a

GAO

United States Government Accountability Office

Report to Congressional Committees

December 2009 FINANCIAL AUDIT

Office of Financial 

Stability (Troubled 

Asset Relief Program) 

Fiscal Year 2009 

Financial Statements

GAO-10-301
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

December 2009

FINANCIAL AUDIT

Office of Financial Stability (Troubled Asset Relief 

Program) Fiscal Year 2009 Financial Statements

Highlights of GAO-10-301, a report to 

congressional committees 

On October 3, 2008, the Emergency 

Economic Stabilization Act of 2008 

(EESA) was signed into law. EESA 

authorized the Secretary of the 

Treasury to implement the 

Troubled Asset Relief Program 

(TARP) and established the Office 

of Financial Stability (OFS) within 

the Department of the Treasury 

(Treasury) to do so. EESA requires 

the annual preparation of financial 

statements for TARP, and further 

requires GAO to audit these 

statements. 

GAO audited OFS’s fiscal year 2009 

financial statements for TARP to 

determine whether, in all material 

respects, (1) the financial 

statements were fairly stated, and 

(2) OFS management maintained 

effective internal control over 

financial reporting. GAO also 

tested OFS’s compliance with 

selected provisions of laws and 

regulations. 

We will be separately reporting to 

OFS on additional details 

concerning the findings in this 

report along with 

recommendations for corrective 

actions. In commenting on a draft 

of this report, the Assistant 

Secretary, Office of Financial 

Stability, stated OFS concurred 

with the two significant 

deficiencies in its internal control 

over financial reporting GAO 

identified. He also stated that OFS 

is committed to correcting the 

deficiencies. 

In GAO’s opinion, OFS’s fiscal year 2009 financial statements for TARP are 

fairly presented in all material respects. GAO also concluded that, although 

internal controls could be improved, OFS maintained, in all material respects, 

effective internal control over financial reporting as of September 30, 2009. 

GAO found no reportable instances of noncompliance with the provisions of 

laws and regulations it tested. 

Since its inception on October 3, 2008, OFS implemented numerous initiatives 

under TARP. As of September 30, 2009, net assets related to TARP direct 

loans, equity investments, and asset guarantees had an estimated value of 

about $239.7 billion. In addition, for the period ending September 30, 2009, 

OFS reported an estimated subsidy cost (estimated losses related to its direct 

loans, equity investments, and asset guarantees) of $41.4 billion and a net cost 

of operations of $41.6 billion for TARP, which includes the estimated subsidy 

costs. In valuing TARP direct loans, equity investments, and asset guarantees, 

OFS management considered and selected assumptions and data that it 

believed provided a reasonable basis for the estimated costs reported in the 

financial statements. However, these assumptions and estimates are 

inherently subject to substantial uncertainty arising from the likelihood of 

future changes in general economic, regulatory, and market conditions. The 

estimates have an added uncertainty arising from the uniqueness of 

transactions for the multiple TARP initiatives and the lack of historical 

information and program experience upon which to base the estimates. As 

such, there will be differences between the net estimated values of the direct 

loans, equity investments, and asset guarantees as of September 30, 2009, and 

the amounts that OFS will ultimately realize from these assets, and such 

differences may be material. These differences will also affect the ultimate 

cost of TARP to the taxpayer. 

GAO identified two significant deficiencies in OFS’s internal control over 

financial reporting concerning (1) accounting and financial reporting 

processes, and (2) verification procedures over the data used for asset 

valuations. While these deficiencies are not considered material weaknesses, 

they are important enough to merit management’s attention. 

View GAO-10-301 or key components.

For more information, contact Gary T. Engel 

at (202) 512-3406 or engelg@gao.gov. 
Page i GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Contents

Transmittal Letter 1

Auditor’s Report 7

Opinion on Financial Statements 8

Opinion on Internal Control 9

Compliance with Laws and Regulations 12

Consistency of Other Information 12

Objectives, Scope, and Methodology 12

Agency Comments 14

Management’s 

Discussion and 

Analysis

15

Financial Statements 106

Balance Sheet 109

Statement of Net Cost 110

Statement of Changes in Net Position 111

Statement of Budgetary Resources 112

Notes to the Financial Statements 113

Appendixes

Appendix I: Management’s Report on Internal Control over Financial 

Reporting 148

Appendix II: Comments from the Office of Financial Stability 149

Appendix III: GAO Contact and Staff Acknowledgments 150

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately.
Page 1 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

United States Government Accountability Office

Washington, D.C. 20548

Page 1 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

A

December 9, 2009 Transmital Leter

Congressional Committees

The accompanying auditor’s report presents the results of our audit of the 

fiscal year 2009 financial statements of the Office of Financial Stability 

(Troubled Asset Relief Program). The Emergency Economic Stabilization 

Act (EESA) of 20081

 that authorized the Troubled Asset Relief Program 

(TARP) on October 3, 2008, requires that TARP, which is implemented by 

the Office of Financial Stability (OFS),2

 annually prepare and submit to 

Congress and the public audited fiscal year financial statements that are 

prepared in accordance with generally accepted accounting principles.3

 

EESA further requires that GAO audit TARP’s financial statements 

annually.

4

 We also are required under EESA to report at least every 60 days 

on the findings resulting from our oversight of the actions taken under 

TARP.5

 This report responds to both of these requirements. Fiscal year 

2009 was the first year that OFS prepared and issued audited financial 

statements for TARP. This accomplishment was made possible by the 

dedication of significant time and effort from both OFS management and 

staff.

This report contains our (1) unqualified opinion on OFS’s fiscal year 2009 

financial statements for TARP; (2) opinion that, although certain controls 

could be improved, OFS maintained, in all material respects, effective 

internal control over financial reporting as of September 30, 2009; and 

(3) conclusion that OFS complied, during the period ended 

1

Pub. L. No. 110-343, Div. A, 122 Stat. 3765 (Oct. 3, 2008), codified in part, as amended, at 12 

U.S.C. §§ 5201-5261.

2

Section 101 of EESA, 12 U.S.C. § 5211, established OFS within Treasury to implement TARP.

3

Section 116(b) of EESA, 12 U.S.C. § 5226(b).

4

Section 116(b) of EESA, 12 U.S.C. § 5226(b).

5

Section 116 of EESA, 12 U.S.C. § 5226, requires the U.S. Comptroller General to report at 

least every 60 days, as appropriate, on findings resulting from oversight of TARP’s 

performance in meeting the act’s purposes; the financial condition and internal controls of 

TARP, its representatives, and agents; the characteristics of asset purchases and the 

disposition of acquired assets, including any related commitments entered into; TARP’s 

efficiency in using the funds appropriated for its operations; its compliance with applicable 

laws and regulations; and its efforts to prevent, identify, and minimize conflicts of interest 

among those involved in its operations. 
Page 2 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

September 30, 2009, with provisions of laws and regulations we tested. The 

accompanying report also provides an overview of two significant 

deficiencies6

 in OFS’s internal control over financial reporting that we 

identified while performing our audit that we believe merit the attention of 

OFS management and users of OFS’s financial statements. We will be 

reporting separately to OFS on more detailed information concerning these 

significant deficiencies along with recommended corrective actions.

Since its inception, OFS implemented numerous initiatives under TARP 

including the (1) Capital Purchase Program, (2) Targeted Investment 

Program, (3) Asset Guarantee Program, (4) Consumer and Business 

Lending Initiative, (5) Public-Private Investment Program, (6) American 

International Group, Inc. Investment Program (formerly known as the 

Systemically Significant Failing Institutions Program), (7) Automotive 

Industry Financing Program, and (8) Home Affordable Modification 

Program. These initiatives are described in more detail in the footnotes to 

OFS’s financial statements and Management’s Discussion and Analysis 

(MD&A) included in this report. 

As of September 30, 2009, OFS reported net assets related to TARP direct 

loans, equity investments, and asset guarantees of about $239.7 billion, 

which is net of a subsidy cost allowance of about $53.1 billion. The subsidy 

cost allowance represents the difference between the amounts paid by OFS 

for the direct loans, equity investments, and asset guarantees and the 

reported value of such assets. In addition, for the period ended September 

30, 2009, OFS reported an estimated subsidy cost7

 of $41.4 billion and a net 

cost of operations of $41.6 billion for TARP, which includes the estimated 

subsidy cost. 

6

A significant deficiency is a deficiency, or combination of deficiencies, in internal control 

that is less severe than a material weakness, yet important enough to merit attention by 

those charged with governance. A material weakness is a deficiency, or combination of 

deficiencies, in internal control such that there is a reasonable possibility that a material 

misstatement of the entity’s financial statements will not be prevented, or detected and 

corrected on a timely basis. A deficiency in internal control exists when the design or 

operation of a control does not allow management or employees, in the normal course of 

performing their assigned functions, to prevent, or detect and correct misstatements on a 

timely basis.

7

The subsidy cost is composed of (1) the subsidy cost allowance, (2) net intragovernmental 

interest cost, (3) certain inflows from the direct loans and equity investments (e.g., 

dividends, interest, proceeds from repurchase of warrants by financial institutions, and 

other realized fees), and (4) the estimated discounted net cash flows related to the Asset 

Guarantee Program.
Page 3 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

OFS management considered and selected assumptions and data that it 

believed provided a reasonable basis for the estimated costs reported in the 

financial statements. However, these assumptions and estimates are 

inherently subject to substantial uncertainty arising from the likelihood of 

future changes in general economic, regulatory, and market conditions. 

The estimates have an added uncertainty arising from the uniqueness of 

transactions for the multiple TARP initiatives and the lack of historical 

information and program experience upon which to base the estimates. As 

such, there will be differences between the net estimated values of the 

direct loans, equity investments, and asset guarantees as of September 30, 

2009, and the amounts that OFS will ultimately realize from these assets, 

and such differences may be material. These differences will also affect 

the ultimate cost of TARP. Further, the ultimate cost will change as OFS 

continues to purchase additional assets and incur related subsidy costs as 

well as incur costs under other TARP initiatives.8

 OFS’s authority to 

purchase or insure additional troubled assets expires on December 31, 

2009, but may be extended by the Secretary of the Treasury to up to 

October 3, 2010.9

We are sending copies of this report to the Secretary of the Treasury, 

Assistant Secretary for Financial Stability, Congressional Oversight Panel, 

Financial Stability Oversight Board, Special Inspector General for TARP, 

Office of Management and Budget, interested congressional committees 

and members, and others. The report is available at no charge on GAO’s 

Web site at http://www.gao.gov.

8

Under EESA, as amended, OFS is authorized to purchase or insure up to almost $700 billion 

in troubled assets.

9

Section 120 of EESA, 12 U.S.C. § 5230, established that the authorities under Sections 

101(a), excluding Section 101(a)(3), and Section 102, shall terminate on December 31, 2009. 

Section 120 of EESA further established that the Secretary of the Treasury, upon submission 

of a written certification to Congress, may extend the authority provided under these 

sections of EESA to expire no later than 2 years from the date of the enactment of EESA 

(Oct. 3, 2008).
Page 4 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

If you have questions about this report, please contact me at (202) 512-3406 

or engelg@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. 

GAO staff who made key contributions to this report are listed in appendix 

III.

Sincerely yours,

Gary T. Engel

Director

Financial Management and Assurance
Page 5 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

List of Congressional Committees

The Honorable Daniel K. Inouye

Chairman

The Honorable Thad Cochran

Vice Chairman

Committee on Appropriations

United States Senate

The Honorable Christopher J. Dodd

Chairman

The Honorable Richard C. Shelby

Ranking Member

Committee on Banking, Housing, and Urban Affairs

United States Senate

The Honorable Kent Conrad

Chairman

The Honorable Judd Gregg

Ranking Member

Committee on the Budget

United States Senate

The Honorable Max Baucus

Chairman

The Honorable Charles E. Grassley

Ranking Member

Committee on Finance

United States Senate

The Honorable David R. Obey

Chairman

The Honorable Jerry Lewis

Ranking Member

Committee on Appropriations

House of Representatives
Page 6 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

The Honorable John M. Spratt, Jr.

Chairman

The Honorable Paul Ryan

Ranking Member

Committee on the Budget

House of Representatives

The Honorable Barney Frank

Chairman

The Honorable Spencer Bachus

Ranking Member

Committee on Financial Services

House of Representatives

The Honorable Charles B. Rangel

Chairman

The Honorable Dave Camp

Ranking Member

Committee on Ways and Means

House of Representatives
Page 7 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

United States Government Accountability Office

Washington, D.C. 20548

Page 7 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

A

To the Assistant Secretary for Financial Stability Auditor’s Report

In accordance with the Emergency Economic Stabilization Act of 2008 

(EESA),1

 we are required to audit the financial statements of the Troubled 

Asset Relief Program (TARP), which is implemented by the Office of 

Financial Stability (OFS).2

 In our audit of OFS’s financial statements for 

TARP for the period from October 3, 2008, (date of OFS’s inception) 

through September 30, 2009, we found 

• the financial statements are presented fairly, in all material respects, in 

conformity with U.S. generally accepted accounting principles;

• although internal controls could be improved, OFS maintained, in all 

material respects, effective internal control over financial reporting as 

of September 30, 2009; and

• no reportable noncompliance in the period ended September 30, 2009, 

with provisions of laws and regulations we tested.

The following sections discuss in more detail (1) these conclusions; (2) our 

conclusion on Management’s Discussion and Analysis (MD&A) and other 

required supplementary and other accompanying information; (3) our audit 

objectives, scope, and methodology; and (4) OFS’s comments on a draft of 

this report. In addition to our responsibility to audit OFS’s annual financial 

statements for TARP, we also are required under EESA to report at least 

every 60 days on the findings resulting from our oversight of the actions 

taken under TARP.3

 This report responds to both of these requirements. We 

1

Section 116(b) of EESA, 12 U.S.C. § 5226(b), requires that the Department of the Treasury 

(Treasury) annually prepare and submit to Congress and the public audited fiscal year 

financial statements for TARP that are prepared in accordance with generally accepted 

accounting principles. Section 116(b) further requires that GAO audit TARP’s financial 

statements annually in accordance with generally accepted auditing standards.

2

Section 101 of EESA, 12 U.S.C. § 5211, established OFS within Treasury to implement TARP.

3

Section 116 of EESA, 12 U.S.C. § 5226, requires the U.S. Comptroller General to report at 

least every 60 days, as appropriate, on findings resulting from oversight of TARP’s 

performance in meeting the act’s purposes; the financial condition and internal controls of 

TARP, its representatives, and agents; the characteristics of asset purchases and the 

disposition of acquired assets, including any related commitments entered into; TARP’s 

efficiency in using the funds appropriated for its operations; its compliance with applicable 

laws and regulations; and its efforts to prevent, identify, and minimize conflicts of interest 

among those involved in its operations. 
Page 8 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

have issued numerous other reports on TARP in connection with this 60-

day reporting responsibility which can be found on GAO’s Web site at 

http://www.gao.gov.

Opinion on Financial 

Statements

OFS’s financial statements for TARP, including the accompanying notes, 

present fairly, in all material respects, in conformity with U.S. generally 

accepted accounting principles, OFS’s assets, liabilities, and net position as 

of September 30, 2009, and its net cost, changes in net position, and 

budgetary resources for the period from October 3, 2008, (date of OFS’s 

inception) through September 30, 2009.

As discussed in notes 2 and 6 to OFS’s financial statements for TARP, the 

valuation of TARP direct loans, equity investments, and asset guarantees is 

based on estimates using economic and financial credit subsidy models. 

The estimates use entity-specific as well as relevant market data as the 

basis for assumptions about future performance, and incorporate an 

adjustment for market risk to reflect the variability around any unexpected 

losses. In valuing the direct loans, equity investments, and asset 

guarantees, OFS management considered and selected assumptions and 

data that it believed provided a reasonable basis for the estimated subsidy 

allowance and related subsidy costs reported in the financial statements.4

 

However, there are a large number of factors that affect these assumptions 

and estimates, which are inherently subject to substantial uncertainty 

arising from the likelihood of future changes in general economic, 

regulatory, and market conditions. The estimates have an added 

uncertainty resulting from the unique nature of transactions associated 

with the multiple initiatives undertaken for TARP and the lack of historical 

program experience upon which to base the estimates. As such, there will 

be differences between the net estimated values of the direct loans, equity 

investments, and asset guarantees as of September 30, 2009, that totaled 

$239.7 billion, and the amounts that OFS will ultimately realize from these 

assets, and such differences may be material. These differences will also 

affect the ultimate cost of TARP. Further, the ultimate cost will change as 

4

The subsidy allowance represents the difference between the amounts paid by OFS to 

acquire the direct loans and equity investments and the reported value of such assets. The 

subsidy cost is composed of (1) the subsidy cost allowance, (2) net intragovernmental 

interest cost, (3) certain inflows from the direct loans and equity investments (e.g., 

dividends, interest, proceeds from repurchase of warrants by financial institutions, and 

other realized fees), and (4) the estimated discounted net cash flows related to the Asset 

Guarantee Program.
Page 9 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

OFS continues to purchase troubled assets and incur related subsidy costs 

as well as incur costs under other TARP initiatives.5

 OFS’s authority to 

purchase or insure additional troubled assets expires on December 31, 

2009, but may be extended by the Secretary of the Treasury to up to 

October 3, 2010.6

As discussed in note 1 to the financial statements, while OFS’s financial 

statements reflect activity of OFS in implementing TARP, including 

providing resources to various entities to help stabilize the financial 

markets, the statements do not include the assets, liabilities, or results of 

operations of commercial entities in which OFS has a significant equity 

interest. According to OFS officials, OFS’s investments were not made to 

engage in the business activities of the respective entities and OFS has 

determined that none of these entities meet the criteria for a federal entity.

Opinion on Internal 

Control

Although certain internal controls could be improved, OFS maintained, in 

all material respects, effective internal control over financial reporting as 

of September 30, 2009, that provided reasonable assurance that 

misstatements, losses, or noncompliance material in relation to the 

financial statements would be prevented or detected and corrected on a 

timely basis. Our opinion on internal control is based on criteria 

established under 31 U.S.C. § 3512(c), (d), commonly known as the Federal 

Managers’ Financial Integrity Act (FMFIA). 

5

 Under EESA, as amended, OFS is authorized to purchase or insure up to almost $700 

billion in troubled assets.

6

 Section 120 of EESA, 12 U.S.C. § 5230, established that the authorities under Sections 

101(a), excluding Section 101(a)(3), and Section 102, shall terminate on December 31, 2009. 

Section 120 of EESA further established that the Secretary of the Treasury, upon submission 

of a written certification to Congress, may extend the authority provided under these 

sections of EESA to expire no later than 2 years from the date of the enactment of EESA 

(Oct. 3, 2008).
Page 10 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

We identified two significant deficiencies7 in OFS’s internal control over 

financial reporting, which although not material weaknesses, are important 

enough to merit management’s attention. These deficiencies, described in 

more detail later in this report, concern OFS’s (1) accounting and financial 

reporting processes, and (2) verification procedures for data used for asset 

valuations. 

We will be reporting additional details concerning these significant 

deficiencies separately to OFS management, along with recommendations 

for corrective actions. We also identified other deficiencies in OFS’s system 

of internal control that we consider not to be material weaknesses or 

significant deficiencies. We have communicated these matters to 

management and, where appropriate, will report on them separately.

Significant Deficiencies Since its creation on October 3, 2008, OFS has made significant progress in 

building a financial reporting structure, including developing an internal 

control system over TARP activities and transactions and addressing key 

accounting and financial reporting issues necessary to enable it to prepare 

financial statements, and receive an audit opinion on those statements, for 

the period ended September 30, 2009. However, OFS’s financial reporting 

structure continued to evolve throughout the year as new TARP programs 

were implemented, which posed a challenge to OFS’s ability to establish a 

comprehensive system of internal control while simultaneously reacting to 

market events and implementing TARP initiatives. This challenge 

contributed to the following two significant deficiencies in OFS’s internal 

control that we identified.

Accounting and Financial 

Reporting Processes

While OFS had developed and implemented controls over TARP 

transactions and activities, we identified several control deficiencies that 

collectively represented a significant deficiency in OFS’s internal control 

7

A significant deficiency is a deficiency, or a combination of deficiencies, in internal control 

that is less severe than a material weakness, yet important enough to merit attention by 

those charged with governance. A material weakness is a deficiency, or a combination of 

deficiencies, in internal control such that there is a reasonable possibility that a material 

misstatement of the entity’s financial statements will not be prevented, or detected and 

corrected on a timely basis. A deficiency in internal control exists when the design or 

operation of a control does not allow management or employees, in the normal course of 

performing their assigned functions, to prevent or detect and correct misstatements on a 

timely basis.
Page 11 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

over its accounting and financial reporting processes. Specifically, OFS did 

not effectively implement its review and approval process for preparing its 

financial statements and related disclosures for TARP. We identified 

incorrect amounts and inaccurate, inconsistent, and incomplete 

disclosures in OFS’s draft financial statements, footnotes, and MD&A for 

TARP that were significant, but not material, and that were not detected by 

OFS. OFS revised the financial statements, footnotes, and MD&A to 

address the issues that we identified. In addition, OFS had not finalized its 

procedures related to its processes for accounting for certain program 

transactions, preparing its September 30, 2009, financial statements, and its 

oversight and monitoring of financial-related services provided to OFS by 

asset managers and certain financial agents. Further, OFS did not have 

proper segregation of duties over a significant accounting database it uses 

in valuing its assets in that the same individual was responsible for 

performing both the data entry and the reconciliation of the data output. 

However, OFS had other controls over TARP transactions and activities 

that reduced the risk of misstatements resulting from these deficiencies. 

Properly designed and implemented controls over the accounting and 

financial reporting processes are key to providing reasonable assurance 

regarding the reliability of the balances and disclosures reported in the 

financial statements and related notes in conformity with generally 

accepted accounting principles.

Verification Procedures for 

Data Input for Asset 

Valuations

OFS did not effectively implement its verification procedures for certain 

assumptions and related data that were input into the economic and 

financial credit subsidy models used for the valuation of TARP direct loans, 

equity investments, and asset guarantees. Specifically, we identified data 

input errors to the estimation models, such as incorrect dividend rates and 

maturity dates, that were not detected by OFS’s verification procedures. 

Significant errors that we identified were corrected and amounts were 

properly reflected in the September 30, 2009, financial statements. OFS did 

perform procedures to assess the reasonableness of the model outputs, 

including comparison of the asset valuations calculated by the model with 

independently performed valuations. We believe that these procedures 

reduced the risk of misstatements resulting from the data input errors. 

Nonetheless, we believe the ineffective implementation of data input 

verification procedures represents a significant deficiency in OFS’s internal 

control warranting management’s attention. Effective verification of data 

inputs used in the subsidy models is key to providing reasonable assurance 

that the asset valuations and related subsidy cost are reliably reported in 

the financial statements. 
Page 12 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Compliance with Laws 

and Regulations

Our tests of OFS’s compliance with selected provisions of laws and 

regulations for the period ended September 30, 2009, disclosed no 

instances of noncompliance that would be reportable under U.S. generally 

accepted government auditing standards. The objective of our audit was 

not to provide an opinion on overall compliance with laws and regulations. 

Accordingly, we do not express such an opinion.

Consistency of Other 

Information

OFS’s MD&A, other required supplementary information, and other 

accompanying information contain a wide range of information, some of 

which is not directly related to the financial statements. We did not audit 

and we do not express an opinion on this information. However, we 

compared this information for consistency with the financial statements 

and discussed the methods of measurement and presentation with OFS 

officials. On the basis of this limited work, we found no material 

inconsistencies with the financial statements, U.S. generally accepted 

accounting principles, or the form and content guidance in Office of 

Management and Budget Circular No. A-136, Financial Reporting 

Requirements. 

Objectives, Scope, and 

Methodology

OFS management is responsible for (1) preparing the financial statements 

in conformity with U.S. generally accepted accounting principles; (2) 

establishing and maintaining effective internal control over financial 

reporting, and evaluating its effectiveness; and (3) complying with 

applicable laws and regulations. Management evaluated the effectiveness 

of OFS’s internal control over financial reporting as of September 30, 2009, 

based on the criteria established under FMFIA. OFS management’s 

assertion based on its evaluation is included in appendix I.

We are responsible for planning and performing the audit to obtain 

reasonable assurance and provide our opinion about whether (1) OFS’s 

financial statements are presented fairly, in all material respects, in 

conformity with U.S. generally accepted accounting principles; and (2) OFS 

management maintained, in all material respects, effective internal control 

over financial reporting as of September 30, 2009. We are also responsible 

for (1) testing compliance with selected provisions of laws and regulations 

that have a direct and material effect on the financial statements, and 

(2) performing limited procedures with respect to certain other 

information accompanying the financial statements.
Page 13 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

In order to fulfill these responsibilities, we

• examined, on a test basis, evidence supporting the amounts and 

disclosures in the financial statements;

• assessed the accounting principles used and significant estimates made 

by management;

• evaluated the overall presentation of the financial statements;

• obtained an understanding of the entity and its operations, including its 

internal control over financial reporting;

• considered OFS’s process for evaluating and reporting on internal 

control over financial reporting that OFS is required to perform by 

FMFIA and Section 116(c) of EESA;

• assessed the risk that a material misstatement exists in the financial 

statements and the risk that a material weakness exists in internal 

control over financial reporting;

• evaluated the design and operating effectiveness of internal control over 

financial reporting based on the assessed risk; 

• tested relevant internal control over financial reporting; 

• tested compliance with selected provisions of the following laws and 

regulations: EESA, as amended; the Antideficiency Act, as amended; the 

Federal Credit Reform Act of 1990; and the Purpose Statute; and

• performed such other procedures as we considered necessary in the 

circumstances. 

An entity’s internal control over financial reporting is a process affected by 

those charged with governance, management, and other personnel, the 

objectives of which are to provide reasonable assurance that 

(1) transactions are properly recorded, processed, and summarized to 

permit the preparation of financial statements in conformity with U.S. 

generally accepted accounting principles, and assets are safeguarded 

against loss from unauthorized acquisition, use, or disposition; and (2) 

transactions are executed in accordance with the laws governing the use of 
Page 14 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

budget authority and other laws and regulations that could have a direct 

and material effect on the financial statements. 

We did not evaluate all internal controls relevant to operating objectives as 

broadly established under FMFIA, such as those controls relevant to 

preparing statistical reports and ensuring efficient operations. We limited 

our internal control testing to testing controls over financial reporting. 

Because of inherent limitations, internal control may not prevent or detect 

and correct misstatements due to error or fraud, losses, or noncompliance. 

We also caution that projecting any evaluation of effectiveness to future 

periods is subject to the risk that controls may become inadequate because 

of changes in conditions, or that the degree of compliance with the policies 

or procedures may deteriorate. 

We did not test compliance with all laws and regulations applicable to OFS.

We limited our tests of compliance to selected provisions of laws and 

regulations that have a direct and material effect on the financial 

statements for the period ended September 30, 2009. We caution that 

noncompliance may occur and not be detected by these tests and that such 

testing may not be sufficient for other purposes. 

We performed our audit in accordance with U.S. generally accepted 

government auditing standards. We believe our audit provides a reasonable 

basis for our opinions and other conclusions.

Agency Comments In commenting on a draft of this report, the Assistant Secretary, Office of 

Financial Stability, stated OFS concurred with the two significant 

deficiencies in its internal control over financial reporting that GAO 

identified. He also stated that OFS is committed to correcting the 

deficiencies. The complete text of OFS’s comments is reprinted in 

appendix II.

Gary T. Engel

Director

Financial Management and Assurance

December 4, 2009
Page 15 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Management’s Discussion and Analysis

1

Executive Summary 

 This report provides a summary of the activities of the Troubled Asset Relief Program 

(TARP), which was established under the Emergency Economic Stabilization Act (EESA) last 

year. The purpose of TARP was to restore the liquidity and stability of the financial system. 

While we will never know for certain what would have happened without TARP, there is broad 

agreement today that because of TARP and other governmental actions, the United States 

averted a potentially catastrophic failure of the financial system. 

This report also provides an update on the costs of TARP. While EESA provided the 

Secretary of the Treasury with the authority to purchase or guarantee $700 billion to meet the 

objectives of the Act, it is clear today that TARP will not cost taxpayers $700 billion. First, the 

Treasury’s Office of Financial Stability (Treasury-OFS) is unlikely to disburse the full $700 

billion. In addition, many of the investments under the program, particularly those aimed at 

stabilizing banks, are expected to deliver returns for taxpayers. This combination of lower 

spending and higher expected returns is expected to lower the projected costs of TARP from the 

$341 billion estimate in the President’s Mid-session Budget in August 2009. 

During the period ended September 30, 2009, the Treasury-OFS disbursed $364 billion of 

the authorized $700 billion, most of it in the form of investments, and $73 billion of those TARP 

funds have already been repaid as of such date. In addition, for the period ended September 30, 

2009, the investments generated $12.7 billion in cash received through interest, dividends, and 

the proceeds from the sale of warrants. For those TARP disbursements in FY 2009, the 

Treasury-OFS reported net cost of operations of approximately $41.6 billion, including 

administrative expenses. The reported net cost of operations includes the estimated net cost 

related to loans, equity investments, and asset guarantees. As additional funds are distributed, 

particularly for the housing initiative, the total cost is likely to rise, although anticipated to 

remain substantially below the $341 billion estimate in the August 2009 Midsession estimate. 

Four TARP programs reported net income in FY 2009: the Capital Purchase Program, 

the Targeted Investment Program, the Asset Guarantee Program, and the Consumer and Business 

Lending Initiative. This net income was offset by reported net cost of the investments in AIG 

and the automotive companies, bringing the net cost for these programs during FY 2009 to 

approximately $41.4 billion. 

As further disbursements are made in FY 2010 and later, the costs of the TARP program 

are likely to rise. In particular, the $50 billion Home Affordable Modification Program or 

“HAMP,” is not designed to recoup money spent on loan modifications to keep people in their 

homes. In addition, the Treasury-OFS’ assistance to AIG includes an equity facility on which 
Management’s Discussion and Analysis

Page 16 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

2

$27 billion remained undrawn at fiscal year end, and $30 billion of investments and loans under 

the Public Private Partnership Program will largely be recorded beginning in FY 2010. 

The ultimate return on the outstanding TARP investments will depend on how the 

economy and financial markets evolve. The general improvement in economic and financial 

environment, early repayments of TARP funds, and refinements to the valuation models have 

significantly lowered expected costs for the program funds disbursed in FY 2009 by $110 billion 

below the estimates made when the programs were initiated. About $10 billion of that decline in 

costs stems from early repayments of TARP funds. 

These estimates will change. The design and the precise amounts of additional 

investments for small banks and to facilitate small business lending have not yet been 

determined. In addition, the ultimate return on TARP investments is subject to significant 

uncertainty as market conditions evolve.

 While this report provides updated information on TARP's costs, the initiative should be 

evaluated primarily based on its impact on stabilizing the financial system. These investments 

were not made to make money but to help prevent a collapse of our financial system and lay the 

foundation for economic recovery. Today, the financial system and the economy are showing 

signs of stability. The cost of borrowing has declined to pre-crisis levels for many businesses, 

states and local governments, the government sponsored enterprises (GSEs), and the banks.

Housing markets have shown signs of stabilization, and home prices have ticked up in recent 

months, after three straight years of declines. The economy grew in the third quarter, and most 

private economists predict it will grow for the remainder of this year and next. 

 That improvement in the economic and financial outlook since the spring reflects a broad 

and aggressive policy response that included the financial stability policies implemented under 

TARP, efforts to bolster confidence in the housing and mortgage markets under the Housing and 

Economic Reform Act (HERA), other financial stability policies implemented by the Federal 

Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System 

(Federal Reserve), accommodative monetary policy, and the Obama Administration’s fiscal 

stimulus package implemented under the American Recovery and Reinvestment Act of 2009. 

 While TARP was necessary, it has put the federal government in the unwelcome position 

of owning sizeable stakes in private sector companies. Given that unusual position as a reluctant 

shareholder, the Treasury-OFS has established a core set of principles to guide its actions. First 

and foremost, the Treasury-OFS is seeking to protect taxpayers by minimizing the long-term 

consequences of the current economic and financial crisis with as little direct cost to the taxpayer 

as possible. As economic and market conditions improve, Treasury-OFS aims to dispose of its 

investments as quickly as practicable, in a timely and orderly manner consistent with the duty to 

promote financial stability and protect taxpayers’ interests. 
Management’s Discussion and Analysis

Page 17 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

3

 To administer the programs under TARP, the Secretary of the Treasury has established 

the Treasury-OFS, which is designed to be temporary in nature, but also highly skilled and well 

equipped to handle the complexity of TARP initiatives. At the same time, Treasury-OFS’ 

process is designed to be highly transparent. Congress and taxpayers are kept informed of 

TARP’s actions, results, investments and costs through frequent and timely public reports, daily 

communication with oversight bodies, public responses to oversight reports, and direct outreach 

to taxpayers through its websites: FinancialStability.gov and MakingHomeAffordable.gov.

 Because of the magnitude and importance of these programs, Congress established a 

strong oversight structure to ensure accountability. The Government Accountability Office 

(GAO), the Special Inspector General for TARP (SIGTARP), the Congressional Oversight Panel 

(COP) and the Financial Stability Oversight Board (FINSOB) engage in frequent reviews of 

TARP activities and have contributed to making the programs stronger and more effective. 

 Despite TARP’s positive record to date, and the improving financial and economic 

outlook, significant challenges remain for the financial sector and our economy. While the 

economy is growing again, jobs are still being lost and the unemployment situation continues to 

worsen. The pace of bank failures, which tends to lag economic cycles, remains elevated. 

Foreclosure rates also remain very high, and bank lending has contracted, with credit standards 

tight. Commercial real estate losses weigh heavily on many banks, especially on smaller banks, 

impairing their ability to extend new loans. Small businesses have been particularly affected 

because they rely heavily on bank lending and do not have the ability to raise capital through the 

securities markets.

While a number of TARP initiatives, particularly those for large institutions, have begun 

to wind down, Treasury-OFS continues to focus on stabilizing the housing markets as well as 

improving access to credit for small businesses. Treasury-OFS is also mindful of the fact that 

risks remain, and history suggests that exiting too soon from policies designed to contain a 

financial crisis can significantly prolong an economic downturn. It is within this larger context 

that the Secretary of the Treasury will evaluate and decide whether to extend TARP authority 

past December 31, 2009. 
Management’s Discussion and Analysis

Page 18 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

4

Section One: Background and Creation of TARP

Stresses in U.S. financial markets began to emerge in 2007 as the performance of 

subprime mortgages deteriorated significantly, and losses on related securities began to climb. 

With the extent and distribution of losses quite uncertain, concerns surfaced about the financial 

condition of banks and other financial institutions. Pressures in short-term funding markets 

escalated and some off-balance sheet funding vehicles were not able to renew their asset-backed 

commercial paper, raising concerns about the ability of sponsoring banks to meet funding needs. 

As a consequence, short-term credit markets came under considerable pressure and risk spreads 

in interbank funding markets and in some segments of the commercial paper (CP) market rose 

sharply. Announcements of large asset write-downs and weak financial reports for many large 

financial institutions in late 2007 raised additional concerns about the resilience and capital 

adequacy of financial counterparties and the likelihood of further large losses. 

Continuing declines in mortgage loan performance, market valuations of mortgagerelated assets, and the credit ratings of even so-called “super-senior” tranches of structured 

finance securitizations heightened the pressure on financial institutions with significant known 

exposures in these areas. Market participants became increasingly cautious and, in some cases, 

unwilling to extend funding to the most-affected institutions, as in the case of Bear Stearns. In 

March 2008, the Federal Reserve, with the full support of the Treasury, facilitated a merger of 

Bear Stearns with JPMorgan Chase to prevent a disorderly collapse of the firm and potentially 

severe spillover effects in the financial markets. The condition of financial guarantors weakened, 

calling into question the value of the insurance they had written, leading to declines in the value 

of products insured by these entities. In March 2008, the Federal Reserve introduced two new 

liquidity facilities (the Primary Dealer Credit Facility and the Term Securities Lending Facility), 

which increased the liquidity available to primary dealers. 

Pressures in financial markets initially appeared to ease somewhat as a consequence of 

these actions. However, housing conditions and the broader economy continued to deteriorate, 

and financial institutions came under renewed stress in the summer of 2008. Capital market 

dislocations and volatility combined with losses and expectations of further losses on mortgagerelated assets resulted in the debt spreads of Fannie Mae and Freddie Mac widening and these 

two companies becoming unable to raise new capital or long-term debt. In September, the 

Federal Housing Finance Agency (FHFA) placed these firms into conservatorship while 

obtaining backup capital and funding support from Treasury under authority granted in July 2008 

by the Housing and Economic Recovery Act of 2008. 

In mid-September, a series of events caused the crisis to escalate. Lehman Brothers came 

under heightened funding pressures, and on September 15, 2008, the parent company filed for 
Management’s Discussion and Analysis

Page 19 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

5

bankruptcy protection. American International Group, Inc. (AIG), a global insurance company, 

experienced severe liquidity pressures, necessitating assistance from the Federal Reserve, with 

the concurrence of Treasury, on September 16, 2008, to prevent the potential for severe systemic 

consequences from a disorderly failure of the firm. In the wake of the bankruptcy of Lehman 

Brothers and the near failure of AIG, spreads on interbank borrowing jumped to a record high as 

banks sought to safeguard their own liquidity and interbank lending volumes contracted sharply.

Losses on Lehman Brothers commercial paper caused a money market mutual fund to 

experience Net Asset Valuations of less than $1 per share (i.e., "breaking the buck") and 

investors accelerated withdrawals from prime money market funds, forcing sales of their CP 

holdings. Total CP outstanding fell sharply, leaving many financial and nonfinancial businesses 

with sharply reduced access to needed short-term funds. Many such institutions tapped existing 

back-up lines of credit at banks, adding to the pressure on liquidity funding needs of those banks. 

To support the functioning of money market mutual funds, on September 19, 2008, the Treasury 

initiated an insurance program for existing balances at money market mutual funds. In addition, 

the Federal Reserve established the Asset-Backed Commercial Paper Money Market Mutual 

Fund Liquidity Facility (AMLF) to provide liquidity to money market mutual funds that were 

holding asset-backed commercial paper. 

The loss of confidence in financial institutions also contributed to the failure of 

Washington Mutual, the largest U.S. thrift institution in September 2008. The FDIC sold the 

banking operations of the institution to JPMorgan Chase. Wachovia Corporation subsequently 

came under intense funding pressures, and ultimately was acquired by Wells Fargo & Co. 

Moreover, as the financial crisis intensified in the U.S. and abroad, risks to the stability of the 

international financial system increased. To help ease liquidity pressures, the Federal Reserve in 

coordination with other central banks around the globe provided dollar liquidity to banking 

institutions through reciprocal currency (or swap) lines. 

