Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues
Published: 2009-03-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: This testimony discusses our work on the Troubled Asset Relief Program (TARP), under which the Department of the Treasury (Treasury) has the authority to purchase and insure up to $700 billion in troubled assets held by financial institutions through its Office of Financial Stability (OFS). As Congress may know, Treasury was granted this authority in response to the financial crisis that has threatened the stability of the U.S. banking system and the solvency of numerous financial institutions. The Emergency Economic Stabilization Act (the act) that authorized TARP on October 3, 2008, requires GAO to report at least every 60 days on the findings resulting from our oversight of the actions taken under the program. We are also responsible for auditing TARP's annual financial statements and for producing special reports on any issues that emerge from our oversight. To carry out these oversight responsibilities, we have assembled interdisciplinary teams with a wide range of technical skills, including financial market and public policy analysts, accountants, lawyers, and economists who represent combined resources from across GAO. This testimon is based primarily on our March 31, 2009 report that we are issuing today--the third under the act's mandate, which covers the actions taken as part of TARP through March 27, 2009, and follows up on the recommendations we made in our previous reports.
section_title: What GAO Found
paragraphs: As of March 27, 2009, Treasury had disbursed $303.4 billion of the $700 billion in TARP funds. Most of the funds (about $199 billion) went to purchase preferred shares of 532 financial institutions under the Capital Purchase Program (CPP)--Treasury's primary vehicle under TARP for stabilizing financial markets. Treasury has continued to take significant steps to address all of the recommendations from our December 2008 and January 2009 reports. In particular, Treasury has recently expanded the scope of the monthly CPP surveys of the largest institutions to include all institutions participating in the program, which is intended to provide Treasury with information necessary to begin to track the effectiveness of the program. Treasury also continued to make progress in several other areas, including requiring firms participating in certain new programs to show how assistance will expand lending. These requirements will better enable Treasury to determine what institutions plan to do with any capital infusions and to track the resulting lending activity of participating institutions on a regular basis. In addition, we specifically found that though Treasury is now receiving dividends from the investments it has made in CPP and certain other programs, it has not publicly reported these receipts, which totaled almost $2.9 billion through March 20, 2009. In February 2009, Treasury announced its broad strategy for using the remaining TARP funds and provided the details for its major components in the following weeks. Specifically, Treasury announced the Financial Stability Plan, which outlined a comprehensive set of measures to help address the financial crisis and restore confidence in our financial markets, and a Homeowner Affordability and Stability Plan to mitigate foreclosures and preserve homeownership. While articulating its plan was an important first step, Treasury continues to struggle with developing an effective overall communication strategy that is integrated into TARP operations. Without such a strategy, Treasury may face challenges, should it need additional funding for the program. Also, while Treasury has announced up to $70 billion dollars in assistance to AIG--more assistance than has been announced for any other single institution to date--it has yet to disperse the up to $30 billion of additional assistance or finalize the agreement. We continue to note the difficulty of measuring the effect of TARP's activities. Developments in the credit markets have generally been mixed since our January 2009 report. Some indicators revealed that the cost of credit has increased in interbank and corporate bond markets and decreased in mortgage markets, while perceptions of risk (as measured by premiums over Treasury securities) have declined in interbank and mortgage markets and risen in corporate debt markets.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our work on the Troubled Asset  Relief Program (TARP), under which the Department of the Treasury  (Treasury) has the authority to purchase and insure up to $700 billion in  troubled assets held by financial institutions through its Office of Financial  Stability (OFS). As you know, Treasury was granted this authority in  response to the financial crisis that has threatened the stability of the U.S.  banking system and the solvency of numerous financial institutions. The  Emergency Economic Stabilization Act (the act) that authorized TARP on  October 3, 2008, requires GAO to report at least every 60 days on the  findings resulting from our oversight of the actions taken under the  program. We are also responsible for auditing TARP’s annual financial  statements and for producing special reports on any issues that emerge  from our oversight. To carry out these oversight responsibilities, we have  assembled interdisciplinary teams with a wide range of technical skills,  including financial market and public policy analysts, accountants,  lawyers, and economists who represent combined resources from across  GAO. In addition, we are building on our in-house technical expertise with  targeted new hires and experts. The act also created additional oversight  entities—the Congressional Oversight Panel (COP) and the Special  Inspector General for TARP (SIGTARP)—that also have reporting  responsibilities. We are coordinating our work with COP and SIGTARP  and are meeting with officials from both entities to share information and  coordinate our oversight efforts. These meetings help to ensure that we  are collaborating as appropriate and not duplicating efforts.
