserving entities.367 November hearing 

witness Simon Johnson, Professor of Global Economics and Management at the MIT Sloan 

School of Management and senior fellow at the Peterson Institute for International Economics,

makes a similar point. He criticizes what he views as the TARP’s “prominent place of policy by 

deal.” All too often, he argues, “when a major financial institution [] got into trouble, the 

Treasury Department and the Federal Reserve would engineer a bailout over the weekend and 

announce that everything was fine on Monday.”368

November hearing witness Alex Pollock, resident fellow at the American Enterprise 

Institute, also takes issue with the lack of clarity surrounding the TARP’s objectives and 

priorities, and agrees with Professor Calomiris that the program’s lack of transparency has made 

it unacceptably susceptible to political considerations. In his view, the “principal goal [of TARP 

managers] should be to run the program in a businesslike manner to return as much of the 

involuntary investment as possible to its owners, along with a reasonable overall profit.”369 He 

therefore argues that “TARP should have full, regular, audited financial statements, which depict 

its financial status and results, exactly as if it were a corporation.”370

 365 See

 According to Mr. Pollock, 

COP November Hearing Transcript, supra note 218.

366 Calomiris COP Testimony, supra note 355, at 16.

367 Calomiris COP Testimony, supra note 355, at 16-17 (“Because assistance programs did not flow from 

previously articulated guiding principles . . . , the rushed debates over TARP and other policies were undisciplined 

and prone to errors of logic (like the use of warrants in preferred stock assistance), and political manipulation (like 

the multiple bailouts of GMAC).”).

368 Johnson COP Testimony, supra note 333, at 6. Professor Johnson also takes both the Bush and the 

Obama administrations to task for providing aid in ways that are difficult for taxpayers to understand. See id. at 7

(“As the crisis deepened and financial institutions needed more assistance, the government got more and more 

creative in figuring out ways to provide subsidies that were too complex for the general public to understand.”).

369 See Congressional Oversight Panel, Written Testimony of American Enterprise Institute Resident 

Fellow Alex J. Pollock, Taking Stock: Independent Views on TARP’s Effectiveness, at 3 (Nov. 19, 2009) (online at

aei.org/docLib/Pollock-Testimony-11192009.pdf) (hereinafter “Pollock COP Testimony”).

370 Pollock COP Testimony, supra note 369, at 4.
97

it would have been far better for transparency and accountability purposes if the TARP had been 

organized as a separate corporation, rather than within an existing agency.371

2. Underlying Issues

Some experts also argue that the TARP, while achieving a measure of short-term 

stability, has failed to address certain underlying issues that may wreak havoc on the financial 

sector and the broader economy in the not-too-distant future. 

For example, the CPP and the stress tests are commonly credited with reviving private 

capital sources for capitalizing American banks and making banks better prepared to weather 

future financial shocks – in other words, with “stabilizing” the financial sector.372 At the Panel’s 

November hearing, however, it became clear that there is some disagreement as to whether even 

the largest banks are in fact adequately capitalized and hence sufficiently stable.373 Much of this 

disagreement, it seems, stems from (1) commentators’ differing economic projections, and (2) 

the difficulty of evaluating precisely banks’ capital positions.374

Toxic assets are a related point of concern. Commentators agree that Treasury’s PPIP, 

which was designed to leverage private funds to purchase such assets, has not been effective at 

removing these assets from banks’ balance sheets.375

In addition, some commentators fear that small- and medium-sized banks are particularly 

susceptible to future shocks, notwithstanding the fact that many have received TARP aid.

 This is a significant issue that the Panel 

addressed in its August report and that poses lingering challenges to economic recovery and 

restoring the banking system to a healthy state. 

376

 371 See

 

Pollock COP Testimony, supra note 369, at 3.

372 See, e.g., COP November Hearing Transcript, supra note 218 (Testimony of Mark Zandi) (arguing that 

banks generally have enough capital to weather greater-than-projected losses on their portfolios, including the toxic 

assets they continue to hold).

373 See COP November Hearing Transcript, supra note 218 (Testimony of Dean Baker), at 1 (“So, I’d be a 

little less confident [that the banks are sufficiently capitalized]. And not to say that they’re all going to collapse, but 

I’m less confident about their soundness, going forward.”); COP November Hearing Transcript, supra note 218

(Testimony of Simon Johnson), at 1 (“So, yes, we have a thinly capitalized banking system, as I said, relative to the 

– relative to the trajectory of the economy. That’s the way I would put it – relative to what I’d see as the real risk 

scenario.”); see also James K. Galbraith, Letter to Panel Staff, at 1 (Nov. 8, 2009) (hereinafter “Galbraith Letter to 

Panel Staff”) (“The Treasury has not demonstrated that the purchase of preferred shares in the banking system 

helped to restore stability. Those purchases were addressed to a question of solvency that they could not, given the 

vast overhang of toxic assets, have fully resolved.”).

374 For a discussion of the difficulties inherent in evaluating banks’ capital positions, see August Oversight 

Report, supra note 100, at 18-37, 62. 

375 See, e.g., Zandi COP Testimony, supra note 217, at 4-5.

376 See, e.g., COP November Hearing Transcript, supra note 218 (Testimony of Mark Zandi) (“I think 

that...many smaller bank institutions will fail, in large part because of their bad lending – in large part related to the 

bad...commercial real estate lending, which is still being played out.”).
98

These banks tend to be disproportionately exposed to commercial real estate loans – loans which 

are widely expected to suffer heavy losses in the coming years.377 Indeed, several small- and 

medium-sized banks have already failed as a result of their commercial real estate exposure, and 

many more are expected to fail for similar reasons.378

Commentators have also expressed concerns about whether the TARP has stimulated 

lending to businesses and consumers – a central justification for using TARP funds for capital 

infusions. For example, according to Paul Volcker, former chairman of the Board of Governors 

of the Federal Reserve System, it remains unclear whether the TARP has had a “significant and 

positive impact” on the provision of credit to businesses and consumers.

 Such failures threaten to further impede a 

broad economic recovery.

379 Joseph Stiglitz 

argues that “one of the key promised benefits of the TARP – restarting lending – has not 

materialized,” meaning that the “hoped for benefits for the ‘real economy’ have not 

materialized.”380 Indeed, some economists argue that TARP-recipient banks have not only 

withdrawn credit from the marketplace, “but they are doing so at an accelerating rate.”381 Some 

experts point to TARP-related causes for these phenomena, including Treasury’s decision to 

accept preferred stock rather than common stock or other assets in exchange for TARP funds,

382

Treasury’s failure to require banks receiving TARP funds to use those funds for lending,

383 and 

Treasury’s failure to direct a sufficient amount of TARP funds to those parts of the financial 

sector (e.g., community banks) that are heavily involved in lending to small- and mid-sized 

businesses.384

 377 See Goldman Sachs, U.S. Commercial Real Estate Take III: Re-constructing Estimates for Losses, 

Timing, at 11-13 (Sept. 29, 2009).

 Others identify non-TARP-related factors such as decreased demand for credit 

378 See, e.g., Office of Inspector General, Federal Deposit Insurance Corporation, Material Loss Review of 

Haven Trust Bank, Duluth, Georgia at 9 (August 2009) (online at www.fdicoig.gov/reports09/09-017.pdf); see also

Office of Inspector General, Federal Reserve Board of Governors, Material Loss Review of County Bank (September 

2009) (online at www.federalreserve.gov/oig/files/County_Bank_MLR_20090909.pdf).

379 Paul A. Volcker, Letter to Panel Staff, at 1 (Nov. 6, 2009).

380 See Joseph E. Stiglitz, Letter to Panel Staff, at 4 (Nov. 17, 2009); see also Richard Christopher Walen, 

Letter to Panel Staff, at 1 (Nov. 9, 2009) (arguing that “there has been little positive impact on the real economy as a 

result of the TARP”).

381 Richard Christopher Whalen, Letter to Panel Staff, at 1 (Nov. 9, 2009). 

382 See Linus Wilson & Yan Wendy Wu, Common (Stock) Sense About Risk-Shifting and Bank Bailouts, at 

2 (Working Paper) (Nov. 30, 2009) (online at papers.ssrn.com/sol3/papers.cfm?abstract_id=1321666) (arguing that 

“[b]uying up common (preferred) stock is always the most (least) ex ante- and ex post-efficient type of capital 

infusion, whether or not the bank volunteers for the recapitalization”).

383 See Joseph E. Stiglitz, Letter to Panel Staff, at 3 (Nov. 17, 2009) (“As a major ‘owner’ of the banks, the 

government could and should have used its potential control to increase lending, to reduce abusive practices, and to 

direct lending to those activities most likely to energize the economy.”).

384 See Joseph E. Stiglitz, Letter to Panel Staff, at 2 (Nov. 17, 2009).
99

and banks’ concerns about potential changes to accounting rules.385

[I]s typical of a recession. The complaints from business owners over being 

denied credit are not qualitatively different than the complaints that were made in 

[the] 1990-91 recession. Lenders will also tighten credit to business during a 

downturn simply because otherwise healthy businesses are much risk[ier] 

prospects during a recession. There is no reason to believe that the tightening of 

credit during this downturn is any greater than what should be expected given the 

severity of the recession.

 According to November 

hearing witness Dr. Baker, the current tightening of credit for businesses

386

Finally, the government’s efforts to address the foreclosure crisis have drawn little praise. 

As discussed above, for many reasons those efforts may not help as many homeowners as 

originally projected. Meanwhile, as James Galbraith has observed, the “underlying financial 

conditions of the household sector” – including new home sales, new home construction, 

underwater mortgages and mortgage delinquency rates – “remain very grim” despite Treasury’s 

efforts. 387 Foreclosures have continued at a rate of nearly two million per year since the TARP

was passed, and various projections show that this pace is likely to continue through 2011 at 

least.388

3. Moral Hazard

 

Much has been said about the costs of the TARP. Generally, these discussions focus on a 

relatively narrow question: whether taxpayers will be paid back for their TARP investments.389

 385 See infra at page 99.

No doubt this is an important question. According to some commentators, however, these more 

quantifiable costs pale in comparison to the so-called “moral hazard” costs of the TARP. These 

commentators reason as follows. By enacting the TARP, Congress made a conscious decision to 

386 Baker COP Testimony, supra note 28, at 4-5. Dr. Baker also notes that large corporations are having 

little difficulty issuing commercial paper and long-term bonds, and that homebuyers are not facing any unusual 

difficulty in securing loans. See Baker COP Testimony, supra note 28, at 4. 

387 Galbraith Letter to Panel Staff, supra note 373, at 1.

388 See Dean Baker, Letter to Panel Staff, at 2 (Nov. 5, 2009).

389 Few believe that the taxpayers will be paid back in full for all of their TARP investments. For example, 

November hearing witness Mark Zandi, chief economist and co-founder of Moody’s Economy.com, estimates that 

“the ultimate cost to taxpayers of TARP is expected to be between $100 and $150 billion.” Under Dr. Zandi’s 

projections,

[t]he most[] costly aspect of TARP will be the aid to the motor vehicle industry, which could total 

up to nearly $50 billion. AIG will cost taxpayers up to $35 billion. Support to the housing market 

is expected to cost as much as $30 billion. The CPP program is ultimately expected to cost 

between $15 and $20 billion, while credit losses on the TALF and PPIP programs are expected to 

reach $10 billion. Some $5 billion will be lost on the small business lending program.

Zandi COP Testimony, supra note 217, at 3.
100

intervene in the market. One consequence of this decision was to stabilize the financial sector. 

Another consequence, however, was to signal to the market that, going forward, the government 

may step in to provide bailouts to certain systemically significant institutions – such as financial 

institutions and auto manufacturers – should they face the risk of failure.

390 As a result, the 

market has been distorted in a way that could, absent responses outside of the TARP, plague the 

financial sector and the broader economy for the foreseeable future.391

E. Accomplishments and Shortcomings: How Well Has the TARP Done in 

Meeting its Statutory Objectives?

 

1. TARP’s Contribution to Financial Stabilization and Economic Recovery

As noted in the overview, the primary objective of the Congress in passing EESA was to

“restore liquidity and stability to the U.S. financial system.”392 EESA further calls for the 

authority it provides to be used to “promote jobs and economic growth.”393 Similarly, Treasury 

officials stated that in implementing the TARP they were seeking to “protect the U.S. 

economy”394 and “the taxpayer,”395 “prevent systemic risk,”396 and “stabilize the financial 

system.”397 Treasury also said it would focus on bank lending to restore economic growth.

398

 390 See, e.g., James K. Galbraith, Letter to Panel Staff, at 2 (Nov. 8, 2009) (“Having once intervened 

decisively, the rules of the game are now changed, and participants will expect renewed intervention, as necessary, 

along similar lines.”).

391 See, e.g., Calomiris COP Testimony, supra note 355, at 3 (“If financial institutions know that the 

government is there to share losses, risk-taking becomes a one-sided bet, and so more risk is preferred to less. There 

is substantial evidence from financial history – including the behavior of troubled financial institutions during the 

current crisis itself – that this ‘moral hazard’ problem can give rise to huge loss-making, high-risk investments that 

are both socially wasteful and an unfair burden on taxpayers.”); Johnson COP Testimony, supra note 333, at 3 

(arguing that the manner in which the TARP was implemented “exacerbated the perception (and the reality) that 

some financial institutions are ‘Too Big to Fail’” – thereby lowering the borrowing costs for such firms, 

incentivizing them to act in risky ways, and leaving the United States vulnerable to similar financial crises in the 

future); see also Edward Kane, Safety-Net Subsidies Keep “Toxic” Assets Illiquid, at 2 (March 10, 2009).

392 12 U.S.C. § 5201; 12 U.S.C. § 5223.

393 12 U.S.C. § 5201.

394 See U.S. Department of the Treasury, U.S. Government Actions to Strengthen Market Stability (Oct. 14, 

2008) (online at www.treas.gov/press/releases/hp1209.htm) (stating “Today we are taking decisive actions to protect 

the U.S. economy....”).

395 See House Committee on Financial Services, Written Testimony by Treasury Secretary Henry M. 

Paulson Jr., Oversight of Implementation of the Emergency Economic Stabilization Act of 2008 and of Government 

Lending and Insurance Facilities; Impact on Economy and Credit Availability, 110th Cong., at 30 (Nov. 18. 2008) 

(online at www.financialstability.gov/latest/hp1279.html) (“It is my responsibility to use the authorities Congress 

provided to protect and strengthen the financial system, and in so doing, protect the taxpayer.”); U.S. Department of 

the Treasury, Interim Assistant Secretary for Financial Stability Neel Kashkari Update on the TARP Program (Dec. 

8, 2008) (online at www.treas.gov/press/releases/hp1321.htm) (hereinafter “Assistant Secretary Kashkari Update on 

TARP”) (stating Treasury “acted with the following critical objectives in mind:...to protect taxpayers.”).

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

Package and Economic Update (Nov. 21, 2008) (online at www.financialstability.gov/latest/hp1265.html) 
101

There is little doubt that – as virtually all of the experts the Panel consulted agree – the 

TARP played an important role, along with other emergency programs from the Federal Reserve 

and the FDIC, in stabilizing the financial system. Following the failure of Lehman Brothers and 

the government’s rescue of AIG in September 2008, government officials decided that a crisis of 

such magnitude could not be contained through the use of monetary policy alone, and that a 

fiscal response was therefore imperative.399 The TARP became the government’s fiscal 

response. And the initial TARP programs, which were aimed at shoring up the capital base of 

financial institutions, did have a positive impact on market confidence. Shortly after the law that 

established the TARP was enacted, measures of risk in the banking sector began to decline. 

Between October 10, 2008 and mid-November 2008, interest-rate spreads that reflect the 

willingness of banks to lend to each other fell by more than 50 percent. These spreads remained 

highly volatile in late 2008, but on balance they have continued to fall, and are currently back in 

the low range where they were prior to the financial crisis.400

Treasury believes that the capital provided through the CPP has been “essential in 

stabilizing the financial system, enabling banks to absorb losses from bad assets while continuing 

to lend to consumers and businesses.”

 

401 In his testimony to the Panel, Assistant Secretary 

Allison also pointed to capital raising as a sign of stabilization of the financial sector: “banks of 

all sizes have raised over $80 billion in common equity and $40 billion in non-guaranteed 

debt.”402

 

(hereinafter “Remarks by Secretary Paulson on Financial Rescue Package”) (“I believe we have taken the necessary 

steps to prevent a broad systemic event.”); see also

 This would appear to reflect renewed confidence in the U.S. banking system and its 

ultimate solvency and profitability, although there is the lingering question of the degree to 

which investors now assume that the federal government has become the implicit guarantor of 

the largest American banks.

Assistant Secretary Kashkari Update on TARP, supra note 395.

397 See Remarks by Secretary Paulson on Financial Rescue Package, supra note 396 (“We must continue to 

reinforce the stability of the financial system.”); Assistant Secretary Kashkari Update on TARP, supra note 395. 

398 See Assistant Secretary Kashkari Update on TARP, supra note 395 (“Treasury expects banks to increase 

their lending as a result of [TARP] investments.”).

399 See James B. Stewart, Eight Days: The Battle to Save the American Financial System, New Yorker 

(Sept. 21, 2009) (available for purchase online at 

www.newyorker.com/reporting/2009/09/21/090921fa_fact_stewart).

400 3 Mo LIBOR-OIS Spread, supra note 27; Bloomberg, TED Spread (online at 

www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND) (accessed Dec. 7, 2009). It should be noted, 

however that there is still a significant lack of liquidity and wide spreads in some markets where the Federal Reserve 

is the dominant participant.

401 Congressional Oversight Panel, Written Testimony of Assistant Secretary of the Treasury for Financial 

Stability Herbert M. Allison, Jr., Congressional Oversight Panel Hearing with Assistant Treasury Secretary Herbert 

M. Allison, Jr.(Oct. 22, 2009) (online at cop.senate.gov/documents/testimony-102209-allison.pdf) (hereinafter

“Allison COP Testimony”).

402 Allison COP Testimony, supra note 401.
102

The role of the TARP in preventing an even worse economic recession is not as clear. 

The Federal Reserve relaxed monetary policy very rapidly beginning in September 2007 once 

the contraction in the housing sector began. From a macroeconomic perspective, the federal 

government’s massive deficit spending – only a portion of which is attributable to the TARP –

has undoubtedly played an important role in fostering economic recovery as well. Support for 

the housing sector through the Federal Housing Administration, Fannie Mae, and Freddie Mac, 

as well as the Federal Reserve, also constitute an important element in stabilizing the economy.

Except for the smaller institutions participating in its small business lending initiative, 

Treasury’s bank capitalization efforts are now over. The question going forward is whether 

banks are currently adequately capitalized and will begin to expand their lending. This, in turn, 

is partly a function of the condition of bank balance sheets and the lingering issue of the toxic 

assets whose presence was the justification for creation of the TARP in the first place.

The PPIP, Treasury’s main TARP initiative for removing toxic assets from bank balance 

sheets, remains difficult to assess. This program has only recently become operational. Treasury 

argues that the mere announcement of the program in March helped to reassure investors, and as 

a result, prices increased for certain mortgage-related securities.403 Treasury further argues that 

because banks are now better positioned to raise private capital, even if they still own toxic 

assets, the purchase program is less important today than it was when it was announced.404

The Panel is also concerned about the health of small banks, which will be helped less by 

PPIP as it is currently implemented than large banks will, because small banks generally hold 

whole loans rather than securities.

 

However, the Panel is concerned that as long as the value of these securities remains unknown to 

investors, they will continue to weigh down the banks and be an impediment to economic 

recovery. 

405

As discussed in Part C above, Treasury has recently turned the focus of its capital 

injection programs to small banks and the promotion of small business lending. Some of this has 

happened naturally, as larger banks have redeemed their CPP preferred, and Treasury reopened 

CPP for small banks, thereby “reduc[ing] the size of the Treasury’s investments in the banking 

 Those concerns are heightened by the deteriorating 

commercial real estate market, another area where smaller banks are heavily exposed. PPIP’s 

success or failure will rest on whether it creates genuine price discovery that would have been 

absent otherwise, and whether it provides a return on the public’s investment.

 403 Allison COP Testimony, supra note 401, at 3-4.

404 Treasury conversations with Panel staff (Nov. 4, 2009).

405 See August Oversight Report, supra note 100, at 4.
103

system...shifting the mix of remaining CPP investments significantly toward small and 

community banks.”406

However, as noted earlier in the report, there remains disagreement on whether banks 

have adequate capital, notwithstanding both the TARP capital they still have on their balance 

sheets and their ability in many cases to acquire new capital from private investors. The stress 

tests have helped to bring some clarity here and the disclosure of their results appears to have 

helped restore investors’ confidence in those large institutions tested. But the high and rising 

level of unemployment continues to raise some concern about the adequacy of the stress tests. 

As we have seen, banks currently enjoy a low interest rate, steep yield curve environment, due to 

the actions of the Federal Reserve to increase and maintain liquidity in the financial system. Yet 

there remain questions about the quality of certain assets on bank balance sheets, particularly 

those related to residential and commercial real estate. Further declines in house prices 

nationwide, for example, could bring on renewed concerns about the quality of the assets at 

major TARP assisted banks and raise concerns about the continuing need for the TARP to 

bolster bank capital positions. Likewise, the low interest rate, steep yield curve environment is 

bolstering bank profitability in the short run but may not last, bringing renewed concern about 

capital strengthening. 

Treasury has said that it realizes that increasing the availability of credit to small 

businesses poses a complex challenge, one that is intertwined with the issues of commercial real 

estate and the economy as a whole. A recent survey found that 14 percent of small business 

owners found it more difficult to get loans, compared to three months earlier.407 Availability of 

credit was not the only factor contributing to this. Although 30 percent of those surveyed found 

that their borrowing was down, much of this could be due to a decline in the credit quality of 

borrowers, caused by the recession and declines in real estate values.408 A significant proportion 

of small business lending depends on real estate as collateral; therefore, a decline in real estate 

values will harm borrowers’ ability to get credit.409

TARP funds have also been used as part of the TALF effort to kick-start the markets for 

various types of securities, including those based on auto loans, credit card payments, and 

commercial mortgages, but their impact is difficult to assess. Since this program’s inception, 

 406 Allison COP Testimony, supra note 401. The CPP expansion for small banks opened in May 2009. 

The deadline for applications was November 21, 2009. FAQs on CPP for Small Banks, supra note 69.

407 National Federation of Independent Business, NFIB Small Business Economic Trends, at 2, 12 (Oct. 

2009) (online at www.nfib.com/Portals/0/PDF/sbet/SBET200910.pdf) (hereinafter “NFIB Small Business Economic 

Trends”). 

408 See NFIB Small Business Economic Trends, supra note 407, at 2 (“In addition, the continued poor 

earnings and sales performance has weakened the credit worthiness of many potential borrowers.”). It should be 

noted that only slightly more than 300 small and community banks out of roughly 7,400 such institutions have 

participated in CPP.

409Treasury conversations with Panel staff (Nov. 4, 2009).
104

issuance of the types of securities that are eligible for the program has risen dramatically, both 

with and without government backing, but these markets have not returned to their pre-crisis 

levels and a number of factors other than TALF may account for much of this recovery.

Continuing problems, and possible upcoming shocks, in the commercial real estate 

market have also contributed to a contraction in small business lending.410 Smaller banks, which 

provide a larger proportion of small business lending, also hold larger proportions of commercial 

real estate loans.411 With high levels of commercial real estate assets on their balance sheets, 

they have less capacity to engage in new and renewed lending. Treasury plans to use its new 

small business lending program to provide banks that are otherwise viable with capital to 

increase lending to small businesses. Assistant Secretary Allison explained that the small 

business lending program can help alleviate small banks’ CRE losses: “by providing [small 

banks with] access to additional capital we can help them to withstand a deterioration of the 

value of [commercial real estate] assets on their books.”412 Treasury believes that the problems 

in the commercial real-estate market are material to the economy, but will not be overwhelming, 

and can be absorbed over time through loan workouts and the bankruptcy process.413

The Congress also made foreclosure mitigation a priority in EESA, laying out that the 

authority under the Act was to be used in a manner that “protects home values”

However, 

as discussed in Section 1.5.f.iv, the Federal Reserve estimates that almost $500 billion of CRE 

loans will mature annually for the next several years, which could generate sizeable losses for the 

banks exposed to this sector.

414 and “preserves

homeownership.”415 Treasury promised to use its new authorities to stabilize housing and 

mortgage finance,

416 avoid preventable foreclosures,417

 410 See, e.g., Federal Reserve Bank of Atlanta, Speech by Federal Reserve Bank of Atlanta President and 

Chief Executive Officer Dennis P. Lockhart, to the Urban Land Institute Emerging Trends in Real Estate 

Conference (Nov. 10, 2009) (online at www.frbatlanta.org/news/speeches/lockhart_111009.cfm).

and keep low cost mortgage financing 

411 See Richard Parkus and Jing An, The Future Refinancing Crisis in Commercial Real Estate, Part II:

Extensions and Refinements, at 23 (July 15, 2009) (“[E]xposure [to

commercial real estate loans] increases markedly for smaller banks. For the four largest banks (on the basis of

total assets), this exposure is 12.3%, for the 5-30 largest banks, the exposure is 24.5%, while for the 31-100 largest 

banks, the exposure grows to 38.9%.”).

412 Congressional Oversight Panel, Transcript of Testimony of Assistant Secretary of the Treasury for 

Financial Stability Herbert M. Allison, Jr., Congressional Oversight Panel Hearing with Assistant Treasury 

Secretary Herbert M. Allison, Jr., at 57 (Oct. 22, 2009).

413 Treasury conversations with Panel staff (Nov. 4, 2009).

414 12 U.S.C. § 5201.

415 12 U.S.C. § 5201.

