Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues
Published: 2009-09-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: This testimony discusses our work on the Troubled Asset Relief Program (TARP), under which the Department of the Treasury (Treasury), through the Office of Financial Stability (OFS), has the authority to purchase or insure almost $700 billion in troubled assets held by financial institutions. It focuses on (1) the nature and purpose of activities that have been initiated under TARP over the past year and ongoing challenges; (2) Treasury's efforts to establish a management infrastructure for TARP; and (3) outcomes measured by indicators of TARP's performance.
section_title: What GAO Found
paragraphs: TARP is one of many programs and activities the federal government has put in place over the past year to respond to the financial crisis. It represents a significant government commitment to stabilizing the financial system. For example, as of September 11, 2009, it had disbursed $363 billion to participating institutions. At the same time, TARP's Capital Purchase Program (CPP) has shown evidence of some success in returning funds to the federal government. Treasury has received almost $7 billion in dividend payments, about $2.9 billion in warrant liquidations, and over $70 billion in repurchases from institutions participating in CPP, as of August 31, 2009. But TARP still faces a variety of challenges. For example, CPP, the largest of the TARP programs, has hundreds of participating institutions. Because of its size, this program requires ongoing strong oversight to ensure that participants comply with the program's requirements as we have recommended in prior reports. In addition, most of the other investment-based TARP programs that have provided assistance to a few large individual institutions present Treasury with the challenge of determining when assistance is no longer needed. Further, amid concerns about the strategic direction of the program and lack of transparency, the new administration has attempted to provide a more strategic plan for using the remaining funds and has created a number of programs aimed at stabilizing the securitization markets and preserving homeownership. While some programs, such as the Term Asset-backed Securities Loan Facility (TALF), are fully operational, others including the Home Affordable Modification Program (HAMP) and the Public-Private Investment Program (PPIP), are still new and face ongoing implementation and operational challenges. Finally, even though substantial investments have been made to avert the collapse of American International Group, Inc. (AIG), General Motors Corporation (GM), and Chrysler LLC (Chrysler), the ultimate outcomes of these investments are unclear and will be influenced by the long-term viability of these entities. Certain of these TARP investments were made with Treasury's expectation that the disbursements would be returned to the federal government. HAMP funds, however, are direct expenditures which are not expected to be repaid. But given the many challenges and uncertainties facing TARP programs, the total cost to the government of these programs remains unclear at this time.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our work on the Troubled Asset  Relief Program (TARP), under which the Department of the Treasury  (Treasury), through the Office of Financial Stability (OFS), has the  authority to purchase or insure almost $700 billion in troubled assets held  by financial institutions. As you know, about 1 year ago, Treasury was  granted this authority in response to the financial crisis that has  threatened the stability of the U.S. banking system and the solvency of  numerous financial institutions. The Emergency Economic Stabilization  Act (the act) that authorized TARP on October 3, 2008, requires GAO to  report at least every 60 days on findings resulting from our oversight of  actions taken under the program. Our statement today draws on the 7  reports we have issued to date under this mandate and on ongoing work.  Our next report, planned to be issued early next month, will include a  detailed progress report of TARP programs and activities over the past  year.
Specifically, this statement focuses on (1) the nature and purpose of  activities that have been initiated under TARP over the past year and  ongoing challenges; (2) Treasury’s efforts to establish a management  infrastructure for TARP; and (3) outcomes measured by indicators of  TARP’s performance. To do this work, we reviewed documents provided  by OFS and conducted interviews with Treasury and OFS officials. In  addition, we have updated the program’s receipts and disbursements  through September 11, 2009. We plan to continue to monitor the issues  highlighted in this statement, as well as future and ongoing capital  purchases and ongoing repurchases. We conducted this performance audit  between June 2009 and September 2009 in accordance with generally  accepted government auditing standards.
subsections: section_title: TARP Strategy Has Evolved From Capitalizing Institutions to Stabilizing Securitization Markets and Preserving Homeownership
paragraphs: In the past year, Treasury has implemented a range of TARP programs to  stabilize the financial system. As of September 11, 2009, it had disbursed  just over $363 billion for TARP loans and equity investments (table 1). In  addition to disbursements, participating institutions have paid Treasury  billions of dollars in repurchases of preferred shares and warrants,  dividend payments, and loan repayments. In particular, Treasury has  received almost $7 billion in dividend payments, about $2.9 billion in  warrant liquidations, and over $70 billion in repurchases from institutions  participating in CPP, as of August 31, 2009.
