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entitled 'Troubled Asset Relief Program: March 2009 Status of Efforts
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
March 2009:
Troubled Asset Relief Program:
March 2009 Status of Efforts to Address Transparency and Accountability
Issues:
GAO-09-504:
GAO Highlights:
Highlights of GAO-09-504, a report to congressional committees.
Why GAO Did This Study:
GAO’s third report on the Troubled Asset Relief Program (TARP) follows
up on recommendations from the January 28, 2009, report (GAO-09-296).
It also reviews (1) the nature and purpose of activities that had been
initiated under TARP as of March 27, 2009; (2) the Department of
Treasury’s Office of Financial Stability’s (OFS) hiring efforts, use of
contractors, and progress in developing an internal control system; and
(3) TARP performance indicators. For this work, GAO reviewed signed
agreements and other relevant documentation and met with officials from
OFS, contractors, and federal agencies.
What GAO Found:
As of March 27, 2009, Treasury had disbursed $303.4 billion of the $700
billion in TARP funds (see table). Most of the funds (almost $199
billion) went to purchase preferred shares of 532 financial
institutions under the Capital Purchase Program (CPP), Treasury’s
primary vehicle under TARP for stabilizing financial markets. Treasury
has continued to improve the integrity, accountability and transparency
of TARP. For example, it recently expanded monthly surveys of the
largest institutions’ lending activity to cover all CPP participants,
as GAO recommended. These surveys should provide additional important
information about how the capital investments are impacting
participants’ lending activities and capital levels.
Table: Status of TARP Funds as of March 27, 2009 (dollars in
billions):
Program: Capital Purchase Program;
Maximum announced program funding level[A]: $250.0; Projected use of
funds: $218.0;
Disbursed: $198.8.
Program: Systemically Significant Failing Institutions;
Maximum announced program funding level[A]: $70.0;
Projected use of funds: $70.0;
Disbursed: $40.0.
Program: Targeted Investment Program;
Maximum announced program funding level[A]: $40.0;
Projected use of funds: $40.0;
Disbursed: $40.0.
Program: Automotive Industry Financing Program;
Maximum announced program funding level[A]: $24.9;
Projected use of funds: $24.9;
Disbursed: $24.5.
Program: Citigroup Asset Guarantee;
Maximum announced program funding level[A]: $5.0;
Projected use of funds: $5.0;
Disbursed: $0.0.
Program: Bank of America Asset Guarantee;
Maximum announced program funding level[A]: $7.5;
Projected use of funds: $7.5;
Disbursed: $0.0.
Program: Homeowner Affordability & Stability Plan;
Maximum announced program funding level[A]: $50.0;
Projected use of funds: $50.0;
Disbursed: $0.0.
Program: Term Asset-Backed Securities Loan Facility (TALF)[B];
Maximum announced program funding level[A]: $100.0;
Projected use of funds: $55.0;
Disbursed: $0.1.
Program: Unlocking Credit for Small Business;
Maximum announced program funding level[A]: $15.0;
Projected use of funds: $15.0;
Disbursed: $0.0.
Program: Auto Supplier Support Program;
Maximum announced program funding level[A]: $5.0;
Projected use of funds: $5.0;
Disbursed: $0.0.
Program: Public Private Investment Program;
Maximum announced program funding level[A]: $100.0;
Projected use of funds: $100.0;
Disbursed: $0.0.
Program: Capital Assistance Program;
Maximum announced program funding level[A]: TBD[C];
Projected use of funds: TBD;
Disbursed: $0.0.
Program: Total;
Maximum announced program funding level[A]: $667.4;
Projected use of funds: $590.4;
Disbursed: $303.4.
Source: Treasury OFS, unaudited.
[A] Some of Treasury’s announced transactions are not yet legal
obligations and actual amounts will depend on participation.
[B] Treasury considers this program part of its Consumer & Business
Lending initiative.
[C] Treasury has announced the Capital Assistance Program, but has not
yet announced the funding level for that program.
[End of table]
Treasury also continues to develop a process to monitor compliance with
the terms of the agreements but has not yet hired asset managers.
Treasury officials told GAO that these managers will have a role in
helping ensure that institutions were honoring dividend and stock
repurchase requirements. In February 2009, Treasury announced its broad
strategy for using the remaining TARP funds and in the following weeks
provided details for its major components. While articulating its plan
was an important step, Treasury continues to struggle with developing
an effective overall communication strategy that is integrated into
TARP operations. Without such a strategy, Treasury may face challenges
should it need additional funding for the program. Finally, as Treasury
finalizes the terms of the agreement with American International Group,
Inc. (AIG) for $30 billion in additional assistance, it should require
that AIG seek additional concessions from employees and existing
derivatives counterparties, as appropriate.
Figure: Timeline of Programs and Selected Actions under TARP, January
30, 2009, to March 23, 2009:
[Refer to PDF for image: illustration]
1/30: Treasury purchases about $1.2 billion in preferred stock and
warrants from 42 institutions under the Capital Purchase Program
(CPP).
2/6: Treasury purchases about $239 million in preferred stock and
warrants from 28 institutions under CPP.
2/10: Treasury announces the Financial Stability Plan.
2/13: Treasury purchases about $429 million in preferred stock and
warrants from 29 institutions under CPP.
2/17: Treasury loans an additional $4 billion to GM.
2/18: Treasury announces the Homeowner Affordability and Stability
Plan.
2/20: Treasury purchases about $365 million in preferred stock and
warrants from 23 institutions under CPP.
2/25: Treasury announces the terms and conditions for the Capital
Assistance Program, part of the Financial Stability Plan.
2/27: Treasury announces plans to restructure assistance to Citigroup.
Treasury purchases about $395 million in preferred stock and warrants
from 28 institutions under CPP.
3/2: Treasury and the Federal Reserve announce plans to restructure
assistance to AIG.
3/3: Treasury and the Federal Reserve announce the launch of TALF.
3/4: The Administration announces the Making Home Affordable Program,
part of the Homeowner Affordability and Stability Plan.
3/6: Treasury purchases about $285 million in preferred stock and
warrants from 22 institutions under CPP.
3/13: Treasury purchases about $1.5 billion in preferred stock and
warrants from 19 institutions under CPP.
3/16: Treasury announces that it will begin purchasing securities
backed by Small Business Administration (SBA) loans, temporarily raise
guarantees, and eliminate certain SBA loan fees.
3/20: Treasury purchases about $80.7 million in preferred stock and
warrants from 10 financial institutions under CPP.
3/23: Treasury, FDIC, and Federal Reserve announce details of the
Public-Private Investment Program, part of the Financial Stability
Plan.
Source: GAO.
[End of figure]
GAO’s January 2009 report also included recommendations about OFS’s
management infrastructure, including hiring, contract oversight, and
internal controls. Treasury has continued to take steps to address
GAO’s recommendations. First, it has continued to hire additional
permanent staff to address OFS’s long-term organizational needs.
Second, Treasury has enhanced its capacity to manage vendors by using
trained oversight personnel and looking for opportunities to use fixed-
price arrangements. Further actions are needed to complete its review
of existing vendor conflict-of-interest mitigation plans and to improve
documentation of decisions relating to potential conflicts. Third, OFS
continued to refine, develop, and document its internal control
framework over financial reporting and compliance, including its risk
assessment activities. However, GAO noted that certain internal control
procedures and the guidance pertaining to determining warrant exercise
prices had not been updated to be consistent with actual practice. GAO
also noted that Treasury had not publicly reported that through March
20, 2009, it had received dividends totaling almost $2.9 billion from
TARP participants. Further steps in these areas are needed to improve
the program’s transparency and integrity.
GAO again notes the difficulty of measuring the effect of TARP’s
activities. Developments in the credit markets have generally been
mixed since the January 2009 report. Some indicators revealed that the
cost of credit has increased in interbank and corporate bond markets
and decreased in mortgage markets, while perceptions of risk (as
measured by premiums over Treasury securities) have declined in
interbank and mortgage markets and risen in corporate debt markets. In
addition, although Federal Reserve survey data suggest that lending
standards remained tight, the largest CPP recipients extended roughly
$245 billion in new loans to consumers and businesses in both December
2008 and January 2009, according to the Treasury’s new loan survey.
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.
What GAO Recommends:
This report has six new recommendations to Treasury, including to
continue developing an integrated communication strategy; require AIG
to seek appropriate concessions from employees and derivatives
counterparties, among others; update documentation of certain internal
control procedures and the public guidance on determining warrant
exercise prices; publicly report monies, such as dividends received
from TARP participants; and finish reviewing existing conflict
mitigation plans, renegotiate them as appropriate, and improve
associated conflicts documentation.
In written comments, Treasury described steps it had taken in the last
60 days to address the extraordinary economic challenges.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-504]. For more
information, contact Thomas McCool at (202) 512-2642 or
mccoolt@gao.gov. To view the e-supplement online, click on [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-09-522SP].
[End of section]
Contents:
Letter:
Scope and Methodology:
Background:
Treasury's Strategy for Deploying TARP Funds Continues to Evolve,
Though CPP Remains the Key Effort to Stabilize the Financial Markets:
Treasury Continues to Make Progress in Establishing OFS:
Indicators Suggest Mixed Recent Developments in Credit Markets, but
Isolating the Impact of TARP Continues to Present Challenges:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Analysis:
Appendix I: Comments from the Department of the Treasury:
Appendix II: Status of GAO Recommendations (January 2009 Report):
Appendix III: Treasury's Actions in Response to Our January 2009 Report
Recommendations:
Appendix IV: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Status of TARP Funds as of March 27, 2009:
Table 2: Capital Investments Made through the Capital Purchase Program,
as of March 27, 2009:
Table 3: TARP Dividends through March 20, 2009:
Table 4: Agencies Detailing Federal Employees to the Office of
Financial Stability:
Table 5: Services and Support Tasks Provided by Selected TARP
Contractors and a Financial Agent:
Table 6: Key Positions for TARP Oversight of Contracts and Financial
Agency Agreements, as of March 2009:
Table 7: OFS Actions Since January 2009 to Enhance Oversight of TARP
Contractors' and Financial Agents' Performance:
Table 8: Changes in Selected Credit Market Indicators, January 22,
2008, and March 25, 2009:
Table 9: New Lending at 20 Largest Recipients of CPP, between October
1, 2008, and January 31, 2009:
Figures:
Figure 1: Timeline of Program Activities for TARP, October 2008-March
2009:
Figure 2: Number of Permanent Staff and Detailees, November 2008
through March 2009:
Figure 3: Number of and Expenses for OFS Financial Agency Agreements,
Contracts, and Blanket Purchase Agreements, as of March 13, 2009:
Figure 4: New Lending at 20 Largest Recipients of CPP, between October
1, 2008, and January 31, 2009:
Figure 5: Net Percentages of Banks Tightening Lending Standards,
Increasing Spreads, and Reporting Stronger Demand for Loans, by firm
size, between October 1997 and March 2009:
Figure 6: Average Finance Rate for New Cars at Auto Finance Companies
and Banks, February 2006 and January 2009:
Abbreviations:
ABS: asset-backed security:
AGP: Asset Guarantee Program:
AIG: American International Group Inc.
CAP: Capital Assistance Program:
CBOE: Chicago Board Options Exchange:
CDFI: Community Development Financial Institutions Fund:
CMBS: commercial mortgage-backed security:
COP: Congressional Oversight Panel:
COTR: Contracting Officer's Technical Representative:
CPP: Capital Purchase Program:
FDIC: Federal Deposit Insurance Corporation:
FHA: Federal Housing Administration:
FHFA: Federal Housing Finance Agency:
FinSOB: Financial Stability Oversight Board:
GM: General Motors Corporation:
GSE: government-sponsored enterprise:
HAMP: Home Affordable Modification Program:
HUD: Department of Housing and Urban Development:
LIBOR: London Interbank Offered Rate:
MBS: mortgage-backed security:
OCC: Office of the Comptroller of the Currency:
OFS: Office of Financial Stability:
OGE: Office of Government Ethics:
OMB: Office of Management and Budget:
OTS: Office of Thrift Supervision:
SBA: Small Business Administration:
SES: Senior Executive Service:
SIGTARP: Special Inspector General for TARP:
SSFI: Systemically Significant Failing Institutions Program:
TALF: Term Asset-Backed Securities Loan Facility:
TARP: Troubled Asset Relief Program:
TIP: Targeted Investment Program:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
March 31, 2009:
Congressional Committees:
On October 3, 2008, the Emergency Economic Stabilization Act of 2008
(the act) was signed into law. The act established the Office of
Financial Stability (OFS) within the Department of the Treasury
(Treasury) and authorized the Troubled Asset Relief Program (TARP).
[Footnote 1] Among other things, the act provides Treasury with broad,
flexible authorities to buy or guarantee up to $700 billion in
"troubled assets," which include mortgages and mortgage-related
instruments, and any other financial instrument whose purchase Treasury
determines is needed to stabilize the financial markets.[Footnote 2]
The act also created oversight mechanisms for the implementation and
operations of TARP. Among other things, the U.S. Comptroller General is
required to report at least every 60 days on findings resulting from
GAO's oversight of TARP's performance in meeting the purposes of the
act; the financial condition and internal controls of TARP, its
representatives, and agents; the characteristics of both asset
purchases and the disposition of assets acquired, including any related
commitments that are entered into; TARP's efficiency in using the funds
appropriated for the program's operation; TARP's compliance with
applicable laws and regulations; efforts to prevent, identify, and
minimize conflicts of interest among those involved in TARP's
operations; and the efficacy of contracting procedures.[Footnote 3]
This report follows up on the status of recommendations from our
December 2008 and January 2009 reports and addresses (1) the nature and
purpose of activities that have been initiated under TARP from January
30, 2009, through March 27, 2009, unless otherwise noted; (2) OFS's
progress in hiring, use of contractors, and developing a system of
internal control; and (3) outcomes measured by indicators of TARP's
performance.[Footnote 4]
Scope and Methodology:
To determine the nature and purpose of TARP activities from January 30,
2009, through March 27, 2009, unless noted, and the status of actions
taken in response to our recommendations from our prior reports, we
reviewed documents from OFS that described the amounts, types, and
terms of Treasury's purchases of preferred stocks and warrants under
the Capital Purchase Program (CPP), the Systemically Significant
Failing Institutions Program (SSFI), the Automotive Industry Financing
Program (AIFP), the Targeted Investment Program (TIP), the Capital
Assistance Program (CAP), and the Term Asset-Backed Securities Loan
Facility (TALF).[Footnote 5] We also reviewed documentation and
interviewed officials from OFS responsible for selecting financial
institutions to participate in CPP. Additionally, we contacted
officials from the four federal banking regulators--the Federal Deposit
Insurance Corporation (FDIC), the Office of the Comptroller of the
Currency (OCC), the Board of Governors of the Federal Reserve System
(Federal Reserve), and the Office of Thrift Supervision (OTS)--to
obtain information on their process for reviewing CPP applications, the
status of pending applications, and their examination process for
reviewing uses of CPP funds and compliance with TARP requirements.
Also, we have developed an approach to determine the extent to which
the review and approval process for CPP applications has been
consistently applied across financial institutions. Specifically, we
have collected documentation supporting all funding decisions for the
period covering October 28, 2008, through January 31, 2009, and are in
the process of reviewing these decisions. For SSFI and TALF, we
reviewed program revisions and agreements, as appropriate, and
contacted officials from OFS.
To describe Treasury's efforts to preserve homeownership, we reviewed
announcements, fact sheets, and program guidelines issued by Treasury
and held meetings to discuss these documents with OFS. To describe how
Treasury estimated the cost of the loan modification program and the
number of borrowers it expected to reach, we reviewed written
explanations of OFS's projections. To discuss the cross-agency effort
to design and plan the implementation of the loan modification program,
we reviewed Financial Agent Agreements that Treasury executed with
Fannie Mae and Freddie Mac, and met with representatives of Fannie Mae,
Freddie Mac, and the Federal Housing Finance Agency (FHFA), Federal
Housing Administration (FHA), OCC, and OTS.
To assess the progress of OFS's hiring efforts, we reviewed OFS's
workforce planning documents, updated organizational chart, and OFS job
announcements posted on USAJOBS. To assess its performance, we reviewed
our prior work on human capital flexibilities, organizational
transformation, and strategic workforce planning. In addition, we met
with a variety of Treasury and OFS officials to discuss their approach
to staffing the office in the near and long terms and their strategies
for recruiting qualified individuals. We also discussed Treasury's
efforts to coordinate its recruitment and hiring efforts, including its
use of human capital flexibilities, with officials from the Office of
Personnel Management (OPM).
To assess OFS's use of contractors and financial agents to support TARP
administration and operation for the period of January 21 through March
13, 2009, we reviewed information from Treasury for new (1) contracts
and financial agency agreements and (2) task orders, modifications, and
amendments involving ongoing contracts and financial agency agreements.
We also identified any small and/or disadvantaged business contractors
or subcontractors providing TARP services and supplies. To obtain
information concerning (1) the progress of ongoing actions taken by OFS
and Treasury in response to our recommendation to improve oversight of
TARP contractors and financial agents and (2) OFS's reliance on
contractors and financial agents to perform a range of professional and
financial services in support of key TARP programs, we reviewed
applicable documents and interviewed officials from Treasury and two
TARP contractors and one financial agent. To assess OFS's progress
responding to our recommendation for addressing potential conflicts of
interest for new contractors and financial agents, we reviewed
solicitation and contract documentation describing organizational and
personal conflicts-of-interest issues and mitigation plans to address
those issues. We interviewed officials and senior managers from
Treasury and the TARP contractors and financial agent to obtain
information on OFS's and contractor's policies and processes to ensure
compliance with TARP conflicts of interest requirements.
To assess the status of internal controls related to TARP activities
and the status of TARP's consideration of accounting and reporting
topics, we reviewed documents provided by OFS and conducted interviews
and made inquiries with officials from OFS, including the Chief
Financial Officer, Deputy Chief Financial Officer, Cash Management
Officer, Director of Internal Controls, and their representatives.
Additionally, we made inquiries with contractor personnel, including
PricewaterhouseCoopers. To evaluate selected internal control
activities related to the CPP and SSFI programs, we designed tests
using the OFS's process flows, narratives, risk matrices, and high-
level operational procedures. For CPP, we made a statistical selection
of 45 unique transactions for the 4 months ending January 31, 2009,
using a monetary unit sampling (probability proportionate to size)
methodology. For this sample, we tested selected CPP control activities
related to asset purchases and dividend receipts. For SSFI, we tested
the only SSFI transaction completed as of March 27, 2009, including
selected control activities related to dividends.
In our initial report under the mandate, we identified a preliminary
set of indicators on the state of credit and financial markets that
might be suggestive of the performance and effectiveness of TARP. We
consulted Treasury officials and other experts and analyzed available
data sources and the academic literature. We selected a set of
preliminary indicators that offered perspectives on different facets of
credit and financial markets, including perceptions of risk, cost of
credit, and flows of credit to businesses and consumers.[Footnote 6] We
assessed the reliability of the data upon which the indicators are
based and found that, despite certain limitations, they were
sufficiently reliable for our purposes. To update the indicators in
this report, we primarily used data from the Federal Reserve. As these
data are widely used, including by GAO and the Federal Reserve, and are
considered to be a reliable and often definitive source for banking
sector data, we conducted only a limited review of the data but ensured
that the trends we found were consistent with other research. We also
relied on data from the Chicago Board Options Exchange (CBOE), Inside
Mortgage Finance, Treasury, and Global Insight. We have relied on CBOE
and Global Insight data for past reports, and we determined that,
considered together, these auxiliary data were sufficiently reliable
for the purpose of presenting and analyzing trends in financial
markets. The data from Treasury's survey of lending at the top 20 CPP
recipients (as of December 31, 2008) are based on internal reporting
from participating institutions, and the definitions of loan categories
may vary across banks. Because the data are unique, we are not able to
benchmark the origination levels against historical lending or seasonal
patterns at these institutions. Based on discussions with Treasury and
our review of the data, we found that the data are sufficiently
reliable for the purpose of documenting trends in lending. The survey
data will prove valuable for more thorough analyses of lending activity
in future reports.
We plan to continue to monitor the issues highlighted in our prior
reports, as well as future and ongoing capital purchases, other more
recent transactions undertaken as part of TARP, and the status of other
aspects of TARP. Together with the Special Inspector General for TARP,
we also plan to review the payment of taxes by the recipients of TARP
funds.
We conducted this performance audit between February 2009 and March
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.
Background:
Treasury has engaged in a variety of activities to address instability
in the financial markets (see figure 1). Leading up to the transition
to the new administration, Treasury made additional equity purchases in
financial institutions under CPP and invested in and announced future
plans to support the automotive industry under AIFP. Following the
transition to the new administration on January 20, 2009, Treasury
continued to make additional equity investments in financial
institutions under CPP, announced plans to restructure the assistance
previously provided to Citigroup Inc. (Citigroup) and American
International Group, Inc. (AIG), and launched TALF, a consumer lending
facility established by the Federal Reserve Bank of New York for which
Treasury originally pledged support in November 2008. In addition, the
new administration announced its plan to pursue new initiatives under
the authority of the act.
Figure 1: Timeline of Program Activities for TARP, October 2008-March
2009:
[Refer to PDF for image: illustration]
2008:
10/3: Congress passes P.L. 110-343, Emergency Economic Stabilization Act
(the act), which authorized the Troubled Assets Relief Program (TARP).
10/14: Treasury announces that it will purchase up to $250 billion in
financial firms’ preferred stock under TARP via the Capital Purchase
Program (CPP).
10/28: Treasury purchases $115 billion in preferred stock and warrants
from 8 national financial institutions under the first round of
CPP.[A]
11/14: Treasury purchases about $33.6 billion in preferred stock and
warrants from 21 financial institutions under CPP.
11/21: Treasury purchases about $2.9 billion in preferred stock and
warrants from 23 financial institutions under CPP.
11/23: Treasury, FDIC, and the Federal Reserve enter into an agreement
with Citigroup to provide a package of guarantees, liquidity access,
and capital.
11/25: Treasury announces allocation of $20 billion to back Term Asset-
Backed Securities Loan Facility (TALF). Treasury purchases $40 billion
in preferred stock and warrants from AIG under the Systemically
Significant Failing Institutions Program (SSFI).
12/5: Treasury purchases about $3.8 billion in preferred stock and
warrants from 35 financial institutions under CPP.
12/12: Treasury purchases about $2.5 billion in preferred stock and
warrants from 28 financial institutions under CPP.
12/19: Treasury purchases about $2.8 billion in preferred stock and
warrants from 49 financial institutions under CPP.
12/23: Treasury purchases about $1.9 billion in preferred stock and
warrants from 43 financial institutions under CPP.
12/29: Treasury announces purchase of $5 billion in senior preferred
equity from GMAC LLC and agrees to loan $1 billion to support its
reorganization as a bank holding company.
12/31: Treasury purchases about $15 billion in preferred stock and
warrants from 7 financial institutions under CPP. Treasury purchases
$20 billion in preferred stock and warrants from Citigroup that were
announced on November 23, 2008, under the newly created Targeted
Investment Program (TIP). Treasury loans $4 billion to GM.
2009:
1/2: Treasury completes $4 billion loan transaction with Chrysler
Holding LLC as part of Auto Industry Financing Program (AIFP).
1/9: Treasury purchases about $14.8 billion in preferred stock and
warrants from 43 financial institutions under CPP.[B]
1/16: Treasury announces that it will make a $1.5 billion loan to a
special purpose entity created by Chrysler Financial to finance the
extension of new consumer auto loans as part of the AIFP. Treasury, the
Federal Reserve, and FDIC announce finalization of the terms of the
guarantee agreement with Citigroup announced on November 23, 2008.
Treasury, the Federal Reserve, and FDIC enter into an agreement with
Bank of America to guarantee about $118 billion of assets and provide
capital assistance via purchase of preferred stock under TIP. Treasury
purchases about $1.5 billion in preferred stock and warrants from 39
institutions under CPP.
1/20: Inauguration Day: Transition to the new administration.
1/21: Treasury loans an additional $5.4 billion to GM.
1/23: Treasury purchases about $386 million in preferred stock and
warrants from 23 institutions under CPP.
1/30: Treasury purchases about $1.2 billion in preferred stock and
warrants from 42 institutions under CPP.
2/6: Treasury purchases about $239 million in preferred stock and
warrants from 28 institutions under CPP.
2/10: Treasury announces the Financial Stability Plan.
2/13: Treasury purchases about $429 million in preferred stock and
warrants from 29 institutions under CPP.
2/17: Treasury loans an additional $4 billion to GM.
2/18: Treasury announces the Homeowner Affordability and Stability
Plan.
2/20: Treasury purchases about $365 million in preferred stock and
warrants from 23 institutions under CPP.
2/25: Treasury announces the terms and conditions for the Capital
Assistance Program, part of the Financial Stability Plan.
2/27: Treasury announces plans to restructure assistance to Citigroup.
Treasury purchases about $395 million in preferred stock and warrants
from 28 institutions under CPP.