My statement today is based primarily on our March 31, 2009 report that  we are issuing today—the third under the act’s mandate, which covers the  actions taken as part of TARP through March 27, 2009, and follows up on  the recommendations we made in our previous reports. The statement  also provides information on our ongoing review of the Auto Industry  Financing Program, which we plan to report on separately. Specifically,  like the March 2009 report, this statement focuses on (1) the nature and  purpose of the activities that had been initiated under TARP through  March 27, 2009, unless otherwise noted; (2) Treasury’s Office of Financial  Stability’s (OFS) hiring efforts, use of contractors, and progress in  developing a system of internal control; and (3) indicators of TARP’s  performance.
To do this work, we reviewed documents related to TARP, including  contracts, agreements, guidance and rules. We also met with officials from  OFS, contractors, and federal agencies. We plan to continue to monitor the  issues highlighted in our prior reports, as well as future and ongoing  capital purchases, other more recent transactions undertaken as part of  TARP, and the status of other aspects of TARP. We conducted this  performance audit between February 2009 and March 2009 in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on our  audit objectives.
subsections: section_title: Treasury’s Strategy for Deploying TARP Funds Continues to Evolve, Though CPP Remains Key Effort to Stabilize Financial Market
paragraphs: As of March 27, 2009, Treasury had disbursed $303.4 billion of the $700  billion in TARP funds (see table). Most of the funds (about $199 billion)  went to purchase preferred shares of 532 financial institutions under the  Capital Purchase Program (CPP)—Treasury’s primary vehicle under TARP  for stabilizing financial markets. Treasury has continued to improve the  integrity, accountability and transparency of TARP. For example, it  recently expanded monthly surveys of the largest institutions’ lending  activity to cover all CPP participants, as GAO recommended. These  surveys should provide additional important information about how the  capital investments are impacting participants’ lending activities and  capital levels.
During this period, Treasury has also taken some steps to improve its  monitoring of compliance with the terms of its existing agreements, but  has yet to hire asset managers to manage its growing portfolio of assets.  Treasury officials told us that they still plan to hire asset managers, whose  primary role will be to provide market advice about the portfolio, but who  also will help monitor dividends and stock purchase limitations. They  noted that asset managers will have a limited role in the area of executive  compensation. In the interim, Treasury has developed a process to ensure  that institutions are complying with dividend, stock repurchase, and  executive compensation restrictions. Treasury relies on participants’  representations and warranties articulated in the agreements, and if  Treasury finds reason to believe that these representations cannot be  relied upon, it can pursue available remedies for any false representations.  At this point, Treasury has not taken steps to verify this information or  require the institutions to provide any additional documentation. As  recommended in our December 2008 report, we continue to believe that  Treasury should develop a formal system to help ensure compliance with  the agreements and leverage the oversight activities of the bank regulators  by having them include compliance with the agreements as part of their  ongoing examinations. This type of compliance activity is generally  consistent with ensuring the safety and soundness of institutions; the  regulators previously told us they are taking steps to build such oversight  into their examination procedures. Without a consistent oversight  approach, Treasury runs the risk of getting inconsistent or incomplete  information from the regulators.
OFS had received approximately $2.9 billion in dividends through March  20, 2009, from its investments in CPP and certain other programs.   Approximately 20 percent of possible dividends during the period were  not declared and, therefore, not paid. This information about the returns  on Treasury’s investments has not been shared with Congress and the  public. We recommended that, to improve transparency, Treasury should  report publicly the monies, such as dividends, paid to it by TARP  participants. By not sharing this information, Treasury is missing an  opportunity to provide information about the returns it is receiving on its  investments.
