Troubled Asset Relief Program: Treasury's Framework for Deciding to Extend TARP Was Sufficient, but Could be Strengthened for Future Decisions
Released: 2010-06-30T00:00:00

Letter

Background

As the economy begins to recover from the financial crisis, the extraordinary government interventions taken to stabilize the financial system will need to be withdrawn. The consequences of financial crises— specifically systemic bank-based crises—on economic activity have been well documented. As a result, governments and monetary authorities typically undertake interventions, even though the resulting actions raise concerns about moral hazard and can come at a significant expense to taxpayers. Given its severity and systemic nature, the recent global financial crisis prompted substantial interventions starting as early as September 2007, after the first signs of serious trouble in the subprime mortgage market surfaced (see app. II). In the early stages of the financial crisis, the observable policy responses were a Department of Housing and Urban Development (HUD)-initiated foreclosure prevention program, a Federal Reserve lending facility for depository institutions, and currency swap arrangements with various foreign central banks. As the crisis intensified, additional lending facilities were created, followed by separate actions by the Federal Reserve, Treasury, and others that dealt with financial sector issues on a case-by-case basis. These actions included facilitating JPMorgan Chase & Co.’s purchase of Bear Stearns Companies, Inc.; addressing problems at Fannie Mae and Freddie Mac by placing them into conservatorship; working with market participants to prepare for the failure of Lehman Brothers; and lending to American International Group (AIG) to allow it to sell some of its assets in an orderly manner.

Although Treasury had begun to take a number of broader steps, including establishing a temporary guarantee program for money market funds in the United States, it decided that additional and comprehensive action was needed to address the root causes of the financial system’s stresses. The passage of EESA and authorization of TARP provided Treasury with the framework it needed to begin its more comprehensive and coordinated course of action that ultimately resulted in several programs. Some TARP funds were utilized to launch joint programs or to support efforts principally led by other regulators. Concurrent with the announcement of the first TARP program, the Federal Reserve and FDIC also announced other actions that were intended to stabilize financial markets and increase confidence in the U.S. financial system. This system-wide approach was also coordinated with a number of foreign governments as part of a global effort.

The various initiatives under TARP are detailed below.

Capital Purchase Program (CPP). CPP was intended to restore confidence in the banking system by increasing the amount of capital in the system. Treasury provided capital to qualifying financial institutions by purchasing preferred shares and warrants or subordinated debentures.

Capital Assistance Program (CAP). CAP was designed to further improve confidence in the banking system by helping ensure that the nation’s largest banking institutions had sufficient capital to cushion themselves against larger than expected future losses, as determined by the Supervisory Capital Assessment Program (SCAP)—or “stress test”— conducted by federal regulators.

Consumer & Business Lending Initiative (CBLI). CBLI was designed to support new securitizations in consumer and business credit markets, especially for auto, student, and small business loans; credit cards; and new and legacy securitizations of commercial mortgages to increase credit availability in these markets and now includes small business lending programs as well. A portion of the CBLI funds were used to support the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF). Under TALF, the Federal Reserve provided loans to private investors who pledged securitizations as collateral and Treasury provided a government backstop against certain losses.

Public Private Investment Program (PPIP). PPIP was designed to facilitate the purchase of “legacy assets” as part of Treasury’s efforts to facilitate price discovery in markets for these assets, repair balance sheets throughout the financial system, and increase the availability of credit to households and businesses. The legacy securities program, or “S-PPIP,” partnered Treasury and private sector equity funding leveraged by Treasury loans to purchase and hold legacy residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS). In the original plan, PPIP was to also include a partnership between Treasury and FDIC to purchase and hold legacy loans, through the legacy loans program, or “L-PPIP,” but it was never implemented as a joint venture using TARP funds.

Making Home Affordable Program (MHA). MHA was launched to offer assistance to homeowners through a loss-sharing arrangement with mortgage investors and an incentive-based system for borrowers and servicers in order to prevent avoidable foreclosures. Under MHA, Treasury developed the Home Affordable Modification Program (HAMP) as its cornerstone effort to meet EESA’s goal of protecting home values and preserving homeownership by helping at-risk homeowners avoid potential foreclosure, primarily by reducing their monthly mortgage payments.

Targeted Investment Program (TIP). The stated purpose of TIP was to foster market stability and thereby strengthen the economy by making case-by-case investments in institutions that Treasury deemed critical to the functioning of the financial system. TIP was designed to prevent a loss of confidence in financial institutions that could (1) result in significant market disruptions, (2) threaten the financial strength of similarly situated financial institutions, (3) impair broader financial markets, and (4) undermine the overall economy.

The AIG Investment Program. Formerly the Systemically Significant Failing Institutions program, the goal of the AIG Investment Program was to provide stability in financial markets and avoid disruptions to the markets from the failure of a systemically significant institution. Treasury has purchased preferred shares and warrants in AIG and provided a facility for additional investment as needed up to a limit.

Asset Guarantee Program (AGP). AGP provided government assurances for certain assets held by financial institutions that are viewed as critical to the functioning of the nation’s financial system. The goal of AGP was to encourage investors to keep funds in the institutions. According to Treasury, placing guarantees, or assurances, against distressed or illiquid assets was viewed as another way to help stabilize the financial system.

Automotive Industry Financing Program (AIFP). The goal of AIFP was to help stabilize the American automotive industry and avoid disruptions that would pose systemic risk to the nation’s economy. Under this program, Treasury has authorized TARP funds to help support automakers, automotive suppliers, consumers, and automobile finance companies. A sizeable amount of funding has been to support the restructuring of Chrysler Group LLC (Chrysler) and General Motors Company (GM).

Taken together, the concerted actions by Treasury and others have been credited by many market observers with averting a more severe financial crisis, although there are critics who believe that markets would have recovered without government support. Particular programs have been reported to have had the desired effects, especially if stabilizing the financial system and restoring confidence was considered to be the principal goal of the intervention. In our October 2009 and February 2010 reports we noted that some of the anticipated effects on credit markets and the economy had materialized while some securitization markets had experienced a tentative recovery. Yet, experience with past financial crises, coupled with analysis of the specifics of the current situation, has led the Congressional Budget Office to predict a modest recovery that will not be robust enough to appreciably improve weak labor markets through 2011. Full recovery will likely take some time given years of excesses, including imprudent use of leverage at financial institutions, overvalued asset prices, and major imbalances in the fiscal and household sectors. Negative shocks like the recent turmoil in international capital markets stemming from European sovereign debt issues have the potential to delay the recovery as well.