416 See Remarks by Secretary Paulson on Financial Rescue Package, supra note 396 (“market turmoil will 

not abate until the biggest part of the housing correction is behind us”).

417 See Remarks by Secretary Paulson on Financial Rescue Package, supra note 396 (stating Treasury 

“worked aggressively to avoid preventable foreclosures”).
105

available.”418 Treasury also promised to “increase foreclosure mitigation efforts”419 and “enforce 

stronger oversight of the mortgage origination process.”420

While more time is needed to evaluate fully Treasury’s substantial use of TARP funds to 

address the foreclosure crisis, it is not too soon to make some preliminary judgments. Treasury 

met its own goal of beginning 500,000 trial modifications by Nov. 1, but the Panel has serious 

concerns about whether the program can keep pace with the evolving nature of the foreclosure 

problem.421

It is too early to evaluate the impact of the TARP investments in General Motors and 

Chrysler. Treasury notes that its actions helped the two automakers to move unusually fast and 

efficiently through the bankruptcy process.

 Since the publication of the Panel’s October report, which analyzed Treasury’s 

foreclosure prevention efforts, new data has underscored the Panel’s concern that Treasury’s 

mortgage modification program is inadequate to address the foreclosure problem as it has 

evolved over the last 10 months. In October, the Panel warned that a growing number of people 

cannot afford their mortgages because they have lost their jobs, and Treasury’s existing programs 

are not designed to help them. Since then, the unemployment rate has passed 10 percent, a level 

it last reached in 1983. Also in October, the Panel warned that Treasury’s existing programs do 

not address the problem of homeowners who owe more on their loans than their homes are 

worth, a factor that’s correlated with foreclosures. Since then, new data from the third quarter of 

2009 showed that 23 percent of mortgage holders have negative equity in their homes. Lastly in 

October, the Panel warned that TARP mortgage modifications were not keeping pace with 

foreclosures. HAMP has led to a total of 10,187 permanent modifications as of the end of 

October 2009, a fraction of the 89,810 completed foreclosure sales in September alone. 

422

 418 See

 In addition, TARP assistance to GM and Chrysler 

likely prevented a much sharper downturn in the manufacturing sector and the broader economy. 

However, as the Panel stated in its September report, Treasury seems likely to absorb losses on 

its investments in GM and Chrysler. In the long term these expenditures should be judged based 

on the viability of GM and Chrysler, as well as their ultimate ability to repay the taxpayers. 

Remarks by Secretary Paulson on Financial Rescue Package, supra note 396 (Paulson, “worked 

aggressively to...keep mortgage financing available”).

419 See Remarks by Secretary Paulson on Financial Rescue Package, supra note 396. See Assistant 

Secretary Kashkari Update on TARP, supra note 395

420 See Remarks by Secretary Paulson on Financial Rescue Package, supra note 396 (Of course, it is 

already clear that we must address a number of significant issues, such as...oversight of mortgage origination”).

421 See Manuel Adelino, Kristopher Gerardi, & Paul S. Willen, Why Don’t Lenders Renegotiate More 

Home Mortgages? Redefaults, Self-Cures, and Securitization, Federal Reserve Bank of Boston Working Paper 09-4 

(version of July 6, 2009) (online at www.bos.frb.org/economic/ppdp/2009/ppdp0904.htm) (hereinafter “Redefaults, 

Self-Cures, and Securitization Paper”).

422 See generally Allison COP Testimony, supra note 401, at 5; Treasury conversations with Panel staff 

(Nov. 4, 2009).
106

One final but very important element of the assessment of Treasury implementation of 

the statutory goals of EESA concerns the objectives of protecting the U.S. economy and 

preventing systemic risk over the long term. As stressed by the experts whom the Panel 

consulted, the major problem is that in executing the TARP, Treasury may have sown the seeds 

for a future crisis by demonstrating that the government will come to the rescue of institutions 

that engage in excessive risk taking and are unprepared to deal with the inevitable collapse. 

Further compounding this problem is the fact that, as a result of the actions taken in the course of 

stemming this economic crisis, the banking system has perhaps an increased number of “too big 

to fail” institutions, and they are even bigger in size. This will be an important issue on which 

policymakers will need to focus in the aftermath of the crisis and the winding down of the 

TARP.

2. The TARP and the American Taxpayer 

While emphasizing the goals of restoring liquidity and stability to the U.S. financial 

system, Congress also directed that the TARP maximize overall returns and minimize overall 

costs to U.S. taxpayers423 and that it ensure the most efficient use of taxpayer funds424 and 

minimize the impact on the national debt.

425

From the perspective of public investors who stepped up at the critical time when private 

investors had fled, Treasury has now gotten back more than one-quarter of the money it spent on 

capital injections,426

As was the case with the savings and loan rescue in the 1980s and 90s, the ultimate 

impact of TARP transactions on the national debt will not be known for many years. That 

financial rescue is now estimated to have cost roughly $150 billion in current dollars, which was 

and has earned an annual rate of 17 percent on the money invested with 

those institutions that have now repaid the TARP investments. It is too soon to estimate how 

much of the overall TARP investment taxpayers will ultimately recover, in part because the 

banks that have returned the money are the same banks that needed it least. We do know that 

initial portions of the $80 billion invested in the auto industry are unlikely to be recovered and 

that no return is expected on the $50 billion TARP mortgage foreclosure program (HAMP). And 

the banks that have yet to repay their TARP investments are no doubt holding larger amounts of 

poorer quality assets. 

 423 See 12 U.S.C. § 5201; 12 U.S.C. § 5223; 12 U.S.C. § 5224.

424 See 12 U.S.C. § 5213.

425 See 12 U.S.C. § 5213. See also 12 U.S.C. 5219 (In coordination with “identify[ing] opportunities for 

the acquisition of classes of troubled assets that will improve the ability of the Secretary to improve the loan 

modification and restructuring process and, where permissible, to permit bona fide tenants who are current on their 

rent to remain in their homes under the terms of the lease”).

426 See Allison COP Testimony, supra note 401, at 3.
107

lower than earlier feared. Increasingly successful sales of assets acquired early in that episode 

accounts for a portion of that decline in overall cost to the government.427

As explained above, the best current estimates of the cost to the U.S. taxpayer of the 

current financial crisis are much larger but again perhaps not as large as initially feared. The 

latest estimates from the budget agencies – OMB and CBO – imply that the ultimate cost of the 

TARP would be about $341 billion (OMB) and $241 billion (CBO).

As the Panel pointed out in its February report, however, the economic value of the 

assistance being provided is less easily assessed based upon the information Treasury has been 

releasing. The Panel therefore contracted with a securities valuation firm and published its 

findings in its February Report. The firm estimated that of the $184 billion in TARP funds it 

analyzed, the securities that Treasury received in exchange had a market value of only $122 

billion, or 66 percent, at the time Treasury announced its agreement to buy them.428

This in turn relates to the larger question of the degree to which Treasury has been 

forthcoming both in acknowledging the economic value of the assistance that it has been 

providing to financial institutions and an explanation for the strategy in providing such 

assistance. As noted in the Zingales and Veronesi working paper, banks with the greatest 

likelihood of experiencing a run benefited the most from taxpayer assistance.

 Moreover, 

the action of injecting public funds into the banks that have been assisted may have served to 

provide these institutions with an implicit public guarantee of their balance sheets, a guarantee 

for which no fee was charged.

429

3. Treasury as TARP Steward and Manager

Simply asserting 

that all recipient institutions were “healthy” is not accurate in this situation. In this respect, 

Treasury’s initial implementation of its authority to purchase bank assets and other financial 

instruments (e.g., preferred stock) lacked critical transparency and continues to be a source of 

confusion in understanding the actual condition of the major banks that were the subject of the 

initial use of TARP resources.

Separate from the issues of how well the American economy is performing after 14 

months of the TARP’s existence and what has the TARP done for the American taxpayer, there 

is also the question of how well Treasury, under two administrations, has performed in 

 427 See Timothy Curry and Lynn Shibut, The Cost of the Savings and Loan Crisis: Truth and 

Consequences, Federal Deposit Insurance Corporation Banking Review, at 33 (Dec. 2000) (online at 

www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf) (“As of December 31, 1999, the thrift crisis had 

cost taxpayers approximately $124 billion and the thrift industry another $29 billion, for an estimated total loss of 

approximately $153 billion. The losses were higher than those predicted in the late 1980s, when the RTC was 

established, but below those forecasted during the early to mid-1990s, at the height of the crisis”).

428 See February Oversight Report, supra note 66, at 4, 27.

429 See Paulson’s Gift, supra note 357, at 3, 52.
108

implementing the sweeping authority EESA provided. EESA calls for “public accountability” in 

the exercise of the authority it provides.430 It also requires Treasury to “facilitate market 

transparency” by making available to the public “a description, amounts, and pricing of assets 

acquired under this Act.” In its initial implementation of EESA, Treasury committed to 

communicate “actions in an open and transparent manner.”431

There is no question that Treasury had to implement the TARP in a crisis atmosphere. 

Through its website at financialstability.gov, the Department has provided voluminous, detailed 

transactions information, which has allowed the public to monitor closely the funding provided 

to individual institutions and under what terms, as well as repayments of investments, dividends 

and interest received, and warrants repurchased. The regular release of online reports has greatly 

improved the public’s access to important information such as the cumulative commitments of 

TARP resources and the accounting for all of its funding. Publication of TARP accounting 

statements for federal fiscal year 2009 should provide further, highly useful information on how 

TARP resources have been utilized and how Treasury has been managing them. Some critics 

argue, however, that the TARP should meet a higher standard of private sector type accounting 

statements including issuance on a quarterly rather than just annual basis.

432

Further, certain transaction details have not been forthcoming, such as the actual number 

of warrants Treasury holds for each financial institution. 

 Additional 

disclosures which the Panel believes would be desirable include further information about 

modifications under HAMP and a more complete picture of PPIP investment structures. 

Despite Treasury’s disclosures, questions continue to be raised as to “where the money 

went.” The identity of the recipients of CPP funds is well-known, and has been throughout the 

implementation of the program. A list of recipients and whether their CPP funds have been 

repaid is available on Treasury’s website,433 and SIGTARP’s quarterly reports give the same 

information.434 The public thus knows who has the money; what is somewhat less clear is what 

the recipients did with it. The TARP securities purchase agreements (SPAs) provide that the 

recipients will expand the flow of credit to U.S. customers and modify mortgage terms but does 

not specify how those objectives should be met, measured, or reported.435

 430 12 U.S.C. § 5201.

431 See Assistant Secretary Kashkari Update on TARP, supra note 395 (“It is essential we communicate our 

actions in an open and transparent manner to maintain [taxpayers’] trust.”).

432 Pollock COP Testimony, supra note 369, at 3.

433 See November 25 Transactions Report, supra note 71.

434 See Office of the Special Inspector General for the Troubled Asset Relief Program, Quarterly Report to 

Congress (Oct. 21, 2009) (online at 

www.sigtarp.gov/reports/congress/2009/October2009_Quarterly_Report_to_Congress.pdf). 

435 The “recitals” to the form of Securities Purchase Agreement—Standard Terms used for CPP 

transactions provide:
109

Treasury’s standard response with respect to the “use of funds” issue is to point out that 

money is fungible and that it is not possible to correlate receipt of funds with a specific use of 

those funds.436

Treasury also states that it does not intend to tell banks how to run their businesses.

 Nevertheless, as the Panel and SIGTARP have noted, Treasury could have 

conditioned receipt of TARP assistance upon requirements to report the usage of those funds and 

the overall lending activities of the institutions in question. 

437 As 

discussed in Section B above, Treasury does, however, track information on lending levels by 

the 22 largest CPP recipients.438 SIGTARP attempted to address the “fungibility of money” issue 

by asking CPP recipients to identify actions that they would not have been able to take without 

TARP funding. In July 2009, SIGTARP published a report whose title speaks for itself: 

“SIGTARP Survey Demonstrates that Banks Can Provide Meaningful Information on Their Use 

of TARP Funds.”439

 

WHEREAS, the Company agrees to expand the flow of credit to U.S. consumers and businesses 

on competitive terms to promote the sustained growth and vitality of the U.S. economy;

 SIGTARP sent survey letters to more than 360 CPP recipients, and 

WHEREAS, the Company agrees to work diligently, under existing programs, to modify the terms 

of residential mortgages as appropriate to strengthen the health of the U.S. housing market...; 

See U.S. Department of the Treasury, Securities Purchase Agreement for Public Institutions (online at 

www.financialstability.gov/docs/CPP/spa.pdf) (accessed Dec. 7, 2009); U.S. Department of the Treasury, Securities 

Purchase Agreement for Private Institutions (online at www.financialstability.gov/docs/CPP/SPA-Private.pdf) 

(accessed Nov. 30, 2009). While it seems clear that Treasury intended that CPP recipients should be agreeing to 

increase the flow of credit and the modification of mortgages, the language cited above is too vague to be useful and 

not in a place where binding obligations are usually set out in a contract. Added to the fact that there are no specific 

restrictions on use of funds or requirements with respect to the reporting of such use, the SPAs seem to be a missed 

opportunity for monitoring the use of taxpayers’ funds. 

436 See Office of the Special Inspector General for the Troubled Asset Relief Program, SIGTARP Survey 

Demonstrates that Banks Can Provide Meaningful Information on Their Use of TARP Funds, at 38-39 (July 20, 

2009) (online at 

www.sigtarp.gov/reports/audit/2009/SIGTARP_Survey_Demonstrates_That_Banks_Can_Provide_Meaningfu_%20

Information_On_Their_Use_Of_TARP_Funds.pdf). In its first report, in December 2008, the Panel noted the need 

for the companies that received TARP funds to explain how they were using those funds. See Congressional 

Oversight Panel, Questions About the $700 Billion Emergency Economic Stabilization Funds, at 4 (Dec. 10, 2008) 

(online at cop.senate.gov/reports/library/report-121008-cop.cfm).

437 See U.S. Department of the Treasury, Summary Response to SIGTARP Recommendations in the April 

21, 2009 SIGTARP Report, at 2 (July 2, 2009) (online at www.financialstability.gov/docs/dividends-interestreports/Final%20Treasury%20Response%20to%20SIGTARP%20Recommendations%20%2807022009%29.pdf).

438 In 2008, when Treasury first began issuing its Monthly Lending and Intermediation Snapshot, it only 

followed the twenty largest CPP recipients. Treasury subsequently added two institutions to the list – American 

Express and Hartford. See U.S. Department of the Treasury, Treasury Department Monthly Lending and 

Intermediation Snapshot, Summary Analysis for October – December 2008 (online at 

www.treas.gov/press/releases/reports/tg30-2-122008.pdf) (accessed Dec. 4, 2009); see also U.S. Department of the 

Treasury, Treasury Department Monthly Lending and Intermediation Snapshot, Summary Analysis for August 2009

(online at 

www.financialstability.gov/docs/surveys/Snapshot%20Analysis%20August%202009%20Data%2010%2014%2009.

pdf) (accessed Dec. 4, 2009).

439 Office of the Special Inspector General for the Troubled Asset Relief Program, SIGTARP Survey 

Demonstrates that Banks Can Provide Meaningful Information on Their Use of TARP Funds, at 5 (July 20, 2009) 
110

summarized their responses. While respondents described the use to which they put their CPP 

funds in general terms, they did not quantify the amount of new lending or the incremental 

difference in lending based on use of TARP funds. 440 The Panel notes the limitations inherent in 

the SIGTARP survey due to the survey’s reliance on self-reporting, and the lack of uniform 

responses or any requirement of quantification. While it is possible to say that 300 banks, more 

than 80 percent of all respondents, reported increased lending by reason of the TARP,441

The Panel staff also reviewed the SEC filings and other public disclosures of a number of 

banks (this group included the 17 of the 19 stress test banks that report to the SEC and the 10 

largest CPP recipients).

it is not 

possible to use the survey itself as authority for anything more meaningful.

442 While, as discussed above, strictly speaking it is not possible to trace 

particular uses to TARP funds, some institutions have made efforts to show how TARP funds 

affected their operations. For example, Citigroup, one of the largest TARP recipients,443

established a Special TARP Committee, which set up guidelines consistent with the objectives 

and spirit of the program, and internal controls to ensure that TARP funds would only be used 

for lending and mortgage activities.444

 

(online at 

www.sigtarp.gov/reports/audit/2009/SIGTARP_Survey_Demonstrates_That_Banks_Can_Provide_Meaningfu_%20

Information_On_Their_Use_Of_TARP_Funds.pdf) (hereinafter “SIGTARP Survey Demonstrates that Banks Can 

Provide Meaningful Information on Their Use of TARP Funds”). 

 Citigroup also separately publishes regular reports 

440 CPP recipients’ responses to SIGTARP’s inquiry included the following:

• More than 80 percent of the respondents cited the use of funds for lending or the avoidance of reduced 

lending. Many banks reported that lending would have been lower without TARP funds or would have 

come to a standstill.

• More than 40 percent of the respondents reported that they used some TARP funds to help maintain the 

capital cushions and reserves required by their banking regulators.

• Nearly a third of the respondents reported that they used some TARP funds to invest in agencymortgage backed securities. 

• A smaller number reported using some TARP funds to repay outstanding loans.

• Several banks reported using some TARP funds to buy other banks. 

441 SIGTARP Survey Demonstrates that Banks Can Provide Meaningful Information on Their Use of 

TARP Funds, supra note 439. 

442 The 19 stress test institutions are: JPMorgan Chase & Co., Citigroup, Bank of America Corp., Wells 

Fargo & Co., Goldman Sachs Group, Morgan Stanley, MetLife, PNC Financial Services Group, U.S. Bancorp, Bank 

of New York Mellon Corp., SunTrust Banks, Inc., State Street Corp., Capital One Financial Corp., BB&T Corp., 

Regions Financial Corp., American Express Co., Fifth Third Bancorp, Keycorp and GMAC LLC. The 10 largest 

CPP recipients are all stress test banks. These recipients, in order of CPP funds received, are: Citigroup, JPMorgan 

Chase & Co., Wells Fargo & Co., Bank of America, Goldman Sachs Group, Morgan Stanley, Bank of New York 

Mellon, State Street Corporation, U.S. Bancorp, and Capital One Financial. 

443 Under CPP, TIP and AGP, Treasury has invested a total of $49 billion in Citibank as of Nov. 17, 2009. 

See November 25 Transactions Report, supra note 71.

444 U.S. Securities and Exchange Commission, Citigroup’s 2008 Annual Report on Form 10-K (Feb. 27, 

2009) (online at www.sec.gov/Archives/edgar/data/831001/000119312509041237/d10k.htm ); Citigroup, TARP 

Progress Report Third Quarter 2009 (Nov. 12, 2009) (online at 
111

summarizing its TARP spending initiatives.445 Similarly, although Associated Banc-Corp did not 

segregate TARP funds from its regular account, it took measures to ensure that the funds are 

readily identifiable, thereby allowing its expenditure to be traced.446

The SEC filings and other public disclosures, like the responses to the SIGTARP survey, 

are mixed both in terms of the level of detail provided and the thought that went into designing 

an approach to answering the question “what did you do with the taxpayers’ money?” As 

Treasury points out, an exact correlation between TARP funds received and loans made is never 

going to be feasible, and the use of TARP funds for prescribed TARP objectives frees up money

received from other sources, lobbying, and other activities that the taxpayers may find 

objectionable. Within these constraints, however, banks such as Citigroup made meaningful 

efforts to show their use of TARP funds. 447

The terms of the CPP SPAs include the objective of promoting the flow of credit to U.S. 

borrowers. The SPAs did not, however, impose any specific geographic restrictions or reporting 

requirements on use or destination of funds. Additionally, as discussed above, tracing particular 

uses of funds to a specific source is difficult. As a result, it is difficult to establish, in many 

cases, whether any TARP funds ended up outside the United States. Of course, use of TARP 

funds for U.S. activities arguably frees up other funds that those banks can use internationally, 

and many of the largest CPP recipients had extensive international operations. With respect to 

Citigroup and AIG, TARP funds permitted the institution to continue functioning and in that 

respect would logically have benefitted non-U.S. customers, creditors and counterparties. On the 

other hand, when non-U.S. countries helped their banks with capital infusions and debt 

guarantees, some of those funds will necessarily flow to U.S. counterparties.

Treasury could have asked the SEC to send “Dear 

CFO” letters to all SEC-reporting TARP recipients, asking them to make the same kind of 

disclosures. It does not appear that any such effort was made.

 

www.citigroup.com/citi/corporategovernance/data/tarp/tarp_pr_3q09.pdf?ieNocache=105) (hereinafter “TARP 

Progress Report Third Quarter 2009”).

445 See generally Citigroup, TARP Progress and Updates (online at

www.citigroup.com/citi/corporategovernance/tarp.htm) (accessed Dec. 4, 2009). “As of the end of the third quarter 

[2009], Citi has authorized $53.8 billion in initiatives supported by investments it received under the TARP capital 

programs.” TARP Progress Report Third Quarter 2009, supra note 444. 

446 Office of the Special Inspector General for the Troubled Asset Relief Program, Associated Banc-Corp: 

UST Sequence No. 76 (online at www.sigtarp.gov/reports/audit/UseOfFunds/Associated%20Banc-Corp.pdf) 

(accessed Dec. 7, 2009). 

447 In order to determine whether a bank had made meaningful efforts to show use of its TARP funds, the 

Panel staff asked the following questions: Was data easily found in the bank’s filings? Did the bank attempt to 

segregate, identify or otherwise follow the money? Did it set up rules or guidelines? Did it specify acceptable and 

non-acceptable uses of funds, and by reference to what? How much quantification was there and how granular was 

the data? Does it report use of funds on special reports?
112

F. Conclusions

The financial crisis that gripped the United States last fall was unprecedented in type and 

magnitude. There is broad consensus that the TARP was an important part of a broader set of 

government actions that stabilized the U.S. financial system by renewing the flow of credit and 

averting a more acute crisis. The financial markets data that are chronicled in this report make a

persuasive case that the government’s actions, while initially halting, were eventually decisive 

enough to stop the panic and restore confidence among key financial institutions and actors. 

However, the TARP’s impact on the underlying weaknesses in the financial system that led to 

last fall’s crisis is less clear.

Congress established broad goals for EESA to help address the economic collapse that 

was gripping the nation at the time of its enactment. It is apparent that after fourteen months the 

TARP’s programs have not been able to solve many of the ongoing problems Congress 

identified. Credit availability, the lifeblood of the economy, remains low. In light of the weak 

economy, banks are reluctant to lend, while small businesses and consumers are reluctant to 

borrow. In addition, questions remain about the capitalization of many banks, and whether they 

are focusing on repairing their balance sheets at the expense of lending. The FDIC, facing red 

ink for the first time in 17 years, must step in to repay depositors at a growing number of failed 

banks. This problem may well worsen, as deep-seated problems in the commercial real estate 

sector are poised to inflict further damage on small and mid-sized banks. Large banks have 

problems of their own. Some of them, waiting for a rebound in asset values that may still be 

years away, continue to hold the toxic mortgage-related securities that contributed to the crisis. 

Consequently, the United States continues to face the prospect of banks too big to fail and too 

weak to play their role adequately in keeping credit flowing throughout the economy. The 

foreclosure crisis continues to grow. Furthermore, the market stability that has emerged since 

last fall’s crisis has been in part the result of an extraordinary mix of government actions, some 

of which will likely be scaled back relatively soon, and few of which are likely to continue 

indefinitely. The removal of this support too quickly could undermine the economy’s nascent 

stability.

What Treasury has done with the nearly $700 billion in TARP funds has not occurred in a 

vacuum. Since the TARP was enacted in October 2008, the FDIC and the Federal Reserve have 

undertaken additional major initiatives that are aimed at bolstering financial stability. The 

Congress enacted a fiscal stimulus measure that is larger than the TARP. The government has 

also taken numerous smaller actions, such as the enactment of the Cash for Clunkers program, 

which boosted auto sales. All of these steps are in addition to global market forces that are 

outside the government’s control, yet have a major impact on the U.S. economy. Still, it is clear 

that the unprecedented government actions taken since last September to bolster the faltering 

economy have not been enough to stem the rise of unemployment, which (except for October) is 

currently at its highest level since June 1983.
113

While strong government action helped prevent a worse crisis, it may have done so at a 

significant long run cost to the performance of our market economy. Implicit government 

guarantees pose the most difficult long-term problem to emerge from the crisis. Looking ahead, 

there is no consensus among experts or policymakers as to how to prevent financial institutions 

from taking risks that are so large as to threaten the functioning of the nation’s economy. 

Congress is currently grappling with this issue as it considers how to respond legislatively to the 

financial crisis. It is clear that a failure to address the moral hazard issue will only lead to more 

severe crises in the future. 

Since its inception, the TARP has gone through several different incarnations. It began 

as a program designed to purchase toxic assets from troubled banks but quickly morphed into a 

means of bolstering bank capital levels. It was later put to use as a source of funds to restart the 

securitization markets, rescue domestic automakers, and modify home mortgages. The evolving 

nature of the TARP, as well as Treasury’s relative lack of fixed goals and measures of success 

for the program, make it hard to provide an overall evaluation. But the Panel remains convinced, 

as it has been since its inception, that Treasury should make both its decision-making and its 

actions more transparent. Despite the difficult circumstances under which many decisions have 

been made, those decisions must be explained to the American people, and the officials who 

make them must be held accountable for their actions. Transparency and accountability may be 

painful in the short run, but in the long run they will help restore market functions and earn the 

confidence of the American people. 
114

Section Two: Additional Views

A. Damon Silvers

This separate view does not reflect a disagreement with the Panel report in any respect. 

Rather I wish to say in a somewhat briefer and perhaps blunter way what I believe the Panel 

report as a whole says about TARP.

