Troubled Asset Relief Program: March 2009 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: GAO's third report on the Troubled Asset Relief Program (TARP) follows up on recommendations from the January 28, 2009, report (GAO-09-296). It also reviews (1) the nature and purpose of activities that had been initiated under TARP as of March 27, 2009; (2) the Department of Treasury's Office of Financial Stability's (OFS) hiring efforts, use of contractors, and progress in developing an internal control system; and (3) TARP performance indicators. For this work, GAO reviewed signed agreements and other relevant documentation and met with officials from OFS, contractors, and federal agencies. As of March 27, 2009, Treasury had disbursed $303.4 billion of the $700 billion in TARP funds. Most of the funds (almost $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.
section_title: What GAO Found
paragraphs: 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. Treasury also continues to develop a process to monitor compliance with the terms of the agreements but has not yet hired asset managers. Treasury officials told GAO that these managers will have a role in helping ensure that institutions were honoring dividend and stock repurchase requirements. In February 2009, Treasury announced its broad strategy for using the remaining TARP funds and in the following weeks provided details for its major components. While articulating its plan was an important 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. Finally, as Treasury finalizes the terms of the agreement with American International Group, Inc. (AIG) for $30 billion in additional assistance, it should require that AIG seek additional concessions from employees and existing derivatives counterparties, as appropriate. GAO's January 2009 report also included recommendations about OFS's management infrastructure, including hiring, contract oversight, and internal controls. Treasury has continued to take steps to address GAO's recommendations. First, it has continued to hire additional permanent staff to address OFS's long-term organizational needs. Second, Treasury has enhanced its capacity to manage vendors by using trained oversight personnel and looking for opportunities to use fixed-price arrangements. Further actions are needed to complete its review of existing vendor conflict-of-interest mitigation plans and to improve documentation of decisions relating to potential conflicts. Third, OFS continued to refine, develop, and document its internal control framework over financial reporting and compliance, including its risk assessment activities. However, GAO noted that certain internal control procedures and the guidance pertaining to determining warrant exercise prices had not been updated to be consistent with actual practice. GAO also noted that Treasury had not publicly reported that through March 20, 2009, it had received dividends totaling almost $2.9 billion from TARP participants. Further steps in these areas are needed to improve the program's transparency and integrity. GAO again notes the difficulty of measuring the effect of TARP's activities. Developments in the credit markets have generally been mixed since the 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 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 roughly $245 billion in new loans to consumers and businesses in both December 2008 and January 2009, according to the Treasury's new loan survey. However, 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 can provide a definitive determination of the program's impact.

section_title: Letter
paragraphs: On October 3, 2008, the Emergency Economic Stabilization Act of 2008  (the act) was signed into law. The act established the Office of Financial  Stability (OFS) within the Department of the Treasury (Treasury) and  authorized the Troubled Asset Relief Program (TARP). Among other  things, the act provides Treasury with broad, flexible authorities to buy or  guarantee up to $700 billion in “troubled assets,” which include mortgages  and mortgage-related instruments, and any other financial instrument  whose purchase Treasury determines is needed to stabilize the financial  markets.
The act also created oversight mechanisms for the implementation and  operations of TARP. Among other things, the U.S. Comptroller General is  required to report at least every 60 days on findings resulting from GAO’s  oversight of TARP’s performance in meeting the purposes of the act; the  financial condition and internal controls of TARP, its representatives, and  agents; the characteristics of both asset purchases and the disposition of  assets acquired, including any related commitments that are entered into;  TARP’s efficiency in using the funds appropriated for the program’s  operation; TARP’s compliance with applicable laws and regulations;  efforts to prevent, identify, and minimize conflicts of interest among those  involved in TARP’s operations; and the efficacy of contracting  procedures.
This report follows up on the status of recommendations from our  December 2008 and January 2009 reports and addresses (1) the nature and  purpose of activities that have been initiated under TARP from January 30,  2009, through March 27, 2009, unless otherwise noted; (2) OFS’s progress  in hiring, use of contractors, and developing a system of internal control;  and (3) outcomes measured by indicators of TARP’s performance.
subsections: section_title: Scope and Methodology
paragraphs: To determine the nature and purpose of TARP activities from January 30,  2009, through March 27, 2009, unless noted, and the status of actions taken  in response to our recommendations from our prior reports, we reviewed  documents from OFS that described the amounts, types, and terms of  Treasury’s purchases of preferred stocks and warrants under the Capital  Purchase Program (CPP), the Systemically Significant Failing Institutions  Program (SSFI), the Automotive Industry Financing Program (AIFP), the  Targeted Investment Program (TIP), the Capital Assistance Program  (CAP), and the Term Asset-Backed Securities Loan Facility (TALF). We  also reviewed documentation and interviewed officials from OFS  responsible for selecting financial institutions to participate in CPP.  Additionally, we contacted officials from the four federal banking  regulators—the Federal Deposit Insurance Corporation (FDIC), the Office  of the Comptroller of the Currency (OCC), the Board of Governors of the  Federal Reserve System (Federal Reserve), and the Office of Thrift  Supervision (OTS)—to obtain information on their process for reviewing  CPP applications, the status of pending applications, and their  examination process for reviewing uses of CPP funds and compliance with  TARP requirements. Also, we have developed an approach to determine  the extent to which the review and approval process for CPP applications  has been consistently applied across financial institutions. Specifically, we  have collected documentation supporting all funding decisions for the  period covering October 28, 2008, through January 31, 2009, and are in the  process of reviewing these decisions. For SSFI and TALF, we reviewed  program revisions and agreements, as appropriate, and contacted officials  from OFS.
To describe Treasury’s efforts to preserve homeownership, we reviewed  announcements, fact sheets, and program guidelines issued by Treasury  and held meetings to discuss these documents with OFS. To describe how  Treasury estimated the cost of the loan modification program and the  number of borrowers it expected to reach, we reviewed written  explanations of OFS’s projections. To discuss the cross-agency effort to  design and plan the implementation of the loan modification program, we  reviewed Financial Agent Agreements that Treasury executed with Fannie  Mae and Freddie Mac, and met with representatives of Fannie Mae,  Freddie Mac, and the Federal Housing Finance Agency (FHFA), Federal  Housing Administration (FHA), OCC, and OTS.
To assess the progress of OFS’s hiring efforts, we reviewed OFS’s  workforce planning documents, updated organizational chart, and OFS job  announcements posted on USAJOBS. To assess its performance, we  reviewed our prior work on human capital flexibilities, organizational  transformation, and strategic workforce planning. In addition, we met with  a variety of Treasury and OFS officials to discuss their approach to staffing  the office in the near and long terms and their strategies for recruiting  qualified individuals. We also discussed Treasury’s efforts to coordinate its  recruitment and hiring efforts, including its use of human capital  flexibilities, with officials from the Office of Personnel Management  (OPM).
To assess OFS’s use of contractors and financial agents to support TARP  administration and operation for the period of January 21 through March  13, 2009, we reviewed information from Treasury for new   (1) contracts and financial agency agreements and (2) task orders,  modifications, and amendments involving ongoing contracts and financial  agency agreements. We also identified any small and/or disadvantaged  business contractors or subcontractors providing TARP services and  supplies. To obtain information concerning (1) the progress of ongoing  actions taken by OFS and Treasury in response to our recommendation to  improve oversight of TARP contractors and financial agents and (2) OFS’s  reliance on contractors and financial agents to perform a range of  professional and financial services in support of key TARP programs, we  reviewed applicable documents and interviewed officials from Treasury  and two TARP contractors and one financial agent. To assess OFS’s  progress responding to our recommendation for addressing potential  conflicts of interest for new contractors and financial agents, we reviewed  solicitation and contract documentation describing organizational and  personal conflicts-of-interest issues and mitigation plans to address those  issues. We interviewed officials and senior managers from Treasury and  the TARP contractors and financial agent to obtain information on OFS’s  and contractor’s policies and processes to ensure compliance with TARP  conflicts of interest requirements.
To assess the status of internal controls related to TARP activities and the  status of TARP’s consideration of accounting and reporting topics, we  reviewed documents provided by OFS and conducted interviews and made  inquiries with officials from OFS, including the Chief Financial Officer,  Deputy Chief Financial Officer, Cash Management Officer, Director of  Internal Controls, and their representatives. Additionally, we made  inquiries with contractor personnel, including PricewaterhouseCoopers.  To evaluate selected internal control activities related to the CPP and SSFI  programs, we designed tests using the OFS’s process flows, narratives,  risk matrices, and high-level operational procedures. For CPP, we made a  statistical selection of 45 unique transactions for the 4 months ending  January 31, 2009, using a monetary unit sampling (probability  proportionate to size) methodology. For this sample, we tested selected  CPP control activities related to asset purchases and dividend receipts.  For SSFI, we tested the only SSFI transaction completed as of March 27,  2009, including selected control activities related to dividends.
In our initial report under the mandate, we identified a preliminary set of  indicators on the state of credit and financial markets that might be  suggestive of the performance and effectiveness of TARP. We consulted  Treasury officials and other experts and analyzed available data sources  and the academic literature. We selected a set of preliminary indicators  that offered perspectives on different facets of credit and financial  markets, including perceptions of risk, cost of credit, and flows of credit to  businesses and consumers.  We assessed the reliability of the data upon  which the indicators are based and found that, despite certain limitations,  they were sufficiently reliable for our purposes. To update the indicators  in this report, we primarily used data from the Federal Reserve. As these  data are widely used, including by GAO and the Federal Reserve, and are  considered to be a reliable and often definitive source for banking sector  data, we conducted only a limited review of the data but ensured that the  trends we found were consistent with other research. We also relied on  data from the Chicago Board Options Exchange (CBOE), Inside Mortgage  Finance, Treasury, and Global Insight. We have relied on CBOE and  Global Insight data for past reports, and we determined that, considered  together, these auxiliary data were sufficiently reliable for the purpose of  presenting and analyzing trends in financial markets. The data from  Treasury’s survey of lending at the top 20 CPP recipients (as of December  31, 2008) are based on internal reporting from participating institutions,  and the definitions of loan categories may vary across banks. Because the  data are unique, we are not able to benchmark the origination levels  against historical lending or seasonal patterns at these institutions. Based  on discussions with Treasury and our review of the data, we found that the  data are sufficiently reliable for the purpose of documenting trends in  lending. The survey data will prove valuable for more thorough analyses of  lending activity in future reports.
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. Together with the Special Inspector General for TARP, we also  plan to review the payment of taxes by the recipients of TARP funds.