Because markets have stabilized, private markets have reopened, and economic growth has resumed, the federal government has begun to move into the exit phase of its financial stabilization initiatives. The winding down of government support is made more pressing by the need to exit market distorting interventions as quickly as possible and to begin shifting focus from the financial crisis to stabilizing the government debt-to-gross domestic product ratio. Crisis-driven interventions are designed to be temporary because they distort the normal functioning of markets and involve public capital when, under normal conditions, private capital is more desirable. Moreover, as we have pointed out in previous reports, the U.S. government faces an unsustainable long-term fiscal path. While these fiscal imbalances predate the financial crisis, the government’s response to the crisis has exacerbated an already challenging fiscal environment. As a result, even as some programs have ramped up to address specific issues, many others have either expired or are already winding down— including those utilizing TARP funds (see app. II). Many programs were designed to wind down naturally, force financial institutions to raise private capital, or become unattractive to participants once markets recovered.

Treasury’s authority under EESA to purchase, commit to purchase, or commit to guarantee troubled assets was set to expire on December 31, 2009, unless the Secretary submitted a written certification to Congress extending these authorities. In anticipation of the upcoming decisions on the future of TARP, the need to unwind the extraordinary federa l support across the board, and the fragile state of the economy we made recommendations to Treasury in our October 2009 report. Specifically, we suggested that any decision to extend TARP be made in coordination with relevant policymakers. We also suggested that Treasury make use of quantitative analysis wherever possible to support the rationale and communicate its determinations to Congress and the American peo noted that without a robust analytic framework, Treasury may be challenged in effectively carrying out the next stages of its programs. Treasury responded that in deciding whether to extend TARP auth beyond December 31, 2009, the Secretary would “coordinate with appropriate officials to ensure that the determination is considered in a broad market context that takes account of relevant objectives, cos measures” and would communicate the rationale for the decision.

Although Trea Undertook a Deliberative Process in Deciding to E TARP, It Could Strengthen Coordination

The Decision to Extend TARP Involved Terminating and Winding Down Some Programs and Making New Commitments in Select Areas

On December 9, 2009, the Secretary announced that he was extending Treasury’s authority under EESA to purchase, commit to purchase, or commit to guarantee troubled assets until October 3, 2010 (TARP expiration date). After the expiration date, no TARP funds can be committed, but there may be expenditures to fund commitments entered into prior to the expiration date. The extension of TARP permits Treasury to reallocate existing commitments and make additional funds available for some programs. As is shown in table 1, according to Treasury, new commitments through October 3, 2010, will be limited to MHA and small business lending programs through CBLI. The funds allocated to MHA have not been increased beyond the initial $50 billion Treasury estimated would be committed under the TARP-funded program. At time of the decision to extend, Treasury had committed $40 billion under existing MHA programs; however, according to Treasury, they had always contemplated additional MHA programs, such as programs to address negative equity. Treasury indicated that the extension of TARP gave them more time and flexibility to build out those programs as well as more time to decide how best to allocate the remaining $10 billion in order to prevent avoidable foreclosures. All other programs, including TIP, have closed or will close by June 30, 2010, and no additional funds will be committed under those programs. However, additional expenditures, which have already been apportioned and accounted for, could occur after the TARP termination date for TALF, PPIP, and the AIG Investment Program to fund commitments made prior to December 2009, and investments acquired through a variety of TARP actions remain under Treasury’s management. Nevertheless, the extension has formally moved TARP from a program with a heavy focus on capitalizing institutions and stabilizing securitization markets to one focused primarily on mitigating preventable foreclosures and improving financial conditions for small banks and small businesses.

Treasury estimates that new commitments under MHA and CBLI could increase the costs of TARP by $25 billion. Even with these additional costs, Treasury expects that TARP will ultimately cost taxpayers $105.4 billion, more than $200 billon less than initially estimated. The Secretary also notified Congress that Treasury expected to use no more than $550 billion of the approximately $700 billion authorized by EESA but reserved the authority to use the remaining funds to respond “to an immediate and substantial” threat to the economy “stemming from financial instability.” In the absence of such threats, Treasury indicated that those resources would be used to pay down the federal debt over time. In his letter to Congress communicating the decision, the Secretary also expressed a desire to expedite both the liquidation of the equity investments and the repayment of funds extended to TARP recipients. As of June 7, 2010, total TARP repayments were roughly $195 billion. Pending legislation, if enacted, would require the Secretary to use any amounts repaid by financial institutions for debt reduction.

The decision to extend TARP followed months of deliberation and internal discussions that began in August 2009. Treasury officials told us that while the decision to extend TARP could have been made earlier, it was not made until December to be certain that extension was necessary and so that the Secretary would be able to consider what conditions to place on the extension to balance the need to minimize the cost to taxpayers while ensuring that the program met its core objectives. According to Treasury officials, this decision was made at the highest levels within the agency. Discussions centered on how to phase out TARP and other government programs adopted in response to the financial crisis generally, as well as what limits to place on an extension, and what programs would not need to be continued beyond the original expiration date of December 31, 2009. Treasury officials indicated this discussion generally did not take place at the program level, but included a range of officials from various Treasury offices. Internal memos and briefing documents suggest considerable deliberation took place on the effectiveness of existing government actions as well as the likely effectiveness of potential policy options to address remaining threats to financial stability. Other programs operated by Treasury and other government agencies were important parts of these deliberations. According to Treasury, the modest pace of the economic recovery and concern about exiting TARP prematurely meant that the likelihood of not extending was low, but programs that were no longer needed were to be terminated. In addition, Treasury believed that while the decision could have been made at an earlier date, officials decided it was better to wait until closer to the certification deadline in order to have a more targeted response. Treasury also considered not extending TARP and instead making up front commitments to problem areas based on available information, but ultimately decided that the additional flexibility and better information that would come from the extension would be preferable.

Treasury Could Strengthen Its Interagency Coordination and Consultation

As part of a robust analytic framework for decision making, we recommended that the Secretary coordinate with the Federal Reserve and FDIC to help ensure that the decision to extend or terminate TARP was considered in a broader market context. Treasury officials said that it had external discussions and consultations in the months prior to the decision to help ensure that the decision-making process incorporated the actions of key financial regulators. Treasury officials also said that the Secretary had discussions with the Chairmen of the Federal Reserve and the FDIC regarding TARP and the status of crisis programs instituted at each respective agency.

