Troubled Asset Relief Program: Status of Programs and Implementation of GAO Recommendations
Published: 2011-01-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since the Troubled Asset Relief Program (TARP) was implemented, GAO has issued more than 40 reports containing more than 60 recommendations to the Department of the Treasury (Treasury). This report assesses the status of Treasury's implementation of GAO's recommendations and current condition of TARP. Specifically, this 60-day report provides information on (1) the condition and status of active TARP programs; (2) Treasury's progress in implementing an effective management structure, including staffing for the Office of Financial Stability (OFS), overseeing contractors, and establishing a comprehensive system of internal control; and (3) trends in the status of key relevant economic indicators. GAO reviewed relevant documentation from various TARP programs and met with OFS officials and financial regulators. GAO also used information from existing reports and ongoing work.
section_title: What GAO Found
paragraphs: TARP programs implemented over the last 2 years covered a broad range of activities, including injecting capital into financial institutions; addressing issues in the securitization markets; providing assistance to the automobile industry and American International Group, Inc. (AIG); and offering incentives for modifying residential mortgages, among other things. While some programs have been terminated, others remain active, including those that focus on preserving homeownership and providing assistance to AIG, and require continued monitoring. Further, the Homeownership Preservation Office has not yet conducted a workforce assessment, despite the recent addition of several new programs. In prior work GAO has identified a number of weaknesses in Treasury's implementation of the Home Affordable Modification Program (HAMP), and a number of homeowner preservation initiatives have not yet reported activity. Other TARP programs have ended or are winding down. As of September 30, 2010, OFS reported $179.2 billion in gross outstanding direct loans and equity investments with a subsidy cost allowance of $36.7 billion resulting in a net balance of $142.5 billion. The reported net cost of TARP transactions from inception through September 30, 2010, was $18.5 billion; however, the ultimate cost of TARP will change as a result of (1) differences between the estimated values and the amounts that OFS will ultimately realize (as the assumptions and estimates underlying the valuation of direct loans and equity investments are inherently subject to substantial uncertainty); and (2) further disbursements, such as those relating to the housing programs which are not subject to repayment. For example, the proposed restructuring of AIG, if implemented, will likely affect TARP's ultimate cost. Although OFS staffing has become more stable over the past year, with more than200 employees, its stability remains fragile as it faces new challenges. For example, while it has filled key leadership positions, the Assistant Secretary of Financial Stability resigned in September 2010 and this key leadership position is temporarily filled. Staffing remains important as some programs are still being implemented, while others have closed or been terminated but have assets that must be managed, repaid, and divested. OFS has begun to take steps that will help to retain staff. But staff retention could be a challenge for OFS going forward, because more than half of OFS's employees, including key leaders, are term appointments (many with 4-year term limits). OFS has also begun to address succession planning for critical senior positions, but its workforce plan has not been updated since March 2009. Without a plan that considers various scenarios, OFS may find itself unprepared to adequately manage and oversee the remaining TARP investments and programs. OFS has strengthened its management and oversight of contractors and financial agents and its system of internal control for financial reporting and compliance with program requirements. Continued progress will depend on retaining qualified staff. As TARP enters its next phase and winds down, GAO recommends that OFS take action to further enhance its ongoing operations by finalizing a plan for addressing how it will manage its workforce, in particular term-appointed and key Senior Executive Service employees. While Treasury agreed with our recommendation, we have differing views on the status of prior recommendations. We will continue to update the status of recommendations as appropriate.

section_title: Letter
paragraphs: Just more than 2 years ago, the U.S. financial system and broader economy  faced the most severe financial crisis since the Great Depression, and in  2011 the economy remains fragile. The crisis, which threatened the  stability of the financial system and the solvency of many financial  institutions, prompted the United States to initiate extraordinary  interventions aimed at moderating any economic impact. Among these  interventions was the Troubled Asset Relief Program (TARP), which was  authorized by the Emergency Economic Stabilization Act of 2008 (EESA).  EESA gave the Department of the Treasury (Treasury) the authority to  purchase or guarantee “troubled assets,” such as mortgages and mortgage- backed securities, that were deemed to be at the heart of the crisis, along  with any other financial instrument Treasury determined that it needed to  purchase to help stabilize the financial system. The Secretary of the  Treasury exercised the authority provided under EESA to extend the  sunset date for purchases of and commitments to purchase troubled assets  through October 3, 2010; however, the Dodd-Frank Wall Street Reform and  Consumer Protection Act (Dodd-Frank Act)—signed into law on July 21,  2010—set a new spending ceiling for TARP, in effect prohibiting Treasury  from incurring any additional obligations for programs that were not  initiated prior to June 25, 2010.
A broad range of activities have been initiated under TARP. Specific  initiatives have injected capital into key financial institutions;  implemented programs to address problems in the securitization markets;  provided assistance to the automobile industry and American  International Group, Inc. (AIG); and offered incentives for modifying  residential mortgages, among other things. As TARP passes the 2-year  mark, U.S. financial markets are less volatile than they were in 2008;  however, questions about a sustained economic recovery continue, and  certain areas of the economy still face significant challenges. For example,  foreclosures and mortgage delinquencies continue to linger and small  businesses still face tight credit conditions. As a result, TARP has been  transformed to a program focused primarily on preserving  homeownership and improving financial conditions for small financial  institutions and businesses. While many other programs have ended or  begun winding down and some participating institutions have repaid part  or all of their TARP funds, the prospect of repayment from some other  institutions, both large and small, is less certain.
EESA provided us with broad oversight authorities for actions taken under  TARP and requires that we report at least every 60 days on TARP activities  and performance. Our reports have focused on  findings resulting from our oversight of TARP’s performance in meeting  the purposes of EESA; the financial condition and internal controls of TARP, its representatives,  and agents; the characteristics of both asset purchases and the disposition of assets  acquired, including any related commitments that were entered into;   TARP’s efficiency in using the funds appropriated for the program’s    TARP’s compliance with applicable laws and regulations;    efforts to prevent, identify, and minimize conflicts of interest among those  involved in TARP’s operations; the efficacy of contracting procedures; and the process for making decisions related to unwinding TARP programs.
This report assesses the status of Treasury’s implementation of our  recommendations and the current condition of TARP. Specifically, this 60- day report provides information on (1) the condition and status of active  TARP programs; (2) Treasury’s progress in implementing an effective  management structure, including staffing for the Office of Financial  Stability (OFS), overseeing contractors, and establishing a comprehensive  system of internal control; and (3) trends in the status of key relevant  economic indicators.
subsections: section_title: Scope and Methodology
paragraphs: To determine the status of active TARP programs that are still being  implemented or utilized, we obtained information from OFS, including  disbursements, dividend payments, repurchases, and warrant liquidations  as of September 30, 2010 (unless otherwise noted). In addition, we also  obtained information on the status of actions Treasury has taken in  response to recommendations from our previous TARP reports, including  its progress in developing a comprehensive system of internal control. We  also reviewed documents provided by OFS and conducted interviews with  officials from its Office of the Chief Financial Officer. In addition, we  obtained and reviewed relevant program documents from OFS and  leveraged our previous reports and reports by the Special Inspector  General for TARP and the Congressional Oversight Panel, as appropriate.
For the Capital Purchase Program (CPP), we leveraged work completed as  part of our detailed review of the program. We used OFS’s reports to  identify the participants that had repurchased their preferred shares and  paid dividends when due, among other things. To update the status of the  Targeted Investment Program (TIP), we reviewed relevant documents  related to its termination, including repayments by the participants.
To update the status of the Automotive Industry Financing Program  (AIFP) and obtain information on the current financial condition of  General Motors Company (GM), Chrysler Group LLC (Chrysler), and Ally  Financial, Inc. (formerly GMAC, Inc.) and Treasury’s plans for managing  its investment in the companies, we leveraged our past work; reviewed  information on the companies’ finances and operations, including financial  statements, selected documents from their bankruptcy proceedings, and  company-provided data; and interviewed representatives of the  companies. To determine how Treasury was managing its investment in  GM and Chrysler, we reviewed information on Treasury’s plans for  overseeing its ownership interests in the companies, including  congressional testimonies and White House and Treasury press releases.  In addition, we interviewed OFS officials about their plans to monitor the  government’s financial interests in the auto companies and Treasury’s  plans to divest its interest in GM, including their preparation for GM’s  initial public offering (IPO). We also updated key information about Ally  Financial, Inc., and the status of additional assistance provided under  AIFP. For this information, we primarily relied on our recently issued  report on the bank holding company stress tests.
To update the status of the AIG Investment Program (formerly the  Systemically Significant Failing Institutions Program) and the Public- Private Investment Program (PPIP), we reviewed relevant documents  from Treasury and other parties. For the AIG Investment Program, these  documents included periodic reports provided to Congress by Treasury,  the Board of Governors of the Federal Reserve System (Federal Reserve),  and the Federal Reserve Bank of New York (FRBNY), and other relevant  documentation such as AIG’s financial disclosures, among other things.  We also interviewed officials from each agency and AIG. For PPIP, we  reviewed and analyzed Treasury’s announcements concerning the program  and its reports on PPIP allocations, expenditures, and fund performance,  along with program operation and design documents published by  Treasury and the Federal Deposit Insurance Corporation (FDIC).
To determine the status of the Home Affordable Modification Program  (HAMP) and our previous recommendations to the program, we obtained  and reviewed Treasury’s published reports on HAMP and servicer  performance, documentation on cost estimates for and guidelines issued  to each TARP-funded housing program, and written responses to our July  2009 recommendations. In addition, we interviewed Treasury officials  about the status of TARP-funded housing programs, including anticipated  implementation dates, numbers of borrowers to be helped, and the actions  Treasury had taken to address our July 2009 recommendations. We also  analyzed data on changes in default and foreclosure activity before and  during HAMP’s implementation.
For the programs aimed at assisting small businesses, we analyzed OFS  transaction and budget documents and reviewed program terms for the  Community Development Capital Initiative (CDCI), the Term Asset- Backed Securities Loan Facility (TALF), and the Small Business  Administration (SBA) 7(a) Securities Purchase Program. We interviewed  officials and collected data, when available, on the credit problems of  small businesses and the impact of TARP programs from Treasury (OFS  and Community Development Financial Institutions (CDFI) Fund), the  Federal Reserve, SBA, small business trade groups, industry associations  for banks and credit unions, and federal regulators for depository  institutions.
For CDCI, we interviewed federal depository institution supervisors— FDIC, the Federal Reserve, the National Credit Union Administration, the  Office of the Comptroller of the Currency, and the Office of Thrift  Supervision (OTS)—about their processes for reviewing CDCI  applications. We also analyzed bank, thrift, and credit union regulatory  data to compare CDFIs to other depository institutions. We analyzed OTS  and National Credit Union Administration data on CDCI applicants’  intended use of capital. Finally, we spoke with advocacy groups for CDFIs  to obtain their views on CDCI.
For the SBA 7(a) Securities Purchase Program, we reviewed documents  on OFS’s internal processes.
To understand the types of depository institutions that lend to small  businesses, we collected bank, thrift, and credit union regulatory financial  data using SNL Financial and discussed this data with experts from federal  regulators for depository institutions. We determined that SNL Financial  was sufficiently reliable for the purposes of our review.
For TALF, we reviewed program announcements and loan volume data to  determine the amount of loans issued and the proportions that were  related to SBA-related securities. We also reviewed TALF impact analyses  from FRBNY. In addition, we obtained information from Treasury officials  in OFS about their progress in addressing recommendations related to  TALF. To determine the status of the Capital Assistance Program (CAP)  and the Asset Guarantee Program (AGP), we reviewed relevant  information from OFS and leveraged our past work.
To determine OFS’s mix of permanent and detailee staff and the number of  vacancies, we reviewed the totals for each type of staff over time and  within each OFS office. To examine changes in composition of OFS’s  organizational structure since the office was established, we reviewed past  GAO reports on TARP and various documents OFS provided to us,  including an updated organizational chart. To assess Treasury’s workforce  planning effort, we met with officials from its Office of the Deputy  Assistant Secretary for Human Resources and Chief Human Capital Officer  and OFS to discuss workforce planning, including staff retention efforts  and plans for managing its workforce as TARP winds down. In these  interviews, we obtained information from officials on the various actions  for retaining individuals with the skill sets and competencies needed to  administer TARP, including succession planning for filling management  and leadership positions and staff development efforts. We reviewed  various documents that OFS provided to us, including its human capital  strategy and workforce plan. We also reviewed GAO reports related to  workforce planning.
To assess OFS’s use of financial agents and contractors since TARP was  established in October 2008, we reviewed information from a Treasury  database of financial agents and contractors and interviewed Treasury  contract officials about financial agency agreements, contracts, and  blanket purchase agreements as of September 30, 2010, that support OFS  administration and operation of TARP. We analyzed information from the  database to update key details on the status of TARP financial agents and  contractors, such as total number of agreements and contracts, type of  services being performed, potential dollar amount, periods of  performance, and share of work by small businesses. To assess OFS’s  progress in maintaining the appropriate infrastructure to manage and  oversee the performance of TARP financial agents and contractors and  address conflicts of interest that could arise with the use of private sector  sources, we reviewed various documents and interviewed OFS officials  regarding recent changes in organizational roles and responsibilities  within OFS and its policies and procedures regarding (1) management and  oversight of TARP financial agents and contractors and (2) monitoring and  oversight activities by the OFS team responsible for financial agent and  contractor compliance with TARP conflicts-of-interest requirements.
As noted in our initial TARP report under the mandate, we identified a  preliminary set of indicators on the state of credit and financial markets  that might be suggestive of the performance and effectiveness of TARP.  We consulted Treasury officials and other experts and analyzed available  data sources and academic literature. We selected a set of indicators that  offered perspectives on different facets of credit and financial markets,  including perceptions of risk, cost of credit, and flows of credit to  businesses and consumers. To update the indicators in this report, we  used data from Thomson Reuters, the Federal Reserve, the National  Federation of Independent Business, and a broker-dealer to assess the  state of the economy and financial markets. We believe that despite  certain limitations, these data considered as a whole, are sufficiently  reliable for the purpose of presenting and analyzing trends in the economy  and financial markets.
We conducted this performance audit from March 2010 to January 2011 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
section_title: Background
paragraphs: When EESA was signed on October 3, 2008, the U.S. financial system and  the broader economy faced the most severe crisis since the Great  Depression. The dramatic correction in the U.S. housing market had  precipitated a decline in the price of financial assets associated with  housing, in particular mortgage assets based on subprime loans that lost  value as the housing boom ended and the market underwent a dramatic  correction. Some institutions found themselves so exposed that they were  threatened with failure—and some failed—because they were unable to  raise the necessary capital as the value of their portfolios declined. Other  institutions, ranging from government-sponsored enterprises (GSE)—such  as Fannie Mae and Freddie Mac—to Wall Street firms, were left holding  “toxic” or “legacy” assets that became increasingly difficult to value, were  illiquid, and potentially had little worth. Moreover, investors not only  stopped buying mortgage-backed securities but also became reluctant to  buy securities backed by many other types of assets. Because of  uncertainty about the financial condition and solvency of financial entities,  the prices banks charged each other for funds rose dramatically, and  interbank lending effectively came to a halt. The resulting credit crunch  made the financing on which businesses and individuals depend  increasingly difficult to obtain as cash-strapped banks held on to their  assets. By late summer of 2008, the potential ramifications of the financial  crisis ranged from the continued failure of financial institutions to  increased losses of individual savings and corporate investments, and  further tightening of credit would exacerbate the emerging global  economic slowdown that was beginning to take shape.
The passage of EESA and its authorization of TARP provided Treasury  with a framework to implement a course of action that ultimately resulted  in the development of a variety of new programs. Soon after EESA was  enacted in October 2008, Treasury decided to change its strategy from  purchasing mortgage-backed securities to recapitalizing financial  institutions. This tactical shift raised questions about TARP’s transparency  and the direction of the program. Amid these concerns, Treasury  attempted to provide a more strategic direction for using the remaining  funds and created a number of programs aimed at stabilizing the  securitization markets, among other things. The extension of TARP,  announced by the Treasury on December 9, 2009, has allowed Treasury to  reallocate existing commitments and make additional funds available for  programs focused primarily on preserving homeownership and providing  assistance to community banks and small businesses. The Dodd-Frank Act  reduced the amount of available TARP funds, and in response, Treasury  has reduced allocations for a number of programs. Figure 1 provides an  overview of key dates for TARP implementation.
In response to EESA’s mandate that we report at least every 60 days on  TARP programs, we have issued more than 40 reports and testimonies  related to TARP and made more than 60 recommendations to Treasury  and the Federal Reserve to improve the transparency and accountability of  TARP operations. Some of our recommendations applied to OFS in  general, while others involved specific programs, such as CPP, HAMP, and  TALF. Our recommendations to Treasury generally fell into three broad  categories: (1) transparency, reporting, and accountability; (2)  management infrastructure; and (3) communication. Other TARP  oversight entities, such as Special Inspector General for TARP and  Congressional Oversight Panel, have also made numerous  recommendations aimed at improving TARP.
Transparency, reporting, and accountability. Initially, we made a  series of recommendations aimed at improving the transparency of several  programs and related processes, including CPP and the warrant  repurchase process. We also made a number of recommendations  addressing the basis for and design of HAMP. Treasury has taken a variety  of steps to implement our recommendations. We also made  recommendations aimed at strengthening the process for making  decisions about the use of TARP funds for TALF. We also recommended  that Treasury improve the transparency of and analytical basis for its  decisions to wind down the remaining programs and liquidate  investments. And we recommended that Treasury implement metrics to  measure the performance of HAMP’s first-lien modification program and  small business lending programs. Treasury has started to address many of  these recommendations.