The Emergency Economic Stabilization Act of 2008 and the Troubled Asset Relief 

Program it created, in my opinion, were significant contributors to stabilizing a full blown 

financial panic in October 2008. It is clear to me that for that reason, we are better off as a 

nation for the existence of TARP than if we had done nothing. Of course this proposition is very 

hard to prove, but I am convinced it is true. Many people deserve credit for doing TARP rather 

than doing nothing, but three people who in particular deserve credit are Federal Reserve 

Chairman Ben Bernanke, Treasury Secretary Timothy Geithner, and in particular, formerTreasury Secretary Henry Paulson.

Further, we are better off that, in implementing TARP, then-Secretary Paulson and his 

colleagues chose to do capital infusions in the form of the Capital Purchase Program rather than 

the initial plan of asset purchases. The prospect of asset purchases did not calm the markets, the 

announcement of capital infusions did. Furthermore, asset purchases at the richly subsidized 

prices the banks had hoped for would have been profoundly unfair to the public. Any other kind 

of asset purchases would certainly have had little impact on the panic and could have worsened 

it.

The reason, however, for the success of the CPP infusions into the nine largest banks 

was, I believe, not that those infusions by themselves made those institutions adequately 

capitalized or resolved the toxic asset problem. It worked because it was a credible signal, 

together with other guarantees issued by Treasury and the FDIC, that the United States 

government was guaranteeing the solvency of the large banks. 

The question then was, what price the Treasury would ask on behalf of the public for 

guaranteeing the large banks? Our February report showed that in purchasing preferred stock 

from the large banks the Treasury accepted significantly less in exchange for its investment than 

private commercial parties were demanding at the time.448

 448 Congressional Oversight Panel, February Oversight Report: Valuing Treasury’s Acquisitions (Feb. 6, 

2009) (online at cop.senate.gov/documents/cop-020609-report.pdf). 

 This mispricing was substantially 

driven by the decision to price the preferred stock purchased from the large banks as if each bank 
115

was equally healthy, a decision later criticized by the Special Inspector General for TARP as 

based on a manifestly false premise.449

This initial mispricing was followed by then-Secretary Paulson’s decision to rescue first 

Citigroup and then Bank of America from imminent bankruptcy without subjecting their 

shareholders to the same levels of dilution that had been forced on AIG. This placed the public 

in the position of rescuing the stockholders of banks. For the previous seventy-five years, it had 

been a fundamental premise of bank regulation that while a stable system required deposit 

insurance, and we might bail out other short term creditors and even bondholders in a crisis, no 

public purpose was served by rescuing stockholders. In fact the moral hazard issues created by 

such a wealth transfer were profoundly dangerous.

After an initial period of deliberation, the Obama Administration settled on an approach 

of trying to limit further capital infusions into the banks while effectively pursuing a time-buying 

strategy. This strategy led to improved transparency in some respects, such as the release of the 

stress test results and the recognition that some banks were stronger than others, opacity 

continued in other areas. For example, in our August report we found it was not possible to 

determine the value of toxic assets on the books of the large banks.450

However, though the consequences of the time-buying strategy appear to be that while 

we have had no further capital infusions into the large banks, it is unclear whether the large 

banks are actually healthy. Citigroup, Wells Fargo, and Bank of America were not allowed to 

return their TARP money after the stress tests. Those banks constitute approximately 40 percent 

of the nation’s bank assets. Recently Bank of America announced its intention to return TARP 

money after completing a public offering, though questions have been raised by informed 

commentators like Andrew Ross Sorkin as to whether Bank of America is really strong enough 

to be allowed to return its TARP capital, and point to the lack of lending on the part of Bank of 

America.

 It appeared in general that 

where transparency led to the conclusion that the banks were strong, the approach was 

transparency. Where transparency might have led to a different conclusion, opacity continued. 

This is of course completely consistent with a time-buying strategy. The time-buying strategy so 

far has worked in that so far there have been no further direct capital infusions into the major 

banks since President Obama took office. 

451

 449 SIGTARP, Emergency Capital Injections Provided to Support the Viability of Bank of America, Other 

Major Banks, and the U.S. Financial System, at 17 (Oct. 5, 2009) (online at 

sigtarp.gov/reports/audit/2009/Emergency_Capital_Injections_Provided_to_Support_the_Viability_of_Bank_of_A

merica..._100509.pdf). 

 Meanwhile, small banks that do not benefit from either implicit or explicit 

guarantees are failing at an alarming rate.

450 August Oversight Report, supra note 100.

451 Andrew Ross Sorkin, Bailout Refund Is All About Pay, Pay, Pay, New York Times (Dec. 7, 2009) 

(online at www.nytimes.com/2009/12/08/business/08sorkin.html).
116

As a result of the continuing underlying weakness in the banking system, banks appear 

reluctant to lend, particularly to small and medium sized businesses. This dynamic has been 

cited by Federal Reserve Chairman Bernanke as a key contributor to the high rate of 

unemployment.452

So the verdict on TARP is that it was a success at stabilizing a serious financial crisis but 

that it has been characterized by a willingness to give public money to the banks at less than fair 

terms to the public, and by a refusal to resolve fundamental problems with the financial 

institutions it has rescued. These weaknesses in TARP were not necessary. In some cases these 

weaknesses have been addressed over time. Where these problems remain, and I believe they 

remain central to the nature of TARP today, they could still be addressed. 

 In a parallel development, Treasury’s foreclosure relief programs seem to be 

designed with the first principle of avoiding writedowns. This is again consistent with a goal of 

buying time for banks, but not consistent with a goal of stabilizing the housing market or keeping 

American families in their homes. These dynamics appear to have some resemblance to the 

forces that led in different circumstances to Japan in the 1990s having a decade long problem 

with bank weakness that contributed to prolonged economic weakness 

 452 Ben S. Bernanke, Speech at the Economic Club of New York (Nov. 16, 2009) (online at 

www.federalreserve.gov/newsevents/speech/bernanke20091116a.htm).
117

B. Richard Neiman

I voted for and support this month’s Report and my Additional Views are related more to

important matters of emphasis than to specific conclusions. It is critical to remember in our 

analysis that EESA was enacted and first implemented in the depths of a major crisis, and the 

TARP was charged with multiple, complex, and enormous responsibilities.

1. TARP Has Significantly Improved the Stability of the Financial System

In my opinion the Report could be stronger in giving credit to TARP for having achieved 

the primary statutory objective of restoring general financial stability and liquidity in the 

financial system, including the restoration of functioning credit markets. There are legitimate 

debates about specific causation (TARP was part of a coordinated set of responses) and about 

particular transactions (methods of rescue or seizure of one institution or another). However, in 

comparison to the situation in October 2008, I give Congress, the Administration, and TARP a 

large share of credit for the achievement of the primary objective under EESA. 

The Panel has issued a series of reports that have closely examined TARP programs and 

transactions and we have been critical of many aspects of implementation, including 

transparency and accountability. Yet, in this year-end review we should take a step back and be 

clear and emphatic that a dominant success and objective was in fact achieved. 

In hindsight it is difficult to remember how close the system was to imploding and even 

more difficult to imagine what the consequences to the “real economy” might have been had the 

global financial system collapsed. It is not possible to adequately construct that scenario. But 

for all the criticism Treasury has received for assisting in the rescue of Bear Stearns and allowing 

the failure of Lehman Brothers, I shudder to imagine what might have happened if AIG had been 

allowed to fail and been followed quickly by a series of major American banks and investment 

banks during those weeks in early October 2008. They would not have simply “failed” in the 

traditional sense – the entire global financial system would have seized and ground to a halt. The 

specter of the United States government not acting in the face of such a crisis would have been 

devastating to the world economy. The impacts on trade, on the movement of goods, possibly on 

hunger and dislocation, and certainly on the American people’s confidence, can only be 

imagined.

Therefore I think this is a moment to give some appropriate credit to the Congress, the

Treasury, and the Federal Reserve for acting decisively in the face of a potential disaster and to 

TARP for playing a central role in averting that outcome. 
118

2. Formidable Problems Remain in the General Economy, Particularly with 

Respect to Mounting Foreclosures 

In restoring liquidity and financial stability to the financial system, Treasury was charged 

with ensuring that TARP funds and its authority under EESA “are used in a manner that ...

preserves homeownership and promotes jobs and economic growth.”453

I do not attribute primary responsibility for solving the problems of general economic 

recovery to TARP programs, but I do think that some TARP programs could have done, and still 

can do, much better in promoting those goals.

These are very serious 

issues for the Treasury and for Congress and the country. In some cases TARP results have been 

better; in other cases worse. 

On the positive side, the TARP capital support programs, including the SCAP, have 

generally been successful in promoting financial condition transparency, bringing private capital 

investment back to the banking sector, and protecting taxpayer funds. The disagreement among 

our expert panel of witnesses about the current adequacy of overall banking capital levels is, I 

believe, more related to their differing views of the future economy and its impact on bank 

capital than it is to their assessment of TARP’s effectiveness. 

As for the asset-related programs, the TALF program has performed reasonably well in 

reviving functioning asset-backed securities markets for certain consumer credit asset classes.

The PPIP program was late in launching but can now be expected to play an important role in 

creating a liquid market for troubled assets. 

The auto companies’ rescue was generally well executed, albeit at a cost, and at this point 

it has helped to mitigate the degree of job dislocation in the general economy. 

On the other hand, as the Report rightly points out in detail, TARP has struggled to help 

homeowners and small businesses. HAMP has made only limited progress for nine months now, 

and the residential foreclosure crisis continues to mount. Moreover, credit is not sufficiently 

available for small businesses and we are entering a period of severe stress on commercial real 

estate loans. Much more needs to be done. 

Looking ahead, TARP needs to close the book on large institution support and focus all 

of its energies on addressing the problems of foreclosures, small business credit, and commercial 

real estate. 

One proposal I have long called for is for Treasury to expand its foreclosure prevention 

program to assist borrowers who risk foreclosure due to job loss or other temporary hardship. As 

the recession lingers, prime borrowers with mortgages that are otherwise affordable are 

 453 EESA § 2.
119

increasingly falling into this category. I therefore have been urging the use of TARP funds to 

support state emergency mortgage assistance programs to help borrowers while they get back on 

their feet. Innovative programs at the state level have demonstrated that this idea can work. 

3. The Risk of Moral Hazard Goes Well Beyond the Implementation of TARP

Moral hazard, which is discussed in the Report, is a far ranging effect that occurs 

anywhere the government interfaces with any of the financial sector (e.g., bank debt support), 

private contracts (e.g., mortgages), and the general industrial economy (e.g., auto rescue). 

TARP’s very enactment was a massive instance of government intervention; presumably 

Congress reached the conclusion that the risks of not acting outweighed the risks of moral hazard 

that implementing TARP required.

Therefore, while moral hazard is a very real issue I do not believe it is appropriate to 

assign the lion’s share of responsibility for moral hazard risk to the implementation of TARP 

programs. The statute itself was an emergency act of moral hazard-inducing intervention. So it 

is not surprising to find moral hazard associated with TARP – it was there from the beginning.

Extraordinary government efforts necessary to avoid system-wide financial collapse last 

fall in some cases made institutions bigger and more complex and interconnected. This was not 

a desirable matter of policy but an unfortunate matter of exigency. In a crisis, a larger company 

may be required to absorb the business of another large company quickly, consolidate 

management and operations, and provide uninterrupted service to customers and business 

partners.

The important lesson of moral hazard is that we need to address “too big to fail” not by 

criticizing or second guessing TARP, but by renewing our efforts to create a systemic regulator 

and resolution authority. This is the greatest legislative imperative for financial reform and 

where our energies must be directed. 

4. Going Forward – Reform of Financial Institutions Must Be Considered

These outcomes of the crisis have only heightened the need to address systemic risk 

legislatively and to create an authority to unwind such institutions in an orderly fashion in event 

of failure. 

They also highlight the debate about whether large financial institutions should be 

allowed to grow so large and complex in the first place. Our national dialogue must include the 

debate over the social responsibility and utility of banks subject to the federal safety net, and 

whether in addition to stronger capital requirements we should consider restricting the level of 

risky activities that these institutions are permitted to conduct (such as proprietary trading and 

sponsorship of hedge funds). Proposals such as those made by former Federal Reserve 

Chairman Paul Volcker warrant full consideration and discussion. 
120

5. Conclusion

TARP was instrumental in avoiding a global financial meltdown – a far worse scenario 

than we experience today – at a much lower cost than was originally expected. Systemic 

stability and functioning credit markets were a necessary pre-condition to be in a position to 

tackle the problems relating to foreclosures, credit availability, and economic growth. Going 

forward these are the most important issues. TARP funds and programs must now focus on 

them.
121

C. Representative Jeb Hensarling 

Although I commend the Panel and its staff for their efforts in producing the December

report, I do not concur with all of the analysis and conclusions presented and, thus, dissent. I 

would like, however, to thank the Panel for incorporating several of the suggestions I offered 

during the drafting process.

Executive Summary

The Panel’s December report focuses on whether Treasury has properly discharged its 

Congressional mandate under the Emergency Economic Stabilization Act of 2008 – the enabling 

statute for the Troubled Asset Relief Program. In my view, it is not possible to assess the overall 

effectiveness of the TARP without acknowledging and thoughtfully analyzing the intended and 

unintended consequences of the program and the manner in which it was implemented by 

Treasury. In making these determinations I analyzed a series of specifically tailored metrics and 

inquired whether the TARP (i) stabilized the U.S. financial system, (ii) promoted lending, (iii) 

was implemented in a manner so as to protect the taxpayers, (iv) enhanced systemic, implicit 

guarantee and moral hazard risks, (v) enhanced political risk, (vi) promoted transparency and 

accountability, and (vii) was used for economic stimulus instead of financial stability. 

Based upon this analysis I conclude that the TARP is failing its mandate and offer the 

following summary of my findings.

• In order to end the abuses of the TARP as evidenced by the Chrysler, General Motors 

(GM) and GMAC bailouts, misguided foreclosure mitigation programs and the reanimation of reckless behavior and moral hazard risks, Secretary Geithner should not 

extend the TARP but permit it to end on December 31, 2009.

• As of today, Treasury has approximately $297.2 billion of TARP authority available to 

fund existing commitments and new programs. As the EESA statute requires, all 

recouped and remaining TARP funds should go back into the Treasury general fund for 

debt reduction. All revenues and proceeds from TARP investments that have generated a 

positive return should also go for debt reduction. 

• If the Secretary extends the TARP to October 31, 2010 I fear the Administration will 

continue to employ taxpayer resources as a revolving bailout fund to promote its 

politically favored projects as was clearly evident in the Chrysler, GM and GMAC 

bailouts.

• While the programs offered by Treasury, the Federal Reserve and the FDIC may very 

well have jointly assisted with the stabilization of the financial system over the past year, 

it seems quite unlikely that the TARP – unassisted by the Federal Reserve and the FDIC 

– would have stabilized the U.S. financial system. 
122

• Although some criticize the TARP for its failure to jump start new lending activity and 

for the creation of dysfunctional financial institutions (zombie banks), others note that 

lending-for-the-sake-of-lending may sow the seeds of the next asset bubble and lead to 

another round of non-performing loans and toxic securitized debt instruments. 

Nevertheless, if the TARP is judged on the basis of whether it successfully restarted the 

lending market for large and small business credit, it appears that it has again failed to 

meet such expectation.

• It is difficult to conclude that Treasury has diligently discharged its taxpayer protection 

obligation given the TARP funds that will most likely be lost with respect to AIG, the 

auto related bailouts and the various foreclosure mitigation efforts.

• Instead of lessening systemic risk the TARP has exacerbated the “too big to fail” problem 

by making the federal government the implicit guarantor of the largest American 

financial institutions as well as an undefined select group of business enterprises the 

failure of which might impede the Administration’s economic, social and political 

agenda. 

• By evidencing its willingness to rescue businesses that engage in excessive risk taking 

and poor business judgment Treasury has created needless implicit guarantee and moral 

hazard risks and laid the foundation for another economic crisis. If the Administration 

provides a safety net from risky behavior no one should be surprised if the intended 

recipients accept the offer and engage in such behavior. If the participants win their high 

risk bets they will reap all of the benefits but if they lose the taxpayers will bear the 

burden of picking up the pieces. It is possible that the TARP not only increased the 

number of “too big to fail” institutions but the size of such institutions as well.

• I remain troubled that the implementation of the TARP has caused the private sector to 

incorporate the concept of “political risk” into its analysis before engaging in any direct 

or indirect transaction with the United States government. The realm of political risk is 

generally reserved for business transactions undertaken in developing countries and not 

interactions between private sector participants and the United States government. 

Following the Chrysler and GM decisions it is possible that private sector participants 

may begin to view interactions with the United States government through the same 

jaundiced eye they are accustomed to directing toward third-world governments.

• Treasury has often been less than forthcoming regarding matters of transparency and 

accountability. Treasury should provide detailed financial statements to the taxpayers 

and operate its TARP investments in a businesslike manner.

• The TARP was promoted as a way to provide “financial stability,” and the American 

Reinvestment and Recovery Act was promoted as a way to provide “economic stimulus.” 
123

Regrettably, the TARP has evolved from a program aimed at financial stability during a 

time of crisis to one that increasingly resembles another attempt by the Administration to 

promote its economic, political and social agenda through fiscal stimulus.

• The bankruptcy restructurings of Chrysler and GM and the recapitalization of GMAC 

were financed with TARP proceeds. These cases serve as the poster child of why the 

TARP should end on December 31, 2009. The restructurings failed each of the standards 

noted above by exacerbating implicit guarantee and moral hazard risks, incorporating a 

heavy dose of political risk into private-public sector interactions, offering little in the 

way of taxpayer protection, transparency and accountability, and using funds dedicated to 

financial stability for economic stimulus 

• Much like the auto industry interventions, HAMP and the Administration’s other 

foreclosure mitigation efforts to date have been a failure. The Administration’s opaque 

foreclosure mitigation efforts have assisted only a small number of homeowners while 

drawing billions of involuntary taxpayer dollars into a black hole. 

• The best foreclosure mitigation program is a job, and the best assurance of job security is 

economic growth and the adoption of public policy that encourages and rewards capital 

formation and entrepreneurial success. Without a robust macroeconomic recovery the 

housing market will continue to languish and any policy that forestalls such recovery will 

by necessity lead to more foreclosures.

A. Overview

The Panel’s December report focuses on whether Treasury has properly discharged its 

Congressional mandate under the Emergency Economic Stabilization Act of 2008 (EESA) – the 

enabling statute for the Troubled Asset Relief Program (TARP).454

• stabilization of the U.S. financial system;

 In assessing the overall 

effectiveness of the TARP I will analyze the program against each of the following metrics:

• increased lending activity;

• taxpayer protection;

 454 The EESA statute requires COP to accomplish the following, through regular reports:

• Oversee Treasury’s TARP-related actions and use of authority;

• Assess the impact to stabilization of financial markets and institutions of TARP spending;

• Evaluate the extent to which TARP information released adds to transparency; and

• Ensure effective foreclosure mitigation efforts in light of minimizing long-term taxpayer costs and 

maximizing taxpayer benefits.

12 U.S.C. § 5223.
124

• systemic, implicit guarantee and moral hazard risks; 

• political risk; 

• transparency and accountability; and 

• financial stability v. economic stimulus. 

I will also describe what I believe was the primary cause of the financial crisis that the 

TARP was created to remedy. In addition I will retrace my analyses of the Chrysler and General 

Motors (GM) restructurings – the TARP’s lowest point – and the misguided TARP funded 

foreclosure mitigation efforts.

Based upon this analysis I conclude that the TARP is failing its mandate and recommend 

that Secretary Geithner not extend the TARP but allow the program to terminate on December 

31, 2009.455

Before beginning my analysis of the TARP I thought it would be helpful to provide some 

perspective regarding the magnitude of the taxpayer resources that have been dedicated to 

financial stability and economic stimulus over the past year. The Wall Street Journal recently 

reported that Treasury is considering the investment of up to an additional $5.6 billion in 

GMAC.456

 455 See generally, Geithner Expects Bailout Program to End Soon, The Associated Press (Dec. 2, 2009) 

(online at www.nytimes.com/2009/12/03/business/economy/03derivatives.html) (“Treasury Secretary Timothy F. 

Geithner affirmed Wednesday the administration’s intent to end the $700 billion financial bailout program soon. 

Although Mr. Geithner did not provide details, he said the government was close to the point at which ‘we can wind 

down this program’ and end it. ‛Nothing would make me happier,’ he told the Senate Agriculture Committee.”); 

Jackie Calmes, Repaid Bailout Money May Go to Jobless Benefits, New York Times (Dec. 3, 2009) (online at 

www.nytimes.com/2009/12/03/us/politics/03jobs.html) (“Treasury Secretary Timothy F. Geithner, testifying on 

Wednesday before the Senate Agriculture Committee, warned against shuttering the program just yet, given the 

continued weakness in the banking, housing and real estate markets. But Mr. Geithner said much of the $700 billion 

would not be needed, an indication of how far the financial industry has improved since Mr. Obama took office and 

prepared to ask for up to $500 billion more. On Wednesday, Bank of America announced that it would repay all of 

its $45 billion in bailout money before the end of the year.”); Michael Crittendon and Sarah Lynch, Geithner Says 

TARP Is Winding Down, but Date Not Set, Wall Street Journal (Dec. 3, 2009) (online at 

online.wsj.com/article/SB125976850821372893.html) (“The Obama administration will outline its plan to end the 

government’s $700 billion financial rescue program in the next few weeks, a top official said, though that doesn’t 

mean it will expire as scheduled by year end. ‘We are close to the point where we can wind down this program and 

stop making new commitments,’ Treasury Secretary Timothy Geithner told a U.S. Senate panel Wednesday.”)

To date Treasury has invested $12.5 billion in GMAC. I am not aware of any serious 

claim that the survival of GMAC is necessary for the financial stability of our country. 

Remarkably, the up to $18 billion that ultimately may be invested in GMAC represents a small 

456 Dan Fitzpatrick and Damian Paletta, GMAC Asks for Fresh Lifeline, Wall Street Journal (Oct. 29, 2009) 

(online at online.wsj.com/article/SB125668489932511683.html?mod=djemalertNEWS) (“The U.S. government is 

likely to inject $2.8 billion to $5.6 billion of capital into the Detroit company, on top of the $12.5 billion that GMAC 

has received since December 2008, these people said. The latest infusion would come in the form of preferred 

stock. The government’s 35.4% stake in the company could increase if existing shares eventually are converted into 

common equity.”). 
125

drop in a large bucket relative to the trillions of dollars of taxpayer sourced funds presently 

committed to financial stability and economic stimulus. By comparison, for fiscal year 2010 the 

National Institute of Health has requested just over $6 billion for cancer research.457

B. Primary Cause of the Financial Crisis 

 Although 

the Panel is not charged with debating the allocation of limited public resources, as taxpayers we 

may nevertheless question if GMAC merits the equivalent of three years of taxpayer funded 

cancer research. 

Just as a history of bad management decisions did not preclude Chrysler and GM from 

receiving TARP funds, the same is true of Fannie Mae and Freddie Mac. It should be noted that 

their financial insolvency materialized after years of mismanagement – and after years of 

enjoying the gold seal of the government’s implicit guarantee. Fannie and Freddie exploited 

their Congressionally-granted charters to borrow money at discounted rates. They dominated the 

entire secondary mortgage market and wildly inflated their balance sheets. Because market 

participants long understood that this government created duopoly was implicitly (and, now, 

explicitly) backed by the federal government, investors and underwriters chose to believe that if 

Fannie or Freddie touched something, it was safe, sound, secure, and most importantly 

“sanctioned” by the government. The results of those misperceptions have had a devastating 

impact on our entire economy. Given Fannie and Freddie’s market dominance, it should come 

as little surprise that once they dipped into the subprime and Alt-A markets, lenders quickly 

followed suit. In 1995, HUD authorized Fannie and Freddie to purchase subprime securities that 

included loans to low-income borrowers and allowed the government sponsored enterprises 

(GSEs) to receive credit for those loans toward their mandatory affordable housing goals. Fannie 

and Freddie readily complied, and as a result, subprime and near-prime loans jumped from 9 

percent of securitized mortgages in 2001 to 40 percent in 2006. In 2004 alone, Fannie and 

Freddie purchased $175 billion in subprime mortgage securities, which accounted for 44 percent 

of the market that year. Then, from 2005 through 2007, the two GSEs purchased approximately 

$1 trillion in subprime and Alt-A loans, and Fannie’s acquisitions of mortgages with less than 

10-percent down payments almost tripled. As a result, the market share of conventional 

mortgages dropped from 78.8 percent in 2003 to 50.1 percent by 2007 with a corresponding 

increase in subprime and Alt-A loans from 10.1 percent to 32.7 percent over the same period. 

These non-traditional loan products, on which Fannie and Freddie so heavily gambled as their 

Congressional supporters encouraged them to “roll the dice a little bit more,” now constitute 

many of the same non-performing loans which have contributed to our current foreclosure 

 457 Senate Committee on Appropriations, Subcommittee on Labor, Health and Human Services, Education, 

and Related Agencies, Written Testimony of National Cancer Institute Director John E. Niederhuber, Budget 

Request for FY 2010 (May 21, 2009) (online at legislative.cancer.gov/files/appropriations-2009-05-21.pdf).
126

troubles. 458 Private sector lenders and securitizers of mortgage backed securities lowered their 

diligence and underwriting standards in order to compete with the heavily subsidized duopoly 

resulting in unprecedented levels of mortgage defaults and the near shut-down of our credit 

markets. Without the reckless behavior of Freddie and Fannie it seems most unlikely that a 

financial crisis of the magnitude we have experienced over the past year would have 

developed.459

GAO noted in a September 2009 report:

While housing finance may have derived some benefits from the enterprises’ 

activities over the years, GAO, federal regulators, researchers, and others long 

have argued that the enterprises had financial incentives to engage in risky 

business practices to strengthen their profitability partly because of the financial 

benefits derived from the implied federal guarantee on their financial 

obligations.460

In September 2008, Treasury put Fannie Mae and Freddie Mac into conservatorship 

under the Federal Housing Finance Agency (FHFA), effectively making taxpayers liable for their 

portfolios which now total about $5.46 trillion (including mortgage-backed securities and other 

guarantees, as well as gross mortgage portfolios).