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.
section_title: Background
paragraphs: Treasury has engaged in a variety of activities to address instability in the  financial markets (see fig. 1). Leading up to the transition to the new  administration, Treasury made additional equity purchases in financial  institutions under CPP and invested in and announced future plans to  support the automotive industry under AIFP. Following the transition to  the new administration on January 20, 2009, Treasury continued to make  additional equity investments in financial institutions under CPP,  announced plans to restructure the assistance previously provided to  Citigroup Inc. (Citigroup) and American International Group, Inc. (AIG),  and launched TALF, a consumer lending facility established by the Federal  Reserve Bank of New York for which Treasury originally pledged support  in November 2008. In addition, the new administration announced its plan  to pursue new initiatives under the authority of the act.
As we described in our January 2009 report, the act created other  oversight entities in addition to our oversight responsibilities, including  the Congressional Oversight Panel (COP), the Special Inspector General  for TARP (SIGTARP), and the Financial Stability Oversight Board  (FinSOB). We are coordinating our work with COP, SIGTARP, and  FinSOB, and are meeting with officials from these entities to share  information and effectively make use of our combined resources. These  meetings help to ensure that we collaborate appropriately and eliminate  unnecessary duplication of effort.
After we issued our January 2009 report on TARP, COP issued reports in  February and March 2009. COP’s February 2009 report focused on the  methods Treasury used to make equity investments in financial  institutions under the CPP and concluded that Treasury paid substantially  more for the assets it purchased under TARP than their then-current  market value. COP’s March 2009 report reviewed Treasury’s plans to  mitigate foreclosures, in particular Treasury’s Homeowner Affordability  and Stability Plan. While the report acknowledges Treasury’s progress in  providing increased refinancing and loan modification opportunities to  homeowners, it also raised questions about, for example, legal protection  for loan servicers involved with voluntary loan modifications, the role of  second mortgages in the foreclosure process, and the federal regulators’  enforcement of new industrywide standards for financial institutions  receiving TARP funds.
In addition, SIGTARP issued its first report to Congress in February 2009.  The report covers TARP activities through January 23, 2009, and describes  how financial institutions used TARP funds during that period. SIGTARP  recommended that TARP managers take action to increase transparency  and oversight through various means, such as acknowledging SIGTARP’s  oversight authority in TARP agreements, developing and communicating  methods used to value program investments, and taking steps to prevent  fraud, waste, and abuse of funds provided.
FinSOB issued its first quarterly report on December 31, 2008, on  Treasury’s policies to implement TARP. We summarized FinSOB’s report  in our January 2009 report. FinSOB plans to issue its next quarterly report  in spring 2009.
section_title: Treasury’s Strategy for Deploying TARP Funds Continues to Evolve, Though CPP Remains the Key Effort to Stabilize the Financial Markets
paragraphs: As of March 27, 2009, Treasury had announced several programs under  TARP with a maximum announced total funding of $667.4 billion of its  $700 billion. As shown in table 1, as of that date Treasury’s projected use  of funds was $590.4 billion and it had disbursed about $303.4 billion in  TARP funds, approximately $198.8 billion of it for CPP. Included in this  amount was $24.5 billion for General Motors Corporation (GM), Chrysler  Holdings LLC (Chrysler), GMAC LLC, and Chrysler Financial Services  Americas LLC. We have initiated a separate effort to, among other things,  discuss the impact of federal financial assistance on the viability of GM  and Chrysler. Treasury has recently announced the Financial Stability  Plan, which outlines a set of measures to address the financial crisis and  hopefully restore confidence in the U.S. financial and housing markets and  a Homeowner Affordability and Stability Plan to mitigate foreclosures and  preserve homeownership. A key component of the Financial Stability Plan  is CAP, for which Treasury recently announced standardized terms.
Officers and employees of Treasury may not obligate or expend  appropriated funds in excess of the amount apportioned by the Office of  Management and Budget (OMB) on behalf of the President. Of the funding  levels announced for TARP, Treasury stated that OMB had apportioned  about $422.4 billion as of March 27, 2009. Based on this information, it  appears that Treasury has not exceeded the troubled asset purchase limit  or obligated funds in excess of those OMB has apportioned. We are  continuing to obtain additional information from Treasury and to review  the controls that Treasury has in place to help ensure compliance with  these restrictions. We will discuss these issues in subsequent reports.
subsections: section_title: CPP Continued to Be a Primary Vehicle for Stabilizing the Financial Markets
paragraphs: Treasury has continued to use CPP as a primary vehicle under TARP as it  attempts to stabilize financial markets. As of March 27, 2009, Treasury had  disbursed about 80 percent of the $250 billion it had allocated for CPP to  purchase almost $198.8 billion in preferred shares of 532 qualified financial  institutions. These purchases ranged from about $300,000 to $25 billion  per institution. About $4.6 billion in preferred stock shares of 215 financial  institutions has been purchased since our January 2009 report.
As of March 27, 2009, the types of institutions that had received CPP  capital included 272 publicly held institutions, 248 privately held  institutions, and 12 community development financial institutions  (CDFI). These purchases represented investments in state-chartered and  national banks and bank holding companies located in 48 states, the  District of Columbia, and Puerto Rico. For a detailed listing of banks that  received CPP funds as of March 20, 2009, see the e-supplement to   GAO-09-504, available electronically at GAO-09-522SP.
According to OFS and the bank regulators, over a thousand applications  for funding are under review. As of March 27, 2009, Treasury was in the  process of reviewing approval recommendations from bank regulators for  1,190 qualified financial institutions. Treasury also reported that the bank  regulators were reviewing applications from more than 750 institutions  that had not yet been forwarded to Treasury. Qualified financial  institutions generally have 30 calendar days after Treasury notifies them of  preliminary approval for CPP funding to submit investment agreements  and related documentation. OFS officials stated that over 250 financial  institutions that received preliminary approval had withdrawn their CPP  applications as of March 27, 2009. Further, Treasury officials stated that  some of these institutions had indicated that they were uncomfortable  with the uncertainty surrounding future program requirements. As of  March 27, 2009, Treasury had yet to deny an application.
We are continuing to examine the process for accepting and approving  CPP applications. Specifically, we have developed a methodology for  reviewing CPP applications that had been funded from October 2008  through January 2009 to determine the extent to which the regulators and  OFS were consistently applying established criteria and adequately  documenting the regulators’ recommendations and OFS’s final decisions.  As part of this review, we have collected relevant case decision memos  and other supporting documentation from Treasury and the regulators. We  will also continue to coordinate and leverage the work of other agencies  and offices involved in the oversight of CPP, including the COP, the  Offices of the Inspector General of FDIC, Federal Reserve, Treasury, and  SIGTARP, all of which have work under way on their review of CPP’s  implementation at their respective agencies. In coordination with the  other oversight agencies and offices, we plan to focus our initial review on  the final phases of the CPP application process—from the point at which  the regulators transmit their recommendations to Treasury to the final  approval by OFS’s Interim Assistant Secretary.
section_title: OFS Has Started Monitoring All Participants’ Use of CPP Funds but Has Not Yet Hired Asset Managers to Help Ensure Compliance with Purchase Agreements
paragraphs: Treasury has taken a number of important steps toward better reporting  and monitoring of CPP. These steps are consistent with our prior  recommendations that Treasury bolster its ability to determine whether all  institutions are using CPP proceeds in ways that are consistent with the  act’s purposes. Treasury has completed the first 2 monthly surveys of the  20 largest institutions to monitor their lending and issued its first report in  February 2009. In our January 2009 report, we recommended that  Treasury expand these surveys to include all CPP participants. In  response, Treasury expanded the monthly survey to all CPP participants  as of March 2009. In addition, it plans to release its analysis of quarterly  monitoring data (call reports) for all reporting institutions by June 30,  2009. Treasury is also requiring that, starting in April 2009, the monthly  surveys of the large CPP recipients collect information on lending to small  businesses. Taken together, these monthly surveys are a step toward  greater transparency and accountability for institutions of all sizes. Survey  results will allow Treasury’s newly created team of analysts to understand  how institutions are using CPP funds and will help in measuring the  program’s effectiveness. We will continue to monitor Treasury’s oversight  efforts, including implementation of its new survey of smaller institutions.
Also consistent with our prior recommendations, Treasury has continued  to take steps to increase its oversight of compliance with terms of the CPP  agreements, including limitations on executive compensation, dividends,  and stock repurchases. Participating institutions are required to comply  with the terms of these agreements, and we recommended that Treasury  develop a process to monitor and enforce them. Treasury has named an  Interim Chief Compliance Officer and uses information sources such as  Bloomberg, SEC filings, press releases, and other information sources to  monitor dividend payments and stock repurchases. 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 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. To date,  they had not yet hired any asset managers. Without a more structured  mechanism in place, and with a growing number of institutions  participating in the program, ensuring compliance with these important  aspects of the program will become increasingly challenging. While the  institutions are obligated to comply with the terms of the agreement,  Treasury has not developed a process to help ensure this compliance and  to verify that any required certifications are accurate.
On February 4, 2009, Treasury issued a press release announcing a new set  of guidelines on executive pay for financial institutions that receive  government assistance. However, the Emergency Economic Stabilization  Act, as amended by the American Recovery and Reinvestment Act of 2009,  imposed additional standards. Specifically, it generally prohibits (1) bonus  and incentive compensation payments to certain employees, depending on  the amount of TARP assistance received, (2) certain golden parachutes,  and (3) compensation that encourages risk-taking that would threaten the  value of the institution. The new law also requires (1) reimbursement  (clawback) of certain bonus or incentive compensation based on  materially inaccurate criteria, (2) compensation tax deduction limits, (3)  compliance certification, (4) establishment of a policy on excessive or  luxury expenditures, (5) creation of a board compensation committee, and  (6) permission to conduct a nonbinding shareholder vote on pay.  According to Treasury, it is planning to implement its guidelines and the  new law. We will be monitoring these efforts.
section_title: Treasury Agrees to Participate in Citigroup’s Proposed Exchange Offering If Certain Conditions Are Met
paragraphs: On February 27, 2009, Treasury announced that Citigroup had asked it to  participate in an exchange of preferred shares for common stock so that  the institution could strengthen its capital structure by increasing tangible  common equity. According to Citigroup, this would help remove  uncertainty and help restore confidence in the company. But the  conversion potentially increases risks to the government and taxpayers,  because common stockholders are lower in the ownership structure than  preferred shareholders. Terms of the transaction were also announced,  but the exchange offering had not occurred as of March 27, 2009. Treasury  noted that it was willing to participate in Citigroup’s exchange offering on  the following conditions:    Treasury would convert its preferred shares only in an amount equal to  the amount of preferred stock converted by other preferred  shareholders and would only participate if at least $11.5 billion in  privately held preferred stock was converted.
Up to $25 billion of Treasury’s CPP senior preferred shares would be  converted to common stock in the exchange offering.
The $20 billion in Treasury’s preferred shares issued under TIP and the  $4 billion in preferred shares issued under the Asset Guarantee  Program (AGP) to Treasury would be converted into a trust preferred  security of greater seniority that would have the same 8 percent  dividend rate as the existing preferred stock.
