Troubled Asset Relief Program:

Status of Efforts to Address Transparency and Accountability Issues

GAO-09-296: Published: Jan 30, 2009. Publicly Released: Jan 30, 2009.

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This is the second GAO report on the Troubled Asset Relief Program (TARP). It follows up on the nine recommendations from the December 2, 2008, report (GAO-09-161). It also reviews (1) the nature and purpose of activities that had been initiated under TARP as of January 23, 2009; (2) Treasury's Office of Financial Stability (OFS) hiring and transition efforts, use of contractors, and progress in developing a system of internal control; and (3) preliminary indicators of TARP's performance. To do this work, GAO reviewed signed agreements and other relevant documentation and met with officials from OFS, contractors, federal agencies, and some participating institutions.

As of January 23, 2009, Treasury had disbursed about $293.7 billion of the $700 billion in program funds. Most of the funds (about $194.2 billion) went to purchase preferred shares of 317 financial institutions under the Capital Purchase Program--Treasury's primary vehicle under TARP for stabilizing financial markets. GAO's previous report emphasized the lack of monitoring and reporting for CPP investments and recommended stronger measures for ensuring that participating institutions use the funds to meet the program's purpose and comply with CPP requirements on, for example, executive compensation and dividend payments. In response to our recommendation, Treasury developed plans to survey the largest twenty institutions monthly to monitor lending and other activities and analyze quarterly monitoring data for all institutions. While the monthly survey is a step toward greater transparency and accountability for the largest institutions, we continue to believe that additional action is needed to better ensure that all participating institutions are accountable for their use of program funds. Treasury has continued to develop a system for detecting noncompliance with key requirements of the program but has not yet finalized its plans. Further, Treasury has made limited progress in formatting articulating and communicating an overall strategy for TARP, continuing to respond to institution- and industry-specific needs by, for example, making further capital purchases and offering loans to the automobile industry. GAO's previous report also included recommendations about OFS's management infrastructure, including hiring, contract oversight, and internal controls. Treasury has taken steps to address our recommendations, but still faces several challenges. First, it 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. Moreover, after losing some potential candidates because of conflicts of interest, Treasury is asking candidates to address potential conflicts earlier in the recruitment process to avoid unnecessary delays in finalizing employment offers. However, it continues to face difficulty providing competitive salaries to attract skilled employees. OFS continues to rely on detailees and contractors to carry out program functions. Second, consistent with our recommendation about contracting oversight, Treasury has enhanced such oversight by tracking costs, schedules, and performance and addressing the training requirements of personnel who oversee the contracts. As we previously recommended, Treasury needs to continue to identify and mitigate conflicts of interest in contracting. Similarly, OFS has adopted a framework for organizing the development and implementation of its system of internal control for TARP activities, which is consistent with our recommendation. However, it has yet to implement a disciplined risk-assessment process.Given the recency of program actions and time lags in the reporting of available data, GAO continues to believe that it is too early in the program's implementation to see measurable results in many areas. However, while perceptions of risk have declined in interbank markets, they changed very little in corporate bond and mortgage markets. Finally, as GAO also noted in December, these indicators may be suggestive of TARP's ongoing impact, but no single indicator or set of indicators can provide a definitive determination of the program's effects because of the range of actions that have been and are being taken to address the current crisis. GAO will continue to refine and monitor the indicators going forward.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: As recommended, beginning in March 2009, Treasury has been publishing a monthly survey of lending at all CPP institutions that includes data on loans outstanding to consumers and commercial entities and total loans outstanding.

    Recommendation: Treasury should expand the scope of planned monthly CPP surveys to include collecting at least some information from all institutions participating in the program to further improve the integrity, transparency, and accountability of the program and more clearly articulate and communicate a strategic vision.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Implemented

    Comments: Although Treasury did not include a mechanism in the CPP agreements to track the use of capital funds, Treasury established a monthly bank lending survey of the 22 largest CPP institutions in February 2009 to monitor their lending and intermediation activities including their small business lending. Starting in August 2009, in conjunction with federal bank regulators, Treasury now 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. Since January 2009, 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. Furthermore, as part of the application process for the Capital Assistance Program (CAP)--which is designed to ensure that qualified financial institutions have sufficient capital to withstand severe economic challenges--institutions must submit a plan showing how they intend to use this capital to support their lending activities and how lending will increase over what would have been possible without government assistance. Although no institutions have yet to participate, those that may participate in the future will be required to submit to Treasury monthly reports--similar to those for CPP--on their lending activities.

    Recommendation: Treasury should ensure that future CPP agreements include a mechanism that will better enable Treasury to track the use of the capital infusions and seek to obtain similar information from existing CPP participants to further improve the integrity, transparency, and accountability of the program and more clearly articulate and communicate a strategic vision.

