Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues
Published: 2009-03-19T00:00:00

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 findings resulting from our oversight of the actions taken under the program. We are also responsible for auditing OFS'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.
section_title: What GAO Found
paragraphs: This testimony is based primarily on our January 30, 2009 report, the second under the act's mandate, which covers the actions taken as part of TARP through January 23, 2009, and follows up on the nine recommendations we made in our December 2, 2008 report.3 This statement also provides additional information on some recent program developments, including Treasury's new financial stability plan and, as you requested, provides some insights on our ongoing work on the implications of actions related to the financial crisis on federal debt management. Our oversight work under the act is ongoing, and our next report is due to be issued by March 31, 2009, as required. Specifically, this statement focuses on (1) the nature and purpose of activities that have been initiated under TARP; (2) the status of OFS's hiring efforts, use of contractors, and development of a system of internal control; (3) implications of TARP and other events on federal debt management, and (4) preliminary 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 OFS, contractors, federal agencies, and officials from all eight of the first large institutions to receive disbursements. 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 (for example, guarantees on assets of Citigroup and Bank of America), and the status of other aspects of TARP.

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 findings  resulting from our oversight of the actions taken under the program. We  are also responsible for auditing OFS’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 January 30, 2009 report, the  second under the act’s mandate, which covers the actions taken as part of  TARP through January 23, 2009, and follows up on the nine  recommendations we made in our December 2, 2008 report. This  statement also provides additional information on some recent program  developments, including Treasury’s new financial stability plan and, as you  requested, provides some insights on our ongoing work on the  implications of actions related to the financial crisis on federal debt  management. Our oversight work under the act is ongoing, and our next  report is due to be issued by March 31, 2009, as required.
Specifically, this statement focuses on (1) the nature and purpose of  activities that have been initiated under TARP; (2) the status of OFS’s  hiring efforts, use of contractors, and development of a system of internal  control; (3) implications of TARP and other events on federal debt  management, and (4) preliminary 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 OFS, contractors,  federal agencies, and officials from all eight of the first large institutions to  receive disbursements.  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  (for example, guarantees on assets of Citigroup and Bank of America), and  the status of other aspects of TARP.
We conducted this performance audit between December 2008 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 Has Continued to Focus On CPP, but a Variety of Other Programs Have Been Created or Are Being Planned
paragraphs: Treasury has continued to focus on CPP, but a variety of other programs  have been created or are in progress, as shown in table 1. As of March 5,  2009, Treasury had disbursed almost 80 percent of the $250 billion it had  allocated for CPP to purchase almost $197 billion in preferred shares of  467 qualified financial institutions (table 1). Treasury also has begun to  receive dividend payments relating to capital purchases under CPP and  other programs. According to Treasury, as of February 17, 2009, it had  received about $2.4 billion.
Initially, Treasury approved $125 billion in capital purchases for nine of  the largest public financial institutions that federal banking regulators and  Treasury considered to be systemically significant to the operation of the  financial system. At the time, these nine institutions held about 55 percent  of U.S. banking assets. Subsequent purchases were made in qualified  institutions of various sizes (in terms of total assets) and types. As we  noted in our January report, most of the institutions that received CPP  capital were publicly held institutions, although a limited number of  privately held institutions and community development financial  institutions (CDFI) also received funds.
Treasury has taken a number of important steps toward better reporting  on and monitoring of CPP. These steps are in keeping with our prior  recommendations that Treasury bolster its ability to determine whether  institutions are using CPP proceeds in ways that are consistent with the  act’s purposes and establish mechanisms to monitor compliance with  program requirements. However, Treasury needs to take further steps in  this area. Treasury has done an initial survey of the largest institutions to  monitor their lending and other activities and announced plans to analyze  quarterly monitoring data (call reports) for all reporting institutions. In  addition, Treasury is developing a more limited monthly survey of lending  by smaller institutions participating in the program. These efforts are  important steps toward ensuring that all participating institutions are held  accountable for their use of the funds and are consistent with our past  recommendation that Treasury seek similar information from existing CPP  participants.. We will continue to monitor Treasury’s oversight efforts as  well as the consistency of the approval process in future work.
