Troubled Asset Relief Program: As Treasury Continues to Exit Programs, Opportunities to Enhance Communication on Costs Exist
Published: 2012-01-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Emergency Economic Stabilization Act of 2008 authorized the Department of the Treasury (Treasury) to create the Troubled Asset Relief Program (TARP), a $700 billion program designed to restore the liquidity and stability of the financial system. The act also requires that GAO report every 60 days on TARP activities. This report examines (1) the condition and status of TARP programs; (2) Treasurys management of TARP operations, including staffing for the Office of Financial Stability (OFS) and oversight of contractors and financial agents; and (3) what is known about the direct and indirect costs of TARP. To do this work, GAO analyzed audited financial data for various TARP programs; reviewed documentation such as program terms and internal decision memos; analyzed TARP cost estimates from the Congressional Budget Office (CBO), the Office of Management and Budget, and Treasury; and interviewed CBO and OFS officials.
section_title: What GAO Found
paragraphs: Many TARP programs continue to be in various stages of unwinding and some programs, notably those that focus on the foreclosure crisis, remain active. The figure provides an overview of selected programs and the amount disbursed and outstanding, as applicable. Treasury has articulated broad principles for exiting TARP, including exiting TARP programs as soon as practicable and seeking to maximize taxpayer returns, goals that at times conflict. Some of the programs that Treasury continues to unwind, such as investments in American International Group, Inc. (AIG), require Treasury to actively manage the timing of its exit as it balances its competing goals. For other programs, such as the Capital Purchase Program (CPP)which was created to provide capital to financial institutionsTreasurys exit will be driven primarily by the financial condition of the participating institutions. Consequently, the timing of Treasurys exit from TARP remains uncertain.
Treasury continues to manage the various TARP programs using OFS staff, financial agents, and contractors. Overall OFS staffing has declined slightly for the first time as staff responsible for managing TARP investment programs and those in term-appointed leadership positions have departed. However, staff in some offices within OFS have increasedfor example, in the Office of Internal Review, which helps to ensure that financial agents and contractors comply with laws and regulations. Through September 30, 2011, about half of Treasurys 116 contracts remained active, along with 14 of the 17 financial agency agreements. Treasury has continued to strengthen its management and oversight of contractors and financial agents and conflict-of-interest requirements. In response to a GAO recommendation, OFS has finalized a plan to address staffing levels and expertise that includes identifying critical positions and conducting succession planning, in light of the temporary nature of its work.
Treasury and CBO project that TARP costs will be much lower than the amount authorized when the program was initially announced. Treasurys fiscal year 2011 financial statement, audited by GAO, estimated that the lifetime cost of TARP would be about $70 billionwith CPP expected to generate the most lifetime income, or net income in excess of costs. OFS also reported that from inception through September 30, 2011, the incurred cost of TARP transactions was $28 billion. Although Treasury regularly reports on the cost of TARP programs and has enhanced such reporting over time, GAOs analysis of Treasury press releases about specific programs indicate that information about estimated lifetime costs and income are included only when programs are expected to result in lifetime income. For example, Treasury issued a press release for its bank investment programs, including CPP, and noted that the programs would result in lifetime income, or profit. However, press releases for investments in AIG, a program that is anticipated to result in a lifetime cost to Treasury, did not include program-specific cost information. Although press releases for programs expected to result in a cost to Treasury provide useful transaction information, they exclude lifetime, program-specific cost estimates.
Consistently providing greater transparency about cost information for specific TARP programs could help reduce potential misunderstanding of TARPs results. While Treasury can measure and report direct costs, indirect costs associated with the moral hazard created by the governments intervention in the private sector are more difficult to measure and assess.
section_title: What GAO Recommends
paragraphs: Treasury should enhance its program-specific press releases to the public by consistently including lifetime cost estimates when reporting on program activities and results. Treasury agreed with our recommendation and plans to implement it by including a link to its cost reporting in future TARP program-specific press releases.

section_title: Letter
paragraphs: The Emergency Economic Stabilization Act (EESA) initially authorized  $700 billion to assist financial institutions and markets, businesses,  homeowners, and consumers through the Troubled Asset Relief Program  (TARP). This amount was intended to provide confidence that the U.S.  government would help address the greatest threat the financial markets  and economy had faced since the Great Depression. As the severity and  immediacy of the 2008 financial crisis began to diminish, Congress  reduced the authorized amount to $475 billion with the Dodd-Frank Wall  Street Reform and Consumer Protection Act (Dodd-Frank Act). TARP  cost estimates were never projected to reach the authorized amounts and  over time these projected costs have declined as some banks have  repaid their assistance and other programs move closer to their  termination dates. However, an increasing number of banks that  received Capital Purchase Program investments are falling behind on  paying dividends related to their government assistance, and TARP- funded housing programs continue to struggle to address the ongoing  foreclosure crisis.
The Department of the Treasury (Treasury) is the primary agency  implementing TARP and its activities have been broad in scope. Treasury  established the Office of Financial Stability (OFS) to carry out TARP  activities, which include injecting capital into key financial institutions,  implementing programs to address problems in the securitization  markets, providing assistance to the automobile industry, and offering  incentives for modifying residential mortgages, among other activities.
As required by EESA, we have provided oversight of TARP activities  since they began in 2008. This 60-day report assesses the condition of  TARP as of September 30, 2011. Specifically, it examines (1) the  condition and status of TARP programs; (2) Treasury’s management of  TARP operations, including staffing for OFS and oversight of contractors  and financial agents; and (3) what is known about the direct and indirect  costs of TARP.
See GAO, Financial Audit: Office of Financial Stability (Troubled Asset Relief Program)  Fiscal Years 2011 and 2010 Financial Statements, GAO-12-169 (Washington, D.C.:  Nov.10, 2011), Financial Audit: Office of Financial Stability (Troubled Asset Relief  Program) Fiscal Years 2010 and 2009 Financial Statements, GAO-11-174 (Washington,  D.C.: Nov.15, 2010), and Financial Audit: Office of Financial Stability (Troubled Asset  Relief Program) Fiscal Year 2009 Financial Statements, GAO-10-301 (Washington, D.C.:  Dec. 9, 2009).
TARP, we analyzed cost data from reports issued by the Congressional  Budget Office (CBO), the Office of Management and Budget (OMB), and  Treasury, focusing on Treasury cost estimates for our analyses. We also  interviewed officials from CBO and Treasury about cost estimate  methodologies.
We conducted this performance audit from June 2011 to January 2012 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: When EESA was signed on October 3, 2008, the U.S. financial system  faced a severe crisis that has rippled throughout the global economy,  moving from the U.S. housing market to an array of financial assets and  interbank lending. The crisis restricted access to credit and made the  financing on which businesses and individuals depend increasingly  difficult to obtain. Further tightening of credit exacerbated a global  economic slowdown. During the crisis, Congress, the President, federal  regulators, and others undertook a number of steps to facilitate financial  intermediation by banks and the securities markets. In addition to  Treasury’s efforts, policy interventions were led by the Board of  Governors of the Federal Reserve System (Federal Reserve) and the  Federal Deposit Insurance Corporation. While the banking crisis in the  United States no longer presents the same level of systemic concerns as  it did in 2008, the economy remains vulnerable, with unemployment  higher than in the recent past. Globally, concerns about the stability of  European banks and countries, especially Greece, escalated in 2011— demonstrating that problems remain in the global economy and financial  markets.
subsections: section_title: TARP Programs and Implementation
paragraphs: The passage of EESA resulted in a variety of programs supported with  TARP funding. (See table 1.)
Some of these programs have begun to unwind.overview of key dates for TARP implementation and the unwinding of  some programs.
section_title: While Many TARP Programs Continue to Wind Down, Others Remain Active
paragraphs: TARP programs continue to wind down, and some programs have ended.  Treasury has stated its goals for the exit process for many programs, but  as we and others have reported, these goals at times conflict. Treasury  has stated that when deciding to sell assets and exit TARP programs, it  will strive to: protect taxpayer investment and maximize overall investment returns promote the stability of financial markets and the economy by bolster markets’ confidence to increase private capital investment, dispose of the investments as soon as it is practicable.
For example, we previously reported that deciding to unwind some of its  assistance to GM by participating in an initial public offering (IPO)  presented Treasury with a conflict between maximizing taxpayer returns  and exiting as soon as practicable. Holding its shares longer could have  meant realizing greater gains for the taxpayer, but only if the stock  appreciated in value. By participating in GM’s November 2010 IPO,  Treasury tried to fulfill both goals, selling almost half of its shares at an  early opportunity. Treasury officials stated that they strove to balance  these competing goals, but have no strict formula for doing so. Rather,  they ultimately relied on the best available information in deciding when to  start exiting this program.
