This is the accessible text file for GAO report number GAO-11-174
entitled 'Financial Audit: Office of Financial Stability (Troubled
Asset Relief Program) Fiscal Years 2010 and 2009 Financial Statements'
which was released on November 15, 2010.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as
part of a longer term project to improve GAO products' accessibility.
Every attempt has been made to maintain the structural and data
integrity of the original printed product. Accessibility features,
such as text descriptions of tables, consecutively numbered footnotes
placed at the end of the file, and the text of agency comment letters,
are provided but may not exactly duplicate the presentation or format
of the printed version. The portable document format (PDF) file is an
exact electronic replica of the printed version. We welcome your
feedback. Please E-mail your comments regarding the contents or
accessibility features of this document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to Congressional Committees:
United States Government Accountability Office:
GAO:
November 2010:
Financial Audit:
Office of Financial Stability (Troubled Asset Relief Program) Fiscal
Years 2010 and 2009 Financial Statements:
GAO-11-174:
GAO Highlights:
Highlights of GAO-11-174, a report to congressional committees.
Why GAO Did This Study:
On October 3, 2008, the Emergency Economic Stabilization Act of 2008
(EESA) was signed into law. EESA authorized the Secretary of the
Treasury to implement the Troubled Asset Relief Program (TARP) and
established the Office of Financial Stability (OFS) within the
Department of the Treasury (Treasury) to do so. EESA requires the
annual preparation of financial statements for TARP, and further
requires GAO to audit these statements.
GAO audited OFS’s fiscal years 2010 and 2009 financial statements for
TARP to determine whether, in all material respects, (1) the financial
statements were fairly stated, and (2) OFS management maintained
effective internal control over financial reporting. GAO also tested
OFS’s compliance with selected provisions of laws and regulations.
In commenting on a draft of this report, the Acting Assistant
Secretary, Office of Financial Stability, stated OFS concurred with
the significant deficiency in its internal control over financial
reporting that GAO identified. He also stated that OFS is committed to
correcting the deficiency.
What GAO Found:
In GAO’s opinion, OFS’s fiscal years 2010 and 2009 financial
statements for TARP are fairly presented in all material respects. GAO
also concluded that, although internal controls could be improved, OFS
maintained, in all material respects, effective internal control over
financial reporting as of September 30, 2010. GAO found no reportable
noncompliance in fiscal year 2010 with the provisions of laws and
regulations it tested.
As of September 30, 2010 and 2009, net assets related to TARP direct
loans, equity investments, and asset guarantee program had an
estimated value of about $145.5 billion and $239.7 billion,
respectively. In addition, for fiscal years 2010 and 2009, OFS
reported an estimated subsidy income of $24.2 billion and subsidy cost
of $41.4 billion, respectively related to its direct loans, equity
investments, and asset guarantee program and net income of $23.1
billion and net cost of $41.6 billion, respectively for TARP. The
estimated net cost of TARP transactions from inception through
September 30, 2010, was $18.5 billion. In valuing TARP direct loans,
equity investments, and asset guarantee program, OFS management
considered and selected assumptions and data that it believed provided
a reasonable basis for the estimated subsidy costs (income) reported
in the financial statements; however, these assumptions and estimates
are inherently subject to substantial uncertainty arising from the
likelihood of future changes in general economic, regulatory, and
market conditions. The estimates have an added uncertainty arising
from the uniqueness of transactions for the multiple TARP initiatives
and the lack of historical information and program experience upon
which to base the estimates. In addition, there are significant
uncertainties related to the potential effect of proposed
transactions, such as the restructuring of American International
Group, Inc., on the amounts that OFS will realize from its
investments. As such, there will be differences between the net
estimated values of the direct loans, equity investments, and asset
guarantee program, and the amounts that OFS will ultimately realize
from these assets, and such differences may be material. These
differences will also affect the ultimate cost of TARP to the taxpayer.
During fiscal year 2010, OFS sufficiently addressed the issues that
resulted in a significant deficiency in fiscal year 2009 regarding OFS’
s verification procedures over the data used for asset valuations such
that we no longer consider this to be a significant deficiency as of
September 30, 2010. In addition, OFS addressed many of the issues
related to the other significant deficiency we reported for fiscal
year 2009 concerning its accounting and financial reporting processes.
However, the remaining control issues along with other control
deficiencies in this area that we identified in fiscal year 2010
collectively represent a continuing significant deficiency in OFS’s
internal control over its accounting and financial reporting
processes. While this deficiency is not considered a material
weakness, it merits management’s attention. We will be separately
reporting to OFS on additional details regarding this significant
deficiency along with recommendations for corrective actions.
View [hyperlink, http://www.gao.gov/products/GAO-11-174] for key
components. For more information, contact Gary T. Engel at (202) 512-
3406 or engelg@gao.gov.
[End of section]
Contents:
Transmittal Letter:
Auditor’s Report:
Opinion on Financial Statements:
Opinion on Internal Control:
Compliance with Laws and Regulations:
Consistency of Other Information:
Objectives, Scope, and Methodology:
Agency Comments:
Management’s Discussion and Analysis:
Financial Statements:
Balance Sheet:
Statement of Net Cost:
Statement of Changes in Net Position:
Statement of Budgetary Resources:
Notes to the Financial Statements:
Appendixes:
Appendix I: Management's Report on Internal Control over Financial
Reporting:
Appendix II: Comments from the Office of Financial Stability:
Appendix III: GAO Contact and Staff Acknowledgments:
[End of section]
United States Government Accountability Office:
Washington, D.C. 20548:
November 12, 2010:
Congressional Committees:
The accompanying auditor's report presents the results of our audit of
the fiscal years 2010 and 2009 financial statements of the Office of
Financial Stability (Troubled Asset Relief Program).[Footnote 1] The
Emergency Economic Stabilization Act (EESA) of 2008[Footnote 2] that
authorized the Troubled Asset Relief Program (TARP) on October 3,
2008, requires that TARP, which is implemented by the Office of
Financial Stability (OFS),[Footnote 3] annually prepare and submit to
Congress and the public audited fiscal year financial statements that
are prepared in accordance with generally accepted accounting
principles.[Footnote 4] EESA further requires that GAO audit TARP's
financial statements annually.[Footnote 5] We are also required under
EESA to report at least every 60 days on the findings resulting from
our oversight of the actions taken under TARP.[Footnote 6] This report
responds to both of these requirements. Fiscal year 2010 was the
second year that OFS prepared and issued audited financial statements
for TARP. This accomplishment was made possible by the dedication of
significant time and effort from both OFS management and staff.
This report contains our (1) unqualified opinion on OFS's fiscal years
2010 and 2009 financial statements for TARP; (2) opinion that,
although certain controls could be improved, OFS maintained, in all
material respects, effective internal control over financial reporting
as of September 30, 2010; and (3) conclusion that our tests of OFS's
compliance with selected provisions of laws and regulations for fiscal
year 2010 disclosed no instances of noncompliance. The accompanying
report also provides an overview of the status of significant
deficiencies identified during last year's audit, and a significant
deficiency[Footnote 7] in OFS's internal control over financial
reporting that we identified while performing our fiscal year 2010
audit that we believe merits the attention of OFS management and users
of OFS's financial statements. We will be reporting separately to OFS
on more detailed information concerning this significant deficiency
along with recommended corrective actions.
Since its inception, OFS has initiated a broad range of activities
under TARP. Specific initiatives have included injecting capital into
key financial institutions, implementing programs to address problems
in the securitization markets, providing assistance to the automobile
industry and American International Group, Inc. (AIG), and offering
incentives for modifying residential mortgages. These initiatives are
described in more detail in the footnotes to OFS's financial
statements and Management's Discussion and Analysis (MD&A) included in
this report.
On December 9, 2009, the Secretary of the Treasury extended the
authority provided under EESA through October 3, 2010.[Footnote 8]
However, the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act), which was signed into law on July 21, 2010, set a
new spending ceiling for TARP, in effect prohibiting OFS from
incurring any obligations for TARP programs that were not initiated
prior to June 25, 2010.[Footnote 9]
As of September 30, 2010, and 2009, OFS reported net assets related to
TARP direct loans, equity investments, and asset guarantee program of
$145.5 billion and $239.7 billion, respectively, which is net of a
subsidy cost allowance of $36.7 billion and $53.1 billion,
respectively. The subsidy cost allowance represents the difference
between the amounts paid by OFS for the direct loans and equity
investments and the reported value of such assets. In addition, for
fiscal year 2010, OFS reported an estimated subsidy income[Footnote
10] of $24.2 billion and net income from operations of $23.1 billion
for TARP, which includes the estimated subsidy income. For fiscal year
2009, OFS reported an estimated subsidy cost of $41.4 billion and net
cost of operations of $41.6 billion, for TARP, which includes the
estimated subsidy cost. The estimated net cost of TARP transactions
from inception through September 30, 2010, was $18.5 billion. This net
cost primarily consists of net subsidy costs on direct loans and/or
equity investments in automobile companies and AIG, partially offset
by the net subsidy income related to TARP's bank and credit market
programs.
OFS management considered and selected assumptions and data that it
believed provided a reasonable basis for the estimated costs reported
in the financial statements; however, these assumptions and estimates
are inherently subject to substantial uncertainty arising from the
likelihood of future changes in general economic, regulatory, and
market conditions. The estimates have an added uncertainty arising
from the uniqueness of transactions for the multiple TARP initiatives
and the lack of historical information and program experience upon
which to base the estimates. In addition, there are significant
uncertainties related to the potential effect of proposed
transactions, such as the restructuring of AIG, on the amounts that
OFS will realize from its investments. As such, there will be
differences between the net estimated values of the direct loans,
equity investments, and asset guarantee program as of September 30,
2010, and 2009, and the amounts that OFS will ultimately realize from
these assets, and such differences may be material. These differences
will also affect the ultimate cost of TARP. Further, the ultimate cost
will change as OFS continues to acquire assets under obligations that
existed as of October 3, 2010, and incur related subsidy costs as well
as incur costs under other TARP initiatives relating to Treasury
Housing Programs under TARP.[Footnote 11]
We are sending copies of this report to the Secretary of the Treasury,
Acting Assistant Secretary for Financial Stability, Congressional
Oversight Panel, Financial Stability Oversight Board, Special
Inspector General for TARP, Acting Director of Office of Management
and Budget, interested congressional committees and members, and
others. The report is available at no charge on GAO's Web site at
[hyperlink, http://www.gao.gov].
If you have questions about this report, please contact me at (202)
512-3406 or engelg@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 key contributions to this
report are listed in appendix III.
Signed by:
Gary T. Engel:
Director:
Financial Management and Assurance:
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 Sander Levin
Acting Chairman
The Honorable Dave Camp
Ranking Member
Committee on Ways and Means
House of Representatives:
[End of section]
United States Government Accountability Office:
Washington, D.C. 20548:
To the Acting Assistant Secretary for Financial Stability:
In accordance with the Emergency Economic Stabilization Act of 2008
(EESA),[Footnote 12] we are required to audit the financial statements
of the Troubled Asset Relief Program (TARP), which is implemented by
the Office of Financial Stability (OFS).[Footnote 13] In our audit of
OFS's financial statements for TARP for fiscal years 2010 and 2009,
[Footnote 14] we found:
* the financial statements are presented fairly, in all material
respects, in conformity with U.S. generally accepted accounting
principles;
* although internal controls could be improved, OFS maintained, in all
material respects, effective internal control over financial reporting
as of September 30, 2010; and:
* no reportable noncompliance in fiscal year 2010 with provisions of
laws and regulations we tested.
The following sections discuss in more detail (1) these conclusions;
(2) our conclusion on Management's Discussion and Analysis (MD&A) and
other required supplementary and other accompanying information; (3)
our audit objectives, scope, and methodology; and (4) OFS's comments
on a draft of this report. In addition to our responsibility to audit
OFS's annual financial statements for TARP, we also are required under
EESA to report at least every 60 days on the findings resulting from
our oversight of the actions taken under TARP.[Footnote 15] This
report responds to both of these requirements. We have issued numerous
other reports on TARP in connection with this 60-day reporting
responsibility which can be found on GAO's Web site at hyperlink,
http://www.gao.gov].
Opinion on Financial Statements:
OFS's financial statements for TARP, including the accompanying notes,
present fairly, in all material respects, in conformity with U.S.
generally accepted accounting principles, OFS's assets, liabilities,
and net position as of September 30, 2010, and 2009, and its net cost,
changes in net position, and budgetary resources for fiscal years 2010
and 2009.
As discussed in notes 2 and 6 to OFS's financial statements for TARP,
the valuation of TARP direct loans, equity investments, and asset
guarantee program is based on estimates using economic and financial
credit subsidy models. The estimates use entity-specific as well as
relevant market data as the basis for assumptions about future
performance, and incorporate an adjustment for market risk to reflect
the variability around any unexpected losses. In valuing the direct
loans, equity investments, and asset guarantee program, OFS management
considered and selected assumptions and data that it believed provided
a reasonable basis for the estimated subsidy allowance and related
subsidy income/costs reported in the financial statements.[Footnote
16] However, there are a large number of factors that affect these
assumptions and estimates, which are inherently subject to substantial
uncertainty arising from the likelihood of future changes in general
economic, regulatory, and market conditions. The estimates have an
added uncertainty resulting from the unique nature of transactions
associated with the multiple initiatives undertaken for TARP and the
lack of historical program experience upon which to base the
estimates. As such, there will be differences between the net
estimated values of the direct loans, equity investments, and asset
guarantee program as of September 30, 2010, and 2009, that totaled
$145.5 billion and $239.7 billion respectively, and the amounts that
OFS will ultimately realize from these assets, and such differences
may be material. These differences will also affect the ultimate cost
of TARP. Further, the ultimate cost will change as OFS continues to
acquire assets under obligations that existed as of October 3, 2010,
and incur related subsidy costs as well as incur costs under other
TARP initiatives relating to Treasury Housing Programs under TARP.
[Footnote 17]
As discussed in note 1 to the financial statements, while OFS's
financial statements for TARP reflect activity of OFS in implementing
TARP, including providing resources to various entities to help
stabilize the financial markets, the statements do not include the
assets, liabilities, or results of operations of commercial entities
in which OFS has a significant equity interest. According to OFS
officials, OFS's investments were not made to engage in the business
activities of the respective entities and OFS has determined that none
of these entities meet the criteria for a federal entity.
Opinion on Internal Control:
Although certain internal controls could be improved, OFS maintained,
in all material respects, effective internal control over financial
reporting as of September 30, 2010, that provided reasonable assurance
that misstatements, losses, or noncompliance material in relation to
the financial statements would be prevented or detected and corrected
on a timely basis. Our opinion on internal control is based on
criteria established under 31 U.S.C. § 3512 (c), (d), commonly known
as the Federal Managers' Financial Integrity Act (FMFIA).
During fiscal year 2010, OFS addressed one significant deficiency and
made progress in addressing the other significant deficiency that we
reported for fiscal year 2009[Footnote 18]. Specifically, OFS
sufficiently addressed the issues that resulted in a significant
deficiency in fiscal year 2009 regarding OFS's verification procedures
over the data used for asset valuations such that we no longer
consider this to be a significant deficiency as of September 30, 2010.
In addition, OFS addressed many of the issues related to the other
significant deficiency we reported for fiscal year 2009 concerning its
accounting and financial reporting processes. However, the remaining
control issues along with other control deficiencies in this area that
we identified in fiscal year 2010 collectively represent a continuing
significant deficiency in OFS's internal control over its accounting
and financial reporting processes. Specifically, we found the
following:
* While improvements were noted in OFS's review and approval process
for preparing its financial statements, notes, and MD&A for TARP from
what we had found for fiscal year 2009, we continued to identify
incorrect amounts and inconsistent disclosures in OFS's draft
financial statements, notes, and MD&A that were significant, but not
material, and that were not detected by OFS.
* For fiscal year 2009, we reported that OFS had not finalized its
procedures related to its process for accounting for certain program
transactions, preparing its September 30, 2009, financial statements,
and its oversight and monitoring of financial-related services
provided to OFS by asset managers and certain financial agents. During
fiscal year 2010, we found that most of these procedures were
finalized. However, we identified instances where OFS's procedures
were not always followed or effectively implemented.
* OFS's documentation was incomplete for certain areas of its asset
valuation process. Specifically, some valuation methodology changes
and the basis for certain assumptions derived from informed opinion
that were used in valuing TARP's assets were not included in its
written documentation.[Footnote 19] After we notified OFS that the
documentation was incomplete, it was able to provide adequate
additional information about its asset valuation process.
* OFS did not have adequate procedures to determine whether the tool
and related guidance it used properly calculated valuations for
certain TARP assets with projected future disbursements.[Footnote 20]
OFS's use of the tool and related guidance resulted in errors in the
valuation of such assets.
OFS had other controls over TARP transactions and activities that
reduced the risk of misstatements resulting from these deficiencies.
For significant errors and issues that were identified, OFS revised
the financial statements, notes, and MD&A, as appropriate. Properly
designed and implemented controls over the accounting and financial
reporting processes are key to providing reasonable assurance
regarding the reliability of the balances and disclosures reported in
the financial statements and related notes in conformity with
generally accepted accounting principles. Misstatements may occur in
other financial information reported by OFS and not be prevented or
detected because of this significant deficiency.
We reported on the two significant deficiencies identified last year
and provided OFS recommendations to address these and other less
significant issues.[Footnote 21] We will be reporting additional
details concerning the significant deficiency identified for fiscal
year 2010 separately to OFS management, along with some
recommendations for corrective actions. During our fiscal year 2010
audit, we also identified other deficiencies in OFS's system of
internal control that we consider not to be material weaknesses or
significant deficiencies. We have communicated these matters to
management and, where appropriate, will report on them separately. We
will follow up in our fiscal year 2011 audit on OFS's progress in
implementing our recommendations.
Compliance with Laws and Regulations:
Our tests of OFS's compliance with selected provisions of laws and
regulations for fiscal year 2010 disclosed no instances of
noncompliance that would be reportable under U.S. generally accepted
government auditing standards. The objective of our audit was not to
provide an opinion on overall compliance with laws and regulations.
Accordingly, we do not express such an opinion.
Consistency of Other Information:
OFS's MD&A, other required supplementary information, and other
accompanying information contain a wide range of information, some of
which is not directly related to the financial statements. We did not
audit and we do not express an opinion on this information. However,
we compared this information for consistency with the financial
statements and discussed the methods of measurement and presentation
with OFS officials. On the basis of this limited work, we found no
material inconsistencies with the financial statements, U.S. generally
accepted accounting principles, or the form and content guidance in
Office of Management and Budget Circular No. A-136, Financial
Reporting Requirements.
Objectives, Scope, and Methodology:
OFS management is responsible for (1) preparing the financial
statements in conformity with U.S. generally accepted accounting
principles; (2) establishing and maintaining effective internal
control over financial reporting, and evaluating its effectiveness;
and (3) complying with applicable laws and regulations. OFS management
evaluated the effectiveness of OFS's internal control over financial
reporting as of September 30, 2010, based on the criteria established
under FMFIA. OFS management's assertion based on its evaluation is
included in appendix I.
We are responsible for planning and performing the audit to obtain
reasonable assurance and provide our opinion about whether (1) OFS's
financial statements are presented fairly, in all material respects,
in conformity with U.S. generally accepted accounting principles; and
(2) OFS management maintained, in all material respects, effective
internal control over financial reporting as of September 30, 2010. We
are also responsible for (1) testing compliance with selected
provisions of laws and regulations that have a direct and material
effect on the financial statements, and (2) performing limited
procedures with respect to certain other information accompanying the
financial statements.
In order to fulfill these responsibilities, we:
* examined, on a test basis, evidence supporting the amounts and
disclosures in the financial statements;
* assessed the accounting principles used and significant estimates
made by management;
* evaluated the overall presentation of the financial statements;
* obtained an understanding of the entity and its operations,
including its internal control over financial reporting;
* considered OFS's process for evaluating and reporting on internal
control over financial reporting that OFS is required to perform by
FMFIA and Section 116(c) of EESA;
* assessed the risk that a material misstatement exists in the
financial statements and the risk that a material weakness exists in
internal control over financial reporting;
* evaluated the design and operating effectiveness of internal control
over financial reporting based on the assessed risk;
* tested relevant internal control over financial reporting;
* tested compliance with selected provisions of the following laws and
regulations: EESA, as amended; the Antideficiency Act; the Federal
Credit Reform Act of 1990; the Dodd-Frank Wall Street Reform and
Consumer Protection Act; and the Purpose Statute; and:
* performed such other procedures as we considered necessary in the
circumstances.
An entity's internal control over financial reporting is a process
effected by those charged with governance, management, and other
personnel, the objectives of which are to provide reasonable assurance
that (1) transactions are properly recorded, processed, and summarized
to permit the preparation of financial statements in conformity with
U.S. generally accepted accounting principles, and assets are
safeguarded against loss from unauthorized acquisition, use, or
disposition; and (2) transactions are executed in accordance with the
laws governing the use of budget authority and other laws and
regulations that could have a direct and material effect on the
financial statements.
We did not evaluate all internal controls relevant to operating
objectives as broadly established under FMFIA, such as those controls
relevant to preparing statistical reports and ensuring efficient
operations. We limited our internal control testing to testing
controls over financial reporting. Our internal control testing was
for the purpose of expressing an opinion on the effectiveness of
internal control over financial reporting and may not be sufficient
for other purposes. Consequently, our audit may not identify all
deficiencies in internal control over financial reporting that are
less severe than a material weakness. Because of inherent limitations,
internal control may not prevent or detect and correct misstatements
due to error or fraud, losses, or noncompliance. We also caution that
projecting any evaluation of effectiveness to future periods is
subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
We did not test compliance with all laws and regulations applicable to
OFS. We limited our tests of compliance to selected provisions of laws
and regulations that have a direct and material effect on the
financial statements for fiscal year 2010. We caution that
noncompliance may occur and not be detected by these tests and that
such testing may not be sufficient for other purposes.
We performed our audit in accordance with U.S. generally accepted
government auditing standards. We believe our audit provides a
reasonable basis for our opinions and other conclusions.
Agency Comments:
In commenting on a draft of this report, the Acting Assistant
Secretary, Office of Financial Stability, stated OFS concurred with
the significant identified. He also stated that OFS is committed to
correcting the deficiency. The complete text of OFS’s comments is
reprinted in appendix II.
Signed by:
Gary T. Engel:
Director:
Financial Management and Assurance:
November 5, 2010:
[End of section]
Management’s Discussion and Analysis:
Executive Summary:
Treasury-OFS is pleased to present the Fiscal Year 2010 Agency
Financial Report (AFR) for the Troubled Asset Relief Program (TARP),
established by the Department of Treasury pursuant to the Emergency
Economic Stabilization Act of 2008 (EESA). There have been a number of
important milestones for TARP in recent months. First, the President
signed the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) on July 21, 2010, which limited TARP cumulative
purchase authority to $475 billion. Second, October 3, 2010 marked the
second anniversary of the passage of EESA and the end of the authority
to make new financial commitments. Therefore, it is an appropriate
time to reflect on what TARP has accomplished.
TARP, in conjunction with other federal government actions, helped to
unfreeze the markets for credit and capital, bringing down the cost of
borrowing for businesses, individuals, and state and local
governments, restoring confidence in the financial system and
restarting economic growth. TARP did so faster, and at a much lower
cost, than many anticipated.
* At the peak of the financial crisis, many banks were not making new
loans to businesses, or even to one another. Many businesses could not
get financing in capital markets. Numerous municipalities and state
governments could not issue bonds at reasonable rates. The
securitization markets — which provide financing for credit cards,
student loans, auto loans and other consumer financing — had basically
stopped functioning. The economy was contracting at an accelerating
rate, with millions of Americans losing their jobs.
* By the middle of 2009, assisted by the combined impact of the
federal government's financial programs, borrowing rates had fallen
sharply for businesses, individuals, and state and local governments.
More companies could fund themselves in private markets by issuing
equity and long-term debt. Housing prices began to stabilize. The
value of the savings of American workers had begun to recover.
Economic growth turned from negative to positive.
EESA provided the Secretary of the Treasury with the authority to
purchase or guarantee $700 billion but it has been clear for some time
that TARP will cost taxpayers substantially less than $700 billion. In
December 2009, the Secretary of the Treasury announced that no more
than $550 billion of the authority would be used. In July 2010, the
Dodd-Frank Act reduced the cumulative authority to $475 billion, in
line with expected investment amounts. Finally, many of the
investments under the program, particularly those aimed at stabilizing
banks, have thus far delivered positive returns for taxpayers.
As a result of improved market conditions, lower utilization of the
program, and careful stewardship, the estimated cost of TARP over its
lifetime continues to decline. In the August 2009 Midsession Review of
the President's 2010 Budget, the lifetime cost of TARP, based on
budget scoring conventions, was projected to be $341 billion (assuming
the full $700 billion of TARP authority was utilized). By the February
2011 President's Budget, the lifetime cost of TARP had decreased to
$117 billion (assuming $546 billion of the $700 billion TARP authority
was utilized).
Our most recent analysis of the potential lifetime cost of TARP
suggests that if the proposed restructuring of AIG is completed as
announced the lifetime cost of TARP could be less than $50 billion.
Under the proposed restructuring of AIG, Treasury-OFS would receive
1.1 billion shares of AIG common stock in exchange for its TARP
investment. While this cost is based on the October 1, 2010 market
price, it should be noted that the proceeds that would actually be
received by Treasury-OFS from the future sale of such stock would be
based on the market price at time of sale, which may differ materially
from the October 1, 2010 market price. Of course the final lifetime
cost of TARP will depend on how financial conditions evolve in the
future, including the price of AIG shares, and other common stock held
by TARP.
The estimated lifetime cost of TARP reflects several factors,
including the cost of the initiatives to help responsible homeowners
avoid foreclosure, for which $45.1 billion is budgeted which has not
yet been spent. All funds disbursed for housing programs result in a
cost because these funds will not be returned. It also reflects losses
on investments in the auto companies and AIG. These losses are largely
offset in part by gains on TARP investments in banks and gains in
other programs.
Because the restructuring has not occurred and its completion is
subject to contingencies, the value of the AIG investment in the
fiscal year 2010 financial statements does not reflect any potential
from the restructuring. The effects of the proposed restructuring of
AIG on the lifetime cost of TARP are presented in more detail later in
Management's Discussion and Analysis.
Note that the lifetime cost of TARP, based on budget scoring
conventions, differs from the cost included in the Treasury-OFS
financial statements. Estimates of lifetime costs assume that all
planned expenditures are made. By contrast, the TARP financial
statement costs are based on transactions through September 30, 2010.
The reported cost of TARP activities from inception, October 3, 2008,
through September 30, 2010 based on the Treasury-OFS financial
statements was $18.5 billion. Unlike the federal budget cost estimate,
this reflects only transactions through September 30, 2010. Thus, it
does not include the committed but undisbursed funds for housing
programs as well as other programs all of which are included in the
expected lifetime cost for budget purposes. The $18.5 billion cost
consists of $23.1 billion of reported TARP net income in the Treasury-
OFS financial statements for fiscal year 2010 and the $41.6 billion of
reported TARP net cost for the period ended September 30, 2009. The
change since last year is primarily due to the early repayment of TARP
investments by the larger banks and an improvement in the financial
markets and the economy.
Since its inception, TARP has disbursed $387.7 billion in direct loans
and equity investments, collected $204.1 billion in repayments, and
reported $16.7 billion in dividends, interest, and fees, and $10.9
billion in net proceeds from the sale and repurchase of assets in
excess of cost. As of September 30, 2010, TARP had $179.2 billion in
gross outstanding direct loans and equity investments, which are
valued at $142.4 billion. In addition, from inception through
September 30, 2010, TARP incurred costs related to Treasury Housing
programs of $0.8 billion and administrative costs of $0.5 billion.
The cost estimates for budget and financial statement purposes are
only estimates. They are based on current market prices where
available. Because market prices change, such estimates will change.
The ultimate cost of the outstanding TARP investments is therefore
subject to significant uncertainty and will depend on, among other
things, how the economy, financial markets and particular companies
perform.
Treasury-OFS is moving quickly to recover the federal government's
investments and to withdraw from the financial system. Treasury-OFS
aims to dispose of its investments as quickly as practicable, in a
timely and orderly manner consistent with the duty to promote
financial stability and protect taxpayers' interests.
* Treasury-OFS continues to carefully manage the TARP assets and has
recovered more than 75 percent of the TARP funds provided to banks,
principally through the Capital Purchase Program (CPP), and expects
these capital support programs for banks to provide an overall
positive return for taxpayers.
* Treasury-OFS is beginning to recover investments in the auto
industry. GM has repaid the assistance it received that remained
outstanding as a loan and has recently agreed to repurchase the
preferred stock issued to Treasury. The ultimate loss estimate on
investments in Chrysler and Ally Financial, Inc. (formerly GMAC) is
expected to be less than last year as well due to financial
improvements in both firms.
* The restructuring plan announced by AIG, assuming it is completed as
announced, will accelerate the timeline for repaying the federal
government and put taxpayers in a considerably stronger position to
recoup the Treasury-OFS investment in the company. As noted earlier,
the AIG restructuring is not yet completed and its closing is subject
to contingencies.
Treasury-OFS also expanded the Treasury Housing Programs under TARP.
Treasury-OFS launched the Housing Finance Agency (11FA) Innovation
Fund for the Hardest Hit Housing Markets (11FA Hardest Hit Fund, or
IMF) to help state housing finance agencies provide additional relief
to homeowners in the states hit hardest by unemployment and house
price declines. In addition, Treasury-OFS and the Department of
Housing and Urban Development (HUD) enhanced the FHA-Refinance program
to enable homeowners whose mortgages exceed the value of their homes
to refinance into more affordable mortgages if their lenders agree to
reduce the unpaid principal balance by at least 10 percent.
* Final authority to make commitments within the reduced TARP
authorization expired on October 3, 2010. Servicers that participate
in the Making Home Affordable Program (MHA) can continue to make
mortgage modifications through the end of calendar year 2012. The HFA
Hardest Hit Fund permits participating state housing agencies to
provide support through their programs until as late as calendar year
2017, depending on available funding. The FHA-Refinance program is
designed to enable homeowners to refinance their mortgage loans and
reduce their overall mortgage debt through the end of calendar year
2012.
Treasury-OFS continues to provide detailed information about TARP to
insure transparency. Treasury-OFS published a Two-Year Retrospective
Report on the Troubled Asset Relief Program on October 5, 2010. This
report includes information on TARP programs and the effects of TARP
and other federal government actions to address the financial crisis.
Readers are invited to refer to this document at [hyperlink,
http://www.financialstability.govidocs/TARP%20Two%20Year%20Retrospective
_10%2005%2010_transmittal%201etter.pdf].
Part I. Management's Discussion And Analysis:
Background, Mission and Organization Structure:
In order to appreciate the effects of TARP and the concentrated
efforts of the Administration to combat the financial crisis, it is
useful to examine the origin and causes of the crisis.
In September 2008, the nation was in the midst of one of the worst
financial crises in our history. The financial institutions and
markets that Americans rely upon to protect their savings, help
finance their children's education, and help pay their bills, and that
businesses rely upon to make payroll, build inventories, fund new
investments, and create new jobs, were threatened unlike at any time
since the Great Depression. Across the country, people were rapidly
losing confidence in our financial system and in the federal
government's ability to safeguard their economic future.
The causes of the crisis will be studied for years, and this report is
not meant to provide a comprehensive analysis of why the crisis
occurred. But some reasons are clear. Over the two decades preceding
the crisis, the financial system had grown rapidly in an environment
of economic growth and stability. Risks grew in the system without
adequate transparency. Lax
regulations and loopholes in supervision let firms become highly
leveraged and take on too much risk. Ample credit around the world
fueled an unsustainable housing boom in the first half of the last
decade. When the housing market inevitably turned down, starting in
2006, the pace of mortgage defaults accelerated at an unprecedented
rate. By mid-2007, rising mortgage defaults were undermining the
performance of many investments held by major financial institutions.
The crisis began in the summer of 2007 and gradually increased in
intensity and momentum over the course of the following year. A series
of major financial institutions, including Countrywide Financial, Bear
Stearns, and IndyMac, failed; and Fannie Mae and Freddie Mac, the
largest purchasers and guarantors of home loans in the mortgage
market, came under severe stress.
By September 2008, for the first time in 80 years, the U.S. financial
system was at risk of collapse. A growing sense of panic was producing
the classic signs of a generalized run on the banks. Peoples' trust
and confidence in the stability of major institutions, and the
capacity of the federal government to contain the damage, were
vanishing.
Our system of regulation and supervision had failed to constrain the
excessive use of leverage and the level of risk in the financial
system, and the United States entered this crisis without adequate
tools to manage it. The Executive Branch did not have existing options
for managing failures of systemically important non-bank financial
institutions.
The Treasury Department, the Federal Reserve, the FDIC, and other
federal government bodies undertook an array of emergency actions to
prevent a collapse and the dangers posed to consumers, businesses, and
the broader economy. However, the severe conditions our nation
faced required additional resources and authorities. Therefore, the
Bush Administration proposed EESA in late September, and with the
support of Democrats and Republicans in Congress, it was enacted into
law on October 3, 2008.
EESA established the Office of Financial Stability (OFS) within the
Office of Domestic Finance of the Treasury Department to implement the
TARP. The mission of Treasury-OFS is to carry out the authorities
given to the Secretary of the Treasury to implement the Troubled Asset
Relief Program (TARP). Section 101 of EESA authorized the Secretary of
the Treasury to establish the TARP to "purchase, and to make and fund
commitments to purchase, troubled assets from any financial
institution, on terms and conditions as are determined by the
Secretary". EESA defines the terms "troubled assets" and "financial
institution" and provides other requirements that must be met for any
such purchase. Section 102 of EESA also provides authority for a
guarantee program for troubled assets. Section 109 of EESA provides
authority to maximize assistance for homeowners. The enactment of the
Dodd-Frank Act in July 2010 subsequently reduced total TARP purchase
authority from $700 billion to a cumulative $475 billion.
Final purchase authority to make new commitments under TARP expired on
October 3, 2010. This means no new commitments to invest funds can be
made. There is, however, still significant work to be done to
implement commitments made by prior to the October 3 deadline but not
yet fully funded. For those assets already purchased, Treasury-OFS
will continue to wind down TARP and manage the remaining TARP
investments in order to recover as much of taxpayers' funds as
possible.
Treasury-OFS is headed by the Assistant Secretary for Financial
Stability, appointed by the President with the advice and consent of
the Senate. Reporting to the Assistant Secretary for Financial
Stability are six major organizations: the Chief Investment Officer,
the Chief Financial Officer, the Chief of Operations, the Chief of
Homeownership Preservation, the Chief Reporting Officer, and the Chief
of OFS Internal Review. A Chief Counsel's Office reports to the
Assistant Secretary and to the Office of the General Counsel in the
Department of Treasury.
The Treasury-OFS organization chart is shown below:
Figure:
[Refer to PDF for image: organization chart]
Top level:
Assistant Secretary for Financial Stability:
Chief Counsel.
Second level, reporting to Assistant Secretary for Financial Stability:
Chief Investment Officer;
Chief Financial Officer;
Chief of Operations;
Chief of Home Ownership Preservation;
Chief of OFS Internal Review
Chief Reporting Officer:
[End of figure]
The Office of the Chief Investment Officer (CIO) is responsible for
program development and the execution and management of all
investments made by either purchasing or insuring "troubled assets"
pursuant to EESA, other than TARP housing programs.
The Office of the Chief Financial Officer (CFO) has lead
responsibility within Treasury-OFS for budget formulation and
execution, cash management, accounting, financial systems, financial
reporting, program and internal metrics analytics, modeling cash
flows, and internal controls.
The Office of the Chief of Homeownership Preservation is responsible
for identifying opportunities to help homeowners and overseeing
homeownership programs while also protecting taxpayers.
The Office of the Chief of Operations is responsible for developing
the operating infrastructure and managing internal operations in
Treasury-OFS.
The Office of the Chief Reporting Officer is responsible for
coordinating Treasury-OFS' work with the external oversight entities
including the Government Accountability Office (GAO), the Special
Inspector General for TARP, the Financial Stability Oversight Board
and the Congressional Oversight Panel. The Office also prepares
periodic reports to the Congress as required by EESA.
The Office of Internal Review (OW) is responsible for identifying the
most significant risks that the TARP faces, both internally and
externally. In addition, OIR is responsible for validating internal
controls are present and functioning correctly and for monitoring TARP
recipient and external entity compliance with various statutory and
regulatory requirements.
The Office of the Chief Counsel reports functionally to the Office of
General Counsel at the Department of the Treasury and provides legal
advice to the Assistant Secretary. The Office is involved in the
structuring of OFS programs and activities to ensure compliance with
EESA and with other laws and regulations.
Treasury-OFS is not envisioned as a permanent organization, so to the
maximum extent possible when economically efficient and appropriate,
Treasury-OFS utilizes private sector expertise in support of the
execution of TARP programs. Fannie Mae and Freddie Mac accounted for
over sixty percent of the fiscal year 2010 non-personnel services
costs ($149 million of $247 million) to assist in the administration
and compliance oversight, respectively, of the Making Home Affordable
Program. Additionally, asset managers were hired to serve as financial
agents in assisting with managing the portfolio of assets associated
with several TARP programs. The balance of the non-personnel, private
sector firms were engaged to assist with the significant volume of
work associated with the TARP in the areas of accounting and internal
controls, administrative support, facilities, legal advisory,
financial advisory, and information technology.
