Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues

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.

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.

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.

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.

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 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.

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.

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.

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.