Accompanying the pressures in interbank and other funding markets, and in light of the 

weakening economy, banks continued to tighten their credit terms and standards on loans to their 

customers. The tighter terms and standards reduced credit availability, leaving its imprint on 

economic activity. In the corporate bond market, borrowing costs increased dramatically and the 

spread of corporate yields to comparable maturity Treasury yields rose, reflecting financial 

market stresses and a weakening economic outlook. Broad stock price indexes fell sharply, 

nearly 15 percent in early October 2008, leaving them down about 40 percent from the beginning 

of 2008. 

This accumulation and confluence of events placed severe financial stresses on financial 

markets and institutions, and strong pressures on institutions to deleverage and restrain lending. 

Because of the dependence of our economy on the flow of credit, serious strains on credit 
Management’s Discussion and Analysis

Page 20 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

6

providers can impose disproportionately large costs on the broader economy. Responding to 

these severe conditions, the Treasury, Federal Reserve, Federal Housing Finance Agency 

(FHFA), Federal Deposit Insurance Corporation (FDIC), and other U.S. government bodies 

undertook an array of unprecedented actions in accordance with their respective authorities.

However, additional resources and authorities were needed to help address the significant 

problems in the financial markets and the dangers posed by such problems to consumers, 

businesses, and the broader economy. To provide additional resources and authorities, Congress 

passed the Emergency Economic Stabilization Act of 2008 (EESA)1

 which was signed into law 

by President George W. Bush on October 3, 2008. The purposes of EESA were to provide 

authority and facilities that the Secretary of the Treasury could use to restore liquidity and 

stability to the financial system of the United States, and to ensure that such authority and 

facilities were used in a manner that protected home values, college funds, retirement accounts, 

and life savings; preserved home ownership; promoted jobs and economic growth; maximized 

overall returns to the taxpayers of the United States; and provided public accountability for the 

exercise of such authority.

Mission and Organizational Structure

The EESA established the Office of Financial Stability (OFS) within the Office of 

Domestic Finance of the Treasury Department to implement the TARP. The mission of 

Treasury-OFS is to carry out the authorities given to the Secretary of the Treasury to implement 

the Troubled Asset Relief Program (TARP). Section 101 of EESA authorized the Secretary of 

the Treasury to establish the TARP to “purchase, and to make and fund commitments to 

purchase, troubled assets from any financial institution, on terms and conditions as are 

determined by the Secretary”. EESA defines the terms “troubled assets” and “financial 

institution” and provides other requirements that must be met for any such purchase. The statute 

also provides authority for a guarantee program for troubled assets. 

EESA Section 101: Definitions

Troubled Assets are defined by EESA as 

residential or commercial mortgages and any 

securities, obligations or other instruments that 

are based on or related to such mortgages, that 

in each case was originated or issued on or 

before March 14, 2008, the purchase of which 

the Secretary of the Treasury determines 

Financial Institutions are defined by EESA as 

any institution, including, but not limited to, 

any bank, savings association, credit union, 

security broker or dealer, or insurance 

company, established and regulated under the 

laws of the United States or any State, 

territory, or possession of the United States, the 

1 The Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. No. 110-343, 122 Stat.3765 (2008), codified 

at 12 U.S.C. §§ 5201 et seq.
Management’s Discussion and Analysis

Page 21 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

7

promotes financial market stability; and any 

other financial instrument that the Secretary of 

the Treasury, after consultation with the 

Chairman of the Board of Governors of the 

Federal Reserve System, determines the 

purchase of which is necessary to promote 

financial market stability, but only upon 

transmittal of such determination, in writing, to 

the appropriate committees of Congress. 

District of Columbia, Commonwealth of 

Puerto Rico, Commonwealth of Northern 

Mariana Islands, Guam, American Samoa, or 

the United States Virgin Islands, and having 

significant operations in the United States, but 

excluding any central bank of, or institution 

owned by, a foreign government. 

Treasury-OFS is headed by an Assistant Secretary of the Treasury, appointed by the 

President with the advice and consent of the Senate. Reporting to the Assistant Secretary for 

Financial Stability are seven major divisions: the Offices of the Chief Investment Officer, the 

Chief Financial Officer, the Chief for Investment Operations/Technology, the Chief 

Homeownership Preservation Officer, the Chief Administrative Officer, the Chief Reporting 

Officer, and the Chief for OFS Internal Review. A Chief Counsel’s Office reports to the 

Assistant Secretary and to the Office of the General Counsel in the Department of Treasury. 

The Treasury-OFS organization chart is shown below: 
Management’s Discussion and Analysis

Page 22 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Additional information regarding the operations of these divisions and other aspects of 

Treasury-OFS’ operations can be found in Section Ten [Other Management Information] of this 

report.

8
Management’s Discussion and Analysis

Page 23 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

9

Section Two: Overview and Analysis of the Troubled Asset Relief Program 

This section provides a broad overview of the TARP. It begins by placing the program in 

context, explaining why it was a necessary ingredient of a coordinated government response to 

contain and resolve the financial crisis. This is followed by a discussion of Treasury-OFS' 

strategic goals, and how particular programs and activities were developed to meet each of these 

goals. Next, this section presents the TARP financial summary for the period ended September 

30, 2009. Finally, this section concludes with a discussion of the aggregate impact of TARP and 

other government financial policies on financial markets and institutions. These are the metrics 

by which we evaluate success or failure of government support policies. 

TARP in Context: A Critical Pillar of a Coordinated Government Response

This crisis really began in August 2007. The Federal Reserve, and to a lesser extent the 

FDIC, led the policy response during the first year of the crisis. Before September 2008, the 

Federal Reserve was providing sorely-needed liquidity to many financial institutions, which 

allowed them to meet near-term obligations. The FDIC was insuring deposits, which helped 

quell traditional bank runs, and it was resolving troubled depository institutions, such as 

IndyMac.

But when stress in the system dramatically intensified in the wake of the Lehman 

Brothers failure, investors began to question whether the financial system was solvent and 

confidence collapsed. A different sort of policy response was needed.

The Federal Reserve does not have the authority to directly inject capital into banks and 

other financial institutions to address potential capital shortfalls. Although it has expanded the 

scope of eligible borrowers and collateral over the past few years, the Federal Reserve's liquidity 

provision is confined to secured lending against good collateral. This is a powerful, but limited 

tool. The large amount of troubled assets held by financial institutions heightened the markets’ 

fears.

The FDIC has a broader toolset in some respects--including the ability to inject capital or 

to purchase or guarantee liabilities--but only for depository institutions. This too proved a 

stabilizing factor. But in the fall of last year the crisis spread well beyond traditional banks, and 

threatened to exceed the limitations of the FDIC’s capacity to effectively respond. Investors 

feared that U.S. financial institutions needed, in the aggregate, hundreds of billions of dollars to 

offset potential credit losses. 

In this context the passage of EESA was essential. It gave the Secretary of the Treasury 

temporary authority to purchase and guarantee assets in a wide range of financial institutions and 

markets. As explained below, that step, combined with the actions of other government agencies 

and the Federal Reserve, helped prevent the potential collapse of the U.S. financial system. To 
Management’s Discussion and Analysis

Page 24 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

10

date, the cost has been considerably less than what was originally projected. Today, EESA 

programs continue to stabilize and rehabilitate still fragile markets and institutions, while 

repayments of the government’s investments over the past year have already begun.

OFS Strategic Goals

The purpose of EESA is to provide the Secretary of the Treasury with the authorities and 

facilities necessary to stabilize the U.S. financial system. In addition, the Secretary is directed to 

ensure that such authorities are used in a manner that protects home values, college funds, 

retirement accounts, and life savings; preserves homeownership; promotes jobs and economic 

growth; maximizes overall returns to taxpayers; and provides public accountability. The EESA 

also provided specific authority to take certain actions to prevent avoidable foreclosures. 

In light of this statutory direction, Treasury-OFS established the following as its 

operational goals:

1. Ensure the overall stability and liquidity of the financial system. 

a. Make capital available to viable institutions. 

b. Provide targeted assistance as needed. 

c. Increase liquidity and volume in securitization markets. 

2. Prevent avoidable foreclosures and help preserve homeownership. 

3. Protect taxpayer interests. 

4. Promote transparency. 

1. Ensure the Overall Stability and Liquidity of the Financial System 

To ensure the overall stability and liquidity of the financial system, Treasury-OFS 

developed several programs under the TARP that were broadly available to financial institutions. 

Under the Capital Purchase Program (CPP), Treasury-OFS provided capital infusions directly to 

banks and insurance companies deemed viable by their regulators but in need of a stronger asset 

base to weather the crisis. The Capital Assistance Program (CAP) was developed to supplement 

the Supervisory Capital Assessment Program (SCAP), or "stress test" of the largest U.S. 

financial institutions. If these institutions were unable to raise adequate private funds to meet the 

SCAP requirements, Treasury-OFS stood ready to provide additional capital. 

In addition, Treasury-OFS provided direct aid to certain financial industry participants 

through the Targeted Investment Program (TIP) and the Asset Guarantee Program (AGP), as 

well as the program originally known as the Systemically Significant Failing Institutions (SSFI) 

program. These programs were designed to mitigate the potential risks to the system as a whole 

from the difficulties facing these firms. (Because SSFI was used only for investments in 

American International Group, Inc. (AIG), such investments are now referred to as the AIG 

Investment Program.) 
Management’s Discussion and Analysis

Page 25 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

11

Similarly, the Automotive Industry Financing Program (AIFP) provided funding for 

General Motors Corporation (GM) and Chrysler LLC (Chrysler), as well as their financing 

affiliates in order to prevent a significant disruption of the automotive industry that would have 

posed a systemic risk to financial markets and negatively affected the real economy. TreasuryOFS’ actions helped GM and Chrysler undertake massive and orderly restructurings through the 

bankruptcy courts that have resulted in leaner and stronger companies. 

The Public-Private Investment Program (PPIP) was established to facilitate price 

discovery and liquidity in the markets for troubled real estate-related assets as well as the 

removal of such assets from the balance sheets of financial institutions. In addition to these 

initiatives, Treasury-OFS implemented the Consumer and Business Lending Initiative (CBLI) to 

enhance liquidity and restore the flow of credit to consumers and small businesses. The primary 

program through which the CBLI operated in 2009 was the Term Asset-Backed Securities Loan 

Facility (TALF). Through this combination of tools, the TARP helped strengthen a broad set of 

financial institutions and markets. 

Details on all of these efforts, including program-specific results, can be found in Section 

Three [Ensuring Stability and Liquidity]. 

2: Prevent Avoidable Foreclosures and Preserve Homeownership

 To prevent avoidable foreclosures and preserve homeownership, Treasury used authority 

granted under EESA to establish the Home Affordable Modification Program (HAMP) in 

February 2009. Other government policies have helped keep home mortgage rates at historic 

lows and allowed millions of Americans to refinance and stay in their homes. But because of 

falling housing prices, many responsible homeowners are unable to refinance. Meanwhile, job 

losses and reductions in working hours and benefits are making it harder for these Americans to 

pay their mortgages. HAMP provides incentives to mortgage servicers, investors, and 

homeowners to work together to reduce an eligible homeowner’s monthly payments to levels 

that are affordable in light of the homeowner’s current income. HAMP operations and program 

detail are provided in Section Four [Preventing Foreclosures and Preserving Homeownership]. 

3. Protect Taxpayer Interests 

Government financial programs, including TARP, helped prevent the U.S. financial 

system from collapse, which could have resulted in a much more severe contraction in 

employment and production. The manner in which TARP was implemented is also designed to 

protect taxpayers and to compensate them for risk. For example, in exchange for capital 

injections, recipients of TARP funds have to adhere to corporate governance standards, limit 

executive pay, and provide additional reporting on lending activity. In addition, Treasury-OFS 

generally received preferred equity, which provides dividends. The dividend rates generally 

increase over time to encourage repayment. 
Management’s Discussion and Analysis

Page 26 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

12

Further, EESA stipulated that the taxpayer benefit as the institutions which received 

TARP funds recovered. In connection with most investments, Treasury-OFS also receives 

warrants for additional securities in the institutions. Under the broad programs described above, 

the Treasury-OFS has priority over existing shareholders of TARP recipients for which TARP 

holds equity investments. This gives taxpayers the ability to share in the potential upside along 

with existing shareholders. 

 Finally, the Treasury-OFS seeks to achieve the goal of protecting the taxpayer through 

the effective management and disposition of all TARP investments, as detailed in Section Five 

[Protecting Taxpayer Interests].

4: Promote Transparency 

EESA requires transparency and accountability. Specifically, EESA requires TreasuryOFS to provide Congress with a variety of reports. These include a monthly report to Congress 

on TARP activity, a “tranche” report each time Treasury-OFS reaches a $50 billion spending 

threshold, and transaction reports posted within two days detailing every TARP transaction. In 

carrying out its operations, the Treasury-OFS has sought to not only meet the statutory 

requirements but also to be creative and flexible with respect to additional transparency 

initiatives. The Treasury-OFS proactively provides to the public monthly Dividends and Interest 

Reports reflecting dividends and interest paid to Treasury-OFS from TARP investments, loans, 

and asset guarantees, as well as monthly reports detailing the lending activity of participants in 

the Capital Purchase Program. All of these reports are publicly available on 

www.FinancialStability.gov.

EESA also provided for extensive oversight of the TARP, including by the Congressional 

Oversight Panel, the Special Inspector General for the TARP, and the Government 

Accountability Office. In addition, Treasury-OFS officials frequently testify before Congress on 

the progress of TARP programs, and Treasury-OFS staff provide briefings to Congressional staff 

on programmatic developments. 

Further details on these efforts are provided in Section Six [Promoting Transparency]. 

TARP Timeline

The following timeline illustrates major events in the implementation of the TARP. 
Management’s Discussion and Analysis

Page 27 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

 13 
Management’s Discussion and Analysis

Page 28 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

14

FY 2009 Financial Summary for TARP 

The EESA provided authority for the TARP to purchase or guarantee up to $700 billion 

in troubled assets.2

 Treasury-OFS used this authority to help strengthen the U.S. financial 

system, restore health and liquidity to credit markets to facilitate borrowing by consumers and 

businesses, and prevent avoidable foreclosures in the housing market. While the TARP should 

be evaluated primarily based on its impact on stabilizing the financial system, a critical factor in 

the analysis is cost. While EESA provided $700 billion in authority, the TARP has not cost 

taxpayers $700 billion. Treasury-OFS used the authority to make investments to stabilize the 

financial system and expects that much of the funding will be repaid. While some of the TARP 

investments are estimated to result in a cost, others are estimated to produce net income. 

Treasury-OFS tracks costs in accordance with Federal budget procedure. First, amounts 

are allocated or budgeted to certain programs or needs within the TARP. Allocations may 

change over time as needs are reevaluated. Second, Treasury-OFS enters into legally binding 

“obligations” to invest or spend the funds. Third, funds are disbursed over time pursuant to the 

obligations. In any given case, it is possible that the full amount allocated will not be obligated, 

and that the full amount obligated will not be disbursed. 

 Based on operations for the period ended September 30, 2009, Treasury-OFS reports the 

following key results: 

x Treasury-OFS entered into obligations with a face value of $454 billion in TARP 

authority during the fiscal year.

x In fiscal year 2009, Treasury-OFS disbursed $364 billion in TARP funds to make 

loans and equity investments, and reported net cost of operations of $41.6 billion. 

x During fiscal year 2009, Treasury-OFS received $72.8 billion of repayments on 

certain investments and loans made early in FY 2009. 

x At September 30, 2009, Treasury-OFS reported $240 billion for the value of 

loans, equity investments, and asset guarantees. 

Treasury-OFS’ FY 2009 net cost of operations of $41.6 billion includes the estimated net 

cost related to loans, equity investments, and asset guarantees. The total ultimate cost of the 

TARP is expected to be higher because additional investments and disbursements have been 

made or will be made after FY 2009. Due to its program structure, the $50 billion HAMP has 

delayed payments as well as a long disbursement cycle so the FY 2009 amounts include only $2 

million in cost. In addition, AIG has drawn an additional $2.1 billion on its $29.8 billion equity 

capital facility since September 30, 2009 and may draw down the additional funds available to it, 

which may result in additional costs. Including these costs as well as the Public-Private 

2

 The Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-22, Div. A, amended the act and reduced 

the maximum allowable amount of outstanding troubled assets under the act by almost $1.3 billion, from $700 

billion to $698.7 billion. 
Management’s Discussion and Analysis

Page 29 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

15

Investment Program and other costs is likely to significantly increase the estimated lifetime net 

cost for TARP. For programs where funds have been obligated but not yet disbursed, the future 

outlays in some cases are dependent on program subscription or other uncertain factors. In 

addition, new commitments may be made under TARP prior to EESA’s expiration. As described 

further throughout this report, the valuation of the TARP investments will naturally change based 

on many factors. 

 As of September 30, 2009, Treasury-OFS currently projects that four programs will 

produce a net return to taxpayers. The Capital Purchase Program, the Targeted Investment 

Program, the Asset Guarantee Program, and the Consumer and Business Lending Initiative had 

reported net income of $19.5 billion. Also, as of September 30, 2009, Treasury-OFS reports 

that two programs -- the AIG Investment Program and the Automotive Industry Financing 

Program – have net costs to taxpayers of $60.9 billion. Taking into consideration the gains, the 

total net cost for TARP to taxpayers, based on disbursements made as of September 30, 2009, is 

reported as $41.4 billion. Accrued expenses for the HAMP as of September 30, 2009, of $2 

million and administrative expenses for the year of $167 million bring the total estimated net 

costs to $41.6 billion, as shown in Table 1. 

Table 1: Net Income (Cost) of TARP Operations 

For the period ended September 30, 2009 

$ in millions 

Programs with Estimated Subsidy Income 

 Capital Purchase Program $15,033

 Targeted Investment Program $ 1,927 

 Asset Guarantee Program $ 2,201 

 Consumer and Business Lending Initiative $ 339 

 Net Income (Cost) from Programs Above $19,500

Programs with Estimated Subsidy (Cost) 

 American International Group, Inc. 

Investments 

($30,427)

 Automotive Industry Financing Program ($30,477)

 Net (Cost) of Two Programs Above ($60,904)

Total Net Subsidy Income (Cost) ($41,404)

Additional TARP (Costs) 

 Home Affordable Modification Program ($ 2) 

 Administrative Costs ($ 167) 

 Total Net (Costs) of TARP Operations ($41,573)

 Over time the ultimate cost of the TARP programs may change. As described later in 

this MD&A, and in the Treasury-OFS audited financial statements, these estimates are based in 

part on currently projected economic factors. Forecasts for these economic factors will likely 
Management’s Discussion and Analysis

Page 30 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

16

change, either increasing or decreasing the ultimate cost of the TARP. HAMP expenses will 

increase significantly over time, as more modifications of mortgage payments are finalized 

between mortgage servicers and borrowers, resulting in increased incentive payments. These 

payments are described in Section Four. 

Table 2 provides a financial summary for TARP programs in FY 2009. For each 

program, the table gives the face value of the amount obligated by each program, the amount 

actually disbursed during the fiscal year, repayments to Treasury-OFS during the period from 

program participants, net outstanding balance (the amount on the original investment that is due 

to be repaid to Treasury) on September 30, 2009, and cash inflows on the investments for each 

program in the form of dividends, interest or other fees. As of fiscal year end 2009, 

approximately $317 billion of the $700 billion in purchase and guarantee authority remained 

available, taking into account $72.8 billion in repayments. However, this does not include the 

full planned amounts for the HAMP, Public Private Investment Program (PPIP), Consumer and 

Business Lending Initiative, and other programs. 
Management’s Discussion and Analysis

Page 31 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

17

Table 2: TARP Summary1

As of September 30, 2009 

$ in billions

Purchase

Price or 

Guarantee

Amounts

Total $ 

Disbursed

Investment 

Repayments

Outstanding 

Balance

Cash

Received

from

Investments

Capital Purchase 

Program $204.6 $204.6 $70.7 $133.9 $9.7

Targeted Investment 

Program $40.0 $40.0 $0.0 $40.0 $1.9

Asset Guarantee 

Program $5.0 $0.0 $0.0 $0.0 $0.5

American

International Group 

Investments2

$69.8 $43.2 $0.0 $43.2 $0.0

Term Asset-Backed 

Securities Loan Facility $20.0 $0.1 $0.0 $0.1 $0.0

Public Private 

Investment Program3 $6.7 $0.0 $0.0 $0.0 $0.0

Automotive Industry 

Financing Program $81.1 $75.9 $2.1 $73.8 $0.7

Home Affordable 

Modification Program4 $27.1 $0.0 NA NA $0.0

Totals $454.3 $363.8 $72.8 $291.0 $12.7

1/ This table shows the TARP activity for the period ended September 30, 2009, on a cash basis. Cash received 

from investments includes dividends and interest income reported in the Statement of Net Cost and proceeds from 

repurchases of warrants and warrant preferred stock. 

2/ The disbursed amount is lower than purchase price because of the $29.8 billion facility available to AIG of which 

only $3.2 billion was drawn at September 30, 2009. AIG drew an additional $2.1 billion from the facility on 

November 13, 2009. 

3/ Reflects the face value of obligations incurred as of September 30, 2009. As of that date, no fund managers had 

made any investments and Treasury-OFS expects to provide a total of $30 billion in funding to the nine fund 

managers selected for PPIP. 

4/ Reflects legal commitments to servicers as of September 30, 2009. Treasury-OFS has allocated $50 billion in 

total for the program. Payments are made to servicers once temporary modifications are made permanent. 
Management’s Discussion and Analysis

Page 32 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

18

 Most of the TARP funds have been used to make investments in preferred stock or make 

loans. Treasury-OFS has generally received dividend on the preferred stock and interest 

payments on the loans from the institutions participating in TARP programs. These payments 

are a return on Treasury’s TARP investments. For period ended September 30, 2009, TreasuryOFS received a total of $9.8 billion in dividends, interest and fees. Table 3 shows the breakdown 

of receipts for the period ended September 30, 2009 for all TARP programs combined. 

Table 3: TARP FY 2009 Receipts and Repayments on 

Investments/Loans 1

For the period ended September 30, 2009 

($ in billions) 

Dividends, Interest, Fees and 

Warrants Repurchases 

Dividends and Fees $9.6

Interest $0.2

Repurchases of Warrants and Warrant 

Preferred Stock 

$2.9

Additional Notes $ 0.0

Subtotal $12.7

Investment/Loan Repayments 

Repurchases/Repayments on preferred 

stock 

$70.7

Loan Principal Repaid $2.1

Subtotal $72.8

GRAND TOTAL $85.5

1/ This table shows the TARP activity for the period ended September 30, 2009, on a 

cash basis. The table includes receipts and repayments that do not result in revenue in 

the Statement of Net Cost. 
Management’s Discussion and Analysis

Page 33 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

19

Treasury-OFS also receives warrants in connection with most of its investments, which 

provides an opportunity for taxpayers to realize an upside on investments. Treasury-OFS has 

begun to dispose of some of its warrants as institutions repay their preferred share investments. 

For the period ended September 30, 2009, twenty-four institutions have already repurchased their 

warrants which generated $2.9 billion in receipts. Table 4 provides information on the 

institutions that have fully repurchased the CPP preferred shares and repurchased warrants as 

well as those that have fully repurchased their preferred shares but not their warrants. (TreasuryOFS receives warrants for preferred stock in the case of most private institutions, which are 

exercised immediately. The receipts from warrants include receipts from the repayment of such 

preferred shares, or “warrant preferred stock”.) 

Table 4: Repurchases of Preferred Shares 

$ in millions 

Institution Procees from

Preferred

Shares

Redeemed

Total

Dividends

Received

Proceeds from 

Warrants

Repurchased

Institutions with fully repurchased preferred shares and repurchased warrants or warrant preferred stock 

Alliance Financial Corporation $ 26.9 $ 0.5 $ 0.9 

American Express Company $ 3,388.9 $ 74.4 $ 340.0 

Bancorp Rhode Island, Inc. $ 30.0 $ 0.9 $ 1.4 

Bank of New York Mellon $ 3,000.0 $ 95.4 $ 136.0 

BB&T Corp. $ 3,133.6 $ 92.7 $ 67.0 

Berkshire Hills Bancorp, Inc. $ 40.0 $ 0.9 $ 1.0 

Centra Financial Holdings, Inc. $ 15.0 $ 0.2 $ 0.8 

First Manitowoc Bancorp, Inc. $ 12.0 $ 0.2 $ 0.6 

First Niagara Financial Group $ 184.0 $ 4.8 $ 2.7 

First ULB Corp. $ 4.9 $ 0.1 $ 0.2 

FirstMerit Corporation $ 125.0 $ 1.8 $ 5.0 

Goldman Sachs Group, Inc. $ 10,000.0 $ 318.1 $ 1,100.0 

HF Financial Corp. $ 25.0 $ 0.7 $ 0.7 

IberiaBank Corporation $ 90.0 $ 1.5 $ 1.2 

Independent Bank Corp. $ 78.2 $ 1.1 $ 2.2 

Morgan Stanley $ 10,000.0 $ 318.1 $ 950.0 

Northern Trust Corporation $ 1,576.0 $ 46.6 $ 87.0 

Old Line Bancshares, Inc. $ 7.0 $ 0.2 $ 0.2 

Old National Bancorp $ 100.0 $ 1.5 $ 1.2 

SCBT Financial Corporation $ 64.8 $ 1.1 $ 1.4 
Management’s Discussion and Analysis

Page 34 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

20

Somerset Hills Bancorp $ 7.4 $ 0.1 $ 0.3 

State Street Corporation $ 2,000.0 $ 63.6 $ 60.0 

Sun Bancorp, Inc. $ 89.3 $ 1.1 $ 2.1 

U.S. Bancorp $ 6,599.0 $ 195.2 $ 139.0 

Subtotal $ 40,597.0 $ 1,220.7 $ 2,900.9

Institutions with fully repurchased preferred shares but warrants are outstanding 

Bank of Marin Bancorp $ 28.0 $ 0.5 $ - 

Capital One Financial Corp $ 3,555.2 $ 105.2 $ - 

Centerstate Banks of Florida Inc. $ 27.9 $ 1.2 $ - 

CVB Financial Corp. $ 130.0 $ 4.7 $ - 

F.N.B. Corporation $ 100.0 $ 3.3 $ - 

First Community Bancshares Inc. $ 41.5 $ 1.3 $ - 

JPMorgan Chase & Co. $ 25,000.0 $ 795.1 $ - 

Manhattan Bancorp $ 1.7 $ 0.1 $ - 

Shore Bancshares, Inc. $ 25.0 $ 0.3 $ - 

Signature Bank $ 120.0 $ 1.8 $ - 

Sterling Bancshares, Inc. $ 125.2 $ 2.5 $ - 

TCF Financial Corporation $ 361.2 $ 7.9 $ - 

Texas Capital Bancshares, Inc. $ 75.0 $ 1.2 $ - 

Washington Federal S and L Association $ 200.0 $ 5.4 $ - 

Wesbanco, Inc. $ 75.0 $ 2.9 $ - 

Subtotal $ 29,865.6 $ 933.4 $ -

Institutions making partial repurchases of preferred shares and outstanding warrants 

State Bankshares, Inc. $ 12.5 $ 1.6 $ - 

Valley National Bancorp $ 200.0 $ 11.2 $ - 

Westamerica Bancorporation $ 41.9 $ 2.2 $ - 

Subtotal $ 254.4 $ 15.0 $ -

Total $ 70,717.0 $ 2,169.1 $ 2,900.9

The ultimate cost of the TARP will not be known for some time. The financial 

performance of the programs will depend on many factors such as future economic and financial 

conditions, and the business prospects of specific institutions. Table 5 provides information on 

the estimated values of the TARP investments by program, as of the end of FY 2009. (HAMP is 

excluded from the chart because no repayments are required). The estimates in Table 5 are 

based on assumptions regarding future events, which are inherently uncertain. The estimates are 

sensitive to a number of factors, including changes in general economic conditions, specific 

stock price volatility of the entities in which Treasury-OFS has an equity interest, estimates of 

expected defaults, and prepayments. If Treasury-OFS experiences higher than currently 

projected early repayments, TARP’s ultimate cost will decline further. Sections Seven and Eight 

of this report describe the methods used to determine the estimates. 
Management’s Discussion and Analysis

Page 35 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

21

In Table 5 below, the Outstanding Balance column represents the amounts paid by 

Treasury-OFS to acquire the loans and equity investments that were outstanding as of fiscal year 

end. The Estimated Value of Investment column represents the present value of net cash inflows 

that Treasury-OFS estimates it will receive from the loans and equity investments. For equity 

securities, this amount represents fair value. The total difference of $53.1 billion between the 

two columns is considered the “subsidy cost allowance” under the Federal Credit Reform Act 

methods Treasury-OFS follows for budget and accounting purposes (see Section Seven for 

further discussion).3

Table 5: Summary of TARP Investments 

$ in billions

Program

Outstanding 

Balance 1

Estimated Value 

of Investment 

9/30/09

Capital Purchase 

Program $133.9 $141.7

Targeted Investment 

Program $40.0 $40.3

AIG Investment 

Program $43.2 $13.2

Automotive Industry 

Financing Program $73.8 $42.3

Term Asset-Backed 

Securities Loan 

Facility 

$0.1 $0.4

Total $291.0 $237.9 1 Before subsidy cost allowance.

3

 To reconcile the subsidy cost allowance to the total subsidy cost amount of $41.4 billion shown in Table 1 

and on the Statement of Net Cost, the $53.1 billion is adjusted by intragovernmental interest cost, the net present 

value of the Asset Guarantee Program, and certain inflows from the loans and equity investments (e.g., dividends, 

interest, proceeds from repurchase of warrants by financial institutions, and other realized fees). 
Management’s Discussion and Analysis

Page 36 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

22

Table 6 below shows the estimated net asset value for the top ten CPP investments held 

as of September 30, 2009. The estimates shown below include only estimates of the value of the 

preferred stock for each institution. Treasury-OFS also holds warrants for each institution and 

those warrants have additional value. As the Treasury-OFS will still need to negotiate a sale 

price for the warrants, the estimated warrant value of each institution cannot be disclosed without 

harming Treasury-OFS' ability to secure the best return for taxpayers. Through an exchange 

process, Treasury-OFS received common shares at $3.25 per share for the originally issued 

preferred shares in Citigroup which had an initial investment of $25 billion. The holdings of 

Citigroup common shares had a market value of $37.23 billion ($4.84 per share) as of September 

30, 2009. 

Table 6: Top Ten CPP Investments 

($ in billions)

Institution Original Investment 

Estimated Net Asset Value 

(excluding warrants)

as of 9/30/09 

Citigroup (Common Shares) $ 25.00 $ 37.23 

Bank of America $ 25.00 $ 22.45 

Wells Fargo $ 25.00 $ 23.47 

PNC Financial $ 7.58 $ 7.17 

SunTrust Bank $ 4.85 $ 4.14 

Regions Bank $ 3.50 $ 3.01 

Fifth Third Bancorp $ 3.41 $ 3.05 

Hartford Financial $ 3.40 $ 3.11 

Keycorp $ 2.50 $ 1.94 

CIT Group $ 2.33 $ 0 

Total $102.57 $105.57

1

 Does not reflect the impact of management’s expectation of an additional $30 billion in early repayments. 
Management’s Discussion and Analysis

Page 37 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

23

 Market conditions and the performance of specific financial institutions will be critical 

determinants of the TARP’s final cost. The changes in the Treasury-OFS estimates during the 

period ended September 30, 2009 provide a good illustration of this impact. The estimated net 

cost of programs implemented to date declined by approximately $110 billion as compared to the 

estimates made while the programs were being initiated in the heart of the financial market crisis 

last winter in large part due to market stabilization seen to date and actual and forecast 

repayments occurring at a faster rate than originally anticipated. In the CPP program for 

example, when the cost of the program was first estimated by the Congressional Budget Office 

and Treasury-OFS last winter, the expectation was that the program would lose about 18-22 

percent.4 In large part because of the improved market conditions, Treasury-OFS reported net 

income of about $15.0 billion for the period ended September 30, 2009. Based on the 

repayments to date and current market conditions, the major bank stabilization programs, 

including the CPP and the TIP, are currently estimated to provide a net financial return to the 

taxpayer. The outstanding $174 billion in CPP and TIP balances are estimated to be worth 

approximately $182 billion. However, the outlook for repayments from the auto industry 

investments and the AIG Investment Program is less positive. Treasury-OFS estimates the $117 

billion originally invested in these programs is currently valued at approximately $56 billion. 

These programs may result in a net financial loss to taxpayers. 

Table 7 provides information as to how the estimated cost of the TARP has changed 

during for the period ended September 30, 2009. The positive amounts reflect an estimated 

income whereas negative amounts reflect a cost or expense. For example, the $204.6 billion 

invested in the CPP program was originally expected to cost about $57 billion (in net present 

value cost). For the period ended September 30, 2009, Treasury-OFS reported net income of 

about $15 billion for CPP. This amount represents primarily the combination of actual 

dividends, interest and realized fees, and the excess of estimated fair value as of September 30, 

2009 of the CPP investments over original cost. Additional explanatory material on how these 

estimates were developed can be found in Sections Seven [Financial Accounting Policy] and 

Eight [TARP Valuation Methodology]. 

4 "The Troubled Asset Relief Program: Report on Transactions Through December 31, 2008." Congressional 

Budget Office. January 2009.
Management’s Discussion and Analysis

Page 38 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

24

Table 7: Estimated Change in Net Cost for the TARP Programs 

$ in billions

Original 

Estimate1

Current

Estimate 

Net Change 

Capital Purchase Program - 57.4 + 15.0 + 72.4

Targeted Investment Program - 19.6 + 1.9 + 21.5

Asset Guarantee Program + 1.0 + 2.2 + 1.2

AIG Investment Program - 31.5 - 30.4 + 1.1

Automotive Industry Financing Program - 43.7 - 30.4 + 13.3

Term Asset-Backed Securities Loan Facility + 0.1 + 0.3 + 0.2

Subtotal - 151.1 - 41.4 + 109.7

Home Affordable Modification Program - 27.1 - 27.1 0.0

Total - 178.2 - 68.5 + 109.7 1 Original estimates completed on or near the initiation of each program and adjusted for modifications. Amounts 

shown in both original and current estimates are based on the same total program disbursements through FY 2009. 

The Impact of TARP

Measuring the impact of the TARP in isolation is challenging. The health of the overall 

system and its impact on the U.S. economy are the most important metrics by which TreasuryOFS can measure the effectiveness of these policies. However, the cost of the financial system 

collapse that was likely averted by TARP and the other government actions taken in the fall of 

2008 and since then will never be known. Moreover, it is difficult to measure separately the 

impact of TARP as it was part of a coordinated government response to restore confidence in our 

financial system. A few TARP programs were uniquely targeted to specific markets and 

institutions. In those instances, Treasury-OFS can measure performance more directly. 

Confidence in the stability of our financial markets and institutions has improved 

dramatically. Interbank lending rates, which reflect stress in the banking system, have returned 

to levels associated with more stable times. For example, the spread of one-month Libor to the 

overnight index swap fell from a peak of about 340 basis points5

 last fall to roughly 10 basis 

points at the end of October 2009, as shown in Figure 1. Credit-default swap spreads for 

financial institutions, which measure investor confidence in their health, have also fallen 

significantly. A measure of credit-default swaps for the largest U.S. banks reached 450 basis 

5

 A basis point is one hundredth of a percentage point or 0.01 percent so 100 basis points equals 1 percent. Basis 

points are often used to measure small changes in interest rates or yields on financial instruments. 
Management’s Discussion and Analysis

Page 39 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

points last fall as shown in Figure 2, and just over 100 basis points today. The TARP was a 

necessary step, but not the only step, to achieving this recovery. 

Figure 1. Libor-OIS Spread (basis points) Figure 2. Credit Default Spreads for Financial 

Institutions (basis points) 

0

50

100

150

200

250

300

350

400

0

50

100

150

200

250

300

350

400

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09

Basis points Basis points

1-Month

3-Month

Lehman FSP

0

50

100

150

200

250

300

350

400

450

500

0

50

100

150

200

250

300

350

400

450

500

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09

Basis points Basis points

Lehman FSP

Source: Bloomberg Sources: Bloomberg. 

Notes: Includes Bank of America, Citigroup, Goldman 

Sachs, JPMorgan, Morgan Stanley, and Wells Fargo. 

At the same time, borrowing costs have declined for many businesses, homeowners, and 

municipalities. Investment-grade corporate bond rates have fallen by over 70 percent since last 

fall, and high-yield bond rates have fallen by more than half. Fears of default on these bonds 

have receded, providing further relief on prices. The CDX investment-grade index (see Figure 

3), an aggregate measure of credit-default swaps for highly-rated companies, has fallen about 35 

percent from its October 2008 peak. Further, conventional 30-year mortgage rates (see Figure 4) 

remain under five percent at historic lows. AAA municipal bond rates are three percent, down 

from five percent last fall. 

Figure 3. Corporate Bond Spreads (basis points) Figure 4. Conventional 30-Year Mortgage Rate 

(percent)

0

100

200

300

400

500

600

0

100

200

300

400

500

600

2006 2007 2008 2009

AA 5-Yr

BBB 5-Yr

Basis points Basis points

4

5

6

7

8

9

10

11

12

13

14

4

5

6

7

8

9

10

11

12

13

14

1985 1988 1991 1994 1997 2000 2003 2006 2009

Basis points Basis points

Source: Bloomberg Source: Federal Reserve 

As borrowing costs have come down, businesses have raised about $900 billion in 

investment-grade debt and over $100 billion in high-yield debt this year. While much of the new 

issuance early this year was supported by the federal government, private investors have funded 

25
Management’s Discussion and Analysis

Page 40 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

most new corporate debt in recent months. In particular, banks have raised substantial capital 

from private sources following the release of the results from the federal government “stress test” 

of major U.S. financial institutions. Since the results were released, banks have raised $80 

billion in new common equity and over $40 billion in debt that is not guaranteed by the federal 

government. 

Figure 5. Corporate Bond Issuance 

 (US$ billions) 

Figure 6. Net Common Issuance by U.S. Banks (US$, 

billions) 

0

40

80

120

160

200

0

40

80

120

160

200

2008 2009

Govt. Guaranteed

Not Guaranteed

US$, bil. US$, bil.

-20

-10

0

10

20

30

40

50

60

-20

-10

0

10

20

30

40

50

60

US$, billions US$, billions

Source: JPMorgan Source: SNL Financial. 

Notes: Excludes equity generated through asset sales 

and preferred conversions. Negative figures represent 

net repurchases of equity. 

Securitization markets that provide important channels of credit for consumers and small 

businesses have also improved, in large part because of programs launched under the TARP.

Announcements about TALF helped narrow spreads in these markets even before the program 

began operating. This trend has continued, with spreads on TALF-eligible asset-backed 

securities (ABS) back to pre-crisis levels today, and spreads on non-TALF-eligible ABS more 

than 90 percent off their peaks from last fall. Issuance of ABS backed by consumer and business 

loans has averaged $14 billion per month since the government launched TALF in March 2009, 

compared to about $1.6 billion per month in the six months prior to the program’s launch. 