Treasury officials noted that EESA required additional coordination with the Federal Reserve because it required the Secretary to consult with the Chairman of the Federal Reserve in order to purchase financial instruments other than those related to residential and commercial real estate. This consultation, which included communication among principals and staff of the two agencies, is represented in several letters by the Chairman to the Secretary reflecting the required consultations prior to the initiation of several TARP programs unrelated to residential and commercial real estate. In addition, Federal Reserve officials stated that the Chairman and Vice Chairman of the Federal Reserve were broadly supportive of the decision to extend TARP. The officials said that the Chairman was consulted by the Secretary on multiple occasions. The Federal Reserve noted that there was consistent coordination at the staff level regarding the TALF program, primarily due to the joint nature of the program. Another forum for coordination around the decision to extend TARP was FinSOB. FinSOB meeting minutes detailed discussions of the decision to extend TARP and the general economic situation. While there was discussion of the decision, FinSOB did not, nor was it required to, authorize or approve the Secretary’s action.

The Secretary also discussed the extension of TARP with the Chairman of FDIC. In particular, both agencies told us that they discussed the timing of FDIC’s exit from programs designed to support the banking system. According to Treasury officials, Treasury took into consideration the winding down of FDIC’s Temporary Liquidity Guarantee Program (TLGP), which was designed to support bank debt and transaction accounts, in deciding to extend TARP. At the time Treasury made the decision to extend TARP, TLGP was scheduled to end June 30, 2010. FDIC subsequently extended TLGP to December 31, 2010.

As Treasury shifts into the exit phase of TARP, it faces upcoming decisions that would benefit from continued collaboration and communication with other agencies including: decisions about allocating any additional funds to MHA and CBLI, decisions about scaling back various programs, and ongoing decisions related to the general exit strategy, including unwinding the equity investments held as a result of actions taken under TARP.

Similar to the need for a coordinated course of action to stabilize the financial system and re-establish investor confidence, the general exit from the government interventions will require coordination to develop a unified disengagement strategy. As mentioned previously, TARP is one of many programs and activities the federal government has put in place over the past year to respond to the financial crisis (see also app. II).

In general, the extent of coordination with the Federal Reserve was consistent with our recommendation and represented the type of collaboration necessary for the next stage of the government response to the crisis. However, the extent of Treasury’s coordination with FDIC, while sufficient for the decision to extend TARP, should be enhanced and formalized for any upcoming decisions that would benefit from interagency collaboration. FinSOB, which was established to help oversee TARP and other emergency authorities and facilities granted to the Secretary under EESA, is composed of the Secretary, the Chairman of the Board of Governors of the Federal Reserve, the Director of FHFA, the Chairman of the Securities Exchange Commission, and the Secretary of HUD. Therefore many of the regulators who led the federal response to the financial crisis are already part of a collaborative body. As a result, FinSOB has been a vehicle for formal consultations over TARP decisions among the agencies that are represented on FINSOB under EESA. By adding future program decisions to the agenda, including decisions on future TARP commitments, FinSOB can continue to serve a role in the next phase of the TARP program as well as in the consideration of exit strategies. Because FINSOB membership is set by statute, Treasury should seek to conduct similar consultations with other agencies that are not represented on FinSOB, such as the FDIC, or these agencies could be invited occasionally to discuss specific issues.

Treasury Considered a Number of Qualitative and Quantitative Factors for Key Decisions Associated with the TARP Extension

Treasury considered a number of qualitative and quantitative factors for key decisions associated with the TARP extension. Important factors considered for the extension of TARP centered on ongoing weaknesses in key areas of the economy. Treasury officials noted that housing market indicators, despite previously announced initiatives, and financial conditions for small businesses necessitated further commitments under MHA and small business lending programs. Treasury underscored that while analysis was possible on the need for or success of individual programs, the fragile state of the economy and remaining downside risks were an ongoing source of uncertainty. Considering this uncertainty, Treasury wanted to extend TARP through October 2010 in order to retain resources to respond to financial instability. On the other hand, Treasury noted that some programs had accomplished their goals and would be terminated. Treasury cited renewed ability of banks to access capital markets, improvements in securitization markets, and stabilization of certain legacy asset prices as motivating the closing of bank capital programs, TALF, and PPIP, respectively. Treasury could strengthen its analytical framework by identifying clear objectives for small business programs and explaining how relevant indicators motivated TARP program decisions.

Treasury officials identified four documents that were central to its efforts to describe and communicate to Congress and the public the framework it used to make decisions related to the extension of TARP, the expansion of some efforts, and the termination of others. Those four documents were (1) the September 2009 report “The Next Phase of Government Financial Stabilization and Rehabilitation Policies”; (2) the December 9, 2009, letter to Congressional leadership certifying the extension of TARP; (3) Secretary Geithner’s December 10, 2009, testimony to the Congressional Oversight Panel; and (4) the “Management Discussion and Analysis” portion of the fiscal year 2009 Office of Financial Stability Agency Financial Report. Based on our analysis of these documents and interviews with Treasury officials, table 2 summarizes the key factors that contributed to Treasury’s program-level decisions associated with the extension of TARP. In addition, we note a number of quantitative indicators identified by Treasury that to some extent measure the key factors that influenced the decisions. We elaborate on the nature of these decisions and the indicators below. AGP, TIP, AIFP, and the AIG Investment Program amounted to exceptional assistance to key institutions on a case-by-case basis, and therefore, the expectation was that these targeted programs would be exited as soon as practical and would not be considered for additional commitments.

Key Factors Considered Were Ongoing Weaknesses in Key Areas of the Economy

Housing. Rather than allow the program to expire with $10 billion of the original $50 billion allocated to MHA remaining uncommitted, Treasury extended the program so that those funds could be used to address continued weaknesses in housing markets and roll out several additional programs that Treasury had not yet had the opportunity to design and implement. Treasury officials noted that various metrics they were monitoring indicated that the recovery had not successfully reached particular areas of the economy (see table 3). Specifically, housing market indicators, such as foreclosures and mortgage delinquencies, remained elevated around the time the decision to extend TARP was made, despite initiatives—like MHA—that were designed to preserve homeownership by directly modifying mortgages for qualified homeowners. The percentage of loans in foreclosure (foreclosure inventory) reached 4.58 percent at the end of the fourth quarter of 2009 and continued to increase to an unprecedented high of 4.63 percent in the first quarter of 2010 (see fig. 1). Over the same period the serious delinquency rate—defined as the percentage of mortgages 90 days or more past due plus those in foreclosure—fell only slightly from 9.67 to 9.54 percent. Although not shown, the serious delinquency rate for subprime loans exceeded 30 percent in the most recent two quarters, indicating the large proportion of subprime loans in trouble. Foreclosure starts, which reflect new foreclosures filings, peaked at 1.42 percent in the third quarter of 2009 before declining over the next two periods to roughly 1.2 percent. By any measure however, foreclosure and delinquency statistics for housing remain well above their historical averages. Moreover, although not explicitly mentioned by Treasury, a comparison of trends in delinquent mortgages and new foreclosure starts indicate that more foreclosures are looming. While the foreclosure start rate grew 36 percent from the last quarter of 2007 to the last quarter of 2009, the rate for delinquencies of 90 days or more grew by 222 percent over the same period (see fig. 1). This suggests mortgages are not rolling from delinquency to foreclosure as expected and that lenders are not initiating foreclosures on many loans normally subject to such actions. To the extent that foreclosure mitigation programs are ineffective, or a large number of the trial modifications represent unavoidable foreclosures, the resulting foreclosures will continue to weigh on the housing market.