Management infrastructure. To ensure that OFS established a robust  management structure, comprehensive system of internal control, and risk  assessment process, we initially made a series of recommendations aimed  at addressing challenges associated with establishing a federal program in  a short period of time, including staffing, contractor oversight, and internal  controls. More recently, we recommended that Treasury finalize a  comprehensive system of internal control over HAMP, ensure that it had  the expertise needed to adequately monitor and divest the government’s  investment in Chrysler and GM, and develop criteria for evaluating the  optimal method and timing for divesting the government’s ownership  stake in these two automakers. Treasury has taken steps to address most  of these recommendations.
Communication. We have made a number of recommendations for  improving communication with stakeholders, including the public, about  TARP. These recommendations are designed to help ensure that Treasury  develops a comprehensive communication strategy and clearly articulated  vision for TARP that goes beyond simply providing information. Treasury  continues to take steps to address these recommendations, including  hiring a communications officer, integrating communications into TARP  operations, maintaining regular contact with congressional committees  and members, and attempting to leverage technology. In the second year  of TARP, we continued to identify opportunities for better communication.  For instance, we recommended that Treasury more clearly inform  borrowers that they could use the HOPE Hotline if they were having  difficulty with their HAMP application or servicers, among other things,  and that Treasury report to Congress on its plans to assess and monitor  the auto companies’ performance and ability to repay their loans.
section_title: Only TARP Programs Focused on Housing Foreclosures, AIG, Securitizations, and Legacy Assets Remain Active
paragraphs: Treasury has managed TARP programs at every stage of development,  from implementation to termination. In the last 2 years Treasury disbursed  about $387 billion under the various TARP programs, and about $179  billion remained outstanding as of September 30, 2010 (see table 1). Some  TARP programs have repaid their balances and have been terminated,  while others that closed in the last year have outstanding balances that  expose Treasury to risk. Furthermore, these outstanding balances require  ongoing attention and monitoring to help ensure that participating  institutions comply with the terms of the agreements and that Treasury  stays abreast of any issues that would impact participants’ ability to  repurchase their assets or repay their debts. Specifically:    CPP, which closed in December 2009, had $49.8 billion outstanding as of  September 30, 2010.
AIFP had an outstanding balance of just more than $67.2 billion as of  September 30, 2010.
AIG has continued to receive assistance over the last year via an equity  capital line established in 2009 and as of September 30, 2010, Treasury’s  assistance to AIG had a balance of $47.6 billion.
While HAMP remains Treasury’s primary program to assist homeowners  facing foreclosure, Treasury announced several new programs in 2010. As  of September 30, 2010, $543 million had been disbursed for TARP housing  programs, which is not recoverable.
PPIP continues to be an active program with $14.1 billion disbursed as of  September 30, 2010, and $13.7 billion outstanding.
Small business programs like CDCI and the SBA 7(a) Securities Purchase  Program account for a small portion of TARP funding and Treasury has  shifted the focus of its small business efforts outside of TARP.
Funding of TALF loans by FRBNY closed in June 2010, and no TARP funds  had been expended as of September 30, 2010 to purchase collateral from  the FRBNY because no collateral had been surrendered to TALF LLC.  TALF will continue to pose potential risks to Treasury until all loans are  repaid to FRBNY and the program is terminated.
Three programs were terminated—CAP, AGP, and TIP. Treasury sold the  Citigroup trust preferred securities it received as a guarantee fee for  AGP. TIP was terminated and its $40 billion outstanding balance was  repaid in December 2009.
As shown in table 1, participants have repaid more than $200 billion. This  amount includes repurchases of preferred stock and repayments of loans.  Treasury also received additional proceeds totaling more than $27 billion  as of September 30, 2010, which includes dividends from equity securities,  interest income from loans and securities, and net proceeds in excess of  cost on the sale or repurchase of common stock and warrants.
As of September 30, 2010, Treasury had received approximately $16.7  billion in dividend payments, interest payments and fees relating primarily  to assets acquired through CPP, TIP, AIFP, PPIP, and AGP (see table 2).  Treasury’s agreements under these programs entitled it to receive dividend  payments on varying terms and at varying rates. The dividend payments to  Treasury are contingent on each institution declaring dividends. As we  discuss later in the report, dozens of institutions have not paid dividends,  primarily institutions participating in CPP. Treasury has also entered into  certain loan agreements and invested in subordinate debentures which  generate interest. Further, Treasury auctioned its first securities in  December 2009 and has been selling its Citigroup common stock  throughout 2010.
As of September 30, 2010, OFS had valued these TARP direct loans and  equity investments at $142.5 billion and the asset guarantee program at $3  billion for a total of $145.5 billion based on estimates using economic and  financial credit subsidy models. The estimates used 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 guarantee program, 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. 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. These differences will also affect the ultimate cost of TARP.  The estimated value of TARP’s $142.5 billion in direct loans and equity  investments is net of a $36.7 billion subsidy cost allowance—primarily the  difference between the amounts paid by OFS for the direct loans and  equity investments and the reported value of such assets. The reported net  cost of TARP transactions from inception through September 30, 2010,  was $18.5 billion. However, the ultimate cost will change as OFS continues  to purchase troubled assets and incur related subsidy costs as well as  incur costs under other TARP initiatives relating to Treasury housing  programs under TARP.
subsections: section_title: Treasury Faces Oversight Challenges in Managing CPP Investments
paragraphs: Under CPP, Treasury provided capital to qualifying financial institutions  by purchasing preferred shares or subordinated debentures. In return for  its investment, Treasury received preferred stock or debentures, which  provided for dividend payments (if declared by the issuer) or interest  payments as well as warrants. As we recently reported, Treasury disbursed  about $205 billion to 707 financial institutions nationwide from October  2008 through December 2009. Increasing numbers of CPP participants  have missed scheduled dividend or interest payments resulting in Treasury  developing a plan for exercising its right to appoint directors as it deems  appropriate. Over the last 2 years, Treasury has restructured the assistance  provided to 12 CPP participants by swapping cumulative preferred stock  for other forms of equity securities or selling the preferred stock to an  institution involved in a merger or capital restructuring with a CPP  institution. Through September 2010, Treasury had received about $152  billion in full and partial repayments from 89 institutions, and 28  institutions exchanged $363 million of their CPP investments for  investments under Treasury’s CDCI program. However, questions about  the health of smaller banks continue, and small institutions participating in  CPP may face challenges in fulfilling the terms needed to exit the program.
subsections: section_title: The Growing Number of CPP Participants with Missed Dividend or Interest Payments Creates Oversight Challenges for Treasury
paragraphs: As the number of institutions that have missed scheduled dividend or  interest payments increases, Treasury faces various oversight and  management challenges (see fig. 2). As of September 30, 2010, 144  institutions had not made at least one scheduled dividend or interest  payment by the end of the reporting month in which the payments were  due, for a total of 413 missed payments. The total amount of missed  dividend and interest payments was $235 million, although some of these  payments were later made prior to the end of the reporting month. From  February 2009 through August 2010, the number of institutions missing  dividend or interest payments due on their CPP investments increased  steadily from 8 to 123, or about 20 percent of existing CPP participants.  Institutions can elect whether to pay dividends and may choose not to pay  for a variety of reasons, including decisions that they or their federal and  state regulators make to conserve cash and maintain (or increase) capital  levels. Institutions are required to pay dividends only if they declare  dividends, although unpaid cumulative dividends generally accrue and the  institution must pay them before making payments to other types of  shareholders, such as holders of common stock.
Generally, if an institution has not paid in full a total of six dividend or  interest payments, Treasury has the right to elect two members to the  institution’s board of directors. As of September 30, 2010, eight institutions  had missed at least six payments, and these payments remained unpaid for  seven of the institutions. For these seven institutions, Treasury had not yet  exercised its right to nominate directors. However, it has elected two  members to AIG’s board of directors under the AIG Investment program.  As more institutions miss scheduled dividend payments, Treasury faces a  significant challenge of determining the extent to which it plans to  exercise its right to nominate board members. In August 2010, Treasury  began addressing this challenge by publicly releasing a “fact sheet” and  “frequently asked questions” regarding the nomination of board members  to these institutions. In nominating directors, Treasury said that it would  proceed in two steps. First, after an institution misses five dividend or  interest payments, Treasury plans, with the institutions’ approval, to send  qualified members of OFS staff to observe board meetings. The  information gleaned will not only help Treasury understand any special  conditions and challenges that the institution is facing, but will also  support Treasury’s ongoing monitoring of its investment. The observers’  activities generally will be limited to listening and asking clarifying  questions regarding materials presented at the board meetings. Second,  once an institution has missed six dividend payments, Treasury will decide  whether to nominate a board member based on a variety of  considerations, including what it learns from the board meetings, the  institution’s financial condition, and the function of its board of directors.  Further, Treasury will prioritize the institutions it is monitoring for  possible appointments to the board, in part based on the size of its  investment, with institutions with investments of more than $25 million  receiving priority.
Treasury reported that it may not nominate directors immediately after an  institution misses six payments but plans to develop a pool of candidates  screened by executive search firms engaged by Treasury. Unlike  observers, board members nominated by Treasury cannot be government  employees. They will have the same fiduciary duties and obligations to the  shareholders of the financial institution as any other member of the board  and will receive the same compensation from the institution. They will  serve until the institution pays its dividends or interest (when Treasury’s  right to appoint them expires) or Treasury chooses to nominate a  replacement director. Going forward, we will continue to monitor  Treasury’s development and implementation of policies and procedures  for nominating board members and assess the extent to which the process  is efficient and consistent with all applicable requirements and goals of  CPP.
section_title: Treasury Has Developed Policies and Procedures for Exchanging Assets
paragraphs: In the last year, Treasury has participated in a limited, but growing,  number of exchanges of CPP preferred stock for other securities or in  direct dispositions of CPP investments to new investors that can provide  new equity, conduct capital restructurings, or otherwise strengthen the  capital position of the institution. Treasury said that it took these actions  to protect the taxpayers’ interest in the CPP investments and promote  financial stability. In October 2009, OFS finalized policies and procedures  governing these exchanges and dispositions. In considering an  institution’s proposal for an asset exchange, OFS stated that it assesses  various factors, including:  the impact on the quality of the institution’s capital, especially in light of  any concurrent efforts to raise capital and exchanges or recapitalizations  involving other securities;  the possible impact on Treasury’s position relative to the holders of  securities that are in equal standing with Treasury; the U.S. government’s overall economic position; and   whether any premium paid over the current market price of the securities  to induce holders to participate in other transactions as part of a larger  capital restructuring is reasonable and consistent with other similar third  party transactions in the marketplace.
As of September 30, 2010, Treasury had completed 12 restructurings.  These restructurings included exchanges of CPP preferred shares for  other securities, such as mandatory convertible preferred shares, trust  preferred securities, or common shares. In two restructurings, Treasury  sold its CPP preferred stock and warrants to third party institutions as part  of a merger agreement and a capital raising investment with the CPP  institutions. One institution with a restructured investment subsequently  filed bankruptcy and had its banking subsidiary placed in receivership by  its banking regulator, and it is unlikely that Treasury will receive any  significant recovery.
section_title: Treasury Does Not Monitor Regulators’ Decisions to Approve or Deny CPP Repayments
paragraphs: As of September 30, 2010, Treasury had received full repayments from 80  institutions and partial repayments from 9 additional institutions, and we  have closely monitored the process for repaying CPP investments. Our  recent report on CPP identified weaknesses in Treasury’s monitoring of  regulators’ decisions to approve or deny requests to repay CPP  investments. Under the original terms of the program, Treasury  prohibited institutions from repaying CPP funds within 3 years unless the  firm had completed a “qualified equity offering” to replace a minimum  amount of the capital, but the American Recovery and Reinvestment Act of  2009 (Recovery Act) included provisions modifying the terms of CPP  repayments. These provisions require that Treasury allow any institution  to repay its CPP investment subject only to consultation with the  appropriate federal bank regulator, without considering whether the  institution has replaced such funds from any other source or applying any  waiting period. Treasury officials indicated that, as a result of these  changes, they had not provided guidance or criteria to regulators on  deciding when to allow institutions to repay CPP investments and had not  collected information on the reasons for these decisions. However,  according to Treasury, it helped facilitate meetings among the regulators  in the spring of 2009 at which they discussed what would be in the  standards for permitting TARP recipients to repay. Bank regulatory  officials said that they used existing supervisory procedures that were  generally applicable to capital reductions as a basis for reviewing CPP  repurchase requests and that they approached the decision from the  perspective of achieving regulatory rather than CPP goals. Regulators  also said that they provided a brief e-mail notification to Treasury  indicating whether they objected or agreed to allow an institution to repay  its CPP investment. Treasury, in turn, communicated the regulators’  decisions to the CPP firms and informed them whether it was able to  process their request to repay.
While the decision to allow repayment ultimately lies with the bank  regulators, the statute does not prohibit Treasury, as administrator of CPP,  from monitoring regulators’ decision-making process and collecting  information or providing feedback about the regulators’ decisions. While  the regulators prepare a case decision memo to document their analysis of  repayment requests that is similar to the memo that was used to document  their evaluations of CPP applicants, officials from both Treasury and the  regulators said that Treasury did not request or review the memo or other  analyses supporting regulators’ decisions. In our recent report, we found  that while the decision ultimately lies with the regulators, without  collecting information on or monitoring regulators’ decisions, Treasury  had no basis for determining whether decisions involving similar  institutions were being made consistently and thus whether CPP  participants were being treated equitably. Furthermore, absent  information on why regulators made repayment decisions, Treasury  cannot provide feedback to regulators. Accordingly, we recommended  that Treasury periodically collect and review certain information from  bank regulators on the analysis and conclusions supporting their decisions  on CPP repayment requests and provide feedback for the regulators’  consideration on the extent to which regulators are evaluating similar  institutions consistently. In its response, Treasury stated that it would  consider ways to address the objectives of our recommendations while  also noting the constraints presented by the law and principles of  regulatory independence.
section_title: Treasury Has Responded to Our Recommendations for Improving Transparency and Accountability of CPP
paragraphs: We have made seven recommendations to strengthen transparency and  accountability of CPP, a key TARP program, over the last 2 years and  Treasury has largely addressed many of these recommendations. For  example, responding to our recommendations for improving the program’s  transparency, Treasury required all CPP participants to participate in some  form of monthly lending survey. However, as institutions leave the  program, which includes the largest banks, they no longer report  information on lending to Treasury. We also recommended that Treasury  consider making the warrant valuation process transparent to the public  by disclosing details of the warrant repurchase process. Treasury has  addressed these recommendations by releasing bank survey information  on lending and detailed reports on warrant repurchases.
Consistent with our past recommendations, Treasury has also taken steps  to ensure compliance with CPP requirements, which include limitations on  dividends, stock repurchase restrictions, and executive compensation.  Treasury tracks the number of missed payments in the monthly Dividends  and Interest Report, which it posts on www.financialstability.gov.  Treasury, in conjunction with its outside asset managers and custodian  (Bank of New York Mellon), monitors corporate actions, such as  restrictions on stock repurchases and dividends. Instances of  noncompliance with CPP requirements are reported to OFS Compliance  within the Office of Internal Review, which evaluates them to determine if  further action is required. Treasury has also created policies for ensuring  that CPP institutions comply with restrictions on executive compensation  and excessive or luxury expenditures. For example, Treasury’s interim  final rule requires that the principal executive officer and principal  financial officer certify to actions to be taken by the compensation  committee, board of directors, and the company itself with regard to  executive compensation. Certifications from these officers are required  to be filed within 90 days after the recipient’s fiscal year-end. As of August  2010, 97 percent of all recipients have filed their certifications. Nine  recipients have a fiscal year end of June 30 and are expected to submit  their certification by September 30, 2010. All certifications and disclosures  as well as correspondences are tracked and monitored by OFS  Compliance within the Office of Internal Review. Treasury’s Office of the  Special Master for TARP Executive Compensation (Special Master)  reviewed payments that taxpayer-assisted firms made to its “top 25”  executives prior to February 17, 2009, when the Recovery Act introduced  additional compensation and corporate governance standards for TARP  recipients. The Special Master conducted the “lookback” review beginning  in March 2010 by requesting compensation data from all 419 institutions  that received taxpayer assistance prior to the passage of the Recovery  Act. All 419 institutions responded to the request, and the Special Master  issued the results of the lookback review on July 23, 2010. Although the  Recovery Act and Treasury rules later imposed much stricter limits on pay  among participating institutions, the Special Master found that  compensation, such as cash bonuses and retention awards, for the  institutions reviewed was permitted by the rules in place at the time.
Treasury has hired nine asset management firms to provide market advice  about its portfolio of investments in financial institutions participating in  CPP and other TARP programs. These management firms are also  responsible for helping Treasury monitor compliance with the key terms  of the program. In past reports we noted that Treasury had not finalized  specific guidance and performance measures for the asset managers’  oversight responsibilities or identified the process for monitoring the asset  managers’ performance. Treasury finalized its oversight policies for asset  managers in April 2010 and developed qualitative and quantitative  performance metrics based on the managers’ core functions and  responsibilities in July 2010.
