CONGRESSIONAL OVERSIGHT PANEL 

DECEMBER OVERSIGHT REPORT * 

TAKING STOCK: WHAT HAS THE 

TROUBLED ASSET RELIEF PROGRAM 

ACHIEVED? 

DECEMBER 9, 2009.—Ordered to be printed 

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

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


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CONGRESSIONAL OVERSIGHT PANEL DECEMBER OVERSIGHT REPORT 


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U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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1 

54–148 2009

CONGRESSIONAL OVERSIGHT PANEL 

DECEMBER OVERSIGHT REPORT * 

TAKING STOCK: WHAT HAS THE 

TROUBLED ASSET RELIEF PROGRAM 

ACHIEVED? 

December 9, 2009.—Ordered to be printed 

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

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


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(II) 

CONGRESSIONAL OVERSIGHT PANEL 

PANEL MEMBERS

ELIZABETH WARREN, Chair 

REP. JEB HENSARLING

PAUL S. ATKINS

RICHARD H. NEIMAN

DAMON SILVERS


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(III) 

C O N T E N T S 

Page 

Glossary of Terms .................................................................................................... V 

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

Section One: 

A. Overview ....................................................................................................... 4 

B. Background on the Origins and Evolution of the TARP .......................... 5 

1. Chronology of the Financial Crisis ...................................................... 5 

2. The Initial Federal Response to the Crisis ......................................... 9 

C. The TARP’s Evolution ................................................................................. 13 

1. Capital Programs and Banking Sector Health ................................... 13 

2. Credit for Consumers and Small Business ......................................... 39 

3. Mortgage Foreclosure Relief ................................................................. 51 

4. Auto Industry Assistance ..................................................................... 59 

5. The TARP as a Whole ........................................................................... 63 

D. Expert Commentary on the TARP ............................................................. 79 

1. Consistency and Transparency ............................................................ 81 

2. Underlying Issues ................................................................................. 82 

3. Moral Hazard ........................................................................................ 84 

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

in Meeting its Statutory Objectives? ........................................................... 85 

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

Recovery ................................................................................................. 85 

2. The TARP and the American Taxpayer .............................................. 90 

3. Treasury as TARP Steward and Manager .......................................... 92 

F. Conclusions ................................................................................................... 95 

Section Two: Additional Views ............................................................................... 98 

A. Damon Silvers .............................................................................................. 98 

B. Richard Neiman ........................................................................................... 101 

C. Representative Jeb Hensarling ................................................................... 104 

D. Paul S. Atkins .............................................................................................. 137 

Section Three: Correspondence with Treasury Update ........................................ 139 

Section Four: TARP Updates Since Last Report ................................................... 140 

Section Five: Oversight Activities .......................................................................... 142 

Section Six: About the Congressional Oversight Panel ........................................ 143 

Appendices: 

APPENDIX I: UNPAID DIVIDEND PAYMENTS UNDER CPP AS OF 

OCTOBER 31, 2009 ...................................................................................... 144 

APPENDIX II: LETTER FROM CHAIR ELIZABETH WARREN TO ASSISTANT SECRETARY HERB ALLISON, RE: WRITTEN RESPONSES FOR HEARING RECORD, DATED NOVEMBER 25, 2009 ... 146 

APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO 

SECRETARY TIMOTHY GEITHNER, RE: STRESS TESTS, DATED 

NOVEMBER 25, 2009 .................................................................................. 148 

APPENDIX IV: LETTER FROM CHAIR ELIZABETH WARREN TO 

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

NOVEMBER 25, 2009 .................................................................................. 150 


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IV 

Appendices—Continued 

APPENDIX V: ENDNOTES TO FIGURE 27: FEDERAL GOVERNMENT’S FINANCIAL STABILIZATION PROGRAMS (AS OF NOVEMBER 25, 2009)—CURRENT MAXIMUM EXPOSURES ............................ 153 


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(V)

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 


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*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. 

DECEMBER OVERSIGHT REPORT 

DECEMBER 9, 2009.—Ordered to be printed 

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. DeVerDate Nov 24 2008 02:18 Jan 26, 2010 Jkt 054148 PO 00000 Frm 00009 Fmt 6659 Sfmt 6602 E:\HR\OC\A148.XXX A148

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spite 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. 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 shortsales 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. 


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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. 

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. 


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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 decision-making 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. 

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 


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1See Standard & Poor’s, S&P/Case-Shiller Home Price Indices—Instrument: Seasonally Adjusted Composite 20 Index (online at www2.standardandpoors.com/spf/pdf/index/ 

SAlCSHomePricelHistoryl092955.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). 2See 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/ 

quarterlylstartslcompletions.pdf) (accessed Dec. 7, 2009). 3See S&P/Case-Shiller Home Price Indices, supra note 1. 4See 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 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’’). 

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

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 


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5See, 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’’). 6See 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/investorlrelations/presentations/merrillllynch.pdf). 7Standard & 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/weblcontent/sectors/subprime/ 

SubprimelPresentationl07l2007.pdf). 8 Id. at 30. 9See 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/liquiditylcreditlcrunch.pdf) (describing the ‘‘unnerve[ing]’’ effect of 

mortgage-backed securities (MBS) downgrades on the broader ABS market). 10See 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’’). 11See 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 www.sec-oig.gov/Reports/AuditsInspections/2008/446-b.pdf). 12Federal 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, JPMorgan Chase and Bear Stearns Announce Amended Agreement 

(March 24, 2008) (online at www.jpmorgan.com/cm/cs?pagename=JPMlredesign/ 

JPMlContentlC/GenericlDetaillPagelTemplate& 

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

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 


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cid=1159339104093&c=JPMlContentlC); 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). 14See 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?abstractlid=1362639##). 15Federal 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). 16Securities Industry and Financial Markets Association, US ABS Issuance (online at 

www.sifma.org/uploadedFiles/Research/Statistics/SIFMAlUSABSIssuance.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 data.bls.gov/PDQ/servlet/ 

SurveyOutputServlet?dataltool=latestlnumbers&serieslid=LNS14000000) (hereinafter 

‘‘Labor Force Statistics’’) (accessed Dec. 7, 2009). 18For 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’’). 20See 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). 21See 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). 

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 asset-backed 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

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 


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22See 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’’). 23See 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 

2008lFINALl112608.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). 24Goldman 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). 25See 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). 26See 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). 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). 28For 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’’). 29See 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). 

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

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 


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30 US ABS Issuance, supra note 16. 31See 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?abstractlid=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/lombardstreet/a-failure-capitalism-the-crisis-of-’08-and-the-descent-into-depression) (writing that the government responded to the crisis with ‘‘a series of improvisations’’). 32Senate 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&FileStorelid=0a0ec016-ad61-4736-b6e3- 

7eb61fbc0c69). 33Summary of Terms and Conditions Regarding the JPMorgan Chase Facility, supra note 12. 34 12 U.S.C. § 343. 35The 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. 36See 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/ 

Continued 

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

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 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 


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fhfalstatementl090708hp1128.pdf) (hereinafter ‘‘Statement of FHFA Director James B. 

Lockhart’’). 37Statement of FHFA Director James B. Lockhart, supra note 36. 38Secretary Paulson Statements on Action to Protect Financial Markets and Taxpayers, supra 

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

note 19. 40White 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). 42See 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=comlcontent&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). 43Simon Johnson and James Kwak, Lehman Brothers and the Persistence of Moral Hazard, Washington Post (Sept. 15, 2009) (online at www.washingtonpost.com/wp-dyn/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/pdfl2008/0916lbarclayslacquisition.pdf); AIG, Counterparty Attachments (Mar. 18, 2009) (online at www.aig.com/aigweb/internet/en/files/ 

CounterpartyAttachments031809ltcm385-155645.pdf). 

held $5.4 trillion in guaranteed securities and outstanding debt, on 

par with the federal government’s publicly held debt 37—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. 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. Then-Secretary 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 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 effects on financial markets, 


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

25, 2008) (online at www.cato.org/publdisplay.php?publid=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 overthe-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. 46See 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/FactorsAffectinglEffortsltolLimitlPaymentsl 

tolAIGlCounterparties.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/ 

CounterpartyAttachments031809ltcm385-155645.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/090922lharrington.pdf). 48See September 16 Press Release, supra note 22. 49See 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). 50The 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). 51This 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). 