3/2: Treasury and the Federal Reserve announce plans to restructure
assistance to AIG.
3/3: Treasury and the Federal Reserve announce the launch of TALF.
3/4: The Administration announces the Making Home Affordable Program,
part of the Homeowner Affordability and Stability Plan.
3/6: Treasury purchases about $285 million in preferred stock and
warrants from 22 institutions under CPP.
3/13: Treasury purchases about $1.5 billion in preferred stock and
warrants from 19 institutions under CPP.
3/16: Treasury announces it will begin purchasing securities backed by
Small Business Administration (SBA) loans, temporarily raise guarantees
and eliminate certain SBA loan fees.
3/20: Treasury purchases about $80.7 million in preferred stock and
warrants from 10 financial institutions under CPP.
3/23: Treasury, FDIC, and Federal Reserve announce details of the
Public-Private Investment Program, part of the Financial Stability
Plan.
Source: GAO.
[A] The participation of a ninth institution was deferred to allow for
completion of its merger with another institution.
[B] This includes purchases of preferred stock and warrants from the
institution whose receipt of CPP funds was deferred pending the
completion of a merger (see October 28, 2009 CPP transaction). The
merger was completed on January 1, 2009.
[End of figure]
As we described in our January 2009 report, the act created other
oversight entities in addition to our oversight responsibilities,
including the Congressional Oversight Panel (COP), the Special
Inspector General for TARP (SIGTARP), and the Financial Stability
Oversight Board (FinSOB).[Footnote 7] We are coordinating our work with
COP, SIGTARP, and FinSOB, and are meeting with officials from these
entities to share information and effectively make use of our combined
resources. These meetings help to ensure that we collaborate
appropriately and eliminate unnecessary duplication of effort.
After we issued our January 2009 report on TARP, COP issued reports in
February and March 2009.[Footnote 8] COP's February 2009 report focused
on the methods Treasury used to make equity investments in financial
institutions under the CPP and concluded that Treasury paid
substantially more for the assets it purchased under TARP than their
then-current market value. COP's March 2009 report reviewed Treasury's
plans to mitigate foreclosures, in particular Treasury's Homeowner
Affordability and Stability Plan. While the report acknowledges
Treasury's progress in providing increased refinancing and loan
modification opportunities to homeowners, it also raised questions
about, for example, legal protection for loan servicers involved with
voluntary loan modifications, the role of second mortgages in the
foreclosure process, and the federal regulators' enforcement of new
industrywide standards for financial institutions receiving TARP funds.
In addition, SIGTARP issued its first report to Congress in February
2009.[Footnote 9] The report covers TARP activities through January 23,
2009, and describes how financial institutions used TARP funds during
that period. SIGTARP recommended that TARP managers take action to
increase transparency and oversight through various means, such as
acknowledging SIGTARP's oversight authority in TARP agreements,
developing and communicating methods used to value program investments,
and taking steps to prevent fraud, waste, and abuse of funds provided.
FinSOB issued its first quarterly report on December 31, 2008, on
Treasury's policies to implement TARP.[Footnote 10] We summarized
FinSOB's report in our January 2009 report. FinSOB plans to issue its
next quarterly report in spring 2009.
Treasury's Strategy for Deploying TARP Funds Continues to Evolve,
Though CPP Remains the Key Effort to Stabilize the Financial Markets:
As of March 27, 2009, Treasury had announced several programs under
TARP with a maximum announced total funding of $667.4 billion of its
$700 billion. As shown in table 1, as of that date Treasury's projected
use of funds was $590.4 billion and it had disbursed about $303.4
billion in TARP funds, approximately $198.8 billion of it for CPP.
Included in this amount was $24.5 billion for General Motors
Corporation (GM), Chrysler Holdings LLC (Chrysler), GMAC LLC, and
Chrysler Financial Services Americas LLC. We have initiated a separate
effort to, among other things, discuss the impact of federal financial
assistance on the viability of GM and Chrysler. Treasury has recently
announced the Financial Stability Plan, which outlines a set of
measures to address the financial crisis and hopefully restore
confidence in the U.S. financial and housing markets and a Homeowner
Affordability and Stability Plan to mitigate foreclosures and preserve
homeownership. A key component of the Financial Stability Plan is CAP,
for which Treasury recently announced standardized terms.
Table 1: Status of TARP Funds as of March 27, 2009:
Program: Capital Purchase Program;
Maximum announced program funding level[A]: $250.0 billion;
Projected use of funds: $218.0 billion;
Apportioned: $230.0 billion;
Asset purchase price[B]: $198.8 billion;
Disbursed: $198.8 billion.
Program: Systemically Significant Failing Institutions;
Maximum announced program funding level[A]: $70.0 billion;
Projected use of funds: $70.0 billion;
Apportioned: $70.0 billion;
Asset purchase price[B]: $40.0 billion;
Disbursed: $40.0 billion.
Program: Targeted Investment Program;
Maximum announced program funding level[A]: $40.0 billion;
Projected use of funds: $40.0 billion;
Apportioned: $40.0 billion;
Asset purchase price[B]: $40.0 billion;
Disbursed: $40.0 billion.
Program: Automotive Industry Financing Program;
Maximum announced program funding level[A]: $24.9 billion;
Projected use of funds: $24.9 billion;
Apportioned: $24.9 billion;
Asset purchase price[B]: $24.8 billion;
Disbursed: $24.5 billion.
Program: Citigroup Asset Guarantee;
Maximum announced program funding level[A]: $5.0 billion;
Projected use of funds: $5.0 billion;
Apportioned: $5.0 billion;
Asset purchase price[B]: $5.0 billion;
Disbursed: 0.0.
Program: Bank of America Asset Guarantee;
Maximum announced program funding level[A]: $7.5 billion;
Projected use of funds: $7.5 billion;
Apportioned: 0.0;
Asset purchase price[B]: 0.0;
Disbursed: 0.0.
Program: Homeowner Affordability & Stability Plan;
Maximum announced program funding level[A]: $50.0 billion;
Projected use of funds: $50.0 billion;
Apportioned: $32.5 billion;
Asset purchase price[B]: 0.0;
Disbursed: 0.0.
Program: Term Asset-Backed Securities Loan Facility (TALF)[C];
Maximum announced program funding level[A]: $100.0 billion;
Projected use of funds: $55.0 billion;
Apportioned: $20.0 billion;
Asset purchase price[B]: $20.0 billion;
Disbursed: $0.1 billion.
Program: Unlocking Credit for Small Business;
Maximum announced program funding level[A]: $15.0 billion;
Projected use of funds: $15.0 billion;
Apportioned: 0.0;
Asset purchase price[B]: 0.0;
Disbursed: 0.0.
Program: Auto Supplier Support Program;
Maximum announced program funding level[A]: $5.0 billion;
Projected use of funds: $5.0 billion;
Apportioned: 0.0;
Asset purchase price[B]: 0.0;
Disbursed: 0.0.
Program: Public-Private Investment Program;
Maximum announced program funding level[A]: $100.0 billion;
Projected use of funds: $100.0 billion;
Apportioned: 0.0;
Asset purchase price[B]: 0.0;
Disbursed: 0.0.
Program: Capital Assistance Program;
Maximum announced program funding level[A]: TBD[D];
Projected use of funds: TBD;
Apportioned: 0.0;
Asset purchase price[B]: 0.0;
Disbursed: 0.0.
Program: Total; Maximum announced program funding level[A]: $667.4
billion;
Projected use of funds: $590.4 billion;
Apportioned: $422.4 billion;
Asset purchase price[B]: $328.6 billion;
Disbursed: $303.4 billion.
Source: Treasury OFS, unaudited.
[A] Some of Treasury's announced transactions are not yet legal
obligations and actual amounts will depend on participation.
[B] The asset purchase price reflects the aggregate purchase price
amount of outstanding troubled assets purchased by treasury that are
subject to the $700 billion purchase limit in section 115 of the act.
It also includes the aggregate amount of outstanding guaranteed
obligations subject to the limit, but before subtracting the balancee
in the troubled assets insurance financing fund required by section
102.
[C] Treasury considers this program part of its Consumer & Business
Lending Initiative.
[D] Treasury has announced CAP but has not yet announced its funding
level.
[End of table]
Officers and employees of Treasury may not obligate or expend
appropriated funds in excess of the amount apportioned by the Office of
Management and Budget (OMB) on behalf of the President. Of the funding
levels announced for TARP, Treasury stated that OMB had apportioned
about $422.4 billion as of March 27, 2009. Based on this information,
it appears that Treasury has not exceeded the troubled asset purchase
limit or obligated funds in excess of those OMB has apportioned. We are
continuing to obtain additional information from Treasury and to review
the controls that Treasury has in place to help ensure compliance with
these restrictions. We will discuss these issues in subsequent reports.
CPP Continued to Be a Primary Vehicle for Stabilizing the Financial
Markets:
Treasury has continued to use CPP as a primary vehicle under TARP as it
attempts to stabilize financial markets. As of March 27, 2009, Treasury
had disbursed about 80 percent of the $250 billion it had allocated for
CPP to purchase almost $198.8 billion in preferred shares of 532
qualified financial institutions.[Footnote 11] These purchases ranged
from about $300,000 to $25 billion per institution. About $4.6 billion
in preferred stock shares of 215 financial institutions has been
purchased since our January 2009 report.
Table 2: Capital Investments Made through the Capital Purchase Program,
as of March 27, 2009:
Closing date of transaction: 10/28/2008;
Amount of CPP capital investment: $115,000,000,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 46.0%;
Number of qualified financial institutions receiving CPP capital: 8.
Closing date of transaction: 11/14/2008;
Amount of CPP capital investment: $33,561,409,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 59.4%;
Number of qualified financial institutions receiving CPP capital: 21.
Closing date of transaction: 11/21/2008;
Amount of CPP capital investment: $2,909,754,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 60.6%;
Number of qualified financial institutions receiving CPP capital: 23.
Closing date of transaction: 12/05/2008;
Amount of CPP capital investment: $3,835,635,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 62.1%;
Number of qualified financial institutions receiving CPP capital: 35.
Closing date of transaction: 12/12/2008;
Amount of CPP capital investment: $2,450,054,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 63.1%;
Number of qualified financial institutions receiving CPP capital: 28.
Closing date of transaction: 12/19/2008;
Amount of CPP capital investment: $2,791,950,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 64.2%;
Number of qualified financial institutions receiving CPP capital: 49.
Closing date of transaction: 12/23/2008;
Amount of CPP capital investment: $1,911,751,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 65.0%;
Number of qualified financial institutions receiving CPP capital: 43.
Closing date of transaction: 12/31/2008;
Amount of CPP capital investment: $15,078,947,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 71.0%;
Number of qualified financial institutions receiving CPP capital: 7.
Closing date of transaction: 1/09/2009;
Amount of CPP capital investment: $14,771,598,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 76.9%;
Number of qualified financial institutions receiving CPP capital: 43.
Closing date of transaction: 1/16/2009;
Amount of CPP capital investment: $1,479,938,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 77.5%;
Number of qualified financial institutions receiving CPP capital: 39.
Closing date of transaction: 1/23/2009;
Amount of CPP capital investment: $385,965,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 77.7%;
Number of qualified financial institutions receiving CPP capital: 23.
Closing date of transaction: 1/30/2009;
Amount of CPP capital investment: $1,151,218,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 78.1%;
Number of qualified financial institutions receiving CPP capital: 42.
Closing date of transaction: 2/06/2009;
Amount of CPP capital investment: $238,555,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 78.2%;
Number of qualified financial institutions receiving CPP capital: 28.
Closing date of transaction: 2/13/2009;
Amount of CPP capital investment: $429,069,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 78.4%;
Number of qualified financial institutions receiving CPP capital: 29.
Closing date of transaction: 2/20/2009;
Amount of CPP capital investment: $365,397,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 78.5%;
Number of qualified financial institutions receiving CPP capital: 23.
Closing date of transaction: 2/27/2009;
Amount of CPP capital investment: $394,906,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 78.7%;
Number of qualified financial institutions receiving CPP capital: 28.
Closing date of transaction: 3/06/2009;
Amount of CPP capital investment: $284,675,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 78.8%;
Number of qualified financial institutions receiving CPP capital: 22.
Closing date of transaction: 3/13/2009;
Amount of CPP capital investment: $1,455,160,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 79.4%;
Number of qualified financial institutions receiving CPP capital: 19.
Closing date of transaction: 3/20/2009;
Amount of CPP capital investment: $80,748,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 79.4%;
Number of qualified financial institutions receiving CPP capital: 10.
Closing date of transaction: 3/27/2009;
Amount of CPP capital investment: $192,958,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 79.5%;
Number of qualified financial institutions receiving CPP capital: 14.
Closing date of transaction: Total;
Amount of CPP capital investment: $198,769,687,000;
Cumulative percentage of allocated fund used for CPP capital
investment: 79.5%;
Number of qualified financial institutions receiving CPP capital:
532[A].
Source: Treasury and GAO.
[A] The total number of financial institutions was reduced by two
because SunTrust Banks, Inc. (SunTrust) and Bank of America Corporation
(Bank of America) each received two capital investments under CPP.
SunTrust received a partial capital investment of $3.5 billion on
November 14, 2008, and another of $1.35 billion on December 31, 2008.
Bank of America received $15 billion on October 28, 2008, and, after
merging with Merrill Lynch & Co., Inc., an additional $10 billion on
January 9, 2009.
[End of table]
As of March 27, 2009, the types of institutions that had received CPP
capital included 272 publicly held institutions, 248 privately held
institutions, and 12 community development financial institutions
(CDFI).[Footnote 12] These purchases represented investments in state-
chartered and national banks and bank holding companies located in 48
states, the District of Columbia, and Puerto Rico. For a detailed
listing of banks that received CPP funds as of March 20, 2009, see the
e-supplement to GAO-09-504, available electronically at GAO-09-522SP.
[Footnote 13]
According to OFS and the bank regulators, over a thousand applications
for funding are under review. As of March 27, 2009, Treasury was in the
process of reviewing approval recommendations from bank regulators for
1,190 qualified financial institutions. Treasury also reported that the
bank regulators were reviewing applications from more than 750
institutions that had not yet been forwarded to Treasury. Qualified
financial institutions generally have 30 calendar days after Treasury
notifies them of preliminary approval for CPP funding to submit
investment agreements and related documentation. OFS officials stated
that over 250 financial institutions that received preliminary approval
had withdrawn their CPP applications as of March 27, 2009. Further,
Treasury officials stated that some of these institutions had indicated
that they were uncomfortable with the uncertainty surrounding future
program requirements. As of March 27, 2009, Treasury had yet to deny an
application.
We are continuing to examine the process for accepting and approving
CPP applications. Specifically, we have developed a methodology for
reviewing CPP applications that had been funded from October 2008
through January 2009 to determine the extent to which the regulators
and OFS were consistently applying established criteria and adequately
documenting the regulators' recommendations and OFS's final decisions.
As part of this review, we have collected relevant case decision memos
and other supporting documentation from Treasury and the regulators. We
will also continue to coordinate and leverage the work of other
agencies and offices involved in the oversight of CPP, including the
COP, the Offices of the Inspector General of FDIC, Federal Reserve,
Treasury, and SIGTARP, all of which have work under way on their review
of CPP's implementation at their respective agencies. In coordination
with the other oversight agencies and offices, we plan to focus our
initial review on the final phases of the CPP application process--from
the point at which the regulators transmit their recommendations to
Treasury to the final approval by OFS's Interim Assistant Secretary.
OFS Has Started Monitoring All Participants' Use of CPP Funds but Has
Not Yet Hired Asset Managers to Help Ensure Compliance with Purchase
Agreements:
Treasury has taken a number of important steps toward better reporting
and monitoring of CPP. These steps are consistent with our prior
recommendations that Treasury bolster its ability to determine whether
all institutions are using CPP proceeds in ways that are consistent
with the act's purposes. Treasury has completed the first 2 monthly
surveys of the 20 largest institutions to monitor their lending and
issued its first report in February 2009.[Footnote 14] In our January
2009 report, we recommended that Treasury expand these surveys to
include all CPP participants. In response, Treasury expanded the
monthly survey to all CPP participants as of March 2009. In addition,
it plans to release its analysis of quarterly monitoring data (call
reports) for all reporting institutions by June 30, 2009.[Footnote 15]
Treasury is also requiring that, starting in April 2009, the monthly
surveys of the large CPP recipients collect information on lending to
small businesses. Taken together, these monthly surveys are a step
toward greater transparency and accountability for institutions of all
sizes. Survey results will allow Treasury's newly created team of
analysts to understand how institutions are using CPP funds and will
help in measuring the program's effectiveness. We will continue to
monitor Treasury's oversight efforts, including implementation of its
new survey of smaller institutions.
Also consistent with our prior recommendations, Treasury has continued
to take steps to increase its oversight of compliance with terms of the
CPP agreements, including limitations on executive compensation,
dividends, and stock repurchases. Participating institutions are
required to comply with the terms of these agreements, and we
recommended that Treasury develop a process to monitor and enforce
them. Treasury has named an Interim Chief Compliance Officer and uses
information sources such as Bloomberg, SEC filings, press releases, and
other information sources to monitor dividend payments and stock
repurchases. Treasury officials told us that they still plan to hire
asset managers, whose primary role will be to provide market advice
about the portfolio, but also will help monitor dividends and stock
purchase limitations. They noted that asset managers will have a
limited role in the area of executive compensation. To date, they had
not yet hired any asset managers. Without a more structured mechanism
in place, and with a growing number of institutions participating in
the program, ensuring compliance with these important aspects of the
program will become increasingly challenging. While the institutions
are obligated to comply with the terms of the agreement, Treasury has
not developed a process to help ensure this compliance and to verify
that any required certifications are accurate.
On February 4, 2009, Treasury issued a press release announcing a new
set of guidelines on executive pay for financial institutions that
receive government assistance. However, the Emergency Economic
Stabilization Act, as amended by the American Recovery and Reinvestment
Act of 2009, imposed additional standards. Specifically, it generally
prohibits (1) bonus and incentive compensation payments to certain
employees, depending on the amount of TARP assistance received, (2)
certain golden parachutes, and (3) compensation that encourages risk-
taking that would threaten the value of the institution. The new law
also requires (1) reimbursement (clawback) of certain bonus or
incentive compensation based on materially inaccurate criteria, (2)
compensation tax deduction limits, (3) compliance certification, (4)
establishment of a policy on excessive or luxury expenditures, (5)
creation of a board compensation committee, and (6) permission to
conduct a nonbinding shareholder vote on pay. According to Treasury, it
is planning to implement its guidelines and the new law. We will be
monitoring these efforts.
Treasury Agrees to Participate in Citigroup's Proposed Exchange
Offering If Certain Conditions Are Met:
On February 27, 2009, Treasury announced that Citigroup had asked it to
participate in an exchange of preferred shares for common stock so that
the institution could strengthen its capital structure by increasing
tangible common equity. According to Citigroup, this would help remove
uncertainty and help restore confidence in the company. But the
conversion potentially increases risks to the government and taxpayers,
because common stockholders are lower in the ownership structure than
preferred shareholders.[Footnote 16] Terms of the transaction were also
announced, but the exchange offering had not occurred as of March 27,
2009. Treasury noted that it was willing to participate in Citigroup's
exchange offering on the following conditions:
* Treasury would convert its preferred shares only in an amount equal
to the amount of preferred stock converted by other preferred
shareholders and would only participate if at least $11.5 billion in
privately held preferred stock was converted.
* Up to $25 billion of Treasury's CPP senior preferred shares would be
converted to common stock in the exchange offering.
* The $20 billion in Treasury's preferred shares issued under TIP and
the $4 billion in preferred shares issued under the Asset Guarantee
Program (AGP) to Treasury would be converted into a trust preferred
security of greater seniority that would have the same 8 percent
dividend rate as the existing preferred stock.[Footnote 17]
* Treasury would receive the most favorable terms and price offered
through the exchange offering.
Treasury's Recently Announced Assistance to AIG Provides an Opportunity
to Encourage AIG to Renegotiate Contracts as Appropriate:
On March 2, 2009, the Federal Reserve and Treasury announced plans to
restructure and expand AIG's assistance.[Footnote 18] Under the
announced plans, Treasury is to receive noncumulative preferred stock
equal to the sum of the $40 billion in cumulative preferred stock
previously issued to Treasury on November 25, 2008, plus any accrued
and unpaid dividends related to those shares.[Footnote 19] According to
OFS officials, this conversion will not increase the amount of money
the government has invested in AIG but will help AIG maintain its
credit rating, because credit rating agencies generally weight
noncumulative preferred stock as 75 percent equity when calculating
capital, compared with 25 percent for cumulative preferred stock.
[Footnote 20] This change will result in a more favorable treatment of
Treasury's investment in AIG by the credit rating agencies. In
addition, the restructuring plan creates an equity capital facility
that will enable AIG to issue to Treasury up to $30 billion in new
preferred shares that generally will have the same terms as the planned
$40 billion preferred stock restructuring. The equity capital facility
had not been funded as of March 27, 2009, and negotiations are ongoing.
In reviewing government assistance to the private sector in the past,
we found that it was essential to establish mechanisms, structures, and
protections to help ensure prudent use of taxpayer resources and to
manage the government's risk, consistent with the congressional goals
and objectives of any federal financial assistance program such as
SSFI.[Footnote 21] Further, because assistance programs pose
significant financial risk to the federal government, consistent with
Treasury's announced executive compensation guidelines, appropriate
mechanisms are needed to help protect the government and taxpayers from
excessive or unnecessary risks.
There are a number of actions that have been taken in the past that
could be considered as Treasury completes its negotiations with AIG and
any future SSFI recipients. But one in particular--obtaining
concessions from others with an interest in the outcome--seems most
relevant in light of AIG's recent payment of $165 million in retention
bonuses to employees of its Financial Products division. In past
crises, and when asked in December 2008 about providing assistance to
the automakers as part of the government's response to the current
crisis, we have stated that the government should require concessions
from those with a stake in the outcome. In AIG's case, those with such
a stake would include management, employees, derivatives
counterparties, and creditors. For example, concessions could include
requiring AIG to seek to renegotiate existing employee bonus contracts
and derivatives contracts, as appropriate. Consistent with this view,
the Treasury Secretary also noted the need for "strong conditions to
protect the taxpayers" when providing exceptional assistance when he
announced the Financial Stability Plan. As we have stated in the past,
the concessions are not meant to extract penalties for past actions,
but to ensure cooperation and flexibility in securing a successful
future outcome. Treasury has an opportunity to negotiate additional
requirements into its latest agreement, including that AIG seek
additional concessions from others for the up to $30 billion in
additional federal assistance. While the purchase of preferred shares
in AIG differs from previous cases of federal assistance, which were
usually loans or loan guarantees, the fundamentals are the same in
terms of the need to protect the government's interests. If such
concessions are not considered to be in the government's interest, the
reasons should be clearly articulated and explained.
Treasury Has Taken Steps to More Clearly Articulate Its Strategy for
Stabilizing Financial Markets and Continued to Finalize the Details:
In our January 2009 report, we recommended that Treasury articulate a
clear strategy for TARP. In response to such calls for greater
transparency and a clear strategy, Treasury announced the Financial
Stability Plan in February that outlined a comprehensive set of
measures to help address the financial crisis and restore confidence in
our financial markets. Treasury described the plan as a comprehensive
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. The
plan established six components: Capital Assistance Program; Public-
Private Investment Fund; Consumer and Business Lending Initiative;
Small Business and Community Lending Initiative; Affordable Housing
Support and Foreclosure Prevention Plan (Housing Affordability and
Modification Plan); and Transparency and Accountability Agenda.
The Capital Assistance Program Has Been Launched:
CAP is designed to help ensure that qualified financial institutions
have sufficient capital to withstand severe economic challenges. These
institutions must meet eligibility requirements, which will be
substantially similar to those used for CPP. A key component of CAP is
a forward-looking supervisory assessment ("stress test") of the 19
largest institutions (those with risk-weighted assets of $100 billion
or more).[Footnote 22] Bank regulators will use the results of this
stress test, along with their specific knowledge of the institutions'
portfolios and management strategies, to assess whether they have the
capital necessary to continue lending and to absorb the potential
losses that could result from a more severe decline in the economy than
currently projected by professional economic forecasters. Currently,
the 19 largest institutions are undergoing comprehensive stress tests
that are expected to be completed by the end of April 2009. Regulators
will use the stress test results to determine whether the institutions
have enough capital to absorb losses from a severe economic downturn
and continue lending. Institutions that do not will have 6 months to
raise private capital or to access capital through CAP. Institutions
with less than $100 billion in risk-weighted assets do not have to
complete a stress test but are also eligible to obtain capital under
CAP. In a process similar to the one used for CPP, institutions
interested in CAP must submit their CAP applications to their primary
banking regulators by May 25, 2009. The regulators are to submit
recommendations to Treasury regarding an applicant's viability. CAP is
currently available only to publicly traded institutions, but Treasury
is developing terms for privately held institutions, subchapter S-
corporations, and mutuals.[Footnote 23]
All approved institutions will have 6 months to raise capital from the
private sector, or Treasury will purchase convertible preferred shares
to help the institution absorb losses and raise private capital.