Moreover, Treasury’s ability to exercise control over the timing of its exit  from TARP programs is limited in some cases. For example, Treasury will  likely decide when to exit AIG based on market conditions but Treasury  has less control over its exit from PPIP because the program’s exit  depends on the timing of each public-private investment fund (PPIF)  selling its investments. Treasury continues to face this tension in its goals  with a number of TARP programs as they continue to unwind. Throughout  this section we provide the status of each TARP program that remains  open or still holds assets that need to be managed, including when the  program will end (or stop acquiring new assets and no longer receive  funding) and when Treasury will exit the program (or sell assets it  acquired while the program was open). We also provide information on  outstanding assets, as applicable—both the book value and the market  value—as of September 30, 2011. Also included are the lifetime  estimated costs for each program calculated by Treasury. Later in this  report we discuss the reasons for recent changes in several of Treasury’s  cost estimates between September 2010 and September 2011.
subsections: section_title: Many Programs Continue to Wind Down, and Treasury Faces Trade-offs in Determining When to Exit
subsections: section_title: Financial Strength Will Determine When Remaining CPP Institutions Exit Program
paragraphs: While repayments and income from CPP investments have exceeded the  original outlays, financial strength will determine when remaining  institutions exit the program. As we have reported, Treasury disbursed  $204.9 billion to 707 financial institutions nationwide from October 2008  through December 2009.received $208.1 billion in repayment and income from its CPP  investments, exceeding the amount originally disbursed by $3.2 billion  (see fig. 2). The repayment and income amount included $182.4 billion in  repayments of original CPP investments, as well as $11.2 billion in  dividends, interest, and fees; $7.6 billion in warrant income; and $6.9  billion in net proceeds in excess of costs. After accounting for writeoffs  and realized losses on sales totaling $2.6 billion, CPP had $17.3 billion in   As of September 30, 2011, Treasury had  outstanding investments as of September 30, 2011. Treasury estimates  lifetime income of $13 billion for CPP as of September 30, 2011.
See Department of the Treasury, Troubled Asset Relief Program (TARP) Monthly 105(a)  Report-September 2011 (Washington, D.C.: Oct. 11, 2011). investments. Another 52 percent, or 165 institutions, exited CPP by  exchanging their securities under other federal programs: 28 through  CDCI and 137 through the Small Business Lending Fund (see fig. 3).the remaining 8 percent of CPP recipients that exited the program, 13  went into bankruptcy or receivership, 11 had their securities sold by  Treasury, and 2 merged with another institution.
Also, according to data in a Treasury report, as of September 30, 2011,  390 of the original 707 institutions remained in CPP but accounted for  only 8.4 percent of the original investments. Much of the $17.3 billion in  outstanding investments was concentrated in a relatively small number of  institutions. The largest single outstanding investment was $3.5 billion,  and the top four outstanding investments totaled $6.8 billion. The top 25  remaining CPP investments accounted for $11.3 billion.
The cumulative number of financial institutions that had missed at least  one scheduled dividend or interest payment by the end of the month in  which the payments were due rose from 164 as of November 30, 2010, to  226 as of November 30, 2011. Institutions can elect whether to pay  dividends and may choose not to pay for a variety of reasons, including  decisions that they or their federal and state regulators make to conserve  cash and maintain (or increase) capital levels. Institutions are required to  pay dividends only if they declare dividends, although unpaid cumulative  dividends generally accrue and the institution must pay them before  making payments to other types of shareholders, such as holders of  common stock.
These figures differ from the number of dividend or interest payments outstanding  because some institutions made their payments after the end of the reporting month. CPP  dividend and interest payments are due on February 15, May 15, August 15, and  November 15 of each year, or the first business day subsequent to those dates. The  reporting period ends on the last day of the calendar month in which the dividend or  interest payment is due. institutions still in the program (see fig. 4).despite reduced program participation, and the proportion of those  missing scheduled payments has risen accordingly. The number of  institutions missing payments stabilized in recent quarters; however, most  of these institutions had repeatedly missed payments. In particular, 119 of  the 158 institutions that missed payments in November 2011 had also  missed payments in each of the previous three quarters. Moreover, these  158 institutions had missed an average of 4.8 additional previous  payments, and only 7 had never missed a previous payment.
On July 19, 2011, Treasury announced that it had, for the first time,  exercised its right to elect members to the boards of directors of two of  the remaining CPP institutions. In considering whether to nominate  directors, Treasury said that it would proceed in two steps. First, after an  institution misses five dividend or interest payments, Treasury sends OFS  staff members to observe board meetings. Second, once an institution  has missed six dividend payments, Treasury decides whether to  nominate a board member based on a variety of considerations, including  what it learns from the board meetings, the institution’s financial condition,  the function of its board of directors, and the size of its investment.
The financial strength of the participating institutions will largely determine  the speed at which institutions repay their investments and exit and the  amount of total lifetime income. Institutions will have to demonstrate that  they are financially strong enough to repay the CPP investments in order  to receive regulatory approval to exit the program. The institutions’  financial strength will also be a primary factor in their decisions to make  dividend payments, and institutions that continue to miss payments may  also have difficulty exiting CPP. Moreover, dividend rates will increase for  remaining institutions beginning in late 2013, up to 9 percent, which may  prompt institutions to repay their investments as that dividend increase  approaches. If broader interest rates are low, especially approaching the  dividend reset, banks could have further incentive to redeem their  preferred shares. Treasury will need to balance the goals of protecting  taxpayer-supported investments while expeditiously unwinding the  program. Treasury officials told us that Treasury’s practice was generally  to hold, rather than sell, its CPP investments. As a result, Treasury’s ability to exit the program largely depends on the ability of institutions to  repay their investments. However, Treasury officials noted that if  warranted, Treasury could change its practice in the future and sell its  investments. In an upcoming report, we plan to describe the financial  condition of the remaining CPP institutions and compare them with  institutions that already exited and those that never participated.
Treasury has disbursed $570 million to its 84 CDCI participants, 28 of  which had previously participated in CPP (see fig. 5). As we previously  reported, CDCI is structured similarly to CPP in that it provides capital to  financial institutions by purchasing equity and subordinated debt from  them. No additional funds are available through the program, as CDCI’s  funding authority expired in September 2010. While no CDFIs have  repaid Treasury’s investment as of September 30, 2011, Treasury has  thus far received $10 million in dividend payments from CDCI  participants. Lastly, Treasury expects CDCI will cost approximately $182  million over its lifetime, almost a third of the $570 million obligated to the  program. Officials stated that CDCI has a cost, while CPP is estimated to  result in lifetime income, in part because CDCI provides a lower dividend  rate that increases the financing costs. CDCI also does not require  warrants of participating institutions, which would otherwise offset  Treasury’s costs.
As with CPP, Treasury must continue to monitor the performance of CDCI  participants because their financial strength will affect their ability to repay  Treasury and Treasury’s ability to exit the program. As of September 30,  2011, 5 of the 84 CDCI participants had missed at least one dividend or  interest payment, according to Treasury. While the continuing weak  economy could negatively affect distressed communities and the CDFIs  that serve them, the program’s low dividend rates may help participants  remain current on payments. When Treasury will exit CDCI is unknown  but the dividend rate that program participants pay increases in 2018,  which provides an incentive for some borrowers to repay before that rate  change occurs. As with CPP, Treasury officials indicated that while  Treasury’s current practice is to hold its CDCI investments, that strategy  could change and Treasury could opt to sell its CDCI shares.
Treasury has received more than $40 billion for its roughly $80 billion  AIFP investment, in large part from its participation in GM’s IPO and its  exit from Chrysler. In November and December 2010, Treasury received  $13.5 billion from its participation in GM’s IPO and $2.1 billion for selling  preferred stock in GM. Treasury’s investment in Chrysler ended with the  repayment of $5.1 billion in loans in May 2011 and the $560 million in  proceeds that Treasury received from the sale of its remaining equity  stake to Fiat in July 2011. Treasury received $2.7 billion from its sale of  Ally Financial trust preferred securities in March 2011.
Treasury’s timing of its exit from GM and Ally Financial—and ultimate  return on its investment—will depend on how it balances its competing  goals of maximizing taxpayer returns and selling its shares as soon as  practicable. As figure 6 shows, all of the $37.3 billion in outstanding AIFP  funds is from Treasury’s investments in GM and Ally Financial, including  32 percent of GM’s common stock and 74 percent of Ally Financial’s  common stock.