Treasury also noted that extending TARP provides the flexibility to modify MHA to respond to the changing dynamics of the foreclosure crisis. Treasury noted early in the crisis that many foreclosures were the result of subprime, predatory, and fraudulent lending activity; however, as the financial crisis progressed, Treasury has modified and expanded its efforts because unemployment and negative equity have become the primary drivers of foreclosures, calling for a different approach to homeownership preservation. Treasury has modified MHA to deal with these issues by allowing more borrowers to qualify for modification—including borrowers with Federal Housing Administration (FHA) loans, who are currently in bankruptcy proceedings or who owe more than the current value of their home. Moreover, Treasury also plans to increase the incentives provided to servicers for writing down mortgage debt, and has included incentives for writing down second liens. Treasury is also implementing programs in addition to existing MHA programs that will address these issues, such as the HFA Hardest-Hit fund and a refinance program with FHA, and expects to use the full $50 billion for all these combined efforts. Treasury officials acknowledged that the consequences of interventions may prevent the housing market from fully correcting and may also increase moral hazard by writing down mortgages for borrowers with negative equity. However, Treasury officials and others have identified reducing the number of unnecessary foreclosures as critical to the economic recovery. Because not all homeowners are expected to qualify for a HAMP modification or other mortgage relief programs under MHA, enhancements to the program are to include relocation assistance to some borrowers that use foreclosure alternatives such as a short sale or a deed-in-lieu of foreclosure.

In addition to continued weakness in the housing markets and the need for flexibility, Treasury noted that when the decision to extend the program was made, HAMP had only recently been implemented and needed time to ramp up to its full potential and build out all program components. In our July 2009 report and March 2010 testimony on HAMP, we noted that the program faced implementation challenges and that Treasury’s projection that three to four million borrowers could be helped by offering loan modifications was based on several uncertain assumptions and might be overly optimistic. Treasury cited the slow pace of conversions of homeowners from trial modifications to permanent modifications as an important reason to extend its ability to have funds available for commitments related to foreclosure mitigation and housing market stabilization. Total trials versus permanent modifications continued to track the initial slow pace (see fig. 2). In October 2009, permanent modifications started totaled an estimated 2 percent of the total cumulative government-sponsored enterprise (GSE) and non-GSE HAMP trials started, before increasing to just 4 percent and 7 percent for November and December 2009, respectively. Treasury believed that the extension would allow the program the necessary time to reach its full potential by providing more time to complete the significant backlog of modifications, as well as giving the servicers the opportunity to build up their capacity, and finally allowing the public and investors time to better understand the requirements and opportunity presented by the HAMP process. The latest trial-to-permanent modification conversion rate has now reached an estimated 28 percent of total cumulative HAMP trials (see fig. 2). It should be noted that there is a 3-month wait time during the trial period. Therefore, contemporaneous comparison of trial versus permanent modifications is not the most meaningful, since trials entered into within the last 3 months are not eligible for conversion into payments.

Our June 2010 report on Treasury’s implementation of HAMP is an update of our prior July 2009 report and March 2010 testimony findings. Specifically, it addressed (1) the extent to which HAMP servicers have treated borrowers consistently and (2) the actions that Treasury has taken to address certain challenges, including the conversion of trial modifications, negative equity, redefaults, and program stability. While one of Treasury’s stated goals for HAMP was to standardize the loan modification process across the servicing industry, we found inconsistencies in how servicers were treating borrowers under HAMP that could lead to inequitable treatment. Specifically, the servicers we contacted varied in the timing of HAMP outreach to delinquent borrowers, the criteria used to determine if borrowers were in imminent danger of default, and the tracking of borrower complaints about servicer’s implementation of HAMP. Additionally we found that while Treasury had taken some steps to address the challenges we had previously reported on, it urgently needed to finalize and implement remaining program components and ensure the transparency and accountability of these efforts. In particular, we reported that Treasury had been slow to implement previously announced programs it identified as needed to address the housing problems hindering the current economic recovery, including its second-lien modification and foreclosure alternatives programs. We noted that Treasury recently announced additional HAMP components to help deal with the high number of foreclosures such as programs to help borrowers with high levels of negative equity and unemployed borrowers, which needed to be prudently designed and implemented as expeditiously as possible. Going forward, as Treasury continues to design and implement new HAMP-funded programs, we reported that it will be important that Treasury develop sufficient capacity—including staffing resources—to plan and implement programs, establish meaningful performance measures, and make appropriate risk assessments.

Treasury indicated that it plans to track performance measures of the number of HAMP modifications (trial and permanent) entered into, the redefault rate, and the change in average borrower payments to evaluate the program going forward. However, foreclosure and delinquency data used to motivate the decision to allocate the full budgeted resources to MHA and other housing programs, although also influenced by general market forces such as falling housing prices and unemployment, should provide an indication of the effectiveness of these efforts.