Treasury has also continued to take steps to increase its planned oversight  of compliance with terms of the CPP agreements including limitations on  executive compensation, dividends, and stock repurchases. Among these  steps, Treasury has named an Interim Chief Compliance Officer. However,  Treasury has not finalized its plans for detecting noncompliance with CPP  requirements or for taking enforcement actions. Without a more  structured mechanism in place to ensure compliance with all CPP  requirements, and as more institutions continue to participate in the  program, ensuring compliance with these aspects of the program will  become increasingly important and challenging. In its recently announced  Financial Stability Plan, Treasury called for banks receiving future  government funds to be held responsible for appropriate use of those  funds through (1) stronger restrictions on dividend payment and executive  compensation, and (2) enhanced reporting to the public, including  reporting on lending activity. In addition, Treasury is in the process of  drafting new regulations to implement the executive compensation  requirements in the American Recovery and Reinvestment Act of 2009 (the  Recovery Act). We will also continue to monitor the system that Treasury  develops to ensure compliance with the agreements and the  implementation of additional oversight and accountability efforts under its  new plan.
Treasury has also continued to make some progress in improving the  transparency of TARP and a few weeks ago announced its plans for the  remaining TARP funds. In our December 2008 report, we first raised  questions about the effectiveness of Treasury’s communication strategy  for TARP with Congress, the financial markets, and the public. These  questions were further heightened in the COP’s January report, which  raised similar questions about Treasury’s strategy for TARP. In response to  our recommendation about its communication strategy, Treasury noted  numerous publicly available reports, testimonies, and speeches. However,  even after reviewing these items collectively, we found that Treasury’s  strategic vision for TARP remained unclear. For example, Treasury  initially outlined a strategy to purchase whole loans and mortgage-backed  securities from financial institutions, but changed direction to make  capital investments in qualifying financial institutions as the global  community opted to move in this direction. However, once Treasury  determined that capital infusions were preferable to purchasing whole  mortgages and mortgage-backed securities, it did not clearly articulate  how the various programs—such as CPP, the Systemically Significant  Failing Institutions (SSFI) program, and the Targeted Investment Program  (TIP)—would work collectively to help stabilize financial markets. For  instance, Treasury has used similar approaches—capital infusions—to  stabilize healthy institutions under CPP as well as SSFI and TIP, albeit  with more stringent requirements. Moreover, with the exception of  institutions selected for TIP being viewed as able to raise private capital,  both SSFI and TIP share similar selection criteria. Further, the same  institution may be eligible for multiple programs. At least two institutions  (Citigroup and Bank of America) currently participate in more than one  program, adding to the confusion about Treasury’s strategy and vision for  implementing TARP. Other actions also have raised additional questions  about Treasury’s strategy. For example, Treasury announced the first  institution under TIP weeks before the program was established. Similarly,  the Asset Guarantee Program was established after Treasury announced  that it would guarantee assets under such a program, but many of the  details of the program have yet to be worked out.
Since our January report, Treasury has taken three key actions related to  our recommendation about the need for a clearly articulated vision for the  program. On February 10, Treasury announced the Financial Stability  Plan, which outlined a set of measures to address the financial crisis and  restore confidence in U.S. financial and housing markets. The plan appears  to be an approach designed to resolve the credit crisis by restarting the  flow of credit to consumers and businesses, strengthening financial  institutions, and providing aid to homeowners and small businesses. On  February 25, Treasury announced the standardized terms and conditions  for eligible financial institutions participating in the Capital Assistance  Program (CAP). Under CAP, an eligible institution that is found by its  federal banking regulator to need additional capital to continue lending  and absorb losses in a severe economic downturn will be eligible to  participate in CAP. Such institutions will be eligible to receive a capital  investment from Treasury, with regulatory approval, in the form of  preferred securities that are convertible into common equity to help  absorb losses and serve as a bridge to receiving private capital. A key  element of Treasury’s Financial Stability Plan, CAP is designed to ensure  that, in severe economic conditions, the largest U.S. bank holding  companies have sufficient capital to support lending to creditworthy  homeowners and businesses. As part of this effort, the federal banking  regulators—the Board of Governors of the Federal Reserve System, Office  of the Comptroller of the Currency, Federal Deposit Insurance  Corporation, and Office of Thrift Supervision—announced that they will  begin conducting a one-time forward-looking capital assessment (or stress  test) of the balance sheets of the 19 largest bank holding companies with  assets exceeding $100 billion. These institutions are required to participate  in the coordinated supervisory capital assessment and may obtain  additional capital from CAP if necessary. Regulators noted that the  capital assessment process for all eligible institutions is expected to be  completed by April 30, 2009.
