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Testimony: 

Before the Subcommittee on Oversight and Investigations, Committee on 
Financial Services, House of Representatives: 

United States Government Accountability Office:
GAO: 

For Release on Delivery: 
Expected at 2:00 p.m. EST:
Tuesday, February 24, 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-09-417T: 

Mr. Chairman and Members of the Subcommittee: 

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] We are 
also responsible for auditing OFS's annual financial statements and for 
issuing special reports on any issues that emerge from our oversight. 
To carry out these oversight responsibilities, we have assembled 
interdisciplinary teams with a wide range of technical skills, 
including financial market and public policy analysts, accountants, 
lawyers, and economists who represent combined resources from across 
GAO. In addition, we are building on our in-house technical expertise 
with targeted new hires, re-employed annuitants with related expertise, 
and outside experts. The act also created additional oversight 
entities--the Congressional Oversight Panel (COP) and the Special 
Inspector General for TARP (SIGTARP)--that also have reporting 
responsibilities. We are coordinating our work with COP and SIGTARP and 
are meeting with officials from both entities to share information and 
coordinate our oversight efforts. These meetings help to ensure that we 
are collaborating as appropriate and not duplicating efforts. 

My statement today is based primarily on our January 30, 2009 report, 
the second under the act's mandate, which covers the actions taken as 
part of TARP through January 23, 2009, and follows up on the nine 
recommendations we made in our December 2, 2008 report.[Footnote 3] 
This statement also provides additional information on some recent 
program developments, including Treasury's new financial stability 
plan. Our oversight work under the act is ongoing, and our next report 
is due to be issued by March 31, 2009, as required. 

Like the report, this statement focuses on (1) the nature and purpose 
of activities that have been initiated under TARP; (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 eight of the first large institutions 
to receive 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 between December 2008 and February 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 
February 19, Treasury had disbursed about $300 billion in TARP funds, 
about $196 billion of which was for CPP. Treasury has recently 
announced the Financial Stability Plan, which outlines a set of 
measures to address the financial crisis and restore confidence in the 
U.S. financial and housing markets, and a Homeowner Affordability and 
Stability Plan to mitigate foreclosures and preserve homeownership. 
Treasury also has taken important steps since our first report to 
implement all nine of our recommendations. However, due in part to the 
short time frame since our first report, we continued to identify a 
number of areas that warrant Treasury's ongoing attention concerning 
TARP. Therefore, we recommended in our latest report 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 the monthly CPP surveys for the 20 largest banks 
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, Treasury should 
document skills and competencies needed within the department. 

* 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. 

Consistent with our recommendations, Treasury's recently announced 
Financial Stability Plan outlines some steps it is taking to improve 
the transparency and accountability of new programs going forward, but 
Treasury still faces several challenges. First, our first 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 
completed its initial survey of the 20 largest institutions to monitor 
lending and other activities and announced plans to analyze quarterly 
monitoring data (call reports) for all reporting 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 yet 
finalized its plans for detecting noncompliance and taking enforcement 
actions. Third, we noted that Treasury had made limited progress in 
articulating and communicating an overall strategic vision for TARP, 
while continuing to respond to institution-and industry-specific needs. 
This lack of clarity has complicated Treasury's ability to effectively 
communicate to Congress, the financial markets, and the public. 
However, Treasury has announced a plan to address foreclosure 
mitigation and homeownership preservation, and as Treasury provides 
more details on its new Financial Stability Plan, its strategic 
approach to addressing the financial crisis may become clearer. 

Treasury has taken proactive steps to help ensure a smooth transition 
to a new administration 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, as of our January report, 
it had 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, 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 between our December and January reports, 
the cost of credit 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. 
However, 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 
February 19, 2009, Treasury had disbursed almost 80 percent of the $250 
billion it had allocated for CPP to purchase almost $196 billion in 
preferred shares of 416 qualified financial institutions. Treasury has 
begun to receive dividend payments relating to capital purchases under 
CPP and other programs. According to Treasury, as of February 17, 2009, 
it has received about $2.4 billion. 

Table 1: Status of TARP Funds as of February 19, 2009: 

Program: Capital Purchase Program; 
Disbursed: $196.0 billion. 

Program: Systemically Significant Failing Institutions; 
Disbursed: $40.0 billion. 

Program: Targeted Investment Program; 
Disbursed: $40.0 billion. 