Finally, in our June 2009 report, we recommended that Treasury ensure  that the primary federal banking regulators use generally consistent  criteria when considering repayment decisions under TARP. Unless  Treasury takes steps to help promote consistency in regulatory decisions  to approve or deny repayment requests, regulators may not treat  comparable TARP institutions equitably. In response, Treasury stated that  it would consult with the primary federal regulators regarding their  criteria and suggest that they follow consistent criteria unless they have  valid regulatory reasons for using different standards.
section_title: Outstanding Balances Under TIP Were Repaid and the Program Terminated
paragraphs: TIP was designed to foster market stability and thereby strengthen the  economy by investing in institutions on a case-by-case basis that Treasury  deemed critical to the functioning of the financial system. Only two  institutions—Bank of America and Citigroup—participated in this  program, and each received $20 billion in capital investment, which both  repaid in December 2009. Both of these institutions also received $25  billion each in exchange for preferred shares under CPP. Bank of America  repurchased these shares in December 2009. Treasury started selling its  Citigroup common shares in April 2010 and finalized such disposition in  December 2010.
section_title: AIFP Illustrates Both Progress and Ongoing Uncertainty in Recouping Assistance
paragraphs: Although Chrysler’s and GM’s financial performance has improved over  the last year, the government’s ability to fully recover its investments in  these companies depends on a variety of factors. Further, the  government’s ability to recoup its investment in Ally Financial rests not  only on economic conditions but on the company’s ability to compete with  other credit providers. From December 2008 through December 2009,  Treasury announced $86.3 billion in funding available to help stabilize the  auto industry and disbursed $79.7 billion of this funding, including about  $62 billion to fund Chrysler and GM while they restructured, about $17  billion to provide capital assistance to Ally Financial, and $1.5 billion to a  special purpose vehicle (SPV) created by Chrysler Financial. In return for  its assistance to Chrysler and GM, Treasury received 9.85 percent equity in  the reorganized Chrysler, 60.8 percent equity and $2.1 billion in preferred  stock in the reorganized GM, and $13.8 billion in debt obligations between  the two companies. In return for its investment in Ally Financial, Treasury  received preferred shares. As of December 15, 2010, approximately $26.9  billion of the $79.7 billion had been repaid.
The federal government’s ability to fully recoup its investments will  depend on the profitability of Chrysler, GM, and Ally Financial and the  success of future public stock offerings. Since we last reported on the  financial condition of the auto industry in November 2009, Chrysler and  GM have shown signs of progress in returning to profitability. For  example:    Positive financial statements. In 2010, both the new Chrysler and new  GM released financial statements for 2009 and the first three quarters of  2010. Thus far, according to Treasury officials, both companies are doing  better than they had projected in the companies’ viability plans during the  bankruptcies and that Treasury had initially projected in terms of  revenues, operating earnings, and cash flow. We are in the process of  reviewing the financial statements in more detail for a subsequent report.
Repayment of GM’s loans. In April 2010, GM repaid the remaining $4.7  billion of the $6.7 billion in debt it owed to Treasury from an escrow  account that was created for the company through the restructuring  process in summer 2009. According to Treasury officials, the escrow  account was GM property and the funds in the account came from a  portion of the proceeds of a loan made by both Treasury and the Canadian  government. After the full repayment of this loan, approximately $6.6  billion was left in the account and these funds became available for GM’s  general use. As of November 2010, Chrysler had made about $440 million  in interest payments on its loans from Treasury.
IPO held for GM and plans for a Chrysler offering. In August 2010,  Treasury announced that it had agreed to be named a selling shareholder  of common stock in GM’s registration statement for the company’s IPO.  On November 17, 2010, GM held an IPO with 478 million common stock  shares held by several stockholders, including Treasury. On November 26,  2010, the underwriters for the IPO exercised the overallotment option,  bringing the total number of shares sold to almost 550 million. The  proceeds from the sale of common shares combined with those from the  sale of the mandatory convertible preferred shares raised $23.1 billion.  Treasury sold more than 412 million of its shares, for which it received  $13.5 billion in net proceeds to repay the government’s initial investment  in GM. As a result of selling these shares, Treasury’s ownership stake in  GM has decreased from 60.8 percent to 33.3 percent. According to  Treasury, the exact timing of further divestments in GM has not yet been  determined. In December 2010, GM also repurchased Treasury’s shares of  preferred GM stock for $2.1 billion. Chrysler has indicated that it expects  to hold an IPO but not before the second half of 2011, subject to approval  from its Board of Directors.
While these steps indicate progress in the companies’ journey towards  profitability, the government’s ability to recoup its investment in the auto  industry is uncertain, and the companies face several challenges in the  coming years. These challenges will require Treasury to provide ongoing  oversight. For instance:    Pension obligations and other future cash payments could be  significant. In April 2010, we reported on the impact of restructuring on  Chrysler’s and GM’s pension plans. We found that although the new  companies had assumed sponsorship of the pension plans, the future of  the plans remained uncertain, in part because the companies might need  to make large contributions to comply with federal pension funding  requirements and their ability to make such contributions was largely  dependent on their ability to become profitable again. As of the most  recent valuation, GM’s U.S. and non-U.S. defined benefit pension plans  were underfunded by more than $27 billion as of December 31, 2009, due  to a number of factors, including significant declines in financial markets  and the deterioration of the value of plan assets. In December 2010, GM  announced that it had contributed $4 billion in cash into its U.S. defined  benefit pension plans and planned to contribute $2 billion in stock to its  U.S. plans in order to move these plans closer to being fully funded.  Although determining exactly how much funding the plans will need in the  future is reliant upon various assumptions and therefore difficult to  pinpoint, GM’s latest estimates indicate that the company may need to  make billions of dollars in contributions to these plans in 2014 and beyond  in order to meet minimum funding requirements. As of December 31,  2009, Chrysler’s worldwide defined benefit pension plans were  underfunded by approximately $3.9 billion.
Future sales levels for new vehicles remain uncertain. While Chrysler  and GM U.S. sales, and industry sales as a whole, were up substantially in  2010 from 2009—up 17 percent and 21 percent, respectively—seasonal  trends were not uniformly positive. For example, compared with May 2010  levels, June 2010 U.S. sales for both companies decreased—12 percent for  Chrysler and 13 percent for GM’s core brands—which was more than the  usual seasonal change of 3 percent between these months, while July 2010  U.S. sales for both Chrysler and GM were up about 5 percent over July  2009. In August 2010, Chrysler’s U.S. sales increased 7 percent over  August 2009 levels while GM’s U.S. core brand sales decreased 11 percent.  Yet in December 2010, U.S. sales for both companies were up over  December 2009 levels (16 percent for Chrysler and 16 percent for GM's  core brands). Vehicle sales volumes are highly dependent on economic  and market conditions such as unemployment levels, consumer  confidence, and credit availability. Improved economic conditions and, in  turn, improved vehicle sales are critical to the future profitability of the  companies and the timing and success of future public stock offerings, but  current economic conditions remain fragile.
Ally Financial’s financial health depends, in part, on the health of the  auto industry and its ability to continue to diversify its portfolio.  Treasury’s AIFP assistance to Ally Financial, a bank holding company,  resulted in the government owning more than half of Ally Financial by the  end of 2009. Recognizing the interconnectedness of auto financing  companies and vehicle sales, Treasury purchased $5 billion in preferred  shares and received warrants from Ally Financial in December 2008 and  purchased an additional $7.5 billion in convertible preferred shares in  2009. Despite this infusion of capital, Ally Financial was required to raise  additional capital by November 2009 based on the results of the Federal  Reserve’s stress test. Unable to raise sufficient additional capital in the  private market, on December 30, 2009, Treasury provided Ally Financial  with a capital investment of $3.8 billion to fulfill its capital buffer  requirement under the stress test, drawing funds from AIFP.  Treasury did  so through the purchase of mandatory convertible preferred shares and  trust preferred securities. Also, in December 2009, Treasury converted $3  billion of existing mandatory convertible preferred shares into common  stock, increasing its equity stake from 35 percent to 56.3 percent of Ally  Financial common stock. As of September 30, 2010, Treasury owned $11.4  billion of Ally Financial mandatory convertible preferred shares, $2.7  billion of its trust preferred securities, and 56.3 percent of its common  stock. As part of its rebranding and growth efforts, GMAC changed its  name to Ally Financial, Inc. in May 2010. However, Ally Financial may face  increased competition for its business in the future, including potentially  from GM, which acquired Americredit, an auto finance company. On  December 30, 2010, Treasury converted $5.5 billion of its preferred stock  in Ally Financial into common stock, raising its total common equity stake  in the company to 74 percent. Ally Financial’s chief executive officer noted  that the conversion of these shares should help the company in its efforts  to conform its capital structure to that more typical of a bank holding  company. Treasury also reported that the conversion may improve Ally  Financial’s ability to raise debt financing.
To help address these challenges, we made several recommendations in  our November 2009 report. For example, we recommended that Treasury  ensure that it had adequate staffing to monitor the government’s  investment in the auto companies. Subsequent to our recommendation,  Treasury hired additional staff to monitor the government’s investment in  the auto companies. We also recommended that Treasury report to  Congress on how it planned to assess and monitor the companies’  performance. While Treasury agreed with the recommendation and has  provided various updates and other information to Congress and to the  public about the status of the taxpayers’ investments in the auto  companies, it has yet to report to Congress on its plans to assess and  monitor the companies’ performance. Treasury noted that it uses monthly  financial and operating information from the companies, as set forth in the  credit agreements, to closely monitor the companies’ financial condition  and that Congress has not requested additional information on the  agency’s efforts to assess and monitor the companies. While we recognize  there is a wide range of publicly available information on the companies’  financial performance, Treasury has not reported to Congress how it is  using this information to ensure the companies are on track to further  improve their financial condition and maximize taxpayer return on its  investment. We will continue to work with Treasury on the  implementation of this recommendation and review Treasury’s actions in  response to our recommendation on developing criteria for evaluating  options for divesting the government's ownership stake in Chrysler and  GM. We are continuing to monitor the financial condition of the industry  and in ongoing work are reviewing the current financial condition and  outlook of Chrysler and GM. As part of that ongoing work, we are also  reviewing the status of the federal government’s efforts to assist workers  and communities that depend on the auto industry for their economic  viability.
section_title: Treasury’s Exposure to AIG Under TARP Is Tied to the Current and Future Health of the Company and the Insurance Industry
paragraphs: Treasury’s exposure to AIG increased slightly in 2010, and its ability to  fully recoup its assistance remains contingent on a number of factors  related to the health of AIG and the insurance industry. Since September 2,  2009, Treasury has increased its level of assistance to AIG, funding an  additional $4.2 billion drawdown on the Equity Capital Facility. This brings  Treasury’s total assistance to AIG as of September 30, 2010, to about $47.4  billion, not including $1.6 billion in unpaid dividends exchanged for  preferred stock. Treasury’s initial wave of assistance to AIG began in  November 2008 under TARP’s Systemically Significant Failing Institutions  Program (now known as the AIG Investment Program) when the agency  agreed to purchase $40 billion in shares of AIG Series D cumulative  preferred stock and received a warrant to purchase approximately 2  percent of the shares of AIG’s common stock. The proceeds were used  by AIG to pay down part of the FRBNY Revolving Credit Facility. FRBNY  also created and funded two special purpose vehicles—Maiden Lane II and  Maiden Lane III—to purchase assets from AIG’s securities lending  portfolio and AIG Financial Product’s credit default swap counterparties,  respectively, both of which were contributing to AIG’s liquidity problems.  Treasury provided additional assistance in April 2009 by agreeing to  exchange this Series D stock for Series E fixed-rate noncumulative  preferred stock and by providing a $29.84 billion Equity Capital Facility to  AIG to help the company meet its liquidity and capital needs, in exchange  for its purchase of 300,000 shares of fixed-rate noncumulative perpetual  preferred stock (Series F) and a warrant to purchase up to 3,000 shares of  AIG common stock. As of September 30, 2010, AIG had drawn about $7.4  billion from this equity facility, up from $3 billion as of September 30,  2009. By comparison, the level of credit FRBNY has provided AIG through  its Revolving Credit Facility has fallen from peaks reached in late 2008,  when Treasury’s assistance was just beginning, to September 30, 2010— from $72.3 billion to about $20.5 billion for the Revolving Credit Facility  primarily because the debt was restructured into equity (see table 4). For  example, FRBNY accepted preferred interests in SPVs holding the  American Life Insurance Company (ALICO) and American International  Assurance Company, Ltd. (AIA), two life insurance holding company  subsidiaries, and reduced the outstanding balance on the revolving facility  by $25 billion. As of September 30, 2010, the federal government’s total  exposure to AIG was $124.6 billion, up from $120.7 billion as of September  2, 2009, but lower than $129.1 billion as of December 31, 2009.
While AIG’s financial condition over the past year has remained relatively  stable or showed signs of improvement, as measured by several indicators,  federal assistance has played a key role in stabilizing AIG’s liquidity, equity  structure, and credit ratings. The government’s prospect for recouping  the assistance it has provided largely rests with the December 8, 2010,  master agreement to restructure the federal assistance and recapitalize  AIG as agreed to by AIG, FRBNY, Treasury, the AIG Credit Facility Trust,  AIA, and ALICO. First, AIG is to repay FRBNY in cash all the amounts  owed under the FRBNY revolving credit facility, which as of September 30,  2010, was approximately $20.5 billion, and the credit facility will be  terminated. The funds for repayment are to come from loans to AIG from  the SPVs that hold the AIA and ALICO net cash proceeds from the IPO of  AIA and the sale of ALICO. Second, AIG is to draw down an amount  available under Treasury’s equity capital facility established pursuant to  the Series F preferred stock securities purchase, less an amount up to $2  billion. AIG will use the amount drawn down to repurchase all or a portion  of FRBNY’s preferred interests in the AIA and ALICO SPVs and then  transfer the repurchased preferred interests to Treasury in partial  consideration for the Series F shares. Third, AIG and Treasury will  amend and restate the securities purchase agreement related to the Series  F preferred stock so that AIG can issue to Treasury Series G preferred  stock at closing, and AIG’s right to draw on the Series F preferred stock  will be terminated. AIG’s right to draw on the Series G preferred stock will  be subject to terms and conditions substantially similar to those in the  current agreement. Fourth, the various preferred stock held by the Trust  and Treasury will be exchanged for common stock. Treasury will then  hold approximately 1.655 billion shares of AIG common stock,  representing approximately 92.1 percent of the AIG common stock that  will be outstanding as of the closing. Fifth, AIG is to issue to holders of  AIG common stock, by means of a dividend, 10-year warrants to purchase  up to 75 million shares of AIG common stock at an exercise price of $45  per share. Completion of the plan depends on a number of conditions,  such as FRBNY is not to hold preferred interests in AIA and ALICO with  an aggregate liquidation preference exceeding $2 billion immediately after  closing.
In addition, AIG must have achieved its year-end 2010 targets for the  derisking (unwinding) of AIGFP. Also, the trustees of the Trust must be  reasonably satisfied with the insurance and indemnification arrangements  provided to them in connection with the recapitalization. Also, the closing  will be subject to regulatory approvals in many of the more than 130  countries and jurisdictions where AIG operates. Any of the parties may  terminate the recapitalization agreement if it is not completed by March  15, 2011. We will continue to monitor the government’s investment and the  status of AIG’s repayment efforts. Our ongoing work on AIG also include a  review of the Federal Reserve facilities implemented to assist AIG.
section_title: HAMP Trial Modifications Have Declined and Some TARP-Funded Housing Programs Are Still In the Early Stages of Implementation
paragraphs: As we have noted in our past reports, Treasury has continued to make  efforts to help borrowers facing potential foreclosures, but its efforts have  continued to face challenges. In particular, Treasury’s cornerstone effort  under TARP to meet EESA’s purposes of preserving homeownership and  protecting home values—HAMP—had a slow start and has not performed  as anticipated. Moreover, a number of key TARP-funded housing programs  are still in the early stages of implementation. In February 2009, Treasury  announced that HAMP would use up to $75 billion—including $50 billion  of TARP funds—to help three to four million homeowners struggling to  stay in their homes by modifying their mortgages to reduce the monthly  payments to affordable levels (31 percent of their gross monthly income).  However, through the end of November 2010, fewer than 550,000  permanent modifications had begun. Furthermore, Treasury had not yet  begun reporting activity for other key components of HAMP and other  TARP-funded housing programs, such as the Second Lien Modification  Program and the Principal Reduction Alternative.
As shown in figure 3, the number of trial modifications started each month  peaked in October 2009 and then declined from roughly 118,000 new trials  in December 2009 to about 31,000 new trials in November 2010. According  to Treasury, this decline may be due, in part, to the new program  requirement that lenders determine HAMP eligibility using verified  information rather than the verbal financial information that was initially  accepted for all HAMP trial periods starting June 1, 2010. Additionally, the  number of trial modifications canceled exceeded the number of  conversions to permanent modification from the program’s inception  through November 2010. Of the about 1.4 million trial modifications  started, roughly 729,000 were cancelled and roughly 550,000 trials were  converted to permanent modifications during this period. The number of  new permanent modifications started each month increased from roughly  36,000 in December 2009 to more than 68,000 in April 2010 and then  decreased to about 31,000 in November 2010.
Further, recent data on default and foreclosure rates indicate that many  borrowers continue to struggle with making their mortgage payments (see  fig. 4). As of June 2010, an estimated 4.6 percent of all mortgages  nationwide were in some stage of foreclosure. Default rates (loans 90 days  or more past due) in the second quarter of 2010 were still more than five  times higher than they were at the start of 2005, increasing from less than  1 percent to roughly 4.5 percent of all mortgages. In addition, foreclosure  starts grew from about 0.4 percent to about 1.1 percent during this period,  meaning roughly 490,000 mortgages entered the foreclosure process in the  second quarter of 2010, compared with about 165,000 in the first quarter of  2005. Finally, as of the end of the second quarter of 2010, loans in the  foreclosure inventory have increased more than three times since the first  quarter of 2005, to more than 2 million loans.