The timing of Ally Financial’s IPO will be critical to Treasury’s exit  strategy, but Ally Financial’s mortgage liabilities could hamper the  company’s efforts to launch an IPO and makes the timing of Treasury’s  exit from Ally Financial unknown. On March 31, 2011, Ally Financial filed  a registration statement with the Securities and Exchange Commission  for a proposed IPO but a date has yet to be announced for the IPO.  Additionally, after six straight quarterly profits, including growing asset  balances for its auto loan business, the company posted a loss of $210  million in the third quarter of 2011, dropping from a profit of about $270  million in the third quarter of 2010, primarily due to losses in its mortgage  business. The company attributed these losses to the negative impact of  the mortgage servicing rights valuation, resulting from a decline in interest  rates and market volatility. Additionally, Ally Financial has $12 billion in  debt coming due in 2012.
Treasury officials told us that they continue to monitor market conditions  and other factors in determining a divestment strategy for GM, but share  prices would have to increase significantly from current levels to fully  recoup Treasury’s investment in GM. As we previously reported, GM’s  share price would have to increase by more than 60 percent from the IPO  share price of $33 to an average of more than $54 for Treasury to fully  recoup its investment. shares have traded far below the IPO share price—with shares closing  above $33 only twice since March 2011, and as of September 30, 2011,  the shares closed at $20.18 (fig. 7).
GAO-11-471. Additional reporting on AIFP appears in GAO, Troubled Asset Relief  Program: Automaker Pension Funding and Multiple Federal Roles Pose Challenges for  the Future, GAO-10-492 (Washington, D.C.: Apr. 6, 2010); 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.:  Nov. 2, 2009); and Auto Industry: Summary of Government Efforts and Automakers’  Restructuring to Date, GAO-09-553 (Washington, D.C.: Apr. 23, 2009).
section_title: Treasury’s Plans to Sell AIG Shares Are Driven by Market Conditions
paragraphs: In September 2008, prior to TARP, AIG received government assistance  in the form of a loan from the Federal Reserve Bank of New York  (FRBNY). In exchange, AIG provided shares of preferred stock to the AIG  Credit Facility Trust created by FRBNY. These preferred shares were  later converted to common stock and transferred to Treasury. In addition  to this non-TARP support, Treasury provided TARP assistance to AIG in  November 2008 by purchasing preferred shares that were also later  converted to common stock. In late January 2011, following the  recapitalization of AIG, Treasury owned 1.655 billion TARP and non- TARP common shares in AIG.
The sale included about 132 million TARP AIG common shares on which Treasury had  a realized loss and about 68 million non-TARP AIG common shares on which Treasury  had a realized gain.
960 million TARP and 495 million non-TARP shares. (AIG also sold 100  million shares of common stock during this offering.) The costs for  underwriting, Treasury’s financial advisors, and Treasury’s legal counsel  were paid by, and will continue to be paid by, AIG. Treasury, however,  pays the costs for assistance it receives from FRBNY. Based on the  September 30, 2011, market price of AIG common stock, in selling all of  its AIG common shares, Treasury expects to incur a lifetime cost of $24.3  billion for its TARP shares and receive income of $12.8 billion for its non- TARP shares, giving it a lower than expected net estimated cost of $11.5  billion for assistance to AIG (see fig. 8).
AIG originally issued $16 billion of preferred shares in a special purpose  vehicle (SPV) called AIA Aurora LLC (or AIA), an SPV created by FRBNY  to hold shares of certain portions of AIG’s foreign life insurance  businesses. Likewise, AIG issued $9 billion of preferred shares in an SPV  called American Life Insurance Company (ALICO) Holdings LLC, which  was created to hold AIG’s ALICO holdings. AIG issued the shares to  FRBNY in December 2009 in exchange for a $25 billion reduction in  FRBNY’s revolving loan to AIG. As part of the recapitalization plan  executed on January 14, 2011, AIG redeemed FRBNY’s preferred shares  by drawing down the Series F equity facility and selling assets. In turn,  FRBNY transferred to Treasury the proceeds, along with a cross  collateralization agreement against certain other AIG businesses, held for  sale. Since the recapitalization, AIG has used the additional sales  proceeds to reduce the remaining liquidation preferences of Treasury’s  preferred interests in the AIA and ALICO SPVs.
Treasury has not announced any time frames for selling its AIG  investments, but as it exits this assistance it needs to balance selling its  AIG stock as soon as practicable based on market conditions with  protecting taxpayers’ interests. Treasury officials said that the agency  would work to avoid economic losses during this exit. To that end,  Treasury officials said that the agency had waited to proceed with its first  underwritten offering of AIG common stock until (1) it reacquainted the  investment community with AIG and (2) AIG executed and closed other  transactions, such as the March 2011 sale of MetLife equity securities  and a subsequent March transaction that reduced the preferred interests  in the AIA SPV by approximately $5.6 billion. The first underwritten  offering of Treasury’s AIG common shares occurred in May 2011.  Treasury expects to use underwritten offerings to sell most of its common  stock in AIG, with assistance from AIG. While Treasury generally prefers  to sell the common stock that it holds through underwritten offerings, it  could also decide to sell stock through other mechanisms, including more  frequent at-the-market offerings.
To sell its AIG stock, officials said that the agency planned to regularly  conduct analyses, consider market challenges, and rely on AIG to  facilitate Treasury’s offerings. Treasury officials have said that they would  continue to conduct analyses using factors such as AIG’s share price,  investor interest in AIG stock, and possible future restructuring. Treasury  officials also expect to face several challenges when disposing AIG stock.  First, because Treasury owns a significant amount of AIG stock—both as  a percentage of total company stock and in absolute terms—the amount  of shares the market can absorb may be limited. Second, continued price  volatility in the domestic and global insurance markets could impede  growth in these insurance markets. Third, the continued low interest rate  environment could likely lead to lower investment incomes and overall  profits for AIG, which in turn could affect Treasury’s opportunities to sell  its AIG shares. According to Treasury officials, Treasury expects to rely  on AIG to prepare and file certain paperwork with the Securities and  Exchange Commission and provide other assistance when Treasury sells  its remaining AIG shares. Given the decline in AIG’s stock price since  January 2011 and the recent volatility in the stock market, when  Treasury’s exit will be completed is unknown. Treasury will also need to  balance the tension of its competing goals by deciding whether it should  exit even if the stock value is below Treasury’s break-even amount.
Treasury purchased 31 SBA 7(a) securities between March and  September 2010 in an attempt to alleviate liquidity strains in secondary   Treasury announced in June 2011 that it markets for SBA 7(a) loans. intended to sell these securities and has sold nearly three-quarters of the  portfolio. As of October 2011, Treasury has sold 23 securities. Treasury  has eight securities remaining to be sold and projects lifetime income of  $3.9 million (see fig. 9).
Treasury officials took into account market effects when they considered  exiting Treasury’s portfolio of SBA 7(a) securities. For example, Treasury  analyzed SBA lending and securitization volumes, which had recovered  to precrisis levels. According to Treasury officials, Treasury also  consulted with its external advisor, EARNEST Partners, to understand the  potential effect of its sales on the markets. According to Treasury officials,  EARNEST Partners advised Treasury that its portfolio was small enough  not to affect liquidity in the $15 billion market for SBA 7(a) securities.  Moreover, the firm advised Treasury that it had received significant  market interest in the securities after Treasury announced its intention to  sell them. Treasury officials concluded that it was an opportune time to  begin selling these securities without negatively affecting markets.
Treasury officials stated that they considered several tradeoffs in deciding  to sell the securities this year, rather than holding them for longer. Exiting  quickly appears to be the main consideration, although Treasury officials  stated that they balanced this with promoting financial stability and  protecting the taxpayer. To determine what prices are reasonable to  accept as it continues to sell these securities, Treasury requested market  price estimates from two companies for each security it held and  compared that to a break-even price and a reserve price, below which it  would require additional approvals to proceed with the sale. While  Treasury might have maximized taxpayer returns by holding the securities  longer, according to Treasury officials, it faced prepayment risk that could  have reduced the securities’ long-term earning potential.