Overview of TARP for Fiscal Year 2010:
Brief Statement of OFS Strategic and Operational Goals:
The purpose of EESA is to provide the Secretary of the Treasury with
the authorities and facilities necessary to restore liquidity and
stability to the U.S. financial system. In addition, the Secretary is
directed to ensure that such authorities are used in a manner that
protects home values, college funds, retirement accounts, and life
savings; preserves homeownership; promotes jobs and economic growth;
maximizes overall returns to taxpayers; and provides public
accountability. EESA also provided specific authority to take certain
actions to prevent avoidable foreclosures.
In light of this statutory direction, Treasury-OFS established the
following as its operational goals:
1. Ensure the overall stability and liquidity of the financial system.
a. Make capital available to viable institutions.
b. Provide targeted assistance as needed.
c. Increase liquidity and volume in securitization markets.
2. Prevent avoidable foreclosures and help preserve homeownership.
3. Protect taxpayer interests.
4. Promote transparency.
1. Ensure the Overall Stability and Liquidity of the Financial System:
To ensure the overall stability and liquidity of the financial system,
Treasury-OFS developed several programs under the TARP that were
broadly available to financial institutions. Under the Capital
Purchase Program (CPP), Treasury-OFS provided capital infusions
directly to banks and insurance companies deemed viable by their
regulators but in need of a stronger asset base to weather the crisis.
The Capital Assistance Program (CAP) was developed to supplement the
Supervisory Capital Assessment Program (SCAP), or "stress test" of the
largest U.S. financial institutions. If these institutions were unable
to raise adequate private funds to meet the SCAP requirements,
Treasury-OFS stood ready to provide additional capital.
In addition, Treasury-OFS provided direct aid to certain financial
industry participants through the Targeted Investment Program (TIP),
the Asset Guarantee Program (AGP), and the AIG Investment Program.
These programs were designed to mitigate the potential risks to the
system as a whole from the difficulties facing these firms.
Similarly, the Automotive Industry Financing Program (AIFP) provided
funding for General Motors Corporation (GM) and Chrysler LLC
(Chrysler), as well as their financing affiliates in order to prevent
a significant disruption of the automotive industry that would have
posed a systemic risk to financial markets and negatively affected
economic growth and employment. Treasury-OFS' actions helped GM and
Chrysler undertake massive and orderly restructurings through the
bankruptcy courts that have resulted in leaner and stronger companies.
The Public-Private Investment Program (PPIP) was established to
facilitate price discovery and liquidity in the markets for troubled
real estate-related assets as well as the removal of such assets from
the balance sheets of financial institutions. In addition to these
initiatives, Treasury-OFS implemented the Consumer and Business
Lending Initiative (CBLI) to enhance liquidity and restore the flow of
credit to consumers and small businesses. Treasury-OFS developed
programs to revitalize asset-backed securities markets critical to
restoring the flow of credit to consumers and small businesses. CBLI
is composed of the Term Asset-Backed Securities Loan Facility, the SBA
7a Securities Purchase Program and the Community Development Capital
Initiative.
Details on all of these efforts, including program-specific results,
can be found later in this Management's Discussion and Analysis under
Operational Goals.
2. Prevent Avoidable Foreclosures and Preserve Homeownership:
To prevent avoidable foreclosures and preserve homeownership, Treasury-
OFS launched the Making Home Affordable Program (MITA), which includes
the Home Affordable Modification Program (HAMP). Under this program,
Treasury-OFS pays the cost of modifications of loans not held by
government-sponsored enterprises (GSEs) while the GSEs pay the cost of
modifications of loans held by the GSEs. After 18 months, more than
1.3 million homeowners participating in HAMP have entered into trial
modifications that reduced their mortgage payments to more affordable
levels. This includes 619,000 homeowners with nonGSE loans. Nearly
500,000 homeowners participating in the HAMP Program have had their
mortgage terms modified permanently, with over 220,000 of those
participants in non-GSE loans that would be funded by Treasury-OFS.
HAMP participants (both GSE and non-GSE loans) collectively have
experienced a 36 percent median reduction in their mortgage payments—
more than $500 per month—amounting to a total, program-wide
anticipated savings for homeowners of more than $3.2 billion. MHA has
also spurred the mortgage industry to adopt similar programs that have
helped millions more at no cost to the taxpayer.
In addition, Treasury-OFS launched the Housing Finance Agency (11FA)
Innovation Fund for the Hardest Hit Housing Markets (HFA Hardest Hit
Fund, or IMF) to help state housing finance agencies provide
additional relief to homeowners in the states hit hardest by
unemployment and house price declines, and Treasury-OFS and the
Department of Housing and Urban Development (HUD) enhanced the FHA-
Refinance Program in creating the FHA Short Refinance option to enable
more homeowners whose mortgages exceed the value of their homes to
refinance into more affordable mortgages if their lenders agree to
reduce principal by at least 10 percent.
MHA operations and program detail can be found later in this
Management Discussion and Analysis under Operational Goals.
3. Protect Taxpayer Interests:
Federal government financial programs, including TARP, helped prevent
the U.S. financial system from collapse, which could have resulted in
a much more severe contraction in employment and production. The
manner in which TARP was implemented is also designed to protect
taxpayers and to compensate them for risk. For example, in exchange
for capital injections, recipients of TARP funds have to adhere to
corporate governance standards, limit executive pay, and provide
additional reporting on lending activity. In addition, Treasury-OFS
generally received preferred equity, which provides dividends. The
dividend rates increase over time to encourage repayment.
Further, EESA stipulated that the taxpayer benefit as the institutions
which received TARP funds recovered. In connection with most
investments, Treasury-OFS also receives warrants for additional
securities in the institutions. Under the broad programs described
above, Treasury-OFS has priority over existing shareholders of TARP
recipients for which TARP holds equity investments. This gives
taxpayers the ability to share in the potential upside along with
existing shareholders.
Finally, Treasury-OFS seeks to achieve the goal of protecting the
taxpayer through the effective management and disposition of all TARP
investments, as detailed under Operational Goals.
4. Promote Transparency:
EESA requires transparency and accountability. Specifically, EESA
requires Treasury-OFS to provide Congress with a variety of reports.
These include a monthly report to Congress on TARP activity and
transaction reports posted within two days detailing every TARP
transaction. In carrying out its operations, Treasury-OFS has sought
to not only meet the statutory
requirements but also to be creative and flexible with respect to
additional transparency initiatives. Treasury-OFS proactively provides
to the public monthly Dividends and Interest Reports reflecting
dividends and interest paid to Treasury-OFS from TARP investments,
loans, and asset guarantees, as well as monthly reports detailing the
lending activity of participants in the Capital Purchase Program.
EESA also provided for extensive oversight of the TARP, including by
the Congressional Oversight Panel, the Special Inspector General for
the TARP, the Financial Stability Oversight Board (FSOB), and the
Government Accountability Office. In addition, Treasury-OFS officials
frequently testify before Congress on the progress of TARP programs,
and Treasury-OFS staff provide briefings to Congressional staff on
programmatic developments.
Further details on these efforts can be found in this Management's
Discussion and Analysis under Operational Goals.
Fiscal Year 2010 Financial Summary:
EESA provided authority for the TARP to purchase or guarantee up to
$700 billion in troubled assets.[Footnote 1] Treasury-OFS used this
authority to help strengthen the U.S. financial system, restore health
and liquidity to credit markets to facilitate borrowing by consumers
and businesses, and prevent avoidable foreclosures in the housing
market. EESA spending authority would terminate December 30, 2009,
unless extended upon submission of a written certification to Congress
by the Secretary of the Treasury, pursuant to Section 120(b) of EESA.
In December 2009, the Secretary of the Treasury certified the
extension of TARP authority until October 3, 2010. The Secretary
identified two principal objectives for the extension of TARP — to
preserve capacity to respond to unforeseen threats to financial
stability and to address continuing challenges in the areas of home
foreclosures and credit for small business lending and consumers. He
also indicated that Treasury-OFS did not expect to use more than $550
billion of the approximately $700 billion authorized by Congress.
The Dodd-Frank Wall Street Reform and Consumer Protection Act[Footnote
2] (the Dodd-Frank Act) amended EESA, as follows:
* Total purchase and guarantee authority under TARP was capped at a
cumulative $475 billion;
* The amount of TARP investments that have been repaid could not be
used to increase spending; and;
* Obligations could not be incurred for programs or initiatives that
were not initiated prior to June 25, 2010.
Treasury-OFS reduced the TARP program allocations to conform to these
limitations. As of September 30, 2010, Treasury-OFS had cumulative
purchases and guarantees (as defined in the Dodd-Frank Act) amounting
to $474.8 billion.
Based on operations for the year ended September 30, 2010, Treasury-
OFS reports the following key results:
* In fiscal year 2010, Treasury-OFS disbursed $23.4 billion in TARP
funds to make loans and equity investments, and reported net income
from operations of $23.1 billion.
* During fiscal year 2010, Treasury-OFS received $131.3 billion of
repayments on certain investments and loans and $8.2 billion in net
proceeds from the sale/repurchase of assets in excess of cost.
* As of September 30, 2010, Treasury-OFS reported $145.5 billion for
the value of loans, equity investments, and the asset guarantee
program.
Net Income of TARP Operations (Fiscal Year 2010 and Fiscal Year 2009):
Treasury-OFS' fiscal year 2010 net income from operations of $23.1
billion includes the estimated net cost related to loans, equity
investments, and the asset guarantee program. For the fiscal year
ended September 30, 2010, Treasury-OFS reported net subsidy income for
five programs -- the Targeted Investment Program, the Asset Guarantee
Program, PPIP, the AIG Investment Program and the Automotive Industry
Financing Program (AIFP). These programs collectively reported net
subsidy income of $28.4 billion. Also, for the fiscal year ended
September 30, 2010, Treasury-OFS experienced net subsidy cost for two
programs — CPP and the Consumer and Business Lending Initiative had
reported net subsidy cost of $4.2 billion. Fiscal year 2010 expenses
for the Treasury Housing Programs under TARP of $825 million and
administrative expenses of $296 million bring the total reported
fiscal year net income from operations to $23.1 billion, as shown in
Table 1. For the period ending September 30, 2009, the net cost of
operations was $41.6 billion as reflected in Table 1. These net income
and net cost amounts reported in the financial statements reflect only
transactions through September 30, 2010 and September 30, 2009
respectively, therefore are different than lifetime cost estimates
made for budgetary purposes. See the discussion in the Executive
Summary.
Table 1: Net Income (Cost) of TARP Operations (dollars in millions):
TARP Program: Capital Purchase Program;
For the Year Ended September 30, 2010: ($3,861);
For the Period Ended September 30, 2009: $15,033;
From TARP's Inception through September 30, 2010: $11,172.
TARP Program: Targeted Investment Program;
For the Year Ended September 30, 2010: $1,879;
For the Period Ended September 30, 2009: $1,927;
From TARP's Inception through September 30, 2010: $3,806.
TARP Program: Asset Guarantee Program;
For the Year Ended September 30, 2010: $1,505;
For the Period Ended September 30, 2009: $2,201;
From TARP's Inception through September 30, 2010: $3,706.
TARP Program: Consumer and Business Lending Initiative;
For the Year Ended September 30, 2010: ($306);
For the Period Ended September 30, 2009: $339;
From TARP's Inception through September 30, 2010: $33.
TARP Program: PPIP;
For the Year Ended September 30, 2010: $704;
For the Period Ended September 30, 2009: [Empty];
From TARP's Inception through September 30, 2010: $704.
TARP Program: American International Group Investment Program;
For the Year Ended September 30, 2010: $7,668;
For the Period Ended September 30, 2009: ($30,427);
From TARP's Inception through September 30, 2010: ($22,759).
TARP Program: Automotive Industry Financing Program;
For the Year Ended September 30, 2010: $16,614;
For the Period Ended September 30, 2009: ($30,477);
From TARP's Inception through September 30, 2010: ($13,863).
Total Net Subsidy Income (Cost):
For the Year Ended September 30, 2010: $24,203;
For the Period Ended September 30, 2009: ($41,404);
From TARP's Inception through September 30, 2010: ($17,201).
Additional TARP (Costs):
Treasury Housing Programs under TARP:
For the Year Ended September 30, 2010: ($825);
For the Period Ended September 30, 2009: ($2);
From TARP's Inception through September 30, 2010: ($827).
Administrative Costs:
For the Year Ended September 30, 2010: ($296);
For the Period Ended September 30, 2009: ($167);
From TARP's Inception through September 30, 2010: ($463).
Total Net (Cost of) Income from TARP Operations:
For the Year Ended September 30, 2010: $23,082;
For the Period Ended September 30, 2009: ($41,573);
From TARP's Inception through September 30, 2010: ($18,491).
[End of table]
Over time the cost of the TARP programs will change. As described
later in this MD&A, and in the Treasury-OFS audited financial
statements, these estimates are based in part on currently projected
economic factors. These economic factors will likely change, either
increasing or decreasing the lifetime cost of the TARP.
TARP Program Summary:
Table 2 provides a financial summary for TARP programs since TARP
inception on October 3, 2008, through September 30, 2010. For each
program, the table gives the face value of the amount obligated for
each program, the amount actually disbursed, repayments to Treasury-
OFS from program participants, net outstanding balance as of September
30, 2010, and cash inflows on the investments for each program in the
form of dividends, interest or other fees. As of fiscal year end 2010,
$230 million of the $475 billion in purchase and guarantee authority
remained unused.[Footnote 3]
Table 2: TARP Summary[A]:
From TARP Inception through September 30, 2010:
Dollars in billions:
Capital Purchase Program[C]:
Purchase Price or Guarantee Amounts: $204.9;
Total Disbursed: $204.9;
Investment Repayments: $152.5[D];
Outstanding Balance[B]: $49.8;
Received from Investments: $19.8.
Targeted Investment Program:
Purchase Price or Guarantee Amounts: $40.0;
Total Disbursed: $40.0;
Investment Repayments: $40.0;
Outstanding Balance[B]: $0.0;
Received from Investments: $4.2.
Asset Guarantee Program:
Purchase Price or Guarantee Amounts: $5.0;
Total Disbursed: $0.0;
Investment Repayments: $0.0;
Outstanding Balance[B]: $0.0;
Received from Investments: $0.7.
American International Group Investment Programs[E]:
Purchase Price or Guarantee Amounts: $69.8;
Total Disbursed: $47.6;
Investment Repayments: $0.0;
Outstanding Balance[B]: $47.6;
Received from Investments: $0.0;
Consumer and Business Lending Initiative:
Purchase Price or Guarantee Amounts: $5.3;
Total Disbursed: $0.94;
Investment Repayments: [Empty];
Outstanding Balance[B]: $0.9[D];
Received from Investments: [Empty].
Public Private Investment Program:
Purchase Price or Guarantee Amounts: $22.4;
Total Disbursed: $14.1;
Investment Repayments: $0.4;
Outstanding Balance[B]: $13.7;
Received from Investments: $0.2.
Automotive Industry Financing Program:
Purchase Price or Guarantee Amounts: $81.8;
79.7;
Investment Repayments: $11.2;
Outstanding Balance[B]: $67.2;
Received from Investments: $2.9.
Treasury Housing Programs Under TARP:
Purchase Price or Guarantee Amounts: $45.6;
Total Disbursed: $0.5;
Investment Repayments: N/A;
Outstanding Balance[B]: N/A;
Received from Investments: N/A.
Totals:
Purchase Price or Guarantee Amounts: $474.8;
Total Disbursed: $387.7;
Investment Repayments: $204.1;
Outstanding Balance[B]: $179.2;
Received from Investments: $27.8.
[A] This table shows the TARP activity for the period from inception
through September 30, 2010, on a cash basis. Received from investments
includes dividends and interest income reported in the Statement of
Net Cost, and Proceeds from sale and repurchases of assets in excess
of costs.
[B] Total disbursements less repayments do not equal the outstanding
balance. Other transactions affecting the outstanding balance include
Treasury housing program funding of $0.5 billion because repayments
are not required (or expected). Also, the outstanding balance is
affected by certain non-cash items including capitalized interest of
$0.3 billion, write-offs totaling $3.9 billion and losses on two
preferred stock transactions of $0.2 billion.
[C] Treasury-OFS received $16.1 billion in proceeds from sales of
Citigroup common stock, of which $13.1 billion is included at cost in
investment repayments, and $3.0 billion of net proceeds in excess of
cost is included in Received from Investments.
[D] Includes Community Development Capital Initiative exchange from
CPP of $363 million.
[E] The disbursed amount is lower than purchase price because of the
$29.8 billion facility available to AIG. During the periods ended
September 30, 2010 and September 30, 2009, AIG drew $4.3 billion and
$3.2 billion respectively from the facility, leaving an undrawn amount
of $22.3 billion under this facility.
[End of table]
Most of the TARP funds have been used to make investments in preferred
stock or make loans. Treasury-OFS has generally received dividends on
the preferred stock and interest payments on the loans from the
institutions participating in TARP programs. These payments are a
return on Treasury's TARP investments. For the two-year period ended
September 30, 2010, Treasury-OFS received a total of $16.7 billion in
dividends, interest and fees. Table 3 shows the breakdown of receipts
for the period ended September 30, 2010 and 2009 for all TARP programs
combined as well as totals for the period from inception through
September 30, 2010.
Table 3: TARP Receipts and Repayments on Investments/Loans[A]:
(Dollars in billions):
Dividends, Interest, Fees and Warrants Repurchases:
Dividends and Fees:
For the Year Ended September 30, 2010: $5.9;
For the Period Ended September 30, 2009: $9.6;
From TARP's Inception through September 30, 2010: $15.5.
Interest:
For the Year Ended September 30, 2010: $1.0;
For the Period Ended September 30, 2009: $0.2;
From TARP's Inception through September 30, 2010: $1.2.
Sales/Repurchases of Warrants and Warrant Preferred Stock and
Additional Notes:
For the Year Ended September 30, 2010: $5.2;
For the Period Ended September 30, 2009: $2.9;
From TARP's Inception through September 30, 2010: $8.1.
Proceeds from Sales of Citigroup Common Stock in Excess of Cost:
For the Year Ended September 30, 2010: $3.0;
For the Period Ended September 30, 2009: $0.0;
From TARP's Inception through September 30, 2010: $3.0.
Subtotal:
For the Year Ended September 30, 2010: $15.1;
For the Period Ended September 30, 2009: $12.7;
From TARP's Inception through September 30, 2010: $27.8.
Investment/Loan Repayments:
Sales/Repurchases/Repayments on Stock:
For the Year Ended September 30, 2010: $122.0;
For the Period Ended September 30, 2009: $70.7;
From TARP's Inception through September 30, 2010: $192.7.
Loan Principal Repaid:
For the Year Ended September 30, 2010: $9.3;
For the Period Ended September 30, 2009: $2.1;
From TARP's Inception through September 30, 2010: $11.4.
Subtotal:
For the Year Ended September 30, 2010: $131.3;
For the Period Ended September 30, 2009: $72.8;
From TARP's Inception through September 30, 2010: $204.1.
Grand Total:
For the Year Ended September 30, 2010: $146.4;
For the Period Ended September 30, 2009: $85.5;
From TARP's Inception through September 30, 2010: $231.9.
[A] This table shows TARP activity on a cash basis.
[End of table]
Treasury-OFS also receives warrants in connection with most of its
investments, which provides an opportunity for taxpayers to realize an
upside on investments. Since the program's inception, Treasury-OFS has
received $8.0 billion in gross proceeds from the disposition of
warrants consisting of (i) $3.1 billion from issuer repurchases at
agreed upon values and (ii) $4.9 billion from auctions. TARP's Warrant
Disposition Report is posted on the OFS website at the following link:
[hyperlink,
http://www.financialstability.gov/latest/reportsanddocs.html].
Summary of TARP Direct Loans and Equity Investments:
Table 4 provides information on the estimated values of the TARP
direct loan and equity investments by program, as of the end of fiscal
year 2010 and the end of fiscal year 2009. (Treasury Housing Programs
under TARP are excluded from the chart because no repayments are
required). The Outstanding Balance column represents the amounts
disbursed by Treasury-OFS relating to the loans and equity investments
that were outstanding as of September 30, 2010 and 2009. The Estimated
Value of the Investment column represents the present value of net
cash inflows that Treasury-OFS estimates it will receive from the
loans and equity investments. For equity securities, this amount
represents fair value. The total difference of $36.8 billion (2010)
and $53.1 billion (2009) between the two columns is considered the
"subsidy cost allowance" under the Federal Credit Reform Act methods
Treasury-OFS follows for budget and accounting purposes (see Note 6 in
the financial statements for further discussion).[Footnote 4] The
chart does not give effect to the proposed restructuring of AIG. The
AIG restructuring plan is still subject to a number of conditions and
much work remains to be done to close the transactions.
Table 4: Summary of TARP Direct Loans and Equity Investments:
Dollars in billions:
Program: Capital Purchase Program;
Estimated Balance as of September 30, 2010[A]: $49.8;
Estimated Value of Investment as of September 30, 2010: $48.2;
Outstanding Balance as of September 30, 2009[A]: $133.9;
Estimated Value of Investment as of September 30, 2009: $141.7.
Program: Targeted Investment Program;
Estimated Balance as of September 30, 2010[A]: 0;
Estimated Value of Investment as of September 30, 2010: N/A;
Outstanding Balance as of September 30, 2009[A]: $40.0;
Estimated Value of Investment as of September 30, 2009: $40.3.
Program: AIG Investment Program;
Estimated Balance as of September 30, 2010[A]: $47.6;
Estimated Value of Investment as of September 30, 2010: $26.1[B];
Outstanding Balance as of September 30, 2009[A]: $43.2;
Estimated Value of Investment as of September 30, 2009: $13.2.
Program: Automotive Industry Financing Program;
Estimated Balance as of September 30, 2010[A]: $67.2;
Estimated Value of Investment as of September 30, 2010: $52.7;
Outstanding Balance as of September 30, 2009[A]: $73.8;
Estimated Value of Investment as of September 30, 2009: $42.3.
Program: Consumer Business Lending Initiative (TALF only 2009);
Estimated Balance as of September 30, 2010[A]: $0.9;
Estimated Value of Investment as of September 30, 2010: $1.0;
Outstanding Balance as of September 30, 2009[A]: $0.1;
Estimated Value of Investment as of September 30, 2009: $0.4.
Program: Public-Private Investment Program;
Estimated Balance as of September 30, 2010[A]: $13.7;
Estimated Value of Investment as of September 30, 2010: $14.4;
Outstanding Balance as of September 30, 2009[A]: [Empty];
Estimated Value of Investment as of September 30, 2009: [Empty].
Program: Total:
Estimated Balance as of September 30, 2010[A]: $179.2;
Estimated Value of Investment as of September 30, 2010: $142.4;
Outstanding Balance as of September 30, 2009[A]: $291.0;
Estimated Value of Investment as of September 30, 2009: $237.9.
[A] Before subsidy cost allowance.
[B] Does not give effect to proposed restructuring. See discussion
concerning "The AIG Restructuring Plan and Taxpayer Exit" later in
this Management's Discussion and Analysis.
[End of table]
Table 5 below shows the estimated net asset value for the top ten CPP
investments held as of September 30, 2010.
Table 5: Top Ten CPP Investments (Dollars in billions):
Institution: Citigroup (Common Shares);
Outstanding Investment[A]: $11.90;
Estimated Net Asset Value (excluding warrants) as of September 30,
2010: $14.31.
Institution: SunTrust;
Outstanding Investment[A]: $4.85;
Estimated Net Asset Value (excluding warrants) as of September 30,
2010: $4.84.
Institution: Regions;
Outstanding Investment[A]: $3.50;
Estimated Net Asset Value (excluding warrants) as of September 30,
2010: $3.49.
Institution: Fifth Third;
Outstanding Investment[A]: $3.41;
Estimated Net Asset Value (excluding warrants) as of September 30,
2010: $3.34.
Institution: Keycorp;
Outstanding Investment[A]: $2.50;
Estimated Net Asset Value (excluding warrants) as of September 30,
2010: $2.50.
Institution: Marshall & Ilsley;
Outstanding Investment[A]: $1.72;
Estimated Net Asset Value (excluding warrants) as of September 30,
2010: $1.47.
Institution: Zions;
Outstanding Investment[A]: $1.40;
Estimated Net Asset Value (excluding warrants) as of September 30,
2010: $1.22.
Institution: Huntington;
Outstanding Investment[A]: $1.40;
Estimated Net Asset Value (excluding warrants) as of September 30,
2010: $1.39.
Institution: Synovus;
Outstanding Investment[A]: $0.97;
Estimated Net Asset Value (excluding warrants) as of September 30,
2010: $0.79.
Institution: Popular;
Outstanding Investment[A]: $0.94;
Estimated Net Asset Value (excluding warrants) as of September 30,
2010: $0.79.
Institution: Total;
Outstanding Investment[A]: $32.59;
Estimated Net Asset Value (excluding warrants) as of September 30,
2010: $34.14.
[A] Outstanding investment for Citigroup common equals the remaining
number of common shares multiplied by the per share cost basis of
$3.25.
[End of table]
The ultimate cost of the TARP will not be known for some time. The
financial performance of the programs will depend on many factors such
as future economic and financial conditions, and the business
prospects of specific institutions. The estimates are sensitive to
slight changes in model assumptions, such as general economic
conditions, specific stock price volatility of the entities in which
Treasury-OFS has an equity interest, estimates of expected defaults,
and prepayments. If Treasury-OFS experiences higher than currently
projected early repayments and fewer defaults, TARP's ultimate cost on
these investments may be lower than estimated. Wherever possible,
Treasury-OFS uses market prices of tradable securities to estimate the
fair value of TARP investments. Use of market prices was possible for
TARP investments that are standard financial instruments that trade in
public markets or are closely related to tradable securities. For
those TARP investments that do not have direct analogs in private
markets, Treasury-OFS uses internal market-based models to estimate
the market value of these investments. All cash flows are adjusted for
market risk. Further details on asset valuation can be found in Note 6
of the Financial Statements.
Comparison of Estimated Lifetime TARP Costs Over Time:
Market conditions and the performance of specific financial
institutions will be critical determinants of the TARP's lifetime
cost. The changes in the Treasury-OFS estimates since TARP's inception
through September 30, 2010 provide a good illustration of this impact.
In the Fiscal Year 2011 President's Budget, Treasury-OFS projected the
cost for TARP to be $117 billion (assuming $546 billion utilized),
down substantially from the previous estimate of $341 billion (based
on the entire $700 billion utilized) reflected in the Midsession
Review in August 2009, which is reflective of the improved economy and
financial markets. An August 2010 report of the Congressional Budget
Office estimated the total cost of TARP as $66 billion.[Footnote 5]
Table 6 provides information on how Treasury-OFS' estimated lifetime
cost of TARP has changed over time. This table assumes that all
expected investments (e.g. AIG, PPIP) and disbursements for Treasury
housing programs under TARP are completed, and adheres to government
budgeting guidance. This table will not tie to the financial
statements since it includes investments and other disbursements
expected to be made in the future. Table 6 is consistent with the
estimated lifetime cost disclosures on the TARP web site at
[hyperlink, http://www.financialstability.gov]. The cost amounts in
Table 6 are based on assumptions regarding future events, which are
inherently uncertain.
Table 6: Estimated Lifetime TARP Costs (Income)[A]:
(Dollars in billions):
Program: Capital Purchase Program;
Estimated Lifetime Cost on March 31, 2010: ($9.8);
Estimated Lifetime Cost on May 31, 2010: ($9.4);
Estimated Lifetime Cost on September 30, 2010: ($11.2);
Pro-forma Lifetime Cost Assuming AIG Restructuring and October 1, 2010
Market Price: ($11.2).
Program: Targeted Investment Program;
Estimated Lifetime Cost on March 31, 2010: ($3.8);
Estimated Lifetime Cost on May 31, 2010: ($3.8);
Estimated Lifetime Cost on September 30, 2010: ($3.8);
Pro-forma Lifetime Cost Assuming AIG Restructuring and October 1, 2010
Market Price: ($3.8).
Program: Asset Guarantee Program[B];
Estimated Lifetime Cost on March 31, 2010: ($3.1);
Estimated Lifetime Cost on May 31, 2010: ($3.0);
Estimated Lifetime Cost on September 30, 2010: ($3.7);
Pro-forma Lifetime Cost Assuming AIG Restructuring and October 1, 2010
Market Price: ($3.7).
Program: AIG Investment Program;
Estimated Lifetime Cost on March 31, 2010: $45.2;
Estimated Lifetime Cost on May 31, 2010: $44.9;
Estimated Lifetime Cost on September 30, 2010: $36.9;
Pro-forma Lifetime Cost Assuming AIG Restructuring and October 1, 2010
Market Price: $5.1[C].
Program: Auto Industry Financing Program[D];
Estimated Lifetime Cost on March 31, 2010: $24.6;
Estimated Lifetime Cost on May 31, 2010: $26.9;
Estimated Lifetime Cost on September 30, 2010: $14.7;
Pro-forma Lifetime Cost Assuming AIG Restructuring and October 1, 2010
Market Price: $14.7.
Program: Consumer and Business Lending Initiative;
Estimated Lifetime Cost on March 31, 2010: $3.0;
Estimated Lifetime Cost on May 31, 2010: ($0.4);
Estimated Lifetime Cost on September 30, 2010: ($0.1);
Pro-forma Lifetime Cost Assuming AIG Restructuring and October 1, 2010
Market Price: ($0.1).
Program: Public Private Investment Program;
Estimated Lifetime Cost on March 31, 2010: $0.5;
Estimated Lifetime Cost on May 31, 2010: $0.5;
Estimated Lifetime Cost on September 30, 2010: ($0.7);
Pro-forma Lifetime Cost Assuming AIG Restructuring and October 1, 2010
Market Price: ($0.7).
Program: Subtotal;
Estimated Lifetime Cost on March 31, 2010: $56.6;
Estimated Lifetime Cost on May 31, 2010: $55.7;
Estimated Lifetime Cost on September 30, 2010: $32.1;
Pro-forma Lifetime Cost Assuming AIG Restructuring and October 1, 2010
Market Price: $0.3.
Program: Treasury Housing Programs under TARP;
Estimated Lifetime Cost on March 31, 2010: $48.8;
Estimated Lifetime Cost on May 31, 2010: $45.6;
Estimated Lifetime Cost on September 30, 2010: $45.6;
Pro-forma Lifetime Cost Assuming AIG Restructuring and October 1, 2010
Market Price: $45.6.
Program: Total;
Estimated Lifetime Cost on March 31, 2010: $105.4;
Estimated Lifetime Cost on May 31, 2010: $101.3;
Estimated Lifetime Cost on September 30, 2010: $77.7;
Pro-forma Lifetime Cost Assuming AIG Restructuring and October 1, 2010
Market Price: $45.9.
[A] Estimated program costs (+) or savings (in parentheses) over the
life of the program, including interest on re-estimates and excluding
administrative costs.
[B] Prior to the termination of the guarantee agreement, Treasury
guaranteed up to $5 billion of potential losses on a $301 billion
portfolio of loans.
[C] The pro-forma lifetime cost for the AIG Investment Program assumes
that: (i) the outstanding preferred stock investment is exchanged for
1.1 billion shares of AIG common stock and valued at the market price
of $38.86 at October 1, 2010, and (ii) the undrawn commitment is
disbursed and is valued consistent with Treasury-OFS methodology for
valuing its non-traded securities. Under this methodology, Treasury-
OFS estimates that it will not incur any loss on the additional
disbursements because the aggregate value of the assets underlying the
preferred interests in the Special Purpose Vehicles that Treasury-OFS
will receive for the disbursements exceeds the liquidation preference
of the preferred interests. The restructuring is subject to
contingencies and has not been completed. In addition, market prices
will change which will result in changes to the cost estimate over
time. The pro-forma lifetime cost does not include any recovery from
the shares of AIG common stock to be received by Treasury from the AIG
Credit Facility Trust that are in addition to Treasury-OFS' shares.
See "The AIG Restructuring Plan and Taxpayer Exit" discussion later in
this Management's Discussion and Analysis.
[D] GM has filed a registration statement for an initial public
offering (IPO). If the IPO is completed, Treasury-OFS will use the
market price for GM common stock to value its investment in the
future. Because there is no market price today, Treasury-OFS cannot
value its investment in this manner and instead uses its methodology
for non-traded securities. The actual price that would be obtained
from the IPO is uncertain and will vary, perhaps significantly, from
the September 30, 2010 valuation. However, if Treasury-OFS were to
value its investment at the IPO range of $26 to $29 per share
announced by GM in the preliminary prospectus dated November 3, 2010,
Treasury-OFS' estimated cost for the AIFP would increase by $3 billion
to $6 billion. Although not given effect in this column either, GM has
also agreed, subject to the closing of the IPO, to repurchase $2.1
billion of preferred shares issued to Treasury-OFS at 102 percent of
par value.
[End of table]
Key Trends/Factors Affecting TARP Future Activities and Ultimate Cost:
This section provides additional TARP analytic information and
enhanced sensitivity analysis focusing on the remaining TARP
dollars/continued taxpayer exposure and what is likely to affect the
expected future return. Five TARP programs, the Capital Purchase
Program, the AIG Investment Program, the Automotive Industry Financing
Program, the Public-Private Investment Program and the Treasury
Housing Programs under TARP, have $10 billion or more still committed.
The recoveries or costs from CPP, AIG, AIFP, and PPIP and the
expenditures for Treasury Housing programs going forward will most
significantly affect the lifetime cost of the TARP.
CPP and Banking Industry Information:
As of September 30, 2010, Treasury-OFS had CPP investments with an
outstanding balance of $49.8 billion. Of these investments $11.9
billion is the Treasury-OFS investment in Citigroup common stock,
$26.5 billion is in financial institutions with assets greater than
$10 billion (25 institutions), and $11.4 billion is in financial
institutions with assets less than $10 billion (565 institutions). As
of September 30, 2010, 5 CPP recipients had failed: 4 were banks and
one was CIT Group, a non-bank financial institution with a bank
subsidiary. As noted earlier in this report, the largest institutions
in the CPP have repaid their investments to Treasury-OFS.
Treasury-OFS' actual recoveries on the outstanding CPP investments
will depend on a number of factors, including the asset quality,
capital position, reserve ratios and capital positions of financial
institutions participating in CPP as well as whether these
institutions have a business focus in areas hit hard by the housing
downtown or difficulties in commercial real estate. It is also
anticipated that a certain number of these institutions will elect to
convert their CPP investments into investments made by the Small
Business Lending Fund which was created by Congress pursuant to the
Small Business Jobs and Credit Act of 2010 (Public Law 111-240).
Throughout the life of the program, 118 CPP recipients have not
declared and paid one or more dividends to Treasury-OFS. Of these
recipients, six have missed six payments, which gives Treasury-OFS the
right to place members on the institutions' boards of directors.
Auto Industry Information:
As of September 30, 2010, Treasury-OFS held $67.2 billion in AIFP
investments, with an estimated value of $52.7 billion. Over the past
several months, conditions in the U.S. automotive industry have
improved as has Treasury-OFS' estimate of the recovery on the AIFP
investment.
The competitiveness of U.S. manufacturers, both domestically and
internationally will affect the value of Treasury-OFS' investment. In
addition, the macroeconomic conditions (unemployment, Gross Domestic
Product (GDP) growth, etc.) will affect the overall trends in auto
sales and thus Treasury-OFS' recoveries.
Treasury-OFS has recovered all amounts invested under the Auto
Supplier Support Program (ASSP) and the Auto Warranty Commitment
Program (AWCP). With the emergence of General Motors Company and
Chrysler Group LLC from bankruptcy proceedings and with the threat of
liquidation greatly reduced, credit market access for suppliers
improved. The ASSP closed in April 2010 after full repayment of all
loans, which had totaled $413 million, plus interest. The AWCP was
terminated in 2009, and the $640 million advanced under the program
was assumed and/or repaid in the bankruptcy sale transactions by
General Motors Company and Chrysler Group LLC.
The outlook for the domestic auto industry has improved and the
estimated value of Treasury-OFS' investments has increased. The cost
of AIFP from inception through September 30, 2010 was $13.9 billion,
as compared to the cost through September 30, 2009 of $30.5 billion.
General Motors Company repaid $7 billion to Treasury-OFS, and is
currently preparing for an initial public offering in which Treasury-
OFS may elect to sell shares. GM has also agreed, subject to the
closing of the initial public offering, to repurchase $2.1 billion of
preferred stock issued to Treasury-OFS. In the first six months of
2010, General Motors Company reported two consecutive quarters of
positive operating profit and net income — its first quarterly profits
since 2007.
* Likewise, after taking one-time charges last year associated with
its restructuring, Chrysler posted two consecutive quarters of
operating profit. With respect to Old Chrysler, Treasury-OFS was
repaid $1.9 billion, which was more than Treasury-OFS had previously
estimated to recover and under the terms of the settlement agreement,
the $1.6 billion remaining face value was written off.
* Each of Ally (formerly GMAC) Financial's four operating businesses
has reported a profit so far this year.