Treasury’s initial HAMP guidelines in March 2009 included programs to  modify the first and second liens of borrowers facing financial hardship. In  addition, Treasury noted that compensation would be provided to  investors, servicers, and borrowers to help when borrowers transition to  more affordable housing and avoid the stigma of a foreclosure in cases  where borrowers meet basic HAMP eligibility criteria (single-family  dwelling, owner-occupied, primary residence, etc.) but did not qualify for  or defaulted under HAMP. While the HAMP first-lien modification  program was implemented in April 2009, specific guidelines for the second  lien and foreclosure alternatives programs were not issued until March  and April 2010, respectively. Seventeen servicers signed agreements to  modify second liens when the corresponding first lien had been modified  under HAMP, and the largest servicers had begun offering alternatives to  foreclosure under the Home Affordable Foreclosure Alternatives program.  As of the end of December 2010, Treasury had not begun reporting activity  under the second-lien modification program. In addition, Treasury had not  specified the number of people these programs were expected to help, and  servicers were still in the early stages of implementation. As we noted in  June 2010, to improve the transparency and accountability of these  programs, Treasury will need to develop performance measures and  benchmarks for the recently announced TARP-funded housing programs,  including measures to assess the extent to which the programs are helping  additional borrowers.
In an effort to reach a broader range of borrowers, including those who  are unemployed or have mortgages with high loan-to-value ratios,  Treasury announced four additional TARP-funded homeowner assistance  programs in March 2010 (see table 4):    The Home Affordable Unemployment Program, implemented in July 2010,  would require servicers to offer eligible unemployed borrowers temporary  reduction or suspension of monthly payments for the lesser of a minimum  of 3 months or until the borrower finds employment.
The HAMP Principal Reduction Alternative Program requires servicers to  consider principal reductions for HAMP-eligible borrowers with loan-to- value ratios above 115 percent. However, while this program was  implemented, as of October 1, 2010, servicers will not be required to offer  principal reduction, even when it is more beneficial for mortgage holders  and investors to do so.
The Federal Housing Administration Short Refinance Option would allow  certain borrowers to refinance their mortgages into loans insured by the  Federal Housing Administration (FHA). Treasury has designated up to $11  billion for this program, which is effective for loans issued on or after  September 7, 2010, and are closed on or before December 31, 2012.
The Housing Finance Agency Innovation Fund for the Hardest-Hit Housing  Markets designates funds to be used by eligible entities of 19 housing  finance agencies (18 states and Washington, D.C.) to develop more  localized programs to preserve homeownership and protect home values.  The implementation time frames and number of borrowers to be helped by  these programs will vary by state. Treasury designated $7.6 billion of the  $45.6 billion intended for housing programs to this program.
As with other TARP-funded programs, Treasury was required to finalize  the total amount of TARP funds allocated to housing programs by October  3, 2010. However, Treasury officials said that at any point before the  program ends on December 31, 2012, HAMP servicers will be able to use  their allocated amount for any of the TARP-funded programs they have  implemented, with the exception of the Hardest-Hit Fund and the loss  coverage portion of the FHA Refinance program. Additionally, after  October 3, 2010, Treasury will still be able to modify TARP-funded housing  programs, as long as Treasury does not enter into any new servicer  agreements.
In July 2009 and June 2010, we reported on the challenges Treasury faced  in implementing HAMP and made recommendations to improve the  transparency and equitable implementation of the program. For example,  in July 2009 we noted that while Treasury required borrowers with high  levels of total debt to agree to obtain counseling before receiving a HAMP  modification, it was not monitoring whether these borrowers in fact  received counseling. In addition, we noted that Treasury had yet to  establish a comprehensive system of internal control for HAMP, including  metrics and benchmarks for servicers’ performance. Three out of the six  recommendations we made in July 2009 have yet to be fully implemented  and remain open.
In June 2010, we reported that while HAMP’s goal was to create clear,  consistent, and uniform guidance for loan modifications across the  industry, we found wide variation in servicers’ practices with respect to  tracking HAMP complaints and evaluating borrowers who were current or  not yet 60 days delinquent on mortgage payments (“imminent default”  borrowers). In addition, while Treasury had taken some steps to address  ongoing challenges, such as limiting redefaults and addressing potential  foreclosures among those who owe more than the value of their homes, it  urgently needed to finalize and fully implement the various components of  HAMP and better ensure the transparency and accountability of these  efforts. We reported that as Treasury continues with its first-lien mortgage  loan modification program and implements the second-lien modification,  foreclosure alternatives, and other TARP-funded housing programs,  adhering to standards for effective program management and establishing  sufficient program planning and implementation capacity will be critical.  We have an ongoing engagement focused on the implementation of a few  of the recently announced TARP-funded housing programs, as well as the  outcomes of borrowers who are denied or cancelled from HAMP  modifications, and will continue to monitor Treasury’s implementation  and management of TARP-funded housing programs as part of our  ongoing oversight of TARP to help ensure that these programs are  appropriately designed and operating as intended. At the request of several  members of Congress, we are also beginning an engagement examining  federal oversight of mortgage servicers in light of recent reports about  potential shortcomings in the processing of foreclosure documents.
section_title: Assets under PPIP Have Shown Positive Returns, but Continued Monitoring is Important Given That Returns on Assets Can Fluctuate and Treasury Must Still Oversee the Program’s Asset Managers
paragraphs: The legacy securities program of PPIP, announced in March 2009, was  designed to facilitate price discovery in markets for these assets, repair  balance sheets throughout the financial system, and increase the  availability of credit to households and businesses through the purchase of  “legacy” residential mortgage-backed securities (RMBS) and commercial  mortgage-backed securities (CMBS). Through the program, Treasury and  private sector fund managers and investors partnered to purchase eligible  securities from banks, insurance companies, mutual funds, pension funds,  and other eligible sellers—though the fund managers have sole discretion  in making purchases and investment decisions according to the terms of  the agreements between Treasury and the PPIFs. PPIP, as originally  conceived, was also to include a partnership between Treasury and FDIC  to purchase and hold legacy loans (the legacy loans program). FDIC has  conducted a pilot sale of receivership assets to test the funding  mechanism contemplated for this program but the program itself was  never implemented as part of TARP.
PPIP is similar to what was envisioned when TARP was first conceived as  an asset-purchase program, but it faced delays in the implementation and  did not reach the announced levels of participation. First announced as a  program that could account for up to $100 billion, Treasury reduced the  PPIP allocation to about $30 billion for the legacy securities program.  Subsequently the PPIP allocation decreased further to about $22 billion.  As of September 30, 2010, Treasury had used about $14 billion to fund  PPIP.
The eight Public Private Investment Funds (PPIF) of PPIP have had  positive returns as of September 30, 2010, and have invested in a variety of  legacy assets (see table 5). As of September 30, 2010, Treasury has  invested a total of $14.1 billion in debt and equity into the PPIFs. Of this  investment, $13.7 billion remained outstanding and Treasury had seen  unrealized capital gains of approximately $750 million. In addition, the  PPIFs had paid $228 million in interest and dividends to Treasury over  fiscal year 2010. However, returns could fluctuate over time, as they are  subject to market risk factors until the PPIFs close.
PPIFs are invested mostly in legacy RMBS, representing 82 percent of  market value held in all PPIFS as of September 30, 2010, with the  remaining 18 percent invested in CMBS (see fig. 5).
In June 2010, we reported improvements in RMBS and CMBS markets as  indicated by an increase in prices for highly rated CMBS after PPIP was  announced. Specifically, highly-rated CMBS prices rebounded from their  lows in late-2008, and average spreads tightened in the same time period.  According to Treasury, improvements in certain CMBS and RMBS prices  are indications of the program’s success. However, market prices can  fluctuate while the funds are still managing assets, and Treasury will need  to maintain oversight responsibility for the program’s asset managers until  the funds no longer hold assets.
section_title: Treasury Initially Launched TARP Programs to Assist Small Businesses but Has Shifted Primary Focus to Efforts outside of TARP
paragraphs: Given the importance of small businesses to the overall economy,  Treasury created several programs to help address small business credit  constraints. Subsequently, Treasury decided to shift its primary focus to  establishing a program outside of TARP. The existing TARP programs that  are intended to assist small businesses focus on capitalizing certain  depository institutions and stabilizing secondary markets for SBA- guaranteed loans, including the CDCI, SBA 7(a) Securities Purchase  Program, and TALF. Table 6 provides a brief description and status of  each program.
Although these programs were intended to increase the amount of credit  available to small businesses, their impact has been limited for several  reasons. First, the amount of funding announced for these programs was  small in comparison to other TARP programs and the amount expended  on these programs as of September 30, 2010, has been even less. As table 7  shows, while OFS originally announced almost $66 billion in funding for  TARP programs for small business-related initiatives, over the last year  that commitment has been cut to about $5.3 billion. As of September 30,  2010, about $548 million has been expended. Treasury noted that the small  expenditures for these programs were not a sign of program failure, but an  indication that the markets were functioning on their own.
Second, these TARP programs targeted markets and institutions that  represent a small percentage of small business lending. Part of the TALF  portfolio and all of the SBA 7(a) Securities Purchase Program focused on  SBA lending markets, which represent a small proportion of small  business financing overall, further limiting the impact the programs might  have on small business lending more broadly. CDCI focuses on CDFIs,  which represent about 1 percent of regulated depository institutions and  less than 1 percent of total assets of regulated depositories. Total lending  related to small businesses—as measured by business loans of $1 million  or less for banks and thrifts, and loans more than $50,000 for credit  unions—is also a relatively small percentage compared with such loans at  other regulated depositories, at about 0.5 percent. Moreover, Treasury  does not require CDFIs to use the capital to increase small business  lending as a condition of participating in CDCI, according to a Treasury  official. Reports from the National Credit Union Association (NCUA) and  OTS—regulators of certain CDFIs—on how CDCI applicants intend to use  their funds indicate that most CDFIs did not specifically state they had a  plan to increase small business lending. However, two of the three thrifts  recommended by OTS and half of the credit unions recommended by  NCUA indicated they would increase or maintain lending in general.
Finally, Treasury officials told us that TARP requirements and the public’s  negative opinion of TARP have curtailed overall interest and participation  in TARP programs. The reduced interest in TARP programs stems from  what Treasury officials refer to as “TARP stigma”—that is, financial  institutions dislike of participating in TARP programs because doing so  exposed them to criticism and they were not willing to comply with TARP  requirements. For example, as we previously reported, concerns about  TARP requirements slowed implementation of the SBA 7(a) Securities  Purchase Program because participants did not agree with the terms.  Treasury attempted to mitigate the concerns by making the program terms  on executive compensation and warrants (in this case, known as senior  securities) less onerous. According to Treasury officials, TARP stigma  also became an obstacle to introducing additional TARP small business  programs.
subsections: section_title: Communication about Small Business Programs Initially Lacked Clarity but Has Improved
paragraphs: Treasury has not always been clear or consistent in describing the intent  of its TARP small business programs, although recent communications  have been clearer about the purpose of the CDCI program. Treasury  officials told us that CDCI’s purpose was mainly to capitalize CDFIs so  they could achieve their economic development goals. However, early  public announcements and congressional testimony about the program  emphasized that the goal of the program was to increase small business  lending. Based on some of these public statements, NCUA and officials  from a credit union industry group raised concerns about the program’s  focus on small business lending, pointing out that some of their  institutions do not make many small business loans. However, NCUA and  credit union officials said that in subsequent discussions Treasury officials  assured them that CDCI participants would not need to demonstrate an  increase in small business lending, because CDCI also aims to capitalize  CDFIs to carry out their other economic development goals. A recent  announcement on CDCI closing, along with Treasury’s Two-Year  Retrospective report on TARP, provided more clarity on the purpose of  CDCI that is consistent with concerns we had about the goals of CDCI  being clear. As we previously reported, clear and transparent  communication about TARP programs is important.
section_title: Treasury Is Now Focusing Efforts to Assist Small Businesses outside of TARP
paragraphs: Given concerns about TARP stigma, Treasury shifted its efforts to assist  small businesses outside of TARP by creating a separate Small Business  Lending Fund (SBLF). The administration first announced SBLF in  October 2009 and originally planned to use TARP to fund it. However,  Treasury officials told us that they repeatedly heard from potential  participants that they were reluctant to participate in any program  associated with TARP. After considering a variety of options and getting  input from potential participants, Treasury officials concluded that SBLF  would not ultimately succeed unless it was completely separated from  TARP. Therefore, Treasury announced in spring 2010 that it was seeking a  separate appropriation to establish SBLF outside of TARP.
Under the Small Business Jobs Act of 2010, enacted on September 27,  2010, SBLF will be a $30 billion bank capital support program encouraging  small and midsize banks to lend to small businesses. The program will  set benchmarks for increasing banks’ lending to small businesses, in part  by measuring changes in the amount of loans of $10 million or less for  commercial and industrial lending, certain kinds of commercial real estate,  and farm-related lending. The more a bank can demonstrate increased  lending based on such measures, the lower the dividend it will pay to  Treasury. The Small Business Jobs Act of 2010 established SBLF and  contains metrics for measuring increases in small business lending. We  will be reviewing SBLF in the future, as required by the act.
section_title: Assets in the TALF will Require Continued Monitoring to Allow Treasury to Anticipate Future Needs for Credit Support
paragraphs: TALF provided loans to private investors to purchase asset-backed  securities (ABS) and CMBS to encourage the issuance of new  securitizations and provide liquidity for new consumer and business  loans. To assist in this effort, Treasury provides credit protection for  TALF as part of TARP’s Financial Stability Plan under the Consumer and  Business Lending Initiative. TALF made about $71 billion in loans from  March 2009 through June 2010, with most of them secured by credit card  ABS, auto loan ABS, legacy CMBS, and student loan ABS (see fig. 6).  According to the Federal Reserve, although none of the loans have come  due, more than half of these loans have been repaid. Moreover, Treasury  has not had to disburse any TARP funds to cover losses from unpaid loans.
In February and June 2010, we reported that the ABS markets had  improved largely due to TALF’s activity for the more frequently traded  TALF-eligible sectors after the program’s first activity in March 2009. The  dollar volume of TALF issuance peaked in the third quarter of 2009 and  until that point represented a significant portion of all ABS issued. But by  the fourth quarter of 2009, TALF volume decreased significantly and at a  faster rate than the total ABS volume, indicating that ABS markets were  relying less on TALF financing. TALF’s impact on credit rates is less clear,  however, as we did not find clear evidence that most consumer credit  rates changed significantly after TALF started with the exception of auto  loans from finance companies. FRBNY officials said that interest rates on  consumer and small business loans could have been much higher without  TALF.
Treasury has addressed the recommendations we made in our February  2010 TALF report. First, we recommended that Treasury give greater  attention to risks in commercial real estate and CMBS markets, and  Treasury developed internal tracking reports to assess such trends.  Second, we found that Treasury had not fully documented the rationale for  final decisions on managing TALF risks, and we recommended that  Treasury develop a formal decision-making policy to strengthen  transparency and internal controls. In response, Treasury created a  process for assessing changes to TALF program terms and outside  analyses and now has a process for documenting such analyses. Third,  because Treasury bears the first-loss risk from assets that TALF borrowers  surrender in conjunction with unpaid loans, we recommended that  Treasury review the data it might collect and publicly report in the event  that any collateral was surrendered to TALF LLC. Treasury responded that  if assets are surrendered, its plan is to direct the public to the Federal  Reserve for public reports it maintains about its securities holdings.  Treasury officials also stated that Treasury has the ability to retain a third  party to advise and assist it in making asset disposition decisions and  noted that Treasury was committed to transparency regarding such  assets. Finally, we issued a matter for consideration requesting that  Congress provide us with audit authority over all Federal Reserve  operational and administrative actions taken with respect to TALF so that  we could audit TARP support for TALF most effectively. Congress  provided authority in the Dodd-Frank Act for us to review various aspects  of Federal Reserve facilities initiated in response to the financial crisis.  This related work is underway, and we will issue a future report on the  results.
section_title: Outstanding Funds under Other TARP Programs Have Been Repaid and the Programs Terminated
paragraphs: Treasury had created two other programs that were terminated in 2009  and the funds repaid.
CAP was terminated without any funds being used. CAP was designed to  further improve confidence in the banking system by helping ensure that  the largest 19 U.S. bank holding companies had sufficient capital to  cushion themselves against larger than expected future losses, as  determined by the Supervisory Capital Assessment Program (SCAP)—or  “stress test”—conducted by the federal banking regulators. CAP made  TARP funds available to any institution not able to raise private capital to  meet SCAP requirements. In the end, 9 of the 10 institutions that needed  additional capital as a result of SCAP raised more than $70 billion from  private sources, and as mentioned previously, Ally Financial received  additional capital from Treasury under AIFP.
AGP was terminated and Treasury retained a guarantee fee. AGP was  established as the Treasury insurance program, which provided federal  government assurances for assets held by financial institutions that were  deemed critical to the functioning of the U.S. financial system. Citigroup  and Bank of America were the only two institutions that participated in  the Treasury program before it was terminated. As previously reported,  Bank of America paid Treasury and others a fee for terminating the term  sheet before any assets were segregated. Treasury entered into a loss  sharing arrangement with Citigroup under which Treasury assumed $5  billion of exposure and in exchange received cumulative nonvoting  preferred shares and warrants to purchase common shares. In December  2009, FRBNY (which has made a loan commitment to Citigroup in  connection with the Treasury guarantee), FDIC, Treasury, and Citigroup  agreed to terminate the Citigroup AGP agreement. Like FDIC, Treasury  retained a portion of the trust preferred shares received as payment for the  asset protection provided under AGP as well as warrants associated with  this assistance. Treasury sold its interest in the trust preferred securities  on September 30, 2010, for approximately $2.25 billion. The FRBNY  obtained a termination fee for agreeing to terminate its loan commitment.
section_title: OFS has Made Progress in Staffing Key Positions, Managing Its Contracts, and Maintaining Internal Controls
paragraphs: OFS has continued to make progress in staffing key positions, managing  its contracts, and maintaining internal controls. While OFS’s organization  structure has stabilized as it moves into maintenance mode, more could be  done to address retention of key staff as TARP winds down. Treasury  continued to rely on a network of financial agents and contractors for  certain activities and will likely do so as the program comes to a close.  Finally, Treasury has taken steps to develop a system of internal control.
subsections: section_title: OFS Staffing Has Stabilized, but OFS Has Not Finalized a Plan for Addressing Staff Retention Challenges as TARP Winds Down
paragraphs: In the last year, OFS staffing has stabilized. Over the past two years, the  number of OFS employees has increased steadily with the number of  employees increasing and the number of detailees decreasing (see fig. 7).  In addition, Treasury has filled key leadership positions in OFS, including  the position of Chief of the Homeownership Preservation Office.  However, this stability is fragile. For example, on September 30, 2010, the  Assistant Secretary of Financial Stability resigned and this key leadership  position is temporarily filled.
