This is the accessible text file for GAO report number GAO-09-359T entitled 'Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues' which was released on February 5, 2009. This text file was formatted by the U.S. Government Accountability Office (GAO) to be accessible to users with visual impairments, as part of a longer term project to improve GAO products' accessibility. Every attempt has been made to maintain the structural and data integrity of the original printed product. Accessibility features, such as text descriptions of tables, consecutively numbered footnotes placed at the end of the file, and the text of agency comment letters, are provided but may not exactly duplicate the presentation or format of the printed version. The portable document format (PDF) file is an exact electronic replica of the printed version. We welcome your feedback. Please E-mail your comments regarding the contents or accessibility features of this document to Webmaster@gao.gov. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. Because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. Testimony: Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate: United States Government Accountability Office: GAO: For Release on Delivery: Expected at 10:00 a.m. EST: Thursday, February 5, 2009: Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues: Statement of Gene L. Dodaro: Acting Comptroller General of the United States: GAO-09-359T: Mr. Chairman and Members of the Committee: I am pleased to be here today to discuss our work on the Troubled Asset Relief Program (TARP), under which the Department of the Treasury (Treasury) has the authority to purchase and insure up to $700 billion in troubled assets held by financial institutions through the Office of Financial Stability (OFS).[Footnote 1] As you know, Treasury was granted this authority in response to the financial crisis that has threatened the stability of the U.S. banking system and the solvency of numerous financial institutions. The Emergency Economic Stabilization Act (the act) that authorized TARP on October 3, 2008, requires GAO to report at least every 60 days on findings resulting from our oversight of the status of actions taken under the program.[Footnote 2] My statement today is based on our January 30, 2009, report, which is the second under the act's mandate, covers the actions taken as part of TARP through January 23, 2009, and follows up on the nine recommendations we made in our December 2008 report.[Footnote 3] Our oversight work under the act is ongoing, and our next report will be issued by March 31, 2009. Like the report, this statement focuses on (1) the nature and purpose of activities that have been initiated under TARP as of January 23, 2009; (2) the status of the transition to the new administration at OFS and its hiring efforts, use of contractors, and development of a system of internal control; and (3) preliminary indicators of TARP's performance. To do this work, we reviewed documents related to TARP, including contracts, agreements, guidance, and rules. We also met with OFS, contractors, federal agencies, and officials from all 8 of the first large institutions that had received disbursements. We plan to continue to monitor the issues highlighted in the report, as well as future and ongoing capital purchases, other more recent transactions undertaken as part of TARP (for example, guarantees on assets of Citigroup and Bank of America), and the status of other aspects of TARP. We conducted this performance audit in December 2008 and January 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Summary: Treasury has announced a number of new programs to try to stabilize financial markets but most of its activity during this period has continued to be through its Capital Purchase Program (CPP). As of January 23, Treasury had disbursed about $294 billion in TARP funds, about $194 billion of which was for CPP. It also announced a new Targeted Investment Program and an Automotive Industry Financing Program. Treasury also has taken important steps since our last report to implement all nine of our recommendations. However, due in part to the short time frame since our last report, we continued to identify a number of areas that warrant Treasury's ongoing attention concerning TARP. Therefore, we recommended that Treasury continue to take action to further improve the transparency and accountability of the program and more clearly articulate and communicate a strategic vision. Specifically, we recommended that Treasury: * Expand the scope of planned monthly CPP surveys to include collecting at least some information from all institutions participating in the program. * 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. * Establish a process to ensure compliance with all CPP requirements, including those associated with limitations on dividends and stock repurchase restrictions. * 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, document skills and competencies needed within Treasury. * Continue to expeditiously hire personnel needed to carry out and oversee TARP. * 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. * Develop a comprehensive system of internal control over TARP, including policies, procedures, and guidance for program activities that are robust enough to ensure that the program's objectives and requirements are met. * 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. * 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. Treasury has taken steps to address our recommendations, but still faces several challenges. First, our 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 began monthly surveys of the largest 20 institutions to monitor lending and other activities and analyze quarterly monitoring data (call reports) for all institutions. [Footnote 4] 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. Second, Treasury has continued to develop a system to ensure compliance with CPP requirements, including executive