Issuance not supported by the federal government program accounted for about 40 percent of all 

such issuance in October 2009. However, the overall size of securitization markets remains 

small, relative to pre-crisis levels. 

26
Management’s Discussion and Analysis

Page 41 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Figure 7. Spreads Between TALF-Eligible ABS and 

Treasury Securities (basis points) 

Figure 8. Issuance of ABS Backed by Consumer and 

Small Business Loans (US$, billions) 

Source: JPMorgan Source: Federal Reserve 

Legacy security prices have improved significantly this year. This is due in part to 

general market improvement and in part to announcements for the Securities PPIP. Most of the 

Public-Private Investment Funds (PPIFs) have now been formed and are starting to purchase 

legacy assets from banks. The PPIFs should continue to contribute to price improvements in 

these markets. 

Stock markets have recovered substantial ground since March, following 18 months of 

steep declines. The S&P 500 has risen over 60 percent over the past six months, and share prices 

for financial companies in the S&P 500 have doubled. At the same time, volatility in stock 

markets is trending lower and approaching historical norms. The implied volatility of the S&P 

500, as measured by the Chicago Board Options Exchange’s Market Volatility (VIX), has fallen 

by over 70 percent since its peak in October and is roughly at its average since 1990. These 

improvements reflect broad-based confidence not only in the financial system, but also the 

prospects for economic recovery. 

Indeed, the American economy is growing again. It expanded at an annual rate of 2.8 

percent in the third quarter of 2009, snapping four consecutive quarters of negative growth. And 

private economists generally expect moderate growth over the next year. 

Meanwhile, housing markets are showing some signs of stabilizing and household wealth 

is recovering, which should stimulate consumer spending -- vital to American economic growth. 

Thanks in part to federal government financial policies, mortgage rates remain near historic 

lows. Home prices have ticked up over the past six months, after showing consistent declines 

since 2006. For example, the seasonally adjusted S&P/Case-Shiller U.S. National Home Price 

Index rose by 1.8 percent and 1.9 percent in the second and third quarters, respectively. Since 

March, sales of existing single-family homes have increased by 20 percent and over 2.7 million 

mortgages have been refinanced. Since Treasury-OFS announced its Making Home Affordable 

program, over 650,000 trial modifications under HAMP have been initiated, with roughly a few 

27
Management’s Discussion and Analysis

Page 42 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

hundred completing the trial period by September 30, 2009. Household net worth increased by 

$2 trillion in the second quarter, the first increase since the third quarter of 2007. 

However, the financial and economic recovery faces significant headwinds. Although 

the unemployment rate fell in November, it remains high at 10 percent. This places enormous 

pressure on homeowners and American families. Indeed, delinquencies of subprime residential 

mortgages reached over 26 percent and conforming mortgages nearly seven percent in the third 

quarter, as illustrated in Figure 9. And although RealtyTrac’s October report shows a third 

straight month of decreasing foreclosure activity, foreclosures are still up nearly 19 percent since 

October 2008. Moreover, according to First American CoreLogic, roughly one in four 

homeowners owed more on their mortgages than the properties were worth in the third quarter of 

2009.

 Bank lending also continues to contract, as shown in Figure 10. In the third quarter, 

commercial and industrial (C&I) loans outstanding contracted at an annual rate of 27 percent, 

and commercial real estate (CRE) loans outstanding at 8 percent. Small businesses rely on banks 

for 90 percent of their financing. Unlike large corporations, few can substitute credit from 

securities issuances. 

The contraction in bank lending reflects a combination of weak demand for credit and 

tightening standards at the banks. The former is a function of the recession preceded by a period 

of over expansion. The latter is in part a function of the fact that many banks face continued 

losses on outstanding exposures, in particular in commercial real estate. FDIC-insured 

commercial banks reported that net charge-offs—that is, losses that have occurred—increased to 

2.9 percent as a share of loans and leases in the third quarter, up from 0.6 percent before the 

recession. And delinquencies of commercial real estate loans were nine percent in the third 

quarter and increasing. 

Figure 9. Mortgage Delinquencies (percent) Figure 10. Bank Loans, C&I and CRE (percent 

change, end of period) 

2

3

4

5

6

7

10

12

14

16

18

20

22

24

26

28

1998 1999 2000 2000 2002 2003 2004 2005 2006 2007 2008 2009

Percent Percent

Subprime (left)

Conforming (right)

Ͳ20

Ͳ16

Ͳ12

Ͳ8

Ͳ4

0

4

8

12

16

20

Ͳ20

Ͳ16

Ͳ12

Ͳ8

Ͳ4

0

4

8

12

16

20

2004 2005 2006 2007 2008 2009

C&I

CRE

Q1 Q2 Q3 Q4 Q1 Q2 Q3

Percent Percent

Source: Mortgage Bankers Association Source: Federal Reserve 

28
Management’s Discussion and Analysis

Page 43 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Bank failures and the number of problem banks continue to increase. There have been 

over 120 bank failures this year through November 20, 2009, compared with 41 over the decade 

that preceded the current recession. And the number of banks that the FDIC classifies as 

“problem institutions” has reached 552 this year, compared with 76 in 2007 and 252 in 2008. 

Banks’ willingness to lend also has a significant impact on consumer spending and, 

consequently, economic growth. Macroeconomic Advisors, a consulting firm, found that a 10-

point increase in bank’s willingness to make consumer installment loans yields a 0.3 percentage 

point increase in personal consumption expenditures.6

 Figure 11 illustrates this relationship 

between bank lending attitudes and consumer spending. 

In this context, some federal 

government financial support is still 

necessary. In particular, the TARP can help 

stimulate credit for small businesses and 

assist responsible homeowners in avoiding 

foreclosures. As discussed in more detail 

below, Treasury-OFS is redirecting the TARP 

to meet these needs. Treasury-OFS recently 

launched initiatives to provide capital to small 

and community banks, which are important 

sources of credit for small businesses. Treasury-OFS is also working with the Small Business 

Administration, Congress, and the small business community to design other programs that will 

use TARP funds to get credit flowing again to these important engines of economic growth. 

Figure 11. Banks’ Willingness to Lend and Personal 

Consumption Expenditures (percent) 

-80

-60

-40

-20

0

20

40

60

80

-8

-6

-4

-2

0

2

4

6

8

1966 1971 1976 1981 1986 1991 1996 2001 2006

Percent Percent, yr/yr Real Personal 

Consumption 

Expenditures (left)

Banks' Willingness 

To Make Consumer 

Installment Loans 

(right)

Source: Federal Reserve, BEA 

External Assessments of TARP Performance

The United States Government Accountability Office (GAO) is one of four oversight 

bodies explicitly designated by Congress to provide oversight of the TARP. GAO’s October 

2009 anniversary report on the TARP provides a comprehensive and independent assessment of 

various aspects of the TARP.7

 The GAO also acknowledges that isolating and estimating the 

effect of TARP programs is challenging and that improvements in credit markets cannot be 

attributed solely to TARP programs. The indicators that the GAO has monitored over the past 

year suggest that there have been broad improvements in credit markets since the announcement 

of CPP, the first TARP program. The GAO notes, specifically, that: 

6

 Macroeconomic Advisers, “Banks’ Willingness to Lend and PCE Growth,” Oct. 8, 2008. 

7

 Troubled Asset Relief Program: One Year Later, Actions Are Needed to Address Remaining Transparency and 

Accountability Challenges. Government Accountability Office. GAO-10-16. October 8, 2009. 

29
Management’s Discussion and Analysis

Page 44 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

30

x the cost of credit and perceptions of risk declined significantly in interbank, 

corporate debt, and mortgage markets; 

x the decline in perceptions of risk (as measured by premiums over Treasury 

securities) in the interbank market could be attributed in part to several federal 

programs aimed at stabilizing markets that were announced on October 14, 2008, 

including CPP; and 

x the institutions that received CPP funds in the first quarter of 2009 saw more 

improvement in their capital positions than banks outside the program. 

Additional information on the assessments and activities of the TARP oversight entities can be 

found in Section Nine [Systems, Controls, and Legal Compliance]. 
Management’s Discussion and Analysis

Page 45 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

31

Section Three: Ensuring Stability and Liquidity

This section provides a description of each of the programs established under the TARP 

to ensure stability and liquidity, including results for each program to date. 

Capital Purchase Program

EESA was originally proposed as a means to buy mortgage loans, 

mortgage-backed securities and certain other assets from banks. However, the authorities 

granted under EESA were broadened in the legislative process to cover any financial instrument 

whose purchase the Secretary of the Treasury, after consultation with the Chairman of the 

Federal Reserve, determines necessary to promote financial market stability. Shortly following 

passage of EESA, it became clear to the leaders of many G-7 nations that rapid action was 

needed to provide capital to the financial system as a whole. Lending even between banks had 

practically stopped, credit markets had shut down, and many financial institutions were facing 

severe stress. There was not sufficient time to implement a program to buy mortgage related 

assets, which posed difficulties related to valuing such assets and getting the holders of such 

assets to sell them at current prices. In this context, immediate capital injections into financial 

institutions were a necessary step to avert a potential collapse of the system. 

Given the high level of uncertainty in financial markets and the economy, even strong 

financial institutions began to hoard capital. Based on various market indicators, it became clear 

that financial institutions needed additional capital to sustain a normal flow of credit to 

businesses and consumers during the financial turmoil and economic downturn. As a result, 

Treasury-OFS launched the Capital Purchase Program (CPP), its largest and most significant 

program under EESA, on October 14, 2008. Treasury-OFS initially committed over a third of 

the total TARP funding, $250 billion, to the CPP, which it lowered to $218 billion in March 

2009.

 The CPP was designed to bolster the capital position of viable institutions and, in doing 

so, to build confidence in these institutions and the financial system as a whole. With the 

additional capital, CPP participants were better equipped to undertake new lending, even while 

absorbing write downs and charge-offs on loans that were not performing. 

Of the $250 billion commitment, Treasury-OFS invested $125 billion in eight of the 

country’s largest financial institutions. The remaining $125 billion was made available to 

qualifying financial institutions (QFIs) of all sizes and types across the country, including banks, 

savings associations, bank holding companies and savings and loan holding companies. QFIs 

interested in participating in the program had to submit an application to their primary federal 

banking regulator. The minimum subscription amount available to a participating institution was 
Management’s Discussion and Analysis

Page 46 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

32

1 percent of risk-weighted assets. The maximum subscription amount was the lesser of $25 

billion or 3 percent of risk-weighted assets.

Over the weeks and months that followed the announcement of the CPP, Treasury-OFS 

provided capital to 685 institutions in 48 states, including more than 300 small and community 

banks, helping to enable them to absorb losses from bad assets while continuing to lend to 

consumers and businesses. The largest investment was $25 billion while the smallest was 

$301,000. To encourage continued participation by small and community banks, the application 

window for CPP was reopened on May 13, 2009, for banks with less than $500 million in assets, 

with an application deadline of November 21, 2009.

Most banks participating in the CPP are to pay Treasury-OFS a dividend rate of 5 percent 

per year, increasing to 9 percent a year after the first five years. In the case of S-corporations, 

Treasury-OFS acquires subordinated debentures. Treasury-OFS has received $6.8 billion in CPP 

dividend and interest payments for the period ended September 30, 2009. As of September 30, 

2009, 38 institutions had not paid full dividends or interest payments. Under the CPP, TreasuryOFS has a right to elect two directors to the board of directors of an institution that misses six or 

more dividend payments. 

One measure of the CPP’s performance is the effect on lending by CPP participants.

Lending typically falls during a recession, and the current cycle is no exception. The Federal 

Reserve Board’s recent article U.S. Credit Cycles: Past and Present examines how credit 

volumes have evolved in the current economic downturn relative to previous business cycle 

downturns using the Federal Reserve’s Flow of Funds data.8

 Significant among the Federal 

Reserve’s findings is that despite many unprecedented aspects of the current financial and 

economic turbulence, movements in credit volumes in the current recession are similar to 

historical patterns. In terms of looking more specifically at CPP bank lending, each month 

Treasury-OFS asks CPP participants to provide information about their lending activity. As 

illustrated by Treasury-OFS' Lending and Intermediation Survey, the 22 largest CPP participants 

have been able to sustain their lending activities during this crisis, despite the significant 

headwinds posed by the recession, including increased bankruptcies, higher unemployment and 

falling home prices. Details on the Bank Lending Surveys can be found at 

http://www.financialstability.gov/impact/surveys.htm. 

8

 The article “U.S. Credit Cycles: Past and Present” can be found at the following link:

http://www.financialstability.gov/docs/CPP/Report/Fed%20US%20Credit%20Cycles%20072409.pdf. 
Management’s Discussion and Analysis

Page 47 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

33

Capital Assistance Program and the Supervisory Capital Assessment 

Program

In early 2009, the Federal banking agencies conducted a one-time, forward-looking 

assessment or “stress test” -- known as the Supervisory Capital Assessment Program (SCAP) -- 

on the nineteen largest U.S. bank holding companies (BHCs). The stress test assessed whether 

these BHCs had the capital to continue lending and absorb all potential losses resulting from a 

more severe decline in economic conditions than projected by economic forecasters. After 

completion of the SCAP, the banking agencies concluded that ten of these BHCs needed to raise 

a total of an additional $75 billion in capital to establish a buffer for more adverse conditions. 

The remaining nine BHCs were found to have sufficient capital to weather more adverse market 

conditions.

In conjunction with this forward-looking test, Treasury-OFS announced that it would 

provide capital through the Capital Assistance Program (CAP) to banks that needed additional 

capital but were unable to raise it through private sources. The capital provided by the CAP 

would take the form of convertible preferred stock. This program was made available to all QFIs, 

not solely to those banks that underwent the SCAP. 

The design of the tests and their results were made public, a highly unusual step that was 

taken because of the unprecedented need to reduce uncertainty and restore confidence. By 

identifying and quantifying potential capital shortfalls and requiring that additional capital be 

raised to eliminate any deficiencies, the SCAP ensured that these financial institutions would 

have sufficient capital to sustain their role as intermediaries and continue to provide loans to 

creditworthy borrowers even if economic conditions suffered a severe and extended 

deterioration.

Of the ten bank holding companies that were identified as needing to raise more capital, 

nine have met or exceeded the capital raising requirements through private efforts. In the 

aggregate, these firms have increased requisite capital by over $77 billion since the results of the 

SCAP were announced. Treasury-OFS may provide additional capital to GMAC under the Auto 

Industry Financing Program to assist its fundraising efforts to meet the requirements of the 

SCAP.

Since the stress test results were released in early May, banks of all sizes have raised over 

$80 billion in common equity and $40 billion in debt that is not guaranteed by the government. 

Importantly, that capital raising has enabled more than 40 banks to repay the TARP investments 

made by Treasury-OFS. Treasury-OFS has received over $70 billion in principal repayments, 

and $9.7 billion in dividends, interest, warrants, and fees from CPP participants. In addition, 

Treasury-OFS estimates that another $70 billion in repayments from all TARP investments will 

occur over the next 12 to 18 months. Another measure of the effectiveness of SCAP and the 
Management’s Discussion and Analysis

Page 48 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

34

CPP, as well as other government efforts, is that Treasury-OFS did not receive any applications 

for CAP which terminated on November 9, 2009. 

Targeted Investment Program

Treasury-OFS established the Targeted Investment Program (TIP) under the TARP in 

December 2008. The TIP gave the Treasury-OFS the necessary flexibility to provide additional 

or new funding to financial institutions that were critical to the functioning of the financial 

system. Through TIP, Treasury-OFS sought to prevent a loss of confidence in critical financial 

institutions, which could result in significant financial market disruptions, threaten the financial 

strength of similarly situated financial institutions, impair broader financial markets, and 

undermine the overall economy.

 Eligibility to participate in the TIP was determined on a case-by-case basis, depending on 

a number of factors. Treasury-OFS considered, among other things: 

x The extent to which the failure of an institution could threaten the viability of its creditors 

and counterparties because of their direct exposures to the institution; 

x The number and size of financial institutions that are perceived or known by investors or 

counterparties as similarly situated to the failing institution, or that would otherwise be 

likely to experience indirect contagion effects from the failure of the institution; 

x Whether the institution is sufficiently important to the nation’s financial and economic 

system that a disorderly failure would, with a high probability, cause major disruptions to 

credit markets or payments and settlement systems, seriously destabilize key asset prices, 

or significantly increase uncertainty or loss of confidence, thereby materially weakening 

overall economic performance; and 

x The extent and probability of the institution’s ability to access alternative sources of 

capital and liquidity, whether from the private sector or other sources of government 

funds.

Treasury-OFS invested $20 billion in each of Bank of America (BofA) and Citigroup 

under the TIP. These investments provide for annual dividends of 8 percent. These investments 

also impose greater reporting requirements and harsher restrictions on the companies than under 

the CPP terms, including restricting dividends to $0.01 per share per quarter, restrictions on 

executive compensation, restrictions on corporate expenses, and other measures. Assistance 

under the TIP is also considered “exceptional assistance”, which means that the recipient is also 

subject to greater restrictions under the executive compensation rules. 
Management’s Discussion and Analysis

Page 49 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

35

American International Group, Inc. (AIG) Investment Program

 Since September 2008, the Federal Reserve and Treasury-OFS have taken a series of 

actions related to AIG in order to prevent AIG’s disorderly failure and mitigate systemic risks. 

These actions addressed the liquidity and capital needs of AIG, helping to stabilize the company. 

Treasury-OFS provided this assistance by purchasing preferred shares in AIG and also received 

warrants to purchase common shares in the institution. The assistance provided to AIG was 

deemed “exceptional assistance” which means that the recipient is subject to greater restrictions 

under the rules relating to executive compensation. Further details on the AIG Investment 

Program can be found in the AIG box. 

AIG

 In September 2008, prior to the passage of EESA, AIG faced severe liquidity pressures 

and potential insolvency. These pressures grew acute the day after the bankruptcy filing of 

Lehman Brothers, as financial and credit markets ceased to function. Treasury and Federal 

Reserve officials feared that a disorderly failure of the company at that time posed a systemic 

risk to the financial system and the U.S. economy. The company had global operations and was 

a significant participant in many financial markets. Through its subsidiaries, the company 

provided insurance protection to more than 100,000 entities, including small businesses, 

municipalities, 401(k) plans, and Fortune 500 companies who together employ over 100 million 

Americans. The company was also a significant counterparty to a number of major financial 

institutions. These commitments were reflected in tens of thousands of contracts that touched 

millions of Americans and businesses. 

The complexity of these insurance contracts and the exposure of the financial system and 

economy to their default required government intervention. The Federal Reserve provided an 

$85 billion credit facility in the form of secured loans to AIG on September 16, 2008 to contain 

the financial panic at least cost to the American taxpayer. At the time, the government was 

constrained by the tools at its disposal. The Federal Reserve was not in a position to selectively 

impose haircuts on AIG counterparties, or to know the long-term costs of its liquidity provision. 

Time was of the essence and the Federal Reserve faced a binary choice: allow AIG to default on 

tens of thousands of contracts, further eroding confidence in U.S. financial institutions and 

perpetuating market freezes, or provide secured credit to allow AIG to meet its near-term 

contractual obligations with millions of insurance holders. The Federal Reserve chose the latter 

option, and, along with Treasury, has managed its investment in AIG to facilitate an orderly 

restructuring of the company and to maximize repayments to taxpayers. 
Management’s Discussion and Analysis

Page 50 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

36

 In November 2008, this assistance was restructured so that the company had more equity 

and less debt. Treasury-OFS purchased $40 billion in cumulative preferred stock from AIG 

under the TARP, the proceeds of which were used to repay the Federal Reserve loan in part. In 

April 2009, Treasury-OFS exchanged the $40 billion in cumulative preferred stock for $41.6 

billion in non-cumulative preferred stock and created an equity capital facility, under which AIG 

may draw up to $29.8 billion as needed in exchange for issuing additional preferred stock to 

Treasury-OFS. As of September 30, 2009, AIG had drawn approximately $3.2 billion from the 

facility. The preferred stock pays a noncumulative dividend, if declared, of 10 percent per 

annum. The Federal Reserve Bank of New York (FRBNY) has also provided additional 

assistance to AIG by funding special purpose entities which purchased certain derivative 

contracts from AIG. In connection with its assistance to AIG, the FRBNY received convertible 

preferred stock representing approximately 79.8 percent of the fully diluted voting power of the 

AIG common stock. 

 The preferred stock was deposited in a trust, which exists for the benefit of the U.S. 

taxpayers. The FRBNY has appointed three independent trustees who have the power to vote the 

stock and dispose of the stock with prior approval of FRBNY and after consultation with 

Treasury. The trust agreement provides that the trustees cannot be employees of Treasury or the 

FRBNY. The Department of the Treasury does not control the trust and cannot direct the 

trustees. Treasury-OFS, through its TARP investment, owns other preferred stock that is not held 

in the trust and does not have voting rights except in certain limited circumstances. 

Asset Guarantee Program

Pursuant to section 102 of EESA, Treasury-OFS established the Asset Guarantee 

Program (AGP) with the same objective as the TIP of preserving financial market stability. The 

AGP, like the TIP, is a targeted program aimed at maintaining the stability of systemically 

important financial institutions and, thereby, reducing the potential for problems at such an 

institution to “spillover” to the broader financial system and economy. More specifically, the 

AGP may be used to provide protection against the risk of significant loss in a pool of assets held 

by a systemically significant financial institution that faces a risk of losing market confidence 

due in large part to its holdings of distressed or illiquid assets. By helping limit the institution’s 

exposure to losses on illiquid or distressed assets, the AGP can help the institution maintain the 

confidence of its depositors and other funding sources and continue to meet the credit needs of 

households and businesses. 

The AGP has been applied with extreme discretion and Treasury-OFS does not anticipate 

wider use of this program. To date, Treasury-OFS has used this program to assist Citigroup and 

began negotiations with Bank of America (BofA) under the AGP which BofA subsequently 
Management’s Discussion and Analysis

Page 51 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

37

terminated. Further details on this assistance can be found in the BofA and Citigroup separate 

presentations.

Bank of America 

 Under the CPP, in October 2008, Treasury-OFS agreed to purchase $15 billion of 

preferred stock from Bank of America and $10 billion from Merrill Lynch. When Bank of 

America completed its acquisition of Merrill Lynch at the end of 2008, the Treasury-OFS held a 

total of $25 billion of preferred in Bank of America. This preferred stock has a dividend rate of 5 

percent per annum for the first five years and increases to 9 percent thereafter. Under the TIP, 

Treasury-OFS purchased an additional $20 billion in preferred stock from Bank of America in 

January 2009, which pays a dividend of 8 percent per annum. Treasury-OFS also received 

warrants in both transactions. 

 In January 2009, Treasury-OFS, the Federal Reserve and the FDIC entered into a term 

sheet for a potential loss sharing arrangement under the AGP on a $118 billion pool of financial 

instruments owned by Bank of America. In May 2009, Bank of America announced its intention 

to terminate negotiations with respect to the loss-sharing arrangement and in September 2009, 

Treasury, the Federal Reserve, the FDIC and Bank of America entered into a termination 

agreement pursuant to which (i) the parties terminated the related term sheet and (ii) Bank of 

America agreed to pay a termination fee of $425 million to the government parties, with $276 

million going to Treasury-OFS. The fee compensated the government parties for the value that 

Bank of America had received from the announcement of the negotiations with government 

parties to guarantee and share losses on the pool of assets from and after the date of the term 

sheet. The termination fee was determined by taking the fee that would have been payable had 

the guarantee been finalized.

Citigroup 

 Under the CPP, Treasury-OFS purchased $25 billion in preferred stock from Citigroup in 

October 2008. This preferred stock had a dividend rate of 5 percent per annum. Under the TIP, 

Treasury-OFS purchased $20 billion in additional preferred stock from Citigroup, Inc. in 

December 2008. That preferred stock had a dividend rate of 8 percent per annum. TreasuryOFS also received warrants in both transactions. As part of an exchange offer designed to 

strengthen Citigroup’s capital, Treasury-OFS recently exchanged all of its preferred stock in 

Citigroup for a combination of common stock and trust preferred securities. 

 In January 2009, Treasury-OFS and Citigroup entered into an agreement for Citigroup’s 

participation in the AGP. Treasury-OFS guaranteed up to $5 billion of potential losses incurred 
Management’s Discussion and Analysis

Page 52 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

38

on a $301 billion pool of loans, mortgage-backed securities, and other financial assets held by 

Citigroup. The Federal Reserve and the FDIC are also parties to this arrangement. Treasury-OFS 

will not become obligated to pay on its guarantee unless and until Citigroup has absorbed $39.5 

billion of losses on the covered pool. Treasury-OFS would then cover 90 percent of all losses on 

the covered pool, up to a maximum of $5 billion. In consideration for the guarantee, TreasuryOFS received $4.03 billion in preferred stock that pays an annual dividend of 8 percent. 

Treasury-OFS also received a warrant to purchase approximately 66 million shares of common 

stock at a strike price of $10.61 per share. 

 As part of the exchange offer noted above, Treasury-OFS exchanged preferred stock 

received under the AGP for an equivalent amount of trust preferred securities paying interest at 

the same rate. 

Consumer and Business Lending Initiative

 Treasury-OFS designed two initiatives to restore consumer and business lending in the 

period ended September 30, 2009, the Term Asset-Backed Securities Loan Facility (TALF) and 

the Unlocking Credit for Small Business Initiative. Both programs are discussed in more detail 

below.

1. Term Asset-Backed Securities Loan Facility 

The asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS) 

markets over time have funded a substantial share of credit to consumers, businesses and real 

estate owners. In the third quarter of 2008, the ABS market and commercial mortgage-backed 

securities markets came to nearly a complete halt. Interest rate spreads on the most highly-rated 

AAA tranches of ABS and CMBS rose to levels outside their historical range, in certain cases 

well over 7 to 15 times their average, respectively. CMBS had accounted for almost half of all 

new commercial mortgage originations in 2007. The disruption of these markets contributed to 

the lack of credit to households and businesses of all sizes, impacting U.S. economic activity. 

In November 2008, the Federal Reserve and Treasury announced the creation of the Term 

Asset-Backed Securities Loan Facility (TALF) and launched TALF under the Financial Stability 

Plan on February 10, 2009. The TALF's objective was to stimulate investor demand for certain 

types of eligible ABS, specifically those backed by loans to consumers and small businesses, and 

ultimately, bring down the cost and increase the availability of new credit to consumers and 

businesses. Under the TALF, the Federal Reserve extends up to $200 billion in three- and fiveyear non-recourse loans to investors that agree to purchase eligible consumer or small business 

ABS. Treasury-OFS provides up to $20 billion of TARP monies in credit protection to the 

Federal Reserve for losses arising under TALF loans.
Management’s Discussion and Analysis

Page 53 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

39

The TALF was initially designed for newly or recently originated AAA-rated ABS 

backed by student loans, auto loans, credit card loans, and loans guaranteed by the SBA. On 

March 19, 2009, Treasury-OFS and the Federal Reserve announced that the TALF would be 

expanded to include newly or recently issued AAA-rated Asset Backed Securities (ABS) backed 

by four additional types of consumer and business loans – mortgage servicing advances, loans or 

leases relating to business equipment, leases of vehicle fleets, and floor plan loans. These new 

categories of collateral were eligible for inclusion in the April 2009 TALF subscription and 

funding process.

The Treasury-OFS and the Federal Reserve structured the TALF to minimize credit risk 

to the U.S. government to the greatest extent possible, consistent with achieving the program’s 

purpose of encouraging lending to consumers and businesses. Investors take risk by providing 

some of the capital to purchase the securities. The amount of private capital is measured in the 

form of haircuts, which represents the investor's equity contribution. For example, if a borrower 

purchases an ABS for $100 and that ABS has an assigned haircut of 15 percent, the borrower 

must put $15 at risk and can receive only $85 in financing. The haircut level varies across asset 

class and maturity to take into account any differences in risk. Finally, the borrower must also 

make monthly or quarterly interest payments to the federal government. The cost of the loan is 

100 basis points over a fixed or floating rate benchmark, such as the London Interbank Offered 

Rate ("LIBOR"). 

 The Federal Reserve had originally authorized using the TALF to make loans through 

December 31, 2009. To promote the flow of credit to businesses and households and to facilitate 

the financing of commercial properties, the Federal Reserve announced on August 17, 2009 that 

the TALF will continue to make loans against newly issued ABS and previously issued CMBS 

through March 31, 2010. In addition, TALF will make loans against newly issued CMBS 

through June 30, 2010. The inclusion of CMBS as eligible collateral helps prevent defaults on 

economically viable commercial properties, increases the capacity of current holders of maturing 

mortgages to make additional loans, and facilitates the sale of distressed properties. 

TALF Results

TALF’s impact on the securitization markets can be measured by a number of indicators, 

including ABS issuance – both TALF and non-TALF eligible, the percentage decline in ABS 

and SMBS spreads from the height of the financial crisis, and the number and composition of 

investors in the securitization market. 

ABS Issuance: The market for new issuance of ABS had shut down at the end of 2008 

and remained effectively closed until TALF became operational. Since March 2009, offerings in 

the ABS markets have gradually increased with nearly $86 billion of new ABS issuance through 

October 2009. Of that amount, $49 billion of securities were purchased with TALF loans.
Management’s Discussion and Analysis

Page 54 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

These securities supported over 3.6 million consumer and small business loans and leases, and 

over 132 million active credit card accounts. TALF has also provided loans to purchase about 

$4.1 billion of legacy CMBS securities (issued before January 1, 2009). 

This re-starting of the securitization market translates into increased consumer and small 

business lending and, in some cases, lower loan rates for consumers. In addition, investors are 

gaining confidence in the market’s ability to function without federal government support. In 

March 2009, approximately 60 percent of new ABS issuance was purchased with the support of 

the TALF. By September 2009, that was down to 40 percent. The following chart (Figure 12) 

shows total consumer ABS issuance and the portion backed by TALF. 

Figure 12: Total Consumer ABS Issuance through 

September

Secondary market spreads: Since the peak of the credit crisis, spreads for the asset 

classes eligible for the program have decreased by 60 percent or more. Spreads on credit card 

and auto loans have fallen from a peak of 600 basis points to less than 100 basis points over their 

benchmarks, the same levels that existed before Lehman Brothers' bankruptcy filing in 

September 2008. Spreads in the secondary market for CMBS have come in from 1500 basis 

points over its benchmark to 300 basis points today. Prior to the beginning of the crisis in 

August 2007, highly rated CMBS were priced on average approximately 100 basis points over its 

benchmark. 

40
Management’s Discussion and Analysis

Page 55 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

41

Borrower Composition: At the peak of the credit crisis, there was little confidence 

among institutional investors in the capital markets. Investors effectively were standing on the 

sidelines. Since the implementation of TALF, there has been renewed confidence in the market. 

A range of institutional investors have become active participants, including hedge funds, asset 

managers, pension funds, and insurance companies. 

 With an increase in investor participation and thus investor demand, required returns 

have fallen more than half, in some cases, suggesting a return of risk premiums to more 

“normalized” levels. Cash participation, specifically for TALF-eligible prime auto and 

equipment transactions, has also increased, suggesting investors’ decreasing reliance on TALF 

support. Further, some transactions for specific asset classes with shorter durations are being 

successfully completed without TALF financing, suggesting investor confidence in shorterduration transactions. 

 TALF Loans to Date: As of September 30, 2009, no securities used as collateral for 

TALF loans had been surrendered to the Federal Reserve. In addition, as of September 30, 2009, 

13.6 percent of the total amount of TALF loans, or $6.3 billion, had been repaid. Given that the 

term of the TALF loans is three to five years, this reflects the increasing health of the 

securitization markets. 

2. Unlocking Credit for Small Businesses Program 

To help restore the confidence needed for financial institutions to increase lending to 

small businesses, Treasury announced a program to unlock credit for small businesses on March 

16, 2009. Under the program, Treasury announced that it would make up to $15 billion in TARP 

funds available to purchase securities backed by the Small Business Administration (SBA)-

guaranteed portions of loans made under the SBA’s 7(a) loan program. The SBA’s 7(a) program 

is the SBA’s most basic and widely used loan program.

Since Treasury's announcement of this program, the credit markets for small businesses 

have improved somewhat. The secondary market for guaranteed SBA loans, for example, had 

essentially ceased working last fall and had only $86 million in January re-sales. That market 

improved notably this spring in the wake of Treasury’s announcement, with $399 million settled 

from lenders to broker-dealers in September 2009. As a result of this improvement, as well as 

reluctance on the part of market participants to accept TARP funds, Treasury-OFS found that 

demand for its proposed program declined. As of September 30, 2009, no funds had been 

disbursed under the program, although it remains available. 

Public-Private Investment Program

Treasury, in conjunction with the Federal Reserve and the FDIC, announced the PublicPrivate Investment Program (PPIP) on March 23, 2009, as a part of the Financial Stability Plan. 

The PPIP is designed to improve the condition of financial institutions by facilitating the removal 
Management’s Discussion and Analysis

Page 56 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

42

of legacy assets from their balance sheets. Legacy assets include both real estate loans held on 

banks’ balance sheets (legacy loans) as well as securities backed by residential and commercial 

real estate loans (legacy securities).

The PPIP should help restart the market and provide liquidity for legacy assets, enabling 

financial institutions to make new loans available to households and businesses. Legacy assets 

became a stumbling block to the normal functioning of credit markets with the bursting of the 

housing bubble. With the housing market in decline, financial institutions and investors suffered 

significant losses on these legacy assets. These losses drove financial institutions to conserve 

capital, reduce leverage and minimize exposure to riskier investments. Many institutions did so 

by selling assets, triggering a wide-scale deleveraging in these markets. As the supply of assets 

being sold increased, prices declined and many traditional investors exited these markets, 

causing further declines in the demand and the liquidity for these assets. This lack of liquidity 

created significant uncertainty regarding the value of these legacy assets, which in turn raised 

questions about the balance sheets of these financial institutions, compromising their ability to 

raise capital and continue lending. 

The PPIP helps address this valuation concern. Through PPIP, Treasury-OFS partners 

with experienced investment managers and private sector investors to purchase legacy assets.

Rather than resolving the uncertainty by having the government set the price for these assets, the 

private sector investors compete with one another to establish the price of the legacy assets 

purchased under the PPIP. By drawing new private sector capital into the market for legacy 

assets and facilitating price discovery, the PPIP should increase the liquidity for these legacy 

assets.

Treasury-OFS initially announced that it would provide up to $100 billion for the PPIP.

Because of improvements in the market, this amount was reduced to $30 billion. Under the 

PPIP, Treasury-OFS provides equity and debt financing to newly-formed public-private 

investment funds (PPIFs) established by private fund managers with private investors for the 

purpose of purchasing legacy securities. These securities are commercial mortgage-backed 

securities and non-agency residential mortgage-backed securities. To qualify for purchase by a 

Legacy Securities PPIP (S-PPIP), these securities must have been issued prior to 2009 and have 

originally been rated AAA – or an equivalent rating by two or more nationally recognized 

statistical rating organizations – without ratings enhancement and must be secured directly by the 

actual mortgage loans, leases, or other assets.

The S-PPIP allows the Treasury-OFS to partner with private investors in a way that 

increases the flow of private capital into these markets while maintaining equity “upside” for the 

taxpayers. Under the principal terms of the S-PPIP, Treasury-OFS partners with pre-qualified 

fund managers that raise a minimum amount of capital from private sources. Each manager 

forms a Public Private Investment Fund or PPIF. Treasury-OFS invests equity capital from the 
Management’s Discussion and Analysis

Page 57 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

43

TARP in each PPIF on a dollar-for-dollar basis, matching the funds raised by these managers. In 

addition, Treasury-OFS also provides debt financing up to 100 percent of the PPIF’s total equity 

capital, subject to certain restrictions on leverage, withdrawal rights, disposition priorities and 

other customary financing protections. Treasury-OFS not only participates pro rata in any profits 

or losses of the PPIF but also receives additional potential equity upside in the form of warrants, 

as required by EESA. Each fund manager will seek to generate attractive returns for the PPIF 

through a predominately long-term buy and hold strategy. 

On July 8, 2009, following a comprehensive two-month application, evaluation and 

selection process, Treasury-OFS pre-qualified nine fund managers to participate in the S-PPIP 

based, in part, on a demonstrated ability to invest in legacy assets and to raise private capital for 

such investments. On September 30, 2009, two PPIFs signed limited partnership agreements and 

loan agreements with Treasury-OFS, resulting in a $6.7 billion commitment for Treasury-OFS. 

As of September 30, 2009, these two PPIFs had approximately $1.13 billion in private sector 

capital commitments, which were matched 100 percent by Treasury-OFS, representing total 

equity capital commitments of $2.26 billion. Treasury-OFS is providing debt financing up to 

100 percent of the total capital commitments of each PPIF, representing in the aggregate 

approximately $4.52 billion of total equity and debt capital commitments. As of November 30, 

2009, eight PPIFs have signed agreements with Treasury-OFS. Following signature of these 

agreements, each fund manager has up to six months to raise additional private capital to receive 

the full allocation of the $3.3 billion in matching equity and debt capital from Treasury-OFS. 

Assuming that each of the nine fund managers raises enough private capital to receive the full 

allocation from Treasury-OFS, the total purchasing power of the PPIFs will be $40 billion, 

including $10 billion in private capital and the $30 billion Treasury-OFS commitment. As of 

September 30, 2009, no fund managers had made any investments and Treasury-OFS had not 

disbursed any funds. 

PPIP Results

Although purchases of assets under the program are just beginning, the announcement of 

the program itself helped reassure investors. Since the announcement, prices for non-agency 

mortgage-backed securities have gone up substantially. Prime fixed-rate securities issued in 

2006 that traded as low as $60 in March have increased in value by over 40 percent as markets 

have become more liquid. That improvement in financial market conditions has created the 

positive backdrop that caused Treasury-OFS to proceed with the program at a scale smaller than 

initially envisioned.
Management’s Discussion and Analysis

Page 58 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

44

Automotive Industry Financing Program

Treasury-OFS established the Automotive Industry Financing Program (AIFP) on 

December 19, 2008, to help prevent a significant disruption to the American automotive 

industry, which would have posed a systemic risk to financial market stability and had a negative 

effect on the economy. Treasury-OFS announced a plan to make emergency loans available from 

the TARP under the AIFP to General Motors Corporation (GM) and Chrysler LLC (Chrysler) to 

provide a path for these companies to go through orderly restructurings and achieve viability. 

Treasury-OFS’ investments in the auto companies were determined to be consistent with 

both the purpose and specific requirements of EESA. Treasury-OFS determined that the auto 

companies were and are interrelated with entities extending credit to consumers and dealers 

because of their financing subsidiaries and other operations, and that a disruption in the industry 

or an uncontrolled liquidation would have had serious effects on financial market stability, 

employment and the economy as a whole. In addition, Congress provided the Secretary of the 

Treasury broad authority by defining “financial institutions” in EESA flexibly so as not to be 

limited to banks, savings institutions, insurance companies and similar entities. The auto 

companies qualified as "financial institutions" under EESA as they met the basic requirements of 

the definition. In each case, they were organized under Delaware law, had significant U.S. 

operations, were subject to extensive federal and state regulation, and were not a central bank or 

institution owned by a foreign government. 