Treasury has also continued to take steps to articulate a more clearly  defined vision for TARP; and, in February 2009, it provided its strategy for  using its remaining funds.  This strategy identified the existing problems  and how the various programs would attempt to address them.   Specifically, Treasury announced the Financial Stability Plan, which  outlines a set of measures to address the financial crisis and restore  confidence in the U.S. financial and housing markets. The plan established  six components: Capital Assistance Program; Public-Private Investment  Fund; Consumer and Business Lending Initiative; Small Business and  Community Lending Initiative; the Affordable Housing Support and  Foreclosures Prevention Plan; and Transparency and Accountability  Agenda. While the initial plan provided a broad vision and strategy, in the  subsequent weeks, Treasury provided additional details for the various  components of the program. In particular, it has announced its plans to  participate in the purchase of troubled assets through public-private  partnerships and launched a homeownership protection program, both  activities consistent with the original plans for TARP. Given that only 60  days have passed since our last report, we acknowledge the significance of  these accomplishments. Yet, Treasury continues to get questions about  TARP and what OFS is doing, which raises questions about the  effectiveness of its existing communication strategy. While Treasury’s  strategy has largely been one of posting information to its Web site, press  releases, speeches, testimonies, and ad hoc outreach to Congress, it  continues to face ongoing communication challenges. Given the  complexity of the issues involved and the heightened public scrutiny, an  effective communication strategy continues to be critical, but Treasury has  yet to develop a means of regularly and routinely communicating its  activities to relevant congressional committees, members, the public, and  other critical stakeholders. An effective communication strategy should,  among other things, build understanding and support for the program  through regular and routine outreach, including confidential member  briefings; integrate communications and operations by making  communication integral to the program; and increase the impact of  communication tools, such as electronic and print media and video. Given  that the President’s proposed budget contemplates additional funding, an  effective communication strategy is critical for ensuring the support  necessary to obtain the funding. Therefore we recommended in our March  2009 report that Treasury develop a communication strategy that includes  building understanding and support for the various components of the  program and suggested specific actions, such as hiring a communications  officer, integrating communications into TARP operations, and scheduling  regular and ongoing contact with congressional committees and members,  among other actions.
Treasury has taken appropriate actions to bolster the conditions or  requirements for assistance that is deemed exceptional, but certain  assistance may require that it go farther to help repair damage caused to  the program. Controversies about the actions of some TARP participants  continue to create issues for the program, in general, and AIG, in  particular. While Treasury has announced $70 billion dollars in assistance  to AIG—more assistance than has been provided to any other single  institution to date—it has yet to disperse the up to $30 billion of additional  assistance or finalize the terms under which the assistance will be  provided. Therefore, Treasury has the ability to further improve the  integrity and accountability associated with this additional assistance,  announced in March 2009. Based on our previous work on government  assistance to the private sector, as well as the Treasury Secretary’s  position, as articulated in the Financial Stability Plan, that “government  support must come with strong conditions,” Treasury has an opportunity  to take additional steps to strengthen its agreement with AIG by requiring  AIG to seek concessions from management, employees, and  counterparties before the agreement is finalized. For example, Treasury  could require that AIG seek to renegotiate contracts with its employees, as  appropriate, such as those related to the retention bonuses provided to  AIG Financial Products and existing counterparties that would face  substantial losses were AIG to have its credit downgraded or fail. While we  understand that Treasury is making an investment in AIG, Treasury’s  failure to act in this instance could cause additional harm to the program’s  reputation and impair its ability to seek additional funding for the program  if it were to need it in the future. We recommended in our March 2009  report that Treasury require that AIG seek to renegotiate existing  contracts with management, employees, and counterparties, among  others, as appropriate, as it finalizes its agreement for the up to $30 billion  in additional assistance, announced on March 2, 2009.
