Troubled Asset Relief Program: Continued Attention Needed to Ensure the Transparency and Accountability of Ongoing Programs
Published: 2010-07-21T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: This testimony discusses our work on the Troubled Asset Relief Program (TARP), which Congress established on October 3, 2008 in response to the financial crisis that threatened the stability of the U.S. financial system and the solvency of many financial institutions. Under the original TARP legislation, the Department of the Treasury (Treasury) had the authority to purchase or insure $700 billion in troubled assets held by financial institutions. As we have seen, since TARP's inception Treasury has chosen to use those funds for a variety of activities, including injecting capital into key financial institutions, implementing programs to address problems in the securitization markets, providing assistance to the automobile industry and American International Group, Inc. (AIG), and working to help homeowners struggling to keep their homes. Today, some of these programs have been discontinued and others are winding down, but others--such as homeownership preservation programs--may continue for some time. Treasury has also seen some participating institutions repay their TARP funds as they recover their financial health. The prospect for repayment from some other institutions, both large and small, remains unclear. The Emergency Economic Stabilization Act (the act) that authorized TARP required GAO to report at least every 60 days on findings from our oversight of actions taken under the programs. We have been monitoring TARP programs since their inception and our reports have highlighted challenges facing many of these programs. To date, we have issued over 25 reports and testimonies related to TARP and made over 50 recommendations to improve the transparency and accountability of its operations. This statement today draws primarily on 7 reports we have issued since October 2009. Specifically, this statement focuses on (1) the nature and purpose of activities that have been initiated under TARP and ongoing challenges, (2) the process for making decisions related to unwinding TARP programs, and (3) indicators of credit conditions in markets targeted by TARP programs. To do our work, we reviewed our prior reports and other documents provided by Treasury's Office of Financial Stability (OFS) and conducted interviews with Treasury and OFS officials. In addition, we have updated the program's receipts and disbursements through June 30, 2010, and indicators of credit markets as of July 1, 2010. We conducted these performance audits between July 2009 and June 2010 and updated information in July 2010 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: What GAO Found
paragraphs: Treasury has initiated a number of programs under TARP, some of which have ended or are being unwound. Others will continue. Among the programs no longer making commitments are the Capital Purchase Program (CPP) and Targeted Investment Program (TIP), while the Home Affordable Modification Program (HAMP) and new small business lending initiatives are expected to continue for some time. Although Treasury has received significant repayments of the funding it provided to financial institutions, some investments and loans could still result in substantial losses to the government. We have been monitoring TARP programs since their inception. In particular, Chrysler Group LLC and General Motors Company (GM) have shown some indications of progress toward returning to profitability, such as doing better than they and Treasury had initially projected in terms of revenues, operating earnings, and cash flow. However, the extent to which the federal government will fully recoup its investment in the auto industry is uncertain, and the companies face several challenges in the coming years. Since early 2009, we have also been monitoring the status of federal assistance to AIG and its financial condition using indicators we developed. In April 2010, we reported that our indicators showed that AIG's financial condition has remained relatively stable largely due to the federal assistance provided by the Federal Reserve and Treasury, but the extent to which the federal government will recoup its investment remains uncertain and will not only depend on the AIG's financial condition but also other market factors such as the performance of the insurance sectors and the credit derivatives markets that are beyond the control of AIG or the government. Many of our reports have also highlighted the challenges facing TARP programs and made recommendations to enhance transparency and accountability of its programs. We reported that while Treasury had taken some steps to address these challenges it urgently needed to finalize and implement the various components of HAMP and ensure the transparency and accountability of these efforts. We will continue to monitor these programs and have ongoing work on several facets of TARP, including those initiatives that have a small business focus. We have also reviewed Treasury's framework for deciding to extend TARP beyond December, 31, 2009, and found that the process