Table 1. TARP Program Description and Total Disbursements, as of September 11, 2009 (dollars in billions)
Capital Purchase Program. To provide capital to viable banks through the purchase of preferred shares and  subordinated debentures.
Targeted Investment Program. To foster market stability and thereby strengthen the economy by making case-by- case investments in institutions that Treasury deems are critical to the functioning of the financial system.
Capital Assistance Program. To restore confidence throughout the financial system that the nation’s largest  banking institutions have sufficient capital to cushion themselves against larger-than-expected future losses, and to  support lending to creditworthy borrowers.
Systemically Significant Failing Institutions. To provide stability in financial markets and avoid disruptions to the  markets from the failure of a systemically significant institution. Treasury determines participation in this program  on a case-by-case basis.
Asset Guarantee Program. To provide government assurances for assets held by financial institutions that are  viewed as critical to the functioning of the nation’s financial system.
Automotive Industry Financing Program. To prevent a significant disruption of the American automotive industry.
Home Affordable Modification Program. To offer assistance to an estimated 3 to 4 million homeowners through a  cost-sharing arrangement with mortgage holders and investors to reduce the monthly mortgage payment amounts  of homeowners at risk of foreclosure to affordable levels.
Consumer & Business Lending Initiative. To support consumer and business credit markets by providing financing  to private investors to issue new securitizations to help unfreeze and lower interest rates for auto, student, and  small business loans; credit cards; commercial mortgages; and other consumer and business credit.
Public-Private Investment Program. To address the challenge of “legacy assets” as part of Treasury’s efforts to  repair balance sheets throughout the financial system and increase the availability of credit to households and  businesses.
CPP continues to be the largest and most widely used program under  Treasury’s TARP authority for stabilizing the financial system. Over the  last year, CPP has made significant capital investments in financial  institutions, and although Treasury has made progress in monitoring the  activities of CPP participants, challenges remain in ensuring that  participants comply with program requirements. As of September 11, 2009,  CPP had provided more than $204 billion in capital to more than 670  institutions, about 56 percent of total TARP disbursements. The amount of  disbursements has slowed significantly, in part, because the institutions  receiving CPP capital in recent months are generally smaller than those  that received capital in the beginning of the program. Also, many CPP  applicants have withdrawn their applications from consideration because  of uncertainties about program requirements and improving economic  conditions.
Consistent with our recommendations, Treasury began to collect detailed  information for the largest institutions in February 2009 and basic  information through monthly lending surveys from all CPP participating  institutions later in June. These monthly surveys are an important step  toward greater transparency and accountability for institutions of all sizes.  We have also made recommendations that Treasury strengthen its  oversight of participants’ compliance with the act’s program requirements  (e.g., restrictions on executive compensation, dividend payments, and  stock repurchases), and Treasury continues to make progress in these  areas. For example, Treasury has hired three asset management firms to  provide market advice about its portfolio of investments and to oversee  compliance with the terms of CPP agreements. However, Treasury has yet  to finalize the specific guidance and performance measures for the asset  managers’ oversight responsibilities and has not established a process for  monitoring asset managers’ performance.