[Footnote 24] Any capital investments made by Treasury under CAP will
be managed by a separate entity--the Financial Stability Trust. Under
CAP, an institution can receive an investment of 1 to 2 percent of its
risk-weighted assets. These institutions can also receive additional
capital to redeem senior preferred shares issued under CPP, enabling
them to replace the existing preferred shares with convertible
preferred shares.[Footnote 25] If applicable, the proceeds from the
sale of the convertible preferred also may be used to redeem the
preferred stock sold to Treasury under TIP. Issuance of the convertible
preferred stock to Treasury under CAP is considered Tier 1 regulatory
capital for holding companies and a "qualified equity offering" for CPP
purposes.[Footnote 26] In addition, the issuance of convertible
preferred stock in excess of 1 to 2 percent of the institution's risk-
weighted assets may be available on a case-by-case basis and will
constitute "exceptional assistance" requiring additional terms and
conditions. CAP convertible preferred stock shares will carry a 9
percent dividend yield that may increase to 20 percent if the necessary
shareholder approvals are not received by the 6-month anniversary after
issuance. Subject to the approval of the primary bank regulator, such
shares can be redeemed at their face value, plus any accrued and unpaid
dividends prior to 2 years.[Footnote 27] These shares are convertible
into common stock at a price equal to 90 percent of the average closing
price for the 20 trading-day period ending February 9, 2009.[Footnote
28] The convertible preferred stock mandatorily converts to common
equity after 7 years, and after the mandatory conversion date, Treasury
must make reasonable efforts to sell, on an annual basis, an amount of
common stock equal to at least 20 percent of the amount of stock owned
on the mandatory conversion date.
Under CAP, Treasury will also receive warrants to purchase a number of
shares of common stock of the financial institution equaling 20 percent
of the convertible preferred stock amount on the date of the
investment.[Footnote 29] If any necessary shareholder approvals are not
received, the exercise price will be reduced by 15 percent of the
original exercise price on each 6-month anniversary of the issue date
of the warrants,[Footnote 30] subject to a maximum reduction of 45
percent of the original exercise price. Treasury requires that
participants be subject to restrictions on executive compensation,
payment of common stock dividends, repurchase of shares, and cash
acquisitions. Institutions also must comply with Treasury rules,
regulations, and guidance regarding executive compensation,
transparency, accountability, and monitoring, as published and in
effect at the time of the investment closing. In addition, as part of
the application process 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. Collecting this information from CAP applicants
addresses concerns we raised in our January report about the need to
ensure an appropriate level of accountability and transparency for
those institutions receiving TARP funds. Participating institutions
under CAP will be required to submit to Treasury monthly reports--
similar to those for CPP--on their lending activities.
Public-Private Partnership Investment Fund Programs Have Been
Established:
On March 23, 2009, the Federal Reserve, FDIC, and Treasury released the
details of the Public-Private Investment Plan. The plan is designed to
help reduce the liquidity discounts currently observed in the prices of
legacy assets--troubled assets on banks' books--and protect taxpayers
by ensuring that the government is not paying more for assets than
their long-run value, as determined by private investors. The plan
consists of two key elements: the Legacy Loans Program and the Legacy
Securities Program. TARP funds will be used to invest alongside private
capital on similar terms, reducing the likelihood taxpayers will be
overpaying for assets.
Through an auction process, the Legacy Loans Program will purchase
troubled and illiquid loans and other assets in "substantially sized"
pools from insured banks and thrifts. FDIC and Treasury launched this
program to attract private capital to purchase eligible legacy loans
from participating banks through the provision of FDIC debt guarantees
and Treasury equity co-investment. The funds will have asset managers
for asset management and servicing within parameters established by
FDIC and Treasury and are designed to facilitate buy-and-hold
strategies. FDIC will oversee the formation, funding, and operation of
the new funds that will purchase the debt, and private sector investors
and Treasury will provide equity to the funds. The funds will finance
their purchases with FDIC-guaranteed debt. FDIC, in conjunction with
participating banks, Treasury, private investors, and contractors, will
administer the auctions of the asset pools. With input from a third-
party valuation firm, FDIC will establish financing terms and leverage
ratios for each fund and disclose these terms to potential investors as
part of the auction process. Banks that sell the pools get cash and
FDIC-guaranteed debt issued by the funds. Treasury and the private
sector investors will share profits and losses in proportion to their
investment; FDIC's guarantee of the public-private investment funds'
debt will be secured by the eligible assets purchased by the funds.
FDIC and Treasury will establish governance procedures.
Eligible private investors must be prequalified by FDIC and are
expected to include, but are not limited to, financial institutions,
individuals, publicly managed investment funds, and pension funds.
According to an OFS official, participating banks will initially
include the 19 banks that are undergoing the stress test under CAP.
Interested banks are to work with their primary regulators to identify
and evaluate eligible asset pools to be sold and the corresponding
impact on the bank from the sale. Once potential pools are identified,
the banks and regulators are to contact FDIC. The banks must
demonstrate to the satisfaction of Treasury and FDIC that the
contemplated loan pools qualify, based upon Treasury and FDIC agreed-
upon minimum requirements. The goal is to restore maximum confidence
for depositors, creditors, investors, and other counterparties. OFS
officials noted that the program is anticipated to expand to include
other insured institutions not participating in the stress test.
The Legacy Securities Program consists of two related parts designed to
draw private capital into these markets: first, by providing debt
financing from the Federal Reserve under TALF; second, through
Treasury's partnering side-by-side with private investors in legacy
securities investment funds. The goal of the Legacy Securities Program
is to restart the market for legacy securities, allowing banks and
other financial institutions to free up capital and stimulate the
extension of new credit. Treasury and FDIC encourage small, veteran-,
minority-and women-owned private managers to partner with others that
meet minimum bidding criteria.
Through TALF, nonrecourse loans will be made available to investors to
fund purchases of legacy securitization assets. Eligible assets are
expected to include certain nonagency residential mortgage-backed
securities that were originally rated Aaa, outstanding commercial
mortgage-backed securities (CMBS), and asset-backed securities (ABS)
that are rated Aaa. Borrowers must meet eligibility criteria. Haircuts-
-a percentage reduction of collateral valuation--minimum loan sizes,
loan durations, and interest rates have not been determined for
eligible assets.
In the new program that will have Treasury partnering with private fund
managers to support the market for legacy securities, public-private
investment funds raise equity capital from private investors and
receive matching equity funds and leverage from Treasury. The
investment objective of the funds will be to generate attractive
returns for both the Treasury and the private investors, predominantly
by following a long-term buy-and-hold strategy, but Treasury will
consider other strategies involving limited trading.
Treasury has published criteria for potential fund managers and is
accepting applications until April 10, 2009. The criteria include a
demonstrable historical track record in the targeted asset classes, a
minimum amount of assets under management in the targeted asset
classes, and detailed structural proposals for the proposed legacy
securities public-private investment fund. Treasury currently expects
to approve approximately five fund managers, although more may be
added, depending on the quality of applications received. Approved fund
managers for the public-private investment funds will raise the private
equity capital and make control decisions, including asset selection,
pricing, liquidation, trading, and disposition. Applicants will have a
limited period of time from preliminary approval to raise at least $500
million in private capital and demonstrate committed capital before
receiving final approval from Treasury.
Treasury equity capital will be invested on a fully side-by-side basis
with private investors in each public-private investment fund.
Moreover, subject to certain restrictions, fund managers will have the
option to obtain secured nonrecourse loans from Treasury (up to 50
percent of a fund's total equity capital), an amount that could rise to
100 percent, subject to additional restrictions. Treasury debt
financing will be secured by the eligible assets held by the applicable
fund. Loans made by Treasury to any public-private investment fund will
accrue interest at an annual rate to be determined by Treasury and will
be payable in full on the date of termination. As required by the act,
Treasury will take warrants, whose terms and amounts will be
determined, in part, on the amount of Treasury debt financing taken.
Additionally, fund managers may charge private investor fees at their
discretion, and Treasury will accept proposals for fixed management
fees, to apply as a percentage of equity capital contributions for
invested equity capital.
Federal Reserve and Treasury Launch Consumer and Business Lending
Initiative:
This initiative builds on previous efforts of the Federal Reserve and
Treasury to establish TALF, which was announced in November 2008. TALF
is intended to increase the availability of credit for consumers and
businesses. Originally, TALF was set up as a $200 billion program to
support consumer finance securitization markets--specifically, credit
cards, auto loans, student loans, and small business loans--and would
be partially supported by $20 billion in TARP funds. In February 2009,
as part of the Financial Stability Plan, the Federal Reserve and
Treasury announced an expansion of TALF to include increasing the
funding size up to $1 trillion, with Treasury providing up to $100
billion in TARP funds. On March 19, 2009, the Federal Reserve extended
the range of eligible collateral to include ABS backed by mortgage
servicing advances, business equipment loans or leases, floorplan
loans, and leases of business fleets. The Federal Reserve noted that
the objective in expanding TALF would be to provide additional
assistance to financial markets and institutions to meet the credit
needs of households and businesses and thus, to support overall
economic growth in the current period of severe financial strains.
Under TALF, the Federal Reserve will make nonrecourse loans to certain
holders of Aaa-rated ABS secured by newly and recently originated
consumer and small business loans. These will be 3-year loans, secured
by eligible collateral. Haircuts will be determined based on the level
of risk for each type of eligible collateral and the maturity of the
pledged collateral.
On March 3, 2009, Treasury and Federal Reserve launched TALF. Funding
requests were accepted on March 19, 2009, and on March 25, 2009, the
new securitizations were funded by the program. Since our January 2009
report, the Federal Reserve has released revised terms and conditions
for the facility and revised sets of frequently asked questions. The
revisions include (1) a reduction in the interest rate and collateral
haircuts for loans secured by the Small Business Administration (SBA)
or backed by government-guaranteed student loans; (2) a statement that
executive compensation restrictions will not apply to TALF sponsors,
underwriters, and borrowers as a result of their participation; and (3)
a requirement that participating sponsors certify that the ABS are
eligible under TALF and include an attestation by an independent
accounting firm of the securities' eligibility. TALF fundings will be
held monthly and will cease at the end of 2009, unless the Federal
Reserve extends the program. As described previously, on March 23,
2009, Treasury and the Federal Reserve announced that TALF would be
broadened to include certain legacy securities.
Small Business and Community Lending Facility Was Rolled Into TALF:
Treasury announced that, working together with the Federal Reserve, it
would establish a lending facility to increase lending in the secondary
markets, reduce borrowing costs, and unfreeze the credit markets to get
credit flowing again to small businesses and consumers. Originally,
this lending facility was to be structured like TALF--Treasury
providing capital and the Federal Reserve providing financing--but,
instead, it was rolled into TALF. Treasury also announced that it would
commit up to $15 billion to purchase securities backed by the
guaranteed portion of loans made under SBA's 7(a) and the first-lien
mortgages of the 504 Community Development Loan Program.[Footnote 31]
In addition to these activities under TARP, SBA will take several steps
to make it easier for small businesses to obtain credit from community
and large banks, including increasing the federally guaranteed portion
of loans, eliminating or reducing fees for SBA loans, and expediting
approval of loans.
A Mortgage Modification Program Has Been Announced, but Significant
Program Components and Controls Are under Development:
On March 4, 2009, Treasury unveiled the structure and key components of
its Making Home Affordable program. One of its components--the Home
Affordable Modification Program (HAMP)--will use $50 billion in TARP
funds to modify mortgages. According to OFS officials, Fannie Mae and
Freddie Mac will provide an additional $25 billion, for a total of $75
billion, to help up to 3 million to 4 million homeowners avoid
potential foreclosure.[Footnote 32] The goal of modifying these
mortgages is to reduce participants' monthly mortgage payments to
affordable levels (a mortgage debt-to-income ratio of 31 percent).
[Footnote 33] Treasury will share the cost of restructuring the
mortgages with lenders (if financial institutions hold the whole loans)
or investors (if the loans have been securitized). The lender or
investor must first reduce the borrower's monthly mortgage payment down
to 38 percent of income. For these mortgages, Treasury will then match
further reductions on a dollar-for-dollar basis down to the target of
31 percent. For eligible loans where the borrower's monthly mortgage
payment is already below 38 percent, Treasury matches reductions in
mortgage payments from the borrower's current monthly payment.
According to Treasury, loan servicers could begin modifying mortgages
consistent with HAMP guidelines as of March 4, 2009. However, Treasury
will not make payments under HAMP until it has executed contracts,
which are currently in draft form, with the servicers. Treasury has
announced a series of financial incentives for loan servicers, mortgage
holders/investors, and borrowers that are intended to encourage
servicers to modify loans, borrowers to continue paying on time under
the modified loans, and servicers and mortgage holders/investors to
modify at-risk loans before borrowers miss payments. Within OFS, the
Office of Homeownership Preservation is responsible for administering
HAMP and is led by a new interim chief. The structure and initial
hiring for this office are in progress, and its efforts are supported
by other personnel within OFS and Treasury. The Making Home Affordable
program also includes a non-TARP funded initiative to help up to 4
million to 5 million homeowners refinance loans owned or guaranteed by
Freddie Mac and Fannie Mae at current market rates. According to
Treasury, this initiative could help homeowners save thousands of
dollars in annual mortgage payments.
Treasury worked with other agencies to estimate the cost and number of
borrowers who would be eligible for loan modifications under HAMP and
to design program parameters. Treasury stated that it used data from
commercial vendors, Fannie Mae, and Freddie Mac to estimate the
potential universe of homeowners who were in default or likely to be in
imminent danger of default from April 2009 to March 2012 and the number
of homeowners eligible and likely to participate in HAMP during the
program's 3-year application period. Treasury then estimated the cost
of the key parameters of HAMP, including the monthly payment subsidy,
incentive payments, and other payments--for example, payments to
homeowners for signing over deeds instead of going through foreclosure
proceedings, and payments to lenders for eliminating second liens for
HAMP participants. According to Treasury officials, HAMP parameters
were designed to provide incentives to servicers, investors, and
borrowers to modify mortgage payments quickly and efficiently without
using government funds to pay for modifications that servicers would
already complete without government assistance. Treasury officials told
us that the principal goal of HAMP was to get mortgage payments to an
affordable level and avoid foreclosures. Treasury officials said that
they recognized that, for some borrowers, an affordable mortgage
payment was not the only concern and that negative equity was also an
issue.[Footnote 34] Treasury's HAMP guidelines allow servicers to
reduce the amount of mortgage principal, in addition to reducing
interest rates to reach an affordable payment. To reach borrowers,
Treasury launched its Making Home Affordable Web site on March 19,
2009, that, among other things, provides program, eligibility, and
housing counseling information.[Footnote 35]
As we have previously stated, some of the challenges that loan
modification programs face include making transparent to investors the
analysis supporting the value of modification over foreclosure,
designing the program to limit the likelihood of redefault, and
ensuring that the program does not encourage borrowers who otherwise
would not default to fall behind on their mortgage payments. Treasury
pointed to a number of HAMP features designed to address these
challenges. According to Treasury, requiring the use of a standardized
net present value test will provide greater transparency to investors
about the value of modification over foreclosure. Treasury officials
stated that HAMP contained features designed to limit the likelihood of
redefault, including a 90-day trial modification period, the reduced
monthly payment, and incentives to keep borrowers current on their
modified loan payments. Treasury stated that the likelihood that
performing borrowers would intentionally default on their mortgages to
access HAMP (e.g., moral hazard) was limited. For instance, servicers
are required to obtain information on borrowers' current income to
verify that the debt-to-income ratio without loan modification is
greater than 31 percent, and borrowers must also represent and warrant
that they do not have sufficient liquid assets to make their monthly
mortgage payments. To reduce adverse selection (the risk that servicers
would selectively choose loans for HAMP), Treasury requires that
servicers consider all the loans that they service for participation in
its loan modification program, unless prohibited by the rules of the
applicable servicing agreements. Treasury has begun developing a data
reporting system that will be used, among other things, to monitor
servicers' compliance with HAMP requirements, as well as the
performance of loans that have been modified.
While the basic structure of HAMP has been announced, Treasury has not
specified several critical components--including a system of internal
control over TARP funds used for loan modification--as of March 23,
2009.[Footnote 36] Treasury officials said that they plan to have a
system of internal control in place when the first payments are due to
servicers. As we noted in our first TARP report, the absence of
appropriate internal control heightens the risk that the interests of
the government and taxpayers may not be adequately protected and that
the program objectives may not be achieved in an efficient and
effective manner.[Footnote 37] Treasury's loan modification proposal
calls for payments to be made to offset probable losses from home price
declines in the event of failed modifications. However, Treasury
officials told us that the specifics of how this HAMP feature would
work were still being developed as of March 20, 2009. Additionally,
incentive payments to servicers and mortgage holders/investors to offer
alternatives to foreclosure to homeowners who fail to qualify for or
default under HAMP had not been specified as of March 20, 2009.
Treasury has selected Fannie Mae to administer, maintain records for,
and serve as the paying agent for its homeowner assistance programs,
including HAMP, and Freddie Mac as the compliance agent to oversee
servicers' modifications. Fannie Mae's responsibilities include
developing and implementing a marketing plan, call center for
borrowers, standard agreements with servicers, standardized
modification documentation, modification reporting systems, processes
for servicer data reporting and collection of data, and fraud
monitoring and detection. Freddie Mac's compliance responsibilities
include conducting examinations, reviewing servicer compliance with
HAMP's published rules, and reporting the results of the examinations
to Treasury. According to representatives of Fannie Mae and Freddie
Mac, the government-sponsored enterprises (GSE) are establishing
separate internal organizations and firewalls, as well as appropriate
procedures and controls--all of which must be approved by Treasury--to
avoid conflicts of interest in carrying out their compliance
responsibilities. We will continue to monitor the design and
implementation of this program, with a particular focus on the
empirical basis for HAMP and the structure and effectiveness of its
internal control system.
New Framework of Corporate Governance, Oversight, and Transparency:
In response to concerns raised by Congress, GAO, and, subsequently, COP
and the SIGTARP about oversight, the Financial Stability Plan also
calls for a new transparency and accountability agenda that is to
consist of a framework of corporate governance and oversight to help
ensure that banks receiving government funds are held responsible for
the appropriate use of those funds through stronger requirements on
acquisitions, dividend payments, executive compensation, and enhanced
public reporting including reporting on lending activity. The new
standards apply to future participants and are not retroactive.
TARP Has Received Approximately $2.9 Billion in Dividend Payments,
Representing About 80 Percent of Possible Dividends:
TARP had received approximately $2.9 billion in dividend payments
through March 20, 2009. But dividends were not declared and not paid to
Treasury for $733 million of cumulative dividends from AIG under the
SSFI program and about $150,000 of noncumulative dividends from eight
institutions under CPP. The undeclared dividends, approximately 20
percent of possible dividends during the period, were identified by
TARP through a process that it implemented to identify possible
dividends and determine whether they were declared and received when
due.
The approximately $2.9 billion TARP received in dividends related to
shares of preferred stock were acquired through CPP, TIP, AIFP, and
AGP. Treasury's agreements under these programs entitled it to receive
dividend payments on varying terms and at varying rates.[Footnote 38]
Table 3 summarizes the dividends received and those not declared and
not paid under each program.
Table 3: TARP Dividends through March 20, 2009 (dollars in thousands):
Program: Capital Purchase Program;
Dividend payments received: $2,473,019;
Cumulative dividends not declared and not paid: [Empty];
Noncumulative dividends not declared and not paid: $150.
Program: Targeted Investment Program;
Dividend payments received: $328,889;
Cumulative dividends not declared and not paid: [Empty];
Noncumulative dividends not declared and not paid: [Empty].
Program: Automotive Industry Financing Program;
Dividend payments received: $53,986;
Cumulative dividends not declared and not paid: [Empty];
Noncumulative dividends not declared and not paid: [Empty].
Program: Asset Guarantee Program;
Dividend payments received: $26,893;
Cumulative dividends not declared and not paid: [Empty];
Noncumulative dividends not declared and not paid: [Empty].
Program: Systemically Significant Failing Institutions Program;
Dividend payments received: [Empty];
Cumulative dividends not declared and not paid: $733,333[A];
Noncumulative dividends not declared and not paid: [Empty].
Program: Total;
Dividend payments received: $2,882,787;
Cumulative dividends not declared and not paid: $733,333;
Noncumulative dividends not declared and not paid: $150.
Source: Treasury OFS, unaudited.
[A] The AIG Board of Directors did not declare a dividend for the
February 1, 2009, dividend payment date. However, the dividends are
cumulative, and Treasury has announced plans to restructure and expand
AIG's assistance. Under the announced plans, Treasury is to receive
noncumulative preferred stock equal to the sum of the $40 billion in
cumulative preferred stock previously issued to Treasury on November
25, 2008, plus any accrued and unpaid dividends related to those
shares.
[End of table]
For the above-listed programs, the dividend payments to Treasury are
contingent on each institution declaring dividends. Generally, in the
event that an institution does not declare a dividend for cumulative
preferred stock during the dividend period, the unpaid dividends
accumulate, and the institution must pay the cumulative accrued
dividends before making dividend payments to other classes of
shareholders. But if the institution does not declare a dividend for
noncumulative preferred stock during the dividend period, the
noncumulative preferred shareholders generally have no right to receive
any dividend for the period, and the issuer has no obligation to pay a
dividend for the period, whether or not dividends are declared for any
subsequent dividend period.
Treasury did not receive all possible dividend payments under two
programs. First, the sole participant in SSFI--AIG--notified Treasury
that the board of directors did not declare a dividend of approximately
$733 million for the February 1, 2009, dividend payment date. The
agreement detailing the terms of Treasury's November 25, 2008, $40
billion investment in AIG's senior preferred stock states that
dividends will be payable at an annual rate of 10 percent when and if
declared by the AIG Board of Directors. Under this agreement, accrued
but unpaid dividends compound quarterly. The agreement further states
that if dividends on the senior preferred stock are not paid in full
for four dividend periods, whether or not consecutive, the senior
preferred stockholders have the right to appoint at least two directors
to the board. As discussed earlier in our report, on March 2, 2009, the
Federal Reserve and Treasury announced plans to restructure and expand
AIG's assistance. Under the announced plans, Treasury is to receive
noncumulative preferred stock equal to the sum of the $40 billion in
cumulative preferred stock previously issued to Treasury on November
25, 2008, plus any accrued and unpaid dividends related to those
shares.
Second, Treasury did not receive approximately $150,000 in possible
noncumulative dividends related to eight CPP participants. According to
Treasury officials, these eight banks informed Treasury that they
lacked the necessary regulatory or shareholder approvals to declare
dividends on their preferred stock. Federal banking laws and
regulations include minimum capital requirements and limitations on the
use of capital to pay dividends.[Footnote 39] In addition, some state
laws impose similar limitations and require shareholder approval for
certain reductions of capital.[Footnote 40]
OFS officials told us they consulted with Treasury's Office of the
General Counsel to address these CPP dividends that were not declared.
Since the $150,000 in undeclared dividends are noncumulative and were
not declared during the dividend period, these institutions are not
obligated to pay, and Treasury has no right to receive the dividends
for the period. According to the standard terms of CPP, after six
nonpayments by a CPP institution (whether or not consecutive), Treasury
and other holders of preferred securities equivalent to Treasury's can
exercise their right to appoint two members to the board of directors
for that institution at the institution's first annual meeting of
stockholders subsequent to the sixth nonpayment. Although OFS indicated
that they were aware of the dividend restrictions for certain banks,
Treasury officials told us that Treasury had not directly suggested to
any institution that it seek the approvals necessary to declare
dividends. These officials said that they had contacted all eight banks
regarding the undeclared dividends. Six of the eight banks that did not
declare dividends have formally communicated to Treasury their
intentions to seek necessary approvals for future dividend payments.
As part of our audit work, we noted that Treasury has not report to the
Congress and the public the amount of dividends received or other
receipts from TARP participants. Disclosing amounts received by
Treasury from these participants would improve the overall transparency
of TARP. By not sharing this information, Treasury is missing an
opportunity to provide information about the return it is receiving on
its investments. Treasury officials acknowledged the benefits of such
disclosures and have agreed to consider establishing a mechanism for
publicly reporting monies received under TARP, such as dividends.
OFS Has Yet to Develop an Integrated Communication Strategy for TARP:
Treasury has taken a number of steps to address the ongoing crisis,
creating new programs, and expanding existing initiatives. However,
Treasury continues to be hampered with questions about TARP and what it
is doing, which raises questions about the effectiveness of its
existing communication strategy. The Financial Stability Plan
represents an important step in clarifying Treasury's strategy for
addressing the financial and housing crisis using its authorities under
TARP, consistent with our January 2009 recommendation. But Treasury's
strategy has otherwise largely been one of posting information to its
Web site, issuing press releases, speeches, testimonies, and engaging
in ad hoc outreach to Congress, and it continues to face ongoing
communication challenges. The complexity of the issues involved and the
heightened public scrutiny make an effective communication strategy
critical going forward. Treasury has yet to develop a communication
strategy for regularly and routinely communicating its activities to
relevant congressional committees, members, the public, and other
critical stakeholders. An effective communication strategy may consist
of any number of elements, such as building understanding and support
for the program (regular and routine outreach, including confidential
member briefings), integrating communications and operations (making
communication integral to the program), and increasing the impact of
communication tools (print and video). Without a mechanism for regular
and ongoing dialogue about plans for the program and its progress, TARP
continues to be poorly understood by Congress and the public. If a
communication strategy that includes regular and routine communication
with Congress is not established, any request for additional funding,
as contemplated in the President's budget, could be severely hampered.