Treasury would receive the most favorable terms and price offered  through the exchange offering.
section_title: Treasury’s Recently Announced Assistance to AIG Provides an Opportunity to Encourage AIG to Renegotiate Contracts as Appropriate
paragraphs: On March 2, 2009, the Federal Reserve and Treasury announced plans to  restructure and expand AIG’s assistance. Under the announced plans,  Treasury is to receive noncumulative preferred stock equal to the sum of  the $40 billion in cumulative preferred stock previously issued to Treasury  on November 25, 2008, plus any accrued and unpaid dividends related to  those shares. According to OFS officials, this conversion will not increase  the amount of money the government has invested in AIG but will help  AIG maintain its credit rating, because credit rating agencies generally  weight noncumulative preferred stock as 75 percent equity when  calculating capital, compared with 25 percent for cumulative preferred  stock. This change will result in a more favorable treatment of Treasury’s  investment in AIG by the credit rating agencies. In addition, the  restructuring plan creates an equity capital facility that will enable AIG to  issue to Treasury up to $30 billion in new preferred shares that generally  will have the same terms as the planned $40 billion preferred stock  restructuring. The equity capital facility had not been funded as of March  27, 2009, and negotiations are ongoing.
In reviewing government assistance to the private sector in the past, we  found that it was essential to establish mechanisms, structures, and  protections to help ensure prudent use of taxpayer resources and to  manage the government’s risk, consistent with the congressional goals and  objectives of any federal financial assistance program such as SSFI.  Further, because assistance programs pose significant financial risk to the  federal government, consistent with Treasury’s announced executive  compensation guidelines, appropriate mechanisms are needed to help  protect the government and taxpayers from excessive or unnecessary  risks.
There are a number of actions that have been taken in the past that could  be considered as Treasury completes its negotiations with AIG and any  future SSFI recipients. But one in particular—obtaining concessions from  others with an interest in the outcome—seems most relevant in light of  AIG’s recent payment of $165 million in retention bonuses to employees of  its Financial Products division. In past crises, and when asked in  December 2008 about providing assistance to the automakers as part of  the government’s response to the current crisis, we have stated that the  government should require concessions from those with a stake in the  outcome. In AIG’s case, those with such a stake would include  management, employees, derivatives counterparties, and creditors. For  example, concessions could include requiring AIG to seek to renegotiate  existing employee bonus contracts and derivatives contracts, as  appropriate. Consistent with this view, the Treasury Secretary also noted  the need for “strong conditions to protect the taxpayers” when providing  exceptional assistance when he announced the Financial Stability Plan. As  we have stated in the past, the concessions are not meant to extract  penalties for past actions, but to ensure cooperation and flexibility in  securing a successful future outcome. Treasury has an opportunity to  negotiate additional requirements into its latest agreement, including that  AIG seek additional concessions from others for the up to $30 billion in  additional federal assistance. While the purchase of preferred shares in  AIG differs from previous cases of federal assistance, which were usually  loans or loan guarantees, the fundamentals are the same in terms of the  need to protect the government’s interests. If such concessions are not  considered to be in the government’s interest, the reasons should be  clearly articulated and explained.
section_title: Treasury Has Taken Steps to More Clearly Articulate Its Strategy for Stabilizing Financial Markets and Continued to Finalize the Details
paragraphs: In our January 2009 report, we recommended that Treasury articulate a  clear strategy for TARP. In response to such calls for greater transparency  and a clear strategy, Treasury announced the Financial Stability Plan in  February that outlined a comprehensive set of measures to help address  the financial crisis and restore confidence in our financial markets.  Treasury described the plan as a comprehensive 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. The plan established six components:  Capital Assistance Program; Public-Private Investment Fund; Consumer  and Business Lending Initiative; Small Business and Community Lending  Initiative; Affordable Housing Support and Foreclosure Prevention Plan  (Housing Affordability and Modification Plan); and Transparency and  Accountability Agenda.
subsections: section_title: The Capital Assistance Program Has Been Launched
paragraphs: CAP is designed to help ensure that qualified financial institutions have  sufficient capital to withstand severe economic challenges. These  institutions must meet eligibility requirements, which will be substantially  similar to those used for CPP. A key component of CAP is a forward- looking supervisory assessment (“stress test”) of the 19 largest institutions  (those with risk-weighted assets of $100 billion or more). Bank regulators  will use the results of this stress test, along with their specific knowledge  of the institutions’ portfolios and management strategies, to assess  whether they have the capital necessary to continue lending and to absorb  the potential losses that could result from a more severe decline in the  economy than currently projected by professional economic forecasters.  Currently, the 19 largest institutions are undergoing comprehensive stress  tests that are expected to be completed by the end of April 2009.  Regulators will use the stress test results to determine whether the  institutions have enough capital to absorb losses from a severe economic  downturn and continue lending. Institutions that do not will have 6 months  to raise private capital or to access capital through CAP. Institutions with  less than $100 billion in risk-weighted assets do not have to complete a  stress test but are also eligible to obtain capital under CAP. In a process  similar to the one used for CPP, institutions interested in CAP must submit  their CAP applications to their primary banking regulators by May 25,  2009. The regulators are to submit recommendations to Treasury regarding  an applicant’s viability. CAP is currently available only to publicly traded  institutions, but Treasury is developing terms for privately held  institutions, subchapter S-corporations, and mutuals.
All approved institutions will have 6 months to raise capital from the  private sector, or Treasury will purchase convertible preferred shares to  help the institution absorb losses and raise private capital. Any capital  investments made by Treasury under CAP will be managed by a separate  entity—the Financial Stability Trust. Under CAP, an institution can receive  an investment of 1 to 2 percent of its risk-weighted assets. These  institutions can also receive additional capital to redeem senior preferred  shares issued under CPP, enabling them to replace the existing preferred  shares with convertible preferred shares. If applicable, the proceeds from  the sale of the convertible preferred also may be used to redeem the  preferred stock sold to Treasury under TIP. Issuance of the convertible  preferred stock to Treasury under CAP is considered Tier 1 regulatory  capital for holding companies and a “qualified equity offering” for CPP  purposes. In addition, the issuance of convertible preferred stock in  excess of 1 to 2 percent of the institution’s risk-weighted assets may be  available on a case-by-case basis and will constitute “exceptional  assistance” requiring additional terms and conditions. CAP convertible  preferred stock shares will carry a 9 percent dividend yield that may  increase to 20 percent if the necessary shareholder approvals are not  received by the 6-month anniversary after issuance. Subject to the  approval of the primary bank regulator, such shares can be redeemed at  their face value, plus any accrued and unpaid dividends prior to 2 years.  These shares are convertible into common stock at a price equal to 90  percent of the average closing price for the 20 trading-day period ending  February 9, 2009. The convertible preferred stock mandatorily converts  to common equity after 7 years, and after the mandatory conversion date,  Treasury must make reasonable efforts to sell, on an annual basis, an  amount of common stock equal to at least 20 percent of the amount of  stock owned on the mandatory conversion date.
Under CAP, Treasury will also receive warrants to purchase a number of  shares of common stock of the financial institution equaling 20 percent of  the convertible preferred stock amount on the date of the investment. If  any necessary shareholder approvals are not received, the exercise price  will be reduced by 15 percent of the original exercise price on each 6- month anniversary of the issue date of the warrants, subject to a  maximum reduction of 45 percent of the original exercise price. Treasury  requires that participants be subject to restrictions on executive  compensation, payment of common stock dividends, repurchase of shares,  and cash acquisitions. Institutions also must comply with Treasury rules,  regulations, and guidance regarding executive compensation,  transparency, accountability, and monitoring, as published and in effect at  the time of the investment closing. In addition, as part of the application  process institutions must submit a plan showing how they intend to use  this capital to support their lending activities and how lending will  increase over what would have been possible without government  assistance. Collecting this information from CAP applicants addresses  concerns we raised in our January report about the need to ensure an  appropriate level of accountability and transparency for those institutions  receiving TARP funds. Participating institutions under CAP will be  required to submit to Treasury monthly reports—similar to those for  CPP—on their lending activities.
section_title: Public-Private Partnership Investment Fund Programs Have Been Established
paragraphs: On March 23, 2009, the Federal Reserve, FDIC, and Treasury released the  details of the Public-Private Investment Plan. The plan is designed to help  reduce the liquidity discounts currently observed in the prices of legacy  assets—troubled assets on banks’ books—and protect taxpayers by  ensuring that the government is not paying more for assets than their long- run value, as determined by private investors. The plan consists of two key  elements: the Legacy Loans Program and the Legacy Securities Program.  TARP funds will be used to invest alongside private capital on similar  terms, reducing the likelihood taxpayers will be overpaying for assets.
Through an auction process, the Legacy Loans Program will purchase  troubled and illiquid loans and other assets in “substantially sized” pools  from insured banks and thrifts. FDIC and Treasury launched this program  to attract private capital to purchase eligible legacy loans from  participating banks through the provision of FDIC debt guarantees and  Treasury equity co-investment. The funds will have asset managers for  asset management and servicing within parameters established by FDIC  and Treasury and are designed to facilitate buy-and-hold strategies. FDIC  will oversee the formation, funding, and operation of the new funds that  will purchase the debt, and private sector investors and Treasury will  provide equity to the funds. The funds will finance their purchases with  FDIC-guaranteed debt. FDIC, in conjunction with participating banks,  Treasury, private investors, and contractors, will administer the auctions  of the asset pools. With input from a third-party valuation firm, FDIC will  establish financing terms and leverage ratios for each fund and disclose  these terms to potential investors as part of the auction process. Banks  that sell the pools get cash and FDIC-guaranteed debt issued by the funds.  Treasury and the private sector investors will share profits and losses in  proportion to their investment; FDIC’s guarantee of the public-private  investment funds’ debt will be secured by the eligible assets purchased by  the funds. FDIC and Treasury will establish governance procedures.
Eligible private investors must be prequalified by FDIC and are expected  to include, but are not limited to, financial institutions, individuals,  publicly managed investment funds, and pension funds. According to an  OFS official, participating banks will initially include the 19 banks that are  undergoing the stress test under CAP. Interested banks are to work with  their primary regulators to identify and evaluate eligible asset pools to be  sold and the corresponding impact on the bank from the sale. Once  potential pools are identified, the banks and regulators are to contact  FDIC. The banks must demonstrate to the satisfaction of Treasury and  FDIC that the contemplated loan pools qualify, based upon Treasury and  FDIC agreed-upon minimum requirements. The goal is to restore  maximum confidence for depositors, creditors, investors, and other  counterparties. OFS officials noted that the program is anticipated to  expand to include other insured institutions not participating in the stress  test.