On March 4, 2009, Treasury unveiled its Making Home Affordable program,  which is based in part on the use of TARP funds. Among other things, the  plan is designed to do the following:  It will use $75 billion ($50 billion from TARP funds) to modify the loans of  up to 3-4 million homeowners to avoid potential foreclosure. The goal of  modifying the mortgages of these homeowners is to reduce the amount  owed per month to sustainable levels (a mortgage debt-to-income ratio of  31 percent). Treasury will share the cost of restructuring the mortgages  with the other stakeholders (e.g., financial institutions holding whole loans  or investors if loans have been securitized). Treasury announced a series  of financial incentives for the loan servicers, mortgage holders/investors,  and borrowers that are intended to “pay for success,” encourage  borrowers to continue paying on time under the modified loan, and  encourage servicers and mortgage holders/investors to modify at-risk  loans before the borrower falls behind on a payment.
It includes an initiative to help up to 4-5 million homeowners to refinance  loans owned or guaranteed by Freddie Mac and Fannie Mae at current  market rates. According to Treasury, these homeowners would not  otherwise be able to refinance their loans at the conforming loan rates  because the declining value of their homes has left them with little or no  equity. Refinancing at current mortgage rates could help homeowners save  thousands of dollars on their annual mortgage payments.
It increases Treasury’s funding commitment to Fannie Mae and Freddie  Mac to ensure the strength and security of the mortgage market and to  help maintain mortgage affordability. The $200 billion funding   commitment is based on authority granted to Treasury under the Housing  and Economic Recovery Act of 2008.
We will continue to monitor the development and implementation of  Treasury’s plan, including how its actions address the challenges we have  previously identified.
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 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 with  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.  Treasury is currently assessing the automakers’ restructuring plans and  determining what the government’s role will be in future assistance. By  March 31, 2009, GM and Chrysler must report to the Secretary of the  Treasury on their progress in implementing these restructuring plans. The  Secretary will then determine whether the companies have made sufficient  progress in implementing the restructuring plans; if they have not, the  loans are automatically accelerated and become due 30 days later. As part  of our oversight responsibilities for TARP, we are monitoring Treasury’s  implementation of AIFP, including the auto manufacturers’ use of federal  funds and development of the required restructuring plans.
section_title: Efforts to Establish OFS Are Ongoing
paragraphs: Treasury has made progress in establishing its management infrastructure  for TARP, including in hiring, overseeing contracts, and establishing  internal controls. However, hiring for OFS is still ongoing, Treasury is  working to improve its oversight of contractors, and its development of a  system of internal control is still evolving.
In the hiring area—one that we highlighted in our first report—Treasury  took steps to help maintain continuity of leadership within OFS during and  after the transition to the new administration. Specifically, Treasury  ensured that interim chief positions would be filled to ensure a smooth  transition and used direct-hire authority and various other appointments  to bring a number of career staff on board quickly. OFS has increased its  overall staff since our December 2008 report from 48 to 90 employees as of  January 26, which includes an increase of permanent staff from 5 to 38.  Treasury officials recently told us that the number of permanent staff had  increased to 60. While progress has been made since our last report, the  number of temporary and contract staff who will be needed to serve long- term organizational needs remains unknown. Because TARP has added  many new programs since it was first established in October and program  activities are changing under the new administration, we recognize that  Treasury may find it difficult to determine OFS’s long-term organizational  needs at this time. However, such considerations will be vital to retaining  institutional knowledge in the organization.
