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entitled 'Troubled Asset Relief Program: June 2009 Status of Efforts to
Address Transparency and Accountability Issues' which was released on
June 17, 2009.
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
June 2009:
Troubled Asset Relief Program:
June 2009 Status of Efforts to Address Transparency and Accountability
Issues:
GAO-09-658:
GAO Highlights:
Highlights of GAO-09-658, a report to congressional committees.
Why GAO Did This Study:
GAO’s fifth report on the Troubled Asset Relief Program (TARP) follows
up on prior recommendations. It also reviews (1) activities that had
been initiated or completed under TARP as of June 12, 2009; (2) the
Department of the Treasury’s Office of Financial Stability’s (OFS)
hiring efforts and use of contractors; and (3) TARP performance
indicators. To do this, GAO reviewed signed agreements and other
relevant documentation and met with officials from OFS, contractors,
and financial regulators.
What GAO Found:
As of June 12, 2009, Treasury had disbursed $330 billion of the roughly
$700 billion in TARP funds (see table below). Most of the funds ($200
billion) went to purchase preferred shares and subordinated debentures
of 623 financial institutions under the Capital Purchase Program (CPP),
which continues to be OFS’s primary vehicle for stabilizing financial
markets. At the same time that Treasury continues to purchase preferred
shares in institutions, others have paid about $1.9 billion to
repurchase shares and Treasury announced that it expects to receive
approximately $68 billion from CPP repurchases later in June 2009.
Unlike the capital purchase process, Treasury, in conjunction with
primary federal regulators, has yet to share criteria used to evaluate
repurchase requests. Treasury also has provided only limited
information about the actual warrant repurchase process resulting in
questions about whether it is getting the best price for taxpayers.
Table: Status of TARP Funds as of June 12, 2009:
Program: Capital Purchase Program;
Treasury’s current projected use of funds[A]: $218.0 billion;
Disbursed: $199.5 billion.
Program: Targeted Investment Program;
Treasury’s current projected use of funds[A]: $40.0 billion;
Disbursed: $40.0 billion.
Program: Capital Assistance Program;
Treasury’s current projected use of funds[A]: TBD[B];
Disbursed: TBD.
Program: Systemically Significant Failing Institutions;
Treasury’s current projected use of funds[A]: $70.0 billion;
Disbursed: $41.2 billion.
Program: Asset Guarantee Program;
Treasury’s current projected use of funds[A]: $12.5 billion;
Disbursed: $0.0 billion.
Program: Automotive Industry Financing Program;
Treasury’s current projected use of funds[A]: $82.6 billion;
Disbursed: $49.2 billion.
Program: Making Home Affordable;
Treasury’s current projected use of funds[A]: $50.0 billion;
Disbursed: $0.0 billion.
Program: Consumer and Business Lending Initiative[C];
Treasury’s current projected use of funds[A]: $70.0 billion;
Disbursed: $0.1 billion.
Program: Public Private Investment Program;
Treasury’s current projected use of funds[A]: $100.0 billion;
Disbursed: $0.0 billion.
Program: Totals;
Treasury’s current projected use of funds[A]: $643.1 billion;
Disbursed: $330.0 billion.
Source: Treasury OFS, unaudited.
[A] Amounts represent Treasury’s most recent projected funding level.
Portions of Treasury’s projected use of funds are not yet legal
obligations.
[B] Treasury has announced the Capital Assistance Program but has not
yet projected its funding level.
[C] The Consumer and Business Lending Initiative now includes the Term
Asset-Backed Securities Loan Facility and the Small Business and
Community Lending Initiative.
[End of table]
Treasury continued to operationalize its more recent programs,
including the Capital Assistance Program (CAP). As part of this
program, the Federal Reserve led the stress tests of the largest 19
U.S. bank holding companies, which revealed that about half needed to
raise additional capital to keep them strongly capitalized and lending
even if economic conditions worsen. Whether any of the institutions
will have to participate in CAP has yet to be determined. While the
Federal Reserve disclosed the stress test results, it has no plans to
disclose information about the 19 institutions going forward. What
information, if any, is disclosed will be left to the discretion of the
affected institutions raising a number of concerns including
potentially inconsistent or only selected information being disclosed.
Moreover, the Federal Reserve had not developed a mechanism to share
information with OFS about the ongoing condition of the 19 bank holding
companies that continue to participate in TARP programs.
According to Treasury, its Financial Stability Plan has provided a
basis for its communication strategy. Treasury plans to more regularly
communicate with congressional committees of jurisdiction about TARP.
However, until this strategy is fully implemented, all congressional
stakeholders will not be receiving information in a consistent or
timely manner. A key component of the communication strategy is the new
[hyperlink, http://www.financialstability.gov] Web site. While a goal
of the new site is to provide the public with a more user friendly
format, Treasury has not yet measured the public’s satisfaction with
the site.
OFS has made progress in establishing its management infrastructure.
Continued attention to hiring remains important because some offices
within OFS, including the Office of the Chief Risk and Compliance
Officer, continue to have a number of vacancies that will need to be
filled as TARP programs are fully implemented. Treasury has also
continued to build a network of contractors and financial agents to
support TARP administration and operations. These contracts and
agreements are key tools OFS has used to help develop and administer
its TARP programs. Treasury has provided information to the public on
procurement contracts and financial agency agreements, but has not
included a breakdown of cost data by each entity. As a result, Treasury
is missing an opportunity to provide additional transparency about TARP
operations.
GAO again notes the difficulty of measuring the effect of TARP’s
activities. As shown in the table below, some indicators suggest
general improvements in various markets since our March 2009 report,
although the cost of credit has risen in some cases. Specifically, the
Baa corporate bond rate and LIBOR have declined but mortgage and Aaa
bond rates have risen. However, perceptions of risk in credit markets
(as measured by premiums over Treasury securities) have decreased in
interbank, mortgage, and corporate bond markets, while total mortgage
originations have increased. Empirical analysis of the interbank
market, which showed signs of significant stress in 2008, suggests that
the CPP and programs outside of the TARP announced in October of 2008
resulted in a statistically significant improvement in risk spreads
even when other important factors were considered. In addition,
although Federal Reserve survey data suggest that lending standards
remained tight, collectively the largest CPP recipients extended
roughly $260 billion on average each month in new loans to consumers
and businesses in the first quarter of 2009, according to the Treasury’
s 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.
Table} Select Credit Market Indicators:
Credit market rates and spreads:
Indicator: LIBOR;
Description: 3-month London interbank offered rate, LIBOR (an average
of interest rates offered dollar-denominated loans);
Basis point change since GAO March 2009 report: Down 38;
Basis point change since October 13, 2008: Down 388.
Indicator: TED Spread;
Description: Spread between 3-month LIBOR and 3-month Treasury yield;
Basis point change since GAO March 2009 report: Down 57;
Basis point change since October 13, 2008: Down 407.
Indicator: Aaa bond rate;
Description: Rate on highest quality corporate bonds;
Basis point change since GAO March 2009 report: Up 22;
Basis point change since October 13, 2008: Down 62.
Indicator: Aaa bond spread;
Description: Spread between Aaa bond rate and 10-year Treasury yield;
Basis point change since GAO March 2009 report: Down 101;
Basis point change since October 13, 2008: Down 61.
Indicator: Baa bond rate;
Description: Rate on corporate bonds subject to moderate credit risk;
Basis point change since GAO March 2009 report: Down 84;
Basis point change since October 13, 2008: Down 108.
Indicator: Baa bond spread;
Description: Spread between Baa bond rate and 10-year Treasury yield;
Basis point change since GAO March 2009 report: Down 207;
Basis point change since October 13, 2008: Down 107.
Indicator: Mortgage rates;
Description: 30-year conforming loans rate;
Basis point change since GAO March 2009 report: Up 61;
Basis point change since October 13, 2008: Down 87.
Indicator: Mortgage spread;
Description: Spread between 30-year conforming loans rate and 10-year
Treasury yield;
Basis point change since GAO March 2009 report: Down 53;
Basis point change since October 13, 2008: Down 74.
Quarterly mortgage volume and defaults:
Indicator: Mortgage originations;
Description: New mortgage loans;
Change from December 31, 2008 to March 31, 2009 (latest available
data): Up $185 billion to $445 billion.
Indicator: Foreclosure rate;
Description: Percentage of homes in foreclosure;
Change from December 31, 2008 to March 31, 2009 (latest available
data): Up 55 basis points to 3.85 percent.
Source: GAO analysis of data from Global Insight, Thomson Datastream,
and Inside Mortgage Finance.
[End of table]
What GAO Recommends:
GAO makes 5 recommendations, including that Treasury improve disclosure
of the warrant repurchase process, fully implement a communication
strategy that ensures that all key congressional stakeholders are kept
up to date about TARP, and in consultation with the primary federal
regulators, ensure consideration of generally consistent criteria to
evaluate repurchase requests. GAO also recommends that the Federal
Reserve consider providing certain aggregate information related to the
stress tests to the public and OFS in particular.
Treasury described the steps it has taken since our March report. The
Federal Reserve said that GAO’s recommendation was operationally
difficult and the information reported would be potentially misleading.
GAO continues to see value in reporting aggregate trend information.
View [hyperlink, http://www.gao.gov/products/GAO-09-658] or key
components. For more information, contact Thomas McCool at (202) 512-
2642 or mccoolt@gao.gov.
[End of section]
Contents:
Letter:
Scope and Methodology:
Background:
Treasury Has Established Its Core Programs under TARP but Continues to
Finalize Some Details:
Treasury Has Made Progress in Developing OFS's Management
Infrastructure:
Indicators Generally Suggest Positive Developments in Credit Markets,
but Isolating the Impact of TARP Continues to Present Challenges:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Comments from the Department of the Treasury:
Appendix II: Status of Prior GAO Recommendations:
Appendix III: Econometric Analysis of TED Spread:
Appendix IV: Overview of Treasury's CPP Repurchase Process:
Appendix V: Synopsis of Citigroup's Financial Condition:
Appendix VI: GAO Contacts and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Status of TARP Funds as of June 12, 2009:
Table 2: TARP Dividend Payments Received as of June 12, 2009:
Table 3: Capital Investments Made through the Capital Purchase Program
as of June 12, 2009:
Table 4: Average Processing Days Reported by the Federal Reserve, OTS,
OCC and Treasury of CPP Applications, as of May 15, 2009:
Table 5: Capital Purchase Program Repurchases, as of June 12, 2009:
Table 6: Estimated Losses for the 19 U.S. Bank Holding Companies in
SCAP, January 2009 through December 2010:
Table 7: Capital Raising Requirements SCAP Bank Holding Companies, as
of June 12, 2009:
Table 8: Amount of TALF Loans Requested from March through June 2009 by
Loan Type:
Table 9: U.S. Treasury Assistance to the Auto Industry:
Table 10: Number of Permanent Staff and Detailees, as of June 8, 2009:
Table 11: Description of Financial Disclosure Reports Filed by OFS
Employees:
Table 12: TARP Contracts, Financial Agency Agreements, and Subcontracts
with Minority-Owned, Women-Owned, and Other Small Businesses, as of
June 1, 2009:
Table 13: Select Credit Market Indicators, as of June 12, 2009:
Table 14: New Lending at the 21 Largest CPP Recipients, First Quarter
of 2009, by Institution:
Figures:
Figure 1: Timeline of Major TARP Events from March 24, 2009, through
June 12, 2009:
Figure 2: Equity Ownership in Chrysler and GM after Restructuring:
Figure 3: Number of Permanent Staff and Detailees, November 21, 2008,
through June 8, 2009:
Figure 4: Number of and Expenses for OFS Contracts and Agreements, as
of June 1, 2009:
Figure 5: Mortgage Applications and Originations, First Quarter of 2004
through First Quarter of 2009:
Figure 6: Total New Lending at the 21 Largest Recipients of CPP, from
October 1, 2008, through March 2009:
Figure 7: Average Finance Rate for New Cars at Auto Finance Companies
and Banks, from February 1, 2006, through March 2009:
Figure 8: Treasury's Repurchase Process:
Figure 9: Net Income (Loss) of the Four Largest U.S. Bank Holding
Companies, First Quarter of 2007 through First Quarter of 2009:
Figure 10: Market Value of Equity (Common) as Percentage of Total
Assets of the Four Largest U.S. Bank Holding Companies, First Quarter
of 2007 through First Quarter of 2009:
Figure 11: The Ratio of Debt to Equity of the Four Largest U.S. Bank
Holding Companies, First Quarter of 2007 through First Quarter of 2009:
Figure 12: Tier 1 Risk-Based Capital Ratio of the Four Largest U.S.
Bank Holding Companies, First Quarter of 2007 through First Quarter of
2009:
Figure 13: Tier 1 Leverage Capital Ratio of the Four Largest Bank
Holding Companies, First Quarter of 2007 through First Quarter of 2009:
Figure 14: Selected Problem Assets as a Percentage of Tier 1 Capital
and Loan Loss Allocation, First Quarter of 2007 through First Quarter
of 2009:
Abbreviations:
ABS: asset-backed security:
AGP: Asset Guarantee Program:
AIFP: Automotive Industry Financing Program:
AIG: American International Group Inc.
ALLL: allowance for loan and lease losses:
ARRA: American Recovery and Reinvestment Act of 2009:
CAP: Capital Assistance Program:
CDFI: Community Development Financial Institution Funds:
CMBS: commercial mortgage-backed security:
CPP: Capital Purchase Program:
FDIC: Federal Deposit Insurance Corporation:
FMV: fair market value:
GM: General Motors Corporation:
GMAC: GMAC LLC
HAC: Heteroskedasticity and Autocorrelation-Consistent:
HAMP: Home Affordable Modification Program
LIBOR: London Interbank Offered Rate:
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:
PBGC: Pension Benefit Guaranty Corporation:
PPIP: Public Private Investment Program:
SBA: Small Business Administration:
SCAP: Supervisory Capital Assessment Program:
SSFI: Systemically Significant Failing Institutions Program
TALF: Term Asset-Backed Securities Loan Facility:
TARP: Troubled Asset Relief Program:
TIP: Targeted Investment Program:
VEBA: voluntary employee beneficiary associations:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
June 17, 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, as amended, provides Treasury
with broad, flexible authorities to buy or guarantee billions 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 to oversee the implementation
and operations of TARP. These include a requirement that the U.S.
Comptroller General report at least every 60 days on (1) findings
resulting from oversight of TARP's performance in meeting the purposes
of the act; (2) the financial condition and internal controls of TARP,
its representatives, and agents; (3) the characteristics of both asset
purchases and the disposition of assets acquired, including any related
commitments that are entered into; (4) TARP's efficiency in using the
funds appropriated for the program's operation; (5) TARP's compliance
with applicable laws and regulations; efforts to prevent, identify, and
minimize conflicts of interest of those involved in TARP's operations;
and (6) the efficacy of contracting procedures.[Footnote 3] In order to
eliminate unnecessary duplication of effort, we have continued to
coordinate our work with entities created under the act who also were
assigned oversight responsibilities for TARP, including the
Congressional Oversight Panel, the Financial Stability Oversight Board
(FinSOB), and the Special Inspector General for TARP (SIGTARP).
This report follows up on the status of recommendations from our
previous reports and addresses (1) the nature and purpose of activities
that have been initiated or completed under TARP from March 27, through
June 12, 2009, unless otherwise noted; (2) OFS's progress in hiring
staff and use of contractors; 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 March 27,
2009, through June 12, 2009, unless noted otherwise, and the status of
actions taken in response to our recommendations from our March 2009
report, we reviewed documents from OFS that described the amounts,
types, and terms of Treasury's purchases of senior preferred stocks,
subordinated debt, and warrants under the Capital Purchase Program
(CPP). We also reviewed documentation and interviewed officials from
OFS who were responsible for approving financial institutions to
participate in CPP and overseeing the repurchase process for CPP
preferred stock and warrants.[Footnote 5] 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, their process for reviewing preferred
stock and warrant repurchase requests, and their examination process
for reviewing recipients' lending activities and compliance with TARP
requirements.
To update the status of the Targeted Investment Program (TIP), the
Systemically Significant Failing Institutions Program (SSFI), and the
Automotive Industry Financing Program (AIFP), we reviewed relevant
documents and interviewed OFS officials about these programs. We also
met with Federal Reserve officials to discuss the stress test
methodology and results for the 19 largest U.S. bank holding companies
and reviewed related documents relevant to the Capital Assistance
Program (CAP).
To provide an update on the Federal Reserve's Term Asset-Backed
Securities Loan Facility (TALF) and its efforts related to small
business securitizations--and in consideration of GAO's statutory
limitations on auditing certain functions of the Federal Reserve--we
reviewed publicly available information on the Web sites of the Federal
Reserve and the Federal Reserve Bank of New York that had been made
available since our March 2009 report. We also interviewed officials in
OFS for updates to TALF.[Footnote 6] For updates to Public Private
Investment Program (PPIP) and small business efforts related to its
Consumer and Business Lending Initiative, we reviewed agency
documentation and interviewed Treasury and FDIC officials. For updates
on the Small Business Administration (SBA) efforts related to improving
credit and securitization markets for small businesses, we relied on
previously issued GAO work.[Footnote 7]
To determine Treasury's progress in developing an overall
communications strategy for TARP, we assessed Treasury's activities
based on GAO reports on effective communications.[Footnote 8] We also
accessed [hyperlink, http://www.financialstability.gov]--Treasury's new
Web site for communication of TARP-related strategies--through June 4,
2009. Further, we interviewed officials from OFS and Treasury's Office
of Public Affairs to determine what steps Treasury had taken to
coordinate communications with the public and Congress.
To determine the status of OFS's efforts to hire staff to administer
TARP duties, we reviewed OFS's organizational chart, documents on staff
composition and workforce planning, Treasury's most recent budget
proposal submission to the Office of Management and Budget (OMB), and
OFS vacancy announcements posted on [hyperlink,
http://www.financialstability.gov] and [hyperlink,
http://www.USAjobs.gov] from March 31, 2009, to June 8, 2009. We also
reviewed our prior work on human capital flexibilities and strategic
workforce planning to assess OFS's performance in these areas. In
addition, we met with a variety of Treasury and OFS officials to
discuss the staffing levels of OFS offices including vacancies, their
processes for recruiting employees with the skill sets and competencies
needed to administer TARP, steps taken to find permanent replacements
to fill key leadership positions, and the extent of pay comparability
challenges. We also met with officials from the Office of Personnel
Management to discuss their coordination with Treasury in establishing
hiring flexibilities and other tools to staff OFS.
To assess OFS's process for vetting employees' potential conflicts of
interest, we reviewed information from Treasury's databases used to
track submission and reviews of Treasury employees' confidential and
public financial disclosure reports. Specifically, we reviewed
information in the databases for 64 OFS employees hired as of April 23,
2009. Of these, 56 were permanent employees required to submit
confidential financial disclosure reports and 8 were senior-level
officials required to submit public disclosure reports.[Footnote 9] In
order to determine the reliability of the information provided in the
databases, we interviewed Treasury officials and performed basic tests
on the data. We determined that the information provided for these 64
employees was sufficiently reliable for our purposes. We also reviewed
standard operating procedures that Treasury developed to manage the
submissions and reviews of its employees' financial disclosure reports
and new internal operating procedures developed specifically for
reviewing OFS employees' confidential financial disclosure reports. In
coordination with GAO experts on federal ethics laws and regulations,
we reviewed information provided by 15 senior-level OFS officials in
public financial disclosure reports and identified any potential
conflicts meriting additional discussion with Treasury ethics counsel.
In addition, we met with Treasury and OFS officials to discuss their
reviews of financial disclosure reports and the training provided to
OFS staff on the laws and regulations pertaining to ethical conduct in
the federal workplace, including those related to conflicts of
interest. We met with officials from the Office of Government Ethics
(OGE) to discuss pertinent ethics regulations that applied to Treasury
and reviewed their guidance on ethical standards of conduct for
employees.[Footnote 10] We also reviewed reports published by
Treasury's Office of the Inspector General describing conflicts of
interest incidents and their resolution.
To assess OFS's use of contractors and financial agents to support TARP
administration and operations for the period of March 14 through June
1, 2009, we reviewed information from Treasury for (1) new financial
agency agreements, contracts, blanket purchase agreements, and
interagency agreements; and (2) task orders, modifications, and
amendments involving ongoing contracts and agreements. We analyzed this
information, in part, to identify small or minority-and women-owned
prime contractors and subcontractors providing TARP services and
supplies. To report OFS expenses for contracts and agreements, we
obtained information from the OFS Chief Financial Officer. To identify
the extent to which federal banking regulators use contractors to
support their TARP activities, we obtained information from FDIC,
Federal Reserve, OCC, and OTS. To assess the status of OFS progress in
developing a final TARP conflicts-of-interest rule and responding to
our prior recommendations to (1) complete reviews of vendor conflicts-
of-interest mitigation plans to conform with the interim rule and to
(2) issue guidance requiring key communications and decisions be
documented, we interviewed officials from Treasury and reviewed
applicable documents.
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, Deputy Chief Risk
Officer, Cash Management Officer, Director of Internal Controls, and
their representatives. To evaluate selected internal control activities
related to the CPP, AIFP, and SSFI programs, we designed tests using
OFS's process flows, narratives, risk matrices, and high-level
operational procedures. As part of our ongoing work, we completed the
following additional activities:
* For CPP, we tested certain internal control activities related to
dividend payments received through June 12, 2009, from institutions
included in our previous sample of 45 unique preferred stock purchase
transactions for the four months ended January 31, 2009. To make that
selection, we used a monetary unit sampling (probability proportionate
to size) methodology. We also tested dividends received through June
12, 2009, for TIP, Asset Guarantee Program (AGP), and AIFP.
* For SSFI, we tested selected control activities, including approvals,
reviews, and closing documentation, for the American International
Group Inc. (AIG) restructuring. The documentation that we reviewed
included an exchange agreement and purchase agreement executed on April
17, 2009.
* For AIFP, we tested controls over the (1) authorization and execution
of the initial General Motors Corporation (GM) and Chrysler LLC
(Chrysler) agreements (executed on December 31, 2008, and January 2,
2009, respectively), (2) funding process, (3) receipt of promissory
notes and securities, (4) disbursements made by Treasury under the
agreements, and (5) receipts of interest and principal. In addition, we
verified that the loan amounts disbursed to and interest received from
GM and Chrysler were consistent with the terms of the agreements.
Finally, 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.[Footnote 11] 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 12] We assessed the reliability of the data upon
which the indicators were 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
Thomson Datastream--a financial statistics database. As these data are
widely used, 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 Inside Mortgage Finance, Treasury, the Federal
Reserve, the Chicago Board Options Exchange, and Global Insight. We
have relied on data from these sources for past reports and 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 to the
top 21 CPP recipients (as of March 31, 2009) 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 were
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 also conducted an econometric
analysis to assess the impact of CPP on the TED spread. Although we
used a standard and widely used methodology, the model results should
be interpreted with caution because we did not attempt to capture all
potential factors that might explain movements in the TED spread.
Moreover, in spite of the empirical evidence, we cannot link
improvements in the TED spread exclusively to CPP (see appendix III for
more detail).
We conducted this performance audit from April 2009 through June 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:
Since its creation, OFS has implemented numerous programs and
initiatives to carry out TARP. According to Treasury, the purpose of
each program is as follows:
* CPP was created in October 2008 to stabilize the financial system by
providing capital to viable banks through the purchase of preferred
shares and subordinated debentures. In return for its investment, the
Treasury will receive dividend payments and warrants.
* TIP was created in January 2009 to foster market stability and
thereby strengthen the economy by making case-by-case investments in
institutions that Treasury deems are critical to the functioning of the
financial system.
* AGP was created in November 2008 to provide government assurances for
assets held by financial institutions that are viewed as critical to
the functioning of the nation's financial system.
SSFI was created in November 2008 to provide stability in financial
markets and avoid disruptions to the markets from the failure of a
systemically significant institution. Treasury determines participation
in this program on a case-by-case basis.
* AIFP was created in December 2008 to prevent a significant disruption
of the American automotive industry. Treasury has determined that such
a disruption would pose a systemic risk to financial market stability
and have a negative effect on the U.S. economy. The program requires
participating institutions to implement plans that will achieve long-
term viability.
* Auto Supplier Support Program was created in March 2009 to help
stabilize the auto supply base, which designs and builds the components
for cars and trucks.
* Making Home Affordable Program was created in March 2009 to offer
assistance to as many as 7 to 9 million homeowners. The program aims to
prevent the destructive impact of the housing crisis on families and
communities. According to Treasury, it will not provide money to
speculators, but will target support to the working homeowners who have
made every possible effort to stay current on their mortgage payments.
[Footnote 13]
* Consumer and Business Lending Initiative created in March 2009 is an
initiative under the Financial Stability Plan that includes the Federal
Reserve-run TALF. This initiative is intended to support consumer and
business credit markets by providing financing to private investors to
issue new securitizations to help unfreeze and lower interest rates for
auto, student, and small business loans; credit cards; commercial
mortgages; and other consumer and business credit. Subsequently, it
subsumed the Small Business and Community Lending Initiative, which was
also created in March 2009 to increase credit available to local
businesses by reducing fees and increasing guarantees for SBA loans and
having Treasury purchase securities backed by SBA loans.
* CAP was created in February 2009 to restore confidence throughout the
financial system that the nation's largest banking institutions have
sufficient capital to cushion themselves against larger-than-expected
future losses, and to support lending to creditworthy borrowers.
* PPIP was established in March 2009 to address the challenge of
"legacy assets" as part of Treasury's efforts to repair balance sheets
throughout the financial system and increase the availability of credit
to households and businesses. In conjunction with the FDIC, Treasury
established the Legacy Loans Programs component of PPIP.
Since our March 2009 report, a number of major TARP-related events have
occurred (see figure 1).
Figure 1: Timeline of Major TARP Events from March 24, 2009, through
June 12, 2009:
[Refer to PDF for image: timeline]
4/6: Treasury releases additional guidance for potential investors into
PPIP and extends the deadline for application.
4/7: Treasury releases three term sheets for qualifying financial
institutions applying to CPP that are mutual holding companies.
4/8: Treasury releases a statement following the launch by Chrysler
LLC’s and General Motors Corporation’s Auto Supplier Support Programs.
4/14: Treasury releases term sheet for mutual banks applying to CPP
that do not have holding companies.
4/15: Treasury releases its monthly bank lending survey with
information from the top 21 financial institutions participating in the
CPP.
4/22: Treasury announces selection of three firms to serve as asset
managers for CPP and other programs.
4/28: The administration releases details of new initiatives under the
Making Home Affordable program that lower payments made on second
mortgages and assist underwater borrowers in retaining their homes.
4/29: Treasury announces receipt of more than 100 applications for fund
manager positions of PPIP’s Legacy Securities.
4/30: The administration announces an agreement for Chrysler to partner
with international car company Fiat.
5/7: Stress test results are announced and the Treasury Secretary
releases a statement announcing his hopes that the release of results
leads to increased bank lending.
5/14: Treasury Secretary Geithner and HUD Secretary Donovan announce
new initiatives of the Making Housing Affordable Program: foreclosure
alternatives, and home price decline protection incentives.
5/15: Treasury releases its monthly bank lending survey with
information from the top 21 financial institutions participating in the
CPP.
5/19: Treasury announces confirmation of Neal S. Wolin as Deputy
Secretary of the Treasury.
5/21: Treasury announces that it has made an investment of $7.5 billion
in GMAC LLC to facilitate loan originations to Chrysler dealers and
consumers and support GMAC’s capital needs.
5/31: Treasury releases fact sheet on General Motors restructuring.
6/1: Treasury releases its first CPP Monthly Lending Report which
includes information on outstanding balances on consumer loans,
commercial loans and total loans of all CPP participants.
6/4: Treasury releases the opening statement of Herbert M. Allison,
nominee for Assistant Secretary for Financial Stability, before the
Senate Committee on Banking, Housing, and Urban Affairs.
6/9: Treasury announces that 10 of the largest CPP financial
institutions are eligible to repay about $68 Billion to Treasury.
6/10: Treasury releases interim final rule on TARP standards for
compensation and corporate governance including limits on employee
compensation at TARP institutions, appointment of a special master to
review compensation plans at institutions receiving exceptional
assistance, implementation of Recovery Act provisions related to TARP
employee compensation, and additional compensation and governance
standards for accountability and disclosure.
Source: GAO.
[End of figure]
Treasury Has Established Its Core Programs under TARP but Continues to
Finalize Some Details:
As of June 12, 2009, Treasury projected that it had used $643.1 billion
of its almost $700 billion limit for TARP. Highlights of the
transactions and activities under the various programs include the
following:
* CPP continues to be one of OFS's most active programs with OFS
continuing to deploy funds and other participants beginning to repay
investments.
* While OFS has hired asset mangers, it has yet to clearly identify
what role the asset managers will have in monitoring compliance.
* The Federal Reserve announced the results of the stress test under
CAP, for which Treasury extended the deadline for applications through
November 9, 2009. As of June 8, 2009, no applications had been
submitted.
* The Federal Reserve announced a number of modifications to TALF and
has completed a number of fundings since March 2009.