In general, the organizational structure of OFS has also remained stable.  We reported in October 2009 that the Assistant Secretary of Financial  Stability was establishing an Office of Internal Review that would perform  the functions of the former Chief Risk and Compliance Officer, among  other duties. This office, which has been established, is responsible for  identifying risks that TARP faces and works with relevant program offices  to develop procedures for overall compliance with EESA. The compliance  staff monitors TARP recipients to help ensure they are adhering to  program requirements and financial agents and contractors to help ensure  they are complying with the TARP conflict-of-interest requirements. In  addition, OFS now has an Office of Reporting that includes a senior  communications officer and director of oversight and reporting. This  office helps to ensure that OFS is meeting all of its reporting requirements  and coordinates OFS’s work with oversight entities such as GAO, Special  Inspector General for TARP, Congressional Oversight Panel, and the  Financial Stability Oversight Board.
In August 2010, Treasury officials estimated that OFS would need 275 full- time equivalents to be fully staffed. As of August 14, 2010, the office had 59  vacancies. Treasury officials told us that they were actively seeking  candidates for about half of the vacancies, most (about 23) in the Office of  Internal Review, and reassessing whether the remaining positions were  still needed. For example, the Chief of Operations Officer is in the process  of determining whether a vacant administrative officer position that would  report directly to her is still needed given that division managers within  the office already report directly to her. OFS continues to use direct-hire  and other appointment authorities to expedite hiring of qualified  candidates. Treasury officials said that hiring for the Office of Internal  Review has been difficult because of competition for auditors who could  conduct internal assessments and compliance reviews. In addition, they  noted that these OFS positions are temporary positions and under the  federal government pay scale, which can make competing with other  employers more challenging.
Although TARP’s authority to establish new programs has expired, OFS  will have to operate existing programs going forward. However, eventually  OFS will need to hire fewer staff as TARP programs continue to wind  down. Treasury officials said that while the expiration of TARP authority  has not yet resulted in employees leaving, they noted that the Assistant  Secretary recently emphasized to staff that OFS still have significant  responsibilities and that OFS employees are still needed. To address  concerns about staff retention, OFS officials told us that they had started  to take steps to help address employee satisfaction. For example, in April  2010 OFS conducted its first employee satisfaction survey. Officials told us  that the survey results had generally been positive but had highlighted two  areas—communication and staff development—that OFS plan to focus on  going forward:  Internally, OFS has several methods for communicating across the  organization, including a monthly staff meeting and monthly employee  newsletter. In addition, the Assistant Secretary has two weekly meetings  with the chiefs, and the chiefs also meet once a week. Treasury officials  told us that a key initiative to improve communication was to revamp its  internal Web site using more collaborative software that would make  sharing information easier. In addition, OFS will identify communications  training for OFS managers and employees.
To enhance staff development, OFS is drafting a training policy and will  soon have staff fill out individual development plans. OFS is also planning  to develop a “Government 101” course for employees new to the federal  government and re-establish an OFS mentoring program. In addition,  OFS allows staff to rotate among positions within the office, enabling  employees to gain additional knowledge and skills and helping to keep  them engaged in OFS’s mission.
Treasury officials also said that OFS could use the retention incentives  that are available to all government agencies if necessary to help ensure  that the office retained key skills and competencies.
OFS is also beginning to address the concerns of employees who were  hired under term appointments. Because OFS is a temporary office, more  than half of its employees (115 as of September 25, 2010) are term  appointed. Most of these employees were hired under 1- or 2-year  appointments that can be extended but are limited to a total of 4 years. In  addition, several leadership positions were filled with limited-term Senior  Executive Service appointments that are limited to 3 years, including the  Chief Investment Officer, Chief of Operations Officer, Chief Counsel, and  Chief of Homeownership Preservation. Although the use of term  appointments is appropriate for a temporary organization such as OFS,  these employees may also be difficult to retain for the full period of their  term appointment. For example, Treasury officials told us that some of  these employees have stated that they wanted to seek permanent career  positions in the federal government, and Treasury’s Office of Human  Resources has offered seminars on the federal hiring process. OFS’s  employee survey also confirmed that some staff are considering  employment elsewhere. For example, Treasury officials stated that about  one-third of staff responded affirmatively to a question asking whether the  employees planned to leave OFS in the next 6 months. However, Treasury  officials noted that in the last 6 months (between April and September  2010), only about 6 percent of employees have left OFS.
Workforce planning for OFS has presented and continues to present some  unique challenges. When OFS was initially created, it staffed the office  largely by relying on detailees until it could hire more permanent  employees, and as we have seen, more than half of its employees have  been hired under term appointments. Early in 2009, OFS developed a  Strategic Workforce Plan that generally focused on the issues related to  acquiring qualified staff. Along with its fiscal year 2011 budget request  issued February 1, 2010, Treasury included a broad human capital strategy  for OFS that included:    using hiring authorities to recruit new employees for short- and long-term    hiring experts or consultants and detailees for temporary or intermittent    establishing training and development interventions to ensure that existing  staff are engaged and possess the requisite skill set, and   performing regular strategic workforce assessments to refine the  organization and identify and eliminate competency gaps in OFS’s  workforce.
The human capital strategy does not provide any details for these various  efforts. According to Treasury officials, this strategy is in the process of  being modified to emphasize staff retention and will be issued along with  OFS’s fiscal year 2012 budget submission. They also told us that OFS no  longer had regular workforce assessment meetings because staffing had  stabilized. For staffing-related decisions, OFS has created a staffing board  that consists of the Chief of Operations Officer, Chief Financial Officer,  and a senior representative from Treasury’s Office of Human Resources.  The board meets as needed to approve new positions and incentive  payments, among other things.
We have reported on the importance of strategic workforce planning to  address two critical needs: (1) aligning an organization’s human capital  program with its current and emerging mission and programmatic goals  and (2) developing long-term strategies for acquiring, developing, and  retaining staff to achieve programmatic goals. Although Treasury has  established a human capital strategy for OFS, OFS has not updated its  strategic workforce plan to reflect its changing environment as TARP  moves from largely implementing to maintaining and terminating  programs or to address the unique challenges associated with maintaining  high-quality staff in a temporary organization. As we have seen, OFS  continues to have many responsibilities and some programs may need  staff for years to come. For example, HAMP could be in operation until  2017. In addition, when Treasury will completely divest its TARP  investments in entities such as GM, and Chrysler is unclear. In 2013, term  employees may be at the 4-year limit, and even before then some term  employees may choose to leave OFS rather than accept an extension.  Further, filling key leadership positions that are under limited-term Senior  Executive Service appointments will be a challenge. Treasury officials told  us that the chiefs in OFS have begun to discuss future staff needs and  various options for addressing these needs but have not yet fully  developed a plan. For example, they said although staff needs may be  somewhat lower by 2014, OFS will still be performing many of the same  functions, and they have considered options, such as creating permanent  positions that will be around for some time.
OFS has undertaken succession management planning in order to better  ensure that leadership positions remain filled and is participating in a  succession planning pilot program. According to OFS officials, the  succession planning pilot began on September 1, 2010, and its purpose is  to help ensure that OFS can fill leadership positions with qualified staff.  The pilot is to include a review of senior positions to identify the key skills  and competencies and a review of OFS employees who could move into  these positions and to identify any skills gaps. Addressing these gaps  should help to inform developmental and training opportunities for  individual development plans. The pilot will also assess whether any of the  leadership positions are at risk of being vacant in the next 6 months.
In past reports, we raised concerns about Treasury having enough staff  with the appropriate skills to effectively support certain TARP programs.  For example, we noted in a July 2009 report on HAMP that having enough  staff with appropriate skills was essential to governing HAMP effectively  and recommended that Treasury place a high priority on fully staffing  Homeownership Preservation Office. Since then, the Home Ownership  Preservation Office has not yet conducted a workforce assessment,  despite the recent addition of several new programs. In November 2009,  we reported that Treasury was planning to disband the auto team and  would lose dedicated staff with industry- and company-specific knowledge  and expertise. We raised concerns that OFS would not have adequate staff  resources with the expertise needed to adequately monitor and divest the  government’s investment in Chrysler and GM and recommended that it  obtain needed expertise in areas where gaps are identified. Subsequently,  Treasury has hired two additional analysts dedicated solely to monitoring  Treasury’s investments in Chrysler and GM, and plans to hire one more.  OFS will likely continue to face such scenarios going forward. Without a  workforce plan that considers various scenarios, particularly the potential  outflow of term employees, OFS risks not being adequately prepared to  manage and oversee ongoing TARP investments and programs.
section_title: Treasury Continues to Rely on a Growing Network of Financial Agents and Contractors to Support TARP Administration and Operations
paragraphs: Since the inception of TARP in October 2008, Treasury has continued to  rely on private sector resources to assist OFS with a variety of activities.  These include providing the infrastructure needed to inject capital into key  financial institutions, implementing programs to address problems in the  financial markets, providing assistance to the automobile industry and  AIG, and working to help homeowners struggling to keep their homes.  Treasury has used two mechanisms for engaging private sector firms.  First, Treasury has exercised its statutory authority to retain 15 financial  agents (depository and related financial institutions designated to perform  assigned functions on its behalf). Second, Treasury has entered into  contracts and blanket purchase agreements under the Federal Acquisition  Regulation for a variety of legal, investment consulting, accounting, and  other services and supplies. According to Treasury’s data, as of September  30, 2010, Treasury had 81 contracts and blanket purchase agreements, up  from 39 about a year ago. In total, Treasury had 96 financial agency  agreements and contractual arrangements with a total potential value of  almost $841 million as of September 30, 2010.
subsections: section_title: Treasury Increased Its Use of Financial Agents and Small Business Contractors
paragraphs: As shown in table 8, the majority of financial agent agreements were  awarded in 2009, many in late December. According to OFS procedures,  financial agents are used for services that cannot be provided with existing  Treasury, financial agent, or contractor resources. Treasury’s decision to  use a financial agent as opposed to a contractor or other provider is  generally based on the inherently governmental or fiduciary nature of the  required service. According to Treasury, all of its financial agents provide  vital support in managing billions of dollars in disbursements, repayments,  and additional proceeds for a variety of TARP programs, some of them  ongoing and some winding down. The functions that Treasury has  assigned these financial agents include asset management for Treasury’s  purchase of “troubled assets,” custodial and infrastructure support  services, and program administration services for OFS’s homeownership  preservation programs.
The share of work by small businesses and minority- and women-owned  businesses under TARP contracts and financial agency agreements has  grown substantially since November 2008, when only one of Treasury’s  prime contracts was with a small business and only one minority small  business firm had teamed as a subcontractor with a large business  contractor. Since we reported in October 2009, the number of prime  contracts and financial agency agreements with small and/or minority  firms has grown from 8 to 20, according to Treasury’s data. From the  outset, Treasury encouraged small businesses to pursue opportunities for  TARP contracts and financial agency agreements. For example, in 2010  Treasury resolicited all OFS legal services contracts. It received and  evaluated 81 proposals and awarded 13 indefinite-delivery/indefinite- quantity contracts, including two small businesses. As shown in table 9,  the majority of small and/or minority- and women-owned businesses  participating in TARP are subcontractors.
When Treasury set up OFS in 2008 and quickly began to implement  numerous TARP initiatives in response to the nation’s financial crisis, OFS  had not yet finalized its procurement oversight procedures and lacked  comprehensive internal controls for its growing number of contractors  and financial agents. Further OFS did not have a comprehensive  compliance system to monitor and fully address vendor-related conflicts  of interest. Recognizing Treasury’s substantial reliance on the private  sector and the challenging contracting environment, we made a series of  recommendations between December 2008 and June 2009 intended to  strengthen Treasury’s management and oversight of its vendors and  improve the transparency of contracted operations. By 2009, when the  financial crisis focus shifted to stimulating economic recovery and TARP  program priorities had already significantly evolved, we noted OFS’s  sustained progress in overcoming the initially challenging contracting  environment. One year after implementation, OFS had put in place an  appropriate infrastructure to manage and monitor its network of financial  agents and contractors. As we have previously reported, OFS took a  number of actions to address our recommendations, including:    ensuring that sufficient OFS personnel were assigned and properly trained  to oversee the performance of all contractors and financial agents;   expeditiously issuing regulations on conflicts of interest involving  Treasury’s financial agents, contractors, and their employees and related  entities; and issuing guidance requiring that key communications and decisions  concerning potential or actual vendor-related conflicts of interest be  documented.
Our discussions with OFS officials and a review of supporting  documentation revealed that since September 2009 OFS has continued to  strengthen key aspects of its infrastructure for managing and overseeing  the cost and performance of TARP financial agents and the compliance  system for conflicts-of-interest requirements. Particularly noteworthy are  OFS’s actions since fall 2009 to define organizational roles and  responsibilities and establish written policies and procedures for the  management and oversight of TARP financial agents, which have doubled  in number since September 2009. Specifically, according to the Director of  the Office of Financial Agents (OFA), the office was reorganized in fall  2009 where common oversight processes are centralized for consistency  across financial agents. According to a Treasury official, installing full-time  leadership and providing adequate staffing and organization within OFS  for more active oversight of the financial agents has enabled this office to  more effectively manage the billion-dollar TARP programs and Treasury  operations that the financial agents support. The ongoing enhancement of  management and oversight for financial agents is expected to help support  Treasury’s goals of helping ensure the overall stability and liquidity of  financial systems and protecting taxpayer interests. Highlights of OFS’s  actions to strengthen the management and oversight of financial agents  are presented in table 10.
Finally, since 2009 and consistent with our prior recommendations, OFS  has continued to implement its comprehensive system of oversight for  conflicts of interest that may arise with financial agents or contractors  seeking or performing work under TARP. For example, between October  2009 and January 2010, the compliance team within OFS’s Office of  Internal Review completed complex renegotiations of the remaining three  contracts that predated the TARP conflicts-of-interest regulations. In  addition, the steps OFS took in 2009 to develop and implement conflicts- of-interest procedures, guidance documents, and an internal reporting  database enable staff to document and track all vendor conflict-of-interest  certifications, inquiries, and requests for waivers. These actions also have  helped OFS automate the workflow process and monitor vendor  compliance in submitting periodic conflict-of-interest certifications on  time. Also, according to OFS officials, these management and oversight  enhancements since 2009 enabled them to manage the conflict-of-interest  inquiries they receive—which totaled more than 700 by December 2010— in a timely manner.
According to OFS, when conflict-of-interest inquiries arise with TARP  contractors or financial agents, they are brought to the attention of the  Office of Internal Review’s compliance team. The team determines  whether an actual or potential conflict-of-interest exists, and if so, whether  it can be addressed with a conflict-of-interest mitigation plan. All conflict- of-interest inquiries are handled in as timely a manner as possible and are  usually resolved within a few days, according to OFS. OFS provided  examples of personal and organizational conflict-of-interest issues that  have arisen among external financial agents:    A financial agent requested approval of a personal conflicts-of-interest  mitigation plan for an employee it was seeking to move from a business  area that did not provide TARP-related services to one that did. However,  the employee owned financial holdings in various TARP recipients. OFS  concluded that considering the employee’s financial holdings and the  contemplated scope of the employee’s work, the proposed mitigation plan  was not adequate to address the potential conflicts of interest. OFS did not  approve the mitigation plan, and the employee did not move to the group  providing support to Treasury.
A financial agent requested approval of a revised conflicts-of-interest  mitigation plan for one of its subcontractors to broaden the scope of the  work the subcontractor performed under TARP. The revised mitigation  plan included a provision stating that the subcontractor would not  maintain any kind of relationship with any current, former, or future entity  that helped manage or administer the added programs without the prior  written consent of OFS. OFS determined that the revisions to the  mitigation plan adequately mitigated the potential conflicts and thus  approved the plan.
These examples illustrate the ongoing nature of conflicts-of-interest  scenarios. OFS officials told us that with the conflicts-of-interest  compliance infrastructure they have in place—including dedicated  resources, consistent policies and procedures, and an internal reporting  database for tracking the disposition of each action item—OFS was  positioned and committed to remaining vigilant in overseeing contractors’  and financial agents’ compliance with conflict-of-interest requirements.
section_title: OFS Maintained Effective Internal Control over Its Financial Reporting as of September 30, 2010, and Has Taken Steps to Develop a System of Internal Control for TARP Programs
paragraphs: In our December 2008 report, shortly after TARP was created, we  highlighted the importance of internal control and recommended that  Treasury continue to develop a comprehensive system of internal control  over TARP, including policies and procedures for program activities that  were robust enough to ensure that the objectives and requirements of  TARP programs were being met. Over the last 2 years, Treasury has  taken steps to address our recommendation for both financial reporting  and program activities. As part of its control environment, OFS established an organizational structure that provides management’s framework for  planning, directing, and controlling operations to achieve its goals. OFS  implemented a risk assessment process that it uses as a basis to identify,  analyze and manage its risks. OFS has also implemented a monitoring  function to verify whether internal controls are designed and operating  effectively. As discussed below, we issued an opinion on OFS’s internal  control over financial reporting as of September 30, 2010, and we have  reviewed specific control activities over compliance with certain program  requirements.
subsections: section_title: Internal Control over Financial Reporting
paragraphs: Our 2010 financial audit report concluded that although certain internal  controls could be improved, OFS maintained, in all material respects,  effective internal control over financial reporting as of September 30, 2010,  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.