Treasury-OFS initially provided loans of $13.4 billion to GM and $4 billion to Chrysler 

under the AIFP to give the companies time to negotiate with creditors and other stakeholders in 

order to prevent disorderly bankruptcies. Under the terms of the loans, each company was 

required to prepare a restructuring plan that included specific actions aimed at assuring: (i) the 

repayment of the loan extended by TARP; (ii) the ability of the company to comply with 

applicable federal fuel efficiency and emissions requirements and commence the domestic 

manufacturing of advanced technology vehicles in accordance with federal law; (iii) 

achievement of a positive net present value; (iv) rationalization of costs, capitalization, and 

capacity with respect to the manufacturing workforce, suppliers and dealerships of the company; 

and (v) a product mix and cost structure that is competitive in the U.S. marketplace. 

To oversee the federal financial assistance—including evaluating the restructuring 

plans—and to make decisions about future assistance to the automakers, the loan agreements 

provided for a presidential designee. Under the terms of the loan agreements, because no 

presidential designee has been appointed to date, the Secretary of the Treasury makes decisions 

on all matters involving financial assistance to the automakers, with input from the National 

Economic Council. 
Management’s Discussion and Analysis

Page 59 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

45

To date, the Treasury-OFS has provided approximately $76 billion in loans and equity 

investments to GM, Chrysler, and their respective financing entities. Further details on these 

loans and the valuation of these investments can be found in Section Eight [Valuation 

Methodology]

General Motors 

On December 31, 2008, Treasury-OFS agreed to make loans of $13.4 billion to General 

Motors Corporation to fund working capital. Under the loan agreement, GM was required to 

implement a viable restructuring plan by March 30, 2009. The Administration determined that 

the first plan GM submitted failed to establish a credible path to viability, and the deadline was 

extended to June 1, 2009. Treasury-OFS loaned an additional $6 billion to fund GM during this 

period. To achieve an orderly restructuring, GM filed bankruptcy proceedings on June 1, 2009. 

Treasury-OFS provided $30.1 billion under a debtor-in-possession financing agreement to assist 

GM through the restructuring period. The new entity, General Motors Company (New GM) 

purchased most of Old GM’s assets and began operating on July 10, 2009. 

Treasury-OFS converted most of its loans to the Old GM to $2.1 billion of preferred 

stock and a 60.8 percent share of the common equity in the New GM and a $7.1 billion debt 

security note. $380 million of Treasury-OFS’ debt in New GM was immediately repaid with the 

termination of the Auto Warranty Program, leaving $6.7 billion of loans outstanding as of 

September 30, 2009. The New GM currently has the following ownership: Treasury-OFS (60.8 

percent), GM Voluntary Employee Benefit Association (17.5 percent), the Canadian 
Management’s Discussion and Analysis

Page 60 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Government (11.7 percent), and Old GM’s unsecured bondholders (10 percent). 

Chrysler

On January 2, 2009, Treasury-OFS loaned $4 billion to Chrysler. On March 30, 2009, 

the Administration determined that the business plan submitted by Chrysler failed to demonstrate 

viability and announced that in order for Chrysler to receive additional taxpayer funds, it needed 

to find a partner with whom it could establish a successful alliance. Chrysler made the 

determination that forming an alliance with Fiat was the best course of action for its 

stakeholders. Treasury-OFS continued to support Chrysler as it formed an alliance with Fiat. In 

connection with Chrysler’s bankruptcy proceedings filed on April 30, 2009, Treasury-OFS 

46
Management’s Discussion and Analysis

Page 61 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

provided an additional $1.9 billion under a debtor-in-possession financing agreement to assist 

Chrysler in an orderly restructuring. On June 10, 2009, substantially all of Chrysler’s assets were 

sold to the newly formed entity, Chrysler Group LLC (New Chrysler). Treasury-OFS committed 

to loan $6.6 billion to New Chrysler in working capital funding, and as of September 30, 2009, 

New Chrysler has drawn $4.6 billion of this amount. 

As of September 30, 2009, Treasury-OFS had a $7.1 billion debt security from New 

Chrysler and held 9.9 percent of the equity in New Chrysler. The original loans to Chrysler 

remain outstanding, but have been reduced by $500 million of debt that was assumed by New 

Chrysler. Current equity ownership in New Chrysler is as follows: the Chrysler Voluntary 

Employee Benefit Association (67.7 percent), Fiat (20 percent), Treasury-OFS (9.9 percent) and 

the Government of Canada (2.5 percent). 

In addition to the AIFP funds committed to the two auto manufacturers, Treasury-OFS 

determined that TARP assistance was also needed for the financing companies affiliated with 

47

these manufacturers. The vast majority of automobile purchases in the U.S. are financed, 
Management’s Discussion and Analysis

Page 62 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

48

hase

GMAC 

including an estimated 80 to 90 percent of consumer purchases and substantially all dealer 

inventory purchases. Without the TARP's assistance, it is unlikely that the tightened credit 

markets would have been able to provide the critical financing needed for consumers to purc

autos. A description of the assistance provided to GMAC and Chrysler Financial is provided 

below.

GMAC is an important source of auto-related credit for consumers and dealers and, 

through a subsidiary, is the country’s fifth largest mortgage servicer. It is also one of the largest

U.S. bank holding companies. On December 29, 2008, Treasury-OFS purchased $5 billion in 

preferred equity from GMAC, and received an additional $250 million in preferred equity 

through warrants that Treasury-OFS exercised at closing. At the same time, Treasury-OFS also

agreed to lend up to $1 billion of TARP funds to GM (one of GMAC’s owners), to enable GM to

participate in GMAC’s rights offering. GM drew $884 million under that commitment on 

January 16, 2009.

In May 2009, banking regulators required GMAC to raise additional capital by 

November 2009 in connection with the SCAP or stress test. On May 21, 2009, Treasury-OFS

purchased $7.5 billion more of convertible preferred shares from GMAC and received warrants

that Treasury-OFS exercised at closing for an additional $375 million in convertible preferred 

shares. GMAC is in discussions with the Treasury-OFS regarding additional financing to

complete GMAC's post-SCAP capital needs up to the amount of $5.6 billion, as previously

discussed in May. 

On May 29, 2009, Treasury-OFS exercised its option to exchange the $884 million loan 

for the ownership interest that GM had purchased, amounting to about 35 percent of the common

membership interests in GMAC. As of September 30, 2009, Treasury-OFS owns $13.1 billion in 

preferred shares in GMAC, through purchases and the exercise of warrants, in addition to 35 

percent of the common equity in GMAC.

Chrysler Financial 

On January 16, 2009, Treasury-OFS announced that it would lend up to $1.5 billion to a 

special purpose vehicle created by Chrysler Financial to enable Chrysler Financial to finance the 

purchase of Chrysler vehicles by consumers. To satisfy the EESA warrant requirement, the 

Chrysler Financial special purpose vehicle issued additional notes entitling Treasury-OFS to an 

amount equal to 5 percent of the maximum loan amount. Twenty percent of those notes vested 

upon the closing of the transaction, and additional notes were to vest on each anniversary of the

transaction closing date. The loan was fully drawn by April 9, 2009. On July 14, 2009, Chrysler 

Financial fully repaid the loan, including the vested additional notes and interest. 
Management’s Discussion and Analysis

Page 63 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

49

 and the rapid decline in auto sales, many of the nation's auto 

parts suppliers were struggling to access credit and faced uncertainty about the prospects for their 

busines

es

s

3.5

Auto Warranty Program 

, Treasury-OFS announced an Auto Warranty Program designed to 

give consumers considering new car purchases from domestic manufacturers the confidence that 

warran

paid

Auto Supplier Support Program 

Because of the credit crisis

ses. Suppliers that ship parts to auto companies generally receive payment approximately

45-60 days after shipment. In a normal credit environment, suppliers can either sell or borrow 

against those commitments, or receivables, in the interim period to pay their workers and fund 

their ongoing operations. However, due to the uncertainty about the ability of the auto compani

to honor their obligations, banks were unwilling to extend credit against these receivables. On 

March 19, 2009, Treasury-OFS announced the Auto Supplier Support Program (ASSP) to help 

address this problem by providing up to $5 billion to domestic auto manufacturers to purchase 

supplier receivables. With the emergence of New GM and New Chrysler from bankruptcy 

proceedings and with the threat of liquidation greatly reduced, credit market access for supplier

has improved. As of July 1, 2009, the base commitment under the ASSP was decreased to $

billion. As of September 30, 2009, Treasury-OFS has funded $413 million under the ASSP. The

loans used to finance the program must be repaid within a year, unless extended. Treasury-OFS 

expects these loans to be fully repaid by or before April 2010. The companies may still draw on 

the loans but they are not expected to. 

On March 30, 2009

ties on those cars would be honored regardless of the outcome of the restructuring 

process. As of July 10, 2009, the program was terminated after New GM and New Chrysler 

completed the purchase of substantially all of the assets of GM and Chrysler from their 

respective bankruptcies. The $640 million advanced to GM and Chrysler under the program has 

been repaid to Treasury-OFS; Chrysler repaid the full amount with interest while GM re

only principal. 
Management’s Discussion and Analysis

Page 64 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

50

Section Four: Preventing Foreclosures and Preserving Homeownership 

To mitigate foreclosures and help ensure homeownership preservation, Treasury 

announced a comprehensive $75 billion program, the Home Affordable Modification Program 

(HAMP), in February 2009. Treasury-OFS will provide up to $50 billion in funding through the 

TARP, while Fannie Mae and Freddie Mac agreed to provide up to $25 billion of additional 

funding. HAMP focuses on creating sustainably affordable mortgage payments for responsible 

home owners who are making a good faith effort to make their mortgage payments, while 

mitigating the spillover effects of preventable foreclosures on neighborhoods, communities, the 

financial system and the economy. 

HAMP is built around three core concepts. First, the program focuses on affordability. 

Every modification under the program must lower the borrower's monthly mortgage payment to 

no more than 31 percent of the borrower's monthly gross income, the “target monthly mortgage 

payment ratio”. Second, the HAMP's pay-for-success structure aligns the interests of servicers, 

investors and borrowers in ways that encourage loan modifications that will be both affordable 

for borrowers over the long term and cost-effective for investors and taxpayers. Third, the 

HAMP establishes detailed guidelines for the industry to use in making loan modifications with 

the goal of encouraging the mortgage industry to adopt a sustainably affordable standard, both 

within and outside of the HAMP. 

HAMP operates through the combined efforts of the Treasury Department, Fannie Mae, 

Freddie Mac, mortgage loan servicers, investors and borrowers to help qualifying homeowners 

who commit to making modified monthly mortgage payments to stay in their homes. In 

addition, the federal bank, thrift, and credit union regulatory agencies have encouraged all 

federally regulated financial institutions that service or hold residential mortgage loans to 

participate in the HAMP. 

The following highlights some of the key terms and conditions of HAMP: 

x Eligible Homeowners: The modification plan was designed to be inclusive, with a loan 

limit of $729,750 for single-unit properties, and higher limits for multi-unit properties. 

Over 97 percent of the mortgages in the country have a principal balance within these 

limits. 

x Servicers’ Obligation to Extend Modification Offer: Servicers participating in HAMP 

are required to apply a standardized net present value (NPV) test to each loan that is at 

risk of foreclosure -- defined as either at risk of imminent default or in default. The NPV 

test compares the net present value of cash flows from the mortgage if modified under 

HAMP and the net present value of the cash flows from the mortgage without 

modification. If the NPV test is positive – meaning that the net present value of expected 
Management’s Discussion and Analysis

Page 65 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

51

cash flows is greater if modified under the HAMP than if the loan is not modified – the 

servicer must extend an offer to modify the loan in accordance with HAMP guidelines, 

absent fraud or a contractual prohibition limiting modification of the mortgage. 

x Reductions in Monthly Payments: Servicers are required to follow the waterfall outlined 

in the program contracts in reducing the borrower's monthly payment to no more than 31 

percent of their monthly gross income. The interest rate floor under HAMP is 2 percent.

Further flexibility is provided if reducing the loan rate to 2 percent, by itself, does not 

achieve the 31 percent threshold. In that case, the servicers can extend the term of the 

loan, up to 480 months, in order to achieve the 31 percent payment threshold. The 

HAMP also provides the servicer the option to reduce principal on a stand-alone basis to 

help reduce the borrower’s monthly payment 

The HAMP includes a standardized set of procedures that servicers must follow in 

modifying eligible loans under the program and in estimating the expected cash flows of 

modified mortgages. The borrower must remain current on their modified mortgage payments 

for at least 90 days in order for a HAMP loan modification to become permanent. 

To increase participation in HAMP and encourage borrowers to remain current on loan 

modifications under the program, Treasury-OFS provides targeted incentives to borrowers, 

investors, and servicers that participate in the program. These incentives include an up-front 

payment of $1,000 to the servicer for each successful modification after completion of the trial 

period, and "pay for success" fees of up to $1,000 per year for three years, provided the borrower 

remains current. Additional one-time incentives of $500 to the servicers and $1,500 to the 

investors are paid if loans are modified for borrowers who are current but are in danger of 

imminent default are successfully modified. Homeowners will also earn up to $1,000 towards 

principal balance reduction each year for five years if they remain current and pay on time. 

Investors are entitled to payment reduction cost-share compensation for up to five years for half 

the cost of reducing the borrower's payment from a 38 percent to 31 percent threshold, provided 

the borrower remains current. Investors must pay for reducing the borrower's payment down to 

the 38 percent threshold before they are able to benefit from the cost-share incentive. This 

requires investors to take the first loss for unaffordable and unsustainable loans that were 

extended to borrowers. 

HAMP Results

The incentives offered under HAMP have had a substantial impact in helping American 

homeowners and stabilizing the housing market, as detailed below: 
Management’s Discussion and Analysis

Page 66 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

52

x As of October 31, 2009, 71 servicers have signed up for the HAMP. Between loans 

covered by these servicers and loans owned or guaranteed by the GSEs, approximately 85 

percent of first-lien residential mortgage loans in the country are now covered by the 

program. As of September 30, 2009, Treasury-OFS has made commitments to fund up to 

$27.1 billion in HAMP payments. 

x As of October 31, 2009, these participating servicers have extended offers on over 

919,665 trial modifications. 

x Over 650,994 trial modifications are already underway, as of October 31, 2009.

HAMP Snapshot through October 2009

Number of Trial 

Modifications 

Started1

650,994

Number of Trial 

Period Plan Offers 

Extended to 

Borrowers2

919,665

Number of Requests 

for Financial 

Information Sent to 

Borrowers2

2,776,740

1

Active trial and permanent modifications as of October 31; based on numbers reported by servicers to the 

HAMP system of record. 

2

 Source: Survey data provided by servicers, through October 29
Management’s Discussion and Analysis

Page 67 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

53

Section Five: Protecting Taxpayer Interests 

The government’s response to the financial crisis including the actions taken under 

TARP, were necessary to avoid an even greater deterioration or collapse of the U.S. and global 

financial systems , which would have resulted in a far worse recession or even depression.

TARP provided a form of taxpayer protection by helping to achieve that basic objective. 

Treasury-OFS is committed to ensuring that taxpayers are also protected with respect to how the 

TARP is implemented. The taxpayers clearly assumed downside risk in the TARP purchases 

and guarantees of troubled assets, thus Treasury-OFS also seeks to protect the taxpayer through 

the effective management and disposition of all TARP investments. EESA also stipulated that 

the taxpayer benefit from any potential upside on any assistance transaction by requiring that 

Treasury receive warrants in most investments. This section addresses portfolio management 

topics such as: 

1) Portfolio Overview 

2) Guiding Principles 

3) Portfolio Management Approach 

4) Exchange Offers and Restructurings

5) Treasury-OFS’ Actions as a Shareholder 

6) Compliance 

7) Program Specific Considerations. 

Portfolio Overview

Treasury-OFS’ TARP investments include:

1) Preferred stock: a majority of the TARP investments are in nonvoting perpetual 

preferred stock;

2) Common stock: currently, Treasury-OFS holds common stock in GM, GMAC, 

Chrysler and Citigroup; 

3) Warrants and senior debt instruments: in connection with its investments in publicly 

traded companies, Treasury-OFS has received, pursuant to Section 113 of EESA, 

warrants to purchase common stock at market price as of the time of the investment. 

In the case of investments in privately held companies, Treasury-OFS has received 

warrants to purchase preferred stock at a nominal price, which it exercised at closing, 

or debt instruments issued by the TARP recipient; 
Management’s Discussion and Analysis

Page 68 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

54

4) Loans: Treasury-OFS has made loans to GM, Chrysler, and the special purpose 

vehicles under TALF, AIFP, ASSP, and WCP as well as signed definitive loan 

agreements for the Public Private Investment Funds (PPIFs); and 

5) Fund investments: Treasury-OFS has signed limited partnership agreements to make 

equity investments in the PPIFs. 

Guiding Principles

Pursuant to Section 2 of EESA, Treasury-OFS has made investments and entered into 

guarantee agreements to “restore liquidity and stability to the financial system of the United 

States” in a manner which “maximizes overall returns to the taxpayers of the United States”.

Consistent with the statutory requirements, Treasury-OFS’ four overarching portfolio 

management guiding principles are as follows: 

x Protect taxpayer investments and maximize overall investment returns within 

competing constraints, 

x Promote stability for and prevent disruption of financial markets and the 

economy, 

x Bolster market confidence to increase private capital investment, and 

x Dispose of investments as soon as practicable, in a timely and orderly manner that 

minimizes financial market and economic impact. 

Treasury-OFS’ asset management approach is designed to implement the guiding 

principles. Treasury-OFS protects taxpayer investments and promotes stability through 

evaluating systemic and individual risk from standardized reporting and proactive monitoring 

and ensuring adherence to EESA and compliance with contractual agreements. By avoiding 

involvement in day to day company management decisions and exercising its rights as a common 

shareholder only on core governance issues, Treasury-OFS seeks to bolster market confidence to 

increase private capital investment. Treasury-OFS also adheres to certain principles in 

connection with restructurings or exchange offers involving TARP recipients, including 

minimizing taxpayer loss, enhancing and preserving institutional viability, treating like 

investments across programs consistently, and minimizing negative governmental impact. Such 

efforts help to prevent disruption of financial markets and the economy. 

Treasury-OFS seeks to exit investments as soon as practicable to remove Treasury-OFS 

as a shareholder, eliminate or reduce Treasury-OFS downside tail risk exposure, return TARP 

funds to reduce the federal debt, and encourage private capital formation to replace federal 

government investment. The desire to achieve such objectives must be balanced against a variety 

of other objectives, including avoiding further financial market and/or economic disruption, and 

the potentially negative impact to the issuer’s health and/or capital raising plans from TreasuryOFS’ disposition. Treasury-OFS must also consider the limited ability to sell an investment to a 
Management’s Discussion and Analysis

Page 69 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

55

third party due to the absence of a trading market or lack of investor demand, and the possibility 

of achieving potentially higher returns through a later disposition. An issuer typically needs the 

approval of its primary federal regulator in order to repay Treasury-OFS and therefore regulatory 

approvals also affect how quickly an institution can repay.

Because of the size of certain positions as well as the overall portfolio, successful 

disposition will take time, as well as expertise. In addition, information about Treasury-OFS’ 

intentions with respect to its investments could be material information and premature release of 

such information could adversely affect the ability of Treasury-OFS to achieve its objectives.

Therefore, Treasury-OFS will make public announcements of its disposition plans when it is 

appropriate to do so in light of these objectives and constraints.

Portfolio Management Approach

In managing the TARP investments, Treasury-OFS takes a disciplined portfolio approach 

with a review down to the individual investment level. Treasury-OFS aims to monitor risk and 

performance at both the overall portfolio level and the individual investment level. Given the 

unique nature and the size of the portfolio, risk and performance are linked to the overall 

financial system and the economy. Therefore, Treasury-OFS conducts sensitivity analyses to 

contextualize the results. Such analyses by their very nature are based upon significant 

assumptions. 

In conducting the portfolio management activities, Treasury-OFS employs a mix of 

dedicated professionals and external asset managers. These external asset managers provide 

market specific information such as market prices and valuations as well as detailed credit 

analysis using public information on a periodic basis. A portfolio management leadership team 

oversees the work of asset management employees organized on a program basis, under which 

investment and asset managers may follow individual investments. 

 Treasury-OFS tracks the fair market value of the assets in the TARP portfolio on a 

regular basis. The value of publicly traded common stock can be measured by market 

quotations. Most of Treasury-OFS’ investments, however, consist of securities and instruments 

for which no market exists. Such securities include preferred stocks, warrants, loans and other 

debt securities, as well as common stock of private companies. As a result, Treasury-OFS has 

developed internal, market-based valuation models in consultation with Treasury-OFS’ external 

asset managers and in compliance with EESA. For purposes of its financial statements, TreasuryOFS calculates valuations in accordance with the Federal Credit Reform Act of 1990, as well as 

OMB guidelines. The methodology is discussed further in Section Eight [Valuation 

Methodology].
Management’s Discussion and Analysis

Page 70 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

56

Risk Assessment

Treasury-OFS has developed procedures to identify and mitigate investment risk. These 

procedures are designed to identify TARP recipients that are in a significantly challenged 

financial condition to ensure heightened monitoring and additional diligence and to determine 

appropriate responses by Treasury-OFS to preserve the taxpayers’ investment and minimize loss 

as well as to maintain financial stability. Specifically, Treasury-OFS’ external asset managers 

review publicly available information to identify recipients for which pre-tax, pre-provision 

earnings and capital may be insufficient to offset future losses and maintain required capital. For 

certain institutions Treasury-OFS and its external asset managers engage in heightened 

monitoring and due diligence that reflects the severity and timing of the challenges. 

Although Treasury-OFS relies on the recommendations of federal banking regulators in 

connection with reviewing and approving applications for assistance, Treasury-OFS does not 

have access to non-public information collected by federal banking regulators on the financial 

condition of TARP recipients. To the contrary, there is a separation between the responsibilities 

of Treasury-OFS as an investor and the duties of the government as regulator. 

 The data gathered through this process is used by Treasury-OFS in consultation with its 

external managers and legal advisors to determine a proper course of action. This may include 

making recommendations to management or working with management and other security 

holders to improve the financial condition of the company, including through recapitalizations or 

other restructurings. These actions are similar to those taken by large private investors in 

dealing with troubled investments. Treasury-OFS does not seek to influence the management of 

TARP recipients for non-financial purposes.

Exchange Offers and Restructurings

TARP recipients may also seek Treasury-OFS’ approval for exchange offers, 

recapitalizations or other restructuring actions to improve their financial condition. TreasuryOFS evaluates each such proposal based on its unique facts and circumstances, and takes into 

account the following principles in all cases: 

x Pro forma capital position of the institution, 

x Pro forma position of Treasury-OFS investment in the capital structure, 

x Overall economic impact of the transaction to the government, 
Management’s Discussion and Analysis

Page 71 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

57

x Guidance of the institution’s primary federal supervisor, and 

x Consistent pricing with comparable marketplace transactions. 

 Treasury-OFS’ Actions as a Shareholder

Treasury-OFS’ role as a shareholder is to manage the government’s investment and not to 

manage the related company. Most of Treasury-OFS’ equity investments have been in the form 

of preferred stock. As is typical for a preferred stock investor, Treasury-OFS does not have 

voting rights except on certain limited issues such as amendments to the charter and certain 

transactions that could adversely affect Treasury-OFS’ rights as an investor. In the event 

preferred dividends are unpaid for six quarters (or four quarters in the case of AIG preferred 

stock), Treasury-OFS has the right to elect two directors to the board. Treasury-OFS holds 

common shares in GM, GMAC, Chrysler and Citigroup. In addition, the taxpayers are the 

beneficiaries of a trust that exercises 80 percent of the voting rights of the outstanding AIG 

common stock. This trust is controlled by three independent trustees who exercise voting rights 

on behalf of the taxpayers and do not report to Treasury-OFS.

Treasury-OFS has established the following four principles to guide its actions as a 

common shareholder:

x Reluctant shareholder: The government is a reluctant owner as a consequence of the 

financial crisis and the current recession. Treasury-OFS intends to dispose of its 

investments as soon as practicable and in conformity with the aforementioned portfolio 

management principles; 

x Treasury-OFS will not interfere in the day-to-day management decisions of a company in 

which it is an investor. Such interference might actually reduce the value of those 

investments, impede the companies’ successful transition to the private sector, expose 

taxpayers to third party lawsuits, and frustrate the federal government's broader economic 

policy goals;

x Strong board of directors: Establishing an effective board of directors that selects 

management with a sound, long-term vision should restore a company to profitability and 

end the need for government support expeditiously. In cases where Treasury-OFS has 

the ability to establish strong upfront conditions at the time of investment, these may 

include changes to the existing board of directors and management; and 

x Limited voting rights: The government intends to exercise its voting rights as a common 

shareholder only with respect to core shareholder matters such as board membership; 

amendments to corporate charters or bylaws; mergers, liquidations, substantial asset 

sales; and significant common stock issuances.
Management’s Discussion and Analysis

Page 72 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

58

Compliance 

Treasury-OFS also takes steps to ensure that TARP recipients comply with their TARPrelated statutory and contractual obligations. Statutory obligations include executive 

compensation restrictions. Contractual obligations vary by investment type. For most of 

Treasury-OFS’ preferred stock investments, TARP recipients must comply with restrictions on 

payment of dividends and on repurchases of junior securities, so that funds are not distributed to 

junior security holders prior to repayment of the government. Recipients of exceptional 

assistance must comply with additional restrictions on executive compensation, lobbying, 

corporate expenses and internal controls and must provide quarterly compliance reports. For 

AIFP loans, additional restrictions and enhanced reporting requirements are imposed, which is 

typical with debt investments compared to equity investments. Such enhanced reporting 

requirements include bi-weekly status reports (rolling 13-week cash forecast), monthly liquidity 

analysis reports, and monthly budget reports covering the current fiscal year. 

Program Specific Considerations

The following briefly describes key contractual terms and other characteristics of each 

program that affect how Treasury-OFS will recover the TARP funds invested in each institution.

Capital Purchase Program (CPP) 

The majority of Treasury’s investments under TARP were made under the CPP 

program. Treasury-OFS received preferred stock and warrants in return for the capital it 

provided each institution. The preferred stock is redeemable at the option of the issuer at any 

time, subject to the approval of the primary federal bank regulator. This means that the 

primary federal bank regulator, such as the Federal Reserve Bank or the FDIC, must determine 

that the issuer has sufficient capital to repay Treasury-OFS. If permitted to repay TreasuryOFS, the issuer must repay the full amount of the investment plus any accrued dividends. As 

of September 30, 2009, 42 issuers have repaid a total of $70.7 billion of CPP investments. 

Treasury-OFS did not require issuers to repay the preferred stock by a particular date, because 

the preferred stock would not have met the requirements for Tier 1 capital had such a fixed 

date been imposed. However, there are incentives for issuers to repay. First, issuers are 

subject to restrictions on executive compensation for as long as the preferred stock is 

outstanding. In addition, they are restricted in their ability to pay dividends to common 

stockholders and to make other distributions and repurchases. In addition, the dividend rate on 

the preferred stock increases from five percent to nine percent after five years.

Treasury-OFS also has the right to sell the preferred stock to a third party. TreasuryOFS also has registration rights, which are rights to require the issuer to assist Treasury-OFS in 
Management’s Discussion and Analysis

Page 73 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

59

making a public sale of the securities which can facilitate transfer. Although Treasury-OFS 

has not exercised these rights, it may do so in the future. In the case of Citigroup, TreasuryOFS exchanged the CPP preferred shares for common stock of Citigroup. Because the 

common stock is not redeemable and because there is a large trading market for Citigroup 

common stock, one potential manner in which Treasury-OFS may exit this investment would 

be by selling the stock in the market. 

Much of Treasury-OFS’ warrant portfolio pertains to CPP investments. Pursuant to the 

requirements of EESA, Treasury receives warrants from TARP recipients in order to give the 

taxpayers an opportunity to participate in any increase in shareholder value that follows the 

investment. In the case of a CPP investment in a company that is publicly traded, TreasuryOFS receives warrants to acquire common stock with a price equal to 15 percent of the senior 

preferred investment. The exercise price on the warrants is the market price of the 

participating institution's common stock at the time of preliminary approval calculated on a 20-

trading day trailing average. In the case of an investment in a privately-held company, 

Treasury-OFS receives warrants to purchase, at a nominal cost, additional preferred stock 

equivalent to 5 percent of the senior preferred investment. Treasury-OFS exercises the latter 

kind of warrants at closing of the senior preferred investment. 

CPP Sale of Warrants

Issuers have a contractual right to repurchase the warrants upon redemption of the 

preferred stock issued to Treasury-OFS. In the event they do not repurchase, Treasury-OFS 

will sell the warrants to third parties. 

If an issuer wishes to repurchase its warrants, the issuer and Treasury-OFS must agree on 

a price. The contract provides for an independent appraisal procedure that can be invoked by 

either party to determine this price. Treasury-OFS has established a methodology for valuing 

warrants for purposes of this process that it uses for all banks, regardless of the size of the bank 

or the warrant position. Treasury-OFS’ determination of the value of any warrant is based on 

three categories of input: market prices, financial modeling, and outside consultants. Further 

details on this valuation approach are provided in Section Eight. If the bank and Treasury-OFS 

do not agree on price and the appraisal procedure is invoked by either party, then each party 

selects an independent appraiser. These independent appraisers will conduct their own 

valuations and attempt to agree upon the fair market value. If they agree on a price, that price 

becomes the basis for repurchase of the warrants by the bank. If these appraisers fail to agree, a 

third appraiser is hired, and subject to some limitations, a composite valuation of the three 

appraisals is used to establish the sale price.

 Even if agreement is not reached within the aforementioned timeframe, an institution 

that has redeemed its preferred stock can always bid to repurchase its warrants at any time, and 
Management’s Discussion and Analysis

Page 74 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

60

Treasury-OFS can choose whether to accept a bid. Similarly, Treasury-OFS retains the right to 

sell the warrants to a third party at a mutually agreed price. If following repayment of the 

preferred stock, an institution notifies Treasury-OFS that it does not intend to repurchase its 

warrants, or if an agreement is not reached, Treasury-OFS intends to dispose of the warrants 

through public auctions. Treasury-OFS has announced that the first such auctions would take 

place in early December. These auctions are conducted as modified “Dutch” auctions which are 

registered under the Securities Act of 1933. Only one issuer’s warrants will be auctioned in each 

auction. In this format, qualified bidders may submit one or more independent bids at different 

price-quantity combinations and the warrants will be sold at a uniform price that clears the 

market. 

Targeted Investment Program (TIP) 

 Treasury-OFS invested $20.0 billion in each of Citigroup and Bank of America under 

TIP and acquired preferred stock. In the case of Citigroup, Treasury-OFS exchanged the 

preferred stock for trust preferred securities, which are senior in right of repayment to preferred 

stock but otherwise have many similar terms. Both the Citigroup trust preferred securities and 

the Bank of America preferred stock pay dividends at 8 percent per year. Treasury-OFS also 

received warrants in connection with both investments. The disposition considerations are 

similar to those for CPP, including the fact that the issuers need the approval of the primary 

banking regulators to repay the trust preferred securities and preferred stock.

Automotive Industry Investments (AIFP/ASSP) 

Treasury-OFS’ auto industry investments consist of equity investments, largely in the 

form of common stock, as well as loans. The loans must be repaid by certain dates. The GM 

loan was recently amended to require quarterly mandatory prepayments of $1 billion from 

existing escrow amounts in addition to the obligation for such funds to be applied to repay the 

loan by June 30, 2010, unless extended. In addition, the loan matures in July 2015. A portion 

of the Chrysler loan also matures in December 2011 and the balance in June 2017. Chrysler 

has recently announced that it plans to repay the loan fully prior to maturity. 

 In the case of the equity investments, Treasury-OFS holds primarily common stock in 

GM, Chrysler, and GMAC. Because the companies are not publicly traded at this time, there is 

no market for the common stock. Treasury-OFS also holds preferred stock in GM and GMAC.

Of the $13.1 billion in preferred shares in GMAC held by Treasury-OFS, $7.875 billion is 

convertible at the option of GMAC subject to certain conditions.
Management’s Discussion and Analysis

Page 75 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

61

Contractual agreements govern disposition options and timetables, and participants in 

AIFP are subject to enhanced reporting requirements relative other TARP recipients (discussed 

under “Compliance”). Treasury-OFS will periodically evaluate both public and private options 

to exit the equity investments under the AIFP. For GM the most likely exit strategy is a 

gradual sell off of shares following a public offering. Pursuant to its operating agreement,

General Motors will attempt a reasonable best efforts initial public offering by July 10, 2010. 

This date marks the one-year anniversary of the automaker’s exit from bankruptcy. For 

Chrysler and GMAC, the exit strategy may involve either a private sale or a gradual sell off of 

shares following a public offering. In each case, Treasury-OFS' goal is to dispose of the 

government’s interests as soon as practicable consistent with EESA goals. As described 

below, Treasury will sell down, and ultimately sell off completely its interests in a timely and 

orderly manner that minimizes financial market and economic impact. At the same time, 

Treasury cannot control market conditions and have an obligation to protect taxpayer 

investments and maximize overall investment returns within competing constraints.

Treasury-OFS has reduced the Automotive Supplier Support Program (ASSP) aggregate 

commitment from $5.0 billion to $3.5 billion. Treasury-OFS’ current funding equates to $0.4 

billion, with GM and Chrysler accounting for $0.3 billion and $0.1 billion, respectively. 

Treasury-OFS does not anticipate increased participation prior to the program’s April 2010 

expiration.

American International Group (AIG) 

Treasury-OFS holds preferred stock in AIG. As with the CPP preferred, there is no 

mandatory repayment date. AIG has replaced most of its board of directors, as well as its 

chief executive officer since September 2008, and is presently engaged in a variety of 

restructuring initiatives, including the divestment of assets to enable repayment of loans made 

by the FRBNY, as well as Treasury-OFS’ investment and the wind-down of exposure to 

certain financial product and derivative trading activities to reduce excessive risk taking.

Term Asset Backed Loan Facility (TALF) 

 Although Treasury-OFS has committed to provide up to $20 billion in credit protection 

to the TALF special purpose vehicle, Treasury-OFS has only funded $0.1 billion as of 

September 30, 2009. Additional funding will be required only if borrowers default on their 

non-recourse loans and surrender the collateral for such loans, which consists of asset-backed 

securities to the FRBNY), which made the loans. In that event, Treasury-OFS’ funds are used 

to reimburse the Federal Reserve Bank, and the asset-backed securities would then be sold to 

repay Treasury-OFS. 

Asset Guarantee Program (AGP) 
Management’s Discussion and Analysis

Page 76 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

62

This program, which currently includes only Citigroup differs from other TARP 

financial institution support programs in that Treasury-OFS, does not invest TARP funds in the 

institution directly. Rather, TARP funds are reserved to cover a portion of the possible losses 

in the selected assets. In conjunction with the transaction, Treasury-OFS received $4.0 billion 

of preferred stock with identical terms as Citigroup’s agreement under TIP. This investment is 

managed and monitored in conjunction with TIP. As of September 30, 2009, no payment had 

been made to Citigroup related to the covered asset pool. The preferred stock can be redeemed 

or sold in the same manner as CPP and TIP preferred stocks. Treasury-OFS also received 

warrants in connection with this investment. 

Treasury-OFS has a cross functional team of staff overseeing and monitoring the 

covered asset pool under the Citigroup AGP. Given the nature of the transaction, the TreasuryOFS, FRBNY and FDIC work collaboratively on overseeing the Citigroup AGP. Additionally, 

U.S. Federal Parties have engaged outside independent service providers to perform various 

business, compliances/audit activities with respect to the covered asset pool.

Public-Private Investment Program (PPIP) 

Treasury-OFS’ investments in Public-Private Investment Funds (PPIFs) are subject to 

different disposition considerations given the nature of the investments. Treasury-OFS provides 

funds which are used by the PPIF managers, together with private capital, to purchase assetbacked securities. These asset-backed securities then yield principal, interest and dividend 

payments to the PPIFs which are used to repay Treasury-OFS for its loans, and provide 

distributions to Treasury and the private investors for their equity investments. 

Treasury-OFS’ management of these investments is therefore focused on ensuring that 

the asset managers comply with the requirements of the program, including the detailed 

compliance rules that govern matters such as conflicts of interest. Fund managers are required to 

disclose to and seek the approval of Treasury-OFS with respect to certain fundamental corporate 

policies that could impact the PPIFs. In addition, there are restrictions on dealings with affiliates 

and other interested parties, which will help ensure that the PPIFs only enter into arm’s-length 

transactions.
Management’s Discussion and Analysis

Page 77 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

63

Section Six: Promoting Transparency 

Treasury-OFS is committed to providing full disclosure regarding the TARP. This 

includes information on how the money has been spent, who has received it, and the results of 

those investments. Providing such information promotes transparency and insures 

accountability. In order to meet these objectives, Treasury-OFS operates under a core set of 

principles. First, Treasury-OFS will provide detailed information on its programs on a timely 

basis, including information on specific institutions. Second, Treasury-OFS will provide that 

information in accessible and usable formats. Finally, Treasury-OFS will focus on answering the 

questions that are most important to the public, the Congress or the oversight bodies. 

1. Providing detailed and timely information 

Treasury-OFS publishes a variety of reports that provide information about TARP 

programs and transactions, and Treasury-OFS activities. For the period ended September 30 

2009, Treasury-OFS published the following reports and information, which are available 

publicly at : 

x 86 transaction reports, in accordance with section 114 of EESA, which include details on 

every investment in every institution under every program, including dates and amounts 

invested, as well as payments received with respect to TARP investments. 

x 10 Section 105(a) monthly congressional reports which provide qualitative program 

updates and detailed financial information on all programs 

x 7 Tranche Reports in accordance with section 105(b) of EESA, which outline the details 

of the transactions related to each $50 billion increment of TARP investments.

x 3 Dividend and interest reports.

x 2 Making Home Affordable program reports, 

x 7 Monthly Lending and Intermediation Snapshot reports and 7 CPP Monthly Lending 

Reports and 

x 2 Section 104(g) Financial Stability Oversight Board quarterly reports to the Congress.

All program descriptions, including term sheets and forms of contracts, are also posted.

Treasury-OFS has used standard forms of contracts and thus within a program there is little 

variation among the contracts for all institutions. Treasury-OFS has also posted investment 

contracts on the Treasury-OFS’ website within two business days of each transaction’s 

closing.
Management’s Discussion and Analysis

Page 78 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

64

The monthly report to Congress, also known as the Section 105(a) report, provides one of 

the most useful ways to track the activities of TARP. It contains easy-to-read charts showing 

how much money has been spent and where the money is going by program. It also contains 

charts on how much money has been repaid or returned to Treasury-OFS, descriptions of 

each TARP program as well as highlights of new developments. For those who want more 

detail, the transaction reports give details on each investment.