was sufficient but could be strengthened for similar decisions that will need to be made in the future. Specifically, we found that the extent of coordination could be enhanced and formalized between Treasury and the Federal Deposit Insurance Corporation (FDIC) and recommended that Treasury formalize coordination with FDIC for future decisions. Although the authority for TARP is set to expire soon, Treasury will continue to face decisions in winding down programs, and many of these decisions will require interagency coordination. Because TARP will be unwinding concurrently with other important regulatory interventions, decisions about the sequencing of the exits from the programs will require regulators to work closely together. We have noted in past reports that some of the anticipated effects of TARP on credit markets and the economy had materialized and that some securitization markets had experienced a tentative recovery. Indicators we have been monitoring suggest that credit markets have been able to sustain their recovery despite the winding down of key programs initiated by the Federal Reserve, Treasury, FDIC and others. However, a slow recovery does not necessarily mean that TARP is ineffective, because in absence of TARP it is possible that foreclosure and delinquency rates would be higher. Finally, because any new TARP activity will be limited to home ownership preservation and small business lending programs, we will also continue to monitor indicators such as foreclosure and delinquencies as potential measures of the programs' success.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our work on the Troubled Asset  Relief Program (TARP), which Congress established on October 3, 2008 in  response to the financial crisis that threatened the stability of the U.S.  financial system and the solvency of many financial institutions. Under the  original TARP legislation, the Department of the Treasury (Treasury) had  the authority to purchase or insure $700 billion in troubled assets held by  financial institutions. As we have seen, since TARP’s inception Treasury  has chosen to use those funds for a variety of activities, including injecting  capital into key financial institutions, implementing programs to address  problems in the securitization markets, providing assistance to the  automobile industry and American International Group, Inc. (AIG), and  working to help homeowners struggling to keep their homes. Today, some  of these programs have been discontinued and others are winding down,  but others—such as homeownership preservation programs—may  continue for some time. Treasury has also seen some participating  institutions repay their TARP funds as they recover their financial health.  The prospect for repayment from some other institutions, both large and  small, remains unclear.
The Emergency Economic Stabilization Act (the act) that authorized TARP  required GAO to report at least every 60 days on findings from our  oversight of actions taken under the programs. We have been monitoring  TARP programs since their inception and our reports have highlighted  challenges facing many of these programs. To date, we have issued over 25  reports and testimonies related to TARP and made over 50  recommendations to improve the transparency and accountability of its  operations. My statement today draws primarily on 7 reports we have  issued since October 2009. Specifically, this statement focuses on (1) the  nature and purpose of activities that have been initiated under TARP and  ongoing challenges, (2) the process for making decisions related to  unwinding TARP programs, and (3) indicators of credit conditions in  markets targeted by TARP programs. To do our work, we reviewed our  prior reports and other documents provided by Treasury’s Office of  Financial Stability (OFS) and conducted interviews with Treasury and OFS  officials. In addition, we have updated the program’s receipts and  disbursements through June 30, 2010, and indicators of credit markets as  of July 1, 2010. We conducted these performance audits between July 2009  and June 2010 and updated information in July 2010 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: Some TARP Programs Are Winding Down, but Others Require Continued Attention
paragraphs: Since TARP was authorized, Treasury has implemented a range of  programs aimed at stabilizing the financial system and preserving  homeownership. As of June 30, 2010, it had disbursed $385 billion for  TARP loans and equity investments, and Treasury has already recouped  some of these disbursements (table 1). As of June 30, 2010, Treasury had  received almost $25 billion in dividend and interest payments and warrant  repurchases and more than $198 billion in repayments.
Bank capital programs. Bank capital programs authorized under TARP,  such as CPP, TIP, and the Capital Assistance Program (CAP), were  established to help stabilize the financial system and ensure the flow of  credit to businesses and consumers. Treasury is no longer disbursing  funds through these programs because according to Treasury, they have  largely achieved their goals of both stabilizing the financial system and  individual institutions.