* OFS and FDIC took additional steps to implement the PPIP's Legacy
Loans Program, but postponed a previously planned pilot sale of assets
by open banks.
* Treasury, in conjunction with the Federal Reserve and SBA, has also
announced additional efforts to provide more accessible and affordable
credit to small businesses.
* Citigroup, Inc. (Citigroup) expanded its request to convert preferred
securities and trust preferred securities for common stock from $27.5
billion to $33 billion and finalized the exchange agreement on Jun 9,
2009, but the conversion had not been completed as of June 12, 2009.
* OFS finalized a $30 billion equity facility with AIG under SSFI and
restructured AIG's existing preferred stock from cumulative to
noncumulative shares but did not require additional concessions from
AIG counterparties.
* OFS provided an additional $44 billion in assistance to Chrysler and
GM under AIFP.
Finally, consistent with our recommendations, Treasury has continued to
take steps to develop an integrated communication strategy for TARP,
but we continue to identify areas that warrant ongoing attention and
consideration.
Treasury Has Disbursed Almost Half the TARP Limit:
As of June 12, 2009, Treasury had disbursed about $330 billion in TARP
funds, approximately $200 billion of them for CPP (table 1).
Table 1: Status of TARP Funds as of June 12, 2009:
Program: Capital Purchase Program;
Treasury's current projected use of funds[A]: $218.0 billion;
Apportioned: $218.0 billion;
Disbursed: $199.5 billion;
Asset purchase price[B]: $199.5 billion.
Program: Targeted Investment Program;
Treasury's current projected use of funds[A]: $40.0 billion;
Apportioned: $40.0 billion;
Disbursed: $40.0 billion;
Asset purchase price[B]: $40.0 billion.
Program: Capital Assistance Program;
Treasury's current projected use of funds[A]: TBD[C];
Apportioned: TBD;
Disbursed: TBD;
Asset purchase price[B]: TBD.
Program: Systemically Significant Failing Institutions;
Treasury's current projected use of funds[A]: $70.0 billion;
Apportioned: $70.0 billion;
Disbursed: $41.2 billion;
Asset purchase price[B]: $69.8 billion.
Program: Asset Guarantee Program;
Treasury's current projected use of funds[A]: $12.5 billion;
Apportioned: $5.0 billion;
Disbursed: 0.0;
Asset purchase price[B]: $5.0 billion.
Program: Automotive Industry Financing Program[D];
Treasury's current projected use of funds[A]: $82.6 billion;
Apportioned: $93.7 billion;
Disbursed: $49.2 billion;
Asset purchase price[B]: $85.0 billion.
Program: Making Home Affordable;
Treasury's current projected use of funds[A]: $50.0 billion;
Apportioned: $32.5 billion;
Disbursed: 0.0;
Asset purchase price[B]: $18.3 billion.
Program: Consumer and Business Lending Initiative[E];
Treasury's current projected use of funds[A]: $70.0 billion;
Apportioned: $20.0 billion;
Disbursed: $0.1 billion;
Asset purchase price[B]: $20.0 billion.
Program: Public Private Investment Program;
Treasury's current projected use of funds[A]: $100.0 billion;
Apportioned: 0.0;
Disbursed: 0.0;
Asset purchase price[B]: 0.0.
Program: Totals;
Treasury's current projected use of funds[A]: $643.1 billion;
Apportioned: $479.2 billion;
Disbursed: $330.0 billion;
Asset purchase price[B]: $437.6 billion.
Program: Less repurchases;
Treasury's current projected use of funds[A]: [Empty];
Apportioned: [Empty];
Disbursed: [Empty];
Asset purchase price[B]: $1.9 billion[F].
Program: Total asset purchase price;
Treasury's current projected use of funds[A]: [Empty];
Apportioned: [Empty];
Disbursed: [Empty];
Asset purchase price[B]: $435.7 billion.
Source: Treasury OFS, unaudited.
[A] The amounts represent Treasury's most recent projected funding
level. Portions of Treasury's projected use of funds are not yet legal
obligations. Projected funds may differ from the original announced
maximum program funding level. For example, Treasury originally
announced a maximum funding level of $250 billion for CPP but now
projects that it will not exceed $218 billion.
[B] The Asset Purchase Price reflects the aggregate amount Treasury
agreed to pay to purchase outstanding troubled assets that are subject
to the almost $700 billion purchase limit in section 115 of the
Emergency Economic Stabilization Act. This amount includes the
aggregate amount of outstanding guarantees made by Treasury, even
though Treasury has not disbursed any cash to honor a guarantee. For
example, AGP's asset purchase price includes the $5 billion Citigroup
guarantee, even though no cash has been disbursed to Citigroup through
this program. However, as required under section 102 of the act, it
does not include a subtraction from the outstanding guarantee amount to
reflect the balance in the Troubled Assets Insurance Financing Fund.
[C] Treasury has announced CAP but has not yet projected its funding
level.
[D] Treasury's current projected use of funds is less than the
apportionment and asset purchase price for AIFP because Treasury
expects to disburse less money than originally anticipated.
[E] The Consumer and Business Lending Initiative now includes TALF and
the Small Business and Community Lending Initiative.
[F] Repurchases represent the amounts received from CPP participant
institutions that repurchased preferred shares from Treasury.
Repurchases exclude any amounts relating to private institutions'
repurchases of preferred shares obtained through the exercise of
warrants and public institutions' repurchases of warrants.
[End of table]
Officers and employees of Treasury may not obligate or expend
appropriated funds in excess of the amount apportioned by OMB on behalf
of the President. Treasury stated that as of June 12, 2009, OMB had
apportioned about $479.2 billion of the funding levels announced for
TARP. Given 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 review the controls that Treasury has in place to
help ensure compliance with the funding restrictions.
In addition, beginning in April 2009, the budgetary costs of TARP asset
purchases, loans, and loan guarantees since the inception of the
program represent the net present value of estimated cash flows to and
from the government, excluding administrative costs.[Footnote 14] OFS
is continuing to develop and enhance its methodology and documentation
surrounding its estimated cash flows. We will review TARP's estimated
cash flows and resulting program costs as part of our ongoing work.
Treasury Has Received Approximately $6.2 Billion in Dividend Payments:
From TARP's inception through June 12, 2009, Treasury had received
approximately $6.2 billion in dividend payments on shares of preferred
stock acquired through CPP, TIP, AIFP, and AGP (table 2). Treasury's
agreements under these programs entitled it to receive dividend
payments on varying terms and at varying rates.[Footnote 15] The
dividend payments to Treasury are contingent on each institution
declaring dividends.
Table 2: TARP Dividend Payments Received as of June 12, 2009 (Dollars
in thousands):
Program: Capital Purchase Program;
Dividend payments received: $4,822,420;
Cumulative dividends not declared and not paid: $5,962;
Noncumulative dividends not declared and not paid: $802.
Program: Targeted Investment Program;
Dividend payments received: $1,128,889;
Cumulative dividends not declared and not paid: [Empty];
Noncumulative dividends not declared and not paid: [Empty].
Program: Automotive Industry Financing Program[A];
Dividend payments received: $159,611;
Cumulative dividends not declared and not paid: [Empty];
Noncumulative dividends not declared and not paid: [Empty].
Program: Asset Guarantee Program;
Dividend payments received: $107,573;
Cumulative dividends not declared and not paid: [Empty];
Noncumulative dividends not declared and not paid: [Empty].
Program: Systemically Significant Failing Institutions Program[B];
Dividend payments received: [Empty];
Cumulative dividends not declared and not paid: [Empty];
Noncumulative dividends not declared and not paid: [Empty][C].
Program: Total;
Dividend payments received: $6,218,493;
Cumulative dividends not declared and not paid: $5,962;
Noncumulative dividends not declared and not paid: $802.
Source: Treasury OFS, unaudited.
[A] GMAC LLC is the only institution participating in AIFP that issued
preferred shares to Treasury and is scheduled to pay dividends per the
terms of the security purchase agreement through June 12, 2009. The
other AIFP participants issued debt instruments to Treasury that are
not reflected on this table.
[B] AIG is the sole participant in the Systemically Significant Failing
Institutions program. On April 17, 2009, AIG and Treasury restructured
their November 25, 2008, agreement. Under the restructuring, Treasury
exchanged $40 billion of cumulative Series D preferred shares for $41.6
billion of noncumulative Series E preferred shares. The amount of
Series E preferred shares is equal to the original $40 billion, plus
approximately $733 million in undeclared dividends as of February 1,
2009--the scheduled quarterly dividend payment date--$15 million in
dividends compounded on the undeclared dividends, and an additional
$855 million in dividends accrued from February 1, 2009, but not paid
as of April 17, 2009.
[C] AIG's restructured agreement kept the quarterly dividend payment
dates of every May 1, August 1, November 1, and February 1, established
by the original November 25, 2008, agreement. However, the restructured
agreement also specified that dividends were payable beginning with the
first dividend payment date to occur at least 20 calendar days after
the restructuring date. Accordingly, in compliance with these dividend
payment terms, the dividend payment for the period from April 17, 2009,
through May 1, 2009, which amounts to approximately $150.2 million, is
to be included in the August 1, 2009, scheduled quarterly dividend
payment.
[End of table]
From March 21, 2009, through June 12, 2009, 17 CPP participants had not
declared or paid dividends of approximately $6.6 million. Specifically,
7 institutions did not declare and pay their cumulative dividends of
approximately $6 million and 10 institutions did not declare and pay
their noncumulative dividends of approximately $666,000.[Footnote 16]
OFS said it received notification from the 17 institutions that they
did not intend to declare or pay their May 15, 2009, quarterly
dividends. According to OFS officials, of the 17 institutions, 13
informed Treasury that state or federal banking regulations or policies
restricted them from declaring dividends, 1 indicated concern about its
profitability, and 3 did not provide an explanation as to why they did
not declare dividends. 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.
Five of these participants were also among the original eight
participants that did not declare or pay approximately $150,000 in
noncumulative dividends as reported in our March 2009 report. Two of
the eight paid their most recent dividend payments for the May 15,
2009, quarterly dividend payment date. The other participant
subsequently declared and paid the approximately $14,000 in
noncumulative dividends previously not paid and its most recent May 15,
2009, quarterly dividend.
Treasury Continues to Deploy Funds through CPP While Some Participants
Repay Investments:
Treasury has continued to use CPP as a primary vehicle under TARP as it
attempts to stabilize financial markets. As of June 12, 2009, Treasury
had disbursed about 92 percent of the $218 billion (revised from the
original $250 billion) it had allocated for the purchase of almost
$199.5 billion in preferred shares and subordinated debt from 623
qualified financial institutions (table 3).[Footnote 17] These
purchases ranged from about $301,000 to $25 billion per institution. As
of June 12, 2009, about $712 million in preferred stock shares and
subordinated debt from 91 financial institutions had been purchased
since our March 2009 report.
Table 3: Capital Investments Made through the Capital Purchase Program
as of June 12, 2009:
Closing date of transaction: 10/28/2008;
Amount of CPP capital investment: $115,000,000,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 52.75%;
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 funds used for CPP capital
investment: 68.15%;
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 funds used for CPP capital
investment: 69.48%;
Number of qualified financial institutions receiving CPP capital: 23.
Closing date of transaction: 12/5/2008;
Amount of CPP capital investment: $3,835,635,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 71.24%;
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 funds used for CPP capital
investment: 72.37%;
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 funds used for CPP capital
investment: 73.65%;
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 funds used for CPP capital
investment: 74.52%;
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 funds used for CPP capital
investment: 81.44%;
Number of qualified financial institutions receiving CPP capital: 7.
Closing date of transaction: 1/9/2009;
Amount of CPP capital investment: $14,771,598,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 88.22%;
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 funds used for CPP capital
investment: 88.89%;
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 funds used for CPP capital
investment: 89.07%;
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 funds used for CPP capital
investment: 89.60%;
Number of qualified financial institutions receiving CPP capital: 42.
Closing date of transaction: 2/6/2009;
Amount of CPP capital investment: $238,555,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 89.71%;
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 funds used for CPP capital
investment: 89.91%;
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 funds used for CPP capital
investment: 90.07%;
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 funds used for CPP capital
investment: 90.26%;
Number of qualified financial institutions receiving CPP capital: 28.
Closing date of transaction: 3/6/2009;
Amount of CPP capital investment: $284,675,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 90.39%;
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 funds used for CPP capital
investment: 91.05%;
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 funds used for CPP capital
investment: 91.09%;
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 funds used for CPP capital
investment: 91.18%;
Number of qualified financial institutions receiving CPP capital: 14.
Closing date of transaction: 4/3/2009;
Amount of CPP capital investment: $54,826,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.20%;
Number of qualified financial institutions receiving CPP capital: 10.
Closing date of transaction: 4/10/2009;
Amount of CPP capital investment: $22,790,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.21%;
Number of qualified financial institutions receiving CPP capital: 5.
Closing date of transaction: 4/17/2009;
Amount of CPP capital investment: $40,945,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.23%;
Number of qualified financial institutions receiving CPP capital: 6.
Closing date of transaction: 4/24/2009;
Amount of CPP capital investment: $121,846,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.29%;
Number of qualified financial institutions receiving CPP capital: 12.
Closing date of transaction: 5/1/2009;
Amount of CPP capital investment: $45,532,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.31%;
Number of qualified financial institutions receiving CPP capital: 7.
Closing date of transaction: 5/8/2009;
Amount of CPP capital investment: $42,019,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.33%;
Number of qualified financial institutions receiving CPP capital: 7.
Closing date of transaction: 5/15/2009;
Amount of CPP capital investment: $107,623,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.38%;
Number of qualified financial institutions receiving CPP capital: 14.
Closing date of transaction: 5/22/2009;
Amount of CPP capital investment: $108,333,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.43%;
Number of qualified financial institutions receiving CPP capital: 12.
Closing date of transaction: 5/29/2009;
Amount of CPP capital investment: $89,207,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.47%;
Number of qualified financial institutions receiving CPP capital: 8.
Closing date of transaction: 6/5/2009;
Amount of CPP capital investment: $40,269,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.49%;
Number of qualified financial institutions receiving CPP capital: 3.
Closing date of transaction: 6/12/2009;
Amount of CPP capital investment: $39,108,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.51%;
Number of qualified financial institutions receiving CPP capital: 7.
Closing date of transaction: Total;
Amount of CPP capital investment: $199,482,185,000;
Cumulative percentage of allocated funds used for CPP capital
investment: 91.51%;
Number of qualified financial institutions receiving CPP capital:
623[A].
Sources: Treasury and GAO.
Note: Treasury adjusted its allocation to CPP from $250 billion to $218
billion in March 2009. According to Treasury officials, this downward
adjustment reflects the estimated funding needs of the program based on
participation to date and the money it expects to receive from
participants that repay their CPP capital investment. The cumulative
percentage of allocated fund numbers are now a percentage of the $218
billion.
[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 investment under CPP.
SunTrust received a partial capital investment of $3.5 billion on
November 12, 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 June 12, 2009, a variety of types of institutions had received
CPP capital investments under TARP, including 278 publicly held
institutions, 307 privately held institutions, 22 S-corporations, 16
community development financial institutions (CDFI), and no mutual
institutions.[Footnote 18] These purchases represented investments in
state-chartered and national banks and U.S. bank holding companies
located in 48 states, the District of Columbia, and Puerto Rico. For a
detailed listing of financial institutions that received CPP funds as
of May 29, 2009, see GAO-09-707SP.[Footnote 19]
Treasury and the federal regulators continued to review applications
for CPP. According to Treasury, it has received over 1,300 CPP
applications from the regulators as of June 12, 2009, fewer than 100
were awaiting decision by the Investment Committee. For many
applications in this category, Treasury is awaiting updated information
from the regulators before taking the application to the Investment
Committee for a vote. The bank regulators also reported that they were
reviewing applications from more than 220 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 about 400 financial
institutions that received preliminary approval had withdrawn their CPP
applications as of June 12, 2009. Many of these institutions withdrew
their applications because of the uncertainty surrounding future
program requirements.[Footnote 20]
Some financial institutions have continued to raise concerns about the
length of time it is taking the bank regulators and Treasury to process
their CPP applications. Bank regulatory officials noted that many
factors could affect the time it took to process a particular bank's
CPP application. For example,
* the necessary term sheet for a particular ownership structure might
not have been available when the bank filed its application and the
application could not be processed,[Footnote 21]
* the bank regulators' interagency CPP Council needed to review the
application,
* regulators needed to perform on-site visitations or conduct new bank
examinations if the existing examination was dated,
* regulators needed to consider enforcement actions, or:
* regulators had to request additional information (e.g., related to
credit quality) from the bank before processing its application.
Data provided by the bank regulators showed that, as of May 15, 2009,
the average processing time for CPP applications--from the date the
regulator received the institution's application to the date it was
forwarded to Treasury--varied from 28 days to 57 days depending on the
regulator (table 4). [Footnote 22] OFS officials noted that some of the
reasons for delays in the final processing of CPP applications once
they had been received, were the need to obtain shareholder approval to
issue preferred stock to Treasury, obtain executive compensation
certification waivers, or schedule board of directors meetings.
According to data provided by OFS, as of May 15, 2009, the average
processing time from the receipt of CPP application package from the
regulators to preliminary funding approval was about 12 days, and from
preliminary funding approval to disbursement of funds was about 34
days. We are verifying this information as part of our ongoing review
of the CPP process.
Table 4: Average Processing Days Reported by the Federal Reserve, OTS,
OCC and Treasury of CPP Applications, as of May 15, 2009:
Bank regulator: Federal Reserve;
Average processing days from bank regulator CPP application receipt
date to submission to Treasury: 28;
Average processing days from Treasury CPP application receipt date from
bank regulators to Treasury disbursement of funds: 42;
Average total processing time[A]: 70.
Bank regulator: Office of Thrift Supervision;
Average processing days from bank regulator CPP application receipt
date to submission to Treasury: 45;
Average processing days from Treasury CPP application receipt date from
bank regulators to Treasury disbursement of funds: 37;
Average total processing time[A]: 82.
Bank regulator: Office of the Comptroller of the Currency;
Average processing days from bank regulator CPP application receipt
date to submission to Treasury: 57;
Average processing days from Treasury CPP application receipt date from
bank regulators to Treasury disbursement of funds: 40;
Average total processing time[A]: 97.
Sources: Federal Reserve, OCC, OTS, and OFS.
Notes: FDIC is not included because according to officials, it did not
track such information and was unable to provide such data. These
numbers are based on applications that were processed by the banking
agencies and submitted to Treasury, regardless of whether the
application was ultimately funded or withdrawn. Applications that were
withdrawn prior to a recommendation being submitted to Treasury and
applications still in process were not included in the averages.
Because these are averages and to the extent that the regulators and
Treasury continue to approve applications that have been in the
pipeline, the averages are likely to increase over time.
[A] Average total processing time is the sum of the prior two columns.
[End of table]
Treasury Extended the Deadline for Small Banks to Apply for CPP Funding
and Increased the Funding Limit:
The Treasury Secretary announced in a May 13, 2009, speech that
Treasury had taken additional actions under CPP to ensure that small
community banks and holding companies (qualifying financial
institutions with total assets less than $500 million) would have the
capital they needed to lend to creditworthy borrowers. Small banks now
have until November 21, 2009, to apply to CPP under all term sheets.
All current CPP participants that qualify as a small bank under these
new program terms will be allowed to reapply and note on their
applications that they are making a supplemental request for CPP
funding. These applications will be evaluated via an expedited approval
process that Treasury is currently working with the four primary
federal banking regulators to establish.[Footnote 23] New CPP
participants will continue to have their applications processed under
the original CPP applications process. Treasury also increased the
maximum amount of CPP funding a small financial institution may receive
from the current 3 percent of risk-weighted assets to 5 percent of risk-
weighted assets.[Footnote 24] The new deadline for small banks to apply
to their regulator to form holding companies and apply for CPP funding
is also November 21, 2009.
Treasury Finalized CPP Standard Term Sheets for Mutual Institutions:
On April 7, and 14, 2009, Treasury issued standardized term sheets for
four types of mutual institutions: mutual holding companies with
publicly held subsidiary holding companies, mutual holding companies
with privately held subsidiary holding companies, top-tier mutual
holding companies without subsidiary holding companies, and mutual
banks or savings associations not controlled by holding companies. The
terms for the four types of mutual institutions are generally similar
to those for the corresponding publicly held institutions, privately
held institutions and S-corporations, with some exceptions. The
application deadline for mutual holding companies was May 7, 2009; for
mutual banks or savings associations not controlled by holding
companies the deadline was May 14, 2009.
Like the terms for publicly held institutions, those for publicly held
mutual subsidiary holding companies stipulate that:
* the preferred shares pay dividends at a rate of 5 percent annually
for the first 5 years and 9 percent annually thereafter;
* the shares are nonvoting, except with respect to protecting
investors' rights;
* a warrant must be issued for common stock with an aggregate value
equal to 15 percent of the Treasury's CPP investment;
* financial institutions may repurchase their shares at their face
value;
* preferred stock will count as tier 1 regulatory capital;[Footnote 25]
and:
Treasury generally may transfer the preferred shares to a third party
at any time.
In addition, the number of shares of common stock underlying the
warrant held by Treasury will be reduced by 50 percent if the
institution completes a qualified equity offering for 100 percent of
the amount of the preferred stock during 2009.[Footnote 26]
The terms for privately held subsidiary holding companies are generally
similar, except for the warrant for preferred stock. For these
companies, as for privately-held institutions, warrants for preferred
stock may have an aggregate value equal to 5 percent of the Treasury's
CPP investment. Treasury intends to immediately exercise such warrants
for warrant preferred shares with a 9 percent dividend rate.
The terms for top-tier mutual holding companies without subsidiary
holding companies and mutual banks or savings associations without
holding companies are similar to those for S-corporations. Those terms
are generally similar to those for publicly held institutions, with the
exception that debt--senior notes--is issued instead of preferred
stock. In addition, the senior notes count as tier 1 capital when held
at the holding company level and tier 2 capital when held by a mutual
bank or savings association. The senior notes pay interest at a rate of
7.7 percent annually for 5 years and 13.8 percent thereafter, and
warrants for additional debt must equal 5 percent of the Treasury's
initial investment.[Footnote 27] Treasury exercises the warrants at the
time of the initial capital investment. Holding companies may defer
interest on the senior notes for up to 20 quarters, but any unpaid
interest will accumulate and compound at the then-applicable interest
rate in effect. In addition, these companies cannot pay dividends on
shares of equity, mutual capital certificates, other capital
instruments, or trust preferred securities as long as any interest is
deferred. Treasury has indicated that, while the term sheets for
privately held mutual institutions allow institutions to reduce the
warrants held by Treasury if they complete a qualified equity offering
during 2009, this provision was included in the term sheets in error.
In each case, Treasury intends to exercise the warrants immediately and
there is no need for the reduction provision.
Financial Institutions Have Begun to Repurchase Their CPP Preferred
Stock and Warrants from Treasury but the Process Lacks Adequate
Transparency:
As permitted by the act--as amended by American Recovery and
Reinvestment Act of 2009 (ARRA)--and the CPP agreements, participants
may repurchase or buy back their preferred stock and warrants issued to
Treasury under CPP at any time, subject to consultation with the
primary federal banking regulator.[Footnote 28] However, the regulators
have yet to disclose to Treasury or the public a generally consistent
set of criteria that they are using to make decisions concerning
repayment other than that they follow existing applicable supervisory
procedures. According to Treasury officials, ARRA severely limits
Treasury's authority to decide whether banks may purchase their stock.
[Footnote 29] After all the preferred shares are repurchased, the
financial institution may repurchase all or part of the warrants held
by Treasury. Under the original terms of CPP, financial institutions
were prohibited from repurchasing within the first 3 years unless they
completed a qualified equity offering.[Footnote 30] ARRA amended this
requirement by allowing institutions to repurchase their shares with
the approval of their primary federal regulator. See appendix IV for a
description of the repurchase process.
While Treasury has some information about the preferred stock
repurchase process on the [hyperlink,
http://www.financialstability.gov] Web site, the federal financial
regulators have yet to disclose the specific criteria for approving
repurchases for certain TARP recipients.[Footnote 31] In order to help
ensure consistency, agencies are expected to develop adequate internal
controls to ensure consistent decision making.[Footnote 32] Unless the
Treasury, in consultation with the primary federal regulators, take
steps to ensure that the regulators have and apply generally consistent
criteria and clearly articulate the basis they have used or plan to use
to approve or deny repurchase requests, Treasury will face an increased
risk that TARP participants may not be treated equitably.
As of June 12, 2009, 22 institutions had repurchased their preferred
stock from Treasury for a total of about $1.9 billion (see table 5 for
additional repurchase information). Also, as of June 12, 2009, 5
financial institutions had repurchased their warrants and 3
institutions had repurchased warrant preferred stock from Treasury at
an aggregate cost of about $13.3 million.[Footnote 33] In addition, 3
financial institutions had informed Treasury that they did not plan to
repurchase their warrants. For those institutions that informed
Treasury that they did not intend to repurchase their warrants,
Treasury may attempt to sell the warrants in the financial markets.
According to a Treasury official, as of June 12, 2009, Treasury has not
yet liquidated any CPP warrants in the financial markets.[Footnote 34]
Table 5: Capital Purchase Program Repurchases, as of June 12, 2009
(Dollars in thousands):
Institution Type: Private Institutions;
Repurchase amount for preferred stock initially issued to Treasury:
$31,900;
Repurchase amount for preferred stock issued through exercise of
warrants: $1,595;
Repurchase amount for warrants: N/A;
Dividend payments received at the time of repurchase[A]: $179;
Total cash received: $33,674.
Institution Type: Public Institutions;
Repurchase amount for preferred stock initially issued to Treasury:
$1,839,960;
Repurchase amount for preferred stock issued through exercise of
warrants: N/A;
Repurchase amount for warrants: $11,725;
Dividend payments received at the time of repurchase[A]: $11,920;
Total cash received: $1,863,605.
Institution Type: Total;
Repurchase amount for preferred stock initially issued to Treasury:
$1,871,860;
Repurchase amount for preferred stock issued through exercise of
warrants: $1,595;
Repurchase amount for warrants: $11,725;
Dividend payments received at the time of repurchase[A]: $12,099;
Total cash received: $1,897,279.
Source: Treasury OFS, unaudited.
[A] Dividend payments received at the time of repurchase are also
included in CPP dividend payments received in Table 2 of this report.
[End of table]
On June 9, 2009, Treasury announced that 10 of the largest U.S.
financial institutions participating in CPP had met the requirements
for repayment established by their primary federal regulator and that,
following consultation with the regulators, Treasury had notified the
institutions that they were eligible to complete the repurchase
process. Collectively, the Treasury-held preferred shares in these 10
institutions have a liquidation preference of approximately $68
billion. Upon completion of the preferred stock repurchase process,
each institution will have the right to repurchase the warrants held by
Treasury.
As mentioned previously, as of June 12, 2009, 5 institutions had
repurchased their warrants from Treasury. We found that Treasury
followed a consistent process in these instances; however, according to
Treasury, there is no readily available market for the warrants that
had been repurchased to date. The value of those warrants depends on
the valuation process and the underlying assumptions. In one instance,
Treasury received multiple offers from the institution to repurchase
its warrants but rejected the first two offers. The final offer that
Treasury accepted was slightly lower than Treasury's own determination
of the market value of the institution's warrants but more than twice
the initial offer and slightly more than its second. According to
documents we reviewed, in accordance with its process for determining
whether to accept an offer from the institution, Treasury considered 1)
warrant price indications from certain market participants, 2) certain
warrant pricing models, 3) a warrant price calculation from a third-
party contractor, and 4) Treasury's own financial analysis of the
institution. According to Treasury, the final warrant price was deemed
to be reasonable given that the institution's stock price had declined
during negotiations, reducing the warrant's value and that Treasury's
market value determination for the warrant was based on a number of
factors that involve judgment such as liquidity discounts. If Treasury
and the issuing institutions cannot agree on a price, either can invoke
an appraisal procedure whereby each chooses an independent appraiser to
determine the estimated fair market value (FMV) and if the two cannot
agree on a FMV, they will appoint a third appraiser.[Footnote 35] If an
institution decides not to repurchase its warrants under the
negotiation and appraisal procedure, Treasury may sell the warrants
through an auction process--another mechanism that Treasury could use
to sell shares--when it deems appropriate.[Footnote 36]
Treasury describes the warrant repurchase process broadly on the
[hyperlink, http://www.financialstability.gov] Web site. Additional
details about the process are contained in the individual securities
purchase agreements that are also posted on the Web site. Further, the
final warrant prices are disclosed on the Web site. However, Treasury
has provided limited information about the valuation process it has
used to date. Specifically, it has not disclosed the details--such as
the institution's initial offer or how the final price compares to
Treasury's valuation. For less liquid securities, prices can vary
widely depending on the assumptions underlying the valuation models
leading some market observers to question whether Treasury had received
a fair market value for the warrants that have been repurchased to
date. By not being more transparent about the valuation process and the
negotiations that were undertaken to establish the accepted warrant
price, Treasury increases the likelihood that questions will remain
about whether Treasury has best served taxpayers' interests. Given the
broad ranging risks inherent in TARP, Treasury must take steps to help
ensure that its decisions are not only fair and equitable but also that
they result in maximum value. Unless Treasury takes this type of broad-
based approach, it may not ensure that taxpayers' interests are fully
protected.[Footnote 37]
In our March 2009 report, we recommended that Treasury update guidance
available to the public on determining warrant exercise prices to be
consistent with actual practices applied by OFS. Treasury has since
updated its frequently asked questions on its Web site to clarify the
process it follows for determining the prices. However, there continues
to be inconsistent guidance available on the Web site for calculating
the exercise prices. Treasury told us that because any new CPP
applicants would most likely be nonpublic institutions, the existing
guidance documents would not apply. Therefore, Treasury does not
believe the inconsistent guidance is a significant issue and therefore
does not plan on further addressing the inconsistency.