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: 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.

    Recommendation: Treasury should establish a process to ensure compliance with all CPP requirements, including those associated with limitations on dividends and stock repurchase restrictions to further improve the integrity, transparency, and accountability of the program and more clearly articulate and communicate a strategic vision.

    Agency Affected: Department of the Treasury

  4. Status: Closed - Implemented

    Comments: In the TARP 60-day report, Troubled Asset Relief Program: March 2009 Status of Efforts to Address Transparency and Accountability Issues, we found that Treasury had taken action to communicate a clearly articulated vision for TARP that explained how individual programs were intended to work together in concert to achieve this vision. Specifically, on February 10, 2009, the administration announced the Financial Stability Plan and made public a fact sheet that clarified how each program would address the financial and housing crisis. Following the announcement of the Plan, Treasury began to document needed skills and competencies required to carry out TARP in regular meetings with the chiefs of each Office of Financial Stability office. In these meetings, Treasury human resource officials gathered input from each chief regarding their office?s staffing needs in the future, as well as current skills gaps in order to plan for budget requests. Treasury also regards the Office of Financial Stability's organizational chart as a tool to assist the department in documenting skills and competencies currently at the agency.

    Recommendation: Treasury should communicate a clearly articulated vision for TARP and how all individual programs are intended to work in concert to achieve that vision. This vision should incorporate actions to preserve homeownership. Once this vision is clearly articulated, Treasury should document needed skills and competencies to further improve the integrity, transparency, and accountability of the program and more clearly articulate and communicate a strategic vision.

    Agency Affected: Department of the Treasury

  5. Status: Closed - Implemented

    Comments: 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.

    Recommendation: Treasury should continue to expeditiously hire personnel needed to carry out and oversee TARP to further improve the integrity, transparency, and accountability of the program and more clearly articulate and communicate a strategic vision.

    Agency Affected: Department of the Treasury

  6. Status: Closed - Implemented

    Comments: We made this recommendation in our second 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. 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.

    Recommendation: Treasury should expedite efforts to ensure that sufficient personnel are assigned and properly trained to oversee the performance of all contractors, especially for contracts priced on a time-and-materials basis, and move toward fixed-price arrangements whenever possible as program requirements are better defined over time to further improve the integrity, transparency, and accountability of the program and more clearly articulate and communicate a strategic vision.

    Agency Affected: Department of the Treasury

  7. Status: Closed - Implemented

    Comments: 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 also 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.

    Recommendation: Treasury should develop a comprehensive system of internal control over TARP activities, including policies, procedures, and guidance that are robust enough to ensure that the program's objectives and requirements are met to further improve the integrity, transparency, and accountability of the program and more clearly articulate and communicate a strategic vision.

    Agency Affected: Department of the Treasury

  8. Status: Closed - Implemented

    Comments: Treasury has developed and is currently implementing a risk assessment process. The process includes setting internal operational objectives, setting risk and other objectives, identifying major risks, designing and assigning responsibility for implementing risk mitigation actions, monitoring and reporting on risks, and testing risk mitigation actions. Treasury has completed the initial risk identification and assessment process, has established risk mitigation plans against high and medium risks, and has begun to address these risks.

    Recommendation: Treasury should develop and implement a well-defined and disciplined risk-assessment process, as such a process is essential to monitoring program status and identifying any risks of potential inadequate funding of announced programs to further improve the integrity, transparency, and accountability of the program and more clearly articulate and communicate a strategic vision.

    Agency Affected: Department of the Treasury

  9. Status: Closed - Implemented

    Comments: Between January 2009 and January 2010, Treasury engaged in an active process to satisfactorily renegotiate five contracts or blanket purchase agreements, and one financial agency agreement that predated the TARP conflicts-of-interest rulemaking and enhanced specificity and conformity with the regulations. In addition, two more legal services contractors awarded separate new contracts after January 2009 for other services have contract provisions and mitigation plans in conformance with the TARP conflict of interest regulations. According to Treasury, the complex nature of these contracts and business relations with other firms meant that in some cases significant time was required to develop new mitigation plans that appropriately meet the provisions of the regulations. Consistent with our recommendation, Treasury continues steps to manage and monitor conflicts of interest and enforce mitigation plans. With these actions, Treasury has put in place the necessary component of a comprehensive and complete system to ensure that all conflicts are fully identified and appropriately addressed.

    Recommendation: Treasury should review and renegotiate existing conflict-of-interest mitigation plans, as necessary, to enhance specificity and conformity with the new interim conflicts of interest regulation, and take continued steps to manage and monitor conflicts of interest and enforce mitigation plans to further improve the integrity, transparency, and accountability of the program and more clearly articulate and communicate a strategic vision.

    Agency Affected: Department of the Treasury

 

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