Small business lending. Treasury decided to allocate new resources to small business lending based on the contraction in bank lending and other indicators of small business credit conditions. However, Treasury has yet to set explicit objectives for its small business lending programs. Treasury wants to support lending to creditworthy small businesses by providing capital to small banks. A drop in the volume of lending could be explained by a combination of reduced demand for loans, higher credit standards, or banks’ lack of capital to make new loans. Demand for business loans, including small business loans, has dropped considerably since 2008, and credit standards have risen, according to Federal Reserve data. At the time of the extension, Treasury set aside $30 billion for programs to support small business lending. Since that time, Treasury has decided to try to create a Small Business Lending Fund through legislation outside of TARP, due to concerns that many banks would not participate in a TARP program. In addition, Treasury expects to make up to $1 billion in new capital investments in community development financial institutions (CDFI) and purchase up to $1 billion in Small Business Administration loan securitizations, to improve access to credit for small businesses. Relative to larger corporations, small businesses generally have difficulty directly accessing capital markets as an alternative source of financing and are therefore largely reliant on bank lending. While Treasury has stated that bank lending has contracted, Treasury refers to data on outstanding bank loans (loan balances) of all sizes that reflect a number of economic conditions that may not be related to new lending and may not capture potentially divergent conditions for large and small firms. We found in previous work that changes in loan balances may not be a good proxy for new lending. In particular, while outstanding commercial and industrial loans and commercial real estate loans have fallen, losses on a loan portfolio and loan repayments may help explain this drop.

For firms of all sizes, lack of comprehensive data on new lending makes assessing business credit conditions particularly difficult. For example, interest rates, on their own, may not be a good indicator of the availability of credit. Specifically, financial institutions may ration credit based on the quality of the borrower, rather than continuing to lend, but charging a wider distribution of interest rates to customers of varying credit quality. As a result, the volume of new lending (loan originations) would be a valuable indicator of credit availability; however, only limited data on loan originations exist. For example, origination data exist only for certain kinds of loans (e.g., mortgages) or only for a small subset of banks (e.g., the largest CPP participants). Moreover, there are no consistent historical data on lending to small businesses. Treasury officials and others have acknowledged the limitations of data in this area, which Treasury officials have noted, making determining when enough has been done difficult.

While the availability of small business credit is difficult to quantify definitively, Treasury officials noted that a number of indicators of small business lending point to reduced access to credit. Officials identified the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) and the National Federation of Independent Business (NFIB) survey, among other sources. Taken together, these indicators, although imperfect, generally point to a tight credit environment for small firms. SLOOS surveys loan officers on, among other things, lending standards for commercial and industrial loans, and features responses by borrower size (small versus large and medium). The survey responses show significant tightening of lending standards for firms of all sizes, although conditions have tightened more in the last year for small firms than for larger firms. The NFIB Small Business Economic Trends survey contains a number of questions on access to credit. Respondents are NFIB members, with nearly half of all respondents from firms with five or fewer employees. A question on borrowing needs (“During the last three months, was your firm able to satisfy its borrowing needs?”) may be indicative of changes in access to credit for firms of this size. We compared responses to this question to interest rate spreads for loans of less than $1 million (a proxy for loans to small businesses) from the Federal Reserve’s Survey of Terms of Business Lending. These spreads are premiums over the federal funds rate and indicate the risk banks perceive in making small loans. We found that the percentage of respondents reporting that their borrowing needs had not been satisfied showed the same broad pattern as spreads for loans of less than $1 million (see figure 3). In particular, both show a spike in recent years, with increases in risk premiums for small loans and the proportion of small businesses reporting that their borrowing needs had not been met.

Another Important Factor Was the Ability to Respond to Financial Instability

Because the economy was still fragile and downside risks remained, Treasury identified the need to retain resources to respond to threats to financial stability as an important consideration in deciding to extend TARP. According to Treasury officials, if the economic recovery were in jeopardy, the TARP extension gave Treasury the capability to react should financial markets need further assistance. Treasury noted several continued areas of weakness that supported the need to retain resources, without making them available for commitment under specific programs. Areas of weakness included the elevated pace of bank failures, high unemployment, and commercial real estate losses. Although banks in the United States had made progress in raising capital and recognizing losses on legacy assets and loans, substantial asset deterioration is expected across some loan classes, such as commercial real estate and consumer and corporate loans. Because banks will likely continue to take steps to reduce leverage, credit conditions are expected to remain tight while high unemployment continues to weigh on residential real estate markets and consumer spending. As indicated above, uncommitted funds up to the total amount authorized by EESA could be used to respond to financial instability or growing weakness that would threaten the recovery. As of June 7, 2010, this amount is roughly $163 billion and remains available for commitment, assuming repayments are not deployed in other efforts.

Treasury noted that, among other reasons, it extended TARP to maintain the capacity to respond to unforeseen threats or unanticipated shocks. Federal Reserve officials similarly noted that unanticipated events, not foreshadowed by market data, have been the hallmark of the crisis. The failure, or near failure, of a systemically important financial institution would be a critical threat to financial stability. Treasury, FDIC and the Federal Reserve responded to the failure, or near failure, of large financial institutions during the crisis with programs to provide assistance, such as guarantees and capital, to keep institutions solvent, including AGP for Citigroup and AIG Financial Assistance. According to Federal Reserve officials, one of the reasons they supported the extension of TARP was the inadequacy of available statutory tools to deal with threats to financial stability, such as the failure of a large financial institution. One proposed tool is an authority for the orderly resolution of large, nonbank financial institutions. In previous work, we have noted that some interventions to support failing institutions can undermine market discipline and increase moral hazard. For example, in the presence of a government back-stop, firms anticipate government assistance in the future and thus have less incentive to properly manage risk. Regulatory reforms that enhance oversight and capital requirements at large financial institutions—in essence making it more costly to be a large financial institution—would help to counter some erosion of market discipline. Similarly, an effective resolution authority could impose losses on managers, shareholders, and some creditors, but must also properly balance the need to encourage market discipline with the need to maintain financial stability. Treasury officials noted the importance of having financial regulatory reform in place before TARP expires in October 2010.

According to Treasury, Programs That Had Accomplished Their Goals Were Terminated

Bank capital programs. Treasury has ended broad programs, such as CPP and CAP, established to improve the solvency of financial institutions to support their ability to lend, based on banks’ renewed ability to access private capital markets and issue new equity. Treasury has stated that by building capital, CPP was expected to increase lending to U.S. businesses and consumers. Treasury has disbursed more than $200 billion for the CPP, and has received $142 billion in repayments as of May 28, 2010. CAP was designed to help ensure that certain large financial institutions had sufficient capital to withstand severe economic challenges. It was supported by SCAP which assessed capital needs at the 19 largest bank holding companies in the United States. Banks that needed additional capital as a result of SCAP raised $80 billion from private sources, while GMAC received additional capital from Treasury under AIFP. No CAP investments were made as a result and the program closed on November 9, 2009. Treasury has indicated that the renewed ability of banks to raise capital on private markets was a key measure of success for CPP and CAP and a key consideration in ending these programs. From 2000 to 2007, banks largely did not need to raise capital by issuing common equity, averaging only $1.3 billion per quarter. Banks and thrifts raised significant amounts of common equity in 2008, averaging $56 billion per quarter, before issuance dropped precipitously in the first quarter of 2009 to $200 million—a 99 percent drop from the previous quarter and a 63 percent drop from the year before. Banks and thrifts raised $63 billion in common equity in the second quarter of 2009, an increase of 28,000 percent from the previous quarter and 236 percent over the year before (see fig. 4).