Treasury Continues to Make Progress in Establishing OFS:
Since our January 2009 report, Treasury has made progress in its hiring
efforts and now has a more stable workforce. Previously, we recommended
that Treasury expedite hiring to ensure that OFS had the personnel it
needed to administer TARP.[Footnote 41] Since our last report, Treasury
has continued to use a variety of hiring mechanisms to bring staff on
board to carry out and oversee TARP, including direct-hire authority,
merit promotion appointments, limited-term Senior Executive Service
(SES) appointments, and reassignments.[Footnote 42] As of March 20,
2009, OFS had 113 total staff, with the number of permanent staff
increasing substantially--from 38 to 77--since our last report and the
number of detailees decreasing from 52 to 36 (see figure 2). Treasury
anticipates that OFS will need 196 full-time employees to operate at
full capacity, an increase of 65 from its January 2009 estimate of 131.
Figure 2: Number of Permanent Staff and Detailees, November 2008
through March 2009:
[Refer to PDF for image: stacked vertical bar graph]
November 21, 2008:
Permanent staff (included limited-term appointments): 5;
Staff detailed to OFS from other areas of Treasury and other federal
agencies (temporary): 43;
Total: 48.
January 26, 2009:
Permanent staff (included limited-term appointments): 38;
Staff detailed to OFS from other areas of Treasury and other federal
agencies (temporary): 52;
Total: 90.
March 16, 2009:
Permanent staff (included limited-term appointments): 77;
Staff detailed to OFS from other areas of Treasury and other federal
agencies (temporary): 36;
Total: 113.
Source: GAO analysis of Treasury data.
[End of figure]
Of the permanent staff currently working in OFS, 50 have come from
other parts of Treasury and the federal government and 27 from the
private sector. In addition, detailees from several Treasury and non-
Treasury offices, bureaus, and agencies currently support OFS (see
table 4). As discussed later in this report, OFS also obtains services
from financial agents and contractors to provide a variety of services
in support of TARP programs.
Table 4: Agencies Detailing Federal Employees to the Office of
Financial Stability:
Treasury Departmental Offices and Bureaus:
Alcohol and Tobacco Tax and Trade Bureau:
Number of employees: 1.
Bureau of Public Debt:
Number of employees: 2.
Bureau of Public Debt; Number of employees: 2.
Community Development Financial Institution Fund;
Number of employees: 1.
Internal Revenue Service;
Number of employees: 4.
Office of the Comptroller of the Currency;
Number of employees: 1.
Office of Thrift Supervision;
Number of employees: 3.
Treasury Departmental Offices;
Number of employees: 4.
Total Treasury;
Number of employees: 16.
Non-Treasury Departments and Agencies:
Department of Housing and Urban Development;
Number of employees: 3.
Department of State;
Number of employees: 1.
Export-Import Bank;
Number of employees: 1.
Federal Deposit Insurance Corporation;
Number of employees: 2.
Board of Governors of the Federal Reserve System;
Number of employees: 10.
Securities and Exchange Commission;
Number of employees: 3.
Total Non-Treasury;
Number of employees: 20.
Source: Treasury data, as of March 12, 2009.
[End of table]
In prior work, we stated that it was important for agencies developing
a workforce planning strategy to implement all of the appropriate
administrative authorities to build and maintain the workforce needed
for the future.[Footnote 43] According to Treasury, as of March 20,
2009, 12 detailees had been converted to permanent staff. Treasury
expects that permanent staff will be largely tasked with long-term
responsibilities, but as the TARP strategy continues to develop,
detailees will continue to play a critical role in supporting the
flexibility of OFS operations. Having a mix of detailees, permanent
staff, and financial agents and contractors on board helps ensure that
OFS can fulfill its short-and long-term organizational needs. Treasury
may use detailees to perform long-term tasks when no permanent staff
are available or when Treasury expects the work to wind down. For
example, Treasury arranged for detailees to review financial
institution applications for CPP and CAP.
Recent changes to OFS's organizational structure have affected
Treasury's efforts to identify its short-and long-term organizational
needs and, therefore, engage in more formal workforce planning efforts.
Following the transition to the new administration and pursuant to the
introduction of new initiatives under its Financial Stability Plan,
Treasury consolidated OFS's chief risk and chief compliance offices
into a single functional area, the Office of the Chief Risk and
Compliance Officer. Treasury said that it consolidated these functions
in order to reduce unnecessary duplication, as the offices shared some
responsibilities and performed some of the same tasks.
Treasury said that it planned to start formal workforce planning
efforts soon, given that the organizational structure had been more
clearly defined and the new administration had articulated further
details of its Financial Stability Plan. In preparation, OFS has
updated descriptions of its various functional areas (e.g., Office of
the Chief Financial Officer and Office of the Chief Risk and Compliance
Officer) to better assess the skills and abilities needed by the
organization. Treasury also has prepared a draft workforce planning
document and anticipates conducting bimonthly reviews of OFS's
workforce operations, during which the Office of the Chief Operating
Officer will consider, among other things, organizational hierarchies
and position classifications; short-, medium-and long-range business
requirements; and skills gaps within OFS.
While Treasury has not documented information on qualified candidates'
reasons for declining offers of employment at OFS, Treasury said that,
as mentioned in our last report, compensation and conflict-of-interest
issues continued to affect their ability to recruit individuals with
the appropriate backgrounds, experience, and skills to administer TARP.
[Footnote 44] In our ongoing monitoring, we plan to review more
detailed information on Treasury's efforts to (1) fill gaps in critical
skills and abilities within the organization and (2) address conflicts
of interest that may be relevant to current OFS employees and any steps
taken to mitigate such conflicts. We will discuss the findings
resulting from this analysis and Treasury's progress in OFS workforce
planning in future reports.
Treasury Has Made Additional Progress In Managing Contractor Support
and Addressing Conflicts Of Interest:
Since our January 2009 report, Treasury has awarded seven new contracts
and two new financial agency agreements, bringing to 25 the total
number of TARP financial agency agreements, contracts, and blanket
purchase agreements as of March 13, 2009. Four new contracts are for a
variety of legal services; others are for management consulting,
document production, and program support services; and the two new
financial agency agreements are to support the new homeownership
preservation program.[Footnote 45] Of these new contracts, one is with
a woman-owned small business. In addition, Treasury issued a new task
order, valued at approximately $5 million, to the internal control
services contractor for expanded OFS support.[Footnote 46] For detailed
status information on new, ongoing, and completed Treasury contracts
and financial agency agreements, as of March 13, see our e-Supplement
at [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-
522SP].[Footnote 47]
As of March 13, 2009, legal services contractors and financial agents
accounted for two-thirds of the 18 service providers directly
supporting OFS's administration of TARP, as shown in figure 3. As of
the same date, Treasury had expended about $12 million for actions
related to contracts-and financial agency agreements. The largest share
of the total (39 percent) was for financial services with one financial
agent (Bank of New York Mellon) while the second largest share (35
percent) was for legal services divided among four law firms (figure
3).
Figure 3: Number of and Expenses for OFS Financial Agency Agreements,
Contracts, and Blanket Purchase Agreements, as of March 13, 2009:
[Refer to PDF for image: 2 pie-charts]
Number of contracts:
Investment/advisory services: 1 (5.6%);
Human resource services: 1 (5.6%);
Accounting/internal control services; 2 (11.1%);
Miscellaneous program support: 2 (11.1%);
Financial agency services: 3 (16.7%);
Legal services: 9 (50.0%).
Expenses:
Investment/advisory services: $801,298 (7%);
Human resource services: $59,052 (0.5%);
Accounting/internal control services: $2,227,461 (19%);
Miscellaneous program support: $8,096 (0.07%);
Financial agency services: $4,622,926 (39%);
Legal services: $4,099,625 (35%).
Source: GAO analysis of Treasury data.
Note: This figure reflects 18 contracts and financial agency agreements
that directly support OFS's administration of TARP; it does not reflect
one contract for management consulting services. It also does not
reflect contracts for, among other things, property leases, a human
resources advertisement, and the purchase of office equipment.
[End of figure]
Budget officials in OFS's Office of the Chief Financial Officer told us
that they anticipated modest increases in the volume and cost of TARP
contract and financial agency agreement activity for the remainder of
fiscal year 2009. Overall, Treasury has budgeted about $175 million to
cover anticipated OFS costs in fiscal year 2009 for the use of
contractors and financial agents, as well as for OFS interagency
agreement obligations to pay, among other things, personnel costs of
employees detailed from other agencies.
OFS Relies on Contractors and Financial Agents to Help Implement TARP:
As discussed in the previous section on OFS's hiring status, a key
factor in Treasury's ongoing efforts to quickly establish the new
organization to operate and administer TARP was the use of a mix of
private contractors and financial agents to fill short-and long-term
needs. OFS relies on this private sector workforce to help implement
TARP. According to OFS preliminary data, about 30 percent of the
employees of TARP contractors and financial agents are on site at
Treasury working with OFS employees in various program offices,
primarily to perform accounting services and support human resources,
and temporary documentation activities. The remaining 70 percent work
off site at their respective offices.
OFS officials responsible for several aspects of TARP, including asset
management and legal services support of CPP and AIFP, noted that TARP
contractors and financial agents play important roles in the
administration and operations of these programs. In discussing the
roles of contractors and financial agents in TARP operations and
administration, OFS program managers we spoke with generally
characterized contractors' involvement as providing technical and
operational input into program execution. Table 5 provides a summary of
the types of services provided, based on our analysis of selected TARP
contracts and a financial agency agreement.
Table 5: Services and Support Tasks Provided by Selected TARP
Contractors and a Financial Agent:
TARP contractor or financial agent: Ennis Knupp and Associates;
Types of services provided: This investment advisory firm assists OFS
program offices with the evaluation of potential CPP asset manager
proposals by:
* designing asset manager compensation plans and investment policies
for the request for proposals;
* developing evaluation criteria;
* providing a structured analysis of proposal submissions;
* supporting follow-up interviews, and;
* evaluating potential asset manager conflicts of interest.
TARP contractor or financial agent: Bank of New York Mellon;
Types of services provided: As custodian for the TARP program, this
financial agent conducts the necessary tasks to complete weekly
closings of CPP deals negotiated by the OFS program office, including:
* taking possession of certificates;
* monitoring CPP assets;
* tracking receipt of dividends;
* maintaining storage of all CPP documentation, and;
* generating reports to track CPP closings and dividend payments;
Bank of New York Mellon also provides expert advice to OFS program
offices regarding the feasibility and structure of new TARP programs,
for example, preparing various analyses on the potential performance of
asset-backed securities for TALF.
TARP contractor or financial agent: Cadwalader, Wickhersham & Taft LLP;
Types of services provided: This firm provides a range of legal
advisory and support services to OFS's chief counsel and program
offices on the AIFP by:
* producing memos and discussing legal options, and;
* providing advice and expertise on bankruptcies and restructurings.
Source: GAO analysis of Treasury information.
[End of table]
OFS officials told us that the use of contractors and financial agents
for the above professional services was critically important given the
technical nature of the tasks, the need for expertise, and the speed
with which OFS must act regarding TARP. OFS officials believe they
retain control over the direction of TARP and have sufficient
management oversight of the advice and assistance provided by TARP
contractors and financial agents.[Footnote 48] For example, an OFS
program manager noted that the advice provided by the Bank of New York
Mellon did not equate to a policy decision but rather supported OFS
officials' development and execution of policy decisions.
OFS Has Made Progress in Strengthening Oversight of Contractors and
Financial Agents:
In response to the recommendation in our January 2009 report that
Treasury improve its oversight of contractors, Treasury has taken steps
to help ensure that sufficient personnel are assigned to facilitate
effective management and oversight of TARP contracts and financial
agency agreements. As shown in table 6, except for one key position
that is to be filled as Treasury enters into financial agency
agreements for asset managers, key contract staffing positions were
filled through new hiring and reassignment actions.
Table 6: Key Positions for TARP Oversight of Contracts and Financial
Agency Agreements, as of March 2009:
Position: Contract Administration Manager;
Office: Chief Operating Officer, OFS;
How Filled: New Hire; Oversight role:
Oversees long-range requirements planning; improves management
practices; provides leadership and guidance to OFS staff overseeing
contractors and financial agents.
Position: Director for Financial Agents;
Office: Chief Investment Officer, OFS;
How Filled: Reassignment;
Oversight role: Supervises Custodian/Infrastructure Program Manager and
Manager of Asset Managers.
Position: Custodian/Infrastructure Program Manager;
Office: Chief Investment Officer, OFS;
How Filled: Reassignment;
Oversight role: Supervises Vendor Managers.
Position: Manager of Asset Managers;
Office: Chief Investment Officer, OFS;
How Filled: Pending[A];
Oversight role: Supervises Vendor Managers.
Position: Vendor Manager;
Office: Chief Investment Officer, OFS;
How Filled: New Hire;
Oversight role: Manages Financial Agents.
Position: Chief, Programs Branch;
Office: Procurement Services Division, Treasury;
How Filled: New Hire;
Oversight role: Provides full-time procurement support to OFS.
Position: TARP Team Lead;
Office: Procurement Services Division, Treasury;
How Filled: New Hire;
Oversight role: Provides full-time procurement support to OFS.
Source: GAO analysis of Treasury information.
[A] This role is currently being filled by the Custodian/Infrastructure
Program Manager.
[End of table]
OFS also made progress responding to our recommendation to help ensure
that staff were appropriately trained to oversee contractors' technical
performance. In particular, it made progress on certifications and
formal training for OFS's roster of Contracting Officers' Technical
Representatives (COTR). OFS has now replaced all the executive-level
COTRs who earlier had been assigned COTR responsibilities without
receiving requisite formal training and certifications in their
acquisition-related responsibilities. Consistent with Treasury's
internal guidance and our prior recommendation, OFS ensured that the
replacement COTRs received the appropriate formal training and
certification.
Given the constantly evolving and financially complex TARP program
requirements, we reviewed OFS's technical oversight of contractors'
performance. We found that OFS exercises oversight consistent with good
practices we have identified when using contractors for more complex
professional services.[Footnote 49] Specifically, information discussed
with COTRs, OFS program officials, and senior contractor officials
responsible for three key TARP areas demonstrated that an interactive
working environment exists between OFS and its TARP contractors and
financial agents. For example, OFS officials, as well as Bank of New
York Mellon managers, told us that they talk daily, and often many
times a day, regarding the execution of the end-of-week closings on
capital investments through CPP--a complex undertaking that involves
many transactions that can total in the billions of dollars.[Footnote
50] According to Treasury officials, this level of interaction provides
frequent opportunities for oversight and helps them to ensure that
their needs are met.
Since January 2009, the Office of the Chief Operating Officer has hired
an executive-level contract administration manager, another action
responsive to and consistent with our prior recommendation.[Footnote
51] His job, in part, is to apply contract management best practices to
TARP contracts and financial agency agreements, and provide leadership
and guidance to COTRs and financial agent managers. Based on
information we reviewed from the contract administration manager, as
well as COTRs and financial agent managers in three program offices,
these efforts should better position OFS to strengthen contract
management.[Footnote 52] Other OFS actions to facilitate the oversight
of TARP contractor and financial agent performance are listed in table
7.
Table 7: OFS Actions Since January 2009 to Enhance Oversight of TARP
Contractors' and Financial Agents' Performance:
Action: Contracting Agreement Review Board;
Purpose: Treasury and OFS executive-level group meets monthly and as
needed to review TARP contractors' and financial agents' performance
and to examine issues with planned TARP acquisitions;
Status: Implemented.
Action: COTR online filing system;
Purpose: Standardizes and centralizes in a data repository key COTR
recordkeeping requirements, including contractors' and financial
agents' invoices; correspondence with contractors; and documentation of
TARP contractors' and financial agents' conflict-of-interest issues.
This system is intended to enhance collaboration across OFS offices and
assist in the transfer of records between COTR appointment transitions;
Status: In development.
Action: COTR roundtable;
Purpose: Weekly discussions with all TARP COTRs led by OFS and Treasury
contract and procurement services managers. The roundtable provides an
opportunity for COTRs to discuss oversight issues they experience
across all TARP contracts and financial agency agreements;
Status: Implemented.
Action: Supplemental COTR training;
Purpose: Annual refresher training program intended to supplement the
formal training and certification required prior to COTR appointment.
OFS Office of the Chief Operating Officer plans to initiate this annual
training to further enhance skills development for COTRs assigned to
TARP contracts and financial agency agreements;
Status: Planned.
Action: Outside expert speaker series;
Purpose: OFS's Contract Administration Manager plans to bring in
outside, executive-level experts from government, the private sector,
and academia to discuss lessons learned working in high-profile
environments with COTRs and other OFS staff responsible for TARP
programs;
Status: Planned.
Source: GAO analysis of Treasury information.
[End of table]
Finally, in response to and consistent with our recommendation,
Treasury has made further progress in using fixed-price contracting
arrangements when the parties possess sufficient knowledge of the
requirements. Although Treasury has awarded new time-and-materials
contracts since January, it also converted work under two time-and-
materials task orders for legal services to fixed-price arrangements
after determining that there were clearly defined requirements (i.e.,
transactional legal services for which the parties could estimate
accurately the level of performance required).[Footnote 53] In
addition, in response to GAO's recommendation, Treasury negotiated a
firm fixed price for two workstreams making up about 20 percent of the
new $5 million task order for internal control services performed by a
contractor. Treasury and OFS officials have worked closely to analyze
the use of time-and-materials arrangements for follow-on requirements
to ensure such arrangements are only used when other contract types are
not suitable. Treasury officials said that their reviews indicate that,
given the nature of the services OFS is procuring, opportunities may be
limited for the foreseeable future to use fixed-price mechanisms when
placing orders for follow-on work or awarding future contracts.
[Footnote 54] According to these officials, fixed-price arrangements
may not be appropriate for many TARP contracts. Considering the still-
evolving nature of TARP's requirements, 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 is gathering 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 our view, Treasury's actions since
January in response to our recommendation generally indicate it is
placing a high priority on making individualized assessments of the
nature of each requirement in order to identify those requirements that
may effectively utilize a fixed-price contract.
OFS Has Made Further Progress Implementing a Compliance System for
Potential Conflicts of Interest Among Contractors and Financial Agents:
Since issuing an interim conflicts-of-interest rule in January 2009,
and consistent with our prior recommendation, OFS continued to make
progress implementing a system of compliance for conflicts of interest
that may arise with vendors seeking or performing work under TARP.
[Footnote 55] Consistent with the framework the interim rule provides,
OFS is formalizing its process for reviewing and addressing potential
or actual organizational and personal conflicts of interest disclosed
by contractors and financial agents.[Footnote 56] Specifically, OFS is
making progress (1) developing and applying its compliance system under
the interim rule, and (2) reviewing existing contracts that predate the
interim rule to determine what changes may be needed.
Regarding OFS's progress in further developing and applying its
conflicts-of-interest compliance system, discussions with OFS program
and compliance officials, two TARP contractors, and a financial agent's
senior contracts manager indicate that a mutual environment for
sustained attention and control is taking root. Specifically, our
discussions with OFS and TARP contractor officials indicate that all
parties have a range of formal and informal processes in place, under
which TARP contractors are expected to detect potential conflicts of
interest. Once detected, the interim rule requires that potential
conflicts be disclosed to Treasury within 5 business days. A disclosure
can trigger a formal review by the OFS compliance officer, who is
responsible for making a final determination.[Footnote 57] The
processes include an ongoing dialogue among OFS officials and officials
from TARP contractors and financial agents about new potential
conflicts and, as needed, discussions about changes to contractors'
mitigation plans to increase their effectiveness and conform with the
interim rule.[Footnote 58]
We note, however, that OFS does not have fully developed procedures for
capturing its decisions on potential conflicts of interest. For
example, concerning the regular discussions of new potential conflicts
that may arise and require OFS's compliance review, it is not clear
that all discussions are documented, or that all information is
captured, such as information supporting OFS's determination that a
conflict does not exist or has been satisfactorily mitigated. TARP
contractors told us that they did not routinely retain records from
their discussions with OFS officials about potential conflict
disclosures and mitigations. These discussions frequently entail phone
conferences but do not always result in formal correspondence
addressing the matter. In the absence of documentation, there is no
record of how issues were addressed and resolved, should the need to
revisit those issues arise in the future. OFS compliance officials
acknowledged that they needed to enhance the procedures for documenting
conflicts discussions in order to better demonstrate compliance with
the interim rule. OFS officials stated they were drafting new policy
and procedure instructions to do so. As conflict disclosures and
proposed mitigations involving TARP contractors and financial agents
continue to emerge, we will need to revisit OFS procedures to ensure
that it maintains appropriate documentation.
OFS has made progress since January, in response to our recommendation
that it review its existing contracts to determine whether changes are
needed in light of the interim rule.[Footnote 59] Specifically, OFS has
reviewed six contracts that predate the interim rule. As of March 13,
2009, this process has resulted in the renegotiation of two
contractors' mitigation plans. OFS compliance officials expect to
finish reviewing the remaining four mitigation plans within the next
several months. We plan to continue monitoring OFS's progress to ensure
that it fully implements our prior recommendation.
Although the above efforts indicate that progress is being made related
to potential conflicts of interest, there may be an opportunity, going
forward, for streamlining OFS oversight in this area. For example, the
portion of the interim rule focusing on personal conflicts of interest
requires that certain contractors obtain financial disclosures in
writing from management officials and key individuals working on TARP
that are no less extensive than those that are required of new high-
level federal government officials.[Footnote 60] Specifically, the
interim rule requires that before working on a TARP matter, management
officials and key individuals at firms involved with the acquisition,
valuation, management, or disposition of troubled assets must disclose
information, in writing, on their and their family's personal,
business, and financial relationships.[Footnote 61] We recognize the
importance of collecting such information to detect and deter conflicts
of interest. However, the selected use of a more streamlined approach,
in appropriate circumstances, could reduce the burden of providing this
information and promote compliance.[Footnote 62] Treasury officials
acknowledged that an alternative financial disclosure process could
offer a less burdensome way for TARP contractors to obtain required
written disclosures from employees but said that any consideration of
an alternative would occur only in the context of evaluating public
comments on the interim conflicts rule. In finalizing the TARP
conflicts-of-interest rule, OFS officials told us that they would be
reviewing various options to the current requirement in the interest of
striking a balance between Treasury's need to protect the government's
interests and the burden the requirement placed on TARP contractors and
financial agents.
OFS Is in the Process of Building TARP's Financial Reporting Structure:
Treasury must annually prepare and submit to Congress and the public
audited fiscal year financial statements for TARP that are prepared in
accordance with generally accepted accounting principles.[Footnote 63]
Moreover, the act requires Treasury to establish and maintain an
effective system of internal control over TARP that includes providing
reasonable assurance of the reliability of its financial reporting
[Footnote 64] and compliance with applicable laws and regulations.
[Footnote 65] It further, requires Treasury to annually report on its
assessment of the effectiveness of internal control over financial
reporting. The act also requires GAO to audit TARP's financial
statements annually in accordance with generally accepted auditing
standards.[Footnote 66]
The fiscal year ending September 30, 2009, will be the first year for
which Treasury prepares financial statements for TARP. OFS has begun to
build a financial reporting structure for preparing the financial
statements. OFS officials told us that they were continuing to address
key accounting and reporting topics, such as defining the reporting
entity; determining the types of revenues and expenses to be included
in TARP; determining the appropriate valuation methods for assets and
liabilities; determining the accounting for administrative expenses,
dividends, and interest; and defining the form and content of TARP's
financial statements. In addition, OFS continues to refine, develop,
and document its internal control framework over financial reporting
and compliance, including its risk assessment activities. The
implementation of a well-defined internal control framework and the
decisions involving key accounting and reporting issues are critical to
enabling OFS to prepare its fiscal year-end financial statements and to
OFS's reporting on its assessment of the effectiveness of TARP's system
of internal control.
As part of GAO's responsibilities under the act, we have begun our
audit of TARP's financial statements and the related internal controls.
Our objectives will be to render opinions on (1) the financial
statements as of and for the period ending September 30, 2009, and (2)
internal control over financial reporting and compliance with
applicable laws and regulations as of September 30, 2009. We will also
be reporting on the results of our test of TARP's compliance with
selected provisions of laws and regulations related to financial
reporting.
Documentation of Certain Internal Control Procedures and Guidance Is
Not Consistent With Actual Practice:
We noted two areas in which OFS's documentation of certain internal
control procedures and guidance pertaining to determining warrant
exercise prices were not updated to be consistent with actual practice.