TALF provided loans to certain institutions and business entities in return for collateral in  the form of securities that are forfeited if the loans are not repaid. Securitization is a  process by which similar debt instruments—such as loans, leases, or receivables—are  aggregated into pools, and interest-bearing securities backed by such pools are then sold  to investors. These asset-backed securities (ABS) provide a source of liquidity for  consumers and small businesses because financial institutions can take assets that they  would otherwise hold on their balance sheets, sell them as securities, and use the  proceeds to originate new loans, among other purposes. Commercial mortgage-backed  securities (CMBS) are securitizations with cash flows backed by principal and interest  payments on a pool of loans on commercial properties. For additional information about  securitization and about TALF see GAO, Federal Reserve System: Opportunities Exist to  Strengthen Policies and Processes for Managing Emergency Assistance, GAO-11-696  (Washington, D.C.: July 21, 2011), and 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.: Feb. 5, 2010). collateral.costs related to the TALF SPV, TALF LLC (see fig. 10). This SPV  receives a portion of the interest income earned on TALF loans that can  be used to purchase any borrower-surrendered collateral from FRBNY,  referred to as excess interest.
section_title: Treasury Continues to Address Staffing Needs While Also Relying on Financial Agents and Contractors to Support TARP Administration and Programs
subsections: section_title: OFS Staffing Declined Slightly for the First Time and Treasury Is Addressing Turnover-Related Staffing Issues
paragraphs: As we have identified in previous reports, Treasury still faces staffing  challenges, including recent turnover stemming from the departure of  term-appointed staff, but it has been addressing these challenges. Overall  staffing numbers steadily increased from 2008 through 2010 but began  declining for the first time in 2011 (see fig. 14).
Also, as we previously reported in September 2011, OFS no longer has  detailees from other federal agencies. When OFS was first organized, it  relied on a significant number of staff from other agencies to start up new  TARP programs. With most TARP programs winding down, OFS officials  stated that OFS has begun to detail OFS staff to other Treasury  programs, such as the Small Business Lending Fund (SBLF), and other  federal agencies, such as the Bureau of Consumer Financial Protection.  From September 2010 through September 2011, about 65 staff left OFS,  according to Treasury officials.
As overall staffing numbers have declined, staffing levels within individual  OFS offices have fluctuated depending on staffing needs. In some offices,  for instance, staff levels have decreased. For example, in the Chief  Investment Office—which includes staff working on various TARP  programs, such as CPP—more than half of the staff departed from June  2010 to September 2011 (a decrease of 20 staff from 2010). Though  some Chief Investment Office staff were replaced with staff in other OFS  offices and staff that were new to Treasury, many were not replaced  because their skill sets were no longer needed given the wind-down  phase of investment programs. Conversely, staff have increased in  certain OFS offices where OFS management had identified specific  needs. For example, the number of staff in the Office of Internal Review  (OIR), which identifies risks and develops procedures for complying with  EESA, increased from June 2010 to September 2011. Treasury had been  seeking new staff with the skill set needed for this work, as we previously  reported, and officials stated that the increase reflected a need to  continue monitoring compliance among Treasury financial agents and  contractors. Treasury filled these positions in part by streamlining the  hiring process and better targeting its job announcements. Treasury  officials anticipate that staffing levels in most OFS offices will decrease  over time, though it will continue to seek talent for OIR, the Chief  Financial Office, and the TARP housing programs that remain active.
In addition to changes in staff numbers and office composition, OFS has  had a number of its leadership team depart since 2010. As we previously  reported, the Assistant Secretary of Financial Stability resigned on  September 30, 2010. His replacement is OFS’s former Chief Counsel,  who was sworn in as Assistant Secretary in July 2011. An acting Chief  Counsel has assumed the Assistant Secretary’s former role. Other staff in  leadership positions have resigned since we last reported in January  2011. The Chief Investment Officer and the Chief of Operations both left  OFS and were replaced internally by OFS staff members. Both of these  departing staff were in 3-year term senior executive service positions that  were set to expire, according to Treasury officials. The Chief of  Operations position is now held by a permanent staff member in an acting  capacity, while the Chief Investment Officer position remains a term  position. Program leadership has also changed for Treasury’s first and  largest program, CPP. Its director left Treasury in 2011 and was replaced  with another staff member from the Chief Investment Office.
Though OFS has experienced staff turnover and still faces staffing  challenges, OFS has been addressing these and other staffing issues.  For example:
As we previously reported, we recommended that OFS finalize its  staffing plan. Treasury has implemented this recommendation, which  should help OFS better ensure that it recognizes and addresses its  staffing challenges, given that many staff still remain in term  appointments. As a result of this plan, OFS produced information on  critical positions that should remain or be filled and successors for all  of the chiefs and those in critical management positions directly below  the chief level. OFS also plans to conduct succession planning for  other staff below the management level.
OFS now hires predominantly term-appointed staff for a maximum of  2 years, according to Treasury officials. Previously, it hired staff for  “permanent” positions as well as term-appointed positions with a  maximum of 4 years. Treasury officials noted that they made this  change in recognition of the fact that most of its programs are winding  down. Additionally, limiting new hires to shorter-term appointments  reduces the number of staff that Treasury will need to absorb when  OFS closes.
OFS has also filled or removed a number of vacancies to recognize  that it is in a period of winding down. Specifically, OFS vacancies  decreased from 61 in 2010 to 29 as of September 30, 2011.
In addition, OFS continues to address employee morale concerns. As we  previously reported, an employee survey in 2010 identified  communication and staff development as two areas for improvement.  According to Treasury officials, OFS took steps to address  communication concerns through a monthly newsletter; “lunch and learn”  sessions on a variety of topics; and briefings attended by senior Treasury  officials, such as the Secretary of the Treasury. To address concerns  about staff development, OFS officials said that they increased training  offerings and provided the opportunity to complete professional  development plans. Treasury has also been assisting term-appointed  staff. For example, Treasury officials stated that they have continued to  provide information sessions for those staff on term appointments that are  seeking permanent positions in the federal government. Officials also  noted that they have briefings on helping staff in term appointments  understand the terms of the appointment and to find opportunities for  detail positions to other agencies.
section_title: Treasury Increased Its Use of Financial Agents and Contractors
paragraphs: Treasury continues to rely heavily on financial agents to support TARP  programs. According to OFS procedures, financial agency agreements  are used for services that cannot be provided with existing Treasury or  contractor resources and generally involve inherently governmental  functions. Since the start of TARP, Treasury has relied on financial  agents for asset management, transaction structuring, disposition  services, custodial services, and administration and compliance support  for the TARP housing assistance programs. Through fiscal year 2011,  Treasury awarded 17 financial agency agreements, of which 14 remain  active. As shown in table 2, the total obligated value of financial agency  agreements increased from about $327 million to about $547 million, or  67 percent, from the end of fiscal year 2010 to the end of fiscal year 2011.  Treasury awarded two new financial agency agreements in fiscal year  2011 for transaction structuring and disposition services.
As shown in table 3, five financial agency agreements accounted for 87  percent of the total obligated value through fiscal year 2011—about $476  million out of about $547 million. The vast majority of these obligations,  approximately $383 million, went to Fannie Mae and Freddie Mac, which  provide administrative and compliance services, respectively, for HAMP.
Congress established Fannie Mae and Freddie Mac as for-profit, shareholder-owned  corporations to stabilize and assist the U.S. secondary mortgage market and facilitate the  flow of mortgage credit.
subsections: section_title: Total
paragraphs: Treasury also heavily relies on contractors to help administer TARP  programs. Treasury uses TARP contracts for a variety of legal,  investment consulting, accounting, and other services and supplies.  Through fiscal year 2011, Treasury had awarded or used 116 contracts  and blanket purchase agreements, up from 81 last year, and about half of  them remain active. As shown in table 2, the total obligated value of  these contracts has increased 42 percent since 2010, from $109 million to  $155 million. About 75 percent of the contracts and blanket purchase  agreements are relatively small (less than $1 million each). The two  largest contracts are $33 million (with PricewaterhouseCoopers, LLP for  internal control services) and $17 million (with Cadwalader, Wickersham  & Taft, LLP for legal services).
From the outset, Treasury encouraged small and minority- and women- owned businesses to pursue opportunities for TARP contracts and  financial agency agreements. The number of contracts and financial  agency agreements that went to small and minority-owned businesses  increased since 2010 from 16 to 31 (as shown in table 4). Also, 6 of the  17 total financial agency agreements and 25 of the 116 total contracts  were with these businesses through 2011. In addition, 73 subcontracts  under financial agency agreements and prime contracts went to small  and/or minority- and women-owned businesses. As in previous years, the  majority of these businesses participating in TARP are subcontractors.
As we have reported, when Treasury began to quickly implement TARP  initiatives in 2008, OFS had not finalized its procurement oversight  procedures and lacked comprehensive internal controls for contractors  and financial agents. Further, it did not have a comprehensive compliance  system to monitor and fully address vendor-related conflicts of interest.  Last year we reported that OFS had put in place an appropriate  infrastructure to manage and monitor its network of financial agents and  contractors. Specifically, by the end of fiscal year 2010, OFS had: defined organizational roles and responsibilities and established  written policies and procedures for the management and oversight of  TARP financial agents; taken action to ensure that sufficient personnel were assigned and  properly trained to oversee the performance of financial agents and  contractors; issued written procedures on measuring the performance of financial  agents and installed qualitative and quantitative performance  measures for several of its financial agents; and issued regulations on conflicts of interest, established an internal  reporting system for tracking all vendor conflict-of-interest  certifications, inquiries, and requests for waivers, and completed  renegotiations of three contracts that predated the regulations.