AIG Investment Program:
As of September 30, 2010, Treasury-OFS held $47.6 billion in the AIG
Investment Program, with an estimated value of $26.1 billion.
On September 30, 2010 AIG announced that it had entered into an
agreement-in-principle which, if completed as announced, will
accelerate the timeline for AIG's repayment of the federal government
and put taxpayers in a stronger position to recoup the Treasury-OFS
investment in the company. In addition, under the restructuring, up to
all of the remaining $22.3 billion available under the AIG capital
facility would be drawn from Treasury-OFS.
The basic terms of the restructuring plan are to: (i) sell sufficient
assets to pay off AIG's obligations to the FRBNY, (ii) streamline
AIG's business portfolio, and (iii) recapitalize AIG's balance sheet
to support investment grade status without the need for ongoing
federal government support. See the discussion under Operational Goal
One, Subpart 1B.
Public-Private Investment Program:
Thus far, each of the eight PPIFs has generated positive investment
returns for Treasury. Because the PPIFs are still in the early stages
of their investment life cycles, it would be premature to draw any
meaningful long-term conclusions regarding the performance of
individual PPIFs or the program in general. However, Treasury-OFS has
been encouraged by the performance of the PPIP fund managers to date
with net internal rates of return on equity since inception ranging
from 19 percent to 52 percent as of September 30, 2010. The PPIFs have
generated cumulative gross unrealized equity gains in excess of funded
capital contributions of more than $1.5 billion as of September 30,
2010 to all investors (Treasury-OFS and private investors). In
addition to its equity investment, Treasury-OFS has made loans in the
PPIFs equal to the total equity invested by Treasury-OFS and private
investors which earns interest at a rate of 1 Month Libor plus 1
percent (approximately 1.26 percent as of September 30, 2010). As of
September 30, 2010, the PPIFs also have made approximately $228
million of interest and dividend payments and distributions to
Treasury.
The PPIFs are still in their first year of investing and are expected
to continue deploying and reinvesting their capital in eligible assets
through 2012.
Sensitivity Analysis:
The ultimate value of TARP investments will only be known in time.
Realized values will vary from current estimates in part because
economic and financial conditions will change. Many TARP investments
do not have readily observable values and their values can only be
estimated by Treasury-OFS.
Sensitivity analysis is one way to get some feel for the degree of
uncertainty around the Treasury-OFS estimates. In the analysis
reported here, Treasury-OFS focuses on the largest components of the
TARP,[Footnote 6] the assets held under the Capital Purchase Program
(CPP), the Automotive Industry Financing Program (AIFP), and the
Public Private Investment Program (PPIP).
For CPP the most important inputs to the valuation are the market
prices of publicly-traded preferred stock used to calibrate the model
derived pricing of the preferred stock held in the TARP and the
current market price of the Citigroup common stock. The valuation
procedure entails observing the market price of publicly-traded
preferred stock and calibrating the model (in particular the risk
premium) to match those prices. The calibrated model is then used to
price the non-publicly traded preferred stock held by the TARP. The
benchmark preferred stock consists of a portfolio of claims issued by
some of the same institutions with TARP preferred stock. It is
generally the larger institutions that have issued preferred stock.
The TARP preferred stock for smaller institutions may not be exactly
comparable, but the bulk of TARP investments, as measured on a dollar
basis, are in large institutions. This calibration influences the
asset-to-liability ratio of the banks and consequently the default and
prepayment estimates predicted by the model.[Footnote 7] The current
market price of the Citigroup common stock is used to value the
Citigroup shares held in CPP and consequently impacts the cost of the
program. As a sensitivity analysis, Treasury-OFS increased and
decreased the value of the benchmark preferred stock in the CPP by 10
percent. As an additional sensitivity analysis, Treasury-01,S
increased and decreased the value of the Citigroup September 30, 2010
closing price 10 percent. Table 7 shows the impact on the value of
Treasury-OFS' outstanding investment under CPP as a result of a 10
percent increase and a 10 percent decrease in the value of the
calibration securities, the 10 percent increase and decrease in the
Citigroup stock price as well as the combined impact of both increases
and decreases. The combined analysis shows the impact on the estimated
value of Treasury-OFS' CPP investment with a combined increase or
decrease of the benchmark preferred stock as well as the Citigroup
common stock.
Table 7: Impact on CPP Valuation (Dollars in Billions):
CPP -— No Citigroup:
September 30, 2010 Reported Value for CPP: $33.92;
Effect of 10% increase: $35.37;
Effect of 10% decrease: $31.06.
Percent change from current:
September 30, 2010 Reported Value for CPP: N/A;
Effect of 10% increase: 4.3%;
Effect of 10% decrease: (8.4%).
CPP -- Citigroup:
September 30, 2010 Reported Value for CPP: $14.31;
Effect of 10% increase: $15.74;
Effect of 10% decrease: $12.88.
Percent change from current:
September 30, 2010 Reported Value for CPP: N/A;
Effect of 10% increase: 10.0%;
Effect of 10% decrease: (10.0%).
Combined:
September 30, 2010 Reported Value for CPP: $48.23;
Effect of 10% increase: $51.11;
Effect of 10% decrease: $43.94.
Percent change from current:
September 30, 2010 Reported Value for CPP: N/A;
Effect of 10% increase: 5.97%;
Effect of 10% decrease: (8.89%).
[End of table]
To put this sensitivity analysis in perspective it is useful to
consider the range over which actual securities have moved over the
past year. Figure A shows the monthly average price of the benchmark
preferred as a percentage of par. (The CPP — no Citigroup value as of
September 30, 2010, represents approximately 88 percent of par,
excluding the warrants held by Treasury-OFS). The dashed lines
indicate the upper and lower bound price used for the sensitivity
analysis. Similarly, Figure B shows the monthly average closing price
of the Citigroup common stock (closing price on September 30, 2010,
was $3.91) with the dashed lines representing the prices used in the
sensitivity analysis. Figure B shows that the securities have been
trading within the range used in the analysis as well as outside of
this range. This helps to illustrate the uncertainty around the cost
estimates.
Figure A: Price Chart of Benchmark Preferred Stock:
[Refer to PDF for image: multiple line graph]
Price as a percentage of PAR:
Date: July 2009;
Market Value:
Increase 10%: 90%;
Decrease 10: 70%.
Date: August 2009;
Market Value:
Increase 10%: 90%;
Decrease 10: 70%.
Date: September 2009;
Market Value:
Increase 10%: 90%;
Decrease 10: 70%.
Date: October 2009;
Market Value:
Increase 10%: 90%;
Decrease 10: 70%.
Date: November 2009;
Market Value:
Increase 10%: 90%;
Decrease 10: 70%.
Date: December 2009;
Market Value:
Increase 10%: 90%;
Decrease 10: 70%.
Date: January 2010;
Market Value:
Increase 10%: 90%;
Decrease 10: 70%.
Date: February 2010;
Market Value:
Increase 10%: 90%;
Decrease 10: 70%.
Date: March 2010;
Market Value:
Increase 10%: 90%;
Decrease 10: 70%.
Date: April 2010;
Market Value:
Increase 10%: 90%;
Decrease 10: 70%.
Date: May 2010;
Market Value:
Increase 10%: 90%;
Decrease 10: 70%.
Date: June 2010;
Market Value:
Increase 10%: 90%;
Decrease 10: 70%.
Date: July 2010;
Market Value:
Increase 10%: 90%;
Decrease 10: 70%.
Date: August 2010;
Market Value:
Increase 10%: 90%;
Decrease 10: 70%.
Date: September 2010;
Market Value:
Increase 10%: 90%;
Decrease 10: 70%.
[End of figure]
Figure B: Price Chart of Citigroup Common Stock:
[Refer to PDF for image: multiple line graph]
Date: September 2009;
Average monthly closing price:
Increase 10%: $3.
Decrease 10: $4.
Date: October 2009;
Average monthly closing price:
Increase 10%: $3.
Decrease 10: $4.
Date: November 2009;
Average monthly closing price:
Increase 10%: $3.
Decrease 10: $4.
Date: December 2009;
Average monthly closing price:
Increase 10%: $3.
Decrease 10: $4.
Date: January 2010;
Average monthly closing price:
Increase 10%: $3.
Decrease 10: $4.
Date: February 2010;
Average monthly closing price:
Increase 10%: $3.
Decrease 10: $4.
Date: March 2010;
Average monthly closing price:
Increase 10%: $3.
Decrease 10: $4.
Date: April 2010;
Average monthly closing price:
Increase 10%: $3.
Decrease 10: $4.
Date: May 2010;
Average monthly closing price:
Increase 10%: $3.
Decrease 10: $4.
Date: June 2010;
Average monthly closing price:
Increase 10%: $3.
Decrease 10: $4.
Date: July 2010;
Average monthly closing price:
Increase 10%: $3.
Decrease 10: $4.
Date: August 2010;
Average monthly closing price:
Increase 10%: $3.
Decrease 10: $4.
Date: September 2010;
Average monthly closing price:
Increase 10%: $3.
Decrease 10: $4.
[End of figure]
Similar to the CPP, the most important inputs to the valuation of
Treasury-OFS' outstanding investments under the AIFP are the market
prices of certain traded defaulted bonds of the Old GM and the change
in the estimated value of Ally Financial (formerly GMAC) common stock,
which is driven by certain pricing metrics of comparable public
financial institutions. The bonds of Old GM are used to estimate the
value of GM common stock held by Treasury-OFS because the bondholders
are entitled to receive GM stock and warrants upon liquidation of Old
GM. Table 8 shows the change in estimated value of Treasury-OFS
outstanding AIFP investments based on a 10 percent increase and 10
percent decrease in the trading price of the Old GM bonds and
separately a 10 percent increase and 10 percent decrease in the
estimated value of the Ally Financial (formerly GMAC) common stock
price. Figure C shows that the securities have been trading within the
range used in the analysis as well as outside of this range,
illustrating the uncertainty around the cost estimates.[Footnote 8]
Table 8: Impact on AIFP Valuation (Dollars in Billions):
Impact of Old GM Bond Price Change on AIFP:
September 30, 2010 Reported Value for AIFP: $52.71;
Effect of 10% increase: $55,29;
Effect of 10% decrease: $50.13.
Percent change from current:
September 30, 2010 Reported Value for AIFP: N/A;
Effect of 10% increase: 4.9%;
Effect of 10% decrease: (4.9%).
Impact of Ally (formerly GMAC) Price Change on AIFP:
September 30, 2010 Reported Value for AIFP: $52,71;
Effect of 10% increase: $54.00;
Effect of 10% decrease: $51.42.
Percent change from current:
September 30, 2010 Reported Value for AIFP: N/A;
Effect of 10% increase: 2.4%;
Effect of 10% decrease: (2.4%).
[End of table]
Figure C, shows the daily prices of the Old GM Bonds for the previous
year. The dashed lines represent the high and low price used in the
sensitivity analysis.
Figure C: Daily Price of Old GM Bonds:
[Refer to PDF for image: multiple line graph]
Date: September 2009;
Median Bond price:
Increase 10%:
Decrease 10%:
Date: October 2009;
Median Bond price:
Increase 10%:
Decrease 10%:
Date: November 2009;
Median Bond price:
Increase 10%:
Decrease 10%:
Date: December 2009;
Median Bond price:
Increase 10%:
Decrease 10%:
Date: January 2010;
Median Bond price:
Increase 10%:
Decrease 10%:
Date: February 2010;
Median Bond price:
Increase 10%:
Decrease 10%:
Date: March 2010;
Median Bond price:
Increase 10%:
Decrease 10%:
Date: April 2010;
Median Bond price:
Increase 10%:
Decrease 10%:
Date: May 2010;
Median Bond price:
Increase 10%:
Decrease 10%:
Date: June 2010;
Median Bond price:
Increase 10%:
Decrease 10%:
Date: July 2010;
Median Bond price:
Increase 10%:
Decrease 10%:
Date: August 2010;
Median Bond price:
Increase 10%:
Decrease 10%:
Date: September 2010;
Median Bond price:
Increase 10%:
Decrease 10%:
[End of table]
To estimate the value of Treasury-OFS outstanding investments under
the PPIP, Treasury-OFS first estimates the cash flows of the portfolio
held by the various funds. Treasury-OFS uses a stochastic process to
generate 300 potential cash flow outcomes, based on the
characteristics of the loans underlying the securities and their
behavior under simulated macro economic variables, such as
unemployment, mortgage interest rates, short-term rates and home price
appreciation. The cash flows are then applied to the waterfall
established for the funds to estimate the cash flows to Treasury-OFS.
The aggregate of these cash flows (each scenario is equally weighted)
is discounted to estimate the value of the program. Table 9 shows the
change in the value of the Treasury-OFS outstanding PPIP investment
using the scenario which produces the minimum amount of cash flows to
Treasury-OFS and the maximum amount of cash flows to Treasury-OFS.
Table 9; Impact on PPIP Valuation (Dollars in Billions):
Dollars;
September 30, 2010 Reported Value for PPIP: $14.40;
Maximum cash flows: $14.79;
Minimum cash flows: $13.90.
Percent change from current:
September 30, 2010 Reported Value for PPIP: N/A;
Maximum cash flows: 2.7%;
Minimum cash flows: (3.5%).
[End of table]
Systems, Controls, and Legal Compliance:
Management Assurance Statement:
The Office of Financial Stability's (OFS) management is responsible
for establishing and maintaining effective internal control and
financial management systems that meet the objectives of the Federal
Managers' Financial Integrity Act (FMFIA), 31 U.S.C. 3512(c), (d). OFS
has evaluated its management controls, internal controls over
financial reporting, and compliance with the federal financial systems
standards. As part of the evaluation process, we considered the
results of extensive documentation, assessment and testing of controls
across OFS, as well as the results of independent audits. We conducted
our reviews of internal controls in accordance with FMFIA and OMB
Circular A-123.
As a result of our reviews, management concludes that the management
control objectives described below, taken as a whole, were achieved as
of September 30, 2010. Specifically, this assurance is provided
relative to Sections 2 (internal controls) and 4 (systems controls) of
FMFIA. OFS further assures that the financial management systems
relied upon by OFS are in substantial compliance with the requirements
imposed by the Federal Financial Management Improvement Act (FFMIA).
OFS' internal controls are designed to meet the management objectives
established by Treasury and listed below:
a) Programs achieve their intended results;
b) Resources are used consistent with the overall mission;
c) Program and resources are free from waste, fraud, and mismanagement;
d) Laws and regulations are followed;
e) Controls are sufficient to minimize any improper or erroneous
payments;
f) Performance information is reliable;
g) Systems security is in substantial compliance with all relevant
requirements;
h) Continuity of operations planning in critical areas is sufficient
to reduce risk to reasonable levels; and;
i) Financial management systems are in compliance with federal
financial systems standards, i.e., FMFIA Section 4/FFMIA.
In addition, OFS management conducted its assessment of the
effectiveness of internal control over financial reporting, which
includes safeguarding of assets and compliance with applicable laws
and regulations, in accordance with OMB Circular A-123, Management's
Responsibility for Internal Control, Appendix A, Internal Control over
Financial Reporting. Based on the results of this evaluation, OFS
provides unqualified assurance that internal control over financial
reporting is appropriately designed and operating effectively as of
September 30, 2010, with no related material weaknesses noted.
Signed by:
Timothy G. Massad:
Acting Assistant Secretary for Financial Stability:
Internal Control Program:
Effective internal controls in safeguarding taxpayer dollars while
providing financial stability through the Troubled Asset Relief
Program (TARP) remains a top priority of Treasury-OFS management.
During fiscal year 2010, Treasury-OFS made significant progress in
effectively deploying new TARP programs and maturing its internal
control environment.
* Treasury-OFS continued to define and deploy new programs as the
focus of TARP activities migrated from stabilizing the financial
markets to assisting the taxpayer through the Treasury Housing
Programs under TARP. For the Housing Programs under TARP and other new
TARP programs, Treasury-OFS maintained its focus on establishing an
initial operating capability for operational processes and
implementing effective internal controls.
* Business processes supporting existing programs, including internal
control activities, matured through well-defined roles and
responsibilities and policies and procedures. Treasury-OFS performed
monitoring activities that demonstrated that control procedures were
performed consistently and as designed.
* Treasury-OFS made significant progress in addressing areas for
improvement in the internal control environment identified through
Treasury-OFS' self assessment processes (e.g., OMB A-123 internal
controls over financial reporting assessment, annual assurance
statement process) and through work performed by the oversight bodies
(e.g., GAO, SIGTARP, and COP). This remains a top priority for
Treasury-OFS senior management.
* Treasury-OFS made investments in information technology (IT) in
fiscal year 2010 to drive efficiencies through automation of the
operational and accounting environment and to reduce the overall cost
of maintaining TARP.
Treasury-OFS is committed to maintaining an effective Internal Control
Program and has a Senior Assessment Team (SAT) to guide the office's
efforts to meet the statutory and regulatory requirements surrounding
a sound system of internal control. The SAT is chaired by the Deputy
Chief Financial Officer (DCFO) and includes representatives from all
Treasury-OFS program and support areas. Furthermore, Treasury-OFS has
an internal control framework in place that is based on the principles
of The Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The SAT leverages this framework in communicating
control objectives across the organization and its third party service
providers.
Treasury-OFS' Internal Control Program Office (ICPO) operates under
the direction of the CFO and is guided by the SAT. ICPO monitors the
implementation of the internal control framework and is responsible
for assessing the achievement of management control objectives. 'CPO
monitors Treasury-OFS activities to promote the achievement of
management control objectives by:
* Integrating management controls into Treasury-OFS business processes
through:
- Developing internal control documentation,
- Reviewing internal control responsibilities with process owners
before major program execution events, and,
- Real-time monitoring of key control effectiveness during and after
significant program execution events;
* Conducting "lessons learned" sessions to identify and remediate
areas requiring improvement;
* Periodic testing of key controls; and,
* Monitoring feedback from third party oversight bodies.
In addition, the internal control environment supporting TARP
undergoes continuous improvement to remain effective and is subject to
significant third party oversight by the Government Accountability
Office (GAO), the Special Inspector General for the Troubled Asset
Relief Program (SIGTARP), and the Congressional Oversight Panel (COP).
The Assistant Secretary for Financial Stability reports annually to
the Under Secretary for Domestic Finance on the adequacy of the
various internal controls throughout the Office of Financial
Stability, to include financial management systems compliance. This
assurance statement covers Treasury-OFS compliance with the Federal
Managers' Financial Integrity Act (FMFIA), the Federal Financial
Management Improvement Act (FFMIA), the Government Performance and
Results Act (GPRA), and Office of Management and Budget (OMB) Circular
A-123, Management's Responsibility for Internal Control. In order to
support the Assistant Secretary's letter of assurance, the respective
Treasury-OFS divisions prepare individual statements of assurance.
These individual statements of assurance provide evidence supporting
the achievement of Treasury-OFS internal control objectives and
disclose any noted internal control weaknesses.
Information Technology Systems:
For fiscal year 2010, Treasury-OFS developed the Core Investment
Transaction Flow (CITF), TARP's system of record and accounting
translation engine. CITF automated important operational and financial
activities, a major improvement from last year's largely manual
financial reporting process.
Other IT systems are supported by financial agents who provide
services to the Department of the Treasury. The Financial Agency
Agreements maintained by the Treasury Office of the Fiscal Assistant
Secretary in support of Treasury-OFS require the financial agents to
design and implement suitably robust IT security plans and internal
control programs, to be reviewed and approved by Treasury at least
annually.
In addition, Treasury-OFS utilizes financial systems maintained by
Treasury Departmental Offices and different Treasury bureaus. These
systems are in compliance with federal financial systems standards and
undergo regular independent audits.
Compliance with the Improper Payments Information Act (IPIA):
The elimination of improper payments is a major focus of Treasury-OFS
senior management. Managers are held accountable for developing and
strengthening financial management controls to detect and prevent
improper payments, and thereby better safeguard taxpayer dollars.
Treasury-OFS carried out its fiscal year 2010 IPIA review per Treasury-
wide guidance and did not assess any programs or activities as
susceptible to significant erroneous payments.
However, management did identify a small number of RAMP investor cost
share payments the amounts of which were incorrect due to unclear
guidelines related to escrow payments and data integrity issues from
servicers related to determinations of homeowner income. While the
overall impact of these improper payments was immaterial to the
financial statements, Treasury-OFS management is in the process of
implementing corrective actions at the servicer-level to remedy this
issue. Treasury-OFS will continue to monitor this issue closely
through resolution.
Areas for Improvement:
Over the next year, Treasury-OFS management will focus on maturing its
internal control environment in several key areas as follows:
* As operational and accounting processes evolve over time, there is a
continued need for Treasury-OFS to develop and update policies and
procedures and internal control documentation to detail the controls
in place to mitigate the risks identified.
* Treasury-OFS relies on financial agents to provide many of the
business processes and controls supporting its programs. The Housing
programs, in particular, have grown in number, scale and complexity
over the last year. Treasury-OFS continues to assess the adequacy of
internal controls provided by third parties as they develop their
program capabilities. However, Treasury-OFS will need to heighten its
oversight practices to monitor controls as these programs grow and
mature. For example, Treasury-OFS will work to provide clarity on
certain Home Affordable Modification Program (RAMP) policy guidelines,
enhance monitoring controls over Housing program financial agents, and
assess the adequacy of staffing and systems at financial agents.
* Over the past year, Treasury-OFS developed information technology
capabilities to increase efficiency and automate some of Treasury-OFS'
manual processes. Treasury-OFS IT management will continue to mature
the information technology control environment in areas such as
privileged access and monitoring procedures where operating
effectiveness issues were identified.
Limitations of the Financial Statements:
The principal financial statements have been prepared to report the
financial position and results of operations of the Treasury-OFS'
Troubled Asset Relief Program, consistent with the requirements of 31
U.S.C. 3515(b). While the statements have been prepared from the books
and records of the Office of Financial Stability and the Department of
the Treasury in accordance with section 116 of EESA and Generally
Accepted Accounting Principles (GAAP) for Federal entities and the
formats prescribed by OMB, the statements are in addition to the
financial reports used to monitor and control budgetary resources
which are prepared from the same books and records.
The statements should be read with the realization that they are for a
component of the U.S. Government, a sovereign entity.
Operational Goals:
Operational Goal One: Ensure the Overall Stability and Liquidity of the
Financial System:
Subgoal 1A: Make capital available to viable institutions.
Through the Capital Purchase Program, Treasury-OFS provided capital
infusions directly to banks and thrifts deemed viable by their
regulators.
Capital Purchase Program 1. Program and Goals:
Treasury-OFS launched the Capital Purchase Program (CPP), the largest
and most significant program under EESA, on October 14, 2008. At the
close of the program, Treasury-OFS had invested approximately $205
billion under the Capital Purchase Program.
The Capital Purchase Program was designed to bolster the capital
position of viable institutions of all sizes and, in doing so, to
build confidence in these institutions and the financial system as a
whole. With the additional capital, CPP participants were better
equipped to undertake new lending and continue to provide other
services to consumers and businesses, even while absorbing write-downs
and charge-offs on loans that were not performing.
Of the originally planned $250 billion in total commitments to CPP,
Treasury-OFS invested $125 billion in eight of the country's largest
financial institutions. The remaining $125 billion was made available
to qualifying financial institutions (QFIs) of all sizes and types
across the country, including banks, savings and loan associations,
bank holding companies and savings and loan holding companies. QFIs
interested in participating in the program had to submit an
application to their primary federal banking regulator. The minimum
subscription amount available to a participating institution was one
percent of risk-weighted assets. The maximum subscription amount was
the lesser of $25 billion or three percent of risk-weighted assets.
In the period following announcement of the Capital Purchase Program,
Treasury-OFS provided $205 billion in capital to 707 institutions in
48 states, including more than 450 small and community banks and 22
certified community development financial institutions (CDFIs)
(see Table 10 below). The largest investment was $25 billion and the
smallest was $301,000. The final investment under the CPP was made in
December 2009.
Table 10:CPP Initial Investment Profile (Dollars in billions):
Asset Range: Less than $1 billion;
CPP Participants, Number: 473;
CPP Participants, Percent: 66.9%;
TARP Investment, Amount: $3.8;
TARP Investment, Percent: 1.8%.
Asset Range: $1 billion - $10 billion;
CPP Participants, Number: 177;
CPP Participants, Percent: 25.0%;
TARP Investment, Amount: $10.0;
TARP Investment, Percent: 4.9%.
Asset Range: More than $10 billion;
CPP Participants, Number: 57;
CPP Participants, Percent: 8.1%;
TARP Investment, Amount: $191.1;
TARP Investment, Percent: 93.3%.
Asset Range: Total;
CPP Participants, Number: 707;
CPP Participants, Percent: 100%;
TARP Investment, Amount: $204.9;
TARP Investment, Percent: 100%.
[End of table]
Treasury-OFS received preferred stock or debt securities in exchange
for these investments. There is no fixed date on which the financial
institutions must redeem the preferred stock—or repay Treasury-OFS.
This is necessary for the investment to qualify as "Tier 1" capital
under regulatory requirements. However, there are incentives for the
financial institutions to repay. Institutions may repay Treasury-OFS
after consultation with the appropriate federal regulator. To date,
Treasury-OFS has received approximately $153 billion in CPP repayments.
Most financial institutions participating in the Capital Purchase
Program pay Treasury-OFS a dividend rate of five percent per year,
which will increase to nine percent a year after the first five years.
In the case of Subchapter S-corporations, Treasury-OFS acquires
subordinated debentures. The subordinated debenture interest rate is
7.7 percent per year for the first five years and 13.8 percent
thereafter; however, the total amount of S-corporation dividends payable
per year is less than $40 million. To date, Treasury-OFS has received
approximately $10 billion in CPP dividends and interest and $3 billion
in net proceeds received from the sale of Citigroup common stock in
excess of cost.
Treasury-OFS also received warrants to purchase common shares or other
securities from the financial institutions at the time of the CPP
investment. The purpose of the additional securities is to provide
opportunities for taxpayers to reap additional returns on their
investments as CPP participants recover. To date, Treasury-OFS has
received more than $8 billion in proceeds from the sale/repurchase of
CPP and TIP warrants.
Small institutions:
Smaller financial institutions make up the vast majority of
participants in the CPP. Of the 707 applications approved and funded
by Treasury-OFS through the Capital Purchase Program by the time it
closed on December 31, 2009, 473 or 67 percent were institutions with
less than $1 billion in assets.
In May 2009, after many larger institutions started raising capital
from the private debt and equity markets, Treasury-OFS re-opened the
CPP application window for institutions with less than $500 million in
assets. This initiative gave smaller institutions, which did not have
the same access to the capital markets as larger institutions, an
opportunity to receive additional CPP investments, and Treasury-OFS
increased the amount of capital available to smaller institutions
under the program. Originally, institutions were eligible for a CPP
capital investment that represented up to three percent of risk-
weighted assets. Upon re-opening the CPP for smaller institutions,
Treasury-OFS raised the amount of funds available to five percent of
risk-weighted assets, and did not require additional warrants for the
incremental investment.
a. TARP CPP investments were structured as non-voting preferred stock,
which provided crucial capital support without creating government
control:
In 2008 Treasury-OFS decided that the most effective way to try to
stabilize the nation's financial system was to provide capital to
QFIs. The majority of TARP investments were made in the form of non-
voting preferred stock. In order to achieve the objective of providing
capital support, and meet regulatory requirements for Tier 1 capital,
TARP could not require that a CPP participant repay Treasury-OFS at a
fixed date, as one would with a loan.
Preferred stock generally is nonvoting (except in limited
circumstances), while common stock has full voting rights. Therefore,
most TARP investments are nonvoting. The preferred stock does not
entitle Treasury-OFS to board seats or board observers, except in the
event dividends are not paid for six quarters, in which case Treasury-
OFS has the right to elect two directors to the board.
2. Status as of September 2010:
a. Repayments — getting TARP funds back:
CPP participants may repay Treasury-OFS under the conditions
established in the purchase agreements as amended by the American
Recovery and Reinvestment Act (ARRA). Treasury-OFS also has the right
to sell the securities. However, Treasury-OFS does not have the right
to require repayment. The repayment price is equal to what Treasury-
OFS paid for the shares, plus any unpaid dividends or interest.
As of September 30, 2010, Treasury-OFS has received over $152 billion
in CPP repayments. Of that amount, approximately $13.1 billion
(excluding net proceeds from sale of common stock in excess of cost —
see below) is from the sales of Citigroup common stock through
September 30, 2010.
b. Returns for taxpayers:
1) Dividend and interest payments:
As is typical for a preferred stock investment, financial institutions
must decide whether to pay the dividends; they can elect instead to
conserve their capital. In some instances, Treasury-OFS received
"cumulative" dividends. That is, if the dividends are not paid in any
quarter, they are added to the liquidation preference, thus increasing
the claim of the holder of the preferred. In other cases, the
dividends were "noncumulative". If a financial institution fails to
pay dividends for six quarterly periods, Treasury-OFS has the right to
appoint two directors to the bank's board.
From inception through September 30, 2010, total dividends and
interest received from Capital Purchase Program investments is
approximately $10 billion. In addition, the sales of Citigroup common
stock through September 30, 2010 have generated $3 billion of gains
(amounts in excess of the recovered principal amount of the Citigroup
investment referred to above).
2) Overall returns:
The CPP is expected to generate a positive return to taxpayers, as are
the other bank support programs (Targeted Investment Program and Asset
Guarantee Program) taken as a whole. The ultimate return will depend
on several factors, including market conditions and performance of
individual companies.
Citigroup:
Under the CPP, Treasury-OFS purchased $25 billion in preferred stock
from Citigroup in October 2008. This preferred stock had a dividend
rate of 5 percent per annum. Under the TIP, Treasury-OFS purchased $20
billion in additional preferred stock from Citigroup in December 2008.
That preferred stock had a dividend rate of 8 percent per annum.
Treasury-OFS also received warrants in both transactions. As part of
an exchange offer designed to strengthen Citigroup's capital, Treasury-
OFS exchanged all of its preferred stock in Citigroup for a
combination of common stock and trust preferred securities.
Citigroup Common Stock Disposition:
* Pursuant to the June 2009 Exchange Agreement between Treasury-OFS
and Citigroup, which was part of a series of exchange offers conducted
by Citigroup to strengthen its capital base, Treasury-OFS exchanged
the $25 billion in preferred stock it received in connection with
Citigroup's participation in the Capital Purchase Program for
approximately 7.7 billion shares of common stock at a price of $3.25
per share.
* During fiscal year 2010, Treasury-OFS entered into three pre-
arranged written trading plans with Morgan Stanley & Co. Incorporated
as its sales agent: in April, June, and July. Under the agreement, the
agent was provided discretionary authority to sell shares of Citigroup
common stock held by Treasury-OFS under certain parameters.
* As of September 30, 2010, Treasury-OFS had sold approximately 4.0
billion shares of Citigroup common stock for total gross proceeds of
$16.1 billion, resulting in $3.0 billion in net proceeds from the sale
of common stock in excess of cost.
CPP Quarterly Report:
An interagency group consisting of representatives from Treasury, the
Federal Reserve Board, and other Federal banking agencies conducts
periodic analysis of the effect of TARP programs on banking
organizations and their activities, and publishes the results in
reports available at [hyperlink,
http://www.FinancialStability.gov/impact/CPPreport.html].
Annual Use of Capital Survey:
Treasury-OFS has also conducted an annual Use of Capital Survey to
obtain insight into the lending, financial intermediation, and capital
building activities of all recipients of government investment through
CPP funds. Collection of the Use of Capital survey data began during
March 2010. Data and survey results are available at [hyperlink,
http://www.FinancialStability.gov/useofcapital]. The overwhelming
majority of respondents (85 percent) indicated that after the receipt
of CPP capital their institutions increased lending or reduced lending
less than otherwise would have occurred. About half of the respondents
(53 percent) indicated that their institutions increased reserves for
non-performing assets after the receipt of CPP capital. Nearly half of
the respondents (46 percent) noted that their institutions held the
CPP capital as a non-leveraged increase to total capital.
Community Development Capital Initiative:
Communities underserved by traditional banks and financial services
providers have found it more difficult to obtain credit in the current
economic environment. Community Development Financial Institutions
(CDFIs) exist to provide financing to these communities. CDFIs offer a
wide range of traditional and innovative financial products and
services designed to help their customers access the financial system,
build wealth and improve their lives and the communities in which they
live. In particular, CDFIs focus on providing financial services to
low- and moderate-income, minority, and other underserved communities.
1. Program and Goals:
Most CDFIs have been adversely affected by the financial crisis.
Treasury-OFS launched the Community Development Capital Initiative to
help viable certified CDFIs and the communities they serve cope with
effects of the financial crisis.
Under this program, CDFI banks and thrifts received investments of
capital with an initial dividend or interest rate of 2 percent,
compared to the 5 percent rate offered under the Capital Purchase
Program. CDFI banks and thrifts applied to receive capital up to 5
percent of risk-weighted assets. To encourage repayment while
recognizing the unique circumstances facing CDFIs, the dividend rate
will increase to 9 percent after eight years, compared to five years
under CPP.
CDFI credit unions could also apply to receive secondary capital
investments at rates equivalent to those offered to CDFI banks and
thrifts and with similar terms. These institutions could apply for up
to 3.5 percent of total assets, which is an amount approximately
equivalent to the 5 percent of risk-weighted assets available to banks
and thrifts.
Treasury-OFS established a process for reviewing CDCI applications
that relied on the appropriate federal regulators. For this program,
viability was determined by the CDFI's federal regulator on a pro-
forma basis. In addition, CDFIs that participated in CPP and were in
good standing could exchange securities issued under CPP for
securities under this program.
2. Status as of September 2010:
Treasury-OFS completed funding under this program in September 2010.
The total investment amount for the CDCI program under TARP is $570
million for 84 institutions. Of this amount, $363.3 million from 28
banks was exchanged from investments under the Capital Purchase
Program into the CDCI.
Subgoal 1B: Provide targeted assistance as needed:
Through the Targeted Investment Program, Asset Guarantee Program, AIG
Investment Program, and the Automotive Industry Financing Program,
Treasury-OFS provided direct aid to certain institutions in order to
mitigate the potential risks to the financial system and the economy
as a whole from the difficulties facing these firms.
Targeted Investment Program:
Treasury-OFS established the Targeted Investment Program (TIP) in
December 2008. The program gave Treasury-OFS the necessary flexibility
to provide additional or new funding to financial institutions that
were critical to the functioning of the financial system. The TIP was
considered "exceptional assistance" for purposes of executive
compensation requirements.
1. Program and Goals:
Through the Targeted Investment Program, Treasury-OFS sought to
prevent a loss of confidence in critical financial institutions, which
could result in significant financial market disruptions, threaten the
financial strength of similarly situated financial institutions,
impair broader financial markets, and undermine the overall economy.
Treasury-OFS invested $20 billion in each of Bank of America and
Citigroup under the Targeted Investment Program, which investments
were in addition to those that the banks received under the CPP. Like
the Capital Purchase Program, Treasury-OFS invested in preferred
stock, and received warrants to purchase common stock in the
institutions. However, the TIP investments provided for annual
dividends of eight percent, which was higher than the CPP rate, and
also imposed greater reporting requirements and more onerous terms on
the companies than under the CPP terms, including restricting
dividends to $0.01 per share per quarter, restrictions on executive
compensation, restrictions on corporate expenses, and other measures.
2. Status as of September 2010:
In December 2009, both participating institutions repaid their TIP
investments in full, with dividends. Total dividends received from
Targeted Investment Program investments were about $3 billion during
the life of the program. Treasury-OFS also received warrants from each
bank which provide the taxpayer with additional gain on the
investments. Treasury-OFS sold the BofA warrants and continues to hold
Citigroup warrants. TIP is closed and resulted in a positive return
for taxpayers.
American International Group. Inc. (AIG) Investment Program:
In September of 2008, panic in the financial system was deep and
widespread as previously discussed. Amidst these events, on Friday,
September 12, American International Group (AIG) officials informed
the Federal Reserve and Treasury that the company was facing
potentially fatal liquidity problems. Although it was neither AIG's
regulator nor supervisor, the Federal Reserve Bank of New York (FRBNY)
immediately brought together a team of people from the Federal
Reserve, the New York State Insurance Department, and other experts to
consider how to respond to AIG's problems. The Federal Reserve Act
authorizes the Federal Reserve to provide liquidity to the financial
system in times of severe stress, and it acted to fulfill that
responsibility.
At the time, AIG was the largest provider of conventional insurance in
the world, with approximately 75 million individual and corporate
customers in over 130 countries. AIG's assets exceeded $1 trillion. It
was significantly larger than Lehman Brothers. It insured 180,000
businesses and other entities employing over 100 million people in the
U.S. It was a large issuer of commercial paper and the second largest
holder of U.S. municipal bonds. AIG's parent holding company engaged
in financial activities that were well beyond the business of life
insurance and property and casualty insurance. Its financial products
unit was a significant participant in some of the newest, riskiest,
and most complex transactions of the financial system.
In the chaotic environment of September 2008, the Federal Reserve and
Treasury concluded that AIG's failure could be catastrophic. Among
other things, if AIG had failed, the crisis would have almost
certainly spread to the entire insurance industry, and its failure
would have directly affected the savings of millions of Americans.
Therefore, the federal government took action to protect the financial
system.