CPP was intended to restore confidence in the banking system by  increasing the amount of capital in the system. Treasury provided capital  to qualifying financial institutions by purchasing preferred shares and  warrants or subordinated debentures. Under the CPP, Treasury disbursed  about $205 billion to 707 financial institutions nationwide from October  2008 through December 2009. Treasury has received about $147 billion in  repayments and about $17 billion in dividend and interest payments and  warrant income as of June 30, 2010. In our past reports, we have made  numerous recommendations to strengthen transparency and  accountability of this key TARP program. For instance, we recommended  that Treasury report whether financial institutions’ activities are generally  consistent with the purposes of program. We also recommended that  Treasury consider making the warrant valuation process transparent to  the public by disclosing details regarding the warrant repurchase process.  In both of these areas, Treasury has addressed these recommendations by  releasing bank survey information on lending and detailed reports on  warrant repurchases. However, as institutions leave the program, which  includes the largest banks, they are no longer required to report  information on lending to Treasury.
TIP was designed to foster market stability and thereby strengthen the  economy by investing in institutions that Treasury deemed critical to the  functioning of the financial system on a case-by-case basis. Only two  institutions—Bank of America Corporation and Citigroup Inc.— participated in this program and each received $20 billion in capital  investment. Both institutions repaid Treasury for these investments in  December 2009.
CAP was designed to further improve confidence in the banking system by  helping ensure that the nation’s 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 over  $70 billion from private sources, and GMAC received additional capital  from Treasury under the Automotive Industry Financing Program (AIFP).  No CAP investments were made and the program closed on November 9,  2009.
Although these programs are no longer making new investments, the  lessons learned from them will be useful in future efforts to stabilize the  financial markets and improve ongoing bank supervision. We are currently  reviewing the characteristics of firms that received CPP investments and  assessing Treasury’s procedures for selecting institutions to participate  and Treasury’s role when institutions elect to repay their CPP investments.  We are also evaluating the process that the regulators used to design and  implement SCAP, as well as the financial performance of the participating  institutions compared to SCAP estimates. As part of this work, we will also  assess how regulators and the banks are applying lessons learned from  SCAP. We plan to issue reports on CPP and SCAP in the coming months.
Auto Industry Financing Program (AIFP). From December 2008  through June 2009, Treasury committed $81.1 billion to help stabilize the  auto industry, including about $62 billion to fund GM and Chrysler while  they restructured. In return for the assistance provided 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. As  of June 30, 2010, approximately $11.2 billion of the $79.7 billion disbursed  has been repaid to the Treasury. Treasury has stated that it plans to sell  its equity in these companies as soon as practicable.
The federal government’s ability to recoup its investments will depend on  the profitability of GM and Chrysler. Since we last reported on the  financial condition of the auto industry in November 2009, Chrysler and  GM have shown some indications of progress towards returning to  profitability. For example:  In April and May 2010, both the new GM and new Chrysler released  financial statements for 2009 and the first quarter of 2010. Thus far,  according to Treasury officials, both companies are doing better than they  and 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.
Also in April 2010, GM repaid Treasury the remaining $4.7 billion on the  $6.7 billion in debt it owed to Treasury using TARP funds from an escrow  account established for the company when it reorganized through the  bankruptcy process.  According to Treasury officials, GM was legally  permitted to keep the remaining $6.6 billion left in the escrow account  after this repayment.
Treasury recently stated that it plans to participate in a GM initial public  offering (IPO), in which Treasury, other GM shareholders, and GM will sell  a portion of their shares in the company. Treasury stated that it expects  the IPO to occur sometime after the third quarter of this year. Treasury has  hired the Lazard investment firm to help manage its equity and prepare for  the IPO. The proceeds from the sale of Treasury’s shares will be used  towards repaying the government’s initial investment in GM.
While these steps indicate progress in the companies’ journey towards  profitability, the extent to which the federal government will recoup its  investment in the auto industry is uncertain, and the companies’ face  several challenges in the coming years. For instance:  In April 2010, we reported on the impact of restructuring on GM’s and  Chrysler’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 are legally required to  make large contributions to the plans that they will be able to make only if  they became profitable again. If the companies are not able to return to  viability and their plans are terminated, the Pension Benefit Guarantee  Corporation would face the significant financial and administrative costs  of taking over these plans.