In fiscal year 2011, Treasury continued to strengthen its policies and  procedures for managing financial agents and contractors and conflicts of  interest. For example, contract administration personnel made  improvements to OFS’s contract record system, including controls and  clear deadlines for validating and certifying the completeness and  accuracy of the information. According to an OFS official responsible for  contracting, contract administration personnel audited most of the items in  the record system by tracing the items back to source documents, and  found some areas that needed to be improved. Data fields that were used  for informational purposes only, such as the contract specialist’s  telephone number, were not selected for audit. Fields selected included  date of award, contractor, potential contract value, and socioeconomic  status. Contract actions were matched against data in the Federal  Procurement Data System-Next Generation before deciding whether the  items needed to be traced back to source documents. According to the  official, new controls were established for adding new contract information  to the system and documentation procedures were developed to improve  data consistency.
The Office of Financial Agents (OFA) also expanded its implementation of  performance assessments of financial agents by issuing performance  measures and initiating assessments for five additional financial agents,  including Fannie Mae. Quarterly performance assessments are now  conducted for all of the active financial agents. OFA establishes  qualitative and quantitative performance measures, with input from the  financial agent, based on the core functions and responsibilities described  in each financial agency agreement. OFA staff review financial agents’  performance against the qualitative and quantitative measures and  prepare an overall performance assessment. The OFA reviews have  identified areas in which a financial agent is performing above  expectations or needs improvement. According to an OFA official, the  performance reviews have been an important management tool and  helped improve compliance through active communication and dialog with  the financial agents. For those financial agents eligible to receive  incentive payments, the performance reviews can affect the amount of  payment. OFA may revise the performance measures annually to  ensure continued alignment with the financial agents’ scope of work and  OFS priorities.
The OIR took several actions to strengthen oversight of conflicts-of- interest requirements over the last year. Specifically, we found the  following:
OIR began conducting on-site compliance reviews to determine  whether financial agents’ internal controls and procedures are  working. According to Treasury officials, six reviews were conducted  in fiscal year 2011. Treasury found that five of the financial agents  reviewed had reasonable internal controls in place. There were no  significant findings, although OIR made some recommendations. The  review of the remaining financial agent identified significant  weaknesses in its controls and in organizational management and  oversight. As a result of the review, the relationship with the financial  agent was terminated. Thus far, the on-site compliance reviews have  been of financial agents, but OIR plans to begin reviewing contractors  in the near future.
In 2011, OIR began preparing a quarterly conflicts-of-interest  feedback report for contractors. The report is shared with the  Contracting Officer’s Technical Representatives and included in the  contractor performance metrics that are incorporated into Contract  and Agreement Review Board reports. OIR’s reports describe and  rate contractors’ performance during the quarter in identifying,  mitigating, and disclosing conflicts of interest to the Treasury;  submitting adequate conflicts-of-interest certifications in a timely  manner; and expeditiously responding to requests for additional  information, among other things.
In 2011, according to OFS’s Compliance Officer, OIR put in place a  requirement that all new contractors and financial agents, as well as  Contracting Officer’s Technical Representatives and OFA personnel  with similar responsibilities, receive conflict-of-interest training. The  training materials used are similar to those used before 2011, but the  information presented is more consistent across all the training  materials than it was before the formalization of the requirement.
OIR continued to review a large number of inquiries from financial  agents and contractors about potential conflicts of interest. The total  reviewed as of September 30, 2011, was about 1,300, compared to  about 655 through fiscal year 2010. Reasons given by OIR for the  increase in inquiries in fiscal year 2011 compared with prior fiscal  years include the addition of several new contractors and financial  agents in fiscal year 2011 and the initiation of new processes, such as  on-site reviews of entities’ conflicts-of-interest controls. Forty-five of  the 1,300 inquiries have resulted in waivers, including 8 waivers  during fiscal year 2011. According to OFS’s Compliance Officer,  examples of waivers include permitting contractors and financial  agents to utilize Office of Government Ethics Form 450 in place of the  Form 278 and allowing contractors and financial agents to use their  own entertainment and gift policies in place of those in Treasury’s  conflicts-of-interest regulation. OIR has never waived an actual or  potential conflict of interest.
Staffing related to management and oversight of financial agents,  contractors, and conflicts of interest has remained stable. However, a  temporary loss of contract administration positions occurred when the  Procurement Services Division transitioned to the Internal Revenue  Service (IRS) in fiscal year 2011 as part of a Treasury-wide consolidation  to improve departmental offices’ procurement. Treasury hopes to realize  cost savings from the consolidation, improve internal controls and risk  management, and enhance employee career development. According to  an OFS contract administration official, several procurement positions  were lost in the transition to IRS because staff did not want to move to the  IRS facility in Oxon Hill, Maryland. IRS has agreed to staff a dedicated  team of ten individuals to support OFS, the same level as before the  move, and the team is currently being staffed by three federal employees  and two contractors, with plans to expand to six federal employees and  four contractors. According to the official, the procurement work is a  partnership between OFS and IRS, with OFS identifying vendors in  conjunction with IRS, IRS awarding the contracts, and OFS and IRS  sharing post-award duties, such as managing vendors, invoicing, and  keeping records.
section_title: Although Estimated Lifetime TARP Costs Have Decreased Significantly, Treasury Could Enhance Its Communication about the Costs of TARP
paragraphs: While lifetime cost estimates for TARP have decreased since the  government first provided assistance in 2008, the lifetime cost and  income estimates for specific TARP programs have fluctuated with  changes in program activity and the market value of Treasury’s TARP  investments. Although Treasury issues several reports on the costs of  TARP, its communications about TARP costs in press releases is  inconsistent and could be enhanced. Moreover, indirect costs such as  moral hazard are also associated with TARP and remain a concern.
subsections: section_title: Estimated Direct TARP Costs Have Decreased Significantly
paragraphs: As of September 30, 2011, Treasury has incurred net costs of $28 billion,  while recent federal lifetime cost projections for TARP—which include  both realized and future cash flows—have decreased. In 2009, the  Congressional Budget Office (CBO) estimated that TARP could cost $356  billion. However, CBO’s most recent estimate, using November 2011  data, is approximately $34 billion. Treasury’s fiscal year 2011 financial  statement, audited by GAO, reported that TARP would cost around $70  billion as of September 30, 2011, a decrease from about $78 billion  estimated as of September 2010. In general, the variation in CBO and  Treasury cost estimates is attributable to their timing—that is, market  conditions and program activities differed when the estimates were  developed. However, program participation assumptions for TARP- funded housing programs explain the large difference between the CBO  and Treasury cost estimates. Treasury assumed that all of the $45.6  billion allocated to TARP housing programs would be utilized and, as a  result, estimated that they would cost $45.6 billion. Conversely, CBO  expected lower participation rates for the housing programs, resulting in a  cost estimate of $13 billion as of November 2011. While these differences  exist, CBO officials noted that as TARP continues to wind down,  Treasury’s and CBO’s lifetime cost estimates should be more similar. This  convergence of cost estimates is likely to occur as program costs become  clearer and more recipients repay their assistance—reducing the number  of outstanding TARP assets and the related uncertainty about how  market risks will affect the future value of these investments.
In our review of Treasury’s lifetime cost estimates for TARP’s equity  investment programs, we found that the estimates for some programs  changed only slightly, if at all, between September 2010 and September  2011, while others changed by a notable margin. For example, Treasury  estimated that CPP would result in lifetime income of $11.2 billion as of  September 2010 and its recent estimate as of September 2011 was  slightly higher at $13 billion (see fig. 15). This increase in CPP’s  estimated lifetime income was the result of proceeds in excess of costs  from the sale of Citigroup common stock offset by a decline in the  estimated market value of Treasury’s remaining CPP investments.  Additionally, Treasury’s lifetime cost estimate of $45.6 billion for TARP- funded housing programs remained unchanged between September  2010 and September 2011 because Treasury continues to assume that  all of the $45.6 billion allocated to the housing programs will be utilized.