2. Making information usable and accessible 

A key element in the Treasury-OFS public outreach effort is providing user-friendly 

resources online. Earlier this year, Treasury-OFS launched a new website -- 

www.FinancialStability.gov -- that provides a wealth of information about the TARP. 

FinancialStability.gov provides all of the TARP reports, lists the institutions participating in the 

Treasury-OFS' programs, and makes available detailed contracts defining those investments. As 

of today, Treasury-OFS has posted nearly 700 investment contracts, in addition to terms and 

program guidelines for all programs under EESA. Treasury-OFS also launched the website 

www.MakingHomeAffordable.gov to provide specific information to homeowners on the 

Making Home Affordable Program and efforts to mitigate the foreclosure crisis. In addition, 

Treasury-OFS has launched an initiative to ensure that its website meets the needs of all its users 

to provide easily accessible data and information. 
Management’s Discussion and Analysis

Page 79 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

65

HAMP Reporting

Treasury-OFS is improving performance and 

enhancing transparency on the HAMP.

1. Servicer-specific results are now 

reported on a monthly basis. These 

reports provide a transparent and public 

accounting of individual servicer 

performance by detailing the number of 

trial modification offers extended. 

2. Treasury-OFS is establishing specific 

operational metrics. These metrics 

will measure the performance of each 

servicer, such as average borrower wait 

time in response to inquiries, and the 

response time for completed 

applications; and servicer performance 

will be included in our monthly public 

report.

3. Treasury-OFS directed that Freddie 

Mac review declined modifications.

In its role as compliance agent, Freddie 

Mac has developed a "second look" 

process by auditing samples of HAMP 

modification applications that have 

been declined. This will minimize the 

likelihood that borrower applications 

are overlooked or that applicants are 

inadvertently or incorrectly denied a 

modification. In addition, the "second 

look" program is examining servicer 

non-performing loan (NPL) portfolios 

to identify eligible borrowers that 

should have been solicited for a 

modification, but were not. 

3. Answering the right questions 

In being transparent with information, 

Treasury-OFS has designed reports not only to 

be detailed and timely, but also to answer the 

questions that observers most frequently ask.

For example, Treasury-OFS is often asked 

about what banks are doing with their TARP 

funds. So, in January 2009, Treasury-OFS 

launched an important initiative to help the 

public easily assess the lending and 

intermediation activities of the largest CPP 

participants and more limited information for 

smaller CPP participants. Treasury-OFS now 

publishes monthly and quarterly lending 

surveys that contain information on the lending 

and other activities of over 670 institutions that 

have received TARP funds.

Performance Metrics for FY 2010

Treasury-OFS has developed 

performance measures related to each of its 

strategic goals for FY 2010. 

x Additional performance 

measures will evaluate the 

change in the capital ratios and 

lending of CPP participants by 

comparing them to a control set 

of banks with similar 

characteristics.

x Treasury-OFS will continue to 

evaluate performance of the 

SCAP bank holding companies 

(BHCs). Performance measures 

will includes changes in capital 

ratios and lending of the SCAP 
Management’s Discussion and Analysis

Page 80 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

66

BHCs versus control banks with similar characteristics. 

x Treasury-OFS will continue to track various performance measures for the TALF. 

These measures will include the TALF-eligible ABS issuance, spreads in the 

secondary markets of RMBS, and CMBS securities, as well as the spread between 

secondary ABS and benchmarks. 

x Performance measures of the number of HAMP modifications (trial and 

permanent) entered into, the redefault rate, and the change in average borrower 

payments will be tracked. 

x Several specific measures will address taxpayer protection. First, Treasury-OFS 

will seek to have a clean audit opinion on its financial statements. In addition, the 

financial return for each program will be evaluated against its benchmark (subsidy 

rate). Finally, Treasury-OFS will report performance data on how oversight 

issues are addressed and resolved.

x Several indicators will measure performance on promoting transparency. First, 

Treasury-OFS will track on-time reporting performance. Second, Treasury-OFS 

will measure the degree of user satisfaction with the TARP's website, 

www.financialstability.gov, to determine areas for improvement. Finally, a 

request response index will be created to provide the public with a clear measure 

of timely performance. 
Management’s Discussion and Analysis

Page 81 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

67

Section Seven: Financial Accounting Policy 

 Under TARP, Treasury-OFS has made equity investments, loans and asset guarantees in 

a range of financial institutions. In exchange for these investments, loans, and asset guarantees, 

Treasury-OFS, on behalf of the taxpayer, has received financial instruments – equity, debt and 

warrants – from these companies. In this report, Treasury-OFS is presenting a transparent 

accounting of the current estimated cost of TARP, which reflects estimates of the value of those 

investments, loans and asset guarantees. Treasury-OFS has developed and presented the 

estimates in a way that is consistent with the statutory reporting requirements.

The statutory reporting requirements for TARP in this area are in some respects unique. 

Under EESA,Treasury-OFS is required to determine the budgetary cost of TARP under the 

general framework of credit reform. Treasury-OFS has determined it was appropriate to also use 

the credit reform framework for financial reporting purposes. EESA also requires that the 

budgetary cost of TARP programs be determined using a methodology that incorporates market 

risk. This requirement means that TARP equity investments similar to those that are publicly 

traded are valued in a way that is analogous to the “fair value” standard that private sector firms 

are required to use.

This section explains the applicable reporting requirements, discusses how Treasury-OFS 

has met the requirements, and describes how this reporting methodology relates to commercial 

reporting concepts. 

Applicable Budget and Accounting Standards

The Emergency Economic Stabilization Act of 2008 (EESA) requires that the cost of 

troubled assets purchased or guaranteed be determined for budgetary accounting purposes in 

accordance with the Federal Credit Reform Act of 1990 (FCRA). EESA also requires that the 

cost calculations be adjusted for market risk. 

FCRA established a methodology for budgeting for loans or loan guarantees issued by 

the federal government. Under the FCRA, the budgets for loans and loan guarantee programs 

reflect the expected cost of these financial arrangements, rather than just the cash flows as is 

typically the case for federal budgeting. For example, when a federal agency enters into a loan 

guarantee, no actual cash outflow from the government typically occurs, however, the cash 

outflows and the expected cost over the life of the guarantee may be substantial. In contrast, 

when a federal agency provides a loan, there is a substantial cash outflow at loan origination, but 

the ultimate cost of that loan to the government will depend on future repayments. 

Rather than using a cash basis for credit programs, which can be misleading, the FCRA 

calls for agencies to record the "subsidy" cost of a loan or loan guarantee at the time of the 

disbursement of the loan or loan. The subsidy cost is the net present value of all cash flows 
Management’s Discussion and Analysis

Page 82 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

68

associated with the credit transaction, usually calculated by discounting all payments back to the 

current period at the appropriate Treasury rate. Subsidy estimates reflect both the terms of the 

underlying instrument and the likelihood of repayment. For example, if a loan carries a rate 

below the comparable Treasury rate, that loan will generate a subsidy cost even if the loan is 

expected to be fully repaid. The subsidy calculation also reflects the risk that the borrower may 

not repay the entire amount of the loan. The potential for less than full repayment is reflected in 

the expected cash flows, which should reflect historical defaults on similar instruments, and 

assumptions about possible future economic performance. 

The original subsidy cost estimate made at the time the transaction occurs is updated each 

year to reflect the actual cash flows that occurred as well as any changes in the expected future 

repayments from the borrower. 

EESA mandated that the FCRA be used to determine the cost of all TARP investments 

for budgetary purposes, although the FCRA as originally designed did not cover equity 

investments. Treasury-OFS concluded that it was appropriate to apply FCRA to its preferred 

stock purchases since preferred stock has a dividend rate and regularly scheduled dividend 

payments, similar to debt instruments. 

The Federal Accounting Standards Advisory Board (FASAB) has promulgated extensive 

accounting guidance that establish Federal accounting practices for loans and guarantees 

consistent with the FCRA method of budgeting for credit programs. TARP investments in direct 

loans, such as those to the auto industry, and asset guarantees are covered by existing accounting 

standards. Specifically Statement of Federal Financial Accounting Standards 2, Accounting for 

Direct Loans and Loan Guarantees (SFFAS 2) provides relevant accounting guidance for direct 

loans and loan guarantees issued by federal entities and closely parallels the FCRA provisions. 

Federal entities must record loans disbursed as an asset, valued at the net present value of 

expected future cash inflows. The difference between the amount disbursed and the net present 

value of expected cash inflows for loans is recorded as a subsidy cost at the time of the loan 

disbursement. Federal entities must book outstanding guarantees as an asset or a liability, valued 

at the net present value of the expected future cash flows, with the corresponding amount 

reflected in subsidy cost. Estimates of future cash flows are revised on an annual basis with 

changes reflected as an increase or decrease in the subsidy allowance and reflected in the 

Statement of Net Costs. 

FASAB standards do not cover equity investments by federal entities in private 

enterprises as the Federal government generally does not make these types of investments. 

Consistent with the accounting policy for equity investments made by Treasury in private 

entities, Treasury-OFS accounts for its equity investments at fair value, defined as the estimated 

amount of proceeds Treasury-OFS would receive if the equity investments were sold to a market 

participant. Treasury-OFS uses the present value accounting concepts embedded in SFFAS No. 
Management’s Discussion and Analysis

Page 83 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

69

2 to derive fair value measurements. Treasury-OFS concluded that the equity investments were 

similar to direct loans in that there is a stated interest rate and a redemption feature which, if 

elected, requires repayment of the amount invested. Furthermore, the EESA requirement to 

consider market risk provides a basis to arrive at a fair value measurement. Therefore, TreasuryOFS uses SFFAS No. 2 for reporting and disclosure requirements of it equity investments. 

Treasury-OFS accounts for the warrants received under Section 113 of EESA as fees under 

SFFAS No. 2, as such the value of the warrants is a reduction of the subsidy allowance. 

Market Risk 

EESA departed from the FCRA by requiring that an adjustment for market risk be made 

to the interest rate used to discount future expected cash flows rather than using the interest rate 

on comparable maturity Treasury debt as the FCRA requires. This distinction values the TARP 

equity investments as closely as possible to how they would be priced in private markets. The 

incorporation of market risk is a departure from the standard FCRA methodology and is an 

important factor in the valuations included in the Treasury-OFS financial statements. The loan 

and asset guarantee models include an adjustment for market risk which is intended to capture 

the risk of unexpected losses, but is not intended to represent fair value. 

TARP holds a variety of investments. The Citigroup common stock is a standard 

financial instrument that trades in public markets and has a market price that can be directly 

observed. Certain other TARP investments are closely related to tradable securities. Wherever 

possible, Treasury-OFS has sought to use market prices of traded equity securities in estimating 

the fair value of TARP equity investments. 

Most TARP equity investments do not have direct analogs in private markets so 

Treasury-OFS uses internal market-based models to estimate the fair value of these investments. 

These models have been benchmarked to actual securities with observable market prices to try 

and ensure, to the maximum extent possible, that the model’s results actually reflect how the 

private markets are pricing risk. As described in Section Eight [Valuation], the valuation of the 

Treasury-OFS’ equity investments comes as close as possible to how private financial markets 

would price those instruments. 

Comparison to Commercial Reporting Concepts 

While commercial reporting standards vary, fair value is the most common valuation 

approach for reporting relatively liquid equity investments like preferred stock. For TreasuryOFS, adjusting our estimates to reflect market risk ensures that the asset values reflect a 

reasonable assessment of fair value, which can be readily compared and evaluated based on 

commercial investment information. 
Management’s Discussion and Analysis

Page 84 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

70

Section Eight: TARP Valuation Methodology 

This section describes the methodologies used to estimate the value of the diverse set of 

TARP investments made under EESA. Wherever possible, Treasury-OFS has sought to use 

market prices of tradable securities to make direct estimates of the market value of TARP 

investments. Use of market prices was possible for TARP investments that are standard financial 

instruments that trade in public markets or are closely related to tradable securities. For those 

TARP investments that do not have direct analogs in private markets, Treasury-OFS uses 

internal market-based models to estimate the market value of these investments as detailed 

below.

Incorporating “Market Risk” in Valuation Models

Risk can be taken into account in a number of ways when estimating the value of an 

asset. EESA requires that the budgetary cost and risk of troubled assets acquired under TARP be 

estimated in accordance with the Federal Credit Reform Act of 1990 (FCRA) and using a market 

adjusted discount rate. Where possible, market prices are used to benchmark the values of TARP 

investments. 

The standard methodology under FCRA is to estimate asset values as the net present 

value of expected cash flows, using Treasury rates for discounting. In that approach, risk is 

reflected in the expected cash flows. For example, default risk on a loan would be reflected in the 

fact that the expected cash flows are less than the contractual obligations.

EESA also requires for budgetary purposes that the FCRA methodology be modified to 

include an adjustment for market risk. Specifically, EESA requires that instead of discounting 

future expected cash flows at the interest rate on comparable maturity Treasury debt, an 

additional adjustment for market risk must be made. For financial reporting purposes, the market 

risk is incorporated in the future expected cash flows.

In effect, the requirement to adjust the standard FCRA methodology to reflect “market 

risk” means that for the purposes of budget and accounting, TARP equity investments are valued 

as closely as possible to how they would be priced in private markets. This requirement is 

relatively easy to implement for TARP investments that are closely related to securities with 

observable market prices. However, where empirical models are needed to estimate the value of 

non-standard TARP investments those models must be benchmarked to ensure, to the extent 

possible, that their results reflect the way public markets price risk. This benchmarking is an 

important part of valuation methodology. 

The adjustment for “market risk” can be reflected in either expected cash flows or the 

discount rate used to calculate net present values. Regardless of where the adjustment is made, it 
Management’s Discussion and Analysis

Page 85 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

71

should not have a material impact on the results as long as those models are benchmarked to 

suitable measures of market risk in an appropriate manner. 

CPP Investments 

Under the CPP as detailed in Section Three [Ensuring Stability], Treasury-OFS has 

provided capital to 685 qualified financial institutions and received preferred stock and warrants 

in return. To estimate the value of these investments, Treasury-OFS has built two separate 

statistical models: one to value the preferred stock and one to value the warrants. Both valuation 

models use standard methods employed in academe and the financial sector. An important 

aspect of these models is the treatment of the implicit options embedded in the assets; i.e., the 

financial institution’s decision to repurchase the asset and Treasury-OFS’ decision to exercise the 

warrants. These models make use of a variety of information, including historical and current 

information on the institution’s balance sheets, the term-structure of interest rates, and equity 

prices and dividends. 

The estimated values of CPP preferred equity investments are the net present values of 

the expected dividend payments and repurchases. The model is used to estimate the likely 

distribution of dividend payments over time. Estimates of the ultimate cost of TARP will decline 

further if early repayments are higher than those currently built into the models. It is assumed 

that the key decisions that affect whether or not banks pay their preferred dividends are made by 

each bank based on the strength of their balance sheet. The model assumes a probabilistic 

evolution of each bank’s asset to liability ratio. Each institution’s assets are subject to uncertain 

returns and institutions are assumed to manage their asset to liability ratio in such a way that it 

reverts over time to a target level. Historical volatility is used to scale the likely evolution of 

each banks’ assets-to-liabilities ratio. 

In the model, when equity decreases, i.e. the asset-to-liability ratio falls; institutions are 

increasingly likely to default, either because they enter bankruptcy or are closed by regulators. 

The probability of default is estimated based on the performance of a large sample of US banks 

over the period 1990-2008. At the other end of the spectrum, institutions call their preferred 

shares when the present value of expected future dividends exceeds the call price; which occurs 

when equity is high and interest rates are low. 

The warrants for the purchase of common stock are priced using an option-pricing model 

augmented for the fact that exercising warrants infuses cash into an institution and also dilutes 

current stockholders. The model assumes optimal warrant exercise by Treasury-OFS; that is, the 

warrants are exercised if the expected present value of income from future optimal warrant 

exercise is less than the current in-the-money value. The key input to the model -- the future 

volatility of bank stock prices -- is derived from the model for preferred stock. 
Management’s Discussion and Analysis

Page 86 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

72

The basic preferred equity model is benchmarked to the market pricing of risk. The 

model was used to estimate the value of preferred equity instruments issued by 18 of the CPP 

banks that trade actively in public markets. These particular instruments were chosen because 

they share important characteristics with the CPP instruments. In particular, these traded 

instruments have very long maturities and are callable. The stochastic assumptions that drive the 

evolution of bank balance sheets in the model were then adjusted so the model’s valuation of this 

portfolio of tradable securities matched the observed market prices. 

The only other adjustment to the model relates to the banks’ repurchases of preferred 

securities from Treasury-OFS. Treasury-OFS management, based on public statements by 

individual banks, believes that a significant volume of CPP and TIP preferred shares is likely to 

be repaid earlier than the model predicts. To reflect this judgment, the model is adjusted to 

generate approximately $70 billion in CPP and TIP repurchases over the next twelve to eighteen 

months.9

Treasury-OFS exchanged the CPP preferred shares purchased from Citigroup for 

common stock. The exchange rate was $3.25 per share resulting in Treasury-OFS obtaining 

approximately 7.7 billion shares. The value of these shares is the amount of shares held times its 

market price. 

TIP

Treasury-OFS provided funds to both Citigroup and Bank of America under the Targeted 

Investment Program through the purchase of additional preferred shares. These investments are 

valued in the same manner that Treasury-OFS uses to value CPP investments in large 

institutions. As noted above, the model assumes $70 billion in CPP and TIP repurchases. 

AIG Investment Program 

The method used to value AIG preferred shares is broadly analogous to the approach 

used to value CPP investments. However, greater uncertainty exists for the valuation of preferred 

shares for AIG. First, the size of Treasury-OFS’ holding of preferred shares relative to AIG’s 

total balance sheet makes the valuation extremely sensitive to assumptions about the recovery 

ratio for preferred shares should AIG enter default. Second, no comparable traded preferred 

shares exist. Therefore, Treasury-OFS based the AIG valuation on the observed market values of 

publicly traded assets on either side of the liquidation preference of the preferred stock; common 

9

 Without this adjustment the CPP preferred equity model predicts roughly $20 billion in repurchases over the next 

year. The valuation model is altered both by directly imposing the repurchases of those institutions that have stated 

plans to repurchase soon, and by adding a small additional benefit for any institution that repays its TARP funds and 

exits the CPP. This adjustment increases rates slightly to be consistent with a reasonable forecast of future 

repurchases. 
Management’s Discussion and Analysis

Page 87 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

73

stock (paid after preferred stock), and the most junior subordinated debt (paid before preferred 

stock). Further, based on certain publicly available third party sources, assumptions about 

payouts in different outcomes and the probability of some outcomes were made. Finally, external 

asset managers provided estimated fair value amounts, premised on public information, which 

also assisted Treasury-OFS in its valuation. These different factors were all used in determining 

the best estimate of the fair value of AIG assets. The AIG Investment Program also includes an 

equity capital facility that can be drawn upon at the discretion of AIG.

AIFP

The valuation of equity-type investments was performed in a manner that is broadly 

analogous to the methodology used for CPP investments, with reliance on publicly traded 

securities to benchmark the assumptions of the valuation exercise. Debt with potential value is 

valued using rating agency default probabilities. 

As part of the General Motors (GM) bankruptcy proceedings, Treasury-OFS received a 

60.8 percent stake in the common equity of General Motors Company (New GM). Because the 

unsecured bond holders in General Motors Corporation (Old GM) received 10 percent of the 

common equity ownership and warrants in New GM, the expected recovery rate implied by the 

current trading prices of the Old GM bonds provides the implied value of the New GM equity. 

Treasury-OFS used this implied equity value to account for its equity stake in New GM. 

For the GMAC equity instruments, Treasury-OFS used the model to estimate the value of 

GMAC subordinated debt that trades actively in public markets. The stochastic assumptions that 

drive the evolution of the institution’s balance sheet in the model were then adjusted so the 

model’s valuation of this security matched the observed market price. 

Treasury-OFS values direct loans using an analytical model that estimates the net present 

value of the expected principal, interest, and other scheduled payments taking into account 

potential defaults. In the event of a financial institution’s default, these models include estimates 

of recoveries, incorporating the effects of any collateral provided by the contract. The probability 

of default and losses given default are estimated by using historical data when available, or 

publicly available proxy data, including credit rating agencies historical performance data. 

Treasury-OFS also benchmarks the valuation of its holdings of auto securities against the 

assumptions about the dynamics of future revenues and costs provided by an inter-agency 

working group dealing with the automotive industry. 

TALF

Under the TALF program, Treasury-OFS will provide funding of up to $20 billion as 

necessary for the purchase of TALF collateral through a direct loan to a Special Purpose Vehicle 

(SPV). The SPV collects monthly interest spreads on all outstanding TALF loans, as well as any 
Management’s Discussion and Analysis

Page 88 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

74

income or sale proceeds from purchased collateral. When the program is wound down, 

Treasury-OFS will be repaid principal and interest on the loan if funds are available, and will 

collect 90 percent of any proceeds remaining in the SPV. The value of the Treasury-OFS’ loan 

to the TALF SPV is the estimated net present value of the expected principal, interest, and 

additional proceeds. 

To derive the cash flows to the SPV, and ultimately, Treasury-OFS, the model simulates 

the performance of underlying collateral. Loss probabilities on the underlying collateral are 

calculated based on analysis of historical loan loss and charge off experience by credit sector and 

subsector. Historical mean loss rates and volatilities are significantly stressed to reflect recent 

and projected performance. Simulated losses are run through cash flow models to project 

impairment to the TALF eligible securities. Impaired securities are projected to be purchased by 

the SPV, requiring additional Treasury-OFS funding. Simulation outcomes consisting of a range 

of loss scenarios are probability-weighted to generate the expected net present value of future 

cash flows. 

AGP

Under the AGP, Treasury-OFS received preferred shares and warrants in exchange for 

providing a guarantee on a pool of Citigroup’s assets. The value of the AGP preferred shares and 

warrants is determined in exactly the same manner that Treasury-OFS uses to value CPP 

investments in large institutions. The cost that Treasury-OFS expects to incur is based on 

projected losses on the asset pool under a weighted average of different possible loss scenarios. 

The value of the AGP is the discounted expected cash inflows from the preferred shares 

and warrants less the expected costs of the TARP expenditures to make good on the asset pool 

guarantees and adjusted for market risk. 
Management’s Discussion and Analysis

Page 89 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

75

Sensitivity Analysis 

The ultimate value of TARP investments will only be known in time. Realized values 

will vary from current estimates in part because economic and financial conditions will change. 

Many TARP investments do not have readily observable values and their values can only be 

estimated by Treasury-OFS. 

Sensitivity analysis is one way to get some feel for the degree of uncertainty around the 

Treasury-OFS estimates. In the analysis reported here, Treasury-OFS focuses on the largest 

components of the TARP, the assets held under the Capital Purchase Program (CPP), as well as 

preferred stock investments made under the Targeted Investment Program (TIP). Second, the 

Treasury-OFS focuses on two of the most important inputs to the valuation: i) whether and when 

the banks repay the preferred stock, and ii) whether there are changes in the market price of 

publicly-traded preferred stock used as a benchmark for valuing the preferred stock held in the 

TARP. 

Prepayments: The CPP preferred stock carries a 5 percent dividend, which increases to 9 

percent after 5 years. Banks able to repay would be likely to do so at the 5-year point. However, 

some banks have repaid early. Over $70 billion of the $204 billion of preferred stock has already 

been repaid. The model forecasts additional repayments over the next 18 months of $19.5 

billion. Treasury-OFS increased that forecast by $50 billion for CPP and TIP combined to 

reflect additional anticipated repayments over the next 12 months. As a sensitivity analysis, 

Treasury-OFS computed the CPP and TIP values without the additional $50 billion of 

anticipated repayments. The result is shown in Scenario 1 of Table 1. 

Benchmark Preferred Stock: The valuation procedure entails observing the market 

price of publicly-traded preferred stock and calibrating the model (in particular the risk 

premium) to match those prices. The calibrated model is then used to price the non-publicly 

traded preferred stock held by the TARP. The benchmark preferred stock consists of a portfolio 

of claims issued by some of the same institutions with TARP preferred stock. It is generally the 

larger institutions that have issued preferred stock. The TARP preferred stock for smaller 

institutions may not be exactly comparable, but the bulk of TARP investments, as measured on a 

dollar basis, are in large institutions. 

The preferred stock calibration procedure imposes a strict discipline on the model. If one 

parameter in the model is changed, calibration to the market benchmark will induce an offsetting 

change in other parameters, with the result that the final valuation is not altered much. Changes 

in the price of the benchmark, however, have the potential to significantly alter the valuations. 

As a sensitivity analysis, Treasury-OFS increases and decreases the value of the benchmark 

preferred stock in the CPP and TIP by 10 percent. The result is shown in Scenarios 2 and 3 of the 

following table. 
Management’s Discussion and Analysis

Page 90 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

To put this sensitivity analysis in perspective it is useful to consider the range over which 

actual preferred shares have moved in this crisis. Figure 15 shows the prices of callable preferred 

shares of those CPP banks that have such instruments outstanding. Since their troughs in early 

March, these shares have recovered substantially. Currently the basket of callable preferred 

shares for CPP banks is trading at about 76 percent of their call prices which leaves opportunity 

for further improvement. Of course just last March these instruments were trading for less than 

half their current value. This considerable volatility, along with the sensitivity analysis presented 

here, gives a good sense of the degree of unavoidable uncertainty around the estimates of the 

valuation of TARP investments presented here. 

Figure 15: Prices of Callable Preferred Shares Issues by CPP Banks, (Percent of Call Price) 

2007 2008 2009

CPP Launched

FSP

Valuation (8/30)

30

40

50

60

70

80

90

100

110

30

40

50

60

70

80

90

100

110

Percent Percent

CPP Repaid

CPP Still Outstanding

Note: Weighted averages of prices of callable preferred shares issued by three CPP banks that 

have already repaid their TARP capital injections and 14 CPP banks that have not. Prices are 

expressed as a percent of the call price. Source Bloomberg. 

76
Management’s Discussion and Analysis

Page 91 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

77

Program

Market Value Sensitivity 

(Dollars in Billions) 

Current Market 

Value 1 Scenario 1 Scenario 2 Scenario 3 

Additional

Repayments2

No Additional 

Repayments

10% Financial 

Stock Price 

Increase

10% Financial 

Stock Price 

Decrease 

CPP 

% change from 

current

133.0

N/A

127.7

-4.03%

141.8

6.58%

123.7

-7.01%

TIP

% change from 

current

38.6

N/A

36.3

-5.96%

39.8

3.05%

37.4

-2.98%

Total

% change from 

current

171.6

N/A

164.0

-4.46%

181.5

5.78%

161.1

-6.10%

1 The difference between the values contained in this table and the financial statements is that the financial 

statement values include the warrants. 

2 Assumes $70 billion in repayments over the next 12 to 18 months. 

Other Sources of Sensitivity

Wherever possible, Treasury-OFS has used direct market proxies to estimate the value of 

TARP investments. The volatility of the market prices of the related securities is an important 

indicator of the uncertainty of our estimates of what the returns on TARP investments ultimately 

will be. For example, the price of Citigroup common shares has fluctuated in a range from $2.6 

to $5.2 per share just since the SCAP results were announced in early May. 
Management’s Discussion and Analysis

Page 92 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

78

Section Nine: Systems, Controls, and Legal Compliance 

Management Assurance Statement 

The Treasury Office of Financial Stability's (Treasury-OFS) management is responsible 

for establishing and maintaining effective internal control and financial management systems 

that meet the objectives of the Federal Managers' Financial Integrity Act (FMFIA), 31 U.S.C. 

Section 3512(c), (d). Treasury-OFS has evaluated its management controls, internal controls 

over financial reporting, and compliance with the federal financial systems standards. As part of 

the evaluation process, Treasury-OFS considered the results of extensive documentation, 

assessment and testing of controls across Treasury-OFS, as well as the results of independent 

audits. Treasury-OFS conducted its reviews of internal controls in accordance with the FMFIA 

and the Office of Management and Budget (OMB’s) Circular A-123, Management’s 

Responsibility for Internal Control.

As a result of its reviews, Treasury-OFS management concludes that the management 

control objectives described below, taken as a whole, were achieved as of September 30, 2009. 

Specifically, this assurance is provided relative to Sections 2 (internal controls) and 4 (systems 

controls) of FMFIA. Treasury-OFS further assures that the financial management systems relied 

upon by Treasury-OFS are in substantial compliance with the requirements imposed by the 

Federal Financial Management Improvement Act (FFMIA). Treasury-OFS does not rely on any 

financial systems beyond those maintained by the Department of the Treasury and Fannie Mae. 

Treasury-OFS’ internal controls are designed to meet the management objectives 

established by Treasury and listed below: 

a) Programs achieve their intended results effectively and efficiently; 

b) Resources are used consistent with the overall mission; 

c) Programs and resources are free from waste, fraud, and mismanagement; 

d) Laws and regulations are followed; 

e) Controls are sufficient to minimize any improper or erroneous payments; 

f) Performance information is reliable; 

g) Systems security is in substantial compliance with all relevant requirements; 

h) Continuity of operations planning in critical areas is sufficient to reduce risk to 

reasonable levels; and 

i) Financial management systems are in compliance with federal financial systems 

standards, i.e., FMFIA Section 4/FFMIA. 

In addition, Treasury-OFS management conducted its assessment of the effectiveness of 

internal control over financial reporting, which includes safeguarding of assets and compliance 

with applicable laws and regulations, in accordance with OMB Circular A-123, Management’s 

Responsibility for Internal Control, Appendix A, Internal Control over Financial Reporting. 
Management’s Discussion and Analysis

Page 93 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Based on the results of this evaluation, Treasury-OFS provides unqualified assurance that 

internal control over financial reporting is appropriately designed and operating effectively as of 

September 30, 2009, with no related material weaknesses noted.

 Sincerely, 

Herbert M. Allison, Jr. 

Assistant Secretary for Financial Stability 

Internal Control Program 

The Emergency Economic Stabilization Act (EESA) established the Office of Financial 

Stability (Treasury-OFS) on October 3, 2008. Shortly thereafter, Treasury-OFS funded $115 

billion to eight financial institutions as part of the Capital Purchase Program. From the inception 

of that initial program to the current day, the importance of effective internal controls in 

safeguarding the use of taxpayer dollars to provide financial stability through the Troubled Asset 

Relief Program (TARP) has remained a top priority of Treasury-OFS management. 

Whether deploying operational processes to support new TARP programs or 

implementing complex budget and financial reporting processes to support its first year of 

operations, Treasury-OFS endeavors to establish an effective initial operating capability for 

internal controls that are first and foremost effective at mitigating risk. Then, Treasury-OFS 

enhances the initial operating capability to a sustainable level that is effective and efficient, and 

designed to meet the long-term needs of its programs. 

Treasury-OFS is committed to implementing an effective internal control program and 

has established a Senior Assessment Team (SAT) to guide the office’s efforts to meet the 

statutory and regulatory requirements surrounding a sound system of internal control. The SAT 

is chaired by the Deputy Chief Financial Officer (DCFO) and includes representatives from all 

Treasury-OFS functional areas. Further, Treasury-OFS has defined an Internal Control 

Framework that is based on the principles of The Committee of Sponsoring Organizations of the 

Treadway Commission (COSO). The SAT leverages this framework in communicating control 

objectives across the organization and its third party service providers.

Treasury-OFS established an Internal Control Program Office (ICPO) under the Office of 

the Chief Financial Officer that is guided by the SAT and focuses on managing the office's 

79
Management’s Discussion and Analysis

Page 94 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

80

internal control efforts. The ICPO monitors the implementation of the Internal Control 

Framework and ensures the achievement of management control objectives. The ICPO monitors 

Treasury-OFS activities to ensure management control objectives are achieved by:

x Integrating management controls into Treasury-OFS business processes through:

o Developing internal control documentation, 

o Reviewing internal control responsibilities with process owners before major 

program execution events, and, 

o Real-time monitoring of key control effectiveness during and after significant 

program execution events; 

x Conducting “lessons learned” sessions to identify and remediate areas requiring 

improvement; 

x Periodic testing of key controls; and,

x Monitoring feedback from third party oversight bodies. 

In addition, the internal control environment supporting TARP programs and Treasury-OFS 

activities undergoes continuous improvement to remain effective and is subject to significant 

third party oversight by the Government Accountability Office (GAO) and the Special Inspector 

General for the Troubled Asset Relief Program (SIGTARP). 

The Assistant Secretary for Financial Stability must report annually to the Under 

Secretary for Domestic Finance on the adequacy of the various internal controls throughout the 

Office of Financial Stability, to include financial management systems compliance. The 

Assurance Statement is required by the Federal Managers’ Financial Integrity Act (FMFIA). In 

order to support the Assistant Secretary’s letter of assurance, the respective Treasury-OFS 

divisions prepare individual statements of assurance. These individual statements of assurance 

provide evidence supporting the achievement of Treasury-OFS-wide internal control objectives 

and disclose any noted weaknesses.
Management’s Discussion and Analysis

Page 95 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

81

Information Technology Systems 

For fiscal year 2009, Treasury-OFS did not directly support any Information Technology 

(IT) systems. Significant IT systems used by TARP are supported by various Departmental 

Offices or bureaus that are part of Treasury.

Other IT systems are supported by Financial Agents which provide services to the U.S. 

Treasury. The Financial Agency Agreements maintained by the Treasury Office of the Fiscal 

Assistant Secretary in support of Treasury-OFS require the Financial Agents to design and 

implement suitably robust IT security plans and internal control programs, to be reviewed and 

approved by the Treasury at least annually.

Compliance with the Improper Payments Information Act (IPIA) 

The elimination of improper payments is a major focus of Treasury-OFS executive 

management. Managers are held accountable for developing and strengthening financial 

management controls to detect and prevent improper payments, and thereby better safeguard 

taxpayer dollars.

Treasury-OFS carried out its fiscal year 2009 IPIA assessment per Treasury-wide 

guidance and did not identify any programs or activities susceptible to significant erroneous 

payments. Treasury-OFS did not identify any payments to incorrect payees or ineligible 

recipients. Management will continue to monitor disbursements and re-assess IPIA compliance 

as new programs are initiated. 

Areas for Improvement 

Over the next year, Treasury-OFS management is focused on enhancing the maturity of 

its internal control environment in several key areas as follows: 

x Because of limited staffing and competing priorities among the various compliance 

activities and TARP programs, independent monitoring of contract requirements for 

TARP programs has been constrained. Treasury-OFS has been challenged to develop 

sufficient resources to respond to the number of requirements imposed by TARP 

programs, the large number of participants in those programs, and recommendations by 

the oversight entities. Management is building the personnel resources to aggressively 

address a number of compliance priorities, including, for example, monitoring the 

Treasury-OFS contract compliance status of CPP recipients' compliance. 

x The system of record used to manage the Home Affordable Modification Program 

(HAMP) requires increased functionality to meet the control requirements of the 
Management’s Discussion and Analysis

Page 96 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

82

program. Weaknesses in these systems are currently mitigated by our detective internal 

controls. However, management recognizes that these system shortfalls must be 

addressed in the near term, as the volume and complexity of these system functions 

increase.

x EESA required the preparation of stand-alone financial statements that would be audited 

by the GAO. As a new entity, neither Treasury-OFS nor our GAO auditors had 

previously been through the statement preparation and auditing process for this 

complicated entity. An additional complication resulted from EESA and OMB’s 

interpretation of the statute to require the application of complex accounting required by 

the Federal Credit Reform Act of 1990 (FCRA) to all of the Treasury-OFS acquisitions 

(i.e. equities, loans and asset guarantees).

Given these facts, Treasury-OFS faced a number of challenges, including a shortage of 

experienced credit reform staff and evolving and untested financial reporting processes 

and controls. Given the pace and evolution of the TARP programs throughout the year 

and subsequent impact on the accounting and financial reporting areas, certain accounting 

practices continued to evolve throughout the period ended September 30, 2009. In an 

effort to keep pace with these changes, management continues to focus its attention on 

the development of robust processes that meet business needs and internal control 

requirements. In developing its accounting processes and controls, management has 

sought to balance effective risk mitigation, flexibility to respond to new programs, and 

efficiency through shared resources. Accordingly, the maturation and formalization of 

financial capabilities and controls will continue into fiscal year 2010. 

x As noted in Section Seven, EESA mandated that the FCRA be used to determine the cost of 

all TARP investments for budgetary purposes. The FCRA calls for agencies to record the 

"subsidy" cost of an investment at the time of the disbursement, which requires the use of 

detailed models following the methodology described in Section Eight. Due to a compressed 

timeframe, management was not able to execute the planned controls around manual data 

inputs in the credit subsidy models in such a manner so as to prevent non-material errors 

from occurring in the final re-estimate production process. Significant errors identified were 

corrected and amounts were properly reflected in the financial statements. In year one, our 

internal controls over data inputs were intended to provide full coverage of the models, but of 

necessity our resources focused more on the high risk programs and items. In fiscal year 

2010, we will focus more attention on improving internal control effectiveness in mitigating 

the risk of errors in data inputs for all models.

Oversight Entities 
Management’s Discussion and Analysis

Page 97 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

83

Per the EESA requirements, Treasury-OFS has four oversight entities with specific 

responsibilities with regard to TARP, which are the Financial Stability Oversight Board, 

the GAO, the Special Inspector General for TARP, and the Congressional Oversight Panel. 

A summary of the responsibilities and activities of each of these entities is provided below. 

Financial Stability Oversight Board 

The Oversight Board was established by section 104 of the EESA to help oversee the 

Troubled Asset Relief Program and other emergency authorities and facilities granted to the 

Secretary of the Treasury under the EESA. The Oversight Board is composed of the 

Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve 

System, the Director of the Federal Housing Finance Agency, the Chairman of the Securities 

and Exchange Commission, and the Secretary of the Department of Housing and Urban 

Development. Through Oversight Board meetings and consultations between the staffs of 

the agencies represented by each Member of the Oversight Board, the Oversight Board 

reviews and monitors the development and ongoing implementation of the policies and 

programs under TARP to restore liquidity and stability to the U.S. financial system. The 

Oversight Board meets each month, and receives presentations and briefings from Treasury 

officials and, where appropriate, other government officials, including officials from the 

other agencies represented on the Oversight Board, concerning the implementation and the 

effects of the programs established under TARP. 

The Oversight Board also monitors Treasury’s responses to the recommendations made 

by SIGTARP and the GAO. Throughout FY 2009, the Oversight Board received updates on 

Treasury’s progress in addressing the issues raised by these oversight bodies with respect to 

transparency, the establishment of internal controls, compliance and risk monitoring, staffing 

and Treasury’s communication strategy. In addition, staff of the Oversight Board and of the 

agencies represented by each Member of the Oversight Board continued to have regular 

discussions with representatives from the SIGTARP and GAO to discuss recent and 

upcoming activities of the oversight bodies. These efforts continued to help facilitate 

coordinated oversight and minimize the potential for duplication.