While Chrysler and GM sales, and industry sales as a whole, were up  substantially in spring 2010 from spring 2009 (up 12 percent for GM and 35  percent for Chrysler), more recent trends are not as positive. For example,  compared with May 2010 levels, June 2010 sales decreased more than  usual (13 percent for GM and 12 percent for Chrysler). Industry analysts  largely attributed this decline to consumers’ wariness about the state of  the economy. Improved economic conditions, and in turn, improved  vehicle sales, are critical to the future profitability of the companies and  the timing and success of an IPO.
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 and that it communicate to Congress its  plans to monitor the companies’ performance. In response to our  recommendation, Treasury has hired additional staff to monitor the  federal government’s investment in the auto companies. However, as of  July 2010 Treasury had not committed to additional communication with  Congress on its future monitoring plans. In addition, we are continuing to  monitor the financial condition of the industry and in ongoing work are  reviewing the current financial condition and outlook of GM and Chrysler.  As part of that ongoing work, we are also reviewing the status of the  federal government’s efforts to assist workers and communities that have  relied on the auto industry for their economic base.
American International Group, Inc (AIG) Investments. One of  TARP’s earliest programs was designed to provide exceptional assistance  aimed at preventing broad disruptions to the financial markets by  stabilizing institutions that were considered systemically significant. In  particular, in November 2008 Treasury joined the Federal Reserve’s effort  to provide assistance to AIG, which first began in September 2008 and was  restructured in November 2008 and again in March 2009. Since early 2009,  we have been monitoring the status of federal assistance to AIG and the  company’s financial condition using GAO-developed indicators and we  have issued two reports that include information on them. In the April  2010 report, our indicators showed that AIG’s financial condition had  remained relatively stable largely due to the federal assistance from the  Federal Reserve and Treasury. AIG is repaying its debt to the federal  government, but much of the progress reflects numerous exchanges of  debt that AIG owed the Federal Reserve Bank of New York Revolving  Credit Facility for various issues of preferred equity. With this shift from  debt to equity, the federal government’s exposure to AIG is increasingly  tied to the future health of AIG, its restructuring efforts, and its ongoing  performance. Similarly, the government’s ability to fully recoup the federal  assistance is uncertain and will be determined by the long-term health of  AIG, the company’s success in selling businesses as it restructures, and  other market factors such as the performance of the insurance sectors and  the credit derivatives markets that are beyond the control of AIG or the  government. We will continue to monitor these issues and plan to issue  our next report in October 2010.
Home Affordable Modification Program (HAMP). HAMP is Treasury’s  cornerstone effort under TARP to meet the act’s purposes of preserving  homeownership and protecting home values and is designed to address  the dramatic increase in foreclosures. Treasury announced the framework  for HAMP in 2009 and said it would use up to $50 billion of TARP funds to  help at-risk homeowners avoid potential foreclosure, primarily by  reducing their monthly mortgage payment. Unlike other TARP programs,  HAMP expenditures are not investments that will be partially or fully  repaid, but rather, expenditures that once made will not be recouped.  According to Treasury, $250 million has been disbursed under the HAMP  program as of June 30, 2010. In our March 2010 testimony before the  House of Representatives’ Committee on Oversight and Government  Reform, we noted that Treasury continued to face implementation  challenges with HAMP. We stated that the program had made limited  progress, suffered from inconsistent program implementation, and faced  additional challenges going forward. Specifically:    While the program was anticipated to help 3 to 4 million homeowners,  Treasury reported as of the end of May 2010, only 1.2 million homeowners  had started trial modifications and 347,000 homeowners had received  permanent modifications. Servicers told us that the continued changes to  the program posed significant implementation challenges for them.
Although HAMP’s goal was to create clear, consistent, and uniform  guidance for loan modifications across the industry, we reported that  there was wide variation in servicers’ practices with respect to  communicating with borrowers about HAMP, evaluating borrowers who  were current or not yet 60 days delinquent on mortgage payments for  whether they were in danger of “imminent default,” and tracking HAMP  complaints.