While these issues do not significantly affect OFS's financial
reporting, they, nevertheless, merit the attention of OFS management to
decrease the risk that the transactions will not be recorded
completely, properly, or consistently and that guidance available to
the public on determining warrant exercise prices will create confusion
about the actual terms and conditions executed by Treasury for its
investments.
Documentation of Certain Internal Control Processes Is Not Consistent
with the Controls Applied:
As part of its internal control framework, OFS plans to develop formal
written policies and procedures governing OFS's operations and expects
to have these policies and procedures finalized by September 30, 2009.
In the interim, OFS has developed and documented process flows and
narratives describing internal control processes for TARP transactions.
Our audit of selected control activities for CPP and SSFI transactions
found that OFS had applied adequate financial reporting controls over
the transactions we tested. However, we found that the actual control
processes and procedures performed for some of the transactions we
tested were inconsistent with the documented flows and descriptions.
Inconsistencies in the application of a control procedure complicate
the review of the transactions and increase the risk that the
transactions will not be recorded completely, properly, or
consistently. According to Treasury officials, these inconsistencies
arose from the removal of certain control activities that were no
longer relevant and the implementation of more effective controls
without the simultaneous updating of the documented process flows or
narratives to reflect these changes. The officials told us that TARP
control processes were continually evolving as management gained more
experience with processing TARP transactions.
Guidance for Determining CPP Warrant Exercise Prices Is Not Consistent
with the Procedures Applied:
Under CPP, Treasury receives warrants to purchase shares of stock of
qualified financial institutions. The date selected as the basis for
determining the warrant exercise price impacts the exercise price and
the number of shares included in the warrants. Treasury consistently
applied its preliminary approval date as the basis for determining the
warrant exercise prices. However, Treasury has not established
guidance, consistent with its procedures, regarding the date to be used
as a basis for determining the warrant exercise prices. We found four
Treasury documents that each had a different description of the date to
use as the basis for determining the warrant exercise prices. For
example, the announced CPP terms and conditions specify, among other
things, the use of the investment date as the basis for determining the
warrant exercise price, but the term "investment date" is not
specifically defined. The CPP program description on Treasury's Web
site, the CPP Application Guidelines, and the Security Purchase
Agreement each provide different guidance on which date to use as a
basis for determining the warrant exercise prices. Inconsistencies in
guidance available to the public for warrant exercise price
determinations may create confusion about the actual terms and
conditions executed by Treasury for its investments.
The eight institutions comprising the first group of CPP transactions,
amounting to $115 billion, signed Participation Commitment documents
stating that the financial institutions are to issue preferred shares
to the Treasury under the terms and conditions announced for CPP.
[Footnote 67] Treasury used October 13, 2008, the date the institutions
signed the Participation Commitment documents, as the basis for
determining the warrant exercise prices. OFS officials told us they
considered the date the institutions signed the Participation
Commitment documents to be Treasury's preliminary approval date.
According to OFS, for the second and subsequent group of CPP
transactions, Treasury's preliminary approval date is the date the
Investment Committee recommends that the Assistant Secretary for
Financial Stability approve the application.[Footnote 68] Our tests of
selected CPP transactions beyond the first group showed that Treasury
consistently utilized the Investment Committee's recommendation date as
the basis for determining the warrant exercise prices. In addition, the
executed agreements between the financial institutions and Treasury
detail, for each warrant, the number of shares of stock Treasury may
purchase at the specific exercise price. As such, these parties are
aware of and consent to the specific terms of the warrants.
Indicators Suggest Mixed Recent Developments in Credit Markets, but
Isolating the Impact of TARP Continues to Present Challenges:
Although indicators of the cost of credit and perceptions of risk in
credit markets suggest mixed developments since our last report, TARP's
activities could improve market confidence in participating banks and
have other beneficial effects on credit markets. However, several
factors will complicate efforts to measure any impact, including
contemporaneous changes in monetary and fiscal policy; other programs
introduced by Treasury, the Federal Reserve, FDIC, and FHFA, and
general market forces. As a result, any changes in credit markets
cannot be attributed solely to TARP. Similarly, slow recovery does not
necessarily reflect its failure. However, if TARP is having its
intended effect, a number of developments might be observed in credit
and other markets over time, such as reduced risk spreads, declining
borrowing costs, and more lending activity than there would have been
in the absence of TARP. Credit market indicators we have been
monitoring suggest the cost of nonmortgage credit has risen, and
perceptions of risk (as measured by premiums over Treasury securities)
have declined in mortgage and interbank markets, while rising in
corporate debt markets. While lending standards remained tight,
according to Federal Reserve data, the largest CPP recipients continued
to extend loans to consumers and businesses of at least $200 billion a
month since October, based on our analysis of Treasury's new loan
survey. As TARP has evolved, we have also initiated tracking of
foreclosure data and consumer credit measures, such as auto loan and
credit card rates, to provide indicators relevant to the new programs.
TARP Programs Could Have a Number of Effects on Credit Markets and the
Economy:
TARP's activities could improve market confidence in participating
banks and have other beneficial effects on credit markets, but several
factors will complicate efforts to measure any impact. In our previous
reports we focused on CPP, detailing the expected effects, as well as
the tension between promoting lending and improving the capital
position of banks. As indicated above, CAP, as proposed by the new
administration, aims to eliminate uncertainty about the solvency of
financial institutions through stress tests and by infusing capital
into the financial system to the point where participating banks can
absorb losses even worse than expected scenarios. The intent is to
improve confidence in financial institutions, allowing the banks to
borrow on more favorable terms, attract private capital and continue
lending to creditworthy businesses and households. Like CPP, if CAP is
effective we should also see improvement in credit market conditions,
including declining risk premiums (the difference between risky and
risk-free interest rates, such as rates on U.S. Treasury securities)
for interbank lending and bank debt and lower borrowing costs for
business and consumers. Improved market conditions may permit some
borrowers to avoid foreclosures by enhancing the capacity and
willingness of banks to refinance loans or modify others. HAMP is
intended to reduce foreclosures by directly modifying and refinancing
mortgages and, therefore, may also indirectly improve the balance
sheets of banks by restoring value to mortgage-related securities.
However, as we discussed in our December 2008 and January 2009 reports,
to the extent that credit quality in the economy is deteriorating,
confidence remains low and the economy continues to experience a
downturn, during which lending and borrowing levels normally drop. Low
interest rates and lower premiums may not translate into increased
lending immediately. Nevertheless, lending may still be higher than it
would have been if the equity injections had not taken place.
Similarly, market forces may continue to force a correction in housing
prices and result in additional foreclosures, albeit fewer than would
have occurred in the absence of TARP.
Similarly, TARP activities could improve credit market conditions by
supporting securitization markets through the expansion of TALF. As
indicated above, TALF will provide funding to certain holders of Aaa-
rated ABS backed by newly and recently originated small business,
student, automobile, and credit card loans. By increasing demand and
prices for these securities, TALF should reduce the rates faced by
borrowers in the associated loan categories and increase the
availability of new credit to consumers and businesses.[Footnote 69]
Moreover, by providing support to securitization markets, TALF may
encourage private investors to return to asset-backed securities,
thereby increasing liquidity and improving general market conditions.
However, as we discussed in our previous reports, other important
policies and interventions by government agencies (some collaborative
efforts) that are undertaken to restore financial stability, as well as
general market forces, will complicate a determination of TARP's
specific effectiveness. TALF, as a joint program with the bulk of the
funding provided by the Federal Reserve, highlights the difficulty of
attributing changes in credit market conditions exclusively to TARP.
Changes in Select Indicators Suggest Mixed Recent Development in Credit
Markets, although These Changes Are Not Necessarily Attributable to
TARP:
While it is difficult to isolate one program's effects, given the
numerous actions being undertaken, we considered a number of indicators
that, although imperfect, may be suggestive of TARP's impact on credit
and other markets. Improvements in these measures would indicate
improving conditions, even though those changes cannot be exclusively
linked to any one program. Table 8 lists the indicators we have
reported on in previous reports, as well as the changes since the last
report and the changes since the announcement of CPP, the first TARP
program. In general, the indicators illustrate that the cost of
nonmortgage credit has risen and that perceptions of risk have declined
in mortgage and interbank markets, while rising in corporate debt
markets since January 2009. For example, while the cost of interbank
credit (LIBOR) has risen slightly since our January 2009 report, the
TED spread, which captures the risk perceived in interbank markets, has
declined. Since the announcement of CPP, the TED spread has fallen 350
basis points.[Footnote 70] Since the announcement of CPP, corporate
bond spreads are up, and there have been increases of 38 and 27 basis
points for high quality (Aaa) and moderate quality (Baa) corporate
spreads, respectively, since our January 2009 report, indicating
heightened risk perceptions. Like the LIBOR, Aaa and Baa bond rates
have increased, indicating an increase in the cost of credit for
businesses. However, the improvement in the mortgage market is
consistent across rates and spreads. Mortgage rates were down 9 basis
points, and the mortgage spread is down 45 basis points. (See our
December and January reports for a more detailed description and
motivation for the indicators.) As discussed above, changes in credit
market conditions may not provide conclusive evidence of TARP's
effectiveness, as other important policies, interventions, and changes
in underlying economic conditions can influence these markets.
Recently, the Federal Reserve announced--in addition to further
interventions in the GSE mortgage-backed security and debt market--that
it intended to improve conditions in private credit markets by
purchasing up to $300 billion of longer-term Treasury securities over
the next 6 months. This activity could result in lower costs for
borrowing activities whose rates tend to move with the Treasury yield.
[Footnote 71]
Table 8: Changes in Selected Credit Market Indicators, January 22,
2008, and March 25, 2009:
Credit market rates and spreads:
Indicator: LIBOR;
Description: 3-month London interbank offered rate (an average of
interest rates offered dollar-denominated loans);
Change since January report: Up 6 basis points;
Change since October 13, 2008: Down 353 basis points.
Indicator: TED Spread;
Description: Spread between 3-month LIBOR and 3-month Treasury yield;
Change since January report: Down 6 basis points;
Change since October 13, 2008: Down 350 basis points.
Indicator: Aaa bond rate;
Description: Rate on highest quality corporate bonds;
Change since January report: Up 38 basis points;
Change since October 13, 2008: Down 84 basis points.
Indicator: Aaa bond spread;
Description: Spread between Aaa bond rate and 10-year Treasury yield;
Change since January report: Up 35 basis points; Change since October
13, 2008: Up 40 basis points.
Indicator: Baa bond rate;
Description: Rate on corporate bonds subject to moderate credit risk;
Change since January report: Up 27 basis points;
Change since October 13, 2008: Down 24 basis points.
Indicator: Baa bond spread;
Description: Spread between Baa bond rate and 10-year Treasury yield;
Change since January report: Up 24 basis points;
Change since October 13, 2008: Up 100 basis points.
Indicator: Mortgage rates;
Description: 30-year conforming loans rate;
Change since January report: Down 9 basis points;
Change since October 13, 2008: Down 143 basis points.
Indicator: Mortgage spread;
Description: Spread between 30-year conforming loans rate and 10-year
Treasury yield;
Change since January report: Down 45 basis points;
Change since October 13, 2008: Down 33 basis points.
Credit market rates and spreads: Indicator: [Empty]; Credit market
rates and spreads: Description: [Empty]; Credit market rates and
spreads: Change since January report: [Empty]; Credit market rates and
spreads: Change since October 13, 2008: [Empty].
Quarterly mortgage volume and defaults:
Indicator: Foreclosure rate;
Description: Percentage of homes in foreclosure;
Change since January report: [Empty];
Change from September 20 to December 31, 2008: Up 0.33 percentage
points to 3.3%.
Indicator: Mortgage originations;
Description: New mortgage loans;
Change since January report: [Empty];
Change from September 20 to December 31, 2008: Down $50 billion to $250
billion.
Source: GAO analysis of data from Global Insight, Federal Reserve Bank
of St. Louis, and Inside Mortgage Finance. (Daily and weekly data will
be updated 4-5 days before the release of March report.)
Note: Rates and yields are daily except mortgage rates, which are
weekly. Higher spreads (measured as premiums over Treasury securities
of comparable maturity) represent higher perceived risk in lending to
certain borrowers. Higher rates represent increases in the cost of
borrowing for relevant borrowers. As a result, "down" suggests
improvement in market conditions for credit market rates and spreads.
Foreclosure rate and mortgage origination data are quarterly. See
previous TARP reports for a more detailed discussion.
[End of table]
Other indicators that may become better measures of TARP's
effectiveness over time are mortgage originations and foreclosures.
While the volume of new mortgage lending may reflect changes in credit
risk or the demand for credit, it may also indicate the availability of
credit as well.[Footnote 72] As table 9 indicates, mortgage
originations fell from $300 billion in the third quarter to $250
billion in the fourth quarter of 2008. To the extent that credit and
economic conditions improve over time, we would expect mortgage
originations to stop declining and eventually rise, although it is not
clear that this measure would or should return to the level seen in the
period leading up to the credit market turmoil. Similarly, foreclosure
data should provide an indication of the effectiveness of the recently
implemented HAMP program going forward. The percentage of loans in
foreclosure had reached an unprecedented high of 3.3 percent at the end
of the fourth quarter of 2008, up from 2.97 percent the previous
quarter. As stated above, general market forces, including falling
housing prices, rising unemployment, and other programs outside of TARP
that are being undertaken to address the rising foreclosure rate will
complicate efforts to determine the effectiveness of HAMP.
New Lending at the 20 Largest Participants in CPP:
The largest CPP recipients continued to extend loans to consumers and
businesses, over $200 billion a month since October, based on our
analysis of Treasury's new loan survey. Because these data are unique,
we were not able to benchmark the origination levels against historical
lending or seasonal patterns at these institutions. As illustrated in
figure 4, while total mortgage originations fell in the fourth quarter
of 2008, these data suggest that new lending at the 20 largest
institutions participating in CPP (as of December 31, 2008), after
dropping by about 21 percent from October to November, rose roughly 18
percent from November to December.[Footnote 73]
Figure 4: New Lending at 20 Largest Recipients of CPP, between October
1, 2008, and January 31, 2009:
[Refer to PDF for image: line graph]
October 2008: $262.1 billion;
November 2008: $207.1 billion;
December 2008: $244.7 billion;
January 2009: $245.1 billion.
Source: GAO analysis of Treasury loan survey data.
[End of figure]
Although lending normally drops during a recession, according to our
analysis of the survey, aggregate new lending by these institutions in
December amounted to roughly $245 billion (table 9). Total new lending
in January increased slightly. The reporting institutions generally
received CPP funds on October 28, 2008, or November 14, 2008, with a
few institutions receiving funds on December 31, 2008. In figure 4, we
present new lending by month. Although we recognize the limitations
inherent in these data, the survey data will prove valuable for more
thorough analyses of lending activity in future reports.
Table 9: New Lending at 20 Largest Recipients of CPP, between October
1, 2008, and January 31, 2009 (Dollars in millions):
Institution: Citigroup;
Date of CPP: 10/28/2008;
Size of CPP: $25,000;
New Lending: October: $19,373;
New Lending: November: $17,854;
New Lending: December: $22,864;
New Lending: January: $18,814.
Institution: JP Morgan Chase & Co.;
Date of CPP: 10/28/2008;
Size of CPP: $25,000;
New Lending: October: $61,192;
New Lending: November: $51,178;
New Lending: December: $52,376;
New Lending: January: $46,785.
Institution: Wells Fargo Bank;
Date of CPP: 10/28/2008;
Size of CPP: $25,000;
New Lending: October: $35,073;
New Lending: November: $26,709;
New Lending: December: $31,063;
New Lending: January: $50,560.
Institution: Bank of America;
Date of CPP: 10/28/2008;
Size of CPP: $15,000;
New Lending: October: $70,569;
New Lending: November: $48,864;
New Lending: December: $61,427;
New Lending: January: $60,624.
Institution: Goldman Sachs & Co.;
Date of CPP: 10/28/2008;
Size of CPP: $10,000;
New Lending: October: $1,490;
New Lending: November: $1,666;
New Lending: December: $2,551;
New Lending: January: $6,487.
Institution: Morgan Stanley;
Date of CPP: 10/28/2008;
Size of CPP: $10,000;
New Lending: October: $1,787;
New Lending: November: $6,302;
New Lending: December: $3,170;
New Lending: January: $3,551.
Institution: Bank of New York Mellon Corp;
Date of CPP: 10/28/2008;
Size of CPP: $3,000;
New Lending: October: $879;
New Lending: November: $800;
New Lending: December: $849;
New Lending: January: $730.
Institution: State Street;
Date of CPP: 10/28/2008;
Size of CPP: $2,000;
New Lending: October: $1,404;
New Lending: November: $749;
New Lending: December: $1,403;
New Lending: January: $289.
Institution: U.S. Bancorp;
Date of CPP: 11/14/2008;
Size of CPP: $6,599;
New Lending: October: $13,371;
New Lending: November: $11,244;
New Lending: December: $17,262;
New Lending: January: $13,866.
Institution: Capital One Financial Corporation;
Date of CPP: 11/14/2008;
Size of CPP: $3,555;
New Lending: October: $3,477;
New Lending: November: $2,825;
New Lending: December: $3,024;
New Lending: January: $2,531.
Institution: SunTrust Banks, Inc.;
Date of CPP: 11/14/2008;
Size of CPP: $3,500;
New Lending: October: $7,612;
New Lending: November: $4,827;
New Lending: December: $6,514;
New Lending: January: $6,511.
Institution: Regions;
Date of CPP: 11/14/2008;
Size of CPP: $3,500;
New Lending: October: $5,994;
New Lending: November: $4,664;
New Lending: December: $5,832;
New Lending: January: $4,983.
Institution: BB&T Corp.;
Date of CPP: 11/14/2008;
Size of CPP: $3,134;
New Lending: October: $5,929;
New Lending: November: $4,901;
New Lending: December: $6,197;
New Lending: January: $5,976.
Institution: KeyCorp;
Date of CPP: 11/14/2008;
Size of CPP: $2,500;
New Lending: October: $3,238;
New Lending: November: $2,671;
New Lending: December: $4,518;
New Lending: January: $3,065.
Institution: Comerica Inc.;
Date of CPP: 11/14/2008;
Size of CPP: $2,250;
New Lending: October: $3,830;
New Lending: November: $2,300;
New Lending: December: $3,242;
New Lending: January: $1,425.
Institution: Marshall & Ilsley;
Date of CPP: 11/14/2008;
Size of CPP: $1,715;
New Lending: October: $1,331;
New Lending: November: $1,181;
New Lending: December: $1,206;
New Lending: January: $960.
Institution: Northern Trust;
Date of CPP: 11/14/2008;
Size of CPP: $1,576;
New Lending: October: $1,985;
New Lending: November: $1,364;
New Lending: December: $1,810;
New Lending: January: $1,270.
Institution: PNC Financial Services Group Inc.;
Date of CPP: 12/31/2008;
Size of CPP: $7,579;
New Lending: October: $11,273;
New Lending: November: $6,313;
New Lending: December: $8,076;
New Lending: January: $8,170.
Institution: Fifth Third Bancorp;
Date of CPP: 12/31/2008;
Size of CPP: $3,408;
New Lending: October: $7,025;
New Lending: November: $6,414;
New Lending: December: $7,119;
New Lending: January: $5,070.
Institution: CIT Group Inc.;
Date of CPP: 12/31/2008;
Size of CPP: $2,330;
New Lending: October: $5,317;
New Lending: November: $4,232;
New Lending: December: $4,182;
New Lending: January: $3,429.
Institution: Total;
Date of CPP:
Size of CPP: $156,646;
New Lending: October: $262,149;
New Lending: November: $207,059;
New Lending: December: $244,686;
New Lending: January: $245,095.
Source: GAO analysis of Treasury loan survey data.
Note: The table features the 20 largest recipients of CPP funds who had
received funds, as of December 31, 2008, and does not include American
Express, which received CPP funds in January. New lending includes new
mortgage, home equity lines of credit, credit card and other consumer
originations, new or renewed commercial and industrial loans, and
commercial real estate loans. However, new lending does not include
other important activities that these institutions may undertake to
facilitate credit intermediation, including underwriting and purchasing
MBS and ABS. Date and size of CPP refers to the initial infusion of CPP
funds. Citigroup and Bank of America have received additional TARP
funds.
[End of table]
Federal Reserve Senior Loan Officer Opinion Survey:
The Federal Reserve Loan Officer survey asks senior loan officers at
U.S. banks about changes in lending standards, lending terms, and the
state of business and household demand for loans.[Footnote 74] The most
recent survey suggests that although the percentage of banks tightening
credit remains above previous peaks, fewer banks have tightened credit
standards in approving applications for loans since the October 2008
survey.[Footnote 75] For example, the net percentage of banks
tightening credit standards for commercial and industrial loans fell
from roughly 84 percent in October 2008 to approximately 64 percent in
January 2009 for large firms, although the drop for small firms was
somewhat less significant, 75 percent and 70 percent, respectively
(figure 5). Although not reported here, similar patterns emerged for
subprime and prime residential mortgage loans and other consumer loans.
However, lending standards in January remained as tight as they were in
October for credit card lending. As figure 5 shows, the results of the
survey also suggest weaker demand for commercial and industrial loans
by both smaller and larger firms and a slight decrease in the
percentage of banks indicating increased spreads (loan rate charged
firms over the cost of funds), although spreads remain well above
previous highs. However, the percentage of banks reporting stronger
demand for both prime and subprime loans has increased significantly
since the October survey, while the demand for other consumer loans has
remained roughly the same.
Figure 5: Net Percentages of Banks Tightening Lending Standards,
Increasing Spreads, and Reporting Stronger Demand for Loans, by firm
size, between October 1997 and March 2009:
[Refer to PDF for image: 3 multiple line graphs]
Standards:
Date: Q3, 1997:
Large and medium firms: -5.7%;
Small firms: -1.9%.
Date: Q4, 1997:
Large and medium firms: -7%;
Small firms: -3.5%.
Date: Q1, 1998:
Large and medium firms: 1.8%;
Small firms: 1.9%.
Date: Q2, 1998:
Large and medium firms: -7.1%;
Small firms: -1.8%.
Date: Q3, 1998:
Large and medium firms: 0%;
Small firms: -5.2%.
Date: Q4, 1998:
Large and medium firms: 36.4%;
Small firms: 14.8%.
Date: Q1, 1999:
Large and medium firms: 7.4%;
Small firms: 3.7%.
Date: Q2, 1999:
Large and medium firms: 10%;
Small firms: 8.3%.
Date: Q3, 1999:
Large and medium firms: 5.4%;
Small firms: 1.9%.
Date: Q4, 1999:
Large and medium firms: 9.1%;
Small firms: 1.9%.
Date: Q1, 2000:
Large and medium firms: 10.9%;
Small firms: 9.4%.
Date: Q2, 2000:
Large and medium firms: 24.6%;
Small firms: 21.4%.
Date: Q3, 2000:
Large and medium firms: 33.9%;
Small firms: 23.6%.
Date: Q4, 2000:
Large and medium firms: 43.8%;
Small firms: 27.3%.
Date: Q1, 2001:
Large and medium firms: 59.7%;
Small firms: 45.4%.
Date: Q2, 2001:
Large and medium firms: 50.9%;
Small firms: 36.4%.
Date: Q3, 2001:
Large and medium firms: 40.4%;
Small firms: 31.6%.
Date: Q4, 2001:
Large and medium firms: 50.9%;
Small firms: 40.4%.
Date: Q1, 2002:
Large and medium firms: 45.4%;
Small firms: 41.8%.
Date: Q2, 2002:
Large and medium firms: 25%;
Small firms: 14.5%.
Date: Q3, 2002:
Large and medium firms: 21.4%;
Small firms: 5.5%.
Date: Q4, 2002:
Large and medium firms: 20%;
Small firms: 18.2%.
Date: Q1, 2003:
Large and medium firms: 22%;
Small firms: 13.8%.
Date: Q2, 2003:
Large and medium firms: 8.9%;
Small firms: 12.7%.
Date: Q3, 2003:
Large and medium firms: 3.5%;
Small firms: 3.5%.
Date: Q4, 2003:
Large and medium firms: 0%;
Small firms: -1.8%.
Date: Q1, 2004:
Large and medium firms: -17.9%;
Small firms: -10.9%.
Date: Q2, 2004:
Large and medium firms: -23.2%;
Small firms: -19.6%.
Date: Q3, 2004:
Large and medium firms: -20%;
Small firms: -3.7%.
Date: Q4, 2004:
Large and medium firms: -21.1%;
Small firms: -18.2%.
Date: Q1, 2005:
Large and medium firms: -23.6%;
Small firms: -12.9%.
Date: Q2, 2005:
Large and medium firms: -24.1%;
Small firms: -24.1%.
Date: Q3, 2005:
Large and medium firms: -16.7%;
Small firms: -11.1%.
Date: Q4, 2005:
Large and medium firms: -8.8%;
Small firms: -5.3%.
Date: Q1, 2006:
Large and medium firms: -10.7%;
Small firms: -7.1%.