The Oversight Board issues a Quarterly Report for each three-month period. Copies of 

approved minutes of the Oversight Board’s meetings and the Quarterly Reports are made 

available on the internet at: http://www.financialstability.gov/about/oversight.html.

GAO

Section 116(a)(3) of EESA stipulates that “the Comptroller General [who heads the 

GAO] shall submit reports of findings ... regularly and no less frequently than once every 60 

days, to the appropriate committees of Congress.” “The Comptroller may also submit special 

reports ... as warranted by the findings of its oversight activities.” 
Management’s Discussion and Analysis

Page 98 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

84

Treasury-OFS has a statutory obligation under Section 116(b)(3) of EESA to take 

corrective actions in response to audit deficiencies identified by the Comptroller General or 

other auditor engaged by the TARP or certify to the appropriate committees of Congress that 

no action is necessary or appropriate. In addition, under Section 236 of the Legislative 

Reorganization Act of 1970, Treasury is required to respond in writing to Congress within 60 

days of the issuance date of a GAO report.

Currently, the GAO is engaged in eight audits related to TARP. Treasury-OFS responds 

to information requests from the GAO by providing responsive documents and other 

information and facilitating comprehensive briefings on TARP programs with senior 

Treasury staff. In addition, Treasury-OFS apprises the GAO of key developments in current 

and proposed programs and policies under EESA. 

To date, the GAO has issued 41 recommendations in its reports issued in December 2008 

and January, March, June, July, October, and November 2009. The recommendations have 

focused on the following themes: (1) transparency, reporting, and accountability; (2) 

management infrastructure; and (3) communication. In response to the recommendations, 

the Treasury-OFS has developed remediation plans and actively communicates the status of 

its remediation efforts to the GAO and will continue to do so in FY 2010. Treasury-OFS has 

fully or partially implemented 32 of the recommendations and has responded or is in the 

process of responding to six recommendations; the remaining recommendations have been 

deemed closed by the GAO and/or Treasury-OFS has taken no action.

Treasury-OFS' actions in response to GAO recommendations include: 

o Treasury-OFS delivered draft internal controls policies and procedures to GAO on 

June 30, 2009. Many of the final policies and procedures were delivered to GAO on 

September 30, 2009. The bulk of the remainder of the Treasury-OFS policies and 

procedures will be delivered by December 31, 2009. 

o Treasury-OFS has completed draft risk assessments of TALF, CPP, HAMP, 

contracting and human resources. Plans have been developed for high risk areas. 

o Treasury-OFS continues to expeditiously hire personnel to carry out and oversee 

HAMP as well as finalizing a comprehensive system of HAMP internal controls. 

Additional detail regarding Treasury-OFS’s progress on the GAO’s recommendations 

can be found at http://www.financialstability.gov/docs/SummaryResponseGAO10-8-

2009.pdf.
Management’s Discussion and Analysis

Page 99 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

85

SIGTARP

SIGTARP was created by section 121 of EESA. The objectives of SIGTARP are to 

investigate and prevent fraud, waste and abuse in TARP programs, while trying to promote 

transparency in TARP programs. 

SIGTARP must report to Congress each quarter certain information about TARP over the 

preceding quarter. As of September 30, 2009, SIGTARP has issued three quarterly reports in 

February 2009, April 2009 and July 2009. SIGTARP also has a duty under EESA to conduct 

audits and investigations of the purchase, management, and sale of assets under any TARP 

program, and with certain limitations, any other action under EESA. As of September 30, 2009, 

SIGTARP has completed four audits and is currently conducting eleven audits that are at various 

stages.

Treasury-OFS has worked closely with SIGTARP and maintains regular lines of 

communications with the personnel conducting audits and investigations of TARP programs. 

Treasury-OFS staff also regularly provides updates to SIGTARP about program design and 

implementation issues. Treasury-OFS has benefited from their involvement in the development 

of TARP programs and policies as we pursue our common goal of carrying out the objectives of 

EESA, which are to promote financial stability and protect the interests of the taxpayers.

As of September 30, 2009, SIGTARP has issued 41 individual recommendations in their 

reports. General topics covered by SIGTARP’s recommendations include reporting on use of 

TARP funds, valuation of the TARP portfolio, and potential fraud vulnerabilities associated with 

PPIP, TALF and HAMP. Treasury-OFS has given careful consideration to the recommendations 

in SIGTARP’s prior reports, and has submitted responses detailing what actions that TreasuryOFS has taken or will take to address SIGTARP’s recommendations. Treasury-OFS’ policies 

and programs currently address many of the issues raised by SIGTARP in their 

recommendations, and in other cases Treasury-OFS took specific action to implement 

SIGTARP’s recommendations. Treasury-OFS also has or will execute alternative approaches 

that we believe address some of the issues raised by SIGTARP in their recommendations.

SIGTARP has closed 29 of its recommendations based on Treasury-OFS’ response to the 

SIGTARP recommendations. 

Congressional Oversight Panel 

The Congressional Oversight Panel (COP)’s mandate includes assessing the impact of 

Treasury-OFS' spending to stabilize the economy, evaluating market transparency, ensuring 

effective foreclosure mitigation efforts, and guaranteeing that Treasury-OFS’ actions are in the 

best interest of the American people. 
Management’s Discussion and Analysis

Page 100 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

86

The COP consists of five panel members appointed as follows: 1 member appointed by the 

Speaker of the House of Representatives; 1 member appointed by the minority leader of the 

House of Representatives; 1 member appointed by the majority leader of the Senate; 1 member 

appointed by the minority leader of the Senate; and 1 member appointed by the Speaker of the 

House of Representatives and the majority leader of the Senate, after consultation with the 

minority leader of the Senate and the minority leader of the House of Representatives. The COP 

also employs a professional staff, numbering approximately 27, who are responsible for carrying 

out the day-to-day work of the Panel. The COP also reaches out to experts, primarily academics, 

to conduct analysis in support of their work.

EESA requires the COP to produce a report every 30 days examining Treasury's efforts and 

the impact on the economy of those efforts. The statute grants the COP the authority to hold 

hearings, review official data, and write reports on actions taken by Treasury and financial 

institutions and their effect on the economy. Generally, the COP focuses on one program or 

topic each month and produces a report that describes the program, assesses its design and 

implementation and presents recommendations. Many of their recommendations have focused 

on issues of transparency and what they see as the need to operate the programs in a way that the 

public can understand exactly how their taxpayer dollars are being used.

The COP staff work in a fairly independent fashion, using publically available documents 

and information to develop the outlines of their reports. They also request information, 

documents, and data from Treasury-OFS. Treasury-OFS regularly briefs COP staff on the topic 

of their current focus, as well as any new initiatives or changes in Treasury-OFS programs. 

The COP also convenes regular hearings on Capitol Hill, usually timed to coincide with the 

issuance of their reports. Treasury makes its senior staff available to appear before the COP as 

witnesses; the Secretary appears before the COP on a quarterly basis, and Assistant Secretary for 

Financial Stability Herb Allison is made available as requested for other hearings. Other 

Treasury officials have also appeared before the COP as requested. 

To date, the COP has issued the following reports: 

x Questions About the $700 Billion Emergency Economic Stabilization Funds 

x Accountability for the Troubled Asset Relief Program 

x Special Report on Regulatory Reform 

x February Oversight Report: Valuing Treasury’s Acquisitions 

x Foreclosure Crisis: Working Toward a Solution 

x Assessing Treasury’s Strategy: Six Months of TARP 
Management’s Discussion and Analysis

Page 101 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

87

x Stress Testing and Shoring Up Bank Capital

x Lending to Small Businesses and Families and the Impact of the TALF 

x TARP Repayments, Including the Repurchase of Stock Warrants 

x Special Report on Farm Loan Restructuring 

x The Continued Risk of Troubled Assets 

x The Use of TARP Funds in Support and Reorganization of the Domestic Automotive 

Industry

x An Assessment of Foreclosure Mitigation Efforts After Six Months 

x Guarantees and Contingent Payments in TARP and Related Programs 
Management’s Discussion and Analysis

Page 102 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

88

Section Ten: Other Management Information 

Over the past year, Treasury-OFS has grown into an organization of 198 full-time 

employees (101 career civil servants, 85 term appointments, and 12 detailees) who support the 

TARP. These employees include 18 employees who report through the Department of the 

Treasury’s Office of General Counsel and approximately 40 others outside of Treasury-OFS who 

continue to provide support to the office on an as-needed basis. Treasury-OFS continues to use 

direct-hire and other appointments to expedite hiring of highly-qualified candidates, which has 

enabled the Treasury-OFS to reduce the number of temporary and contract staff and strengthen 

the continuity and institutional knowledge of the workforce. The FY 2009 Administrative 

budget obligations totaled $248 million split between salaries and benefits of approximately $14 

million and non-personnel services, generally contracts, of approximately $234 million. 

As noted in Section One, Treasury-OFS is made up of seven divisions. 

The Chief Investment Office (CIO) is responsible for program development and the 

execution and management of all investments made pursuant to EESA. Investments can be made 

by either purchasing or insuring “troubled assets” (as defined in EESA). The CIO relies on 

contracted asset managers and a custodian to assist in the management of acquired or insured 

assets. The CIO also manages a contract with an investment advisor who provides guidance on 

the selection of asset managers. 

The Office of the Chief Financial Officer (CFO) has lead responsibility within TreasuryOFS for budget formulation and execution, cash management, accounting, financial systems, 

financial reporting, and internal controls. In each of these areas the CFO works closely with the 

appropriate offices within main Treasury. The CFO manages Treasury-OFS budget, cash flow 

requirements and accounting support activities for all of Treasury-OFS concentrating on 

accounting and reporting activities required by the Federal Credit Reform Act to include 

modeling of cash flow and all required re-estimates. The Office serves as liaison with 

Government Accountability Office (GAO) staff for financial statement reporting and internal 

controls. For the FY 2009 reporting cycle, the OCFO led the implementation of the OMB 

Circular A-123 internal controls requirements for Treasury-OFS. 

The Office of the Chief of Homeownership Preservation is responsible for identifying 

opportunities to help homeowners while also protecting taxpayers. The key policy goals of the 

Office are to reduce the number of principal residences lost to foreclosure and to stabilize the 

value of homeownership in surrounding communities through polices which impact 

homeowners, home mortgage loans, lenders, servicers and their communities. The priorities of 

the Office are to: implement the Administration’s loss mitigation program; develop and 

implement a robust outreach program targeted to at-risk homeowners; outline and implement 
Management’s Discussion and Analysis

Page 103 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

89

strategies to regularly update the Administration, Congress, the public, and other key 

stakeholders, on results; and monitor, analyze and report on the results of the loan modification 

program. 

The Office of the Chief Administrative Officer (OCAO) is responsible for developing an 

office infrastructure and managing internal operations in Treasury-OFS. The OCAO works to 

integrate Treasury-OFS investments, program, compliance, risk, finance, and legal functions and 

facilitates communication across the organization. The OCAO supports the execution of TARP 

programs and the management of the Treasury-OFS employees and contractual resources. The 

OCAO works with the Assistant Secretary for Financial Stability to set and execute goals and 

objectives. The OCAO works with each Treasury-OFS organizational entity to effectively 

manage the budget, facilities, information technology (IT), acquisition management oversight, 

document flows, physical security and privacy, and workforce planning. 

The Office of the Chief Counsel provides legal advice to the Assistant Secretary. The 

Chief Counsel reports to the Assistant General Counsel (Banking and Finance) in Treasury’s 

Legal Division. The Office of the Chief Counsel is responsible for the legal affairs of TreasuryOFS. The Office is involved in the structuring of Treasury-OFS programs and activities to ensure 

compliance with EESA and with other laws and regulations and to insure the programs and 

activities are well designed from a legal point of view. The Office assists in responding to FOIA 

requests, the inquiries of oversight bodies such as the GAO and the Congressional Oversight 

Panel (COP) and any litigation concerning EESA or Treasury-OFS activities. The Office also 

works on a variety of other legal matters pertaining to Treasury-OFS operations.

The Office of Reporting is responsible for coordinating Treasury-OFS’ work with the 

external oversight entities including the GAO, Special Inspector General for TARP, Financial 

Stability Oversight Board and the Congressional Oversight Panel. The Office also prepares 

periodic reports to the Congress under EESA. 

The Office of Internal Review (OIR) was recently established within Treasury-OFS to 

ensure that proper management controls are developed, in place, and operating as intended.

Management controls include organization, policies, and procedures, all of which are designed to 

help program and financial managers achieve results and safeguard the integrity of their 

programs. The OIR also works with the other program offices to identify the most significant 

risks that the TARP faces including operational risk, credit risk, market risk, and reputational 

risk. The office assesses those risks (either quantitatively or qualitatively) and works to ensure 

that the assessments are integrated into the decision making processes of each business line of 

the TARP and that risks are managed in a consistent fashion across business lines. The OIR 

scope of responsibilities also covers the compliance oversight area including developing and 
Management’s Discussion and Analysis

Page 104 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

90

implementing, in conjunction with the relevant program offices, processes and procedures to 

provide for overall program compliance with EESA. These include the HAMP program 

requirements, executive compensation, statutory reporting, and conflict of interest requirements. 

Treasury-OFS is not envisioned as a permanent organization, so to the maximum extent 

possible and appropriate, Treasury-OFS utilizes private sector expertise in support of the 

execution of TARP programs. Fannie Mae and Freddie Mac accounted for almost thirty percent 

of the non-personnel services to assist in the administration and compliance, respectively, of the 

Home Affordable Modification Program. Additionally, asset managers were hired to serve as 

financial agents in managing the portfolio of assets associated with several TARP programs. 

The balance of the non-personnel private sector firms were engaged to assist with the significant 

volume of work associated with the TARP in the areas of accounting and internal controls, 

administrative support, facilities, legal advisory, financial advisory, and information technology.
Management’s Discussion and Analysis

Page 105 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

91

Section Eleven: Limitations of the Financial Statements

The principal financial statements have been prepared to report the financial position and 

results of operations of the Treasury-OFS’ Troubled Asset Relief Program, consistent with the 

requirements of 31 U.S.C. 3515(b). While the statements have been prepared from the books 

and records of the Office of Financial Stability and the Department of the Treasury in accordance 

with section 116 of EESA and GAAP for Federal entities and the formats prescribed by OMB, 

the statements are in addition to the financial reports used to monitor and control budgetary 

resources which are prepared from the same books and records. 

 The statements should be read with the realization that they are for a component of the 

U.S. Government, a sovereign entity. 
Page 106 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Financial Statements

Message from the Chief Financial Officer 

I am very pleased to submit the Office of Financial Stability’s (OFS) Annual Financial Report 

for FY 2009. This report provides our stakeholders with meaningful financial results and 

program performance as required by the Emergency Economic Stabilization Act (EESA) and the 

Reports Consolidation Act. The unqualified audit opinion provided by our auditor, the 

Government Accountability Office (GAO), on these financial statements represents an 

extraordinary achievement by OFS and Treasury staff. The support of our contractors, staff at 

the Office of Management and Budget and the GAO audit team was invaluable to this success. I 

am exceptionally proud and appreciative of the effort and commitment made by everyone 

involved.

Under the EESA authority as described throughout this report, the government made 

unprecedented investments in private entities through the Troubled Asset Relief Program 

(TARP). The unique features of the EESA programs, as well as the statutory requirement that 

the budgetary cost of the programs be determined under the standards of the Federal Credit 

Reform Act (FCRA), adjusted for market risk, meant that OFS had to navigate unchartered 

ground in Federal budget and accounting concepts. For these and related reasons, creating the 

accounting and reporting infrastructure and internal control environment to support the 

development of the first year financial statements for the TARP, was an extraordinary challenge. 

As a start up organization with an unprecedented emergency mission to stabilize the nation’s 

financial system, OFS moved swiftly to develop and implement eight new programs. The face 

value of the amounts obligated for these programs in FY 2009 totaled $454 billion, nearly as 

much as the entire combined FY 2008 Federal non-defense discretionary outlays. OFS’s budget, 

accounting, and financial reporting policies and operations had to be designed and executed 

simultaneously with the establishment of the new programs. OFS was able to leverage a number 

of Treasury’s existing financial management systems and resources, but also had to develop 

procedures, reports, models, and methodologies from scratch. 

All of the TARP initiatives except for the housing program are loans, guarantees or investments 

and are accounted for using FCRA methods of net present value for budgeting and financial 

reporting. Cost models (or “subsidy” models as they are called under FCRA) had to be 

developed for all of the programs and unique transactions. Never before has a Federal entity 

created as many subsidy cost models in such a short period made even more difficult by the 

vastness and complexity of TARP’s programs. While we and GAO identified some non-material 

errors and opportunities for improvements in the models and processes, overall the results were 

outstanding, given the magnitude of the effort required this year. Because the credit and 

investment programs constitute the vast majority of OFS’s financial activity, continuing to build 

a very strong internal control process and high quality, state of the art subsidy cost models is a 

top priority for us.

A consistent focus on internal control was a mainstay of OFS’s efforts. From the first 

transactions in October, 2008, 23 days after passage of EESA, OFS instituted comprehensive 

controls around the highest risk elements of the transaction lifecycle – for example the 

disbursement and receipt of funds and receipt of appropriate consideration such as preferred 
Financial Statements

Page 107 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

shares and warrants associated with a transaction. OFS aggressively used prototyping to 

establish an effective process design, cross-functional meetings to ensure cohesion across areas, 

and real time control monitoring of all transactions to improve accuracy in execution. We 

focused on core controls such as appropriate levels of authorization and reconciliation of critical 

transaction information. Over the course of the year, we were able to maturate much of our 

internal control capacity from heavily monitored, individual transactions, to documented, 

repeated processes with embedded control monitoring, automated control evidence collection, 

and ongoing control testing.

Finally, OFS implemented the internal control requirements for financial reporting under 

Appendix A of OMB Circular A-123. OFS staff within the Office of the Chief Financial Officer 

worked closely with the program and other support offices to develop a comprehensive subcertification and review process supporting management's interim and final assurance statements. 

Looking ahead, we plan to continue improving our financial management capacity, including 

strengthening our financial reporting processes, developing additional or enhancing existing 

documentation supporting our policies, and formalizing our financial data management 

approach. We will be actively addressing GAO’s audit findings and look forward to building on 

our successes this year to resolve the outstanding issues identified in this audit. 

Successfully preparing the first year financial statements for the programs developed under the 

EESA required extraordinary dedication and commitment. It has been a privilege to lead this 

effort and I want to extend my thanks to the many people who contributed to making this 

endeavor successful. 

Thank you for your interest in our FY 2009 Annual Financial Report.

Jennifer E. Main 

Chief Financial Officer 
Financial Statements

Page 108 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Financial Statements and Notes 

The OFS prepares financial statements for the Troubled Asset Relief Program as a 

critical aspect of ensuring the accountability and stewardship for the public resources 

entrusted to it and as required by Section 116 of EESA. Preparation of these statements 

is also an important part of the OFS’ financial management goal of providing accurate 

and reliable information that may be used to assess performance and allocate 

resources. The OFS management is responsible for the accuracy and propriety of the 

information contained in the financial statements and the quality of internal controls. The 

statements are, in addition to other financial reports, used to monitor and control 

budgetary resources. The OFS prepares these financial statements from its books and 

records in conformity with the accounting principles generally accepted in the United 

States for federal entities and the formats prescribed by the Office of Management and 

Budget.

While these financial statements reflect activity of the OFS in executing its programs, 

including providing resources to various entities to help stabilize the financial markets, 

they do not include, as more fully discussed in Note 1, the assets, liabilities, or results of 

operations of commercial entities in which the OFS has a significant equity interest. In 

addition, comparative information is not available because OFS began operations on 

October 3, 2008. 

The Balance Sheet summarizes the OFS assets, liabilities and net position as of the 

reporting date. Intragovernmental assets and liabilities resulting from transactions 

between federal agencies are presented separately from assets and liabilities from 

transactions with the public. 

The Statement of Net Cost shows the net cost of operations for the reporting period. 

The Statement of Changes in Net Position presents the OFS ending net position by two 

components - Cumulative Results of Operations and Unexpended Appropriations. It 

summarizes the change in net position. The ending balances of both components of net 

position are also reported on the Balance Sheet. 

The Statement of Budgetary Resources provides information about funding and 

availability of budgetary resources and the status of those resources at the end of the 

reporting period. 
Financial Statements

Page 109 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Balance Sheet

Office of Financial Stability (Troubled Asset Relief Program)

BALANCE SHEET 

As of September 30, 2009

Dollars in Millions

ASSETS

 Intragovernmental Assets:

 Fund Balance with Treasury (Note 4) 97,733 $

Troubled Asset Relief Program:

 Direct Loans and Equity Investments, Net (Note 6) 237,892

 Asset Guarantee Program (Note 6) 1,765

Total Assets $ 337,390

LIABILITIES

 Intragovernmental Liabilities:

 Accounts Payable and Other Liabilities 5 $

 Principal Payable to the Bureau of the Public Debt (Note 8) 143,335

 Due to the General Fund (Note 3) 109,748

 Total Intragovernmental Liabilities 253,088 $

 Accounts Payable and Other Liabilities 73

 Liability for Home Affordable Modification Program (Note 5) 1

Total Liabilities $ 253,162

Commitments and Contingencies (Note 7)

NET POSITION 

 Unexpended Appropriations $ 84,229

 Cumulative Results of Operations (1)

Total Net Position $ 84,228

Total Liabilities and Net Position $ 337,390

The accompanying notes are an integral part of these financial statements.
Financial Statements

Page 110 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Statement of Net Cost

Office of Financial Stability (Troubled Asset Relief Program)

STATEMENT OF NET COST

For the Period Ended September 30, 2009

Dollars in Millions

Gross Cost:

 Subsidy Cost (Note 6)

 Direct Loan and Equity Investment Programs $ 43,605

 Asset Guarantee Program (2,201)

 Total Program Subsidy Cost 41,404

 Interest Expense on Borrowings from the Bureau of the

 Public Debt (Note 8) 6,436

 Home Affordable Modification Program (Note 5) 2

 Administrative Cost 167

Total Gross Cost $ 48,009

Less Earned Revenue:

 Dividend and Interest Income - Programs (Note 6) (9,503)

 Interest Income on Financing Account (3,649)

 Subsidy Allowance Amortized (Note 9) 6,716

Net Earned Revenue $ (6,436)

Total Net Cost of Operations $ 41,573

The accompanying notes are an integral part of these financial statements.
Financial Statements

Page 111 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Statement of Changes in Net Position

Office of Financial Stability (Troubled Asset Relief Program)

STATEMENT OF CHANGES IN NET POSITION

For the Period Ended September 30, 2009

Dollars in Millions

Unexpended

Approprations

Cumulative

Results of 

Operations

Beginning Balances, at Inception $ - $ -

Budgetary Financing Sources

 Appropriations Received 238,268 -

 Appropriations Used (154,039) 154,039

Other Financing Sources (112,467) - 

Total Financing Sources 84,229 41,572

Net Cost of Operations - (41,573)

Ending Balances $ 84,229 $ (1)

The accompanying notes are an integral part of these financial statements.
Financial Statements

Page 112 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Statement of Budgetary Resources

Office of Financial Stability (Troubled Asset Relief Program)

STATEMENT OF BUDGETARY RESOURCES

For the Period Ended September 30, 2009

Dollars in Millions

Budgetary

Accounts

Nonbudgetary

Financing Accounts

BUDGETARY RESOURCES

 Unobligated Balances Brought Forward, Inception - $ $ -

 Budget Authority:

 Appropriations 238,268 -

 Borrowing Authority 309,971 - 

 Spending Authority from Offsetting Collections

 Earned: Collected 243,072 - 

 Change in Unfilled Orders Without Advance - 28,927

 Total Budget Authority 238,268 581,970

 Permanently Not Available (120,841) - 

TOTAL BUDGETARY RESOURCES (Note 10) $ 238,268 $ 461,129

STATUS OF BUDGETARY RESOURCES

 Obligations Incurred:

 Direct $ 210,112 $ 452,184

 Unobligated Balance:

 Apportioned and Available 28,156 7,009

 Not Available - 1,936

, ,

TOTAL STATUS OF BUDGETARY RESOURCES $ , , 238,268 $ , , 461,129

CHANGE IN OBLIGATED BALANCES

 Obligated Balance Brought Forward, Inception - $ $ -

 Obligations Incurred 452,184 210,112 

 Gross Outlays (153,961) (372,982)

 Change in Uncollected Customer Payments from Federal Sources - (28,927)

 Obligated Balance, Net, End of Period:

 Unpaid Obligations 56,151 79,202

 Uncollected Customer Payments from Federal Sources - (28,927)

 Obligated Balance, Net, End of Period $ 56,151 $ 50,275

NET OUTLAYS

 Gross Outlays $ 153,961 $ 372,982

 Offsetting Collections (243,072) - 

 Distributed Offsetting Receipts (2,720) -

NET OUTLAYS $ 151,241 $ 129,910

The accompanying notes are an integral part of these financial statements.
Financial Statements

Page 113 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Notes to the Financial Statements

Office of Financial Stability – 2009 Financial Report 

Note 1. Reporting Entity 

The Troubled Asset Relief Program (TARP) was authorized by the Emergency 

Economic Stabilization Act of 2008 (EESA or “The Act”). The Act gave the Secretary of 

the Treasury (the Secretary) broad and flexible authority to establish the TARP to 

purchase and insure mortgages and other troubled assets, which permits the Secretary 

to inject capital into banks and other commercial companies by taking equity positions in 

those entities, if needed, to stabilize the financial markets. 

The EESA established certain criteria under which the TARP would operate, including 

provisions that impact the budgeting, accounting, and reporting of troubled assets 

acquired under the Act. Section 101(a) of the EESA provided the authority for the 

Secretary to purchase troubled assets, and Section 101(a)(3) of the EESA established the 

Office of Financial Stability (OFS) to implement the TARP. Section 102 of the EESA 

required the Secretary to establish a program to guarantee troubled assets originated or 

issued prior to March 14, 2008, including mortgage-backed securities. Section 115 of the 

EESA limits the authority of the Secretary to purchase troubled assets up to $700 billion1

outstanding at any one time, calculated at the aggregate purchase prices of all troubled 

assets held. There was approximately $381.3 billion outstanding against the Section 115 

authority as of September 30, 2009. Section 120 of the EESA established that the 

authorities under Sections 101(a), excluding Section 101(a)(3) and Section 102 of the 

EESA, shall terminate on December 31, 2009. Section 120 of the EESA further 

established that the Secretary, upon submission of a written certification to Congress, may 

extend the authority provided under the Act to expire no later than 2 years from the date of 

the enactment of the Act (October 3, 2008). 

Under the provisions of the EESA, the OFS implemented the TARP which resulted in the 

development of the following programs: the Capital Purchase Program; the Targeted 

Investment Program; the Asset Guarantee Program; the Consumer and Business 

Lending Initiative; the Public-Private Investment Program; the American International 

Group, Inc. Investment Program (formerly known as the Systemically Significant Failing 

Institutions Program); and the Automotive Industry Financing Program (see Note 6); as 

well as the Home Affordable Modification Program (see Note 5). 

While these financial statements reflect the activity of the OFS in executing its programs, 

including providing resources to various entities to help stabilize the financial markets, 

they do not include the assets, liabilities, or results of operations of commercial entities 

in which the OFS has a significant equity interest. Through the purchase of troubled 

assets, the OFS has entered into several different types of direct loan, equity 

investment, and asset guarantee arrangements with private entities. These direct loans, 

equity investments, and asset guarantees were made with the intent of helping to 

 

1 The Helping Families Save Their Homes Act of 2009 (PubL.No. 111-22, Div. A, 123 Stat., 1632 (2009) 

amended the act to reduce the maximum allowable amount of outstanding troubled assets under the act by 

almost $1.3 billion, from $700 billion to $698.7 billion. As required under section 102 of EESA, the $381.3 

billion does not include a subtraction from the outstanding guarantee amount to reflect the balance in the 

Troubled Assets Insurance Financing Fund. 
Financial Statements

Page 114 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

stabilize the financial markets and mitigating, as best as possible, any adverse impact on 

the economy. These direct loans, equity investments, and asset guarantees were not 

made to engage in the business activities of the respective private entities. Based on 

this intent, the OFS has concluded that such direct loans, equity investments, and asset 

guarantees are considered “bail outs”, under the provisions of paragraph 50 of 

Statement of Federal Financial Accounting Concepts (SFFAC) No. 2, Entity and Display.

In addition, these entities do not meet the conclusive criteria in SFFAC No. 2. As such, 

OFS determined that none of these entities meet the criteria to be classified as a federal 

entity. Consequently, their assets, liabilities, and results of operations are not 

consolidated in these OFS financial statements. 

In addition, the OFS has made investments in certain Special Purpose Vehicles2

 (SPV). 

SFFAC No. 2, paragraphs 43 and 44, reference indicative criteria such as ownership 

and control over an SPV to carry out government powers and missions, as criteria in the 

determination of consolidation. The OFS has concluded that the lack of control over the 

SPVs is the primary basis for determining that none of the SPVs meet the criteria to be 

classified as a federal entity. As a result, the assets, liabilities and results of operations 

of the SPVs are not included in these OFS financial statements. The OFS has recorded 

the investments in private entities and investments in SPVs in accordance with Credit 

Reform Accounting, as discussed below. Additional disclosures regarding these SPV 

investments are included in these Notes. 

The EESA established the OFS within the Office of Domestic Finance of the Department 

of the Treasury (Treasury). The OFS prepares stand-alone financial statements to 

satisfy EESA’s requirement for the TARP to prepare annual financial statements. 

Additionally, as an office of the Treasury, its financial statements are consolidated into 

Treasury’s department-wide financial statements and Agency Financial Report. 

Note 2. Summary of Significant Accounting Policies

Basis of Accounting and Presentation 

The accompanying financial statements include the operations of the OFS and have 

been prepared from the accounting records of the OFS in conformity with accounting 

principles generally accepted in the United States for federal entities (Federal GAAP), 

and the Office of Management and Budget (OMB) Circular A-136, Financial Reporting 

Requirements, as amended. Federal GAAP includes the standards issued by the 

Federal Accounting Standards Advisory Board (FASAB). The FASAB is recognized by 

the American Institute of Certified Public Accountants (AICPA) as the official accounting 

standards-setting body for the U.S. Government. As such, the FASAB is responsible for 

establishing Federal GAAP for Federal reporting entities. 

In July 2009, the FASAB issued the Statement of Federal Financial Accounting 

Standards (SFFAS) No. 34, The Hierarchy of Generally Accepted Accounting Principles, 

Including the Application of Standards Issued by the Financial Accounting Standards 

 

2

 The OFS has invested in SPV’s under the Consumer and Business Lending Initiative and the 

Automotive Industry Financing Program.
Financial Statements

Page 115 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

Board. SFFAS No. 34 identifies the sources of accounting principles and the framework 

for selecting the principles used in the preparation of general purpose financial reports of 

federal reporting entities that are presented in conformity with Federal GAAP. 

In addition to the above, Section 123(a) of the EESA requires that the budgetary cost of 

purchases of troubled assets and guarantees of troubled assets, and any cash flows 

associated with authorized activities, be determined in accordance with the Federal 

Credit Reform Act of 1990 (FCRA). Section 123(b) (1) of the EESA requires that the 

budgetary costs of troubled assets and guarantees of troubled assets be calculated by 

adjusting the discount rate for market risks. As a result of this requirement, the OFS 

considered market risk in its calculation and determination of the estimated net present 

value of its direct loans, asset guarantees, and equity investments for budgetary 

purposes. Similarly, market risk is considered in valuations for financial reporting 

purposes (see Note 6 for further discussion). 

Consistent with the accounting policy for equity investments made by Treasury in private 

entities, the OFS accounts for its equity investments at fair value, defined as the 

estimated amount of proceeds the OFS would receive if the equity investments were 

sold to a market participant. The OFS uses the present value accounting concepts 

embedded in SFFAS No. 2, Accounting for Direct Loans and Loan Guarantees, to derive 

fair value measurements. The OFS concluded that the equity investments were similar 

to direct loans in that there is a stated rate and a redemption feature which, if elected, 

requires repayment of the amount invested. Furthermore, consideration of market risk 

provides a basis to arrive at a fair value measurement. Therefore, the OFS uses SFFAS 

No. 2 (as more fully discussed below) for reporting and disclosure requirements of it 

equity investments.

Federal loans and loan guarantees are governed by FCRA for budgetary accounting and 

the associated FASAB accounting standard SFFAS No. 2, as amended for financial 

reporting. The OFS applies the provisions of the SFFAS No. 2, as amended, when 

accounting for direct loans, equity investments, and asset guarantees. Direct loans and 

equity investments disbursed and outstanding are recognized as assets at the net 

present value of their estimated future cash flows and outstanding asset guarantees are 

recognized as liabilities or assets at the net present value of their estimated future cash 

flows. The subsidy allowance account represents the difference between the face value 

of the outstanding direct loan and equity investment balance and the net present value 

of the expected future cash flows, and is reported as an adjustment to the face value of 

the direct loan or equity investment. Consequently, direct loans, asset guarantees, and 

equity investments, including investments in preferred and common stock and warrants 

of public companies, are accounted for and reported by the OFS using credit reform 

accounting in accordance with SFFAS No. 2, as amended. 

The OFS recognizes dividend revenue associated with equity investments when 

declared by the entity in which OFS has invested and when received in relation to any 

repurchases and restructuring. The OFS reflects changes in the value of direct loans, 

equity investments, and asset guarantees in the subsidy cost on the Statement of Net 

Cost annually. The OFS has received common stock warrants, additional preferred 

stock (referred to as warrant preferred stock) or additional notes, as additional 

consideration for direct loans and equity investments made and asset guarantees 
Financial Statements

Page 116 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

entered into. The OFS accounts for the warrants and warrant preferred stock received 

under Section 113 of EESA as fees under SFFAS No. 2, and, as such, the value of the 

warrants and warrant preferred stock is a reduction of the subsidy allowance. 

Use of Estimates 

The OFS has made certain estimates and assumptions relating to the reporting of 

assets, liabilities, revenues, and cost to prepare these financial statements. Actual 

results could significantly differ from these estimates. Major financial statement line 

items subject to estimates include Troubled Asset Relief Program Direct Loans and 

Equity Investments, Net, Asset Guarantee Program, and related subsidy cost (see Note 

6).

The most significant differences between actual results and estimates may occur in the 

valuation of direct loans, equity investments, and asset guarantees. The forecasted 

future cash flows used to determine these amounts as of September 30, 2009, are 

sensitive to slight changes in model assumptions, such as general economic conditions, 

specific stock price volatility of the entities which the OFS has an equity interest, 

estimates of expected default, and prepayment rates. Forecasts of future financial 

results have inherent uncertainty and the OFS's Troubled Asset Relief Program Direct 

Loans and Equity Investments, Net and Asset Guarantee Program line items as of 

September 30, 2009, are reflective of relatively illiquid, troubled assets whose values are 

particularly sensitive to future economic conditions and other assumptions. Additional 

discussion related to sensitivity analysis can be found in the Management Discussion 

and Analysis section of the Agency Financial Report. 

Credit Reform Accounting 

The FCRA provided for the use of program, financing, and general fund receipt accounts 

to separately account for activity related to loans and guarantees. These accounts are 

classified as either budgetary or non-budgetary in the Statement of Budgetary 

Resources. The budgetary accounts include the program and general fund receipt 

accounts, and the non-budgetary accounts consist of the credit reform financing 

accounts.

As discussed previously, the OFS accounts for the cost of purchases of troubled assets 

and guarantees of troubled assets, and any cash flows associated with authorized 

activities, including direct loans, in accordance with Section 123(a) of the EESA and the 

FCRA for budgetary accounting and SFFAS No. 2 for financial reporting, except for the 

Home Affordable Modification Program (HAMP) (see Note 5). 

The authoritative guidance for financial reporting is primarily contained in the SFFAS No. 

2, as amended by the SFFAS No. 18, Amendments to Accounting Standards for Direct 

Loans and Loan Guarantees, and the SFFAS No. 19, Technical Amendments to 

Accounting Standards for Direct Loans and Loan Guarantees.

In accordance with SFFAS No. 2, the OFS maintains program accounts which receive 

appropriations and obligate funds to cover the subsidy cost of direct loans, equity 

investments and asset guarantees, and disburses the subsidy cost to the OFS financing 
Financial Statements

Page 117 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

accounts. The financing accounts are non-budgetary accounts that are used to record all 

of the cash flows resulting from the OFS direct loans, equity investments and asset 

guarantees.3

 Cash flows include disbursements, repayments, repurchases, fees, 

recoveries, borrowings from the Treasury, interest, negative subsidy and the subsidy 

cost received from the program accounts. 

The financing arrangements specifically for the TARP activities are provided for in the 

EESA as follows: (1) Borrowing for program funds under Section 118 that constitute 

appropriations when obligated or spent, which are reported as “appropriations” in these 

financial statements; (2) borrowing by financing accounts for non-subsidy cost under the 

FCRA and Section 123; and (3) the Troubled Assets Insurance Financing Fund (TAIFF) 

under Section 102(d). 

The OFS has general fund receipt accounts which are used to record the receipt of 

amounts paid from the financing accounts when there is a negative subsidy or negative 

modification from the original estimate or a downward reestimate. Amounts in the 

general fund receipt accounts are available for appropriations only in the sense that all 

general fund receipts are available for appropriations. Any assets in these accounts are 

non-entity assets and are offset by intragovernmental liabilities. At the end of the fiscal 

year, the fund balance transferred to the U.S. Treasury through the general fund receipt 

account is no longer included in the OFS’s fund balance reporting. 

The SFFAS No. 2 requires that the actual and expected costs of federal credit programs 

be fully recognized in financial reporting. The OFS calculated and recorded an initial 

estimate of the future performance of direct loans, equity investments, and asset 

guarantees. The data used for these estimates were reestimated at the fiscal year-end 

to reflect adjustments for market risk, asset performance, and other key variables and 

economic factors. The reestimate data was then used to estimate and report the 

“Subsidy Cost” in the Statement of Net Cost. A detailed discussion of the OFS subsidy 

calculation and reestimate assumptions, process and results is provided in Note 6. 

Fund Balance with Treasury 

The Fund Balance with Treasury includes general, financing and other funds available to 

pay current liabilities and finance authorized purchases. Cash receipts and 

disbursements are processed by the Treasury, and the OFS’s records are reconciled 

with those of the Treasury on a regular basis. 

Available unobligated balances represent amounts that are apportioned for obligation in 

the current fiscal year. Unavailable unobligated balances represent unanticipated 

collections in excess of the amounts apportioned which are unavailable. Obligated 

balances not yet disbursed include undelivered orders and unpaid expended authority. 