OFS Continues to Collect Information on Participants' Lending Activity
and Recently Hired Asset Managers to Help Ensure Compliance with
Securities Purchase Agreements:
OFS continues to take important steps toward better reporting on and
monitoring of CPP. These steps are consistent with our prior
recommendations that Treasury bolster its ability to determine whether
all institutions' activities are generally consistent with the act's
purposes. On May 15, 2009, Treasury published the fourth monthly bank
lending and intermediation snapshot and survey.[Footnote 38] In April
2009, Treasury started collecting basic information from the 21 largest
CPP recipients on their lending to small businesses in the monthly
lending surveys. According to Treasury, these data will be published in
June 2009. 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 the
lending practices of CPP participants and will help in measuring the
program's effectiveness in achieving its goal of stabilizing the
financial system by enabling the institutions to continue lending
during the financial crisis. We will continue to monitor Treasury's
oversight efforts, including implementation of its new survey of all
other CPP recipients.
In addition, on June 1, 2009, Treasury published the results of its
first monthly survey of lending at all CPP institutions. These data
include loans outstanding to consumers, commercial entities and total
loans outstanding. This survey will continue on a monthly basis going
forward. The survey and the results can be found at [hyperlink,
http://www.financialstability.gov].
Also, and 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. According to Treasury, it relied on its custodian bank--
Bank of New York Mellon--to collect relevant information from a variety
of informal sources, such as Securities and Exchange Commission filings
and press releases and information provided by CPP participants.
According to Treasury, if OFS becomes aware of any instances of
noncompliance with requirements, they are to refer the instances to its
Chief Risk and Compliance Office, which would work with the CPP office,
to determine if further action is needed. On April 22, 2009, Treasury
hired three asset management firms that will play a role in this
process.[Footnote 39] According to Treasury officials, the asset
managers' primary role will be to provide Treasury with market advice
about its portfolio of investments in financial institutions and
corporations participating in various TARP programs. The managers will
also help OFS monitor compliance with limitations on compensation,
dividend payments, and stock repurchases.[Footnote 40] Treasury said
that it is also exploring software solutions and other data resources
to improve compliance monitoring. We plan to continue monitoring this
area.
As we have noted previously, without a more structured mechanism in
place, and with a growing number of institutions participating in TARP,
ensuring compliance with these important requirements will become
increasingly challenging. While the institutions are obligated to
comply with the terms of the agreement, Treasury has not yet developed
a process to help ensure compliance and to verify that any required
certifications are accurate.
Treasury Issued New Interim Final Rules on Executive Compensation:
On June 10, 2009, Treasury adopted an interim final rule to implement
the executive compensation and corporate governance provisions of the
act, as amended by ARRA, as well as to adopt certain additional
standards deemed necessary by the Secretary to carry out the purposes
of the act.[Footnote 41] The interim final rule requires that
recipients of TARP financial assistance meet standards for executive
compensation and corporate governance. The requirements generally
include:
* limits on compensation that exclude incentives for senior executive
officers to take unnecessary and excessive risks that threaten the
value of TARP recipients;[Footnote 42]
* provision for the recovery of any bonus, retention award, or
incentive compensation paid to a senior executive officer or the next
20 most highly compensated employees based on materially inaccurate
statements of earnings, revenues, gains, or other criteria;
* prohibition on making any golden parachute payment to a senior
executive officer or any of the next 5 most highly compensated
employees;
* prohibition on the payment or accrual of bonus, retention awards, or
incentive compensation to senior executive officers or certain highly
compensated employees, subject to certain exceptions for payments made
in the form of restricted stock; and:
* prohibition on employee compensation plans that would encourage
manipulation of earnings reported by TARP recipients to enhance
employees' compensation.
The new rule also requires the (1) establishment of a compensation
committee of independent directors to meet semiannually to review
employee compensation plans and the risks posed by these plans to TARP
recipients; (2) adoption of an excessive or luxury expenditures policy;
(3) disclosure of perquisites offered to senior executive officers and
certain highly compensated employees; (4) disclosure related to
compensation consultant engagement; (5) prohibition on tax gross-ups
(payments to cover taxes due on compensation) to senior executive
officers and certain highly compensated employees; and (6) compliance
with federal securities rules and regulations regarding the submission
of a nonbinding resolution on senior executive officer compensation to
shareholders.
The new interim regulations also require the establishment of the
Office of the Special Master for TARP Executive Compensation (Special
Master) to address the application of the rules to TARP recipients and
their employees. Among the duties and responsibilities of the Special
Master, with respect to TARP recipients of exceptional assistance, is
to review and approve compensation payments and compensation structures
applicable to the senior executive officers and certain highly
compensated employees, and to review and approve compensation
structures applicable to certain additional highly compensated
employees. Companies receiving exceptional assistance include those
receiving assistance under the SSFI, TIP, and AIFP and currently
include AIG, Bank of America, Citigroup, Chrysler, Chrysler Financial,
GM, and GMAC. TARP recipients not receiving exceptional assistance may
apply to the Special Master for an advisory opinion with respect to
compensation payments and structures. The Special Master will also have
responsibility for administering the review of bonuses, retention
awards, and other compensation paid to employees of TARP recipients
before February 17, 2009, and the negotiation of appropriate
reimbursements to the federal government. Finally, the interim final
rule also establishes compliance reporting and record-keeping
requirements regarding the rule's executive compensation and corporate
governance standards.
While No Funds Have Been Disbursed under CAP, the Regulators Announced
the Results of the Stress Tests of the 19 Largest U.S. Bank Holding
Companies:
While no funds had been disbursed under CAP as of June 12, 2009,
regulators have announced the results of stress tests that were a key
component of the program. Moreover, Treasury announced that
institutions interested in CAP funding are required to submit CAP
applications to their primary banking regulators by November 9, 2009.
According to Treasury, no CAP applications have been received. In a
process similar to the one used for CPP, the regulators are to submit
recommendations to Treasury regarding an applicant's viability. A key
component of the program is the Supervisory Capital Assessment Program
(SCAP) or stress test of the 19 largest U.S. bank holding companies--
those with risk-weighted assets of at least $100 billion--that together
account for approximately two-thirds of the assets in the aggregate U.S
banking industry. The federal banking regulators designed the
assessment as a forward-looking exercise intended to help them gauge
the extent of the additional capital buffer necessary to keep the
institutions strongly capitalized and lending even if economic
conditions are worse than had been expected between December 2008 and
December 2010. On Thursday May 7, 2009, the Federal Reserve released
the stress test results. Bank regulators found that 10 of the
institutions needed to raise additional capital (via the private sector
or CAP) to meet capital standards that would allow them to continue
lending to creditworthy borrowers and absorb potential losses.
The stress tests involved two economic scenarios, one representing the
baseline expectation and the other a more adverse outlook involving a
deeper and more protracted downturn. According to the Federal Reserve,
the more adverse outlook was not intended to be a worst-case scenario
but rather a deliberately stringent test designed to account for highly
uncertain financial and economic conditions by identifying the extent
to which a bank holding company is vulnerable today to a weaker than
expected economy in the future. The required capital buffer was sized
based on the more adverse scenario. While the forecast for the three
economic indicators--GDP growth, unemployment rates, and home price
changes--were considered quite severe at the time they were formulated
in February, subsequent data indicated that the probability of the more
adverse scenario was likely higher than previously thought,
particularly with respect to the unemployment rate. According to
Federal Reserve officials, house prices are at least as important as
the unemployment rate in determining estimated losses at banks over the
next 2 years because many of the estimated losses are related to real
estate values. The specified trend in house prices under the more
adverse scenario still represents a very severe outcome. These are
areas that we plan to continue to monitor.
Stress Tests Estimated Losses for 2009 and 2010 of $600 Billion and
Projected Capital Requirements:
Based on data as of December 31, 2008, the Federal Reserve estimated
that total losses for the 19 companies during the 2009 to 2010 period
would be approximately $600 billion, in addition to any losses prior to
2009 (table 6). As a result, the total losses for the top 19 U.S. bank
holding companies since the beginning of the financial crisis in the
second quarter of 2007 would be nearly $950 billion. The $600 billion
represents a 7.7 percent loss of total risk-weighted assets for the 19
companies.
Table 6: Estimated Losses for the 19 U.S. Bank Holding Companies in
SCAP, January 2009 through December 2010 (Dollars in billions):
Bank holding company: Bank of America Corporation;
Total losses: $136.6.
Bank holding company: Citigroup, Inc.;
Total losses: $104.7.
Bank holding company: JPMorgan Chase & Co.;
Total losses: $97.4.
Bank holding company: Wells Fargo & Company;
Total losses: $86.1.
Bank holding company: Morgan Stanley;
Total losses: $19.7.
Bank holding company: PNC Financial Services Group, Inc.;
Total losses: $18.8.
Bank holding company: The Goldman Sachs Group, Inc.;
Total losses: $17.8.
Bank holding company: U.S. Bancorp;
Total losses: $15.7.
Bank holding company: Capital One Financial Corporation;
Total losses: $13.4.
Bank holding company: SunTrust Banks, Inc.;
Total losses: $11.8.
Bank holding company: American Express Company;
Total losses: $11.2.
Dollars in billions: Bank holding company: MetLife, Inc.;
Total losses: $9.6.
Bank holding company: GMAC LLC;
Total losses: $9.2.
Bank holding company: Regions Financial Corporation;
Total losses: $9.2.
Bank holding company: FifthThird Bancorp;
Total losses: $9.1.
Bank holding company: BB&T Corporation;
Total losses: $8.7.
Bank holding company: State Street Corporation;
Total losses: $8.2.
Bank holding company: KeyCorp;
Total losses: $6.7.
Bank holding company: The Bank of New York Mellon Corporation;
Total losses: $5.4.
Bank holding company: Total;
Total losses: $599.2.
Source: Federal Reserve Board.
[End of table]
The U.S. bank holding companies were asked to list available resources
that they could use to absorb losses without impacting capital. Primary
among these was the allowance for loan and lease losses as of year end
of 2008 and preprovision net revenue, or the expected recurring income
from ongoing business lines before any credit costs. The SCAP buffer
for each bank holding company is defined as the incremental capital
that must be provided to ensure that the bank would be able to meet two
capital ratio tests at December 31, 2010, assuming losses under the
more adverse scenario. First, tier 1 common capital to risk-weighted
assets must be at least 4 percent, and second, tier 1 capital to risk-
weighted assets must be at least 6 percent at December 31, 2010. While
some market observers have been critical of the process by which
regulators shared preliminary results with the bank holding companies
and made subsequent adjustments based on feedback from the bank holding
companies, Federal Reserve officials noted that such discussions are a
normal part of the examination process. Further, Federal Reserve
officials explained that the adjustments to the capital shortfall or
"SCAP Buffer" largely reflected addressing data errors, double counts,
and other technical issues, rather than to present any substantive
arguments made by the U.S. bank holding companies. We will be
evaluating this process and will report on our results in a future
report.
While the data used was as of December 31, 2008, some banks reported
significant earnings and capital increases in the first quarter of 2009
from asset sales, announced common equity issuances, and in one case
the announced, but not yet completed, conversion of preferred shares to
common shares. The regulators incorporated these changes into their
analysis. The results showed that 10 of the 19 institutions needed to
raise a total of almost $75 billion in equity capital (table 7). As
required, the institutions submitted capital plans to the Federal
Reserve on June 8, 2009, on how they plan to raise the needed capital
and will have a total of 6 months in which to raise the capital from
private markets (common equity offerings, assets sales, and the
conversion of other forms of capital into common equity) or additional
government assistance through CAP. As of June 12, 2009, eight of the 19
U.S. bank holding companies have announced or raised a total of $59.2
billion toward the required $75 billion.
Table 7: Capital Raising Requirements SCAP Bank Holding Companies, as
of June 12, 2009 (Dollars in billions):
U.S. Bank holding companies: Bank of America Corporation;
SCAP buffer required under more adverse scenario: $46.5;
Capital action taken as of stress test and first quarter profit:
(loss): $12.7;
Required new common equity under SCAP: $33.9;
New capital raised as of June 12, 2009: $32.9;
Capital actions announced as of June 12, 2009: [Empty];
Required capital yet to be raised: $1.0.
U.S. Bank holding companies: Wells Fargo & Company;
SCAP buffer required under more adverse scenario: $17.3;
Capital action taken as of stress test and first quarter profit:
(loss): $3.6;
Required new common equity under SCAP: $13.7;
New capital raised as of June 12, 2009: $8.6;
Capital actions announced as of June 12, 2009: [Empty];
Required capital yet to be raised: $5.1.
U.S. Bank holding companies: GMAC LLC;
SCAP buffer required under more adverse scenario: $6.7;
Capital action taken as of stress test and first quarter profit:
(loss): ($4.8);
Required new common equity under SCAP: $11.5;
New capital raised as of June 12, 2009: $3.5;
Capital actions announced as of June 12, 2009: [Empty];
Required capital yet to be raised: $8.0.
U.S. Bank holding companies: Citigroup, Inc.;
SCAP buffer required under more adverse scenario: $92.6;
Capital action taken as of stress test and first quarter profit:
(loss): $87.1;
Required new common equity under SCAP: $5.5;
New capital raised as of June 12, 2009: [Empty];
Capital actions announced as of June 12, 2009: $5.5;
Required capital yet to be raised: [Empty].
U.S. Bank holding companies: Regions Financial Corporation;
SCAP buffer required under more adverse scenario: $2.9;
Capital action taken as of stress test and first quarter profit:
(loss): $0.4;
Required new common equity under SCAP: $2.5;
New capital raised as of June 12, 2009: $1.9;
Capital actions announced as of June 12, 2009: [Empty];
Required capital yet to be raised: $0.7.
U.S. Bank holding companies: SunTrust Banks, Inc.;
SCAP buffer required under more adverse scenario: $3.4;
Capital action taken as of stress test and first quarter profit:
(loss): $1.3;
Required new common equity under SCAP: $2.2;
New capital raised as of June 12, 2009: $2.1;
Capital actions announced as of June 12, 2009: [Empty];
Required capital yet to be raised: $0.1.
U.S. Bank holding companies: KeyCorp;
SCAP buffer required under more adverse scenario: $2.5;
Capital action taken as of stress test and first quarter profit:
(loss): $0.6;
Required new common equity under SCAP: $1.8;
New capital raised as of June 12, 2009: $1.3;
Capital actions announced as of June 12, 2009: [Empty];
Required capital yet to be raised: $0.5.
U.S. Bank holding companies: Morgan Stanley;
SCAP buffer required under more adverse scenario: $8.3;
Capital action taken as of stress test and first quarter profit:
(loss): $6.5;
Required new common equity under SCAP: $1.8;
New capital raised as of June 12, 2009: $10.2;
Capital actions announced as of June 12, 2009: [Empty];
Required capital yet to be raised: [Empty].
U.S. Bank holding companies: FifthThird Bancorp;
SCAP buffer required under more adverse scenario: $2.6;
Capital action taken as of stress test and first quarter profit:
(loss): $1.5;
Required new common equity under SCAP: $1.1;
New capital raised as of June 12, 2009: $1.0 ;
Capital actions announced as of June 12, 2009: $1.1;
Required capital yet to be raised: [Empty].
U.S. Bank holding companies: PNC Financial Services Group, Inc.;
SCAP buffer required under more adverse scenario: $2.3;
Capital action taken as of stress test and first quarter profit:
(loss): $1.7;
Required new common equity under SCAP: $0.6;
New capital raised as of June 12, 2009: $0.6;
Capital actions announced as of June 12, 2009: [Empty];
Required capital yet to be raised: [Empty].
U.S. Bank holding companies: Total;
SCAP buffer required under more adverse scenario: $185.0;
Capital action taken as of stress test and first quarter profit:
(loss): $110.6;
Required new common equity under SCAP: $74.6;
New capital raised as of June 12, 2009: $62.0;
Capital actions announced as of June 12, 2009: $6.6;
Required capital yet to be raised: $15.4.
Source: Federal Reserve Board and company press releases.
[A] While GMAC has sold $7.5 billion in mandatorily converted preferred
membership interests to Treasury, this amount was bifurcated with $3.5
billion being applied to the SCAP buffer requirement and the remaining
$4 billion reserved for GMAC's agreement with Chrysler LLC to finance
dealers and auto sales.
Note: Not all numbers total due to rounding.
[End of table]
Treasury and the Federal Reserve Released Stress Tests Results but Do
Not Plan Further Disclosures:
Both Treasury and Federal Reserve officials emphasized the
unprecedented nature of the detailed bank-level disclosure of both
losses and revenue forecasts in the stress tests. However, Federal
Reserve officials told us that they had no plans to provide periodic
updates of actual performance of the U.S. bank holding companies in the
stress tests relative to loss or revenue estimates under the more
adverse scenario. Federal Reserve officials said they view this
information as part of the supervisory process. While the Federal
Reserve shared preliminary results of the stress test with senior
Treasury officials, it neither shared the results of the stress tests
with CPP officials prior to the public release nor does it plan to
provide any additional routine information going forward. However,
federal Reserve officials said that supervisory information can be
provided to Treasury on a confidential basis when Treasury has a
significant program need for the information. Moreover, whether and to
what extent the bank holding companies will disclose additional
information is unclear. These decisions raise a number of potential
concerns. First, to the extent that information is disclosed by the
institutions, it may be disclosed selectively and may not be consistent
across institutions and could lead to increased market uncertainty.
Second, because the stress tests were conducted as part of CAP, not
making the results available to OFS officials for ongoing participants
could adversely impact Treasury's ability to monitor the program.
Finally, such information would be useful in the measurement of the
effectiveness of SCAP and CAP. Without it, the public will not have
reliable information that can be used to gauge the accuracy of the
stress test projections on a more detailed basis than what has been
disclosed in the SCAP papers.[Footnote 43]
The Federal Reserve Announced Criteria for Large Banks to Repay Capital
Investments:
With respect to the 19 U.S. bank holding companies that participated in
SCAP, on June 1, 2009, the Federal Reserve released the criteria it
plans to use to evaluate applications to repurchase Treasury's capital
investments. The items published are similar to those already in use to
evaluate repurchase requests that had been received from smaller bank
holding companies,[Footnote 44] and include the following
considerations:
* the bank holding company's ability to continue to act as an
intermediary and spur lending to creditworthy households and
businesses,
* whether the bank holding company's post-repurchase capital position
is consistent with the Federal Reserve's supervisory expectations,
* whether the bank holding company will maintain its financial and
management support for its subsidiary banks subsequent to repurchase,
and:
* whether the bank holding company and subsidiaries are in a position
to meet all of their funding and counterparty obligations without
government capital or utilization of the FDIC's Temporary Liquidity
Guarantee Program.
Finally, the Federal Reserve stated that the U.S. bank holding
companies that participated in the SCAP process seeking to repurchase
CPP would be subject to the following additional criteria:
* A demonstrated ability to raise long-term debt without any FDIC
guarantee or equity in the public equity market.
* Progress towards a robust longer-term capital assessment and
management process geared toward achieving and maintaining a prudent
level and composition of capital commensurate with their business
activities and firm-wide risk profile.
The Federal Reserve in consultation with the U.S. banking holding
companies' primary bank regulator and FDIC informed Treasury on June 9,
2009, that it had no objection to the repurchase of preferred shares by
9 of the SCAP bank holding companies. Also on June 9, 2009, Treasury
announced that these 9 U.S. bank holding companies, and one other large
institution, met the requirements for repayment and would be eligible
to repay $68 billion to Treasury.
The Federal Reserve Announced Modifications to the Term Asset-Backed
Securities Loan Facility:
In May 2009, the Federal Reserve announced some modifications to TALF,
a program administered by the Federal Reserve but part of the
President's broader strategy to restart lending. As we have previously
reported, the Federal Reserve originally designed TALF to make
nonrecourse loans to fund purchases of asset-backed securities (ABS)
that are secured by eligible consumer and small business loans.
[Footnote 45] The modifications to TALF include the addition of two
asset classes, an extension of certain TALF loan terms, and additions
to the credit rating agencies approved for rating TALF-eligible
collateral.
The additional asset classes accepted for collateral are commercial
mortgage-backed securities (CMBS) and securities backed by insurance
premium finance loans. CMBS are securities backed by mortgages for
commercial real estate, such as office buildings or shopping centers.
The Federal Reserve noted that it had extended the range of eligible
collateral to include CMBS to help prevent defaults on viable
commercial properties, encourage further lending for commercial
properties, and encourage the sale of distressed properties. CMBS
issued on or after January 1, 2009, and "legacy" CMBS issued prior to
January 1, 2009, will be accepted. The Federal Reserve Bank of New York
has specified a number of requirements that must be met before it will
accept this collateral--for example, CMBS must have the highest long-
term investment grade credit rating available from certain credit
rating agencies. [Footnote 46] The Federal Reserve will include
nonlegacy CMBS in its June subscriptions for TALF loans and legacy CMBS
in its July subscriptions.[Footnote 47] The Federal Reserve also
announced that it would accept securities backed by insurance premium
finance loans.[Footnote 48] These securities will be included to
encourage the flow of credit to small businesses, one of the goals of
TALF under the Consumer and Business Lending Initiative.
Furthermore, the Federal Reserve extended the available terms for
certain TALF loans from 3 years to 5 years to finance purchases of CMBS
and ABS backed by student loans and SBA-guaranteed loans. The Federal
Reserve will limit financing to $100 billion for loans with 5-year
maturities. The volume of loans requested for TALF collateral increased
significantly in May and June 2009, compared with the previous 2 months
(table 8). Additionally, loans requested in March and April 2009 were
provided only on collateral for auto and credit card securitizations,
whereas May 2009 subscriptions extended to student loan, small
business, and equipment securitizations for the first time. June 2009
subscriptions included the first loans requested for securities based
on insurance premium finance loans and servicing advances. The total
amount of loans requested on TALF-eligible collateral since the
program's first activity is $28.5 billion.
Table 8: Amount of TALF Loans Requested from March through June 2009 by
Loan Type (Dollars in millions):
Type of loan: Auto;
March: $1,902;
April: $811;
May: $2,185;
June: $3,307;
Total by loan type: $8,205.
Type of loan: Credit card;
March: $2,805;
April: $897;
May: $5,525;
June: $6,223;
Total by loan type: $15,450.
Type of loan: Equipment;
March: 0;
April: 0;
May: $456;
June: $591;
Total by loan type: $1,047.
Type of loan: Floorplan;
March: 0;
April: 0;
May: 0;
June: 0;
Total by loan type: 0.
Type of loan: Insurance premium finance;
March: [Empty];
April: [Empty];
May: [Empty];
June: $529;
Total by loan type: $529.
Type of loan: Servicing advances;
March: 0;
April: 0;
May: 0;
June: $495;
Total by loan type: $495.
Type of loan: Small business;
March: 0;
April: 0;
May: $87;
June: $82;
Total by loan type: $169.
Type of loan: Student loan;
March: 0;
April: 0;
May: $2,348;
June: $228;
Total by loan type: $2,576.
Type of loan: Total;
March: $4,707;
April: $1,708;
May: $10,600;
June: $11,453;
Total by loan type: $28,467.
Source: GAO analysis of information available on the Federal Reserve
Bank of New York Web site.
Note: Not all numbers will total due to rounding.
[End of table]
On May 19, 2009, the Federal Reserve expanded the number of credit
rating agencies approved for rating TALF-eligible collateral from three
to five. All collateral accepted under TALF, with the exception of ABS
backed by SBA-guaranteed small business loans and related debt
instruments, must receive the highest investment-grade rating from at
least two TALF-eligible rating agencies. Fitch Ratings, Moody's
Investors Service, and Standard & Poor's are eligible rating agencies
for all ABS. DBRS, Inc. and Realpoint LLC are two additional TALF-
eligible rating agencies for CMBS collateral.
Treasury and FDIC Are Taking Steps to Implement the Public-Private
Investment Program, but Progress Has Been Slow:
As we previously reported, PPIP consists of the Legacy Loans Program
and the Legacy Securities Program. Treasury and FDIC have been
finalizing the terms of the Legacy Loans program. On March 26, 2009,
FDIC announced that it was seeking public comments on a number of
elements of the program. FDIC officials at the time stated that the
implementation date for the program would depend on the nature of the
comments received and the time required to consider them for the design
of the program. FDIC officials with whom we spoke said that the
implementation date of the program remained unclear because of changes
to accounting rules, potential participants' concerns about having to
write-down assets, and TARP-related restrictions. More recently, on
June 3, 2009, FDIC announced that a previously planned pilot sale of
assets by open banks will be postponed. In making that announcement,
the Chairman stated that banks have been able to raise capital without
selling bad assets but that FDIC will continue to work on the Legacy
Loans Program and will be prepared to offer it in the future. Further,
FDIC announced that it intended to test the Legacy Loans Program
funding mechanism in a receivership assets sale with bids to begin in
July. For the Legacy Securities Program, Treasury is currently
reviewing fund manager applications. Treasury extended the application
deadline for these fund managers from April 10, 2009, to April 24,
2009, in part to give small businesses and businesses owned by
veterans, minorities, and women the ability to partner with larger fund
managers in the program. Treasury initially announced that it
anticipated prequalifying about 5 fund managers from about 100
applications; however, it later clarified that more than five fund
managers may be prequalified depending on the number of applications
deemed to be qualified. A public announcement of the selections will be
made in June 2009. Treasury officials estimated that it could take the
fund managers as long as 12 weeks to raise capital for the funds and it
is difficult to determine how soon Treasury would be contributing
matching capital and financing to the funds.
The Administration Has Announced Small Business Lending Efforts That
Are in Various Stages of Implementation:
As we previously reported, Treasury, Federal Reserve, and SBA have
plans in place to contribute to the administration's efforts to improve
the accessibility and affordability of credit to small businesses.
Treasury announced on March 16, 2009, that it would set aside $15
billion of TARP funds to directly purchase securities based on 7(a) and
504 small business loans guaranteed by SBA.[Footnote 49] TALF, managed
by the Federal Reserve Bank of New York, is also a part of the efforts
to increase access to credit for small businesses. Under TALF,
securities consisting of SBA-guaranteed 7(a) and 504 small business
loans are provided as collateral to the Federal Reserve, and in return
TALF provides loans, with the goal of encouraging securitizations for
SBA-guaranteed debt.[Footnote 50] For its part, SBA has been directed
under ARRA to implement administrative provisions to help facilitate
small business lending and enhance liquidity in the secondary markets.
These administrative provisions include (1) temporarily requiring SBA
to reduce or eliminate certain fees on 7(a) and 504 loans; (2)
temporarily increasing the maximum 7(a) guarantee from 85 percent to 90
percent; and (3) implementing provisions designed specifically to
facilitate secondary markets, such as extending existing guarantees in
the 504 program and making loans to systemically important broker-
dealers that operate in the 7(a) secondary market.
These initiatives are in various stages of implementation. Treasury has
not yet purchased securities related to the Small Business and
Community Lending Initiative, though it had stated that it expected to
purchase 7(a)-related securities by the end of March 2009 and 504-
related securities by the end of May 2009. A Treasury official said
that Treasury has faced challenges implementing the program because of
sellers' concerns about warrants and executive compensation, as
stipulated under the act, as amended by ARRA. Treasury is reaching out
to these sellers and anticipates completing term sheets in June 2009.
Federal Reserve efforts related to small businesses have also started.
As shown in table 8, in May 2009, TALF received collateral for and
offered loans based on 7(a) and 504-related small business securities
for the first time. Loans requested since May related to these small
business securities total about $169 million. SBA, as we reported to
congressional committees, issued policy notices to temporarily reduce
or eliminate certain fees for 7(a) and 504 loans and temporarily
increase the maximum 7(a) guarantee, effective as of March 16, 2009.
SBA formalized its implementation of these provisions in Federal
Register notices on June 8, 2009. However, the SBA has not yet
implemented provisions intended to enhance secondary markets.[Footnote
51]
Citigroup Finalized Its Previously Announced Securities Exchange
Agreement on June 9, 2009:
On May 7, 2009, Citigroup announced that it would expand its planned
exchange of preferred securities and trust preferred securities for
common stock from $27.5 billon to $33 billion. The stress test found
that Citigroup would need an additional $5.5 billion in tier 1 common
capital, for a total of $58.1 billion, to ensure adequate capital for
the more adverse economic scenario. On June 9, 2009, Treasury and
Citigroup finalized their exchange agreement and Treasury agreed to
convert up to $25 billion of its Treasury CPP senior preferred shares
for interim securities and warrants and its remaining preferred
securities for trust preferred securities so that the institution could
strengthen its capital structure by increasing tangible common equity.