Finally, we identified additional challenges that HAMP faced going  forward, including converting trial modifications to permanent status,  addressing the growing issue of negative equity, limiting redefaults among  borrowers who receive modifications, and ensuring program stability and  effective program management.
In June 2010, we issued a report that expanded on our March testimony  and discussed Treasury’s actions to address the challenges that we had  outlined in the March hearing. We reported that while Treasury had taken  some steps to address these challenges it urgently needed to finalize and  implement the various components of HAMP and ensure the transparency  and accountability of these efforts. For example, Treasury announced  several potentially substantial new HAMP-funded efforts in March 2010,  but did not say how many borrowers these programs were intended to  reach. In particular, Treasury announced a principal reduction program  that could help borrowers with substantial negative equity, but made the  program voluntary for servicers. We noted that Treasury needed to ensure  that future public reporting on this program provided program  transparency and address the potential question of whether borrowers  were being treated fairly. In addition, we reported that as Treasury  continues with its first-lien mortgage loan modification program and  implements other HAMP-funded programs, including the second-lien  modification and foreclosure alternatives, it will need to adhere to  standards for effective program management and establish sufficient  program planning and implementation capacity.
Our June 2010 report contained eight recommendations to Treasury,  including that it expeditiously establish specific criteria for imminent  default, specify which HAMP complaints servicers should track, finalize  and issue remedies for servicer noncompliance with HAMP requirements,  and implement a prudent design for remaining HAMP-funded programs.  However, Treasury has yet to fully implement several of the  recommendations we made in July 2009 to improve HAMP’s effectiveness,  transparency, and accountability. For example, we recommended that  Treasury consider methods of monitoring borrowers who receive HAMP  mortgage loan modifications and continue to have high total household  debt (more than 55 percent of their income) to determine whether they  obtain the required HUD-approved housing counseling. While Treasury has  told us that monitoring borrower compliance with the counseling  requirement would be too burdensome, we continue to believe that it is  important that Treasury determine whether borrowers are actually  receiving counseling and whether the counseling requirement is having its  intended effect of limiting redefaults. In addition, we recommended that  Treasury place a high priority on fully staffing the Homeownership  Preservation Office—the office within Treasury responsible for overseeing  HAMP implementation—and noted that having enough staff with  appropriate skills was essential to governing HAMP effectively. However,  Treasury has since reduced the number of staff in this office without  formally assessing staffing needs. We believe that having sufficient staff is  critical to Treasury’s ability to design and implement HAMP-funded  programs quickly and effectively. We will continue to monitor Treasury’s  implementation and management of HAMP-funded programs as part of our  ongoing oversight of TARP to ensure that these programs are  appropriately designed and operating as intended.
Small Business Initiatives. TARP also includes programs that have a  small business emphasis or component. Treasury has announced two new  initiatives aimed at small business lending. The Community Development  Capital Initiative (CDCI) will provide capital to Community Development  Financial Institutions (CDFIs). CDCI is open to CDFI-certified banks,  thrifts, and credit unions which have been certified by Treasury’s CDFI  Fund as targeting more than 60 percent of their small business lending and  other economic development activities to underserved communities. The  second initiative, the Small Business and Community Lending Initiative,  refers to Treasury’s SBA 7(a) securities purchase program, which makes  direct purchases of securitized loan pools guaranteed under SBA’s 7(a)  small business loan guarantee program. Finally, the Term Asset-Backed  Securities Loan Facility (TALF), which is winding down, accepted asset- backed securities (ABS) as collateral for loans to restore liquidity in  securitization markets, including securities consisting of SBA-guaranteed  loan pools. We are currently reviewing these efforts and our objectives are  to assess the data that are available on small business lending and to  assess the status of Treasury’s actions in meeting its goals for these  programs.