461

C. Analysis of the TARP

In my view, it is not possible to assess the overall effectiveness of the TARP without 

acknowledging and thoughtfully analyzing the intended and unintended consequences of the 

 458 Representative Jeb Hensarling, Additional Views to Congressional Oversight Panel, March Oversight 

Report: Foreclosure Crisis: Working Towards a Solution (Mar. 6, 2009) (online at cop.senate.gov/documents/cop030609-report-view-hensarling.pdf).

459In addition, for well over twenty years, federal policy has promoted lending and borrowing to expand 

homeownership, through incentives such as the home mortgage interest tax exclusion, the FHA, discretionary HUD 

spending programs, and the Community Reinvestment Act (CRA). CRA is an example of a program with the best of 

intentions having adverse, unintended consequences on exactly the population it hopes to serve. It was initially 

authorized to prevent “redlining,” a term that refers to the practice of denying loans to neighborhoods considered to 

be higher economic risks, by mandating banks lend to the communities where they take deposits. Since its passage 

into law in 1977, however, CRA has advanced at least two undesirable outcomes: (1) some financial institutions 

completely avoided doing business in neighborhoods and restricted even low-risk forms of credit, and (2) many 

institutions went the other way and relaxed underwriting standards to meet CRA guidelines, thus opening the door to 

the development of certain risky products that have contributed to the problem of foreclosures. These lax 

underwriting standards spread to Fannie and Freddie and ultimately to the private sector as the role of the GSEs 

morphed from that of a liquidity provider to a promoter of home ownership.

460 Government Accountability Office, Analysis of Options for Revising the Housing Enterprises’ Longterm Structures (September 2009) (online at www.gao.gov/new.items/d09782.pdf).

461 Fannie Mae, Monthly Summary (July 2009) (online at 

www.fanniemae.com/ir/pdf/monthly/2009/073109.pdf); Freddie Mac, Monthly Volume Summary (July 2009) 

(online at www.freddiemac.com/investors/volsum/pdf/0709mvs.pdf).
127

program and the manner in which it was implemented by Treasury. Any analysis that does not 

thoroughly consider the issues of implicit guarantee, moral hazard, political risk, transparency 

and accountability, and financial stability v. economic stimulus is myopic and of limited benefit.

1. Stabilization of U.S. Financial System

Any role that the TARP may have played over the past year in stabilizing the financial 

system cannot be analyzed to the exclusion of the programs adopted by the Federal Reserve and 

the FDIC. Although Treasury’s maximum exposure under the TARP totals $698.7 billion, the 

Federal Reserve and the FDIC have maximum exposures of $1.732 trillion and $666.7 billion, 

respectively.462

Any such analysis becomes more challenging when you consider the broad array of 

programs adopted by Treasury, the Federal Reserve and the FDIC. Treasury – under TARP 

authority – rolled out a dizzying group of programs including, among others: 

• the Capital Purchase Program (CPP-the purchase of preferred stock in approximately 700 

financial institutions); 

• the Targeted Investment Program (TIP-exceptional assistance to Citigroup and Bank of 

America); 

• the Systemically Significant Failing Institutions Program (SSFI-exceptional assistance to 

AIG); 

• the Asset Guarantee Program (AGP-the guarantee of certain assets of Citigroup); 

• the Public-Private Investment Program (PPIP-purchase of toxic assets from financial 

institutions); 

• the Term-Asset Back Securities Loan Facility Program (TALF-restart the securitization 

market); 

• various small business programs; 

• the Making Home Affordable Program (MHA-foreclosure mitigation, including the 

Home Affordable Modification Program (HAMP) and the Home Affordable Refinancing 

Program (HARP); 

• the Automotive Industry Financing Program (AIFP-bailout of Chrysler, GM and

GMAC); and 

• the Auto Supplier Support Program (bailout of certain auto suppliers). 

 462 See Figure 27 on pp. 79-80 of the Panel’s December Report.
128

The Federal Reserve has extended credit to AIG, advanced loans under the TALF 

program, provided asset guarantees to Citigroup and extended over $1 trillion in credit under, 

among others, its Term Auction Facility, discount window program, Primary Dealer Credit 

Facility, commercial paper facility programs, and GSE debt securities and mortgage backed 

securities programs. The FDIC introduced the Temporary Liquidity Guarantee Program (TLGPguarantee of debt issued by certain financial institutions), structured a PPIP for whole loans, 

guaranteed assets of Citigroup and increased outlays to its deposit insurance fund.463

While the programs offered by Treasury, the Federal Reserve and the FDIC may very 

well have jointly assisted with the stabilization of the financial system over the past year, it 

seems quite unlikely that the TARP – unassisted by the Federal Reserve and the FDIC – would 

have stabilized the U.S. financial system.

 The Panel’s 

current and prior reports analyze many of these programs in detail.

464

Interestingly, some who attribute relative success to certain aspects of the TARP offer 

only faint praise. Dr. Dean Baker, Co-Director, Center for Economic and Policy Research, 

provided the following testimony to the Panel:

There are many factors that make it difficult to assess the effectiveness of the 

TARP, most important one being the fact that the TARP was carried through in 

conjunction with rescue efforts by the Federal Deposit Insurance Corporation 

(FDIC) and the Federal Reserve Board. The money made available to the 

financial system through these alternative mechanisms was considerably larger 

than the amount made available through the TARP. Furthermore, there is no 

publicly available information on the terms or the beneficiaries of the loans issued 

through the Fed’s special lending facilities.

For this reason, there is no easy way to determine the importance of TARP funds 

in stabilizing the financial system. Clearly, the TARP did play a role in stopping 

the panic that was driving financial markets last year. Together with the other 

structures put in place, the TARP did succeed in restoring stability to the financial 

system.

However, keeping the financial system operating is a rather low bar. There is little 

doubt that the Federal Reserve Board, with its virtual unlimited ability to print 

 463 See pp. 74-81 of the Panel’s December Report.

464 Because it has served as a barrier to private-sector investment and capital formation, TARP has likely 

done much more to impede job creation and organic economic growth than it has done to promote them. U.S. 

unemployment recently surpassed 10 percent for the first time in 26-years and the broader definition of 

unemployment – including those who are underemployed and have stopped looking for work – recently jumped to 

17.5 percent. Although the two metrics have fallen to 10 percent and 17.2 percent, respectfully, such improvements, 

while encouraging, hardly signal a return to a robust employment market. 
129

money, can prevent a financial collapse. The relevant question is whether the 

TARP, along with the other programs put in place, restored stability in a way that 

best served the real economy and also can be viewed as fair by the American 

people. By these criteria, the TARP does not score very well.465

Roy Smith, Professor of Finance, New York University Stern School of Business, states

in his written submission to the Panel that the role of the TARP was relatively small compared to 

that of the Federal Reserve. In his view, the greatest contribution of the program was its 

announcement, which signaled that the government intended to act, while the actual 

accomplishments of the program are “relatively few and unimportant.” Professor Smith states

that Treasury’s highest priority should be to recover the TARP’s investment.466

William Isaac, chairman of the FDIC, 1981-1985, argues in his written submission to the 

Panel that the TARP legislation did more harm than good, and that the Federal Reserve, the 

FDIC and the SEC had the tools necessary to alleviate the financial crisis without taxpayer 

outlays. In Chairman Isaac’s view, Treasury lacked the expertise and personnel to run the capital 

infusion program, and as a result Treasury should have turned the program over to the FDIC. 

Isaac criticizes Treasury for (i) forcing banks to participate in the TARP, (ii) publicly 

announcing the stress tests, and (iii) taking the position that the TARP is a revolving fund.467

2. Lending

Dr. Baker offered the following written testimony to the Panel regarding the lending 

activity of TARP recipients:

The one sector that clearly is having difficulty securing credit is the small 

business sector. While this is an impediment to recovery, this sort of credit 

tightening is typical of a recession. The complaints from business owners over 

being denied credit are not qualitatively different than the complaints that were

made in 1990-91 recession. Lenders will also tighten credit to business during a 

downturn simply because otherwise healthy businesses are much risk[ier]

prospects during a recession. There is no reason to believe that the tightening of 

credit during this downturn is any greater than what should be expected given the 

severity of the recession. To press banks to make more loans in this context 

 465 Congressional Oversight Panel, Written Testimony of Center for Economic and Policy Research CoDirector Dean Baker, Taking Stock: Independent Views on TARP’s Effectiveness, at 1 (Nov. 19, 2009) (online at 

cop.senate.gov/documents/testimony-111909-baker.pdf).

466 Roy Smith, Letter to Panel Staff (Oct. 23, 2009).

467 William Isaac, Letter to Panel Staff (Nov. 6, 2009).
130

would be to insist that they make loans on which they expect to lose money. This 

would be questionable economic policy.468

Although some criticize the TARP for its failure to jump start new lending activity and 

for the creation of dysfunctional financial institutions (zombie banks), Dr. Baker notes that 

lending-for-the-sake-of-lending may sow the seeds of the next asset bubble and lead to another 

round of non-performing loans and toxic securitized debt instruments. Nevertheless, if the 

TARP is judged on the basis of whether it successfully restarted the lending market for large and 

small business credit, it appears that it has again failed to meet such expectation.

3. Taxpayer Protection

Roughly $71 billion of TARP funds have been paid back, mostly from large financial 

institutions who received equity injections as part of the CPP. In addition, Bank of America 

recently announced that it will repay the full $45 billion with interest it has accessed from the 

TARP. As Treasury unwinds several TARP programs where the taxpayers have recouped their 

investments with interest, the Panel should focus its attention on the new or existing programs 

that are likely more enduring and costly to the taxpayers. The opportunity cost of not providing 

rigorous oversight in these areas is high. These programs include taxpayer funds directed to 

AIG, Chrysler, GM, GMAC, foreclosure mitigation, preferred and common share purchases in 

Citigroup, Bank of America and hundreds of additional large and small financial institutions and 

other initiatives. The Panel should undertake to analyze these programs to determine if the 

investment of taxpayer funds is appropriate, authorized under EESA and adequately protected. 

This undertaking is particularly important with respect to the TARP funded foreclosure 

mitigation programs since EESA requires the Panel to “ensure effective foreclosure mitigation 

efforts in light of minimizing long-term taxpayer costs and maximizing taxpayer benefits.” It is 

difficult to conclude that Treasury has diligently discharged its taxpayer protection obligation 

given the TARP funds that will most likely be lost with respect to AIG, the auto related bailouts 

and the various foreclosure mitigation efforts.

4. Systemic, Implicit Guarantee and Moral Hazard Risks

Instead of reducing systemic risk the TARP has exacerbated the “too big to fail” problem 

by making the federal government the implicit guarantor of the largest American financial 

institutions as well as an undefined select group of business enterprises the failure of which 

might impede the Administration’s economic, social and political agenda.469

 468 Congressional Oversight Panel, Written Testimony of Center for Economic and Policy Research CoDirector Dean Baker, Taking Stock: Independent Views on TARP’s Effectiveness, at 4, 5 (Nov. 19, 2009) (online at 

cop.senate.gov/documents/testimony-111909-baker.pdf).

 By evidencing its 

469 The Financial Times reports that thirty institutions have made the latest “too big to fail list”:

The list, which is not public, contains many of the multinational bank names that would be widely 

expected: Goldman Sachs, JPMorgan Chase, Morgan Stanley, Bank of America Merrill Lynch and 
131

willingness to rescue businesses that engage in excessive risk taking and poor business judgment 

Treasury has created needless implicit guarantee and moral hazard risks and laid the foundation 

for another economic crisis. If the Administration provides a safety net from risky behavior no 

one should be surprised if the intended recipients accept the offer and engage in such behavior. 

If the participants win their high risk bets they will reap all of the benefits but if they lose the 

taxpayers will bear the burden of picking up the pieces. It is possible that the TARP not only 

increased the number of “too big to fail” institutions but the size of such institutions as well.

Charles Calomiris, the Henry Kaufman Professor of Financial Institutions, Columbia 

Business School, stated in written testimony before the Panel:

In my judgment, TARP and other interventions were not designed properly, and 

consequently assistance programs have resulted in less benefit to the economy 

than they should have (in particular, have resulted in insufficient mitigation of the 

credit crunch) and they have cost more than they should have (in the form of 

 

Citigroup of the US; Royal Bank of Canada; UK groups HSBC, Barclays, Royal Bank of Scotland 

and Standard Chartered; UBS and Credit Suisse of Switzerland; France’s Société Générale and 

BNP Paribas; Santander and BBVA from Spain; Japan’s Mizuho, Sumitomo Mitsui, Nomura, 

Mitsubishi UFJ; Italy’s UniCredit and Banca Intesa; Germany’s Deutsche Bank; and Dutch group 

ING.

The exercise follows the establishment of the FSB in the summer and is principally designed to 

address the issue of systemically important cross-border financial institutions through the setting 

up of supervisory colleges. These colleges will comprise regulators from the main countries in 

which a bank or insurer operates and will have the job of better coordinating the supervision of 

cross-border financial groups.

As a spin-off from that process, the groups on the list will also be asked to start drawing up socalled living wills – documents outlining how each bank could be wound up in the event of a 

crisis.

Regulators are keen to see living wills prepared for all systemically important financial groups, but 

the concept has split the banking world, with the more complex groups arguing that such 

documents will be almost impossible to draft without knowing the cause of any future crisis.

Patrick Jenkins and Paul J. Davies, Thirty Financial Groups on Systemic Risk List, Financial Times (Nov. 30, 2009) 

(online at www.ft.com/cms/s/0/c680e0da-dd4e-11de-ad60-00144feabdc0.html). 

The Wall Street Journal recently reported regarding Treasury’s AIG exit strategy:

The bailout of AIG, owned 80% by taxpayers, is one of the most controversial of the 

government’s unpopular bailouts. Yet with so much taxpayer money at stake, the government is 

asserting its ownership.

AIG is the best example of why the government should never get itself in the position of even 

having to make these tradeoffs,” said Anil Kashyap, an economics professor at the University of 

Chicago Booth School of Business. “It’s why you don’t want the government involved in the 

private sector in the first place.”

Deborah Solomon, AIG’s Rescue Bedevils U.S., Wall Street Journal (Nov. 23, 2009) (online at 

online.wsj.com/article/SB10001424052748703819904574554241356640428.html).
132

excessive taxpayer bearing of current losses, and unnecessary moral-hazard 

incentive costs going forward).

. . .

Government loans, guarantees and investments in troubled financial institutions 

(which even include potential capital infusions into the GSEs), not to mention 

government purchases of assets (as originally contemplated under the TARP plan, 

and as executed under the TALF plan) have resulted in huge losses to taxpayers 

(Fannie and Freddie and FHA subprime lending will account for the lion’s share 

of these losses, as they alone will approach half a trillion dollars) and remaining 

risks of future loss. They also have changed the risk-taking behavior of financial 

institutions going forward. If financial institutions know that the government is 

there to share losses, risk-taking becomes a one-sided bet, and so more risk is 

preferred to less. There is substantial evidence from financial history – including 

the behavior of troubled financial institutions during the current crisis itself – that 

this “moral-hazard” problem can give rise to hugely loss-making, high-risk 

investments that are both socially wasteful and an unfair burden on taxpayers.470

In order to avoid the creation of moral hazard risks, Professor Calomiris advises that any 

government sponsored intervention incorporate the following concepts:

(emphasis in original.)

(1) Assistance should be offered only under rare circumstances. The purpose of 

assistance is not to prevent the failure of one or a few institutions, per se; 

assistance is only warranted when asymmetric information about the incidence of 

losses in the financial system leads to a general breakdown in financial market 

buying and selling, resulting in a liquidity crisis, which makes it impossible or 

excessively difficult for otherwise solvent borrowers to roll over their debts, or for 

banks to prove their solvency to the market in order to access needed capital to 

shore up their positions.

(2) The design of assistance is crucial to maximizing its effectiveness and 

minimizing its social costs; particularly the allocation of the risk of loss between 

the private sector and the government is crucial to the successful design of 

assistance. Assistance should be selective, targeted toward institutions worth 

saving, not basket cases. Government should take a senior position in loss 

sharing; in discount window lending that is ensured through collateralization of 

loans; in preferred stock purchases, seniority is ensured through the adequacy of 

 470 Congressional Oversight Panel, Written Testimony of Charles Calomiris, Henry Kaufman Professor of 

Financial Institutions, Columbia Business School, Taking Stock: Independent Views on TARP’s Effectiveness, at 1, 3

(Nov. 19, 2009) (online at cop.senate.gov/documents/testimony-111909-calomiris.pdf). 
133

common equity; in other assistance programs, it is achieved through the structure 

of guarantees (e.g., their out-of-the-moneyness).

(3) The assistance toolkit must be diverse. The proper structure of assistance 

depends on the severity of the systemic crisis being addressed; discount window 

lending may be sufficient for dealing with liquidity crises that are not very severe, 

bank preferred stock purchases by the government may make sense for more 

severe shocks, and other mechanisms (organized rescues of failed institutions, or 

guarantees attached to liabilities or assets) may be the only effective tools to 

employ when the crisis is even more severe. No matter which of the tools is 

employed, the other principles (rarity, selectivity, and seniority) can and should be 

adhered to.”471

Dr. Baker submitted the following testimony to the Panel regarding systemic risk:

(emphasis in original).

“The crisis itself led to further concentration in the financial sector, with the 

largest banks all having been encouraged to buy up bankrupt competitors. As a 

result, the largest banks now enjoy fairly explicit “too big to fail” protection. 

There also has been almost nothing done to restrain the speculative practices of 

the major banks. Goldman Sachs, in particular, stands out by virtue of the fact that 

it is still acting as an investment bank (arguably, it can better be described as a 

hedge fund), even though it is now operating under the protective umbrella of the 

Federal Reserve Board and the FDIC. There does not appear to be any effort to 

restrain its speculative activity.

Simon Johnson, the Ronald Kurtz Professor of Entrepreneurship, MIT Sloan School of 

Management, stated in written testimony before the Panel:

If any country pursues (a) unlimited government financial support, while not 

implementing (b) orderly resolution for troubled large institutions, and refusing to 

take on (c) serious governance reform, it would be castigated by the United States 

and come under pressure from the IMF. At the heart of every crisis is a political 

problem – powerful people, and the firms they control, have gotten out of hand. 

Unless this is dealt with as part of the stabilization program, all the government 

has done is provide an unconditional bailout. That may be consistent with a 

short-term recovery, but it creates major problems for the sustainability of the 

recovery and for the medium-term. Serious countries do not do this. Seen in this 

context, TARP has been badly mismanaged.

 471 Congressional Oversight Panel, Written Testimony of Charles Calomiris, Henry Kaufman Professor of 

Financial Institutions, Columbia Business School, Taking Stock: Independent Views on TARP’s Effectiveness, at 6, 7

(Nov. 19, 2009) (online at cop.senate.gov/documents/testimony-111909-calomiris.pdf). 
134

. . .

The implementation of TARP exacerbated the perception (and the reality) that 

some financial institutions are “Too Big to Fail.” This lowers their funding costs, 

enabling them to borrow more and to take more risk.

. . .

The administration as much as said that the major banks will all pass the stress 

tests, making it appear that the results were foreordained. Essentially, this was 

used to signal that the government stood behind the 19 banks in the stress test and 

would not allow any of them to fail. Effectively, the government signaled which 

banks were Too Big To Fail.472

Viral Acharya and Matthew Richardson, Professors of Finance, New York University 

Stern School of Business, argue in their written submission to the Panel that the CPP did not 

include “sufficient strings attached,” and as a result created the expectation of “unconditional 

government support” in the future. Moving forward, Professors Acharya and Richardson 

highlight the risks of moral hazard, noting “it is not just about fighting the last war, but also 

about the next one.”473

Paul Volcker, former Chairman of the Federal Reserve, 1979-1987, and member of the

Economic Recovery Advisory Board, states in his written submission to the Panel that Treasury 

“appears to have done a good job in structuring their capital investments,” but questions the 

extent to which the program is currently having a positive impact on the flow of credit. 

Chairman Volcker also notes the problems associated with moral hazard, concluding that reform 

is necessary.474

William Poole, Senior Fellow, the Cato Institute, argues in his written submission to the 

Panel that the core issue in the financial system today is the subsidy to large banks created by the 

implicit federal guarantee of bank liability. Citing a recent paper by Dean Baker and Travis 

McArthur, Mr. Poole notes that the implicit subsidy may be as large as $34 billion per year. In 

addition to this subsidy, the funding advantage enjoyed by large banks permits them to grow 

larger, increasing the risks posed by banks that are too big to fail. Poole also notes that efforts to 

control executive compensation are “unwise and will ultimately be ineffective.”475

 472 Congressional Oversight Panel, Written Testimony of Professor Simon Johnson, Ronald Kurtz Professor 

of Entrepreneurship, MIT Sloan School of Management, Taking Stock: Independent Views on TARP’s Effectiveness, 

at 2, 3, 7 (Nov. 19, 2009) (online at cop.senate.gov/documents/testimony-111909-johnson.pdf). 

473 Viral Acharya and Matthew Richardson, Letter to Panel Staff (received Nov. 6, 2009).

474 Paul A. Volcker, Letter to Panel Staff (Nov. 6, 2009).

475 William Poole, Letter to Panel Staff (Oct. 23, 2009).
135

In a recent report, SIGTARP addressed the problem of moral hazard, stating that “TARP 

runs the risk of merely re-animating markets that had collapsed under the weight of reckless 

behavior.”476

The SIGTARP report also discussed the cost of the TARP to the government’s 

credibility. It claims, “Unfortunately, several decisions by Treasury – including Treasury’s 

refusal to require TARP recipients to report on their use of TARP funds, its less-than accurate 

statements concerning TARP’s first investments in nine large financial institutions, and its initial 

defense of those inaccurate statements – have served only to damage the Government’s 

credibility and thus the long-term effectiveness of TARP.”

I am concerned that the TARP is again inflating the problem of moral hazard by 

providing government funded capital to institutions that contributed to the crisis, modifications 

to homeowners who may have taken on too much risk, and lower-cost loans to spur the purchase 

of what may be volatile, high-priced asset backed securities.

477 I do not see how Treasury will be 

able to regain the public’s trust so long as it continues to employ taxpayer sourced funds to make 

investments based upon the Administration’s economic, political and social agenda where there 

is diminished promise that such funds will be fully recouped.

478

 476 SIGTARP, Quarterly Report to Congress, at 4 (Oct. 21, 2009) (online at 

sigtarp.gov/reports/congress/2009/October2009_Quarterly_Report_to_Congress.pdf).

477 SIGTARP, Quarterly Report to Congress, at 4 (Oct. 21, 2009) (online at 

sigtarp.gov/reports/congress/2009/October2009_Quarterly_Report_to_Congress.pdf).

478 There are three recent examples of the problems that may arise with respect to government financed 

investments in the private sector.

(i) A recent GAO report on the Chrysler and GM bailouts states:

As long as Treasury maintains ownership interests in Chrysler and GM, it will likely be pressured 

to influence the companies’ business decisions.

. . .

Treasury officials stated that they established such up-front conditions not solely to protect 

Treasury’s financial interests as a creditor and equity owner but also to reflect the 

Administration’s views on responsibly utilizing taxpayer resources for these companies. While 

Treasury has stated it does not plan to manage its stake in Chrysler or GM to achieve social policy 

goals, these requirements and covenants to which the companies are subject indicate the 

challenges Treasury has faced and likely will face in balancing its roles.

Government Accountability Office, Troubled Asset Relief Program: Continued Stewardship Needed as Treasury 

Develops Strategies for Monitoring and Divesting Financial Interests in Chrysler and GM (Nov. 2, 2009) (online at

www.gao.gov/new.items/d10151.pdf).

(ii) Thomas E. Lauria, the Global Practice Head of the Financial Restructuring and Insolvency Group at 

White & Case LLP, represented a group of senior secured creditors, including the Perella Weinberg Xerion 

Fund (“Perella Weinberg”), during the Chrysler bankruptcy proceedings. On May 3, the New York Times

reported:

In an interview with a Detroit radio host, Frank Beckmann, Mr. Lauria said that Perella Weinberg 

‘was directly threatened by the White House and in essence compelled to withdraw its opposition 

to the deal under threat that the full force of the White House press corps would destroy its 

reputation if it continued to fight.’ 
136

In my view and as supported by the above cited economists, the TARP has created 

substantial and needless implicit guarantee and moral hazard risks. In order to articulate these 

risks I offer the following analysis from the Panel’s November report on the government 

sponsored guarantee programs which also applies to the broader TARP:

A larger issue arises when one considers the implicit guarantees, those that are 

paid for by neither party, but whose cost is borne by the taxpayer. The 

[government sponsored guarantee programs] carry fees paid for by the financial 

institutions. But their existence, and the existence of the other elements of the 

bailout of the financial system, could imply that there is a permanent, and “free,” 

insurance provided by the government, especially for those institutions deemed 

 

In a follow-up interview with ABC News’s Jake Tapper, he identified Mr. [Steven] Rattner, the 

head of the auto task force, as having told a Perella Weinberg official that the White House ‘would 

embarrass the firm.’

Michael J. de la Merced, White House Denies Claims of Threat to Chrysler Creditor, New York Times (May 3, 

2009) (online at dealbook.blogs.nytimes.com/2009/05/03/white-house-perella-weinberg-deny-claims-of-threat-tofirm/). See also News/Talk WJR 760 am, Frank Talks With Tom Lauria, Who Represents a Group of Lenders That 

Object to the Chrysler Sale (May 1, 2009) (online at www.760wjr.com/article.asp?id=1301727&spid=6525). 