As part of the agreement, Citigroup agreed to offer to convert both
privately placed and publicly issued preferred stock held by other
preferred shareholders. To increase the exchange by $5.5 billion,
Citigroup decided to offer to exchange more publicly held preferred
stock and trust preferred securities for common stock. Treasury and
Citigroup finalized the exchange agreement on June 9, 2009. According
to OFS officials, the conversion of the government preferred shares to
common stock will not be finalized until the exchange of $33 billion of
preferred securities and trust preferred securities has been completed.
In addition, Citigroup has taken a number of other actions designed to
improve Citigroup's capital and financial position including the sale
of Nikko Cordial Securities and a joint venture with Morgan Stanley
relating to its brokerage subsidiary, Smith Barney. See appendix V for
additional information about the condition of Citigroup.
Citigroup issued its first 2009 quarterly TARP progress report on May
12, 2009.[Footnote 52] Citigroup reported that it had authorized
initiatives to deploy $44.75 billion in TARP capital. According to the
report, $8.25 billion of new funding initiatives were approved during
the first quarter of 2009 to expand the flow of credit to consumers,
businesses, and communities. For example, Citigroup lent $1 billion to
qualified borrowers to help homeowners refinance their primary
residence. According to Treasury officials, Citigroup issued this
report voluntarily and Treasury had not verified the information it
contained.
Treasury Completed Transactions with AIG under the Systemically
Significant Failing Institutions Program:
Treasury completed the previously announced restructuring of its
support for AIG by exchanging $40 billion of cumulative Series D
preferred shares for $41.6 billion of noncumulative Series E preferred
shares. The amount of Series E preferred shares is equal to the
original $40 billion plus approximately $733 million in dividends
undeclared on February 1, 2009; $15 million in dividends compounded on
the undeclared dividends; and an additional $855 million in dividends
accrued from February 1, 2009, but not paid as of April 17, 2009. Our
tests of selected control activities found that Treasury had applied
adequate financial reporting controls over the restructuring
transaction.
AIG's restructured agreement kept the quarterly dividend payment dates
of every May 1, August 1, November 1, and February 1 that were
established in the original November 25, 2008, agreement. However, the
restructured agreement also specified that dividends are not payable
within 20 calendar days of the restructuring date and that the
dividends for a period of fewer than 20 days would be payable in the
subsequent dividend period. Accordingly, in compliance with these
dividend payment terms, the dividends for the period from April 17
through May 1, 2009, which amounted to approximately $150.2 million,
are to be included in the August 1, 2009, scheduled dividend payment.
Treasury also finalized its approximately $30 billion Series F
preferred stock capital facility with AIG on April 17, 2009.[Footnote
53] In our March report, we recommended that Treasury require that AIG
seek concessions from stakeholders--such as management, employees, and
counterparties--including seeking to renegotiate existing contracts, as
appropriate, as it finalized this agreement. While Treasury extended
negotiations several weeks, the negotiations did not result in material
changes to the final agreement. According to Treasury, AIG had been
consulting with Treasury on any substantial compensation payments until
interim final executive compensation rules were issued on June 10,
2009.
Government Investment and Involvement in the Auto Industry Grows as
Chrysler and GM Continue to Take Steps toward Restructuring:
Since we last reported on the Automotive Industry Financing Program
(AIFP),[Footnote 54] Treasury has provided additional funding to the
auto industry, including amounts to assist GM and Chrysler, which have
filed voluntary petitions for reorganization under Chapter 11 of the
U.S. Bankruptcy Code, bringing Treasury's total commitments under this
program to approximately $82.6 billion.[Footnote 55] Treasury committed
to providing additional funding to support the companies both during
and after their respective reorganizations, in the amounts of $8.5
billion for Chrysler and $30.1 billion for GM. In exchange for
providing this funding, Treasury is to be repaid over a period of years
for a portion of the amounts provided and will receive equity ownership
in Chrysler and GM. Table 9 shows the amounts Treasury has provided or
committed to providing under AIFP and its plans for being repaid for or
otherwise recovering this funding.
Table 9: U.S. Treasury Assistance to the Auto Industry (Dollars in
billions):
Description of funding: Loans to Chrysler prior to bankruptcy filing;
Amount: $4.0;
Treasury's plans for recovery: $500 million--the portion secured by a
senior lien on Mopar[A] --will be assumed under the restructured
Chrysler's loan agreement (see row below).
Description of funding: Assistance to the restructured Chrysler after
bankruptcy filing;
Amount: $8.5;
Treasury's plans for recovery: $7.1 billion will be repaid as a term
loan, including $5.1 billion to be repaid within 8 years and $2 billion
to be repaid within 2.5 years. The loan is secured with a senior lien
on all of the restructured Chrysler's assets. Treasury also received a
9.85 percent equity share in the new company. Treasury also set aside
$350 million of the $8.5 billion for a loss-sharing provision and is
not expected to be initially drawn.
Description of funding: Assistance to GM prior to bankruptcy filing;
Amount: $19.4;
Treasury's plans for recovery: Treasury will receive $6.7 billion debt
to be repaid as a term loan, $2.1 billion in preferred stock, and 61
percent equity in the new company.
Description of funding: Estimated assistance to the restructured GM
after bankruptcy filing;
Amount: $30.1;
Treasury's plans for recovery: Treasury will receive $6.7 billion debt
to be repaid as a term loan, $2.1 billion in preferred stock, and 61
percent equity in the new company.
Description of funding: Supplier Support Program; Chrysler;
Amount: $1.5;
Treasury's plans for recovery: Amounts provided to Chrysler and GM are
due to be repaid in April 2010.
Description of funding: GM;
Amount: $3.5;
Treasury's plans for recovery: Amounts provided to Chrysler and GM are
due to be repaid in April 2010.
Description of funding: Warranty Commitment Program; Chrysler;
Amount: $0.3;
Treasury's plans for recovery: Treasury expects that Chrysler and GM
will be able to continue to support their warranties and will not need
the funds provided under these programs. The funds will be returned to
Treasury.
Description of funding: GM;
Amount: $0.4;
Treasury's plans for recovery: Treasury expects that Chrysler and GM
will be able to continue to support their warranties and will not need
the funds provided under these programs. The funds will be returned to
Treasury.
Description of funding: Assistance to auto finance companies Chrysler
Financial and GMAC;
Amount: $14.9;
Treasury's plans for recovery: Plans for recovery vary based on
assistance provided.
Description of funding: Total assistance to Chrysler and GM;
Amount: $82.6.
Source: GAO analysis of Treasury information.
[A] Mopar is Chrysler's parts business.
[End of table]
In the case of Chrysler, on April 30, 2009, the White House announced
that Treasury would provide more than $8 billion in additional funding
to help finance Chrysler's operations through bankruptcy and that
Chrysler would attempt to arrange an alliance with the Italian
automaker Fiat as part of its restructuring. On June 1, 2009, a
bankruptcy judge approved Chrysler's restructuring proposal, including
the alliance with Fiat, the sale of its assets to the new Chrysler, and
the additional funding from Treasury.[Footnote 56]
On June 9, 2009, the asset sale was finalized, and Treasury executed a
loan agreement with the restructured Chrysler under which the company
will be required to repay Treasury $7.1 billion, secured by a senior
lien on all of the new Chrysler's assets. This new loan includes $500
million of the prebankruptcy loan that was secured by a senior lien on
Mopar--Chrysler's parts business. Although Chrysler signed a loan
agreement with Treasury for the entire $4.0 billion of the
prebankruptcy loan, Treasury officials said that the U.S. government
will likely recover little of this amount because other debt holders
have seniority for being repaid. However, in further consideration of
the funding to the restructuring of Chrysler, Treasury is initially
receiving a 10 percent equity stake in the new company.
In the case of GM, on June 1, 2009, Treasury announced that it would
make $30.1 billion of financing available to support an expedited
bankruptcy proceeding and to transition the new GM through its
restructuring plan. If GM's restructuring proposal is approved by the
bankruptcy court--in exchange for the $30.1 billion in bankruptcy
funding, as well as the $19.4 billion in prebankruptcy funding--the
U.S. government would receive about $6.7 billion of debt, $2.1 billion
in preferred stock, and approximately 61 percent of the equity in the
new GM. At the present time, Treasury said it does not plan to provide
additional assistance to GM beyond this commitment.
As part of the companies' reorganization, they have also reached
agreements with other stakeholders to resolve outstanding obligations,
including by offering these stakeholders equity shares in the
companies. The agreements with each stakeholder group are discussed in
more detail in the following paragraphs, and the companies' equity
ownership following restructuring is shown in figure 2.
Figure 2: Equity Ownership in Chrysler and GM after Restructuring:
[Refer to PDF for image: two pie-charts]
Chrysler’s equity ownership:
Chrysler VEBA: 67.7%;
Fiat[B]: 20.0%;
U.S. Treasury: 9.9%;
Canadian governments[A]: 2.5%.
GM’s equity ownership[C]:
U.S. Treasury: 60.8%;
GM VEBA[E]: 17.5%;
Canadian governments[A]: 11.7%;
Unsecured creditors[D]: 10.0%.
Source: GAO analysis of Department of Treasury information.
[A] The Canadian and Ontario governments will both receive equity in
the new Chrysler and GM.
[B] Fiat will have the right to earn up to 15 percent in additional
equity in three tranches of 5 percent--each in exchange for meeting
performance metrics, including introducing a vehicle produced at a
Chrysler factory in the United States that performs at 40 miles per
gallon; providing Chrysler with a distribution network in numerous
foreign jurisdictions; and manufacturing state-of-the-art, next
generation engines at a U.S Chrysler facility. Fiat will also hold an
option to acquire up to an additional 16 percent fully diluted equity
interest in the restructured Chrysler. Fiat may exercise this option
once Treasury's loan has been repaid in full.
[C] GM's new equity ownership structure will be finalized pending the
decision of the bankruptcy court. Ownership percentages assume warrants
granted to unsecured creditors and the United Auto Workers' VEBA are
exercised.
[D] Unsecured creditors would receive warrants to acquire an additional
15 percent of the new GM.
[E] The GM VEBA would receive warrants to acquire an additional 2.5
percent of the new GM.
[End of figure]
* Auto workers and retirees: The International Union, United
Automobile, Aerospace and Agricultural Implement Workers of America
reached agreements separately with Chrysler and GM on modifications to
the existing labor contract, as specified by the terms of Treasury's
prebankruptcy loans to the companies. The agreements will be applicable
to the reorganized companies. Chrysler and GM also developed plans to
meet their obligations for funding their retiree healthcare funds, also
known as voluntary employee beneficiary associations (VEBA). In the
case of Chrysler, the VEBA will be funded by a note of $4.6 billion and
will receive 55 percent of the new company's fully-diluted equity. In
the case of GM, the company will fund its VEBA trust with a $2.5
billion note, $6.5 billion in preferred stock, 17.5 percent of the
equity in the new GM, and warrants to purchase an additional 2.5
percent of the company. Both GM and Chrysler VEBAs will have the right
to select one independent director for their respective company's
board, but will have no other governance rights. Regarding the
companies' pension plans, as we have previously reported, the
termination of either company's plans would result in a substantial
liability to the federal Pension Benefit Guaranty Corporation (PBGC),
which insures private-sector defined benefit pension plans. However, at
this time, the companies do not intend to terminate their plans, which
will be transferred to the new companies as part of the reorganization.
* Canadian government: The Canadian government will provide
restructuring funding to and become a shareholder of both companies. In
total, the Canadian government has provided $3 billion to Chrysler and
will hold $1.9 billion in debt and a 2.5 percent equity stake in the
reorganized company.[Footnote 57] For GM, the Canadian government will
fund $9.5 billion in exchange for $1.7 billion in debt and preferred
stock and approximately a 12 percent equity stake in the new GM. As a
shareholder the Canadian government will have the right to select
members of Chrysler's and GM's boards of directors.[Footnote 58]
* Former shareholders and creditors: In the case of Chrysler, Daimler
AG and Cerberus Capital, which together held 100 percent of Chrysler's
prebankruptcy equity and $4 billion of Chrysler's debt, will relinquish
their equity stakes and waive their share of debt holdings.[Footnote
59] Chrysler's largest secured creditors agreed to exchange their
portion of the $6.9 billion secured claim for a proportional share of
$2 billion in cash. In the case of GM, bondholders representing more
than half of GM's $27.1 billion in unsecured bonds have agreed to
exchange their portion of bonds for 10 percent equity and warrants for
an additional 15 percent in the restructured company. About $6 billion
in debt held by GM's secured bank lenders will be repaid from proceeds
of the loan GM received from Treasury and the Canadian government after
it filed for bankruptcy.
* Fiat: As part of the alliance, Fiat has contributed intellectual
property and "know how" to the new Chrysler in exchange for a 20
percent equity share in the reorganized company. Fiat also has the
right to select three directors for the reorganized company and the
right to increase its ownership incrementally up to a total of 35
percent.
As a shareholder of the reorganized companies, as well as a lender,
Treasury will continue to have a monitoring and oversight role. For
instance, Treasury will have the right to appoint four independent
directors to Chrysler's board and five directors to GM's board.
[Footnote 60] However, Treasury officials told us they do not plan to
play a role in the management of the companies following the selection
of these directors. In addition, the companies are to meet the
following requirements:
* Establish internal controls to provide reasonable assurance that they
are complying with the conditions of the loan agreements relating to
executive:
* compensation, expense policy reporting, asset divestiture, and
compliance with the Employ American Workers Act, and report to Treasury
each quarter on these controls.
* Collect and maintain records to account for their use of government
funds and their compliance with the terms and conditions under the Auto
Supplier Support Program and other federal support programs.
* Provide Treasury with periodic financial reports.
Treasury officials said that they plan to require Chrysler and GM to
submit monthly reporting packages containing the above items and to
meet with the companies quarterly. They said that Treasury's
involvement in the companies will be on a commercial basis and that
their interest is in ensuring the companies are in a position to repay
the loans.
We have previously reported that in a market economy, the federal role
in aiding industrial sectors should generally be of limited duration
and have noted the importance of setting clear limits on the extent of
government involvement.[Footnote 61] Regarding assistance provided to
the auto industry, Treasury should have a plan for ending its financial
involvement with Chrysler and GM that indicates how it will both divest
itself of its equity shares--and the attendant responsibilities for
appointing directors to the companies' boards--and ensure that it is
adequately repaid for the financial assistance it has provided. In
developing and implementing such a plan, it should weigh the objective
of expeditiously ending the government's financial involvement in the
companies with the objective of recovering an acceptable amount of the
funding provided to these companies. Treasury has taken steps in this
direction, including establishing repayment terms for the loan provided
to the new Chrysler as part of its reorganization and developing plans
to sell its equity in the companies over a period of years in a manner
calculated to maximize its value. We plan to monitor Treasury's efforts
to develop and implement a plan for ending the government's financial
involvement with the automakers and will report our findings in future
reports as appropriate.
Treasury Provides Funding to GMAC LLC to Assist in Auto Financing to
Chrysler Dealers and Customers and to Address Capital Needs Identified
under SCAP:
In April 2009, Chrysler filed for bankruptcy. On May 20, 2009, the
bankruptcy court approved GMAC LLC (GMAC) as the preferred provider of
new credit to Chrysler's dealers and customers.[Footnote 62] Also in
May 2009, the Federal Reserve through SCAP identified the need for GMAC
to raise additional capital to be in compliance with SCAP results.
The federal government indicated that it would provide additional
assistance to GMAC to support GMAC's ability to originate new loans to
Chrysler dealers and consumers and help address GMAC's capital needs as
identified under SCAP.[Footnote 63] On May 21, 2009, Treasury purchased
$7.5 billion of mandatorily convertible preferred membership interests
from GMAC with an annual 9 percent dividend, payable quarterly.
Treasury's $7.5 billion investment included $4 billion to support GMAC
and address its capital needs as identified through SCAP, which
identified a need of $9.1 billion of new capital. After 7 years, the
interests must be converted to GMAC common interests. Prior to that
time, they may be converted at Treasury's option upon specified
corporate events (including public offerings). The shares may also be
converted at GMAC's option with the approval of the Federal Reserve,
though any conversion at GMAC's option must not result in Treasury
owning in excess of 49 percent of GMAC's common membership interests,
except (1) with prior written consent of Treasury, (2) pursuant to
GMAC's capital plan, as agreed upon by the Federal Reserve, or (3)
pursuant to an order of the Federal Reserve compelling such a
conversion. On June 8, 2009, GMAC submitted a detailed capital plan to
the Federal Reserve describing specific actions it has taken and plans
to take to increase capital to meet its total SCAP capital needs.
Under the agreement, GMAC also issued warrants to Treasury to purchase
additional mandatorily convertible preferred membership interests in an
amount equal to 5 percent of the preferred purchased membership
interests. The warrant preferred shares provide an annual 9 percent
dividend payable quarterly. According to Treasury, because the exercise
price for the warrants is nominal and there were no downside risks to
exercising the warrants immediately, Treasury exercised the warrants at
closing and received an additional $375 million of mandatorily
convertible preferred membership interests. Under the funding
agreement, GMAC must comply with all executive compensation and
corporate governance requirements of Section 111 of the act applicable
to qualifying financial institutions under CPP.
Treasury noted that the May 21, 2009, $7.5 billion capital investment
would not immediately result in it holding any common membership
interests in GMAC at that time. However, on May 29, 2009, Treasury
exercised its option to exchange the $884 million loan it made to GM in
December 2008 to acquire about 35 percent of the common membership
interests in GMAC.
Treasury Has Continued to Take Steps to Develop an Integrated
Communication Strategy for TARP, but Additional Actions Could Help
Ensure the Strategy Is Effective:
In our March 2009 report, we noted that while Treasury had taken a
number of steps to address the ongoing crisis, it had been hampered
with questions about TARP decision making and activities, raising
questions about the effectiveness of its existing communication
strategy.[Footnote 64] As a result, we recommended that Treasury
continue to develop an integrated communication strategy that may
include, among other things, building understanding and support through
the program, integrating communications and operations, and increasing
the impact of communication tools such as print and video. Moreover, we
emphasized the need for the communication strategy to establish a means
to engage in regular and routine communication with Congress. Since our
March 2009 report, Treasury said that it established a working group to
address communications both within OFS and to external stakeholders.
Treasury has stated that the working group is responsible for
monitoring, reporting on, and addressing all OFS communication efforts,
and has been developing a communications plan to build support for the
various programs it has established under the act. Treasury also noted
that its Financial Stability Plan provided the basis for its improved
communication strategy.
The current communication strategy for TARP utilizes and builds on
existing resources, such as Treasury's Office of Public Affairs and
Office of Legislative Affairs. Officials from Treasury's Office of
Public Affairs and Office of Legislative Affairs told us that the
Financial Stability Plan announced in February 2009 provided a base for
the new administration launching its current communication strategy. To
ensure that Treasury can communicate with the public and Congress in a
timely manner, officials from Treasury's Office of Public Affairs and
Office of Legislative Affairs are included in regular policy meetings
with OFS officials and officials from other offices in Treasury. As
major changes occur, Treasury's Office of Public Affairs--in
conjunction with OFS, the Office of the Secretary, and the Office of
Legislative Affairs--has established a routine approach to more fully
communicate activities to the public. Specifically, the Office of
Public Affairs has a process that involves timely issuance of press
releases and white papers, holding media briefings, and conducting
outreach to the academic and investor community. According to Treasury,
policy officials from OFS and Domestic Finance are involved in this
process. Moreover, the Office of Public Affairs told us that Treasury
had dedicated a media and public affairs employee that works on TARP
and in coordination with other senior members of the Public Affairs
office.
Staff from the Office of Legislative Affairs told us that they
routinely communicate with congressional leadership and staff from key
committees with jurisdiction over TARP activities, specifically noting
the Senate Committee on Banking, Housing, and Urban Affairs and the
House Committee on Financial Services. They also respond to a variety
of questions and requests made to them by individual members' and
congressional staff on an ongoing basis. In addition, Treasury noted
that on April 15, 2009, the Secretary transmitted written letters to
congressional committees to provide a broad update on TARP-related
activities, and on May 15, 2009, OFS staff provided background
briefings to Congressional staff on TARP programs and recent
developments. OFS told us they plan to provide additional briefings to
congressional staff on a monthly basis. They also said that they are in
the process of hiring a communications officer to work with the Office
of Public Affairs and the Office of Legislative Affairs, who have two
staff members dedicated to TARP, among other duties, to implement a
coordinated communications strategy. Though these efforts may improve
communication with congressional stakeholders, Treasury has yet to
implement an approach that ensures all relevant stakeholders are
routinely reached. For example, the act creating TARP includes several
other committees of jurisdiction besides Senate Banking, Housing, and
Urban Affairs and House Financial Services--the House and Senate
Committees on Appropriations, the House and Senate Committees on
Budget, the Senate Committee on Finance, and the House Committee on
Ways and Means. However, according to Treasury officials, while they
have more recently begun to outreach to others, their efforts have
primarily been targeted to House Financial Services and Senate Banking.
Treasury's communication strategy, once finalized, should help ensure
regular and proactive outreach to all of the committees of jurisdiction
and Congress in general. Until the plans for regular outreach to
Congress on TARP matters are implemented, Treasury risks that some
congressional committees or staff may not be receiving consistent and
timely information, increasing the likelihood of misunderstanding by
Congress and according to Treasury officials, will continue to be
inundated with ad hoc TARP-related inquires.
Since our March 2009 report, Treasury has made operational its new Web
site, [hyperlink, http://www.financialstability.gov], to report TARP-
related matters and has taken steps to improve the site's effectiveness
through the use of various communication tools. Treasury said that this
effort is part of a refocused public communications initiative to
enhance communications on how TARP strategies will stabilize the
financial system and restore credit markets. According to Treasury,
there are several key differences between the new site and the older
Web page used to communicate TARP strategies, which was a part of the
Treasury's Web site. Specifically, Treasury officials told us that the
new site is less technical than the former Web page and the intention
was to provide details on TARP activities in a more user-friendly,
simplified manner that is easier for the general public to understand.
For example, the site features a "decoder" tool that translates
frequently-used financial language and TARP program names, such as
"asset-backed security," to reach a wider audience. In addition, the
site has provided information on all of the investments Treasury has
made and the contractual terms of and participants in those investment
programs. Treasury also posts a detailed monthly lending and
intermediation survey on the Web site. Moreover, Treasury has provided
links to program-related content provided on other federal agencies'
sites, such as frequently asked questions on the TALF posted by the
Federal Reserve. Treasury has also tried to provide information to
better address constituent interests. For example, the Web site has
included an interactive map illustrating state-by-state bank and
financial institution funding provided under TARP. According to
Treasury, the site provided some information on warrant sales and
repayments of principal investments made to various institutions under
CPP. Consistent with our recommendation aimed at better disclosure of
monies paid to Treasury, it now includes dividends and interest
received in its periodic reports to Congress that are also posted to
the Web site, and according to Treasury, it is in the process of
creating a mechanism to report dividends received under the various
TARP programs on the Web site.
Treasury also created a separate Web site--[hyperlink,
http://www.makinghomeaffordable.gov]--in order to communicate about the
homeownership preservation program established under TARP. Treasury
said that it has coordinated closely with the White House, HUD, FHFA,
Fannie Mae, and Freddie Mac in developing a means to communicate
information on the Making Home Affordable program to stakeholders
across the country. The Web site includes information targeted to
homeowners on refinancing and loan modifications and, according to
Treasury, as of May 29, 2009, the site has received more than 19.5
million hits.
In other work, we have noted that best practices useful for improving
the quality of federal public Web sites include conducting usability
testing of Web sites and developing performance measures or other means
to gauge customer satisfaction, such as conducting surveys and
convening focus groups.[Footnote 65] Treasury is in the process of
entering into an agreement with a vendor to conduct usability testing
of the Web site. According to a Treasury official, small surveys of
site visitors will be conducted and every six months the vendor will
suggest changes to improve the Web site. While Treasury said that the
new Web site was designed to make information less technical and
accessible to a wider audience, until Treasury gauges whether the new
[hyperlink, http://www.financiastability.gov] Web site provides more
useful and easily found information to the general public than the old
Web page, Treasury lacks a meaningful measure of the effectiveness of
its communication strategy.
The lack of ready access to key information on some recent TARP
developments on the new [hyperlink, http://www.financialstability.gov]
Web site underscores the need to seek input from others in making
continuous improvements in TARP-related communications. For example,
users from the general public, unfamiliar with the TARP terminology,
would have difficulty finding basic descriptive information on the
stress test initiative announced February 2009 under the
administration's Financial Stability Plan. Among other things, we found
that the Web site lacked readily-found information on the components of
the test and test results. Further, while Treasury officials said that
the decoder tool intends to translate more technical program
information, as of June 4, 2009, we found no information in the decoder
tool or elsewhere on the Web site to let users know that the stress
test is now formally referred to in Treasury press releases as SCAP.
Treasury Has Made Progress in Developing OFS's Management
Infrastructure:
Since our March 2009 report, Treasury has continued to take steps to
hire permanent OFS staff and detailees to fill short-and long-term
organizational needs. First, Treasury has continued to seek qualified
successors for various permanent leadership positions, including the
Chief Investment and Chief Homeownership Preservation officers. Until
permanent successors are identified, Treasury has appointed an Acting
Chief Investment Officer and appointed an interim Chief Homeownership
Preservation Officer to head these areas of OFS. In addition, Treasury
has created a new senior position within OFS--a senior restructuring
official--to oversee major investments that have been made under TARP.
The administration has also nominated an individual to become the
Assistant Secretary of Financial Stability. This appointment, which is
subject to Senate confirmation, would fill the vacancy created by the
departure of the Interim Assistant Secretary of Financial Stability,
who had served in this capacity since TARP was created in October 2008.
Second, Treasury has increased the number of permanent OFS staff. As of
June 8, 2009, OFS had 166 total staff, with the number of permanent
staff rising from 77 to 137 since our March 2009 report and the number
of detailees decreasing to 29 (see figure 3). In its latest budget
request to OMB, Treasury anticipated that OFS would need 225 full-time
employees to operate at full capacity in fiscal year 2010, an increase
of 29 from its March 2009 estimate of 196. Having both detailees and
long-term staff helps OFS meet its short-and long-term needs. Treasury
continues to anticipate that permanent staff will support long-term
responsibilities, while detailees will continue to play an important
role by supporting the flexibility of OFS operations.
Figure 3: Number of Permanent Staff and Detailees, November 21, 2008,
through June 8, 2009:
[Refer to PDF for image: stacked vertical bar graph]
Date: November 21, 2008;
Permanent staff (including limited-term appointments): 5;
Staff detailed to OFS from other areas of Treasury and other federal
agencies (temporary): 43;
Total number of employees: 48.
Date: January 26, 2009;
Permanent staff (including limited-term appointments): 38;
Staff detailed to OFS from other areas of Treasury and other federal
agencies (temporary): 52;
Total number of employees: 90.
Date: March 16, 2009;
Permanent staff (including limited-term appointments): 77;
Staff detailed to OFS from other areas of Treasury and other federal
agencies (temporary): 36;
Total number of employees: 113.
Date: June 8, 2009;
Permanent staff (including limited-term appointments): 137;
Staff detailed to OFS from other areas of Treasury and other federal
agencies (temporary): 29;
Total number of employees: 166.
Source: GAO analysis of Treasury data.
[End of figure]
Currently, some offices are more fully staffed than others. OFS
provided information on 2 types of vacancies--ones the agency is
currently in the process of hiring for (current vacancies)--and ones
that the agency anticipates based on the projected size of each office
over time (anticipated vacancies). While the offices of the Chief
Financial Officer and Chief Investment Officer have identified only a
few current vacancies, the offices of the Chief Risk and Compliance
Officer and Chief Homeownership Preservation Officer have identified
several current vacancies (table 10). Current vacancies that Treasury
has identified within OFS include senior positions for program
compliance within the office of the Chief Risk and Compliance Officer
and leadership positions for data analysis and communications and
marketing within the office of the Chief Homeownership Preservation
Officer. In some instances, OFS has filled important personnel gaps.
For example, since our March 2009 report, OFS has filled two new staff
positions for program and data management analysts to support its
oversight of financial agents.[Footnote 66]
Table 10: Number of Permanent Staff and Detailees, as of June 8, 2009:
Functional area of OFS: Chief Risk and Compliance Officer;
Permanent staff: 18;
Detailees: 2;
Current vacancies: 16;
Anticipated vacancies: 8.
Functional area of OFS: Chief Homeownership Preservation Officer;
Permanent staff: 6;
Detailees: 3;
Current vacancies: 16;
Anticipated vacancies: 3.