AIG needed a durable restructuring of both its balance sheet and its
business operations. Falling asset prices generated substantial losses
on the company's balance sheet. They also increased the payments to
counterparties that AIG was required to make under the terms of credit
protection contracts it had sold. AIG's insurance subsidiaries
experienced significant cash outflows related to a securities lending
program, as the value of residential mortgage-backed securities that
they had purchased and loaned against cash collateral continued to
fall.
The federal government faced escalating and unprecedented challenges
on many different fronts of the financial crisis during September,
October, and November 2008. During that time, the Federal Reserve and
Treasury-OFS took a series of steps to prevent AIG's disorderly
failure and mitigate systemic risks.
1. Program and Goals:
The initial assistance to AIG was provided by the FRBNY before the
passage of EESA and the creation of TARP. The FRBNY provided loans to
AIG under the section 13(3) authority of the Federal Reserve Act to
lend on a secured basis under "unusual and exigent" circumstances to
companies that are not depository institutions:
* In September 2008, the FRBNY provided an $85 billion credit facility
to AIG, and received preferred shares which currently have
approximately 79.8 percent of the voting rights of AIG's common stock
(known as Series C). The FRBNY created the AIG Credit Facility Trust
(the Trust) to hold the shares for the benefit of the U.S. Treasury
but the Department of the Treasury does not control the Trust and
cannot direct its trustees.
After TARP was enacted, the Treasury-OFS and the Federal Reserve
continued to work together to address the challenges posed by AIG:
* In November 2008, the Federal Reserve and Treasury-OFS jointly
announced a package of actions designed to address the continuing
vulnerabilities in AIG's balance sheet that threatened its viability
and its credit ratings. Treasury-OFS invested $40 billion in senior
preferred stock of AIG under the authority granted by EESA (the
preferred stock was subsequently exchanged in April 2009, for face
value plus accrued dividends, into $41.6 billion of a different series
of preferred stock), and it also received warrants to purchase common
shares in the firm. The funds were used immediately to reduce the
loans provided by the FRBNY. As part of the restructuring, the FRBNY
also agreed to lend up to $22.5 billion to a newly created entity,
Maiden Lane II LLC, to fund the purchase of residential mortgage-
backed securities from the securities lending portfolio of several of
AIG's regulated U.S. insurance subsidiaries, and up to $30 billion to
a second newly created entity, Maiden Lane Ill LLC, to fund the
purchase of multi-sector collateralized debt obligations from certain
counterparties of AIG Financial Products Corp. (AIGFP).
* In April 2009, Treasury-OFS created an equity capital facility,
under which AIG may draw up to $29.8 billion as needed in exchange for
issuing additional shares of preferred stock to Treasury-OFS. As of
September 30, 2010, AIG has drawn $7.5 billion from the facility and
the remainder is expected to be used in connection with the
restructuring plan discussed below.
* In December 2009, the Federal Reserve received preferred equity
interests in two special purpose vehicles (SPVs) formed to hold the
outstanding stock of AIG's largest foreign insurance subsidiaries,
American International Assurance Company (MA) and American Life
Insurance Company (ALICO), in exchange for a $25 billion reduction in
the balance outstanding and maximum credit available under AIG's
revolving credit facility with the FRBNY. The transactions positioned
MA and ALICO for initial public offerings or sale.
2. The AIG Restructuring Plan and Taxpayer Exit:
On September 30, 2010, AIG announced that it had entered into an
agreement-in-principle with the U.S. Department of the Treasury, the
FRBNY, and the Trust. The restructuring plan, if completed as
announced, will accelerate the timeline for the federal government's
recovery of its investment in AIG and will put Treasury-OFS in a
considerably stronger position to recoup Treasury-OFS' investment in
the company. Giving effect to the proposed restructuring, the lifetime
cost of Treasury-OFS' investment in AIG would be $5 billion. This
lifetime cost reflects the effects of restructuring when valued at
October 1, 2010 including principally the following: (i) the
outstanding preferred stock investment is exchanged for common stock
and valued at the market price of $38.86 at October 1, 2010, and (ii)
the undrawn commitment of $22.3 billon is disbursed and is valued
consistent with Treasury-OFS' methodology for valuing its non-traded
securities. Under this methodology, Treasury-OFS estimates that it
will not incur any loss on the additional disbursements because the
aggregate value of the assets supporting the preferred interests in
the Special Purpose Vehicles that Treasury-OFS will receive for the
disbursements exceeds the liquidation preference of the preferred
interests. The common stock price will vary over time, and the price
realized by Treasury-OFS in disposing of common shares will likely not
be the same as this price, which would result in changes, possibly
material, to this lifetime cost.
a. Repaying and terminating the FRBNY Credit Facility with AIG:
As of September 30, 2010, AIG owed the FRBNY approximately $21 billion
in senior secured debt under the FRBNY credit facility. Under the
plan, AIG will repay this entire amount and terminate the FRBNY senior
secured credit facility Funding for this is expected to come primarily
from the proceeds of the initial public offering of the company's
Asian life insurance business (AIA) and the pending sale of its
foreign life insurance company (ALICO) to MetLife. As of November 5,
2010, AIG completed an IPO of MA selling approximately 67 percent for
total proceeds of $20.5 billion and closed the sale of ALICO for total
proceeds of $16.2 billion, approximately $7.2 billion of which is cash.
b. Facilitating the orderly exit of the U.S. Government's interests in
two special purpose vehicles (SPVs) that hold AIA and ALICO:
As of September 30, 2010, the FRBNY holds preferred interests in two
AIG-related SPVs totaling approximately $26 billion. Under the plan,
AIG will draw up to all of the remaining $22.3 billion of TARP funds
available to it (under the Series F preferred stock facility provided
in April 2009) and Treasury-OFS will receive an equal amount of the
FRBNY's preferred interests in the SPVs. Over time, AIG is expected to
repay the FRBNY and Treasury-OFS for these preferred interests through
proceeds from the sales of AIG Star Life Insurance and AIG Edison Life
Insurance, the monetization of the remaining equity stake in MA, the
sale of MetLife equity securities that AIG will own after the close of
the ALICO sale, and the monetization of certain other designated
assets. The aggregate value of the assets underlying the preferred
interests in the SPVs exceeds the liquidation preference of the
preferred interests. As a result, the net cost associated with the
$22.3 billion of draws is assumed to be zero if the restructuring plan
is completed as announced. See also footnote 3 to Table 6 in Part I.
c. Retiring AIG's remaining TARP support:
To date, Treasury-OFS has invested approximately $47.5 billion of TARP
funds in AIG. Under the plan, Treasury-OFS is expected to receive
approximately 1.1 billion shares of AIG common stock in exchange for
its existing TARP investments in AIG. The Department of the Treasury
is also expected to receive an additional 563 million shares of common
stock from the exchange of the Series C preferred shares held by the
Trust on behalf of the United States taxpayers. After the exchange is
completed, it is expected that Treasury-OFS' shares will be sold into
the public markets over time. The lifetime cost of the TARP investment
in AIG after giving effect to the restructuring (as shown in Table 6)
does not include any recovery from the shares of AIG common stock to
be received by Treasury from the Trust that are in addition to Treasury-
OFS' shares.
The plan is still subject to a number of contingencies, and much work
remains to be done to close the transactions. Nevertheless, the plan
reflects the substantial progress that AIG and the federal government
have made in restructuring the company and reducing the systemic risk
that it once posed. The plan also represents a significant step
towards ending the federal government's role in providing assistance
to the company.
Over the past two years, AIG has recruited a new CEO, a new Chief Risk
Officer, a new General Counsel, a new Chief Administrative Officer,
and an almost entirely new Board of Directors. All of these executives
and directors are committed to the objective of executing the
restructuring plan and paying back taxpayers as promptly as
practicable. In addition, the profitability of the AIG's core
business — its insurance subsidiaries — has been steadily improving,
as has the market's perception of the value of these subsidiaries. The
improvement in the value of these businesses and their ultimate sale
are central to the AIG restructuring plan.
Upon completion of the restructuring plan, AIG is expected to be a
simplified life, property and casualty insurer with solidly
capitalized insurance subsidiaries, adequate liquidity, and a stable
balance sheet.
Asset Guarantee Program 1. Program and Goals:
Under the Asset Guarantee Program (AGP), Treasury-OFS acted to support
the value of certain assets held by qualifying financial institutions,
by agreeing to absorb a portion of the losses on those assets. The
program was conducted jointly by Treasury, the Federal Reserve and the
FDIC. Like the Targeted Investment Program, it was designed for
financial institutions whose failure could harm the financial system
and reduce the potential for "spillover" to the broader financial
system and economy.
a. Bank of America:
In January 2009, Treasury-OFS, the Federal Reserve and the FDIC agreed
in principle to share potential losses on a $118 billion pool of
financial instruments owned by Bank of America, consisting of
securities backed by residential and commercial real estate loans and
corporate debt and derivative transactions that reference such
securities, loans and associated hedges. If the arrangement had been
finalized, Treasury-OFS and the FDIC would have received preferred
stock and warrants as a premium for the guarantee. The announcement of
the transaction (and the Citigroup transaction discussed below) was
widely welcomed by the markets and contributed immediately to helping
restore investor confidence in the financial institution and the
banking system generally. In May 2009, before the transaction was
finalized, Bank of America announced its intention to terminate
negotiations with respect to the loss-sharing arrangement and in
September 2009, the federal government and Bank of America entered
into a termination agreement. Bank of America agreed to pay a
termination fee of $425 million to the federal government parties,
$276 million of which went to Treasury-OFS. The fee compensated the
federal government for the value that Bank of America had received
from the announcement of the federal government's willingness to
guarantee and share losses on the pool of assets from and after the
date of the term sheet. The termination fee was determined by
reference to the fees that would have been payable had the guarantee
been finalized. No claims for loss payments were made to the federal
government, nor was any TARP or other funds spent. Thus, the fee was a
net gain for taxpayers.
b. Citigroup:
In January 2009, Treasury, the Federal Reserve and the FDIC similarly
agreed to share potential losses on a $301 billion pool of Citigroup's
covered assets. The arrangement was finalized and, as a premium for
the guarantee, Treasury-OFS and the FDIC received $7.0 billion of
preferred stock, with terms that were similar to those in the TIP
investment and more onerous than in the CPP, including a dividend rate
of eight percent. Treasury-OFS also received warrants to purchase 66.5
million shares of common stock. Although the guarantee was originally
designed to be in place for five to ten years, Citigroup requested
that it be terminated in December 2009 in conjunction with Citigroup's
repayment of the $20 billion TIP investment. This was because
Citigroup's financial condition had improved and the bank raised over
$20 billion of private capital. The banking regulators approved this
request.
In connection with the termination, Treasury-OFS and the FDIC kept
most of the premium paid. That is, these parties retained a total of
$5.3 billion of the $7.0 billion of preferred stock (which had since
been converted to trust preferred securities). Of this amount,
Treasury-OFS retained $2.23 billion, and the FDIC and Treasury-OFS
agreed that, subject to certain conditions, the FDIC would transfer to
Treasury-OFS $800 million of their Citigroup trust preferred stock
holding plus dividends thereon contingent on Citigroup repaying its
previously-issued FDIC debt under the FDIC's Temporary Liquidity
Guarantee Program which expires on December 31, 2012.
For the period that the Citigroup asset guarantee was outstanding
prior to termination in December 2009, Citigroup made no claims for
loss payments to the federal government, and consequently Treasury-OFS
made no guarantee payments of TARP funds to Citigroup. Thus, all
payments received to date, and the income received from the sale of
the securities described above, will constitute a net gain for the
taxpayer. The cumulative total dividends received through September
30, 2010 from the securities totaled approximately $440 million. On
September 30, 2010, Treasury-OFS agreed to sell the trust preferred
securities for approximately $2.25 billion and on October 5, 2010, the
transaction was consummated. Treasury-OFS still holds its Citigroup
warrants which should provide additional returns for taxpayers.
2. Status as of September 2010:
The Asset Guarantee Program is now closed. No Treasury-OFS payments
were made. The fee from Bank of America, and securities and dividends
received from Citigroup, represents a positive return for taxpayers.
Automotive Industry Financing Program:
The Automotive Industry Financing Program (AIFP) was begun in December
2008 to prevent a significant disruption of the U.S. automotive
industry, because the potential for such a disruption posed a systemic
risk to financial market stability and would have had a negative
effect on the economy. Recognizing both GM and Chrysler were on the
verge of disorderly liquidations, Treasury-OFS extended temporary
loans to GM and Chrysler in December 2008. After the Obama
Administration took office, it agreed to provide additional
investments conditioned on each company and its stakeholders
participating in a fundamental restructuring. Sacrifices were made by
unions, dealers, creditors and other stakeholders, and the
restructurings were achieved through bankruptcy court proceedings in
record time. As a result, General Motors Company and Chrysler Group
LLC are more competitive and viable companies, supporting American
jobs and the economy. Operating results have improved, the industry
has added jobs, and the TARP investments have begun to be repaid.
1. Programs and Goals:
a. Automotive companies:
Short-term funding was initially provided to General Motors (GM) and
Chrysler on the condition that they develop plans to achieve long-term
viability. In the spring and summer of 2009, GM and Chrysler developed
satisfactory viability plans and successfully conducted sales of their
assets to new entities in bankruptcy proceedings. Chrysler completed
its sale process in 42 days and GM in 40 days. Treasury-OFS provided
additional assistance during these periods.
In total, Treasury-OFS has provided approximately $80 billion in loans
and equity investments to GM, GMAC (now known as Ally Financial),
Chrysler, and Chrysler Financial. The terms of Treasury's assistance
impose a number of restrictions including rigorous executive
compensation standards, limits on luxury expenditures, and other
corporate governance requirements.
While some have questioned why TARP was used to support the automotive
industry, both the Bush and Obama Administrations determined that
Treasury's investments in the auto companies were consistent with the
purpose and specific requirements of EESA. Among other things,
Treasury-OFS determined that the auto companies were and are
interrelated with entities extending credit to consumers and dealers
because of their financing subsidiaries and other operations, and that
a disruption in the industry or an uncontrolled liquidation would have
had serious effects on financial market stability, employment and the
economy as a whole.
b. Supplier and warranty support programs:
In the related Auto Supplier Support Program (ASSP), Treasury-OFS
provided loans to ensure that auto suppliers receive compensation for
their services and products, regardless of the condition of the auto
companies that purchase their products. In the Auto Warranty
Commitment Program (AWCP), Treasury-OFS provided loans to protect
warranties on new vehicles purchased from GM and Chrysler during their
restructuring periods.
In early 2009, auto suppliers faced the risk of uncontrolled
liquidations across the sector. Fifty-four (54) supplier-related
bankruptcies occurred in 2009 as the industry went through a painful
restructuring. Today, in part due to the support provided by
Automotive Supplier Support Program (ASSP), the auto supply base
appears to have stabilized. Suppliers are now breaking even at a lower
level of North American production.
2. General Motors:
Treasury-OFS provided $50 billion under TARP to General Motors. This
began in December 2008, with a $13.4 billion loan to General Motors
Corporation (GM or Old GM) to fund working capital. Under the loan
agreement, GM was required to submit a viable restructuring plan. The
first plan GM submitted failed to establish a credible path to
viability, and the deadline was extended to June 2009 for GM to
develop an amended plan. Treasury-OFS loaned an additional $6 billion
to fund GM during this period.
To achieve an orderly restructuring, GM filed for bankruptcy on June
1, 2009. Treasury-OFS provided $30.1 billion under a debtor-in-
possession financing agreement to assist GM during the restructuring.
A newly formed entity, General Motors Company purchased most of the
assets of Old GM under a sale pursuant to Section 363 of the
bankruptcy code (363 Sale). When the sale to General Motors Company
was completed on July 10, Treasury-OFS converted most of its loans to
60.8 percent of the common equity in the General Motors Company and
$2.1 billion in preferred stock. At that time, Treasury-OFS held $6.7
billion in outstanding loans.
Approximately $986 million remained with Old GM (now known as Motors
Liquidation Company) for wind-down costs associated with its
liquidation.
a. Repayments:
General Motors Company repaid the $6.7 billion loan in full on April
21, 2010. (The rest of the investment is equity which Treasury-OFS
expects to sell as described below.)
Ownership structure:
General Motors Company currently has the following ownership: Treasury-
OFS (60.8 percent), GM Voluntary Employee Benefit Association (VEBA)
(17.5 percent), the Canadian Government (11.7 percent), and Old GM's
unsecured bondholders (10 percent). As part of the restructuring, GM
issued warrants to acquire additional shares of common stock to VEBA
and Old GM (for distribution to the creditors of Old GM following
confirmation of a plan of liquidation by the bankruptcy court).
b. General Motors Company initial public offering:
Treasury-OFS' most likely exit strategy for the AIFP equity
investments is a gradual sale beginning with an initial public
offering of General Motors Company. In June 2010, Treasury-OFS
provided guidance on its role in the exploration of an IPO by General
Motors Company. Consistent with this guidance:
* The timing of the offering is being determined by General Motors
Company and the IPO process is being managed by General Motors
Company. Treasury-OFS will determine whether to sell shares and the
price at which it will sell shares.
* The selection of the lead underwriters was made by General Motors
Company, subject to Treasury-OFS' agreement that the selection was
reasonable. Treasury-OFS will determine the fees to be paid to the
underwriters.
In August 2010, General Motors Company filed a registration statement
on Form S-1 with the U.S. Securities and Exchange Commission (SEC) for
a proposed IPO consisting of common stock to be sold by certain of its
stockholders, including Treasury, and the issuance by the company of
its Series B mandatory convertible junior preferred stock.
GM has filed a registration statement for an initial public offering
(IPO). If the IPO is completed, Treasury-OFS will use the market price
for GM common stock to value its investment in the future. Because
there is no market price today, Treasury-OFS cannot value its
investment in this manner and instead uses its methodology for non-
traded securities. The actual price that would be obtained from the
IPO is uncertain and will vary, perhaps significantly, from the
September 30, 2010 valuation. However, if Treasury-OFS were to value
its investment at the IPO range of $26 to $29 per share announced by
GM in the preliminary prospectus dated November 3, 2010, Treasury-OFS'
estimated cost for the AIFP would increase by $3 billion to $6
billion. GM has also agreed, subject to the closing of the IPO, to
repurchase $2.1 billion of preferred shares issued to Treasury-OFS at
102 percent of par value.
3. Chrysler:
Treasury-OFS has provided a total commitment of approximately $14
billion to Chrysler and Chrysler Financial of which more than $12
billion has been utilized. In January 2009, Treasury-OFS loaned $4
billion to Chrysler Holding (the parent of Chrysler Financial and Old
Chrysler). Under the loan agreement, Chrysler was required to
implement a viable restructuring plan. In March 2009, the
Administration determined that the business plan submitted by Chrysler
failed to demonstrate viability and concluded that Chrysler was not
viable as a standalone company.
The Administration subsequently laid out a framework for Chrysler to
achieve viability by partnering with the international car company
Fiat. As part of the planned restructuring, in April 2009, Chrysler
filed for bankruptcy protection. In May 2009, Treasury-OFS provided
$1.9 billion to Chrysler (Old Chrysler) under a debtor-in-possession
financing agreement for assistance during its bankruptcy proceeding.
a. Chrysler Group LLC:
In June 2009, a newly formed entity, Chrysler Group LLC, purchased
most of the assets of Old Chrysler under a 363 (bankruptcy) Sale.
Treasury-OFS provided a $6.6 billion loan commitment to Chrysler Group
LLC (as of September 30, 2010, and 2009, $2.1 billion remained
undrawn), and received a 9.9 percent equity ownership in Chrysler
Group LLC. Fiat transferred valuable technology to Chrysler and, after
extensive consultation with the Administration, committed to building
new fuel efficient cars and engines in U.S. factories.
As of September 30, 2010, Treasury-OFS' investments in Chrysler Group
LLC consist of 9.9 percent of common equity and a $7.1 billion loan
(including $2.1 billion of undrawn commitments and $500 million
assumed from Chrysler Holding) Chrysler Group LLC currently has the
following ownership: Chrysler Voluntary Employee Benefit Association
(VEBA) (67.7 percent), Fiat (20 percent), Treasury-OFS (9.9 percent),
and the Government of Canada (2.5 percent).
b. Old Chrysler:
In April 2010, the bankruptcy court approved Old Chrysler's Plan of
Liquidation. As a result, the $1.9 billion debtor-in-possession loan
provided to Old Chrysler in May 2009 was extinguished and the assets
remaining with Old Chrysler, including collateral security attached to
the loan, were transferred to a liquidation trust. Treasury-OFS
retained the right to recover the proceeds from the liquidation of the
specified collateral, but does not expect a significant recovery from
the liquidation proceeds.
c. Settlement with Chrysler Holding
The original $4 billion loan made to Chrysler Holding in January 2009
went into default when Old Chrysler filed for bankruptcy. In July
2009, $500 million of that loan was assumed by Chrysler Group LLC. As
a result of a settlement agreement in May 2010, Treasury-OFS accepted
a settlement payment of $1.9 billion as satisfaction in full of the
remaining debt obligations ($3.5 billion) associated with the original
loan. The final repayment, while less than face value, was more than
Treasury-OFS had previously estimated to recover following the
bankruptcy and greater than an independent valuation provided by
Keefe, Bruyette and Woods, Treasury's adviser for the transaction.
d. Chrysler Financial:
In January 2009, Treasury-OFS announced that it would lend up to $1.5
billion to a special purpose vehicle (SPV) created by Chrysler
Financial to enable the company to finance the purchase of Chrysler
vehicles by consumers. In July 2009, Chrysler Financial fully repaid
the loan, including the additional notes that were issued to satisfy
the EESA warrant requirement, together with interest.
4. Ally Financial (formerly GMAC):
Through September 30, 2010, Treasury-OFS had invested approximately
$17 billion in Ally Financial. This began with an investment of $5
billion in December 2008. Treasury-OFS also lent $884 million of TARP
funds to GM (one of GMAC's owners) for the purchase of additional
ownership interests in a rights offering by GMAC. In May 2009, federal
banking regulators required GMAC to raise additional capital by
November 2009 in connection with the SCAP/stress test. Treasury-OFS
exercised its option to exchange the loan with GM for 35.4 percent of
common membership interests in GMAC. Treasury-OFS also purchased $7.5
billion of convertible preferred shares from GMAC in May 2009, which
enabled GMAC to partially meet the SCAP requirements. Additional
Treasury-OFS investments in GMAC were contemplated to enable GMAC to
satisfy the SCAP requirements. These were completed in December 2009,
when Treasury-OFS invested an additional $3.8 billion in GMAC,
increasing the percentage of ownership. As of September 30, 2010,
Treasury's investment in Ally Financial consists of 56.3 percent of
the common stock, $11.4 billion of mandatorily convertible preferred
securities (which may be converted into common stock at a later date)
and $2.7 billion of trust preferred securities. If the mandatorily
convertible preferred securities were converted, Treasury-OFS
ownership would increase to 80.48 percent.
5. Status as of September 2010:
a. Outlook on automotive industry following restructurings and
repayments:
As the outlook for the domestic auto industry has improved and the
estimated value of Treasury's investments has increased, the projected
cost to taxpayers of AIFP has decreased. The cost of AIFP from
inception through September 30, 2010 was $13.9 billion, as compared to
the cost through September 30, 2009 of $30.5 billion.
Subgoal 1c: Increase liquidity and volume in securitization markets:
The Community Development Capital Initiative, the Term Asset-Backed
Securities Loan Facility, the SBA 7a Securities Purchase Program and
the Public-Private Investment Program were developed by Treasury-OFS
to help restore the flow of credit to consumers and small businesses.
Consumer and Business Lending Initiative:
Community Development Capital Initiative:
CDCI contributed to this subgoal, but is discussed in detail above
following the Capital Purchase Program because of the link between the
two programs.
Term Asset-Backed Securities Loan Facility:
The Term Asset-Backed Securities Loan Facility (TALF) is a key part of
the Financial Stability Plan and the major initiative under the TARP's
Consumer and Business Lending Initiative (CBLI). TALF is a joint
Federal Reserve-Treasury-OFS program that was designed to restart the
asset-backed securitization markets that had ground to a virtual
standstill during the early months of this financial crisis. The ABS
markets historically have helped to fund a substantial share of credit
to consumers and businesses. The effects of this issuance standstill
were many: limited availability of credit to households and businesses
of all sizes, an unprecedented widening of interest rate spreads,
sharply contracting liquidity in the capital markets and a potential
to further weaken U.S. economic activity.
1. Program and Goals:
a. Program design:
Pursuant to its Federal Reserve Act Section 13(3) authority, the
Federal Reserve Bank of New York (FRBNY) agreed to extend up to $200
billion in non-recourse loans to borrowers to enable the purchase of
newly issued asset-backed securities (including newly issued CMBS and
legacy CMBS) AAA-rated securities including those backed by consumer
loans, student loans, small business loans, and commercial real estate
loans. In return, the borrowers pledged the eligible collateral with a
risk premium ("haircut") as security for the loans. Should a borrower
default upon its TALF loan or voluntarily surrender the collateral,
the collateral would be seized and sold to TALF LLC, a special purpose
vehicle created by FRBNY to purchase and hold seized or surrendered
collateral. Through September 30, 2010, TALF LLC has not purchased any
collateral from the FRBNY.
Treasury-OFS' role in TALF is to provide credit protection for the
program through the purchase of subordinated debt in TALF LLC. The
funds would be used to purchase the underlying collateral associated
with the FRBNY TALF loans in the event the borrower surrendered the
collateral or defaulted upon its loan. Treasury-OFS originally
committed to purchase $20 billion in subordinated debt from TALF LLC,
or 10 percent of the maximum amount of loans that could be issued.
This commitment was later reduced to $4.3 billion after the program
closed to new lending in June 2010 with $43 billion in loans
outstanding, so that the commitment remained at 10 percent of the
outstanding loans.
Although TALF was designed to provide up to $200 billion in loans
secured by eligible collateral, the positive effects of TALF on
liquidity and interest rate spreads resulting from the announcement of
TALF made utilization of the full amount unnecessary. As TALF positively
impacted the market for asset-backed securities, investors became able
to access cheaper funds in the restarted capital markets. The program
was at first extended past the original termination date of December
2009 to March 2010, for non-mortgage-backed ABS and legacy CMBS
collateral, and to June 2010, for newly issued CMBS collateral. Given
the improvements in the markets, at the time of the closing of the
program in June 2010, the FRBNY had disbursed approximately $70
billion in loans under TALF. Of that amount, $29.7 billion (or 47
percent) in TALF loans remained outstanding as of September 30, 2010.
Figure D: Total Consumer and TALF ABS Issuance from June 2008 through
March 2010 (dollars in billions):
[Refer to PDF for image: stacked vertical bar graph]
Date: 2007 average;
TALF issuance: $0;
Non-TALF issuance: $18.5;
Date: June 2008;
TALF issuance: $0;
Non-TALF issuance: $18.2.
Date: July 2008;
TALF issuance: $0;
Non-TALF issuance: $8.2.
Date: August 2008;
TALF issuance: $0;
Non-TALF issuance: $8.1.
Date: September 2008;
TALF issuance: $0;
Non-TALF issuance: $3.6.
Date: October 2008;
TALF issuance: $0;
Non-TALF issuance: $0.4.
Date: November 2008;
TALF issuance: $0;
Non-TALF issuance: $0.5.
Date: December 2008;
TALF issuance: $0;
Non-TALF issuance: $1.9.
Date: January 2009;
TALF issuance: $0;
Non-TALF issuance: $1.3.
Date: February 2009;
TALF issuance: $0;
Non-TALF issuance: $1.6.
Date: March 2009;
TALF issuance: $8.3;
Non-TALF issuance: $2.0.
Date: April 2009;
TALF issuance: $2.9;
Non-TALF issuance: $5.2.
Date: May 2009;
TALF issuance: $13.6;
Non-TALF issuance: $1.2.
Date: June 2009;
TALF issuance: $16.5;
Non-TALF issuance: $5.8.
Date: July 2009;
TALF issuance: $12.6;
Non-TALF issuance: $2.0.
Date: August 2009;
TALF issuance: $9.1;
Non-TALF issuance: $0.1.
Date: September 2009;
TALF issuance: $16.8;
Non-TALF issuance: $4.4.
Date: October 2009;
TALF issuance: $6.6;
Non-TALF issuance: $4.3.
Date: November 2009;
TALF issuance: $6.0;
Non-TALF issuance: $5.6.
Date: December 2009;
TALF issuance: $3.8;
Non-TALF issuance: $4.1.
Date: January 2010;
TALF issuance: $1.5;
Non-TALF issuance: $7.4.
Date: February 2010;
TALF issuance: $4.2;
Non-TALF issuance: $3.9.
Date: March 2010;
TALF issuance: $7.2;
Non-TALF issuance: $0.6.
Source: FRBNY TALF Subscription Report.
[End of figure]
b. Protection of taxpayer interests:
TALF was designed to provide borrowers with term loans of up to five
years against highly rated securities, which are forfeited in the
event a loan is not repaid. TALF employs a number of other safeguards
to protect taxpayers' interests including the following:
* TALF borrowers bear the first loss risk in all securities pledged as
collateral for TALF loans due to the substantial haircuts (set by
reference to borrower's equity in the securities) required of those
borrowers. Haircuts ranged from 5 percent to 20 percent based on asset
quality thereby further limiting risk.
* Eligible securities must have received two AAA ratings from a major
rating agency, and have never been rated below AAA or placed on watch
for downgrade by a major rating agency.
* Protection is provided by the risk premium included in the TALF loan
rates. The interest rate spread provides accumulated excess interest
in TALF LLC as a first loss position. The available excess spread to
fund forfeited loans is $501 million as of September 30, 2010.
* Each ABS issuer must engage an external auditor to offer an opinion
that supports management's assertion that the ABS is TALF eligible.
Further protection is provided by FRBNY and their collateral monitors
responsible for assessing the risk associated with ABS and CMBS
collateral and performing due diligence.
2. Status as of September 2010:
TALF helped encourage lending to consumers and businesses while
operating under a conservative structure that protects taxpayer
interests. The facility has ceased making new loans as noted above. By
improving credit market functioning and adding liquidity to the
system, TALF has provided critical support to the financial system.
This has allowed lenders to meet the credit needs of consumers and
small businesses, and has strengthened the overall economy.
Specifically, TALF helped increase credit availability and liquidity
in the securitization markets and reduced interest rate spreads.
Secondary spreads narrowed significantly across all eligible asset
classes by 60 percent or more. For instance, spreads on AAA-rated auto
receivables fell sharply from a peak of 600 basis points in the fourth
quarter of 2008 to 27 basis points over their benchmarks on September
30, 2010. Spreads in the secondary market for CMBS have declined from
1500 basis points over its benchmark to 210 basis points as of
September 30, 2010.
Moreover, the improvements in the secondary credit market contributed
to the re-start of the new-issue market. According to the Federal
Reserve Bank of New York, issuance of non-mortgage asset-backed
securities jumped to $35 billion in the first three months of TALF
lending in 2009, after having slowed to less than $1 billion per month
in late 2008.
In November 2009, TALF funds also facilitated the first issuance of
commercial mortgage-backed securities since June 2008. This helped re-
open the market for such securities. Following that transaction, there
have been additional commercial mortgage-backed transactions funded
without assistance from TALF.
Treasury-OFS loaned TALF LLC $100 million of the original $20 billion
committed. The maturity date on the Treasury-OFS loan to the TALF LLC
is March 2019. The loans made by the FRBNY through TALF mature at the
latest by March 2015. To date, the TALF program has experienced no
losses and all outstanding TALF loans are well collateralized.
Treasury-OFS and FRBNY continue to see it as highly likely that the
accumulated excess interest spread will cover any loan losses that may
occur without recourse to the dedicated TARP funds. Therefore,
Treasury-OFS does not expect any cost to the taxpayers from this
program.
Public-Private Investment Program:
The Legacy Securities Public Private Investment Program (PPIP) was
designed to purchase troubled legacy securities (i.e., non-agency
residential mortgage-backed securities ("RMBS") and commercial
mortgage-backed securities ("CMBS")) that were central to the problems
facing the U.S. financial system, and thereby help ensure that credit
is available to households and businesses and ultimately drive the
U.S. toward economic recovery.
1. Program Goals and Design:
a. The Goal: Unlock credit markets for legacy securities to allow
financial institutions to repair their balance sheets and extend new
credit:
During the crisis, many financial institutions and investors were
under extreme pressure to reduce indebtedness. This de-leveraging
process pushed down the market prices for many financial assets,
including troubled legacy RMBS and CMBS, below their fundamental
value. Institutions and investors were trapped with hard-to-value
assets, marked at distressed prices on their balance sheets, which
constrained liquidity and the availability of credit in these markets.
The purpose of PPIP was to draw new private capital into the market
for legacy RMBS and CMBS by providing financing on attractive terms as
well as a matching equity investment made by Treasury-OFS. By
providing this financing, PPIP was designed to help restart the market
for these securities, thereby helping financial institutions begin to
remove these assets from their balance sheets and allowing for a
general increase in credit availability to consumers and small
businesses.
The key objectives of the Public Private Investment Program include:
* Support market functioning by acting as a catalyst to bring private
capital back to the market for legacy RMBS and CMBS;
* Facilitate price discovery in the markets for mortgage-backed
securities, thereby reducing the uncertainty regarding the value of
such securities among the banks and other financial institutions
holding them and enabling these financial institutions to sell such
assets and raise new private capital;
* Restore confidence in and create an environment conducive to new
issuance of new credit; and;
* Protect taxpayer interests and generate returns through long-term
investments in eligible assets by following predominantly a buy and
hold strategy.
b. Program Design:
Following the completion of obtaining commitments from private
investors, Treasury-OFS has committed approximately $22 billion of
equity and debt financing to eight Public Private Investment Funds
(PPIFs). Treasury-OFS matches equity dollar-for-dollar and will loan
up to the amount of equity raised by the PPIFs. These funds were
established by private sector fund managers for the purpose of
purchasing eligible RMBS and CMBS from eligible financial institutions
under EESA. This represented a reduction from Treasury's initial
allocation of $30 billion (for nine PPIFs) in potential capital
commitments, because there was less aggregate demand from private
sector investors due to improved market conditions for legacy non-
agency RMBS and CMBS.
The equity capital raised from private investors by the PPIP fund
managers has been matched by Treasury. Treasury-OFS has also provided
debt financing up to 100 percent of the total equity committed to each
PPIF. PPIFs have the ability to invest in eligible assets over a three-
year investment period. They then have up to five additional years,
which may be extended for up to two more years, to manage these
investments and return the proceeds to Treasury-OFS and the other PPIF
investors. PPIP fund managers retain control of asset selection,
purchasing, trading, and disposition of investments.
The profits generated by a PPIF, net of expenses, will be distributed
to the investors, including Treasury, in proportion to their equity
capital investments. Treasury-OFS also receives warrants from the
PPIFs, which gives Treasury-OFS the right to receive a percentage of
the profits that would otherwise be distributed to the private
partners that are in excess of their contributed capital. The program
structure allows for risk to be spread between the private investors
and Treasury, and provides taxpayers with the opportunity for positive
returns.
The following fund managers currently participate in PPIP:
* AllianceBernstein, LP and its sub-advisors Greenfield Partners, LLC
and Rialto Capital Management, LLC;
* Angelo, Gordon & Co., L.P. and GE Capital Real Estate;
* BlackRock, Inc.;
* Invesco Ltd.;
* Marathon Asset Management, L.P.;
* Oaktree Capital Management, L.P.;
* RLJ Western Asset Management, LP.; and;
* Wellington Management Company, LLP.
In addition, PPIP fund managers have established meaningful
partnership roles for small, minority-, and women-owned businesses.
These roles include, among others, asset management, capital raising,
broker-dealer, investment sourcing, research, advisory, cash
management and fund administration services. Collectively, PPIP fund
managers have established relationships with ten leading small-,
minority-, and women-owned firms, located in five different states.
2. Status as of September 2010:
a. PPIF status:
Through September 30, 2010, the PPIFs have completed funding
commitments from private investors for approximately $7.4 billion of
private sector equity capital, which was matched 100 percent by
Treasury, representing $14.7 billion of total equity capital. Treasury-
OFS also committed to provide $14.7 billion of direct loans,
representing $29.4 billion of total purchasing power to the program.
As of September 30, 2010, PPIFs have drawn-down approximately $18.6
billion of total capital (63 percent of total purchasing power),
[Footnote 9] which has been invested in eligible assets and cash
equivalents pending investment. After the announcement of the program
contributed to improved market conditions, Treasury-OFS reduced its
maximum commitment from $30 billion to $22.4 billion, which allowed
Treasury-OFS to accomplish certain of its objectives with reduced
amount of taxpayer funds.
b. Support market functioning:
The announcement and subsequent implementation of PPIP were considered
keys to reducing the illiquidity discount embedded in these legacy
securities and the uncertainty associated with their value, which
created an environment conducive for financial institutions to begin
trading and selling their holdings of such assets. According to the
National Information Center, the non-agency RMBS and CMBS holdings of
the top 50 bank holding companies holdings were $237 billion as of
June 30, 2010, approximately $47 billion or 17 percent lower than
levels from a year earlier. PPIP played a role in helping restart the
market for such securities, thereby allowing banks and other financial
institutions to begin reducing their holdings in such assets at more
normalized prices.
c. Facilitate price discovery:
Since the announcement of PPIP in March 2009, prices for
representative legacy securities have increased by as much as 75
percent for RMBS and CMBS.
d. Extending New Credit:
Since the announcement of the program in March 2009, approximately ten
new CMBS and RMBS transactions have been brought to market,
collectively representing approximately $5 billion in new issuance to
date. Although smaller than the annual issuance prior to the financial
crisis, these transactions, particularly in CMBS, represent meaningful
steps toward new credit formation in the marketplace.
