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
Published: 2009-12-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The recent financial crisis resulted in a wide-ranging federal response that included infusing capital into several major corporations. The Troubled Asset Relief Program (TARP) has been the primary vehicle for most of these actions. As a result of actions and others, the government is a shareholder in the American International Group (AIG), Citigroup Inc. (Citi), Chrysler Group LLC (Chrysler), and General Motors Company (GM), among others. As market conditions have become less volatile, the government has been considering how best to manage these investments and ultimately divest them. This testimony discusses (1) the government's approach to past crisis and challenges unique to the current crisis; (2) the principles guiding the Department of the Treasury's implementation of its authorities and mechanisms for managing its investments; and (3) preliminary views from GAO's ongoing work with the Special Inspector General for TARP on the federal government's monitoring and management of its investments. This statement builds on GAO's work since the 1970s on providing government assistance to large corporations and more recent work on oversight of the assistance and investments provided under TARP. In its November 2009 report, GAO recommended that Treasury ensure it has expertise needed to monitor its investment in Chrysler and GM and that it has a plan for evaluating the optimal method and timing for divesting this equity.
section_title: What GAO Found
paragraphs: Looking at the government's role in providing assistance to large companies dating back to the 1970s, we have identified principles that serve as a framework for such assistance; including identifying and defining the problem, setting clear goals and objectives that reflect the national interests, and protecting the government's interests. These actions have been important in the past, but the current financial crisis has unique challenges, including the sheer size and scope of the crisis, that have affected the government's actions. As a result, the government's response has involved actions on the national and international levels and oversight and monitoring activities tailored to specific institutions and companies. We have also reported on considerations important for Treasury's approach to monitoring its investments in the companies that received assistance. The administration developed several guiding principles for managing its ownership interest in AIG, Citigroup, Chrysler, and GM. It does not intend to own equity stakes in companies on a long-term basis and plans to exit from them as soon as possible. It reserves the right to set up-front conditions to protect taxpayers, promote financial stability, and encourage growth. It intends to manage its ownership stake in institutions and companies in a hands-off, commercial manner and to vote only on core governance issues, such as the selection of a company's board of directors. Treasury has also required companies and institutions that receive assistance to report on their use of funds and has imposed restrictions on dividends and repurchases, lobbying expenses, and executive compensation, among other things. As part of its oversight efforts, it also monitors a number of performance benchmarks. Chrysler and GM will submit detailed financial and operational reports to Treasury, while an asset management firm will monitor the data on Citi, including credit spreads, liquidity and capital adequacy. To monitor its investment in AIG, Treasury coordinates with the Federal Reserve Bank of New York in tracking liquidity and cash reports, among other indicators. Treasury directly manages its investment in Citi, Chrysler, and GM, but the common equity investment in AIG, obtained with the assistance of the Federal Reserve, is managed through a trust arrangement. Each of these management strategies has advantages and disadvantages. Directly managing the investment affords the government the greatest amount of control but could create a conflict of interest if the government both regulates and has an ownership share in the institutions and could expose the government to external pressures. A trust structure, which places the government's interest with a third party, could mitigate any potential conflict-of-interest risk and reduce external pressures. But a trust structure would largely remove accountability from the government for managing the investment. GAO is reviewing Treasury's plans for managing and divesting itself of its investments, but the plans are still evolving, and, except for Citi, Treasury has yet to develop exit strategies for unwinding the investments.

section_title: Letter
paragraphs: We are pleased to be here to discuss the federal government’s role as  shareholder in American International Group (AIG), Citigroup Inc. (Citi),  Chrysler Group LLC (Chrysler), and General Motors Company (GM). As  you know, the recent financial crisis resulted in a wide-ranging federal  response that included providing large infusions of capital into the  financial system and automotive industry, sometimes in the form of  common equity investments. The Troubled Asset Relief Program (TARP),  which was created under the Emergency Economic Stabilization Act of  2008 (the act), has been the primary vehicle for making these equity  investments. As market conditions have become less volatile, Treasury is  working to determine how best to manage these investments and  ultimately divest itself of them.