Date: Q2, 2006:
Large and medium firms: -12.3%;
Small firms: -7%.
Date: Q3, 2006:
Large and medium firms: -8.9%;
Small firms: -1.8%.
Date: Q4, 2006:
Large and medium firms: 0%;
Small firms: -1.8%.
Date: Q1, 2007:
Large and medium firms: 0%;
Small firms: 5.3%.
Date: Q2, 2007:
Large and medium firms: -3.7%;
Small firms: 1.9%.
Date: Q3, 2007:
Large and medium firms: 7.5%;
Small firms: 7.7%.
Date: Q4, 2007:
Large and medium firms: 19.2%;
Small firms: 9.6%.
Date: Q1, 2008:
Large and medium firms: 32.2%;
Small firms: 30.4%.
Date: Q2, 2008:
Large and medium firms: 55.4%;
Small firms: 51.8%.
Date: Q3, 2008:
Large and medium firms: 57.6%;
Small firms: 65.3%.
Date: Q4, 2008:
Large and medium firms: 83.6%;
Small firms: 74.5%.
Date: Q1, 2009:
Large and medium firms: 64.2%;
Small firms: 69.2%.
Demand:
Date: Q3, 1997:
Large and medium firms: 13.4%;
Small firms: 19.6%.
Date: Q4, 1997:
Large and medium firms: 19.3%;
Small firms: 19.3%.
Date: Q1, 1998:
Large and medium firms: 25.2%;
Small firms: 15.4%.
Date: Q2, 1998:
Large and medium firms: 28.5%;
Small firms: 21.1%.
Date: Q3, 1998:
Large and medium firms: -8.9%;
Small firms: 0%.
Date: Q4, 1998:
Large and medium firms: 27.7%;
Small firms: 7.7%.
Date: Q1, 1999:
Large and medium firms: 20.4%;
Small firms: 11.4%.
Date: Q2, 1999:
Large and medium firms: 0%;
Small firms: 10.1%.
Date: Q3, 1999:
Large and medium firms: 0%;
Small firms: 0.1%.
Date: Q4, 1999:
Large and medium firms: -1.8%;
Small firms: -3.8%.
Date: Q1, 2000:
Large and medium firms: 9.1%;
Small firms: -1.9%.
Date: Q2, 2000:
Large and medium firms: -8.8%;
Small firms: 5.3%.
Date: Q3, 2000:
Large and medium firms: -5.3%;
Small firms: -3.6%.
Date: Q4, 2000:
Large and medium firms: -22.8%;
Small firms: -12.8%.
Date: Q1, 2001:
Large and medium firms: -50.0%;
Small firms: -29.7%.
Date: Q2, 2001:
Large and medium firms: -40%;
Small firms: -34.5%.
Date: Q3, 2001:
Large and medium firms: -52.7%;
Small firms: -42.1%.
Date: Q4, 2001:
Large and medium firms: -70.2%;
Small firms: -50%.
Date: Q1, 2002:
Large and medium firms: -54.5%;
Small firms: -45.4%.
Date: Q2, 2002:
Large and medium firms: -35.7%;
Small firms: -29%.
Date: Q3, 2002:
Large and medium firms: -44.6%;
Small firms: -36.4%.
Date: Q4, 2002:
Large and medium firms: -52.7%;
Small firms: -48.2%.
Date: Q1, 2003:
Large and medium firms: -32%;
Small firms: -20.6%.
Date: Q2, 2003:
Large and medium firms: -39.3%;
Small firms: -21.8%.
Date: Q3, 2003:
Large and medium firms: -22.5%;
Small firms: -12.3%.
Date: Q4, 2003:
Large and medium firms: -11.6%;
Small firms: -3.9%.
Date: Q1, 2004:
Large and medium firms: 10.7%;
Small firms: 21.8%.
Date: Q2, 2004:
Large and medium firms: 28.6%;
Small firms: 38.1%.
Date: Q3, 2004:
Large and medium firms: 31.4%;
Small firms: 38.9%.
Date: Q4, 2004:
Large and medium firms: 26.3%;
Small firms: 25.5%.
Date: Q1, 2005:
Large and medium firms: 45.5%;
Small firms: 29.6%.
Date: Q2, 2005:
Large and medium firms: 37%;
Small firms: 37%.
Date: Q3, 2005:
Large and medium firms: 40.8%;
Small firms: 35.2%.
Date: Q4, 2005:
Large and medium firms: 14.3%;
Small firms: 8.9%.
Date: Q1, 2006:
Large and medium firms: 16.1%;
Small firms: 5.3%.
Date: Q2, 2006:
Large and medium firms: 3.5%;
Small firms: 3.5%.
Date: Q3, 2006:
Large and medium firms: -1.8%;
Small firms: 0%.
Date: Q4, 2006:
Large and medium firms: -3.7%;
Small firms: -13%.
Date: Q1, 2007:
Large and medium firms: -1.8%;
Small firms: -5.3%.
Date: Q2, 2007:
Large and medium firms: -22.6%;
Small firms: -19.2%.
Date: Q3, 2007:
Large and medium firms: -19.2%;
Small firms: -11.8%.
Date: Q4, 2007:
Large and medium firms: -17.3%;
Small firms: -7.7%.
Date: Q1, 2008:
Large and medium firms: -16.4%;
Small firms: -23.6%.
Date: Q2, 2008:
Large and medium firms: 0%;
Small firms: -16.1%.
Date: Q3, 2008:
Large and medium firms: -3.8%;
Small firms: -15.4%.
Date: Q4, 2008:
Large and medium firms: -16.7%;
Small firms: -7.4%.
Date: Q1, 2009:
Large and medium firms: -60.4%;
Small firms: 57.7%.
Spreads:
Date: Q3, 1997:
Large and medium firms: -38.5%;
Small firms: -25.5.
Date: Q4, 1997:
Large and medium firms: -40.4%;
Small firms: -40.4%.
Date: Q1, 1998:
Large and medium firms: -25.4%;
Small firms: -24.1%.
Date: Q2, 1998:
Large and medium firms: -34%;
Small firms: -25%.
Date: Q3, 1998:
Large and medium firms: -14.3%;
Small firms: -30.4%.
Date: Q4, 1998:
Large and medium firms: 47.3%;
Small firms: 18.9%.
Date: Q1, 1999:
Large and medium firms: 31.4%;
Small firms: 5.7%.
Date: Q2, 1999:
Large and medium firms: 7.1%;
Small firms: 1.8%.
Date: Q3, 1999:
Large and medium firms: 21.5%;
Small firms: 5.5%.
Date: Q4, 1999:
Large and medium firms: 23.6%;
Small firms: -1.9%.
Date: Q1, 2000:
Large and medium firms: 25%;
Small firms: 10%.
Date: Q2, 2000:
Large and medium firms: 35.2%;
Small firms: 16%.
Date: Q3, 2000:
Large and medium firms: 35.8%;
Small firms: 25.4%.
Date: Q4, 2000:
Large and medium firms: 54.4%;
Small firms: 26.9%.
Date: Q1, 2001:
Large and medium firms: 57.1%;
Small firms: 28.9%.
Date: Q2, 2001:
Large and medium firms: 44.4%;
Small firms: 22.3%.
Date: Q3, 2001:
Large and medium firms: 50.8%;
Small firms: 38.2%.
Date: Q4, 2001:
Large and medium firms: 58.9%;
Small firms: 41.8%.
Date: Q1, 2002:
Large and medium firms: 40%;
Small firms: 36.4%.
Date: Q2, 2002:
Large and medium firms: 23.7%;
Small firms: 13.2%.
Date: Q3, 2002:
Large and medium firms: 41.1%;
Small firms: 20%.
Date: Q4, 2002:
Large and medium firms: 29.1%;
Small firms: 14.8%.
Date: Q1, 2003:
Large and medium firms: 27.1%;
Small firms: 15.5%.
Date: Q2, 2003:
Large and medium firms: 14.6%;
Small firms: 11.1%.
Date: Q3, 2003:
Large and medium firms: -12.3%;
Small firms: -3.6%.
Date: Q4, 2003:
Large and medium firms: -13.8%;
Small firms: -10.5%.
Date: Q1, 2004:
Large and medium firms: -26.8%;
Small firms: -16.7%.
Date: Q2, 2004:
Large and medium firms: -39.3%;
Small firms: -25.9%.
Date: Q3, 2004:
Large and medium firms: -30.8%;
Small firms: -29.1%.
Date: Q4, 2004:
Large and medium firms: -50%;
Small firms: -38.2%.
Date: Q1, 2005:
Large and medium firms: -45.5%;
Small firms: -26%.
Date: Q2, 2005:
Large and medium firms: -70.4%;
Small firms: -54.7%.
Date: Q3, 2005:
Large and medium firms: -46.3%;
Small firms: -37.7%.
Date: Q4, 2005:
Large and medium firms: -45.6%;
Small firms: -36.8%.
Date: Q1, 2006:
Large and medium firms: -42.5%;
Small firms: -33.4%.
Date: Q2, 2006:
Large and medium firms: -59.7%;
Small firms: -45.6%.
Date: Q3, 2006:
Large and medium firms: -41.8%;
Small firms: -21.5%.
Date: Q4, 2006:
Large and medium firms: -29.6%;
Small firms: -31.5%.
Date: Q1, 2007:
Large and medium firms: -44.6%;
Small firms: -29.6%.
Date: Q2, 2007:
Large and medium firms: -52.8%;
Small firms: -37.2%.
Date: Q3, 2007:
Large and medium firms: -32.1%;
Small firms: -32.7%.
Date: Q4, 2007:
Large and medium firms: 34.6%;
Small firms: 21.1%.
Date: Q1, 2008:
Large and medium firms: 43.6%;
Small firms: 40.1%.
Date: Q2, 2008:
Large and medium firms: 71%;
Small firms: 63.6%.
Date: Q3, 2008:
Large and medium firms: 80.8%;
Small firms: 71.1%.
Date: Q4, 2008:
Large and medium firms: 98.2%;
Small firms: 92.7%.
Date: Q1, 2009:
Large and medium firms: 92.5%;
Small firms: 88.5%.
Source: GAO analysis of Federal Reserve data.
Note: Negative percentage implies, for example, that the percentage of
firms loosening standards exceeds the percentage tightening standards.
Large and medium-size firms are those with annual sales of $50 million
or more.
[End of figure]
Automobile Lending and Credit Card Rates:
In addition to the indicators previously identified, we continue to
evaluate the potential usefulness of other indicators and expect to add
new indicators and modify or drop others. Among these are measures of
lending activity in consumer loan markets that may become more
appropriate indicators as time progresses, given the initiation of
TALF. As stated above, TALF support to securitization markets should
result in lower rates and increased availability of credit for the
businesses and households that receive the underlying loans. The
primary consumer-ABS markets include ABS backed by auto loans, credit
card receivables and student loans. Although the TALF program was
initiated only recently, figure 6 establishes the historical context
for continued monitoring of auto loan rates. As the figure shows, until
recently, average finance company auto rates were consistently below
commercial bank auto rates. However, from August to November of 2008,
finance company rates increased significantly (132 basis points), while
bank rates increased just slightly (13 basis points). Finance company
rates increased another 180 basis points from November 2008 to January
2009.[Footnote 76] Because stand-alone auto finance companies are more
heavily reliant on securitization than commercial banks, the difference
in these trends (or the spread between the two rates) could partially
reflect the issues in securitization markets that TALF is intended to
address.[Footnote 77] We continue to monitor this spread, as well as
other measures of consumer loan activity.
Figure 6: Average Finance Rate for New Cars at Auto Finance Companies
and Banks, February 2006 and January 2009:
[Refer to PDF for image: multiple line graph]
February 2006:
Bank auto rate: 7.39%;
Finance company auto rate: 6.32%.
May 2006:
Bank auto rate: 7.6%;
Finance company auto rate: 6.18%.
August 2006:
Bank auto rate: 7.95%;
Finance company auto rate: 4%.
November 2006:
Bank auto rate: 7.92%;
Finance company auto rate: 5.14%.
February 2007:
Bank auto rate: 7.74%;
Finance company auto rate: 4.49%.
May 2007:
Bank auto rate: 7.92%;
Finance company auto rate: 5.18%.
August 2007:
Bank auto rate: 7.82%;
Finance company auto rate: 4.65%.
November 2007:
Bank auto rate: 7.59%;
Finance company auto rate: 4.72%.
February 2008:
Bank auto rate: 7.27%;
Finance company auto rate: 5.37%.
May 2008:
Bank auto rate: 6.84%;
Finance company auto rate: 5.82%.
August 2008:
Bank auto rate: 6.92%;
Finance company auto rate: 5.11%.
November 2008:
Bank auto rate: 7.05%;
Finance company auto rate: 6.43%.
January 2008:
Finance company auto rate: 8.23%.
Source: GAO analysis of Federal Reserve data.
[End of figure]
Conclusions:
Treasury has continued to take significant steps to address all the
recommendations from our December 2008 and January 2009 reports. In
particular, Treasury has recently expanded the scope of the monthly CPP
surveys of the 20 largest institutions to include all institutions
participating in the program. This change should provide Treasury with
the information necessary to begin to track the effectiveness of the
program and effectively implement our recommendation. Treasury also has
expedited efforts to ensure that trained and certified personnel
oversee the performance of all contracts and moved toward fixed-price
arrangements, when appropriate. These actions were consistent with our
recommendations for improved contractor oversight in these areas.
Moreover, Treasury continued to make progress in several other areas,
including ensuring that future agreements entered into under its new
programs better enable it to determine what institutions plan to do
with any capital infusions and to track the resulting lending activity
of participating institutions on a regular basis. Appendix II provides
our assessment of Treasury's implementation of our open recommendations
from our January 2009 report, and appendix III provides a high-level
summary, prepared by Treasury, of the progress it has made on each
recommendation since our last report and some planned next steps.
During this period, Treasury has also continued to improve its
monitoring of compliance with the terms of its existing agreements.
Treasury officials told us that asset managers are to play a role in
monitoring the participating institutions' compliance with the
agreements. In the interim, Treasury has taken some steps to help
ensure that institutions are complying with dividend, stock repurchase,
and executive compensation restrictions. Treasury relies on
participants' representations and warranties in the agreements, and if
it finds reason to believe that these representations can not be relied
upon, it can pursue the available remedies for any false
representations. At this point, Treasury has not taken steps to verify
the information or require the institutions to provide any additional
documentation. As recommended in our December 2008 report, we continue
to believe that Treasury should develop a formal system to help ensure
compliance with the agreements and leverage the oversight activities of
the bank regulators by having them include compliance with the
agreements as part of their ongoing examinations. This type of
compliance activity is generally consistent with ensuring the safety
and soundness of institutions. The regulators previously told us that
they were taking steps to build such oversight into their examination
procedures. However, without a consistent oversight approach, Treasury
runs the risk of receiving inconsistent or incomplete information from
the regulators.
Treasury has also continued to take steps to articulate a more clearly
defined vision for TARP, and in February 2009, provided its strategy
for using its remaining funds. This strategy defined the existing
problems and how the various programs would begin to address them.
While the initial plan provided a broad vision and strategy, in the
subsequent weeks, Treasury provided additional details for the various
components of the program. In particular, it announced its plans to
participate in the purchase of troubled assets through public-private
partnerships and launched a homeownership protection program,
activities that are consistent with the original plans for TARP. Given
that only 60 days have passed since our last report, we acknowledge the
significance of these accomplishments. Yet, Treasury continues to be
hampered by questions about its overall strategy and OFS's activities,
raising questions about the effectiveness of its existing communication
strategy. Treasury's strategy has largely been one of posting
information to its Web site; issuing press releases, speeches, and
testimonies; and reaching out to Congress on an ad hoc basis; and it
continues to face ongoing communication challenges. Given the
complexity of the issues involved and the heightened public scrutiny,
an effective communication strategy continues to be critical, but
Treasury has yet to develop a means of regularly and routinely
communicating its activities to relevant congressional committees and
members, the public, and other critical stakeholders. For example, TARP
had received approximately $2.9 billion in dividend payments through
March 20, 2009, but this information has not been reported to the
Congress and the public. To improve transparency, Treasury should
publicly announce the amounts, such as dividends, it has received from
TARP participants. By not sharing this information, Treasury is missing
an important opportunity to provide information about the returns it is
receiving on its investments. An effective communication strategy
should, among other things, build understanding and support for the
program through regular and routine outreach, including confidential
member briefings; integrate communications and operations by making
communication integral to the program; and increase the impact of
communication tools such as electronic and print media and video. Given
that the President's proposed budget contemplates additional funding,
an effective communication strategy is critical for ensuring the
support necessary to obtain such funding.
Treasury has taken appropriate actions to bolster the conditions or
requirements for assistance that is deemed exceptional, but certain
assistance may require that it go farther to repair damage caused to
the program. Controversies about the actions of some TARP participants
continue to surround the program, in general, and AIG, in particular.
While Treasury announced $70 billion dollars in assistance to AIG--more
assistance than has been provided to any other single institution to
date--it has yet to disperse the up to $30 billion of additional
assistance announced on March 2, 2009, or finalize the agreement.
Therefore, Treasury has an opportunity to further improve the integrity
and accountability associated with this additional assistance. Based on
our previous work on government assistance to the private sector, as
well as the Treasury Secretary's position, as articulated in the
Financial Stability Plan that "government support must come with strong
conditions," Treasury has an opportunity to take additional steps to
strengthen its agreement with AIG by requiring AIG seek to negotiate
concessions from management, employees, and counterparties, as
appropriate, before the agreement is finalized. For example, Treasury
could require that AIG seek to renegotiate contracts with its
employees, such as existing contracts similar to the contract for
retention bonuses with AIG Financial Products' employees, and with
existing counterparties that would face substantial losses were AIG to
have its credit downgraded or fail. While we understand that Treasury
is making an investment in AIG, Treasury's failure to act in this
instance could cause additional harm to its reputation and impair its
ability to seek additional funding for TARP that might be needed in the
future.
Next, Treasury has also made progress in establishing its management
infrastructure and has responded to our five open recommendations that
are related to hiring, contracting, and establishing its internal
controls.
* In the hiring area, Treasury has continued to make progress in
establishing its management infrastructure, including hiring more
staff. In accordance with our prior recommendation that it
expeditiously hire personnel to OFS, Treasury continued to use direct-
hire and various other appointments to bring a number of career staff
on board quickly. Since our January 2009 report, Treasury has increased
the total number of OFS staff overall and the balance has shifted from
mostly detailees to more permanent staff, indicating that the workforce
has become more stable over time. In our last report, we recognized
that the changing nature of OFS had made it difficult for officials to
determine its long-term organizational needs but that such
considerations continued to be vital to retaining institutional
knowledge within the organization as programs evolved. Treasury has
taken further steps to align OFS's human capital program with its
current and emerging mission and programmatic goals. For example, as
outlined in its draft workforce plan, Treasury has taken steps to
identify the critical skills and competencies needed to operate OFS and
plans to develop strategies to address gaps in these areas. These
actions will be critical to OFS's ability to monitor its progress in
building and developing the OFS workforce.
* Treasury has continued to build a network of contractors and
financial agents to support TARP administration and operations. At the
same time, Treasury has continued to build its capacity to manage these
vendors by putting into place the people and processes necessary to
enhance its oversight of contractor and financial agent performance.
Given the still-evolving nature of TARP requirements, we recognize that
opportunities for using fixed-price arrangements may be limited.
Nonetheless, Treasury has a process that should help it determine where
those opportunities exist. In developing this process, Treasury has
addressed our prior recommendation in this area, and we will monitor
continued progress. In addition, Treasury could enhance its efforts to
safeguard the TARP program from conflicts of interest involving its
contractors and financial agents by completing its review of mitigation
plans to ensure conformity with the new conflicts-of-interest rule and
by requiring that decisions on potential conflicts be documented.
* OFS has begun to build a financial reporting structure, including
addressing the key accounting and financial reporting issues necessary
to enable it to prepare financial statements and to assess the
effectiveness of TARP's system of internal control. Consistent with our
previous recommendations, OFS is continuing to develop a comprehensive
system of internal control and has established plans for finalizing
formal policies and procedures to govern TARP activities and assess its
risks. In the interim, OFS has developed and documented process flows
and narratives describing internal control procedures for TARP
transactions. While OFS applied adequate control procedures over
selected CPP and SSFI transactions we tested, it has not taken steps to
provide consistency between the documented descriptions and the actual
procedures for certain controls that were applied to the transactions.
Inconsistencies in the application of a control procedure complicate
review of the transactions and increase the risk that the transactions
may not be recorded completely, properly, or consistently. Similarly,
OFS needs to address inconsistencies in guidance pertaining to
determining warrant exercise prices. Inconsistencies in guidance
available to the public for these price determinations may create
confusion about the actual terms and conditions executed by Treasury
for its investments.
* Finally, we again note that while isolating the effect of TARP's
activities continues to be difficult, developments in the credit
markets have generally been mixed since our January 2009 report. Some
indicators demonstrate that the cost of credit has increased in
interbank and corporate bond markets and decreased in mortgage markets,
while perceptions of risk (as measured by premiums over Treasury
securities) have declined in interbank and mortgage markets and risen
in corporate debt markets. In addition, although Federal Reserve survey
data suggest that lending standards remained tight, the largest CPP
recipients extended over $240 billion in new loans to consumers and
business in both December 2008 and January 2009, according to the
Treasury's new loan survey. 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 will provide a definitive determination
of the program's impact.
Recommendations for Executive Action:
While Treasury continues to take action to address our recommendations
and has begun to make progress in many areas, we identified new areas
that warrant ongoing attention and focus. Therefore, we recommend that
Treasury take the following actions as it continues to improve the
integrity, accountability, and transparency of the program.
We recommend that Treasury take the following six actions:
* Develop a communication strategy that includes building an
understanding and support for the various components of the program.
Specific actions could include hiring a communications officer,
integrating communications into TARP operations, scheduling regular and
ongoing contact with congressional committees and members, holding town
hall meetings with the public across the country, establishing a
counsel of advisors, and leveraging available technology.
* Require that AIG seek concessions from stakeholders, such as
management, employees, and counterparties, including seeking to
renegotiate existing contracts, as appropriate, as it finalizes the
agreement for additional assistance.
* Update OFS documentation of certain internal control procedures and
the guidance available to the public on determining warrant exercise
prices to be consistent with actual practices applied by OFS.
* Improve transparency pertaining to TARP program activities by
reporting publicly the monies, such as dividends, paid to Treasury by
TARP participants.
* Complete the review of, and as necessary renegotiate, the four
existing vendor conflicts-of-interest mitigation plans to enhance
specificity and conformity with the new interim conflicts-of-interest
rule.
* Issue guidance requiring that key communications and decisions
concerning potential or actual vendor-related conflicts of interest be
documented.
Agency Comments and Our Analysis:
We provided a draft of this report to Treasury for review and comment.
We received written comments from Treasury that are reprinted in
Appendix I. We also received technical comments from Treasury, that we
incorporated, as appropriate. In its comments, Treasury described steps
it had taken in the last 60 days to address extraordinary economic
challenges and noted that recommendations in our latest report
presented a thoughtful way forward.
We are sending copies of this report to the Special Inspector General
for TARP and interested congressional committees and members, Treasury,
the federal banking regulators, and others. The report also is
available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staff have any questions about this report, please
contact Richard J. Hillman at (202) 512-8678 or hillmanr@gao.gov,
Thomas J. McCool at (202) 512-2642 or mccoolt@gao.gov, or Orice M.
Williams at (202) 512-8678 or williamso@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made major contributions to
this report are listed in appendix IV.
Signed by:
Gene L. Dodaro:
Acting Comptroller General of the United States:
List of Congressional Committees:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Thad Cochran:
Vice Chairman:
Committee on Appropriations:
United States Senate:
The Honorable Christopher J. Dodd:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Kent Conrad:
Chairman:
The Honorable Judd Gregg:
Ranking Member:
Committee on the Budget:
United States Senate:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable David R. Obey:
Chairman:
The Honorable Jerry Lewis:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable John M. Spratt, Jr.
Chairman:
The Honorable Paul Ryan:
Ranking Member:
Committee on the Budget:
House of Representatives:
The Honorable Barney Frank:
Chairman:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Charles B. Rangel:
Chairman:
The Honorable Dave Camp:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Comments from the Department of the Treasury:
Department Of The Treasury:
Assistant Secretary
Washington, D.C.
March 27, 2009:
Thomas J. McCool:
Director, Center for Economics Applied Research and Methods:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. McCool:
The Treasury Department (Treasury) appreciates the opportunity to
review GAO's latest report on Treasury's Troubled Assets Relief
Program, entitled March 2009 Status of Efforts to Address Transparency
and Accountability Issues. Treasury welcomes the recognition by the GAO
that "Treasury has continued to improve the integrity, accountability
and transparency of the program" and that "Treasury has continued to
take significant steps to address all the recommendations from GAO's
December 2008 and January 2009 reports."
In the past two months, Treasury has taken important steps to stabilize
financial institutions, launch new programs, monitor existing
agreements, and build an operational infrastructure. There is important
work ahead, and GAO's recommendations are a thoughtful step forward.