Small Business and Community Lending Initiatives - SBA 7a Securities
Purchase Program:
Small businesses have played an important role in generating new jobs
and growth in our economy. The Small Business Administration's (SBA)
7(a) Loan Guarantee Program assists start-up and existing small
businesses that face difficulty in obtaining loans through traditional
lending channels. SBA 7(a) loans help finance a wide variety of
business needs, including working capital, machinery, equipment,
furniture and fixtures.
1. Program and Goals:
To ensure that credit flows to entrepreneurs and small business
owners, Treasury-OFS developed the SBA 7(a) Securities Purchase
Program to purchase SBA guaranteed securities from pool assemblers. By
purchasing in the open market, Treasury-OFS injected liquidity -
providing cash to pool assemblers - enabling those entities to
purchase additional loans from loan originators. In this manner,
Treasury-OFS acted as a patient provider of incremental liquidity to
foster a fluid secondary market, which in turn benefits small business
lending.
Since the launch of the program Treasury-OFS has conducted
transactions with two pool assemblers. An external asset manager
purchases the SBA 7(a) securities on behalf of Treasury-OFS directly
from those pool assemblers (sellers) in the open market. Treasury-OFS
utilized independent valuation service providers to gain additional
market insight in order to make informed purchases.
2. Status as of September 2010:
Securities purchased by Treasury-OFS comprised about 700 loans ranging
across approximately 17 diverse industries including: retail, food
services, manufacturing, scientific and technical services, health
care and educational services. The program has supported loans from 39
of the 50 states in the country, indicating a broad geographic impact.
As of September 30, 2010, Treasury-OFS has conducted 31 transactions
totaling approximately $357 million. All securities were purchased at
a premium.
Indicators of Impact for Subgoal 1C:
During the financial crisis, interbank lending froze. The LIBOR
(spreads of the term London interbank offered rate) from mid-2007 to
mid-2008 widened from a range of 100 basis points to 200 basis points
for a specific three-month LIBOR spread rate. In the fall of 2008, the
LIBOR spread rose to a peak of nearly 360 basis points.
TARP actions stimulated confidence in the financial system, and
combined with the expansion of lending facilities by the Federal
Reserve, helped to lower the LIBOR spread rate to 100 basis points by
January 2009. TARP is commonly credited with helping tighten spreads
because the Federal Reserve's actions alone (before TARP) were not
sufficient to ease the credit crisis. The ability of financial
institutions to address their losses and balance sheet capitalization,
both through the TARP, provided elements for a rebound in bank
valuations and a further narrowing in the LIBOR spread rate to the
under 40 basis point pre-crisis level.
Figure E: Libor-OIS Spread:
[Refer to PDF for image: multiple line graph]
Date:
1 month basis points:
3 month basis points:
Source: Bloomberg.
[End of figure]
Operational Goal Two: Prevent Avoidable Foreclosures and Preserve
Homeownership:
Through the Treasury's Housing Programs under TARP, Treasury-OFS
created a mortgage modification program that provides incentives to
mortgage servicers, investors, and homeowners to work together to
reduce eligible homeowners' monthly payments to affordable levels
based on the homeowner's current income.
Housing Programs:
Making Home Affordable:
In January 2009, the nation's housing market had been in broad decline
for 18 months. EESA authorities enabled Treasury-OFS to develop a
voluntary program that would support servicers' efforts to modify
mortgages, consistent with the protection of taxpayers. While the
serious effects of the recession and financial crisis on the housing
market and foreclosures persist, this Administration has taken
aggressive action on many fronts, including under TARP, and has made
considerable progress in helping to stabilize the housing market.
* Treasury-OFS launched the Making Home Affordable (MHA) program,
which includes the Home Affordable Modification Program (HAMP), under
TARP. Under this program, Treasury-OFS pays the cost of modifications
of loans not held by government-sponsored enterprises (GSEs) while the
GSEs pay the cost of modifications of loans held by the GSEs. HAMP has
helped hundreds of thousands of responsible homeowners reduce their
mortgage payments by an average of $500 per month and avoid
foreclosure. MHA has also spurred the mortgage industry to adopt
similar programs that have helped millions more at no cost to the
taxpayer.
As the housing crisis has evolved, Treasury-OFS has responded to the
unemployment and negative equity problems by adjusting HAMP and
instituting additional programs. For example:
* Treasury-OFS launched the Housing Finance Agency (11FA) Hardest Hit
Fund to help state housing finance agencies provide additional relief
to homeowners in the states hit hardest by unemployment and house
price declines.
* Treasury-OFS and the Department of Housing and Urban Development
(BUD) enhanced the FHA- Refinance program to enable more homeowners
whose mortgages exceed the value of their homes to refinance into more
affordable mortgages.
To protect taxpayers, MHA housing initiatives have pay-for-success
incentives: funds are spent only when transactions are completed and
thereafter only as long as those contracts remain in place. Therefore,
funds will be disbursed over many years. The total cost of the housing
programs cannot exceed—and may be less than—$46 billion, which is the
amount committed to that purpose. Making Home Affordable is a
collection of multiple initiatives. The individual programs and their
purposes are detailed below.
Making Home Affordable Program (MHA):
Home Affordable Modification Program (HAMP):
The Home Affordable Modification Program (HAMP) is the largest program
within MHA and includes several additional components to complement
first lien modifications. HAMP provides eligible homeowners the
opportunity to reduce their monthly first lien mortgage payments to 31
percent of their gross (pre-tax) income.
To qualify for HAMP, a borrower must:
* Own a one- to four-unit home that is a primary residence;
* Have received a mortgage on or before January 1, 2009;
* Have a mortgage payment (including principal, interest, taxes,
insurance, and homeowners association dues) that is more than 31
percent of the homeowner's gross monthly income; and;
* Owe not more than $729,750 on a first mortgage for a one–unit
property (there are higher limits for two– to four– unit properties).
To create an affordable payment, a participating servicer applies a
series of modification steps in the following order: rate reduction to
as low as two percent; term extension up to 40 years; and principal
deferral (or forgiveness, at the servicer's option). The modified
interest rate is fixed for a minimum of five years. Beginning in year
six, the rate may increase no more than one percentage point per year
until it reaches the Freddie Mac Primary Mortgage Market Survey rate
(essentially the market interest rate) at the time the permanent
modification agreement was prepared.
Before a mortgage is permanently modified, the homeowner must make the
new, reduced monthly mortgage payment on time and in full during a
trial period of three or four months.
Homeowners who make payments on permanently modified loans on time
accrue an incentive of $1,000 per year for five years to reduce the
amount of principal they owe up to $5,000.
Home Price Decline Protection Program (HPDP):
The HPDP, an additional component of HAMP, provides incentives to
investors to partially offset losses from home price declines.
Principal Reduction Alternative (PRA):
Under the Principal Reduction Alternative (PRA), an additional
component of HAMP, servicers are required to evaluate the benefit of
principal reduction and are encouraged to offer principal reduction
whenever the NPV result of a HAMP modification using PRA is greater
than the NPV result without considering principal reduction.
Incentives are paid based on the dollar value of the principal reduced.
The Unemployment Program (UP):
The Unemployment Program (UP), an additional component of HAMP,
requires participating servicers to grant qualified unemployed
borrowers a forbearance period during which their mortgage payments
are temporarily reduced for a minimum of three months, and up to six
months for some borrowers, while they look for new jobs. If a
homeowner does not find a job before the temporary assistance period
is over or finds a job with a reduced income, the homeowner will be
evaluated for a permanent HAMP modification or may be eligible for
certain alternatives to the modification program under MHA. No
incentives are paid by Treasury-OFS.
Home Affordable Foreclosure Alternatives (HAFA) Program:
Under the Home Affordable Foreclosure Alternatives (HAFA) Program, an
additional component of HAMP, Treasury-OFS provides incentives for
short sales and deeds-in-lieu of foreclosure for circumstances in
which borrowers are unable or unwilling to complete the HAMP
modification process. Borrowers are eligible for relocation assistance
of $3,000 and servicers receive a $1,500 incentive for completing a
short sale or deed-in-lieu of foreclosure. In addition, investors are
paid up to $2,000 for allowing short sale proceeds to be distributed
to subordinate lien holders.
FHA-HAMP Program:
The FHA-HAMP Program, an additional component of MHA, provides the
same incentives as HAMP for Federal Housing Administration (FHA)
guaranteed loans.
Second Lien Modification Program (2MP):
Under the Second Lien Modification Program (2MP), an additional
component of MHA, Treasury-OFS provides incentives for second-lien
holders to modify or extinguish a second-lien mortgage when a
modification has been initiated on the first lien mortgage for the
same property under HAMP. Under 2MP, when a borrower's first lien is
modified under HAMP and the servicer of the second lien is a 2MP
participant, that servicer must offer to modify the borrower's second
lien according to a defined protocol, which provides for a lump sum
payment from Treasury-OFS in exchange for full extinguishment of the
second lien, or a reduced lump sum payment from Treasury-OFS in
exchange for a partial extinguishment and modification of the
borrower's remaining second lien.
Treasury/FHA Second Lien Program (2LP):
The Treasury/FHA Second Lien Program (2LP), an additional component of
MHA, provides for incentives to servicers for extinguishment of second
liens for borrowers who refinance their first lien mortgages under the
FHA-Refinance Program.
Rural Development (RD) HAMP Program:
The RD-HAMP Program provides incentives for modified United States
Department of Agriculture (USDA) guaranteed mortgages.
The PRA, RD-HAMP, and 2LP programs were announced late in the fiscal
year and no activity has occurred in these programs.
Housing Finance Agency Innovation Fund for the Hardest Hit Housing
Markets (HFA Hardest Hit Fund, or HHF):
In February 2010, the Obama Administration announced the Housing
Finance Agency Innovation Fund for the Hardest Hit Housing Markets
(HFA Hardest Hit Fund, or HHF), allowing state housing finance
agencies (IIFAs) in the nation's hardest hit housing markets and high
unemployment to design innovative, locally targeted foreclosure
prevention programs. States included those which have had average home
price declines greater than 20 percent since the housing market
downturn, accounting for the majority of "underwater" mortgages in the
country or have concentrated areas of economic distress due to
unemployment or had an unemployment rate at or above the national
average for the past year.
A total of $7.6 billion is being made available to 18 states and the
District of Columbia. These states include Alabama, Arizona,
California, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan,
Mississippi, Nevada, New Jersey, North Carolina, Ohio, Oregon, Rhode
Island, South Carolina, and Tennessee. As of September 30, 2010, $56.1
million has been disbursed to states participating in HHF — largely
for administrative and startup expenses.
To receive funding, programs must satisfy the requirements for funding
under EESA. These requirements include that the recipient of funds
must be an eligible financial institution and that the funds must be
used to pay for programs designed to prevent avoidable foreclosures
and other permitted uses under EESA. HFAs designed the state programs,
tailoring the housing assistance to their local needs. Further
information on the funded programs is available at [hyperlink,
http://www.FinancialStability.gov/roadtostability/hardesthitfund.html].
Support for the FHA-Refinance Program:
In March 2010, the Administration announced enhancements to an
existing FHA program that will permit lenders to provide additional
refinancing options to homeowners who owe more than their homes are
worth because of large declines in home prices in their local markets.
This program, known as the FHA Short Refinance program, will provide
more opportunities for qualifying mortgage loans to be restructured
and refinanced into FHA-insured loans.
Among other requirements:
* The homeowner must be current on the existing first lien mortgage;
* The homeowner must occupy the home as a primary residence and have a
qualifying credit score;
* The mortgage investor must reduce the amount owed on the original
loan by at least ten percent;
* The new FHA loan must have a balance less than the current value of
the home; and;
* Total mortgage debt for the borrower after the refinancing,
including both the first lien mortgage and any other junior liens,
cannot be greater than 115 percent of the current value of the home —
giving homeowners a path to regain equity in their homes and an
affordable monthly payment.
TARP funds will be made available up to approximately $8 billion in
the aggregate to provide additional coverage to lenders for a share of
potential losses on these loans and to provide incentives to support
the write-downs of second liens and encourage participation by
servicers.
HAMP Results:
The incentives offered under RAMP are helping American homeowners and
assisting in stabilizing the housing market. The RAMP program is
designed to help make housing affordable to American homeowners who
are strained by the double impact of high mortgage payments and a
significantly reduced home value. The program has reached out to these
borrowers and provided an industry-leading solution for servicers to
negotiate lower mortgage payments with qualifying homeowners which
allows those homeowners to make continued mortgage payments through a
trial program and remain in their homes.
Through September 30, 2010, 144 active servicers have signed up for
MHA. Between loans covered by these servicers and loans owned or
guaranteed by the GSEs, more than 85 percent of first-lien residential
mortgage loans in the country are now held by servicers participating
in the program. Through September 30, 2010, Treasury-OFS has made
commitments to fund up to $29.9 billion in HAMP payments.
After 18 months, more than 1.3 million homeowners participating in
HAMP have entered into trial modifications that reduced their mortgage
payments to more affordable levels. This includes 619,000 homeowners
with non-GSE loans. Nearly 500,000 homeowners participating in the
HAMP Program have had their mortgage terms modified permanently, with
over 220,000 of those participants in non-GSE loans that would be
funded by Treasury-OFS.
Housing Scorecard:
On June 21, 2010, the U.S. Department of Housing and Urban Development
(HUD) and Treasury-OFS introduced a Monthly Housing Scorecard on the
nation's housing market. Each month the scorecard presents key housing
market indicators and highlights the impact of the Administration's
housing recovery efforts, including assistance to homeowners through
the Federal Housing Administration (FHA) and the Home Affordable
Modification Program. The Housing Scorecard is available at
[hyperlink, http://www.hud.gov/scorecard].
Operational Goal Three: Protect Taxpayers' Interests:
Treasury-OFS manages TARP investments to minimize costs to taxpayers
and receives income on its holdings of preferred equity and other TARP
investments in the form of interest, dividends and fees. Treasury-OFS
also takes steps to ensure that TARP recipients comply with any TARP-
related statutory or contractual obligations such as executive
compensation requirements and restrictions on dividend payments.
Consistent with the statutory requirements, Treasury-OFS' four
overarching portfolio management guiding principles are as follows:
* Protect taxpayer investments and maximize overall investment returns
within competing constraints,
* Promote stability for and prevent disruption of financial markets
and the economy,
* Bolster market confidence to increase private capital investment,
and,
* Dispose of investments as soon as practicable, in a timely and
orderly manner that minimizes financial market and economic impact.
Treasury-OFS' asset management approach is designed to implement the
guiding principles. Treasury-OFS protects taxpayer investments and
promotes stability through evaluating systemic and individual risk
from standardized reporting and proactive monitoring and ensuring
adherence to EESA and compliance with contractual agreements. By
avoiding involvement in day to day company management decisions and
exercising its rights as a common shareholder only on core governance
issues, Treasury-OFS seeks to bolster market confidence to increase
private capital investment. Treasury-OFS also adheres to certain
principles in connection with restructurings or exchange offers
involving TARP recipients, including minimizing taxpayer loss,
enhancing and preserving institutional viability, treating like
investments across programs consistently, and minimizing negative
governmental impact. Such efforts help to prevent disruption of
financial markets and the economy.
Treasury-OFS seeks to exit investments as soon as practicable to
remove Treasury-OFS as a shareholder, eliminate or reduce Treasury-OFS
exposure, return TARP funds to reduce the federal debt, and encourage
private capital formation to replace federal government investment.
The desire to achieve such objectives must be balanced against a
variety of other objectives, including avoiding further financial
market and/or economic disruption, and the potentially negative impact
to the issuer's health and/or capital raising plans from Treasury-OFS'
disposition. Treasury-OFS must also consider the limited ability to
sell an investment to a third party due to the absence of a trading
market or lack of investor demand, and the possibility of achieving
potentially higher returns through a later disposition. An issuer
typically needs the approval of its primary federal regulator in order
to repay Treasury-OFS and therefore regulatory approvals also affect
how quickly an institution can repay.
Because of the size of certain positions as well as the overall
portfolio, successful disposition will take time, as well as
expertise. In addition, information about Treasury-OFS' intentions
with respect to its investments could be material information and
premature release of such information could adversely affect the
ability of Treasury-OFS to achieve its objectives. Therefore, Treasury-
OFS will make public announcements of its disposition plans when it is
appropriate to do so in light of these objectives and constraints.
Treasury-OFS tracks the fair value of the assets in the TARP
portfolio. The value of publicly traded common stock can be measured
by market quotations. Most of Treasury-OFS' investments, however,
consist of securities and instruments for which no market value
exists. Such securities include preferred stocks, warrants, loans, and
other debt securities, as well as common stock of private companies.
As a result, Treasury-OFS has developed internal market-based
valuation models in consultation with Treasury-OFS' external asset
managers and in compliance with EESA. For purposes of its financial
statements, Treasury-OFS calculates valuations in accordance with the
Federal Credit Reform Act of 1990, as well as OMB guidelines.
Portfolio Management Approach:
In managing the TARP investments, Treasury-OFS takes a disciplined
portfolio approach with a review down to the individual investment
level. Treasury-OFS aims to monitor risk and performance at both the
overall portfolio level and the individual investment level. Given the
unique nature and the size of the portfolio, risk and performance are
linked to the overall financial system and the economy.
In conducting the portfolio management activities, Treasury-OFS
employs a mix of dedicated professionals and external asset managers.
These external asset managers provide market specific information such
as market prices and valuations as well as detailed credit analysis
using public information on a periodic basis.
Risk Assessment:
Treasury-OFS has developed procedures to identify and mitigate
investment risk. These procedures are designed to identify TARP
recipients that are in a significantly challenged financial condition
to ensure heightened monitoring and additional diligence and to
determine appropriate responses by Treasury-OFS to preserve the
taxpayers' investment and minimize loss as well as to maintain
financial stability. Specifically, Treasury-OFS' external asset
managers review publicly available information to identify recipients
for which pre-tax, pre-provision earnings and capital may be
insufficient to offset future losses and maintain required capital.
For certain institutions, Treasury-OFS and its external asset managers
engage in heightened monitoring and due diligence that reflects the
severity and timing of the challenges.
Although Treasury-OFS relies on the recommendations of federal banking
regulators in connection with reviewing and approving applications for
assistance, Treasury-OFS does not have access to non-public
information collected by federal banking regulators on the financial
condition of TARP recipients. To the contrary, there is a separation
between the responsibilities of Treasury-OFS as an investor and the
duties of the federal government as regulator.
The data gathered through this process is used by Treasury-OFS in
consultation with its external managers and legal advisors to
determine a proper course of action. This may include making
recommendations to management or working with management and other
security holders to improve the financial condition of the company,
including through recapitalizations or other restructurings. These
actions are similar to those taken by large private investors in
dealing with troubled investments. Treasury-OFS does not seek to
influence the management of TARP recipients for non-financial purposes.
Exchanges and Restructurings:
TARP recipients may also seek Treasury-OFS' approval for exchange
offers, recapitalizations or other restructuring actions to improve
their financial condition. Treasury-OFS evaluates each such proposal
based on its unique facts and circumstances, and takes into account
the following principles in all cases:
* Pro forma capital position of the institution,
* Pro forma position of Treasury-OFS investment in the capital
structure,
* Overall economic impact of the transaction to the federal government,
* Guidance of the institution's primary federal supervisor, and,
* Consistent pricing with comparable marketplace transactions.
Compliance:
Treasury-OFS also takes steps to ensure that TARP recipients comply
with their TARP-related statutory and contractual obligations.
Statutory obligations include executive compensation restrictions.
Contractual obligations vary by investment type. For most of Treasury-
OFS' preferred stock investments, TARP recipients must comply with
restrictions on payment of dividends and on repurchases of junior
securities, so that funds are not distributed to junior security
holders prior to repayment of the federal government. Recipients of
exceptional assistance must comply with additional restrictions on
executive compensation, lobbying, corporate expenses and internal
controls and must provide quarterly compliance reports. For AIFP
loans, additional restrictions and enhanced reporting requirements are
imposed, which is typical with debt investments compared to equity
investments.
All servicers voluntarily participating in MHA have contractually
agreed to follow the MHA program guidelines, which require the
servicer to offer a MHA modification to all eligible borrowers and to
have systems that can process all MHA-eligible loans. Servicers are
subject to periodic, on-site compliance reviews performed by Treasury-
OFS' compliance agent, Making Home Affordable-Compliance (MHA-C), a
separate, independent division of Freddie Mac, to ensure that
servicers satisfy their obligations under MHA requirements in order to
provide a well-controlled program that assists as many deserving
homeowners as possible to retain their homes while taking reasonable
steps to prevent fraud, waste and abuse. Treasury-OFS works closely
with MHA-C to design and refine the compliance program and conducts
quality assessments of the activities performed by MHA-C.
Warrant Sales Results:
Treasury-OFS adheres to a consistent process for evaluating bids from
institutions to repurchase their warrants. Upon receiving a bid for a
warrant repurchase, Treasury-OFS utilizes (i) market quotes, (ii)
independent, third party valuations, and (iii) model valuations to
assess the bid. Treasury-OFS began selling warrants back to banks that
had repaid the TARP investment in May 2009.
For the 50 fully repaid CPP investments representing $131.8 billion in
capital, Treasury-OFS has received a return of 4.2 percent from
dividends and an added 4.4 percent return from the sale of the
warrants for a total return of 8.6 percent. For the $20 billion TIP
investment in Bank of America Corporation, Treasury-OFS received a
return of 7.2 percent from dividends and an added 6.3 percent return
from the sale of the warrants for a total return of 13.5 percent.
These returns are not predictive of the eventual returns on the entire
CPP and TIP portfolios.
On August 4, 2010, Treasury-OFS released the second Warrant
Disposition Report. Through September 30, 2010, Treasury-OFS has
received over $8 billion in warrant repurchases by and sales to 64
institutions. For the full report, please visit: [hyperlink,
http://www.financialstability.govidocs/TARP_WRRTDISP_80310.pdf].
Operational Goal Four: Promote Transparency:
Treasury-OFS is committed to transparency and accountability in all of
its programs and policies, including all programs established under
EESA. To protect taxpayers and ensure that every dollar is directed
toward promoting financial stability, Treasury-OFS established
comprehensive accountability and transparency measures.
A. Comprehensive Measures:
Treasury-OFS publishes hundreds of reports and other information about
TARP so that the public knows how the money was spent, who received it
and on what terms. This includes all contracts governing any
investment or expenditure of TARP funds, and more than 275 reports
over two years. All of these reports and information are posted on the
Treasury-OFS website, [hyperlink, http://www.FinancialStability.gov],
including:
* Lists of all the institutions participating in TARP programs, and
all of the investments Treasury-OFS has made;
* All investment contracts defining the terms of those investments
within five to ten business days of a transaction's closing;
* All contracts with Treasury-OFS service providers involved with TARP
programs;
* A report of each transaction within two business days of completing
the transaction;
* Monthly reports of dividend and interest received, which allow the
American people to see and evaluate the investment income they are
receiving from these investments;
* Monthly reports to Congress, which present updates on Treasury-OFS
investments and programs in a clear, concise manner, and answer basic
questions that many Americans have, such as how TARP funds are invested;
* Monthly reports detailing the progress of modifications under the
Making Home Affordable program;
* All program guidelines, within two business days of any program
launch; and;
* A monthly lending survey, and an annual use of capital survey, which
contains detailed information on the lending and other activities of
banks that have received TARP funds to help the public understand what
banks are doing with their TARP funds.
Treasury-OFS has worked to maximize the transparency of the housing
program to borrowers and ensure that servicers are held accountable.
Every borrower is entitled to a clear explanation if he or she is
determined to be ineligible for a HAMP modification. Treasury-OFS has
established denial codes that require servicers to report the reason
for modification denials in writing to Treasury-OFS. Servicers are
required to use those denial codes as a uniform basis for sending
letters to borrowers who are evaluated for HAMP but denied a
modification. In those letters, borrowers will be provided with a
phone number to contact their servicers as well as the phone number of
the HOPE hotline, which has counselors who are trained to work with
borrowers to help them understand reasons they may have been denied
modifications and explain other modification or foreclosure prevention
options that may be available to them.
Treasury-OFS increased transparency and public access to the Net
Present Value (NPV) model -- a key component of the eligibility test
for HAMP — in releasing the NPV white paper, which explains the
methodology used in the NPV model. To ensure accuracy and reliability,
Freddie Mac, Treasury-OFS' compliance agent, conducts periodic audits
of servicers' implementation of the model and requires servicers to
use models which meet Treasury-OFS' NPV specifications or to revert
back to Treasury-OFS' NPV application. As required by the Dodd-Frank
Act, Treasury-OFS is preparing to establish a web portal that
borrowers can access to run a NPV analysis on their own mortgages, and
that borrowers who are turned down for a HAMP modification can use.
B. Audited Financial Statements:
Treasury-OFS prepares separate financial statements for TARP on an
annual basis. This is the second audited Treasury-OFS Agency Financial
Report, presented for the fiscal year ended September 30, 2010 and for
the period ended September 30, 2009. The initial MR for the period
ended September 30, 2009 was released in December 2009. Both reports
are available at [hyperlink, http://www.FinancialStability.gov].
In its first year of operations, TARP's financial statements received
an unqualified ("clean") audit opinion from its auditors, the
Government Accountability Office, and a separate "clean" report on
internal control over financial reporting found no material
weaknesses -unprecedented achievements for a start-up operation with
an extraordinary emergency mission. As a result of these efforts,
Treasury-OFS received a Certificate of Excellence in Accountability
Reporting (CEAR) from the Association of Government Accountants.
C. TARP Retrospective Report:
In October 2010, Treasury-OFS published the TARP Two-Year
Retrospective. This report includes information on TARP programs and
the effects of TARP and other federal government actions to address
the financial crisis. Readers are invited to refer to this document at
[hyperlink,
http://www.financialstability.govidocs/TARP%20Two%20Year%20Retrospective
_10%2005%2_010_transmittal%201etter.pdf].
D. Oversight by Four Separate Agencies:
Congress also established four avenues of oversight for TARP:
* The Financial Stability Oversight Board, established by EESA §104;
* Specific responsibilities for the Government Accountability Office
as set out in EESA §116;
* The Special Inspector General for TARP, established by EESA § 121;
and;
* The Congressional Oversight Panel, established by EESA §125.
Treasury-OFS has productive working relationships with all of these
bodies, and cooperates with each oversight agency's effort to produce
periodic audits and reports that focus on the many aspects of TARP.
Individually and collectively, the oversight bodies' audits and
reports have made and continue to make important contributions to the
development, strengthening, and transparency of TARP programs.
E. Congressional Hearings and Testimony:
Treasury-OFS officials have testified in numerous Congressional
hearings since TARP was created. Copies of the written testimony are
available at [hyperlink,
http://www.FinancialStability.govilatest/pressreleases.html].
[End of Part I]
Part Ii. Financial Section:
Message from the Chief Financial Officer (CFO):
Government Accountability Office (GAO's) Report on Fiscal Year 2010
Financial Statements:
Assistant Secretary's Response to GAO Report on Fiscal Year 2010
Financial Statements:
Financial Statements:
Notes to the Financial Statements:
Appendices:
A. Oversight Entities:
B. TARP Glossary:
Appendix A. Oversight Entities:
Per the EESA requirements, Treasury-OFS has four oversight entities
with specific responsibilities with regard to TARP, which are the
Financial Stability Oversight Board, the Government Accountability
Office (GAO), the Office of the Special Inspector General for TARP
(SIGTARP), and the Congressional Oversight Panel (COP). A summary of
the responsibilities and activities of each of these entities is
provided below.
Financial Stability Oversight Board:
The Oversight Board was established by section 104 of EESA to help
oversee TARP and other emergency authorities and facilities granted to
the Secretary of the Treasury under EESA. The Oversight Board is
composed of the Secretary of the Treasury, the Chairman of the Board
of Governors of the Federal Reserve System, the Director of the
Federal Housing Finance Agency, the Chairman of the Securities and
Exchange Commission, and the Secretary of the Department of Housing
and Urban Development. Through Oversight Board meetings and
consultations between the staffs of the agencies represented by each
Member of the Oversight Board, the Oversight Board reviews and
monitors the development and ongoing implementation of the policies
and programs under TARP to restore liquidity and stability to the U.S.
financial system.
The Oversight Board meets each month, and receives presentations and
briefings from Treasury-OFS officials and, where appropriate, other
government officials, including officials from the other agencies
represented on the Oversight Board, concerning the implementation and
the effects of the programs established under TARP. The Oversight
Board also monitors Treasury's responses to the recommendations made
by SIGTARP and the GAO. Throughout fiscal year 2010, the Oversight
Board received updates on Treasury's progress in addressing the issues
raised by these oversight bodies with respect to transparency, the
establishment of internal controls, compliance and risk monitoring,
staffing and Treasury's communication strategy. In addition, staff of
the Oversight Board and of the agencies represented by each Member of
the Oversight Board continued to have regular discussions with
representatives from the SIGTARP and GAO to discuss recent and
upcoming activities of the oversight bodies. These efforts continued
to help facilitate coordinated oversight and minimize the potential
for duplication.
Based on this dialogue and analysis, the Oversight Board issues a
Quarterly Report for each three-month period that describes its
activities for that quarter, its assessment of the effects of TARP
programs on financial stability and housing markets in the quarter,
and developments in TARP programs and administration during the
quarter. Copies of approved minutes of the Oversight Board's meetings
and the Quarterly Reports are made available on the internet at:
[hyperlink, http://www.financialstability.gov/aboutioversight.html].
Government Accountability Office (GAO):
Section 116(a)(3) of EESA stipulates that "the Comptroller General
[who heads the GAO] shall submit reports of findings ... regularly and
no less frequently than once every 60 days, to the appropriate
committees of Congress." "The Comptroller may also submit special
reports ... as warranted by the findings of its oversight activities."
Section 116(b)(1) provides for the Comptroller General to conduct an
annual audit of TARP financial statements in accordance with generally
accepted auditing standards.
Treasury-OFS has a statutory obligation under Section 116(b)(3) of
EESA to take corrective actions in response to audit deficiencies
identified by the Comptroller General or other auditor engaged by the
TARP or certify to the appropriate committees of Congress that no
action is necessary or appropriate. In addition, under Section 236 of
the Legislative Reorganization Act of 1970, Treasury-OFS is required
to respond in writing to Congress within 60 days of the issuance date
of a GAO report.
Currently, the GAO is engaged in 10 audits related to TARP. Treasury-
OFS responds to information requests from the GAO by providing
responsive documents and other information and facilitating
comprehensive briefings on TARP programs with senior Treasury-OFS
staff. In addition, Treasury-OFS apprises the GAO of key developments
in current and proposed programs and policies under EESA.
Between December 2008 and September 2010, the GAO issued 74
recommendations in its 20 published reports. The topics addressed by
GAO's recommendations include (1) transparency, reporting, and
accountability; (2) management infrastructure; and (3) communication.
In response to the recommendations, Treasury-OFS has developed
remediation plans and regularly communicates the status of its
remediation efforts to the GAO and will continue to do so in fiscal
year 2011. Treasury-OFS has fully or partially implemented 72 of the
recommendations and the remaining recommendations have been deemed
closed by the GAO and/or Treasury-OFS has taken no action.
The Office of the Special Inspector General for TARP (SIGTARP):
Section 121 of EESA created the SIGTARP. The objectives of SIGTARP are
to investigate and prevent fraud, waste and abuse in TARP programs,
while promoting transparency in TARP programs.
SIGTARP must report to Congress each quarter certain information about
TARP regarding the preceding quarter. As of September 30, 2010,
SIGTARP has issued seven quarterly reports. SIGTARP also has a duty
under EESA to conduct audits and investigations of the purchase,
management, and sale of assets under any TARP program, and with certain
limitations, any other action under EESA. As of September 30, 2010,
SIGTARP had published 11 audit reports and is currently conducting ten
audits that are at various stages.
Treasury-OFS has worked closely with SIGTARP and maintains open lines
of communications with audit staff and investigations of TARP
programs. Treasury-OFS staff also regularly provide updates to SIGTARP
about program design and implementation. Treasury-OFS has benefited
from SIGTARP's involvement in the development of TARP programs and
policies as Treasury-OFS pursues our common goal of carrying out the
objectives of EESA, which are to promote financial stability and
protect the interests of the taxpayers.
As of September 30, 2010, SIGTARP has issued 64 recommendations in its
reports. General topics addressed by SIGTARP's recommendations include
establishing goals, metrics, costs and expected participation for the
TARP housing programs; documenting communications with TARP recipients
concerning the warrant repurchase process; and conducting independent
testing of TARP recipients' compliance with TARP contractual
requirements. Treasury-OFS has carefully considered SIGTARP's
recommendations in prior reports, and has submitted responses
describing the actions Treasury-OFS has taken or will take to address
them. Treasury-OFS' policies and programs currently address many of
the issues SIGTARP raised in its recommendations. Treasury has
implemented or is in the process of implementing 53 of the 64 SIGTARP
recommendations and has declined to implement nine of the
recommendations. Additionally, SIGTARP has concurred with Treasury's
assessment that two of SIGTARP's 64 recommendations are no longer
applicable due to subsequent events.
Congressional Oversight Panel (COP):
The COP consists of five panel members appointed as follows: one
member appointed by the Speaker of the House of Representatives; one
member appointed by the minority leader of the House of
Representatives; one member appointed by the majority leader of the
Senate; one member appointed by the minority leader of the Senate; and
one member appointed by the Speaker of the House of Representatives
and the majority leader of the Senate, after consultation with the
minority leader of the Senate and the minority leader of the House of
Representatives. In October 2010, Senator Ted Kaufman of Delaware was
appointed to replace Elizabeth Warren on the panel. He was elected by
his fellow members to serve as the Chair of this panel. The COP also
employs a professional staff, numbering approximately 27, who are
responsible for carrying out the day-to-day work of the Panel. The COP
also reaches out to experts, primarily academics, to conduct analyses
in support of their work.
The COP's mandate includes assessing the impact of Treasury-OFS'
spending to stabilize the economy, evaluating market transparency,
ensuring effective foreclosure mitigation efforts, and guaranteeing
that Treasury-OFS' actions are in the best interest of the American
people. Unlike the other oversight bodies, EESA mandated that COP's
work would end six months after the expiration of the TARP spending
authority which means that it will cease to exist on April 3, 2011.
EESA requires the COP to produce a report every 30 days examining
Treasury's efforts and the impact on the economy of those efforts. The
statute grants the COP the authority to hold hearings, review official
data, and write reports on actions taken by Treasury-OFS and financial
institutions and their effect on the economy. Generally, the COP
focuses on one program or topic each month and produces a report that
describes the program, assesses its design and implementation and, in
some instances, presents recommendations. Many of its recommendations
have focused on issues of transparency and what COP views as the need
to be clearer on goals and metrics so that taxpayers can better
understand whether their monies are being effectively utilized.
The COP staff uses public information to develop the outlines of their
reports, then follows up with requests of information, documents, and
data from Treasury-OFS. Treasury-OFS engages with COP on a regular
basis, offering briefings on the topic of their current focus, as well
as any new initiatives or changes in Treasury-OFS programs.
The COP holds semi-regular hearings on Capitol Hill, often timed to
coincide with its work on a particular report. Treasury-OFS makes its
senior staff available to appear before the COP as witnesses; the
Secretary of the Treasury appears before the COP on a quarterly basis,
and the Assistant Secretary for Financial Stability is made available
as requested for other hearings. Other Treasury-OFS officials have
also appeared before the COP as requested.
Appendix B: TARP Glossary:
Asset-Backed Security (ABS): A financial instrument representing an
interest in a pool of other assets, typically consumer loans. Most ABS
are backed by credit card receivables, auto loans, student loans, or
other loan and lease obligations.
Asset Guarantee Program (AGP): A TARP program under which Treasury,
together with the Federal Reserve and the FDIC, agreed to share losses
on certain pools of assets held by systemically significant financial
institutions that faced a high risk of losing market confidence due in
large part to a portfolio of distressed or illiquid assets.
Automotive Industry Financing Program (AIFP): A TARP program under
which Treasury-OFS provided loans or equity investments in order to
avoid a disorderly bankruptcy of one or more auto companies that would
have posed a systemic risk to the country's financial system.
Capital Purchase Program (CPP): A TARP program pursuant to which
Treasury-OFS invested in preferred equity securities and other
securities issued by financial institutions.
Commercial Mortgage-Backed Securities (CMBS): A financial instrument
representing an interest in a commercial real estate mortgage or a
group of commercial real estate mortgages.
Commercial Paper (CP): An unsecured debt instrument with a short
maturity period, 270 days or less, typically issued by large financial
institutions or other large commercial firms.
Community Development Capital Initiative (CDCI): A TARP program that
provides low-cost capital to CDFIs to encourage lending to small
businesses and help facilitate the flow of credit to individuals in
underserved communities.