For a further discussion of the interactions between Mr. Rattner and Perella Weinberg see William D. 

Cohan, The Final Days of Merrill Lynch, The Atlantic (Sept. 2009) (online at 

www.theatlantic.com/doc/200909/bank-of-america) and Steve Fishman, Exit the Czar, New York Magazine (Aug. 

2, 2009) (online at nymag.com/news/features/58193/).

I requested Secretary Geithner to investigate the allegation and, to my disappointment, he declined. 

Specifically, I submitted the following question for the record to the Secretary: “Will you agree to conduct a prompt 

and thorough investigation of this matter by contacting Mr. Rattner, Mr. Lauria and representatives of Weinberg 

Perella and submit your findings to the Panel?”

The Secretary responded: “SIGTARP will determine the appropriate actions with regard to this 

issue. But as noted above, I would reiterate that Mr. Rattner categorically denies Mr. Lauria’s 

allegations.”

Again, I ask the Secretary to investigate this matter and report his findings to the Panel.

See my dissent from the September report on the auto bailouts. Representative Jeb Hensarling, Additional 

Views to Congressional Oversight Panel, September Oversight Report: The Use of TARP Funds in the Support and 

Reorganization of the Domestic Automotive Industry (Sept. 9, 2009) (online at cop.senate.gov/documents/cop090909-report-additionalviews.pdf).

(iii) The Wall Street Journal recently reported:

Federal support for companies such as GM, Chrysler Group LLC and Bank of America Corp. has 

come with baggage: Companies in hock to Washington now have the equivalent of 535 new board 

members – 100 U.S. senators and 435 House members.

Since the financial crisis broke, Congress has been acting like the board of USA Inc., invoking the 

infusion of taxpayer money to get banks to modify loans to constituents and to give more help to 

those in danger of foreclosure. Members have berated CEOs for their business practices and 

pushed for caps on executive pay. They have also pushed GM and Chrysler to reverse core 

decisions designed to cut costs, such as closing facilities and shuttering dealerships.

Neil King, Jr., Politicians Butt In at Bailed-Out GM, Wall Street Journal (Oct. 29, 2009) (online at 

online.wsj.com/article/SB125677552001414699.html#mod=todays_us_page_one).
137

“too big to fail,” or “too connected to fail.” There is an implication that, in the 

case of another major economic collapse, the government will again step in to 

prop up the financial system, especially the “too big to fail” institutions. This 

moral hazard creates a real risk to the system. 

This “free” insurance causes a number of distortions in the marketplace. On the 

financial institution side, it might promote risky behavior. On the investor and 

shareholder side, it will provide less incentive to hold management to a high 

standard with regard to risk-taking. By creating a class of “too big to fail” 

institutions, it has provided these institutions with an advantage with respect to 

the pricing of credit:

Creditors who believe that an institution will be regarded by the 

government as too big to fail may not price into their extensions of credit 

the full risk assumed by the institution. That, of course, is the very 

definition of moral hazard. Thus the institution has funds available to it at 

a price that does not fully internalize the social costs associated with its 

operations. The consequences are a diminution of market discipline, 

inefficient allocation of capital, the socialization of losses from supposedly 

market-based activities, and a competitive advantage for the large 

institution compared to smaller banks.479

The implied guarantee of “too big to fail” institutions might also result in a 

concentration of risk in this group, resulting in greater danger to the taxpayer if 

and when the government must step in again.

5. Political Risk

In addition to the implicit guarantee and moral hazard issues discussed above, I am

troubled that the implementation of the TARP has caused the private sector to incorporate the 

concept of “political risk” into its analysis before engaging in any direct or indirect transaction 

with the United States government. While private sector participants are accustomed to 

operating within a complex legal and regulatory environment, many are unfamiliar with the 

emerging trend of public sector participants to bend or restructure rules and regulations so as to 

promote their economic, social and political agenda as was clearly evident in the Chrysler and 

GM bankruptcies (described in more detail below). The realm of political risk is generally 

reserved for business transactions undertaken in developing countries and not interactions 

between private sector participants and the United States government. Following the Chrysler 

and GM decisions it is possible that private sector participants may begin to view interactions 

 479 Board of Governors of the Federal Reserve System, Speech: Federal Reserve Board Governor Daniel K. 

Tarullo at the Exchequer Club, Washington D.C., Confronting Too Big to Fail (Oct. 21, 2009) (online at 

www.federalreserve.gov/newsevents/speech/tarullo20091021a.htm).
138

with the United States government through the same jaundiced eye they are accustomed to 

directing toward third-world governments. It’s disingenuous for the Administration to champion 

transparency and accountability for the private sector but neglect such standards when 

conducting its own affairs. How is it possible for directors and managers of private sector 

enterprises to discharge their fiduciary duties and responsibilities when policy makers legislate 

and regulate without respect for precedent and without thoughtfully vetting the unintended 

consequences of their actions?

6. Transparency and Accountability

Although improvements have been made, Treasury has often been less than forthcoming 

regarding matters of transparency and accountability. I agree with Alex Pollock, a Resident 

Fellow with the American Enterprise Institute, that Treasury should provide detailed financial 

statements to the taxpayers and operate its TARP investments in a businesslike manner. Mr. 

Pollock provided the following testimony to the Panel:

The principal goal should be to run [TARP] in a businesslike manner to return as 

much of the involuntary investment as possible to its owners, along with a 

reasonable overall profit. The predominant discipline should be that of investment 

management, not politics.

...

In my view, TARP should have full, regular, audited financial statements, which 

depict its financial status and results, exactly as if it were a corporation. There 

should be a balance sheet, with all assets, liabilities, accumulated profits or losses, 

and contingencies. There should be a profit and loss statement and a statement of 

cash flows. The expenses should include the interest cost of the Treasury debt 

required to fund its disbursements, and like every financial operation, TARP 

management should be estimating probable losses on investments and reserving 

accordingly.

Had TARP been organized as a corporation, it would have facilitated this 

accountability. But even with its status as a “program”, we should insist on 

appropriate and regular accounting. Everybody must agree with this basic 

requirement for financial responsibility.

Moreover, TARP’s financial statements should include line of business reporting. 

Logical separate profit and loss reporting units would include: the Capital 

Purchase Program; automotive program; Citigroup; AIG; mortgage modification 
139

(of course a total loss from the TARP point of view); and small business and 

consumer programs.480

7. Financial Stability v. Economic Stimulus

The TARP was promoted as a way to provide “financial stability,” and the American 

Reinvestment and Recovery Act (ARRA) was promoted as a way to provide “economic 

stimulus.” In testimony on the still-nascent TARP, former Treasury Secretary Henry Paulson 

reminded Congress, “[t]he rescue package was not intended to be an economic stimulus or an 

economic recovery package; it was intended to shore up the foundation of our economy by 

stabilizing the financial system...”481

D. Chrysler and GM Bankruptcies

 Regrettably, the TARP has evolved from a program aimed 

at financial stability during a time of crisis to one that increasingly resembles another attempt by 

the Administration to promote its economic, political and social agenda through fiscal stimulus. 

If the TARP is not being used for “economic stimulus,” then how else is it possible to explain the 

$81 billion bankruptcy restructuring of Chrysler and GM, neither of which qualifies as a 

“financial institution” as required under EESA? In addition, the United States government has 

agreed to transfer to Fiat part of the equity it received in Chrysler if Fiat assists Chrysler in 

building a car that produces 40 miles per gallon. What does this transfer of United States

government owned Chrysler stock to Fiat have to do with “financial stability”? No transparent 

end-game is in sight for the TARP’s commitment to support Chrysler, GM and GMAC. 

482

The bankruptcy restructurings of Chrysler and GM and the recapitalization of GMAC 

were financed with TARP proceeds. These cases serve as the poster child of why the TARP

should end on December 31, 2009. If the TARP is extended to October 31, 2010, I fear the 

Administration will continue to employ taxpayer resources as a revolving bailout fund to 

promote its economic, social and political agenda as was clearly evident in the Chrysler, GM and 

GMAC bankruptcy restructurings. These restructurings failed each of the standards noted above 

by exacerbating implicit guarantee and moral hazard risks, incorporating a heavy dose of 

political risk into private-public sector interactions, offering little in the way of taxpayer 

 480 Congressional Oversight Panel, Written Testimony of American Enterprise Institute resident fellow 

Alex J. Pollock, Taking Stock: Independent Views on TARP’s Effectiveness (Nov. 19, 2009) (online at 

aei.org/docLib/Pollock-Testimony-11192009.pdf).

481 U.S. Department of the Treasury, Testimony of Treasury Secretary Paulson before the House Financial 

Services Committee (Nov. 18, 2008) (online at www.treasury.gov/press/releases/hp1279.htm). 

482 In this section I borrow extensively from my dissent to the Panel’s September report on the auto 

bailouts. Representative Jeb Hensarling, Additional Views to Congressional Oversight Panel, September Oversight 

Report: The Use of TARP Funds in the Support and Reorganization of the Domestic Automotive Industry (Sept. 9, 

2009) (online at cop.senate.gov/documents/cop-090909-report-additionalviews.pdf).
140

protection, transparency and accountability, and using funds dedicated to financial stability for 

economic stimulus.483

1. Policy Issues and Fundamental Questions Arising from the Use of TARP 

Proceeds in the Chrysler and GM Bankruptcies

Over the past year taxpayers have involuntarily “invested” over $81 billion484 in Chrysler, 

GM, GMAC and the other auto programs. According to a recent estimate from the CBO, the

investment of TARP funds in the auto industry is expected to add $40 billion more to the deficit 

than CBO calculated just five months earlier in March 2009.

485 A reasonable interpretation of 

such an estimate provides that the American taxpayers may suffer a loss of over 50 percent of the 

TARP funds invested in Chrysler, GM and the other auto programs.486

By making such an unprecedented investment in Chrysler and GM

 

487

 483 Edward Niedermeyer, Taking Taxpayers for a Ride, New York Times (Nov. 22, 2009) at 

www.nytimes.com/2009/11/23/opinion/23niedermayer.html?_r=1&sq=taking taxpayers for a ride niedermeyer 

november 22&st=cse&adxnnl=1&scp=1&adxnnlx=1259856084-RhEqA9+sraJEUegFNAcvew).

the Administration

by definition chose not to assist other Americans who are in need. With the economic suffering 

484 According to the Panel’s December report, $2.2 billion of the funds advanced under the Auto Industry 

Financing Program have been repaid. See Figure 25 of this Report, supra. 

485 Congressional Budget Office, The Budget and Economic Outlook: An Update August 2009, at 55-56

(online at www.cbo.gov/ftpdocs/105xx/doc10521/08-25-BudgetUpdate.pdf) (accessed Dec. 8, 2009). The report 

provides in part:

The improvement in market conditions results in a reduction in the subsidy rate associated with 

the Capital Purchase Program (CPP) – a major initiative through which the government 

purchases preferred stock and warrants (for the future purchase of common stock) from banks. 

CBO has dropped the projected subsidy for the remaining investments in that program from 35 

percent in the March baseline to 13 percent. The decrease in the estimated CPP subsidy cost also 

reflects banks’ repurchase of $70 billion of preferred stock through June. Similarly, the estimated 

subsidy cost for other investments in preferred stock (for example, that of American International 

Group) has also been reduced. Partially offsetting those reductions in projected costs is the 

expansion of assistance to the automotive industry; CBO has raised its estimate of the costs of that 

assistance by nearly $40 billion relative to the March baseline. (emphasis added).

In addition, our country faces a staggering deficit of $1.6 trillion in 2009, and a debt that more-than-triples 

in ten years. 

486 How is it possible that with the economic challenges facing our nation the Administration chose to 

allocate such a significant share of the TARP to such questionable investments? How much additional funding will 

be provided by the Administration for Chrysler and GM? What is the strategy and timeline for recouping taxpayer 

dollars? See Keith Bradsher, G.M. is Said to Agree to Sell Stakes to China Partner, New York Times (Dec. 3, 2009) 

(online at www.nytimes.com/2009/12/04/business/global/04gm.html?hp). What are the metrics for determining 

whether or not Chrysler and GM are “successful,” and will the Administration continue to provide assistance until 

this is attained? 

487 In the bankruptcy proceedings for Chrysler and GM, (i) “Old Chrysler” sold substantially all of its assets 

to “New Chrysler” and (ii) “Old GM” sold substantially all of its assets to “New GM,” each pursuant to Section 363 

of the United States Bankruptcy Code. For purposes of simplicity, I generally refer to these entities as “Chrysler” or 

“GM,” but occasionally employ other terms as appropriate. 
141

the American taxpayers have endured during the past two years one wonders why Chrysler and 

GM merited such generosity to the exclusion of other taxpayers. Why, indeed, did the United 

States government choose to reward two companies that have been arguably mismanaged for 

many years at the expense of other hard working taxpayers? More poetically, The New York 

Times on July 25 asked: “Why, after all, should the automakers receive the equivalent of a 

Technicolor dreamcoat, giving them favorite-son status, when other industries, like airlines and 

retailers, also have suffered from the national recession?” More bluntly, the September 2009 

issue of The Atlantic simply cut to the bottom line: “Essentially, the government was engineering 

a transfer of wealth from TARP bank shareholders to auto workers, and pressuring other 

creditors to go along.”488

Given the unorthodox reordering of the rights of the Chrysler and GM creditors, a 

fundamental question arises as to whether the Administration directed that TARP funds be used 

to advance its economic, social and political objectives rather than to stabilize the American 

economy as required by EESA. It has long been my view that the United States government 

should not engage in the business of picking winners and losers and certainly should not allocate 

its limited resources to favor one group of taxpayers over another. Following the Chrysler and 

GM bankruptcies one has to question what’s next in the Administration’s playbook – a bailout of 

the airline industry and its unionized workforce? What about Starbucks? 

 The Chrysler and GM reorganizations represent a sad day for the rule 

of law, the sanctity of commercial law principles and contractual rights, long term economic 

growth, and the ideal that the United States government should not pick winners and losers. 

2. Transfer of TARP Proceeds and Retirement Saving of Indiana School Teachers 

and Police Officers to the UAW and the VEBAs

On a “before” v. “after” basis the Chrysler and GM bankruptcy cases make little legal or 

economic sense.489 How is it possible that the Chrysler and GM VEBAs490

 488 William D. Cohan, The Final Days of Merrill Lynch, The Atlantic (Sept. 2009) (online at 

www.theatlantic.com/doc/200909/bank-of-america).

– unsecured creditors

489 The Chrysler and GM bankruptcy rearranged the rights of the creditors and equity holders as follows:

Chrysler. Pursuant to the Chrysler bankruptcy, the equity of New Chrysler was allocated as follows:

(i) United States government (9.846 percent initially, but may decrease to 8 percent),

(ii) Canadian government (2.462 percent initially, but may decrease to 2 percent),

(ii) Fiat (20 percent initially, but may increase to 35 percent), and 

(iii) UAW (comprising current employee contracts and a VEBA for retired employees) (67.692 percent, but 

may decrease to 55 percent).

The adjustments noted above permit Fiat to increase its ownership interest from 20 percent to 35 percent by 

achieving specific performance goals relating to technology, ecology and distribution designed to promote improved 

fuel efficiency, revenue growth from foreign sales and US based production.

Some, but not all, of the claims of the senior secured creditors were of a higher bankruptcy priority than the 

claims of the UAW/VEBA.
142

– received a greater allocation of proceeds than the Chrysler senior secured creditors or the GM 

bondholders? In other words, why did the United States government spend tens of billions of 

dollars of taxpayer money to bailout employees and retirees of the UAW to the detriment of 

other non-UAW employees and retirees – such as retired school teachers and police officers from 

the State of Indiana491 – whose pension funds invested in Chrysler and GM indebtedness?492

 

The Chrysler senior secured creditors received 29 cents on the dollar ($2 billion cash for $6.9 billion of 

indebtedness).

The UAW/VEBA, an unsecured creditor, received (x) 43 cents on the dollar ($4.5 billion note from New 

Chrysler for $10.5 billion of claims) and (y) a 67.692 percent (which may decrease to 55 percent) equity ownership 

interest in New Chrysler.

GM. Pursuant to the GM bankruptcy, the equity of New GM was allocated as follows:

(i) United States government (60.8 percent), 

(ii) Canadian government (11.7 percent), 

(iii) UAW (comprising current employee contracts and a VEBA for retired employees) (17.5 percent), and 

(iv) GM bondholders (10 percent).

The bankruptcy claims of the UAW/VEBA and the GM bondholders were of the same bankruptcy priority. 

The equity interest of the UAW/VEBA and the GM bondholders in New GM may increase (with an 

offsetting reduction in each government’s equity share) to up to 20 percent and 25 percent, respectively, upon the 

satisfaction of specific conditions. It is important to note, however, the warrants received by the UAW/VEBA and 

the GM bondholders are out of the money and it’s possible they will not be exercised. As such, it seems likely that 

the UAW/VEBA and the GM bondholders will hold 17.5 percent and 10 percent, respectively, of the equity of New 

GM. 

The GM bondholders exchanged $27 billion in unsecured indebtedness for a 10 percent (which may 

increase to 25 percent) common equity interest in New GM, while the UAW/VEBA exchanged $20 billion in claims 

for a 17.5 percent (which may increase to 20 percent) common equity interest in New GM and $9 billion in 

preferred stock and notes in New GM. 

490 The Chrysler and GM VEBAs (voluntary employee benefit associations) administer and fund the health 

and retirement plans of Chrysler and GM retirees.

491 The Chrysler senior secured debt and the GM bonds were held by pension funds (for the benefit of 

retirees such as the Indiana school teachers and police officers), individuals (including the retirees who have 

contacted my office to ask why they lost their savings but UAW employees benefited) as well as different types of 

business entities. 

492 If you trace the funds, TARP money was employed by New Chrysler and New GM to purchase assets of 

the old auto makers, yet a substantial portion of the equity in the new entities was transferred to the VEBAs and, 

thus, not retained for the benefit of the American taxpayers (who funded the TARP) or shared with other creditors of 

Old Chrysler and Old GM. Accordingly, it’s hardly a stretch to conclude that TARP funds were transferred to the 

UAW and the VEBAs after being funneled through New Chrysler and New GM. In addition, New Chrysler and 

New GM entered into promissory notes and other contractual arrangements for the benefit of the VEBAs, but not for 

the benefit of the other creditors of Old Chrysler and Old GM. Why did the United States government—the 

controlling shareholder of New Chrysler and New GM – direct New Chrysler and New GM to make an exclusive 

gift of taxpayer funds to the VEBAs? Why didn’t New Chrysler and New GM transfer more of their equity interests 

to the creditors of Old Chrysler and Old GM? Why were Indiana school teachers and police officers and other 

investors in the Chrysler senior secured indebtedness and the GM bonds in effect forced by the Administration to 

transfer a portion of their claims against Chrysler and GM, respectively, to the UAW and the VEBAs? That is, why 

did the Administration orchestrate two bankruptcy plans whereby one group of employees and retirees was preferred 

to another?
143

What message do the Chrysler and GM holdings send to non-UAW employees whose 

pension funds invested in Chrysler and GM indebtedness – you lose part of your retirement 

savings because your pension fund does not have the special political relationships of the UAW? 

What message do the Chrysler and GM bankruptcies send to the financial markets – contractual 

rights of investors may be ignored when dealing with the United States government?

In written testimony submitted to the Panel, Barry E. Adler, professor of law and 

business at New York University, noted:

There are at least two negative consequences from the disregard of creditor rights. 

First, at the time of the deviation from contractual entitlement, there is an 

inequitable distribution of assets. Take the Chrysler case itself, where the 

approved transaction well-treated the retirement funds of the UAW. If such 

treatment deprived the secured creditors of their due, one might well wonder why 

the UAW funds should be favored over other retirement funds, those that invested 

in Chrysler secured bonds. Second, and at least as importantly, when the 

bankruptcy process deprives a creditor of its promised return, the prospect of a 

debtor’s failure looms larger in the eyes of future lenders to future firms. As a 

result, given the holding in Chrysler, and the essentially identical holding in the 

General Motors case, discussed next, one might expect future firms to face a 

higher cost of capital, thus dampening economic development at a time when the 

country can least well afford impediments to growth.493

In an article analyzing the Chrysler and GM bankruptcies, Mark J. Roe and David A. 

Skeel, professors of law at Harvard University and the University of Pennsylvania, respectively, 

noted: 

Warren Buffett worried in the midst of the reorganization that there would be “a 

whole lot of consequences” if the government’s Chrysler plan emerged as 

planned, which it did. If priorities are tossed aside, as he implied they were, 

“that’s going to disrupt lending practices in the future.” “If we want to encourage 

lending in this country,” Buffett added, “we don’t want to say to somebody who 

lends and gets a secured position that the secured position doesn’t mean 

anything.494

In an op-ed in The Wall Street Journal, Todd J. Zywicki, professor of law at George 

Mason University, noted:

 493 Congressional Oversight Panel, Written Testimony of Barry E. Adler, Field Hearing on the Auto 

Industry (July 27, 2009) (online at cop.senate.gov/documents/testimony-072709-adler.pdf). 

494 Mark Roe and David Skeel, Assessing the Chrysler Bankruptcy (Aug. 12, 2009) (online 

atssrn.com/abstract=1426530).
144

By stepping over the bright line between the rule of law and the arbitrary behavior 

of men, President Obama may have created a thousand new failing businesses.

That is, businesses that might have received financing before but that now will 

not, since lenders face the potential of future government confiscation. In other 

words, Mr. Obama may have helped save the jobs of thousands of union workers 

whose dues, in part, engineered his election. But what about the untold number of 

job losses in the future caused by trampling the sanctity of contracts today?495

In the September 2009 issue of The Atlantic, William D. Cohan notes:

“The rules as to how the government will act are not what we learned,” explained 

Gary Parr, the deputy chairman of Lazard and one of the leading mergers-andacquisitions advisers to financial institutions. “In the last 12 months, new 

precedents have been set weekly. The old rules often don’t apply as much 

anymore.” He said the recent examples of the government’s aggression are ‘a 

really big deal,” but adds, “I am not sure it is going to last a long time. I sure hope 

not. I can’t imagine the markets will function properly if you are always 

wondering if the government is going to step in and change the game.”496

Richard A. Epstein, the James Parker Hall Distinguished Service Professor of Law, The 

University of Chicago, the Peter and Kirsten Bedford Senior Fellow, The Hoover Institution, and 

a visiting law professor at New York University Law School, offered the following analysis in 

the May 12, 2009 issue of Forbes: 

The proposed bankruptcy of the now defunct Chrysler Corp. is the culmination of 

serious policy missteps by the Bush and Obama administrations. To be sure, the 

long overdue Chrysler bankruptcy is a welcomed turn of events. But the heavyhanded meddling of the Obama administration that forced secured creditors to the 

brink is not.

A sound bankruptcy proceeding should do two things: productively redeploy the 

assets of the bankrupt firm and correctly prioritize various claims against the 

bankrupt entity. The Chrysler bankruptcy fails on both counts.

...

In a just world, that ignominious fate would await the flawed Chrysler 

reorganization, which violates these well-established norms, given the nonstop 

 495 Todd Zywicki, Chrysler and the Rule of Law, Wall Street Journal (May 13, 2009) (online at 

online.wsj.com/article/SB124217356836613091.html).

496 William D. Cohan, The Final Days of Merrill Lynch, The Atlantic (Sept. 2009) (online at 

www.theatlantic.com/doc/200909/bank-of-america).
145

political interference of the Obama administration, which put its muscle behind 

the beleaguered United Auto Workers. Its onerous collective bargaining 

agreements are off-limits to the reorganization provisions, thereby preserving the 

current labor rigidities in a down market.

Equally bad, the established priorities of creditor claims outside bankruptcy have 

been cast aside in this bankruptcy case as the unsecured claims of the union health 

pension plan have received a better deal than the secured claims of various bond 

holders, some of which may represent pension plans of their own.

President Obama – no bankruptcy lawyer – twisted the arms of the banks that 

have received TARP money to waive their priority, which is yet another reason 

why a government ownership position in banks is incompatible with its regulatory 

role. Yet the president brands the non-TARP lenders that have banded together to 

fight this bogus reorganization as “holdouts” and “speculators.”

Both charges are misinformed at best. A holdout situation arises when one party 

seeks to get a disproportionate return on the sale of an asset for which it has little 

value in use. Thus the owner of a small plot of land could hold out for a fortune if 

his land is the last piece needed to assemble a large parcel of land. But the entire 

structure of bankruptcy eliminates the holdout position of all creditors, secured 

and unsecured alike, by allowing the court to “cram” the reorganization down 

their throats so long as it preserves the appropriate priorities among creditors and 

offers the secured creditors a stake in the reorganized business equal to the value 

of their claims. Ironically, Obama's Orwellian interventions have allowed 

unsecured union creditors to hold out for more than they are entitled to. 

His charge of “speculation” is every bit as fatuous. Speculators (who often 

perform a useful economic function) buy high-risk assets at low prices in the hope 

that the market will turn in their favor. By injecting unneeded uncertainty into the 

picture, Obama has created the need for a secondary market in which nervous 

secured creditors, facing demotion, sell out to speculators who are better able to 

handle that newly created sovereign risk. He calls on citizens to buy Chrysler 

products, but patriotic Americans will choose to go to Ford, whose own self-help 

efforts have been hurt by the Chrysler and GM bailouts.