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 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. 

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,49 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 


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52See Andrew Ross Sorkin, Too Big To Fail (2009). 53Wachovia was soon bought by Wells Fargo and Morgan Stanley was stabilized by a capital 

infusion from a Japanese bank, Mitsubishi UFJ Financial Group. 54See 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). 55The 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). 57See 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/Bankingbail-out-France-unveils-360bn-package.html). 59David 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). 60See 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-bankbail.html). 

mergers, including Citigroup-Goldman Sachs, Citigroup-Morgan 

Stanley, Citigroup-Wachovia, Wachovia-Goldman Sachs, WachoviaMorgan Stanley, and JPMorgan Chase-Morgan Stanley.52 In the 

end, none of those mergers happened.53 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. 

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.’’ 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 Shortly 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


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61See S&P/Case-Shiller Home Price Indices, supra note 1. 62See 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). 65These 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. 

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 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 purchases 65 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. 

1. Capital Programs and Banking Sector Health 

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 


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66For 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’’). 67Treasury 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. 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 U.S. Department of the Treasury, The Next Phase of Government Financial Stabilization 

and Rehabilitation Policies, at 36 (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’’). 71See U.S. Department of the 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/tgl10222009.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. 72This 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. 

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 Program 66

Treasury used the CPP to provide capital to banks and other financial institutions, usually by purchasing senior preferred stock.67

Treasury has stated that it only provided CPP funds to 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 recipiVerDate Nov 24 2008 02:18 Jan 26, 2010 Jkt 054148 PO 00000 Frm 00022 Fmt 6602 Sfmt 6602 E:\HR\OC\A148.XXX A148

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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). 73For 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 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. 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/Warrant-Statement.pdf ). 76Treasury 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/tgl11192009b.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/tgl12042009.html) (hereinafter ‘‘Capital One Warrant Purchase’’). 77For 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. 78Federal 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/tgl11092009.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). 

ents 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 Treasury 

has determined that it will not hold 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 


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79 U.S. Department of the Treasury, FAQs on Capital Purchase Program Repayment and Capital Assistance Program (online at www.financialstability.gov/docs/FAQlCPP-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/FAQlCPP-CAP.pdf) (accessed Dec. 7, 2009). 80The 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. 81See 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. 

regulator.79 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 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


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84See 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’’). 85See 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). 86Treasury Programs, supra note 84. 87The 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 non-cumulative 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). 88See 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/ 

030209lAIGlTermlSheet.pdf). 89Treasury’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. 

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’’). 

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 the fiVerDate Nov 24 2008 02:18 Jan 26, 2010 Jkt 054148 PO 00000 Frm 00025 Fmt 6602 Sfmt 6602 E:\HR\OC\A148.XXX A148

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90Targeted Investment Program, supra note 84. 91See U.S. Department of the Treasury, Summary of Terms: Preferred Securities (Nov. 23, 

2008) (online at www.treas.gov/press/releases/reports/cititermsheetl112308.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. 93See November 25 Transactions Report, supra note 71. 94See November 25 Transactions Report, supra note 71. 95See U.S. Department of the Treasury, Monthly 105(a) Report (Nov. 10, 2009) (online at 

www.financialstability.gov/docs/105CongressionalReports/October%20105(a)l11.10.2009.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’’). 96For 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’’). 97Treasury 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 November report. 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). 

nancial 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 ad- dition 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 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. 

Asset Guarantee Program.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 After 

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

its financial 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 


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99Overall, 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. 100For 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’’). 101The 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/legacylsecuritieslfaqs.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). 102See 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%20Reportl2009%2010%2007.pdf) (hereinafter ‘‘TARP Eighth Tranche Report’’). 103The 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). 104See TARP Eighth Tranche Report, supra note 102, at 8. 105See 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/tgl11302009.html) (hereinafter ‘‘Treasury Announces Additional Initial Closing of Legacy Securities Public-Private Investment Fund’’). 106See 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/tgl07082009.html). 

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

iii. Public-Private Investment Program 100

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 although Treasury recently stated that government officials are continuing to review applications from firms that would 

share the cost of funding whole-loan purchases.104 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. 

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.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 


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107Treasury 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/tgl11052009.html). 108Treasury communications with Panel staff (Sept. 29, 2009). 109The 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. 

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

FIGURE 2: FEDERAL GOVERNMENT’S CAPITAL PROGRAMS (AS OF NOVEMBER 30, 2009)110

[In billions of dollars] 

Program Treasury 

(TARP) 

Federal 

Reserve FDIC111 Total 

AIG: 

Outlays 112 ............................................................................................ $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 


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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. 

FIGURE 2: FEDERAL GOVERNMENT’S CAPITAL PROGRAMS (AS OF NOVEMBER 30, 2009)110— 

Continued 

[In billions of dollars] 

Program Treasury 

(TARP) 

Federal 

Reserve FDIC111 Total 

Loans ..................................................................................................... 0 0 0 0 

Guarantees ............................................................................................ 0 0 0 0 

CPP (other than Citigroup, Bank of America) subtotal ....................... 97 0 0 97 

Capital Programs Total .................................................................... $291.8 $315.7 $10 $617.58 

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. 

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 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. 

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 mediumsized banks to which Treasury applies a liquidity discount in its 

valuation, while the Panel does not. This results in a lower price 


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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. 

FIGURE 3: WARRANTS OUTSTANDING VALUATION AS OF NOVEMBER 30, 2009 

[In millions of dollars] 

Institution Investment date Low 

estimate 

High 

estimate 

Best 

estimate 

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 One 114 ........................................................................ 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 QEO 115 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 


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116On 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.corporate-ir.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. 117See Appendix I for a list of banks that have missed dividend payments. 118See 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). 

FIGURE 4: WARRANT REPURCHASES AS OF NOVEMBER 30, 2009—Continued 

Institution Investment 

date QEO 115 Repurchase date 

Repurchase 

amount 

Panel valuation (best 

est.) 

Price/estimate (%) IRR (%) 

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 

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 

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 I 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. 

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 


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119See 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). 120See 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). 121See 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/EmergencylCapital lInjections lProvided ltolSupport lthe lViability lof lBank lof lAmerica . . . l100509.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 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. 122David Enrich, TARP Can’t Save Some Banks, Wall Street Journal (Nov. 17, 2009) (online 

at online.wsj.com/article/SB100014240527487 04538404574539954068634242.html). 123See 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’’). 124The 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. 

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 Furthermore, The 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 


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125Tier 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. 127These 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. 128The Panel discussed this issue in depth in its August Report. August Oversight Report, 

supra note 100. 129This 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 

Continued 

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 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 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. 2009 129


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26 

(online at www.snl.com/interactivex/TemplateBrowser.aspx?V =V&Format=XLS&Doc= 

9676136&File=7970111&SaveFileAs= Bank & Thrift Stress Test Tear Sheet) (accessed Dec. 7, 

2009). 130This 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 Bank of America Repayment, supra note 82. 131The 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. See November 

Oversight Report, supra note 96. 132See 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/totallissuance5-09.html). 133See 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/totallissuance10-09.html). 134Data provided under subscription by SNL Financial. 135The $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. 

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 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. 

iii. Borrowing by Financial Institutions 

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 This voluntary FDIC 

program, which is not a part of the TARP, provided a full guarantee to senior unsecured debt issued by participating banks. 

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.132 There is 

currently $315 billion in debt outstanding under the program, covering 88 institutions.133 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 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 


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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. See November Oversight Report, supra note 96, 

at 69. 137SNL Financial, Financial Institutions Offering Activity (online at www1.snl.com/ 

interactivex/Template Browser.aspx?V=V&Doc=10022881&File= 

8302325&Format=XLS&SaveFileAs=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. 139Five-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. 