Early in the implementation of TARP, Treasury provided what it now  refers to as “exceptional assistance” to three institutions—AIG, Citigroup  and Bank of America. For example, Treasury, along with the Board of  Governors of the Federal Reserve System (Federal Reserve), and the  Federal Reserve Bank of New York (FRBNY), provided assistance to AIG,  the sole participant in TARP’s Systemically Significant Failing Institutions  (SSFI) program. As discussed in our recently issued report, Treasury  committed $70 billion in TARP funds to AIG and, together with the Federal  Reserve, had made over $182 billion available to assist the company  between September 2008 and April 2009. As of September 2, 2009, the  outstanding balance of federal government assistance used by AIG was  $120.7 billion. In providing the assistance, Treasury and the Federal  Reserve have taken several steps intended to protect the federal  government’s interest. These include making loans that are secured with  collateral, instituting certain controls over management, and obtaining  compensation for risks such as charging interest, requiring dividend  payments, and obtaining warrants. Moreover, Treasury and the FRBNY  staff routinely monitor AIG’s operations and receive reports on AIG’s  condition and restructuring. While these efforts are being made, however,  the government remains exposed to risks, including credit and investment  risk. As a result, Treasury and FRNYB may not be repaid in full. We  recently reported that, as of September 21, 2009, AIG had not declared and  paid the three scheduled dividend payments since the inception of the  preferred equity investments. According to Treasury, if AIG fails to make  its next dividend payment due on November 1, Treasury will be able to  directly elect at least two board members. GAO-developed indicators of  AIG’s repayment of federal assistance show some progress in AIG’s ability  to repay the federal assistance; however, any improvement in the stability  of AIG’s business depends on the long-term health of the company, market  conditions, and continued federal government support. For this reason,  the ultimate success of federal efforts to aid AIG’s restructuring and the  scope of possible repayments remain unclear at this point.
Also during the early phase of TARP (December 2008), Treasury  established the Automotive Industry Financing Program (AIFP) to help  stabilize the U.S. automotive industry and avoid disruptions that would  pose systemic risk to the nation’s economy. Under this program, Treasury  has committed a total of about $82.6 billion to help support automakers,  automotive suppliers, consumers, and auto finance companies. Chrysler  and GM have received a sizeable amount of funding to support their  reorganization. In exchange, Treasury received a substantial ownership  interest in the companies and debt obligations. Over the last year, Chrysler  and GM filed for bankruptcy and streamlined their operations by closing  factories and reducing the number of dealerships. However, whether the  new Chrysler and new GM will achieve long-term financial viability  remains unclear. As we have previously reported, Treasury should have a  plan for ending its financial involvement with Chrysler and GM that  indicates how it will divest itself of its ownership shares. In developing  and implementing such a plan, Treasury should weigh the objective of  expeditiously ending the federal government’s financial involvement in the  companies with the objective of recovering an acceptable amount of the  funding provided to them. We will report later this fall on Treasury’s  approach to managing its ownership interests in the companies, how it  plans to divest itself of these interests, and the progress the companies  have made in restructuring since receiving federal government assistance.  We also plan to report this winter on how Chrysler and GM’s restructuring  efforts have affected their pension plan assets and what the federal  government’s potential exposure will be should the companies terminate  their plans.
Following the early months of TARP implementation, which largely  focused on capital investments and amid concerns about the overall  strategic direction of the program and lack of transparency, the new  administration has attempted to provide a more strategic direction for  using the remaining funds and creating a number of programs aimed at  stabilizing the securitization markets and preserving homeownership. For  example, TALF, a program launched by Treasury and the Federal Reserve,  has been mostly used for credit card and auto loan securitization and was  extended through March 2010 for more asset classes. As of September  n  17, 2009, TALF loan requests are only about a quarter of the $200 billio maximum that Treasury currently anticipates being made by FRBNY,  which is much less than the $1 trillion potential expansion that the Federal  Reserve and Treasury initially announced.  The relatively low loan volume  could be attributed to recent improvements in securitization and credit  markets that make the financing terms of TALF loans less attractive,  according to agency officials and certain market participants. Because the  Banking Agency Audit Act (31 U.S.C. § 714) prohibits GAO from auditing  certain Federal Reserve activities, we are limited in our ability to review  the Federal Reserve’s actions with respect to TALF. In May 2009,  legislation was passed that gave GAO authority to audit Federal Reserve  actions taken with respect to three entities also assisted under TARP— AIG, Citigroup and Bank of America—but not TALF. To enable us to audit  TARP support for TALF most effectively, we would support legislation to  provide GAO with audit authority over Federal Reserve actions taken with  respect to TALF, together with appropriate access.