The government has purchased equities in hundreds of financial  institutions and other companies under TARP.  As requested, our  statement today focuses on four of them:  AIG, Citi, Chrysler, and GM.  Specifically, we will address three broad issues relating to the  government’s ownership interest:  the historical context of large-scale federal financial assistance programs  and the challenges specific to the current crisis; the U.S. Department of the Treasury’s (Treasury) implementation of its  authorities under the act and management of its investments in each  company; and   preliminary observations on the federal government’s role as shareholder  from our ongoing work with the Special Inspector General for TARP  (SIGTARP).
This statement builds primarily on our work since the 1970s on providing  government assistance to large corporations; our recent work on the  oversight of the assistance and investments provided under TARP,  including the government’s investments in AIG, Citi, Chrysler, and GM; and  our ongoing work on the role of the federal government as shareholder  that we have undertaken with SIGTARP. As part of our ongoing work, we  have reviewed relevant laws, regulations, guidance, and documents and  interviewed relevant federal and company officials. We conducted our  ongoing work from August 2009 through December 2009 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.
subsections: section_title: Background
paragraphs: The act’s purposes are to provide Treasury with the authorities and  facilities to restore liquidity and stability to the U.S. financial system while  protecting taxpayers, including the value of their homes, college funds,  retirement accounts, and life savings. The act also mandated that  Treasury’s efforts help preserve homeownership and promote jobs and  economic growth, maximize overall returns to taxpayers, and provide  public accountability for the exercise of its authority. The act created OFS  within Treasury to administer TARP, which in turn created a number of  programs designed to address various aspects of the unfolding financial  crisis. Some of those programs resulted in the government having an  ownership interest in several companies.
The Capital Purchase Program (CPP) is the largest program, with several  hundred participants, including Citi. Created in October 2008, it aimed to  stabilize the financial system by providing capital to viable banks through  the purchase of preferred shares and subordinated debentures. In addition  to the value of the assets purchased, these transactions require that the  fixed dividends be paid on the preferred shares, that the debentures  accrue interest, and that all purchases are accompanied by a warrant to  purchase either common stock or additional senior debt instruments. Citi  is one of several hundred participants in this program.
The Targeted Investment Program (TIP) was created in November 2008 to  foster market stability and thus strengthen the economy by investing in  institutions that Treasury deemed critical to the functioning of the  financial system. In addition to the value of the assets purchased,  transactions under this program also required that the fixed dividends be  paid on the preferred shares, and that all purchases be accompanied by a  warrant to purchase common stock or additional senior debt instruments.  TIP provided assistance to two institutions, which Treasury selected on a  case-by-case basis. Citi is the only remaining participant but has recently  announced plans to repay the Treasury.
The Asset Guarantee Program (AGP) was created in November 2008 to  provide federal government assurances for assets held by financial  institutions that were deemed critical to the functioning of the U.S.  financial system. Citigroup is the only institution participating in AGP. As a  condition of participation, Citigroup issued preferred shares to the  Treasury and the Federal Deposit Insurance Corporation (FDIC) and  warrants to Treasury in exchange for their participation, along with the  Federal Reserve Bank of New York (FRBNY) $301 billion of loss  protection on a specified pool of Citigroup assets.
The Systemically Significant Failing Institutions Program was created in  November 2008 to help avoid disruptions to financial markets from an  institutional failure that Treasury determined would have broad  ramifications for other institutions and market activities. AIG has been the  only participant in this program and was targeted because of its close ties  to other institutions. Assistance provided under this program is in addition  to the assistance provided by FRBNY. Under this program, Treasury owns  preferred shares and warrants. Treasury now refers to this program as the  AIG, Inc. Investment Program.