Community Development Financial Institution (CDFI): A financial
institution that focuses on providing financial services to low- and
moderate-income, minority and other underserved communities, and is
certified by the CDFI Fund, an office within Treasury-OFS that
promotes economic revitalization and community development.
Consumer and Business Lending Initiative (CBLI): A series of programs
created under TARP which included the TALF, the CDCI, and the SBA 7(a)
Securities Purchase Program. These were designed to jump start the
credit markets that provide financing to consumers and businesses and
otherwise support small banks.
Emergency Economic Stabilization Act (EESA): The law that created the
Troubled Asset Relief Program (TARP).
Government-Sponsored Enterprises (GSEs): Private corporations created
by the U.S. Government. Fannie Mae and Freddie Mac are GSEs.
Home Affordable Modification Program (HAMP): A TARP program Treasury-
OFS established to help responsible but struggling homeowners reduce
their mortgage payments to affordable levels and avoid foreclosure.
Legacy Securities: CMBS and non-agency RMBS issued prior to 2009 that
were originally rated AAA or an equivalent rating by two or more
NRSROs without ratings enhancement and that are secured directly by
actual mortgage loans, leases or other assets and not other securities.
Making Home Affordable (MHA): A comprehensive plan to stabilize the
U.S. housing market and help responsible, but struggling, homeowners
reduce their monthly mortgage payments to more affordable levels and
avoid foreclosure. HAMP is part of MHA.
Mortgage-Backed Securities (MBS): A type of ABS representing an
interest in a pool of similar mortgages bundled together by a
financial institution.
Nationally Recognized Statistical Rating Organization (NRSRO): A
credit rating agency which issues credit ratings that the U.S.
Securities and Exchange Commission permits other financial firms to
use for certain regulatory purposes.
Non-Agency Residential Mortgage-Backed Securities: RMBS that are not
guaranteed or issued by Freddie Mac, Fannie Mae, any other GSE, Ginnie
Mae, or a U.S. federal government agency.
Preferred Stock: Equity ownership that usually pays a fixed dividend
and gives the holder a claim on corporate earnings superior to common
stock owners. Preferred stock also has priority in the distribution of
assets in the case of liquidation of a bankrupt company.
Public-Private Investment Fund (PPIF): An investment fund established
to purchase Legacy Securities from financial institutions under PPIP.
Public-Private Investment Program (PPIP): A TARP program designed to
improve the health of financial institutions holding real estate-
related assets. The program is designed to increase the flow of credit
throughout the economy by partnering with private investors to
purchase Legacy Securities from financial institutions.
Qualifying Financial Institution (QFI): Private and public U.S.-
controlled banks, savings associations, bank holding companies,
certain savings and loan holding companies, and mutual organizations.
Residential Mortgage-Backed Securities (RMBS): A financial instrument
representing an interest in a group of residential real estate
mortgages.
SBA: U.S. Small Business Administration.
SBA 7(a) Securities Purchase Program: A TARP program under which
Treasury-OFS purchases securities backed by the guaranteed portions of
the SBA 7(a) loans.
Servicer: An administrative party that collects payments and generates
reports regarding mortgage payments.
Targeted Investment Program (TIP): A TARP program that was created to
stabilize the financial system by making investments in institutions
that are critical to the functioning of the financial system.
Term Asset-Backed Securities Loan Facility (TALF): A program under
which the Federal Reserve Bank of New York makes term non-recourse
loans to buyers of AAA-rated Asset-Backed Securities in order to
stimulate consumer and business lending by the issuers of those
securities. Treasury-OFS used TARP funds to provide credit support for
the TALF as part of its Consumer and Business Lending Initiative.
Tier 1 Capital or "core capital": A measure of a bank's assets and
liabilities that includes primarily common equity (including retained
earnings), limited types and amounts of preferred equity, certain
minority interests, and limited types and amounts of trust preferred
securities, but excludes goodwill, certain other intangibles and
certain other assets. It is used by banking regulators as a measure of
a bank's ability to sustain future losses and still meet depositor's
demands.
Tier 1 Common (also known as Tangible Common Equity or TCE): A measure
of a bank's assets and liabilities calculated by removing all non-
common elements from Tier 1 Capital, e.g., preferred equity, minority
interests, and trust preferred securities. It can be thought of as the
amount that would be left over if the bank were dissolved and all
creditors and higher levels of stock, such as preferred stock, were
paid off. Tier 1 Common is the highest "quality" of capital in the
sense of providing a buffer against loss by claimants on the bank.
Tier 1 Common is used in calculating the Tier 1 Common Ratio which
determines the percentage of a bank's total assets that is categorized
as Tier 1 Common. Generally, the higher the percentage, the better
capitalized the bank. Preferred stock is an example of capital that is
counted in Tier 1 Capital, but not in Tier 1 Common.
Troubled Asset Relief Program (TARP): The Troubled Asset Relief
Program, which was established under EESA to stabilize the financial
system and prevent a systemic collapse.
Trust Preferred Security: A security that has both equity and debt
characteristics, created by establishing a trust and issuing debt to
it. A company may create a trust preferred security to realize tax
benefits, since the trust is tax deductible.
Warrant: A financial instrument that represents the right, but not the
obligation, to purchase a certain number of shares of common stock of
a company at a fixed price.
Management's Discussion and Analysis Footnotes:
[1] 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 $698.7 billion.
[2] Pub. L. 111-203.
[3] Treasury-OFS tracks costs in accordance with Federal budget
procedures. First, Treasury-OFS enters into legally binding
"obligations" to invest or spend the funds for TARP programs. Then,
funds are disbursed over time pursuant to the obligations. In any
given case, it is possible that the full amount obligated will not be
disbursed.
[4] The subsidy cost in Table 1 and on the Statement of Net Cost, is
composed of (1) the change in the subsidy cost allowance, net of write-
offs, (2) net intragovemmental interest cost, (3) certain inflows from
the direct loans and equity investments (e.g., dividends, interest,
net proceeds from sales and repurchases of assets in excess of cost,
and other realized fees), and (4) the change in the estimated
discounted net cash flows related to the asset guarantee program.
[5] The Budget and Economic Outlook: An Update. August 2010. Available
at [hyperlink, http://www.cbo.gov/ftpdocs/117xx/doc11705/08-18-
Update.pdf].
[6] See further discussion of AIG under Operational Goal One, Subgoal
1B.
[7] See discussion of valuation methodology in Note 6 of the Financial
Statements.
[8] On November 3, 2010, GM issued a preliminary prospectus for an
initial public offering of stock with an estimated price range between
$26 and $29 per share. Due to the uncertainty as to the market price
that would result from the initial public offering, the potential
effect on the value of Treasury-OFS' investment in GM is unknown and
could be significantly different from the September 30, 2010 financial
statement valuation.
[9] Includes $13.8 billion of Treasury-OFS loans and equity, net of
$356 million of amounts returned from a wound-down PPIF.
[End of section]
Financial Statements:
Message From The Chief Financial Officer:
I am pleased to provide the Office of Financial Stability's (OFS)
Agency Financial Report for fiscal year 2010. This report provides
readers information on financial results relating to the Troubled
Asset Relief Program (TARP) as required by the Emergency Economic
Stabilization Act (EESA) and other laws.
For fiscal year 2010, the Government Accountability Office (GAO)
provided Treasury-OFS unqualified audit opinions on the fair
presentation of our financial statements and the effectiveness of our
internal control over financial reporting. The auditors determined
that we had no material weaknesses and concluded that Treasury-OFS
successfully addressed one of the significant deficiencies identified
in the prior year's audit relating to internal control over financial
reporting. However, GAO continued to report a significant deficiency
in internal control over our accounting and financial reporting
processes.
As a second year organization executing large and complicated
programs, we are extremely proud of these audit results. I would like
to acknowledge senior management's commitment to good governance as
well as the discipline, transparency, and care exhibited by Treasury-
OFS employees in the creation and execution of our organization's
policies and procedures.
For fiscal year 2010, net income from operations was $23.1 billion
resulting in a cumulative net cost of operations of $18.5 billion
since inception. The reduction in cost is primarily due to the early
repurchase of TARP investments by the larger banks and an improvement
in the financial markets and the economy.
During the past year, Treasury-OFS focused on further strengthening
its rigorous internal control processes around obligations,
transaction processing, disbursement, collections, and financial
reporting. While our processes continue to mature, the audit opinions
evidence successes surrounding internal controls over financial
reporting implementation across the organization. In fiscal year 2010,
Treasury-OFS developed a subsidiary ledger for tracking TARP equity
investments and loans and the supporting accounting data. This new
ledger will provide automated controls over reporting financial
information with appropriate separation of duties. In addition, we
implemented credit model enhancements to reduce the possibility of
human error in loading assumption data.
On October 3, 2010, authority to make new commitments to purchase
troubled assets expired under the EESA. While new obligations are
prohibited, funding under our existing commitments for housing and
other programs will continue to be disbursed and many assets in our
investment program are currently outstanding. As a result, the
organization will primarily focus on managing current investment
assets and implementing the housing programs.
I feel fortunate to have had the chance to play a role in the
continuing tradition of sound fiscal stewardship at Treasury-OFS. This
organization recognizes the importance of a proper control environment
and will continue to uphold the highest standards of integrity as we
carry out our fiduciary responsibilities to the American public.
Moving forward, we will continue to strengthen our financial
management capacity. In particular, we will continue to enhance our
procedures, documentation, and controls over systems in order to
protect taxpayer interests and ensure transparency in our activities.
Sincerely,
[Not signed]
Lorenzo Rasetti:
Chief Financial Officer:
Financial Statements:
The Office of Financial Stability (OFS) prepares financial statements
for the Troubled Asset Relief Program (TARP) as a critical aspect of
ensuring the accountability and stewardship for the public resources
entrusted to it and as required by Section 116 of the Emergency
Economic Stabilization Act of 2008 (EESA). Preparation of these
statements is also an important part of the OFS's financial management
goal of providing accurate and reliable information that may be used
to assess performance and allocate resources. The OFS management is
responsible for the accuracy and propriety of the information
contained in the financial statements and the quality of internal
controls. The statements are, in addition to other financial reports,
used to monitor and control budgetary resources. The OFS prepares
these financial statements from its books and records in conformity
with the accounting principles generally accepted in the United States
for federal entities and the formats prescribed by the Office of
Management and Budget (OMB).
While these financial statements reflect activity of the OFS in
executing its programs, including providing resources to various
entities to help stabilize the financial markets, they do not include,
as more fully discussed in Note 1, the assets, liabilities, or results
of operations of commercial entities in which the OFS has a
significant equity interest.
The statements presented are for the year ended September 30, 2010 and
for the period from October 3, 2008 (the inception of OFS) through
September 30, 2009.
The Balance Sheet summarizes the OFS assets, liabilities and net
position as of the reporting date. Intragovemmental assets and
liabilities resulting from transactions between federal agencies are
presented separately from assets and liabilities from transactions
with the public.
The Statement of Net Cost shows the net cost of operations for the
reporting period.
The Statement of Changes in Net Position presents the OFS ending net
position by two components - Cumulative Results of Operations and
Unexpended Appropriations. It summarizes the change in net position.
The ending balances of both components of net position are also
reported on the Balance Sheet.
The Statement of Budgetary Resources provides information about
funding and availability of budgetary resources and the status of
those resources at the end of the reporting period.
Table:
Office of Financial Stability (Troubled Asset Relief Program):
Balance Sheet:
As of September 30, 2010 and 2009:
Dollars in Millions:
Assets:
Intragovernmental Assets:
Fund Balance with Treasury (Note 4);
2010: $98,664;
2009: $97,733.
Asset Guarantee Program (Note 6):
2010: $815;
2009: [Empty].
Total Intragovernmental Assets:
2010: $99,479;
2009: $97,733.
Accounts Receivable:
2010: $4; [Empty]. $
Troubled Asset Relief Program:
Direct bans and Equity Investments, Net (Note 6):
2010: $142,452;
2009: $237,892.
Asset Guarantee Program (Note 6);
2010: $2,240;
2009: $1,765.
Total Assets:
2010: $244,175;
2009: $337,390.
Liabilities:
Intragovernmental Liabilities:
Accounts Payable and Other Liabilities:
2010: $5;
2009: $5.
Principal Payable to the Bureau of the Public Debt (Note 8):
2010: $140,404;
2009: $143,335.
Due to the General Fund (Note 3):
2010: $25,112;
2009: $109,748.
Total Intragovernmental Liabilities:
2010: $165,521;
2009: $253,088.
Accounts Payable and Other Liabilities:
2010: $134;
2009: $73.
Liability for Treasury Housing Programs under TARP (Note 5):
2010: $283;
2009: $1.
Total Liabilities:
2010: $165,938;
2009: $253,162.
Commitments and Contingencies (Note 7):
Net Position:
Unexpended Appropriations:
2010: $79,783;
2009: $84,229.
Cumulative Results of Operations:
2010: ($1,546);
2009: ($1).
Total Net Position:
2010: $79,783;
2009: $84,228.
Total Liabilities and Net Position:
2010: $244,175;
2009: $337,390.
The accompanying notes am an integral part of these financial
statements.
Statement Of Net Cost:
For the Year Ended September 30, 2010 And the Period Ended September
30, 2009:
Dollars in Millions:
Gross Cost:
Subsidy Cost (Income) (Note 6):
Direct Loan and Equity Investment Programs (Including $8,013 in 2010
and $2,916 in 2009 of Net Proceeds from Sales and Repurchases of
Assets in Excess of Cost):
2010: ($22,698);
2009: $$43,605.
Asset Guarantee Program:
2010: ($1,505);
2009: $(2,201).
Total Program Subsidy Cost (Income):
2010: ($24,203);
2009: $41,404.
Interest Expense on Borrowings from the Bureau of the Public Debt
(Note 9):
2010: $5,913;
2009: $6,436.
Treasury Housing Programs Under TARP (Note 5):
2010: $825;
2009: $2.
Administrative Cost:
2010: $296;
2009: $167.
Total Gross Cost (Income):
2010: ($17,169);
2009: $48,009.
Less Earned Revenue:
Dividend and Interest Income - Programs (Note 6):
2010: ($7,242);
2009: $(9,503).
Interest Income on Financing Account (Note 9):
2010: ($1,173);
2009: ($3,649).
Subsidy Allowance Amortization (Note 9):
2010: $2,502;
2009: $6,716.
Net Earned Revenue:
2010: ($5,913);
2009: ($6,436).
Total Net Cost of (Income from) Operations:
2010: ($23,082);
2009: $41,573.
The accompanying notes are an integral part of these financial
statements.
Statement Of Changes In Net Position:
For the Year Ended September 30, 2010 And the Period Ended September
30, 2009:
Dollars in Millions:
Beginning Balances:
2010: Unexpended Appropriations: $84,229;
2010: Cumulative Results of Operations: ($1);
2009: Unexpended Appropriations: [Empty];
2009: Cumulative Results of Operations: [Empty].
Budgetary Financing Sources:
Appropriations Received:
2010: Unexpended Appropriations: $5,151;
2010: Cumulative Results of Operations: [Empty];
2009: Unexpended Appropriations: $238,268;
2009: Cumulative Results of Operations: [Empty].
Appropriations Used:
2010: Unexpended Appropriations: ($9,597);
2010: Cumulative Results of Operations: $9,597;
2009: Unexpended Appropriations: $154,039;
2009: Cumulative Results of Operations: ($154,039).
Other Financing Sources:
2010: Unexpended Appropriations: [Empty];
2010: Cumulative Results of Operations: ($34,224);
2009: Unexpended Appropriations: [Empty];
2009: Cumulative Results of Operations: ($112,467).
Total Financing Sources:
2010: Unexpended Appropriations: ($4,446);
2010: Cumulative Results of Operations: ($24,627);
2009: Unexpended Appropriations: $84,229;
2009: Cumulative Results of Operations: $41,572.
Net (Cost of) Income from Operations:
2010: Unexpended Appropriations: [Empty];
2010: Cumulative Results of Operations: $23,682;
2009: Unexpended Appropriations: [Empty];
2009: Cumulative Results of Operations: ($41,573).
Net Change:
2010: Unexpended Appropriations: ($4,446);
2010: Cumulative Results of Operations: ($1,545);
2009: Unexpended Appropriations: $84,229;
2009: Cumulative Results of Operations: ($1).
Ending Balances:
2010: Unexpended Appropriations: $79,783;
2010: Cumulative Results of Operations: ($1,546);
2009: Unexpended Appropriations: $84,229;
2009: Cumulative Results of Operations: ($1).
The accompanying notes am an integral part of these financial
statements.
Statement Of Budgetary Resources:
For the Year Ended September 30, 2010 And the Period Ended September
30, 2009:
Dollars in Millions:
Budgetary Resources:
Unobligated Balances Brought Forward:
2010: Budgetary Accounts: $28,156;
2010: Nonbudgetary Financing Accounts: $8,945;
2009: Budgetary Accounts: [Empty];
2009: Nonbudgetary Financing Accounts: [Empty].
Recoveries of Prior Year Unpaid Obligations:
2010: Budgetary Accounts: $1,173;
2010: Nonbudgetary Financing Accounts: $39,364;
2009: Budgetary Accounts: [Empty];
2009: Nonbudgetary Financing Accounts: [Empty];.
Budget Authority:
Appropriations:
2010: Budgetary Accounts: $5,151;
2010: Nonbudgetary Financing Accounts: [Empty];
2009: Budgetary Accounts: $238,268;
2009: Nonbudgetary Financing Accounts: [Empty].
Borrowing Authority:
2010: Budgetary Accounts: [Empty];
2010: Nonbudgetary Financing Accounts: $69,440;
2009: Budgetary Accounts: [Empty];
2009: Nonbudgetary Financing Accounts: $309,971.
Spending Authority from Offsetting Collections:
Earned: Collected:
2010: Budgetary Accounts: [Empty];
2010: Nonbudgetary Financing Accounts: $156,112;
2009: Budgetary Accounts: [Empty];
2009: Nonbudgetary Financing Accounts: $243,072.
Change in Unfilled Orders Without Advance:
2010: Budgetary Accounts: [Empty];
2010: Nonbudgetary Financing Accounts: ($5,111);
2009: Budgetary Accounts: [Empty];
2009: Nonbudgetary Financing Accounts: $28,927.
Total Budget Authority:
2010: Budgetary Accounts: $34,480;
2010: Nonbudgetary Financing Accounts: $268,750;
2009: Budgetary Accounts: $238,268;
2009: Nonbudgetary Financing Accounts: $581,970.
Permanently Not Available:
2010: Budgetary Accounts: [Empty];
2010: Nonbudgetary Financing Accounts: $(107,976);
2009: Budgetary Accounts: [Empty];
2009: Nonbudgetary Financing Accounts: $(120,841).
Total Budgetary Resources (Note 10):
2010: Budgetary Accounts: $34,480;
2010: Nonbudgetary Financing Accounts: $160,774;
2009: Budgetary Accounts: $238,268;
2009: Nonbudgetary Financing Accounts: $461,129.
Status Of Budgetary Resources:
Obligations Incurred-Direct:
2010: Budgetary Accounts: $23,405;
2010: Nonbudgetary Financing Accounts: $150,226;
2009: Budgetary Accounts: $210,112;
2009: Nonbudgetary Financing Accounts: $452,184.
Unobligated Balance:
Apportioned and Available:
2010: Budgetary Accounts: $142;
2010: Nonbudgetary Financing Accounts: $7,692;
2009: Budgetary Accounts: $28,156;
2009: Nonbudgetary Financing Accounts: $7,009.
Not Available:
2010: Budgetary Accounts: $10,933;
2010: Nonbudgetary Financing Accounts: $2,856;
2009: Budgetary Accounts: [Empty];
2009: Nonbudgetary Financing Accounts: $1,936.
Total Status Of Budgetary Resources:
2010: Budgetary Accounts: $34,480;
2010: Nonbudgetary Financing Accounts: $160,774;
2009: Budgetary Accounts: $238,268;
2009: Nonbudgetary Financing Accounts: $461,129.
Change In Obligated Balances:
Obligated Balance Brought Forward:
Unpaid Obligations:
2010: Budgetary Accounts: $56,151;
2010: Nonbudgetary Financing Accounts: $79,202;
2009: Budgetary Accounts: [Empty];
2009: Nonbudgetary Financing Accounts: [Empty].
Uncollected Customer Payments from Federal Sources:
2010: Budgetary Accounts: [Empty];
2010: Nonbudgetary Financing Accounts: ($28,927);
2009: Budgetary Accounts: [Empty];
2009: Nonbudgetary Financing Accounts: [Empty].
Obligated Balance, Net, Brought Forward:
2010: Budgetary Accounts: $56,151;
2010: Nonbudgetary Financing Accounts: $50,275;
2009: Budgetary Accounts: [Empty];
2009: Nonbudgetary Financing Accounts: [Empty].
Obligations Incurred:
2010: Budgetary Accounts: $23,405;
2010: Nonbudgetary Financing Accounts: $150,226;
2009: Budgetary Accounts: $210,112;
2009: Nonbudgetary Financing Accounts: $452,184.
Gross Outlays:
2010: Budgetary Accounts: ($9,255);
2010: Nonbudgetary Financing Accounts: ($148,146);
2009: Budgetary Accounts: ($153,961);
2009: Nonbudgetary Financing Accounts: ($372,982).
Recoveries of Prior Year Unpaid Obligations:
2010: Budgetary Accounts: ($1,173);
2010: Nonbudgetary Financing Accounts: ($39,364);
2009: Budgetary Accounts: [Empty];
2009: Nonbudgetary Financing Accounts: [Empty].
Change in Uncollected Customer Payments from Federal Sources:
2010: Budgetary Accounts: [Empty];
2010: Nonbudgetary Financing Accounts: $5,111;
2009: Budgetary Accounts: [Empty];
2009: Nonbudgetary Financing Accounts: ($28,927).
Obligated Balance, Net, End of Period:
Unpaid Obligations:
2010: Budgetary Accounts: $69,128;
2010: Nonbudgetary Financing Accounts: $41,918;
2009: Budgetary Accounts: $56,151;
2009: Nonbudgetary Financing Accounts: $79,202.
Uncollected Customer Payments from Federal Sources:
2010: Budgetary Accounts: [Empty];
2010: Nonbudgetary Financing Accounts: ($23,816);
2009: Budgetary Accounts: [Empty];
2009: Nonbudgetary Financing Accounts: ($28,927).
Obligated Balance, Net, End of Period:
2010: Budgetary Accounts: $69,128;
2010: Nonbudgetary Financing Accounts: $18,102;
2009: Budgetary Accounts: $56,151;
2009: Nonbudgetary Financing Accounts: $50,275.
Net Outlays:
Gross Outlays:
2010: Budgetary Accounts: $9,255;
2010: Nonbudgetary Financing Accounts: $148,146;
2009: Budgetary Accounts: $153,961;
2009: Nonbudgetary Financing Accounts: $372,982.
Offsetting Collections:
2010: Budgetary Accounts: [Empty];
2010: Nonbudgetary Financing Accounts: ($156,112)
2009: Budgetary Accounts: [Empty];
2009: Nonbudgetary Financing Accounts: ($243,072).
Distributed Offsetting Receipts:
2010: Budgetary Accounts: ($118,860)
2010: Nonbudgetary Financing Accounts: [Empty];
2009: Budgetary Accounts: ($2,720)
2009: Nonbudgetary Financing Accounts: [Empty].
Net Outlays:
2010: Budgetary Accounts: ($109,605);
2010: Nonbudgetary Financing Accounts: ($7,966);
2009: Budgetary Accounts: $151,241;
2009: Nonbudgetary Financing Accounts: $129,910.
The accompanying notes am an integral part of these financial
statements.
Notes To The Financial Statements:
Note 1. Reporting Entity:
The Troubled Asset Relief Program (TARP) was authorized by the
Emergency Economic Stabilization Act of 2008 (EESA or "the Act"). The
Act gave the Secretary of the Treasury (the Secretary) broad and
flexible authority to establish the TARP to purchase and insure
mortgages and other troubled assets, which permits the Secretary to
inject capital into banks and other commercial companies by taking
equity positions in those entities, if needed, to stabilize the
financial markets.
The EESA established certain criteria under which the TARP would
operate, including provisions that impact the budgeting, accounting,
and reporting of troubled assets acquired under the Act. Section
101(a) of the EESA provided the authority for the Secretary to
purchase troubled assets, and Section 101(a)(3) of the EESA
established the Office of Financial Stability (OFS) to implement the
TARP. Section 102 of the EESA required the Secretary to establish a
program to guarantee troubled assets originated or issued prior to
March 14, 2008, including mortgage-backed securities. Section 115 of
the EESA limited the authority of the Secretary to purchase troubled
assets up to $700.0 billion outstanding at any one time, calculated at
the aggregate purchase prices of all troubled assets held. Amendments
to Section 115 of EESA during the period ended September 30, 2009
reduced that authority by $1.3 billion, from $700 billion to $698.7
billion. Section 120 of the EESA established that the authorities
under Sections 101(a), excluding Section 101(a)(3) and Section 102 of
the EESA would terminate December 31, 2009 unless extended upon
submission of a written certification to Congress by the Secretary of
the Treasury. On December 9, 2009, the Secretary extended the program
authorities through October 3, 2010. In July, 2010, the Dodd-Frank
Wall Street Reform and Consumer Protection Act amended Section 115 of
EESA, limiting the TARP's authority to a total of $475 billion
cumulative obligations (i.e. purchases and guarantees) and prohibiting
any new obligations for programs or initiatives that had not been
publicly announced prior to June 25, 2010. There was $474.77 billion
of obligations outstanding against the Section 115 authority as of
September 30, 2010 and $3813 billion of obligations outstanding as of
September 30, 2009.
Under the provisions of the EESA, the OFS implemented the TARP which
resulted in the development of the following programs: the Capital
Purchase Program (CPP); American International Group, Inc. Investment
Program (AIG, formerly known as the Systemically Significant Failing
Institutions Program); the Targeted Investment Program (TIP); the
Automotive Industry Financing Program (AIFP); the Consumer and
Business Lending Initiative (CBLI); the Public-Private Investment
Program (PPIP); and the Asset Guarantee Program (AGP); (see Note 6 for
details regarding all of these programs); as well as the Treasury
Housing Programs Under the TARP (see Note 5).
While these financial statements reflect the activity of the OFS in
executing its programs, including providing resources to various
entities to help stabilize the financial markets, they do not include
the assets, liabilities, or results of operations of commercial
entities in which the OFS has a significant equity interest. Through
the purchase of troubled assets, the OFS has entered into several
different types of direct loan, equity investment, and asset guarantee
program arrangements with private entities. These direct loans, equity
investments, and asset guarantees were made with the intent of helping
to stabilize the financial markets and mitigating, as best as
possible, any adverse impact on the economy. These direct loans,
equity investments, and asset guarantees were not made to engage in
the business activities of the respective private entities. Based on
this intent, the OFS has concluded that such direct loans, equity
investments, and asset guarantees are considered "bail outs", under
the provisions of paragraph 50 of Statement of Federal Financial
Accounting Concepts (SFFAC) No. 2, Entity and Display. In addition,
these entities are not included in the Federal budget, and therefore,
do not meet the conclusive criteria in SFFAC No. 2. As such, the OFS
determined that none of these entities meet the criteria to be
classified as a federal entity. Consequently, their assets,
liabilities, and results of operations are not consolidated in these
OFS financial statements.
In addition, the OFS has made loans and investments in certain Special
Purpose Vehicles[Footnote 1] (SPV). SFFAC No. 2, paragraphs 43 and 44,
reference indicative criteria such as ownership and control over an
SPV to carry out government powers and missions, as criteria in the
determination about whether the SPV should be classified as a federal
entity. The OFS has concluded that none of the SPVs meet the
conclusive or indicative criteria to be classified as a federal
entity. As a result, the assets, liabilities and results of operations
of the SPVs are not included in these OFS financial statements. The
OFS has recorded the loans and investments in private entities and
investments in SPVs in accordance with Credit Reform Accounting, as
discussed below. Additional disclosures regarding these SPV
investments are included in Note 6, see Automotive Industry Financing
Program, Term Asset-Backed Loan Facility and the Public-Private
Investment Program.
The EESA established the OFS within the Office of Domestic Finance of
the Department of the Treasury (Treasury). The OFS prepares stand-
alone financial statements to satisfy EESA's requirement for the TARP
to prepare annual financial statements. Additionally, as an office of
the Treasury, its financial statements are consolidated into
Treasury's annual Performance and Accountability Report.
Note 2. Summary Of Significant Accounting Policies:
Basis of Accounting and Presentation:
The accompanying financial statements include the operations of the
OFS and have been prepared from the accounting records of the OFS in
conformity with accounting principles generally accepted in the United
States for federal entities (Federal GAAP), and the OMB Circular A-
136, Financial Reporting Requirements, as amended. Federal GAAP
includes the standards issued by the Federal Accounting Standards
Advisory Board (FASAB). The FASAB is recognized by the American
Institute of Certified Public Accountants (AICPA) as the official
accounting standards-setting body for the U.S. Government. As such,
the FASAB is responsible for establishing Federal GAAP for Federal
reporting entities.
The FASAB issued the Statement of Federal Financial Accounting
Standards (SFFAS) No. 34, The Hierarchy of Generally Accepted
Accounting Principles, Including the Application of Standards Issued
by the Financial Accounting Standards Board in July, 2009. SFFAS No.
34 identifies the sources of accounting principles and the framework
for selecting the principles used in the preparation of general
purpose financial reports of federal reporting entities that are
presented in conformity with Federal GAAP.
In addition to the above, Section 123(a) of the EESA requires that the
budgetary cost of purchases of troubled assets and guarantees of
troubled assets, and any cash flows associated with authorized
activities, be determined in accordance with the Federal Credit Reform
Act of 1990 (FCRA). Section 123 (b) (1) of the EESA requires that the
budgetary costs of troubled assets and guarantees of troubled assets
be calculated by adjusting the discount rate for market risks. As a
result of this requirement, the OFS considered market risk in its
calculation and determination of the estimated net present value of
its direct loans, equity investments and asset guarantee program for
budgetary purposes. Similarly, market risk is considered in the
valuations for financial reporting purposes (see Note 6 for further
discussion).
Consistent with the accounting policy for equity investments made by
Treasury in private entities, the OFS accounts for its equity
investments at fair value, defined as the estimated amount of proceeds
the OFS would receive if the equity investments were sold to a market
participant. The OFS uses the present value accounting concepts
embedded in SFFAS No. 2, Accounting for Direct Loans and Loan
Guarantees, as amended (SFFAS No. 2), to derive fair value
measurements. The OFS concluded that the equity investments were
similar to direct loans in that there is a stated rate and a
redemption feature which, if elected, requires repayment of the amount
invested. Furthermore, consideration of market risk provides a basis
to arrive at a fair value measurement. Therefore, the OFS uses SFFAS
No. 2 (as more fully discussed below) for reporting and disclosure
requirements of its equity investments.
Federal loans and loan guarantees are governed by FCRA for budgetary
accounting and the associated FASAB accounting standard SFFAS No. 2
for financial reporting. The OFS applies the provisions of the SFFAS
No. 2 when accounting and reporting for direct loans, equity
investments, asset guarantee program and the Federal Housing
Administration (FHA)-Refinance Program. Direct loans and equity
investments disbursed and outstanding are recognized as assets at the
net present value of their estimated future cash flows. Outstanding
asset guarantees are recognized as liabilities or assets at the net
present value of their estimated future cash flows. Liabilities under
the FHA-Refinance Program are recognized at the net present value of
their estimated future cash flows when the guaranteed loans are
disbursed. For direct loans and equity investments, the subsidy
allowance account represents the difference between the face value of
the outstanding direct loan and equity investment balance and the net
present value of the expected future cash flows, and is reported as an
adjustment to the face value of the direct loan or equity investment.
The OFS recognizes dividend income associated with equity investments
when declared by the entity in which the OFS has invested and when
received in relation to any repurchases, exchanges and restructurings.
The OFS recognizes interest income when earned on performing loans.
The OFS reflects changes, referred to as reestimates, in the value of
direct loans, equity investments, and asset guarantee program in the
subsidy cost on the Statement of Net Cost annually. The OFS has
received common stock warrants, additional preferred stock (referred
to as warrant preferred stock) or additional notes, as additional
consideration for providing direct loans and equity investments made
and the asset guarantee program. The OFS accounts for the warrants and
warrant preferred stock received under Section 113 of EESA as fees
under SFFAS No. 2, and, as such, the value of the warrants, warrant
preferred stock and additional notes, when the assets are sold, is a
reduction of the subsidy allowance.
Use of Estimates:
The OFS has made certain estimates and assumptions relating to the
reporting of assets, liabilities, revenues, and cost to prepare these
financial statements. Actual results could significantly differ from
these estimates. Major financial statement line items that include
estimates are TARP Direct Loans and Equity Investments, Net and the
Asset Guarantee Program on the Balance Sheet, and related subsidy cost
on the Statement of Net Cost (see Note 6).
The most significant differences between actual results and estimates
may occur in the valuation of direct loans, equity investments, and
the asset guarantee program. The forecasted future cash flows used to
determine these amounts as of fiscal year end are sensitive to slight
changes in model assumptions, such as general economic conditions,
specific stock price volatility of the entities which the OFS has an
equity interest, estimates of expected default, and prepayment rates.
Forecasts of future financial results have inherent uncertainty and
the OFS's TARP Direct Loans and Equity Investments, Net and Asset
Guarantee Program line items as of fiscal year end are reflective of
relatively illiquid, troubled assets whose values are particularly
sensitive to future economic conditions and other assumptions.
Additional discussion related to sensitivity analysis of factors
affecting estimates can be found in the Management Discussion and
Analysis section of the Agency Financial Report.
Credit Reform Accounting:
The FCRA provides for the use of program, financing, and general fund
receipt accounts to separately account for activity related to direct
loans and loan guarantees. These accounts are classified as either
budgetary or non-budgetary in the Statement of Budgetary Resources.
The budgetary accounts include the program and general fund receipt
accounts, and the non-budgetary accounts consist of the credit reform
financing accounts.
As discussed previously, the OFS accounts for the cost of direct
loans, equity investments, the asset guarantee program and the FHA-
Refinance Program in accordance with Section 123(a) of the EESA and
the FCRA for budgetary accounting and SFFAS No. 2 for financial
reporting.
The authoritative guidance for financial reporting is primarily
contained in the SFFAS No. 2, as amended by the SFFAS No. 18,
Amendments to Accounting Standards for Direct Loans and Loan
Guarantees, and the SFFAS No. 19, Technical Amendments to Accounting
Standards for Direct Loans and Loan Guarantees.
In accordance with SFFAS No. 2, the OFS maintains program accounts
which receive appropriations and obligate funds to cover the subsidy
cost of direct loans, equity investments, asset guarantee program and
the FHA-Refinance Program and disburses the subsidy cost to the OFS
financing accounts. The financing accounts are non-budgetary accounts
that are used to record all of the cash flows resulting from the OFS
direct loans, equity investments and asset guarantee program.[Footnote
2] Cash flows include disbursements, repayments, repurchases, fees,
recoveries, interest, dividends, proceeds from the sale of stock and
warrants, borrowings from Treasury, negative subsidy and the subsidy
cost received from the program accounts.
The financing arrangements specifically for the TARP activities are
provided for in the EESA as follows: (1) Borrowing for program funds
under Section 118 that constitute appropriations when obligated or
spent, which are reported as "appropriations" in these financial
statements; (2) borrowing by financing accounts for non-subsidy cost
under the FCRA and Section 123; and (3) the Troubled Assets Insurance
Financing Fund (TAIFF) under Section 102(d).
The OFS uses general fund receipt accounts to record the receipt of
amounts paid from the financing accounts when there is a negative
subsidy or negative modification (a reduction in subsidy cost due to
changes in program policy or terms that change estimated future cash
flows) from the original estimate or a downward reestimate. Amounts in
the general fund receipt accounts are available for appropriations
only in the sense that all general fund receipts are available for
appropriations. Any assets in these accounts are non-entity assets and
are offset by intragovemmental liabilities. At the end of the fiscal
year, the fund balance transferred to the U.S. Treasury through the
general fund receipt account is no longer included in the OFS's fund
balance reporting.
The SFFAS No. 2 requires that the actual and expected costs of federal
credit programs be fully recognized in financial reporting. The OFS
calculated and recorded an initial estimate of the future performance
of direct loans, equity investments, and asset guarantee program. The
data used for these estimates were reestimated at the fiscal year-end
to reflect adjustments for market risk, asset performance, and other
key variables and economic factors. The reestimate data was then used
to estimate and report the "Subsidy Cost" in the Statement of Net
Cost. A detailed discussion of the OFS subsidy calculation and
reestimate assumptions, process and results is provided in Note 6.
Fund Balance with Treasury:
The Fund Balance with Treasury includes general, financing and other
funds available to pay current liabilities and finance authorized
purchases. Cash receipts and disbursements are processed by the
Treasury, and the OFS's records are reconciled with those of the
Treasury on a regular basis.
Available unobligated balances represent amounts that are apportioned
for obligation in the current fiscal year. Unavailable unobligated
balances represent unanticipated collections in excess of the amounts
apportioned which are unavailable. Obligated balances not yet
disbursed include undelivered orders and unpaid expended authority.