While TALF has been implemented, HAMP and PPIP face ongoing  implementation and operational challenges. For example,    HAMP faces a significant challenge that centers on uncertainty over the  number of homeowners it will ultimately help. Residential mortgage  defaults and foreclosures are at historical highs and Treasury officials and  others have identified reducing the number of unnecessary foreclosures as  critical to the current economic recovery. In our July 2009 report, we  noted that Treasury’s estimate of the 3 to 4 million homeowners who  would likely be helped under the HAMP loan modification program may  have been overstated. Further, concerns have been raised about the  capacity and consistency of servicers participating in HAMP in offering  loan modifications to qualified homeowners facing potential foreclosure.  Treasury has taken some actions to encourage servicers to increase the  number of modifications made, including sending a letter to participating  HAMP servicers and meeting with them to discuss challenges to making  modifications. However, the ultimate result of Treasury’s actions to  increase the number of HAMP loan modifications and the corresponding  impact on stabilizing the housing market remains to be seen. Treasury  faces other challenges in implementing HAMP, including ensuring that  decisions to deny or approve a loan modification are transparent to  borrowers and establishing an effective system of operational controls to  oversee the compliance of participating servicers with HAMP guidelines.  In July 2009, we made six recommendations to Treasury to help improve  the transparency and accountability of HAMP, which included  recommending actions to monitor particular program requirements,  reevaluate and review certain program components and assumptions, and  strengthen internal controls over HAMP. Treasury noted that it will take  various actions in response to our recommendations, such as exploring  options to monitor counseling requirements and working to refine its  internal controls over HAMP. We plan to continue to monitor Treasury’s  responses to our recommendations as part of our ongoing work on HAMP.
Treasury announced PPIP in March 2009, but as of September 2009 many  elements of the program remain unimplemented and some have  questioned whether the program is actually needed. While Treasury  continues to take steps to implement the legacy securities program, the  legacy loans program has been on hold since early June. Some market  participants and observers we spoke with questioned the necessity and  timing of PPIP, noting that while the problem of toxic assets remains, the  program is less important now than when the crisis first began, for several  reasons. One main reason cited by these individuals and by Treasury and  the FDIC is that rising investor confidence following the stress test results  and successful capital-raising by financial institutions reduced the need for  the legacy loans portion of PPIP.  In addition, banks have increasing  incentives to hold troubled assets in the hopes that such assets will  perform better in the future, rather than taking losses now.
section_title: Treasury Has Made Progress in Developing OFS’s Management Infrastructure, but Effective Communication Has Been an Ongoing Challenge
paragraphs: Treasury has continued to make progress in establishing OFS’s  management infrastructure, overseeing of contractors and financial  agents, and developing a system of internal control for financial reporting.  However, some challenges remain—for example, in staffing some key  positions.
In accordance with our prior recommendation that it expeditiously hire  personnel to OFS, Treasury continued to use direct-hire and various other  appointments to bring a number of staff on board quickly and has 197 staff  as of September 15, 2009. However, it has yet to fill several key senior  positions. For example, in our July 2009 report we recommended that  Treasury give high priority to filling the Chief Homeownership  Preservation Officer position. Treasury has also been seeking to fill the  Chief Investment Officer position since June 2009. Neither position has  been filled with permanent staff as of September 15, 2009.