Treasury’s use of existing contract flexibilities has enabled it to enter into  agreements and award contracts quickly in support of TARP. However,  Treasury’s use of time-and-materials contracts, although authorized when  flexibility is needed, can increase the risk that government dollars will be  wasted unless adequate mechanisms are in place to oversee contractor  performance. In this regard, Treasury has improved its oversight of  contractors, including those using time-and- materials pricing. In addition,  while Treasury has taken the important step of recently issuing an interim  regulation outlining the process for reviewing and addressing conflicts of  interest among new contractors and financial agents, it is still reviewing  existing contracts or agreements to ensure conformity with the new  regulation. We believe this step is a necessary component of a  comprehensive and complete system to ensure that all conflicts are fully  identified and appropriately addressed.
OFS has adopted a framework for developing and implementing its system  of internal control for TARP activities. OFS plans to use this framework to  develop specific policies, drive communications on expectations, and  measure compliance with internal control standards and policies.  However, it has yet to develop comprehensive written policies and  procedures governing TARP activities or implement a disciplined risk- assessment process.
In each of these areas, we made additional recommendations. Specifically,  we recommended that Treasury continue to expeditiously hire personnel  needed to carry out and oversee TARP. For contracting oversight, we  recommended that Treasury expedite efforts to ensure that sufficient  personnel are assigned and properly trained to oversee the performance of  all contractors, especially for contracts priced on a time-and-materials  basis, and move toward fixed-price arrangements whenever possible as  program requirements are better defined over time. We also recommended  that Treasury review and renegotiate existing conflict-of-interest  mitigation plans, as necessary, to enhance specificity and conformity with  the new interim conflicts of interest regulation and that it take continued  steps to manage and monitor conflicts of interest and enforce mitigation  plans. Finally, we recommended that Treasury, in addition to developing a  comprehensive system of internal controls, develop and implement a well- defined and disciplined risk-assessment process, because such a process is  essential to monitoring the status of TARP programs and identifying any  risks that announced programs will not be adequately funded. We will  continue to monitor OFS’s hiring and contracting practices and  implementation of the internal control framework, which is vital to TARP’s  effectiveness.
section_title: Measuring the Impact of TARP on the Credit Markets and the Economy Continues to Be Challenging
paragraphs: It is still too early in TARP’s implementation to see measurable results in  many areas given that program actions have only recently occurred and  there are time lags in the reporting of data. Even with more time and  better data, it will remain difficult to separate the impact of TARP  activities from the effects of other economic forces. Some indicators  suggest that the cost of credit has declined in interbank, mortgage, and  corporate debt markets since the December report. However, while  perceptions of risk (as measured by premiums over Treasury securities)  have declined in interbank markets, they have changed very little in  corporate bond and mortgage markets. Finally, as noted in December,  these indicators may be suggestive of TARP’s ongoing impact, but no  single indicator or set of indicators can provide a definitive determination  of its effects because of the range of actions that have been and are being  taken to address the current crisis. These include coordinated efforts by  U.S. regulators—namely, the Federal Deposit Insurance Corporation, the  Board of Governors of the Federal Reserve System, and the Federal  Housing Finance Agency—as well as actions by financial institutions to  mitigate foreclosures. For example, a large drop in mortgage rates  occurred shortly after the Federal Reserve announced it would purchase  up to $500 billion in mortgage-backed securities, highlighting the fact that  policies outside of TARP may have important effects on credit markets.  We will continue to refine and monitor the indicators. Additionally, we  plan to use the Treasury survey data in our efforts to evaluate changes in  lending activity resulting from CPP. We recognize that the data has certain  limitations primarily that it is self-reported and difficult to benchmark  because it is unique. Nonetheless, we think it will prove valuable in future  analyses.
section_title: Federal Debt Management Challenges
paragraphs: You also asked that I discuss the impact of TARP and related activities on  the national debt and borrowing. Congress has assigned to the Treasury  Department the responsibility to borrow the funds necessary to finance  the gap between cash in and cash out subject to a statutory limit. Since the  onset of the current recession in December 2007, the gap between  revenues and outlays has grown. Because the Treasury must borrow the  funds disbursed, TARP and other actions taken to stabilize the financial  markets increase the need to borrow so adding to the federal debt. Also,  federal borrowing needs typically increase during an economic  downturn—largely because tax revenues decline while expenditures  increase for programs to assist those affected by the downturn. In  addition, the American Recovery and Reinvestment Act enacted on  February 17, 2009 contains both decreases in revenues and increases in  spending. Further, all of this takes place in the context of the longer-term  fiscal outlook, which will present Treasury with continued financing  challenges even after the return of financial stability and economic  growth.