compensation, dividend payments, and repurchase of stocks, but it has not finalized its plans for detecting noncompliance and taking enforcement actions. Third, Treasury has made limited progress in articulating and communicating an overall strategic vision for TARP, while continuing to respond to institution-and industry-specific needs. It has yet to develop a strategic approach to explain how its various programs work together to fulfill TARP's purposes or how it will use the remaining funds. This lack of clarity has complicated Treasury's ability to effectively communicate to Congress, the financial markets, and the public. Treasury has taken proactive steps to help ensure a smooth transition by keeping positions filled and using an expedited hiring process. However, it continues to face difficulty providing competitive salaries to attract skilled employees. Also, given the program's evolving nature and the likelihood of changes under the new administration, Treasury will need to identify OFS's long-term organizational needs. Additionally, 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. However, 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. Finally, given the fact that program actions have only recently occurred and that there are 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. Even with more time and better data, it will remain difficult to separate the impact of TARP activities from the effects of other economic forces. Credit market indicators we have identified demonstrate that since our last report, the cost of credit has declined in interbank, mortgage, and corporate debt markets. Conversely, while perceptions of risk (as measured by premiums over Treasury bonds) have declined in interbank markets, they appear to have changed little in the corporate bond and mortgage markets. Attributing any of these changes directly to TARP continues to be problematic because of the range of actions that have been and are being taken to address the current crisis. While these indicators may be suggestive of TARP's ongoing impact, no single indicator or set of indicators can provide a definitive determination of the program's impact. Treasury Has Continued to Focus on CPP, but a Variety of Other Programs Have Been Created or Are in Progress: Treasury has continued to focus on CPP, but a variety of other programs have been created or are in progress, as shown in table 1. As of January 23, 2009, Treasury had disbursed more than 75 percent of the $250 billion it had allocated for CPP to purchase more than $194 billion in preferred shares of 317 qualified financial institutions. About $42.7 billion in preferred stock shares of 265 financial institutions has been purchased since our December report. Table 1: Status of TARP Funds as of January 23, 2009 (dollars in billions): Program: Capital Purchase Program; Disbursed: $194.2. Program: Systemically Significant Failing Institutions; Disbursed: $40.0. Program: Targeted Investment Program; Disbursed: $40.0. Program: Term Asset-backed Securities Loan Facility; Disbursed: 0.0. Program: Automotive Industry Financing Program; Disbursed: $19.5. Program: Citigroup Asset Guarantee; Disbursed: 0.0. Program: Bank of America Asset Guarantee; Disbursed: 0.0. Program: Totals; Disbursed: $293.7. Source: Treasury OFS, unaudited. [End of table] Initially, Treasury approved $125 billion in capital purchases for nine of the largest public financial institutions that federal banking regulators and Treasury considered to be systemically significant to the operation of the financial system.[Footnote 5] At the time, these nine institutions held about 55 percent of U.S. banking assets. Subsequent purchases were made in qualified institutions of various sizes (in terms of total assets) and types. As of January 23, 2009, the types of institutions that received CPP capital included 226 publicly held institutions, 83 privately held institutions, and 8 community development financial institutions (CDFI).[Footnote 6] Treasury has taken a number of important steps toward better reporting on and monitoring of CPP, in accordance with our prior recommendations that it bolster its ability to determine whether institutions were using the proceeds consistent with the purposes of the act and that it establish mechanisms to monitor compliance with program requirements. However, more needs to be done. First, while Treasury has begun monthly survey of the largest institutions to monitor their lending and other activities, Treasury plans to rely on quarterly call report data from the other participating institutions. While the monthly survey is a step toward greater transparency and accountability for the largest institutions, we continue to believe that additional actions are needed to better ensure that all participating institutions are accountable for their use of the funds. Without more frequent information on all participants, Treasury will have little timely information about the changing condition of the institutions, which may limit the ability of its newly created team of analysts to understand how the institutions used the funds and the effectiveness of the program. In addition, without ensuring that future CPP agreements include a mechanism that will enable Treasury to track the use of capital infusions and by not seeking to obtain similar information from existing CPP participants, Treasury may have difficulty determining that an institution had not used the funds in a manner consistent with the intent of the program. Therefore, we recommended that Treasury expand the scope of planned monthly CPP surveys to include collecting at least some information from all participating institutions. We also recommended that it ensure that future CPP agreements include a mechanism that will enable Treasury to track the use of capital infusions and seek to obtain similar information from existing CPP participants. We will continue to monitor Treasury's oversight efforts as well as the consistency