 

3 For the Asset Guarantee Program, OFS has established the Troubled Assets Insurance Financing Fund, 

as required by section 102(d) of the EESA which is the financing account under FCRA for the Asset 

Guarantee Program. 
Financial Statements

Page 118 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

Troubled Asset Relief Program Direct Loans and Equity Investments, Net 

Troubled Asset Relief Program Direct Loans and Equity Investments, Net represents the 

estimated net outstanding amount of the OFS direct loans and equity investments, 

exclusive of the HAMP. The direct loan and equity investment balances have been 

determined in accordance with the provisions of SFFAS No. 2 (see Note 6). 

Asset Guarantee Program

The Asset Guarantee Program represents the asset resulting from the net present value 

of the estimated cash inflows that are in excess of the estimated future claim payments 

(see Note 6).

Liabilities for Home Affordable Modification Program 

Liabilities for Home Affordable Modification Program (HAMP) represent the liability for 

payments to servicers and investors, and principal balance reduction payments for the 

account of borrowers under the HAMP are accounted for in accordance with SFFAS No. 

5, Accounting for Liabilities of the Federal Government. Under SFFAS No. 5, a liability is 

recognized for any unpaid amounts due as of the reporting date. This liability includes 

amounts due from the OFS to pay for benefits and services provided under the terms of 

the HAMP as of the OFS’s reporting date regardless of whether such payments have 

been reported to the OFS. The liability estimate is calculated based on information 

reported by participating servicers. 

The OFS has determined that credit reform accounting, is not applicable to HAMP since 

there are no incoming cash flows to be valued. 

General Property and Equipment 

Equipment with a cost of $50 thousand or more per unit and a useful life of two years or 

more is capitalized at full cost and depreciated using the straight-line method over the 

equipment’s useful life. Other equipment not meeting the capitalization criteria is 

expensed when purchased. Under this policy, the OFS had no capitalized general 

property and equipment at September 30, 2009. 

Accounts Payable and Other Liabilities 

Accounts Payable and Other Liabilities are amounts due to intragovernmental or public 

entities that will generally be liquidated during the next operating cycle (within one year 

from the balance sheet date). 

Principal Payable to the Bureau of the Public Debt 

Principal Payable to the Bureau of the Public Debt (BPD) represents the net amount due 

to the BPD for equity investments, direct loans, and asset guarantees funded by 

borrowings from the BPD as of September 30, 2009 (see Note 8). 
Financial Statements

Page 119 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

Due to the General Fund 

Due to the General Fund represents the amount of downward reestimates as of 

September 30, 2009, related to direct loans, equity investments, and asset guarantees 

as of September 30, 2009 (see Notes 3 and 6). 

Unexpended Appropriations 

Unexpended Appropriations represents the OFS undelivered orders and unobligated 

balances as of September 30, 2009. 

Cumulative Results of Operations 

Cumulative Results of Operations, presented on the Balance Sheet and on the 

Statement of Changes in Net Position, represents the net results of the OFS operations 

since inception, through September 30, 2009. The Other Financing Sources in the 

Statement of Changes in Net Position consist primarily of transfers due to the Treasury 

General Fund as of September 30, 2009, relating to the downward reestimates. 

Leave

A liability for OFS employees’ annual leave is accrued as it is earned and reduced as 

leave is taken. Each year the balance of accrued annual leave is adjusted to reflect 

current pay rates as well as forfeited “use or lose” leave. Amounts are unfunded to the 

extent current or prior year appropriations are not available to fund annual leave earned 

but not taken. Sick leave and other types of non-vested leave are expensed as taken. 

Employee Health and Life Insurance and Workers’ Compensation Benefits 

The OFS employees may choose to participate in the contributory Federal Employees 

Health Benefit and the Federal Employees Group Life Insurance Programs. The OFS 

matches a portion of the employee contributions to each program. Matching 

contributions are recognized as current operating expenses. 

The Federal Employees’ Compensation Act (FECA) provides income and medical cost 

protection to covered Federal civilian employees injured on the job, and employees who 

have incurred a work-related injury or occupational disease. Future workers’ 

compensation estimates are generated from an application of actuarial procedures 

developed to estimate the liability for FECA benefits. The actuarial liability estimates for 

FECA benefits include the expected liability for death, disability, medical, and 

miscellaneous costs for approved compensation cases. 

Employee Pension Benefits 

The OFS employees participate in either the Civil Service Retirement System (CSRS) or 

the Federal Employees’ Retirement System (FERS) and Social Security. These systems 

provide benefits upon retirement and in the event of death, disability or other termination 

of employment and may also provide pre-retirement benefits. They may also include 
Financial Statements

Page 120 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

benefits to survivors and their dependents, and may contain early retirement or other 

special features. The OFS contributions to both retirement plans and Social Security, as 

well as imputed costs for pension and other retirement benefit costs administered by the 

Office of Personnel Management, are recognized on the Statement of Net Cost as 

Administrative Costs. Federal employee benefits also include the Thrift Savings Plan 

(TSP). For FERS employees, a TSP account is automatically established and the OFS 

matches employee contributions to the plan, subject to limitations. The matching 

contributions are also recognized as Administrative Costs on the Statement of Net Cost. 

Note 3. Non-Entity Liabilities

The OFS had approximately $109.7 billion in downward reestimates related to its 

Troubled Asset Relief Program Direct Loans and Equity Investments, Net and Asset 

Guarantee program which is a non-entity liability payable due to the Treasury General 

Fund as of September 30, 2009 (see Note 6). 

Note 4. Fund Balances with Treasury

As of September 30, 2009, Fund Balances with Treasury, by fund type and status, 

consisted of the following: 

Fund Balances: (Dollars in Millions) 

 General Funds $ 45,650

 Program Funds 38,658

 Financing Funds 13,425

Total Fund Balances $ 97,733

Status of Fund Balances: 

 Unobligated Balances 

 Available $ 35,165

 Unavailable 1,936

 Obligated Balances Not Yet Disbursed 60,632

Total Status of Fund Balances $ 97,733

Included in the OFS Financing Funds is the premium collections of approximately $174.8 

million related to the Asset Guarantee Program (AGP) that are required by the EESA 

Section 102(d) to be maintained in the TAIFF (see Note 6). 

Note 5. The Home Affordable Modification Program

The Home Affordable Modification Program (HAMP) is designed to assist eligible 

homeowners who are experiencing financial hardships to remain in their homes by 

providing reductions in their monthly mortgage payments for up to five years. The 

HAMP provides for one-time, monthly, and annual incentives to servicers, borrowers, 

and investors who participate in the program. On an ongoing basis, beyond such 

incentives, the OFS shares equally in the cost of the reductions with the mortgage 

investors. Lastly, investors are paid a Home Price Decline Protection payment to 

partially offset losses from home price declines. 
Financial Statements

Page 121 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

For the HAMP, Fannie Mae provides direct programmatic support as a third party agent 

on behalf of the OFS, Freddie Mac provides compliance oversight as a third party agent 

on behalf of the OFS, and the servicers work directly with the borrowers to modify and 

service the borrowers’ loans. 

As of September 30, 2009, the OFS had entered into agreements with 63 servicers to 

provide up to approximately $27.1 billion in payments and incentives to borrowers, 

servicers and investors. As of September 30, 2009, this $27.1 billion was included in 

Obligations Incurred in the Statement of Budgetary Resources. All HAMP payments are 

made to servicers either for themselves or for the benefit of borrowers and investors. 

Furthermore, all payments are contingent on borrowers remaining current on their 

mortgage payments. As of September 30, 2009, approximately $946.5 thousand in 

incentive payments had been paid to three servicers in incentive payments for 743 

borrowers who had completed official loan modifications. 

Servicers have until December 31, 2012, to enter into mortgage modifications with 

borrowers.

As of September 30, 2009, the OFS had accrued approximately $1.4 million of first lien 

incentive for modifications under the HAMP program. 

Note 6. Troubled Asset Relief Program Direct Loans and Equity 

Investments, Net and Asset Guarantee Program 

The OFS applies the provisions of SFFAS No. 2 to account for direct loans, equity 

investments and asset guarantees. This standard requires measurement of the asset or 

liability at the net present value of the estimated future cash flows. The cash-flow 

estimates for each transaction reflect the actual structure of the instruments. For each of 

these instruments, analytical cash flow models generate estimated cash flows to and 

from the OFS over the estimated term of the instrument. Further, each cash-flow model 

reflects the specific terms and conditions of the program, technical assumptions 

regarding the underlying assets, risk of default or other losses, and other factors as 

appropriate. The models also incorporate an adjustment for market risk to reflect the 

additional return required by the market to compensate for variability around the 

expected losses reflected in the cash flows (the “unexpected loss”). The basic methods 

for each of these models are outlined below. 

Direct Loans 

The estimated future cash flows for direct loans are derived using analytical models that 

estimate the cash flows to and from the OFS over the life of the loan. These cash flows 

include the scheduled principal, interest, and other payments to the OFS, including 

estimated proceeds from equity interest obtained or additional notes. These models 

also include estimates of default and recoveries, incorporating the value of any collateral 

provided by the contract. The probability and timing of default and losses relating to a 

default are estimated by using applicable historical data when available, or publicly 

available proxy data, including credit rating agency historical performance data. 
Financial Statements

Page 122 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

In the case of the Term Asset-backed Securities Loan Facility (TALF), the OFS uses an 

analytical model to project cash flows to and from the OFS based on the estimated loan 

collateral performance, the estimated mix of collateral funded through the TALF and the 

terms of the contracts. 

The models include an adjustment for market risk which is intended to capture the risk of 

unexpected losses, but are not intended to represent fair value, i.e. the proceeds that 

would be expected to be received if the loans were sold to a market participant. 

Equity Investments 

Preferred stock cash flows are projected using an analytical model developed to 

incorporate the risk of losses associated with adverse events, such as failure of the 

institution or increases in market interest rates. The model estimates how cash flows 

vary depending on: 1) current interest rates, which may affect the decision whether to 

repay the preferred stock; and 2) the strength of a financial institution’s assets. Inputs to 

the model include institution specific accounting data obtained from regulatory filings, an 

institution’s stock price volatility, historical bank failure information, as well as market 

prices of comparable securities trading in the market. OFS estimates the values and 

projects the cash flows of warrants using an option-pricing approach based on the 

current stock price and its volatility. Investments in common stock which are exchange 

traded are valued at the market price. The result of using market prices, either quoted 

prices for the identical asset or quoted prices for comparable assets, is that the equity 

investments are recorded at estimated fair value.

Asset Guarantees 

The value of the asset guarantee reflects the net present value of estimated defaultclaim payments by the OFS, net of income from recoveries on defaults, fees, or other 

income. Guarantee fees to date have been paid in the form of preferred stock, 

subsequently converted to trust preferred stock, and a warrant to purchase common 

stock of the financial institution, whose value is modeled using the same methodology 

for other equity purchase programs, discussed above. Default-claim payments are 

based on estimated losses on the guaranteed assets. Key inputs into these estimates 

are forecasted gross domestic product, unemployment rates and home price 

depreciation, in a base scenario and a stress scenario. 

Subsidy Cost 

The recorded subsidy cost of a direct loan, equity investment or asset guarantee is 

based on a set of estimated future cash flows. OFS actions that change these estimated 

future cash flows change subsidy costs and are recorded as a modification. The cost of 

a modification is recognized as a modification expense, included in subsidy cost, when 

the direct loan, equity investment, or asset guarantee is modified. During fiscal year 

2009, modifications occurred within the Capital Purchase Program, Consumer and 

Business Lending Initiative, the American International Group, Inc. Investment Program, 

and the Automotive Industry Financing Program. See detailed discussion related to 

each program and related modifications below. Total net modification costs for the 

period ended September 30, 2009, approximated $412.1 million. 
Financial Statements

Page 123 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

Equity Investments, Direct Loan and Asset Guarantee Programs 

The OFS administers a number of programs designed to help stabilize the financial 

system and restore the flow of credit to consumers and businesses. The OFS has 

purchased direct loans and made equity investments and entered into asset guarantees. 

The table below is a list and type of the OFS programs: 

Program Program Type 

Capital Purchase Program Equity Investment/ 

Subordinated Debentures 

Targeted Investment Program Equity Investment 

Asset Guarantee Program Guarantee 

Consumer and Business Lending Initiative Direct Loan 

Public-Private Investment Program Equity Investment and 

Direct Loan 

American International Group, Inc. Investment 

Program (*) 

Equity Investment 

Automotive Industry Financing Program Equity Investment and 

Direct Loan 

(*) Formerly known as the Systemically Significant Failing Institutions Program 

A description of each of these programs is provided below, and certain financial data by 

program is provided in the table at the end of this footnote. 

Capital Purchase Program 

In October 2008, the OFS began implementation of the TARP with the Capital Purchase 

Program (CPP), designed to help stabilize the financial system by assisting in building 

the capital base of certain viable U.S. financial institutions to increase the capacity of 

those institutions to lend to businesses and consumers and support the economy. 

Under this program, the OFS purchases senior perpetual preferred stock from qualifying 

U.S. controlled banks, savings associations, and certain bank and savings and loan 

holding companies (Qualified Financial Institution or QFI). The senior preferred stock 

has a stated dividend rate of 5.0% through year five, increasing to 9.0% in subsequent 

years. The dividends are cumulative for bank holding companies and subsidiaries of 

bank holding companies and non-cumulative for others and payable when and if 

declared by the institution’s board of directors. Under the original terms of the senior 

preferred stock the QFI may not redeem the shares within the first three years of the 

date of the investment, unless it has received the proceeds of one or more Qualified 

Equity Offerings (QEO)4

 which results in aggregate gross proceeds to the QFI of not less 

than 25.0% of the issue price of the senior preferred stock. QFIs that are Sub-chapter S 

 

4

A Qualified Equity Offering is defined as the sale by the QFI after the date of the senior preferred stock 

investment of Tier 1 perpetual preferred stock or common stock for cash.
Financial Statements

Page 124 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

corporations issued subordinated debentures in order to maintain compliance with the 

Internal Revenue Code. The maturity of the subordinated debentures is 30 years and 

interest rates are 7.7% for the first 5 years and 13.8% for the remaining years. 

In February 2009 and May 2009, the United States Congress passed the American 

Recovery and Reinvestment Act of 2009 and the Helping Families Save Their Homes 

Act of 2009, respectively. These acts contained amendments to the EESA (EESA 

Amendments) which require the Secretary to allow QFIs to repay at any time, subject to 

regulatory approval, regardless of whether the 25.0% or greater QEO was 

accomplished. The ability of a QFI to repay the OFS investment prior to year 3 or a 

25.0% QEO was not considered in the original subsidy cost estimate. Therefore, a 

modification cost of $77.7 million was recorded as a result of these amendments. 

In addition to the senior preferred stock, the OFS received warrants, as required by 

section 113(d) of EESA, from public QFIs to purchase a number of shares of common 

stock. The warrants have an aggregate market price equal to 15.0% of the total senior 

preferred stock investment. The exercise price and market value used to determine the 

number of shares of common stock subject to the warrant was calculated based on the 

average of closing prices of the common stock on the 20 trading days ending on the last 

day prior to the date the QFIs application was preliminarily approved for participation in 

the program. The warrants include customary anti-dilution provisions. In the event that 

a public QFI completes, prior to December 31, 2009, one or more QEOs with aggregate 

gross proceeds of not less than 100.0% (100.0% QEO) of the senior perpetual preferred 

stock investment, the number of shares subject to the warrants will be reduced by 

50.0%. As of September 30, 2009, 19 QFIs reduced the number of shares available 

under the warrants as a result of this provision. The warrants have a 10 year term. The 

OFS may exercise one half of the warrants prior to the earlier of a 100.0% QEO, or 

December 31, 2009. Subsequent to December 31, 2009, OFS may exercise any 

warrants held in whole or in part. The OFS considers the impact of potential future 

QEOs in the valuation process. 

The OFS received warrants from non-public QFIs for the purchase of additional senior 

preferred stock (or subordinated debentures if appropriate) with a stated dividend rate of 

9.0% (13.8% interest rate for subordinate debentures) and a liquidation value equal to 

5.0% of the total senior preferred stock (additional subordinate debenture) investment. 

These warrants were immediately exercised and resulted in the OFS holding additional 

senior preferred stock (subordinated debentures) (collectively referred to as “warrant 

preferred stock”) of non-public QFIs. The OFS did not receive warrants from banks 

considered Community Development Financial Institutions (CDFIs). As of September 

30, 2009, the OFS has invested in 20 institutions considered CDFIs. 

The EESA Amendments previously discussed also allow the Secretary to liquidate 

warrants associated with repurchased senior preferred stock at the market price. In 

addition, a QFI, upon the repurchase of its senior preferred stock, also has the 

contractual right to repurchase the common stock warrants at the market price. 

In June 2009, the OFS entered into an exchange agreement with Citigroup. Under the 

terms of the agreement the OFS exchanged $25.0 billion of its investment in senior 

preferred stock for a new series (Series M) of mandatorily convertible preferred stock.
Financial Statements

Page 125 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

The initial conversion price was $3.25 per share. In July 2009, the OFS received the 

Series M shares, which were subsequently converted in September 2009 to 

approximately 7.7 billion common shares of Citigroup. This exchange transaction was 

not considered in the original subsidy cost estimate for CPP. As a result, the OFS 

recorded a modification cost of approximately $1.8 billion for the fiscal year ended 2009. 

The OFS also has investments in Citigroup through the TIP and AGP. 

During the period ended September 30, 2009, the OFS invested approximately $204.6 

billion in 685 institutions, including small, community, regional, and national banks, as 

well as CDFIs, in 48 states, the District of Columbia, and Puerto Rico. Approximately 

$70.7 billion of the OFS investments have been repurchased or redeemed bringing the 

total gross investment balance as of September 30, 2009 to approximately $133.9 

billion. In addition, during the period ended September 30, 2009, the OFS received 

under CPP approximately $6.8 billion in dividends on senior preferred and warrant 

preferred stock and approximately $2.9 billion in proceeds from the repurchase of 

warrants and warrant preferred stock. 38 QFIs have not declared and paid one or more 

dividends to OFS under CPP as of September 30, 2009. 

On November 1, 2009, a CPP participant, CIT Group, filed for Chapter 11 Bankruptcy. 

The OFS had invested $2.3 billion in senior preferred stock of CIT Group and received a 

warrant for the purchase of common stock. The OFS does not expect a significant 

recovery of its preferred stock investment. As such, this investment has been reduced 

to zero in these financial statements. The ultimate amount received, if any, from this 

investment will depend on the outcome of the bankruptcy proceedings. 

On November 6, 2009, a subsidiary of UCBH Holdings, Inc. (a CPP participant), United 

Commercial Bank, was closed by its regulators. The OFS had invested approximately 

$298.7 million in senior preferred stock and received a warrant for the purchase of common 

shares. The value of these shares, including the warrant, reflected in these financial 

statements is approximately $22.5 million as of September 30, 2009. The ultimate amount 

received, if any, from this investment will depend on the outcome of the receivership.

On November 13, 2009, a subsidiary of Pacific Coast National Bancorp. (a CPP participant), 

Pacific Coast National Bank, was closed by its regulators. The OFS had invested 

approximately $4.1 million in senior preferred stock and received warrant preferred stock in 

the amount of $206 thousand. The value of the shares, including the warrant preferred 

stock, reflected in these financial statements is approximately $154 thousand as of 

September 30, 2009. The ultimate amount received, if any, from this investment will depend 

on the outcome of the receivership.

Further details on the outstanding senior preferred share investments and subordinated 

debentures under CPP and the net investment amount including estimated cash flows 

associated with the sale or exercise of the warrants, as of September 30, 2009, are 

presented in the table at the end of this section. 

Targeted Investment Program 

The Targeted Investment Program (TIP) was designed to prevent a loss of confidence in 

financial institutions that could result in significant market disruptions, threatening the 

financial strength of similarly situated financial institutions, impairing broader financial 
Financial Statements

Page 126 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

markets, and undermining the overall economy. The OFS considers institutions as 

candidates for the TIP on a case-by-case basis, based on a number of factors described 

in the program guidelines. These factors include the threats posed by destabilization of 

the institution, the risks caused by a loss of confidence in the institution, and the 

institution’s importance to the nation’s economy. 

The OFS completed the first transaction under the TIP in December 2008, when it 

invested $20.0 billion in Citigroup cumulative perpetual preferred stock and received a 

warrant for the purchase of Citigroup common stock. Under the agreement with 

Citigroup, the OFS receives an 8.0% annual dividend, payable quarterly, if and when 

declared by Citigroups’ Board of Directors. As part of this agreement, Citigroup must 

implement rigorous compensation standards and other restrictions on corporate 

expenditures. In June 2009, the OFS and Citigroup agreed to an exchange of the 

cumulative perpetual preferred stock issued under the TIP for a new series of trust 

preferred securities. Citigroup issued subordinated debentures to a trust established by 

Citigroup, and the trust issued trust preferred securities to OFS. Interest and principal 

payments on the subordinated debentures are passed-through to the trust preferred 

security holders. The trust preferred securities pay a quarterly distribution at an annual 

rate of 8.0% to OFS. The subordinated debentures contain an interest deferral provision 

allowing Citigroup to defer payment of interest for up to 5 years. The OFS will not 

receive distributions from the trust preferred securities during a deferral period. 

Deferred interest is required to be paid upon termination of the deferral period. As of 

September 30, 2009, Citigroup has not exercised its option to defer interest payments. 

The subordinated debentures mature in 2039. As a result, the trust is scheduled to pay 

out the proceeds to the holders of the trust preferred securities. In addition, the 

subordinated debentures can be prepaid by Citigroup at any time prior to maturity, 

subject to consultation with the Federal Reserve, as long as the U.S. Government holds 

the trust preferred securities. The terms of the new securities are substantially the same 

as the preferred stock originally received by the OFS and therefore the exchange 

transaction did not result in a modification. The OFS also has investments in Citigroup 

through the CPP and the AGP. 

In January 2009, the OFS completed its second transaction under the TIP, investing 

$20.0 billion in Bank of America. Under the agreement with Bank of America, the OFS 

purchased $20.0 billion of cumulative perpetual preferred stock and received a warrant 

for the purchase of Bank of America common stock. The preferred stock purchased 

from Bank of America contains a stated annual dividend rate of 8.0%, payable quarterly, 

if declared. Bank of America’s agreement under the TIP stipulated that the institution 

must implement rigorous executive compensation standards and other restrictions on 

corporate expenditures. The OFS also has investments in Bank of America through the 

CPP.

During the period ended September 30, 2009, OFS received approximately $1.9 billion 

in dividends under the TIP. See the table presented at the end of this section for further 

details.
Financial Statements

Page 127 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

Asset Guarantee Program 

The Asset Guarantee Program (AGP) provides guarantees for assets held by 

systemically significant financial institutions that face a risk of losing market confidence 

due in large part to a portfolio of distressed or illiquid assets. The AGP is applied with 

extreme discretion in order to improve market confidence in the systemically significant 

institution and in financial markets broadly. 

Section 102 of the EESA established the AGP to guarantee troubled assets originated or 

issued prior to March 14, 2008, including mortgage-backed securities, and established 

the Troubled Assets Insurance Financing Fund (TAIFF). In accordance with Section 

102(c) and (d) of the EESA, premiums from financial institutions, are collected and all 

fees are recorded by the OFS in the TAIFF. In addition, Section 102(c)(3) of the EESA 

requires that the original premiums assessed are “set” at a minimum level necessary to 

create reserves sufficient to meet anticipated claims. In the event there are insufficient 

funds within the TAIFF for the payment of claims, amounts are borrowed from the 

Treasury until sufficient funds are received into the TAIFF. In the event that the estimate 

of claims exceeds the estimated future cash inflows, an upward reestimate would be 

recorded and amounts would be transferred to the TAIFF as a subsidy expense. 

The OFS completed its first transaction under the AGP in January 2009, when it finalized 

the terms of a guarantee agreement with Citigroup. Under the agreement, the OFS, the 

Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve Bank of New 

York (FRBNY) provided protection against the possibility of large losses on an asset 

pool of approximately $301.0 billion of loans and securities backed by residential and 

commercial real estate and other such assets, which remain on Citigroup’s balance 

sheet. The following loss-sharing terms apply to the transaction: Citigroup absorbs the 

first $39.5 billion in losses, and losses over the $39.5 billion are shared by the U. S. 

government (90.0 %) and Citigroup (10.0 %) (the “second loss”). For the second loss, 

the OFS absorbs up to $5.0 billion, then the FDIC absorbs up to $10.0 billion, and lastly 

the FRBNY funds any U.S. government losses above the OFS and the FDIC 

commitments through a non-recourse loan. The guarantee is in place for ten years for 

residential assets and five years for non-residential assets. 

As a premium for the guarantee, Citigroup issued $7.0 billion of cumulative perpetual 

preferred stock with an 8.0 % stated dividend rate and a warrant for the purchase of 

common stock; approximately $4.0 billion and the warrant were issued to the OFS, and 

approximately $3.0 billion was issued to the FDIC. As part of the agreement, Citigroup 

submitted an executive compensation plan to the OFS and the FDIC for approval and 

must comply with certain common stock dividend restrictions. The OFS has received 

approximately $174.8 million in dividends on the preferred stock received as 

compensation for this arrangement. These dividends have been deposited into the 

TAIFF. The preferred stock originally issued to the OFS and the FDIC were exchanged 

for the trust preferred securities discussed above under the TIP. The OFS has also 

invested in Citigroup through the CPP and the TIP. 

The net present value of the estimated cash inflows from the preferred stock and warrant 

received by the OFS from Citigroup as a premium is greater than the estimated net 
Financial Statements

Page 128 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

present value of future claim payments, resulting in an asset of approximately $1.8 

billion, after reestimates, as of September 30, 2009. 

In January 2009, the OFS, FDIC, FRBNY (together the USG Parties) and Bank of 

America signed a Summary of Terms (Term Sheet) pursuant to which the USG Parties 

agreed to guarantee or lend against a pool of up to $118.0 billion of financial instruments 

consisting of securities backed by residential and commercial real estate loans and 

corporate debt and related derivatives. In May 2009, prior to completing definitive 

documentation, Bank of America notified the USG Parties of its desire to terminate 

negotiations with respect to the guarantee contemplated in the Term Sheet. All parties 

agreed that Bank of America received value for entering into the Term Sheet with the 

USG Parties and that the USG Parties should be compensated for out-of-pocket 

expenses and a fee equal to the amount Bank of America would have paid for the 

guarantee from the date of the signing of the Term Sheet through the termination date. 

Under the terms of the settlement, the U.S. Treasury received $276.0 million for its role 

in the guarantee agreement through the OFS, the FRBNY received $57.0 million, and 

the FDIC received $92.0 million. All the OFS funds received for the settlement were 

deposited in the TAIFF and subsequently paid to the Treasury General Fund. The $276 

million received by OFS pursuant to the settlement is reflected in the OFS Statement of 

Net Cost as a reduction of the AGP subsidy cost. 

Consumer and Business Lending Initiative (CBLI) 

Term Asset-Backed Securities Loan Facility 

The Term Asset-Backed Securities Loan Facility (TALF) was created by the Federal 

Reserve Board (FRB) to provide low cost funding to investors in certain classes of Asset 

Backed Securities (ABS). The OFS agreed to participate in the program by providing 

liquidity and credit protection to the FRB. 

Under the TALF, the FRBNY, as implementer of the TALF program, originated loans on 

a non-recourse basis to holders of certain AAA rated ABS secured by recently originated 

consumer and commercial loans and commercial mortgage backed securities (New 

Issue CMBS). In addition to securities secured by recently originated loans, CMBS 

issued prior to January 2009 and originally AAA rated (Legacy CMBS) are eligible 

collateral. TALF loans have a term of 3 or 5 years and are secured solely by eligible 

collateral. Haircuts (a percentage reduction used for collateral valuation) are determined 

based on the riskiness of each type of eligible collateral and the maturity of the eligible 

collateral pledged to the FRBNY. The “haircuts” provide additional protection to OFS by 

exposing the TALF borrowers to some risk of loss. Interest rates charged on the TALF 

loans depend on the weighted average maturity of the pledged collateral, the collateral 

type and whether the collateral pays a fixed or variable coupon. 

As part of the program, the FRBNY has entered into a put agreement with the TALF, 

LLC, a special purpose vehicle created by the FRBNY. In the event of a TALF borrower 

default, the FRBNY will seize the collateral and sell it to the TALF, LLC under this 

agreement. The TALF, LLC receives a monthly fee equal to the difference between the 

TALF loan rate and the FRBNY’s fee (spread) as compensation for entering into the put 

agreement. The accumulation of this fee will be used to fund purchases. In the event 
Financial Statements

Page 129 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

there are insufficient funds to purchase the collateral, the OFS has committed to invest 

up to $20.0 billion in non-recourse subordinate notes issued by the TALF, LLC. The 

subordinate notes bear interest at 1 Month LIBOR plus 3.0% and mature 10 years from 

the closing date, subject to extension. The OFS disbursed $100.0 million upon creation 

of the TALF, LLC and the remainder can be drawn to purchase collateral in the event the 

spread is not sufficient to cover purchases. Any amounts needed in excess of the OFS 

commitment and the fee would be provided through a loan from the FRBNY. Upon 

wind-down of the TALF, LLC (collateral defaults, reaches final maturity or is sold), the 

cash balance will be disbursed according to the following payment priority: 

1. FRBNY principal balance 

2. OFS principal balance 

3. FRBNY interest 

4. OFS interest 

5. Remaining cash balance – 90.0% to the OFS, 10.0% to the FRBNY 

Subsequent to the initial cost estimates prepared for the TALF, certain changes were 

made to the terms of the program, including increasing the term to 5 years and the 

addition of different types of acceptable collateral. These program changes resulted in a 

modification, increasing the original cost estimate by $8.0 million. 

The TALF, LLC is owned and controlled by the FRBNY. The credit agreement between 

the OFS and the TALF, LLC provides the OFS with certain rights consistent with a 

creditor but would not constitute control. As such TALF, LLC is not a federal entity and 

the assets, liabilities, revenue and cost of TALF, LLC are not included in the OFS 

financial statements. The discussion below provides information on 1) the amount of 

TALF loans issued by the FRBNY, by collateral class, and 2) the assets, liabilities, 

income and expense of the TALF, LLC. 
Financial Statements

Page 130 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

The FRBNY has originated $50.9 billion in TALF loans5

, of which about $42.7 billion is 

outstanding as of September 30, 2009. The average “haircut” was approximately 9.92% 

of the originated balance. As of September 30, 2009, all of the TALF loans performed 

as agreed. The table below shows the outstanding balance of the FRBNY TALF loans 

as of September 30, 2009, by collateral type: 

Collateral Type Loan Amount 

(Dollars in Billions) % of Total 

Auto $ 7.43 17.3%

Credit Cards $ 21.61 50.6 % 

Equipment $ 0.89 2.1 %

Floor Plan $ 1.01 2.4 %

Premium Finance $ 0.99 2.3 %

Servicing Advances $ 0.58 1.4 %

Small Business $ 0.46 1.1 % 

Student Loan $ 5.63 13.1 %

New Issue CMBS $ 0.0 0.0 %

Legacy CMBS $ 4.13 9.7 %

 Total $ 42.73 100.0 %

As of September 30, 2009, the TALF, LLC has assets of approximately $198.9 million 

consisting primarily of investments in U.S. Treasury and Agency securities6. Total 

liabilities of the TALF, LLC are $101.8 million consisting of the OFS subordinated note 

plus accrued interest. During the period ended September 30, 2009, the TALF, LLC 

collected $99.1 million in fees and investment income and incurred $2.3 million in 

expenses, $1.8 million of which is accrued interest on the OFS subordinated note. As of 

September 30, 2009 there were no TALF borrower defaults and consequently no 

purchases of collateral by the TALF, LLC. 

American International Group, Inc. Investment Program (AIG) 

The OFS provides assistance to certain systemically significant financial institutions on a 

case by case basis in order to provide stability to institutions that are critical to a 

functioning financial system and are at substantial risk of failure as well as to prevent 

broader disruption to financial markets. 

In November 2008, the OFS invested $40.0 billion in AIG’s cumulative Series D 

perpetual cumulative preferred stock with a dividend rate of 10.0% compounded 

quarterly. On April 17, 2009, AIG and the OFS restructured their November 2008 

agreement. Under the restructuring, the OFS exchanged $40.0 billion of cumulative 

Series D preferred stock for $41.6 billion of non-cumulative 10.0% Series E preferred 

stock. The amount of Series E preferred stock is equal to the original $40.0 billion, plus 

approximately $733.0 million in undeclared dividends as of the February 1, 2009, 

scheduled quarterly dividend payment date, $15.0 million in dividends compounded on 

 

5

 These represent loans originated by the FRBNY and not the OFS. The intention of this disclosure is to 

show the activity in the program and the types of collateral that could eventually be purchased by the TALF, 

LLC with funding provided by the OFS.

6

 Agency securities refer to securities issued by either Ginnie Mae, Fannie Mae, Freddie Mac, or the Federal 

Home Loan Banks.
Financial Statements

Page 131 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

the undeclared dividends, and an additional $855.0 million in dividends from February 1, 

2009, but not paid as of April 17, 2009. AIG’s restructured agreement kept the quarterly 

dividend payment dates of May 1, August 1, November 1, and February 1, as 

established by the original November 2008 agreement. The original subsidy cost 

estimate did not consider this restructuring which resulted in a modification cost of 

$127.2 million. 

In addition to the exchange, the OFS agreed to make available an additional $29.8 

billion capital facility to allow AIG to draw additional funds if needed to assist in AIG’s 

restructuring. The OFS investment consists of Series F non-cumulative perpetual 

preferred stock with an initial liquidation amount of $0.0. This liquidation amount 

increases with any draw down by AIG on the facility. The dividend rate applicable to 

these shares is 10.0% and is payable quarterly, if declared, on the outstanding 

liquidation amount. As of September 30, 2009, approximately $3.2 billion has been 

funded by the OFS to AIG under this additional capital facility. Consistent with SSFAS 

No.2, the unused portion of the AIG capital facility is not recognized as an asset as of 

September 30, 2009. 

As of September 30, 2009, AIG has not made any dividend payments on any of the 

perpetual preferred stock. Subsequently, AIG failed to make a dividend payment on 

November 2, 2009. Per the terms of the preferred stock, if AIG misses 4 dividend 

payments, the OFS may appoint to the AIG board of directors, the greater of two 

members or 20.0% of the total number of directors of the Company. 

Automotive Industry Financing Program 

The objective of the Automotive Industry Financing Program (AIFP) was to help prevent 

a significant disruption of the American automotive industry, which could have a negative 

effect on the economy of the United States. The discussion below details the various 

investments and loans made by the OFS in the automotive industry, generally provided 

in chronological order. 
Financial Statements

Page 132 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

The table below illustrates amounts originally disbursed and collected under AIFP. 

These amounts are shown before conversions, exchanges, or valuation. For a detailed 

discussion on the current status of the loans see the narrative below the table. 

Amounts 

Disbursed 

as of 

September 

30, 2009 

Collection of 

Interest,

Dividends, and 

Additional Notes 

Principal

Repayments 

Amount 

Outstanding

before 

Conversions, 

Exchanges, and 

Valuation

(dollars in millions) 

GM General Purpose Loan including 

Working Capital Advances $ 19,400 $ 134 $ - $ 19,400 

GMAC LLC Rights Offering 884 9 - 884 

Chrysler Holding LLC General Purpose 4,000 53 - 4,000 

Chrysler Financial 1,500 22 1,500 - 

Auto Supplier Support Program 413 6 - 413 

Auto Warranty Program 640 4 640 - 

Chrysler Debtor-In-Possession 1,888 - - 1,888 

Chrysler Exit 4,577 - - 4,577 

GM Debtor-In-Possession 30,100 34 - 30,100 

GMAC Preferred stock 5,000 265 - 5,000 

GMAC Mandatorily Convertible Preferred 

stock 7,500 165 - 7,500 

Total $ 75,902 $ 692 $ 2,140 $ 73,762 

General Motors (GM or old GM) General Purpose Loan including Working Capital 

Advances

The OFS provided GM with a total of $13.4 billion in a three-year direct loan bearing 

interest at 3 Month LIBOR (subject to a 2.0% floor), plus 3.0% and secured by various 

types of collateral. $4.0 billion of this loan was funded in December 2008, an additional 

$5.4 billion in January, 2009, and an additional $4.0 billion in February 2009. In April 

2009, the OFS and GM amended this loan agreement to increase the maximum loan 

amount from $13.4 billion to $15.4 billion, and on May 20, 2009 to increase the 

maximum loan amount from $15.4 billion to $19.4 billion (these amendments are 

referred to as the Working Capital Advances) to provide GM with adequate working 

capital to assist in the restructuring effort. The additional amounts were funded upon 

amendment, bringing the total funded under this loan to $19.4 billion. The agreement 

required GM to develop and implement a restructuring plan to achieve long-term 

financial viability and required compliance with certain enhanced executive 

compensation and expense control requirements. 

Furthermore, the OFS received warrants for shares of GM common stock and an 

additional senior unsecured note in the principal amount of $748.6 million. The purpose 

of this loan was to enhance the ability of GM and its subsidiaries to pursue timely and 

aggressive production of energy-efficient advanced technology vehicles; preserve and 

promote the jobs of American workers employed directly by GM and its subsidiaries; 

safeguard the ability of GM and its subsidiaries to provide retirement and health care 

benefits for retirees and their dependents; and stimulate manufacturing and sales of 

automobiles produced by GM. On June 1, 2009, GM filed for Chapter 11 bankruptcy. 

All rights under this loan were transferred to a newly created entity (GM NewCo) and 
Financial Statements

Page 133 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

subsequently extinguished in connection with a successful credit bid for the assets of old 

GM. In addition, the OFS received $134.4 million in interest while the loan was 

outstanding. See further discussion below under GM Debtor-In-Possession. 

GMAC LLC Rights Offering

In December 2008, the OFS agreed, in principal, to lend up to $1.0 billion to GM for 

participation in a rights offering by GMAC in support of GMAC’s reorganization as a bank 

holding company. The loan was secured by the GMAC common interest acquired in the 

rights offering. The loan agreement specified that at any time, at the option of the lender 

(OFS), the unpaid principal and accrued interest was exchangeable for the membership 

interest purchased, by GM, during the rights offering. The note was funded for $884.0 

million. In May 2009, the OFS exercised its exchange option under the loan and 

received 190,921 membership interests, representing approximately 35.36% of the 

voting interest, in GMAC in full satisfaction of the loan. In addition, OFS received $9.1 

million in interest while the loan was outstanding. The conversion to GMAC shares was 

not considered in the original subsidy cost. As a result, a modification was recorded 

reducing the estimated subsidy cost by approximately $1.6 billion. 