Banks’ renewed ability to raise capital on private markets reflects improvements in perceptions of the financial condition of banks. The 3- month TED spread—the premium of the London interbank offered rate (LIBOR) over the Treasury interest rate of comparable maturity—indicates the perceived risk of lending among banks. The TED spread peaked at more than 450 basis points in October 2008 before falling to less than 15 basis points at the end of the third quarter of 2009 (see fig. 5). In previous work, we found that the decline in perceptions of risk in the interbank market could be attributed in part to several federal programs aimed at stabilizing markets that were announced on October 14, 2008, including CPP. Nevertheless, the associated improvement in the TED spread cannot be attributed solely to TARP because the announcement of CPP was a joint announcement that also introduced the Federal Reserve’s Commercial Paper Funding Facility program and FDIC’s TLGP. Financial stress re-emerged in the interbank market in May 2010, highlighting the fragile nature of the recovery in the financial system. The TED spread has increased moderately from a low of less than 10 basis points in March 2010 to more than 40 basis points as of mid-June 2010, as concerns about sovereign debt in the European Union has increased. U.S. banks’ exposure to credit risk in Europe and the sensitivity to the global economy has heightened risk premiums among banks lending to each other. While fluctuations in perceived risk in the banking system are natural, and necessary, if risk is to be priced and allocated efficiently, this re-emergence of risk offers some support for Treasury’s decision to retain resources to combat financial instability, especially in light of the limitations of the current financial regulatory system.

The impact of CPP on lending is difficult to determine because data on loan originations are limited, and how much lending would have occurred in the absence of CPP is not known. We have noted in previous reports that some tension exists between the goals of improving banks’ capital positions and promoting lending—that is, the more capital banks use for lending, the less their overall capital positions will improve. Treasury collects data monthly on new lending from the largest participants in CPP, which included for a time as many as 22 institutions. As a result, more is known about recent loan originations by large banks than small banks. Ten institutions that repaid CPP in June 2009 stopped submitting data after November 2009. New lending by the largest CPP recipients was $244 billion in November 2009, up 2 percent from the prior month and 17 percent from the year before. However, lending in the third quarter of 2009 quarter of 2009 was down 12 percent from the second quarter (see fig. 6). was down 12 percent from the second quarter (see fig. 6).

Support to securitization markets through TALF. With underwriters finding increasing success in bringing issuances to the ABS market and decreasing their utilization of TALF, Federal Reserve and Treasury decided not to extend TALF further. TALF expired on March 31, 2010, for loans backed by ABS and legacy CMBS, and is scheduled to terminate at the end of June 2010 for loans backed by newly-issued CMBS. The program was designed to increase liquidity and reopen the asset-backed securitization markets in an effort to improve access to credit for consumers and small businesses after the decrease in issuances and the refusal of market participants to purchase potential offerings at rates that were acceptable to issuers. TALF-assisted issuances began in March 2009 after an initial announcement in late 2008. Officials from the Federal Reserve and Treasury highlighted that TALF was designed to attract investors when market conditions were stressful, but lose its appeal as conditions improved and spreads tightened to the point that the rate on ABS bonds were lower than the cost of borrowing from the program.

Federal Reserve and Treasury officials have also cited declining asset spreads in the ABS market as justification for not making new commitments under TALF (see fig. 7). While not at precrisis levels, spreads have tightened significantly from their heights at the beginning of 2009. Considering the excesses during the recent credit expansion, the desirability of a return to precrisis levels in many areas of the securitization markets is debatable. However, for most TALF-eligible assets, spreads have tightened significantly. For instance, average auto ABS spreads peaked at more than 400 basis points over the benchmark in late 2009, but have since returned to less than 100 basis points over the benchmark in early 2010. Private student loans ABS, however, have maintained spreads above precrisis levels. According to Federal Reserve officials this is partly due to the performance of the underlying student loans and because some of the securities were not structured well. Nevertheless, the contraction in spreads for most TALF-eligible ABS can be seen as normalization of the securitization markets as participants view new and existing issuances as less risky. Some of the decline in spreads and the perceptions of risk in recent securitizations may be attributable to the products themselves. Since the crisis, new securitizations have generally been structured with more credit protections through enhancements such as greater levels of subordination and overcollateralization.

The Federal Reserve structured TALF to reduce the rate of utilization of the facility as the market returned to normalcy through relatively high pricing of TALF loans. As we noted in a previous GAO report, during 2009, returns generally decreased for select classes of TALF-eligible collateral between the first TALF operation in March 2009 and the latter part of the year, with limited exceptions. The report notes that as these returns generally became increasingly negative through the year, participants would have essentially locked in losses with certain issuances. To avoid this, many participants instead chose to forego TALF financing for these issuances and instead finance their own investments.

ABS markets began to show signs of health as 2009 quarterly issuances were above their lows in 2008 and utilization of TALF began decreasing in mid-2009. ABS issuances experienced a significant decline in 2008, but stabilized in 2009 (see fig. 8). TALF issuance dollar volume peaked in the third quarter of 2009, but by the fourth quarter TALF volume decreased significantly and at a faster rate than the total decrease in ABS volume. Further, there has been one CMBS new issuance that utilized TALF financing although the commercial real estate market continues to experience stresses and there has been little activity in the sector as a whole. Partly as a result of the continuing difficulties in this market, TALF loans backed by newly issued CMBS will be allowed through June 2010 even though the rest of the program closed at the end of March.

Addressing “troubled” (legacy) securities through PPIP. Initially announced at up to $100 billion, Treasury reduced the amount available for commitment under PPIP based on improvements in the prices for certain legacy assets. Announced in March 2009, Treasury offered equity and debt financing to nine private fund managers, however, no further commitments to new funds are planned. The Legacy Securities Public- Private Investment Program (S-PPIP) is a program whereby Treasury and private sector fund managers and investors partnered to purchase eligible securities from banks, insurance companies, mutual funds, pension funds, and other sellers defined as eligible under EESA. Treasury indicated that this process was designed to allow financial institutions to repair their balance sheets by removing troubled assets and allow for renewed lending to households. Treasury participates by providing matching equity financing and debt financing up to 100 percent of the total equity of the fund. A related program, L-PPIP, was also announced at the same time by Treasury and FDIC but never operated as a TARP program. This program, however, suspended its planned sale of legacy assets held by banks in order to focus its use in the sale of receivership assets in bank failures. Treasury did not include PPIP in its plans for new commitments in 2010, but has tracked the performance of each individual fund since inception.