The Automotive Industry Financing Program (AIFP) was created in  December 2008 to prevent a significant disruption of the U.S. automotive  industry. Treasury has determined that such a disruption would pose a  systemic risk to financial market stability and have a negative effect on the  U.S. economy. The program requires participating institutions to  implement plans to show how they intend to achieve long-term viability.  Chrysler and GM participate in AIFP.
section_title: The Federal Response to the Current Financial Crisis Builds on Responses to Past Crises but Faces Unique Challenges
paragraphs: The government has a long history of intervening in markets during times  of crisis. From the Great Depression to the Savings and Loan crisis of the  1980s, the government has shown a willingness to intervene in private  markets when national interests are at stake. It has undertaken financial  assistance efforts on a large scale, including to private companies and  municipalities—for example, Congress created separate financial  assistance programs totaling over $12 billion to stabilize Conrail,  Lockheed, Chrysler, and the New York City government during the 1970s.  Most recently, in response to the most severe financial crisis since the  Great Depression, Congress authorized Treasury to buy or guarantee up to  $700 billion of the “troubled assets” that were deemed to be at the heart of  the crisis. The past and current administrations have used this funding to  help stabilize the financial system and domestic automotive industry.  While TARP was created to help address the crisis, the Treasury, Federal  Reserve Board, FRBNY, and FDIC have also taken a number of steps to  address the unfolding crisis.
Looking at the government’s role in providing assistance to large  companies dating back to the 1970s, we have identified three fundamental  principles that can serve as a framework for large-scale federal financial  assistance efforts and that still apply today. These principles are  identifying and defining the problem, determining the national interests  and setting clear goals and objectives that reflect them, and protecting the  government’s interests. The federal response to the current financial crisis  generally builds on these principles.
Identifying and defining the problem includes separating out those issues  that require an immediate response from structural challenges that will  take more time to resolve. For example, in the case of AIFP, Treasury  identified as a problem of national interest the financial condition of the  domestic automakers and its potential to affect financial market stability  and the economy at large. In determining what actions to take to address  this problem, Treasury concluded that Chrysler’s and GM’s lack of liquidity  needed immediate attention and provided short-term bridge loans in  December 2008. Treasury also required Chrysler and GM to prepare  restructuring plans that outlined how the automakers intended to achieve  long-term financial viability and provided financial assistance to help them  through the restructuring process.
Determining national interests and setting clear goals and objectives that  reflect them requires deciding whether a legislative solution or other  government intervention best serves the national interest. For example,  during the recent crisis Congress determined that government action was  needed and Treasury determined that the benefits of intervening to  support what were termed “systemically significant” institutions far  exceeded the costs of letting these firms fail. As we have also seen during  the current crisis, companies receiving assistance should not remain under  federal protection indefinitely, and as we discuss later, Treasury has been  clear that it wants to divest as soon as practicable.
Because large-scale financial assistance programs pose significant  financial risk to the federal government, they necessarily must include  mechanisms to protect taxpayers. Four actions have been used to  alleviate these risks in financial assistance programs:   Concessions from others with a stake in the outcome—for example, from  management, labor, and creditors—in order to ensure cooperation and  flexibility in securing a successful outcome. For example, as a condition of  receiving federal financial assistance, TARP recipients had to agree to  limits on executive compensation and GM and Chrysler had to use their  “best efforts” to reduce their workers’ compensation to what workers at  foreign automakers receive.
Controls over management, including the authority to approve financial  and operating plans and new major contracts, so that any restructuring  plans have realistic objectives and hold management accountable for  achieving results. Under AIFP, Chrysler and GM were required to develop  restructuring plans that outlined their path to financial viability. In  February 2009, the administration rejected both companies’ restructuring  plans, and required them to develop more aggressive ones. The  administration subsequently approved Chrysler’s and GM’s revised plans,  which included restructuring the companies through the bankruptcy code.
Adequate collateral that, to the extent feasible, places the government in a  first-lien position in order to recoup maximum amounts of taxpayer funds.  While Treasury was not able to fully achieve this goal given the highly  leveraged nature of Chrysler and GM, FRBNY was able to secure collateral  on its loans to AIG.