Functional area of OFS: Chief Operations Officer;
Permanent staff: 19;
Detailees: 9;
Current vacancies: 8;
Anticipated vacancies: 2.
Functional area of OFS: Chief Investment Officer;
Permanent staff: 43;
Detailees: 14;
Current vacancies: 8;
Anticipated vacancies: 14.
Functional area of OFS: Chief Financial Officer;
Permanent staff: 18;
Detailees: 1;
Current vacancies: 7;
Anticipated vacancies: 0.
Functional area of OFS: Total;
Permanent staff: 104;
Detailees: 29;
Current vacancies: 55;
Anticipated vacancies: 27.
Source: OFS, Treasury.
Note: The table only shows staffing levels and vacancies for selected
areas of OFS. Current vacancies are ones that OFS is currently in the
process of bringing on board. Anticipated vacancies are ones that the
agency believes it will have based on the projected size of each office
over time.
[End of table]
Treasury has made progress in developing a more routine process for
hiring OFS staff. During the transition from the previous
administration, with new TARP responsibilities still emerging and OFS
functional areas still developing, Treasury employed an informal
approach to hiring staff in order to bring employees on board
expeditiously and meet immediate mission needs. As TARP activities have
solidified and become more stable, Treasury and OFS staff have been
better able to identify the skills and abilities OFS needs and develop
a more structured process for hiring. Currently, Treasury routinely
updates its Web site, [hyperlink, http://www.financialstability.gov],
to inform potential candidates of new OFS vacancies. These vacancy
announcements are linked to job announcements posted on the USAJOBS Web
site. Additionally, Treasury has developed more systematic approaches
to reviewing applications and interviewing candidates. For example,
Treasury recently updated its standard operating procedures for hiring
staff to OFS. This includes a procedure describing how to bring on
board federal employees to serve as detailees in OFS. While Treasury
has developed more formal processes for assessing candidates seeking
employment with OFS, the department still uses flexible hiring
strategies in order to ensure that it is recruiting candidates with the
right skill sets and abilities to meet OFS mission needs. For example,
Treasury still utilizes the flexibilities provided under direct hire
authority to select candidates for employment who do not submit formal
applications via [hyperlink, http://www.usajobs.gov]. Nonetheless,
Treasury officials said that they encourage all candidates expressing
interest in OFS employment to apply via announcements posted on
[hyperlink, http://www.usajobs.gov] whenever feasible. In addition, to
retain critical skills learned on the job, Treasury has established a
process to ensure knowledge transfer between outgoing and incoming OFS
detailees.
Treasury continues to experience challenges in hiring qualified
employees, however, in part due to pay disparities with federal
financial regulatory agencies. In the past, Treasury told us that it
had identified candidates with the right skills and abilities to fill
various OFS positions, but these candidates often worked for financial
regulators that could offer more competitive salaries than OFS. To
mitigate the effects of pay differences, Treasury has employed some
strategies that are available to all federal agencies. In particular,
Treasury has utilized maximum payable rates and offered promotions to
mid-level career employees.[Footnote 67] According to Treasury, these
incentives have been helpful in hiring some employees who had
previously worked at financial regulatory agencies. Nonetheless,
Treasury noted that while these tools have been useful in attracting
lower-and mid-level career employees, they do not always address
substantial differences between the compensation OFS can offer senior
executives and the rates offered by financial regulators. In addition,
while the department has the ability to use recruitment bonuses, use of
this incentive has been limited to employees who are not currently
government employees and therefore has not been used to recruit
employees from financial regulatory agencies.[Footnote 68] Moreover,
while Treasury may use relocation bonuses, its use of these for
recruiting employees from financial regulatory agencies has been
limited because most candidates currently working for financial
regulatory agencies would not have to relocate to accept a position in
OFS.
Treasury Has Taken Various Steps to Manage Potential Conflicts of
Interest among TARP Employees:
As mentioned in our prior work, Treasury has told us that vetting OFS
candidates' potential conflicts of interest has added time to the
hiring process. In particular, there has been heightened concern about
employees' financial interests creating potential conflicts because
TARP decision-making activities often involve providing funds to
various financial institutions and targeting assistance to certain
types of investments (such as mortgage-backed securities) that new
employees might hold.
Treasury officials told us they had taken a number of steps to manage
potential conflicts of interest. First, Treasury officials have been
obtaining information on candidates' potential conflicts earlier in the
hiring process, through preliminary reviews of information provided on
financial disclosure reports. OFS employees are subject to the same
laws and regulations covering ethical codes of conduct as employees of
other executive branch agencies. Accordingly, OFS employees are
prohibited from participating personally and substantially in a
particular matter that will affect their financial interests or those
of (1) a spouse or minor child; (2) a general partner; (3) an
organization for which they serve as an officer, director, trustee,
general partner or employee; or (4) a person with whom they are
negotiating for employment or have an arrangement concerning
prospective employment.[Footnote 69]
In accordance with the Ethics in Government Act, Senate-confirmed
appointees, members of the Senior Executive Service, and other senior-
level executive branch employees must disclose assets and other
interests that are attributable to them when beginning federal service
and annually thereafter in a public financial disclosure report.
[Footnote 70] Other OFS employees whose duties involve the exercise of
significant discretion are required by regulation to report their
financial interests on a confidential financial disclosure report (see
table 11). Employees required to file a financial disclosure report
must do so within 30 days of appointment, unless granted an extension.
Treasury said it had obtained and retained a copy of the financial
disclosure reports filed by detailees with their home agencies.
[Footnote 71]
Table 11: Description of Financial Disclosure Reports Filed by OFS
Employees:
Report title: Public financial disclosure report[A];
Type of official filing report: Senate-confirmed appointees, members of
the senior-executive service and other senior-level employees;
Information required: List specified financial interests including
outside income or gifts, assets, and liabilities and identify the value
of and income generated by each interest by dollar ranges. Reports of
transactions required on an annual basis.
Report title: Confidential financial disclosure report[B];
Type of official filing report: Other staff whose duties involved the
exercise of significant discretion;
Information required: List specified financial interests held; no
requirement to specify values of assets or income amounts. No
transaction reporting required.
Source: GAO.
[A] A blank version of this report may be accessed via Office of
Government Ethics Web site. See [hyperlink,
http://http://www.usoge.gov/forms/sf278.aspx].
[B] A blank version of this report may be accessed via Office of
Government Ethics Web site. See [hyperlink,
http://http://www.usoge.gov/forms/form_450.aspx].
[End of table]
Treasury has used databases to track reviews of Treasury employee
financial disclosure reports. These databases provide sufficient
evidence to demonstrate that, in general, OFS employees have filed
financial disclosure reports within 30 days of their appointment. We
found that in all but two cases, individuals required to complete these
reports filed them within 30 days of their appointment to OFS.[Footnote
72] In one case, the employee was granted an extension to file and
filed before the expiration of the extension period. In the other case,
the employee appears to have submitted the report on time, but it was
not officially marked as received by Treasury ethics counsel until 1
business day after the expiration of the 30-day time-to-file period.
Our analysis also supports Treasury's statement that it usually vets
conflicts of interest earlier in the hiring process for OFS staff than
for employees in other areas of Treasury. We found that, on average,
permanent OFS employees required to submit confidential financial
disclosure reports filed them about 21 days before their appointment.
Moreover, we found that the majority of OFS employees coming from
outside the federal government who were required to submit public
financial disclosure reports filed the reports in advance of their
appointment to OFS.
To address the unique aspects of TARP operations in its reviews of OFS
employees' financial disclosure reports, Treasury established new
internal operating procedures on February 17, 2009, concerning the
submission and review of OFS employees' confidential financial
disclosure reports. To facilitate a preliminary identification and
communication of obvious potential conflicts, the new procedures set
out as a goal to have OFS candidates submit for initial review
confidential financial disclosure reports with Treasury ethics counsel
before their formal appointment to OFS. Generally, Treasury has
followed this new procedure. In our review, we found that of the 31
employees filing confidential financial disclosure reports who were
appointed to OFS on or after February 17, 2009, Treasury ethics counsel
received copies of such reports in advance of the candidate's
appointment to OFS in all but three cases. The new procedures outlined
plans for Treasury ethics counsel to better coordinate with OFS
supervisors during their reviews of confidential financial disclosure
reports submitted by OFS candidates.[Footnote 73] Treasury officials
said that the new coordination effort was helpful because OFS mission
staff were often more familiar with the day-to-day roles and
responsibilities of employees directly under their supervision. One of
the tracking databases provides some evidence to support Treasury's
assertion that it routinely coordinates reviews of employees' financial
interests with OFS mission staff. Specifically, the database includes a
field that tracks the dates of supervisory OFS staff reviews of
confidential disclosure reports. In reviewing the database, we
identified several instances in which OFS supervisors had reviewed
confidential financial disclosure reports within a few days of the
Treasury ethics counsel's initial review. We found that for 42
permanent employees, OFS supervisors reviewed confidential financial
disclosure reports, on average, 5 days after Treasury's ethics counsel
first received the reports. However, the supporting information is
somewhat limited because the supervisory review field was incomplete
for 14 of the 56 database pages we reviewed. Treasury's ethics counsel
told us that this information was absent most often because of a lag in
data entry. Specifically, Treasury said that dates might be entered
into the database some time after the reviews were complete because
supervisory mission staff might retain the reports for extended periods
to, among other things, track potential conflicts identified in the
reports and help ensure that employees recuse themselves from matters
in which they had a financial interest.
Treasury provides various types of training to employees to help them
understand conflicts of interest and ensure compliance with ethical
standards of conduct. According to Treasury, this training is more
rigorous for employees whose jobs have higher potential to involve
financial or other conflicts. Treasury officials said that all
employees receive group training at orientation and certain employees
whose positions are of a more sensitive nature are provided one-on-one
training with an ethics officer. The databases also support Treasury's
statement that it provided both individual and group-based ethics
training to OFS staff. Specifically, we found that as of April 23,
2009, all OFS staff who completed financial disclosure reports had
received at least one ethics training session and almost half had
received two or more types of ethics training sessions. While one
database lacked some information on specific training dates, it did
provide some information on types of training provided to these
individuals (such as one-on-one training with ethics officers, makeup
training sessions, or group training conducted at orientation).
OFS uses a variety of other measures to manage potential conflicts of
interest. Federal law permits Treasury to authorize a waiver permitting
an employee to hold certain financial interests if Treasury determines
that holding such interests does not substantially interfere with the
integrity of the individual's performance.[Footnote 74] According to
Treasury, to date, two waivers have been issued to OFS employees. One
of these waivers gave a new OFS employee 90 days to divest assets held
in pooled investment funds that could have presented a conflict into
nonconflicting assets. In the other case, after determining that a
senior OFS official's deposits in a banking institution could present a
conflict of interest to the extent that these deposits exceeded the
FDIC-insured limit of $250,000, as a precautionary measure, Treasury
issued a waiver to permit the individual to retain these deposit
accounts. In both cases, Treasury determined that the investments
involved were not likely to affect the integrity of the individual's
federal service.
In addition, when reviewing financial disclosure reports, Treasury
ethics counsel consulted with OFS employees on what activities they
should recuse themselves from participating in during their employment
with OFS because such activities could have potentially interfered with
the independent and objective performance of their jobs. According to
Treasury, during reviews of financial disclosure reports, OFS employees
have agreed to divest themselves of certain financial assets to
mitigate potential conflicts. Although Treasury does not routinely
track divestments, Treasury provided some documentation demonstrating
that multiple OFS employees divested assets that might have caused a
conflict with their official duties.
Treasury has appropriately identified potential conflicts of interests
among senior-level OFS officials and has taken appropriate steps to
address such issues. We reviewed 15 public financial disclosure reports
submitted by OFS officials as of April 23, 2009. Seven of the reports
reviewed had already been submitted to the detailees' federal agencies
during the past fiscal year, but Treasury's ethics counsel reviewed the
reports again to assess potential conflicts in the context of the
employee's OFS duties. In our review of the reports, we identified
financial interests that could have conflicted with the independent and
objective performance of some duties. During our consultation with
Treasury's ethics counsel, however, we found that the same interests
had already been identified, and we obtained information showing that
the ethics counsel had taken the appropriate steps to address them. For
example, in some cases, Treasury's ethics counsel instructed
individuals to divest themselves of certain investments. In other
cases, Treasury's ethics counsel directed individuals to recuse
themselves from matters involving former employers or firms that
compensated them for consulting services.
Treasury Has Continued to Engage Contractors and Financial Agents:
Since our March 2009 report, Treasury has awarded 11 new contracts and
entered into four new financial agency agreements, bringing to 40 the
total number of TARP financial agency agreements,[Footnote 75]
contracts, and blanket purchase agreements as of June 1, 2009.[Footnote
76] Of the 11 new contracts,
* 4 are in support of services related to the automotive industry,
* 2 are for legal services related to PPIP,
* 1 is for legal services related to small business loans and
securities,
* 1 is to perform credit reform modeling analysis, and:
* 3 are for OFS facilities services.
Of the 4 new financial agency agreements,
* 1 is for asset management services in support of the small business
assistance program, and:
* 3 are for asset management services in support of CPP.
Since March 2009, Treasury used expedited procedures to award seven
contracts using other than full and open competition based on unusual
and compelling urgency.[Footnote 77] Treasury also used the General
Services Administration's Federal Supply Schedule in three instances.
[Footnote 78] In most cases, Treasury solicited and received offers
from multiple firms. While competition requirements do not apply to
Treasury's authority to designate financial agents, Treasury issued a
general solicitation for asset manager proposals in support of CPP and
received more than 200 submissions, from which it made its current
three selections. Treasury has yet to decide on the extent to which it
will need additional asset managers. For detailed status information on
new, ongoing, and completed Treasury contracts and agreements as of
June 1, 2009, see GAO-09-707SP.[Footnote 79]
Treasury encourages small businesses, including minority-and women-
owned businesses, to pursue procurement opportunities on TARP contracts
and financial agency agreements.[Footnote 80] OFS has considered
potential vendors' efforts to utilize small businesses as part of its
selection criteria on most contracts and some financial agency
agreements. As of June 1, 2009, Treasury has awarded nine of its 40
prime contracts or financial agency agreements (23 percent) to small or
minority-and women-owned businesses. Two of the new prime contracts
awarded since our March 2009 report were awarded to small businesses
for credit reform analysis and OFS facilities services, one was awarded
to a small minority/women-owned business for legal support to PPIP, and
two of the new financial agency agreements are with minority-and women-
owned businesses for asset management services. To date, however, the
majority of small or minority-and women-owned businesses participating
in TARP are subcontractors with TARP prime contractors. According to
OFS officials, as of June 1, 2009, 30 of 42 TARP subcontractors (71
percent) represented small or minority-and women-owned business
categories, as shown in table 12.[Footnote 81]
Table 12: TARP Contracts, Financial Agency Agreements, and Subcontracts
with Minority-Owned, Women-Owned, and Other Small Businesses, as of
June 1, 2009:
Socioeconomic business category: Minority-owned[C];
Prime contracts and financial agency agreements[A]: 4;
Subcontracts[B]: 9;
Total: 13.
Socioeconomic business category: Women-owned;
Prime contracts and financial agency agreements[A]: 2;
Subcontracts[B]: 11;
Total: 13.
Socioeconomic business category: Other Small;
Prime contracts and financial agency agreements[A]: 3;
Subcontracts[B]: 10;
Total: 13.
Socioeconomic business category: Total;
Prime contracts and financial agency agreements[A]: 9;
Subcontracts[B]: 30;
Total: 39.
Source: GAO analysis of Treasury data.
[A] As of June 1, 2009, 40 TARP prime contracts and financial agency
agreements have been issued.
[B] As of June 1, 2009, prime contractors have awarded 42 TARP
subcontracts, excluding 3 subcontractors for Fannie Mae.
[C] includes combination minority-and women-owned businesses.
[End of table]
As of June 1, 2009, legal services contracts and financial agency
agreements continue to account for the majority (67 percent) of
services used to directly support OFS's administration of TARP, as
shown in figure 4. As of the same date, Treasury had expended
$48,894,415 for actions related to contracts and agreements--a $37
million increase in contract and financial agency agreement expenses in
the last 2 months alone. The largest share of the total (38 percent)
was for legal services, and the second-largest share (24 percent) was
for services provided by financial agents.
Figure 4: Number of and Expenses for OFS Contracts and Agreements, as
of June 1, 2009:
[Refer to PDF for image: two pie-charts]
Number of contracts:
Legal services: 15 (46%);
Financial agency services: 7 (21%);
Miscellaneous program support: 6 (18%);
Accounting/internal control services: 2 (6%);
Investment/advisory services: 2 (6%);
Human resource services: 1 (3%).
Expenses:
Legal services: $13,444,352 (38%);
Financial agency services: $8,563,420 (24%);
Miscellaneous program support: $2,075,019 (6%);
Accounting/internal control services: $6,330,987 (18%);
Investment/advisory services: $4,455,819 (13%);
Human resource services: $203,606 (1%).
Source: GAO analysis of Treasury data.
Note: These figures reflect 33 contracts, financial agency agreements,
and interagency agreements for services that have directly supported
OFS's administration of TARP, including 2 contracts that expired as of
June 1, 2009. This figure does not reflect contracts for, among other
things, property leases, a human resources advertisement, internal
information technology services, and the purchase of office equipment.
[End of figure]
Since our March 2009 report, Treasury has increased its fiscal year
2009 budget estimate from $175 million to $263 million to cover higher
anticipated costs for OFS's use of contractors and financial agents,
interagency agreement obligations, information technology services,
office rental, and other facilities costs. According to OFS budget
officials, the estimated $88 million budget increase is due primarily
to financial agency agreement costs for Fannie Mae and Freddie Mac, the
addition of new TARP programs, and the realignment of some budget
categories.[Footnote 82]
Treasury provides a basic descriptive listing of information on its
contracts and financial agency agreements through its TARP Web site and
its monthly report to Congress pursuant to section 105(a) of the act.
However, this reporting lacks the detail Congress and other interested
stakeholders need to track the progress of individual contracts and
agreements--such as a breakdown of obligations and/or expenses, in
dollars, by each entity. As OFS's capacity to manage and monitor TARP
contracts and other agreements continues to grow, making this type of
information public on a regular basis would be useful, in addition to
the information Treasury already reports.[Footnote 83]
Some of the principal federal banking regulators involved in activities
related to TARP (Federal Reserve, FDIC, OCC, and OTS) currently use or
plan to use contractors in support of activities related to the
program. Officials reported that, as of June 1, 2009, the Federal
Reserve was contracting with four firms to provide support for AGP,
including financial evaluation and accounting services related to
Federal Reserve loans made to Citigroup and Bank of America.[Footnote
84] In addition, FDIC plans to obtain future contractor support to
assist with activities related to PPIP's Legacy Loans Program. Though
this program is still in development, FDIC anticipates that contractor
services in support of the program may include financial advisory
services, asset valuation, oversight and compliance monitoring, title
assignment, trustee services, and master servicer responsibilities.
OFS Has Continued to Make Progress in Managing and Monitoring Conflicts
of Interest among Contractors and Financial Agents:
OFS continues to implement its system of compliance to manage and
monitor potential conflicts of interest that may arise with contractors
and financial agents seeking or performing work under TARP.[Footnote
85] In response to the January 2009 TARP conflicts-of-interest interim
rule,[Footnote 86] OFS received nine comments before the public comment
period ended March 23, 2009. OFS anticipates that the process of
developing a final rule on conflicts of interest may take several
months to complete.
We continue to track the actions OFS has taken to address two prior
recommendations: (1) to complete the review of, and as necessary
renegotiate, the four vendor conflicts-of-interest mitigation plans
that predated Treasury's interim rule to enhance specificity and
conformity with the interim rule and (2) to issue guidance requiring
that key communications and decisions concerning potential or actual
vendor-related conflicts of interest be documented.
Since March, OFS has made progress toward completing the review, and as
necessary renegotiation, of four pre-existing vendor conflicts-of-
interest mitigation plans. In addition, Treasury extended the period of
performance for two existing legal services contracts in March 2009. Of
these six required reviews, two were completed as of May 2009,
resulting in updated contract language and revised mitigation plans.
OFS anticipates completing all remaining reviews and any necessary
renegotiations by the end of July 2009.
The two contracts OFS revised now include specific language mirroring
the interim rule and provide more details regarding required
disclosures and certifications. The revised language also added
provisions such as:
* requirements for conflicts-of-interest training for staff working
under the agreement,
* prohibitions on offers of future employment or gifts to Treasury
employees, and:
* requirements that conflicts-of-interest rules apply to subcontractors
and consultants.
One of the two contracts was revised to include more specificity in the
conflicts-of-interest mitigation plan regarding steps to mitigate
potential organizational and personal conflicts, codes of ethics, and
gift policies. Based on our review, the revised requirements in these
contracts match those in new contracts that were awarded after the
interim rule was issued.
OFS concurred with, and has taken initial steps to implement, the
second recommendation that it issue guidance requiring that key
communications and decisions concerning vendor-related conflicts of
interest be documented, but it has yet to complete this task. OFS has
drafted the process flows for the formal inquiry process, illustrating
how OFS tracks and documents decisions concerning vendor-related
conflicts of interest. OFS plans to discuss implementation of this
process at an internal training of its contracting officer's technical
representatives and financial agent relationship managers on June 23,
2009.
Indicators Generally Suggest Positive Developments in Credit Markets,
but Isolating the Impact of TARP Continues to Present Challenges:
While isolating and estimating the effect of TARP programs continues to
present a number of challenges, indicators of perceptions of risk in
credit markets generally suggest improvement since our March 2009
report, although the cost of credit has risen in some markets. As we
have noted in prior reports, 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. However, a slow recovery does not necessarily mean that TARP is
failing, because it is not clear what would have happened without the
programs. In particular, several market factors helping to explain slow
growth in lending include weaknesses in securitization markets and the
balance sheets of financial intermediaries, a decline in the demand for
credit, and the reduced creditworthiness among borrowers. Nevertheless,
credit market indicators we have been monitoring suggest that while
some rates have increased since our March 2009 report, there has been
broad improvement in interbank, mortgage, and corporate debt markets in
terms of perceptions of risk (as measured by premiums over Treasury
securities). In addition, empirical analysis of the interbank market,
which showed signs of significant stress in 2008, suggests that CPP and
other programs outside TARP that were announced in October of 2008 have
resulted in a statistically significant improvement in risk spreads
even when other important factors were considered. Although
foreclosures continue to highlight the challenges facing the U.S.
economy, total mortgage originations rose roughly 70 percent over the
fourth quarter of 2008. Similarly, while the Federal Reserve data show
that lending standards remain tight, our analysis of Treasury's new
loan survey indicate that the largest 21 CPP recipients extended
roughly $260 billion, on average, each month in new loans to consumers
and businesses in the first quarter of 2009.
TARP Programs Could Have a Number of Effects on Credit Markets and the
Economy:
In our previous reports, we highlighted the rationale for CPP, CAP,
TALF, and the Home Affordability Mortgage Program (HAMP) and the
intended effects of these programs. Among other improvements, the TARP
programs, if effective, should jointly result in the following:
* 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.
* improvement in banks' balance sheets, enhancing lenders' ability to
borrow, raise capital, and lend to creditworthy borrowers; however, as
we have discussed in previous reports, tension exists between promoting
lending and improving banks' capital position.
* fewer foreclosures and delinquencies than would otherwise occur in
absence of TARP.
* improvements in asset-backed securities markets, a development that
should increase the availability of new credit to consumers and
businesses, lowering rates on credit card, automobile, small business,
student, and other types of loans traditionally facilitated by
securitization.
While TARP's activities could improve market confidence in
participating banks and have other beneficial effects on credit
markets, we have also noted in our previous reports that several
factors will complicate efforts to measure any impact. For example, any
changes attributed to TARP may well be changes that (1) would have
occurred anyway; (2) can be attributed to other policy interventions,
such as the actions of FDIC, the Federal Reserve, or other financial
regulators; or (3) have been enhanced or counteracted by other market
forces, such as the correction in housing markets and revaluation of
mortgage-related assets. Consideration of market forces is particularly
important when using bank lending as a measure of CPP's and CAP's
success because it is not clear what would have happened in absence of
TARP. Weaknesses in the balance sheets of financial intermediaries, a
decline in the demand for credit, reduced creditworthiness among
borrowers, and other market fundamentals suggest lower lending activity
relative to the expansion phase of the business cycle. Similarly,
nonbank financial institutions, which have accounted for a significant
portion of lending activity over the past two decades, have been
constrained due to weak securitization markets.[Footnote 87] Because it
is unlikely that any increase in loans originated by banks would
completely offset the decline in nonbank activity, the weakness in
securitization markets suggests that growth in aggregate lending will
be slow. Success in supporting nonbank financial institutions and
revitalizing the securitization market will depend in part on the
success of TALF. Lastly, because the extension of credit to less-than-
creditworthy borrowers appears to have been an important factor in the
current financial crisis, it is not clear that lending should return to
precrisis levels.
As discussed in our March 2009 report, Treasury has introduced PPIP to
facilitate the purchase of legacy loans and securities. The program
aims not only to reduce uncertainty about the solvency of holders of
these assets but also to encourage price discovery in markets for these
assets, assuming current market prices are below what they would
otherwise be in a normally functioning market. The impact of PPIP will
depend in particular on the pricing of the purchased assets.
Sufficiently high prices will allow financial institutions to sell
assets, deleverage, and improve their capital adequacy.[Footnote 88] To
the extent that markets are underpricing such assets or prices are
suppressed due to illiquidity, higher prices may be more reflective of
the underlying value or cash flows associated with the assets (and
therefore aid in price discovery). However, all other things being
equal, higher prices impose certain risks on Treasury, FDIC, and the
Federal Reserve if prices paid are too high, as these agencies will
absorb losses beyond the equity supplied by investors. The contribution
of private-sector equity capital reduces incentives to overpay for
assets, depending on the proportion of equity supplied, because greater
equity contributions entail greater downside risk for buyers. In
addition to providing more transparent pricing to these assets, PPIP,
if it is effective, should have effects broadly similar to the intended
effects of CPP and CAP: improved solvency at participating
institutions, reduced uncertainty about their balance sheets, and
improved investor confidence, allowing these institutions to borrow and
lend at lower rates and raise additional capital from the private
sector.
Changes in Selected Indicators Suggest General Improvement in Credit
Market Conditions, but These Changes Cannot Be Attributed Exclusively
to TARP:
We continue to consider 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 may be influenced by general
market forces and cannot be exclusively linked to any one program or
action being undertaken to stabilize and improve the economy. Table 13
lists the indicators we have reported on in previous reports, as well
as the changes since the March 2009 report and the changes since the
announcement of CPP, the first TARP program. In general, the indicators
illustrate that the cost of credit and perceptions of risk have
declined in corporate debt, mortgage, and interbank markets since mid-
October 2008 although the cost of credit has risen in some markets
since our March 2009 report. For example, the cost of interbank credit
(LIBOR) has declined by 38 basis points since our March 2009 report,
and the TED spread, which captures the risk perceived in interbank
markets, has declined by 57 basis points. Since the announcement of
CPP, the LIBOR and TED spreads have fallen by approximately 400 basis
points. Since the announcement of CPP, corporate bond spreads have
declined, and there have been significant decreases of 101 and 207
basis points for high-quality (Aaa) and moderate-quality (Baa)
corporate spreads, respectively, since our March 2009 report,
indicating reduced risk perceptions.[Footnote 89] Although the Aaa bond
market rate has increased somewhat since our March 2009 report, both
Aaa and Baa bond rates have declined since the announcement of CPP,
indicating an decrease in the cost of credit for businesses. Similarly,
the improvement in the mortgage market is consistent across rates and
spreads although rates have been rising dramatically recently. Mortgage
rates were up 61 basis points since our March 2009 report largely due
to significant increases over the last two weeks. However, the mortgage
spread is down 53 basis points. Since the announcement of CPP the
improvement in the mortgage market was consistent across rates and
spreads--down 87 basis points and 74 basis points, respectively. (See
our December and January reports for a more detailed description and
motivation for the indicators.)[Footnote 90] Recent trends in these
metrics are consistent with indicators monitored by GAO but not
reported and those tracked by other researchers. For example, although
not reported, the credit default swap index for the banking sector has
declined significantly since March 2009.[Footnote 91] 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.
Table 13: Select Credit Market Indicators, as of June 12, 2009:
Credit market rates and spreads:
Indicator: LIBOR;
Description: 3-month London interbank offered rate (an average of
interest rates offered in dollar-denominated loans);
Basis point change since GAO March 2009 report: Down 38;
Basis point change since October 13, 2008: Down 388.
Indicator: TED spread;
Description: Spread between 3-month LIBOR and 3-month Treasury yield;
Basis point change since GAO March 2009 report: Down 57;
Basis point change since October 13, 2008: Down 407.
Indicator: Aaa bond rate;
Description: Rate on highest quality corporate bonds;
Basis point change since GAO March 2009 report: Up 22;
Basis point change since October 13, 2008: Down 62.