The Legacy Securities Program consists of two related parts designed to  draw private capital into these markets: first, by providing debt financing  from the Federal Reserve under TALF; second, through Treasury’s  partnering side-by-side with private investors in legacy securities  investment funds. The goal of the Legacy Securities Program is to restart  the market for legacy securities, allowing banks and other financial  institutions to free up capital and stimulate the extension of new credit.  Treasury and FDIC encourage small, veteran-, minority- and women- owned private managers to partner with others that meet minimum  bidding criteria.
Through TALF, nonrecourse loans will be made available to investors to  fund purchases of legacy securitization assets. Eligible assets are expected  to include certain nonagency residential mortgage-backed securities that  were originally rated Aaa, outstanding commercial mortgage-backed  securities (CMBS), and asset-backed securities (ABS) that are rated Aaa.  Borrowers must meet eligibility criteria. Haircuts—a percentage reduction  of collateral valuation—minimum loan sizes, loan durations, and interest  rates have not been determined for eligible assets.
In the new program that will have Treasury partnering with private fund  managers to support the market for legacy securities, public-private  investment funds raise equity capital from private investors and receive  matching equity funds and leverage from Treasury. The investment  objective of the funds will be to generate attractive returns for both the  Treasury and the private investors, predominantly by following a long- term buy-and-hold strategy, but Treasury will consider other strategies  involving limited trading.
Treasury has published criteria for potential fund managers and is  accepting applications until April 10, 2009. The criteria include a  demonstrable historical track record in the targeted asset classes, a  minimum amount of assets under management in the targeted asset  classes, and detailed structural proposals for the proposed legacy  securities public-private investment fund. Treasury currently expects to  approve approximately five fund managers, although more may be added,  depending on the quality of applications received. Approved fund  managers for the public-private investment funds will raise the private  equity capital and make control decisions, including asset selection,  pricing, liquidation, trading, and disposition. Applicants will have a limited  period of time from preliminary approval to raise at least $500 million in  private capital and demonstrate committed capital before receiving final  approval from Treasury.
Treasury equity capital will be invested on a fully side-by-side basis with  private investors in each public-private investment fund. Moreover,  subject to certain restrictions, fund managers will have the option to  obtain secured nonrecourse loans from Treasury (up to 50 percent of a  fund’s total equity capital), an amount that could rise to 100 percent,  subject to additional restrictions. Treasury debt financing will be secured  by the eligible assets held by the applicable fund. Loans made by Treasury  to any public-private investment fund will accrue interest at an annual rate  to be determined by Treasury and will be payable in full on the date of  termination. As required by the act, Treasury will take warrants, whose  terms and amounts will be determined, in part, on the amount of Treasury  debt financing taken. Additionally, fund managers may charge private  investor fees at their discretion, and Treasury will accept proposals for  fixed management fees, to apply as a percentage of equity capital  contributions for invested equity capital.
section_title: Federal Reserve and Treasury Launch Consumer and Business Lending Initiative
paragraphs: This initiative builds on previous efforts of the Federal Reserve and  Treasury to establish TALF, which was announced in November 2008.  TALF is intended to increase the availability of credit for consumers and  businesses. Originally, TALF was set up as a $200 billion program to  support consumer finance securitization markets—specifically, credit  cards, auto loans, student loans, and small business loans—and would be  partially supported by $20 billion in TARP funds. In February 2009, as part  of the Financial Stability Plan, the Federal Reserve and Treasury  announced an expansion of TALF to include increasing the funding size up  to $1 trillion, with Treasury providing up to $100 billion in TARP funds. On  March 19, 2009, the Federal Reserve extended the range of eligible  collateral to include ABS backed by mortgage servicing advances,  business equipment loans or leases, floorplan loans, and leases of business  fleets. The Federal Reserve noted that the objective in expanding TALF  would be to provide additional assistance to financial markets and  institutions to meet the credit needs of households and businesses and  thus, to support overall economic growth in the current period of severe  financial strains.
Under TALF, the Federal Reserve will make nonrecourse loans to certain  holders of Aaa-rated ABS secured by newly and recently originated  consumer and small business loans. These will be 3-year loans, secured by  eligible collateral. Haircuts will be determined based on the level of risk  for each type of eligible collateral and the maturity of the pledged  collateral.
On March 3, 2009, Treasury and Federal Reserve launched TALF. Funding  requests were accepted on March 19, 2009, and on March 25, 2009, the new  securitizations were funded by the program. Since our January 2009  report, the Federal Reserve has released revised terms and conditions for  the facility and revised sets of frequently asked questions. The revisions  include (1) a reduction in the interest rate and collateral haircuts for loans  secured by the Small Business Administration (SBA) or backed by  government-guaranteed student loans; (2) a statement that executive  compensation restrictions will not apply to TALF sponsors, underwriters,  and borrowers as a result of their participation; and (3) a requirement that  participating sponsors certify that the ABS are eligible under TALF and  include an attestation by an independent accounting firm of the securities’  eligibility. TALF fundings will be held monthly and will cease at the end of  2009, unless the Federal Reserve extends the program. As described  previously, on March 23, 2009, Treasury and the Federal Reserve  announced that TALF would be broadened to include certain legacy  securities.
section_title: Small Business and Community Lending Facility Was Rolled Into TALF
paragraphs: Treasury announced that, working together with the Federal Reserve, it  would establish a lending facility to increase lending in the secondary  markets, reduce borrowing costs, and unfreeze the credit markets to get  credit flowing again to small businesses and consumers. Originally, this  lending facility was to be structured like TALF—Treasury providing  capital and the Federal Reserve providing financing—but, instead, it was  rolled into TALF. Treasury also announced that it would commit up to $15  billion to purchase securities backed by the guaranteed portion of loans  made under SBA’s 7(a) and the first-lien mortgages of the 504 Community  Development Loan Program. In addition to these activities under TARP,  SBA will take several steps to make it easier for small businesses to obtain  credit from community and large banks, including increasing the federally  guaranteed portion of loans, eliminating or reducing fees for SBA loans,  and expediting approval of loans.
section_title: A Mortgage Modification Program Has Been Announced, but Significant Program Components and Controls Are under Development
paragraphs: On March 4, 2009, Treasury unveiled the structure and key components of  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 help up to 3 million to 4 million homeowners avoid potential  foreclosure. The goal of modifying these mortgages is to reduce  participants’ monthly mortgage payments to affordable levels (a mortgage  debt-to-income ratio of 31 percent). Treasury will share the cost of  restructuring the mortgages with lenders (if financial institutions hold the  whole loans) or investors (if the loans have been securitized).  The lender  or investor must first reduce the borrower’s monthly mortgage payment  down to 38 percent of income.  For these mortgages, Treasury will then  match further reductions on a dollar-for-dollar basis down to the target of  31 percent. For eligible loans where the borrower’s monthly mortgage  payment is already below 38 percent, Treasury matches reductions in  mortgage payments from the borrower’s current monthly payment.  According to Treasury, loan servicers could begin modifying mortgages  consistent with HAMP guidelines as of March 4, 2009. However, Treasury  will not make payments under HAMP until it has executed contracts,  which are currently in draft form, with the servicers. Treasury has  announced a series of financial incentives for loan servicers, mortgage  holders/investors, and borrowers that are intended to encourage servicers  to modify loans, borrowers to continue paying on time under the modified  loans, and servicers and mortgage holders/investors to modify at-risk loans  before borrowers miss payments. Within OFS, the Office of  Homeownership Preservation is responsible for administering HAMP and  is led by a new interim chief. The structure and initial hiring for this office  are in progress, and its efforts are supported by other personnel within  OFS and Treasury. 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 who would be eligible for loan modifications under HAMP and  to design program parameters. Treasury stated that it used data from  commercial vendors, Fannie Mae, and Freddie Mac to estimate the  potential universe of homeowners who were in default or likely to be in  imminent danger of default from April 2009 to March 2012 and the number  of homeowners eligible and likely to participate in HAMP during the  program’s 3-year application period. Treasury then estimated the cost of  the key parameters of HAMP, including the monthly payment subsidy,  incentive payments, and other payments—for example, payments to  homeowners for signing over deeds instead of going through foreclosure  proceedings, and payments to lenders for eliminating second liens for  HAMP participants. According to Treasury officials, HAMP parameters  were designed to provide incentives to servicers, investors, and borrowers  to modify mortgage payments quickly and efficiently without using  government funds to pay for modifications that servicers would already  complete without government assistance. Treasury officials told us that  the principal goal of HAMP was to get mortgage payments to an affordable  level and avoid foreclosures. Treasury officials said that they recognized  that, for some borrowers, an affordable mortgage payment was not the  only concern and that negative equity was also an issue. Treasury’s  HAMP guidelines allow servicers to reduce the amount of mortgage  principal, in addition to reducing interest rates to reach an affordable  payment. To reach borrowers, Treasury launched its Making Home  Affordable Web site on March 19, 2009, that, among other things, provides  program, eligibility, and housing counseling information.
As we have previously stated, some of the challenges that loan  modification programs face include making transparent to investors the  analysis supporting the value of modification over foreclosure, designing  the program to limit the likelihood of redefault, and ensuring that the  program does not encourage borrowers who otherwise would not default  to fall behind on their mortgage payments. Treasury pointed to a number  of HAMP features designed to address these challenges. According to  Treasury, requiring the use of a standardized net present value test will  provide greater transparency to investors about the value of modification  over foreclosure. Treasury officials stated that HAMP contained features  designed to limit the likelihood of redefault, including a 90-day trial  modification period, the reduced monthly payment, and incentives to keep  borrowers current on their modified loan payments. Treasury stated that  the likelihood that performing borrowers would intentionally default on  their mortgages to access HAMP (e.g., moral hazard) was limited. For  instance, servicers are required to obtain information on borrowers’  current income to verify that the debt-to-income ratio without loan  modification is greater than 31 percent, and borrowers must also represent  and warrant that they do not have sufficient liquid assets to make their  monthly mortgage payments. To reduce adverse selection (the risk that  servicers would selectively choose loans for HAMP), Treasury requires  that servicers consider all the loans that they service for participation in its  loan modification program, unless prohibited by the rules of the applicable  servicing agreements. Treasury has begun developing a data reporting  system that will be used, among other things, to monitor servicers’  compliance with HAMP requirements, as well as the performance of loans  that have been modified.