Treasury stated that a recovery in asset prices in the RMBS and CMBS markets was one indicator that PPIP was effective and achieved its stated purpose. The return of market confidence can be seen in the general recovery or stabilization of asset prices. PPIP and the TARP programs to support bank capital were both intended to improve bank balance sheets. As we noted previously, banks have already been able to raise large amounts of private capital and perceptions of risk in the banking system have declined markedly since the onset of the crisis. PPIP and various other programs and initiatives may have to some extent addressed concerns about bank balance sheets. An indication of the reduction in perceptions of risk is the general recovery in prices of legacy securities is the pricing of Jumbo and Alt-A RMBS securities (see fig. 9).

Highly-rated CMBS prices also confirm that parts of the ABS and MBS markets have stabilized since PPIP was announced. Specifically, highly- rated CMBS prices have rebounded from their lows in late-2008, and we note that average spreads have also tightened in the same time period (see fig. 10). This, however, does not reflect the continuing troubles in the broader commercial real estate market as delinquencies have continued to increase.

Treasury Can Strengthen Its Analytical Framework to Improve Its Usefulness for Future Decisions

Treasury could strengthen its analytical framework by identifying clear objectives for small business programs and explaining how relevant indicators motivated TARP program decisions. As noted above, Treasury identified four public documents that represented its rationale and decision-making process for the decision to extend TARP. Our understanding of Treasury’s decision-making process was also informed by reading FinSOB quarterly reports and through our interviews with Treasury and other officials. Treasury often directly or indirectly linked program decisions to a variety of quantitative indicators, including surveys, financial market prices and quantities, and measures of program utilization, among others. As discussed previously, all of these factors played an important role in the decision to extend TARP, expand some programs, and end others. As noted in our October 2009 report, indicators are an important step toward providing a credible foundation for TARP decision making. However, how the performance of an indicator affected a program decision, or if and when that indicator would signal a program had or had not met its goals was not always clear. Balancing the costs and benefits of TARP programs effectively will require making objectives explicit, assessing the impact of any commitments under TARP programs, and accounting for the fiscal and other costs of continuing to support markets. Again, a set of indicators, although imperfect, might inform the proper timing for winding down the remaining programs and liquidating of investments.

Treasury has yet to identify clear program objectives for small business lending, which raises questions about when Treasury will know that government assistance can be removed. Without a strong analytic framework that includes clear objectives and meaningful measures, Treasury will be challenged in determining whether the program is achieving its desired goals. Given the scale of TARP and importance of the government’s entry and exit from financial market interventions, decisions to allocate remaining resources should be subject to rigorous analysis. Because Treasury may decide to commit additional resources to problem areas before the expiration of TARP, or scale back commitments in others, it needs to be able to estimate the effect of program resources on meeting its objectives. Wherever possible Treasury should use quantitative factors in its decision making, but we recognize that qualitative factors are also important. While HAMP continues to face implementation challenges, the small business initiatives are challenged by a lack of data needed to clarify the root of the problem which may limit Treasury’s ability to effectively address it. For example, without data and analysis to determine the extent to which access to small business credit is being restricted by limited capital at institutions engaged in small business lending, Treasury will not have a sufficient basis to address the underlying issues that may be affecting small business lending. With a better understanding of the problem, Treasury can set clear, achievable goals to address it.

Conclusions

The crisis and consequent interventions temporarily changed the U.S. financial system from one primarily reliant on markets and market discipline to one more reliant on government assistance and public capital. With the recovery underway, financial regulators in the United States have begun to shift focus from stabilizing the economy to exiting from crisis- driven interventions and transferring risk back into the hands of the private sector. Many TARP recipients have repaid loans and repurchased shares and warrants. A recent Federal Open Market Committee meeting focused on how the Federal Reserve should sell off assets acquired during the financial crisis. However, weaknesses in residential housing, commercial real estate, and labor markets, as well as risk from more global economic forces, limit the ability to withdraw rapidly and completely. For example, the Federal Reserve dollar liquidity swap lines were re-established with some central banks in response to the re- emergence of strains in short-term U.S. dollar funding markets as a result of European debt and currency issues.

While the Secretary, in consultation with the Federal Reserve and FDIC, elected to extend TARP to address perceived weaknesses in the economy and respond to unanticipated shocks, Treasury still faces remaining decisions about allocating any additional funds to MHA and CBLI before its ability to take actions authorized by EESA expires on October 3, 2010. Moreover, ongoing decisions will need to be made related to the general exit strategy, including unwinding the equity investments and scaling back commitments in an environment where (1) other regulators are unwinding their programs, (2) the economy is still coping with the legacy of the crisis, (3) market distortion and moral hazard concerns are pressing, and (4) the long-term fiscal challenges facing the United States have become more urgent. While the level of consultation with the Federal Reserve was generally robust, broad coordination could be enhanced and formalized for future judgments. Similarly, decisions to allocate remaining resources and the timing of exits should be subject to rigorous analysis. By strengthening its framework for decision making, Treasury can better ensure that competing priorities are properly weighed and the next phase of the program is effectively executed.

Although the economy is still fragile, a key priority will be to develop, coordinate, and communicate exit strategies to unwind the remaining programs and investments resulting from the extraordinary crisis-driven interventions. Because TARP will be unwinding concurrently with other important interventions by federal regulators, decisions about the sequencing of the exits from various federal programs will require bringing a larger body of regulators to the table to plan and sequence the continued unwinding of federal support. Similar to the need for a coordinated course of action to stabilize the financial system and re-establish investor confidence, the general exit from the government interventions will require careful coordination to avoid upsetting the recovery and help ensure the proper sequencing of the exits. Beyond the immediate costs of financial crises, these episodes can have longer term consequences for fiscal balances and government debt especially if the policy responses exacerbate the situation, lack coherency and effectiveness, or the exit strategy undermines the recovery because it occurs too soon or not soon enough. Moreover, as we discussed earlier in this report, the financial crisis and response has contributed to an already challenging fiscal legacy. As a result, the administration and Congress will need to apply the same level of intensity to the nation’s long-term fiscal challenge as they have to the recent economic and financial market issues. Coherent and effectively carried out exit strategies are the first step in beginning to address these challenges.