Aaa bond spread;
Description: Spread between Aaa bond rate and 10-year Treasury yield;
Basis point change since GAO March 2009 report: Down 101;
Basis point change since October 13, 2008: Down 61.
Indicator: Baa bond rate;
Description: Rate on corporate bonds subject to moderate credit risk;
Basis point change since GAO March 2009 report: Down 84;
Basis point change since October 13, 2008: Down 108.
Indicator: Baa bond spread;
Description: Spread between Baa bond rate and 10-year Treasury yield;
Basis point change since GAO March 2009 report: Down 207;
Basis point change since October 13, 2008: Down 107.
Indicator: Mortgage rates;
Description: 30-year conforming loans rate;
Basis point change since GAO March 2009 report: Up 61;
Basis point change since October 13, 2008: Down 87.
Indicator: Mortgage spread;
Description: Spread between 30-year conforming loans rate and 10-year
Treasury yield;
Basis point change since GAO March 2009 report: Down 53;
Basis point change since October 13, 2008: Down 74.
Quarterly mortgage volume and defaults:
Indicator: Mortgage originations;
Description: New mortgage loans;
Change from December 31, 2008 to March 31, 2009 (latest available
date): Up $185 billion to $445 billion.
Indicator: Foreclosure rate;
Description: Percentage of homes in foreclosure;
Change from December 31, 2008 to March 31, 2009 (latest available
date): Up .55 basis points to 3.85 percent.
Sources: GAO analysis of data from Global Insight, Inside Mortgage
Finance, and Thomson Datastream.
Note: Rates and yields are daily, except for 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 (GAO-09-161 and
GAO-09-296).
[End of table]
To examine further whether the decline in the TED spread could be
attributed in part to CPP, we conducted additional analysis using a
simple econometric model to address one of the most obvious threats to
validity. Because the TED spread reached extreme values leading up to
the CPP announcement (over 450 basis points), it is possible there
would have been declines from these peaks even in the absence of CPP
simply because extreme values have a tendency to return to normal
levels.[Footnote 92] However, even when we accounted for this
possibility and the general state of the economy using variables such
as stock market performance and the spread between long-and short-term
Treasuries, we found that CPP, announced on October 14, 2008, had a
statistically significant negative impact on changes in the TED spread.
[Footnote 93] Even so, the associated improvement in the TED spread (or
LIBOR) cannot be attributed solely to TARP because the October 14
announcement was a joint announcement that introduced other Federal
Reserve and FDIC programs in addition to CPP. Moreover, the model we
used is relatively simple and did not attempt to account for all of the
important factors that might influence the TED spread. Omitting such
variables could bias the results in unpredictable ways. (See appendix
III for additional information and limitations.)
We continue to monitor mortgage originations and foreclosures as
potential measures of TARP's effectiveness. As table 13 indicates,
mortgage originations increased over 70 percent, from $260 billion in
the fourth quarter of 2008 to $445 billion in the first quarter of 2009
(see also figure 5). We noted in previous reports that if TARP worked
as intended, we expected mortgage originations to stop declining and
eventually rise.[Footnote 94] While the volume of new mortgage lending
may reflect the availability of credit, it may also indicate changes in
credit risk or the demand for credit. As figure 5 illustrates, mortgage
applications also increased in the first quarter, principally due to
refinancing.[Footnote 95] Although originations were still below the
level in the first quarter of 2008, it is not clear that originations
would or should return to the level seen in the period leading up to
the credit market turmoil. Similarly, foreclosure data, although also
influenced by general market forces like falling housing prices and job
loss, should provide an indication of the effectiveness of HAMP and CPP
to the extent that improved market conditions enhance the ability of
creditworthy borrowers to refinance mortgages. However, it is too soon
to expect material changes in this area given that HAMP was only
recently implemented. As table 13 shows, the percentage of loans in
foreclosure reached an unprecedented high of 3.9 percent at the end of
the first quarter of 2009, up from 3.3 percent the previous quarter.
The foreclosure rate on subprime loans rose to 14.3 percent from 13.7
percent (the rate for adjustable-rate subprime loans is now over 23
percent). We will provide additional information on foreclosures and
general conditions in mortgage markets in future TARP-related and other
reports to Congress.
Figure 5: Mortgage Applications and Originations, First Quarter of 2004
through First Quarter of 2009:
[Refer to PDF for image: combined vertical bar and line graph]
Year and quarter: 2004, Q1;
Mortgage originations: $647 billion;
Mortgage applications index: 859.66.
Year and quarter: 2004, Q2;
Mortgage originations: $847 billion;
Mortgage applications index: 742.33.
Year and quarter: 2004, Q3;
Mortgage originations: $707 billion;
Mortgage applications index: 655.45.
Year and quarter: 2004, Q4;
Mortgage originations: $718 billion;
Mortgage applications index: 598.54.
Year and quarter: 2005, Q1;
Mortgage originations: $665 billion;
Mortgage applications index: 683.91.
Year and quarter: 2005, Q2;
Mortgage originations: $790 billion;
Mortgage applications index: 781.07.
Year and quarter: 2005, Q3;
Mortgage originations: $875 billion;
Mortgage applications index: 762.1.
Year and quarter: 2005, Q4;
Mortgage originations: $790 billion;
Mortgage applications index: 547.11.
Year and quarter: 2006, Q1;
Mortgage originations: $705 billion;
Mortgage applications index: 581.27.
Year and quarter: 2006, Q2;
Mortgage originations: $800 billion;
Mortgage applications index: 604.63.
Year and quarter: 2006, Q3;
Mortgage originations: $755 billion;
Mortgage applications index: 562.36.
Year and quarter: 2006, Q4;
Mortgage originations: $720 billion;
Mortgage applications index: 541.79.
Year and quarter: 2007, Q1;
Mortgage originations: $680 billion;
Mortgage applications index: 637.61.
Year and quarter: 2007, Q2;
Mortgage originations: $730 billion;
Mortgage applications index: 694.32.
Year and quarter: 2007, Q3;
Mortgage originations: $570 billion;
Mortgage applications index: 634.8.
Year and quarter: 2007, Q4;
Mortgage originations: $450 billion;
Mortgage applications index: 600.96.
Year and quarter: 2008, Q1;
Mortgage originations: $490 billion;
Mortgage applications index: 826.87.
Year and quarter: 2008, Q2;
Mortgage originations: $445 billion;
Mortgage applications index: 631.98.
Year and quarter: 2008, Q3;
Mortgage originations: $305 billion;
Mortgage applications index: 481.5.
Year and quarter: 2008, Q4;
Mortgage originations: $260 billion;
Mortgage applications index: 562.86.
Year and quarter: 2009, Q1;
Mortgage originations: $445 billion;
Mortgage applications index: 874.48.
Sources: Inside Mortgage Finance estimates and Global Insight.
[End of figure]
New Lending at the 21 Largest Participants in CPP:
Our analysis of Treasury's loan survey showed that the largest CPP
recipients continued to extend loans to consumers and businesses,
roughly $260 billion on average each month in 2009. 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 6, new lending at the 21 largest institutions
participating in CPP fell 6 percent in February and rose 27 percent in
March, month over month.[Footnote 96]
Figure 6: Total New Lending at the 21 Largest Recipients of CPP, from
October 1, 2008, through March 2009:
[Refer to PDF for image: line graph]
Date: October 2008;
New lending: $264.52 billion.
Date: November 2008;
New lending: $209.1 billion.
Date: December 2008;
New lending: $246.1 billion.
Date: January 2009;
New lending: $246.0 billion.
Date: February 2009;
New lending: $232.2 billion.
Date: March 2009;
New lending: $294.8 billion.
Source: GAO analysis of Treasury loan survey data.
Note: Lending levels may be affected by merger activity.
[End of figure]
Although lending normally drops during a recession and lending
standards for consumer and business credit remained tight, our analysis
of the April 2009 release of the Federal Reserve's loan officer survey
found that aggregate new lending by these institutions in March
amounted to roughly $295 billion (see table 14), or 41 percent higher
than the low recorded in November 2008.[Footnote 97] Consistent with
the trends in aggregate mortgage originations discussed above, total
mortgage originations for the largest CPP banks rose 15 percent to
roughly $117 billion.[Footnote 98] 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, or January 9,
2009.
Table 14: New Lending at the 21 Largest CPP Recipients, First Quarter
of 2009, by Institution (Dollars in millions):
Institution: Citigroup, Inc.;
Date of CPP: 10/28/2008;
Size of CPP: $25,000;
New lending: January: $18,814;
New lending: February: $14,692;
New lending: March: $18,945.
Institution: JPMorgan Chase;
Date of CPP: 10/28/2008;
Size of CPP: $25,000;
New lending: January: $46,785;
New lending: February: $39,543;
New lending: March: $65,445.
Institution: Wells Fargo Bank;
Date of CPP: 10/28/2008;
Size of CPP: $25,000;
New lending: January: $50,560;
New lending: February: $56,051;
New lending: March: $64,810.
Institution: Bank of America;
Date of CPP: 10/28/2008;
Size of CPP: $15,000;
New lending: January: $60,624;
New lending: February: $58,201;
New lending: March: $66,031.
Institution: Goldman Sachs;
Date of CPP: 10/28/2008;
Size of CPP: $10,000;
New lending: January: $6,487;
New lending: February: $744;
New lending: March: $3,631.
Institution: Morgan Stanley;
Date of CPP: 10/28/2008;
Size of CPP: $10,000;
New lending: January: $3,551;
New lending: February: $2,614;
New lending: March: $4,022.
Institution: Bank of New York Mellon;
Date of CPP: 10/28/2008;
Size of CPP: $3,000;
New lending: January: $730;
New lending: February: $816;
New lending: March: $360.
Institution: State Street;
Date of CPP: 10/28/2008;
Size of CPP: $2,000;
New lending: January: $289;
New lending: February: $1,170;
New lending: March: $1,457.
Institution: U.S. Bancorp;
Date of CPP: 11/14/2008;
Size of CPP: $6,599;
New lending: January: $13,866;
New lending: February: $13,256;
New lending: March: $16,272.
Institution: Capital One;
Date of CPP: 11/14/2008;
Size of CPP: $3,555;
New lending: January: $2,531;
New lending: February: $2,275;
New lending: March: $2,344.
Institution: Regions;
Date of CPP: 11/14/2008;
Size of CPP: $3,500;
New lending: January: $4,983;
New lending: February: $4,867;
New lending: March: $5,800.
Institution: SunTrust;
Date of CPP: 11/14/2008;
Size of CPP: $3,500;
New lending: January: $6,511;
New lending: February: $7,585;
New lending: March: $8,875.
Institution: BB&T;
Date of CPP: 11/14/2008;
Size of CPP: $3,134;
New lending: January: $5,976;
New lending: February: $6,399;
New lending: March: $7,202.
Institution: KeyCorp;
Date of CPP: 11/14/2008;
Size of CPP: $2,500;
New lending: January: $3,065;
New lending: February: $2,241;
New lending: March: $2,501.
Institution: Comerica;
Date of CPP: 11/14/2008;
Size of CPP: $2,250;
New lending: January: $1,425;
New lending: February: $1,661;
New lending: March: $2,534.
Institution: Marshall & Ilsley;
Date of CPP: 11/14/2008;
Size of CPP: $1,715;
New lending: January: $960;
New lending: February: $898;
New lending: March: $884.
Institution: Northern Trust;
Date of CPP: 11/14/2008;
Size of CPP: $1,576;
New lending: January: $1,270;
New lending: February: $1,278;
New lending: March: $1,641.
Institution: PNC;
Date of CPP: 12/31/2008;
Size of CPP: $7,579;
New lending: January: $8,170;
New lending: February: $7,991;
New lending: March: $9,851.
Institution: FifthThird Bancorp;
Date of CPP: 12/31/2008;
Size of CPP: $3,408;
New lending: January: $5,070;
New lending: February: $5,467;
New lending: March: $7,082.
Institution: CIT;
Date of CPP: 12/31/2008;
Size of CPP: $2,330;
New lending: January: $3,429;
New lending: February: $3,497;
New lending: March: $3,832.
Institution: American Express;
Date of CPP: 1/9/2009;
Size of CPP: $3,389;
New lending: January: $889;
New lending: February: $845;
New lending: March: $1,303.
Institution: Total;
Size of CPP: $160,035;
New lending: January: $245,984;
New lending: February: $232,089;
New lending: March: $294,822.
Source: GAO analysis of Treasury loan survey.
Note: The table features the 21 largest recipients of CPP funds that
had received funds as of March 31, 2009. New lending includes new home
equity lines of credit; mortgage, 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. In addition, lending levels may be affected by merger
activity. 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]
Automobile Lending:
As we discussed in the March report, TALF support to securitization
markets should, if effective, 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 TALF is in its beginning stages, we have begun monitoring
lending activity at the institutions most likely to be impacted by
conditions in securitization markets. For example, because stand-alone
auto finance companies are more heavily reliant on securitization than
commercial banks, we noted that changes in the trends in their
automobile loan rates could partially reflect the issues in
securitization markets that TALF is intended to address.[Footnote 99]
As figure 7 shows, the average finance company auto rate has been
consistently below commercial bank auto rates. However, from August to
November 2008 the average finance company rate increased significantly,
rising by 132 basis points, while the average bank rate increased just
slightly (13 basis points).[Footnote 100] In contrast, from November
2008 to February 2009, the finance company rate declined significantly
(326 basis points) to 3.2--well below the bank rate, which fell only 13
basis points. The average rate for new automobile loans at finance
companies declined another 43 basis points to 2.74 percent during
March.[Footnote 101] While these declines correlate with the launching
of TALF, the finance rate could also reflect the attempt by auto
finance companies to attract buyers in a weak market, as well as other
forces. We will continue to monitor these trends as well as data on
credit card debt and other consumer and business loan markets.
Moreover, because TALF has been expanded to other assets, including
commercial MBS, other measures of lending activity and loan rates may
become more appropriate indicators as time progresses.
Figure 7: Average Finance Rate for New Cars at Auto Finance Companies
and Banks, from February 1, 2006, through March 2009:
[Refer to PDF for image: multiple line graph]
Month and year: February 2006;
Bank auto rate: 7.39;
Finance company auto rate: 6.32.
Month and year: May 2006;
Bank auto rate: 7.6;
Finance company auto rate: 6.18.
Month and year: August 2006;
Bank auto rate: 7.95;
Finance company auto rate: 4.
Month and year: November 2006;
Bank auto rate: 7.92;
Finance company auto rate: 5.14.
Month and year: February 2007;
Bank auto rate: 7.74;
Finance company auto rate: 4.49.
Month and year: May 2007;
Bank auto rate: 7.92;
Finance company auto rate: 5.18.
Month and year: August 2007;
Bank auto rate: 7.82;
Finance company auto rate: 4.65.
Month and year: November 2007;
Bank auto rate: 7.59;
Finance company auto rate: 4.72.
Month and year: February 2008;
Bank auto rate: 7.27;
Finance company auto rate: 5.37.
Month and year: May 2008;
Bank auto rate: 6.84;
Finance company auto rate: 5.82.
Month and year: August 2008;
Bank auto rate: 6.92;
Finance company auto rate: 5.11.
Month and year: November 2008;
Bank auto rate: 7.05;
Finance company auto rate: 6.43.
Month and year: February 2009;
Bank auto rate: 6.92;
Finance company auto rate: 3.17.
Month and year: March 2009;
Finance company auto rate: 2.74.
Source: GAO analysis of Federal Reserve data.
Note: Bank finance rate reflects 48-month loans, while the average
maturity for the finance company rate is between 59 and 67 months.
[End of figure]
Conclusions:
Treasury has continued to take steps to refine some TARP programs and
finalize others. In doing so, it has taken steps to address our
previous recommendations. Some areas, however, require ongoing
attention. For example, Treasury has hired the asset managers that will
have a role in monitoring compliance with the terms of CPP and other
programs, but it is continuing to develop a comprehensive oversight
program for all TARP program recipients. Consistent with our
recommendation for greater disclosure of monies paid to Treasury by
TARP participants, Treasury now includes dividends and interest
received in its periodic reports to Congress that are also posted to
the [hyperlink, http://www.financialstaility.gov] Web site and plans to
provide dividend information by institution on the Web site. OFS has
also made progress in filling key positions in most areas but some
vacancies continue to be more challenging to fill. Finally, Treasury
has made additional progress in improving its communication strategy,
including hiring an individual who will be responsible for managing
OFS's relationships with Congress, among other duties, but continued
progress in this area would further improve the transparency of the
program. Appendix II provides our assessment of Treasury's
implementation of our previous recommendations.
Since our March 2009 report, Treasury has hired its first asset
managers to help manage its investment portfolio and help monitor
compliance with limitations on dividend payments and stock repurchases.
However, Treasury has yet to clearly identify the role that asset
managers will have in monitoring compliance; it has only noted that the
asset managers will have a limited role in the area of executive
compensation oversight. While hiring these managers is an important
step, Treasury has yet to develop a structured process to oversee
compliance with program requirements and the act. As noted in prior
reports, we will continue to monitor developments in this area, which
is critical to ensuring the accountability and integrity of the
program.
The Federal Reserve's completion of the stress tests for the 19 largest
bank holding companies was a significant milestone for CAP. While
stress test results revealed that about half of the banks needed to
raise additional capital to ensure their ability to continue lending to
creditworthy borrowers and maintain sufficient capital against losses,
it remains unclear whether any of the institutions will have to use CAP
to raise additional capital. The results of the stress test provided a
rare glimpse into the condition of these institutions, but questions
have been raised about the stress test assumptions, given the ongoing
challenges in financial markets. Moreover, the Federal Reserve does not
plan to provide any additional information on the condition of the
banks over the next 18 months that could show whether the banks had met
their projected performance and loss levels. The extent to which the
institutions will disclose additional information is unclear. As a
result, the information provided could be selective and difficult to
compare across institutions, raising questions not only about
transparency of SCAP but also CAP. Moreover, the Federal Reserve did
not provide OFS staff with information about SCAP prior to its public
release and has no plans to share ongoing information about any of the
SCAP institutions that continue to be CPP or CAP participants. Without
such information, OFS lacks information needed to adequately monitor
these programs.
Although several banks have repurchased or announced plans to
repurchase their preferred shares and warrants, the regulators'
repurchase approval criteria have lacked adequate transparency. The
Federal Reserve has provided criteria for the 19 largest bank holding
companies, but the other regulators have not consistently provided
details about how they have made repurchase determinations and how they
will make future determinations. Clearly articulated and consistently
applied criteria are indicative of a robust decision-making process,
and without them, Treasury's ability to help ensure consistent
treatment of institutions requesting repurchase of their shares is
limited.
Similarly, Treasury has provided limited information about the warrant
repurchase process on its [hyperlink,
http://www.financialstability.gov] Web site. We recognize the
challenges associated with valuing warrants in the absence of readily
available markets for these instruments. For this reason, and because
the valuation process can be assumption driven, a well-designed, fully
vetted transparent process becomes critical to defusing questions about
the warrant valuation process and whether the resulting prices paid by
the institutions reflect the taxpayers' best interests. While Treasury
has provided some limited information about the valuation process, it
has yet to provide the level of transparency at the transaction level
that would begin to address such questions. Additional information,
such as the institution's initial offer and Treasury's final valuation,
would begin to address some of these issues.
Treasury has taken steps toward implementing a communication strategy,
such as developing a new Web site and developing a media relations
position dedicated to TARP. Treasury has also included its public
affairs and legislative affairs staff in regular meetings with OFS to
ensure that communication and operations are better integrated.
However, Treasury's current communication strategy may not be as
effective as it could be. Treasury has recognized the importance of
reaching out to congressional stakeholders on a regular and proactive
basis and planned to do more to ensure that all committees of
jurisdiction receive regular communication about TARP. However, until
this strategy is fully implemented, congressional stakeholders may not
receive information in a consistent or timely manner. In addition,
although Treasury has said that the new [hyperlink,
http://www.financialstability.gov] Web site is a key component of its
efforts to improve communication on TARP, it has not yet taken steps to
determine whether the site is user-friendly or whether visitors to the
site are finding the information they seek. Usability testing and
customer satisfaction surveys are recognized best practices for
improving the usefulness of Web sites. While Treasury is in the process
of exploring the use of such tools, these efforts should be implemented
as quickly as possible to gauge the effectiveness of its communication
efforts.
Treasury has continued to make progress in establishing its management
infrastructure and has responded to our two most recent contracting
recommendations and continued to respond to the others.
* In the hiring area, Treasury has continued to establish 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 March 2009 report, Treasury has continued to increase the total
number of OFS staff overall, including the number of permanent staff.
However, continued attention to hiring remains important because some
offices within OFS, such as the offices of Homeownership and Risk and
Compliance, continue to have a number of vacancies that need to be
filled as TARP programs become fully implemented.
* In the internal controls area, consistent with our previous report
recommendation that Treasury update guidance available to the public on
determining warrant exercise prices to be consistent with actual
practices applied by OFS, Treasury updated its frequently asked
questions on its Web site to clarify the process it follows for
determining the prices. However, there continues to be inconsistent
guidance available on the Web site for calculating the exercise prices.
Treasury told us that any new CPP applicants would most likely be non-
public institutions for which these guidance documents would not apply.
As such, Treasury does not believe the inconsistent guidance is a
significant issue and therefore does not plan on further addressing the
inconsistency. If this warrant exercise price guidance is no longer
needed, then we believe that Treasury should remove these guidance
documents from its Web site to alleviate any inconsistent descriptions
of its process pertaining to warrant exercise price calculations for
public institutions. If Treasury chooses to leave the documents on its
Web site, then, as we previously recommended, Treasury should make
these documents consistent with respect to the warrant exercise price
calculations.
* Treasury has continued to build a network of contractors and
financial agents to support TARP administration and operations and has
an opportunity to enhance transparency through its existing reporting
mechanisms. Treasury issues a number of reports and uses other
mechanisms, such as public announcements and its Web site, to provide
information to the public. Useful details are still lacking, however,
on the costs of procurement contracts and financial agency agreements,
such as a breakdown obligated and expenses for each entity. These
contracts and agreements are key tools OFS has used to help develop and
administer its TARP programs. By not providing this information,
Treasury is missing an opportunity to provide additional transparency
about the cost of TARP operations.
Finally, while again noting the difficulty of measuring the effect of
TARP's activities, some indicators suggest general improvements in
various markets since our March 2009 report although the cost of credit
has risen in some cases. Specifically, the Baa corporate bond rate and
LIBOR have declined but mortgage and Aaa bond rates have risen.
However, perceptions of risk in credit markets (as measured by premiums
over Treasury securities) have decreased in interbank, mortgage, and
corporate bond markets, while total mortgage originations have
increased. Empirical analysis of the interbank market, which showed
signs of significant stress in 2008, suggests that CPP and other
programs outside of TARP that were announced in October 2008 resulted
in a statistically significant improvement in risk spreads, even when
other important factors were considered. In addition, although Federal
Reserve survey data suggest that lending standards remained tight,
collectively the largest CPP recipients extended roughly $260 billion
on average each month in new loans to consumers and businesses in the
first quarter of 2009, according to the Treasury's 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.
Recommendations for Executive Action:
While the Department of the Treasury has taken actions to address our
previous recommendations, we continue to identify areas that warrant
ongoing attention and focus. Therefore, we recommend that Treasury take
the following five actions as it continues to improve TARP and make it
more accountable and transparent:
* Ensure that the warrant valuation process maximizes benefits to
taxpayers and consider publicly disclosing additional details regarding
the warrant repurchase process, such as the initial price offered by
the issuing entity and Treasury's independent valuations, to
demonstrate Treasury's attempts to maximize the benefit received for
the warrants on behalf of the taxpayer.
* In consultation with the Chairmen of the Federal Deposit Insurance
Corporation and the Federal Reserve, the Comptroller of the Currency,
and the Acting Director of the Office of Thrift Supervision, ensure
consideration of generally consistent criteria by the primary federal
regulators when considering repurchase decisions under TARP.
* Fully implement a communication strategy that ensures that all key
congressional stakeholders are adequately informed and kept up to date
about TARP.
* Expedite efforts to conduct usability testing to measure the quality
of users' experiences with the financial stability Web site and measure
customer satisfaction with the site, using appropriate tools such as
online surveys, focus groups, and e-mail feedback forms.
* Explore options for providing to the public more detailed information
on the costs of TARP contracts and agreements, such as a dollar
breakdown of obligations and/or expenses.
Finally, to help improve the transparency of CAP--in particular the
stress tests results--we recommend that the Director of Supervision and
Regulation of the Federal Reserve consider periodically disclosing to
the public the aggregate performance of the 19 bank holding companies
against the more adverse scenario forecast numbers for the duration of
the 2-year forecast period and whether or not the scenario needs to be
revised. At a minimum, the Federal Reserve should provide the aggregate
performance data to OFS program staff for any of the 19 institutions
participating in CAP or CPP.
Agency Comments and Our Evaluation:
We provided a draft of this report to Treasury for review and comment.
We also provided excerpts of the draft to the FDIC, Federal Reserve,
OCC, and OTS. We received written comments from Treasury that are
reprinted in Appendix I. The Federal Reserve provided oral comments,
which we discuss later. We also received technical comments from
Treasury, the Federal Reserve, and FDIC that we incorporated, as
appropriate.
In its written comments, Treasury described steps it had taken in the
last 60 days to address the extraordinary economic challenges,
including the Treasury financed restructurings of GM and Chrysler among
others. Treasury also noted the progress it has made in addressing our
previous recommendations. It also noted that the recommendations in
this report were constructive as it implements its programs and
enhances OFS's performance. Moreover, they said several initiatives
underway are consistent with our recommendations. According to
Treasury, among other things, it is in the process of expanding its
public disclosure about the warrant repurchase process, implementing a
communication strategy that will provide all key congressional
stakeholders more current information about TARP, and planning a
usability test to measure satisfaction with its new Web site. We will
continue to monitor Treasury's progress in implementing these and other
planned initiatives in future reports.
On June 12 and 15, 2009, we received oral comments from the Senior
Advisor to the Director of the Division of Banking Supervision and
Regulation on excerpts of the draft pertaining to the Federal Reserve.
The official expressed concern that our recommendation to consider
periodically disclosing aggregate information to the public on the
performance of the 19 U.S. bank holding companies against the more
adverse scenario would be operationally difficult and potentially
misleading. Specifically, the official said the SCAP loss estimates
were developed as aggregate 2-year estimates, without attempting to
forecast the quarter-to-quarter path of such losses over the 2009 to
2010 period. Further, the official expressed concern that the size and
character of the bank holding companies' on-and off-balance sheet
exposures may change materially over the 2-year period and that the
Federal Reserve never intended that the one-time SCAP estimates be used
as a tool for measuring U.S. bank holding company performance during
the 2009 to 2010 period.
We understand that while this analysis would pose some operational
challenges for the Federal Reserve because the exercise was intended to
calculate a one-time capital buffer needed to withstand a more adverse
economic scenario and that the on-and off-balance sheet exposure of the
19 institutions may change materially over time. However, given the
dynamic economic environment, we see great value in periodically
measuring and reporting U.S. bank holding company performance against
the adverse scenario and whether the adverse scenario is more or less
adverse compared against changing economic conditions. Although this
would periodically require additional calculations, we believe this
analysis would provide useful trend information on the aggregate health
of these important institutions. As we previously stated, without such
analysis, the public will not have reliable information that can be
used to gauge the accuracy of the stress test projections on a more
detailed basis than what has been disclosed in the SCAP papers.
Further, it could counter any adverse affect of any selective reporting
by individual institutions. Finally, such periodic reporting would be
useful in the measurement of the effectiveness of SCAP and CAP.
We are sending copies of this report to the Congressional Oversight
Panel, Financial Stability Oversight Board, Special Inspector General
for TARP, 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 staffs 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
Williams Brown 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 VI.
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:
Washington, D.C. 20220:
June 15, 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 June 2009 Status of Efforts to Address Transparency
and Accountability Issues. Treasury welcomes the recognition by the GAO
that Treasury "has taken steps to address our previous recommendations"
as it continues to refine, finalize and implement its financial
stability programs and improve the Office of Financial Stability's
(OFS) procedures and operations. 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 financial sector and economic challenges. In
order to prevent collapse of the systemically significant automotive
industry, Treasury financed the restructurings of General Motors and
Chrysler, and provided support for their automotive suppliers, vehicle
warranties and automotive finance companies. The Term Asset Backed
Lending Facility (TALF), which has already stimulated increased
securitization activity, was expanded to provide liquidity for
commercial mortgage loans and insurance premium financing, and TALF
loan terms were extended for certain asset classes. Treasury finalized
and completed transactions that improved the capital structures of AIG
and Citigroup and made available additional capital to AIG. Treasury
also made significant progress toward selecting fund managers and
finalizing investment terms and conflict rules for Public-Private
Investment Partnerships, which are intended to catalyze markets for the
legacy assets that currently clog bank balance sheets. In addition to
launching these new programs, Treasury continued to make investments in
viable institutions through the Capital Purchase Program, while
extending the application deadline and increasing maximum funding
levels for small banks and finalizing investment terms for mutual
institutions.