Term Asset-Backed Securities Loan Facility (TALF). TARP was also  intended to address problems in the securitization markets. TALF was  designed to restore the securitization markets and improve access to  credit for consumers and businesses. It is administered by the Board of  Governors of the Federal Reserve System (Federal Reserve) and the  Federal Reserve Bank of New York (FRBNY) and Treasury committed $20  billion of TARP funds for credit protection for TALF assets. The program  stopped accepting ABS and legacy commercial mortgage-backed securities  (CMBS) as collateral for new loans in March 2010 and new-issue CMBS in  June 2010. FRBNY issued about $71 billion in TALF loans, with most of  them secured by credit card ABS, legacy CMBS, and auto loan ABS. Our  analysis in our February 2010 report suggested that the securitization  markets improved for the more frequently traded TALF-eligible sectors  after the program’s first activity in March 2009. However, we did not find  clear evidence that consumer credit rates changed significantly after TALF  started. FRBNY officials said that it is possible that without TALF, interest  rates on loans to consumers and small businesses could have been much  higher.
We reported in February 2010 that TALF contained a number of features  to help reduce the risk of loss to TARP funds. Analyses by Treasury and  FRBNY project minimal, if any, use of TARP funds for TALF-related losses,  and Treasury currently anticipates a profit. We found that CMBS could  pose a higher risk of loss than ABS, given the ongoing uncertainty in the  commercial real estate market. For this reason, we recommended that  Treasury give greater attention to risks in commercial real estate and  CMBS markets. In response, Treasury developed internal tracking reports  to assess these trends.
We also found that at the outset of TALF, Treasury had not fully  documented the rationale for final decisions that were made on managing  risks associated with TALF—including decisions involving the Federal  Reserve. We found that Treasury’s analysis of TALF-related risks  sometimes differed from FRBNY’s and that Treasury lacked clear  documentation on how it resolved discrepancies or made final decisions  with the Federal Reserve and FRBNY. Documenting such rationales  increases transparency and strengthens internal controls for decision  making. Since the report, Treasury has created a process document that  details how it assesses changes to TALF program terms proposed by the  Federal Reserve, including specifying levels of management review and  approval. In addition, Treasury has a formal process for assessing outside  analyses it may request for assessing risks to TARP.
Finally, while Treasury bears the first-loss risk from assets that TALF  borrowers might surrender in conjunction with unpaid loans, it has not  developed measures to analyze and publicly report on the potential  purchase, management, and sale of such assets. Without such a plan,  Treasury may not fully and publicly disclose how such surrendered assets  are managed and financed, undermining Treasury’s efforts to be fully  transparent about TARP activities. We recommended that Treasury review  the data it might collect and publicly report on the event that any collateral  is surrendered to TALF LLC and Treasury lends to it. To date, Treasury has  not provided evidence that it has conducted such a review or established  such a plan, though officials stated that they would hire an asset manager  to assist in managing surrendered assets in order to protect taxpayer  interests and noted that Treasury was committed to transparency  regarding such assets.
section_title: Treasury’s Framework for Deciding to Extend TARP Was Sufficient, but Could be Strengthened For Future Decisions
paragraphs: In anticipation of the upcoming decisions on the future of TARP, the need  to unwind the extraordinary federal support across the board, and the  fragile state of the economy, we made recommendations to Treasury in  October 2009. Specifically, we suggested that any decision to extend TARP  be made in coordination with relevant agencies and that Treasury use  quantitative analysis whenever possible to support its reasons for doing  so. We noted that without a robust analytic framework, Treasury could  face challenges in effectively carrying out the next stages of its programs.  Subsequently, on December 9, 2009, the Secretary of the Treasury notified  Congress that he was extending the authority for TARP provided under the  act until October 3, 2010. The extension involved winding down some  programs while extending others, transforming the program to one  focused primarily on preserving homeownership and improving financial  conditions for small banks and businesses. As such, according to Treasury,  new commitments through October 3, 2010 will be limited to programs,  under the Making Home Affordable Program (MHA), including HAMP, and  small business lending programs. The Dodd-Frank Wall Street Reform and  Consumer Protection Act, passed by both the House and Senate and  expected to be signed by the President this week, would (1) reduce  Treasury’s authority to purchase or insure troubled assets to $475 billion  and (2) prohibit Treasury, under the act, from incurring any additional  obligations for a program or initiative unless the program or initiative had  already been initiated prior to June 25, 2010.