Chrysler Holding LLC General Purpose

The OFS provided a three-year, $4.0 billion loan to Chrysler in January 2009, bearing 

interest at 3 Month LIBOR (subject to a 2.0% floor) plus 3.0%. The loan was secured by 

various collateral including parts inventory, real estate, and certain equity interests held 

by Chrysler. This agreement required Chrysler to submit a restructuring plan to achieve 

long-term viability and required compliance with certain enhanced executive 

compensation and expense-control requirements. Furthermore, the OFS received a 

senior unsecured note from Chrysler in the principal amount of approximately $266.8 

million, containing the same terms as the General Purpose loan. The purpose of this 

loan was to: enhance the ability of Chrysler and its subsidiaries to pursue timely and 

aggressive production of energy-efficient advanced technology vehicles; preserve and 

promote the jobs of American workers employed directly by Chrysler and its 

subsidiaries; safeguard the ability of Chrysler and its subsidiaries to provide retirement 

and health care benefits for retirees and their dependents; and stimulate manufacturing 

and sales of automobiles produced by Chrysler. 

On April 30, 2009, Chrysler filed for Chapter 11 bankruptcy. Upon entering bankruptcy, 

a portion of Chrysler was sold to a newly created entity (New Chrysler). Under the terms 

of the bankruptcy agreement, $500.0 million of this loan was assumed by New Chrysler 

(see discussion under Chrysler Exit for discussion of note terms). The balance remains 

outstanding and is in default. Any recovery of the remainder of this loan will depend on: 

(a) Chrysler Holding’s obligation to pay the greater of $1.375 billion or 40.0% of the 

equity value of Chrysler Financial to OFS should Chrysler Holding receive certain 

distributions from Chrysler Financial and, (b) proceeds received from the sale of assets 

remaining in the bankrupt company. In addition, OFS received $52.1 million in interest 

payments on this note. 
Financial Statements

Page 134 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

Chrysler Financial

In January, 2009, the OFS loaned $1.5 billion to Chrysler LB Receivables Trust 

(Chrysler Trust), a special purpose entity created by Chrysler Financial, to finance the 

extension of new consumer auto loans. The five-year loan bore interest at 1 Month 

LIBOR plus 1.0% for the first year, 1.5% for the remaining term and was secured by a 

senior secured interest in a pool of newly originated consumer automotive loans, and 

Chrysler served as a guarantor for certain covenants of Chrysler Financial. Under the 

agreement, Chrysler Financial was required to comply with the executive compensation 

and corporate governance requirements of Section 111(b) of the EESA, as well as 

enhanced restrictions on executive compensation including the need to reduce by 40.0% 

its bonus pool for Senior Executive Officers and Senior Employees. In lieu of warrants, 

the OFS received additional notes in an amount equal to 5.0% of the maximum loan 

amount. The additional notes would vest 20.0% on the closing date and 20.0% on each 

anniversary of the closing date and had other terms similar to the loan. The purpose of 

this loan was to assist Chrysler Financial in providing retail financing to purchasers of 

automobiles, light duty trucks and recreational vehicles; to stimulate manufacturing and 

sales of automobiles produced by Chrysler’s affiliates; preserve and promote the jobs of 

American workers employed directly by Chrysler’s affiliates and in related industries; and 

safeguard the ability of Chrysler to provide retirement and health care benefits for their 

retirees and their dependents. On July 14, 2009, the loan and additional note of $15.0 

million were paid in full. In addition, the OFS received $7.4 million in interest payments 

while this loan was outstanding. 

Auto Supplier Support Program

In April 2009, the OFS committed $5.0 billion in financing for the Auto Supplier Support 

Program, as follows: $3.5 billion for GM suppliers and $1.5 billion for Chrysler suppliers. 

These commitments were subsequently reduced to $2.5 billion for GM suppliers and 

$1.0 billion for Chrysler suppliers per the loan agreement. Under the program, suppliers 

are able to sell their receivable to a SPV, created by the respective automaker, at a 

discount. The purchases of the receivables are funded by equity investments made by 

the automaker, cash payments made by the automaker on previously purchased 

receivables or from draws on the OFS funding commitment. The duration of the 

program is 12 months, extendable at the option of the OFS. Interest is charged on 

advances under the facility at a rate of 3 Month LIBOR (subject to a 2.0% floor) plus 

3.5%. In addition, the OFS received a contingent payment note comprised of an exit fee 

equal to 4.0% of the adjusted commitment amount and 50.0% of the residual equity in 

the SPV after the program’s end date. This program provides suppliers with access to 

government backed protection ensuring that money owed to them for the products they 

ship will be paid regardless of what happens to the recipient car company. This provided 

suppliers with needed funding to operate their businesses and help unlock credit more 

broadly in the supplier industry. Purchases of receivables and collection of amounts due 

from GM and Chrysler is performed by a third party service provider. Suppliers must 

maintain qualifying commercial terms with the automakers to participate in the program. 

The OFS has provided approximately $413.1 million of funding to this program. The 

bankruptcy of Chrysler and GM did not impact this program, as both companies were 

allowed to continue paying suppliers while in bankruptcy. As of September 30, 2009, the 

OFS had received $5.9 million in interest under the Auto Supplier Support Program. 
Financial Statements

Page 135 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

Auto Warranty Program

In April 2009 and May 2009, the OFS loaned approximately $280.0 million to Chrysler 

and $360.6 million to GM , respectively, to capitalize SPVs created by Chrysler and GM 

to finance participation in the Warranty Commitment Program (warranty program). The 

OFS also received additional notes as consideration for its loans in an amount equal to 

6.67% of the funded amounts. The warranty program covered all warranties on new 

vehicles purchased from Chrysler and GM during the period in which Chrysler and GM 

were restructuring. The program was run by a third party program administrator with the 

backing of financial resources allocated by the OFS, Chrysler and GM. Chrysler and 

GM contributed 15.0% of the projected cost for warranty service on each covered 

vehicle, with the OFS providing additional funds to cover 110.0% of the projected cost. 

The SPVs holding the funds operated separately from Chrysler and GM and would 

transfer the necessary funds to a third-party to handle all warranty claims even if 

Chrysler and GM entered into bankruptcy or went out of business. Both Chrysler and 

GM have completed the Section 3637

 sales in June 2009 and July 2009, respectively. 

Upon completion of the sale, the OFS received principal amounts due from both GM and 

Chrysler and terminated the warranty program. Interest in the amount of $3.1 million 

was received by the OFS from Chrysler. No interest was received in connection with the 

GM repayment. The GM additional note was assigned to the New GM as part of the 

bankruptcy proceedings and extinguished as part of the credit bid for the assets of old 

GM. The Chrysler additional note is still outstanding. 

Chrysler Debtor-In-Possession

In May 2009, the OFS and the Canadian government jointly agreed to make a loan in 

the total amount of $4.1 billion ($3.0 billion by the OFS and $1.1 billion by Canada) to 

Chrysler LLC in its capacity as debtor-in-possession (DIP) in its bankruptcy case. In 

May 2009, the OFS increased its loan commitment in the DIP credit agreement to $3.8 

billion, and the Canadian government increased its commitment to $1.2 billion, bringing 

the maximum loan amount to $5.0 billion. The loan interest rate was the 3 Month 

Eurodollar rate plus 3.0%. The stated maturity was September 2009, with earlier 

maturity depending on the bankruptcy proceedings. Of the $3.8 billion committed by the 

OFS, approximately $1.9 billion was funded during the bankruptcy. This DIP loan 

provided the necessary liquidity to sustain Chrysler during the bankruptcy period. Upon 

the Section 363 sale of the Chrysler assets, the funding commitment was reduced to 

amounts previously drawn. As such, no additional amounts were drawn from this facility.

Recovery of the DIP loan is subject to the bankruptcy process associated with the 

Chrysler assets remaining after the sale to New Chrysler. 

Chrysler Exit

In May 2009, the OFS committed to make a loan to New CarCo Acquisition LLC (New 

Chrysler or Chrysler Group LLC), the company that purchased the assets of Chrysler. 

 

7

 Section 363 refers to Section 363 of the Federal Bankruptcy Code, which allows companies in bankruptcy 

to sell assets in reorganization.
Financial Statements

Page 136 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

The final terms of the credit agreement resulted in a loan to New Chrysler for 

approximately $7.1 billion. This amount consists of $6.6 billion of new funding and 

$500.0 million of assumed debt8

 from the OFS January 2, 2009 credit agreement with 

Chrysler Holding LLC. The loan was secured by a first priority lien on the assets of 

Chrysler Group LLC. Funding of the loan was available in two installments or tranches 

(B and C), each with varying availability and terms. The following describes the terms of 

Tranches B and C. 

The maximum funding under Tranche B was $2.0 billion and was funded on the closing 

date of the agreement. Interest on Tranche B is 3 Month Eurodollar plus 5.0% margin 

(in certain situations, defined in the agreement, a rate other than the 3 Month Eurodollar 

rate will be applied. This rate, referred to as the Alternative Base Rate, will be the 

greater of the Prime Rate, the Federal Funds Effective rate plus 0.5% or the 3 Month 

Eurodollar rate plus 1.0%. If this Alternative Base Rate is applied, the margin will be 

4.0% versus the 5.0% if the 3 Month Eurodollar Rate is used). Tranche B is due and 

payable on December 10, 2011, provided that the Chrysler Group LLC may elect to 

extend the maturity of up to $400.0 million of Tranche B to the Tranche C maturity date. 

If so elected, the applicable margin will increase to 6.5% for Eurodollar and 5.5% for 

ABR loans, respectively. 

The maximum funding under Tranche C is approximately $4.64 billion, of which 

approximately $2.58 billion was funded on the closing date. Interest on Tranche B is 3 

Month Eurodollar plus 7.91% margin (in certain situations, defined in the agreement, a 

rate other than the 3 Month Eurodollar rate will be applied. This rate, referred to as the 

Alternative Base Rate, will be the greater of the Prime Rate, the Federal Funds Effective 

rate plus 0.5% or the 3 Month Eurodollar rate plus 1.0%. If this Alternative Base Rate is 

applied, the margin will be 6.91% versus the 7.91% if the 3 Month Eurodollar Rate is 

used). On June 10, 2016, the Tranche C loan shall be prepaid to the extent the funded 

amount is greater than 50.0% of the closing date commitment amount, taking into 

consideration amounts previously prepaid as a voluntary prepayment. The remaining 

balance of the Tranche C loan is due and payable on June 10, 2017. 

Interest on both the Tranche B and Tranche C will be payable in-kind through December 

2009 and will be added to the principal balance of the respective Tranche. In addition, 

additional in-kind interest will accrue in the amount of $17.0 million per quarter. Such 

amount will be added to the Tranche C loan balance subject to interest at the 

appropriate rate. 

The OFS also obtained other consideration, including a 9.85% equity interest in Chrysler 

Group LLC and additional notes9

 with principal balances of $288.0 million and $100.0 

million10. As of September 30, 2009, the OFS has funded approximately $4.6 billion 

under this facility. 

 

8

 The assumed debt contains the same terms as the Tranche C loan with respect to mandatory prepayment, 

interest and maturity.

9

 The additional notes bear the same interest rate and maturity as the Tranche C loan.

10 Interest begins to accrue on this note after certain events, defined in the credit agreement, have taken 

place.
Financial Statements

Page 137 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

GM Debtor-In-Possession

On June 1, 2009, GM filed for Chapter 11 bankruptcy. As part of the filing the OFS and 

the Canadian government agreed to lend up to $33.3 billion under the terms of the DIP 

credit agreement; the OFS’s commitment amount was $30.1 billion. The OFS funded 

the $30.1 billion of which approximately $986.0 million remains outstanding as of 

September 30, 2009. In July 2009, the DIP credit agreement was amended to reflect the 

fact that the amounts there under (other than approximately $986.0million that remained 

with GM for wind-down in bankruptcy and $7.1 billion that was assumed by GM NewCo) 

were extinguished in connection with a successful credit bid for the assets of old GM. 

The OFS has assigned its rights in this loan as well as the General Purpose and 

Working Capital loans and previously received common stock warrants to a newly 

created entity (GM NewCo or General Motors Company). The purpose of this GM 

NewCo was to obtain sufficient assets of GM out of bankruptcy to satisfy the original 

loans disbursed to GM and discussed above, which it accomplished through a 

successful credit bid for the assets in a sale pursuant to Section 363 of the Bankruptcy 

Code. Upon closing of the Section 363 sale, the General Motors Company has 

assumed $7.1 billion of the DIP loan, simultaneously paying $0.4 billion (return of 

warranty program funds), resulting in a balance of $6.7 billion. The loan has a term of 6 

years and bears interest at 3 Month Eurodollar (subject to a 2.0% floor) plus 5.0% and 

has a first lien security interest in the assets of General Motors Company. The OFS also 

received $2.1 billion in 9.0% cumulative perpetual preferred stock and 60.8% of the 

common equity interest in General Motors Company. The assets received by the OFS 

as a result of the assignment and Section 363 sale are considered recoveries of the 

original loans for subsidy cost estimation purposes. As of September 30, 2009, the OFS 

had received $34.1 million in dividends on GM preferred stock. 

GMAC Preferred Stock

In December 2008, the OFS purchased preferred membership interests for $5.0 billion 

which were converted to senior preferred stock with an 8.0% annual distribution right 

(dividends) from GMAC. Under the agreement, GMAC issued warrants to the OFS to 

purchase, for a nominal price, additional preferred equity in an amount equal to 5.0% of 

the preferred equity purchased. These warrants were exercised at closing of the 

investment transaction. The additional preferred stock provided for a 9.0% annual 

distribution right. The purpose of this investment was to enable GMAC to restore 

liquidity to its finance businesses and restore stability to the domestic automobile 

industry in the United States. As of September 30, 2009, the OFS has received $265.2 

million in dividends associated with these preferred and warrant preferred stock. 

GMAC Mandatorily Convertible Preferred Stock

In May 2009, the OFS published a non-binding term sheet to invest $13.1 billion to 

support GMAC, subject to definitive documentation and GMAC’s capital needs. The 

OFS has invested $7.5 billion (of the $13.1 billion) in 9.0% Mandatorily Convertible 

Preferred Stock in GMAC to support its ability to originate new loans to Chrysler dealers 

and consumers, and help address GMAC’s capital needs. The preferred stock have a 

liquidation amount of $50 per share and are convertible in whole or in part, at any time, 
Financial Statements

Page 138 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

at the option of GMAC, subject to the approval of the Federal Reserve. Furthermore, 

GMAC shall not convert any of the stock to the extent such conversion would result in 

the OFS owning in excess of 49% of GMAC’s common equity except (1) with the prior 

written consent of the OFS, (2) pursuant to GMAC’s Capital Plan, or (3) pursuant to an 

order of the Federal Reserve compelling such a conversion. The determination of the 

percentage of common equity owned by the OFS would take into account the common 

stock currently owned by the OFS as a result of the conversion of the GMAC Rights 

Offering, previously discussed. Absent a previous conversion, the preferred stock will 

automatically convert after 7 years. The conversion rate is 0.00432 units of common 

stock per unit of convertible preferred stock. The remaining $5.6 billion (per the nonbinding term sheet) is subject to the FRB’s review of GMAC’s capital plan assessment of 

whether additional capital is needed. As of September 30, 2009, the remaining $5.6 

billion has not been funded. The OFS had received approximately $165.4 million in 

dividends associated with these preferred and warrant preferred stock. 

Public-Private Investment Program 

The Public-Private Investment Program (PPIP) is part of the OFS’s efforts to help restart 

the market and provide liquidity for legacy assets. Under this program, the OFS will 

make equity and debt investments in investment vehicles (referred to as Public Private 

Investment Funds or “PPIFs”) established by private investment managers. The equity 

investment will be used to match private capital and will equal not more than 50.0% of 

the total equity invested. The debt investment will be, at the option of the investment 

manager, equal to 50.0% or 100.0% of the total equity (including private equity). The 

PPIFs are only allowed to purchase commercial mortgage-backed securities and nonagency residential mortgage-backed securities issued prior to January 1, 2009 that were 

originally rated AAA or an equivalent rating by two or more nationally recognized 

statistical rating organizations without external credit enhancement and that are secured 

directly by the actual mortgage loans, leases or other assets and not other securities. 

The PPIFs are also permitted to invest in certain temporary securities, including bank 

deposits, U.S. Treasury securities, and certain money market mutual funds. At least 90 

percent of the assets underlying any eligible asset must be situated in the United States. 

On September 30, 2009, the OFS signed definitive limited partnership and loan 

agreements with two investment managers, committing to potentially disburse up to $6.7 

billion. As of September 30, 2009, no private fund managers had made any investments 

and the OFS had not disbursed any funds. 

Subsidy Reestimates 

The purpose of reestimates is to update original program subsidy cost estimates to 

reflect actual cash flow experience as well as changes in forecasts of future cash flows. 

Forecasts of future cash flows are updated based on actual program performance to 

date, additional publicly available relevant historical market data on securities 

performance, revised expectations for future economic conditions, and enhancements to 

cash flow projection methods. Financial statement reestimates for all programs were 

performed using actual financial transaction data through September 30, 2009. In 

accordance with credit reform guidance and to ensure the timely completion of the credit 

reform reestimate process, market and security specific data publicly available as of 

September 30, 2009, was used for the CPP, AGP, TIP and direct loan AIFP and data 
Financial Statements

Page 139 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

through August 31, 2009 was used for the equity portion of AIFP, AIG and TALF in the 

reestimate calculations. The OFS assessed the key inputs of the reestimates using data 

publically available as of September 30, 2009, and in its determination, there were no 

significant changes to the key inputs for the three programs for which August 31, 2009, 

data was used that would require a revision to the reestimates. 

Downward Reestimates for the fiscal year ended September 30, 2009, are as follows: 

Downward Reestimate Amounts 

(Dollars in Millions)

Program Subsidy Interest Total 

AGP $(1,097) $(77) $(1,174)

Direct Loan 

 AIFP $(9,039) $(1,571) $(10,610)

 CBLI/TALF (222) (21) (243)

 Subtotal Direct $(9,261) $(1,592) $(10,853)

Equity Investment 

 CPP $(68,558) $(3,861) $(72,419)

 TIP (20,366) (1,101) (21,467)

 AIG (845) (280) (1,125)

 AIFP (2,331) (379) (2,710)

 Subtotal Equity $(92,100) $(5,621) $(97,721)

Total $(102,458) $(7,290) $(109,748)

Descriptions of the reestimates, by OFS Program, are as follows: 

The approximately $1.2 billion in downward reestimates for the AGP is primarily due to 

improvements in market conditions from when the guarantee was committed in January 

2009. The improved market conditions resulted in an increase in the projected AGP 

asset due to the net present value of the estimated cash inflows from the preferred stock 

and warrants received by OFS from Citigroup as a premium being greater than the 

estimated value of future claim payments associated with the $5.0 billion asset 

guarantee.

The approximately $10.6 billion in downward reestimates for the direct loans-AIFP is 

primarily the result of the post bankruptcy improved financial position of one of the major 

companies participating in the program. The $0.2 billion in downward reestimates for 

the TALF is entirely due to projected improved performance of the securities within the 

program versus the original estimate. 

The $70.7 billion in repurchases during fiscal year 2009 accounts for $9.7 billion of the 

$72.4 billion in downward reestimates in the CPP. Projected repurchases of $30.0 

billion in the next 12 months accounts for approximately $5.4 billion, with the $57.3 

billion balance in downward reestimates in the CPP primarily due to improved market 

conditions from when the original estimate was made in December 2008. 
Financial Statements

Page 140 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

The $21.5 billion in downward reestimates in the TIP is mostly due to improved market 

conditions from when the original estimates were made in December 2008 and January 

2009. Approximately $2.3 billion is due to a $20.0 billion repurchase forecast within 12 

months following September 30, 2009. 

The $1.1 billion in downward reestimates for the AIG Investment Program and $2.7 

billion in downward reestimates for the AIFP equity programs are primarily due to 

improvements in market conditions from when the equities were purchased resulting in a 

reduction in the projected costs of the programs. 

Key financial data for the Troubled Asset Relief Program Loans and Equity Investments 

and Asset Guarantee Program are included in the following two tables: 

1. Direct Loans and Equity Investments Outstanding, Gross, represent amounts 

paid by OFS to acquire the loans and equity investments. Repurchases, 

redemptions, and repayments have been deducted from these balances. 

2. Net Direct Loans and Equity Investments represent the present value of net cash 

flows that OFS estimates it will receive from the loans and equity investments. 

For equity securities, this amount represents fair value. 

3. Subsidy Expense by component, subsidy cost allowance and a reconciliation of 

the subsidy cost allowance illustrate the relationship between subsidy cost and 

asset value. 

4. Reconciliation of subsidy cost by program is also incorporated in the tables. 
Financial Statements

Page 141 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability (Troubled Asset Relief Program) CPP Capital Purchase Program

NOTES TO THE FINANCIAL STATEMENTS AIG American International Group, Inc. Investment Program

For the Period Ended September 30, 2009 TIP Targeted Investment Program

AIFP Automotive Industry Financing Program

CBLI Consumer and Business Lending Initiative

Dollars in Millions TOTAL CPP AIG TIP AIFP CBLI

Troubled Asset Relief Program Direct Loans and Equity Investments

Direct Loans and Equity Investment Programs:

Direct Loans and Equity Investments Outstanding, Gross $ 290,969 $ 133,901 $ 40,000 43,206 $ 73,762 $ 100 $

Subsidy Cost Allowance (53,077) 7,770 (30,054) 341 (31,478) 344

Net Direct Loans and Equity Investments $ 237,892 $ 141,671 $ 13,152 $ 40,341 $ 42,284 $ 444

New Loans or Investments Disbursed $ 363,826 $ 204,618 $ 43,206 $ 40,000 $ 75,902 $ 100

Obligations for Loans and Investments not yet Disbursed $ 51,681 $ - $ 26,629 $ - $ 5,152 $ 19,900

Budget Subsidy Rate, Excluding Modifications and Reestimates: (See Note 1 below)

 Interest Differential 5.97% -45.52% 9.31% 6.97% 5.87%

 Defaults 25.60% 123.56% 48.38% 54.21% 0.00%

 Other -4.58% 4.74% -8.84% -3.13% -110.10%

Total Budget Subsidy Rate 26.99% 82.78% 48.85% 58.05% -104.23%

Subsidy Cost by Component:

 Interest Differential $ 4,175 $ 12,279 $ (17,280) $ 3,724 $ 5,446 $ 6

 Defaults 161,297 52,655 46,906 19,352 42,384 -

 Other (13,705) (9,414) 1,799 (3,536) (2,444) (110)

Total Subsidy Cost, Excluding Modifications and Reestimates $ 151,767 $ 55,520 $ 31,425 $ 19,540 $ 45,386 $ (104)

Reconciliation of Subsidy Cost Allowance:

Balance, inception $ - $ - $ - $ - $ - $ -

 Subsidy cost for disbursements 151,767 55,520 31,425 19,540 45,386 (104)

 Subsidy cost for modifications 412 1,866 127 (1,589) - 8

 Interest and Dividend Collections 9,329 6,790 - 1,862 677 -

 Warrants and additional notes 2,916 2,901 - - 15 -

 Net Interest (to) / from Treasury on Borrowings

 and Financing Account Balance (2,773) (2,428) (373) (276) 309 (5)

Balance, End of Period, Before Reestimates $ 161,651 $ 64,649 $ 31,179 $ 21,126 $ 44,798 $ (101)

 Subsidy Reestimates (108,574) (72,419) (1,125) (21,467) (13,320) (243)

Balance, End of Period $ 53,077 $ (7,770) $ 30,054 $ (341) $ 31,478 $ (344)

Reestimates:

 Interest on Reestimate $ (7,213) $ (3,861) $ (280) $ (1,101) $ (1,950) $ (21)

 Subsidy (101,361) (68,558) (845) (20,366) (11,370) (222)

Total Reestimates - (Decrease) in Subsidy Cost $ (108,574) $ (72,419) $ (1,125) $ (21,467) $ (13,320) $ (243)

Reconciliation of Subsidy Cost:

 Subsidy cost for disbursements $ 151,767 $ 55,520 $ 31,425 $ 19,540 $ 45,386 $ (104)

 Subsidy cost for modifications 412 1,866 127 (1,589) - 8

 Subsidy Reestimates (108,574) (72,419) (1,125) (21,467) (13,320) (243)

Total Direct Loan and Equity Investment Programs

 Subsidy Cost 43,605 $ $ (15,033) $ 30,427 $ (1,927) $ 30,477 $ (339)

Note 1: The rates reflected in the "Budget Subsidy Rate" table above are weighted rates for the program. To compensate for the weighting of the various risk category subsidy 

rates, the "by component" dollar amounts reflected were computed as a ratio of the component rate to the total weighted subsidy rate multiplied by the subsidy expense for the 

program. Therefore, the Total Subsidy Cost excluding modifications and reestimates will not equal the New Loans or Investments Disbursed multiplied by the Budget Subsidy 

Rate .
Financial Statements

Page 142 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability (Troubled Asset Relief Program)

NOTES TO THE FINANCIAL STATEMENTS

For the Period Ended September 30, 2009

Dollars in Millions AGP

Asset Guarantee Program

Asset Guarantees Outstanding:

Oustanding Principal Amount of Guaranteed Assets, Face Value 301,000 $ 

Amount of Outstanding Principal Guaranteed 5,000 $ 

Asset for Asset Guarantee Program 1,765 $ 

Budget Subsidy Rate, Excluding Modifications and Reestimates:

 Defaults 43.62%

 Fees and Other Collections -53.23%

 Other -5.37%

Total Budget Subsidy Rate -14.98%

Subsidy Cost by Component:

 Defaults 2,181

 Fees and Other Collections (2,662) 

 Other (270)

Total Subsidy Cost, Excluding Modifications and Reestimates $ (751)

Reconciliation of Asset Guarantee Program:

Balance, Inception -$ 

 Subsidy Cost (751)

Dividend Collections on Preferred Stock 175

Net Interest from Treasury on Borrowings and Financing Account Balance (15)

Balance, End of Period, Before Reestimate $ (591)

Subsidy Reestimate (1,174)

Balance, End of Period $ (1,765)

Reestimates:

 Interest on Reestimate $ (77)

 Subsidy (1,097)

Total Reestimates - (Decrease) in Subsidy Cost $ (1,174)

Reconciliation of Subsidy Cost:

 Subsidy cost $ (751)

Subsidy reestimate (1,174)

Cancellation fees collected (276)

Total Asset Guarantee Program Subsidy Cost $ (2,201)
Financial Statements

Page 143 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

Note 7. Commitments and Contingencies 

The OFS is party to various legal actions and claims brought by or against it. In the 

opinion of management and General Counsel, the ultimate resolution of these legal 

actions and claims will not have a material effect on the OFS financial statements as of 

September 30, 2009. The OFS has not incurred any loss contingencies that would be 

considered probable or reasonably possible for these cases. Refer to Note 6 for 

additional commitments. 

Note 8. Principal Payable to the Bureau of the Public Debt 

Equity investments, direct loans, and asset guarantees accounted for under credit 

reform accounting are funded by subsidy appropriations and borrowings from the BPD. 

The OFS also borrows funds to pay the Treasury General Fund for negative subsidy 

costs and downward reestimates. The OFS makes periodic principal repayments to the 

BPD based on the analysis of its cash balances and future disbursement needs. All 

debt is intragovernmental and covered by budgetary resources. See additional details on 

borrowing authority in Note 10, Statement of Budgetary Resources. 

Debt transactions for the period ending September 30, 2009, are: 

(Dollars in Millions)

Beginning Balance, Principal Payable to the BPD $ -

New Borrowings 215,593

Repayments (72,258)

Ending Balance, Principal Payable to the BPD $ 143,335

Borrowings from the BPD by TARP Program that are outstanding as of September 30, 

2009, are as follows: 

(Dollars in Millions)

Capital Purchase Program $ 77,232

American International Group, Inc. Investment Program 12,531

Targeted Investment Program 20,460

Automotive Industry Financing Program 32,134

Consumer & Business Lending Initiative 204

Asset Guarantee Program 774

Total Borrowings Outstanding $ 143,335

Borrowings are payable to the BPD as collections are available and carry terms ranging 

from 2 to 30 years. Interest rates on borrowings range from 1.0% to 4.5%. Interest 

expense for the period ended September 30, 2009, was $6.4 billion. 

Note 9. Statement of Net Cost 

The Statement of Net Cost (SNC) presents the net cost of operations for the OFS for the 

Department of the Treasury strategic goal of ensuring that U.S. and World economies 
Financial Statements

Page 144 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

perform at full economic potential. The OFS has determined that all initiatives and 

programs under the TARP fall within this strategic goal. 

The OFS SNC reports the accumulated full cost of the TARP’s output, including both 

direct and indirect costs of the program services and output identifiable to TARP, in 

accordance with SFFAS No. 4, Managerial Cost Accounting Concepts and Standards.

The OFS SNC includes approximately $6.4 billion of intragovernmental costs relating to 

interest expense on borrowings from the BPD and approximately $3.6 billion in 

intragovernmental revenues relating to interest income on financing account balances 

for the period ended September 30, 2009. 

Subsidy Allowance Amortized on the SNC is the difference between interest income on 

financing fund account balances, dividends and interest income on direct loans, equity 

investments, and asset guarantees from TARP participants, and interest expense on 

borrowings from the BPD. Credit reform accounting requires all costs on the SNC for 

programs to be reflected only in the subsidy cost. The subsidy allowance account is 

used to present the loan or equity investment at the estimated net present value of future 

cash flows. 

Note 10. Statement of Budgetary Resources 

The Statement of Budgetary Resources (SBR) presents information about total 

budgetary resources available to the OFS and the status of those resources for the 

period ended September 30, 2009. The OFS’s total budgetary resources were 

approximately $238.3 billion for the period ended September 30, 2009. Additionally, 

non-budgetary resources including borrowing authority and spending authority from 

collections of loan principal, liquidation of equity investments, interest and fees in 

financing funds were approximately $461.1 billion for the period ended September 30, 

2009.

Permanent Indefinite Appropriations 

The OFS receives permanent indefinite appropriations annually to fund increases in the 

projected subsidy costs of loans and the OFS investment programs as determined by 

the reestimation process required by the FCRA. The initial funding as a result of the 

reestimation process will occur in 2010. 

Additionally, Section 118 of the EESA states that the Secretary may issue public debt 

securities and use the resulting funds to carry out the Act and that any such funds 

expended or obligated by the Secretary for actions authorized by this Act, including the 

payment of administrative expenses, shall be deemed appropriated at the time of such 

expenditure or obligation. 

Borrowing Authority 

The OFS is authorized to borrow from the BPD when funds needed to disburse direct 

loans and investments, and to enter into asset guarantee arrangements exceed subsidy 
Financial Statements

Page 145 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

costs and collections in the non-budgetary financing accounts. As of September 30, 

2009, the OFS had available approximately $45.8 billion of borrowing authority. 

The OFS uses dividends and interest received as well as principal repayments on direct 

loans and liquidation of equity investments to repay debt in the non-budgetary loan and 

investment financing accounts. These receipts are not available for any other use per 

credit reform accounting guidance. 

Apportionment Categories of Obligations Incurred: Direct vs. Reimbursable 

Obligations 

All of the OFS apportionments are Direct and are Category B. Category B 

apportionments typically distribute budgetary resources on a basis other than calendar 

quarters, such as by activities, projects, objects or a combination of these categories. 

The OFS obligations incurred are direct obligations (obligations not financed from 

reimbursements).

Undelivered Orders 

Undelivered orders as of September 30, 2009, were approximately $56.1 billion in 

budgetary accounts, and approximately $79.2 billion in non-budgetary financing 

accounts.

Explanation of Differences Between the Statement of Budgetary Resources 

and the Budget of the United States Government 

Federal agencies are required to explain material differences between amounts reported 

in the SBR and the actual amounts reported in the Budget of the U.S. Government 

(President’s Budget). However, the President’s Budget, which will include the FY 2009 

actual amounts for OFS, has not yet been published. The President’s Budget is 

expected to be published in February 2010 and will be made available from the U.S. 

Government Printing Office. Since the financial statements are published before the 

President’s Budget, a reconciliation is to be performed between the prior year’s SBR and 

the actual amounts for that year published in the prior year’s President’s Budget. Any 

significant differences identified from this reconciliation are to be explained in the federal 

agency’s notes to its financial statements. Given that FY 2009 is the OFS’s first year of 

operations, no prior year data was available to perform a comparison. 

Note 11. Reconciliation of Obligations Incurred to Net Cost of 

Operations

The OFS presents the SNC using the accrual basis of accounting. This differs from the 

obligation-based measurement of total resources supplied, both budgetary and from 

other sources, on the SBR. The reconciliation of obligations incurred to net cost of 

operations shown below categorizes the differences between the two, and illustrates that 

the OFS maintains reconcilable consistency between the two types of reporting. 
Financial Statements

Page 146 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Office of Financial Stability – 2009 Financial Report 

The Reconciliation of Obligations Incurred to Net Cost of Operations for the period 

ended September 30, 2009 is as follows: 

(Dollars in Millions) 

Resources Used to Finance Activities: 

Obligations Incurred $ 662,296

Spending Authority from Offsetting Collections (271,999)

Offsetting Receipts (2,720)

Total Resources Used to Finance Activities 387,577

Resources Used to Finance Items Not Part of Net Cost: 

Net Obligations in Loan and Investment Financing Funds (180,185)

Increase in Resources Obligated for Items Ordered but not yet Provided (56,073)

Total Resources Used to Finance Items Not Part of Net Cost (236,258)

Resources Used to Finance Net Cost 151,319

Components of Net Cost That Will Not Require or Generate 

Resources in the Current Period: 

Downward Reestimate of Subsidy Cost (109,748)

Other 2

Total Components of Net Cost Not Requiring or Generating 

Resources in the Current Period 

(109,746)

Net Cost of Operations $ 41,573
Financial Statements

Page 147 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Required Supplementary Information

Office of Financial Stability (Troubled Asset Relief Program)

COMBINED STATEMENT OF BUDGETARY RESOURCES

For the Period Ended September 30, 2009

Combined TARP Programs TARP Administrative Fund

Dollars in Millions

Budgetary

Accounts

Nonbudgetary

Financing Accounts

Budgetary

Accounts

Nonbudgetary

Financing Accounts

Budgetary

Accounts

Nonbudgetary

Financing Accounts

BUDGETARY RESOURCES

 Unobligated Balances Brought Forward, Inception $ - $ - $ - $ - $ - $ -

 Budget Authority:

 Appropriations 238,268 - 237,989 - 279 -

 Borrowing Authority 309,971 - 309,971 - - -

 Spending Authority from Offsetting Collections

 Earned: Collected 243,072 - 243,072 - - -

 Change in Unfilled Orders Without Advance - 28,927 - 28,927 - -

 Total Budget Authority 238,268 581,970 237,989 581,970 279 -

 Permanently Not Available (120,841) - (120,841) - - -

TOTAL BUDGETARY RESOURCES $ 238,268 $ 461,129 $ 237,989 $ 461,129 $ 279 $ -

STATUS OF BUDGETARY RESOURCES

 Obligations Incurred:

 Direct $ 210,112 452,184 $ 209,863 452,184 $ 249 $ -

 Unobligated Balance:

 Apportioned and Available 28,156 7,009 28,126 7,009 30 -

 Not Available - 1,936 - 1,936 - -

TOTAL STATUS OF BUDGETARY RESOURCES $ 238,268 $ 461,129 $ 237,989 $ 461,129 $ 279 $ -

CHANGE IN OBLIGATED BALANCES

 Obligated Balance Brought Forward, Inception $ - $ - $ - $ - $ - $ -

 Obligations Incurred 210,112 452,184 209,863 452,184 249 -

 Gross Outlays (153,961) (372,982) (153,871) (372,982) (90) -

 Change in Uncollected Customer Payments from Federal Sources - (28,927) - (28,927) - -

 Obligated Balance, Net, End of Period:

 Unpaid Obligations 56,151 79,202 55,992 79,202 159 -

 Uncollected Customer Payments from Federal Sources - (28,927) - (28,927) - -

 Obligated Balance, Net, End of Period $ 56,151 $ 50,275 $ 55,992 $ 50,275 $ 159 $ -

NET OUTLAYS

 Gross Outlays $ 153,961 $ 372,982 $ 153,871 $ 372,982 $ 90 $ -

 Offsetting Collections (243,072) - (243,072) - - -

 Distributed Offsetting Receipts (2,720) - (2,720) - - -

NET OUTLAYS $ 151,241 $ 129,910 $ 151,151 $ 129,910 $ 90 $ -
Page 148 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Appendix I

Management’s Report on Internal Control over Appendixes

Financial Reporting Appendix I
Page 149 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Appendix II

Comments from the Office of Financial 

Stability Appendix I
Page 150 GAO-10-301 OFS Fiscal Year 2009 Financial Statement

Appendix III

GAO Contact and Staff Acknowledgments Appendix I

GAO Contact Gary T. Engel, (202) 512-3406 or engelg@gao.gov

Acknowledgments The following individuals made key contributions to this report: Marcia L. 

Carlsen, Lynda E. Downing, Paul F. Foderaro, Joseph P. O’Neill (lead 

Assistant Directors); and Serena Agoro-Menyang, Cheryl E. Clark, Francis 

L. Dymond, Tony J. Eason, Lawrance L. Evans, Cynthia L. Grant, Natasha F. 

Guerra, Cole D. Haase, Brian S. Harechmak, Tyrone D. Hutchins, Arthur L. 

James, Jr., Charles E. Jones, Jason Scott Kirwan, Jeffrey L. Knott, Steven M. 

Koons, Damian Kudelka, Judy Lee, Robert E. Lee, John A. Long, Dragan 

Matic, Diane M. Monticchio, Tim Mooney, Mary V. Orsorno, Rebecca A. 

Riklin, Grant L. Simmons, Anne Y. Sit-Williams, John A. Spence, Monique B. 

Williams, Chris G. Yfantis, and Heneng Yu.

(198560)
GAO’s Mission The Government Accountability Office, the audit, evaluation, and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help 

Congress make informed oversight, policy, and funding decisions. GAO's 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability.

Obtaining Copies of 

GAO Reports and 

Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost 

is through GAO's Web site (www.gao.gov). Each weekday afternoon, GAO 

posts on its Web site newly released reports, testimony, and 

correspondence. To have GAO e mail you a list of newly posted products, 

go to www.gao.gov and select "E-mail Updates."

Order by Phone The price of each GAO publication reflects GAO's actual cost of production 

and distribution and depends on the number of pages in the publication and 

whether the publication is printed in color or black and white. Pricing and 

ordering information is posted on GAO's Web site, 

http://www.gao.gov/ordering.htm. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 

TDD (202) 512-2537.

Orders may be paid for using American Express, Discover Card, 

MasterCard, Visa, check, or money order. Call for additional information.

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Congressional 

Relations

Ralph Dawn, Managing Director, dawnr@gao.gov, (202) 512-4400

U.S. Government Accountability Office, 441 G Street NW, Room 7125

Washington, DC 20548

Public Affairs Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149

Washington, DC 20548