Following the announcement of Treasury’s Homeownership Affordability  and Stability Plan, in March 2009, Treasury released information on its  Making Home Affordable Program. One of its components—the Home  Affordable Modification Program (HAMP)—will use $50 billion in TARP  funds to modify mortgages. According to OFS officials, Fannie Mae and  Freddie Mac will provide an additional $25 billion for a total of $75 billion  to assist up to 4 million homeowners in order to avoid potential  foreclosure. The Making Home Affordable program also includes a non- TARP funded initiative to help up to 4 million to 5 million homeowners  refinance loans owned or guaranteed by Freddie Mac and Fannie Mae at  current market rates. According to Treasury, this initiative could help  homeowners save thousands of dollars in annual mortgage payments.  Treasury worked with other agencies to estimate the cost and number of  borrowers that would be eligible for loan modifications under HAMP and  to design program parameters. On March 19, 2009, in order to reach out to  borrowers, Treasury launched a Making Home Affordable Web site, which,  among other things, provides program, eligibility, and housing counselor  information. While the basic structure of HAMP has been announced, as of  March 23, 2009, Treasury had not specified several components of the  program, including a system of internal controls over TARP funds used to  make loan modifications. According to Treasury, it plans to put in place  such a system of internal control by the time the first payments are due to  servicers. In addition, as of March 20, 2009, Treasury had not provided  specific information on incentive payments, which servicers and mortgage  holders/investors would be eligible for under HAMP. We will continue to  monitor the design and implementation of this program, with a particular  focus on the empirical basis for HAMP and the structure and effectiveness  of its system of internal control.
Treasury also established the Auto Industry Financing Program (AIFP) in  December 2008 to prevent a disruption of the domestic automotive  industry that would pose systemic risk to the nation’s economy. Under this  program, Treasury has lent $13.4 billion to General Motors (GM) and $4  billion to Chrysler to allow the automakers to continue operating while  working out details of their plans to become solvent, such as achieving  concessions from stakeholders. The loans were designed to allow the  automakers to operate through the first quarter of 2009 with recognition  that, after that point, GM and Chrysler would need additional funds or  have to take other steps, such as an orderly bankruptcy. As required by  the terms of their loan agreements, GM and Chrysler submitted  restructuring plans to Treasury in February that describe the actions the  automakers will take to become financially solvent. Because of the  continued sluggish economy and lower than expected revenues, GM and  Chrysler are requesting an additional $16.6 billion and $5 billion in federal  financial assistance, respectively. On March 30, Treasury announced that it  had determined the plans GM and Chrysler submitted were not viable and  would give GM 60 days and Chrysler 30 days to take additional steps to  restructure their companies.  Treasury said that it would provide the  companies with interim financing during this period.  As part of our  oversight responsibilities for TARP, we are monitoring Treasury’s  implementation of AIFP, including the development of the required  restructuring plans.
section_title: Treasury Continues to Make Progress in Establishing OFS
paragraphs: Treasury has also made progress in establishing its management  infrastructure, which includes five of our nine recommendations from our  January 2009 report related to hiring, contracting, and establishing its  internal controls. However, in our March 2009 report, we made new  recommendations to improve contract oversight and documentation of  certain internal control procedures, as well as guidance pertaining to  determining warrant exercise prices.
In the hiring area, Treasury has continued to make progress in establishing  its management infrastructure, including hiring more staff. In accordance  with our prior recommendation that it expeditiously hire personnel in  OFS, Treasury continued to use direct-hire and various other  appointments to bring a number of career staff on board quickly.  Since  our January 2009 report, Treasury increased the total number of OFS staff  overall and shifted from mostly detailees to more permanent staff,  indicating that the workforce has become more stable over time.  Specifically, as of March 20, 2009, OFS has 113 total staff, with the number  of permanent staff increasing substantially—from 38 to 77—since our last  report and the number of detailees decreasing from 52 to 36. Of the  permanent staff currently working in OFS, 50 have come from other parts  of Treasury and the federal government and 27 from the private sector. In  addition, detailees from several Treasury and non-Treasury offices,  bureaus, and agencies currently support OFS. While Treasury expects that  permanent staff will be largely tasked with long-term responsibilities, as  the TARP strategy evolves, detailees will continue to play a critical role in  supporting the flexibility of OFS operations. In our last report, we  recognized that the changing nature of OFS had made it difficult for  officials to determine its long-term organizational needs, but that such  considerations continue to be vital for retaining institutional knowledge  within the organization as programs evolve. Treasury has taken further  steps to align OFS’s human capital program with its current and emerging  mission and programmatic goals. For example, as outlined in its draft  workforce plan, Treasury has taken steps to identify the critical skills and  competencies needed to operate OFS and plans to develop strategies to  address gaps in these areas. These actions will be critical to OFS’s ability  to monitor its progress in building and developing the OFS workforce.