During fiscal year 2010, OFS addressed one significant deficiency and  made progress in addressing the other significant deficiency that we  reported for fiscal year 2009. Specifically, OFS sufficiently addressed the  issues that resulted in a significant deficiency in fiscal year 2009 regarding  OFS’s verification procedures over the data used for asset valuations such  that we no longer consider this to be a significant deficiency as of  September 30, 2010. In addition, OFS addressed many of the issues related  to the other significant deficiency we reported for fiscal year 2009  concerning its accounting and financial reporting processes. However, the  remaining control issues along with other control deficiencies in this area  that we identified in fiscal year 2010 collectively represent a continuing  significant deficiency in OFS’s internal control over its accounting and  financial reporting processes. Specifically, we found the following:    While improvements were noted in OFS’s review and approval process for  preparing its financial statements, notes, and Management’s Discussion  and Analysis for TARP from what we had found for fiscal year 2009, we  continued to identify incorrect amounts and inconsistent disclosures in  OFS’s draft financial statements, notes, and Management’s Discussion and  Analysis that were significant, but not material, and that were not detected  by OFS.
For fiscal year 2009, we reported that OFS had not finalized its procedures  related to its process 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. During fiscal year 2010, we found  that most of these procedures were finalized. However, we identified  instances where OFS’s procedures were not always followed or effectively  implemented.
OFS’s documentation was incomplete for certain areas of its asset  valuation process. Specifically, some valuation methodology changes and  the basis for certain assumptions derived from informed opinion that were  used in valuing TARP’s assets were not included in its written  documentation. After we notified OFS that the documentation was  incomplete, it was able to provide adequate additional information about  its asset valuation process.
OFS did not have adequate procedures to determine whether the tool and  related guidance it used properly calculated valuations for certain TARP  assets with projected future disbursements. OFS’s use of the tool and  related guidance resulted in errors in the valuation of such assets.
OFS had other controls over TARP transactions and activities that reduced  the risk of misstatements resulting from these deficiencies. For significant  errors and issues that were identified, OFS revised the financial  statements, notes, and Management’s Discussion and Analysis, as  appropriate. 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. Misstatements  may occur in other financial information reported by OFS and not be  prevented or detected because of this significant deficiency.
We reported on the two significant deficiencies identified last year and  provided OFS recommendations to address these and other less significant  issues. The significant deficiency identified for fiscal year 2010, although  not considered to be a material weakness, is important enough to merit  management’s attention. We will be reporting additional details  concerning this significant deficiency separately to OFS management,  along with some recommendations for corrective actions. During our  fiscal year 2010 audit, 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. We  will follow up in our fiscal year 2011 audit on OFS’s progress in  implementing our recommendations.
section_title: Internal Control for Program Activities
paragraphs: Treasury has taken steps to develop an internal control system to ensure  compliance with program requirements, including limitations on executive  compensation, stock repurchases, and dividends. For example, as noted  earlier in this report, Treasury’s interim final rule requires that the  principal executive officer and principal financial officer at firms that  received TARP funds certify to actions to be taken by the compensation  committee, board of directors, and the company itself with regard to  executive compensation. All certifications and disclosures are monitored  by compliance staff within the Office of Internal Review. Also, Treasury  relies on financial agents—including the custodian and individual asset  managers—to perform additional oversight responsibilities. For example,  Treasury, in conjunction with its outside asset managers and custodian  (Bank of New York Mellon) monitor corporate actions, such as  restrictions on stock repurchases and dividends. Further, Treasury has  retained nine asset management firms to provide oversight of CPP  participants. Treasury finalized its oversight policies for financial agents in  April 2010 and developed qualitative and quantitative performance metrics  based on the managers’ core functions and responsibilities in July 2010.
OFS’s Office of Internal Review has a key role in helping to ensure  compliance with program requirements. As noted earlier, this office is  responsible for identifying risks to TARP, working with program offices to  develop procedures for compliance with EESA, monitoring recipients’  compliance with program requirements, monitoring financial agents’ and  contractors’ compliance with the conflict of interest interim rule, and  reviewing controls to help ensure that they are in compliance with  program requirements. In particular, instances of noncompliance with  program requirements are evaluated to determine if further action is  required.
Though Treasury has generally developed an overall system of internal  control for compliance with program requirements, we have continued to  monitor internal controls and identify areas in which certain controls for  specific programs, such as HAMP, could be improved. In particular,  Treasury has not fully implemented our recommendation to develop a  comprehensive system of internal control for HAMP. For example, though  Treasury, in conjunction with Fannie Mae as the HAMP program  administrator, has developed risk control matrixes that identify various  risks associated with the first-lien modification process, such as potential  inaccuracies in the accruals of incentive payments, additional areas of  internal control may be needed. For example, Treasury has yet to develop  benchmarks, or goals, for specific HAMP performance measures such as  conversion and redefault rates. In the absence of benchmarks to indicate  acceptable levels of performance, assessing the results of these measures  will be difficult. We will continue to monitor Treasury’s actions to address  these deficiencies.
section_title: Indicators Suggest That Credit Markets Have Largely Held the Gains They Achieved since October 2008
paragraphs: The concerted actions by Treasury, the Federal Reserve, and others since  the crisis began have been credited with helping to avert a more severe  financial crisis, but the ultimate impact of the interventions on the  economy as a whole remains to be seen. The panic that stressed financial  markets in October 2008 has largely disappeared along with the prospect  that systemically significant financial institutions would fail and  precipitate widespread financial instability. Although the long-term  implications of the interventions remain unknown and no one can know  what would have happened without the actions that were taken, some  quantitative evidence indicates that the economy would be worse off  today had the government not acted. Critics, however, question the  rationale for particular programs, point to policy missteps early on in the  crisis that may have exacerbated the situation, or believe that the long- term effects of the massive interventions will eventually outweigh the  short-term benefits.
Nevertheless, 2 years after the passage of EESA, some credit markets are  beginning to show signs of a sustained recovery, even as other areas of the  economy remain fragile (see table 11). While the effectiveness of the  programs has varied, some have reportedly had the desired effects,  especially if stabilizing the financial system and restoring confidence was  considered to be the principal goal of the intervention. We have noted in  prior reports that many of the anticipated effects of TARP on credit  markets and the economy have materialized including:    declines in perceptions of risks in various financial markets, including  asset spreads in ABS markets;   declines in the cost of credit in interbank, mortgage and corporate debt  renewed ability by banks to access private capital markets and issue new  equity; increasing issuance in ABS markets; and recovery in prices from some legacy or “troubled” assets.
For example, the cost of credit and perceptions of risk (as measured by  premiums over Treasury securities) fell significantly in interbank,  mortgage, and corporate debt markets, while the volume of credit, as  measured by new mortgage loans, increased from October 2008 to October  2009. Although the recovery in securitization markets was more tentative  than that in the broader financial market, spreads for most TALF-eligible  assets tightened significantly from their heights at the beginning of 2009,  and new asset-back security issuances began to occur in larger volumes.  Treasury has said that banks’ renewed ability to access capital markets  and improvements in securitization markets helped motivate the decision  to close bank capital programs and TALF even before the Dodd-Frank Act  ended its authority to incur new obligations under TARP. Since October  2009, perceptions of risk in these markets were up slightly in some cases  although these trends appear to be more related to concerns about  sovereign debt in the European Union and other market dynamics.
While the movements in most of these indicators since October 2009 are  likely more reflective of market developments outside of TARP, some  metrics we have monitored for programs with later start dates like PPIP,  HAMP, and to a lesser extent TALF, remain relevant. PPIP indicators show  substantial improvements during the second year of the TARP program.  For example during the second year of the TARP program the price of  AAA and BBB tranches of certain RMBS rose significantly. As we noted in  our June 2010 report, Treasury stated that the stabilization of certain  legacy asset prices, namely those in RMBS and CMBS markets, was one  indicator that the PPIP had achieved its stated purpose and influenced the  decision not to commit additional funds to the program. Similarly, TALF- eligible ABS spreads have continued to narrow since October 2009 (see  table 11).
Over the last 2 years indicators for the Making Home Affordable (MHA)  program continued to highlight challenges in the area of residential  housing. The nationwide foreclosure rate reached an unprecedented high  of 4.63 percent in March 2010. Estimates of the total mortgages  outstanding suggest that this percentage amounts to roughly 2.5 million  loans that were in some stage of the foreclosure process. While the  foreclosure inventory increased by 128 basis points to 4.58 percent from  December 2008 to December 2009, it has decreased by 19 basis points  between December 2009 and October 2010, suggesting a leveling off of the  foreclosure inventory and some signs of stabilization. However, the  reasons for the change in the foreclosure inventory are unclear. For  example, the slowdown could be driven by any combination of (1) the  foreclosure mitigation programs, including those under MHA; (2) banks  forbearing or delaying foreclosures; and (3) other forces related to the  economic fundamentals of the housing market. Analysis of delinquency  and foreclosure data suggests that mortgages are not rolling from  delinquency to foreclosure as expected and that lenders are not initiating  foreclosures on many loans that would normally be subject to such  actions. A recent International Monetary Fund report estimated that this  “shadow inventory” could be as much as 1.7 million homes.
In our October 2009 report, we recommended that any decision to extend  TARP be made in coordination with relevant agencies and that Treasury  use quantitative analysis whenever possible to support its rationale.  Treasury subsequently dedicated additional funds to preserving  homeownership and improving financial conditions for small banks and  businesses while winding down and terminating other programs. We  reviewed the analytical process underpinning the decision to extend TARP  and in June 2010 reported on Treasury’s process. We found that Treasury  had coordinated and consulted with other agencies and considered a  number of qualitative and quantitative factors, as we recommended.  Although we found Treasury’s framework for deciding to extend TARP  sufficient, we recommended that the Secretary (1) formalize coordination  with FDIC for future TARP decisions and (2) improve the transparency  and analytical basis for TARP program decisions. Because TARP will be  winding down concurrently with other important interventions by federal  regulators, decisions about the sequencing of the exits from these  programs will require bringing a larger body of regulators to the table to  plan and sequence the continued withdrawal of federal support.
Although the economy is still fragile and potential threats remain, U.S.  financial regulators have begun to shift their focus from stabilizing the  economy to exiting from crisis-driven interventions and transferring risk  back into the hands of the private sector. As a result, even as some  programs have ramped up to address specific issues, many others have  either expired or are already winding down. As discussed earlier, TARP  recipients have begun to repay loans and repurchase shares and warrants;  however, signs that the recovery is not robust raise some concerns about  the government withdrawing support rapidly and completely. For  example, in addition to weak housing markets, consumer spending,  private investment and employment growth have remained weak and real  gross domestic product growth is estimated to be about one-half of its full  potential. Moreover, sovereign debt issues in Europe may have led to an  increase in risk aversion that translated into strains in short-term U.S.  dollar funding markets.
As table 11 shows, interest rates have generally continued to decline since  October 2009. Despite the unwinding of TARP, its early termination, the  general exit from other government interventions, and the turmoil in  Europe, credit spreads, while rising slightly for the mortgage and bond  markets, are down in the interbank market and all remain well below their  October 2008 peaks. In particular, the average value for the TED spread  for 2010 through November 1, 2010, is 32 basis points below its 2009  average and 131 basis points below its value in 2008 (see fig. 8). Similarly  the banking sector credit default swap index, which provides an indicator  of the credit risk associated with U.S. banks (as judged by the market), is  well below its value in 2008 and 2009, despite increasing in response to  sovereign debt issues in May 2010. Collectively, our indicators suggest  that recovery in credit markets has thus far withstood the unwinding of  government interventions.
We tested whether the announcement of a deal to pass financial regulatory  reform (the Dodd-Frank Act) and end Treasury’s authority to incur new  obligations under TARP several months early had an impact on  perceptions of risk in the interbank lending market as measured by  changes in the TED spread.  The TED spread has declined modestly since  June 29, 2010, media reports of the early end of TARP. In theory, the early  end of TARP could, in isolation, increase perceptions of risk in lending to  banks, as Treasury would no longer be able to use TARP funds to respond  to new threats to financial stability—an authority that has allowed it to  respond to urgent problems in the banking sector several times over the  life of TARP. Alternatively, the early end of TARP could have no effect if  financial institutions were perceived to have built up adequate capital and  liquidity to weather a new shock to the financial system. In several  versions of our model, we consistently found that the announcement of  the early end of TARP had no statistically or economically significant  impact on the interbank market. Given the substantial impact of the  initiation of TARP and other crisis programs, this result may indicate some  durability of the improvements in the interbank market. However, the  extent to which this result reflected purely the market response to the end  of TARP is unclear, as the response may have been muted by the passage  of regulatory reform, or other factors. For example, the early end of TARP  could have increased credit risk in the interbank market, while the  passage of financial regulatory reform could have simultaneously reduced  credit risk, yielding the no net impact we found in the interbank market.  Furthermore, this test assesses market participants’ initial expectations  and not the ultimate impact of the early end of TARP and passage of  regulatory reform. Over time, analysis of the exits from remaining TARP  programs will provide a more complete assessment of the resilience of the  financial system.
section_title: Conclusions
paragraphs: TARP programs implemented over the last 2 years covered a broad range  of activities: they were designed to inject capital into financial institutions,  address issues in the securitization markets, provide assistance to the  automobile industry and AIG, and offer incentives for modifying  residential mortgages, among other things.  Many credit markets have  shown signs of a sustained recovery even as other areas of the economy,  particularly housing markets and jobs starts, remain fragile. While the  degree of effectiveness has varied across programs, some programs  reportedly have had the desired effects, especially where stabilizing the  financial system and restoring market confidence are considered to be the  principal goals of the government’s interventions.
Going forward, Treasury continues to face unique oversight and  monitoring challenges, as TARP programs are currently at every phase of  development and significant investments remain that must be managed.  Treasury is attempting to address ongoing challenges in certain areas,  including home foreclosures and small business lending. Thus far, the  existing TARP programs in these areas have been far less successful than  other TARP initiatives. While we and others have argued that some of  these programs have been ill-designed, the complexity of the issues  involved have contributed to ongoing difficulties in designing programs  that achieve desired goals.
Although HAMP was first announced in February 2009 as Treasury’s  primary effort to preserve homeownership and protect home values, the  program has had a slow start and has not performed as anticipated.  Despite program changes that were intended to increase the number of  mortgage loan modifications made under HAMP, more borrowers have  had their trial modifications canceled than have received permanent  modifications. Further, while Treasury has added TARP-funded program  enhancements in an effort to reach more borrowers and address  persistently high default and foreclosure levels, the newly announced  programs are in the early stages of implementation and the number of  additional borrowers they will ultimately help remains unclear. Treasury  has not yet fully implemented all of our prior recommendations to  increase the transparency, accountability, and consistency of the program  Treasury also has two remaining TARP programs aimed at increasing  lending to small businesses—CDCI and the SBA 7(a) Securities Purchase  Program. But given the relatively small amount of funding allocated for  these programs and the fact that SBA and CDFIs account for a small  proportion of total small business lending, the question of whether these  programs will have a significant impact is debatable. Moreover, the  success of the SBA 7(a) Securities Purchase Program and other potential  small business programs appeared to have been hampered by lenders’  reluctance to participate due to concerns about the stigma of participating  in a TARP program and objections to TARP requirements such as  executive compensation restrictions. Given these types of concerns,  whether TARP could have created an effective small business program is  unclear. CDCI was also plagued with initial confusion about whether the  program’s primary goal was to increase small business lending. Treasury  officials and early public statements placed different emphasis on the two  goals of CDCI: (1) to assist in small business lending and (2) to capitalize  certain small financial institutions, some of which do not lend much to  small businesses. However, in more recent communications about CDCI,  Treasury clarified the importance of both goals of the program. Now that  SBLF has been signed into law, using the experience learned from TARP  small business programs to clearly articulate how SBLF complements and  differs from ongoing TARP small business programs will be important.
While additional programs—AIG and PPIP—remain active, others have  closed but have substantial outstanding balances that will require  Treasury’s ongoing attention and oversight. For programs with  outstanding balances, the prospect for repayment from some institutions,  both large and small, and the ultimate cost of TARP remain unknown. For  example:    Reflecting continued improvements in its financial condition, AIG has  announced plans to restructure its assistance from the federal  government. While a number of transactions associated with the  restructuring will occur throughout the first quarter of 2011, to the extent  the plan is successful, it will eliminate the Federal Reserve’s exposure to  AIG. However, for Treasury, the ultimate return that OFS will realize from  its investments in AIG will be determined by the long-term health of AIG  and subject to uncertainty arising from the likelihood of future changes in  general economic, regulatory, and market conditions.
CPP, one of TARP’s oldest and most widely used programs, had recouped  more than $152 billion in payments and almost $20 billion in additional  proceeds but continued to have $49.8 billion outstanding as of September  30, 2010, and faces growing questions about the ability of some  participants, especially small participants, to repurchase their preferred  shares. A growing number of institutions that have also missed at least one  dividend payment could mean that Treasury will be appointing members  to some institutions’ boards of directors. While institutions continue to  repurchase their preferred shares, the program will require ongoing  oversight and monitoring until all these assets are divested.
The remaining programs will require ongoing oversight, and Treasury will  have to manage the remaining investments. For example, AIFP, which  closed, continues to pose a number of challenges, and the health and  ultimate ability of the participants—GM, Chrysler, and Ally Financial—to  repay Treasury depends on a number of external factors, including  substantial uncertainty arising from the likelihood of future changes in  general economic and market conditions. Conversely, while no TARP  funds have been disbursed to purchase TALF collateral as of September  2010, ongoing challenges in commercial real estate markets warrant  ongoing attention. Finally, while AGP was terminated in December 2009,  Treasury kept a portion of the trust preferred securities issued under this  program in exchange for the guarantee provided to Citigroup.