On the other hand, Treasury’s recent cost estimates for AIFP and  assistance to AIG changed markedly when compared to estimates as of  September 2010. Specifically, Treasury estimated a lifetime cost of $14.7  billion for AIFP as of September 2010 but that estimate increased to  $23.6 billion using September 2011 data due to a decline in the value of  Treasury’s equity investments in GM and Ally Financial. Additionally,  Treasury’s estimate for assistance to AIG decreased from $36.9 billion to  $24.3 billion between September 2010 and September 2011 as a result of  improvements in the financial condition of AIG since Treasury first  provided assistance and the restructuring of Treasury’s AIG investment to  common stock. However, as we have seen, the ultimate cost of the  assistance to AIG could be about $11.5 billion after factoring in the  estimated lifetime income of $12.8 billion from Treasury’s non-TARP  assistance to AIG. As shown, lifetime cost estimates are likely to  fluctuate, particularly for investment programs like AIFP and the AIG  Investment Program, because future results rely heavily on the market  price of common stock.
Although Treasury regularly reports on the cost of TARP and its  programs, it could improve the clarity and consistency of its  communications on TARP costs, specifically in its press releases about  specific programs. Treasury issues several reports—including the Agency  Financial Report, Monthly 105(a) Reports, and Transaction Reports—that  provide updates on the funds obligated and disbursed, repayments and  income, and gains and losses. Compared to Treasury’s past reporting  practices, recent versions of the Agency Financial Report and the Monthly  105(a) Reports clearly present Treasury’s lifetime cost estimates for  TARP and its programs. However, Treasury’s press releases do not  consistently include these cost estimates. Rather, Treasury’s press  releases on specific TARP programs typically only include transaction- oriented updates, such as disbursements and returns on Treasury’s  investments from repayments, dividends, and the sale of its assets. While  the transaction-oriented updates in Treasury’s press releases are  important, they do not provide the general public with the greater  context—the lifetime cost associated with individual programs.
Furthermore, it appears that over the last 2 years Treasury has included  lifetime cost estimates in some of its program-specific press releases for  programs expected to result in a lifetime income, while excluding these  estimates for programs expected to result in a cost for taxpayers. For  instance, a press release from April 2011 indicated that Treasury’s bank  programs were expected to result in a lifetime positive return of  approximately $20 billion. Other press releases for TARP banking  programs also include this reference to expected lifetime income.  However, during the same period Treasury did not include lifetime cost  estimates in its press releases for TARP programs that projected a cost to  the government, such as SBA 7(a), AIG, and AIFP. For example,  Treasury issued a press release in June 2011 that described its sale of  several SBA 7(a) securities. Treasury stated that the sale resulted in  overall gains and income. The content of this press release implied that  the program had earned a significant amount of money but did not  provide the more comprehensive lifetime cost estimate for the program,  which was $1 million at that time. In addition, over the last 2 years none of  Treasury’s press releases for AIG and AIFP (programs expected to cost  approximately $24.3 billion and $23.6 billion respectively, as of  September 30, 2011) have included the lifetime cost estimates associated  with the programs. investment in the programs and revenues received. This inconsistent  disclosure of lifetime cost estimates raises concerns about the  consistency and transparency of Treasury’s press releases and suggests  a selective approach that focuses on reporting program lifetime income  and not lifetime costs.
As noted earlier in this report, the $24.3 billion is associated with TARP-related  assistance. Factoring in income of $12.8 billion for its non-TARP shares could result in a  net estimated cost of $11.5 billion.
As we have previously reported, transparency is important in the context  of TARP and the unprecedented government assistance it provided to the  financial sector. In discussing our questions about the press releases with  Treasury officials, they noted that they provide cost information in other  public reports. However, by improving the clarity of its communication on  the costs of TARP through consistently incorporating lifetime cost  estimates into its program press releases, Treasury could reduce  potential confusion and misunderstanding of TARP’s results. Treasury  would also be setting a precedent for cost reporting associated with any  future government interventions.
section_title: Despite Estimated Decreases in TARP Costs, Government Interventions Such as TARP Can Exacerbate Moral Hazard
paragraphs: Though direct costs for TARP—including potential lifetime income—can  be estimated and quantified, certain indirect costs connected to the  government’s assistance are less easily measured. For example, as we  have previously reported, when the government provides assistance to  the private sector, it may increase moral hazard that would then need to  be mitigated. That is, in the face of government assistance, private firms  are motivated to take risks they might not take in the absence of such  assistance, or creditors may not price into their extensions of credit the  full risk assumed by the firm, believing that the government would provide  assistance should the firm become distressed.
EESA and the amendments made by the American Recovery and  Reinvestment Act of 2009 established a number of measures to mitigate  the moral hazard of TARP by requiring that participating institutions follow  certain requirements. These include providing Treasury with warrants in  exchange for TARP funds to allow taxpayers to benefit from any  appreciation of the company’s stock, and limiting certain bonuses and  golden parachute payments for certain highly compensated employees  and senior executive officers, as such payments can encourage  excessive risk-taking. Even with such requirements in place, however,  government intervention in the private sector can encourage market  participants to expect similar emergency actions. This belief diminishes  market discipline as it can weaken private or market-based incentives to  properly manage risks and can in particular contribute to the perception  that some firms are “too big to fail.”
Government interventions can also have consequences for the banking  industry as a whole, including institutions that do not receive bailout  funds. For instance, investors may perceive the debt associated with  institutions that received government assistance as being less risky  because of the potential for future government bailouts. This perception  could lead them to choose to invest in such assisted institutions instead of  those that did not receive assistance. However, such effects may be  temporary, as evidenced by the recent downgrade by Moody’s Investors  Service, Inc. (Moody’s) of the long-term credit ratings of Bank of America  Corp. and Wells Fargo & Co. after the Dodd-Frank Act’s new regulatory  provisions were enacted into law, which aim to avoid or at least limit  future government bailouts to financial institutions. Moody’s stated that it  downgraded these credit ratings because it believes the government is  less likely to rescue these financial institutions now than it was during the  financial crisis. This rating change could affect their ability to access  financing with as favorable terms.
The Dodd-Frank Act included a number of provisions intended to address  the problem of “too big to fail” by strengthening oversight of financial  institutions. For example, the Dodd-Frank Act required the Federal  Reserve to implement enhanced prudential standards for bank holding  companies that are deemed systemically important and increased  oversight of certain nonbank financial companies. Specifically, the  Federal Reserve has been given supervisory authority over any nonbank  financial company that the Financial Stability Oversight Council  determines could pose a threat to the financial stability of the country.  Also, the Dodd-Frank Act provided new reporting and resolution  authorities to the Federal Deposit Insurance Corporation for certain large,  systemic financial institutions, and requires those institutions to write  plans for their unwinding. However, if these new provisions fail to  address the too big to fail phenomenon, future financial crises could  emerge that may be similar or worse than the financial meltdown that  escalated with the failures of Bear Stearns and Lehman Brothers in 2008.  That is, some firms may see the government assistance that was  provided during the last crisis as a promise of similar aid in the future and  therefore have an incentive to continue engaging in risky activities.  Ultimately, any moral hazard effects of the Dodd-Frank Act changes will  not be known until financial institutions face another period of financial  stress.
section_title: Conclusions
paragraphs: As Treasury continues to unwind most TARP programs, the estimated  costs of TARP have decreased significantly from when Treasury first  announced TARP. Treasury’s latest estimate of approximately $70 billion  as of September 30, 2011, includes a large projection of lifetime income  from CPP, and the cost estimates for assistance to AIG and the auto  companies continue to fluctuate, demonstrating that such estimates are  subject to price movements in the market, among other factors, and could  change in the future. We found that Treasury enhanced some of its cost  reporting in the past year, although its press releases require  improvements. Such communications about specific programs include  information about estimated lifetime costs and income only when  programs are expected to result in lifetime income and not when they are  expected to result in a lifetime cost. This practice does not represent a  consistent approach to reporting to the public through press releases on  the costs of individual programs. As we have indicated in many past  reports on TARP, transparency remains a critical element to the  government’s unprecedented assistance to the financial sector. Such  transparency helps clarify to the public the costs of TARP assistance and  to understand how the government intervened in various markets.  Enhancing the transparency and clarity of these press releases will also  set a precedent for any future government interventions, should they ever  be needed.
section_title: Recommendation for Executive Action
paragraphs: To enhance transparency about the costs of TARP programs as Treasury  unwinds its involvement, we recommend that the Secretary of the  Treasury enhance Treasury’s communications with the public, in  particular Treasury’s press releases, about TARP programs and costs by  consistently including information on estimated lifetime costs, especially  when reporting on program results. For example, Treasury should  consider including lifetime cost estimates, or references to Treasury  reports that include such information, in its press releases about specific  programs.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to Treasury for its review and comment.  Treasury provided written comments that we have reprinted in appendix  III. Treasury also provided technical comments that we have incorporated  as appropriate.