Sadly, long ago Chrysler and GM should have been allowed to bleed to death 

under ordinary bankruptcy rules, without government subsidy or penalty.
146

Libertarians have often remarked on these twin dangers in isolation. The Chrysler 

fiasco confirms their deadly synergistic effect.497

In his testimony before the Judiciary Committee of the United States House of 

Representatives, Andrew M. Grossman, senior legal policy analyst, The Heritage Foundation, 

stated:

Also detrimental to General Motors and Chrysler is the difficulty that they will 

have accessing capital and debt markets. Lenders know how to deal with 

bankruptcy – it’s a well understood risk of doing business. But the tough 

measures employed by the Obama Administration to cram down debt on behalf of 

the automakers were unprecedented and will naturally make lenders reluctant to 

do business with these companies, for fear they could suffer the same fate. Even 

secured and senior creditors, those who forgo higher interest rates to protect 

themselves against risks, suffered large, unexpected losses. So nothing that either 

company can offer, no special status or security measure, can fully assuage 

lenders’ fears that, in an economic downturn, they could be forced to accept far 

less than the true value of their holdings. At best, if General Motors and Chrysler 

have access to debt markets at all, they will have to pay dearly for the privilege. 

At worst, even high rates and tough covenants will not be enough to attract 

interest.

...

The Obama Administration’s transparent favoritism toward its political supporters 

in the United Auto Workers Union may lead other unions to demand the same: 

hefty payouts and ownership stakes in exchange for halfhearted concessions. 

Lenders know now that the Administration is unable to resist such entreaties. As 

one hedge fund manager observed, “The obvious [lesson] is: Don't lend to a 

company with big legacy liabilities, or demand a much higher rate of interest 

because you may be leapfrogged in bankruptcy.”

Perhaps the most affected will be faltering corporations and those undergoing 

reorganization – that is, the enterprises with the greatest need for capital. Lending 

money to a nearly insolvent company is risky enough, but that risk is magnified 

when bankruptcy ceases to recognize priorities or recognize valid liens. With 

private capital unavailable, larger corporations in dire straits will turn to the 

government for aid – more bailouts – or collapse due to undercapitalization, at an 

enormous cost to the economy.

 497 Richard Epstein, The Deadly Sins Of The Chrysler Bankruptcy, Forbes (May 12, 2009) (online at 

www.forbes.com/2009/05/11/chrysler-bankruptcy-mortgage-opinions-columnists-epstein.html).
147

...

Financial institutions – enterprises that the federal government has already spent 

billions to strengthen – will also be affected. Many hold debt in domestic 

corporations that could be subject to government rescue, rendering their 

obligations uncertain. It is that uncertainty which transforms loans into 

impossible-to-value toxic assets and blows holes in balance sheets across the 

economy.

Finally, there are the investors, from pension funds and school endowments to 

families building nest eggs for their future. General Motors bonds, like the debt 

of other long-lived corporations, has been long regarded as a refuge from the 

turmoil of equity markets. The once-safe investment held directly by millions of 

individuals and indirectly, through funds and pensions, by far more, are now at 

risk, which will be reflected in those assets' values.498

3. The Use of TARP Funds in the Chrysler and GM Bankruptcies

Section 101(a)(1) of the EESA states that:

The Secretary [of the Treasury] is authorized to...purchase, and to make and fund 

commitments to purchase, troubled assets from any financial institution, on such 

terms and conditions as are determined by the Secretary, and in accordance with 

this Act and the policies and procedures development and published by the 

Secretary. (emphasis added).

A plain reading of the statue would necessarily preclude the employment of TARP funds 

for the benefit of the auto industry because, among other reasons, neither Chrysler nor GM 

qualifies as a “financial institution.” If Chrysler and GM are somehow deemed to qualify as 

“financial institutions,” then what business enterprise will fail to so qualify? If Congress had 

intended for the TARP to cover all business enterprises it would not have incorporated such a 

restrictive term as “financial institution” into EESA.

Further, a funding bill specifically aimed at assisting the auto industry was not approved 

by Congress. Nevertheless, the Bush Administration extended credit to Chrysler and GM and 

the Obama Administration orchestrated the Chrysler and GM bankruptcies which resulted in an 

investment of over $81 billion in the auto industry. 

 498 Andrew M. Grossman, Bailouts, Abusive Bankruptcies, And the Rule of Law, Testimony before the 

Judiciary Committee of the United States House of Representatives (May 21, 2009) (online at 

www.heritage.org/Research/Economy/tst052209a.cfm).
148

Since the authority for such an investment remains unclear, I requested that the 

Administration provide the Panel with a formal written legal opinion justifying:

499

(i) the use of TARP funds to support Chrysler and GM prior to their bankruptcies;

(ii) the use of TARP funds in the Chrysler and GM bankruptcies; 

(ii) the transfer of equity interests in New Chrysler and New GM to the 

UAW/VEBAs; and 

(iii) the delivery of notes and other credit support by New Chrysler and New GM 

for the benefit of the UAW/VEBAs.

500

 499 In a written response to the Panel the Administration stated:

The Treasury described the authority to use TARP funds to finance the old Chrysler and GM in 

bankruptcy court filings made on its behalf by the Department of Justice, specifically in the 

Statement of the United States of America Upon The Commencement of General Motors 

Corporation’s Chapter 11 Case filed June 10, 2009, a copy of which has been provided to the 

Congressional Oversight Panel. In Judge Gerber’s final sale order in the GM bankruptcy case 

dated July 5, 2009, also provided to the Congressional Oversight Panel, he wrote: 

The U.S. Treasury and Export Development Canada (“EDC”), on behalf of the 

Governments of Canada and Ontario, have extended credit to, and acquired a security 

interest in, the assets of the Debtors as set forth in the DIP Facility and as authorized by 

the interim and final orders approving the DIP Facility (Docket Nos. 292 and 2529, 

respectively). Before entering into the DIP Facility and the Loan and Security 

Agreement, dated as of December 31, 2008 (the “Existing UST Loan Agreement”), the 

Secretary of the Treasury, in consultation with the Chairman of the Board of Governors 

of the Federal Reserve System and as communicated to the appropriate committees of 

Congress, found that the extension of credit to the Debtors is “necessary to promote 

financial market stability,” and is a valid use of funds pursuant to the statutory authority 

granted to the Secretary of the Treasury under the Emergency Economic Stabilization Act 

of 2008, 12 U.S.C. §§ 5201 et seq. (“EESA”). The U.S. Treasury’s extension of credit to, 

and resulting security interest in, the Debtors, as set forth in the DIP Facility and the 

Existing UST Loan Agreement and as authorized in the interim and final orders 

approving the DIP Facility, is a valid use of funds pursuant to EESA.

The rationale and determination of the ability to use TARP funds applies equally to the financing 

provided to the new Chrysler. There was no new financing provided to New GM. Instead, cash 

flowed from old GM to new GM as part of the asset sale, and new GM assumed a portion of the 

loan that Treasury had made to old GM.

The interests received by other stakeholders of Chrysler and GM including the UAW/VEBAs 

were a result of negotiations between all stakeholders as described in detail by myself and Harry 

Wilson in our depositions in the bankruptcy cases, transcripts of which have been provided to the

Congressional Oversight Panel.

I find the response unhelpful and ask the Administration to provide a formal written legal opinion supporting its 

position. Since Congress specifically rejected the bailout of Chrysler and GM, under what theory and precedent did 

the Executive unilaterally invest $81 billion in these non-financial institutions?

500 The promissory notes issued to the UAW/VEBAs are senior to the equity issued to the United States 

government. Since the government controlled New Chrysler and New GM at the time the notes were issued, it’s 

apparent that the government agreed to subordinate the TARP claims held by the American taxpayers to the claims 
149

Such opinions have not been delivered.

4. Analysis of the Chrysler and GM Cases by Bankruptcy Scholars and Pressure 

on TARP Recipients

A number of bankruptcy academics at top-tier law schools have questioned the holdings 

in the Chrysler and GM bankruptcies. In the Chrysler and GM proceedings, Section 363 of the 

United States bankruptcy code was used by the Administration to upset well established 

commercial law principles and the contractual expectations of the parties. As Professors Adler, 

Roe and Skeel note, the Chrysler and GM bankruptcy courts required each Section 363 bidder to 

assume certain obligations of the UAW/VEBAs as part of its bid. This means that potential 

purchasers could not simply acquire the assets free and clear of the liabilities of the seller, but, 

instead, were also required to assume certain of those liabilities. This requirement most likely

chilled the bidding process and precluded the determination of the true fair market value of the 

assets held by Chrysler and GM. By disrupting the bidding process it’s entirely possible that 

TARP proceeds were misallocated away from the Chrysler senior secured creditors and the GM 

bondholders to the UAW/VEBAs.501

 

held by the UAW/VEBAs. What was the purpose of the subordination except perhaps to prefer the claims of a 

favored class over the claims of the taxpayers who funded the TARP? 

 Although I do not concur that EESA authorized the use of 

501 A summary of the analysis of Professors Adler, Roe and Skeel as well as a set of examples are included 

in Appendix A to my Dissenting Views to the Panel’s September Auto Report. Representative Jeb Hensarling, 

Additional Views to Congressional Oversight Panel, September Oversight Report: The Use of TARP Funds in the 

Support and Reorganization of the Domestic Automotive Industry (Sept. 9, 2009) (online at 

cop.senate.gov/documents/cop-090909-report-additionalviews.pdf). 

The following example illustrates how the Administration used Section 363 of the bankruptcy code to 

achieve its economic, social and political objectives at the expense of the American taxpayers and the Chrysler 

senior secured creditors and GM bondholders.

Assume Oldco (i.e., Old Chrysler or Old GM) has (i) assets with a fair market value (FMV) of 

$70, (ii) secured debt (with liens on $40 FMV of assets) in an outstanding principal amount of $90 

held by Creditor 1, and (iii) unsecured debt in an outstanding principal amount of $50 held by 

Creditor 2. Creditor 1 in effect holds two claims, a $40 secured claim (equal to the FMV of the 

assets securing Creditor 1’s claim) and a $50 unsecured claim (which together equal Creditor 1’s 

total claim of $90); and Creditor 2 holds a $50 unsecured claim. Any distribution on the 

unsecured claims should be shared 50/50 percent (because each creditor holds a $50 unsecured 

claim) under the “no unfair discrimination” rule of Chapter 11.

If, in a Section 363 sale, Newco (i.e., New Chrysler or New GM) purchased the Oldco assets (with 

no assumption of Oldco liabilities) for $70 FMV, then the $70 cash proceeds would be distributed 

as follows: Creditor 1 would receive $55 ($40 secured position, plus $15 unsecured position), and 

Creditor 2 would receive $15.

Conversely, if in the Section 363 sale the bankruptcy court required Newco to assume Creditor 2’s 

debt of $50, then Newco would only pay $20 cash for the Oldco assets ($70 FMV of assets, less 

$50 required assumption of Creditor 2’s debt). In such event, Creditor 1 would only receive $20 

(representing 100 percent of the cash sales proceeds from the Section 363 sale, but leaving a 

shortfall of $70 ($90, less $20)). Creditor 2 would receive no proceeds from the Section 363 sale, 

but would quite possibly receive $50 in the future from Newco (the amount of Creditor 2’s debt 

assumed by Newco).
150

TARP proceeds in the Chrysler and GM bailouts, it’s nevertheless important to follow the TARP 

funds once they were committed.

The technical bankruptcy laws issues are exacerbated because the winning purchaser in 

the Chrysler and GM cases – entities directly or indirectly controlled by the United States 

government – had virtually unlimited resources, which is certainly not the case in typical private 

equity transactions. The matter becomes particularly muddled when you consider that a majority 

in interest of the Chrysler senior secured debt was held by TARP recipients at a time when there 

was much talk in the press about “nationalizing” some or all of these institutions. It is not 

difficult to imagine that these recipients felt direct pressure to “get with the program” and 

support the Administration’s proposal.502

 

Thus, without the required assumption of the $50 claim by Newco, Creditor 1 (the senior creditor) 

would receive $55 and Creditor 2 (the junior creditor) would receive $15. This result is consistent 

with commercial law principles and the contractual expectations of the parties. With the required 

assumption, however, Creditor 1 would only receive $20 and Creditor 2 would receive $50. The 

required assumption results in a shift of $35 from Creditor 1 to Creditor 2, a result that is not 

consistent with commercial law principles, the contractual expectations of the parties and the 

Chapter 11 reorganization rules.

502 TARP recipients who were also Chrysler senior secured creditors included Citigroup, JP Morgan Chase, 

Morgan Stanley and Goldman Sachs.

Michael J. de la Merced, Dissident Chrysler Group to Disband, New York Times (May 8, 2009) (online at 

dealbook.blogs.nytimes.com/2009/05/08/oppenheimer-withdraws-from-dissident-chryslergroup/?scp=1&sq=TARP%20lender%20Chrysler%20pressure&st=cse). The article provides:

“After a great deal of soul-searching and quite frankly agony, Chrysler’s non-TARP lenders 

concluded they just don’t have the critical mass to withstand the enormous pressure and 

machinery of the US government,” Thomas E. Lauria, a partner of Mr. Kurtz’s and the lead lawyer 

for the group. “As a result, they have collectively withdrawn their participation in the court case.”

With the group’s disbanding, a little over a week since it made itself public, a vocal obstacle to 

Chrysler’s reorganization has subsided. The committee’s membership has shrunken by the day as 

it faced public criticism from President Obama and others. That continued withdrawal of firms led 

Oppenheimer and Stairway to conclude that they could not succeed in opposing the Chrysler 

reorganization plan in court, the two firms said in separate statements.

In its first public statement last week, the ad hoc committee said that it consisted of about 20 firms 

holding $1 billion in secured debt. But hours after Mr. Obama criticized the firms as 

“speculators,” the group lost its first major member, Perella Weinberg Partners, which changed its 

mind and signed onto the Chrysler plan.

In the September 2009 issue, The Atlantic reported: 

As the crisis has receded this year, the government has remained aggressive, seeking business 

outcomes it finds desirable with some apparent indifference to contractual rights. In Chrysler’s 

bankruptcy negotiations in April, for example, Treasury’s plan offered the automaker’s seniordebt holders 29 cents on the dollar. Some debt holders, including the hedge fund Xerion Capital 

Partners, believed they were contractually entitled to a much better deal as senior creditors holding 

secured debt. But four TARP banks – JPMorgan Chase, Citigroup, Morgan Stanley, and Goldman 

Sachs – which owned about 70 percent of the Chrysler senior debt at par (100 cents on the dollar), 

had agreed to the 29-cent deal. By getting these banks and the other senior-debt holders to accept 

the 29-cent deal and give up their rights to push for the higher potential payout they were entitled 
151

Based upon the analysis of Professors Adler, Roe and Skeel, the bankruptcy courts

should have called a time-out and changed the bidding procedure (i.e., no assumption of 

liabilities required), extended the time to submit a bid503

 

to, the government could give Chrysler’s workers, whose contracts were general unsecured claims

– and therefore junior to the banks’ – a payout far more generous than would otherwise have been 

possible or likely. Essentially, the government was engineering a transfer of wealth from TARP 

bank shareholders to auto workers, and pressuring other creditors to go along.

and applied the protections afforded 

under the Chapter 11 reorganization rules. With those changes the judicial holdings would have 

most likely appeared fair and reasonable and could have served as a model for highpressure bankruptcies that followed. Without such changes, however, the process was inherently 

...

A somewhat similar story played out during GM’s bankruptcy – the government again put 

together a deal that looked to many like a gift to the United Auto Workers at the expense of 

bondholders, who were pressed hard to quickly take a deal that would leave them with 10 percent 

of the equity of the reorganized company (plus some out-of-the-money warrants) when they likely 

would have been able to negotiate for more in a less well-orchestrated bankruptcy proceeding.” 

(emphasis added.)

William D. Cohan, The Final Days of Merrill Lynch, The Atlantic (Sept. 2009) (online at 

www.theatlantic.com/doc/200909/bank-of-america).

In the Panel’s September Report I requested that SIGTARP investigate this matter. 

503 Mr. Richard E. Mourdock, the Indiana State Treasurer, whose pension funds invested in Chrysler senior 

secured indebtedness, provided the following testimony to the Panel: 

The principal restriction was imposed by the time requirement that mandated the bankruptcy be 

completed by June 15, 2009. Throughout the bankruptcy process, the government maintained if 

the deal was not completed by that date that Fiat would walk away from its “purchase” of 20% of 

the Chrysler assets. From the beginning, the June 15 date was a myth generated by the federal 

government. Fiat was being given the assets at no cost at a minimum value of $400,000,000. 

Why would Fiat establish or negotiate such a date when they were to receive such a bonanza? On 

the very day that the Chrysler assets were transferred to Fiat, the company’s chairman stated to the 

media that the June 15th date never originated from them. The artificial date drove the process in 

preventing creditors from having any opportunity to establish true values, prepare adequate cases, 

and therefore failed to protect their rights to the fullest provisions of the law. The artificial date 

also forced the courts to act with less than complete information.

The U.S. [Second Circuit] Court of Appeals in its written opinion of August 9, 2009, denied our 

pensioners standing pursuant to the argument that we could not prove, under any other bankruptcy 

plan, we could have received more than the $0.29 we were offered. We believe this was an error 

because the court used a liquidation value for the company rather than an ‘on-going concern’ 

basis. We received written notice from the U.S. Bankruptcy Court of New York by certified letter 

of our rights to file a claim on Monday, May 18, 2009, at 10:00 a.m. We were advised in the letter 

that any evidence we wished to submit to make a claim against the submitted plan, (in part, the 

$0.29), would have to include trade tickets, depositions, affidavits, documents of evidence to 

substantiate claims, and etc. and would have to be filed with the bankruptcy court on Tuesday, 

May 19, 2009, by 4:00p.m. The bankruptcy of Chrysler was frequently referred to as “the most 

complex bankruptcy in American history,” and yet we were given thirty hours to respond. We feel 

this was clearly an error in the process that helped to reduce the wealth of our beneficiaries.

Congressional Oversight Panel, Field Hearing on the Auto Industry, at 154 (July 27, 2009) (online at 

cop.senate.gov/documents/transcript-072709-detroithearing.pdf).
152

flawed because we will never know if another bidder would have paid more for the gross assets 

(without the assumption of any liabilities) of Chrysler or GM.504

E. TARP and Foreclosure Mitigation

 As intentionally structured by 

the Administration, the bidding procedures ultimately adopted for the Section 363 sales 

necessarily precluded the determination of the true fair market value of the assets held by 

Chrysler and GM. Without such determination, the appropriateness of the price paid for the 

assets of Old Chrysler and Old GM as well as the appropriateness of the distribution made by 

Old Chrysler and Old GM to the Chrysler senior secured creditors and GM bondholders will 

remain in doubt. 

505

Much like the auto industry interventions, HAMP and the Administration’s other 

foreclosure mitigation efforts to date have been a failure.506 The Administration’s opaque 

foreclosure mitigation efforts have assisted only a small number of homeowners while drawing 

billions of involuntary taxpayer dollars into a black hole.507

1. 100 Percent Loss to the Taxpayers from the Administration’s Foreclosure 

Mitigation Efforts

While the CBO estimates that taxpayers will lose 100 percent of the $50 billion in TARP 

funds committed to the Administration’s foreclosure relief programs, the Administration appears 

 504 It is also important to note that for these purposes it’s irrelevant if certain Chrysler or GM creditors 

happened to have purchased their securities at a cheap price. The substantive legal issue concerns whether their 

contractual rights were honored. Courts should not abrogate well established commercial law principles and 

contractual expectations simply because an investor has earned a “reasonable return” on its investment. That’s not 

the rule of law, but the law of political expediency.

505 In this section I borrow extensively from my dissent to the Panel’s October report on foreclosure 

mitigation. Representative Jeb Hensarling, Congressional Oversight Panel, October Oversight Report: An 

Assessment of Foreclosure Mitigation Efforts After Six Months (Oct. 9, 2009) (online at 

cop.senate.gov/documents/cop-100909-report-hensarling.pdf).

506 Taxpayer protection is a guiding principle of EESA interwoven throughout the legislation, including for 

foreclosure mitigation efforts. EESA gives the Panel a clear duty to provide information on foreclosure mitigation 

programs, but with the following caveat. Reports must include:

The effectiveness of foreclosure mitigation efforts and the effectiveness of the program from the 

standpoint of minimizing long-term costs to the taxpayers and maximizing the benefits for 

taxpayers.

12 U.S.C. § 5223(b)(1)(A)(iv).

507 Housing GSEs – Government Sponsored Enterprises – Fannie Mae and Freddie Mac play key roles in 

the Administration’s new housing policies. Funds from the Preferred Share Purchase Agreements, which allow the 

GSEs to draw up to $400 billion from Treasury, are being deployed for foreclosure mitigation and refinancing 

efforts. Since Fannie Mae and Freddie Mac are now under the conservatorship of the Federal Housing Finance 

Agency (FHFA), their concerns are now officially the taxpayer’s concerns – any losses they experience through 

MHA should be a carefully considered part of a cost-benefit analysis.

Fannie Mae and Freddie Mac should be more forthcoming with respect to their foreclosure mitigation 

efforts and use of taxpayer funds. 
153

inclined to commit additional taxpayer funds in hopes of helping distressed homeowners – both 

deserving and undeserving – with a taxpayer subsidized rescue.508

 While there may be some positive signals in our economy, recovery remains in a 

precarious position. The unemployment rate hovers around 10 percent and the broader definition 

of unemployment exceeds 17 percent. This is unfortunate because the best foreclosure 

mitigation program is a job, and the best assurance of job security is economic growth and the 

adoption of public policy that encourages and rewards capital formation and entrepreneurial 

success. Without a robust macroeconomic recovery the housing market will continue to languish 

and any policy that forestalls such recovery will by necessity lead to more foreclosures.

To date, despite the commitment of some $27 billion,509 only a modest number of 

underwater homeowners have received a permanent modification of their mortgage.510

 508 Dealbook, Treasury Pushes Mortgage Firms for Loan relief, New York Times (Nov. 30, 2009) (online 

at dealbook.blogs.nytimes.com/2009/11/30/treasury-presses-banks-for-mortgagerelief/?scp=1&sq=Treasury%20Goodman%20November%2030&st=cse):

 If the 

Administration’s goal of subsidizing up to 9 million home mortgage refinancings and 

modifications is met, the cost to the taxpayers will possibly exceed the $75 billion already 

The Obama administration said Monday that it would increase the pressure on banks to help 

troubled homeowners permanently lower mortgage payments...

...

Monday’s push was the latest evidence that a $75 billion taxpayer-financed effort aimed at

stemming foreclosures was struggling. Even as lenders have accelerated the pace at which they 

are reducing mortgage payments for borrowers, most loans modified remain in a trial stage lasting 

up to five months, and only a fraction have been made permanent.

In its statement on Monday, the Treasury Department said that more than 650,000 borrowers have 

received trial modifications under the program, called Making Home Affordable, and that about 

375,000 borrowers were scheduled to convert to permanent modifications by the end of the year.

That would represent a sharp turnaround – last month, an oversight panel created by Congress 

reported that fewer than 2,000 of the 500,000 loan modifications then in progress had become 

permanent.

Jim Kuhnhenn, Strong Banks, Weak Credit: Treasury Rethinks TARP, ABC News (Nov. 24, 2009) (online

at abcnews.go.com/Business/wireStory?id=9161503). Determination of costs is especially important if, as Treasury 

Secretary Geithner has stated, TARP is interpreted to be a “revolving facility.” Given the likelihood that he will 

extend TARP to October 31, 2010, it’s possible that a substantial portion of the $700 billion TARP facility could be 

directed to foreclosure mitigation efforts.

509 Number as defined by the current “Total Cap” for the Home Affordable Modification Program, 

$27,382,460,000. U.S. Department of the Treasury, Transactions Report (Nov. 30, 2009) (online at 

www.financialstability.gov/docs/transaction-reports/11-30-09%20Transactions%20Report%20as%20of%2011-25-

09.pdf).

510 See Section One, C.3. of the Panel’s December report.
154

allocated to the MHA – Making Home Affordable – program,

511

2. Mortgage Holders Profit from Private Sector Foreclosure Mitigation Efforts 

and it is likely that most (if not 

all) of it will be not be recovered. 

Professor Alan M. White, an expert retained by the Panel, notes in a paper attached to the 

Panel’s October Report the effectiveness of non-subsidized voluntary foreclosure mitigation 

when he states:

Nevertheless, there is convincing evidence that successful modifications avoided 

substantial losses, while requiring only very modest curtailment of investor 

income. In fact, the typical voluntary modification in the 2007-2008 period 

involved no cancellation of principal debt, or of past-due interest, but instead 

consisted of combining a capitalization of past-due interest with a temporary 

(three to five year) reduction in the current interest rate. Foreclosures, on the 

other hand, are resulting in losses of 50% or more, i.e. upwards of $124,000 on 

the mean $212,000 mortgage in default.512

Significantly, he also quantifies the overall benefit of voluntary foreclosure mitigation to 

investors by concluding:

The bottom line to the investor is that any time a homeowner can afford the 

reduced payment, with a 60% or better chance of succeeding, the investor’s net 

gain from the modification could average $80,000 per loan or more. Two million 

modifications with a 60% success rate could produce $160 billion in avoided 

losses, an amount that would go directly to the value of the toxic mortgagebacked securities that have frozen credit markets and destabilized banks.

513

 511 The Making Home Affordable program presently consists of the HAMP – Home Affordable 

Modification Program – and the HARP – Home Affordable Refinancing Program.