Troubled Asset Relief Program Direct Loans and Equity Investments, Net:
Troubled Asset Relief Program Direct Loans and Equity Investments, Net
represents the estimated net outstanding amount of the OFS direct
loans and equity investments, exclusive of the Treasury Housing
Programs Under TARP. The direct loan and equity investment balances
have been determined in accordance with the provisions of SFFAS No. 2
(see Note 6). Writeoffs of gross direct loan and equity investment
balances (presented in Note 6 table) are recorded when a legal event,
such as a bankruptcy with no further chance of recovery, or
extinguishment of a debt instrument by agreement, occurs. Under SFFAS
2, writeoffs do not affect the Statement of Net Cost because the
written-off asset is fully reserved. Therefore, the write-off removes
the asset balance and the associated subsidy allowance.
Asset Guarantee Program:
The Asset Guarantee Program line item on the Balance Sheet as of
September 30, 2009 represents the asset value resulting from the net
present value of the estimated cash inflows that were in excess of the
estimated future claim payments. During fiscal year 2010, the OFS and
the Federal Deposit Insurance Corporation (FDIC) entered into a
termination agreement with the program's remaining participant,
Citigroup. As a result, the Asset Guarantee Program line item (non-
intragovemmental asset) represents the net present value of the
estimated cash inflows from Citigroup trust preferred securities that
OFS held after the guarantee was terminated. The intragovemmental
Asset Guarantee Program line item is the estimated value of certain
Citigroup trust preferred securities currently held by the FDIC. Under
the termination agreement, the FDIC has agreed to transfer to the OFS
these securities less any losses on FDIC's guarantee of Citigroup
debt. See Note 6.
General Property and Equipment:
Equipment with a cost of $50,000 or more per unit and a useful life of
two years or more is capitalized at full cost and depreciated using
the straight-line method over the equipment's useful life. Other
equipment not meeting the capitalization criteria is expensed when
purchased. Software developed for internal use is capitalized and
amortized over the estimated useful life of the software if the cost
per project is greater than $250,000. However, OFS may expense such
software if management concludes that total period costs would not be
materially distorted and the cost of capitalization is not
economically prudent. Based upon these criteria, the OFS reports no
capitalized property, equipment or software on its Balance Sheet as of
September 30, 2010 and 2009.
Accounts Payable and Other Liabilities:
Accounts Payable and Other Liabilities are amounts due to
intragovemmental or public entities that will generally be liquidated
during the next operating cycle (within one year from the balance
sheet date).
Principal Payable to the Bureau of the Public Debt:
Principal Payable to the Bureau of the Public Debt (BPD) represents
the net amount due for equity investments, direct loans, and asset
guarantee program funded by borrowings from the BPD as of the end of
the fiscal year. Additionally, OFS borrows from the BPD for payment of
intragovemmental interest and payment of negative subsidy cost to the
general fund, as necessary. See Note 8.
Due to the General Fund:
Due to the General Fund represents the amount of accrued downward
reestimates and, for fiscal year 2010, one downward modification not
yet funded, related to direct loans, equity investments and asset
guarantee programs as of September 30, 2010 and 2009. See Notes 3 and 6.
Liabilities for the Treasury Housing Programs Under TARP
There are three initiatives in the Treasury Housing Programs: the
Making Home Affordable Program, the Housing Finance Agency Hardest-Hit
Fund and the Federal Housing Administration Refinance Program (see
Note 5). The OFS has determined that credit reform accounting is not
applicable to the Treasury Housing Programs Under TARP except the FHA-
Refinance Program, since there are no incoming cash flows to be
valued. Therefore, liabilities for the Making Home Affordable Program
and Housing Finance Agency Hardest-Hit Fund for payments to service's
and investors, including principal balance reduction payments for the
accounts of borrowers are accounted for in accordance with SFFAS No.
5, Accounting for Liabilities of the Federal Government. A liability
is recognized for any unpaid amounts due as of the reporting date. The
liability estimate is based on information about loan modifications
reported by participating servicers for the Making Home Affordable
Program and participating states for the Housing Finance Agency
Hardest Hit Fund.
Unexpended Appropriations:
Unexpended Appropriations represents the OFS undelivered orders and
unobligated balances in budgetary appropriated funds as of September
30, 2010 and 2009.
Cumulative Results of Operations:
Cumulative Results of Operations, presented on the Balance Sheet and
on the Statement of Changes in Net Position, represents the net
results of the OFS operations not funded by appropriations or some
other source, such as borrowing authority, from inception through
fiscal year end. For fiscal year 2010, there were $1.5 billion of
unfunded upward reestimates that increased subsidy cost. The
appropriations for this increase in cost will be received next fiscal
year. Until then, the cost is recorded as negative Cumulative Results
of Operations. The Other Financing Sources line in the Statement of
Changes in Net Position for each year consists primarily of transfers
due to the Treasury General Fund relating to downward reestimates.
Each program's reestimates, upward and downward, are recorded
separately, not netted together.
Leave:
A liability for OFS employees' annual leave is accrued as it is earned
and reduced as leave is taken. Each year the balance of accrued annual
leave is adjusted to reflect current pay rates as well as forfeited
"use or lose" leave. Amounts are unfunded to the extent current or
prior year appropriations are not available to fund annual leave
earned but not taken. Sick leave and other types of non-vested leave
are expensed as taken.
Employee Health and Life Insurance and Workers' Compensation Benefits
The OFS employees may choose to participate in the contributory
Federal Employees Health Benefit and the Federal Employees Group Life
Insurance Programs. The OFS matches a portion of the employee
contributions to each program. Matching contributions are recognized
as current operating expenses.
The Federal Employees' Compensation Act (FECA) provides income and
medical cost protection to covered Federal civilian employees injured
on the job, and employees who have incurred a work-related injury or
occupational disease. Future workers' compensation estimates are
generated from an application of actuarial procedures developed to
estimate the liability for FECA benefits. The actuarial liability
estimates for FECA benefits include the expected liability for death,
disability, medical, and miscellaneous costs for approved compensation
cases.
Employee Pension Benefits:
The OFS employees participate in either the Civil Service Retirement
System (CSRS) or the Federal Employees' Retirement System (FERS) and
Social Security. These systems provide benefits upon retirement and in
the event of death, disability or other termination of employment and
may also provide pre-retirement benefits. They may also include
benefits to survivors and their dependents, and may contain early
retirement or other special features. The OFS contributions to
retirement plans and Social Security, as well as imputed costs for
pension and other retirement benefit costs administered by the Office
of Personnel Management, are recognized on the Statement of Net Cost
as Administrative Costs. Federal employee benefits also include the
Thrift Savings Plan (TSP). For FERS employees, a TSP account is
automatically established and the OFS matches employee contributions
to the plan, subject to limitations. The matching contributions are
also recognized as Administrative Costs on the Statement of Net Cost.
Related Parties:
The nature of related parties and descriptions of related party
transactions are discussed within Notes 1 and 6.
Note 3. Due To The General Fund:
As of September 30, 2010, the OFS accrued $25.1 billion of downward
reestimates and one downward modification payable to the General Fund
(See Note 6). Due to the General Fund is a Non-Entity liability on the
Balance Sheet. At September 30, 2009, Due to the General Fund payable
was $109.7 billion for downward reestimates.
Note 4. Fund Balances With Treasury:
Fund Balances with Treasury, by fund type and status, are presented in
the following table as of September 30, 2010 and 2009: (Dollars in
Millions):
Fund Balances:
General Funds:
2010: $45,438;
2009: $45,650.
Program Funds:
2010: $34,766;
2009: $38,658.
Financing Funds:
2010: $18,460;
2009: $13,425.
Total Fund Balances:
2010: $98,664;
2009: $97,733.
Status of Fund Balances:
Unobligated Balances:
Available:
2010: $7,834;
2009: $35,165.
Unavailable:
2010: $13,790;
2009: $1,936.
Obligated Balances Not Yet Disbursed:
2010: $77,040;
2009: $60,632.
Total Status of Fund Balances:
2010: $98,664;
2009: $97,733.
Included in the OFS Financing Funds balance are premium collections of
$265.2 million during fiscal year 2010 and $174.8 million for the
period ended September 30, 2009 related to the AGP that are required
by the EESA Section 102(d) to be maintained in the Troubled Asset
Insurance Financing Fund (see Note 6).
Note 5. The Treasury Housing Programs Under Tarp:
Fiscal year 2010 has seen an expansion of programs designed to provide
stability for both the housing market and homeowners. These programs
assist homeowners who are experiencing financial hardships to remain
in their homes while they get back on their feet or relocate to a more
sustainable living situation. These programs fall into three
initiatives:
1) Making Home Affordable Program (MHA);
2) Housing Finance Agency (HFA) Hardest-Hit Fund; and;
3) Federal Housing Administration (FHA)-Refinance Program.
Under MHA, the initial programs rolled out in the period ended
September 30, 2009 were the Home Affordable Modification Program
(HAMP) including the Home Price Decline Protection Program (HPDP).
MHA includes HAMP, FHA-HAMP, Second Lien Program (2MP), Treasury/FHA
Second Lien Program (FHA 2LP) (extinguishment of 2nd lien portion of
the program), and Rural Development (RD-HAMP). The HAMP includes first
lien modifications, the HPDP, the Principal Reduction Alternative
Waterfall Program (PRA), the Unemployment Program (UP), and the Home
Affordable Foreclosure Alternatives Program (HAFA). The HAMP first
lien modification program provides for onetime, monthly and annual
incentives to servicers, borrowers, and investors who participate in
the program whereby the investor and OFS share the costs of modifying
qualified first liens. The HPDP provides incentives to investors to
partially offset losses from home price declines. In fiscal year 2010,
additional programs have been introduced under HAMP to complement the
first lien modification program and HPDP. The Principal Reduction
Alternative Waterfall Program (PRA) offers mortgage relief to eligible
homeowners whose homes are worth significantly less than the remaining
amounts outstanding under their first-lien mortgage. The Unemployment
Program (UP) offers assistance to unemployed homeowners through
temporary forbearance of a portion of their mortgage payments. The UP
will not have a financial impact on the OFS because no incentives are
paid by OFS. Finally, the Home Affordable Foreclosure Alternatives
Program (HAFA) is designed to assist eligible borrowers unable to
retain their homes through a HAMP modification by simplifying and
streamlining the short sale and deed in lieu of foreclosure processes
and providing incentives to borrowers, servicers and investors to
pursue short sales and deeds in lieu.
Fiscal year 2010 has also seen the introduction of additional programs
under MHA. These programs include the FHA-HAMP which provides the same
incentives as HAMP for Federal Housing Administration (FHA) guaranteed
loans. The 2MP provides additional incentives to servicers to
extinguish second liens on first lien loans modified under HAMP. The
FHA 2LP provides for incentives to servicers for extinguishment of
second liens for borrowers who refinance their FHA-insured first lien
mortgages under the FHA-Refinance Program. The RD-HAMP Program
provides HAMP incentives for USDA guaranteed mortgages.
All MHA disbursements are made to servicers either for themselves or
for the benefit of borrowers and investors. Furthermore, all payments
are contingent on borrowers remaining current on their mortgage
payments. Servicers have until December 31, 2012 to enter into
mortgage modifications with borrowers.
Included in administrative costs are fees paid to Fannie Mae and
Freddie Mac. Fannie Mae provides direct programmatic support as a
third party agent on behalf of the OFS. Freddie Mac provides
compliance oversight as a third party agent on behalf of the OFS, and
the servicers work directly with the borrowers to modify and service
the borrowers' loans.
The Housing Finance Agency (HFA) Hardest-Hit Fund was implemented in
2010 and provides targeted aid to families in the states hit hardest
by the housing market downturn and unemployment. States that meet the
criteria for this program consist of Alabama, Arizona, California,
Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Mississippi,
Nevada, New Jersey, North Carolina, Ohio, Oregon, Rhode Island, South
Carolina, Tennessee, and Washington D.C. Approved states develop and
roll out their own programs with timing and types of programs offered
targeted to address the specific needs and economic conditions of
their state. States have until December 31, 2017 to enter into
agreements with borrowers.
The FHA-Refinance Program is a joint initiative with the Department of
Housing and Urban Development (HUD) which is intended to encourage
refinancing of existing underwater (i.e. the borrower owes more than
the home is worth) mortgage loans not currently insured by FHA into
FHA-insured mortgages. HUD will pay a portion of the amount refinanced
to the investor and OFS will pay incentives to encourage the
extinguishment of second liens associated with the refinanced
mortgages. OFS established a Letter of Credit to fund the OFS portion
of any claims associated with the FHA-insured mortgages. Homeowners
can refinance into FHA-guaranteed mortgages through December 31, 2012
and OFS will honor its share of claims against the Letter of Credit
through 2020. As of September 30, 2010, no loans had been refinanced
under this program as the joint initiative was entered into late in
the fiscal year. However, in fiscal year 2010, OFS paid $3 million to
establish the Letter of Credit.
The table below recaps payments and accruals as of September 30, 2010
and September 30, 2009. As noted above, the UP is structured so that
there is no financial impact on the OFS. Although in operation on
September 30, 2010 the PRA, FHA-RAMP, 2LP and RD-RAMP had not been in
operation for a period long enough to have fiscal year 2010 financial
activity.
Table: Treasury Housing Programs Under Tarp:
MHA:
(Dollars in Billions) Commitments, 9/30/2010: $29.9;
(Dollars in Thousands) Payments, 9/30/2010: [Empty];
(Dollars in Thousands) Accruals, 9/30/2010: [Empty];
(Dollars in Thousands) Accruals, 9/30/2009: [Empty].
HAMP (1st Lien):
(Dollars in Billions) Commitments, 9/30/2010: [Empty];
(Dollars in Thousands) Payments, 9/30/2010: $473,592;
(Dollars in Thousands) Accruals, 9/30/2010: $946;
(Dollars in Thousands) Accruals, 9/30/2009: $175,415;
(Dollars in Thousands) Accruals, 9/30/2009: $1,361.
HPOP:
(Dollars in Billions) Commitments, 9/30/2010: [Empty];
(Dollars in Thousands) Payments, 9/30/2010: $8,755;
(Dollars in Thousands) Payments, 9/30/2009: [Empty];
(Dollars in Thousands) Accruals, 9/30/2010: [Empty];
(Dollars in Thousands) Accruals, 9/30/2009: $107,914.
PRA[A]:
(Dollars in Billions) Commitments, 9/30/2010: [Empty];
(Dollars in Thousands) Payments, 9/30/2010: [Empty];
(Dollars in Thousands) Payments, 9/30/2009: [Empty];
(Dollars in Thousands) Accruals, 9/30/2010: [Empty];
(Dollars in Thousands) Accruals, 9/30/2009: [Empty].
UP[B}:
(Dollars in Billions) Commitments, 9/30/2010: N/A;
(Dollars in Thousands) Payments, 9/30/2010: N/A;
(Dollars in Thousands) Payments, 9/30/2009: N/A;
(Dollars in Thousands) Accruals, 9/30/2010: N/A;
(Dollars in Thousands) Accruals, 9/30/2009: N/A;
HAFA[C]:
(Dollars in Billions) Commitments, 9/30/2010: [Empty];
(Dollars in Thousands) Payments, 9/30/2010: $1,627
(Dollars in Thousands) Payments, 9/30/2009: [Empty];
(Dollars in Thousands) Accruals, 9/30/2010: N/A;
(Dollars in Thousands) Accruals, 9/30/2009: [Empty].
FHA HAMP:
(Dollars in Billions) Commitments, 9/30/2010: [Empty];
(Dollars in Thousands) Payments, 9/30/2010: [Empty];
(Dollars in Thousands) Payments, 9/30/2009: [Empty];
(Dollars in Thousands) Accruals, 9/30/2010: $24;
(Dollars in Thousands) Accruals, 9/30/2009: [Empty].
2MP:
(Dollars in Billions) Commitments, 9/30/2010: [Empty];
(Dollars in Thousands) Payments, 9/30/2010: $11;
(Dollars in Thousands) Payments, 9/30/2009: [Empty];
(Dollars in Thousands) Accruals, 9/30/2010: $5;
(Dollars in Thousands) Accruals, 9/30/2009: [Empty].
2LP[A]:
(Dollars in Billions) Commitments, 9/30/2010: [Empty];
(Dollars in Thousands) Payments, 9/30/2010: [Empty];
(Dollars in Thousands) Payments, 9/30/2009: [Empty];
(Dollars in Thousands) Accruals, 9/30/2010: [Empty];
(Dollars in Thousands) Accruals, 9/30/2009: [Empty].
RD-HAMP:
(Dollars in Billions) Commitments, 9/30/2010: [Empty];
(Dollars in Thousands) Payments, 9/30/2010: [Empty];
(Dollars in Thousands) Payments, 9/30/2009: [Empty];
(Dollars in Thousands) Accruals, 9/30/2010: [Empty];
(Dollars in Thousands) Accruals, 9/30/2009: [Empty].
HFA Hardest Hit Fund:
(Dollars in Billions) Commitments, 9/30/2010: $7.6;
(Dollars in Thousands) Payments, 9/30/2010: $56,120;
(Dollars in Thousands) Payments, 9/30/2010: [Empty];
(Dollars in Thousands) Accruals, 9/30/2010: [Empty];
(Dollars in Thousands) Accruals, 9/30/2009: [Empty].
FHA-Refinance:
(Dollars in Billions) Commitments, 9/30/2010: $8.1;
(Dollars in Thousands) Payments, 9/30/2010: $3,015;
(Dollars in Thousands) Payments, 9/30/2010: [Empty];
(Dollars in Thousands) Accruals, 9/30/2010: [Empty];
(Dollars in Thousands) Accruals, 9/30/2009: [Empty].
Totals:
(Dollars in Billions) Commitments, 9/30/2010: $45.6;
(Dollars in Thousands) Payments, 9/30/2010: $543,120;
(Dollars in Thousands) Accruals, 9/30/2010: $946;
(Dollars in Thousands) Accruals, 9/30/2010: $283,358;
(Dollars in Thousands) Accruals, 9/30/2009: $1,361.
[A] No FY2010 activity with financial impact.
[B] No financial impact.
[C] HAFA payments are made in the month earned and not accrued.
For fiscal year 2010, cost for Treasury Housing Programs Under TARP
totaled $825 million; for the period ending September 30, 2009, cost
totaled $2 million.
[End of table]
Note 6. Troubled Asset Relief Program Direct Loans And Equity
Investments, Net And Asset Guarantee Program:
Direct Loan, Equity Investments and Asset Guarantee Program:
The OFS administers a number of programs designed to help stabilize
the financial system and restore the flow of credit to consumers and
businesses. The OFS has made direct loans, equity investments and
entered into asset guarantees. The table below recaps OFS programs by
title and type:
Program: Capital Purchase Program;
Program Type: Equity Investment/Subordinated Debentures.
Program: American International Group, Inc. Investment Program;
Program Type: Equity Investment.
Program: Targeted Investment Program;
Program Type: Equity Investment.
Program: Automotive Industry Financing Program;
Program Type: Equity Investment and Direct Loan.
Program: Consumer and Business Lending Initiative: Term Asset-Backed
Securities ban Facility;
Program Type: Subordinated Debentures;
Program: Consumer and Business Lending Initiative: SBA 7(a) Security
Purchase Program:
Program Type: Direct Loan.
Program: Consumer and Business Lending Initiative: Community
Development Capital Initiative;
Program Type: Equity Investment.
Program: Public-Private Investment Program;
Program Type: Equity Investment and Direct Loan.
Program: Asset Guarantee Program:
Program Type: Asset Guarantee.
The OFS applies the provisions of SFFAS No. 2 to account for direct
loans, equity investments and the asset guarantee program. This
standard requires measurement of the asset or liability at the net
present value of the estimated future cash flows. The cash-flow
estimates for each transaction reflect the actual structure of the
instruments. For each of these instruments, analytical cash flow
models generate estimated cash flows to and from the OFS over the
estimated term of the instrument. Further, each cash-flow model
reflects the specific terms and conditions of the program, technical
assumptions regarding the underlying assets, risk of default or other
losses, and other factors as appropriate. The models also incorporate
an adjustment for market risk to reflect the additional return
required by the market to compensate for variability around the
expected losses reflected in the cash flows (the "unexpected loss").
The adjustment for market risk requires the OFS to determine the
return that would be required by market participants to enter into
similar transactions or to purchase the assets held by OFS.
Accordingly, the measurement of the assets attempts to represent the
proceeds expected to be received if the assets were sold to a market
participant. The methodology employed for determining market risk for
equity investments generally involves a calibration to market prices
of similar securities that results in measuring equity investments at
fair value. The adjustment for market risk for loans is intended to
capture the risk of unexpected losses, but not intended to represent
fair value, i.e. the proceeds that would be expected to be received if
the loans were sold to a market participant. The OFS uses market
observable inputs, when available, in developing cash flows and
incorporating the adjustment required for market risk. For purposes of
this disclosure, the OFS has classified the various investments as
follows, based on the observability of inputs that are significant to
the measurement of the asset:
Quoted prices for Identical Assets: The measurement of assets in this
classification is based on direct market quotes for the specific
asset, e.g. quoted prices of common stock.
Significant Observable Inputs: The measurement of assets in this
classification is primarily derived from market observable data, other
than a direct market quote, for the asset. This data could be market
quotes for similar assets for the same entity.
Significant Unobservable Inputs: The measurement of assets in this
classification is primarily derived from inputs which generally
represent management's best estimate of how a market participant would
assess the risk inherent in the asset. These unobservable inputs are
used because there is little to no direct market activity.
The table below displays the assets held by the observability of
inputs significant to the measurement of each value:
(Dollars in Millions):
As of September 30, 2010:
Program: Capital Purchase Program;
Quoted Prices for Identical Assets: $14,899;
Significant Observable Inputs: [Empty];
Significant Unobservable Inputs: $33,334;
Total: $48,233.
Program: American International Group Investment Program[A];
Quoted Prices for Identical Assets: [Empty];
Significant Observable Inputs: [Empty];
Significant Unobservable Inputs: $26,138;
Total: $26,138.
Program: Targeted Investment Program;
Quoted Prices for Identical Assets: [Empty];
Significant Observable Inputs: [Empty];
Significant Unobservable Inputs: $1;
Total: $1.
Program: Automotive Industry Financing Program;
Quoted Prices for Identical Assets: [Empty];
Significant Observable Inputs: [Empty];
Significant Unobservable Inputs: $52,709;
Total: $52,709.
Program: Consumer and Business Lending Initiative, which includes
TALF, SBA 7(a) securities and CDCI;
Quoted Prices for Identical Assets: [Empty];
Significant Observable Inputs: [Empty];
Significant Unobservable Inputs: $966;
Total: $966.
Program: Public-Private Investment Program;
Quoted Prices for Identical Assets: [Empty];
Significant Observable Inputs: [Empty];
Significant Unobservable Inputs: $14,405;
Total: $14,405.
Program: Asset Guarantee Program;
Quoted Prices for Identical Assets: $2,240;
Significant Observable Inputs: $815;
Significant Unobservable Inputs: [Empty];
Total: $3,055.
Program: Total TARP Program;
Quoted Prices for Identical Assets: $17,139;
Significant Observable Inputs: $815;
Significant Unobservable Inputs: $127,553;
Total: $145,507.
As of September 30, 2039:
Program: Capital Purchase Program;
Quoted Prices for Identical Assets: $37,231;
Significant Observable Inputs: [Empty];
Significant Unobservable Inputs: $104,440;
Total: $141,671.
Program: American International Group Investment Program[A];
Quoted Prices for Identical Assets: [Empty];
Significant Observable Inputs: [Empty];
Significant Unobservable Inputs: $13,152;
Total: $13,152.
Program: Targeted Investment Program;
Quoted Prices for Identical Assets: [Empty];
Significant Observable Inputs: $40,341;
Significant Unobservable Inputs: [Empty];
Total: $40,341.
Program: Automotive Industry Financing Program;
Quoted Prices for Identical Assets: [Empty];
Significant Observable Inputs: [Empty];
Significant Unobservable Inputs: $42,284;
Total: $42,284.
Program: Consumer and Business Lending Initiative, which includes TALF;
Quoted Prices for Identical Assets: [Empty];
Significant Observable Inputs: [Empty];
Significant Unobservable Inputs: $444;
Total: $444.
Program: Asset Guarantee Program;
Quoted Prices for Identical Assets: [Empty];
Significant Observable Inputs: [Empty];
Significant Unobservable Inputs: $1,765;
Total: $1,765.
Program: Total TARP Program;
Quoted Prices for Identical Assets: $37,231;
Significant Observable Inputs: $40,341;
Significant Unobservable Inputs: $162,085;
Total: $239,657.
[A] Does not give effect to the proposed restructuring as discussed
under American International Group, Inc. Investment Program in this
note.
[End of table]
The following provides a description of the methodology used to
develop the cash flows and incorporate the market risk into the
measurement of the OFS assets.
Financial Institution Equity Investments[Footnote 3]:
The estimated values of preferred equity investments are the net
present values of the expected dividend payments and repurchases. The
model assumes that the key decisions affecting whether or not
institutions pay their preferred dividends are made by each
institution based on the strength of their balance sheet. The model
assumes a probabilistic evolution of each institution's asset-
toliability ratio (the asset-to-liability ratio is based on the
estimated fair value of the institution's assets against its
liabilities). Each institution's assets are subject to uncertain
returns and institutions are assumed to manage their asset to
liability ratio in such a way that it reverts over time to a target
level. Historical volatility is used to scale the likely evolution of
each institution's asset-to-liability ratio.
In the model, when equity decreases, i.e. the asset-to-liability ratio
falls, institutions are increasingly likely to default, either because
they enter bankruptcy or are dosed by regulators. The probability of
default is estimated based on the performance of a large sample of US
banks over the period 1990-2009. At the other end of the spectrum,
institutions call their preferred shares when the present value of
expected future dividends exceeds the call price; this occurs when
equity is high and interest rates are low. Inputs to the model include
institution specific accounting data obtained from regulatory filings,
an institution's stock price volatility, historical bank failure
information, as well as market prices of comparable securities trading
in the market. The market risk adjustment is obtained through a
calibration process to the market value of certain trading securities
of financial institutions within the TARP programs. The OFS estimates
the values and projects the cash flows of warrants using an option-
pricing approach based on the current stock price and its volatility.
Investments in common stock which are exchange traded are valued at
the quoted market price.
AIG Investment:
The method used to measure AIG preferred shares is broadly analogous
to the approach used to measure financial institution preferred
shares. However, greater uncertainty exists for the valuation of
preferred shares for AIG. First, the size of OFS's holding of
preferred shares relative to AIG's total balance sheet makes the
valuation extremely sensitive to assumptions about the recovery ratio
for preferred shares should AIG enter default. Second, no comparable
traded preferred shares exist. Therefore, OFS based the AIG valuation
on the observed market values of publicly traded junior subordinated
debt, adjusted for OFS's position in the capital structure. Further,
based on certain publicly available third party sources, assumptions
about payouts in different outcomes and the probability of some
outcomes were made. Finally, an external asset manager provided
estimated fair value amounts, premised on public information, which
also assisted OFS in its measurement. These different factors were all
used in determining the best estimate for the AIG assets. The
adjustment for market risk is incorporated in the data points the OFS
uses to determine the measurement for AIG as all points rely on market
data.
Asset Guarantee Program:
As of September 30, 2009, the value of the asset guarantee program
reflected the net present value of estimated default-claim payments by
the OFS, net of income from recoveries on defaults, fees (including
equity received), or other income. Default-claim payments were based
on estimated losses on the guaranteed assets. Key inputs into these
estimates are forecasted gross domestic product, unemployment rates
and home price depreciation, in a base scenario and a stress scenario.
During fiscal year 2010, an agreement was entered into to terminate
the guarantee of OFS to pay for any defaults. After the termination,
the OFS still held some of the trust preferred securities (initially
received as the guarantee fee) issued by Citigroup and the potential
to receive $800 million (liquidation preference) of additional
Citigroup trust preferred securities from the FDIC, see further
discussion below under the heading of Asset Guarantee Program. As
such, as of September 30, 2010, the value of the instruments within
the AGP is the value of the trust preferred securities held and the
estimated cash flows associated with the contingent right to receive
additional trust preferred securities. On September 30, 2010, the OFS
entered into an agreement to sell[Footnote 4] the trust preferred
securities held within AGP, and the value of the trust preferred
securities is approximately the sales price and the contingent right
is valued in a similar manner as the financial institutions preferred
equity investments noted above.
Investments in Special Purpose Vehicles:
The OFS has made certain investments in financial instruments issued
by special purpose vehicles (SPVs). Generally, the OFS estimates the
cash flows of the SPV and then applies those cash flows to the
waterfall governing the priority of payments out of the Spy.
For the loan associated with the Term Asset-Backed Securities Loan
Facility (TALF), the OFS model derives the cash flows to the SPV, and
ultimately the OFS, by simulating the performance of underlying
collateral. Loss probabilities on the underlying collateral are
calculated based on analysis of historical loan loss and charge off
experience by credit sector and subsector. Historical mean loss rates
and volatilities are significantly stressed to reflect recent and
projected performance. Simulated losses are run through cash flow
models to project impairment to the TALF-eligible securities. Impaired
securities are projected to be purchased by the SPV, requiring
additional OFS funding. Simulation outcomes consisting of a range of
loss scenarios are probability-weighted to generate the expected net
present value of future cash flows.
For the PPIP investments and loans made in the Public Private
Investment Funds (PPIF), the OFS model derives cash flows to the SPV
by simulating the performance of the collateral supporting the
residential mortgage-backed securities (RMBS) and commercial mortgage
backed securities (CMBS) held by the PPIF (i.e. performance of the
residential and commercial mortgages). The simulated cash flows are
then run through the waterfall of the RMBS/CMBS to determine the cash
flows to the SPV. Once determined, the cash flows are run through the
waterfall of the PPIF to determine the expected cash flows to the OFS
through both the equity investments and loans. Inputs used to simulate
the cash flows are unemployment forecast, home price appreciation/
depreciation forecast, the current term structure of interest rates,
historical pool performance as well as estimates of the net income and
value of commercial real estate supporting the CMBS.
SBA 7(a) Securities:
The valuation of SBA 7(a) securities is based on the discounted
estimated cash-flows of the securities.
Auto Industry Financing Program (AIFP) Investments and Loans:
The valuation of equity investments was performed in a manner that is
broadly analogous to the methodology used for financial institution
equity investments, with reliance on publicly traded securities to
benchmark the assumptions of the valuation exercise. AIFP loans with
potential value are valued using rating agency default probabilities.
As part of the General Motors (GM) bankruptcy proceedings, OFS
received a 60.8 percent stake in the common equity of General Motors
Company (New GM). Because the unsecured bond holders in General Motors
Corporation (Old GM) received 10 percent of the common equity
ownership and warrants in New GM, the expected recovery rate implied
by the current trading prices of the Old GM bonds provides the implied
value of the New GM equity. OFS used this implied equity value to
account for its common stock ownership in New GM. The adjustment for
market risk is incorporated in the data points the OFS uses to
determine the measurement for GM as all points rely on market data.
For GMAC, Inc (GMAC — currently known as Ally Financial) trust
preferred equity instruments, OFS estimates the value based on
comparable publicly traded securities adjusted for factors specific to
GMAC, such as credit rating. For investments in GMAC's common equity
and mandatorily convertible preferred stock, which is valued on an "if-
converted" basis, the OFS uses certain valuation multiples such as
price-to-earnings and price-to-tangible book value to estimate the
value of the shares. The multiples are based on those of comparable
publicly-traded entities. The adjustment for market risk is
incorporated in the data points the OFS uses to determine the
measurement for GMAC as all points rely on market data.
OFS values direct loans using an analytical model that estimates the
net present value of the expected principal, interest, and other
scheduled payments taking into account potential defaults. In the
event of an institution's default, these models include estimates of
recoveries, incorporating the effects of any collateral provided by
the contract. The probability of default and losses given default are
estimated by using historical data when available, or publicly
available proxy data, including credit rating agencies historical
performance data. The models also incorporate an adjustment for market
risk to reflect the additional return on capital that would be
required by a market participant.
Subsidy Cost:
The recorded subsidy cost of a direct loan, equity investment or asset
guarantee is based on the estimated future cash flows calculated as
discussed above. The OFS actions, as well as changes in legislation,
that change these estimated future cash flows change subsidy costs and
are recorded as modifications. The cost of a modification is
recognized as a modification expense, included in subsidy cost, when
the direct loan, equity investment, or asset guarantee is modified.
During fiscal year 2010, modifications occurred within the Capital
Purchase Program, the Asset Guarantee Program and the Automotive
Industry Financing Program. During the period ended September 30,
2009, modifications occurred within the Capital Purchase Program;
Consumer and Business Lending Initiative; the American International
Group, Inc. Investment Program; and the Automotive Industry Financing
Program. See detailed discussion related to each program and related
modifications below. Total net modification cost for the year ended
September 30, 2010 was $47.9 million. For the period ended September
30, 2009, net modification costs were $412.1 million.
The following table recaps gross loan or equity investment, subsidy
allowance, and net loan or equity investment by TARP program. Detailed
tables providing the net composition, subsidy cost, modifications and
reestimates, along with a reconciliation of subsidy cost allowances as
of and for the year ended September 30, 2010 and the period ended
September 30, 2009, are provided at the end of this Note for Direct
Loans and Equity Investments, detailed by program, and for the Asset
Guarantee Program separately.
Descriptions and chronology of significant events by program are after
the summary table.
(Dollars in Millions):
As of September 30, 2010:
Program: Capital Purchase Program;
Gross Direct Loan or Equity Investment: $49,779;
Subsidy Allowance: ($1,546);
Net Direct Loan or Equity Investment: $48,233.
Program: American International Group Investment Program[A];
Gross Direct Loan or Equity Investment: $47,543;
Subsidy Allowance: ($21,405);
Net Direct Loan or Equity Investment: $26,138.
Program: Targeted Investment Program;
Gross Direct Loan or Equity Investment: [Empty];
Subsidy Allowance: $1;
Net Direct Loan or Equity Investment: $1.
Program: Automotive Industry Financing Program;
Gross Direct Loan or Equity Investment: $67,238;
Subsidy Allowance: ($14,529);
Net Direct Loan or Equity Investment: $52,709.
Program: Consumer and Business Lending Initiative, which includes
TALF, SBA 7(a) securities and CDCI;
Gross Direct Loan or Equity Investment: $908;
Subsidy Allowance: $58;
Net Direct Loan or Equity Investment: $966.
Program: Public-Private Investment Program;
Gross Direct Loan or Equity Investment: $13,729;
Subsidy Allowance: $676;
Net Direct Loan or Equity Investment: $14,405.
Program: Total TARP Program;
Gross Direct Loan or Equity Investment: $179,197;
Subsidy Allowance: ($36,745);
Net Direct Loan or Equity Investment: $142,452.
As of September 30, 2009:
Program: Capital Purchase Program;
Gross Direct Loan or Equity Investment: $133,901;
Subsidy Allowance: $7,770;
Net Direct Loan or Equity Investment: $141,671.
Program: American International Group Investment Program[A];
Gross Direct Loan or Equity Investment: $43,206;
Subsidy Allowance: ($30,054);
Net Direct Loan or Equity Investment: $13,152.
Program: Targeted Investment Program;
Gross Direct Loan or Equity Investment: $40,000;
Subsidy Allowance: $341;
Net Direct Loan or Equity Investment: $40,341.
Program: Automotive Industry Financing Program;
Gross Direct Loan or Equity Investment: $73,762;
Subsidy Allowance: ($31,478);
Net Direct Loan or Equity Investment: $42,284.
Program: Consumer and Business Lending Initiative, which includes
TALF, SBA 7(a) securities and CDCI;
Gross Direct Loan or Equity Investment: $100;
Subsidy Allowance: $344;
Net Direct Loan or Equity Investment: $444.
Program: Public-Private Investment Program;
Gross Direct Loan or Equity Investment: [Empty];
Subsidy Allowance: [Empty];
Net Direct Loan or Equity Investment: [Empty].
Program: Total TARP Program;
Gross Direct Loan or Equity Investment: $290,969;
Subsidy Allowance: ($53,077);
Net Direct Loan or Equity Investment: $237,892.
[A] Does not give effect to the proposed restructuring as discussed
under American International Group, Inc. Investment Program in this
note.
[End of table]
Capital Purchase Program:
In October 2008, the OFS began implementation of the TARP with the
Capital Purchase Program (CPP), designed to help stabilize the
financial system by assisting in building the capital base of certain
viable U.S. financial institutions to increase the capacity of those
institutions to lend to businesses and consumers and support the
economy. Under this program, the OFS purchased senior perpetual
preferred stock from qualifying U.S. controlled banks, savings
associations, and certain bank and savings and loan holding companies
(Qualified Financial Institution or QFI). The senior preferred stock
has a stated dividend rate of 5.0% through year five, increasing to
9.0% in subsequent years. The dividends are cumulative for bank
holding companies and subsidiaries of bank holding companies and non-
cumulative for others and payable when and if declared by the
institution's board of directors. Under the original terms of the
senior preferred stock the QFI may not redeem the shares within the
first three years of the date of the investment, unless it had
received the proceeds of one or more Qualified Equity Offerings (QEO)
[Footnote 5] which results in aggregate gross proceeds to the QFI of
not less than 25.0% of the issue price of the senior preferred stock.