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 or could be attributed to restored confidence in the financial system. 

FIGURE 6: NON-TLGP SENIOR DEBT SINCE 4Q 2006, AND TLGP DEBT SINCE 4Q 2008 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 If a bank’s bondholders are worried about 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


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28 

141Data provided under subscription by BLOOMBERG Data Services. 

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. 


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30 

143The report discusses small business lending in section C2b infra at 57. 144See 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’’). 145Specifically, 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. 146See 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/SnapshotlDatalSeptemberl2009.xls). Data manipulated in order to exclude PNC and Wells Fargo. For further explanation of Panel methodology 

see footnote 147. 

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 Institutions 143

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 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. 

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.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


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147The 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. 

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’’). 149Loan Officer Opinion Survey October 2009, supra note 148 (accessed Dec. 7, 2009). 

FIGURE 8: TOTAL LOAN ORIGINATIONS OF SELECTED CPP RECIPIENTS SINCE INCEPTION 

OF EESA 147

Banks remain cautious with respect to lending, even as they become better capitalized.148 In the Federal Reserve’s October 2009 

survey of senior loan officers, 25 percent of respondents 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


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32 

150Loan 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/Snloan Survey/200811/fullreport.pdf) (accessed Dec. 7, 2009). 151See 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/monetary policy/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’’). 

Banks continued to tighten lending, but less banks reported tightening than in late 2008.150 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. 

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.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

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. 


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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). 

FIGURE 9: TOTAL DELINQUENCIES AT ALL DOMESTIC COMMERCIAL BANKS, BY TYPE 153


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34 

154 Id. 

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 TYPE 154


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35 

155 Remarks by Chairman Ben S. Bernanke, supra note 151. 156See 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 (‘‘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’’). 157See 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). 158Loan Officer Opinion Survey October 2009, supra note 148, at 3. 159 Remarks by Chairman Ben S. Bernanke, supra note 151. 160Data provided under subscription by SNL Financial. 161See 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). 

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 As Chairman Bernanke has explained: 

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, writedowns of bad debt show up on bank balance sheets as reductions in credit outstanding.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 occurred in 2009, 

with assets totaling $141.6 billion.161 This is the most bank failures since 1992, when 181 banks failed. Two of these 124 banks 


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162 CIT Group is not an FDIC insured institution, so it is not included on failed bank lists. 163See 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. 164This 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.) 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. 166Michael 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). 167This 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. 168This 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. 

were TARP recipients.162 Many of these failed banks were smalland 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 This is only the second time in the FDIC’s history 

that the Fund balance has been below zero. 

There are currently 552 banks on the FDIC’s watch list.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 outweigh those from the 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


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169Failures 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). 

FIGURE 11: BANK FAILURES THROUGH NOVEMBER 30, 2009 (IN 2005 DOLLARS) 169

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. 


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38 

170 SNL Financial, Deposit Market Share, 1998–2009 (online at www.snl.com/interactivex/ 

InDeposit MarketshareDetail.aspx?ID=US&Number= 10&Refreshed=1&Year=2009 

&Market=0&Ownership=0) (accessed Dec. 7, 2009). 

FIGURE 12: MARKET SHARE OF THE FOUR U.S. BANKS WITH THE MOST DEPOSITS IN 

MARKET SINCE 1998 170


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39 

171This 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. 

§ 1A1823(c)(4)(G)(i). 172See 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). 174See 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/ 

smalllbusinesslfinal.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’’). 175The securitization process is described in the Panel’s May oversight report. May Oversight 

Report, supra note 174, at 34–39. 

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

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 Many small and medium banks, however, are in a more precarious situation. 

2. Credit for Consumers and Small Business 

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 


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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 Paper: Term Asset-Backed Securities Loan Facility (Mar. 3, 

2009) (online at www.treas.gov/press/releases/reports/talflwhitelpaper.pdf) (hereinafter ‘‘TALF 

White Paper’’). 177 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. 

the way to revive credit to consumers and created the Temporary 

Asset-Backed Securities Loan Facility (TALF) to produce that revival.176

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, 2006–2009 177


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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. 180See, 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/talflterms.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). 181See TALF White Paper, supra note 176. 182This 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/TALFlrecentloperations.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/ 

cmbsloperations.html) (accessed Dec. 4, 2009). 

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

FRBNY cannot recover more than the then-value 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 non-recourse 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 non-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 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. 

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,182 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. 


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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 AssetBacked Securities Loan Facility: Recent Operations (online at www.newyorkfed.org/markets/ 

TALFlrecentloperations.html) (hereinafter ‘‘TALF Recent Operations’’) (accessed Dec. 3, 

2009). 

FIGURE 14: TALF V. NON-TALF ABS ISSUANCE, MARCH 2009–NOVEMBER 2009 183


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184 Compare Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: 

Non-CMBS—Recent Operations (online at www.newyorkfed.org/markets/ 

TALFlrecentloperations.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. 185Pre-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. 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. 

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 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 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 

2009 186


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187 Chart prepared by Panel staff using U.S. monthly ABS issuances data provided by SIFMA 

and FRBNY. For FRBNY source data, see TALF Recent Operations, supra note 183. 

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. 

FIGURE 16: ABS ISSUANCE WITHOUT TALF, 2006–2009 187

2. Changes in Interest Rate Spreads. 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. 


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45 

188 Chart prepared by Panel staff using data provided under subscription by BLOOMBERG 

Data Services. 

FIGURE 17: ABS SPREADS OF SELECTED INDICATORS SINCE DECEMBER 2006 188

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. 


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189 Chart prepared by Panel staff using U.S. monthly non-CMBS ABS issuances data provided 

by FRBNY. See TALF Recent Operations, supra note 183. 

FIGURE 18: PERCENT CHANGE IN CONSUMER CREDIT OUTSTANDING 189

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. 


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190See 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). 191See Financial Stability Plan, supra note 173. 192 Unable to shed the risk from their books, commercial lenders significantly curtailed their 

lending activities. 193Government 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. 195Government 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’’). 196Treasury 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/ 

April2009lQuarterlylReportltolCongress.pdf). 197See 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’’). 

b. Loans to Small Business 

During the financial crisis, small business credit froze along with 

the rest of the lending markets.190 On March 17, 2009, Treasury 

outlined measures to ‘‘jumpstart credit markets for 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 government-guaranteed portion of 

Small Business Administration (SBA) 7(a) loans and the non-government-guaranteed 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 pur- chase 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 It has noted that the lack of an earlier start to the 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’’ 


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199Pursuant 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 firstlien 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. 205Small- 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. 206See President Obama Announces Small Business Efforts, supra note 174 at 2. 207 Community development financial institutions, which are certified by the federal government, provide loans to underserved communities. 208See President Obama Announces Small Business Efforts, supra note 174. 209 Id. 210 Id. 211For 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. 

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 banks 204 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 institutions 207 that 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 Further 

implementing details for this program have not been announced as 

of the date of this report. 

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.211


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212 Calculation based on data provided by SIFMA. 213Prior 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). 

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 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. 

FIGURE 19: SMALL BUSINESS ORIGINATIONS OF SELECTED CPP RECIPIENTS SINCE 

MARCH 2009 (WITHOUT PNC OR WELLS FARGO) 213


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214See id. 215See 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’’). 218See 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 cop.senate.gov/hearings/library/hearing-111909-economists.cfm) 

(hereinafter ‘‘COP November Hearing Transcript’’). 

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 precrisis 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


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51 

219Prior 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. 220See 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/cop-100909-report.pdf) (hereinafter ‘‘October Oversight Report’’). 221The 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’’). 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. 

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 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. 

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, 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 


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224See 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). 225The 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). 226See November 25 Transactions Report, supra note 71. 227The 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/ 

RC08SEPT24ServicingJordanDorchuck.pdf). 228This 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/modificationlprogramlguidelines.pdf) (hereinafter ‘‘HAMP Guidelines’’). 230Making Home Affordable Summary of Guidelines, supra note 220; October Oversight Report, supra note 220. 231See 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/ 

housinglfactlsheet.pdf). 232 HAMP Guidelines, supra note 229. 

the funds paid out.224 Altogether, Treasury has designated $75 bil- lion 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

Servicers are expected to comply with any private contractual restrictions on loan modifications, however. 