In its written comments, Treasury agreed with our recommendation that it  could further enhance its communications about the costs of TARP  programs in its program-specific press releases, also noting that it has  established comprehensive accountability and transparency regarding  TARP. Treasury stated that it will implement our recommendation by  including a link to its Monthly 105(a) Report, which contains cost  estimates for each TARP program, in its future program-specific press  releases. Implementation of our recommendation through this practice  would provide a good opportunity for Treasury to clearly and fully  communicate TARP program costs to the public.
We are sending copies of this report to the Financial Stability Oversight  Board, Special Inspector General for TARP, interested congressional  committees and members, and Treasury. The report also is available at  no charge on the GAO website at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  Orice Williams Brown at (202) 512-8678 or williamso@gao.gov, A. Nicole  Clowers at (202) 512-8678 or clowersa@gao.gov, or Thomas J. McCool  at (202) 512-2642 or mccoolt@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To assess the condition and status of all programs initiated under the  Troubled Asset Relief Program (TARP), we collected and analyzed data  about program utilization and assets held, as applicable, focusing  primarily on financial information that we had audited in the Office of  Financial Stability’s (OFS) financial statements, as of September 30,  2011. As noted in the report, in some instances we provided more recent,  unaudited financial information. The financial information includes the  types of assets held in the program, obligations that represent the highest  amount ever obligated for a program (to provide historical information on  total obligations), disbursements, and income. We also provide  information on program start dates, defining them based on the start of  the first activity under a program, and we provide program end dates,  based on official announcements or program terms from the Department  of the Treasury (Treasury). Finally, we provide approximate program exit  dates—either estimated by Treasury or actual if the exit already  occurred—that reflect the time when a program will no longer hold assets  that need to be managed. We also used OFS cost estimates for TARP  that we audited as part of the financial statement audit and reviewed  Congressional Budget Office (CBO) cost estimates from publicly available  CBO reports. In addition, we tested OFS’s internal controls over financial  reporting as it relates to our annual audit of OFS’s financial statements.  The financial information used in this report is sufficiently reliable to  assess the condition and status of TARP programs based on the results  of our audits of fiscal years 2009, 2010, and 2011 financial statements for  TARP.
We also examined Treasury documentation such as program terms,  decision memos, press releases, and reports on TARP programs and  costs. Also, we interviewed OFS program officials to determine the  current status of each TARP program, the role of TARP staff while most  programs continue to unwind, and to update what is known about exit  considerations for TARP programs. Other TARP officials we interviewed  included those responsible for financial reporting. Additionally, in reporting  on these programs and their exit considerations we leveraged our  previous TARP reports and publications from the Special Inspector  General for TARP and the Congressional Oversight Panel, as  appropriate. In addition:
For the Capital Purchase Program, we used OFS’ reports to describe  the status of the program, including amount of investments  outstanding, the number of institutions that had repaid their  investments, and the amount of dividends paid, among other things.  In addition, we reviewed Treasury’s press releases on the program.  We also relied on information that we have collected as part of our  ongoing review of the financial condition of Capital Purchase Program  institutions.
For the Community Development Capital Initiative, we interviewed  program officials to determine how the program is managed and what  repayment or exit concerns Treasury has for the program.
To update the status of the Automotive Industry Financing Program  (AIFP) and Treasury’s plans for managing its investment in the  companies, we leveraged our past work; reviewed information on  Treasury’s exit from Chrysler, including Chrysler and Treasury press  releases; reviewed information on Treasury’s plans for overseeing its  remaining financial interests in General Motors (GM) and Ally  Financial, including Administration and Treasury reports. To obtain  information on the current financial condition of the companies, we  reviewed information on GM’s and Ally Financial’s finances and  operations, including financial statements and industry analysts’  reports.
To update the status of the American International Group, Inc. (AIG)
Investment Program (formerly the Systemically Significant Failing  Institutions Program) we reviewed relevant documents from Treasury  and other parties. For the AIG Investment Program, these documents  included 105(a) reports provided periodically to Congress by  Treasury, as well as reports produced by the Board of Governors of  the Federal Reserve System, and the Federal Reserve Bank of New  York, and other relevant documentation such as AIG’s financial  disclosures and Treasury’s press releases. We also interviewed  officials from each of these agencies and AIG.
For the Small Business Administration (SBA) 7(a) Securities Purchase  Program, we analyzed data on Treasury purchases and dispositions  of SBA 7(a) securities collected during our financial audit. We also  reviewed decision memos on the disposition of the SBA 7(a) portfolio.  In addition, we reviewed press releases about the program’s sales  activity and income. We reviewed SBA 7(a) loan volume data   provided by Treasury and compared that to trends in our past reports  related to SBA 7(a) lending and we also interviewed program staff  about the status of the programs and plans for future sales.
For the Term Asset-Backed Securities Loan Facility (TALF), we  reviewed program terms and requested data from Treasury about  loan prepayments and TALF LLC activity. We also researched trends  in the values of commercial mortgage-backed securities. Additionally,  we interviewed OFS officials about their role in the program as it  continues to unwind.
To update the status of the Public-Private Investment Program, we  analyzed program quarterly reports, term sheets, and other  documentation related to the public-private investment funds. We also  interviewed OFS staff responsible for the program to determine the  status of the program while it remains in active investment status.
To determine the status of Treasury’s TARP-funded housing  programs, we obtained and reviewed Treasury’s published reports on  the programs and servicer performance, documentation on projected  cost estimates and disbursements for each of the programs, and  guidelines and related updates issued by Treasury for each of the  programs. In addition, we obtained information from and interviewed  Treasury officials about the status of the TARP-funded housing  programs, including numbers of borrowers helped and the actions  Treasury had taken to address our prior recommendations.
To obtain the final status for three programs that Treasury exited and  for which Treasury no longer holds assets that it must manage—the  Asset Guarantee Program, Capital Assistance Program, and Targeted  Investment Program—we reviewed Treasury’s recent reports and  leveraged our past work.
To determine the proportion of permanent, term, and detailee staff in  OFS, we reviewed program data showing changes in the number of staff  over time and in each OFS office. We assessed this staffing data for  reliability by comparing it to organizational directories to ensure that the  changes were generally equivalent. We determined that the staffing data  was sufficiently reliable to show trends in OFS staffing. We also  interviewed agency officials to gain insight into the trends. Additionally,  we obtained program-specific staffing information from agency officials  during interviews to inform our discussion of the staffing needs of each  TARP program and any succession planning undertaken by OFS. Also,  we reviewed OFS documentation, such as the organizational directories,  to analyze any changes in leadership positions in OFS. To assess the  staffing challenges of OFS as TARP continues to wind down, we  reviewed past GAO reports and recommendations and the OFS staffing  and development plan, and we interviewed agency officials.
To assess OFS’s use of financial agents and contractors since TARP was  established in October 2008, we reviewed information on financial agents  and contractors from OFS’s contract record system and interviewed  Treasury contract officials about financial agency agreements, contracts,  and blanket purchase agreements as of September 30, 2011, that  support TARP administration and programs. We analyzed information  from the contract record system to update key details on the status of  TARP financial agents and contractors, such as total number of  agreements and contracts, type of services being performed, obligated  values, periods of performance, and share of work by small businesses.  Through discussions with Treasury officials responsible for the contract  record system and inquiries we made about selected data items, as well  as matching OFS’s contract list against data we obtained from the  Federal Procurement Data System-Next Generation, we determined that  data in the record system were sufficiently reliable for our purposes. To  assess OFS’s progress in strengthening its infrastructure for managing  and overseeing the performance of TARP financial agents and  contractors and addressing conflicts of interest that could arise with the  use of private sector firms, we reviewed various documents and  interviewed OFS officials about changes in fiscal year 2011 to its policies  and procedures regarding (1) management and oversight of TARP  financial agents and contractors and (2) monitoring and oversight  activities by the OFS team responsible for financial agent and contractor  compliance with TARP conflicts-of-interest requirements. We did not  review financial agents’ performance assessments or incentive payments.
To ascertain what is known about TARP costs, we reviewed the cost  reporting of CBO, the Office of Management and Budget (OMB), and  Treasury, including the credit reform accounting methods used to develop  cost estimates for TARP programs. For our analysis we focused on  Treasury’s cost estimates for the following reasons: (1) Treasury’s recent  financial statements and cost projections have been audited by GAO and  (2) estimates reported by OMB are based on numbers provided by  Treasury.methods used to calculate TARP costs and the reasons for any significant  differences among the cost estimates calculated by each agency. We  utilized data from our financial audit and leveraged other internal  resources related to credit reform accounting and the modeling of TARP  costs. We also reviewed Treasury’s press releases on the costs of TARP.  For our review of the moral hazards of TARP, we reviewed pertinent  legislation such as the Emergency Economic Stabilization Act and the  Dodd-Frank Wall Street Reform and Consumer Protection Act and utilized  previous GAO reports and Congressional Oversight Panel publications.