Treasury has made significant progress in the last sixty days to
address extraordinary economic challenges. In February, Treasury
announced the new Financial Stability Plan, a comprehensive approach to
stabilizing the financial system and enabling credit to flow to our
communities. This plan includes the following components: 1) the
Homeowner Affordability and Stability Plan, designed to help millions
of homeowners stay in their homes by reducing their monthly mortgage
payments to an affordable level; 2) the Consumer and Business Lending
Initiative, which will increase the availability of credit to consumers
and businesses; 3) the Capital Assistance Program that will ensure
banks have an adequate capital buffer to be able to continue lending
during severe downturns; and 4) the Public-Private Investment Program,
which will combine public and private financing to help clear banks'
balance sheets of legacy assets so they can support new lending. In
addition to launching these new programs, Treasury continued to make
weekly investments in viable institutions through the Capital Purchase
Program.
While taking these aforementioned actions to stabilize the financial
system and restore the flow of credit, Treasury remained focused on
addressing GAO's recommendations in the last report. Treasury made
significant progress in implementing every GAO recommendation,
including the following important measures: Treasury hired more staff,
strengthened its internal controls framework, improved procedures to
oversee contractor performance, and published and expanded its survey
on the lending and intermediation activities of banks. Treasury also
continued to make progress on the GAO recommendation to improve its
communication with the public. Notably, Treasury is finalizing the
launch of a new web site, FinancialStability.gov, with a wealth of
additional and more user-friendly information designed to more clearly
communicate our policies and programs to taxpayers, Congress and
various stakeholders. In addition, together with the Department of
Housing and Urban Development, Treasury launched a second new web site
for homeowners seeking help with their mortgage payments. This web
site, MakingHomeAffordable.gov, has had over 3 million visitors since
March 19, 2009.
The recommendations in GAO's latest report present a thoughtful way
forward, and track several initiatives that Treasury is already
undertaking. Treasury agrees that, when intervening to stabilize an
institution, the government should maximize protection for taxpayers
while ensuring financial stability. Accordingly, on March 26, Treasury
proposed important regulatory reforms focused on systemic risk,
including a stronger resolution authority to protect against the
failure of complex institutions. This would include broad powers,
including to renegotiate or repudiate the institution's contracts
(including with its employees), and to deal with a derivatives book.
Once again, Treasury appreciates the opportunity to review this report
and GAO's thoughtful recommendations. We look forward to demonstrating
further progress in your next report.
Sincerely,
Signed by:
Neel Kashkari:
Interim Assistant Secretary for Financial Stability:
[End of section]
Appendix II: Status of GAO Recommendations (January 2009 Report):
GAO Recommendation: Expand the scope of planned monthly CPP surveys to
include collecting at least some information from all institutions
participating in the program;
Status: Implemented.
GAO Recommendation: 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;
Status: Partially Implemented.
GAO Recommendation: Establish a process to ensure compliance with all
CPP requirements, including those associated with limitations on
dividends and stock repurchase restrictions;
Status: Partially implemented.
GAO Recommendation: 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;
Status: Partially implemented.
GAO Recommendation: Continue to expeditiously hire personnel needed to
carry out and oversee TARP;
Status: Partially implemented.
GAO Recommendation: 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;
Status: Implemented.
GAO Recommendation: 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;
Status: Partially implemented.
GAO Recommendation: 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;
Status: Partially implemented.
GAO Recommendation: Review and renegotiate existing conflicts-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;
Status: Partially implemented.
Source: GAO.
[End of table]
[End of section]
Appendix III: Treasury's Actions in Response to Our January 2009 Report
Recommendations:
The U.S. Treasury Department:
Summary Response to Recommendations in the January 2009 GAO Report:
March 18, 2009:
Introduction:
The Treasury Department (Treasury) welcomes the recommendations made by
the GAO on the Troubled Assets Relief Program (TARP) in all of its
reports, including the 9 most recent recommendations set forth in the
GAO's January 2009 report. Treasury has actively kept the GAO apprised
of all of its progress on all the GAO recommendations to date, as well
as on developments with current and proposed programs and policies
under the EESA. The Office of Financial Stability (OFS) continues to
make tremendous progress on building the organization and related
frameworks and procedures, while simultaneously developing and
implementing Treasury's policies to respond to the financial crisis.
This document is Treasury's second Summary Response to the GAO's
recommendations, with a specific focus on the recommendations in the
January 2009 report. This Summary Response provides a written, high
level summary of Treasury's progress on the January GAO recommendations
and identifies the next steps that Treasury plans to take in these
areas.
The March report is structured as follows:
* Identification of the January GAO recommendation;
* Summary of Treasury's status on that recommendation at the time of
the January GAO Report;
* High level illustration of Treasury's progress on the issue to-date;
* Identification of Treasury's next steps;
GAO Recommendation 1 and Treasury Progress:
GAO January Recommendation 1:
Treasury should expand the scope of planned monthly CPP surveys to
include collecting at least some information from all institutions
participating in the program.
Status at January GAO Report:
In January, Treasury launched a monthly bank lending survey, requesting
data on lending and intermediation activities from the 20 largest CPP
recipients. Treasury's Office of Financial Stability (OFS) was also
working with the federal bank to develop a quarterly process for
analyzing the CPP program that would include specific metrics, as well
as more in-depth qualitative analysis on topical issues.
High Level Summary of Progress since January GAO Report:
* Treasury expanded the Monthly Intermediation Snapshot surveys to the
21 largest CPP recipients because another large CPP investment was
made.
* Treasury published two Monthly Intermediation Snapshot surveys of the
largest CPP participants, on February 17 and March 15, 2009. The
February Snapshot assesses the lending and intermediation activities of
20 institutions over the fourth quarter of 2008 (October 2008 to
December 2008), essentially the period following the launch of the CPP.
The March 2009 Snapshot covers the month of January for the 21 largest
participants. Going forward the results of the survey will be published
on the 15th of each month and cover the activities for the prior month.
* Treasury has worked closely with the federal banking agencies and
finalized a data collection template for all CPP recipients beyond the
top 21. Treasury is finalizing the process of obtaining clearance from
the Office of Management and Budget (OMB) for this survey and expects
to send out the data request to the CPP participants this week.
* In the expanded survey, Treasury will require all CPP participants to
report on their loans outstanding by total amount and by key
categories. As with the Monthly Intermediation Snapshot, these surveys
will published monthly at the institution level. The first request will
cover data for the months of February and March. The data will be due
to Treasury by April 30 and will be published by mid-May.
* Treasury's Quarterly Analysis Project, which it leads in coordination
with the 4 federal banking agencies, has advanced into the design stage
The project consists of two work streams:
1. Research that focuses on identifying the specific metrics that will
be calculated and tracked for the Quarterly Analysis report. This work
stream will leverage work that the banking regulators have already
conducted on lending and intermediation activities during past
recessions and incorporate that analysis and metrics into the Report.
2. In-depth qualitative analysis on TARP-related issues, including both
exam and research focused. Going forward, this group will coordinate
topics of interest to the entire group, ensure that information is
shared and conduct research accordingly.
* The quarterly analysis project is holding regular meetings. The first
Quarterly Analysis report is scheduled for release on June 30, 2009,
and will cover the fourth quarter of 2008 and the first quarter of
2009.
Treasury's Next Steps:
* Small business lending will be added to the Monthly Intermediation
Snapshot for the largest CPP recipients beginning with the April 2009
submission, which will be due to Treasury on May 31, 2009.
GAO January Recommendation 2:
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.
Status at January GAO Report:
The CPP agreements through which Treasury purchases preferred stock in
financial institutions do not contain provisions requiring these
institutions to report information on their intermediation activities.
High Level Summary of Progress since January GAO Report:
* In January 2009, as noted in the response to Recommendation 1,
Treasury initiated a survey of the largest CPP participants regarding
their lending and intermediation activities and published 2 Snapshots
with results.
* In February 2009, Treasury established the Capital Access Program
(CAP). Under the terms of this program, Treasury will require all
participating financial institutions to submit a plan outlining their
intended use of the capital received through the CAP. If the
institution does not meet the goals outlined in its plans, the
institution will be required to submit to Treasury a detailed
explanation.
* In addition, Treasury will gather data on each institution's lending
activity against a pre-established baseline lending level that would
have occurred without the capital injection under the CAP. For programs
under the Financial Stability Plan, participating financial
institutions will submit a monthly report to Treasury outlining the
amount of their loans outstanding, both in total and by key category.
This amount will be compared to the firms' baseline level. Treasury has
met with banking regulators to discuss possible measures and is in the
process of finalizing the baseline calculation.
* Treasury will not amend past CPP agreements, but will ask all CPP
participants to report lending data to Treasury. See recommendation 1.
Treasury's Next Steps:
* Each month, Treasury will publish the results of its survey of the
lending levels of each institution participating in the CAP, along with
a comparison against their reported baselines. Institutions that fall
short of their baseline will be required to comment on the factors that
caused the shortfall.
GAO January Recommendation 3:
Treasury should establish a process to ensure compliance with all CPP
requirements, including those associated with limitations on dividends
and stock repurchase restrictions.
Status at January GAO Report:
In response to a similar recommendation in GAO's December report,
Treasury highlighted its progress in increasing the number of OFS staff
and also regulating executive compensation through a second interim
rule.
High Level Summary of Progress after the January GAO Report:
* Compliance: Since GAO's January report, Treasury made significant
progress toward institutionalizing a compliance process for CPP
requirements. Notably:
1. Dividend payments are being monitored, and the process flow for
these payments is being documented.
2. All other requirements have been catalogued, and detailed monitoring
procedures for dividend and stock purchase restrictions are being
developed and documented.
3. Treasury is developing requirements for a software application to
assist in tracking and reporting on compliance.
* Executive Compensation: Significant policy developments have occurred
since GAO's second report in the area of executive compensation that
have affected executive compensation policies and procedures for TARP.
On February 4, the Obama Administration announced strict new
restrictions for executive compensation, and, on February 17, President
Obama signed into law the American Recovery and Reinvestment Act (ARRA)
of 2009. This law amended the executive compensation provisions that
apply to recipients of financial assistance under the TARP and imposes
significant new limitations. In light of the ARRA:
1. The executive compensation regulation that Treasury posted just
prior to GAO's January report did not take effect
2. Treasury is preparing a new interim rule to implement the
requirements of the ARRA.
3. Treasury has initiated a process to engage outside vendors to help
Treasury implement the executive compensation compliance requirements
under ARRA.
* The Office of the Chief Compliance Officer continues to make progress
in building its staff.
Treasury's Next Steps:
* Treasury will continue to develop and implement a rigorous compliance
program for the CPP, complete the interim rule and finalize the
procurement of vendors to help implement our oversight of the
compliance requirements.
* The Office of the Chief Compliance Officer will continue to build up
its staff.
GAO January Recommendation 4:
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.
Status at January GAO reports:
Treasury had used reports to Congress, Congressional testimony, and
speeches and interviews by senior Treasury officials as a means to keep
all stakeholders informed of the program's status and strategy.
Treasury met all of its reporting requirements on time, and posted all
reports, speeches and testimony on the EESA website:
http://www.treas.gov/initiatives/cesa/. Treasury expanded its outreach
to ensure that all stakeholders are informed of TARP program
developments as they occur.
* As of January 30, Treasury had published:
1. 8 transaction reports:
http://www.treas.gov/initiatives/eesa/transactions.shtml.
2. 2 tranche reports: http://www.trcas.gov/initiatives/eesa/tranche-
reports.shtml.
3. 2 section 105 reports:
http://www.treas.gov/initiatives/eesa/congressionalreports.shtml.
4. 1 section 102 report:
http://www.treas.eov/initiatives/eesa/congressionalreports102.shtml.
5. 1 response to questions from the Congressional Oversight Panel:
http://www.treas.gov/press/releases/hpl336.htm.
* Treasury officials also participated in Congressional hearings
regarding the TARP on December 4 and December 10:
1. http://www.treas.gov/press/releases/hp1312.htm.
2. http://www.treas.gov/press/releases/hp1322.htm.
* Treasury officials also made public remarks on the program's status
on 6 occasions:
1. http://www.treas.gov/press/releases/hp1301.htm.
2. http://www.treas.gov/press/releases/hp1314.htm.
3. http://www.treas.gov/press/relcases/hpl321.htm.
4. http://www.treas.gov/press/releases/hp1332.htm.
5. http://www.treas.gov/press/releases/hpl347.htm.
6. http://www.treas.gov/press/releases/hp1349.htm.
High Level Summary of Progress since January GAO Report:
* On February 10, Secretary Geithner publicly outlined Treasury's
Financial Stability (FSP) Plan, a new, comprehensive strategy to
restore stability to the nation's financial system. In his speech, he
also addressed Treasury's plan to address home ownership preservation.
The Secretary outlined the following goals of the FSP: to restore
confidence in the strength of U.S. financial institutions; restart
markets critical to financing American households and businesses; and
address housing market problems and the foreclosure crisis. As
Secretary Geithner outlined, these programs arc built upon all of
Treasury's actions to stabilize the financial system under the EESA.
* Treasury has launched a reinvigorated public communications
initiative designed to more clearly and effectively explain our
comprehensive policies to stabilize the financial system and restore
the flow of credit to consumer and businesses. One key to this enhanced
public outreach effort Treasury's new, revamped website,
www.financialstability.gov which will become a one-stop destination for
comprehensive information all programs under the EESA and the FSP. The
website will provider more user-friendly information on each program
and also works to explain how Treasury's programs work in concert to
stabilize the system.
* Treasury has also clearly articulated its plans and policies to
preserve home ownership. On March 4, Treasury released information and
guidelines on the Homeowner Affordability and Stability Plan which will
offer assistance to as many as 7 to 9 million homeowners making a good-
faith effort to stay current on their mortgage payments, while
attempting to prevent the destructive impact of foreclosures on
families and communities. The plan will support low mortgage rates
through strengthening confidence in Fannie Mae and Freddie Mac,
providing up to 4 to 5 million homeowners with new access to
refinancing. Additionally, the Homeowner Stability Initiative will
provide a comprehensive approach in order to offer reduced monthly
payments for up to 3 to 4 million at-risk homeowners.
* Treasury new programs and comprehensive vision for restoring
financial stability have been outlined extensively by Secretary
Geithner in a number of public forums, including:
1. Launch of the Financial Stability Plan on February 10.
2. Testimony to the Senate Banking Committee on February 10.
3. Testimony to the Senate Budget Committee on February 11.
4. Statement following the G-7 meeting on February 14.
5. Announcement of the Homeownership Affordability and Stability Plan
on February 18.
6. Testimony to the House Ways and Means Committee on March 3.
7. Testimony to the Senate Finance Committee on March 4.
8. Testimony to the House Budget Committee on March 5.
9. Statements made prior to and during the G-20 Finance Ministers and
Central Bank Governors Meeting on March 11.
10. March 14 statement following the G20.
11. Testimony to the Senate Budget Committee on March 12.
* Treasury continued to utilize reports to Congress, Congressional
testimony, and speeches and interviews by senior Treasury officials as
a means to keep all stakeholders informed of the program's status and
strategy.
* As of March 13, 2009, Treasury has issued the following reports:
1. 21 transaction reports:
http://www.treas.gov/initiatives/eesa/transactions.shtml.
2. 5 tranche reports: http://www.treas.gov/initiatives/eesa/tranche-
reports.shtml.
3. 4 section 105 reports:
http://www.treas.gov/initiatives/eesa/congressionalreports.shtml.
4. 1 section 102 report:
http://www.treas.gov/initiatives/eesa/congressionalreports102.shtml.
* As of March 13, 2009, Treasury officials have participated in
Congressional hearings regarding the TARP on:
1. December 4: http://www.treas.gov/press/releases/hpl312.htm.
2. December 10: http://www.treas.gov/press/releases/hpI322.htm.
3. February 10: http://www.treas.gov/press/releases/tgO2102009.htm.
4. February 11: http://www.treas.gov/press/releases/tgO2112009.htm.
5. March 3: http://www.treas.gov/press/releases/tg47.htm.
6. March 4: http://www.treas.gov/press/releases/tg50.htm.
7. March 5: http://www.treas.gov/press/releases/tg5l.htm.
8. March 11: http://www.treas.gov/press/releases/tg52.htm.
9. March 12: http://www.treas.gov/press/releases/tg55.htm.
* As of March 13, 2009, Treasury officials also made public remarks on
the program's status on 6 occasions:
1. December 1: http://www.treas.gov/press/releases/hp1301.htm.
2. December 5: http://www.treas.gov/press/releases/hp1314.htm.
3. December 8: http://www.treas.gov/press/releases/hp1321.htm.
4. December 19: http://www.treas.gov/press/releases/hp1332.htm.
5. January 8: http://www.treas.gov/press/releases/hp1347.htm.
6. January 13: http://www.trcas.gov/press/releases/hp1349.htm.
7. February 8: http://www.treas.gov/press/releases/tgl6.htm.
8. February 10: http://www.trcas.gov/press/releases/tgl8.htm.
9. February 14: http://www.treas.gov/press/releases/tg27.htm.
10. February 17: http://www.treas.gov/press/releases/tg3l.htm.
11. March 11: http://www.treas.gov/press/releases/tg53.htm.
* OFS staff works closely with Treasury public affair's office, which
has numerous staff specifically dedicated to TARP, FSP, related
domestic finance issues and the new website.
* With respect to identifying needed skills and competencies, the OFS
is charged with executing the Administration's vision and policies for
FSP and TARP within Treasury's Department of Domestic Finance. The OFS
has staffed according (sew section 5 below).
Treasury's Next Steps:
* Treasury will continue to develop, and launch, the new website
www.financialstabilitv.gov, posting detailed information about new and
existing programs under the EESA.
GAO January Recommendation 5:
Treasury should continue to expeditiously hire personnel needed to
carry out and oversee TARP.
Status at January GAO Report:
The OFS filled or selected candidates for key leadership positions. As
of January 15, 2009, OFS had a staff of 88 employees, including 28 long-
term staff and 60 detailees. OFS continued to benefit from broad
support across the Department of the Treasury and from individuals
detailed to the OFS from within Treasury or other federal
organizations.
High Level Summary of Progress since January GAO Report:
* As of March 16, 2009, Treasury had increased the number of OFS staff
to 113 employees, including 77 long-term staff and 36 detailees. OFS
also continues to benefit from the support of an additional 40 to 50
employees from throughout Treasury. Over the past two months, OFS has:
1. Increased its overall staffing level by 30 percent;
2. Increased long-term OFS staff by 175 percent; and
3. Decreased detailee staff by 39 percent.
* The OFS expects to increase overall staffing levels to approximately
195 full-time employees.
* These staffing changes reflect the success of the OFS in shifting
from reliance on Treasury staff (outside of OFS) and detailees to a
reliance on long-term OFS staff. In the last month alone, OFS has added
23 long-term hires.
* The OFS is developing a formal Workforce Plan that balances the need
for high performing, long-term personnel with that of the potential
temporary nature of the OFS.
* The OFS has attracted excellent private and public sector candidates;
OFS has received thousands of resumes through the OFS website and each
job posting through USAJOBS.com generates a high level of interest.
* The OFS has established effective processes for refinement of
staffing requirements, development of appropriate vacancy
announcements, recruitment strategies and reviewing applications. There
is broad involvement of the OFS staff in the recruitment and
interviewing process and OFS is actively interviewing candidates for
management and staff positions.
* The OFS developed a flexible Workforce Plan and created a bimonthly
review process to address competencies, staffing needs, gaps, and
changes in program direction.
Treasury's Next Steps:
* The OFS will continue to actively interview and hire candidates for
management and staff positions.
GAO January Recommendation 6:
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.
Status at January GAO Report:
Executives in the OFS and Treasury's Office of the General Counsel
managed contract performance. The OFS added additional personnel for
procurement management, procurement services, and financial agent
management to manage TARP contracts and financial agents. The OFS also
continued to design the organizational infrastructure to oversee TARP's
contracts and agreements. In addition, contracting officers and OFS
staff identified opportunities to transition from labor-hour contracts
to firm pricing arrangements where feasible. The Treasury instituted a
twice per month contract performance report requirement for OFS
procurements, monthly meetings with the financial agent's senior
management, and "procurement summit" meetings with broad representation
from employees across the Treasury to facilitate requirements planning
and contract management. Procurement Services Division (PSD) provided
training, support, and recommendations to the OFS with respect to OFS
contracts. The OFS committed to complete hiring actions to transition
to permanent and more experienced COTRs.
High Level Summary of Progress since January GAO Report:
* Treasury hired an executive Contract Administration Manager who
reports to the OFS Chief Operating Officer. His responsibilities
include: overseeing the planning of long range requirements,
implementing contract management best practices, and providing
leadership and guidance to OFS Contracting Officer Technical
Representatives (COTRs) and Financial Agent management personnel.
* The OFS transitioned from a model of executive administration for OFS
contracts and agreements to the executive oversight of professional
COTRs. Trained, certified COTRs are now in place for all OFS contracts.
The Contract Administration Manager has instituted weekly roundtable
meetings with COTRs to identify significant issues and actions on
particular contracts and agreements, facilitate cross-training and
professional development of COTRs, and continuously improve the
administration and oversight of OFS contracts and agreements.
* The OFS has created a Contract and Agreement Review Board comprised
of program and procurement executives; the Board is chartered to
monitor contracts and financial agency agreements and ensure sufficient
and effective planning, administration, and management.
* Where appropriate, Treasury has begun to shift from time-and-
materials based contracts toward fixed-price arrangements. Fixed price
arrangements have been negotiated where OFS can accurately estimate the
extent or duration of the work associated with a particular, repeatable
transaction type. The programs created under the EESA often involve the
creation of new financial structures, forms, and transaction sets.
These requirements generally are not estimable at the time of contract
due to the underlying complexity of the structures and the amount of
information available about affected entities during their formulation.
Once these structures are operational, Treasury collects data on the
level of effort required to execute discrete transactions. The
performance data enables Treasury to anticipate costs with a reasonable
degree of confidence, allowing for fixed pricing in some
circumstances.
* The OFS is designing an on-line Contracting Officer's Technical
Representative (COTR) document management structure for contract and
agreement administration to ensure consistent and complete
documentation of COTR files, standardize processes, and facilitate
personnel transition through access to information and shared
practices.
Treasury's Next Steps:
* The OFS will continue to build its contract administration staff and
infrastructure to ensure effective oversight of the performance of all
contracts and agreements.
* The OFS will continue to select the appropriate contract type
considering the complexity and the forseeability of the need, as well
as capabilities in the commercial marketplace.
GAO January Recommendation 7:
Continue to develop a comprehensive system of internal control over
TARP, including policies, procedures, and guidance for program
activities that are robust enough to ensure that program's objectives
and requirements are being met.
Status at January GAO Report:
Treasury had established a framework for internal controls and was
initiating planning for its OMB Circular A-123 compliance program,
including risk assessments, but had not fully established the
governance bodies. Continued progress had been made on documenting the
detailed elements of transactions that had occurred to date,
particularly in the CPP program. Inputs and assumptions for subsidy
cost models were generally documented.
High Level Summary of Progress Since January Report:
* Treasury has made considerable progress in the area of governance.
Treasury has formed two governance committees that are actively
discussing and prioritizing internal control objectives and providing
oversight of the internal control program.
1. The first is the Executive Committee (EC) chaired by the Assistant
Secretary for Financial Stability. The EC serves as the primary
management vehicle for OFS and also provides a link between the
Treasury and OFS policy makers and the operational execution
capabilities within OFS.
2. The second committee is the Senior Assessment Team (SAT) chaired by
the Deputy Chief Financial Officer (CFO). This committee oversees the
execution by the OFS of the OMB Circular A-123 program and guides the
office's efforts to meet the statutory and regulatory requirements
surrounding a sound system of internal controls.
* In addition to the two governance committees, OFS formed a New
Program Implementation Team (NPIT) to support the implementation of new
programs and to help facilitate communication and ensure the right mix
of internal controls is put in place by management. The purpose of this
team is to strengthen the ability of the OFS to effectively implement
new loan, insurance, asset purchase, and investment programs as they
are developed. This cross functional team will serve as a bridge
between the governance committee structure of the Executive Committee/
Senior Assessment Team and the business and support functions that
perform the control activities on a daily basis.
* Similarly, on the area of internal controls, the OFS has taken
measurable steps as it continues to build a comprehensive system of
internal controls to cover its core program and support functions in
tandem with the growth and development of its business model. Initial
efforts focused on the various equity and debt purchase transactions,
but has since been expanded to include connection points with other
Departmental Offices and third party service providers.
* In compliance with Treasury departmental requirements, the OFS is
conducting its own internal OMB Circular A-123 assessment for Fiscal
Year (FY) 2009 and will report the results to Treasury through an
Annual Assurance Statement signed by the Assistant Secretary for
Financial Stability. OFS's Internal Control Program Office (ICPO) will
lead the assessment from within the Office of the CFO. The ICPO will
drive the development of policies and procedures, document business
processes, conduct internal control assessments, evaluate assessment
results, monitor and track corrective action plans (CAPs), and report
CAP progress to the Senior Assessment Team. A detailed plan for
complying with the requirements of OMB Circular A-123 has been created
and will form the basis for defining the scope and timing of these
efforts.
