Troubled Asset Relief Program:

Treasury Needs to Strengthen Its Decision-Making Process on the Term Asset-Backed Securities Loan Facility

GAO-10-25: Published: Feb 5, 2010. Publicly Released: Feb 5, 2010.

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The Term Asset-Backed Securities Loan Facility (TALF) was created by the Board of Governors of the Federal Reserve System (Federal Reserve) to help meet consumer and small business credit needs by supporting issuance of asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS). This report assesses (1) the risks TALF-eligible assets pose to the Troubled Asset Relief Program (TARP), (2) Department of the Treasury's (Treasury) role in decision making for TALF, and (3) the condition of securitization markets before and after TALF. GAO reviewed program documents, analyzed data from prospectuses and other sources, and interviewed relevant agency officials and TALF participants.

TALF contains a number of risk management features that in turn likely reduce the risk of loss to TARP funds, but risks remain. TALF was designed to reopen the securitization markets in an effort to improve access to credit for consumers and businesses. The Federal Reserve Bank of New York (FRBNY), which manages TALF, is authorized to lend up to $200 billion to certain eligible borrowers in return for collateral in the form of securities that are forfeited if the loans are not repaid. To assist in this effort, Treasury has pledged $20 billion of TARP funds in the form of credit protection to the program in the event the loans are not repaid. As of December 2009, FRBNY has made about $61.6 billion in TALF loans, of which $47.5 billion remained outstanding. For most TALF-eligible collateral, FRBNY will stop providing new TALF loans in March 2010, while new-issue CMBSs will be accepted as collateral on new TALF loans through June 2010. Treasury and FRBNY analyses project minimal, if any, use of TARP funds for TALF-related losses, and Treasury currently anticipates a profit. While GAO found that the overall risks TALF poses to TARP funds are likely minimal, GAO analyses showed that CMBSs potentially pose higher risk of loss than ABSs. As shown in figure 1, ongoing uncertainty in the commercial real estate market and TALF exposure to legacy CMBSs warrant ongoing monitoring. Finally, TALF may present risks beyond the potential risks to TARP, such as the risk that FRBNY might fail to identify material noncompliance with program requirements by TALF participants. Because the Federal Reserve views TALF as a monetary policy tool, however, statutory limitations on GAO's authority prohibited GAO from auditing FRBNY's role in administering TALF. Treasury has not fully documented its rationale, as part of its decision-making processes, for reaching final decisions related to the risks of TALF--including decisions involving other agencies. For example, the outcomes of Treasury's internal analysis of the amount of equity that TALF borrowers should hold in TALF ABS collateral, along with other TALF program terms, sometimes differed from FRBNY's. However, there was no clear documentation or explanation of how the discrepancies were resolved or how final decisions were made with FRBNY. Documenting the rationale and basis for these decisions would increase transparency and strengthen internal controls for TALF decision-making processes. Moreover, a sound decision-making process would help ensure that TALF objectives are being met and that it is functioning as intended. Unless Treasury documents the basis for major program decisions that it made with the Federal Reserve, it cannot demonstrate accountability for meeting the goals of TALF and could unnecessarily place TARP funds at risk.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matter for Congressional Consideration

    Matter: To enable GAO to audit TARP support for TALF most effectively, Congress may wish to provide GAO with audit authority over all Federal Reserve operational and administrative actions taken with respect to TALF, together with appropriate access authority.

    Status: Closed - Implemented

    Comments: On July 21, 2010, the Dodd Frank Act was enacted, which provides GAO authority to audit, on a one-time basis, certain Federal Reserve lending facilities, including the Term Asset-Backed Securities Loan Facility. The law requests that GAO assess operational and internal control elements of the facilities, among other things. The Act is consistent with our matter for congressional consideration.

    Recommendations for Executive Action

    Recommendation: To improve transparency of decision making on the use of TARP funds for TALF and to ensure adequate monitoring of risks related to TALF collateral, the Secretary of the Treasury should direct the OFS to strengthen the process for making major program decisions for TALF and document how it arrives at final decisions with the Federal Reserve and FRBNY. Such decisions should include how Treasury considers expert and contractor recommendations and resolves those recommendations that differ from those of the Federal Reserve and FRBNY.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: The Department of Treasury, Office of Financial Stability, provided Program Update Procedures that identify roles and responsibilities for various offices within Treasury related to TALF decisions. In addition, the document stipulates approval processes for major decisions based on the budgetary and financial impacts of proposed TALF program changes. Further, the procedures explain how Treasury will consider any third-party analysis and that officials will draft a memo on important findings and their impact. Moreover, all related documentation will be saved as supporting evidence. These procedures address the intent of our recommendation on strengthening OFS's process for making and documenting major program decisions for TALF.

    Recommendation: To improve transparency of decision making on the use of TARP funds for TALF and to ensure adequate monitoring of risks related to TALF collateral, given the distressed conditions in the commercial real estate market, as part of its ongoing monitoring of TALF collateral, the Secretary of the Treasury should direct the Office of Financial Stability (OFS) to continue to give greater attention to reviewing risks posed by CMBSs.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: Treasury submitted information to GAO on continued conversations it has with the Federal Reserve Board and the Federal Reserve Bank of New York, which includes conversations on commercial mortgage-backed securities (CMBS) and their performance. Additionally, Treasury collects and tracks information on TALF collateral, including CMBS, and tracks those securities that are of potential concern. Such actions addressed our recommendation for Treasury to give greater attention to reviewing risks posed by CMBS.

    Recommendation: To improve transparency of decision making on the use of TARP funds for TALF and to ensure adequate monitoring of risks related to TALF collateral, the Secretary of the Treasury should direct the OFS to conduct a review of what data to track and metrics to disclose to the public in the event that TALF LLC purchases surrendered assets from FRBNY. Such data and metrics should relate to the purchase, management, and sale of assets in TALF LLC that potentially impact TARP funds. Metrics related to TALF LLC could include periodic reports on the date and purchase price of assets; fluctuations in the market value of assets held; the date, price, and rationale when assets are sold; and the total amount of loans outstanding to Treasury.

    Agency Affected: Department of the Treasury

    Status: Closed - Implemented

    Comments: In responding to the recommendation, Treasury noted that currently no security has been put to the TALF LLC facility. Treasury also added that it is committed to providing transparency to the taxpayer while also protecting the taxpayer. In the event that assets are surrendered, Treasury plans to direct the public to the Federal Reserve to view public reports it maintains about its securities holdings. Because the Federal Reserve has primary operational responsibility for TALF, this solution meets the intent of GAO's recommendation to ensure that Treasury has a plan for publicly reporting on any TALF assets that are surrendered.

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