In reviewing the analytical process underpinning this decision to extend  TARP, we reported that Treasury used a deliberative process that included  sufficient interagency coordination and consultation and considered a  number of qualitative and quantitative factors. However, we noted that  the extent of coordination could be enhanced and formalized, specifically  with the FDIC, for any upcoming decisions that would benefit from  interagency collaboration. Although the economy is still fragile, a key  priority will be to develop, coordinate, and communicate exit strategies to  unwind the remaining programs and investments resulting from the  extraordinary crisis-driven interventions. Because TARP will be unwinding  concurrently with other important interventions by federal regulators,  decisions about the sequencing of the exits from various federal programs  will require bringing a larger body of regulators to the table to plan and  sequence the continued unwinding of federal support. We also noted that  Treasury could strengthen its analytical framework by identifying clear  objectives for small business programs and explaining how relevant  indicators motivated TARP program decisions. Finally, we recommended  (1) formalizing coordination with FDIC for future TARP decisions and (2)  improving the transparency and analytical basis for TARP program  decisions. Though TARP will soon expire, Treasury will still need to work  with other agencies to effectively conduct a coordinated exit from TARP  and other government financial assistance.
section_title: Indicators Suggest a Recovery in Credit Markets, but Isolating the Impact of TARP’s Foreclosure Mitigation and Small Business Lending Efforts Will Be Difficult
paragraphs: Many market observers have said that, taken together, the concerted  actions by Treasury and others helped avert a more severe financial crisis,  although some critics believe that the markets would have recovered  without government support. Particular programs have been reported to  have had the desired effects, especially if stabilizing the financial system  and restoring confidence was considered to be the principal goal of the  intervention. In our October 2009 and February 2010 reports we noted that  some of the anticipated effects of TARP on credit markets and the  economy had materialized and that some securitization markets had  experienced a tentative recovery. During our review of the decision to  extend TARP, Treasury noted that some programs that it believed had  accomplished their goals would be terminated. For example, as noted  earlier, Treasury ended CPP and CAP largely because of banks’ renewed  ability to access capital markets. It also noted improvements in  securitization markets and stabilization of certain legacy asset prices as  motivating the closing of TALF and the Public Private Investment Program  (PPIP). Indicators we have been monitoring suggest credit markets have  been able to sustain their recovery despite the winding down of key  programs initiated by the Federal Reserve, Treasury, FDIC and others. As  shown in table 2 interbank, mortgage, corporate debt, and securitization  markets continue to perform better than their pre-TARP lows. The cost of  credit and perceptions of risk (as measured by premiums over Treasury  securities) have fallen in interbank, mortgage, and corporate debt markets,  and the volume of credit, as measured by new mortgage loans and asset- backed securities, has increased since the first TARP program, CPP.
Basis point change since  October 13, 2008   3-month London interbank offered rate (an average of interest rates offered  on dollar-denominated loans)
Unfortunately, rising foreclosures continue to highlight the challenges  facing the U.S. economy. By any measure foreclosure and delinquency  statistics for residential housing remain well above their historical  averages despite programs such as HAMP. However, a slow recovery does  not necessarily mean that TARP is ineffective, because in absence of TARP  it is possible that foreclosure and delinquency rates would be higher.  Moreover, full recovery will likely take some time given the build up of  imbalances in the real estate, fiscal and household sectors over several  years.
Experience with past financial crises, coupled with analyses of the  specifics of the current situation, has led the Congressional Budget Office  to predict a modest recovery that will not be robust enough to appreciably  improve weak labor markets through 2011. Weaknesses in labor markets  will likely weigh on residential housing markets. Given that any new TARP  activity will be limited to home ownership preservation and small business  lending programs, we will continue to monitor indictors such as  foreclosure and delinquencies as potential measures of the efficacy of  these programs. Isolating the impact of TARP from general market forces  and other foreclosure initiatives will be a challenge. This challenge will be  compounded in the area of small business lending because Treasury has  yet to set explicit objectives for its small business lending programs and  because a lack of comprehensive data on new lending makes assessing  credit conditions for small business particularly difficult. In  recommending that Treasury improve the transparency and analytical  basis for TARP program decisions, we specifically noted the need to set  quantitative program objectives for its small business lending programs  and identify any additional data needed to make program decisions.
