The federal government intervention and involvement in the financial markets was created through a number of existing and recently enacted laws. This legal framework provided the financial resources for assistance, the federal government’s authorities, and the restrictions companies were required to comply with in exchange for the financial assistance. In assisting the public to understand its involvement in the companies, in May 2009 the administration published a set of core principles that are to guide the government’s management of ownership interests in private firms. Most of the institutions that the government had or has an ownership interest in are regulated by one of several financial regulators, which have a role in overseeing the financial condition and operations of its regulated entities. The federal government’s efforts in late 2008 to stabilize the financial markets are not its first intervention in private markets during economic downturns. The government has previously undertaken large-scale financial assistance efforts, including to private companies. For example, in the 1970s and early 1980s Congress created separate financial assistance programs totaling more than $12 billion to stabilize Conrail, Lockheed- Martin, and Chrysler, with most of the funds being distributed in the form of loans or loan guarantees. Most recently, in response to the most severe financial crisis since the Great Depression, Congress provided Treasury additional authority to stabilize the financial system. In particular: In July 2008, Congress passed the Housing and Economic Recovery Act of 2008 (HERA), which established FHFA—the agency responsible for the monitoring of safety and soundness and the housing missions of the Enterprises and the other housing government-sponsored enterprises, namely, the Federal Home Loan Banks—and among other things, provided for expanded authority to place the Enterprises in conservatorship or receivership and provides Treasury with certain authorities to provide financial support to the Enterprises. In accordance with HERA, on September 6, 2008, FHFA placed the Enterprises into conservatorship because of concern that their deteriorating financial condition ($5.4 trillion in outstanding obligations) would destabilize the financial system. The goals of the conservatorships are to preserve and conserve the assets and property of the Enterprises and enhance their ability to fulfill their missions. FHFA has the authority to manage the Enterprises and maintains the powers of the board of directors, officers, and shareholders. Treasury agreed to provide substantial financial support so that Enterprises could continue as going concerns to support mortgage financing, subsequently, the Federal Reserve Board committed to a variety of activities, including purchasing substantial amounts of their debt and securities to support housing finance, housing markets, and the financial markets more generally. In October 2008, Congress passed EESA, which authorized the creation of TARP to, among other things, buy up to $700 billion in troubled assets, such as mortgage-backed securities and any other financial instrument that the Secretary of the Treasury, in consultation with the Chairman of the Federal Reserve Board, determined that it needed to purchase to help stabilize the financial system. EESA created OFS within Treasury to administer TARP, which comprises a number of programs that were designed to address various aspects of the unfolding financial crisis. Early in the program, Treasury determined that providing capital infusions would be the fastest and most effective way to address the crisis. In return for these capital infusions, Treasury received equity in the hundreds of companies that have participated in the program. In return for receiving these capital infusions, TARP-recipients were subject to certain requirements and restrictions, such as dividend requirements and limits on executive compensation. The American Recovery and Reinvestment Act of 2009 (Recovery Act) amended and expanded EESA’s executive compensation provisions and directed Treasury to require appropriate standards for executive compensation and corporate governance of TARP recipients. On June 10, 2009, Treasury adopted an interim final rule to implement the law for executive compensation and corporate governance, including limits on compensation, providing guidance on the executive compensation and corporate governance provisions of EESA, and setting forth certain additional standards pursuant to authority under EESA. The requirements for executive compensation generally include: (1) limits on compensation that exclude incentives for senior executive officers to take unnecessary and excessive risks that threaten the value of TARP recipients; (2) provision for the recovery of any bonus, retention award, or incentive compensation paid to certain executives based on materially inaccurate statements of earnings, revenues, gains, or other criteria; (3) prohibition on “golden parachute” payments accrued to certain executives; (4) prohibition on payment or accrual of bonuses, retention awards, or incentive compensation to certain executives; and (5) prohibition on employee compensation plans that would encourage manipulation of earnings reported by TARP recipients to enhance employees’ compensation. The regulation required the establishment of Office of the Special Master for TARP Executive Compensation (Special Master) to review the compensation payments and structures of TARP recipients of “exceptional