We interviewed officials from CBO and Treasury on the  We conducted this performance audit from June 2011 to January 2012 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: Appendix II: Information on Programs Treasury Has Exited
paragraphs: This appendix includes information about TARP programs that Treasury  has exited and for which Treasury no longer holds assets to manage. We  provide an overview of the purpose of these programs, when they started  and ended, the status of funding, and the final lifetime costs or income of  the programs, as applicable.
subsections: section_title: Asset Guarantee Program
paragraphs: The Asset Guarantee Program was established as the Treasury  insurance program, which provided federal government assurances for  assets held by financial institutions that were deemed critical to the  functioning of the U.S. financial system. Citigroup and Bank of America  were the only two institutions that participated in this program before it  was terminated. As previously reported, Bank of America paid Treasury  and others a fee for terminating the term sheet before any assets were  segregated. Treasury sold the remaining assets that it held related to this  program in January 2011 with the sale of Citigroup warrants, though it  could receive future monies from trust preferred stock held by the Federal  Deposit Insurance Corporation. Treasury reports that lifetime income from  terminating the Bank of America agreement and exiting Citigroup-related  assets is $3.7 billion (see fig. 16).
section_title: Targeted Investment Program
paragraphs: The Targeted Investment Program was designed to foster market stability  and thereby strengthen the economy by investing in institutions on a  case-by-case basis that Treasury deemed critical to the functioning of the  financial system. Only two institutions—Bank of America and Citigroup— participated in this program, and each received $20 billion in capital  investment, which both repaid in December 2009. Treasury auctioned the  Bank of America warrant that it received under the Targeted Investment  Program in March 2010. Treasury auctioned the Citigroup warrant in  January 2011. Treasury reports that lifetime income for this program  totals $4 billion (see fig. 17).
section_title: Capital Assistance Program
paragraphs: The Capital Assistance Program was designed to further improve  confidence in the banking system by helping ensure that the largest 19  U.S. bank holding companies had sufficient capital to cushion themselves  against larger than expected future losses, as determined by the  Supervisory Capital Assessment Program—or “stress test”—conducted  by the federal banking regulators. The Capital Assistance Program was  announced in February 2009 and ended in November 2009. It was never  utilized.
section_title: Appendix III: Comments from the Department of the Treasury
section_title: Appendix IV: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above, Gary Engel, Mathew J. Scirè,  and William T. Woods (lead Directors); Marcia Carlsen, Lawrance Evans,  Jr., Dan Garcia-Diaz, Lynda Downing, Kay Kuhlman, Harry Medina,  Joseph O’Neill, John Oppenheim, Raymond Sendejas, and Karen  Tremba (lead Assistant Directors); Emily Chalmers; Rachel DeMarcus;  John Forrester; Christopher Forys; Heather Krause; Robert Lee; Aaron  Livernois; Dragan Matic; Emily Owens; Erin Schoening; and Mel Thomas  have made significant contributions to this report.
section_title: Related GAO Products
paragraphs: Financial Audit: Office of Financial Stability (Troubled Asset Relief  Program) Fiscal Years 2011 and 2010 Financial Statements.  GAO-12-169. Washington, D.C.: November 10, 2011.
Troubled Asset Relief Program: Status of GAO Recommendations to  Treasury. GAO-11-906R. Washington, D.C.: September 16, 2011.
Troubled Asset Relief Program: The Government’s Exposure to AIG  Following the Company’s Recapitalization. GAO-11-716. Washington,  D.C.: July 28, 2011.
Troubled Asset Relief Program: Results of Housing Counselors Survey  on Borrowers’ Experiences with the Home Affordable Modification  Program. GAO-11-367R. Washington, D.C.: May 26, 2011.
Troubled Asset Relief Program: Survey of Housing Counselors about the  Home Affordable Modification Program, an E-supplement to  GAO-11-367R. GAO-11-368SP. Washington, D.C.: May 26, 2011.
TARP: Treasury’s Exit from GM and Chrysler Highlights Competing  Goals, and Results of Support to Auto Communities Are Unclear.   GAO-11-471. Washington, D.C.: May 10, 2011.
Management Report: Improvements Are Needed in Internal Control Over  Financial Reporting for the Troubled Asset Relief Program.  GAO-11-434R. Washington, D.C.: April 18, 2011.
Troubled Asset Relief Program: Status of Programs and Implementation  of GAO Recommendations. GAO-11-476T. Washington, D.C.: March 17,  2011.
Troubled Asset Relief Program: Treasury Continues to Face  Implementation Challenges and Data Weaknesses in Its Making Home  Affordable Program. GAO-11-288. Washington, D.C.: March 17, 2011.
Troubled Asset Relief Program: Actions Needed by Treasury to Address  Challenges in Implementing Making Home Affordable Programs.   GAO-11-338T. Washington, D.C.: March 2, 2011.
Troubled Asset Relief Program: Third Quarter 2010 Update of  Government Assistance Provided to AIG and Description of Recent  Execution of Recapitalization Plan. GAO-11-46. Washington, D.C.:  January 20, 2011.
Troubled Asset Relief Program: Status of Programs and Implementation  of GAO Recommendations. GAO-11-74. Washington, D.C.: January 12,  2011.
Financial Audit: Office of Financial Stability (Troubled Asset Relief  Program) Fiscal Years 2010 and 2009 Financial Statements.  GAO-11-174. Washington, D.C.: November 15, 2010.
Troubled Asset Relief Program: Opportunities Exist to Apply Lessons  Learned from the Capital Purchase Program to Similarly Designed  Programs and to Improve the Repayment Process. GAO-11-47.  Washington, D.C.: October 4, 2010.
Troubled Asset Relief Program: Bank Stress Test Offers Lessons as  Regulators Take Further Actions to Strengthen Supervisory Oversight.  GAO-10-861. Washington, D.C.: September 29, 2010.
Financial Assistance: Ongoing Challenges and Guiding Principles  Related to Government Assistance for Private Sector Companies.  GAO-10-719. Washington, D.C.: August 3, 2010.
Troubled Asset Relief Program: Continued Attention Needed to Ensure  the Transparency and Accountability of Ongoing Programs.  GAO-10-933T. Washington, D.C.: July 21, 2010.
Management Report: Improvements are Needed in Internal Control Over  Financial Reporting for the Troubled Asset Relief Program.  GAO-10-743R. Washington, D.C.: June 30, 2010.
Troubled Asset Relief Program: Treasury’s Framework for Deciding to  Extend TARP Was Sufficient, but Could be Strengthened for Future  Decisions. GAO-10-531. Washington, D.C.: June 30, 2010.
Troubled Asset Relief Program: Further Actions Needed to Fully and  Equitably Implement Foreclosure Mitigation Programs. GAO-10-634.  Washington, D.C.: June 24, 2010.
Debt Management: Treasury Was Able to Fund Economic Stabilization  and Recovery Expenditures in a Short Period of Time, but Debt  Management Challenges Remain. GAO-10-498. Washington, D.C.:   May 18, 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: Capital Purchase Program Transactions  for October 28, 2008, through September 25, 2009, and Information on  Financial Agency Agreements, Contracts, Blanket Purchase Agreements,  and Interagency Agreements Awarded as of September 18, 2009.  GAO-10-24SP. Washington, D.C.: October 8, 2009.
Debt Management: Treasury Inflation Protected Securities Should Play a  Heightened Role in Addressing Debt Management Challenges.  GAO-09-932. Washington, D.C.: September 29, 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.
Troubled Asset Relief Program: Capital Purchase Program Transactions  for October 28, 2008, through May 29, 2009, and Information on Financial  Agency Agreements, Contracts, Blanket Purchase Agreements, and  Interagency Agreements Awarded as of June 1, 2009. GAO-09-707SP.  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.
Troubled Asset Relief Program: Capital Purchase Program Transactions  for the Period October 28, 2008 through March 20, 2009 and Information  on Financial Agency Agreements, Contracts, and Blanket Purchase  Agreements Awarded as of March 13, 2009. GAO-09-522SP.  Washington, D.C.: March 31, 2009.
Troubled Asset Relief Program: March 2009 Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-539T. Washington,  D.C.: March 31, 2009.
Troubled Asset Relief Program: Status of Efforts to Address  Transparency and Accountability Issues. GAO-09-484T. Washington,  D.C.: March 19, 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-09-474T. Washington,  D.C.: March 11, 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-09-247T. Washington, D.C.: December 5, 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.