512 Since these numbers apparently include up to $9,000 of incentive payments it appears that the total cost 

to the taxpayers of all interest rate and principal adjustments is approximately $10,000 per modification, or 

approximately $2,000 per year ($167 per month) for the full five-year HAMP modification period. Perhaps this is 

correct, but I question whether mortgage loans may be successfully modified at such a relatively modest cost to the 

taxpayers under the HAMP. It appears that Professor White did not independently calculate these amounts, but, 

instead, generally relied upon estimates provided by Treasury. It is unclear what methodology Treasury employed 

except, perhaps, to divided the $50 billion of TARP funds initially allocated to HAMP by 2.5 million modifications, 

or $20,000 per mortgage modification. Treasury’s approach, although employed by Professor White, should be 

augmented by the application of a more comprehensive methodology. See generally Alan M. White, Annex B to 

Congressional Oversight Panel, October Oversight Report: An Assessment of Foreclosure Mitigation Efforts After 

Six Months Potential Costs and Benefits of the Home Affordable Modification Program, at 118 (Oct. 9, 2009) 

(online at cop.senate.gov/documents/cop-100909-report.pdf).

513 If this is indeed the case, then why is it not in the best interest of each mortgage holder to modify the 

mortgage loans in its portfolio? Why would a mortgage holder risk breaching its fiduciary duties to its investor 

group by foreclosing on mortgaged property instead of restructuring the underlying loans? Why should the 

taxpayers subsidize the restructuring of mortgage loans – whether through the HAMP or otherwise – if the mortgage 
155

Notwithstanding the complexity injected into the foreclosure mitigation debate by the 

Administration, a solution appears relatively straightforward. If, as Professor White suggests, 

mortgage holders stand to realize a net gain of approximately $80,000 from restructuring each 

mortgage loan instead of foreclosing on the underlying property, the mortgage holders 

themselves should undertake to subsidize the “contracting failure” of their servicers out of such 

gains. I appreciate that mortgage holders may not wish to remit additional fees to their servicers, 

but, between mortgage holders and the taxpayers, why should the taxpayers – through TARP or 

otherwise – bear such burden? Taxpayers should not be required to subsidize mortgage holders 

or servicers when foreclosure mitigation efforts appear to be in their own economic best 

interests. 

The Administration by enticing mortgage holders and servicers with the $75 billion 

HAMP and HARP programs (with a reasonable expectation that additional funds may be 

forthcoming) has arguably caused them to abandon their market oriented response to the atypical 

rate of mortgage defaults in favor of seeking hand-outs from the government.514

 

holders may independent of such subsidy realize a net gain of approximately $80,000 per loan by voluntarily 

restructuring their distressed mortgage loans?

 All of the false 

starts with HAMP and the other government programs may have in effect exacerbated the 

foreclosure mitigation process by keeping private sector servicers and mortgage holders on the 

sidelines waiting on a better deal from the government. By creating a perceived safety net, the 

foreclosure mitigation efforts advocated by the Administration may encourage economically 

Professor White seems to imply that without taxpayer funded subsidies the mortgage servicers would be 

economically disinclined to modify distressed mortgage loans because of unfavorable terms included in typical 

pooling and servicing agreements – the contracts pursuant to which servicers discharge their duties to mortgage 

holders. Professor White writes:

While modification can often result in a better investor return than foreclosure, modification 

requires “high-touch” individualized account work by servicers for which they are not normally 

paid under existing securitization contracts (pooling and servicing agreements or “PSAs”.) 

Servicer payment levels were established by contracts that last the life of the mortgage pools. 

Servicers of subprime mortgages agreed to compensation of 50 basis points, or 0.5% from interest 

payments, plus late fees and other servicing fees collected from borrowers, based on conditions 

that existed prior to the crisis, when defaulted mortgages constituted a small percentage of a 

typical portfolio. At present, many subprime and alt-A pools have delinquencies and defaults in 

excess of 50% of the pool. The incentive payments under HAMP can be thought of as a way to 

correct this past contracting failure.

...

Because mortgage servicers are essentially contractors working for investors who now include the 

GSE’s, the Federal Reserve and the Treasury, we can think of the incentive payments under 

HAMP as extra-contractual compensation for additional work that was not anticipated by the 

parties to the PSAs at the time of the contract. (emphasis added).

Is the purpose of the HAMP to bailout servicers from their “contracting failure” through the payment of 

“extra-contractual compensation”? The taxpayers should not be charged with such a responsibility and I am 

disappointed that the Administration and Professor White would advocate such an approach. 

514 It is difficult to fault mortgage holders and servicers for their rational behavior in accepting bailout 

funds that may enhance the overall return to their investors.
156

inefficient speculation in the residential real estate market with its adverse bubble generating 

consequences.

3. Taxpayer Protection and Shared Appreciation Rights

It is my understanding that the foreclosure mitigation programs announced by Treasury 

do not provide Treasury or the mortgage lenders with the ability to participate in any subsequent 

appreciation in the fair market value of the properties that serve as collateral for the modified or 

refinanced mortgage loans. Since one of Treasury’s fundamental mandates is taxpayer 

protection, the incorporation of a shared appreciation right or equity kicker feature would appear 

appropriate. Homeowners should not receive a windfall at the expense of the taxpayers and 

mortgage lenders who suffered the economic loss from restructuring their distressed mortgage 

loans.

For example, a $100,000, 6 percent home mortgage loan may be modified by reducing 

the principal to $90,000 and the interest rate to 5 percent. If the house securing the mortgage 

loan subsequently appreciates by, say, $25,000, the taxpayers and the mortgage lender who 

shared the cost of the mortgage modification will not benefit from any such increase in value. 

Such result seems inappropriate and particularly unfair to the taxpayers. By modifying the 

mortgage loan and avoiding foreclosure the taxpayers and the mortgage lender have provided a 

distinct and valuable financial benefit to the distressed homeowner that should be recouped to the 

extent of any subsequent appreciation in the value of the house securing the modified mortgage. 

A simple filing in the local real estate records should make the shared appreciation feature selfeffectuating upon the sale or exchange of the applicable residence. In order to ensure the 

integrity of the shared appreciation right, limitations should apply regarding the ability of 

homeowners to obtain home equity loans except when the proceeds of the loans are used to repay 

the taxpayers for the costs incurred with respect to the mortgage modifications.

In addition, as I noted in my dissent to the Panel’s October report on foreclosure 

mitigation,515 it would also seem productive if modified home mortgage loans were treated as 

recourse loans to the homeowners instead of as in effect non-recourse loans under the “antideficiency” laws of many jurisdictions.516

4. Equity and Moral Hazard

 

Regardless of whether one believes foreclosure mitigation can truly work, taxpayers who 

are struggling to pay their own mortgage should not be forced to bail out their neighbors through 

 515 Representative Jeb Hensarling, Congressional Oversight Panel, October Oversight Report: An 

Assessment of Foreclosure Mitigation Efforts After Six Months, at 158-61 (Oct. 9, 2009) (online at 

cop.senate.gov/documents/cop-100909-report-hensarling.pdf).

516 Edward Pinto, Saving More Homes for the Same Money, Wall Street Journal (Dec. 6, 2009) (online at 

online.wsj.com/article/SB10001424052748704342404574577853961145272.html).
157

such an inefficient and transparency-deficient program. The Administration appears to prioritize 

good intentions and wishful thinking over taxpayer protection.

Any foreclosure mitigation effort must appear fair and reasonable to the American 

taxpayers. It is important to remember that the number of individuals in mortgage distress 

reaches beyond individuals who have experienced an adverse “life event” or been the victims of 

fraud. This complicates moral hazard issues associated with large-scale modification programs. 

Distinct from a moral hazard question there is an inherent question of fairness as those who are 

not facing mortgage trouble are asked to subsidize those who are facing trouble. 

In light of current statistics regarding the overall foreclosure rate, an essential public 

policy question that must be asked regarding the effectiveness of any taxpayer-subsidized 

foreclosure mitigation program is: “Is it fair to expect approximately 19 out of every 20 people to 

pay more in taxes to help the 20th person maintain their current residence?” Although that 

question is subject to individual interpretation, there is an ever-increasing body of popular 

sentiment that such a trade-off is indeed not fair.517

Since there is no uniform solution for the problem of foreclosures, a sensible approach 

should encourage multiple private sector mitigation programs that do not amplify taxpayer risk 

or require government mandates. Subsidized loan refinancing and modification programs may 

provide relief for a select group of homeowners, but they work against the majority who shoulder

the tax burden and make mortgage payments on time. Based upon the analysis of Professor 

White, little reason exists for government sponsored programs since it is in the best economic 

interest of the mortgage holders to restructure troubled loans rather than to pursue a foreclosure 

remedy. 

 517 State anti-deficiency laws also create significant moral hazard risks that will be exacerbated if Congress 

passes a cramdown amendment to the bankruptcy code. With these laws in effect, the risk-reward mix underlying 

each mortgage and home equity loan will be bifurcated with lenders assuming substantially all of the risks regarding 

the underlying value of the mortgaged property and homeowners receiving substantially all of the rewards. These 

laws may have the unintended consequence of encouraging homeowners to reject their contractual responsibilities 

and service their mortgage obligations only when it’s in their economic self-interest. Since option contracts are 

inherently more risky to lenders than traditional mortgage contracts, lenders may have little choice but to incorporate 

such risks into the interest rates and fees charged on mortgage loans. The Administration should refrain from 

suggesting that Congress enact legislation that encourages individuals and families to invest in the housing market 

for speculative purposes while permitting them to avoid their contractual obligations upon the occurrence of adverse 

market conditions. 

It is worth noting that the decision of individuals and families to speculate in the housing market, while 

perhaps unwise, is not entirely irrational. While some may contend that the average consumer is too unskilled to 

comprehend seemingly sophisticated financial products, I would argue to the contrary. With anti-deficiency, singleaction and, perhaps, bankruptcy cramdown laws in effect, borrowers will receive the bulk of any equity appreciation 

while lenders will bear substantially all of the risk of loss arising from home mortgage loans. Most consumers are 

rational and react favorably to incentives that reward particular behavior. Providing economic and legal incentives 

that encourage inappropriate speculation in the housing market is unwise and fraught with adverse unintended 

consequences. That a bankruptcy cramdown law could help re-inflate a housing bubble by encouraging reckless 

speculation and cause lenders to raise mortgage interest rates and fees justifies its rejection.
158

F. Secretary Geithner Should Not Extend the TARP but Permit it to End on 

December 31, 2009

In order to end the abuses of EESA as evidenced by the Chrysler and GM bankruptcies, 

misguided foreclosure mitigation programs and the re-animation of reckless behavior and moral 

hazard risks, Secretary Geithner should not extend the TARP but permit it to end on December 

31, 2009. As of today, Treasury has approximately $297.2 billion of TARP authority available 

to fund existing commitments and new programs.518

Further, the TARP should be terminated due to:

 As the EESA statute requires, all recouped 

and remaining TARP funds should go back into the Treasury general fund for debt reduction. 

All revenues and proceeds from TARP investments that have generated a positive return should 

also go to the general fund. Neither the letter nor the spirit of the law allow for TARP funds to 

be used as offsets for future spending programs, such as those currently being considered by the 

Administration and Majority leadership. 

• the desire of the taxpayers for TARP recipients to repay all TARP related investments 

sooner rather than later; 

• the troublesome corporate governance and regulatory conflict of interest issues raised by 

Treasury’s ownership of equity and debt interests in the TARP recipients;

• enhanced implicit guarantee and moral hazard risks;

• an increase in the number and size of “too big to fail” financial institutions;

• the absence of appropriate standards of transparency and accountability in TARP-related 

disclosure by Treasury;

• the stigma associated with continued participation in the TARP by the recipients;519

• the use of the TARP (i) for economic stimulus instead of EESA mandated financial 

stability and (ii) to promote the Administration’s economic, social and political agenda as 

evidenced by, among others, the Chrysler and GM bankruptcies. 

and 

Some of the adverse consequences that have arisen for TARP recipients include, without 

limitation:

 518 See Section One, C.5.b.i. of the Panel’s December report.

519 Dealbook, Bank of America’s TARP Move Helps Shed Stigma, New York Times (Dec. 3, 2009) (online 

at dealbook.blogs.nytimes.com/2009/12/03/move-to-repay-aid-helps-bank-of-america-shedstigma/?scp=2&sq=stigma%20bank%20of%20america&st=cse).
159

• the private sector must now incorporate the concept of “political risk” into its due 

diligence analysis before engaging in any transaction with the United States government;

• corporate governance and conflict of interest issues; and

• the distinct possibility that TARP recipients – including those who have repaid all CPP

advances but have warrants outstanding to Treasury – and other private sector entities 

may be subjected to future adverse rules and regulations.

A recent report issued by SIGTARP provides an insightful analysis of the actual cost of 

the TARP.520

• Assuming that most financing for the TARP comes from short-term Treasury bills, 

Treasury estimates the interest cost for TARP funds spent to be about $2.3 billion, 

although SIGTARP says a blended cost would double this amount and an “all-in” 

estimate would triple or quadruple it.521

• Were the TARP to reach its $699 billion potential, it would mean a $5,000 expenditure 

for each taxpayer.

 

522

• Other costs identified by SIGTARP include (i) higher borrowing costs in the future as a 

result of increased Treasury borrowing levels, (ii) a potential “crowding out effect” on 

prospective private sector borrowers, potentially driving private sector borrowers out of 

the market, (iii) moral hazard, or unnecessary risk-taking in the private sector due to the 

bailout, and (iv) costs incurred by the other financial-rescue-related federal agencies that 

have not yet been quantified.

 The TARP represents five percent of 2008 GDP. 

I introduced legislation – H.R. 2745 – to end the TARP on December 31, 2009. In 

addition, the legislation:

• requires Treasury to accept TARP repayment requests from well capitalized banks;

• requires Treasury to divest its warrants in each TARP recipient following the redemption 

of all outstanding TARP-related preferred shares issued by such recipient and the 

payment of all accrued dividends on such preferred shares;

 520 SIGTARP, Quarterly Report to Congress (Oct. 21, 2009) (online at 

sigtarp.gov/reports/congress/2009/October2009_Quarterly_Report_to_Congress.pdf).

521 A blended cost combines short- and medium-term Treasury securities, while an “all-in” cost balances 

those with longer-term Treasury securities. If TARP is a medium- to longer-term program, either approach would 

seem more sensible than Treasury’s current short-term interest estimate.

522 The $5,000 “cost” per taxpayer assumes 138.4 million taxpayers are covering the full $699 billion.
160

• provides incentives for private banks to repurchase their warrant preferred shares from 

Treasury; and

• reduces spending authority under the TARP for each dollar repaid.
161

D. Paul S. Atkins

Although I concur with the report issued by the Panel today, some aspects of the report 

should be elucidated. The report is careful to come to no outright conclusion regarding the 

TARP. The program is still in operation and distributing money (although at a much diminished 

rate), and we are still much too close to the events of last year to be able to obtain good data in 

order to render a dispassionate analysis. 

The basic question of this month’s report is: Has TARP been a success? The response 

must be that we do not know. Not that the program, together with larger government programs 

instituted by the Federal Reserve and FDIC that dwarfed TARP in terms of taxpayer dollars put 

at risk, did not show some results. Indeed, the Panel report on page 77, points out that the 

federal government had almost $8 trillion of exposure through various programs to try to cure 

the ills of the banking and finance industry, including TARP’s $700 billion. With the injection 

of all of this money into the system, something had to happen. The fact that these programs had 

some effect does not answer the question of whether the resources were used wisely.

More time is needed to judge the short- and long-term ramifications of TARP and the 

other programs. The benefits that some ascribe to TARP only manifested themselves long after 

the program was implemented. Looking at the equity markets, the banks hit bottom in March 

2009, months after the implementation of TARP. The credit markets also took a while to 

recover. Does this length of time between the implementation of TARP and the manifestation of 

supposed benefits indicate that exogenous factors might have come into play? 

A major cause of the turmoil in the financial markets last year was the lack of 

transparency and the resulting lack of confidence that investors had in bank balance sheets. The 

TARP infusions, other than demonstrating that the government was willing to put taxpayer 

money on the line and stood ready to bail banks out, did not solve the transparency issue. In fact, 

the issue persists and affects valuation of financial firms. It did not help that the government at 

first claimed that TARP money would only be given to “healthy” banks. This claim proved to be 

manifestly false as even some of the original recipients appear not to have been healthy.

One cannot view government programs only in the short term; one must take into account 

the longer term. Otherwise, the analysis inevitably will be superficial because the full 

ramifications of decisions are given little weight. With TARP, dangerous precedents have been 

made and expectations established in the marketplace. These include the unfortunate embrace of 

the principle of “too big to fail” and the implicit guarantees that go with that doctrine. I am

pleased that the Panel will consider these issues in next month’s report.

Under normal circumstances, TARP would be in the liquidating phase because 

institutions are repaying the money they received. Unfortunately, the Treasury seems to be 
162

trying to maximize its power by improperly considering TARP to be like a revolving line of 

credit, contrary to the intent of Congress and section 106(d) of EESA, which states: “Revenues 

of, and proceeds from the sale of troubled assets purchased under this Act, or from the sale, 

exercise, or surrender of warrants or senior debt instruments acquired in section 113 shall be paid 

into the general fund of the Treasury for reduction of the public debt.” Moreover, the program 

may yet be extended by the Treasury Secretary until October 2010, and it may transform itself 

into something entirely different during that time, given the nature of the hastily drafted statute 

that established TARP and the extreme flexibility with which the Treasury apparently interprets 

its mandate and powers thereunder. 

Already, $80 billion of TARP funds have been used to intervene in General Motors, 

Chrysler, and GMAC, hardly major components of the banking and finance system. The 

Treasury has announced that it intends to dump billions more into GMAC, but the underlying 

problems of the automotive industry, including excessive labor costs, inflexible work rules, and a 

poor product mix have yet to be addressed. As the financial markets have stabilized, a 

continuation of TARP raises the prospect that Treasury will put funds into other companies with 

only a tenuous connection to the financial markets, contrary to Congress’s intent. Thus, TARP 

should not be extended. If more funds are needed in the future, Treasury should go back to the 

current Congress and make its case.

During our hearing featuring five economists on November 19, 2009, I posed a question 

to Dr. Dean Baker as to whether things would look different today in the financial industry if 

TARP had never been established. He responded by saying that “I am not convinced that we’d 

be in a hugely different world.” Presumably, the Treasury and the Federal Reserve would have 

found ways to muddle through, much as they had done during and after the collapse of Bear 

Stearns. Dr. Baker further argued that “the biggest flaw of TARP” was that “we rushed in with 

something that wasn’t well thought out.” Indeed, some economists argue that the confusing roll 

out of TARP in 2008 only made matters worse. Ultimately, however, had there been no TARP, 

we would not be facing all of the unfortunate collateral consequences of TARP and a poorly 

thought-out EESA. 

As we move into 2010, perhaps into the final few months of this Panel’s existence, we 

should be insisting that Treasury stick to the intent of EESA and to a strict reading of the statute. 

In addition, we should follow the advice of Mr. Alex Pollock, who appeared before the Panel on 

November 19, to insist that Treasury run TARP as a business. Transparency, audited financial 

statements, and adherence to Congressional intent will foster accountability and taxpayer 

confidence. 
163

Section Three: Correspondence with Treasury Update

On behalf of the panel, Chair Elizabeth Warren sent a letter on November 25, 2009,523 to 

Secretary of the Treasury Timothy Geithner, to follow up on a letter sent on September 15, 

2009,524

On behalf of the panel, Chair Elizabeth Warren sent a letter on November 25, 2009,

and to request that the Secretary provide a timely response to the questions contained 

therein regarding inputs, formulae, and other information for the stress tests. The Panel has not 

yet received a response from Secretary Geithner.

525

On behalf of the panel, Chair Elizabeth Warren sent a letter on November 25, 2009,

to 

Secretary of the Treasury Timothy Geithner, to obtain information on Treasury’s assistance to

CIT Group, Inc. (CIT). Specifically, the letter inquires about the effects of CIT’s recent 

bankruptcy on the taxpayers’ investment in the company via the Capital Purchase Program 

(CPP), and whether Treasury expects failures of more financial institutions participating in the 

CPP. The Panel has not yet received a response from Secretary Geithner.

526 to 

Assistant Secretary of the Treasury for Financial Stability Herbert M. Allison, Jr. The letter 

notes that Assistant Secretary Allison had yet to respond to a series of questions for the record 

following his appearance before the Congressional Oversight Panel on October 22, 2009, despite 

an initial request to receive a response by November 18, 2009. The Panel received a response 

from Assistant Secretary Allison on December 1, 2009.527

 523 See Appendix III of this report, infra. 

524 See Appendix I of the Congressional Oversight Panel’s October Oversight Report. October Oversight 

Report, supra note 220, at 207.

525 See Appendix IV of this report, infra. 

526 See Appendix II of this report, infra. 

527 Questions for the Record for Assistant Secretary Allison, supra note 253.
164

Section Four: TARP Updates Since Last Report

A. TARP Repayment

Since the Panel’s prior report, additional banks have repaid their TARP investments 

under CPP. A total of 50 banks have repaid in full their preferred stock TARP investments 

provided under the CPP to date. Of these banks, 30 have repurchased their warrants as well. 

Additionally, during the month of October, CPP participating banks paid $481.6 million in 

dividends and $125.8 million in interest on Treasury investments.

Bank of America has been given leave by its regulator to repay $45 billion in TARP 

funds. News reports stated that Bank of America would sell common equity to raise the funds 

for the repayment. As of December 2, 2009, Bank of America reported that it had raised $19.3 

billion, and that it would be holding a shareholder meeting to approve the issuance of additional 

shares to be sold for this purpose.

B. CPP Monthly Lending Report

Treasury releases a monthly lending report showing loans outstanding at the top 22 CPP 

recipient banks. The most recent report, issued on November 16, 2009, includes data through the 

end of September 2009, and shows that CPP recipients had $4.18 trillion in loans outstanding as 

of September 2009. This represents a one percent decline in loans outstanding between the end 

of August and the end of September.

C. Term Asset-Backed Securities Loan Facility (TALF)

At the November 17, 2009 facility, there were $1.4 billion in loans requested for legacy 

CMBS, and $72.2 million for new CMBS. By way of comparison, there were $2.1 billion in 

loans for legacy CMBS requested at the October facility, and $1.4 billion at the September 

facility. This month was the first facility in which there was a request for TALF loans for new 

CMBS.

At the December 3, 2009 facility, there were $3 billion in loans requested to support the 

issuance of ABS collateralized by loans in the credit card, equipment, floorplan, small business, 

servicing advances, and student loan sectors. No loans in the auto and premium financing 

sectors were requested. By way of comparison, there were $1.1 billion in loans requested at the 

November 3, 2009 facility to support the issuance of ABS collateralized by loans in the auto, 

credit card, equipment, floorplan, small business, and student loan sectors. 
165

D. Public-Private Investment Funds

Treasury announced the initial closing of three more of the nine funds pre-qualified as 

Fund Managers as part of the Public-Private Investment Program. Treasury expects the final 

fund to close shortly. As of November 30, 2009, Public-Private Investment Funds have closed 

on $5.07 billion of private sector equity. This investment has been matched by Treasury for a 

total of $10.13 billion in equity capital. Treasury has also provided $10.13 billion of debt 

capital.

E. Capital Assistance Program Closing

On November 9, 2009, Treasury announced that it would close the CAP without making 

any investments through the program. CAP was established to provide additional assistance to 

institutions subject to the stress tests. The only institution that was determined to need additional 

capital was GMAC. Treasury has announced that GMAC will receive the needed assistance 

through the Automotive Industry Financing Program instead of through CAP. 

F. Auctions to Sell Capital Purchase Program Warrants

Treasury announced on November 19, 2009, that it would sell several warrant positions 

received under the Capital Purchase Program. The sales would take place over the month 

following the announcement and would include Treasury’s warrant positions in JPMorgan Chase 

& Co., Capital One Financial Corporation, and TCF Financial Corporation. Each of these banks 

has already repurchased Treasury’s full preferred stock investment. The sales will be conducted 

through registered public offerings using a Dutch auction method. The auction for Capital One 

began on December 1, 2009 and closed on December 3, 2009. This auction included 12,657,960 

warrants to purchase common stock of Capital One and the net proceeds from the sale, which 

should close on or around December 9, are expected to be $146.5 million.
166

Section Five: Oversight Activities

The Congressional Oversight Panel was established as part of EESA and formed on 

November 26, 2008. Since then, the Panel has produced twelve oversight reports, as well as a 

special report on regulatory reform, issued on January 29, 2009, and a special report on farm 

credit, issued on July 21, 2009. Since the release of the Panel’s November oversight report 

assessing guarantees and contingent payments, the following developments pertaining to the 

Panel’s oversight of the Troubled Asset Relief Program (TARP) took place:

• The Panel held a hearing in Washington, DC with several prominent economists to 

discuss the effectiveness of the TARP. The views of these experts informed this report.

Upcoming Reports and Hearings

The Panel will release its next oversight report in January. The report will assess 

Treasury’s strategy for exiting the TARP. 

The Panel is planning its third hearing with Secretary Geithner on December 10, 2009. 

The Secretary has agreed to testify before the Panel once per quarter. His most recent hearing 

was on September 10, 2009.
167

Section Six: About the Congressional Oversight Panel

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

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

promote economic growth. Congress created the Office of Financial Stability (OFS) within 

Treasury to implement a Troubled Asset Relief Program. At the same time, Congress created the 

Congressional Oversight Panel to “review the current state of financial markets and the 

regulatory system.” The Panel is empowered to hold hearings, review official data, and write 

reports on actions taken by Treasury and financial institutions and their effect on the economy. 

Through regular reports, the Panel must oversee Treasury’s actions, assess the impact of 

spending to stabilize the economy, evaluate market transparency, ensure effective foreclosure 

mitigation efforts, and guarantee that Treasury’s actions are in the best interests of the American 

people. In addition, Congress instructed the Panel to produce a special report on regulatory 

reform that analyzes “the current state of the regulatory system and its effectiveness at 

overseeing the participants in the financial system and protecting consumers.” The Panel issued 

this report in January 2009. Congress subsequently expanded the Panel’s mandate by directing it 

to produce a special report on the availability of credit in the agricultural sector. The report was 

issued on July 21, 2009.