In taking these 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. Notably, Treasury expanded
its lending survey of CPP participants to include all CPP banks,
meeting a key GAO request, while continuing to publish and also expand
its survey on the lending and intermediation activities of the largest
banks. Treasury also made considerable progress on other GAO
recommendations, including the following important measures: OFS
increased its permanent staff by more than 50%; refined and began using
its internal controls framework to guide establishment of controls for
new programs; developed a prioritized risk matrix and began
implementing plans to eliminate or mitigate risks; hired and trained
additional staff to oversee contractor performance; renegotiated
contracts to standardize conflict-of-interest requirements and
formalized procedures for dealing with conflict-of-interest inquiries.
Treasury also continued to make progress on the GAO recommendation to
improve its communications with Congress and the public. In addition to
expanding the content of Treasury's FinancialStability.gov website,
Treasury became more proactive in briefing its oversight bodies and
Congress, including by conducting pre-release briefings on stress test
results, auto industry announcements, and program design issues and
initiating what is expected to be a series of regular monthly briefings
for Congressional staff.
The recommendations in GAO's latest report are constructive as Treasury
continues to implement its financial stability programs and enhance OFS
performance. The GAO recommendations also track several initiatives
that Treasury is already undertaking. Among other things, Treasury is
in the process of preparing expanded public disclosure about the
warrant repurchase process, implementing a communication strategy that
will provide all key congressional stakeholders more current
information about TARP, and planning for usability testing to measure
customer satisfaction with its new Web site.
Once again, Treasury appreciates the opportunity to review the report
and GAO's thoughtful recommendations. We look forward to demonstrating
further progress in your next report.
Sincerely,
Signed by:
Duane D. Morse:
Chief Risk and Compliance Officer:
[End of section]
Appendix II: Status of Prior GAO Recommendations:
December 2, 2008, report:
GAO recommendation: Work with the bank regulators to establish a
systematic means of monitoring and reporting whether financial
institutions' activities are generally consistent with the purposes of
CPP and help ensure an appropriate level of accountability and
transparency;
Status: Implemented.
GAO recommendation: Develop a means to ensure that institutions
participating in CPP comply with key program requirements (for example,
executive compensation, dividend payments, and the repurchase of
stock);
Status: Partially implemented.
GAO recommendation: Formalize the existing communication strategy to
ensure that external stakeholders, including Congress, are informed
about the program's current strategy and activities and understand the
rationale for changes in this strategy to avoid information gaps and
surprises;
Status: Partially implemented.
GAO recommendation: Facilitate a smooth transition to the new
administration by building on and formalizing ongoing activities,
including ensuring that key Office of Financial Stability (OFS)
leadership positions are filled during and after the transition;
Status: Implemented.
GAO recommendation: Expedite OFS's hiring efforts to ensure that
Treasury has the personnel needed to carry out and oversee Troubled
Asset Relief Program (TARP);
Status: Partially implemented.
GAO recommendation: 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;
Status: Implemented.
GAO recommendation: Continue to develop a comprehensive system of
internal control over TARP, including policies, procedures, and
guidance that are robust enough to protect taxpayers' interests and
ensure that the program objectives are being met;
Status: Partially implemented.
GAO recommendation: Issue final regulations on conflicts of interest
involving Treasury's financial agents, contractors, and their employees
and related entities as expeditiously as possible, and review and
renegotiate vendor mitigation plans, as necessary, to enhance
specificity and compliance with the new regulations once they are
issued;
Status: Partially implemented.
GAO recommendation: Institute a system to effectively manage and
monitor the mitigation of vendor-related conflicts of interest;
Status: Implemented.
January 30, 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 vendor 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: Partially implemented.
March 31, 2009 report:
GAO recommendation: 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 advisers, and leveraging available
technology;
Status: Partially implemented.
GAO recommendation: 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;
Status: Closed, not implemented.
GAO recommendation: 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;
Status: Partially implemented.
GAO recommendation: Improve transparency pertaining to TARP program
activities by reporting publicly the monies, such as dividends, paid to
Treasury by TARP participants;
Status: Implemented.
GAO recommendation: 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;
Status: Partially implemented.
GAO recommendation: Issue guidance requiring that key communications
and decisions concerning potential or actual vendor-related conflicts
of interest be documented;
Status: Partially implemented.
Source: GAO.
[End of table]
[End of section]
Appendix III: Econometric Analysis of TED Spread:
We conducted an econometric analysis to assess the impact of Capital
Purchase Program (CPP) on the TED spread. Our multivariate econometric
model uses a standard interrupted time series design using daily data
on the TED spread. In lieu of relying on graphing and identifying
trends in the data before and after the announcement, the goal of this
exercise was to determine whether the large decline in the TED spread
could be associated with CPP in a statistically significant way when
other important variables were also considered, including a time trend
and a variable thought to control for the tendency of extreme values to
revert to more normal levels. To carry out the exercise as validly as
possible, we conducted tests to ensure the stationarity of the
variables in the model, used heteroskedasticity and autocorrelation-
consistent (HAC) standard errors and conducted sensitivity analysis.
[Footnote 102]
The primary regressions model changes in the TED spread as a function
of lagged values of changes in the term structure (spread between short-
and long-term bonds), default spread (spread between lower quality and
higher quality bonds), target federal funds rate, and the S&P 500, as
well as a variable that indicates whether CPP was in place (starting
with the announcement date). We also include a time trend, an indicator
variable that indicates whether the TED spread was at an extreme value
the day before (defined as 200 basis points or greater) and a counter
variable that indicated the number of consecutive days, including the
day in question, that the TED spread had taken on an extreme value. The
latter variable was included to control for a potential "regression to
the mean" effect. As a robustness check, we also ran a variation of the
model using a two-step procedure where we (1) extract the predictable
component from the TED spread, term structure and default risk premium
and (2) use the unpredicted spreads in the regression. We also ran the
model on various time periods. In all cases, we found CPP to have a
statistically significant impact on the TED spread. However, it should
be noted that we did not attempt to capture all potential factors that
might explain movements in the TED spread, and, therefore, omitted
variable bias remains a concern. Moreover, since other programs were
put in place from October 2008 to February 2009, further analysis that
attempts to control for these interventions would provide more
definitive results.
[End of section]
Appendix IV: Overview of Treasury's CPP Repurchase Process:
As participants have started to repay their assistance as permitted by
the Emergency Economic Stabilization Act of 2008 (the act), as amended
by the American Recovery and Reinvestment Act of 2009, the Department
of the Treasury (Treasury) has developed standard processes for each
type of security. The following provides an overview of the repurchase
process for preferred shares and subordinated debt and warrants.
Preferred Stock and Subordinated Debt Repurchase Process:
In a repurchase, the financial institution buys back preferred stock or
subordinated debt from Treasury that was issued under Treasury's
Capital Purchase Program (CPP) to stabilize the financial system. Under
the original terms of CPP, financial institutions were prohibited from
repurchasing such stock and debt within the first 3 years unless they
completed a qualified equity offering.[Footnote 103] Under the act, as
amended, Treasury must permit a financial institution to repurchase the
preferred stock or subordinated debt issued to Treasury at any time,
subject to Treasury's consultation with the primary federal banking
regulator. In Treasury's public guidance (FAQs) on repurchases, it
states that financial institutions should give notice of their intent
to repurchase to their primary banking regulator, which will apply
existing supervisory procedures to determine whether to approve the
repurchase.
As shown in figure 8, the process begins when Treasury and the primary
federal regulator receive written notification (e-mail or letter) from
the financial institution of its intent to repurchase in full or in
part its preferred stock or other securities from Treasury. The primary
federal regulator performs an analysis using available supervisory
information and information provided by the institution to gauge its
current financial condition and prospects, such as whether there has
been a significant change in a financial institution's financial
condition and viability since it received CPP funds. This analysis
allows the regulator to determine if the repurchase request should be
approved or denied. In addition, the 19 largest U.S. bank holding
companies that were subject to the stress test must also be able to
demonstrate access to common equity through public issuance in the
equity capital markets, and successfully issue senior unsecured debt
for a term greater than 5 years and not backed by Federal Deposit
Insurance Corporation (FDIC) guarantees, in amounts sufficient to
demonstrate a capacity to meet funding needs independent of FDIC
guarantees. According to Treasury, the consultation consists of the
primary federal regulator informing Treasury of its decision to approve
or deny the request via e-mail. If the federal regulator of the entity
that issued the preferred stock or other securities to the Treasury
indicates it has no objection to, or approves of, the repurchase,
Treasury then notifies in writing the financial institution that the
repurchase is in process and instructs the financial institution to
contact its Treasury counsel to set up dates for closing and
settlement. If the repurchase is denied, Treasury notifies the
institution.
Figure 8: Treasury's Repurchase Process:
[Refer to PDF for image: illustration]
Financial institution (FI):
(A) Notice of repurchase of preferred stock or subordinated debt: sent
to treasury and Federal regulator.
* Treasury:
- FI preferred stock or subordinated debt;
- FI warrants.
(B) Federal regulator: Regulator analyzes financial condition and
viability of institution since CPP funds were received.[A] Approval or
denial of request is e-mailed to Treasury.
(C) Treasury notifies institution that the repurchase is in process and
instructs institution to contact Treasury counsel to set up dates for
closing and settlement.
(D) Does institution want to repurchase warrants?
If no: Treasury may liquidate registered warrants;
If yes: Notice is sent to Treasury.
(E) Treasury and institution calculate fair market value (FMV) of
warrants. They have 10 days to agree on FMV. If they agree, the
warrants are sold; if they disagree, they have 20 days to invoke the
appraisal process.
Sources: GAO; Art Explosion.
[A] The 19 largest bank holding companies must also demonstrate their
financial strength by issuing senior unsecured debt for a term greater
than 5 years not backed by FDIC guarantees, in amounts sufficient to
demonstrate a capacity to meet funding needs independent of FDIC
guarantees.
[End of figure]
All four primary federal regulators noted that their role in the
repurchase process followed existing regulations and procedures for
evaluating requests by any financial institution regardless of whether
they participate in CPP. The Federal Reserve has established
instructions for processing capital repurchase requests for CPP and
other government capital programs by bank holding companies.[Footnote
104] For the 19 U.S. bank holding companies that participated in the
Supervisory Capital Assessment Program, on June 1, 2009, the Federal
Reserve released the criteria it planned to use to evaluate
applications to repurchase Treasury's capital investments. The Federal
Reserve in consultation with the U.S. bank holding companies' primary
bank regulator and FDIC informed Treasury on June 9, 2009, that it had
no objection to the repurchase of preferred shares by 9 of the SCAP
bank holding companies. Also on June 9, 2009, Treasury announced that
these 9 U.S. bank holding companies, and one other large institution,
met the requirements for repayment and would be eligible to repay about
$68 billion to Treasury. An Office of Financial Stability official
noted that Treasury plays a limited role in this determination process.
Warrant Repurchase Process:
If a financial institution repurchases all of its senior preferred
shares, it can repurchase some or all of its other equity securities
held by Treasury. The treatment of warrants differs in the standard
securities purchase agreements, depending on whether the firm that
issues the warrants is privately held or publicly traded. For privately
held institutions, Treasury immediately exercises the warrants at the
time of the capital investment and receives additional preferred
shares. The financial institution repurchases these warrant preferred
shares after it repurchases the senior preferred shares from Treasury.
Publicly traded institutions have the option to repurchase outstanding
and unexercised warrants after the senior preferred shares are
repurchased. Although Treasury can sell the warrants at any time,
Treasury is required to notify the financial institution 30 days prior
to a sale. Following a repurchase of the senior preferred shares held
by Treasury, an institution can repurchase the warrants at fair market
value (FMV), as defined in section 4.9 of the Securities Purchase
Agreement. If the financial institution chooses not to repurchase the
warrants, Treasury may liquidate the registered warrants.
According to the Securities Purchase Agreement, financial institutions
have 15 days from the date of a repurchase of preferred stock to give
notice to Treasury of the intent to repurchase the warrants that were
originally issued with the stock. If the financial institution does not
wish to repurchase the outstanding warrants, Treasury may proceed with
liquidating the warrants at the current market price. If the financial
institution decides to repurchase the warrants, the institution's board
of directors determines the FMV, acting in good faith and relying on an
opinion of a nationally recognized independent investment banking firm
retained by the financial institution for such purpose and certified in
a resolution to Treasury. Through the use of market quotes from market
participants, financial modeling, fundamental research, and a third-
party consultation, Treasury makes an independent determination of the
FMV of the warrants. If Treasury does not agree with the financial
institution's determination, it may object in writing within 10 days of
receipt of the financial institution's FMV determination, and the two
parties must work together to resolve any issues and agree on an FMV.
If they are unable to agree on an FMV in 10 days, either party has 20
more days to invoke the appraisal procedure by delivery of written
notice.
Under the appraisal procedure, Treasury and the financial institution
each choose an independent appraiser to determine the estimated FMV and
notify each other of their choices within 10 days. If the two
appraisers are unable to agree upon an FMV for the warrants within 30
days of their appointment, the appraisers have 10 additional days to
select and appoint a third independent appraiser. The third appraiser
then has 30 days to render its estimated FMV. The three estimated FMVs
are to be averaged unless the larger of the differences between the
higher FMV and middle valuations and the middle and lower valuations is
more than 200 percent of the smaller difference. If the larger
difference exceeds 200 percent of the smaller, the outlying valuation
that triggers the exception is to be excluded and the remaining two are
to be averaged.[Footnote 105] The average will become the binding FMV
for Treasury and the financial institution; the financial institution
will be responsible for paying the costs of the appraisal procedure.
[End of section]
Appendix V: Synopsis of Citigroup's Financial Condition:
Citigroup, Inc. (Citigroup) is one of the few institutions that has
participated in multiple Troubled Asset Relief Program (TARP) programs.
As of June 12, 2009, it is participating in the Capital Purchase
Program (CPP), the Targeted Investment Program (TIP), and the Asset
Guarantee Program (AGP). Its participation in multiple programs has
raised a number of questions about Citigroup's financial condition. To
analyze Citigroup's financial condition, we compared Citigroup with
three similar institutions that also received initial TARP funds
through CPP in October 2008: Bank of America Corporation, JPMorgan
Chase, and Wells Fargo Company.[Footnote 106] As of March 31, 2009,
these four institutions were the largest U.S. bank holding companies.
This appendix compares selected data on Citigroup's financial condition
from 2007 through the first quarter 2009 with that of the other three
bank holding companies.[Footnote 107] Regarding net income, during all
four quarters of 2008, Citigroup recorded growing losses, while the
other three bank holding companies continued to record profits. By the
fourth quarter of 2008, Citigroup's quarterly loss had increased to $27
billion (see figure 9).
Figure 9: Net Income (Loss) of the Four Largest U.S. Bank Holding
Companies, First Quarter of 2007 through First Quarter of 2009:
[Refer to PDF for image: multiple line graph]
Year and quarter: 2007, Q1;
Citigroup: $5.0 billion;
Bank of America: $5.3 billion;
JP Morgan Chase and Company: $4.8 billion;
Wells Fargo and Company: $2.2 billion.
Year and quarter: 2007, Q2;
Citigroup: $11.2 billion;
Bank of America: $11.0 billion;
JP Morgan Chase and Company: $9.0 billion;
Wells Fargo and Company: $4.5 billion.
Year and quarter: 2007, Q3;
Citigroup: $13.4 billion;
Bank of America: $14.7 billion;
JP Morgan Chase and Company: $12.4 billion;
Wells Fargo and Company: $6.8 billion.
Year and quarter: 2007, Q4;
Citigroup: $3.6 billion;
Bank of America: $14.9 billion;
JP Morgan Chase and Company: $15.4 billion;
Wells Fargo and Company: $8.1 billion.
Year and quarter: 2008, Q1;
Citigroup: -$5.1 billion;
Bank of America: $1.2 billion;
JP Morgan Chase and Company: $2.4 billion;
Wells Fargo and Company: $2.0 billion.
Year and quarter: 2008, Q2;
Citigroup: -$7.6 billion;
Bank of America: $4.6 billion;
JP Morgan Chase and Company: $4.4 billion;
Wells Fargo and Company: $3.8 billion.
Year and quarter: 2008, Q3;
Citigroup: -$10.4 billion;
Bank of America: $5.8 billion;
JP Morgan Chase and Company: $4.9 billion;
Wells Fargo and Company: $5.4 billion.
Year and quarter: 2008, Q4;
Citigroup: -$27.7 billion;
Bank of America: $4.0 billion;
JP Morgan Chase and Company: $5.6 billion;
Wells Fargo and Company: $2.7 billion.
Year and quarter: 2009, Q1;
Citigroup: $1.6 billion;
Bank of America: $4.2 billion;
JP Morgan Chase and Company: $2.1 billion;
Wells Fargo and Company: $3.0 billion.
Source: GAO analysis of data from Consolidated Financial Statements for
Bank Holding Companies, FR Y-9C from First Quarter 2007 through First
Quarter 2009, Board of Governors of the Federal Reserve System.
[End of figure]
Since the beginning of 2007, all four of the bank holding companies
experienced a decline in the market value of their equity as a
percentage of their total assets (see figure 10).[Footnote 108]
However, since the beginning of 2008, Citigroup's ratio has been the
lowest of the four.
Figure 10: Market Value of Equity (Common) as Percentage of Total
Assets of the Four Largest U.S. Bank Holding Companies, First Quarter
of 2007 through First Quarter of 2009:
[Refer to PDF for image: multiple line graph]
Year and quarter: 2007, Q1;
Citigroup: 14%;
Bank of America: 16%;
JP Morgan Chase and Company: 12%;
Wells Fargo and Company: 25%.
Year and quarter: 2007, Q2;
Citigroup: 11%;
Bank of America: 15%;
JP Morgan Chase and Company: 11%;
Wells Fargo and Company: 21%.
Year and quarter: 2007, Q3;
Citigroup: 11%;
Bank of America: 14%;
JP Morgan Chase and Company: 11%;
Wells Fargo and Company: 22%.
Year and quarter: 2007, Q4;
Citigroup: 11%;
Bank of America: 13%;
JP Morgan Chase and Company: 10%;
Wells Fargo and Company: 22%.
Year and quarter: 2008, Q1;
Citigroup: 7%;
Bank of America: 11%;
JP Morgan Chase and Company: 9%;
Wells Fargo and Company: 17%.
Year and quarter: 2008, Q2;
Citigroup: 6%;
Bank of America: 11%;
JP Morgan Chase and Company: 9%;
Wells Fargo and Company: 17%.
Year and quarter: 2008, Q3;
Citigroup: 5%;
Bank of America: 6%;
JP Morgan Chase and Company: 5%;
Wells Fargo and Company: 13%.
Year and quarter: 2008, Q4;
Citigroup: 6%;
Bank of America: 1%;
JP Morgan Chase and Company: 9%;
Wells Fargo and Company: 9%.
Year and quarter: 2009, Q1;
Citigroup: 2%;
Bank of America: 4%;
JP Morgan Chase and Company: 6%;
Wells Fargo and Company: 9%.
Source: GAO analysis of Thomson Datastream data.
[End of figure]
We also reviewed the four bank holding companies' debt-to-equity ratios
for the same period.[Footnote 109] We calculated the debt-to-equity
ratio as the holding company liabilities or debt divided by the equity
shareholder funds. A higher ratio generally indicates a higher amount
of financing with debt. Citigroup's debt-to-equity ratio was
significantly higher than the other three holding companies' ratios, as
shown in figure 11. From the fourth quarter 2008 through the first
quarter 2009, Citigroup's ratio increased slightly from 9.4:1 to about
9.5:1.
Figure 11: The Ratio of Debt to Equity of the Four Largest U.S. Bank
Holding Companies, First Quarter of 2007 through First Quarter of 2009:
[Refer to PDF for image: multiple line graph]
Debt-to-equity ratio:
Year and quarter: 2007, Q1;
Citigroup: 6.74;
Bank of America: 4.12;
JP Morgan Chase and Company: 3.56;
Wells Fargo and Company: 2.28.
Year and quarter: 2007, Q2;
Citigroup: 7.09;
Bank of America: 4.14;
JP Morgan Chase and Company: 3.63;
Wells Fargo and Company: 2.89.
Year and quarter: 2007, Q3;
Citigroup: 7.88;
Bank of America: 4.34;
JP Morgan Chase and Company: 3.61;
Wells Fargo and Company: 2.91.
Year and quarter: 2007, Q4;
Citigroup: 7.14;
Bank of America: 4.28;
JP Morgan Chase and Company: 3.50;
Wells Fargo and Company: 3.26.
Year and quarter: 2008, Q1;
Citigroup: 7.72;
Bank of America: 4.41;
JP Morgan Chase and Company: 3.80;
Wells Fargo and Company: 3.32.
Year and quarter: 2008, Q2;
Citigroup: 7.14;
Bank of America: 4.49;
JP Morgan Chase and Company: 4.28;
Wells Fargo and Company: 4.02.
Year and quarter: 2008, Q3;
Citigroup: 7.59;
Bank of America: 4.60;
JP Morgan Chase and Company: 5.10;
Wells Fargo and Company: 4.16.
Year and quarter: 2008, Q4;
Citigroup: 9.44;
Bank of America: 4.59;
JP Morgan Chase and Company: 4.69;
Wells Fargo and Company: 5.54.
Year and quarter: 2009, Q1;
Citigroup: 9.52;
Bank of America: 5.25;
JP Morgan Chase and Company: 4.97;
Wells Fargo and Company: 4.69.
Source: GAO analysis of Thomson Datastream data.
[End of figure]
One indicator of capital adequacy is the tier 1 risk-based capital
ratio.[Footnote 110] Using this measure, before TARP funding,
Citigroup's tier 1 capital ratio was similar to that of the three other
large bank holding companies (see figure 12). In the third quarter of
2008, the capital ratios of the four bank holding companies ranged from
8.9 percent to 7.6 percent, with Citigroup reporting a tier 1 risk-
based capital ratio of 8.2 percent.
Figure 12: Tier 1 Risk-Based Capital Ratio of the Four Largest U.S.
Bank Holding Companies, First Quarter of 2007 through First Quarter of
2009:
[Refer to PDF for image: multiple vertical bar graph]
Year and end of quarter: 2007, Q1;
Citigroup: 8.26;
Bank of America: 8.57;
JP Morgan Chase and Company: 8.48;
Wells Fargo and Company: 8.7.
Year and end of quarter: 2007, Q2;
Citigroup: 7.91;
Bank of America: 8.52;
JP Morgan Chase and Company: 8.38;
Wells Fargo and Company: 8.57.
Year and end of quarter: 2007, Q3;
Citigroup: 7.32;
Bank of America: 8.22;
JP Morgan Chase and Company: 8.37;
Wells Fargo and Company: 8.21.
Year and end of quarter: 2007, Q4;
Citigroup: 7.12;
Bank of America: 6.87;
JP Morgan Chase and Company: 8.44;
Wells Fargo and Company: 7.59.
Year and end of quarter: 2008, Q1;
Citigroup: 7.71;
Bank of America: 7.5;
JP Morgan Chase and Company: 8.33;
Wells Fargo and Company: 7.92.
Year and end of quarter: 2008, Q2;
Citigroup: 8.74;
Bank of America: 8.25;
JP Morgan Chase and Company: 9.15;
Wells Fargo and Company: 8.24.
Year and end of quarter: 2008, Q3;
Citigroup: 8.19;
Bank of America: 7.55;
JP Morgan Chase and Company: 8.85;
Wells Fargo and Company: 8.59.
Year and end of quarter: 2008, Q4;
Citigroup: 11.92;
Bank of America: 9.15;
JP Morgan Chase and Company: 10.94;
Wells Fargo and Company: 7.84.
Year and end of quarter: 2009, Q1;
Citigroup: 11.92;
Bank of America: 10.09;
JP Morgan Chase and Company: 11.36;
Wells Fargo and Company: 8.3.
Source: GAO analysis of data from Consolidated Financial Statements for
Bank Holding Companies, FR Y-9C from First Quarter 2007 through First
Quarter 2009, Board of Governors of the Federal Reserve
System.
[End of figure]
A different measure of capital adequacy is the tier 1 leverage ratio.
[Footnote 111] Using this measure, Citigroup had the lowest ratio for
the entire period compared with the other three bank holding companies.
Citigroup's tier 1 leverage ratio ranged from a low of about 4 percent
in the fourth quarter of 2007 to a high of just over 6.6 percent in the
first quarter of 2009. In the third quarter of 2008 and before TARP
funding, Bank of America, JPMorgan Chase, and Wells Fargo reported
their tier 1 leverage ratio as 5.5 percent, 7.2 percent, and 7.5
percent, respectively, while Citigroup reported a tier 1 leverage ratio
of 4.7 percent as show in figure 13.
Figure 13: Tier 1 Leverage Capital Ratio of the Four Largest Bank
Holding Companies, First Quarter of 2007 through First Quarter of 2009:
[Refer to PDF for image: multiple vertical bar graph]
Year and end of quarter: 2007, Q1;
Citigroup: 4.84;
Bank of America: 6.25;
JP Morgan Chase and Company: 6.23;
Wells Fargo and Company: 7.83.
Year and end of quarter: 2007, Q2;
Citigroup: 4.37;
Bank of America: 6.33;
JP Morgan Chase and Company: 6.18;
Wells Fargo and Company: 7.9.
Year and end of quarter: 2007, Q3;
Citigroup: 4.13;
Bank of America: 6.2;
JP Morgan Chase and Company: 6.05;
Wells Fargo and Company: 7.29.
Year and end of quarter: 2007, Q4;
Citigroup: 4.03;
Bank of America: 5.04;
JP Morgan Chase and Company: 6.02;
Wells Fargo and Company: 6.83.
Year and end of quarter: 2008, Q1;
Citigroup: 4.45;
Bank of America: 5.59;
JP Morgan Chase and Company: 5.95;
Wells Fargo and Company: 7.04.
Year and end of quarter: 2008, Q2;
Citigroup: 5.04;
Bank of America: 6.07;
JP Morgan Chase and Company: 6.43;
Wells Fargo and Company: 7.35.
Year and end of quarter: 2008, Q3;
Citigroup: 4.7;
Bank of America: 5.51;
JP Morgan Chase and Company: 7.18;
Wells Fargo and Company: 7.54.
Year and end of quarter: 2008, Q4;
Citigroup: 6.08;
Bank of America: 6.45;
JP Morgan Chase and Company: 6.92;
Wells Fargo and Company: 14.52.
Year and end of quarter: 2009, Q1;
Citigroup: 6.6;
Bank of America: 7.07;
JP Morgan Chase and Company: 7.13;
Wells Fargo and Company: 7.09.
Source: GAO analysis of data from Consolidated Financial Statements for
Bank Holding Companies, FR Y-9C from First Quarter 2007 through First
Quarter 2009, Board of Governors of the Federal Reserve System.
[End of figure]
In addition to capital, a bank holding company has a cushion against
losses in its "allowance for loan and lease losses" (ALLL), which must
be maintained by the bank holding company to cover expected losses in
its loan and lease portfolio.[Footnote 112] For Citigroup and the other
three companies, we examined the data on assets that already reflected
repayment problems ("nonaccrual loans" plus "other real estate owned")
and compared this to the companies' tier 1 capital plus ALLL.[Footnote
113] The data for the first quarter 2007 through the first quarter 2009
are shown in figure 14. Throughout this period, Citigroup's assets with
repayment problems as a percentage of this cushion was consistently
higher than that of the other three bank holding companies.
Figure 14: Selected Problem Assets as a Percentage of Tier 1 Capital
and Loan Loss Allocation, First Quarter of 2007 through First Quarter
of 2009:
[Refer to PDF for image: multiple line graph]
Year and quarter: 2007, Q1;
Citigroup: 8%;
Bank of America: 2.3%;
JP Morgan Chase and Company: 6.2%;
Wells Fargo and Company: 6.3%.
Year and quarter: 2007, Q2;
Citigroup: 8.8%;
Bank of America: 2.5%;
JP Morgan Chase and Company: 6.4%;
Wells Fargo and Company: 6.1%.
Year and quarter: 2007, Q3;
Citigroup: 10.8%;
Bank of America: 3.6%;
JP Morgan Chase and Company: 7.5%;
Wells Fargo and Company: 7.2%.
Year and quarter: 2007, Q4;
Citigroup: 13.5%;
Bank of America: 6.6%;
JP Morgan Chase and Company: 8.7%;
Wells Fargo and Company: 8.9%.
Year and quarter: 2008, Q1;
Citigroup: 13.5%;
Bank of America: 8.2%;
JP Morgan Chase and Company: 9.4%;
Wells Fargo and Company: 9.8%.
Year and quarter: 2008, Q2;
Citigroup: 14.9%;
Bank of America: 9.1%;
JP Morgan Chase and Company: 9.4%;
Wells Fargo and Company: 10.3%.
Year and quarter: 2008, Q3;
Citigroup: 17.5%;
Bank of America: 12.6%;
JP Morgan Chase and Company: 10.6%;
Wells Fargo and Company: 11.6%.