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.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

HAMP modifications begin with a three-month trial modification. 

If the borrower is current on payments at the end of the threemonth 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 


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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.’’ 234Treasury Mortgage Market Data, id. 235See 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/SeptlRefinancelFinallreportlandlreleasel11l2l09.pdf) 

(hereinafter ‘‘FHFA Refinance Report’’). 236Treasury Mortgage Market Data, supra note 233. 237FHFA Refinance Report, supra note 235. 238Treasury Mortgage Market Data, supra note 233. 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/ 

housinglfactlsheet.pdf). 240Goldman 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%20 

Update%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’’). 242Treasury Mortgage Market Data, supra note 233. 

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-to-value ratio (LTV) over 105 percent.238

These numbers should increase, however, as the program’s maximum LTV was only recently increased from 105 percent to 125 

percent. While 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 


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243 Id. 244See 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) (hereinafter ‘‘Allison 

COP Hearing, Oct. 22’’). 245Treasury Mortgage Market Data, supra note 233. 246 Allison COP Hearing, Oct. 22, supra note 246. 247See U.S. Department of the Treasury, Obama Administration Kicks Off Mortgage Modification Conversion Drive (Nov. 30, 2009) (online at www.ustreas.gov/press/releases/tg421.htm). 248Treasury Mortgage Market Data, supra note 233. 249See 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. 

trials started the previous month to 99,183.243 It is unclear why 

the number of trials dropped and whether or not this trend will 

continue into the future. 

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.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 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 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 although the success of the 

program over the long term will certainly require a much higher 

rate. 

A second major concern about HAMP is that many homeowners 

who receive permanent modifications may redefault and ultimately 

lose their homes in foreclosure sales.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 


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250These 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. 252 Allison COP Hearing, Oct. 22, supra note 246. 253See 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/testimony-102209-allison-qfr.pdf) (hereinafter ‘‘Questions for the 

Record for Assistant Secretary Allison’’). 254Treasury Mortgage Market Data, supra note 233. 255See HAMP Guidelines, supra note 229. 256See October Oversight Report, supra note 220, at 9–21. 

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 At 

the Panel’s Oct. 22 hearing, Assistant Secretary Allison noted that 

HAMP results in material reductions in borrowers’ payments.252

He later noted that Treasury’s baseline assumption for redefault 

rates is 40 percent over the next five years.253 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. 

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 redefaults.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 Redefaults during the fiveyear modification period mean that taxpayer funds will be paid out 

for modifications that nevertheless end in foreclosure. 

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. 

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 


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257Labor Force Statistics, supra note 17. 258 Id. 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/hamplservicer/hampfaqs.pdf). 261See 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. 262October Oversight Report, supra note 220, at 97. 263See 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 owner-occupied 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 online at www.facorelogic.com/newsroom/ 

marketstudies/ 

negative-equity-report.jsp) (accessed Dec. 7, 2009); see also U.S. Census Bureau, American Houspercent for the first time in 26 years.257 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 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 And while Treasury’s programs have made mortVerDate Nov 24 2008 02:18 Jan 26, 2010 Jkt 054148 PO 00000 Frm 00064 Fmt 6602 Sfmt 6602 E:\HR\OC\A148.XXX A148

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ing Survey—Frequently Asked Questions (online at www.census.gov/hhess/www/housing/ahs/ 

ahsfaq.html) (accessed Dec. 4, 2009). 266Treasury Mortgage Market Data, supra note 233. 267MHA 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/industry-data/ 

HOPE%20NOW%20National%20 

Data%20July07%20to%20Sep09%20v2.pdf) (accessed Dec. 7, 2009). 268Treasury 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). 

gages more affordable, they have not significantly reduced the 

amount of negative equity in modified and refinanced loans.266 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. 

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. 

FIGURE 21: FORECLOSURE STARTS V. TRIAL MODIFICATIONS STARTED 267

In October 2009, there were 222,107 foreclosure starts, significantly more than the 99,183 HAMP trial modifications initiated in 

the same month.268 In October there were also 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. 


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58 

269Mortgage 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%20 

NOW%20National%20Data%20July07 

%20to%20Sep09%20v2.pdf) (accessed Dec. 7, 2009). 271Mortgage Bankers Association, National Delinquency Survey. 

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 As currently structured, HAMP appears capable of preventing only a fraction of foreclosures. 

FIGURE 22: PERCENTAGE OF 1–4 FAMILY MORTGAGES IN 30–90 DAYS DELINQUENT 271


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59 

272Mortgage 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&FileStorelid=c41857b2-7253-4253-95e3-5cfd7ea81393). 274See U.S. Department of the Treasury, Loan and Security Agreement [GM] (Dec. 31, 2008) 

(online at www.financialstability.gov/docs/agreements/GM%20Agreement%20 

Dated%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 

/Chyslerl12312008.pdf). 275See 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. 

FIGURE 23: PERCENTAGE OF 1–4 FAMILY MORTGAGES IN FORECLOSURE 272

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 The government funding, which did not 

end with those initial loans, came from a new TARP 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. 


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276See 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). 277See 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). 278For 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’’). 279General 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). 281See Chrysler Group LLC, Formation of Chrysler Group LLC Board is Completed (July 5, 

2009) (online at www.chryslergroupllc.com/en/news/article/ 

?lid=formationlboard&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). 282 November 25 Transactions Report, supra note 71, at 16 GMAC was the former financing 

arm of pre-bankruptcy GM, but is now an independent company. 283See Treasury Announcement Regarding the CAP, supra note 78. 284See Treasury Announcement Regarding the CAP, supra note 78. 285Treasury 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 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. 

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 ‘‘hands-off’’ 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

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 


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286See November 25 Transactions Report, supra note 71, at 16. 287See November 25 Transactions Report, supra note 71, at 16. 295These 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. 

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. 

FIGURE 24: TARP FUNDS USED IN SUPPORT OF THE AUTO INDUSTRY (AS OF NOVEMBER 30, 2009) 

Cumulative 

obligations 288

Total amounts repaid and 

de-obligated Amounts invested 289

Chrysler ................................................................... $15,222,130,642 290 $2,691,977,062 $12,530,153,580 

General Motors ........................................................ 49,860,624,198 360,624,198 291 49,500,000,000 

GMAC ....................................................................... 12,500,000,000 — 12,500,000,000 

Chrysler Financial 292 ............................................. 1,500,000,000 1,500,000,000 

Loan for GMAC rights offering 293 ......................... 884,024,131 — 884,024,131 

Auto Supplier Supports ........................................... 3,500,000,000 — 294 3,500,000,000 

Total ............................................................... 83,466,778,971 4,552,601,260 78,914,177,711 

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. 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.

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 Indicators were mixed. On one 


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296See 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/newsldetail.html/content/Pages/news/us/en/2009/Nov/1116learnings). 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?lr=2&hp) (hereinafter ‘‘G.M. Shows Signs of Recovery Despite New Loss’’). 298See 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. 300See Chrysler Group LLC, Our Plan Presentation (Nov. 4, 2009) (online at 

www.chryslergroupllc.com/business/). 301See Autodata, U.S. Light Vehicle Retail Sales (Oct. 2009) (online at 

www.motorintelligence.com/fileopen.asp?File=SR-Sales-3.xls). 302The 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 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/autol bailoutlrattner.fortune/index.htm?postversion=2009102104). 

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 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 On the 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 


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303See September Oversight Report, supra note 273, at 55–58; GAO: Continued Stewardship 

Needed, supra note 302, at 25–28. 304See September Oversight Report, supra note 273, at 79–83. 305Treasury 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). 306The 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). 

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 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 

programs and initiatives.306 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. 