Compensation for risk through fees and/or equity participation, a  mechanism that is particularly important when programs succeed in  restoring recipients’ financial and operational health. In return for the $62  billion in restructuring loans to Chrysler and GM, Treasury received 9.85  percent equity in Chrysler, 60.8 percent equity and $2.1 billion in preferred  stock in GM, and $13.8 billion in debt obligations between the two  companies.
These actions have been important in previous financial crises, but the  shear size and scope of the current crisis has presented some unique  challenges that affected the government’s actions. For example, as  discussed later, as Treasury attempted to identify program goals and  determine, which ones would be in the national interest, its goals were  broad and often conflicted. Likewise, while steps were taken to protect  taxpayer interests, some actions resulted in increased taxpayer exposure.  For example, preferred shares initially held in Citi offered more protection  to taxpayers than the common shares into which they were converted.  However, the conversion strengthened Citi’s capital structure. In the next  section, we discuss the federal government’s actions in the current crisis  that resulted in it having an ownership interest and provide information on  how the government is managing its interests.
In addition to these principles, we have also reported on important  considerations for Treasury in monitoring and selling its ownership  interest in Chrysler and GM, which may also serve as useful guidelines for  its investments in AIG and Citi as well. The considerations that we  identified, based on interviews with financial experts and others, include  the following:    Retain necessary expertise.  Experts stressed that it is critical for  Treasury to employ or contract with individuals with experience managing  and selling equity in private companies. Individuals with investment,  equity, and capital market backgrounds should be available to provide  advice and expertise on the oversight and sale of Treasury’s equity.
Monitor and communicate company, industry, and economic  indicators. All of the experts we spoke with emphasized the importance  of monitoring company-specific indicators and broader economic  indicators such as interest rates and consumer spending. Monitoring these  indicators allows investors, including Treasury, to determine how well the  companies, and in turn the investment, are performing in relation to the  rest of the industry. It also allows an investor to determine how receptive  the market would be to an equity sale, something that contributes to the  price at which the investor can sell.
To the extent possible, determine the optimal time and method to  divest. One of the key components of an exit strategy is determining how  and when to sell the investment. Given the many different ways to dispose  of equity—through public sales, private negotiated sales, all at once, or in  batches—experts noted that the seller’s needs should inform decisions on  which approach is most appropriate.  Experts noted that a convergence of  factors related both to financial markets and to the company itself create  an ideal window for an IPO; this window can quickly open and close and  cannot easily be predicted. This requires constant monitoring of up-to-date  company, industry, and economic indicators when an investor is  considering when and how to sell.
Manage investments in a commercial manner. Experts emphasized the  importance of Treasury resisting external pressures to focus on public  policy goals over focusing on its role as a commercial investor. For  example, some experts said that Treasury should not let public policy  goals such as job retention interfere with its goals of maximizing its return  on investment.  Nevertheless, one expert suggested that Treasury should  consider public policy goals and include the value of jobs saved and other  economic benefits from its investment when calculating its return, since  these goals, though not important to a private investor, are critical to the  economy.
section_title: Treasury Has Developed Core Principles to Guide the Management of Its Varied Ownership Interests
paragraphs: Treasury ownership interests differ across the institutions that have  received federal assistance, largely because of differences in the types of  institutions and the nature of the assistance they received. Initially,  Treasury had proposed purchasing assets from financial institutions as a  way of providing liquidity to the financial system. Ultimately, however,  Treasury determined that providing capital infusions would be the fastest  and most effective way to address the initial phase of the crisis. As the  downturn deepened, Treasury provided exceptional assistance to a  number of institutions including AIG, Citi, Chrysler, and GM. In each case,  it had to decide on the type of assistance to provide and the conditions  that would be attached. In several cases, the assistance resulted in the  government obtaining an ownership interest that must be effectively  managed.