While the basic structure of HAMP has been announced, Treasury has not  specified several critical components—including a system of internal  control over TARP funds used for loan modification—as of March 23,  2009. Treasury officials said that they plan to have a system of internal  control in place when the first payments are due to servicers. As we noted  in our first TARP report, the absence of appropriate internal control  heightens the risk that the interests of the government and taxpayers may  not be adequately protected and that the program objectives may not be  achieved in an efficient and effective manner. Treasury’s loan  modification proposal calls for payments to be made to offset probable  losses from home price declines in the event of failed modifications.  However, Treasury officials told us that the specifics of how this HAMP  feature would work were still being developed as of March 20, 2009.  Additionally, incentive payments to servicers and mortgage  holders/investors to offer alternatives to foreclosure to homeowners who  fail to qualify for or default under HAMP had not been specified as of  March 20, 2009. Treasury has selected Fannie Mae to administer, maintain  records for, and serve as the paying agent for its homeowner assistance  programs, including HAMP, and Freddie Mac as the compliance agent to  oversee servicers’ modifications. Fannie Mae’s responsibilities include  developing and implementing a marketing plan, call center for borrowers,  standard agreements with servicers, standardized modification  documentation, modification reporting systems, processes for servicer  data reporting and collection of data, and fraud monitoring and detection.  Freddie Mac’s compliance responsibilities include conducting  examinations, reviewing servicer compliance with HAMP’s published  rules, and reporting the results of the examinations to Treasury. According  to representatives of Fannie Mae and Freddie Mac, the government- sponsored enterprises (GSE) are establishing separate internal  organizations and firewalls, as well as appropriate procedures and  controls—all of which must be approved by Treasury—to avoid conflicts  of interest in carrying out their compliance responsibilities. 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 internal control system.
section_title: New Framework of Corporate Governance, Oversight, and Transparency
paragraphs: In response to concerns raised by Congress, GAO, and, subsequently, COP  and the SIGTARP about oversight, the Financial Stability Plan also calls  for a new transparency and accountability agenda that is to consist of a  framework of corporate governance and oversight to help ensure that  banks receiving government funds are held responsible for the appropriate  use of those funds through stronger requirements on acquisitions,  dividend payments, executive compensation, and enhanced public  reporting including reporting on lending activity. The new standards apply  to future participants and are not retroactive.
section_title: TARP Has Received Approximately $2.9 Billion in Dividend Payments, Representing About 80 Percent of Possible Dividends
paragraphs: TARP had received approximately $2.9 billion in dividend payments  through March 20, 2009. But dividends were not declared and not paid to  Treasury for $733 million of cumulative dividends from AIG under the  SSFI program and about $150,000 of noncumulative dividends from eight  institutions under CPP. The undeclared dividends, approximately 20  percent of possible dividends during the period, were identified by TARP  through a process that it implemented to identify possible dividends and  determine whether they were declared and received when due.
The approximately $2.9 billion TARP received in dividends related to  shares of preferred stock were acquired through CPP, TIP, AIFP, and AGP.  Treasury’s agreements under these programs entitled it to receive dividend  payments on varying terms and at varying rates. Table 3 summarizes the  dividends received and those not declared and not paid under each  program.
For the above-listed programs, the dividend payments to Treasury are  contingent on each institution declaring dividends. Generally, in the event  that an institution does not declare a dividend for cumulative preferred  stock during the dividend period, the unpaid dividends accumulate, and  the institution must pay the cumulative accrued dividends before making  dividend payments to other classes of shareholders. But if the institution  does not declare a dividend for noncumulative preferred stock during the  dividend period, the noncumulative preferred shareholders generally have  no right to receive any dividend for the period, and the issuer has no  obligation to pay a dividend for the period, whether or not dividends are  declared for any subsequent dividend period.
Treasury did not receive all possible dividend payments under two  programs. First, the sole participant in SSFI—AIG—notified Treasury that  the board of directors did not declare a dividend of approximately $733  million for the February 1, 2009, dividend payment date. The agreement  detailing the terms of Treasury’s November 25, 2008, $40 billion  investment in AIG’s senior preferred stock states that dividends will be  payable at an annual rate of 10 percent when and if declared by the AIG  Board of Directors. Under this agreement, accrued but unpaid dividends  compound quarterly. The agreement further states that if dividends on the  senior preferred stock are not paid in full for four dividend periods,  whether or not consecutive, the senior preferred stockholders have the  right to appoint at least two directors to the board. As discussed earlier in  our report, on March 2, 2009, the Federal Reserve and Treasury announced  plans to restructure and expand AIG’s assistance. Under the announced  plans, Treasury is to receive noncumulative preferred stock equal to the  sum of the $40 billion in cumulative preferred stock previously issued to  Treasury on November 25, 2008, plus any accrued and unpaid dividends  related to those shares.
Second, Treasury did not receive approximately $150,000 in possible  noncumulative dividends related to eight CPP participants. According to  Treasury officials, these eight banks informed Treasury that they lacked  the necessary regulatory or shareholder approvals to declare dividends on  their preferred stock. Federal banking laws and regulations include  minimum capital requirements and limitations on the use of capital to pay  dividends. In addition, some state laws impose similar limitations and  require shareholder approval for certain reductions of capital.
OFS officials told us they consulted with Treasury’s Office of the General  Counsel to address these CPP dividends that were not declared. Since the  $150,000 in undeclared dividends are noncumulative and were not  declared during the dividend period, these institutions are not obligated to  pay, and Treasury has no right to receive the dividends for the period.  According to the standard terms of CPP, after six nonpayments by a CPP  institution (whether or not consecutive), Treasury and other holders of  preferred securities equivalent to Treasury’s can exercise their right to  appoint two members to the board of directors for that institution at the  institution’s first annual meeting of stockholders subsequent to the sixth  nonpayment. Although OFS indicated that they were aware of the dividend  restrictions for certain banks, Treasury officials told us that Treasury had  not directly suggested to any institution that it seek the approvals  necessary to declare dividends. These officials said that they had  contacted all eight banks regarding the undeclared dividends. Six of the  eight banks that did not declare dividends have formally communicated to  Treasury their intentions to seek necessary approvals for future dividend  payments.
As part of our audit work, we noted that Treasury has not report to the  Congress and the public the amount of dividends received or other  receipts from TARP participants. Disclosing amounts received by Treasury  from these participants would improve the overall transparency of TARP.  By not sharing this information, Treasury is missing an opportunity to  provide information about the return it is receiving on its investments.  Treasury officials acknowledged the benefits of such disclosures and have  agreed to consider establishing a mechanism for publicly reporting monies  received under TARP, such as dividends.
section_title: OFS Has Yet to Develop an Integrated Communication Strategy for TARP
paragraphs: Treasury has taken a number of steps to address the ongoing crisis,  creating new programs, and expanding existing initiatives. However,  Treasury continues to be hampered with questions about TARP and what  it is doing, which raises questions about the effectiveness of its existing  communication strategy. The Financial Stability Plan represents an  important step in clarifying Treasury’s strategy for addressing the financial  and housing crisis using its authorities under TARP, consistent with our  January 2009 recommendation. But Treasury’s strategy has otherwise  largely been one of posting information to its Web site, issuing press  releases, speeches, testimonies, and engaging in ad hoc outreach to  Congress, and it continues to face ongoing communication challenges. The  complexity of the issues involved and the heightened public scrutiny make  an effective communication strategy critical going forward. Treasury has  yet to develop a communication strategy for regularly and routinely  communicating its activities to relevant congressional committees,  members, the public, and other critical stakeholders. An effective  communication strategy may consist of any number of elements, such as  building understanding and support for the program (regular and routine  outreach, including confidential member briefings), integrating  communications and operations (making communication integral to the  program), and increasing the impact of communication tools (print and  video). Without a mechanism for regular and ongoing dialogue about plans  for the program and its progress, TARP continues to be poorly understood  by Congress and the public. If a communication strategy that includes  regular and routine communication with Congress is not established, any  request for additional funding, as contemplated in the President’s budget,  could be severely hampered.
section_title: Treasury Continues to Make Progress in Establishing OFS
paragraphs: Since our January 2009 report, Treasury has made progress in its hiring  efforts and now has a more stable workforce. Previously, we  recommended that Treasury expedite hiring to ensure that OFS had the  personnel it needed to administer TARP. Since our last report, Treasury  has continued to use a variety of hiring mechanisms to bring staff on board  to carry out and oversee TARP, including direct-hire authority, merit  promotion appointments, limited-term Senior Executive Service (SES)  appointments, and reassignments. As of March 20, 2009, OFS had 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 (see fig. 2). Treasury anticipates that OFS will  need 196 full-time employees to operate at full capacity, an increase of 65  from its January 2009 estimate of 131.
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 (see table 4). As  discussed later in this report, OFS also obtains services from financial  agents and contractors to provide a variety of services in support of TA programs.
subsections: section_title: Treasury Has Made Additional Progress In Managing Contractor Support and Addressing Conflicts Of Interest
paragraphs: Since our January 2009 report, Treasury has awarded seven new contracts  and two new financial agency agreements, bringing to 25 the total number  of TARP financial agency agreements, contracts, and blanket purchase  agreements as of March 13, 2009. Four new contracts are for a variety of  legal services; others are for management consulting, document  production, and program support services; and the two new financial  agency agreements are to support the new homeownership preservation  program. Of these new contracts, one is with a woman-owned small  business. In addition, Treasury issued a new task order, valued at  approximately $5 million, to the internal control services contractor for  expanded OFS support. For detailed status information on new, ongoing,  and completed Treasury contracts and financial agency agreements, as of  March 13, see our e-Supplement at http://www.gao.gov/cgi- bin/getrpt?GAO-09-522SP.
As of March 13, 2009, legal services contractors and financial agents  accounted for two-thirds of the 18 service providers directly supporting  OFS’s administration of TARP, as shown in figure 3. As of the same date,  Treasury had expended about $12 million for actions related to contracts-  and financial agency agreements. The largest share of the total (39  percent) was for financial services with one financial agent (Bank of New  York Mellon) while the second largest share (35 percent) was for legal  services divided among four law firms (fig. 3).
Budget officials in OFS’s Office of the Chief Financial Officer told us that  they anticipated modest increases in the volume and cost of TARP  contract and financial agency agreement activity for the remainder of  fiscal year 2009. Overall, Treasury has budgeted about $175 million to  cover anticipated OFS costs in fiscal year 2009 for the use of contractors  and financial agents, as well as for OFS interagency agreement obligations  to pay, among other things, personnel costs of employees detailed from  other agencies.
subsections: section_title: OFS Relies on Contractors and Financial Agents to Help Implement TARP
paragraphs: As discussed in the previous section on OFS’s hiring status, a key factor in  Treasury’s ongoing efforts to quickly establish the new organization to  operate and administer TARP was the use of a mix of private contractors  and financial agents to fill short- and long-term needs. OFS relies on this  private sector workforce to help implement TARP. According to OFS  preliminary data, about 30 percent of the employees of TARP contractors  and financial agents are on site at Treasury working with OFS employees  in various program offices, primarily to perform accounting services and  support human resources, and temporary documentation activities. The  remaining 70 percent work off site at their respective offices.
OFS officials responsible for several aspects of TARP, including asset  management and legal services support of CPP and AIFP, noted that TARP  contractors and financial agents play important roles in the administration  and operations of these programs. In discussing the roles of contractors  and financial agents in TARP operations and administration, OFS program  managers we spoke with generally characterized contractors’ involvement  as providing technical and operational input into program execution.  Table 5 provides a summary of the types of services provided, based on  our analysis of selected TARP contracts and a financial agency agreement.