Treasury has strengthened management and oversight as reliance on  contractors to support TARP grew over the past year. Treasury is using  contracts and financial agency agreements with several private sector  firms to obtain a wide range of professional services and other support. In  starting up TARP a year ago, OFS’s management infrastructure lacked  many of the necessary oversight procedures and internal controls for its  growing number of contractors and financial agents, including a  comprehensive and complete compliance system to monitor and  appropriately address vendor-related conflicts of interest. However,  Treasury has taken a number of steps toward overcoming a challenging  contracting environment and has implemented or substantially  implemented all of our contracting- and conflicts-of-interest  recommendations we have made over the past year.
OFS has also made progress in developing a comprehensive system of  internal control, as we recommended. As required by section 116(b) of the  act, we are currently performing the audit of TARP’s financial statements  and the related internal controls. Our objectives are to render opinions on  (1) the financial statements as of and for the period ending September 30,  2009, and (2) internal control over financial reporting and compliance with  applicable laws and regulations as of September 30, 2009. We will also be  reporting on the results of our tests of TARP’s compliance with selected  provisions of laws and regulations related to financial reporting. The  results of our financial statement audit will be published in a separate  report.
We also made a series of recommendations aimed at improving the  transparency of TARP including that Treasury establish more effective  communication with Congress and the public and develop a clearly  articulated strategy for the program, among other things. Consistent with  our recommendations, OFS has taken steps over the last year to formalize  its communication strategy and improve its communications with  Congress and the public about TARP activities and the strategy for using  TARP funds. Consistent and timely communication will continue to be an  important focus for Treasury as it makes key decisions on the remaining  use of TARP funds.
section_title: Indicators Suggest Positive Developments in Credit Markets, but Isolating TARP’s Impact Continues to Present Challenges
paragraphs: While isolating and estimating the effect of TARP programs continues to  present a number of challenges, indicators of the cost of credit and  perceptions of risk in credit markets suggest broad improvement since the  announcement of CPP in October 2008. As we have noted in prior reports,  if TARP is having its intended effect, a number of developments might be  observed in credit and other markets over time, such as reduced risk  spreads, declining borrowing costs, and more lending activity than there  would have been in its absence. However, a slow recovery does not  necessarily mean that TARP is failing, because it is not clear what would  have happened without the programs. In particular, several market factors  helping to explain slow growth in lending include weaknesses in  securitization markets and the balance sheets of financial intermediaries, a  decline in the demand for credit, and the reduced creditworthiness among  borrowers. Nevertheless, as shown in table 2, credit market indicators we  have been monitoring suggest there has been broad improvement in  interbank, mortgage, and corporate debt markets in terms of the cost of  credit and perceptions of risk (as measured by premiums over Treasury  securities). In addition, empirical analysis of the interbank market, which  showed signs of significant stress in 2008, suggests that CPP and other  programs outside TARP that were announced in October 2008 have  resulted in a statistically significant improvement in risk spreads even in  the presence of other important factors. Although rising foreclosures  continue to highlight the challenges facing the U.S. economy, total  mortgage originations in the second quarter of 2009 have more than  doubled since the fourth quarter of 2008.
Basis point change since  October 13, 2008   3-month London interbank offered rate (an average of interest rates offered on  dollar-denominated loans)
Though it is difficult to isolate the impact of TARP, economic and credit  market indicators will provide important information as Treasury makes  decisions about the future of the program. Treasury has recently released  a report that begins to discuss the next phase of its stabilization and  rehabilitation efforts and includes several indicators. Treasury’s authority  to purchase or insure additional troubled assets will expire on December  31, 2009, unless the Secretary submits a written certification to Congress  describing “why the extension is necessary to assist American families and  stabilize financial markets, as well as the expected cost to the taxpayers  for such an extension.” In the next few months, Treasury will need to  make decisions about providing new funding for TARP programs. A set of  indicators could serve as part of an analytical basis for such a  determination.
Mr. Chairman, Ranking Member Shelby, and Members of the Committee, I  appreciate the opportunity to discuss these critically important issues and  would be happy to answer any questions that you may have. Thank you.
For further information on this testimony, please contact Thomas J.  McCool on (202) 512-2642 or mccoolt@gao.gov.
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