First, Treasury has committed almost $70 billion of TARP funds for the  purchase of AIG preferred stock, $43.2 billion of which had been invested  as of September 30, 2009. The remainder may be invested at AIG’s request.  As noted earlier, FRBNY has also provided secured loans to AIG. In  consideration of the loans, AIG deposited into a trust convertible preferred  shares representing approximately 77.9 percent of the current voting  power of the AIG common shares after receiving a nominal fee ($500,000)  paid by FRBNY.  The trust is managed by three independent trustees.  The  U.S. Treasury (i.e., the general fund), not the Department of the Treasury,  is the sole beneficiary of the trust proceeds.
Second, Treasury purchased $25 billion in preferred stock from Citi under  CPP and an additional $20 billion under TIP. Each of these preferred stock  acquisitions was also accompanied by a warrant to purchase Citi common  stock. Treasury has also received $4.03 billion in Citi preferred stock  through AGP as a premium for Treasury’s participation in a guarantee  against losses on a defined pool of $301 billion of assets owned by Citi and  its affiliates. As part of a series of transactions designed to strengthen  Citi’s capital, Treasury exchanged all its preferred shares in Citi for a  combination of common shares and trust-preferred securities. This  exchange, which was completed in July 2009, gave Treasury an almost 34  percent common equity interest in the bank holding company.
Finally, under AIFP Treasury owns 9.85 percent of the common equity in  the restructured Chrysler and 60.8 percent of the common equity, plus $2.1  billion in preferred stock in the restructured GM. Treasury’s ownership  interest in the automakers was provided in exchange for the assistance  Treasury provided before and during their restructurings. The restructured  Chrysler is to repay Treasury $7.1 billion of the assistance as a term loan,  and the restructured GM is to repay $7.1 billion of the assistance as a term  loan.
subsections: section_title: Four Core Principles Guide Treasury’s Management of Its Ownership Interest
paragraphs: Recognizing the challenges associated with the federal government having  an ownership interest in the private market, the administration developed  several guiding principles for managing its TARP investments. According  to Treasury, it has developed core principles that will guide its equity  investments going forward, which are discussed in detail in OFS’s financial  report.
Acting as a reluctant shareholder. The government has no desire to  own equity stakes in companies any longer than necessary and will seek to   dispose of its ownership interests as soon as it is practical to do so—that  is, when the companies are viable and profitable and can contribute to the  economy without government involvement.
Not interfering in the day-to-day management decisions of a  company in which it is an investor. In exceptional cases, the  government may determine that ongoing assistance is necessary but will  reserve the right to set upfront conditions to protect taxpayers, promote  financial stability, and encourage growth. When necessary, these  conditions may include restructurings similar to that now under way at  GM and changes to help ensure a strong board of directors.
Ensuring a strong board of directors. After any up-front conditions are  in place, the government will protect the taxpayers’ investment by  managing its ownership stake in a hands-off, commercial manner. Any  changes to boards of directors will be designed to help ensure that they  select management with a sound long-term vision for restoring their  companies to profitability and ending the need for government support as  quickly as possible. The government will not interfere with or exert  control over day-to-day company operations, and no government  employees will serve on the boards or be employed by these companies.
Exercising limited voting rights. As a common shareholder, the  government will vote on only core governance issues, including the  selection of a company’s board of directors and major corporate events or  transactions. While protecting taxpayer resources, the government has  said that it intends to be extremely disciplined as to how it uses even these  limited rights.
Treasury’s investments have generally been in the form of nonvoting  securities. For example, the preferred shares that Treasury holds in  financial institutions under CPP do not have voting rights except in certain  limited circumstances, such as amendments to the charter of the company  or in the event that dividends are not paid for several quarters (in which  case Treasury has the right to elect two directors to the board). However,  the agreements that govern Treasury’s common ownership interest  expressly state that Treasury does not have the right to take part in the  management or operation of the company other than voting on certain  issues, which are summarized in the following table (table 1).