Year and quarter: 2008, Q4;
Citigroup: 18.9%;
Bank of America: 14.3%;
JP Morgan Chase and Company: 11.6%;
Wells Fargo and Company: 8.4%.
Year and quarter: 2009, Q1;
Citigroup: 20.1%;
Bank of America: 15.7%;
JP Morgan Chase and Company: 13.1%;
Wells Fargo and Company: 11.4%.
[End of figure]
Source: GAO analysis of data from Consolidated Financial Statements for
Bank Holding Companies, FR Y-9C from First Quarter 2007 through Third
Quarter 2008, Board of Governors of the Federal Reserve System.
[End of section]
Appendix VI: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Richard J. Hillman, (202) 512-8678 or hillmanr@gao.gov Thomas J.
McCool, (202) 512-2642 or mccoolt@gao.gov Orice Williams Brown, (202)
512-8678 or williamso@gao.gov:
Staff Acknowledgments:
In addition to the contacts named above, Nikki Clowers, Gary Engel, and
William Woods (Lead Directors); Cheryl Clark, Lawrence Evans Jr.,
Barbara Keller, Carolyn Kirby, Kay Kuhlman, Karen Tremba, and Katherine
Trimble (Lead Assistant Directors); and Marianne Anderson, Noah
Bleicher, Benjamin Bolitzer, Angela Burriesci, Emily Chalmers, Michael
Derr, Rachel DeMarcus, M'Baye Diagne, Abe Dymond, Patrick Dynes, Nima
Edwards, Nancy Eibeck, Karin Fangman, Ryan Gottschall, Brenna
Guarneros, Heather Halliwell, Michael Hoffman, Joe Hunter, Tyrone
Hutchins, Elizabeth Jimenez, Jamila Jones Kennedy, Jason Kirwan,
Christopher Klisch, Steven Koons, Rick Krashevski, John Krump, Jim
Lager, Rob Lee, John Lord, Matthew McDonald, Sarah McGrath, Susan
Michal-Smith, Marc Molino, Tim Mooney, Jill Namaane, Joseph O'Neill,
Ken Patton, Josephine Perez, Omyra Ramsingh, Mary Reich, Rebecca
Riklin, LaSonya Roberts, Susan Sawtelle, Chris Schmitt, Raymond
Sendejas, Jeremy Swartz, Maria Soriano, Cynthia Taylor, John Treanor,
and Jason Wildhagen made important contributions to this report.
[End of section]
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Small Business Administration's Implementation of Administrative
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2009.
Troubled Asset Relief Program: March 2009 Status of Efforts to Address
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2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions
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2009.
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Federal Financial Assistance: Preliminary Observations on Assistance
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Troubled Asset Relief Program: Status of Efforts to Address
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http://www.gao.gov/products/GAO-09-474T]. Washington, D.C.: March, 11,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
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http://www.gao.gov/products/GAO-09-417T]. Washington, D.C.: February
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http://www.gao.gov/products/GAO-09-359T]. Washington, D.C.: February 5,
2009.
Troubled Asset Relief Program: Status of Efforts to Address
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http://www.gao.gov/products/GAO-09-296]. Washington, D.C.: January 30,
2009.
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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,
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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] The act originally authorized Treasury to buy or guarantee up to
$700 billion in troubled assets. The Helping Families Save Their Homes
Act of 2009, Pub. L. No. 111-22, Div. A, amended the act and reduced
the maximum allowable amount of outstanding troubled assets under the
act by almost $1.3 billion, from $700 billion to $698.741 billion.
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] See 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); 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); Troubled Asset Relief Program: March 2009 Status of Efforts to
Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-504] (Washington, D.C.: Mar. 31,
2009); and Auto Industry: Summary of Government Efforts and Automakers'
Restructuring to Date, [hyperlink,
http://www.gao.gov/products/GAO-09-553] (Washington, D.C.: Apr. 23,
2009). See appendix II for status of all prior recommendations.
[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] The Federal Banking Agency Audit Act limits GAO's authority to
audit certain Federal Reserve activities. Specifically, GAO audits of
the Federal Reserve generally may not include monetary policy matters,
including discount window operations and open market operations. This
prohibition limits GAO's ability to audit the Federal Reserve Board's
actions taken with respect to TALF. The Helping Families Save Their
Homes Act of 2009, Pub. L. No. 111-22, enacted on May 20, 2009, amended
the Federal Banking Agency Audit Act to provide GAO authority to audit
Federal Reserve Board actions taken under section 13(3) of the Federal
Reserve Act with respect to a single and specific partnership or
corporation. Among other things, this amendment provides GAO with
authority to audit Federal Reserve actions taken with respect to three
entities also assisted under TARP--Citigroup, Inc., American
International Group, Inc., and Bank of America Corporation--but does
not provide GAO with authority to audit Federal Reserve monetary policy
actions taken with respect to TALF.
[7] See GAO, Small Business Administration's Implementation of
Administrative Provisions in the American Recovery and Reinvestment Act
of 2009, [hyperlink, http://www.gao.gov/products/GAO-09-507R]
(Washington, D.C.: Apr. 16, 2009).
[8] See GAO, Financial Literacy and Education Commission: Progress Made
in Fostering Partnerships, but National Strategy Remains Largely
Descriptive Rather Than Strategic, [hyperlink,
http://www.gao.gov/products/GAO-09-638T] (Washington, D.C.: April 29,
2009) and Securities Investor Protection: Update on Matters Related to
the Securities Investor Protection Corporation, [hyperlink,
http://www.gao.gov/products/GAO-03-811] (Washington, D.C.: July 11,
2003).
[9] Although Treasury had entered information in the tracking database
for 15 senior-level officials required to complete public financial
disclosure reports, information for 7 of these individuals did not
reflect the dates that the forms were submitted to and reviewed by
Treasury in response to their appointment to OFS. This occurred because
these individuals had already submitted forms during the past fiscal
year to their former federal employers and so the dates entered reflect
their original submission and review dates in their formerly held
positions during 2008.
[10] The Office of Government Ethics is an executive branch agency that
exercises leadership in the executive branch to prevent conflicts of
interest on the part of government employees and to resolve conflicts
of interest that do occur.
[11] [hyperlink, http://www.gao.gov/products/GAO-09-161].
[12] 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 because a variety of actions that have been
taken to address the economic downturn.
[13] The Making Home Affordable program will be the focus of a future
GAO report.
[14] This reporting is based on the Federal Credit Reform Act of 1990
and Section 123 of the act, which states that the discount rate used to
determine the present value of cash flows be adjusted for market risk.
[15] 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 quarterly dividends 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.
[16] If an 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 institution has no obligation to pay a dividend for the
period, whether or not dividends are declared for any subsequent
dividend period. Generally, if 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.
[17] For purposes of CPP, financial institutions generally include
qualifying U.S.-controlled banks, savings associations, and both bank
and savings and loan holding companies.
[18] 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, Boston Mutual and New York Life) are mutuals. 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.
[19] GAO, Troubled Asset Relief Program: Capital Purchase Program
Transactions for the Period October 28, 2008, through May 29, 2009, and
Information on Financial Agency Agreement, Contract, Blanket Purchase
Agreements, and Interagency Agreements Awarded as of June 1, 2009,
[hyperlink, http://www.gao.gov/products/GAO-09-707SP] (Washington,
D.C.: June 17, 2009).
[20] We are continuing to examine the process for accepting and
approving CPP applications. Specifically, we have begun 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. We also plan
to review subsequent applications, and in conjunction with SIGTARP, to
evaluate the process across the banking regulators. We will report on
this work separately.
[21] Treasury issued the term sheet for publicly held institutions on
October 20, 2008; for privately held institutions on November 17, 2008;
for S-corporations on January 14, 2009; and for mutual institutions on
April 7 and 14, 2009.
[22] According to FDIC, it does not keep track of processing times for
individual applications and thus was unable to provide us with the
average processing time for the more than 1,700 CPP applications it has
received.
[23] This applies to all types of CPP participants: publicly held
institutions, privately held institutions, S-corporations, and mutual
institutions. The application deadlines for each of these types of CPP
participants have passed.
[24] Risk-weighted asset 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.
[25] 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.
[26] A qualified equity offering is the sale and issuance of Tier 1
qualifying perpetual preferred stock, common stock, or a combination of
such stock for cash.
[27] According to the term sheets, the higher rates of 7.7 percent and
13.8 percent will equate to after-tax effective rates (assuming a 35
percent tax rate) of 5 percent and 9 percent, respectively--the same
rates applied to securities issued by other classes of institutions
participating in CPP.
[28] Pub. L. No. 111-5, 123 Stat. 115 (2009). Section 7001 provides, in
part, that "Subject to consultation with the appropriate Federal
banking agency, if any,...Treasury shall permit a TARP recipient to
repay any assistance previously provided under the TARP to such
financial institution, without regard to whether the financial
institution has replaced the funds from any other source or to any
waiting period." (Emphasis added.) ARRA also required that Treasury
liquidate the warrants when the assistance was repaid. This requirement
was amended by the Helping Families Save Their Homes Act of 2009, Pub.
L. No. 111-22, which removed the requirement that Treasury liquidate
the warrants when the assistance is repaid.
[29] Treasury cites ARRA section 7001, which, as noted above, states
that Treasury "shall" permit repayment.
[30] Our use of the term repurchases in this report is general and does
not differentiate between repurchases and redemptions of senior
preferred stock. A redemption of senior preferred stock occurs when an
institution completes a qualified equity offering per the standard
terms of the preferred stock and subsequently exchanges cash for its
senior preferred stock previously issued to Treasury. A repurchase
occurs when the institution buys back its senior preferred shares
without having completed a qualified equity offering, as permitted by
ARRA or an other authority.
[31] The Federal Reserve has provided such criteria for the 19 bank
holding companies that were subject to the stress test. We discuss
these criteria later in the report.
[32] See GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/AIMD-00-21.3.1] (Washington,
D.C.: Nov. 1, 1999).
[33] The five institutions are publicly held. Privately held
institutions do not have warrants to repurchase from Treasury. Treasury
received from the privately held institutions warrants to purchase a
specified number of shares of preferred stock, called warrant preferred
stock, that pay dividends at 9 percent annually. The exercise price for
the warrant preferred stock is $0.01 per share unless the financial
institution's charter requires otherwise. Unlike for publicly held
institutions, Treasury exercised these warrants immediately for warrant
preferred stock.
[34] CPP preferred stock repayments by financial institutions are
deposited to the General Fund of the U.S. Treasury that is used to
repay the debt that was issued to fund Treasury's original purchase.
The proceeds received from the repurchases reduce the outstanding
balance under the almost $700 billion TARP limit. Treasury then may
issue new debt to purchase new financial instruments if it so chooses.
However, CPP dividends and interest paid by recipients back to TARP and
the proceeds from liquidation from warrants and any common or preferred
stock Treasury obtains through the exercise of warrants are deposited
into the General Fund of the Treasury and are not to be used to reduce
the outstanding balance under the almost $700 billion TARP limit.
[35] Under the appraisal procedure, the three valuations are to be
averaged unless the larger of the differences between the higher and
middle valuations and the middle and lower valuations is more than 200
percent of the smaller of the differences. If the larger difference
exceeds 200 percent of the smaller of the differences, the outlying
valuation that triggers the exception is to be excluded and the FMV is
to be determined by the average of the remaining two. For example, if
the FMVs are $75 million, $50 million, and $40 million, the $75 million
FMV would be excluded because the difference between $75 million and
$50 million ($25 million) is more than 200 percent of the difference
between $50 million and $40 million ($10 million).
[36] Once Treasury rejects the initial offer from an institution to
repurchase its warrant, the institution and Treasury have 10 days to
negotiate a purchase price. If they are unable to agree on a price,
either party has 30 days from the day Treasury rejected the offer to
invoke the appraisal procedure specified in the Securities Purchase
Agreement. If Treasury rejects an offer from an institution and neither
party invokes the appraisal procedure, Treasury may sell the warrant to
a third party through any means, including an auction.
[37] The Special Inspector General for TARP is planning to explore
additional issues involving the warrant valuation process.
[38] See Treasury, Treasury Department Monthly Lending and
Intermediation Snapshot Summary Analysis for March 2009, [hyperlink,
http://www.treas.gov/press/releases/tg30.htm].
[39] These three asset managers were selected from more than 200
submissions from firms interested in the November 7, 2008, solicitation
for asset managers. Treasury also selected a consulting firm to provide
management services relating to AIFP.
[40] The portfolio of TARP investments generally includes senior
preferred stock, senior subordinated debt, equity warrants, and other
equity and debt obligations.
[41] TARP Standards for Compensation and Corporate Governance, 74.Fed.
Reg. 28, 394 (June 15, 2009)(to be codified at 31 C.F.R. Part 30).
Pursuant to section 101(c) of the act, the Secretary is authorized to
issue regulations and other guidance that the Secretary deems necessary
and appropriate to carry out the purposes of the act. The interim final
rule became effective on June 15, 2009, and will be open for public
comment for an additional 60 days.
[42] The senior executive officers are generally the principal
executive officer, the principal financial officer, and the three most
highly compensated executive officers (other than the principal
executive officer and the principal financial officer).
[43] See Board of Governors of the Federal Reserve System, "The
Supervisory Capital Assessment Program: Design and Implementation,"
April 24, 2009, and "The Supervisory Capital Assessment Program:
Overview of Results," May 7, 2009.
[44] For U.S. bank holding companies other than the SCAP 19, the
Federal Reserve's criteria include consideration of the ability of the
company to maintain appropriate capital levels, even assuming worsening
economic conditions; whether the holding company will be able to serve
as a source of financial and managerial strength to subsidiary banks;
and the level of capital and composition of capital, earnings, asset
quality, and liquidity, among other factors.
[45] Nonrecourse loans are provided against collateral, and if they go
into default the Federal Reserve assumes control of the pledged assets.
However, if a participant in TALF is found ineligible or misrepresents
the eligibility of its collateral, the loan will not be considered
nonrecourse and must be repaid.
[46] For additional information on CMBS collateral requirements, see
the Web site of the Federal Reserve Bank of New York at [hyperlink,
http://www.newyorkfed.org/markets/talf_faq.html].
[47] TALF subscriptions for CMBS will occur on a different schedule
than for other ABS with nonlegacy CMBS collateral being first accepted
on June 16, 2009, and as announced thereafter.
[48] Insurance premium finance loans are originated to borrowers for
the payment of insurance premiums.
[49] This $15 billion is referred to as "Unlocking Credit for Small
Business" and falls under the "Small Business and Community Lending
Initiative" of Treasury's Financial Stability Plan. Separately, SBA has
two principal loan guarantee programs, the 7(a) and 504 programs, which
aim to facilitate the accessibility and affordability of financing to
small businesses. Under the 7(a) program, SBA generally provides
lenders guarantees on up to 85 percent of the value of loans to
qualifying small businesses in exchange for fees to help offset the
costs of the program. Under the 504 program, which generally applies to
small business real estate and other fixed assets, SBA also provides
certified development companies with a guarantee on up to 40 percent of
the financing of the projects' costs in exchange for fees, while the
small business borrowers and other lenders provide the remaining 60
percent of the financing with no guarantee. For additional information,
[hyperlink, http://www.gao.gov/products/GAO-09-507R].
[50] TALF efforts fall under the "Consumer and Business Lending
Initiative" of Treasury's Financial Stability Plan.
[51] For additional details on the type and status of changes from SBA,
see [hyperlink, http://www.gao.gov/products/GAO-09-507R].
[52] "What Citi Is Doing to Expand the Flow of Credit, Support
Homeowners and Help the U.S. Economy," TARP Progress Report for First
Quarter, May 12, 2009.
[53] The $30 billion preferred stock capital facility previously
announced was reduced by $165 million representing retention payments
AIG Financial products made to its employees in March 2009.
[54] GAO reported separately on the federal assistance to the auto
industry. See GAO, [hyperlink, http://www.gao.gov/products/GAO-09-553].
[55] On April 30, 2009, Chrysler and its subsidiaries filed voluntary
petitions under Chapter 11 of the U. S. Bankruptcy Code, and on June 1,
2009, GM and its subsidiaries filed voluntary petitions under Chapter
11 of the bankruptcy code. Both companies filed with the U.S.
Bankruptcy Court, Southern District of New York.
[56] An appeal had been filed with the U.S. Court of Appeals for the
Second Circuit contesting the bankruptcy court's approval of the
proposed asset sale under § 363 of the bankruptcy code. On June 5,
2009, the Court of Appeals affirmed the bankruptcy court's decision but
stayed the asset sale until June 8, 2009. On June 6, 2009, some of
Chrysler's creditors requested the U.S. Supreme Court to review and
issue an emergency stay of the asset sale orders, and on June 8, 2009,
Justice Ginsburg granted a temporary stay. On June 9, 2009, the Supreme
Court removed the temporary stay and declined further review, allowing
the asset sale to proceed.
[57] Amounts are in U.S. dollars.
[58] In both cases, the shareholders are the governments of Canada and
Ontario.
[59] Additionally, Daimler AG will pay $600 million to Chrysler's
pension funds to settle its obligation to the PBGC and Cerberus will
contribute a claim it had against Daimler to assist in the Daimler
settlement with the PBGC.
[60] The number of directors Treasury has the right to appoint varies
based on the amount of GMAC LLC equity that Treasury owns at a given
time.
[61] [hyperlink, http://www.gao.gov/products/GAO-09-553], Auto
Industry: A Framework for Considering Federal Financial Assistance,
[hyperlink, http://www.gao.gov/products/GAO-09-247T] (Washington, D.C.:
Dec. 5, 2008), and Auto Industry: A Framework for Considering Federal
Financial Assistance, [hyperlink, http://www.gao.gov/products/GAO-09-
242T] (Washington, D.C.: Dec. 4, 2008).
[62] GMAC specializes in automotive finance, real estate finance,
insurance, commercial finance, and online banking. As of March 31,
2009, GMAC had $180 billion in total assets.
[63] On December 29, 2008, Treasury purchased $5 billion of senior
preferred membership interests from GMAC.
[64] [hyperlink, http://www.gao.gov/products/GAO-09-504].
[65] [hyperlink, http://www.gao.gov/products/GAO-09-638T].
[66] OFS also has plans to hire three additional analysts and an
Acquisition Program Manager to support oversight of its financial
agents.
[67] The maximum payable rate rule allows an agency to set pay at a
rate above that which would normally apply, based on the higher rate of
pay the employee previously received in another federal job. The pay
set, however, may not exceed the highest rate for the general schedule
grade to which the employee would be entitled under normal pay-setting
rules. See 5 C.F.R. Part 531.221.
[68] Federal regulations currently limit use of recruitment bonuses to
individuals hired from outside the federal government. See 5 C.F.R.
Part 575 Subpart A.
[69] 18 U.S.C. § 208(a); 5 C.F.R. §§ 2635.401-403; 5 C.F.R. pt. 2640.
101.Certain investments are exempt from this prohibition, including
investments in securities that are valued at $15,000 or less and,
regardless of their value, diversified interests in mutual funds and
investment trusts.
[70] 5 U.S.C. App. § 101.
[71] We did not review information on OFS detailees' filing of
confidential financial disclosure reports because they were already
required to file these with their home agencies and were not new
filers.
[72] In reviewing whether a report was filed on time, we determined
that the date the report was marked as received by Treasury ethics
counsel to be the date the report was "filed." We reviewed information
in the database tracking information on 56 permanent employees filing
confidential financial disclosure reports and 8 employees filing public
financial disclosure reports. We were unable to determine the
timeliness of a confidential financial disclosure report filing for 1
employee because certain key dates were missing and the date of
appointment entered did not reflect the employee's appointment to OFS
but instead to another area of Treasury.
[73] According to a Treasury ethics official, the department did not
establish any new procedures for vetting public disclosure reports
since Treasury already extensively reviews these reports.
[74] 18 U.S.C §208(b).
[75] A financial agency agreement is a document that establishes and
governs the relationship between Treasury and its financial agent. A
financial agent is a financial institution that has authority to hold
deposits of public money and perform related services. A financial
agent has a principal-agent relationship with Treasury and owes a
fiduciary duty of loyalty and fair dealing to the United States. See 31
C.F.R. pt. 202.
[76] In addition, Treasury is utilizing contractor support for internal
controls, information technology, and financial advisory services
through four interagency agreements.
[77] This total does not include a recent contract with Phacil Inc.,
for which Treasury did not provide information. The Competition in
Contracting Act authorizes agencies to limit competition when, for
example, an unusual and compelling urgency precludes the use of full
and open competition. 41 U.S.C. § 253.
[78] The total does not include a contract with Heery International
Inc., for which Treasury did not provide information. The Federal
Supply Schedule program is managed by the General Services
Administration and provides federal agencies with a simplified process
for obtaining commercial supplies and services at prices associated
with volume buying.
[79] [hyperlink, http://www.gao.gov/products/GAO-09-707SP].
[80] For example, according to Treasury, it hosted an Industry Day and
Small Business Networking event on May 27, 2009, related to a planned
omnibus acquisition for legal services to present information, address
questions, and provide a forum for small businesses to pursue partner
arrangements to enhance their capability to compete for the
acquisition. According to Treasury, approximately 40 interested firms
attended the event, and 11 small business firms presented their
capabilities to the audience.
[81] The total of 42 subcontractors excludes three subcontractors for
Fannie Mae.
[82] In February 2009, Treasury selected Fannie Mae to administer,
maintain records for, and serve as the paying agent for its homeowner
assistance programs and Freddie Mac as the compliance agent to oversee
servicers' home mortgage modifications.
[83] To enhance the level of information provided to the public, we
have provided through our reports detailed status information on each
new, ongoing, and completed TARP-related financial agency agreement,
contract, blanket purchase agreement, and interagency agreement,
including obligation and expense information, in dollars, provided to
us by Treasury.
[84] The Federal Reserve's contractors for the Asset Guarantee Program
are Cleary Gottlieb Steen & Hamilton, Pacific Management Investment
Company (PIMCO), BlackRock, and Ernst & Young.
[85] In addition to the contractors and financial agents performing
work for OFS under TARP, in December 2008 OFS established an
interagency agreement with the Pension Benefit Guaranty Corporation to
obtain financial advisory services from Rothschild Inc. related to the
TARP-assisted domestic auto industry restructurings. Part of this
agreement includes Rothschild's Conflicts of Interest Statement
addressing OFS requirements for nondisclosure of TARP information and
identifying and preventing organizational and personal conflicts of
interest. While the statement addresses some of the same issues as the
TARP conflicts-of-interest interim rule, according to OFS, since
Treasury does not directly contract with Rothschild for financial
advisory services, the interim rule does not apply. As of May 31, 2009
Treasury's obligations and expenses under this agreement were
$7,770,000 and $4,303,000, respectively.
[86] See 74 Fed. Reg. 3431-3436 (Jan. 21, 2009).
[87] Asset-backed security (ABS) issuance has become an important means
by which financial institutions fund loans to businesses and
households. However, according to Security Industry and Financial
Markets Association estimates there has been very little activity in
private label mortgage backed-security (MBS) or ABS markets in general,
outside of MBS with government sponsorship.
[88] Prices at or below what financial institutions are currently
valuing these loans or securities would provide limited incentive for
them to sell. To the extent that nonrecourse funding and FDIC-
guaranteed debt provide an implicit subsidy (e.g., through offering
below-market loan terms) to potential buyers of legacy loans and
securities, buyers would likely be willing to pay higher prices for
these assets.
[89] 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 percent would be an increase of 10
basis points.
[90] [hyperlink, http://www.gao.gov/products/GAO-09-161] and
[hyperlink, http://www.gao.gov/products/GAO-09-296].
[91] The credit default swap (CDS) index provides an indicator of the
credit risk associated with U.S. banks, as judged by the market.
Therefore, declines in this index suggest lower perceived risk in the
U.S. banking sector. Thompson Datastream data show that the 5-year CDS
index dropped significantly after the initial passage of the act and
again after the announcement of CPP, before trending up again. However,
from the end of March 2009 to June 1, 2009, the bank CDS index fell by
roughly 55 percent. Similarly, the Chicago Board of Option Exchange VIX
index, which measures expected stock market volatility, has fallen
considerably since late November 2008.
[92] This phenomenon is often referred to as "regression to the mean"
or "regression artifacts." Failure to acknowledge this phenomenon can
lead to invalid inferences about a program's impact when analyzing time
series data. We found that since 1982 the TED spread exceeded 200 basis
points only 3.2 percent of the time, underscoring the fact that 450
basis points is extreme and indicates the significant stress present in
the interbank market at the time of the CPP announcement.
[93] The model used changes in the TED spread as the dependent variable
regressed on a CPP indicator variable, a time trend, lagged values of
changes in the S&P 500, the term spread (structure), and the default
risk premium--a dummy variable that denoted whether the TED spread
exceeded 200 basis points--as well as a counter variable that indicated
the number of consecutive days, including the day in question, that the
TED spread became extreme. However, the results were robust to a number
of different econometric specifications, including a two-stage approach
that allowed us to generate the unexpected value of the TED spread (as
well as other spreads variables) by extracting the predictable
component from the variables using an autoregression model fit to each
series. Like our primary regressions modeling changes in the TED
spread, the CPP indicator variable had a statistically significant
impact on the unexpected level of the TED spread, even when we
controlled for other potentially confounding factors.
[94] It should also be noted that the increase in mortgage activity
coincides with a drop in mortgage rates associated with the Federal
Reserve's expanded program for the purchase of agency MBS.
[95] The mortgage application index is not seasonally adjusted here, to
provide a more appropriate comparison to the unadjusted mortgage
origination data.
[96] New lending includes new home equity lines of credit; mortgage,
credit card, and other consumer originations; new or renewed commercial
and industrial loans, and commercial real estate loans.
[97] The Federal Reserve Senior 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 (see
our March report for additional information or [hyperlink,
http://www.federalreserve.gov/boarddocs/snloansurvey/]). The most
recent survey conducted in April 2009 suggests that although the
percentage of banks tightening credit remains above previous peaks, the
net percentage of respondents reporting having tightened their credit
standards in approving applications has continued to trend downward
from the October 2008 survey for most business and consumer loans.
[98] This trend occurred even though the net percentage of banks that
tightened lending standards actually increased for prime and
nontraditional mortgages from January to April 2009 according to
Federal Reserve Senior Loan Officer Surveys.
[99] However, changes in these trends could also reflect the success of
the CPP (or CAP) in lowering or preventing a rise in bank auto rates.
Note also that the bank rate reflects 48-month loans, while the average
maturity for the finance rate is between 59 and 67 months over the time
period surveyed.
[100] Although not included in the figure because comparable data were
not available for the banks, the finance rate increased to 8.42 percent
in December 2008.
[101] March data were unavailable for commercial bank auto rates for
inclusion in this report.
[102] It has been shown that carrying out an HAC adjustment in an event
study context with dichotomous event variables (pulse dummies) can
result in inconsistent standard errors and spurious findings under
certain conditions. For example, see T. Fromby and J. Murfin,
"Inconsistency of HAC Standard Errors in Event Studies with i.i.d.
errors," Applied Financial Letters, vol. 1 (2005). Our results were not
sensitive to this adjustment; however, the correction did result in
smaller standard errors and larger t-statistics for the CPP variable.
[103] A qualified equity offering is the sale and issuance of Tier 1
qualifying perpetual preferred stock, common stock, or a combination of
such stock for cash.
[104] Federal Reserve's supervisory letter SR 09-4, dated February 24,
2009, and revised March 27, 2009, Applying Supervisory Guidance and
Regulations on the Payment of Dividends, Stock Redemptions, and Stock
Repurchases at Bank Holding Companies and related frequently asked
questions. According to the letter, the revision is intended to provide
greater clarity on the priority of dividend payments on Tier 1 capital
instruments and the repurchase of capital instruments issued by bank
holding companies under government investment programs (such as CPP).
[105] For example, if the FMVs are $75 million, $50 million, and $40
million, the $75 million FMV would be excluded because the difference
between $75 million and $50 million ($25 million) is more than 200
percent of the difference between $50 million and $40 million ($10
million).
[106] Four additional financial institutions received initial TARP
funds: The Bank of New York Mellon, the Goldman Sachs Group, Inc.,
Morgan Stanley, and State Street Corporation.
[107] Net income is the amount of income after applicable taxes,
minority interest, extraordinary items, and adjustments.
[108] Market value equity is the share price multiplied by the number
of ordinary shares in an issue. The amount in issue is updated whenever
new tranches of stock are issued or after a capital change.
[109] Equity (common) represents common shareholders' investment in a
company.
[110] 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. The
preferred shares purchased by Treasury under TARP counted as tier 1
capital.
[111] Tier 1 leverage ratio is tier 1 capital divided by average total
assets for leverage capital purposes.
[112] For loans that a bank holding company intends to hold for the
foreseeable future until maturity or payoff, the allowance for loan and
lease losses is the amount it maintains to cover estimated credit
losses.
[113] Nonaccrual loans are loans for which payment in full of interest
or principal is not expected. "Other real estate owned" is the value of
all real estate other than premises actually owned by the bank holding
company or its consolidated subsidiaries. This includes real estate
acquired in satisfaction of debts previously contracted.
[End of section]
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