OFS officials told us that the use of contractors and financial agents for  the above professional services was critically important given the  technical nature of the tasks, the need for expertise, and the speed with  which OFS must act regarding TARP. OFS officials believe they retain  control over the direction of TARP and have sufficient management  oversight of the advice and assistance provided by TARP contractors and  financial agents. For example, an OFS program manager noted that the  advice provided by the Bank of New York Mellon did not equate to a  policy decision but rather supported OFS officials’ development and  execution of policy decisions.
section_title: OFS Has Made Progress in Strengthening Oversight of Contractors and Financial Agents
paragraphs: In response to the recommendation in our January 2009 report that  Treasury improve its oversight of contractors, Treasury has taken steps to  help ensure that sufficient personnel are assigned to facilitate effective  management and oversight of TARP contracts and financial agency  agreements. As shown in table 6, except for one key position that is to be  filled as Treasury enters into financial agency agreements for asset  managers, key contract staffing positions were filled through new hiring  and reassignment actions.
OFS also made progress responding to our recommendation to help  ensure that staff were appropriately trained to oversee contractors’  technical performance. In particular, it made progress on certifications  and formal training for OFS’s roster of Contracting Officers’ Technical  Representatives (COTR). OFS has now replaced all the executive-level  COTRs who earlier had been assigned COTR responsibilities without  receiving requisite formal training and certifications in their acquisition- related responsibilities. Consistent with Treasury’s internal guidance and  our prior recommendation, OFS ensured that the replacement COTRs  received the appropriate formal training and certification.
Given the constantly evolving and financially complex TARP program  requirements, we reviewed OFS’s technical oversight of contractors’  performance. We found that OFS exercises oversight consistent with good  practices we have identified when using contractors for more complex  professional services. Specifically, information discussed with COTRs,  OFS program officials, and senior contractor officials responsible for three  key TARP areas demonstrated that an interactive working environment  exists between OFS and its TARP contractors and financial agents. For  example, OFS officials, as well as Bank of New York Mellon managers,  told us that they talk daily, and often many times a day, regarding the  execution of the end-of-week closings on capital investments through  CPP—a complex undertaking that involves many transactions that can  total in the billions of dollars. According to Treasury officials, this level of  interaction provides frequent opportunities for oversight and helps them  to ensure that their needs are met.
Since January 2009, the Office of the Chief Operating Officer has hired an  executive-level contract administration manager, another action  responsive to and consistent with our prior recommendation. His job, in  part, is to apply contract management best practices to TARP contracts  and financial agency agreements, and provide leadership and guidance to  COTRs and financial agent managers. Based on information we reviewed  from the contract administration manager, as well as COTRs and financial  agent managers in three program offices, these efforts should better  position OFS to strengthen contract management. Other OFS actions to  facilitate the oversight of TARP contractor and financial agent  performance are listed in table 7.
Finally, in response to and consistent with our recommendation, Treasury  has made further progress in using fixed-price contracting arrangements  when the parties possess sufficient knowledge of the requirements.  Although Treasury has awarded new time-and-materials contracts since  January, it also converted work under two time-and-materials task orders  for legal services to fixed-price arrangements after determining that there  were clearly defined requirements (i.e., transactional legal services for  which the parties could estimate accurately the level of performance  required). In addition, in response to GAO’s recommendation, Treasury  negotiated a firm fixed price for two workstreams making up about 20  percent of the new $5 million task order for internal control services  performed by a contractor. Treasury and OFS officials have worked  closely to analyze the use of time-and-materials arrangements for follow- on requirements to ensure such arrangements are only used when other  contract types are not suitable. Treasury officials said that their reviews  indicate that, given the nature of the services OFS is procuring,  opportunities may be limited for the foreseeable future to use fixed-price  mechanisms when placing orders for follow-on work or awarding future  contracts. According to these officials, fixed-price arrangements may not  be appropriate for many TARP contracts. Considering the still-evolving  nature of TARP’s requirements, the ability of the parties to accurately  anticipate the performance requirements and estimate costs, as required  for fixed-price arrangements, is limited. This limitation places Treasury at  risk of paying a higher fixed price for the services than it might otherwise  pay under a time-and-materials contract. Treasury is gathering cost data  from existing time-and-materials and labor-hour contracts to identify costs  of recurring transactions to support the future negotiation of reasonable  fixed pricing for follow-on work where appropriate. In our view,  Treasury’s actions since January in response to our recommendation  generally indicate it is placing a high priority on making individualized  assessments of the nature of each requirement in order to identify those  requirements that may effectively utilize a fixed-price contract.
section_title: OFS Has Made Further Progress Implementing a Compliance System for Potential Conflicts of Interest Among Contractors and Financial Agents
paragraphs: Since issuing an interim conflicts-of-interest rule in January 2009, and  consistent with our prior recommendation, OFS continued to make  progress implementing a system of compliance for conflicts of interest  that may arise with vendors seeking or performing work under TARP.   Consistent with the framework the interim rule provides, OFS is  formalizing its process for reviewing and addressing potential or actual  organizational and personal conflicts of interest disclosed by contractors  and financial agents. Specifically, OFS is making progress (1) developing  and applying its compliance system under the interim rule, and (2)  reviewing existing contracts that predate the interim rule to determine  what changes may be needed.
Regarding OFS’s progress in further developing and applying its conflicts-  of-interest compliance system, discussions with OFS program and  compliance officials, two TARP contractors, and a financial agent’s senior  contracts manager indicate that a mutual environment for sustained  attention and control is taking root. Specifically, our discussions with OFS  and TARP contractor officials indicate that all parties have a range of  formal and informal processes in place, under which TARP contractors are  expected to detect potential conflicts of interest. Once detected, the  interim rule requires that potential conflicts be disclosed to Treasury  within 5 business days. A disclosure can trigger a formal review by the  OFS compliance officer, who is responsible for making a final  determination. The processes include an ongoing dialogue among OFS  officials and officials from TARP contractors and financial agents about  new potential conflicts and, as needed, discussions about changes to  contractors’ mitigation plans to increase their effectiveness and conform  with the interim rule.
We note, however, that OFS does not have fully developed procedures for  capturing its decisions on potential conflicts of interest. For example,  concerning the regular discussions of new potential conflicts that may  arise and require OFS’s compliance review, it is not clear that all  discussions are documented, or that all information is captured, such as  information supporting OFS’s determination that a conflict does not exist  or has been satisfactorily mitigated. TARP contractors told us that they did  not routinely retain records from their discussions with OFS officials  about potential conflict disclosures and mitigations. These discussions  frequently entail phone conferences but do not always result in formal  correspondence addressing the matter. In the absence of documentation,  there is no record of how issues were addressed and resolved, should the  need to revisit those issues arise in the future. OFS compliance officials  acknowledged that they needed to enhance the procedures for  documenting conflicts discussions in order to better demonstrate  compliance with the interim rule. OFS officials stated they were drafting  new policy and procedure instructions to do so. As conflict disclosures  and proposed mitigations involving TARP contractors and financial agents  continue to emerge, we will need to revisit OFS procedures to ensure that  it maintains appropriate documentation.
OFS has made progress since January, in response to our recommendation  that it review its existing contracts to determine whether changes are  needed in light of the interim rule. Specifically, OFS has reviewed six  contracts that predate the interim rule. As of March 13, 2009, this process  has resulted in the renegotiation of two contractors’ mitigation plans. OFS  compliance officials expect to finish reviewing the remaining four  mitigation plans within the next several months. We plan to continue  monitoring OFS’s progress to ensure that it fully implements our prior  recommendation.
Although the above efforts indicate that progress is being made related to  potential conflicts of interest, there may be an opportunity, going forward,  for streamlining OFS oversight in this area. For example, the portion of the  interim rule focusing on personal conflicts of interest requires that certain  contractors obtain financial disclosures in writing from management  officials and key individuals working on TARP that are no less extensive  than those that are required of new high-level federal government  officials. Specifically, the interim rule requires that before working on a  TARP matter, management officials and key individuals at firms involved  with the acquisition, valuation, management, or disposition of troubled  assets must disclose information, in writing, on their and their family’s  personal, business, and financial relationships. We recognize the  importance of collecting such information to detect and deter conflicts of  interest. However, the selected use of a more streamlined approach, in  appropriate circumstances, could reduce the burden of providing this  information and promote compliance. Treasury officials acknowledged  that an alternative financial disclosure process could offer a less  burdensome way for TARP contractors to obtain required written  disclosures from employees but said that any consideration of an  alternative would occur only in the context of evaluating public comments  on the interim conflicts rule. In finalizing the TARP conflicts-of-interest  rule, OFS officials told us that they would be reviewing various options to  the current requirement in the interest of striking a balance between  Treasury’s need to protect the government’s interests and the burden the  requirement placed on TARP contractors and financial agents.
section_title: OFS Is in the Process of Building TARP’s Financial Reporting Structure
paragraphs: Treasury must annually prepare and submit to Congress and the public  audited fiscal year financial statements for TARP that are prepared in  accordance with generally accepted accounting principles. Moreover, the  act requires Treasury to establish and maintain an effective system of  internal control over TARP that includes providing reasonable assurance  of the reliability of its financial reporting and compliance with applicable  laws and regulations. It further, requires Treasury to annually report on  its assessment of the effectiveness of internal control over financial  reporting. The act also requires GAO to audit TARP’s financial statements  annually in accordance with generally accepted auditing standards.
The fiscal year ending September 30, 2009, will be the first year for which  Treasury prepares financial statements for TARP. OFS has begun to build  a financial reporting structure for preparing the financial statements. OFS  officials told us that they were continuing to address key accounting and  reporting topics, such as defining the reporting entity; determining the  types of revenues and expenses to be included in TARP; determining the  appropriate valuation methods for assets and liabilities; determining the  accounting for administrative expenses, dividends, and interest; and  defining the form and content of TARP’s financial statements. In addition,  OFS continues to refine, develop, and document its internal control  framework over financial reporting and compliance, including its risk  assessment activities. The implementation of a well-defined internal  control framework and the decisions involving key accounting and  reporting issues are critical to enabling OFS to prepare its fiscal year-end  financial statements and to OFS’s reporting on its assessment of the  effectiveness of TARP’s system of internal control.