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FIGURE 25: TARP ACCOUNTING (AS OF NOVEMBER 30, 2009) 

[In billions of dollars] 

TARP Initiative Anticipated 

funding 

Actual 

funding 

Total repayments Net funding 

outstanding 

Net funding 

available 

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) ............................... 308 3.5 3.5 0 3.5 0 

Unlocking SBA Lending ............................................. 15.0 0 N/A 0 15.0 

Home Affordable ........................................................ 50.0 309 27.4 0 27.4 22.7 

Modification Program (HAMP): 

Total Committed ........................................................ 528.9 471.3 — 401.5 54.3 

Total Uncommitted .................................................... 169.8 N/A 73.2 N/A 310 243.0 

TOTAL ........................................................... 698.7 474.7 73.2 401.5 297.2 

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 Re- lief 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. 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). 

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. 


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311See November 25 Transactions Report, supra note 71. 

FIGURE 26: NET CURRENT INVESTMENT OF TARP FUNDS 311

c. The TARP in the Context of Other Federal Government Stablilization 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. 


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312Outlays 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. 313See November 25 Transactions Report, supra note 71. 314See Figure 27 infra. 315See Appendix V footnote iv infra. 316See Figure 27 infra. 317See Figure 27 infra. 318The 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. 

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 ex- posure 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 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; 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. 

FIGURE 27—FEDERAL GOVERNMENT’S FINANCIAL STABILIZATION PROGRAMS (AS OF NOVEMBER 

25, 2009)—CURRENT MAXIMUM EXPOSURES *

[In billions of dollars] 

Program Treasury (TARP) Federal Reserve FDIC Total 

AIG .................................................................................. $69.8 $94.6 $0 $164.4 

Outlays .................................................................. i 69.8 0 0 69.8 

Loans ..................................................................... 0 ii 94.6 0 94.6 

Guarantees ............................................................ 0 0 0 0 

Bank of America ............................................................ 45 0 0 45 

Outlays .................................................................. iii 45 0 0 45 


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FIGURE 27—FEDERAL GOVERNMENT’S FINANCIAL STABILIZATION PROGRAMS (AS OF NOVEMBER 

25, 2009)—CURRENT MAXIMUM EXPOSURES *—Continued 

[In billions of dollars] 

Program Treasury (TARP) Federal Reserve FDIC Total 

Loans ..................................................................... 0 0 0 0 

Guarantees ............................................................ 0 0 0 0 

Citigroup ......................................................................... 50 220.4 10 280.4 

Outlays .................................................................. v 45 0 0 45 

Loans ..................................................................... 0 0 0 0 

Guaranteesiv ........................................................ 5 220.4 10 235.4 

Capital Purchase Program (Other) ................................ 97 0 0 97 

Outlays .................................................................. vi 97 0 0 97 

Loans ..................................................................... 0 0 0 0 

Guarantees ............................................................ 0 0 0 0 

Capital Assistance Program .......................................... TBD TBD TBD viiTBD 

TALF ................................................................................ 20 180 0 200 

Outlays .................................................................. 0 0 0 0 

Loans ..................................................................... 0 ix 180 0 180 

Guarantees ............................................................ viii 20 0 0 20 

PPIF (Loans) x ................................................................ 0 0 0 0 

Outlays .................................................................. 0 0 0 0 

Loans ..................................................................... 0 0 0 0 

Guarantees ............................................................ 0 0 0 0 

PPIF (Securities) ............................................................. xi 30 0 0 30 

Outlays .................................................................. 10 0 0 10 

Loans ..................................................................... 20 0 0 20 

Guarantees ............................................................ 0 0 0 0 

Home Affordable Modification Program ......................... 50 0 0 xiii 50 

Outlays .................................................................. xii 50 0 0 50 

Loans ..................................................................... 0 0 0 0 

Guarantees ............................................................ 0 0 0 0 

Automotive Industry Financing Program ....................... 75.4 0 0 75.4 

Outlays .................................................................. xiv 55.2 0 0 55.2 

Loans ..................................................................... 20.2 0 0 20.2 

Guarantees ............................................................ 0 0 0 0 

Auto Supplier Support Program ..................................... 3.5 0 0 3.5 

Outlays .................................................................. 0 0 0 0 

Loans ..................................................................... xv 3.5 0 0 3.5 

Guarantees ............................................................ 0 0 0 0 

Unlocking Credit for Small Businesses ......................... 15 0 0 15.0 

Outlays .................................................................. xvi 15 0 0 15 

Loans ..................................................................... 0 0 0 0 

Guarantees ............................................................ 0 0 0 0 

Temporary Liquidity Guarantee Program ....................... 0 0 609 609 

Outlays .................................................................. 0 0 0 0 

Loans ..................................................................... 0 0 0 0 

Guarantees ............................................................ 0 0 xvii 609 609 

Deposit Insurance Fund ................................................. 0 0 47.7 47.7 

Outlays .................................................................. 0 0 xviii 47.7 47.7 

Loans ..................................................................... 0 0 0 0 

Guarantees ............................................................ 0 0 0 0 

Other Federal Reserve Credit Expansion ....................... 0 1,237.9 0 1,237.9 

Outlays .................................................................. 0 1,008.5 0 1,008.5229.4 

Loans ..................................................................... 0 xix 229.4 0 0 

Guarantees ............................................................ 0 0 0 0 

Uncommitted TARP Funds .............................................. 243 0 0 24 

Outlays .................................................................. TBA 0 0 TBA 

Loans ..................................................................... TBA 0 0 TBA 

Guarantees ............................................................ TBA 0 0 TBA 

Total ............................................................. 698.7 1,732.9 666.7 xxii 3,054.7 

Outlays xx ........................................... 387 1,008.5 47.7 1,443.2 

Loans ................................................... 43.7 504 0 547.7 

Guarantees xxi .................................... 25.0 220.4 619.0 864.4 

Uncommitted TARP Funds .................. 243 0 0 243 

* Associated footnotes are located in Appendix V. 


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319The 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. 

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 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. 

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 mortgage-backed 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. 


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320Federal 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). 321See November 25 Transactions Report, supra note 71. 322See 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. 

FIGURE 28: FEDERAL RESERVE AND FDIC ASSISTANCE SINCE JANUARY 2007 320

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 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. 


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325Section 123 of EESA requires that TARP be treated on a credit reform basis. 326The 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. 327See 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. 

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. 

FIGURE 29: TARP INCOME (AS OF OCTOBER 31, 2009) 324

[In billions of dollars] 

TARP initiative Repayments Dividends Interest Warrant 

repurchases Total 

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 

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/August2009lDividendsInterestReport.pdf); November 25 Transactions Report, supra note 71. 

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 

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 billion 326 and the overall subsidy rate to 12 

percent.327 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. 

Because TARP outlays reflect the discounted present value of 

TARP cash flows, the resulting net cost that is recorded as an outVerDate Nov 24 2008 02:18 Jan 26, 2010 Jkt 054148 PO 00000 Frm 00078 Fmt 6602 Sfmt 6602 E:\HR\OC\A148.XXX A148

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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). 329Office 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). 331SNL Financial, Bank and Thrift Capital Raises (online at www.snl.com/InteractiveX/article.aspx?CDID=A-9619028-11615&KPLT=4) (accessed Dec. 7, 2009). 332See 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). 333See, 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’’). 

lay 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. 

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 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 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 conVerDate Nov 24 2008 02:18 Jan 26, 2010 Jkt 054148 PO 00000 Frm 00079 Fmt 6602 Sfmt 6602 E:\HR\OC\A148.XXX A148

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334 Next Phase of Government Financial Stabilization, supra note 70, at 8. 335 Next Phase of Government Financial Stabilization, supra note 70, 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). 337GAO: TARP One Year, supra note 195, at 36. 

tinue to live with the prospect of imminent foreclosure and the loss 

of their homes. 

i. Credit Risk 

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 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 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. 

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.337 The GAO analysis supports Treasury’s claim that the 

TARP had a positive effect on credit markets. 


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338SNL 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%2c2% 

2c8%2c7%2c22%2c10%2c21%2c5%2c4) (accessed Dec. 7, 2009). 

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. 