Although OFS has become a more stable organization over the past year,  with more than 200 employees, it faces new challenges as the TARP  authority to make new commitments has expired, some programs wind  down, and others continue to operate. For example:    OFS has begun to take steps that will help to retain staff, but staff  retention could be a significant challenge for OFS, as term appointees  making up more than half of its workforce. Most of these employees can  be extended only up to 4 years, and some may seek more permanent  employment elsewhere. Moreover, several key leadership positions were  filled under limited-term Senior Executive Service appointments. Positions  could become more difficult to fill, given that TARP authority has expired  and most programs are winding down. While OFS has begun to assess  options for future staff needs, including succession planning for senior  positions, its workforce plan has not been updated since March 2009 to  reflect the changing environment. Without a plan that considers various  scenarios, particularly the potential outflow of term employees, OFS may  find itself unprepared to adequately manage and oversee the TARP  investments and programs that remain.
OFS has overcome an initially challenging contracting environment. It has  strengthened its management and oversight of a growing network of  contractors and financial agents to support TARP administration and  operations. With an appropriate infrastructure in place, Treasury should  remain vigilant in monitoring and managing performance issues and  conflicts of interests that may arise with the use of private sector sources.
Treasury’s development of a system of internal control for financial  reporting and compliance with program requirements has evolved over the  last two years and will continue to be an important area for oversight.  Although certain internal controls could be improved, OFS has in all  material respects maintained effective internal control over financial  reporting as of September 30, 2010, 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. Treasury has also developed a system of internal control to  ensure compliance with program requirements, including limitations on  executive compensation, stock repurchases, and dividends. However, we  have continued to identify areas where certain controls for specific  programs, such as HAMP, could be improved.
Two years after the passage of EESA, indicators generally suggest that  credit markets have improved and that many of the anticipated effects of  TARP have materialized. However, the economy remains fragile, and the  ultimate impact of the interventions on the real economy remains to be  seen. While movements in most of these indicators during the second year  of TARP are likely more reflective of other non-TARP market  developments, some metrics we have monitored for programs with later  start dates (PPIP, HAMP, and to a lesser extent TALF) show some  improvements. For example, PPIP indicators show substantial  improvement and TALF indicators continue to improve. However,  indicators for MHA continue to highlight the challenges in the area of  residential housing. During the second year of TARP, Treasury made  decisions about winding down particular programs and making additional  funds available to others. In our July 2010 TARP report, we found that the  framework Treasury used in making these decisions was sufficient but  offered additional recommendations to enhance and formalize  coordination with FDIC and improve the transparency and analytical basis  for remaining TARP program decisions. Our indicators suggest that credit  markets have largely held the gains achieved since October 2008, despite  the unwinding of TARP programs, the early termination of TARP’s  authority, the general exit from other government interventions, and the  turmoil in Europe.
While Treasury has taken a number of steps to help ensure that TARP  programs are operating effectively and being adequately overseen, it has  yet to fully implement all of our previous recommendations. These  recommendations are generally aimed at improving communication,  working with regulators to ensure consistency of repurchase decisions,  and numerous aspects of HAMP. Moreover, the Federal Reserve has yet to  implement 5 recommendations related to SCAP.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to Treasury for its review and comment.  We also provided the draft report to the FDIC, Federal Reserve, OCC, OTS,  and the SBA to verify the factual information they provided about certain  TARP programs and small business trends. Treasury provided written  comments that we have reprinted in appendix IV. Treasury, the Federal  Reserve, and FDIC also provided technical comments that we have  incorporated as appropriate.
In its comments, Treasury noted that TARP and other government actions  have contributed to stabilizing the financial system and restoring market  confidence. While we agree that there have been broad improvements in  the financial system and the economy, the economy remains fragile and  there continues to be notable uncertainty in areas such as the housing  markets and employment. Further, as we note in the draft report, Treasury  continues to face unique oversight and monitoring challenges, as TARP  programs are currently at every phase of development and significant  investments remain that must be managed. In addition, each TARP  program has demonstrated varying degrees of success in meeting its goals.  For example, we acknowledged the role of TALF in restarting frozen  securitization markets, but we also pointed out that HAMP has not fulfilled  its intended goal of addressing the foreclosure crisis and while conditions  appear to be improving, the ultimate success of OFS’s interventions into  AIG and the auto industry continues to be unknown. We will continue to  monitor active TARP programs in our future work.
Treasury also had a differing view on the number of our prior  recommendations that it had fully or partially implemented. While  Treasury continues to make progress in addressing our prior  recommendations, in some cases, we have a different view about whether  sufficient actions have been taken to fully address our prior  recommendations. For example, Treasury believes that our  recommendation that Treasury communicate to Congress its plans to  monitor the companies’ performance should be considered closed, noting  that it uses monthly financial and operating information from the  companies to monitor the companies’ financial condition and that  Congress has not requested additional information on the agency’s efforts  to assess and monitor the companies. While we recognize that Treasury  and the auto companies have made a range of information on the  companies’ financial performance publicly available, Treasury has not  reported to Congress how it is using this information to ensure the  companies are on track to further improve their financial condition and  maximize taxpayer return on Treasury’s investment.  As we stated in our  previous report on Treasury’s oversight of its financial interests in the auto  companies, transparency as to how the companies are being monitored is  important to ensuring accountability and providing assurances that the  taxpayers’ investment is being appropriately safeguarded.  In other cases,  Treasury has yet to provide sufficient documentation for us to fully  ascertain the status of open recommendations. For example, for the TARP- funded housing programs, Treasury noted that it has considered methods  of monitoring whether borrowers with total household debt of more than  55 percent of their income have received housing counseling, but Treasury  has not provided us with documentation to show the methods that were  considered and the analysis conducted to determine the feasibility of these  methods. Reconciliation of the status of our recommendations was  ongoing at the close of our review and going forward, as we have  previously discussed with OFS officials, we will continue to review and  consider any additional support and documentation related to the progress  of actions taken to address our recommendations and will continue to  update the status of the recommendations as appropriate.
Finally, Treasury agreed with our recommendation on OFS workforce  planning, and stated that it will continue to refine this document and other  staffing initiatives.
section_title: Recommendation for Executive Action
paragraphs: As TARP enters its next phase, OFS must continue to build on its past  experiences and take steps to better ensure that it is effectively managing  its programs and resources. Therefore, we recommend that OFS take the  following action:    OFS should finalize a plan for addressing how it will manage its  workforce, in particular term-appointed employees and key SES positions,  including plans for various staffing scenarios.
We are sending copies of this report to the Congressional Oversight Panel,  Financial Stability Oversight Board, Special Inspector General for TARP,  interested congressional committees and members, Treasury, the federal  banking regulators, and others. The report also is available at no charge on  the GAO Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  Thomas J. McCool at (202) 512-2642 or mccoolt@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 major contributions to  this report are listed in appendix V.
section_title: Appendix I: Status of GAO Recommendations, as of December 30, 2010
subsections: section_title: Develop and implement a well-defined and disciplined risk-assessment process, as such a process is essential to monitoring program status and identifying any risks of potential inadequate funding of announced programs.
paragraphs: Review and renegotiate existing conflict-of-interest mitigation plans, as necessary, to enhance specificity  and conformity with the new interim conflicts of interest regulation, and take continued steps to manage  and monitor conflicts of interest and enforce mitigation plans.
Develop a communication strategy that includes building an understanding and support for the various  components of the program. Specific actions could include hiring a communications officer, integrating  communications into TARP operations, scheduling regular and ongoing contact with congressional  committees and members, holding town hall meetings with the public across the country, establishing a  counsel of advisors, and leveraging available technology.
Require that the American International Group, Inc. (AIG) seek concessions from stakeholders, such as  management, employees, and counterparties, including seeking to renegotiate existing contracts, as  appropriate, as it finalizes the agreement for additional assistance.
Update OFS documentation of certain internal control procedures and the guidance available to the  public on determining warrant exercise prices to be consistent with actual practices applied by OFS.
Improve transparency pertaining to TARP program activities by reporting publicly the monies, such as  dividends, paid to Treasury by TARP participants.
Complete the review of, and as necessary renegotiate, the four existing vendor conflicts-of-interest  mitigation plans to enhance specificity and conformity with the new interim conflicts-of-interest rule.
Issue guidance requiring that key communications and decisions concerning potential or actual vendor- related conflicts of interest be documented.
Ensure that the warrant valuation process maximizes benefits to taxpayers and consider publicly  disclosing additional details regarding the warrant repurchase process, such as the initial price offered  by the issuing entity and Treasury’s independent valuations, to demonstrate Treasury’s attempts to  maximize the benefit received for the warrants on behalf of the taxpayer  In consultation with the Chairman of the Federal Deposit Insurance Corporation (FDIC), the Chairman of  the Board of Governors of the Federal Reserve System (Federal Reserve), the Comptroller of the  Currency, and the Acting Director of the Office of Thrift Supervision, ensure consideration of generally  consistent criteria by the primary federal regulators when considering repurchase decisions under  TARP.
Fully implement a communication strategy that ensures that all key congressional stakeholders are  adequately informed and kept up to date about TARP  Expedite efforts to conduct usability testing to measure the quality of users’ experiences with the  financial stability Web site and measure customer satisfaction with the site, using appropriate tools such  as online surveys, focus groups, and e-mail feedback forms.
Explore options for providing to the public more detailed information on the costs of TARP contracts and  agreements, such as a dollar breakdown of obligations and/or expenses.
Finally, to help improve the transparency of Capital Assistance Program (CAP)—in particular the stress  tests results—we recommend that the Director of Supervision and Regulation of the Federal Reserve  consider periodically disclosing to the public the aggregate performance of the largest 19 U.S. bank  holding companies against the more adverse scenario forecast numbers for the duration of the 2-year  forecast period and whether or not the scenario needs to be revised. At a minimum, the Federal Reserve  should provide the aggregate performance data to OFS program staff for any of the 19 institutions  participating in CAP or CPP.
Consider methods of monitoring whether borrowers with total household debt of more than 55 percent of  their income who have been told that they must obtain housing counseling do so, and assessing how  this counseling affects the performance of modified loans to see if the requirement is having its intended  effect of limiting redefaults.
Re-evaluate the basis and design of the Home Price Decline Protection (HPDP) program to ensure that  Home Affordable Modification Program (HAMP) funds are being used efficiently to maximize the number  of borrowers who are helped under HAMP and to maximize overall benefits of utilizing taxpayer dollars.
Institute a system to routinely review and update key assumptions and projections about the housing  market and the behavior of mortgage-holders, borrowers, and servicers that underlie Treasury’s  projection of the number of borrowers whose loans are likely to be modified under HAMP and revise the  projection as necessary in order to assess the program’s effectiveness and structure.
Place a high priority on fully staffing vacant positions in the Homeownership Preservation Office— including filling the position of Chief Homeownership Preservation Officer with a permanent placement— and evaluate the office’s staffing levels and competencies to determine whether they are sufficient and  appropriate to effectively fulfill its HAMP governance responsibilities.
Expeditiously finalize a comprehensive system of internal control over HAMP, including policies,  procedures, and guidance for program activities, to ensure that the interests of both the government and  taxpayer are protected and that the program objectives and requirements are being met once loan  modifications and incentive payments begin.
Expeditiously develop a means of systematically assessing servicers’ capacity to meet program  requirements during program admission so that Treasury can understand and address any risks  associated with individual servicers’ abilities to fulfill program requirements, including those related to  data reporting and collection.
Consider TARP in a broad market context, and as part of determining whether to extend TARP work  with the Chairmen of the Federal Reserve and FDIC to develop a coordinated framework and analytical  basis to determine whether an extension is needed. And if so, clearly spell out what objectives and  measures of any extended programs would be, along with anticipated costs and safeguards.
Document its analytical decision-making process and clearly communicate the results to Congress and  the American people for determining whether an extension is needed.
Update its projected use of funds and if the program is extended, continue to reevaluate them on a  periodic basis.
Ensure that Treasury has the expertise needed to adequately monitor and divest the government’s  investment in Chrysler Group LLC (Chrysler) and General Motors Company (GM), and obtain needed  expertise in areas where gaps are identified (either through in-house or external means).
Report to Congress on Treasury’s plans to assess and monitor the auto companies’ performance and  ability to repay their loans. When reporting, balance the need for transparency with need to protect  proprietary information.
Develop criteria for evaluating the optimal method and timing for divesting the government’s ownership  stake in Chrysler and GM, including evaluating the full range of available options, such as initial public  offerings or private sales.
To enable GAO to audit TARP support for Term Asset-Backed Securities Loan Facility (TALF) most  effectively, Congress may wish to provide GAO with audit authority over all Federal Reserve operational  and administrative actions taken with respect to TALF, together with appropriate access authority.
To improve transparency of decision making on the use of TARP funds for TALF and to ensure  adequate monitoring of risks related to TALF collateral, given the distressed conditions in the  commercial real estate market, as part of its ongoing monitoring of TALF collateral, the Secretary of the  Treasury should direct theOFS to continue to give greater attention to reviewing risks posed by  commercial mortgage-backed securities.
To improve transparency of decision making on the use of TARP funds for TALF and to ensure  adequate monitoring of risks related to TALF collateral, the Secretary of the Treasury should direct the  OFS to strengthen the process for making major program decisions for TALF and document how it  arrives at final decisions with the Federal Reserve and Federal Reserve Bank of New York (FRBNY).  Such decisions should include how Treasury considers expert and contractor recommendations and  resolves those recommendations that differ from those of the Federal Reserve and FRBNY.
To improve transparency of decision making on the use of TARP funds for TALF and to ensure  adequate monitoring of risks related to TALF collateral, the Secretary of the Treasury should direct the  OFS to conduct a review of what data to track and metrics to disclose to the public in the event that  TALF LLC purchases surrendered assets from FRBNY. Such data and metrics should relate to the  purchase, management, and sale of assets in TALF LLC that potentially impact TARP funds. Metrics  related to TALF LLC could include periodic reports on the date and purchase price of assets; fluctuations  in the market value of assets held; the date, price, and rationale when assets are sold; and the total  amount of loans outstanding to Treasury.
Establish clear and specific criteria for determining whether a borrower is in imminent default to ensure  greater consistency across servicers.
Develop additional guidance for servicers on their quality assurance programs for HAMP, including  greater specificity on how to categorize loans for sampling and what servicers should be evaluating in  their reviews.
Specify which complaints servicers should track to ensure consistency and to facilitate program  oversight and compliance.
More clearly inform borrowers that the HOPE Hotline may also be used if they are having difficulty with  their HAMP application or servicer or feel that they have been incorrectly denied HAMP, monitor the  effectiveness of the HOPE Hotline as an escalation process for handling borrower concerns about  potentially incorrect HAMP denials, and develop an improved escalation mechanism if the HOPE Hotline  is not sufficiently effective.
Finalize and issue consequences for servicer noncompliance with HAMP requirements as soon as  possible.
Report activity under the principal reduction program, including the extent to which servicers determined  that principal reduction was beneficial to investors but did not offer it, to ensure transparency in the  implementation of this program feature across servicers.
Finalize and implement benchmarks for performance measures under the first-lien modification program,  as well as develop measures and benchmarks for the recently announced TARP-funded homeowner  assistance programs.
Implement a prudent design for remaining TARP-funded housing programs.
Formalize and document coordination with the Chairman of the FDIC for decisions associated with the  expiration of TARP (1) by including the Chairman at relevant FinSOB meetings, (2) through formal  bilateral meetings, or (3) by utilizing other forums that accommodate more structured dialogue.
Publicly identify clear program objectives, the expected impact of programs, and the level of additional  resources needed to meet those objectives. Set quantitative program objectives for its small business  lending programs and identify any additional data needed to make program decisions.
To gain a better understanding of the Supervisory Capital Assistance Program (SCAP) and inform the  use of similar stress tests in the future, the Federal Reserve should compare the performance of the 19  largest bank holding companies against the more adverse scenario projections following the completion  of the 2-year period covered in the SCAP stress test ending December 31, 2010, and disclose the  results of the analysis to the public.
The Federal Reserve, in consultation with the other banking regulators, should develop a plan that  reconciles the divergent views on transparency and allows for increased transparency in the regular  supervisory process. Such a plan should, at a minimum, outline steps for releasing supervisory  methodologies and analytical results for stress testing.
The Federal Reserve, in consultation with the other banking regulators, should develop more specific  criteria to include in its guidance to examiners for assessing the quality of stress tests and how these  tests inform bank holding companies capital adequacy planning. These guidelines should clarify the  stress testing procedures already incorporated into banking regulations and incorporate lessons learned  from SCAP.
The Federal Reserve, in consultation with the other banking regulators, should fully develop its plan for  maintaining and improving the use of data, risk identification and assessment infrastructure, and  requisite systems in implementing its supervisory functions and new responsibilities under the Dodd- Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). This plan should also ensure  the dissemination of these enhancements throughout the Federal Reserve System and other financial  regulators, as well as new organizations established in the Dodd-Frank Act.
The Federal Reserve, in consultation with the other banking regulators, should take further steps to  more effectively coordinate and communicate among the banking regulators, including that all applicable  agencies are included in discussions and decisions regarding multi-agency activities, such as horizontal  examinations of financial institutions.
Apply lessons learned from the implementation of CPP to similar programs, such as Small Business  Lending Fund, and enhance procedural controls for addressing the risk of inconsistency in regulators’  decisions on withdrawals. Specifically, establish a process for collecting information from federal bank  regulators on all applicants that withdraw from consideration in response to a regulator’s  recommendation, including the reasons behind the recommendation. Evaluate the information to identify  trends or patterns that may indicate whether similar applicants were treated inconsistently across  different regulators and take action, if necessary, to help ensure a more consistent treatment.