Treasury has continued to build a network of contractors and financial  agents to support TARP administration and operations. Since our January  report, Treasury has awarded seven new contracts and two new financial  agency agreements as of March 13, 2009, bringing to 25 the total number of  TARP financial agency agreements, contracts, and blanket purchase  agreements. Four new contracts are for a variety of legal services; others  are for management consulting and document production and program  support services; and the two new financial agency agreements are to  support the new home loan modification program.  At the same time,  Treasury has continued to build its capacity to manage these vendors by  putting into place the people and processes necessary to enhance its  oversight of contractor and financial agent performance. Given the still- evolving nature of TARP requirements, we recognize that opportunities for  using fixed-price arrangements may be limited. Nonetheless, Treasury has  a process that should help it determine where those opportunities exist. In  developing this process, Treasury has addressed our prior  recommendation in this area and we will continue to monitor its continued  progress. In addition, Treasury could enhance its efforts to safeguard the  TARP program from conflicts-of -interest involving its contractors and  financial agents by completing its review of mitigation plans to enhance  specificity and conformity with the new conflicts-of-interest rule and by  requiring that decisions on potential conflicts be documented, which we  recommended in our March 2009 report.
OFS has begun to build a financial reporting structure, including  addressing the key accounting and financial reporting issues necessary to  enable it to prepare financial statements and receive an audit opinion on  those statements at this fiscal year end. Consistent with our previous  recommendations, OFS is continuing to develop a comprehensive system  of internal control and has established plans for finalizing formal policies  and procedures to govern TARP activities and assess its risks. In the  interim, OFS has developed and documented process flows and narratives  describing internal control procedures for TARP transactions. While OFS  applied adequate control procedures over selected CPP and SSFI  transactions we tested, it has not taken steps to provide consistency  between the documented control descriptions and the actual control  procedures that were applied to the transactions. Inconsistencies in the  application of a control procedure complicate review of the transactions  and increase the risk that the transactions are not recorded completely,  properly, or consistently. Similarly, OFS needs to address inconsistencies  in guidance pertaining to determining warrant exercise prices.  Inconsistencies in guidance available to the public for these price  determinations may create confusion about the actual terms and  conditions executed by Treasury for its investments.
section_title: Indicators Suggest Mixed Developments in the Credit Markets, but Isolating the Impact of TARP Continues to Present Challenges
paragraphs: Finally, we again note that while isolating the effect of TARP’s activities  continues to be difficult, conditions appear to have generally improved in  various credit markets since the announcement of the first TARP program.  However, some indicators demonstrate that, since our January 2009  report, the cost of credit continues to increase in interbank and corporate  bond markets and decrease in mortgage markets, while perceptions of risk  (as measured by premiums over Treasury securities) have declined in  interbank and mortgage markets and risen in corporate debt markets. In  addition, although Federal Reserve survey data suggest that lending  standards remained tight, the largest CPP recipients extended over $240  billion in new loans to consumers and business in both December 2008  and January 2009, according to the Treasury’s new loan survey. Attributing  any of these changes directly to TARP continues to be problematic  because of the range of actions that have been and are being taken to  address the current crisis. While these indicators may be suggestive of  TARP’s ongoing impact, no single indicator or set of indicators will  provide a definitive determination of the program’s impact.
Mr. Chairman, Ranking Member Grassley, and Members of the Committee,  I appreciate the opportunity to discuss this critically important issue and  would be happy to answer any questions you may have. Thank you.
section_title: GAO Contact
paragraphs: For further information on this testimony, please contact Thomas J.  McCool at (202) 512-2642 or mccoolt@gao.gov.
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