of the approval process in future work. Second, Treasury has continued to take steps to increase its planned oversight of compliance with terms of agreements such as limitations on executive compensation, dividends, and stock repurchases. These steps include plans to implement new interim final rules that amend and clarify the past interim rules on executive compensation and naming an Interim Chief Compliance Officer. However, Treasury has not finalized its plans for detecting noncompliance with these requirements and taking enforcement actions. Without a more structured mechanism in place to ensure compliance with all CPP requirements--and as more institutions continue to participate in the program--ensuring compliance with these aspects of the program will become increasingly important and challenging. We will also continue to monitor the system that Treasury develops to ensure compliance with their agreements. Treasury has made less progress in improving the transparency of the program and has not yet articulated a clear strategic vision for TARP. In our December 2008 report, we raised questions about the effectiveness of Treasury's communication strategy for TARP with Congress, the financial markets, and the public. These questions were further heightened in the Congressional Oversight Panel's (COP) January report, which raised similar questions about Treasury's strategy for TARP. In response to our recommendation about its communication strategy, Treasury noted numerous publicly available reports, testimonies, and speeches. However, even after reviewing these items collectively, we found that Treasury's strategic vision for TARP remains unclear. For example, early on Treasury outlined a strategy and approach to purchase whole loans and mortgage-backed securities from financial institutions, but changed direction to make capital investments in qualifying financial institutions as the global community opted to move in this direction. However, once Treasury determined that capital infusions were preferable to purchasing whole mortgages and mortgage-backed securities, Treasury did not clearly articulate how the various programs--such as CPP, the Systemically Significant Failing Institutions Program (SSFI) , and the Targeted Investment Program (TIP)--would work collectively to help stabilize financial markets. For instance, Treasury has used similar approaches- -capital infusions--to stabilize healthy institutions under CPP as well as SSFI and TIP, albeit with more stringent requirements. Moreover, with the exception of institutions selected for TIP being viewed as able to raise private capital, both SSFI and TIP share similar selection criteria. Treasury also created the Auto Industry Financing Program in December 2008 to prevent a disruption of the domestic automotive industry that would pose systemic risk to the nation's economy and provided loans to two auto companies and two financing companies that, among other business lines, provide consumer automotive loans. Finally, the same institution may be eligible for multiple programs--at least two institutions (Citigroup and Bank of America) currently participate in more than one program--and this has added to confusion about Treasury's strategy and vision for the implementation of TARP. Other actions have raised additional questions about Treasury's strategy. First, Treasury announced the first institution under TIP weeks before the program was established. Similarly, the Asset Guarantee Program was established only after Treasury announced that it would guarantee assets under such a program, and many of the details of the program have yet to be worked out. Second, Treasury's efforts to mitigate residential foreclosures, which have contributed to increased volatility in financial markets, remain in the design phase with no clearly articulated strategy. Finally, while Treasury has continued to publicly report on individual issues, testify, and make speeches about the program, it continues to struggle to convey a clearly articulated and overarching message about its efforts, potentially hampering TARP's effectiveness and underscoring ongoing questions about its communication strategy. Without a clearly articulated strategic vision, Treasury's effectiveness in stabilizing markets may be hampered. We recommended that Treasury communicate a clearly articulated vision for TARP and explain how the individual programs are intended to work in concert to achieve that vision. This is another area that we will continue to monitor. Efforts to Establish the Office of Financial Stability Are Ongoing: Treasury has made progress in establishing its management infrastructure, which included hiring, contracting oversight, and internal controls. However, hiring for the Office of Financial Stability is still ongoing and Treasury is still developing an oversight structure for contractors and its development of a system of internal control is still evolving. * In the hiring area, Treasury took steps to help maintain continuity of leadership within OFS during and after the transition to the new administration, one of the areas we highlighted in our first report. Specifically, Treasury ensured that interim chief positions would be filled to ensure a smooth transition and used direct-hire and various other appointments to bring a number of career staff on board quickly. OFS has increased its overall staff since our December 2008 report from 48 to 90 employees as of January 26, which includes an increase of permanent staff from 5 to 38. While progress has been made since our last report, the number of temporary and contract staff who will be needed to serve long-term organizational needs remains unknown. Because TARP has added many new programs since it was first established in October and program activities may expand or change under the new administration, we recognize that Treasury may find it difficult to determine OFS's long-term organizational needs at this time. However, such