Treasury’s primary debt management goal is to finance the government’s  borrowing needs at the lowest cost over time. Issuing debt through  regularly scheduled auctions lowers borrowing costs because investors  and dealers value liquidity and certainty of supply. Treasury issues  marketable securities that range in maturity from one month to 30 years  and sells them at auction on a pre-announced schedule. The mix of  securities that Treasury has outstanding changes regularly as new debt is  issued. The mix of securities is important because it can have a significant  influence on the federal government’s interest payments. Longer-term  securities typically carry higher interest rates—or cost to the  government—primarily due to concerns about future inflation. However,  these longer-term securities offer the government the certainty of knowing  what the Treasury’s payments will be over a longer period.
At the end of February 2009, Treasury’s outstanding marketable securities  stood at just under $6 trillion—an increase of $1.476 trillion since  December 31, 2007. As shown in figure 1, a large portion of this debt  increase was in the form of short-term cash management bills (CM bills).  Between October 1, 2008 and February 28, 2009 Treasury issued $1.035  trillion in CM bills, of which $510 billion were outstanding at the end of  February.
Interest rates have decreased dramatically since the start of the financial  crisis, particularly for short-term debt. Figure 2 below illustrates the size  of that drop.
The impact of this drop can be seen in lower borrowing costs—indeed, the  budget shows net interest declining in fiscal year 2009. Although these  relatively low interest rates have reduced Treasury’s borrowing costs, the  increasing amount of short-term debt that needs to be rolled over does  present challenges. As shown in figure 3, approximately $2.5 trillion—or  41 percent of total outstanding marketable securities will mature in 2009— and will have to be refinanced. As Treasury borrows to meet its current  needs, Treasury must also plan for rolling over large amounts of debt in  the short term.
Treasury has said that it “recognizes the need to monitor short-term  issuance versus longer dated issuance.” Market experts generally believe  that Treasury needs to increase the average maturity of its debt portfolio  in part to lock in relatively low long-term rates and to ensure adequate  borrowing capacity in the coming years. To support Congress’ oversight of  the use of TARP funds we have work underway looking at how Treasury  has financed borrowing associated with the recent financial crisis and at  additional ideas for debt management that might make sense going  forward.
Total borrowing will increase by trillions of dollars this year, not solely  due to TARP and other activities aimed at stabilizing the financial system.  Debt also grows in response to the economic slowdown as revenues fall  and spending for some programs grows. Further, both the tax and  spending provisions of the Recovery Act will also increase debt. All of this  contributes to the borrowing challenge faced by the Treasury. As this  Committee well knows, debt is also held in governmental accounts—such  as the Social Security Trust Fund. This debt is included in the total debt  subject to limit. The debt limit was increased by the Emergency  Economic Stabilization Act of 2008 and the Recovery Act, but with only  $1.2 trillion remaining under the limit, it will have to be raised again.
The combination of slower growth and greater debt lead to increases in  publicly-held debt as a share of our economy—The President’s budget  projects debt reaching 65 percent of gross domestic product in 2010 and  remaining at that level for the rest of the decade. Today Congress, the  executive branch and the American people are understandably focused on  restoring financial stability and economic growth. At some point, however,  the nation’s leaders will need to apply the same level of intensity to the  serious long-term fiscal challenges facing the federal government.
Mr. Chairman and Members of the Subcommittee, I appreciate the  opportunity to discuss this critically important issue and would be happy  to answer any questions that you may have. Thank you.
section_title: Contact
paragraphs: For further information on this testimony, please contact Thomas J.  McCool on (202) 512-2642 or mccoolt@gao.gov.
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