Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency

Treasury publishes a monthly bank lending survey of the 22 largest CPP institutions to monitor their lending and intermediation activities including their small business lending. In conjunction with federal bank regulators, Treasury publishes on a quarterly basis an evaluation of changes in regulatory financial data for all CPP reporting institutions and non-CPP institutions that focuses on three broad categories: on- and off-balance sheet items, performance ratios and asset quality measures. All federal bank regulators, except the Federal Reserve, have developed examination polices and procedures to monitor CPP participants for compliance with CPP agreements and TARP requirements.

Treasury hired nine asset management firms to provide market advice about investments in financial institutions and corporations participating in TARP programs, and help monitor compliance with limitations on compensation, dividend payments, and stock repurchases. Treasury finalized its oversight policies for asset managers in April 2010 and developed qualitative and quantitative performance metrics based on the managers? core functions and responsibilities in July 2010. Treasury has created policies for ensuring that CPP institutions comply with restrictions on executive compensation and excessive or luxury expenditures. The interim final executive compensation rule established the Office of the Special Master for TARP Executive Compensation to address application of the rules to TARP recipients and their employees, administer reviews of bonuses, retention awards, and other compensation for employees of TARP recipients before February 17, 2009, and negotiate reimbursements. The rule also established compliance reporting and record-keeping requirements for executive compensation and corporate governance standards. Specifically, Treasury?s interim final rule requires that the principal executive officer and principal financial officer certify to actions to be taken by the compensation committee, board of directors, and the company itself with regard to executive compensation. Certifications from these officers are required to be filed within 90 days after the recipient?s fiscal year-end. All certifications and disclosures as well as correspondence are tracked and monitored by OFS Compliance within the Office of Internal Review. Instances of non-compliance with CPP requirements are reported to OFS Compliance, which evaluates them to determine if further action is required. Treasury also uses its custodian bank (Bank of New York Mellon) to collect information from a variety of sources, such as Securities and Exchange Commission filings and press releases, Bloomberg, and information provided by CPP participants to monitor dividend payments and stock repurchases and OFS refer instances of noncompliance to the Chief Risk and Compliance Office for further action if required. Treasury also publishes a monthly Dividend and Interest reports detailing monthly and cumulative dividends and interest payments received and missed payments for CPP and other TARP investments. These reports are posted on www.financialstability.gov.

Treasury has taken several steps to improve its communication strategy for TARP, , including launching its FinancialStability.gov Web site in March 2009 and forming a working group to help ensure that Treasury's communications strategy addresses both internal and external communications and is hiring appropriate staff to support the strategy. Treasury officials told us that key components of the strategy include (1) coordinating communication among OFS and Treasury's Office of Public Affairs and Office of Legislative Affairs to ensure that congressional and other external stakeholders receive timely information, (2) continuously improving the financial stability Web site, and (3) conducting outreach across the country on the homeownership preservation programs. To support these efforts, Treasury hired a communications director for OFS in June 2010 who works to support the communication strategy. In March 2011, OFS also hired a senior liaison for Legislative Affairs to provide OFS-specific outreach to Congress and respond to requests for information. Collectively, these actions will help Treasury to ensure external stakeholders, including Congress, are informed and updated about TARP programs in a timely manner.

GAO made this recommendation in the first 60-day report on the Troubled Asset Relief Program (TARP) because the program was new and its administration would transfer to the new administration in January 2009. Therefore, it was critical that Treasury ensure key processes and people were in place to facilitate the continued operation of the TARP program activities to the next administration. In GAO's January 2009 60-day mandated report on the TARP, GAO reported that Treasury took proactive steps to help ensure a smooth transition to the new administration by keeping positions filled and using an expedited hiring process, including direct hire authority. GAO determined that Treasury made efforts to ensure that key leadership positions remain filled after the transition to the new administration. Specifically, Treasury took steps to either (1) confirm that each interim chief would stay for a period covering the transition to the new administration; or (2) in cases where a leader was unlikely to stay beyond the transition, to work with the interim chief to find candidates to serve in the role on a permanent basis. Treasury facilitated continuity of operations through the transition for a number of other key positions. Also, OFS continued to use staff and other existing resources from other part of Treasury and the federal government, as well as the private sector. OFS's financial agents and contractors remained in place throughout the transition, providing institutional knowledge of past practices, continuity of operations, and expertise needed to carry out OFS policies and operations. Treasury also took steps to build and formalize ongoing activities, such as by establishing processes and documenting internal controls used to carry out the various new programs established under TARP and the associated financial transactions. In addition, OFS staff and the current administration kept the transition team informed of all activities and met with the transition team frequently. An official from the transition team told GAO that they were very satisfied with the coordination efforts made by the current administration to facilitate a smooth transition.