Mr. Chairman 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 Richard J.  Hillman on (202) 512-8678 or hillmanr@gao.gov, Orice Williams Brown on  (202) 512-8678 or williamso@gao.gov, or Thomas McCool on (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  statement.
section_title: Appendix I: Related GAO Products
paragraphs: Troubled Asset Relief Program:  Treasury’s Framework for Deciding to  Extend TARP Was Sufficient, but Could be Strengthened for Future  Decisions. GAO-10-531. Washington, D.C.: June 30, 2010.
Troubled Asset Relief Program: Further Actions Needed to Fully and  Equitably Implement Foreclosure Mitigation Program. GAO-10-634.  Washington, D.C.:  June 24, 2010.
Troubled Asset Relief Program: Update of Government Assistance  Provided to AIG. GAO-10-475. Washington, D.C.: April 27, 2010.
Troubled Asset Relief Program: Automaker Pension Funding and  Multiple Federal Roles Pose Challenges for the Future. GAO-10-492.  Washington, D.C.: April 6, 2010.
Troubled Asset Relief Program: Home Affordable Modification Program  Continues to Face Implementation Challenges. GAO-10-556T.  Washington, D.C.: 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. Washington, D.C.: 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. Washington,  D.C.: December 16, 2009.
Financial Audit: Office of Financial Stability (Troubled Asset Relief  Program) Fiscal Year 2009 Financial Statements. GAO-10-301.  Washington, D.C.: 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. Washington, D.C.:  November  2, 2009.
Troubled Asset Relief Program: One Year Later, Actions Are Needed to  Address Remaining Transparency and Accountability Challenges.  GAO-10-16. Washington, D.C.: October 8, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-1048T. Washington,  D.C.: September 24, 2009.
Troubled Asset Relief Program: Status of Government Assistance  Provided to AIG. GAO-09-975. Washington, D.C.: September 21, 2009.
Troubled Asset Relief Program: Treasury Actions Needed to Make the  Home Affordable Modification Program More Transparent and  Accountable. GAO-09-837. Washington, D.C.: July 23, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-920T. Washington,  D.C.: July 22, 2009.
Troubled Asset Relief Program: Status of Participants' Dividend  Payments and Repurchases of Preferred Stock and Warrants.  GAO-09-889T. Washington, D.C.: July 9, 2009.
Troubled Asset Relief Program: June 2009 Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-658. Washington, D.C.:  June 17, 2009.
Auto Industry: Summary of Government Efforts and Automakers’  Restructuring to Date. GAO-09-553. Washington, D.C.: April 23, 2009.
Troubled Asset Relief Program: March 2009 Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-504. Washington, D.C.:  March 31, 2009.
Federal Financial Assistance: Preliminary Observations on Assistance  Provided to AIG. GAO-09-490T. Washington, D.C.: March 18, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-417T. Washington,  D.C.: February 24, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-359T. Washington,  D.C.: February 5, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-296. Washington, D.C.:  January 30, 2009.
Troubled Asset Relief Program: Additional Actions Needed to Better  Ensure Integrity, Accountability, and Transparency. GAO-09-266T.  Washington, D.C.: December 10, 2008.
Auto Industry: A Framework for Considering Federal Financial  Assistance. GAO-09-242T . Washington, D.C.: December 4, 2008.
Troubled Asset Relief Program: Status of Efforts to Address Defaults and  Foreclosures on Home Mortgages. GAO-09-231T. Washington, D.C.:  December 4, 2008.
Troubled Asset Relief Program: Additional Actions Needed to Better  Ensure Integrity, Accountability, and Transparency. GAO-09-161.  Washington, D.C.: December 2, 2008.
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