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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). 340See 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). 341 Next Phase of Government Financial Stabilization, supra note 70, at 12. 

FIGURE 31: COMMERCIAL PAPER OUTSTANDING 339

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 2009 340—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 mortgage-related 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. 

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/CaseShiller index. The 2009 data from both indices show signs of housing price stabilization, and prices are currently 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


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342Standard & Poor’s, S&P/Case-Shiller Home Price Indices—Instrument: Seasonally Adjusted Composite20 Index (online at www2.standardandpoors.com/spf/pdf/index 

/SAlCSHomePrice l 

Historyl102706.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. 343 National Association of Realtors, Existing-Home Sales Record Another Big Gain, Inventories Continue to Shrink (Nov. 23, 2009) (online at http://www.realtor.org/presslroom/newsl 

releases/2009 /11/recordlbig). 

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. 

FiGURE 32: CASE SHILLER AND FHFA HOME PRICE INDEXES 342

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


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344 National Association of Realtors, Housing Inventory Data. Information provided in response to Panel request. Shaded areas represent periods of recession. 

FIGURE 33: HOUSING INVENTORY 344

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. 


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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. 346 National Association of Realtors, New and Existing Home Sales. Information provided in 

response to Panel request. Shaded areas represent periods of recession. 

FIGURE 34: MORTGAGE RATES 345

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 SALES 346


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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). 348See 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’’). 349See 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% . . .’’). 350See 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). 351See 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’’). 352Deutsche 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’’). 

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 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. 


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353 2009 CRE Outlook, supra note 352. The ‘‘Banks 1–4’’ group includes banks with total as- sets 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, multi-family, or 

farm loans. See June Oversight Report, supra note 77. 354Testifying 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. 

FIGURE 36: BANK EXPOSURE TO CORE CRE LOANS 353

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


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355See, 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’’); Johnson COP Testimony, supra note 333, at 1 

(‘‘There is no question that passing the TARP was the right thing to do’’); Zandi COP Testimony, 

supra note 217, at 1 (‘‘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). 356See, e.g., Takeo Hoshi, Letter to Panel Staff, at 1 (Nov. 8, 2009). 357See Pietro Veronesi & Luigi Zingales, Paulson’s Gift, NBER Working Paper, at 5 (Oct. 

2009) (online at faculty.chicagobooth.edu/brian.barry/igm/Plgift.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?abstractlid=1461884). 358See Paulson’s Gift, supra note 357, at 3. 359See Paulson’s Gift, supra note 357, at 32–36. 360See Paulson’s Gift, supra note 357, at 36. 

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 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 Nevertheless, they argue that an even 

more cost-effective 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 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 

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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). 362See, 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). 363See, e.g., Lawrence White, Letter to Panel Staff, at 1 (Nov. 20, 2009). 364See COP November Hearing Transcript, supra note 218. 365See COP November Hearing Transcript, supra note 218. 366 Calomiris COP Testimony, supra note 355, at 16. 

ment’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 socalled ‘‘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 Thus, Dr. 

Baker 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 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 


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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’’). 369See 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’’). 370Pollock COP Testimony, supra note 369, at 4. 371See Pollock COP Testimony, supra note 369, at 3. 372See, 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). 373See 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 

benefit well-connected but not necessarily deserving entities.367 November hearing witness Simon Johnson, Professor of Global Economics and Management at 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 According to Mr. Pollock, 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 

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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) (‘‘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’’). 374For a discussion of the difficulties inherent in evaluating banks’ capital positions, see August Oversight Report, supra note 100, at 18–37, 62. 375See, e.g., Zandi COP Testimony, supra note 217, at 4–5. 376See, 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’’). 377See Goldman Sachs, U.S. Commercial Real Estate Take III: Re-constructing Estimates for 

Losses, Timing, at 11–13 (Sept. 29, 2009). 378See, 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/CountylBanklMLRl20090909.pdf). 379Paul A. Volcker, Letter to Panel Staff, at 1 (Nov. 6, 2009). 380See Joseph E. Stiglitz, Letter to Panel Staff, at 4 (Nov. 17, 2009); see also Richard Christopher Whalen, 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). 

mentators’ 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 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. 

In addition, some commentators fear that small- and mediumsized banks are particularly susceptible to future shocks, notwithstanding the fact that many have received TARP aid.376 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 Such failures threaten to further impede a broad economic 

recovery. 

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.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 

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382See 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? 

abstractlid=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’’). 383See 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.’’) 384See Joseph E. Stiglitz, Letter to Panel Staff, at 2 (Nov. 17, 2009). 385See infra at page 99. 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. 387Galbraith Letter to Panel Staff, supra note 373, at 1. 388See Dean Baker, Letter to Panel Staff, at 2 (Nov. 5, 2009). 389Few 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. 

cision 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

Others identify non-TARP-related factors such as decreased demand for credit and banks’ concerns about potential changes to accounting rules.385 According to November hearing witness Dr. 

Baker, the current tightening of credit for businesses 

[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.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 No 


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Zandi COP Testimony, supra note 217, at 3. 390See, 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’’). 391See, 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. 394See 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 . . .’’). 395See 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’’). 396See 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) (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 Assistant Secretary Kashkari Update on TARP, supra note 395. 

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 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 


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397See 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. 398See Assistant Secretary Kashkari Update on TARP, supra note 395 (‘‘Treasury expects 

banks to increase their lending as a result of [TARP] investments’’). 399See 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/ 

21/090921falfactlstewart). 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. 

system.’’ 397 Treasury also said it would focus on bank lending to 

restore economic growth.398

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 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. 

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, 


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403 Allison COP Testimony, supra note 401, at 3–4. 404Treasury conversations with Panel staff (Nov. 4, 2009). 405See August Oversight Report, supra note 100, at 4. 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. 

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 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. 

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.405 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. 

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 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 


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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’’). 408See 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). 410See, 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/ 

lockhartl111009.cfm). 411See 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%’’). 

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, 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 precrisis 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 

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412 Allison COP Testimony, supra note 401, at 57. 413Treasury conversations with Panel staff (Nov. 4, 2009). 414 12 U.S.C. § 5201. 415 12 U.S.C. § 5201. 416See 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’’). 417See Remarks by Secretary Paulson on Financial Rescue Package, supra note 396 (stating 

Treasury ‘‘worked aggressively to avoid preventable foreclosures’’). 418See Remarks by Secretary Paulson on Financial Rescue Package, supra note 396 (Paulson, 

‘‘worked aggressively to . . . keep mortgage financing available’’). 419See Remarks by Secretary Paulson on Financial Rescue Package, supra note 396. See Assistant Secretary Kashkari Update on TARP, supra note 395. 420See 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’’). 421See Manuel Adelino, Kristopher Gerardi, and 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). 

erwise 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 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. 

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’’ 414 and ‘‘preserves homeownership.’’ 415 Treasury promised to use its new authorities to stabilize housing and mortgage finance,416 avoid preventable foreclosures,417 and keep low cost mortgage financing 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 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 


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422See generally Allison COP Testimony, supra note 401, at 5; Treasury conversations with 

Panel staff (Nov. 4, 2009). 423See 12 U.S.C. § 5201; 12 U.S.C. § 5223; 12 U.S.C. § 5224. 424See 12 U.S.C. § 5213. 425See 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’’). 426See Allison COP Testimony, supra note 401, at 3. 

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. 

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.422 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. 

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. taxpayers 423 and that it ensure the most efficient use of taxpayer 

funds 424 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 and has earned an annual rate of 17 percent on the 

money invested with those institutions that have now repaid the 

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427See 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/brv13n2l2.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’’). 428See February Oversight Report, supra note 66, at 4, 27. 429See Paulson’s Gift, supra note 357, at 3, 52. 

all 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. 

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 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 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. 

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.429 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 


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430 12 U.S.C. § 5201. 431See 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’’). 432Pollock COP Testimony, supra note 369, at 3. 433See November 25 Transactions Report, supra note 71. 434See 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/ 

October2009lQuarterlylReportltolCongress.pdf). 

major banks that were the subject of the initial use of TARP resources. 