financial assistance,” which includes all of the companies in our study with the exception of the government-sponsored Enterprises. The Senior Preferred Stock Agreements between Treasury and the Enterprises negotiated prior to EESA and the Recovery Act included a requirement that FHFA consult with Treasury relating to executive compensation. A number of programs under TARP—designed to help stabilize institutions and financial markets—have resulted in Treasury having an ownership interest in such institutions. The Capital Purchase Program (CPP) is the largest TARP program and at its peak had more than 700 participants, including Bank of America and Citigroup. Created in October 2008, it aimed to stabilize the financial system by providing capital to viable banks through the purchase of preferred shares and subordinated debentures. These transactions generally provide that the banks pay fixed dividends on the preferred shares, that the debentures accrue interest, and that the banks issue a warrant to purchase common stock, preferred shares, or additional senior debt instruments. The Targeted Investment Program (TIP), established in December 2008, 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. Treasury determined the forms, terms, and conditions of any investments made under this program and considered the institutions for approval on a case- by-case basis. Treasury required participating institutions to provide warrants or alternative considerations, as necessary, to minimize the long- term costs and maximize the benefits to the taxpayers, in accordance with EESA. Only two institutions participated in TIP, Bank of America and Citigroup, and both repurchased their preferred shares and trust preferred shares, respectively, from Treasury in December 2009. Treasury has terminated the program. The Asset Guarantee Program (AGP), was created in November 2008 to provide a federal government guarantee for assets held by financial institutions that had been deemed critical to the functioning of the U.S. financial system. The goal of AGP was to encourage investors to keep funds in the institutions. According to Treasury, placing guarantee assurances against distressed or illiquid assets was viewed as another way to help stabilize the financial system. In implementing AGP, Treasury collected a premium on the risk assumed by the government that was paid in preferred shares that were exchanged later for trust preferred shares. Citigroup terminated its participation on December 23, 2009. Treasury has since terminated AGP. While the asset guarantee was in place, no losses were claimed by Citigroup and no federal funds were paid out. The AIG Investment Program—originally called the Systemically Significant Failing Institutions Program (SSFI)—was created in November 2008 to help avoid disruptions to financial markets from an institutional failure that Treasury determined would have broad ramifications for other institutions and market activities. AIG has been the only participant in this program and was provided the assistance because of its systemic importance to the financial system. The assistance provided under this program is reflected in the securities purchase agreements, which required Treasury to purchase preferred shares from AIG and entitles Treasury to dividends declared by AIG on these preferred shares and provide warrants to purchase common stock. The Automotive Industry Financing Program (AIFP) was created in December 2008 to prevent a significant disruption to the U.S. automotive industry. Treasury determined that such a disruption would pose a systemic risk to financial market stability and have a negative effect on the U.S. economy. The program was authorized to provide funding to support automakers during restructuring, to ensure that auto suppliers to Chrysler and GM received compensation for their services and products, and to support automotive finance companies. AIFP provided sizeable loans to Chrysler and GM (including a loan to GM that was convertible into shares of GMAC that were purchased with the proceeds). Treasury loaned up to $1.5 billion to Chrysler Financial, which was fully repaid on July 14, 2009. Ultimately the government obtained an equity stake through the restructurings and loan conversion. The Capital Assistance Program (CAP), established in February 2009, was designed to help ensure that qualified financial institutions have sufficient capital to withstand severe economic challenges. These institutions were required to meet eligibility requirements substantially similar to those used for CPP. A key component of CAP was the Supervisory Capital Assessment Program (SCAP), under which federal bank regulators, led by the Federal Reserve, conducted capital assessments, or “stress tests,” of large financial institutions. Participation in SCAP was mandatory for the 19 largest U.S. bank holding companies (those with risk-weighted assets of $100 billion or more as of December 31, 2008). The tests were designed to determine whether these companies had enough capital to absorb losses and continue lending even if economic and market conditions were worse than expected between December 2008 and December 2010. Institutions deemed not to have sufficient capital were given 6 months to raise private capital. In conjunction with the test, Treasury announced that it would provide capital through CAP to banks that needed additional capital but were unable to raise it through private sources. GMAC was the only institution determined to need additional capital assistance from Treasury.