* In addition to the governance and internal control framework
activities outlined above, the OFS continues to build on its efforts
related to control activities, information and communication, and
ongoing monitoring. Some examples of these efforts include the
following.
1. Within the office of the CFO, the internal control program office
actively monitors transactions involving the disbursement of funds from
Treasury, including documenting process flows, narratives, and risk and
control matrices for key business and support functions.
2. Staff gather data supporting the execution of controls on a near
real-time basis, providing management with confirmation that the
transaction controls are being executed as designed.
3. The internal control program office is currently scoping and
planning the assessment of Information Technology (IT) controls related
to the important business and support processes across OFS including
working with the Bank of New York Mellon to define the requirements for
a TARP-specific SAS 70 examination and the timing of the delivery of a
Type II report.
* The OFS has prioritized the documentation of policies and procedures
for core program and support functions and is finalizing a plan to
complete that documentation by June 30, 2009. The OFS recently
completed initial policies and procedures for the following areas: 1)
Budget Control and Reporting for Program Funds; 2) Credit Reform
Modeling; 3) Accruals for Contracts, Inter/Intra-Agency Agreements and
Financial Agent Agreements; and 4) Financial Agent Agreements.
* Treasury continues to utilize the outside expertise of
PricewaterhouseCoopers in support of the development and execution of
its internal controls framework.
Treasury's Next Steps:
* As Treasury continues to rapidly establish new programs to stabilize
the financial system, the OFS, still a new Department, will continue to
monitor and document the operational processes and associated controls
for these "start-up" program transactions on a real-time basis. At the
same time, the OFS will continue its implementation of a comprehensive
internal control program, including risk identification, key controls
documentation, and effective processes to ensure control objectives are
met. The OFS is committed to meeting Treasury and other federal
requirements for a sustainable and effective system of internal
control.
GAO January Recommendation 8:
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.
Status at January GAO Report:
Treasury was developing a risk assessment process, but it was informal
and not fully documented.
High Level Summary of Progress since January GAO Report:
* The OFS has begun implementation of a well-defined risk assessment
process. The process includes a number of steps, including the
following:
1. setting internal operational objectives;
2. setting risk and other objectives;
3. identifying major risks and assigning responsibilities;
4. designing and implementing risk mitigation actions;
5. monitoring and reporting on risks;
6. testing risk mitigation actions.
* An Executive Committee and Senior Assessment Team have been
established to implement this risk-assessment process. In addition to
its other management duties, the Executive Committee has responsibility
over setting objectives (e.g., internal, operational, risk, and
establishing risk priorities. The Senior Assessment Team, together with
the OFS operational units, identifies major risks, designs and
implements risk mitigation activities, monitors and reports on risks,
and works with the CFO's staff to test risk mitigation actions.
* OFS is undertaking a robust risk identification and assessment
process, which is a combination of top-down and bottom-up processes.
1. Top Down Process: Each area within OFS has identified first cut high
level risks. This will be refined further over the coming weeks to
ensure that all current Joint Chiefs and their Deputies have a chance
to provide input on any potential risks to the program.
2. Bottom-Up Process: This process builds on the OMB Circular A-123
control process. OFS is using the GAO checklist process as a way of
identifying more granular risks from a variety of sources. The
interview process will be substantially completed by March 13, 2009.
The risk office will synthesize this data to develop a picture of
potential risks.
Next Steps:
* Once this initial assessment is complete, the Executive Committee
will prioritize the risks and assign responsibility for addressing
them. The operating areas, in conjunction with the Risk Office, will
develop action plans to quickly put the necessary mitigating actions
into place.
* This will be an ongoing process, with formal Executive Committee risk
oversight meetings occurring monthly.
GAO January Recommendation 9:
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.
Status at January GAO Report:
When GAO issued its last report, Treasury had just published its
interim final regulations on conflicts of interest. These regulations
describe formal steps for identifying, monitoring, and mitigating
conflicts of interest during the procurement process and over the
contract's term.
Prior to these regulations, Treasury controlled conflicts by
implementing conflicts guidelines and the Federal Acquisition
Regulation.
High Level Summary of Progress after the January GAO Report:
* The compliance office has reviewed all existing contracts and
financial agency agreements for conformity with the interim rule on
conflicts of interest. Treasury executed nine contracts that contained
conflicts mitigation plans before the interim rule took effect.
Treasury reviewed all nine, renegotiated the conflicts provisions on
two of them, and continues negotiations on four others. Treasury is not
renegotiating the terms of the three remaining contracts because they
are scheduled to expire shortly. These contracts, however, conform to
the conflicts guidelines that were in place prior to the interim rule.
* Treasury has procedures in place to monitor conflicts of interest
with contractors and financial agents. The compliance office currently
devotes over two full-time employees to conflicts issues that arise
with new and existing contracts and financial agency agreements;
additional contracting personnel at Treasury also work on these
issues.
* In addition to discussions on particular issues, Treasury meets bi-
weekly by telephone or in person with our contractors and financial
agents to discuss any conflicts issues on the horizon. When a potential
conflict does arise in an existing contract, the compliance office
takes a standard approach to evaluating the potential conflict and
feasibility of mitigation measures.
Treasury's Next Steps:
* Treasury will analyze the interim final conflicts rule and any
comments received with respect to the rule and will work to finalize
the rule as soon as possible.
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Richard J. Hillman at (202) 512-8678 or hillmanr@gao.gov Thomas J.
McCool at (202) 512-2642 or mccoolt@gao.gov Orice M. Williams at (202)
512-8678 or williamso@gao.gov:
Staff Acknowledgments:
In addition to the contacts named above; Gary Engel, Mathew Scire, and
William Woods (Lead Directors); Cheryl Clark, Lawrence Evans Jr.,
Daniel Garcia-Diaz, Carolyn Kirby, Kay Kuhlman, and Harry Medina, (Lead
Assistant Directors); and Marianne Anderson, Kevin Averyt, Noah
Bleicher, Patrick Breiding, Emily Chalmers, Clayton Clark, Bob Dacey,
Rachel DeMarcus, Matt Drerup, Abe Dymond, Nancy Eibeck, Katherine
Eikel, Gena Evans, Karin Fangman, Jeanette Franzel, Ryan Gottschall,
Brenna Guarneros, Michael Hoffman, Chir-Jen Huang, Joe Hunter, Tyrone
Hutchins, Elizabeth Jimenez, Jason Kirwan, Christopher Klisch, Steven
Koons, John Krump, J. Andrew Long, John Lord, Lisa Mavrogianis,
Stephanie May, Marc Molino, Diane Monticchio, Susan Offutt, Akiko
Ohnuma, Joseph O'Neill, Rebecca Riklin, LaSonya Roberts, Susan
Sawtelle, Maria Soriano, Cynthia Taylor, John Treanor, Katherine
Trimble, Julie Trinder, James Vitarello, and Seyda Wentworth made
contributions to this report.
[End of section]
Related GAO Products:
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-484T]. Washington, D.C.: March 19,
2009.
Federal Financial Assistance: Preliminary Observations on Assistance
Provided to AIG. [hyperlink, http://www.gao.gov/products/GAO-09-490T].
Washington, D.C.: March 18, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-474T]. Washington, D.C.: March, 11,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-417T]. Washington, D.C.: February
24, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-359T]. Washington, D.C.: February 5,
2009.
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.: January 30,
2009.
High-Risk Series: An Update. [hyperlink,
http://www.gao.gov/products/GAO-09-271]. Washington, D.C.: January 22,
2009.
Troubled Asset Relief Program: Additional Actions Needed to Better
Ensure Integrity, Accountability, and Transparency. [hyperlink,
http://www.gao.gov/products/GAO-09-266T]. Washington, D.C.: December
10, 2008.
Auto Industry: A Framework for Considering Federal Financial
Assistance. [hyperlink, http://www.gao.gov/products/GAO-09-247T].
Washington, D.C.: December, 5, 2008.
Auto Industry: A Framework for Considering Federal Financial
Assistance. [hyperlink, http://www.gao.gov/products/GAO-09-242T].
Washington, D.C.: December 4, 2008.
Troubled Asset Relief Program: Status of Efforts to Address Defaults
and Foreclosures on Home Mortgages. [hyperlink,
http://www.gao.gov/products/GAO-09-231T]. Washington, D.C.: December 4,
2008.
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.: December 2,
2008.
[End of section]
Footnotes:
[1] Pub. L. No. 110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C.
§§ 5201 et seq.
[2] Section 102 of the act, 12 U.S.C. § 5212, authorizes Treasury to
guarantee troubled assets originated or issued prior to March 14, 2008,
including mortgage-backed securities.
[3] Section 116 of the act, 12 U.S.C. § 5226.
[4] GAO, 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) and 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).
[5] A warrant is an option to buy shares of common stock or preferred
stock at a predetermined price on or before a specified date.
[6] No indicator on its own provides a definitive perspective on the
state of markets; collectively, the indicators should provide a broad
sense of stability and liquidity in the financial system and could be
suggestive of the program's impact. However, it is difficult to draw
conclusions about causality.
[7] [hyperlink, http://www.gao.gov/products/GAO-09-296].
[8] Congressional Oversight Panel, Valuing Treasury's Acquisitions
(Washington, D.C., Feb. 6, 2009) and The Foreclosure Crisis: Working
Towards a Solution (Washington, D.C., Mar. 6, 2009).
[9] Special Inspector General for Troubled Asset Relief Program,
Initial Report to the Congress (Washington, D.C., Feb. 6, 2009).
[10] Financial Stability Oversight Board, First Quarterly Report to
Congress Pursuant to Section 104(g) of the Emergency Economic
Stabilization Act of 2008 (Washington, D.C., Dec. 31, 2008).
[11] For purposes of CPP, financial institutions generally include
qualifying U.S.-controlled banks, savings associations, and both bank
and savings and loan holding companies.
[12] 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.
[13] GAO, Troubled Asset Relief Program: Capital Purchase Program
Transactions for the Period of October 28, 2008, through March 20,
2009, and Information on Financial Agency Agreement, Contract, and
Blanket Purchase Agreements Awarded as of March 13, 2009, [hyperlink,
http://www.gao.gov/products/GAO-09-522SP] (Washington, D.C.: Mar. 31,
2009).
[14] See Treasury Department Monthly Lending and Intermediation
Snapshot: Summary Analysis for October-December 2008, [hyperlink,
http://www.ustreas.gov/press/releases/tg30.htm].
[15] 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).
[16] Tangible common equity equals shareholder's equity minus preferred
shares minus intangible assets.
[17] FDIC will also receive $3 billion in preferred stock, for a total
of $7 billion.
[18] See GAO, Federal Financial Assistance: Preliminary Observations on
Assistance Provided to AIG, [hyperlink,
http://www.gao.gov/products/GAO-09-490T] (Washington, D.C.: Mar. 18,
2009) for discussion on the Federal Reserve's restructuring of AIG's
debt.
[19] Dividends do not accumulate on noncumulative preferred stock.
[20] This statement reflects the market's view that cumulative
preferred stock is generally viewed as more akin to debt than equity.
[21] GAO, Troubled Financial Institutions: Solutions to the Thrift
Industry Problem [hyperlink,
http://www.gao.gov/products/GAO/GGD-89-47], Feb. 21, 1989, Resolving
the Savings and Loan Crisis [hyperlink,
http://www.gao.gov/products/GAO/T-GGD-89-3], Jan. 26, 1989, Guidelines
for Rescuing Large Failing Firms and Municipalities [hyperlink,
http://www.gao.gov/products/GAO/GGD-84-34], Mar. 29, 1984, and
Commercial Aviation: A Framework for Considering Federal Financial
Assistance [hyperlink, http://www.gao.gov/products/GAO-01-1163T], Sept.
20, 2001.
[22] Risk-weighted assets are the total assets and off balance sheet
items held by an institution that are weighted for risk according to
regulation by the Federal Reserve.
[23] An S corporation makes a valid election to be taxed under
Subchapter S of Chapter 1 of the Internal Revenue Code and, thus, does
not pay any income taxes. Instead, the corporation's income or losses
are divided among and passed through to its shareholders. A mutual
organization is a company that is owned by its customers, rather than
by a separate group of stockholders. Many thrifts and insurance
companies (for example, Metropolitan and Prudential) are mutuals.
[24] These preferred shares will be convertible to common shares.
[25] While the CAP term sheet and application includes TIP
participants, according to Treasury officials, CAP will be limited to
CPP participants.
[26] Tier 1 capital is the core measure of a bank's financial strength
from a regulator's point of view. It is considered the most stable and
readily available capital for supporting a bank's operations. A
"qualified equity offering" under CPP is the sale and issuance of Tier
1 qualifying perpetual preferred stock, common stock, or a combination
of such stock for cash. CPP senior preferred may be redeemed prior to 3
years from the date of investment only if the proceeds of "qualified
equity offerings" results in aggregate gross proceeds to the financial
institutions of not less than 25 percent of the issue price of the
senior preferred.
[27] Such shares are redeemable with the proceeds of a cash sale of
common stock, provided that the gross proceeds from the stock sale are
at least 25 percent of the CAP convertible preferred issuance price or
additions to retained earnings.
[28] This date is one day before the Treasury announced its Financial
Stability Plan.
[29] The date of the investment is the date that Treasury provides
capital assistance to a financial institution.
[30] If the institution does not have sufficient available authorized
shares of common stock to reserve for the conversion of the convertible
preferred and the exercise of the warrants and stockholder approval is
required for issuance, the institution is to call a meeting of its
stockholders to increase the number of authorized shares of common
stock.
[31] SBA's 7(a) program guarantees loans made by commercial lenders--
mostly banks--to small businesses for working capital and other general
purposes. The guarantee assures the lender that if a borrower defaults
on a loan, the lender will receive an agreed-upon portion (generally
between 50 percent and 85 percent) of the outstanding balance. The 504
program provides long-term, fixed-rate financing for major fixed
assets, such as land and buildings, through a loan backed by an SBA-
guaranteed debenture from a community development company. These
purchases will include securities packaged on or after July 1, 2008.
[32] According to Treasury officials, TARP funds will be used to modify
mortgages that financial institutions own and hold in their portfolios
(whole loans) and private-label securitized loans (loans not insured or
guaranteed by Fannie Mae, Freddie Mac, HUD's FHA, the Department of
Veterans Affairs, and rural housing loans).
[33] Treasury's HAMP guidelines, issued on March 4, 2009, specify the
use of a ratio of principal, interest, taxes, insurance, and any
association fees to monthly gross income for the debt-to-income
calculation.
[34] Having negative equity or being "under water" means that the
current market value of the home is less than the outstanding mortgage
balance.
[35] See [hyperlink, http://makinghomeaffordable.gov/].
[36] Internal control is an integral component of an organization's
management that provides reasonable assurance that the following
objectives are being achieved: effectiveness and efficiency of
operations, reliability of financial reporting, and compliance with
applicable laws and regulations. Internal control comprises the plans,
methods, and procedures used to meet missions, goals, and objectives.
See GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00.21.3.1]
(Washington, D.C.: November 1999).
[37] [hyperlink, http://www.gao.gov/products/GAO-09-161].
[38] For example, according to the CPP terms for publicly held
institutions, participating institutions pay quarterly dividends at a
rate of 5 percent per year for the first 5 years on the initial
preferred shares acquired by Treasury. After the first 5 years, the
preferred shares pay dividends quarterly at a rate of 9 percent per
year. Any preferred shares acquired through Treasury's exercise of
warrants pay quarterly dividends at a rate of 9 percent per year.
[39] For example, see 12 U.S.C. §§ 59 (national banks) and 1831o (FDIC
insured banks) and 12 C.F.R. § 208.5(d).
[40] For example, see the State of California's Financial Code, Section
644.
[41] [hyperlink, http://www.gao.gov/products/GAO-09-161].
[42] Under authorization by OPM, agencies may make appointments for
positions that are not of a confidential or policy-determining
character, not in the SES, and not practical to examine. These are
referred to as Schedule A appointments and are exempt from the
examination requirements typically required for competitive service
positions. Although Treasury has not used Schedule A authority since
our last report, it anticipates doing so in the future. See 5 C.F.R. §§
213.3101-3102.
[43] GAO, Human Capital: Key Principles for Effective Strategic
Workforce Planning, [hyperlink, http://www.gao.gov/products/GAO-04-39]
(Washington, D.C.: Dec. 2, 2003).
[44] [hyperlink, http://www.gao.gov/products/GAO-09-296].
[45] In addition, Treasury issued a delivery order to a small business
for office equipment. Treasury awarded another financial agency
agreement on March 16, 2009, designating EARNEST Partners as the asset
manager for the small business assistance program. EARNEST is a
minority-owned firm. We will provide additional details on this
agreement in our next report.
[46] Treasury also modified several other existing task orders to
obligate more funds and extend the performance periods.
[47] [hyperlink, http://www.gao.gov/products/GAO-09-522SP].
[48] We have previously reported that contractor services that include
expert advice, opinions, and other types of consulting require an
enhanced degree of management oversight to ensure that agency officials
retain control over and remain accountable for policy decisions that
may be based, in part, on a contractor's performance and work products.
See GAO, Department of Homeland Security: Improved Assessment and
Oversight Needed to Manage Risk of Contracting for Selected Services,
[hyperlink, http://www.gao.gov/products/GAO-07-990] (Washington, D.C.:
Sept. 17, 2007).
[49] [hyperlink, http://www.gao.gov/products/GAO-07-990] and GAO,
Highlights of a GAO Forum: Federal Acquisition Challenges and
Opportunities in the 21st Century, [hyperlink,
http://www.gao.gov/products/GAO-07-45SP] (Washington, D.C.: Oct. 6,
2006).
[50] Other examples concern OFS's investment advisory contractor and a
legal services contractor. According to the Office of the Chief
Investment Officer's COTR and Ennis Knupp's Chief Executive Officer,
communications is primarily by phone two to three times per week and
sometimes several times per day. These frequent phone conferences are
to discuss upcoming contract support tasks to follow up questions on
completed assignments, or to review and resolve matters concerning
emerging organizational or personal conflicts of interest. On
Cadwalader, Wickersham, and Taft's legal services contract to support
OFS, the Chief Counsel's COTR and the law firm's leading partner for
the contract interact frequently with each other through document
sharing, e-mail exchange, teleconferences, and in-person meetings in
order to submit the contracted legal advice concerning the structure of
the TARP automotive industry program.
[51] A mid-March update to OFS's organization chart indicates
additional staffing to support the contract administration manager
position, including government positions for procurement, program, and
reports analysts and an acquisition program manager.
[52] These latest actions build on earlier practices put in place as of
January, such as the bi-weekly Contract Management Reporting Forms
submitted by COTRs to track cost, schedule, and performance of
contracts and financial agency agreements awarded under TARP.
[53] This type of fixed price arrangement is called a firm fixed-price,
level of effort term contract. These contracts require the contractor
to provide a certain level of effort, over a stated period of time, on
work that can be stated only in general terms. Under these contract
types, the government pays the contractor a fixed dollar amount. 48
C.F.R. § 16.207-1.
[54] According to TARP contract managers, other services being procured
through time-and-materials contracts that are unlikely to be suitable
for conversion to fixed pricing are the contracts with law firms and
accounting firms. According to these officials, it is standard practice
for such firms to bill commercial and government customers on an hourly
basis for each attorney and accountant involved in the work, consistent
with their time-and-materials pricing arrangements for TARP.
[55] 74 Fed. Reg. 3431-3436 (Jan. 21, 2009). Public comments on the
TARP conflicts-of-interest interim rule were due March 23, 2009.
[56] Under the interim rule, for some administrative service providers
(e.g. temporary services for document production), OFS has decided that
those contractors are unlikely to have conflicts of interest and do not
warrant the burden imposed by the requirements.
[57] Under the interim rule, in making the required determination there
are three possibilities--i.e., OFS must conclude that (1) no conflict
exists; (2) no conflict exists that has not been adequately mitigated;
or (3) if a conflict exists that cannot be adequately mitigated, OFS
has expressly waived it.
[58] For example, consistent with the interim rule's personal conflicts-
of-interest disclosure procedures, one TARP contractor told us about
recently disclosing to the TARP program manager a potential personal
conflict of interest involving a new employee. Rather than
disqualifying this person from being hired, the contractor discussed
the matter with OFS officials who were satisfied that the contractor's
mitigation measures (which involved establishing an ethical screen to
prevent the employee from speaking with staff engaged on the TARP work
or accessing related files) had neutralized the conflict.
[59] According to Treasury and OFS procurement and compliance
officials, three existing legal services contracts that predate the
TARP conflicts-of-interest rule are not in need of mitigation plan
reviews and renegotiation to conform, because their performance periods
are to end in April 2009.
[60] Section 31.212(b) requires that the information to be obtained in
writing be no less extensive than that required under Office of
Government Ethics (OGE) Form 278, Executive Branch Personnel Public
Financial Disclosure Report. Among the very high-level federal
officials required to annually file this report are the President, vice
president, presidential nominees to positions requiring Senate
confirmation, military general and flag officers, and senior
executives.
[61] According to OGE Form 278, the basic premise of the financial
disclosure requirement is that those having responsibility for review
of the reports must be given sufficient information by reporting
individuals concerning the nature of any outside interests and
activities so that an informed judgment can be made with respect to
compliance with applicable conflicts-of-interest requirements.
[62] For example, there is an alternative financial disclosure report
currently required of certain other federal employees: OGE Form 450,
Confidential Financial Disclosure Report (Executive Branch). Unlike the
longer Form 278 required of very high-level officials, the Form 450
does not require a detailed breakout of the valuation of listed assets
and sources of investment or other income by dollar amount and type.
[63] Section 116(b) of the act, 12 U.S.C. §5226(b).
[64] Section 116(c) of the act, 12 U.S.C. § 5226(c). An entity's
internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
disposition of the assets of the entity; (2) provide reasonable
assurance that transactions are recorded, as necessary, to permit
preparation of financial statements in accordance with generally
accepted accounting principles and that receipts and expenditures of
the entity are being made only in accordance with authorizations of
management and those charged with governance; and (3) provide
reasonable assurance regarding prevention or timely detection and
correction of unauthorized acquisition, use, or disposition of the
entity's assets that could have a material effect on the financial
statements.
[65] Internal controls over compliance with laws and regulations should
provide reasonable assurance that transactions are executed in
accordance with laws governing the use of budget authority and with
other laws and regulations that could have a direct and material effect
on the financial statements, and, as applicable, other laws and
regulations identified in OMB's audit guidance.
[66] Section 116(b) of the act, 12 U.S.C. § 5226(b).
[67] In addition to the eight institutions funded in the first group,
Merrill Lynch & Co., Inc. (Merrill Lynch) signed a participation
commitment on October 13, 2008. Following Merrill Lynch's merger with
Bank of America, on January 9, 2009, Bank of America received the $10
billion specified in Merrill Lynch's Participation Commitment with
Treasury.
[68] As part of the process of determining eligibility in CPP, Treasury
established an investment committee to evaluate each financial
institution's application. The investment committee either recommends
that the Assistant Secretary for Financial Stability approve the
application or requests additional analysis or information. According
to Treasury, the investment committee was created after October 13,
2008.
[69] The Federal Reserve Bank of New York will initially provide $200
billion in funding for TALF, while Treasury's initial $20 billion will
fund, in part, a special purpose vehicle that will manage the
collateral taken by the Federal Reserve Bank of New York if a borrower
defaults. TALF is similar in many ways to the Federal Reserve program
to buy Fannie Mae and Freddie Mac mortgage-backed securities (MBS).
[70] A basis point is a common measure used in quoting yield on bills,
notes, and bonds and represents 1/100 of a percent of yield. An
increase from 4.35 percent to 4.45 would be an increase of 10 basis
points.
[71] As we noted in our last report, mortgage rates fell by 90 basis
points shortly after the Federal Reserve announced it would intervene
in the GSE MBS and debt markets.
[72] Like other bank interest rates, mortgage rates may reflect the
customers to whom banks choose to lend, rather than the cost of credit
for all potential customers.
[73] New lending includes new mortgage, home equity lines of credit,
credit card and other consumer originations, and new or renewed
commercial and industrial, and commercial real estate loans.
[74] The results are based on a survey of approximately 60 banks,
accounting for more than 75 percent of the real estate loans originated
by banks in the U.S. The sample is selected from among the largest
banks in each Federal Reserve District. See [hyperlink,
http://www.federalreserve.gov/boarddocs/snloansurvey/].
[75] Respondent banks received the January survey on or after December
30, 2008, and their responses were due January 13, 2009. Banks received
the October survey on or after October 2, and their responses were due
on October 16.
[76] January and February data were unavailable for commercial bank
auto rates for inclusion in this report.
[77] However, differences in these trends could also reflect the
success of CPP (or CAP) in lowering, or preventing a rise, in bank auto
rates.
[End of section]
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