3. Treasury as TARP Steward and Manager 

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 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

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. 

Further, certain transaction details have not been forthcoming, 

such as the actual number of warrants Treasury holds for each financial institution. 

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 


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435The ‘‘recitals’’ to the form of Securities Purchase Agreement—Standard Terms used for 

CPP transactions provide: 

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; 

WHEREAS, the Company agrees to work diligently, under existing programs, to modify the 

terms of residential mortgages as appropriate to strength the health of the U.S. housing market 

. . .; 

See U.S. Department of the Treasury, Securities Purchse 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 reequirements with respect to the reporting of such use, the SPAs seem to be a missed opportunity for monitoring the use of taxpayers’ funds. 436See 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/ 

SIGTARPlSurveylDemonstrateslThat—BankslCanlProvidelMeaningfull %20InformationlOnlTheirlUselOflTARPlFunds.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). 437See 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-interest-reports/Final%20Treasury%20Response %20to%20 

SIGTARP%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%20 

August%202009%20Data%2010%2014% 2009.pdf) (accessed Dec. 4, 2009). 439Office 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) (online at www.sigtarp.gov/reports/audit/ 2009/SIGTARPlSurveyl DemonstrateslThatlBankslCanlProvidelMeaningfull%20Informationl OnlTheirlUsel OflTARPlFunds.pdf) (hereinafter ‘‘SIGTARP Survey Demonstrates that 

Banks Can Provide Meaningful Information on Their Use of TARP Funds’’). 

specify how those objectives should be met, measured, or reported.435

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 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. 

Treasury also states that it does not intend to tell banks how to 

run their businesses.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

SIGTARP sent survey letters to more than 360 CPP recipients, and 

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 


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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 

agency-mortgage 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. 441SIGTARP Survey Demonstrates that Banks Can Provide Meaningful Information on Their 

Use of TARP Funds, supra note 439. 442The 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 www.citigroup.com/citi/corporategovernance/data 

/tarp/tarplprl3q09.pdf?ieNocache=105) (hereinafter ‘‘TARP Progress Report Third Quarter 

2009’’). 445See 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. 446Office 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). 

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 it is not possible to use the survey itself as authority for anything more meaningful. 

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).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 Citigroup also separately publishes regular reports 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 


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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? 

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 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. 

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. 

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 


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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. 

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 


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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. 


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448 Congressional Oversight Panel, February Oversight Report: Valuing Treasury’s Acquisitions 

(Feb. 6, 2009) (online at cop.senate.gov/documents/cop-020609-report.pdf). 449SIGTARP, 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/EmergencylCapitallInjectionslProvidedlTolSupportlthelViabilityl oflBankloflAmerica...l100509.pdf). 

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, former-Treasury 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 This mispricing was substantially driven by the decision to 

price the preferred stock purchased from the large banks as if each 

bank 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 


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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). 452 Ben S. Bernanke, Speech at the Economic Club of New York (Nov. 16, 2009) (online at 

www.federalreserve.gov/ newsevents/ speech/ bernanke20091116a.htm). 

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 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. 

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.451 Meanwhile, small banks 

that do not benefit from either implicit or explicit guarantees are 

failing at an alarming rate. 

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 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 


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decade long problem with bank weakness that contributed to prolonged economic weakness. 

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. 


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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. 

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 


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453 § EESA 2. 

homeownership and promotes jobs and economic growth.’’ 453 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. 

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. 

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 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 


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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. 

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. 


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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 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. 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. 

• 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-sakeof-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 


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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.’’ 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. 


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454The 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. 

455See 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 

• 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 In assessing the overall effectiveness of the TARP I will analyze the program against each of the following metrics: 

• stabilization of the U.S. financial system; 

• increased lending activity; 

• taxpayer protection; 

• 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


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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’’). 456Dan 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’’). 457Senate 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). 

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 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 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 Institutes of Health 

has requested just over $6 billion for cancer research.457 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. 

B. Primary Cause of the Financial Crisis 

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 


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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/cop–030609–report-view-hensarling.pdf). 459 In addition, for well over twenty years, federal policy has promoted lending and borrowing 

to expand home ownership, 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. 460Government Accountability Office, Analysis of Options for Revising the Housing Enterprises’ Long-term Structures (September 2009) (online at www.gao.gov/new.items/d09782.pdf). 461Fannie 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). 

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 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


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462See Figure 27 on pp. 79–80 of the Panel’s December Report. 

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 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). 

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 


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463See 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. 465 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 1 

(Nov. 19, 2009) (online at cop.senate.gov/documents/testimonyμ09111909-baker.pdf). 

increased outlays to its deposit insurance fund.463 The Panel’s current and prior reports analyze many of these programs in detail. 

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.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 

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 


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466 Roy Smith, Letter to Panel Staff (Oct. 23, 2009). 467William Isaac, Letter to Panel Staff (Nov. 6, 2009). 468 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, 

5 (Nov. 19, 2009) (online at cop.senate.gov/documents/testimony-111909-baker.pdf). 

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 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-thesake-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 proVerDate Nov 24 2008 02:18 Jan 26, 2010 Jkt 054148 PO 00000 Frm 00119 Fmt 6602 Sfmt 6602 E:\HR\OC\A148.XXX A148

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469The 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 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 Socie ́te ́

Ge ́ne ́rale 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 

so-called 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). 

grams 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 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 

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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/testimony111909-calomiris.pdf). 

ior 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 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, risktaking 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 ‘‘moralhazard’’ problem can give rise to hugely loss-making, highrisk investments that are both socially wasteful and an unfair burden on taxpayers. 470 (emphasis in original.) 

In order to avoid the creation of moral hazard risks, Professor 

Calomiris advises that any government sponsored intervention incorporate the following concepts: 

(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 


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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/testimony111909-calomiris.pdf). 

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 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 (emphasis in original). 

Dr. Baker submitted the following testimony to the Panel regarding systemic risk: 

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 


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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). 474Paul A. Volcker, Letter to Panel Staff (Nov. 6, 2009). 

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. 

* * * * * 

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 


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475William Poole, Letter to Panel Staff (Oct. 23, 2009). 476SIGTARP, Quarterly Report to Congress, at 4 (Oct. 21, 2009) (online at sigtarp.gov/reports/ 

congress/2009/October2009lQuarterlylReportltolCongress.pdf). 477 Id. 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.’ 

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/2009/05/03white-house-perellaweinberg-deny-claims-of-threat-to-firm/). 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/). 

too big to fail. Poole also notes that efforts to control executive compensation are ‘‘unwise and will ultimately be ineffective.’’ 475

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 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. 

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.’’ 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


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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 regards 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. Representatives 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). 

(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., Politiciand 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). 

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 ‘‘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 

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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). 

tion 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 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. 

* * * * * 


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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-Testimonyμ-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). 

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 (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 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. 


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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/cop090909-report-additionalviews.pdf). 483 Edward Niedermeyer, Taking Taxpayers for a Ride, New York Times (Nov. 22, 2009) at 

www.nytimes.com/2009/11/23/opinion/23niedermayer.html?lr=1&sq=taking taxpayers for a ride 

niedermeyer november22&st=cse&adxnnl=1&scp=1&adxnnlx=1259856084- 

RhEqA9+sraJEUegFNAcvew). 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? 

D. Chrysler and GM Bankruptcies 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 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 billion 484 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


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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. 488William D. Cohan, The Final Days of Merrill Lynch, The Atlantic (Sept. 2009) (online at 

www.theatlantic.com/doc/200909/bank-of-america). 489The 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. 

Continued 

By making such an unprecedented investment in Chrysler and 

GM 487 the Administration by definition chose not to assist other 

Americans who are in need. With the economic suffering 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

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. 

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? 