The AIG trust created by FRBNY owns shares that carry 77.9 percent of  the voting rights of the common stock. FRBNY has appointed three  independent trustees who have the power to vote and dispose of the stock  with prior FRBNY approval and after consultation with Treasury. The trust  agreement provides that the trustees cannot be employees of Treasury or  FRBNY, and Treasury does not control the trust or direct the actions of the  trustees. Treasury also owns AIG preferred stock, which does not have  voting rights except in certain limited circumstances (such as amendments  to the charter) or in the event dividends are not paid for four quarters, in  which case Treasury has the right to elect additional directors to the  board.
section_title: Treasury Imposed a Number of Conditions That These Companies Must Meet
paragraphs: As a condition of receiving exceptional assistance, Treasury placed certain  conditions on these companies. Specifically, the agreements with the  companies impose certain reporting requirements and include provisions  such as restrictions on dividends and repurchases, lobbying expenses, and  executive compensation. The companies were also required to establish  internal controls with respect to compliance with applicable restrictions  and provide reports certifying their compliance.
While all four institutions were subject to internal control requirements, as  set forth in the credit and other agreements that outline Treasury’s and the  companies’ roles and responsibilities, Chrysler and GM have agreed to (1)  produce a portion of their vehicles in the United States; (2) report to  Treasury on events related to their pension plans; and (3) report to  Treasury monthly and quarterly financial, managerial, and operating  information. More specifically, Chrysler must either manufacture 40  percent of its U.S. sales volume in the United States, or its U.S. production  volume must be at least 90 percent of its 2008 U.S. production volume. In  addition, Chrysler’s shareholders, including Treasury, have agreed that  Fiat’s equity stake in Chrysler will increase if Chrysler meets benchmarks  such as producing a vehicle that achieves a fuel economy of 40 miles per  gallon or producing a new engine in the United States. GM must use its  commercially reasonable best efforts to ensure that the volume of  manufacturing conducted in the U.S. is consistent with at least 90 percent  of the level envisioned in GM’s business plan. Treasury has stated that it  plans to manage its equity interests in Chrysler and GM in a hands-off  manner and does not plan to manage its interests to achieve social policy  goals. But Treasury officials also noted that some requirements reflect the  administration’s views on responsibly utilizing taxpayer resources for  these companies as well as efforts to protect Treasury’s financial interests  as a creditor and equity owner.
As a condition of receiving exceptional assistance, all four institutions  must also adhere to the executive compensation and corporate  governance rules established under the act, as amended by the American  Recovery and Reinvestment Act of 2009 (ARRA), which limited  compensation to the highest paid executives. Treasury also created the  Office of the Special Master (Special Master) to carry out this requirement.
The Special Master generally rejected the companies’ initial proposals for  compensating the top 25 executives and approved a modified set of  compensation structures with the following features:    generally limited salaries to no greater than $500,000, with the remainder  of compensation in equity;    most compensation paid as vested “stock salary,” which executives must  hold until 2011, after which it can be transferred by executives in three  equal annual installments (subject to acceleration of the company’s  repayment of TARP funds);   annual incentive compensation payable in “long-term restricted stock,”  which requires three years of service, in amounts determined based on  objective performance criteria;   actual payment of the restricted stock is subject to the company’s  repayment of TARP funds (in 25 percent installments);   $25,000 limit on perquisites and “other” compensation, absent special    no further accruals or company contributions to executive pension plans.
The Special Master also made determinations about the compensation  structures (but not individual salaries) of these companies’ next 75 most  highly compensated employees. He rejected the proposed compensation  structures for the companies subject to review, so the companies must  make additional changes to their compensation structures and resubmit  them for approval.
section_title: Treasury Monitors a Number of Performance Benchmarks as Part of Its Oversight Effort
paragraphs: One of the principles guiding the government’s management of its  investments in the companies includes monitoring and communicating  information from company, industry, and economic indicators. According  to OFS, the asset management approach is designed to implement these  guiding principles. It attempts to protect taxpayer investments and  promote stability by evaluating systemic and individual risk through  standardized reporting and proactive monitoring and ensuring adherence  to the act and compliance with contractual agreements.