Periodically collect and review certain information from federal bank regulators on the analysis and  conclusions supporting their decisions on CPP repayment requests and provide feedback for the  regulators’ consideration on the extent to which regulators are evaluating similar institutions consistently.
These recommendations were made to the Federal Reserve.
section_title: Appendix II: Small Business Credit
subsections: section_title: Large Banks Devote a Small Percentage of Total Lending to Small Business Loans, although the Total Dollar Value of the Loans Is Significant
paragraphs: As a proportion of their outstanding value of total loans, large banks have  the smallest percentage of small business loans of all lenders. In  examining the proportion of the outstanding value of small business loans  at banks and credit unions, we found that the largest banks—banks with  $10 billion or greater in total assets—consistently held the smallest share  of small business loans as a percentage of their total loans (see fig. 9).
Despite the small number of small business loans to total loans, larger  banks consistently deliver the largest dollar amount of loans to small  businesses (see fig. 10).
section_title: Credit Unions Overall Devote a Small Percentage of Total Lending to Small Business Loans, though Larger Credit Unions Do More Small Business Lending
paragraphs: Credit unions have smaller business loan portfolios than other depository  institutions, in part because they are restricted in the dollar value of small  business loans they can extend. By 2009, the largest credit unions had  significantly increased their value of small business loans to 6.5 percent  (see fig. 11). The National Credit Union Association has noted in a  supervisory letter to their credit unions that business loans have grown by  60 percent from 2005 to 2009. The smallest credit unions—those with less  than $20 million in assets—hold less than 2 percent of member business  loans to total loans.
section_title: The Small Business Administration Also Provides Financing to Small Businesses, and Those Markets Are Beginning to Recover after Sharp Declines
paragraphs: The Small Business Administration’s (SBA) 7(a) and 504 loan programs  are intended to facilitate the capacity of small businesses to raise  financing they cannot obtain from other private lending institutions.  Originations of government-guaranteed small business loans (by dollar  value) faced steep declines during the onset of the financial crisis, though  volumes have since recovered. SBA loan approvals sharply declined in  2009 from 2008 levels but increased guarantees and reduced fees on 7(a)  loans initiated through the American Recovery and Reinvestment Act  (Recovery Act) helped increase loan volumes from fiscal year 2009 to  fiscal year 2010 (see fig. 12).
The SBA data also show that secondary markets have recently stabilized.  For example, figure 13 illustrates that the guaranteed portion of 7(a) loans  sold on the secondary market averaged about 45 percent from fiscal years  2006 through 2008, but declined to 35 percent in fiscal year 2009 and  increased to 37 percent in fiscal year 2010.
section_title: Data Suggest that Small Businesses Face Credit Constraints
paragraphs: During the recent financial crisis, many financial institutions faced severe  capital shortfalls that threatened their solvency and limited their ability to  lend. In addition, the securitization markets came to a virtual halt, freezing  sources of funds for new lending to consumers and businesses. This  contraction has affected many businesses, but in particular small  businesses. For example, the Federal Reserve Senior Loan Officer Opinion  Survey on Bank Lending Practices (SLOOS) in April 2010 showed  somewhat larger net fractions of banks having tightened loan terms for  small firms than had done so for medium-sized and large firms. However,  the July 2010 survey showed a slight easing of standards for credit to small  firms—the first such loosening since 2006. Further, the August 2010 Small  Business Economic Trends survey from the National Federation of  Independent Business (NFIB) shows that 9 percent of small businesses  reported their borrowing needs had not been satisfied, an increase from  about 6 percent since the fourth quarter of 2007. In comparison, during  the recession in 2001, there was no change in this number.
Since the recent financial crisis, bank lending trends suggest that access to  credit for small businesses has become more restricted. Because small  banks tend to be concentrated in small business lending, measuring  lending trends at small banks should provide particular insight into credit  conditions facing small businesses. The Board of Governors of the  Federal Reserve (Federal Reserve) calculates interest rate spreads (a  measure of the risk and other costs banks perceive in making loans) on  loans from large and small banks based on the Survey of Terms of  Business Lending. Spreads for loans less than $1 million—a proxy for  loans to small businesses—made by small banks have risen 181 basis  points from their precrisis lows (see fig. 15) and remain among the highest  levels recorded since 1986. Increased spreads at small banks—more so  than large banks—are likely to indicate increased perceptions of risk for  small business loans. need not atified (percentge reponding)
A basis point is a common measure used in quoting yields on bills, notes, and bonds. A  basis point represents .01 percent, or one-hundredth of a percent. In other words, 100 basis  points equals 1 percent. For example, the difference between 1 percent and 1.5 percent  would be expressed as 50 basis points.
Spreads for small loans at large banks have risen less dramatically—110 basis points from  recent lows.  However, these loans may not represent small business loans and may instead  be small amounts drawn on loan commitments to large firms. somewhat higher for small banks than for large banks. In addition, both  interest rate spreads and small businesses reporting unsatisfied borrowing  needs show a substantial increase in recent years. Moreover, the high  correlation between interest rate spreads for small loans, especially at  small banks, and the proportion of small businesses able to satisfy their  borrowing needs suggests that the perceived deterioration in credit quality  is contributing to the reduced access to credit for small businesses. In  essence, small businesses are finding it harder to get credit in part because  banks believe those firms are at increased risk of default.
Whether the supply of or the demand for credit plays a larger role in  explaining the tighter credit conditions for small businesses remains  unclear. According to the recent NFIB Economic Trends survey, the  majority of respondents cited poor sales, taxes, and government  requirements as their single most important problem, with only a small  fraction of respondents citing access to credit—indicating that concerns  about credit access are important but not the most important issue facing  small businesses. SLOOS survey responses in July 2010 also point to  weaker demand for credit across both small firms and medium-sized and  large firms. With declining sales, these results indicate that many small  businesses are not growing and therefore have less need for credit. In  contrast, some small businesses that are growing may face challenges in  accessing credit or may not seek it for fear of being denied, according to  some small businesses.
section_title: Small Business Data Have a Number of Limitations
paragraphs: We and others have noted that limitations in the available data hinder a  complete analysis of the credit constraints facing small businesses, which  creates challenges in trying to address this issue. First, definitions of  small businesses vary across data sources and many sources are survey- based and not always nationally representative. Second, because banks  are not generally required to collect and report information on lending to  small businesses, certain data sources use proxies for such lending. Some  quantitative loan origination data are available, but these data are also  limited. For example, the largest Capital Purchase Program (CPP)  recipients were required to report loan origination information on their  small business lending until they fully repaid their capital; thus Treasury  only received this type of information for a short period of time for most of  these institutions. Based on our analysis of the data and interviews with  Treasury and Federal Reserve officials, table 11 summarizes the key  benefits and limitations of the sources considered to assess small business  credit conditions for small business programs.
section_title: Appendix III: Econometric Analysis of the TED Spread
paragraphs: We conducted an econometric analysis to assess the impact of the early  end of the Department of Treasury’s (Treasury) authority to incur new  obligations under the Troubled Asset Relief Program (TARP) (for brevity  we denote this “the early end of TARP”) and the passage of the Dodd- Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)  on the TED spread, an indicator of risk in the interbank lending market.  Our multivariate econometric model uses an event study design (with  elements of a difference-in-difference model) using daily data on the TED  spread. In lieu of relying on graphing and identifying trends in the data  before and after the announcement, the goal of this exercise was to  determine whether the decline in the TED spread in the near term after the  deal to end TARP early and pass financial regulatory reform was  statistically significant when other important variables were also  considered, in particular, other measures of short term credit risk.  Economic theory offers no unified or straightforward predictions about  the impact of such a simultaneous change in policy. The early end of TARP  could, in isolation, (1) increase perceptions of risk in lending to banks as  Treasury would lose the ability to use TARP funds to respond new threats  to financial stability or (2) have no effect if the market perceived financial  institutions had built up adequate capital and liquidity to weather a new  shock to the financial system. Alternatively, if markets took the early end  of TARP as a signal that the government believed that financial institutions  were sound, it could reduce perceptions of risk in the interbank market.  The passage of regulatory reform could reduce perceptions of risk in the  interbank market to the extent that it implies increases in capital and  liquidity at financial institutions or otherwise enhances financial stability,  or increase perceptions of risk if, for example, a new “orderly liquidation  authority” reduced the necessity to bail out creditors in systemically  important financial institutions. In short, the multitude of potential  theoretical channels for the early end of TARP and passage of regulatory  reform imply that their ultimate impact is an empirical question.
The primary regressions model changes in the 3-month TED spread as a  function of contemporaneous changes in the spread between 90-day  nonfinancial commercial paper and 3-month Treasury bonds. The  nonfinancial commercial paper spread should have favorable properties as  a control variable: it has the same maturity as the TED spread, and is likely  to capture general credit risk in the economy but does not cover financial  firms and thus is less apt to be confounded by (although is not fully  insulated from) reverse causality. Other control variables we used were  daily changes in the S&P 500 and the term spread (measured as the  difference between the 10-year and 3-month Treasury bonds). We used a  dummy variable to indicate news of the deal to end TARP early and pass  financial regulatory reform. To carry out the exercise as validly as  possible, we conducted tests to ensure the stationarity of the variables in  the model, used heteroskedasticity and autocorrelation-consistent  standard errors, and conducted sensitivity analysis. To help ensure that  our results were not sensitive to the main specification we chose, we ran  the model with a number of variations, including    a variety of event start dates, including June 29, 2010, when news of the  likely passage of financial regulatory reform was reported; June 30, 2010,  one day after (when the conference report passed in the House of  Representatives); June 22, 2010, one week before (to address the  possibility that information became available to market participants before  media reports of the deal); and July 15, 2010, (when the conference report  passed in the Senate), two different nonfinancial commercial paper rates, AA and the higher  credit risk A2/P2 rate, longer maturity (6-month and 12-month) TED spreads,   a time trend, and    an autoregressive model where changes in the TED spread were modeled  as a function of lagged values of itself rather than control variables.
In numerous specifications we found that news of the early end of TARP  and likely passage of financial regulatory reform did not have a  statistically significant impact on the TED spread. The effect is also  economically inconsequential, less than four-tenths of a basis point (itself  one one hundredth of a percent) deterioration in the TED spread (per day)  in our primary specification. Whether the muted response to news of the  early end of TARP is because market participants did not view it as a  meaningful event, or because the simultaneous increase in the likelihood  of financial regulatory reform counteracted any effect, is unknown.  Because we may not have captured all important factors that might  explain movements in the TED spread, omitted variable bias remains a  possibility. Furthermore, this test assesses market participants’ initial  expectations and not the ultimate impact of the early end of TARP and  passage of financial regulatory reform. In addition, ending TARP less than  3 months early, along with previous announcements related to TARP exits  beginning in late 2009, could have limited informational content relevant  for interbank markets in the June 29, 2010, announcement. Finally,  because we use contemporaneous variables, in particular the nonfinancial  commercial paper spread, it is possible that reverse causation would result  in our model being misspecified.
section_title: Appendix IV: Department of the Treasury Comment Letter
section_title: Appendix V: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above, A. Nicole Clowers, Gary Engel,  Mathew J. Scirè, and William T. Woods (lead Directors); Lawrance Evans,  Jr., Dan Garcia-Diaz, Lynda Downing, Carolyn Kirby, Kay Kuhlman, Harry  Medina, Joseph O’Neill, Raymond Sendejas, and Karen Tremba (lead  Assistant Directors); Kevin Averyt; Ken Bombara; Tania Calhoun; Emily  Chalmers; William Chatlos; Rachel DeMarcus; Sharon Dyer; Sarah Farkas;  John Forrester; Michael Hoffman; Christine Houle; Joe Hunter; Karen  Jarzynka; Elizabeth Jimenez; Charles Jones; John Karikari; Tory Klepacz;  Heather Krause; Damian Kudelka; Robert Lee; Grant Mallie; Karine  McClosky; Tim Mooney; Susan Michal-Smith; Daniel Newman; Lauren  Nunnally; Anna Maria Ortiz; Jared Sippel; Winnie Tsen; Jim Vitarello;  Letisha Watson; and Chris Yfantis have made significant contributions to  this report.
section_title: Related GAO Products
paragraphs: Financial Audit: Office of Financial Stability (Troubled Asset Relief  Program) Fiscal Years 2010 and 2009 Financial Statements.  GAO-11-174. November 15, 2010.
Troubled Asset Relief Program: Opportunities Exist to Apply Lessons  Learned from the Capital Purchase Program to Similarly Designed  Programs and to Improve the Repayment Process. GAO-11-47. October 4,  2010.
Troubled Asset Relief Program: Bank Stress Test Offers Lessons as  Regulators Take Further Actions to Strengthen Supervisory Oversight.  GAO-10-861. September 29, 2010.
Financial Assistance: Ongoing Challenges and Guiding Principles  Related to Government Assistance for Private Sector Companies.  GAO-10-719. August 3, 2010.
Troubled Asset Relief Program: Continued Attention Needed to Ensure  the Transparency and Accountability of Ongoing Programs.  GAO-10-933T. July 21, 2010.
Management Report: Improvements are Needed in Internal Control Over  Financial Reporting for the Troubled Asset Relief Program.  GAO-10-743R. June 30, 2010.
Troubled Asset Relief Program: Treasury’s Framework for Deciding to  Extend TARP Was Sufficient, but Could be Strengthened for Future  Decisions. GAO-10-531. June 30, 2010.
Troubled Asset Relief Program: Further Actions Needed to Fully and  Equitably Implement Foreclosure Mitigation Programs. GAO-10-634.  June 24, 2010.
Debt Management: Treasury Was Able to Fund Economic Stabilization  and Recovery Expenditures in a Short Period of Time, but Debt  Management Challenges Remain. GAO-10-498. May 18, 2010.
Troubled Asset Relief Program: Update of Government Assistance  Provided to AIG. GAO-10-475. April 27, 2010.
Troubled Asset Relief Program: Automaker Pension Funding and  Multiple Federal Roles Pose Challenges for the Future. GAO-10-492. April  6, 2010.
Troubled Asset Relief Program: Home Affordable Modification Program  Continues to Face Implementation Challenges. GAO-10-556T. March 25,  2010.
Troubled Asset Relief Program: Treasury Needs to Strengthen Its  Decision-Making Process on the Term Asset-Backed Securities Loan  Facility. GAO-10-25. February 5, 2010.
Troubled Asset Relief Program: The U.S. Government Role as Shareholder  in AIG, Citigroup, Chrysler, and General Motors and Preliminary Views  on its Investment Management Activities. GAO-10-325T. December 16,  2009.
Financial Audit: Office of Financial Stability (Troubled Asset Relief  Program) Fiscal Year 2009 Financial Statements. GAO-10-301.  December 9, 2009.
Troubled Asset Relief Program: Continued Stewardship Needed as  Treasury Develops Strategies for Monitoring and Divesting Financial  Interests in Chrysler and GM. GAO-10-151. November 2, 2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions  for October 28, 2008, through September 25, 2009, and Information on  Financial Agency Agreements, Contracts, Blanket Purchase Agreements,  and Interagency Agreements Awarded as of September 18, 2009.   GAO-10-24SP. October 8, 2009.
Troubled Asset Relief Program: One Year Later, Actions Are Needed to  Address Remaining Transparency and Accountability Challenges.   GAO-10-16. October 8, 2009.
Debt Management: Treasury Inflation Protected Securities Should Play a  Heightened Role in Addressing Debt Management Challenges.  GAO-09-932. September 29, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-1048T. September 24,  2009.
Troubled Asset Relief Program: Status of Government Assistance  Provided to AIG. GAO-09-975. September 21, 2009.
Troubled Asset Relief Program: Treasury Actions Needed to Make the  Home Affordable Modification Program More Transparent and  Accountable. GAO-09-837. July 23, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-920T. July 22, 2009.
Troubled Asset Relief Program: Status of Participants’ Dividend  Payments and Repurchases of Preferred Stock and Warrants.  GAO-09-889T. July 9, 2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions  for October 28, 2008, through March 20, 2009, and Information on  Financial Agency Agreements, Contracts, Blanket Purchase Agreements,  and Interagency Agreements Awarded as of June 1, 2009. GAO-09-707SP.  June 17, 2009.
Troubled Asset Relief Program: June 2009 Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-658. June 17, 2009.
Auto Industry: Summary of Government Efforts and Automakers’  Restructuring to Date. GAO-09-553. April 23, 2009.
Small Business Administration’s Implementation of Administrative  Provisions in the American Recovery and Reinvestment Act.  GAO-09-507R. April 23, 2009.
Troubled Asset Relief Program: March 2009 Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-539T. March 31, 2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions  for the Period October 28, 2008 through March 20, 2009 and  Information on Financial Agency Agreements, Contracts, and Blanket  Purchase Agreements Awarded as of March 13, 2009. GAO-09-522SP.  March 31, 2009.
Troubled Asset Relief Program: March 2009 Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-504. March 31, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-484T. March 19, 2009.
Federal Financial Assistance: Preliminary Observations on Assistance  Provided to AIG. GAO-09-490T. March 18, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-474T. March 11, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-417T. February 24,  2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-359T. February 5, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-296. January 30, 2009.
High-Risk Series: An Update. GAO-09-271. January 22, 2009.
Troubled Asset Relief Program: Additional Actions Needed to Better  Ensure Integrity, Accountability, and Transparency. GAO-09-266T.  December 10, 2008.
Auto Industry: A Framework for Considering Federal Financial  Assistance. GAO-09-247T. December 5, 2008.
Auto Industry: A Framework for Considering Federal Financial  Assistance. GAO-09-242T. December 4, 2008.
Troubled Asset Relief Program: Status of Efforts to Address Defaults and  Foreclosures on Home Mortgages. GAO-09-231T. December 4, 2008.
Troubled Asset Relief Program: Additional Actions Needed to Better  Ensure Integrity, Accountability, and Transparency. GAO-09-161.  December 2, 2008.