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 


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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. 490The Chrysler and GM VEBAs (voluntary employee benefit associations) administer and 

fund the health and retirement plans of Chrysler and GM retirees. 491The 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? 

the Chrysler and GM VEBAs 490—unsecured creditors—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 Indiana 491—whose pension funds invested in Chrysler and GM indebtedness? 492

What message do the Chrysler and GM holdings send to nonUAW 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 


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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). 494Mark Roe and David Skeel, Assessing the Chrysler Bankruptcy (Aug. 12, 2009) (online 

atssrn.com/abstract=1426530). 495Todd Zywicki, Chrysler and the Rule of Law, Wall Street Journal (May 13, 2009) (online 

at online.wsj.com/article/SB124217356836613091.html). 

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: 

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-and-acquisitions advisers to financial institutions. ‘‘In the last 12 

months, new precedents have been set weekly. The old 


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496William D. Cohan, The Final Days of Merrill Lynch, The Atlantic (Sept. 2009) (online at 

www.theatlantic.com/doc/200909/bank-of-america). 

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 heavy-handed 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 wellestablished norms, given the nonstop 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 nonTARP 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, 


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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). 

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. 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 


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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). 

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. 

* * * * * 

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 longlived 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 statute 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 


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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? 500The 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 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? 

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. 

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; 

(iii) the transfer of equity interests in New Chrysler and 

New GM to the UAW/VEBAs; and 

(iv) the delivery of notes and other credit support by New 

Chrysler and New GM for the benefit of the UAW/VEBAs.500

Such opinions have not been delivered. 


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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-reportadditionalviews.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). 

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. 

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 Although I do not concur that EESA authorized 

the use of 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 


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502TARP recipients who were also Chrysler senior secured creditors included Citigroup, 

JPMorgan 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-chrysler-group/?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 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. 

* * * * * 

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. 

503Mr. 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 ‘onContinued 

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

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 bid 503 and applied the protections afVerDate Nov 24 2008 02:18 Jan 26, 2010 Jkt 054148 PO 00000 Frm 00137 Fmt 6602 Sfmt 5601 E:\HR\OC\A148.XXX A148

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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 4:00 p.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). 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). 506Taxpayer 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. 

forded 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 high-pressure 

bankruptcies that followed. Without such changes, however, the 

process was inherently 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 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. 

E. TARP and Foreclosure Mitigation505

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


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508Dealbook, 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-mortgage-relief/?scp=1&sq=Treasury%20Goodman%20November%2030&st=cse): 

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 Pro- gram, $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). 510See Section One, C.3. of the Panel’s December report. 511The Making Home Affordable program presently consists of the HAMP—Home Affordable 

Modification Program—and the HARP—Home Affordable Refinancing Program. 

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 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 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 allocated to the MHA—Making Home Affordable—program,511 and it is likely that most (if not all) of it will 

be not be recovered. 

2. Mortgage Holders Profit from Private Sector Foreclosure 

Mitigation Efforts 

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: 


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512Since 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 holders may independent of 

such subsidy, realize a net gain of approximately $80,000 per loan by voluntarily restructuring 

their distressed mortgage loans? 

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 bail out servicers from their ‘‘contracting failure’’ through the 

payment of ‘‘extra-contractual compensation’’? The taxpayers should not be charged with such 

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 pastdue 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 mortgage-backed 

securities that have frozen credit markets and destabilized 

banks.513


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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. 

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 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 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 


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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). 517State 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 averany 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 self-effectuating 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 ‘‘anti-deficiency’’ 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 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


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age consumer is too unskilled to comprehend seemingly sophisticated financial products, I would 

argue to the contrary. With anti-deficiency, single-action 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 reinflate a housing bubble by encouraging reckless speculation and cause lenders to raise mortgage interest rates and fees justifies its rejection. 518See Section One, C.5.b.i. of the Panel’s December report. 519Dealbook, 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-americashed-stigma/?scp=2&sq=stigma%20bank%20of%20america&st=cse). 

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. 

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 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. 

Further, the TARP should be terminated due to: 

• 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 and • the use of the TARP (i) for economic stimulus instead of 

EESA mandated financial stability and (ii) to promote the AdVerDate Nov 24 2008 02:18 Jan 26, 2010 Jkt 054148 PO 00000 Frm 00143 Fmt 6602 Sfmt 6602 E:\HR\OC\A148.XXX A148

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520SIGTARP, Quarterly Report to Congress (Oct. 21, 2009) (online at sigtarp.gov/reports/congress/2009/October2009lQuarterlylReportltolCongress.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. 522The $5,000 ‘‘cost’’ per taxpayer assumes 138.4 million taxpayers are covering the full $699 

billion. 

ministration’s economic, social and political agenda as evidenced by, among others, the Chrysler and GM bankruptcies. 

Some of the adverse consequences that have arisen for TARP recipients include, without limitation: • 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 shortterm 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 The TARP represents five percent of 2008 GDP. • 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. 

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; 

• provides incentives for private banks to repurchase their 

warrant preferred shares from Treasury; and 

• reduces spending authority under the TARP for each dollar repaid. 


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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 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 


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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 thoughtout 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. 


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523See Appendix III of this report, infra. 524See Appendix I of the Congressional Oversight Panel’s October Oversight Report. October 

Oversight Report, supra note 220, at 207. 525See Appendix IV of this report, infra. 526See Appendix II of this report, infra. 527Questions for the Record for Assistant Secretary Allison, supra note 253. 

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

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. 

On behalf of the panel, Chair Elizabeth Warren sent a letter on 

November 25, 2009,525 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. 

On behalf of the panel, Chair Elizabeth Warren sent a letter on 

November 25, 2009,526 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


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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. 

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 


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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. 


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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. 


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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. 


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APPENDIX I: UNPAID DIVIDEND PAYMENTS UNDER CPP 

AS OF OCTOBER 31, 2009 


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UNPAID DIVIDEND PAYMENTS UNDER CPP AS OF OCTOBER 31, 2009 528

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 the 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/October2009lQuarterlylReportltol Congress.pdf). 


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APPENDIX II: LETTER FROM CHAIR ELIZABETH WARREN TO ASSISTANT SECRETARY HERB ALLISON, RE: 

WRITTEN RESPONSES FOR HEARING RECORD, DATED 

NOVEMBER 25, 2009 


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APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY GEITHNER, RE: STRESS 

TESTS, DATED NOVEMBER 25, 2009 


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APPENDIX IV: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY GEITHNER, RE: CIT 

GROUP, INC., DATED NOVEMBER 25, 2009 


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APPENDIX V: ENDNOTES TO FIGURE 27: FEDERAL GOVERNMENT’S FINANCIAL STABILIZATION PROGRAMS 

(AS OF NOVEMBER 25, 2009)—CURRENT MAXIMUM EXPOSURES 

iThis 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 the 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%20 as%20of%2011-25-09.pdf). iiThis 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 the 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/ 

cititermsheetl112308.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/10-927- 

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. viThis 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 the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending November 25, 2009 (Nov. 30, 2009) (online at 


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www.financialstability.gov/docs/transaction-reports/11-30- 

09%20Transactions%20Report%20 as%20of%2011-25-09.pdf). viiThe 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 www.financialstability.gov/latest/tgl11092009.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. viiiThis 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 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/cop081109-report.pdf) (discussing criteria for constituting a ‘‘troubled asset’’). ixThis 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. xThe 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/tgl07082009.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/ 

ppiplfactlsheet.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 the 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%20 as%20of%2011-25-09.pdf). 


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xiiiFannie 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: Updated Detailed Program Description (Mar. 4, 2009) (online at www.treas.gov/press/ 

releases/reports/housinglfactlsheet.pdf). xiv U.S. Department of the 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%20 as%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 the 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%20 as%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/ 

ppiplfactlsheet.pdf). xviiThis 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/totallissuance9-09.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). xviiiThis 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/cfolreportl4qtrl08/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/cfolreportl3rdqtrl08/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/cfolreportl1stqtrl09/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/ 

cfolreportl2ndqtrl09/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-txlplandlalwladdendum.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 


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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). xxThe 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. xxiWhile 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. xxiiThis 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/July2009lQuarterlylReportltolCongress.pdf). However, the Panel 

has sought to capture additional anticipated exposure and thus employs a different 

methodology than SIGTARP. 


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