Treasury has developed a number of performance benchmarks that it  routinely monitors. For example, as we reported in November, Treasury  will monitor financial and operational data such as cash flow, market  share, and market conditions and use this information to determine the  optimal time and method of sale. Similarly, for AIG and Citi, Treasury has  been monitoring liquidity, capital, profits/losses, loss reserves, and credit  ratings. Treasury has hired an outside asset management firm to monitor  its investment in Citigroup. The valuation process includes tracking  market conditions on a daily basis and collecting data on indicators such  as credit spreads, bond and equity prices, liquidity, and capital adequacy.  To monitor its investment in AIG, Treasury also coordinates with FRBNY  in tracking liquidity, weekly cash forecasts and daily cash reports, among  other indicators.
section_title: Our Ongoing Work Suggests That Different Management Strategies for Investments Have Advantages and Disadvantages and That Divestment Strategies Are Evolving
paragraphs: As part of our ongoing work with SIGTARP, we are reviewing the extent of  government involvement in the corporate governance and operations of  companies that have received exceptional assistance, Treasury’s  mechanisms for ensuring that companies are complying with key  covenants, and the government’s management of the investment and its  divestiture strategies. Today, we will highlight some of our preliminary  observations from this review including observations about the  advantages and disadvantages of managing these investments directly or  though a trust arrangement.
According to OFS, investments are managed on the individual  (institutional and program) and portfolio levels. As previously discussed,  the government generally does not manage the day-to-day activities of the  companies. Rather, Treasury monitors the financial condition of the  companies with the goal of achieving financial viability. In conducting the  portfolio management activities, OFS employs a mix of professional staff  and external asset managers. According to OFS, these external asset  managers provide periodic market-specific information such as market  prices and valuations, as well as detailed credit analysis using public  information. A portfolio management leadership team oversees the work  of asset management employees organized by program basis, so that  investment and asset managers may follow individual investments. OFS  uses this strategy to manage its investment in Citi, Chrysler, and GM, and  the independent trustees of the AIG trust manage the government’s  common equity interest in AIG. According to officials we interviewed,  each structure—managing the investment directly or through a trust—has  advantages and disadvantages.
Directly managing the investments offers two significant advantages. First,  it affords the government the greatest amount of control over the  investment. Second, having direct control over investments better enables  the government to manage them as a single portfolio. However, such a  structure also has disadvantages. For example, having the government  both regulate and hold an ownership interest in an institution or company  could create a conflict of interest and potentially expose the government  to external pressures. Treasury officials have noted that they have been  contacted by members of Congress expressing concern about dealership  closings, and as long as Treasury maintains ownership interests in  Chrysler and GM, it will likely be pressured to influence the companies’  business decisions. Further, a direct investment requires that the  government have staff with the requisite skills. For instance, as long as  Treasury maintains direct control of its ownership interest in Citi,  Chrysler, and GM, among others, it must have staff or hire contractors  with the necessary expertise in these specific types of companies. In our  previous work, we questioned whether Treasury would be able to retain  the needed expertise to assess the financial condition of the auto  companies and develop strategies to divest the government’s interests  given the substantial decline in the number of staff and lack of dedicated  staff providing oversight of its investments in the automakers. We  recommended that Treasury take action to address this concern.
In contrast, a trust structure puts the government’s interest in the hands of  an independent third party. While the Treasury has interpreted the act as  currently prohibiting placing TARP assets in a trust structure, FRBNY was  able to create a trust to manage the government’s ownership interest in  AIG. One potential advantage of a trust structure is that it helps to avoid  any potential conflicts of interest that could stem from the government’s  having both regulatory functions and its ownership interests in a company.  It also mitigates any perception that actions taken with respect to TARP  recipients were politically motivated or that any actions taken by Treasury  were based on any “inside information” received from the regulators.  Conversely, a trust structure largely removes control of the investment  from the government.  Finally, the trustees would also require specialized  staff or contractors, would need to develop their own mechanisms to  monitor the investments and analyze the data needed to assess the  financial condition of the institutions or companies and decide when to  divest.
