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