Recommendations for Executive Actions

We are making two recommendations to the Secretary of the Treasury: 1. To effectively conduct a coordinated exit from TARP and other government financial assistance, we recommend that the Secretary of Treasury formalize and document coordination with the Chairman of the FDIC for decisions associated with the expiration of TARP (1) by including the Chairman at relevant FinSOB meetings, (2) through formal bilateral meetings, or (3) by utilizing other forums that accommodate more structured dialogue. 2. To improve the transparency and analytical basis for program decisions made before TARP’s expiration, we recommend that the Secretary of the Treasury publicly identify clear program objectives, the expected impact of programs, and the level of additional resources needed to meet those objectives. In particular, Treasury should set quantitative program objectives for its small business lending programs and identify any additional data needed to make program decisions.

Agency Comments and Our Evaluation

We provided a draft of this report to Treasury for its review and comment. We also provided the draft report to the Federal Reserve and FDIC for their review. Treasury provided written comments that we have reprinted in appendix III. Treasury, the Federal Reserve, and the FDIC also provided technical comments that have been incorporated as appropriate.

In its comments, Treasury generally agreed with our recommendations and noted that it would continue to consult extensively with the Federal Reserve and FDIC. Treasury agreed that publicly identifying clear program objectives was important and pledged to continue its efforts to do so.

In commenting, the Federal Reserve questioned the use of FinSOB as a coordination mechanism for the next phase of the TARP program. We have amended our recommendation to clarify that we are not advocating an expansion of FinSOB membership or to otherwise change its structure or purpose. We continue to believe FinSOB is a potential forum for more formal interaction between agencies by including nonmembers at relevant meetings, not by expanding membership. Moreover, leveraging FinSOB is just one option for formalizing and documenting coordination between Treasury and FDIC. Bilateral meetings or using other forums that accommodate structured dialogue would be consistent with our recommendation.

We are sending copies of this report to the Congressional Oversight Panel, Financial Stability Oversight Board, Special Inspector General for TARP, interested congressional committees and members, Treasury, the federal banking regulators, and others. In addition, the report will be 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 Williams Brown 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.

Appendix I: Scope and Methodology

The objectives of this report are to determine (1) the process the Department of the Treasury (Treasury) used to decide to extend the Troubled Asset Relief Program (TARP) and the extent of coordination with relevant agencies and (2) the analytical framework and quantitative indicators Treasury used to decide to extend TARP.

To determine the process Treasury used to decide to extend TARP and the extent of coordination with relevant agencies, we interviewed officials from Treasury and the Board of Governors of the Federal Reserve System (Federal Reserve), and received official responses to our questions from the Federal Deposit Insurance Corporation (FDIC). In addition, we reviewed Treasury documents and analyses, Financial Stability Oversight Board (FinSOB) reports, and previous GAO reports. In particular, we reviewed four public documents Treasury identified as central to its efforts to describe and communicate the framework it used to make decisions related to the extension of TARP to Congress and the public (1) the September 2009 report “The Next Phase of Government Financial Stabilization and Rehabilitation Policies”; (2) the December 9, 2009, letter to Congressional leadership certifying the extension of TARP; (3) Secretary Geithner’s December 10 testimony to the Congressional Oversight Panel; and (4) the “Management Discussion and Analysis” portion of the fiscal year 2009 Office Financial Stability Agency Financial Report.

To determine the analytical framework and quantitative indicators Treasury used to decide to extend TARP, we similarly interviewed Treasury and the Federal Reserve and received official responses to our questions from FDIC. We also reviewed Treasury documents and analyses, FinSOB reports, and previous GAO reports. Based on the four key documents that Treasury identified and interviews with Treasury officials, we determined the key factors that motivated Treasury’s program-specific decisions associated with the extension of TARP and quantitative indicators that to some extent captured those factors. We furthermore analyzed data from Thomson Reuters, Treasury, the Federal Reserve, the National Federation of Independent Businesses, SNL Financial, and a broker-dealer to assess the state of the economy and financial markets. These data may also be suggestive of the performance and effectiveness of TARP. We believe that these data, considered as a whole, are sufficiently reliable for the purpose of summarizing TARP activity and Treasury’s decision-making process, and presenting and analyzing trends in the economy and financial markets. We identified some limitations of the data on credit conditions for small businesses, including the fact that the National Federation of Independent Business survey over- represents certain industries, and therefore may not represent the credit experiences of all small firms. Moreover, there are no consistent historical data on lending to small businesses. In addition, the data from Treasury’s survey of lending by the largest Capital Purchase Program (CPP) recipients (as of November 30, 2009, the last month in which all of the largest CPP recipients participated) are based on internal reporting from participating institutions, and the definitions of loan categories may vary across banks. Because these data are unique, we are not able to benchmark the origination levels against historical lending or seasonal patterns at the institutions.

We conducted our audit from March 2010 through June 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Selected Interventions by Federal Financial Regulators in the United States

The financial crisis prompted an extraordinary response from financial regulators in the United States. As table 3 shows, the crisis-driven interventions—both within and outside of TARP—can be roughly categorized into programs that: 1) provided capital directly to financial institutions, 2) enhanced financial institution’s access to liquid assets through collateralized lending or other credit facilities to 3) purchased nonperforming or illiquid assets, 4) guaranteed liabilities, 5) intervened in specific financial markets, and 6) mitigated home foreclosures. Some programs involved exceptional assistance to particular institutions, such as American International Group (AIG), because of its systemic importance or supported particular markets while others involved assistance to individuals through refinance or loan modification programs. Table 3 does not include interventions or programs that existed prior to the financial crisis, such as the Federal Reserve’s loan program through the discount window, FDIC receivership of failed banks, or interventions that did not expose the intervening bodies to risks or involve federal outlays such as the Securities and Exchange Commission’s temporary ban on short selling in financial stocks.

Appendix III: Comments from the Department of the Treasury

Appendix VI: Contacts and Staff Acknowledgments

Contacts

Staff Acknowledgments

In addition to the contacts named above, Lawrance Evans Jr. (lead Assistant Director), Benjamin Bolitzer, Timothy Carr, Emily Chalmers, William Chatlos, Rachel DeMarcus, Michael Hoffman, Steven Koons, Matthew Keeler, Robert Lee, Matt McDonald, Sarah McGrath, Harry Medina, Marc Molino, Joseph O’Neill, Jose Oyola, Rhiannon Patterson, Omyra Ramsingh, Matt Scire, Karen Tremba, and Winnie Tsen have made significant contributions to this report.