As part of GAO’s responsibilities under the act, we have begun our audit of  TARP’s financial statements and the related internal controls. Our  objectives will be to render opinions on (1) the financial statements as of  and for the period ending September 30, 2009, and (2) internal control over  financial reporting and compliance with applicable laws and regulations as  of September 30, 2009. We will also be reporting on the results of our test  of TARP’s compliance with selected provisions of laws and regulations  related to financial reporting.
section_title: Documentation of Certain Internal Control Procedures and Guidance Is Not Consistent With Actual Practice
paragraphs: We noted two areas in which OFS’s documentation of certain internal  control procedures and guidance pertaining to determining warrant  exercise prices were not updated to be consistent with actual practice.  While these issues do not significantly affect OFS’s financial reporting,  they, nevertheless, merit the attention of OFS management to decrease the  risk that the transactions will not be recorded completely, properly, or  consistently and that guidance available to the public on determining  warrant exercise prices will create confusion about the actual terms and  conditions executed by Treasury for its investments.
subsections: section_title: Documentation of Certain Internal Control Processes Is Not Consistent with the Controls Applied
paragraphs: As part of its internal control framework, OFS plans to develop formal  written policies and procedures governing OFS’s operations and expects  to have these policies and procedures finalized by September 30, 2009. In  the interim, OFS has developed and documented process flows and  narratives describing internal control processes for TARP transactions.  Our audit of selected control activities for CPP and SSFI transactions  found that OFS had applied adequate financial reporting controls over the  transactions we tested. However, we found that the actual control  processes and procedures performed for some of the transactions we  tested were inconsistent with the documented flows and descriptions.  Inconsistencies in the application of a control procedure complicate the  review of the transactions and increase the risk that the transactions will  not be recorded completely, properly, or consistently. According to  Treasury officials, these inconsistencies arose from the removal of certain  control activities that were no longer relevant and the implementation of  more effective controls without the simultaneous updating of the  documented process flows or narratives to reflect these changes. The  officials told us that TARP control processes were continually evolving as  management gained more experience with processing TARP transactions.
section_title: Guidance for Determining CPP Warrant Exercise Prices Is Not Consistent with the Procedures Applied
paragraphs: Under CPP, Treasury receives warrants to purchase shares of stock of  qualified financial institutions. The date selected as the basis for  determining the warrant exercise price impacts the exercise price and the  number of shares included in the warrants. Treasury consistently applied  its preliminary approval date as the basis for determining the warrant  exercise prices. However, Treasury has not established guidance,  consistent with its procedures, regarding the date to be used as a basis for  determining the warrant exercise prices. We found four Treasury  documents that each had a different description of the date to use as the  basis for determining the warrant exercise prices. For example, the  announced CPP terms and conditions specify, among other things, the use  of the investment date as the basis for determining the warrant exercise  price, but the term “investment date” is not specifically defined. The CPP  program description on Treasury’s Web site, the CPP Application  Guidelines, and the Security Purchase Agreement each provide different  guidance on which date to use as a basis for determining the warrant  exercise prices. Inconsistencies in guidance available to the public for  warrant exercise price determinations may create confusion about the  actual terms and conditions executed by Treasury for its investments.
The eight institutions comprising the first group of CPP transactions,  amounting to $115 billion, signed Participation Commitment documents  stating that the financial institutions are to issue preferred shares to the  Treasury under the terms and conditions announced for CPP. Treasury  used October 13, 2008, the date the institutions signed the Participation  Commitment documents, as the basis for determining the warrant exercise  prices. OFS officials told us they considered the date the institutions  signed the Participation Commitment documents to be Treasury’s  preliminary approval date.
According to OFS, for the second and subsequent group of CPP  transactions, Treasury’s preliminary approval date is the date the  Investment Committee recommends that the Assistant Secretary for  Financial Stability approve the application. Our tests of selected CPP  transactions beyond the first group showed that Treasury consistently  utilized the Investment Committee’s recommendation date as the basis for  determining the warrant exercise prices. In addition, the executed  agreements between the financial institutions and Treasury detail, for each  warrant, the number of shares of stock Treasury may purchase at the  specific exercise price. As such, these parties are aware of and consent to  the specific terms of the warrants.
section_title: Indicators Suggest Mixed Recent Developments in Credit Markets, but Isolating the Impact of TARP Continues to Present Challenges
paragraphs: Although indicators of the cost of credit and perceptions of risk in credit  markets suggest mixed developments since our last report, TARP’s  activities could improve market confidence in participating banks and  have other beneficial effects on credit markets.  However, several factors  will complicate efforts to measure any impact, including contemporaneous  changes in monetary and fiscal policy; other programs introduced by  Treasury, the Federal Reserve, FDIC, and FHFA, and general market  forces. As a result, any changes in credit markets cannot be attributed  solely to TARP. Similarly, slow recovery does not necessarily reflect its  failure. However, if TARP is having its intended effect, a number of  developments might be observed in credit and other markets over time,  such as reduced risk spreads, declining borrowing costs, and more lending  activity than there would have been in the absence of TARP. Credit market  indicators we have been monitoring suggest the cost of nonmortgage  credit has risen, and perceptions of risk (as measured by premiums over  Treasury securities) have declined in mortgage and interbank markets,  while rising in corporate debt markets. While lending standards remained  tight, according to Federal Reserve data, the largest CPP recipients  continued to extend loans to consumers and businesses of at least $200  billion a month since October, based on our analysis of Treasury’s new  loan survey. As TARP has evolved, we have also initiated tracking of  foreclosure data and consumer credit measures, such as auto loan and  credit card rates, to provide indicators relevant to the new programs.
subsections: section_title: TARP Programs Could Have a Number of Effects on Credit Markets and the Economy
paragraphs: TARP’s activities could improve market confidence in participating banks  and have other beneficial effects on credit markets, but several factors will  complicate efforts to measure any impact. In our previous reports we  focused on CPP, detailing the expected effects, as well as the tension  between promoting lending and improving the capital position of banks.  As indicated above, CAP, as proposed by the new administration, aims to  eliminate uncertainty about the solvency of financial institutions through  stress tests and by infusing capital into the financial system to the point  where participating banks can absorb losses even worse than expected  scenarios. The intent is to improve confidence in financial institutions,  allowing the banks to borrow on more favorable terms, attract private  capital and continue lending to creditworthy businesses and households.  Like CPP, if CAP is effective we should also see improvement in credit  market conditions, including declining risk premiums (the difference  between risky and risk-free interest rates, such as rates on U.S. Treasury  securities) for interbank lending and bank debt and lower borrowing costs  for business and consumers. Improved market conditions may permit  some borrowers to avoid foreclosures by enhancing the capacity and  willingness of banks to refinance loans or modify others. HAMP is  intended to reduce foreclosures by directly modifying and refinancing  mortgages and, therefore, may also indirectly improve the balance sheets  of banks by restoring value to mortgage-related securities. However, as we  discussed in our December 2008 and January 2009 reports, to the extent  that credit quality in the economy is deteriorating, confidence remains low  and the economy continues to experience a downturn, during which  lending and borrowing levels normally drop. Low interest rates and lower  premiums may not translate into increased lending immediately.  Nevertheless, lending may still be higher than it would have been if the  equity injections had not taken place. Similarly, market forces may  continue to force a correction in housing prices and result in additional  foreclosures, albeit fewer than would have occurred in the absence of  TARP.
Similarly, TARP activities could improve credit market conditions by  supporting securitization markets through the expansion of TALF. As  indicated above, TALF will provide funding to certain holders of Aaa-rated  ABS backed by newly and recently originated small business, student,  automobile, and credit card loans. By increasing demand and prices for  these securities, TALF should reduce the rates faced by borrowers in the  associated loan categories and increase the availability of new credit to  consumers and businesses. Moreover, by providing support to  securitization markets, TALF may encourage private investors to return to  asset-backed securities, thereby increasing liquidity and improving general  market conditions. However, as we discussed in our previous reports,  other important policies and interventions by government agencies (some  collaborative efforts) that are undertaken to restore financial stability, as  well as general market forces, will complicate a determination of TARP’s  specific effectiveness. TALF, as a joint program with the bulk of the  funding provided by the Federal Reserve, highlights the difficulty of  attributing changes in credit market conditions exclusively to TARP.
section_title: Changes in Select Indicators Suggest Mixed Recent Development in Credit Markets, although These Changes Are Not Necessarily Attributable to TARP
paragraphs: While it is difficult to isolate one program’s effects, given the numerous  actions being undertaken, we considered a number of indicators that,  although imperfect, may be suggestive of TARP’s impact on credit and  other markets. Improvements in these measures would indicate improving  conditions, even though those changes cannot be exclusively linked to any  one program. Table 8 lists the indicators we have reported on in previous  reports, as well as the changes since the last report and the changes since  the announcement of CPP, the first TARP program. In general, the  indicators illustrate that the cost of nonmortgage credit has risen and that  perceptions of risk have declined in mortgage and interbank markets,  while rising in corporate debt markets since January 2009. For example,  while the cost of interbank credit (LIBOR) has risen slightly since our  January 2009 report, the TED spread, which captures the risk perceived in  interbank markets, has declined. Since the announcement of CPP, the TED  spread has fallen 350 basis points. Since the announcement of CPP,  corporate bond spreads are up, and there have been increases of 38 and 27  basis points for high quality (Aaa) and moderate quality (Baa) corporate  spreads, respectively, since our January 2009 report, indicating heightened  risk perceptions. Like the LIBOR, Aaa and Baa bond rates have increased,  indicating an increase in the cost of credit for businesses. However, the  improvement in the mortgage market is consistent across rates and  spreads. Mortgage rates were down 9 basis points, and the mortgage  spread is down 45 basis points. (See our December and January reports  for a more detailed description and motivation for the indicators.) As  discussed above, changes in credit market conditions may not provide  conclusive evidence of TARP’s effectiveness, as other important policies,  interventions, and changes in underlying economic conditions can  influence these markets. Recently, the Federal Reserve announced—in  addition to further interventions in the GSE mortgage-backed security and  debt market—that it intended to improve conditions in private credit  markets by purchasing up to $300 billion of longer-term Treasury  securities over the next 6 months. This activity could result in lower costs  for borrowing activities whose rates tend to move with the Treasury  yield.