We are reviewing Treasury’s plans for divesting its investments and so far,  have found that the strategy is evolving. Although Treasury has stated that  it intends to sell the federal government’s ownership interest as soon as  doing so is practical, it has yet to develop exit strategies for unwinding  most of these investments. For Citi, Chrysler, and GM, Treasury will  decide when and how to divest its common shares. With the exception of  the TARP investments, the AIG trustees, with FRBNY approval, generally  are responsible for developing a divestiture plan for the shares in the trust.
For Chrysler and GM, Treasury officials said that they planned to consider  all options for selling the government’s ownership stakes in each  company. However, they noted that the most likely scenario for GM would  be to dispose of Treasury’s equity in the company through a series of  public offerings. While Treasury has publicly discussed the possibility of  selling part of its equity in the company through an initial public offering  (IPO) that would occur sometime in 2010, some experts we spoke with  had doubts about this strategy. Two said that GM might not be ready for a  successful IPO by 2010, because the company might not have  demonstrated sufficient progress to attract investor interest, and two other  experts noted that 2010 would be the earliest possible time for an IPO.  Treasury officials noted that a private sale for Chrysler would be more  likely because the equity stake is smaller. Several of the experts we  interviewed agreed that non-IPO options could be possible for Chrysler,  given the relatively smaller stake Treasury has in the company (9.85  percent, versus its 60.8 percent stake in GM) and the relative affordability  of the company. Determining when and how to divest the government’s  equity stake will be one of the most important decisions Treasury will have  to make regarding the federal assistance provided to the domestic  automakers, as this decision will affect the overall return on investment  that taxpayers will realize from aiding these companies. Given the  complexity and importance of this decision, we recently recommended  that Treasury develop criteria for evaluating the optimal method and  timing for divesting its equity stake.
In closing, we would like to highlight three issues. First, as we have noted,  having clear, nonconflicting goals is a critical part of providing federal  financial assistance. Treasury, however, faces a number of competing and  at times conflicting goals. For example, the goal of protecting the  taxpayers’ interests must be balanced against its goal of divesting  ownership interests as soon as it is feasible. Consequently, Treasury must  temper any desire to exit as quickly as possible with the need to maintain  its equity interest long enough for the companies to demonstrate sufficient  financial progress. Second, an important part of Treasury’s management of  these investments is establishing and monitoring benchmarks that will  inform the ultimate decision on when and how to sell each investment. To  ensure that taxpayer interests are maximized, it will be important for  Treasury to monitor these benchmarks regularly. And finally, while many  agree that TARP funding has contributed to the stabilization of the  economy, the significant sums of taxpayer dollars that are invested in a  range of private companies warrant continued oversight and development  of a prudent divestiture plan.
Mr. Chairman, Ranking Member Jordan, and Members of the  Subcommittee, we appreciate the opportunity to discuss these critically  important issues and would be happy to answer any questions that you  may have. Thank you.
section_title: Contacts
paragraphs: For further information on this testimony, please contact Orice Williams  Brown on (202) 512-8678 or williamso@gao.gov or A. Nicole Clowers on  (202) 512-4010 or clowersa@gao.gov. Contact points for our Congressional  Relations and Public Affairs offices may be found on the last page of this  statement. Individuals making key contributions to this testimony were  Emily Chalmers, Rachel DeMarcus, Francis A. Dymond, Nancy M. Eibeck,  Sarah A. Farkas, Heather J. Halliwell, Cheryl M. Harris, Debra R. Johnson,  Christopher Ross, and Raymond Sendajas.
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