Program: Term Asset-backed Securities Loan Facility; 
Disbursed: 0.0. 

Program: Automotive Industry Financing Program; 
Disbursed: $23.7 billion. 

Program: Citigroup Asset Guarantee; 
Disbursed: 0.0. 

Program: Bank of America Asset Guarantee; 
Disbursed: 0.0. 

Program: Totals; 
Disbursed: $299.7 billion. 

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 we noted in our January 
report, most of the institutions that received CPP capital were 
publicly held institutions, while a limited number of privately held 
institutions and community development financial institutions (CDFI) 
also received funds.[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, Treasury has initially surveyed 
the largest institutions to monitor their lending and other activities 
and announced plans to analyze quarterly monitoring data (call reports) 
for all reporting 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 the institutions' use 
of 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 without 
seeking to obtain similar information from existing CPP participants, 
Treasury may have difficulty determining that an institution has used 
the funds in a manner consistent with the purposes 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 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. In its recently announced Financial 
Stability Plan, Treasury called for banks receiving future government 
funds to be held responsible for appropriate use of those funds through 
(1) stronger restrictions on lending, dividend payment, and executive 
compensation and (2) enhanced reporting to the public. In addition, 
Treasury is in the process of drafting new regulations to implement the 
executive compensation requirements in the American Recovery and 
Reinvestment Act of 2009.[Footnote 7] We will also continue to monitor 
the system that Treasury develops to ensure compliance with their 
agreements and the implementation of additional oversight and 
accountability efforts under its new plan. 

Treasury has continued to make some progress in improving the 
transparency of the program and a few weeks ago announced its plans for 
the remaining TARP funds. In our December 2008 report, we first 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 COP's 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 remained unclear. For 
example, Treasury initially outlined a strategy 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 also have raised 
additional questions about Treasury's strategy. For example, 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. 

Since our January report, Treasury has taken two key actions related to 
our recommendation about the need for a clearly articulated vision for 
the program. On February 10, Treasury announced the Financial Stability 
Plan, which outlines a set of measures to address the financial crisis 
and restore confidence in U.S. financial and housing markets. The plan 
appears to be an approach designed to resolve the credit crisis by 
restarting the flow of credit to consumers and businesses, 
strengthening financial institutions, and providing aid to homeowners 
and small businesses. On February 18, Treasury unveiled its Homeowner 
Affordability and Stability Plan, which, in part, is based on the use 
of TARP funds. Specifically, the plan will use $75 billion of TARP 
funds to modify the loans of up to 3-4 million homeowners to avoid 
potential foreclosure. The plan also includes a number of other 
components, including an initiative to help an additional 4-5 million 
homeowners with loans owned or guaranteed by Freddie Mac and Fannie Mae 
refinance their loans at current market rates.[Footnote 8] We will 
continue to monitor the development and implementation of Treasury's 
plan. In addition, we will assess the extent to which the plan 
addresses the need for a clearly articulated vision for TARP and 
explains how the individual programs are intended to work in concert to 
achieve that vision. 

Efforts to Establish OFS 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, Treasury is working to improve its 
oversight of 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 authority 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. 

* 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 potentially inadequate 
funding of announced programs. We will continue to monitor 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, it 
continues to be 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 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 Board of Governors of the Federal Reserve System, 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. Additionally, we 
plan to use the Treasury survey data in our efforts to evaluate changes 
in lending activity resulting from CPP. We recognize that the data has 
certain limitations--primarily that it is self-reported and difficult 
to benchmark because it is unique. Nonetheless, we think it will prove 
valuable in future analyses. 

Mr. Chairman and Members of the Subcommittee, I appreciate the 
opportunity to discuss this critically important issue and would be 
happy to answer any questions that you may have. Thank you. 

Contact: 

For further information on this testimony, please contact Thomas J. 
McCool on (202) 512-2642 or mccoolt@gao.gov. 

[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] Information is current 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, 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. 

[7] Pub. L. No. 111-5, 123 Stat. 115 (2009). 

[8] As part of its Homeowner Affordability and Stability Plan, Treasury 
announced that it was increasing its funding commitment to Fannie Mae 
and Freddie Mac to ensure the strength and security of the mortgage 
market and to help maintain mortgage affordability. The $200 billion 
funding commitment is based on authority granted to Treasury under the 
Housing and Economic Recovery Act of 2008 Pub. L. No. 110-289, 122 
Stat.2654 (2008). 

[End of section] 

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