Other indicators that may become better measures of TARP’s  effectiveness over time are mortgage originations and foreclosures. While  the volume of new mortgage lending may reflect changes in credit risk or  the demand for credit, it may also indicate the availability of credit as  well. As table 9 indicates, mortgage originations fell from $300 billion in  the third quarter to $250 billion in the fourth quarter of 2008. To the extent  that credit and economic conditions improve over time, we would expect  mortgage originations to stop declining and eventually rise, although it is  not clear that this measure would or should return to the level seen in the  period leading up to the credit market turmoil. Similarly, foreclosure data  should provide an indication of the effectiveness of the recently  implemented HAMP program going forward. The percentage of loans in  foreclosure had reached an unprecedented high of 3.3 percent at the end  of the fourth quarter of 2008, up from 2.97 percent the previous quarter. As  stated above, general market forces, including falling housing prices, rising  unemployment, and other programs outside of TARP that are being  undertaken to address the rising foreclosure rate will complicate efforts to  determine the effectiveness of HAMP.
subsections: section_title: New Lending at the 20 Largest Participants in CPP
paragraphs: The largest CPP recipients continued to extend loans to consumers and  businesses, over $200 billion a month since October, based on our analysis  of Treasury’s new loan survey. Because these data are unique, we were not  able to benchmark the origination levels against historical lending or  seasonal patterns at these institutions. As illustrated in figure 4, while total  mortgage originations fell in the fourth quarter of 2008, these data suggest  that new lending at the 20 largest institutions participating in CPP (as of  December 31, 2008), after dropping by about 21 percent from October to  November, rose roughly 18 percent from November to December.   ecember amounted to roughly $245 billion (table 9). Total new lending in  Although lending normally drops during a recession, according to our  analysis of the survey, aggregate new lending by these institutions in  D January increased slightly. The reporting institutions generally received CPP funds on October 28, 2008, or November 14, 2008, with a few  institutions receiving funds on December 31, 2008. In figure 4, we present  new lending by month. Although we recognize the limitations inherent in  these data, the survey data will prove valuable for more thorough analyses of lending activity in future reports.
section_title: Conclusions
paragraphs: ecommendations from our December 2008 and January 2009 reports. In  Treasury has continued to take significant steps to address all the  r particular, Treasury has recently expanded the scope of the month ly CPP  surveys of the 20 largest institutions to include all institutions participatin in the program. This change should provide Treasury with the information necessary to begin to track the effectiveness of the program and  effectively implement our recommendation. Treasury also has expedited  efforts to ensure that trained and certified personnel oversee the  performance of all contracts and moved toward fixed-price arrangements, when appropriate. These actions were consistent with our  recommendations for improved contractor oversight in these areas.  Moreover, Treasury continued to make progress in several o including ensuring that future agreements entered into under its new programs better enable it 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. Appendix II provides our  assessment of Treasury’s implementation of our open recommendations  from our January 2009 report, and appendix III provides a high-level  ther areas,  summary, prepared by Treasury, of the progress it has made on each  recommendation since our last report and some planned next steps.
During this period, Treasury has also continued to improve its monitoring  of compliance with the terms of its existing agreements. Treasury officials  told us that asset managers are to play a role in monitoring the  participating institutions’ compliance with the agreements. In the interim,  Treasury has taken some steps to help ensure that institutions are  complying with dividend, stock repurchase, and executive compensation  restrictions. Treasury relies on participants’ representations and  warranties in the agreements, and if it finds reason to believe that these  representations can not be relied upon, it can pursue the available  remedies for any false representations. At this point, Treasury has not  taken steps to verify the 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. For example,  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 that they were taking steps to build such oversight into  their examination procedures. However, without a consistent oversight  approach, Treasury runs the risk of receiving inconsistent or incomplete  information from the regulators.
Treasury has also continued to take steps to articulate a more clearly  defined vision for TARP, and in February 2009, provided its strategy for  using its remaining funds. This strategy defined the existing problems and  how the various programs would begin to address them. 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 announced its plans to participate in the  purchase of troubled assets through public-private partnerships and  launched a homeownership protection program, activities that are  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 be hampered by questions  about its overall strategy and OFS’s activities, raising questions about the  effectiveness of its existing communication strategy. Treasury’s strategy  has largely been one of posting information to its Web site; issuing press  releases, speeches, and testimonies; and reaching out to Congress on an ad  hoc basis; and 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 and  members, the public, and other critical stakeholders. For example, TARP  had received approximately $2.9 billion in dividend payments through  March 20, 2009, but this information has not been reported to the Congress  and the public. To improve transparency, Treasury should publicly  announce the amounts, such as dividends, it has received from TARP  participants. By not sharing this information, Treasury is missing an  important opportunity to provide information about the returns it is  receiving on its investments. 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 such funding.
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 repair damage caused to the  program. Controversies about the actions of some TARP participants  continue to surround the program, in general, and AIG, in particular. While  Treasury 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  announced on March 2, 2009, or finalize the agreement. Therefore,  Treasury has an opportunity to further improve the integrity and  accountability associated with this additional assistance. 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 seek to negotiate concessions from  management, employees, and counterparties, as appropriate, before the  agreement is finalized. For example, Treasury could require that AIG seek  to renegotiate contracts with its employees, such as existing contracts  similar to the contract for retention bonuses with AIG Financial Products’  employees, and with 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, Treasu failure to act in this instance could cause additional harm to its reputa and impair its ability to seek additional funding for TARP that might be  needed in the future.
Next, Treasury has also made progress in establishing its management  infrastructure and has responded to our five open recommendations tha are related to hiring, contracting, and establishing its internal controls.
In the hiring area, Treasury has continued to make progress in  establishing its management infrastructure, including hiring mo re staff.  In accordance with our prior recommendation that it expeditiously hire  personnel to OFS, Treasury continued to use direct-hire and various  other appointments to bring a number of career staff on board quickly .   Since our January 2009 report, Treasury has increased the total number of OFS staff overall and the balance has shifted from mostly detailees  to more permanent staff, indicating that the workforce has become  more stable over time. In our last report, we recognized that the  changing nature of OFS had made it difficult for officials to deter its long-term organizational needs but that such considerations  continued to be vital to retaining institutional knowledge within  the o  organization as programs evolved. Treasury has taken further steps t align OFS’s human capital program with its current and emerging  mission and programmatic goals. For example, as outlined in its dr aft  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 c ritical  to OFS’s ability to monitor its progress in building and developing the  OFS workforce. reasury has continued to build a network of contractors and financial  T agents to support TARP administration and operations. At the same  time, Treasury has continued to build its capacity to manage these  vendors by putting into place the people and processes necessary toenhance its oversight of contractor and financial agent performance.  Given the still-evolving nature of TARP requirements, we recognize th 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, Treasu has addressed our prior recommendation in this area, and we will  monitor continued progress. In addition, Treasury could enhance it efforts to safeguard the TARP program from conflicts of interest  involving its contractors and financial agents by completing its review  of mitigation plans to ensure conformity with the new conflicts-of- s  interest rule and by requiring that decisions on potential conflicts b documented.
FS has begun to build a financial reporting structure, including  O addressing the key accounting and financial reporting issues nece to enable it to prepare financial statements and to assess the  effectiveness of TARP’s system of internal control. Consistent previous recommendations, OFS is continuing to develop a  comprehensive system of internal control and has establishe d 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  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 descriptions a the actual procedures for certain controls that were applied to the  transactions. Inconsistencies in the application of a control procedu complicate review of the transactions and increase the risk that the  transactions may not be recorded completely, properly, or consisten 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 Trea for its investments.  tly. inally, we again note that while isolating the effect of TARP’s activities  F continues to be difficult, developments in the credit markets have  generally been mixed since our January 2009 report. Some indicato demonstrate 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 securit ies)  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 extende over $240 billion in new loans to consumers and business in both  December 2008 and January 2009, according to the Treasury’s new survey. Attributing any of these changes directly to TARP continues to beproblematic 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.
section_title: Recommendations for Executive Action
paragraphs: While Treasury continues to take action to address our recommendations  and has begun to make progress in many areas, we identified new areas  that warrant ongoing attention and focus. Therefore, we recommend that  Treasury take the following actions as it continues to improve the  integrity, accountability, and transparency of the program.
We recommend that Treasury take the following six actions:    Develop a communication strategy that includes building an  understanding and support for the various components of the program.  Specific actions could include hiring a communications officer,  integrating communications into TARP operations, scheduling regular  and ongoing contact with congressional committees and members,  holding town hall meetings with the public across the country,  establishing a counsel of advisors, and leveraging available technology.
Require that AIG seek concessions from stakeholders, such as  management, employees, and counterparties, including seeking to  renegotiate existing contracts, as appropriate, as it finalizes the  agreement for additional assistance.
Update OFS documentation of certain internal control procedures and  the guidance available to the public on determining warrant exercise  prices to be consistent with actual practices applied by OFS.
Improve transparency pertaining to TARP program activities by  reporting publicly the monies, such as dividends, paid to Treasury by  TARP participants.
Complete the review of, and as necessary renegotiate, the four existing  vendor conflicts-of-interest mitigation plans to enhance specificity and  conformity with the new interim conflicts-of-interest rule.
Issue guidance requiring that key communications and decisions  concerning potential or actual vendor-related conflicts of interest be  documented.
section_title: Agency Comments and Our Analysis
paragraphs: We provided a draft of this report to Treasury for review and comment. We  received written comments from Treasury that are reprinted in   Appendix I. We also received technical comments from Treasury, that we  incorporated, as appropriate. In its comments, Treasury described steps it  had taken in the last 60 days to address extraordinary economic  challenges and noted that recommendations in our latest report presented  a thoughtful way forward.
We are sending copies of this report to the Special Inspector General for  TARP and interested congressional committees and members, Treasury,  the federal banking regulators, and others. The report also is available at  no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  Richard J. Hillman at (202) 512-8678 or hillmanr@gao.gov, Thomas J.  McCool at (202) 512-2642 or mccoolt@gao.gov, or Orice M. Williams at  (202) 512-8678 or williamso@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: Comments from the Department of the Treasury
section_title: Appendix II: Status of GAO Recommendations (January 2009 Report)
paragraphs: Appendix II: Status of GAO Recommen (January 2009 Report)
subsections: section_title: Review and renegotiate existing conflicts-of-interest mitigation plans, as necessary, to enhance specificity and conformity with the new interim conflicts-of-interest regulation, and take continued steps to manage and monitor conflicts of interest and enforce mitigation plans.
section_title: Appendix III: Treasury’s Actions in Response to Our January 2009 Report Recommendations
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above; Gary Engel, Mathew Scire, and  William Woods (Lead Directors); Cheryl Clark, Lawrence Evans Jr., Daniel  Garcia-Diaz, Carolyn Kirby, Kay Kuhlman, and Harry Medina, (Lead  Assistant Directors); and Marianne Anderson, Kevin Averyt, Noah  Bleicher, Patrick Breiding, Emily Chalmers, Clayton Clark, Bob Dacey,  Rachel DeMarcus, Matt Drerup, Abe Dymond, Nancy Eibeck, Katherine  Eikel, Gena Evans, Karin Fangman, Jeanette Franzel, Ryan Gottschall,  Brenna Guarneros, Michael Hoffman, Chir-Jen Huang, Joe Hunter, Tyrone  Hutchins, Elizabeth Jimenez, Jason Kirwan, Christopher Klisch, Steven  Koons, John Krump, J. Andrew Long, John Lord, Lisa Mavrogianis,  Stephanie May, Marc Molino, Diane Monticchio, Susan Offutt, Akiko  Ohnuma, Joseph O’Neill, Rebecca Riklin, LaSonya Roberts, Susan  Sawtelle, Maria Soriano, Cynthia Taylor, John Treanor, Katherine Trimble,  Julie Trinder, James Vitarello, and Seyda Wentworth made contributions  to this report.
section_title: Related GAO Products
paragraphs: 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.
High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 22,  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.