On November 14, 2008, Senate Majority Leader Harry Reid and the Speaker of the 

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

New York, Damon Silvers, Director of Policy and Special Counsel of the American Federation 

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

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

November 19, 2008, of Congressman Jeb Hensarling to the Panel by House Minority Leader 

John Boehner, the Panel had a quorum and met for the first time on November 26, 2008, electing 

Professor Warren as its chair. On December 16, 2008, Senate Minority Leader Mitch 

McConnell named Senator John E. Sununu to the Panel. Effective August 10, 2009, Senator 

Sununu resigned from the Panel, and on August 20, 2009, Senator McConnell announced the 

appointment of Paul Atkins, former Commissioner of the U.S. Securities and Exchange 

Commission, to fill the vacant seat.
168

APPENDIX I: 

UNPAID DIVIDEND PAYMENTS UNDER CPP AS OF

OCTOBER 31, 2009
169

Unpaid Dividend Payments Under CPP as of October 31, 2009528

Institution Value of Unpaid Dividends

CIT Group Inc $29,125,000

Popular, Inc 11,687,500

First BanCorp 5,000,000

Pacific Capital Bancorp 4,515,850

First Banks, Inc 4,024,825

Sterling Financial Corporation/Sterling Savings Bank 3,787,500

UCBH Holdings, Inc 3,734,213

Anchor BanCorp Wisconsin, Inc 2,979,167

Midwest Banc Holdings, Inc 2,119,600

Dickinson Financial Corporation II 1,989,980

Central Pacific Financial Corp 1,687,500

Seacoast Banking Corporation of Florida/Seacoast National Bank 1,250,000

Blue Valley Ban Corp 543,750

Centrue Financial Corporation 408,350

Royal Bancshares of Pennsylvania, Inc 380,088

One United Bank 301,575

United American Bank 230,490

Pacific City Financial Corporation/Pacific City Bank 220,725

Commonwealth Business Bank 209,850

The Connecticut Bank and Trust Company 178,573

Peninsula Bank Holding Co 162,500

Commerce National Bank 150,000

Citizens Bancorp 141,700

Pacific Coast National Bancorp 112,270

Premier Service Bank 105,972

Idaho Bancorp 94,013

Lone Star Bank 87,917

Pacific International Bancorp Inc 81,250

One Georgia Bank 80,766

Georgia Primary Bank 70,850

Saigon National Bank 54,378

Patterson Bancshares, Inc 50,288

Grand Mountain Bancshares, Inc 35,395

Fresno First Bank 33,357

Citizens Bank & Trust Company 32,700

Pacific Commerce Bank 31,961

Community Bank of the Bay 28,874

Community First Bank 11,199

Total $75,739,924

 528 U.S. Department of Treasury, Dividends and Interest Reports, May, 2009 – October, 2009 (online at 

www.financialstability.gov/latest/reportsanddocs.html); SIGTARP, Quarterly Report to Congress, at 58 (Oct. 21, 

2009) (online at www.sigtarp.gov/reports/congress/2009/October2009_Quarterly_Report_to_Congress.pdf).
170

APPENDIX II: 

LETTER FROM CHAIR ELIZABETH WARREN TO 

ASSISTANT SECRETARY HERB ALLISON, 

RE: WRITTEN RESPONSES FOR HEARING RECORD, 

DATED NOVEMBER 25, 2009
November 25, 2009 

The Honorable Herbert M. Allison, Jr. 

Assistant Secretary for Financial Stability 

United States Department of the Treasury 

1500 Pennsylvania Avenue, NW 

Washington, DC 20220

Dear Mr. Assistant Secretary: 

 Following your testimony before the Congressional Oversight Panel on October 22, 

2009, the Panel sent you a series of questions for the hearing record and requested that you 

respond to them in writing by November 18, 2009. As of the date of this letter, the Panel has yet 

to receive your responses. We ask that you provide these responses to the Panel as soon as 

possible, and no later than Tuesday, December 1, to allow us sufficient time to review and 

incorporate them into our forthcoming December oversight report. 

 If, for some reason, you are unable to provide these responses in a timely fashion, please 

have a member of your staff contact the Panel’s Executive Director, Naomi Baum, at 

 to explain why and when they can be expected. Thank you for your cooperation. 

Sincerely, 

 

 Elizabeth Warren 

 Chair 

 Congressional Oversight Panel 
172

APPENDIX III: 

LETTER FROM CHAIR ELIZABETH WARREN TO 

SECRETARY TIMOTHY GEITHNER, RE: STRESS TESTS, 

DATED NOVEMBER 25, 2009
November 25, 2009

The Honorable Timothy F. Geithner

Secretary of the Treasury

United States Department of the Treasury

Room 3330

1500 Pennsylvania Avenue, N.W.

Washington, DC 20220

Dear Mr. Secretary:

During and after your testimony before the Congressional Oversight Panel on September 

10, you said that you would be willing to provide the Panel with the inputs and formulae for the 

stress tests, including the loss rates you referred to in your testimony. I followed up with a letter 

to you on September 15 to request that information as soon as possible. A copy of my original 

letter is enclosed.

Although I sent my letter in advance of the Panel’s questions for the record, emphasizing 

the urgency of my request, I have not yet received any reply. By contrast, Treasury has already 

sent the Panel the formal responses to the questions for the record.

Effective oversight depends on timely response from the Department of Treasury to the 

Panel’s requests for information. This is especially true of the stress tests, which have been a 

critical part of your strategy to assure bank stability. I would appreciate receiving the 

information I requested more than two months ago so that our Panel can continue its work. 

Sincerely,

Elizabeth Warren

Chair

Congressional Oversight Panel

Enclosure

Cc:

Mr. Paul Atkins

Rep. Jeb Hensarling

Mr. Richard H. Neiman

Mr. Damon A. Silvers
174

APPENDIX IV: 

LETTER FROM CHAIR ELIZABETH WARREN TO 

SECRETARY TIMOTHY GEITHNER, RE: CIT GROUP, INC., 

DATED NOVEMBER 25, 2009
November 25, 2009 

The Honorable Timothy F. Geithner 

Secretary of the Treasury 

United States Department of the Treasury 

Room 3330 

1500 Pennsylvania Avenue, N.W. 

Washington, D.C. 20220 

Dear Mr. Secretary: 

 On behalf of the Congressional Oversight Panel (Panel), I am writing to obtain 

information on Treasury’s assistance to CIT Group, Inc. (CIT) in conjunction with the Panel’s 

oversight of the Capital Purchase Program (CPP). The Panel was created pursuant to section 125 

of the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343 (EESA), which 

requires the Panel to report to Congress on Treasury’s use of authority under EESA and on the 

impact of EESA-authorized purchases on financial institutions. 

On December 29, 2008, taxpayers made a $2.3 billion CPP investment in CIT, and 

obtained warrants for 88,705,584 shares of CIT stock as part of that investment. On November 

1, 2009, CIT filed for bankruptcy protection. Under the terms of its bankruptcy plan, preferred 

and common equity holders – including the U.S. government – will receive only a minimal 

return. 

CIT’s failure is the largest to date by a CPP-recipient financial institution, and it raises 

several significant oversight questions: 

1. How much does the U.S. taxpayer stand to lose due to CIT’s bankruptcy, including, 

separately, the value of all preferred stock, warrants, and projected dividends? 

2. How much, separated into the same categories, has the taxpayer lost due to the 

failures of other CPP-recipient financial institutions? 

3. Treasury has stated that “participation [in CPP] is reserved for healthy, viable 

institutions,” noting that “[h]ealthy banks, not weak banks, lend to their communities, 

and the CPP is a program for healthy banks.” Did Treasury consider CIT to be a 

healthy bank at the time when CPP assistance was first provided? If so, on what basis 

did Treasury make this determination? If not, for what reasons did Treasury consider 

CIT to be eligible for CPP funding? Please provide any due diligence memoranda or 

other documentation explaining Treasury’s decision. 

4. Treasury has explicitly stated that CPP is not a bailout and that it was “designed to 

generate a positive return over time to the taxpayer.” In the case of CIT, however, it 
appears clear that taxpayers will face significant losses. Regulators have closed 

United Commercial Bank and Pacific Coast National Bank as well, which also 

received CPP assistance. Did Treasury’s expectation of “a positive return over time” 

incorporate the possibility of the failure of these or other financial institutions? If so, 

how has Treasury accounted for these loss projections in estimating the long-term 

cost or benefit to taxpayers of CPP? 

5. How many more failures does Treasury expect among CPP-recipient financial 

institutions, and what is the estimated cost to taxpayers of these failures? Please 

provide any memoranda projecting such losses. How is Treasury acting to protect the 

taxpayers’ investments in those institutions?

6. In particular, how many institutions in the CPP program are now on the list of 

problem banks maintained by the Federal Deposit Insurance Corporation? What 

steps is Treasury taking to protect the taxpayers’ investment in those institutions? 

7. What is Treasury’s projection of the final benefit or cost to taxpayers of the overall 

CPP program? 

8. Treasury has provided exceptional assistance outside of CPP to several firms that it 

considers “systemically significant,” including Bank of America, Citigroup, and AIG. 

Did Treasury consider whether CIT’s significance to the financial system warranted 

similar assistance? If Treasury determined that CIT was not systemically significant, 

on what basis was this determination made? Please provide any memoranda 

regarding this determination. 

The information sought by this letter is necessary for the Congressional Oversight Panel 

to carry out section 125 of EESA. This information request is made pursuant to section 125(e) 

(3) of that Act. 

I would be happy to answer any questions about this letter that you may have. If you 

would prefer, a member of your staff can contact the Panel’s Executive Director, Naomi Baum, 

to discuss any such questions. Ms. Baum’s telephone number is 

Sincerely, 

Elizabeth Warren 

Chair

Congressional Oversight Panel 

Cc: 

Mr. Paul Atkins 

Rep. Jeb Hensarling 

Mr. Richard H. Neiman 

Mr. Damon A. Silvers 
177

APPENDIX V: 

ENDNOTES TO FIGURE 27: FEDERAL GOVERNMENT’S 

FINANCIAL STABILIZATION PROGRAMS (AS OF 

NOVEMBER 25, 2009) – CURRENT MAXIMUM 

EXPOSURES
178

 i

This number includes investments under the SSFI Program: a $40 billion investment made on November 

25, 2008, and a $30 billion investment committed on April 17, 2009 (less a reduction of $165 million representing 

bonuses paid to AIG Financial Products employees). See U.S. Department of Treasury, Troubled Asset Relief 

Program Transactions Report for Period Ending November 25, 2009, (Nov. 30, 2009) (online at 

www.financialstability.gov/docs/transaction-reports/11-30-09%20Transactions%20Report%20as%20of%2011-25-

09.pdf).

ii This number represents the full $60 billion that is available to AIG through its revolving credit facility 

with the Federal Reserve ($44.9 billion had been drawn down as of November 27, 2009) and the outstanding 

principal of the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of November 19, 2009, 

$16 billion and $19 billion respectively). Board of Governors of the Federal Reserve System, Factors Affecting 

Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks (Nov. 27, 2009) 

(online at www.federalreserve.gov/RELEASES/H41/20091127/). Income from the purchased assets is used to pay 

down the loans to the SPVs, reducing the taxpayers’ exposure to losses over time. Board of Governors of the 

Federal Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity Programs and the 

Balance Sheet October 2009, at 17 (online at 

www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200910.pdf) (accessed Dec. 7, 2009). On 

December 1, 2009, AIG entered into an agreement with FRBNY to reduce the debt AIG owes the FRBNY by $25 

billion. In exchange, FRBNY received preferred equity interests in two AIG subsidiaries. This also reduced the 

debt ceiling on the loan facility from $60 billion to $35 billion. This figure does not reflect that agreement since the 

table is intended to represent exposure as of November 30, 2009. American International Group, AIG Closes Two 

Transactions That Reduce Debt AIG Owes Federal Reserve Bank of New York by $25 billion (Dec. 1, 2009) (online 

at phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MjE4ODl8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1).

iii U.S. Department of Treasury, Troubled Asset Relief Program Transactions Report for Period Ending 

November 25, 2009, (Nov. 30, 2009) (online at www.financialstability.gov/docs/transaction-reports/11-30-

09%20Transactions%20Report%20as%20of%2011-25-09.pdf). This figure includes: (1) a $15 billion investment 

made by Treasury on October 28, 2008 under the CPP; (2) a $10 billion investment made by Treasury on January 9, 

2009 also under the CPP; and (3) a $20 billion investment made by Treasury under the TIP on January 16, 2009.

iv U.S. Department of the Treasury, Summary of Terms: Eligible Asset Guarantee (Nov. 23, 2008) (online 

at www.treasury.gov/press/releases/reports/cititermsheet_112308.pdf) (granting a 90 percent federal guarantee on all 

losses over $29 billion after existing reserves (totaling a $39.5 billion first-loss position for Citigroup) of a $306 

billion pool of Citigroup assets, with the first $5 billion of the cost of the guarantee borne by Treasury, the next $10 

billion by FDIC, and the remainder by the Federal Reserve). See also U.S. Department of the Treasury, U.S. 

Government Finalizes Terms of Citi Guarantee Announced in November (Jan. 16, 2009) (online at 

www.treas.gov/press/releases/hp1358.htm) (reducing the size of the asset pool from $306 billion to $301 billion).

v U.S. Department of the Treasury, Transactions Report (Oct. 27, 2009) (online at 

www.financialstability.gov/docs/transaction-reports/10-27-09%20Transactions%20Report%20as%20of%2010-23-

09.pdf). This figure includes: (1) a $25 billion investment made by Treasury under the CPP on October 28, 2008; 

and (2) a $20 billion investment made by Treasury under TIP on December 31, 2008.

vi This figure represents the $218 billion Treasury has anticipated spending under the CPP, minus the $50 

billion investment in Citigroup ($25 billion) and Bank of America ($25 billion) identified above, and the $71 billion 

in repayments that are reflected as uncommitted TARP funds. This figure does not account for future repayments of 

CPP investments, nor does it account for dividend payments from CPP investments. See U.S. Government 

Accountability Office, Troubled Asset Relief Program June 2009 Status of Efforts to Address Transparency and 

Accountability Issues, at 12 (online at www.gao.gov/new.items/d09658.pdf) (accessed Dec. 7, 2009); U.S. 

Department of Treasury, Troubled Asset Relief Program Transactions Report for Period Ending November 25, 2009 

(Nov. 30, 2009) (online at www.financialstability.gov/docs/transaction-reports/11-30-

09%20Transactions%20Report%20as%20of%2011-25-09.pdf).

vii The CAP was officially closed on November 9, 2009. Of the original 19 SCAP participants, GMAC was 

the only institution that requested additional capital under the CAP. U.S. Department of the Treasury, Treasury 

Announcement Regarding the Capital Assistance Program (Nov. 9, 2009) (online at
179

 

www.financialstability.gov/latest/tg_11092009.html). As of yet, further details of this transaction, including the 

amount GMAC will receive, have not been released, and the Panel continues to reflect the program as dormant. 

viii This figure represents a $20 billion allocation to the TALF special purpose vehicle on March 3, 2009. 

U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending October 

28, 2009 at 18 (Oct. 30, 2009) (online at financialstability.gov/docs/transaction-reports/10-30-

09%20Transactions%20Report%20as%20of%2010-28-09.pdf). Consistent with the analysis in the Panel’s August 

report, only $61.9 billion dollars in TALF loans have been requested as of December 3, 2009, the Panel continues to 

predict that TALF subscriptions are unlikely to surpass the $200 billion currently available by year’s end. 

Congressional Oversight Panel, August Oversight Report: The Continued Risk of Troubled Assets, at 10-22 (Aug. 

11, 2009) (online at cop.senate.gov/documents/cop-081109-report.pdf) (discussing criteria for constituting a 

“troubled asset”).

ix This number is derived from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value 

of Federal Reserve loans under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan

(Feb.10, 2009) (online at www.financialstability.gov/docs/fact-sheet.pdf) (describing the initial $20 billion Treasury 

contribution tied to $200 billion in Federal Reserve loans and announcing potential expansion to a $100 billion 

Treasury contribution tied to $1 trillion in Federal Reserve loans). Because Treasury is responsible for reimbursing 

the Federal Reserve Board for $20 billion of losses on its $200 billion in loans, the Federal Reserve Board’s 

maximum potential exposure under the TALF is $180 billion.

x The Panel continues to account for this program as dormant. It appears unlikely that resources will be 

expended under the PPIP Legacy Loans Program in its original design as a joint Treasury-FDIC program to 

purchase troubled assets from solvent banks. See also Federal Deposit Insurance Corporation, FDIC Statement on 

the Status of the Legacy Loans Program (June 3, 2009) (online at 

www.fdic.gov/news/news/press/2009/pr09084.html); Federal Deposit Insurance Corporation, Legacy Loans 

Program – Test of Funding Mechanism (July 31, 2009) (online at 

www.fdic.gov/news/news/press/2009/pr09131.html). The sales described in these statements do not involve any 

Treasury participation, and FDIC activity is accounted for here as a component of the FDIC’s Deposit Insurance 

Fund outlays.

xi U.S. Department of the Treasury, Joint Statement By Secretary of the Treasury Timothy F. Geithner, 

Chairman of the Board Of Governors Of The Federal Reserve System Ben S. Bernanke, and Chairman of the 

Federal Deposit Insurance Corporation Sheila Bair: Legacy Asset Program (July 8, 2009) (online at 

www.financialstability.gov/latest/tg_07082009.html) (“Treasury will invest up to $30 billion of equity and debt in 

PPIFs established with private sector fund managers and private investors for the purpose of purchasing legacy 

securities.”); U.S. Department of the Treasury, Fact Sheet: Public-Private Investment Program, at 4-5 (Mar. 23, 

2009) (online at www.treas.gov/press/releases/reports/ppip_fact_sheet.pdf) (outlining that, for each $1 of private 

investment into a fund created under the Legacy Securities Program, Treasury will provide a matching $1 in equity 

to the investment fund; a $1 loan to the fund; and, at Treasury’s discretion, an additional loan up to $1). As of 

November 30, 2009, Treasury reported $17.8 billion in outstanding loans and $8.8 billion in membership interest 

associated with the program, thus substantiating the Panel’s assumption that Treasury may routinely exercise its 

discretion to provide $2 of financing for every $1 of equity 2:1 ratio. U.S. Department of Treasury, Troubled Asset 

Relief Program Transactions Report for Period Ending November 25, 2009 (Nov. 30, 2009) (online at 

www.financialstability.gov/docs/transaction-reports/11-30-09%20Transactions%20Report%20as%20of%2011-25-

09.pdf).

xii U.S. Government Accountability Office, Troubled Asset Relief Program: June 2009 Status of Efforts to 

Address Transparency and Accountability Issues, at 2 (June 17, 2009) (GAO09/658) (online at 

www.gao.gov/new.items/d09658.pdf). Of the $50 billion in announced TARP funding for this program, $27.4 

billion has been allocated as of November 30, 2009. U.S. Department of the Treasury, Troubled Asset Relief 

Program Transactions Report for Period November 30, 2009, at 22 (Nov. 30, 2009) (online at 

financialstability.gov/docs/transaction-reports/11-30-09%20Transactions%20Report%20as%20of%2011-25-09.pdf).

xiii Fannie Mae and Freddie Mac, GSEs that were placed in conservatorship of the Federal Housing Finance 

Housing Agency on September 7, 2009, will also contribute up to $25 billion to the Making Home Affordable 

Program, of which the HAMP is a key component. U.S. Department of the Treasury, Making Home Affordable: 
180

 

Updated Detailed Program Description (Mar. 4, 2009) (online at 

www.treas.gov/press/releases/reports/housing_fact_sheet.pdf).

xiv U.S. Department of Treasury, Troubled Asset Relief Program Transactions Report for Period Ending 

November 25, 2009 (Nov. 30, 2009) (online at www.financialstability.gov/docs/transaction-reports/11-30-

09%20Transactions%20Report%20as%20of%2011-25-09.pdf). A substantial portion of the total $80 billion in 

loans extended under the AIFP have since been converted to common equity and preferred shares in restructured 

companies. $20.2 billion has been retained as loans (with $7.7 billion committed to GM and $12.5 billion to 

Chrysler). This figure represents Treasury’s current obligation under the AIFP. There have been $2.1 billion in 

repayments and $2.4 billion in de-obligated funds under the AIFP.

xv U.S. Department of Treasury, Troubled Asset Relief Program Transactions Report for Period Ending 

November 25, 2009 (November 30, 2009) (online at www.financialstability.gov/docs/transaction-reports/11-30-

09%20Transactions%20Report%20as%20of%2011-25-09.pdf). 

xvi U.S. Department of the Treasury, Fact Sheet: Public-Private Investment Program, at 1 (Mar. 23, 2009) 

(online at www.treas.gov/press/releases/reports/ppip_fact_sheet.pdf).

xvii This figure represents the current maximum aggregate debt guarantees that could be made under the 

program, which, in turn, is a function of the number and size of individual financial institutions participating. $315 

billion of debt subject to the guarantee was outstanding as of October 31, 2009. This represents approximately 52 

percent of the cap. Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the 

Temporary Liquidity Guarantee Program: Debt Issuance Under Guarantee Program (Sept. 30, 2009) (online at 

www.fdic.gov/regulations/resources/TLGP/total_issuance9-09.html) (updated Nov. 30, 2009). The FDIC has 

collected $10.4 billion in fees and surcharges from this program since its inception in the fourth quarter of 2008. 

Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary Liquidity 

Guarantee Program (Oct. 31, 2009) (online at www.fdic.gov/regulations/resources/TLGP/fees.html) (updated Nov. 

30, 2009). 

xviii This figure represents the FDIC’s provision for losses to its deposit insurance fund attributable to bank 

failures in the third and fourth quarters of 2008 and the first and second quarters of 2009. Federal Deposit Insurance 

Corporation, Chief Financial Officer’s (CFO) Report to the Board: DIF Income Statement (Fourth Quarter 2008)

(online at www.fdic.gov/about/strategic/corporate/cfo_report_4qtr_08/income.html); Federal Deposit Insurance 

Corporation, Chief Financial Officer’s (CFO) Report to the Board: DIF Income Statement (Third Quarter 2008)

(online at www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_08/income.html); Federal Deposit Insurance 

Corporation, Chief Financial Officer’s (CFO) Report to the Board: DIF Income Statement (First Quarter 2009)

(online at www.fdic.gov/about/strategic/corporate/cfo_report_1stqtr_09/income.html); Federal Deposit Insurance 

Corporation, Chief Financial Officer’s (CFO) Report to the Board: DIF Income Statement (Second Quarter 2009)

(online at www.fdic.gov/about/strategic/corporate/cfo_report_2ndqtr_09/income.html). This figure includes the 

FDIC’s estimates of its future losses under loss share agreements that it has entered into with banks acquiring assets 

of insolvent banks during these four quarters. Under a loss sharing agreement, as a condition of an acquiring bank’s 

agreement to purchase the assets of an insolvent bank, the FDIC typically agrees to cover 80 percent of an acquiring 

bank’s future losses on an initial portion of these assets and 95 percent of losses of another portion of assets. For 

example, see Federal Deposit Insurance Corporation, Purchase and Assumption Agreement Among FDIC, Receiver 

of Guaranty Bank, Austin, Texas, FDIC and Compass Bank, at 65-66 (Aug. 21, 2009) (online at 

www.fdic.gov/bank/individual/failed/guaranty-tx_p_and_a_w_addendum.pdf).

xix In past reports, the Panel has classified as loans the Federal Reserve’s purchases of federal agency debt 

securities and mortgage-backed securities issued by GSEs. With this report, the Panel adopts a different approach. 

Instead, these purchases will be accounted as outlays made under the Federal Reserve’s credit expansion effort. 

Federal Reserve Liquidity Facilities classified in this table as loans include: Primary credit, Secondary credit, 

Central bank liquidity swaps, Primary dealer and other broker-dealer credit, Asset-Backed Commercial Paper 

Money Market Mutual Fund Liquidity Facility, Net portfolio holdings of Commercial Paper Funding Facility LLC, 

Seasonal credit, Term auction credit, Net Portfolio Holdings of TALF LLC, and loans outstanding to Bear Stearns 

(Maiden Lane I LLC). While the Federal Reserve does not employ the outlays, loans and guarantees classification, 

its accounting clearly separates its mortgage-related purchasing programs from its liquidity programs. See Board of 

Governors of the Federal Reserve, Credit and Liquidity Programs and the Balance Sheet November 2009, at 2 

(online at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200911.pdf) (accessed Dec. 7, 2009). 
181

 xx The term “outlays” is used here to describe the use of Treasury funds under the TARP, which are broadly 

classifiable as purchases of debt or equity securities (e.g., debentures, preferred stock, exercised warrants, etc.). The 

outlays figures are based on: (1) Treasury’s actual reported expenditures; and (2) Treasury’s anticipated funding 

levels as estimated by a variety of sources, including Treasury pronouncements and GAO estimates. Anticipated 

funding levels are set at Treasury’s discretion, have changed from initial announcements, and are subject to further 

change. Outlays as used here represent investments and assets purchases and commitments to make investments and 

asset purchases and are not the same as budget outlays, which under section 123 of EESA are recorded on a “credit 

reform” basis. 

xxi While many of the guarantees may never be exercised or exercised only partially, the guarantee figures 

included here represent the federal government’s greatest possible financial exposure.

xxii This figure is roughly comparable to the $3.0 trillion current balance of financial system support 

reported by SIGTARP in its July report. SIGTARP, Quarterly Report to Congress, at 138 (July 21, 2009) (online at 

www.sigtarp.gov/reports/congress/2009/July2009_Quarterly_Report_to_Congress.pdf). However, the Panel has 

sought to capture additional anticipated exposure and thus employs a different methodology than SIGTARP.