Since we issued our first TARP report in December 2008, Treasury has continuously improved upon its efforts to expedite hiring for its Office of Financial Stability (OFS) as we recommended. Specifically, as of August 3, 2009, Treasury reported that it had brought on board 194 full-time employees, including 19 detailees. This is a significant change from what we reported in our previous reports. Specifically, in December 2009, we reported that Treasury had 5 permanent staff and 137 detailees. Accordingly, Treasury has also become less reliant on OFS detailees over time as the TARP strategy has solidified. Treasury officials reported use of various hiring strategies to bring on board staff quickly. This includes direct-hire authority, standardization of hiring practices and promotion of current federal employees to higher level positions, among other things. Treasury's hiring efforts has enabled the organization to reach a steady state with sufficient resources to oversee TARP programs.

We made this recommendation in our first 60-day report on the Troubled Asset Relief Program (TARP) due to the importance of proper oversight of contractors, particularly those providing services on a time and materials basis. We reported in March 2009 that OFS had made progress in strengthening oversight of contractors and financial agents by ensuring sufficient personnel were assigned to oversight activities and that these personnel were appropriately trained. Treasury hired an executive-level contract administration manager for OFS, added staff to support TARP in the Procurement Services Division, and replaced all untrained executive-level Contracting Officers' Technical Representatives (COTR) with COTRs that have received the requisite formal training and certifications in their acquisition-related responsibilities. We also reported in March 2009 that OFS had made progress in using fixed-price contracting arrangements when the parties possessed sufficient knowledge of the requirements. Treasury and OFS officials have worked closely to analyze the use of time-and-materials arrangements to ensure such arrangements are only used when other contract types are not suitable. Considering the still-evolving nature of TARP's requirements, the ability of the parties to accurately anticipate the performance requirements and estimate costs, as required for fixed-price arrangements, is limited. This limitation places Treasury at risk of paying a higher fixed price for the services than it might otherwise pay under a time-and-materials contract. Treasury has gathered cost data from existing time-and-materials and labor-hour contracts to identify costs of recurring transactions to support the future negotiation of reasonable fixed pricing for follow-on work where appropriate.

In response to our recommendation, OFS adopted a framework for organizing the development and implementation of a comprehensive system of internal control for TARP activities. OFS developed an organizational structure that defines lines of authority and implemented policies and procedures to help ensure that program objectives are met. Furthermore, OFS addressed the five areas of internal control as specified in our Standards for Internal Control in the Federal Government: control environment, risk assessment, control activities, information and communications, and monitoring. In subsequent work, we have continued to monitor internal controls and identify areas where certain controls for specific programs, such as HAMP, could be improved. In our audit opinion for OFS?s fiscal year 2009 financial statements, we concluded that although internal controls could be improved, OFS maintained, in all material respects, effective internal control over financial reporting as of September 30, 2009. While OFS continues to have areas that merit improvement in its internal control structure, overall, OFS has implemented a comprehensive system of internal control that helps ensure that TARP program objectives are met and taxpayers? interest are protected.

Consistent with GAO's recommendation and as expeditiously as possible, on January 21, 2009 Treasury issued an interim regulation on TARP conflicts of interest which was effective immediately and applicable to retained entities defined to include contractors, financial agents, and subcontractors. [TARP Conflicts of Interest, 74 Fed. Reg. 3431-3436 (Jan. 21, 2009) (codified at 31 C.F.R. Part 31)]. Also consistent with GAO's recommendation, Treasury issued this regulation as an interim rule based on a determination that urgent and compelling circumstances and good cause existed that justified the promulgation of the interim rule without public comment. Treasury found it essential to issue conflict-of-interest regulations without delay so that anyone participating in the TARP program would have clear information as soon as possible on avoiding conflicts of interest. Treasury received public comments on the interim rule and anticipates that the process of developing a final rule will take more time. However, Treasury's action to issue this regulation as an interim rule is responsive to GAO?s recommendation to issue final regulations as expeditiously as possible. Specifically, with this action, Treasury put in place a set of clear requirements to address actual or potential conflicts that may arise during the selection of retained entities to be involved in the acquisition, valuation, management, and disposition of troubled assets or that may arise in the course of TARP services.

We made this recommendation in our first 60-day report on the Troubled Asset Relief Program (TARP) due to the importance of properly managing conflicts of interest issues that may arise with vendors seeking or performing work under TARP. We reported in March 2009 that discussions with OFS program and compliance officials, two TARP contractors, and a financial agent's senior contracts manager indicate that a mutual environment for sustained attention and control had taken root. Specifically, our discussions with OFS and TARP contractor officials indicated that all parties have a range of formal and informal processes in place, under which TARP contractors are expected to detect potential conflicts of interest. Once detected, the interim rule requires that potential conflicts be disclosed to Treasury within 5 business days. A disclosure can trigger a formal review by the OFS compliance officer, who is responsible for making a final determination. The processes include an ongoing dialogue among OFS officials and officials from TARP contractors and financial agents about new potential conflicts and, as needed, discussions about changes to contractors' mitigation plans to increase their effectiveness and conform with the interim rule. OFS has a formal written policy on mitigating conflicts of interest.