considerations will be vital to retaining institutional knowledge in the organization. * Treasury's use of existing contract flexibilities has enabled it to enter into agreements and award contracts quickly in support of TARP. However, Treasury's use of time-and-materials contracts, although authorized when flexibility is needed, can increase the risk of wasted government dollars without adequate oversight of contractor performance. Although Treasury has improved its oversight of contractors, the department itself has identified certification of its Contracting Officer Technical Representatives and the use of time-and- materials pricing to be high-risk issues that still need attention. In addition, while Treasury has taken the important step of recently issuing an interim regulation outlining the process for reviewing and addressing conflicts of interest among new contractors and financial agents, it is still reviewing contracts or agreements that existed prior to issuance to ensure conformity with the new regulation. We believe this is a necessary component of a comprehensive and complete system to ensure that all conflicts are fully identified and appropriately addressed. * In the area of internal controls, OFS has adopted a framework for organizing the development and implementation of its system of internal control for TARP activities. OFS plans to use this framework to develop specific policies, drive communications on expectations, and measure compliance with internal control standards and policies. However, it has yet to develop comprehensive written policies and procedures governing TARP activities or implement a disciplined risk assessment process. In each of these areas, we made additional recommendations. Specifically, we recommended that Treasury continue to expeditiously hire personnel needed to carry out and oversee TARP. For contracting oversight, we recommended that Treasury 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. We also recommended that Treasury 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. Finally, we recommended that Treasury, in addition to developing a comprehensive system of internal control, 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. We will continue to monitoring OFS's hiring and contracting practices as well as its implementation of the internal control framework, which is vital to the effectiveness of the program. Measuring the Impact of TARP on Credit Markets and the Economy Continues to Be Challenging: Given the fact that program actions have only recently occurred and that there are 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. Even with more time and better data, it will remain difficult to separate the impact of TARP activities from the effects of other economic forces. Some indicators suggest that the cost of credit has declined in interbank, mortgage, and corporate debt markets since the December report. However, while perceptions of risk (as measured by premiums over Treasury securities) have declined in interbank markets, they have 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. These include coordinated efforts by U.S. regulators-- namely, the Federal Deposit Insurance Corporation, the Federal Reserve, and the Federal Housing Finance Agency--as well as actions by financial institutions to mitigate foreclosures. For example, a large drop in mortgage rates occurred shortly after the Federal Reserve announced it would purchase up to $500 billion in mortgage-backed securities, highlighting that policies outside of TARP may have important effects on credit markets. We will continue to refine and monitor the indicators. Mr. Chairman and Members of the Committee, I appreciate the opportunity to discuss this critically important issue and would be happy to answer any questions that you may have. Thank you. [End of section] Footnotes: [1] GAO, Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues, [hyperlink, http://www.gao.gov/products/GAO-09-296] (Washington D.C.: Jan. 30, 2009) and Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency, [hyperlink, http://www.gao.gov/products/GAO-09-161] (Washington, D.C.: Dec. 2, 2008). [2] The Emergency Economic Stabilization Act of 2008, Pub. L. No. 110- 343, 122 Stat. 3765 (2008). The act requires the U.S. Comptroller General to report at least every 60 days, as appropriate, on findings resulting from oversight of TARP's performance in meeting the act's purposes; the financial condition and internal controls of TARP, its representatives, and agents; the characteristics of asset purchases and the disposition of acquired assets, including any related commitments entered into; TARP's efficiency in using the funds appropriated for its operations; its compliance with applicable laws and regulations; and its efforts to prevent, identify, and minimize conflicts of interest among those involved in its operations. [3] All information is as of January 23, 2009, unless otherwise noted in the statement. [4] Call reports are quarterly reports that collect basic financial data of commercial banks in the form of a balance sheet and income statement (formally known as Report of Condition and Income). [5] While Treasury approved $125 billion to the nine largest institutions, as table 2 shows, it initially disbursed funds to eight of the nine institutions. The $10 billion to Merrill Lynch was not disbursed until January 9, 2009, after its merger with Bank of America was completed. [6] A CDFI is a specialized financial institution that works in market niches that are underserved by traditional financial institutions. CDFIs provide a range of financial products and services such as mortgage financing for low-income and first-time homebuyers and not- for-profit developers; flexible underwriting and risk capital for needed community facilities; and technical assistance, commercial loans and investments to small start-up or expanding businesses in low-income areas. 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