QFIs that are Sub-chapter S corporations issued subordinated
debentures in order to maintain compliance with the Internal Revenue
Code. The maturity of the subordinated debentures is 30 years and
interest rates are 7.7% for the first 5 years and 13.8% for the
remaining years.
In February 2009 and May 2009, the United States Congress passed the
American Recovery and Reinvestment Act of 2009 and the Helping
Families Save Their Homes Act of 2009, respectively. These acts
contained amendments to the EESA (EESA Amendments) which require the
Secretary to allow QFIs to repay at any time, subject to regulatory
approval, regardless of whether the 25.0% or greater QEO was
accomplished. The ability of a QFI to repay the OFS investment prior
to year 3 or a 25.0% QEO was not considered in the original subsidy
cost estimate. Therefore, a modification cost of $77.7 million was
recorded for the period ended September 30, 2009 as a result of these
amendments.
In addition to the senior preferred stock, the OFS received warrants,
as required by section 113(d) of EESA, from public QFIs to purchase a
number of shares of common stock. The warrants have an aggregate
exercise price equal to 15.0% of the total senior preferred stock
investment. The exercise price per share used to determine the number
of shares of common stock subject to the warrant was calculated based
on the average closing prices of the common stock on the 20 trading
days ending on the last day prior to the date the QFI's application
was preliminarily approved for participation in the program. The
warrants include customary anti-dilution provisions. Prior to December
31, 2009, in the event a public QFI completed one or more QEOs with
aggregate gross proceeds of not less than 100.0% (100.0% QEO) of the
senior perpetual preferred stock investment, the number of shares
subject to the warrants was reduced by 50.0%. As of September 30,
2009, 19 QFIs had reduced shares pursuant to the provision. As of
December 31, 2009, a total of 38 QFIs reduced the number of shares
available under the warrants as a result of this provision. The
warrants have a 10 year term. Subsequent to December 31, 2009, the OFS
may exercise any warrants held in whole or in part at any time.
The OFS received warrants for non-public QFIs for the purchase of
additional senior preferred stock (or subordinated debentures if
appropriate) with a stated dividend rate of 9.0% (13.8% interest rate
for subordinate debentures) and a liquidation preference equal to 5.0%
of the total senior preferred stock (additional subordinate debenture)
investment. These warrants were immediately exercised and resulted in
the OFS holding additional senior preferred stock (subordinated
debentures) (collectively referred to as "warrant preferred stock") of
non-public QFIs. The OFS did not receive warrants flow financial
institutions considered Community Development Financial Institutions
(CDFIs). A total of 35 and 20 institutions considered CDFIs were in
the CPP portfolio as of September 30, 2010, and 2009, respectively.
The EESA Amendments previously discussed also allow the Secretary to
liquidate warrants associated with repurchased senior preferred stock
at the market price. In addition, a QFI, upon the repurchase of its
senior preferred stock, also has the contractual right to repurchase
the common stock warrants at the market price.
The following table provides key data points related to the CPP. In
addition, 106 and 38 QFIs have not declared and paid one or more
dividends to the OFS under CPP as of September 30, 2010 and September
30, 2009, respectively:
CPP Investment:
(Dollars in Billions):
Number of Institutions Participating;
Fiscal Year 2010: 707;
Period Ended September 30, 2009: 685.
Outstanding Beginning Balance, Investment in CPP Institutions; Fiscal
Year 2010: $133.9;
Period Ended September 30, 2009: $0.0.
Purchase Price, Current Year Investments;
Fiscal Year 2010: $0.3;
Period Ended September 30, 2009: $204.6.
Repayments and Sales of Investments;
Fiscal Year 2010: ($81.4);
Period Ended September 30, 2009: ($70.7).
Write-offs and Losses;
Fiscal Year 2010: ($2.6);
Period Ended September 30, 2009: [Empty].
Transfers to CDCI;
Fiscal Year 2010: ($0.4);
Period Ended September 30, 2009: [Empty].
Outstanding Ending Balance, Investment in CPP Institutions;
Fiscal Year 2010: $49.8;
Period Ended September 30, 2009: $133.9.
Interest and Dividends Collections;
Fiscal Year 2010: $3.1;
Period Ended September 30, 2009: $6.8.
Net Proceeds from Sales and Repurchases of Assets in Excess of Cost;
Fiscal Year 2010: $6.7;
Period Ended September 30, 2009: $2.9.
[End of table]
The task of managing the investments in CPP banks may require that the
OFS enter into certain agreements to exchange and/or convert existing
investments in order to achieve the best possible return for
taxpayers. In the period ended September 30, 2009, the OFS entered
into an exchange agreement with Citigroup under which the OFS
exchanged $25.0 billion, at $3.25 per share, of its investment in
senior preferred stock for 7.7 billion common shares of Citigroup.
This exchange transaction was not considered in the original subsidy
cost estimate for CPR As a result, the OFS recorded a modification
cost of $1.8 billion for the period ended September 30, 2009. In April
2010, the OFS began a process of selling the Citigroup common stock.
As of September 30, 2010, the OFS had sold approximately 4.0 billion
shares for total proceeds of $16.1 billion resulting in proceeds from
sales in excess of cost of $3.0 billion. As of September 30, 2010, the
OFS continues to hold approximately 3.7 billion shares of Citigroup
common stock with an estimated fair value of $143 billion, based on
the September 30, 2010 closing price of $3.91 per share. Included in
shares held as of September 30, 2010, is approximately 77.2 million
shares which were sold prior to or on September 30, 2010, but did not
settle until October 2010. Proceeds from these sales were $302.7
million resulting in proceeds from sales in excess of cost of $51.9
million.
In addition to the above transaction, the OFS has entered into other
transactions with various financial institutions including, exchanging
existing preferred shares for a like amount of non tax-deductible
Trust Preferred Securities, shares of mandatorily convertible
preferred securities and selling preferred shares to acquiring
financial institutions. Generally the transactions are entered into
with financial institutions in poor financial condition with a high
likelihood of failure. As such, in accordance with SFFAS No. 2, these
transactions are considered workouts and not modifications. The
changes in cost associated with these transactions are captured in the
year-end reestimates.
During fiscal year 2010, certain financial institutions participating
in CPP which are in good standing became eligible to exchange their
OFS-held stock investments to preferred stock under the Community
Development Capital Initiative (CDCI) of the Consumer and Business
Lending Initiative Program (CBLI). The exchange of stock is treated as
a repayment of CPP investments from the participating financial
institution and a distribution for the CDCI. See further discussion of
the CBLI and CDCI below. This was not considered in the formulation
estimate for the CPP program. As a result, OFS recorded a modification
cost savings of $31.9 million in the CPP program for this option
during fiscal year 2010.
Failed institutions:
In November 2009, a CPP participant, CIT Group, filed for Chapter 11
Bankruptcy. The OFS had invested $2.3 billion in senior preferred
stock of CIT Group and received a warrant for the purchase of common
stock. In fiscal year 2010, as a result of the bankruptcy proceedings,
the OFS wrote off the $2.3 billion investment in CIT Group and will
not recover any amounts associated with it. In addition, during fiscal
year 2010, four other financial institutions within the CPP portfolio
either filed for bankruptcy or were closed by their regulators. The
OFS had invested approximately $396.3 million into these institutions.
The OFS does not anticipate recovery on these investments and
therefore the value of these shares are reflected at zero as of
September 30, 2010. The ultimate amount received, if any, from the
investments in institutions that filed for bankruptcy and institutions
closed by regulators will depend primarily on the outcome of the
bankruptcy proceedings and of the receivership.
American International Group, Inc. Investment Program (AIG):
The OFS provided assistance to certain systemically significant
financial institutions on a case by case basis in order to provide
stability to institutions that are critical to a functioning financial
system and are at substantial risk of failure as well as to prevent
broader disruption to financial markets.
In November 2008, the OFS invested $40.0 billion in AIG's cumulative
Series D perpetual cumulative preferred stock with a dividend rate of
10.0% compounded quarterly. The OFS also received a warrant for the
purchase of approximately 53.8 million shares (adjusted to 2.7 million
shares after a 20:1 reverse stock split) of AIG common stock. On April
17, 2009, AIG and the OFS restructured their November 2008 agreement.
Under the restructuring, the OFS exchanged $40.0 billion of cumulative
Series D preferred stock for $41.6 billion of non-cumulative 10.0%
Series E preferred stock. The amount of Series E preferred stock is
equal to the original $40.0 billion, plus approximately $733.0 million
in undeclared dividends as of the February 1, 2009, scheduled
quarterly dividend payment date, $15.0 million in dividends compounded
on the undeclared dividends, and an additional $855.0 million in
dividends from February 1, 2009, but not paid as of April 17, 2009.
AIG's restructured agreement kept the quarterly dividend payment dates
of May 1, August 1, November 1, and February 1, as established by the
original November 2008 agreement. The original subsidy cost estimate
did not consider this restructuring, which resulted in a modification
cost of $127.2 million being recorded. The OFS requested and received
an appropriation for this additional cost in the period ended
September 30, 2009.
In addition to the exchange, the OFS agreed to make available an
additional $29.8 billion capital facility to allow AIG to draw
additional funds if needed to assist in AIG's restructuring. The OFS
investment related to the capital facility consists of Series F
noncumulative perpetual preferred stock with no initial liquidation
preference, and a warrant for the purchase of 3,000 shares (adjusted
to 150 shares after a 20:1 reverse stock split of AIG common stock).
This liquidation preference increases with any draw down by AIG on the
facility. The dividend rate applicable to these shares is 10.0% and is
payable quarterly, if declared, on the outstanding liquidation
preference. For the fiscal year ended September 30, 2010 and the
period ended September 30, 2009, $43 billion and $3.2 billion,
respectively, has been funded by the OFS to AIG under this additional
capital facility. Consistent with SFFAS No.2, the unused portion of
the AIG capital facility is not recognized as an asset as of September
30, 2010 and 2009.
According to the terms of the preferred stock, if AIG misses four
dividend payments, the OFS may appoint to the AIG board of directors,
the greater of two members or 20.0% of the total number of directors
of the Company. The ability to appoint such directors shall remain in
place until dividends payable on all outstanding shares of the Series
E Preferred Stock have been declared and paid in full for four
consecutive quarterly dividend periods, subject to revesting for each
and every subsequent missed dividend payment. On April 1, 2010, the
OFS appointed two directors to the Company's board as a result of non-
payments of dividends. The additional two directors increased the
total number of AIG directors to twelve.
On September 30, 2010, the Treasury, Federal Reserve Bank of New York
and AIG announced plans for a restructuring of the Federal
Government's investments in AIG. The restructuring plan provides for,
among other items, the conversion of currently outstanding Series E &
F preferred stock to 1.092 billion shares of AIG common stock. Under
the plan, the current undrawn portion of Series F will be available to
AIG for the repayment of certain amounts owed to the Federal Reserve
Bank of New York and for general corporate liquidity. The plan is
still subject to a number of conditions which must be met in order to
close. OFS management believes that the implementation of this plan
would not result in additional losses on the AIG investment. See
additional discussion regarding the proposed restructuring plan within
the Management's Discussion and Analysis section of the Agency
Financial Report.
Targeted Investment Program:
The Targeted Investment Program (TIP) was designed to prevent a loss
of confidence in financial institutions that could result in
significant market disruptions, threatening the financial strength of
similarly situated financial institutions, impairing broader
financial markets, and undermining the overall economy. The OFS
considered institutions as candidates for the TIP on a case-by-case
basis, based on a number of factors including the threats posed by
destabilization of the institution, the risks caused by a loss of
confidence in the institution, and the institution's importance to the
nation's economy.
In the period ended September 30, 2009, the OFS invested $20.0 billion
in each of Bank of America and Citigroup under TIP. Under each
agreement, the OFS purchased $20.0 billion of perpetual preferred
stock with an annual cumulative dividend rate of 8% and received a
warrant for the purchase of common stock. In December 2009, Bank of
America and Citigroup repaid the amounts invested by OFS along with
dividends through the date of repayment. The amounts remaining within
the TIP subsidy cost allowance represent the estimated value of the
Citigroup warrant still held by the program.
During fiscal year 2010, the OFS received $1.1 billion in dividends
under the TIP and proceeds of $1.2 billion from the auction of the
Bank of America warrants. In the period ended September 30, 2009, the
OFS received $1.9 billion in dividends under this program.
Automotive Industry Financing Program:
The Automotive Industry Financing Program (AIFP) was designed to
prevent a significant disruption of the American automotive industry,
which could have had a negative effect on the economy of the United
States.
General Motors (GM):
In the period ended September 30, 2009, the OFS provided $493 billion
to GM through various loan agreements including the initial loan for
general and working capital purposes and the final loan for debtor in
possession (DIP) financing while GM was in bankruptcy. The OFS
assigned its rights in these loans (with the exception of $986.0
million which remained in GM for wind down purposes and $7.1 billion
that would be assumed) and previously received common stock warrants
to a newly created entity (General Motors Company). General Motors
Company used the assigned loans and warrants to credit bid for
substantially all of the assets of GM in a sale pursuant to Section
363 of the Bankruptcy Code. Upon closing of the Section 363 sale, the
credit bid loans and warrants were extinguished and the OFS received
$2.1 billion in 9.0% cumulative perpetual preferred stock and 60.8% of
the common equity interest in General Motors Company. In addition,
General Motors Company assumed $7.1 billion of the DIP loan,
simultaneously paying $0.4 billion (return of warranty program funds),
resulting in a balance of $6.7 billion. The assets received by the OFS
as a result of the assignment and Section 363 sale are considered
recoveries of the original loans for subsidy cost estimation purposes.
Recovery of the $986.0 million remaining in GM is subject to the final
outcome of the bankruptcy proceedings. During fiscal year 2010, the
OFS had received the remaining $6.7 billion as full repayment of the
DIP loan assumed. In addition as of September 30, 2010 the OFS had
received $188.8 million in dividends and $343.1 million in interest on
General Motors Company preferred stock and the loan prior to
repayment, respectively. The OFS received $34.1 million in dividends
on the preferred stock and no interest on the loan during the period
ended September 30, 2009. On October 27, 2010, the OFS signed a Letter
Agreement with GM agreeing to sell the preferred stock to GM. GM will
repurchase the preferred stock for 102% of the liquidation amount.
OFS has not yet determined whether to sell any of its shares of
General Motors Company common stock in connection with the company's
proposed initial public offering. Due to the uncertainty as to the
market price that would result from the initial public offering, the
potential effect on the value of OFS's investment in General Motors
Company is unknown and could be significantly different from the
September 30, 2010 financial statement value.
GMAC LLC Rights Offering:
In December 2008, the OFS agreed, in principal, to lend up to $1.0
billion to GM for participation in a rights offering by GMAC (now
known as Ally Financial, Inc.) in support of GMAC's reorganization as
a bank holding company. The loan was secured by the GMAC common
interest acquired in the rights offering. The loan agreement specified
that at any time, at the option of the lender (OFS), the unpaid
principal and accrued interest was exchangeable for the membership
interest purchased by GM during the rights offering. The loan was
funded for $884.0 million. In May 2009, the OFS exercised its exchange
option under the loan and received 190,921 membership interests,
representing approximately 3536% of the voting interest at the time,
in GMAC in full satisfaction of the loan. In addition, during the
period ended September 30, 2009, the OFS received $9.1 million in
interest while the loan was outstanding. The conversion to GMAC shares
was not considered in the original subsidy cost. As a result, a
modification was recorded reducing the estimated subsidy cost by
approximately $1.6 billion for the period ended September 30, 2009. As
of September 30, 2010 the OFS continues to hold the GMAC shares
obtained in this transaction (see further discussion of OFS's GMAC
holdings under GMAC, Inc. in this note.)
Chrysler Holding LLC (Chrysler):
In the period ended September 30, 2009, the OFS invested approximately
$5.9 billion in Chrysler. Specifically, $4.0 billion was for general
and working capital purposes (General Purpose Loan) and $1.9 billion
was for DIP financing while Chrysler was in
bankruptcy (DIP Loan). Upon entering bankruptcy, a portion of Chrysler
was sold to a newly created entity (New Chrysler). Under the terms of
the bankruptcy agreement, $500.0 million of the general purpose loan
was assumed by the New Chrysler (see discussion under Chrysler Exit
for discussion of note terms). In fiscal year 2010, the OFS received
approximately $1.9 billion and subsequently wrote-off the remaining
$1.6 billon of the General Purpose Loan. Recovery of the DIP Loan is
subject to the bankruptcy process associated with the Chrysler assets
remaining after the sale to New Chrysler. During fiscal year 2010 the
OFS received $40.2 million in recoveries on the DIP loan. OFS did not
receive any interest on these loans during the fiscal year 2010.
During the period ended September 30, 2009, the OFS had received $52.1
million in interest payments from these loans.
Chrysler Exit:
In May 2009, the OFS committed to make a loan to New CarCo Acquisition
LLC (Chrysler Group LLC), the company that purchased certain assets of
Chrysler. The final terms of the credit agreement resulted in a loan
to New Chrysler for approximately $7.1 billion. This amount consists
of a commitment to fund up to $6.6 billion of new funding and $500.0
million of assumed debt[Footnote 6] from the OFS January 2, 2009
General Purpose Loan with Chrysler, described above. The loan was
secured by a first priority lien on the assets of Chrysler Group LLC.
Funding of the loan was available in two installments or tranches (B
and C), each with varying availability and terms. The following
describes the terms of Tranches B and C.
The maximum funding under Tranche B was $2.0 billion and was funded on
the closing date of the agreement. Interest on Tranche B is generally
[Footnote 7] 3 Month Eurodollar plus 5.0% margin. Tranche B is due and
payable on December 10, 2011, provided that the Chrysler Group LLC may
elect to extend the maturity of up to $400.0 million of Tranche B to
the Tranche C maturity date. If so elected, the applicable margin will
increase from 5.0% to 6.5%.
The maximum funding under Tranche C is approximately $4.64 billion, of
which approximately $2.58 billion was funded on the closing date.
Interest on Tranche C is 3 Month Eurodollar plus 7.91% margin. On June
10, 2016, the Tranche C loan is due to be prepaid to the extent the
funded amount is greater than 50.0% of the dosing date commitment
amount, taking into consideration amounts previously prepaid as a
voluntary prepayment. The remaining balance of the Tranche C loan is
due and payable on June 10, 2017.
Interest on both the Tranche B and Tranche C was payable in-kind
through December 2009 and added to the principal balance of the
respective Tranche. Subsequently, interest is paid quarterly beginning
on March 31, 2010. In addition, additional in-kind interest is being
accrued in the amount of $17.0 million per quarter. Such amount will
be added to the Tranche C loan balance subject to interest at the
appropriate rate.
The OFS also obtained other consideration, including a 9.85% equity
interest in Chrysler Group LLC and additional notes[Footnote 8] with
principal balances of $288.0 million and $100.0 million.[Footnote 9]
As of September 30, 2009, the OFS had funded approximately $4.6
billion under this facility, which was outstanding as of September 30,
2010 and 2009. During fiscal year 2010, the OFS received $381.8
million in interest payments. No interest was due for payment in the
period ended September 30, 2009. For the year ended September 30,
2010, the OFS has recognized $344.4 million of in-kind interest that
has been capitalized. No in-kind interest was recognized in the period
ended September 30, 2009.
Chrysler Financial:
In January 2009, the OFS loaned $1.5 billion to Chrysler LB
Receivables Trust (Chrysler Trust), a special purpose entity created
by Chrysler Financial, to finance the extension of new consumer auto
loans. On July 14, 2009, the loan and additional note of
$15.0 million were paid in full. In addition, during the period ended
September 30, 2009, the OFS received $7.4 million in interest payments
while this loan was outstanding.
Auto Supplier Support Program:
In April 2009, under the Auto Supplier Support Program, OFS committed
$5.0 billion in financing for the Auto Supplier Program as follows:
$3.5 billion for GM suppliers and $1.5 billion for Chrysler suppliers.
These commitments were subsequently reduced to $2.5 billion for GM
suppliers and $1.0 billion for Chrysler suppliers per the loan
agreements. Under the program, suppliers were able to sell their
receivable to a SPV, created by the respective automaker, at a
discount. The OFS provided approximately $413.1 million of funding to
this program during the period ended September 30, 2009. The
bankruptcy of Chrysler and GM did not impact this program, as both
companies were allowed to continue paying suppliers while in
bankruptcy. The OFS received $5.9 million in interest during the
period ended September 30, 2009. The $413.1 million was repaid in
fiscal year 2010 along with approximately $9.0 million in interest and
$101.1 million in fees and other income.
Auto Warranty Program:
In April 2009 and May 2009, the OFS loaned approximately $280.0
million to Chrysler and $360.6 million to GM, respectively, to
capitalize SPVs created by Chrysler and GM to finance participation in
the Warranty Commitment Program (warranty program). The OFS also
received additional notes as consideration for its loans in an amount
equal to 6.67% of the funded amounts. The warranty program covered all
warranties on new vehicles purchased from Chrysler and GM during the
period in which Chrysler and GM were restructuring. In the period
ended September 30, 2009, the OFS received all principal amounts due
on the Auto Warranty Program loans from both GM and Chrysler and
terminated the warranty program. Interest in the amount of $3.1
million was received by the OFS from Chrysler during the period ended
September 30, 2009. No interest was received in connection with the GM
repayment. The GM additional note was assigned to the General Motors
Company as part of the bankruptcy proceedings and extinguished as part
of the credit bid for the assets of old GM. In fiscal year 2010, the
Chrysler additional note was written off with the remaining portion of
the Chrysler General Purpose Loan.
GMAC Inc. (GMAC-currently known as Ally Financial):
In December 2008, the OFS purchased preferred membership interests for
$5.0 billion that were converted to senior preferred stock with an
8.0% annual distribution right (dividends) from GMAC. Under the
agreement, GMAC issued warrants to the OFS to purchase, for a nominal
price, additional preferred equity in an amount equal to 5.0% of the
preferred equity purchased. These warrants were exercised at closing
of the investment transaction. The additional preferred stock provided
for a 9.0% annual distribution right. During the period ended
September 30, 2009, the OFS received $265.2 million in dividends
associated with these preferred and warrant preferred shares. On
December 30, 2009, this preferred stock (including the warrant
preferred shares) was exchanged for 105.0 million shares of GMAC's
Series F-2 Fixed Rate Cumulative Mandatorily Convertible Preferred
Stock (Series F-2) shares (described below). This exchange was not
considered in the original subsidy estimate for GMAC; therefore OFS
recorded a modification cost of $1.5 billion in fiscal year 2010.
In May 2009, the OFS published a non-binding term sheet to invest
$13.1 billion to support GMAC, subject to definitive documentation and
GMAC's capital needs. In the period ended September 30, 2009, OFS
invested $75 billion (150.0 million shares) in 9.0% Mandatorily
Convertible Preferred Stock in GMAC to support its ability to
originate new loans to Chrysler dealers and consumers, and help
address GMAC's capital needs. The preferred stock have a liquidation
preference of $50 per share and are convertible in whole or in part,
at any time, at the option of GMAC, subject to the approval of the
Federal Reserve. In addition, the OFS received warrants to purchase an
additional 75 million shares of Mandatorily Convertible Preferred
Stock, which were exercised upon closing of the transaction. In
December 2009, 97.5 million shares (which include the warrant
preferred shares) were exchanged for GMAC's Series F-2 shares
(displayed below) and the remaining 60 million were converted to
259,200 shares of GMAC common stock.
In addition to the exchanges and conversions discussed above, on
December 30, 2009, the OFS entered into the following transactions
with GMAC to assist it in complying with the requirements of the
Federal Reserve Board's Supervisory Capital Assessment Program:
1. Purchased $254 billion (254 million shares with a face value of
$1,000) of 8.0% Trust Preferred Securities and received a warrant for
an additional $127 million of the Trust Preferred Securities, which
was immediately exercised. GMAC issued $2.747 billion of subordinate
debentures to a trust, established by GMAC, which in turn issued the
trust preferred securities. The trust preferred securities pay
cumulative cash distributions of 8%. GMAC may defer payments on the
debentures (and the trust may defer distributions on the trust
preferred securities) for a period of up to 20 consecutive quarters,
but such distributions will continue to accrue through any such
deferral period. GMAC has not elected to defer payments. The Trust
Preferred Securities have no stated maturity date, but must be
redeemed upon the redemption or maturity of the debentures (February
15, 2040).
2. Purchased $1.25 billion (25 million shares) of GMAC's Series F-2,
$50 liquidation preference per share. The Series F-2 is convertible
into GMAC common stock at the option of GMAC subject to the approval
of the Federal Reserve and consent by the OFS or pursuant to an order
by the Federal Reserve compelling such conversion. The Series F-2 is
also convertible at the option of the OFS upon certain specified
corporate events. Absent an optional conversion, the Series F-2 will
automatically convert to common stock after 7 years from the issuance
date. The initial conversion rate is .00432 and is subject to a
"reset" such that the conversion price will be adjusted in 2011, if
beneficial to OFS, based on the market price of private capital
transactions occurring in 2010 and certain anti-dilution provisions.
The Series F-2 have a stated dividend rate of 9%, payable when and if
declared by the board of directors. The Series F-2 may be redeemed by
GMAC, subject to certain limitations and restrictions. The OFS also
received a warrant to purchase $62.5 million (1.25 million shares) of
additional Series F-2, which was immediately exercised.
As a result, after the December 30, 2009 transaction, the OFS had the
following investments in GMAC as of September 30, 2010:
8% Trust Preferred Securities:
Purchased:
Number of Shares: 2,540,000;
Investment amount/% ownership (dollars in millions): $2,540.
Received from warrant exercise:
Number of Shares: 127,000;
Investment amount/% ownership (dollars in millions): $127.
Total Trust Preferred Securities:
Number of Shares: 2,667,000;
Investment amount/% ownership (dollars in millions): $2,667.
Series F-2 Mandatorily Convertible Securities:
Purchased/exchanged for:
Number of Shares: 227,500,000;
Investment amount/% ownership (dollars in millions): $11,375.
Received from warrant exercise:
Number of Shares: 1,250,000;
Investment amount/% ownership (dollars in millions): $63.
Total Series F-2[A]:
Number of Shares: 228,750,000;
Investment amount/% ownership (dollars in millions): $11,438
Common Stock[B]:
Number of Shares: 450,121;
Investment amount/% ownership (dollars in millions): 56.3%.
[A] These shams are convertible into 988,200 shares of GMAC common
stock, which if combined with common stock currently held by OFS would
represent approximately 805% ownership of GMAC.
[B] Includes shams received upon conversion of GMAC Rights Loan
discussed above.
[End of table]
In fiscal year 2010, the OFS received $1.2 billion in dividends from
GMAC. In the period ended September 30, 2009, the OFS received $430.6
million in dividends from GMAC.
Consumer and Business Lending Initiative (CBLI):
The Consumer and Business Lending Initiative is intended to help
unlock the flow of credit to consumers and small businesses. Three
programs were established to help accomplish this. The Term Asset-
Backed Securities Loan Facility was created to help jump start the
market for securitized consumer and small business loans. The SBA 7(a)
Securities Purchase Program was created to provide additional
liquidity to the SBA 7(a) market so that banks are able to make more
small business loans. The Community Development Capital Initiative was
created to provide additional low cost capital to small banks to
encourage more lending to small businesses. Each program is discussed
in more detail below.
Term Asset-Backed Securities Loan Facility:
The Term Asset-Backed Securities Loan Facility (TALF) was created by
the Federal Reserve Board (FRB) to provide low cost funding to
investors in certain classes of Asset Backed Securities (ABS). The OFS
agreed to participate in the program by providing liquidity and credit
protection to the FRB.
Under the TALE, the Federal Reserve Bank of New York (FRBNY), as
implementer of the TALF program, originated loans on a non-recourse
basis to purchasers of certain AAA rated ABS secured by consumer and
commercial loans and commercial mortgage backed securities. Generally
ABS issued after January 1, 2009 are eligible collateral under the
TALF program. In addition, SBA securities issued after January 1, 2008
and CMBS issued prior to January 2009 and originally AAA rated are
eligible collateral. TALF loans have a term of 3 or 5 years and are
secured solely by eligible collateral. Haircuts (a percentage
reduction used for collateral valuation) are determined based on the
riskiness of each type of eligible collateral and the maturity of the
eligible collateral pledged to the FRBNY. The "haircuts" provide
additional protection to the OFS by exposing the TALF borrowers to
some risk of loss. Interest rates charged on the TALF loans depend on
the weighted average maturity of the pledged collateral, the
collateral type and whether the collateral pays fixed or variable
interest. The program ceased issuing new loans on June 30, 2010. As of
September 30, 2010, approximately $29.7 billion of loans due to the
FRBNY remained outstanding.
As part of the program, the FRBNY has entered into a put agreement
with the TALF, LLC, a special purpose vehicle created by the FRBNY. In
the event of a TALF borrower default, the FRBNY will seize the
collateral and sell it to the TALF, LLC under this agreement. The
TALF, LLC receives a monthly fee equal to the difference between the
TALF loan rate and the FRBNY's fee (spread) as compensation for
entering into the put agreement. The accumulation of this fee will be
used to fund purchases. In the event there are insufficient funds to
purchase the collateral, the OFS originally committed to invest up to
$20.0 billion in non-recourse subordinated notes issued by the TALF,
LLC. On July 19, 2010, the OFS's commitment was reduced to $43
billion. The subordinated notes bear interest at 1 Month LIBOR plus
3.0% and mature 10 years from the closing date, subject to extension.
The OFS disbursed $100.0 million upon creation of the TALF, LLC and
the remainder can be drawn to purchase collateral in the event the
spread is not sufficient to cover purchases. Any amounts needed in
excess of the OFS commitment and the fee would be provided through a
loan from the FRBNY. Upon wind-down of the TALF, LLC (collateral
defaults, reaches final maturity or is sold), the cash balance will be
disbursed according to the following payment priority:
1. FRBNY principal balance.
2. OFS principal balance.
3. FRBNY interest.
4. OFS interest.
5. Remaining cash balance — 90.0% to the OFS, 10.0% to the FRBNY.
During the period ended September 30, 2009, subsequent to the initial
cost estimates prepared for the TALF, certain changes were made to the
terms of the program, including increasing the term to 5 years and the
addition of different types of acceptable collateral. These program
changes resulted in a modification for the period ended September 30,
2009, increasing the original cost estimate by $8.0 million.
The TALF, LLC is owned, controlled and consolidated by the FRBNY. The
credit agreement between the OFS and the TALF, LLC provides the OFS
with certain rights consistent with a creditor but would not
constitute control. As such, TALF, LLC is not a federal entity and the
assets, liabilities, revenue and cost of TALF, LLC are not included in
the OFS financial statements.
As of September 30, 2010 and 2009, no TALF loans were in default and
consequently no collateral was purchased by the TALF, LLC.
SBA 7(a) Security Purchase Program:
In March 2010, the OFS began the purchase of securities backed by
Small Business Administration 7(a) loans (7(a) Securities) as part of
the Unlocking Credit for Small Business Initiative. Under this program
OFS purchases 7(a) Securities collateralized with 7(a) loans (these
loans are guaranteed by the full faith and credit of the United States
Government) packaged on or after July 1, 2008. Generally, the OFS
entered into a trade to purchase 7(a) Securities with actual
settlement and delivery to occur one to three months in the future. As
of September 30, 2010, OFS has entered into trades to purchase $3563
million (excluding purchased accrued interest) of these securities. Of
this amount, $240.7 million has settled with the remaining trades to
be settled by December 30, 2010. During fiscal year 2010, the OFS
received $3.5 million in interest and principal payments on these
securities.
Community Development Capital Initiative:
In February 2010, the OFS announced the Community Development Capital
Initiative (CDCI) to invest lower cost capital in Community
Development Financial Institutions (CDFIs). Under the terms of the
program, the OFS purchases senior preferred stock (or subordinated
debt) from eligible CDFI financial institutions. The senior preferred
stock has an initial dividend rate of 2 percent. CDFIs may apply to
receive capital up to 5 percent of risk-weighted assets. To encourage
repayment while recognizing the unique circumstances facing CDFIs, the
dividend rate will increase to 9 percent after eight years.
For CDFI credit unions, the OFS purchased subordinated debt at rates
equivalent to those offered to CDFI financial institutions and with
similar terms. These institutions may apply for up to 35 percent of
total assets - an amount approximately equivalent to the 5 percent of
risk-weighted assets available to banks and thrifts.
CDFIs participating in the CPP, subject to certain criteria, were
eligible to exchange, through September 30, 2010, their current CPP
preferred shares (subordinated debt) for CDCI preferred shares
(subordinated debt). These exchanges were treated as a disbursement
from CDCI and a repayment to CPP.
As of September 30, 2010, the OFS has invested $570.1 million ($3633
million was a result of exchanges from CPP) in 84 institutions under
the CDCI.
Public-Private Investment Program:
The PPIP is part of the OFS's efforts to help restart the market and
provide liquidity for legacy assets. Under this program, the OFS made
equity investment in and loans to investment vehicles (referred to as
Public Private Investment Funds or "PPIFs") established by private
investment managers. The equity investment was used to match private
capital and equaled approximately 50.0% of the total equity invested.
The loan is, at the option of the investment manager, equal to 50.0%
or 100.0% of the total equity (including private equity). As of
September 30, 2010, all PPIFs have elected to receive loans up to 100%
of total equity. The loans bear interest at 1 Month LIBOR, plus 1.0%,
which accrues monthly and is payable on the tenth business day of the
month following the accrual period. The maturity date of the loan is
the earlier of 10 years or the termination of the PPIF. The loan can
be prepaid, subject to compliance with the priority of payments
discussed below, without penalty. The PPIF will terminate in 8 years
from the commencement of the fund. The governing documents of the
funds allow for 2 one year extensions, subject to approval of the OFS.
The loan agreements also require purchased security cash flows from
securities received by the PPIFs to be distributed in accordance with
a priority of payments schedule (waterfall) designed to help ensure
secured parties are paid before equity holders. Specifically, security
cash flows collected are disbursed as follows (steps 7 through 10 are
at the discretion of the PPIF),
1. To pay administrative expenses, excluding certain tax expenses of
the Partnership;
2. To pay interest or margin due on permitted interest rate hedges;
3. To pay current period interest due to the Lender;[Footnote 10]
4. To pay amounts due to an interest reserve account if the total
deposit in the interest reserve account is less than the required
interest reserve account;
5. To pay principal on the Loan required when the minimum Asset
Coverage Ratio Test is not satisfied as of the prior month end;
6. To pay other amounts due on permitted interest rate hedges not paid
in accordance with step 2. above;
7. For investment in Temporary Investments, prepayments of the Loan
and/or investment in eligible Assets during the investment period,
which is three years from the Initial Closing Date (the "Investment
Period");
8. For distribution to partners after step 1 through 7 not to exceed
the lesser of (a) cumulative consolidated net interest income for the
preceding twelve months or (b) 8% on the funded capital commitments,
so long as no event of default is then continuing and the appropriate
Asset Coverage Ratio Requirement is satisfied;
9. To pay the Loan not to exceed the lesser of (a) prepayment on the
Loan as scheduled or (b) an amount which reduces the Loan to zero,
provided that dollar for dollar credit is given for any optional
prepayments of the Loan made during the related collection period on
any date prior to the applicable determination date; and;
10. Remaining amounts to be used or distributed in accordance with the
limited partnership agreement after repayment of the Loan.
The loan is subject to certain affirmative and negative covenants as
well as a financial covenant, the Asset Coverage Test. The Asset
Coverage Test generally requires that the Asset Coverage Ratio be
equal to or greater than 150%. The Asset Coverage Ratio is a
percentage obtained by dividing total assets of the PPIF by the
principal amount of the loan and accrued and unpaid interest on the
loan. Failure to comply with the test could require accelerated
repayment of loan principal (see step 7 above) and prohibit the PPIF
from borrowing additional funds under the loan agreement.
As a condition of its investment, the OFS also received a warrant from
the PPIFs entitling the OFS to 2.5% of investment proceeds (excluding
those from temporary investments) otherwise allocable to the non-OFS
partners. The warrant payment will be distributed by the PPIF to the
OFS following the return of 100% of the non-OFS partner's capital
contributions to the PPIF.
The PPIFs pay a management fee to the fund manager from the OFS's
share of investment proceeds. During the Investment Period, the
management fee is equal to 0.20% per annum of the OFS's capital
commitment as of the last day of the applicable quarter. Thereafter,
the management fee will be equal to 0.20% per annum of the lesser of
(a) the OFS's capital commitment as of the last day of the applicable
quarter and (b) the OFS Interest Value as of the last day of the
quarter.
The PPIFs are allowed to purchase commercial mortgage-backed
securities (CMBS) and non-agency residential mortgage-backed
securities (RMBS) issued prior to January 1, 2009 that were originally
rated AAA or an equivalent rating by two or more nationally recognized
statistical rating organizations without external credit enhancement
and that are secured directly by the actual mortgage loans, leases or
other assets (eligible assets) and not other securities. The PPIFs may
invest in the aforementioned securities for a period of 3 years using
proceeds from capital contribution, loans and amounts generated by
previously purchased investments (subject to the requirements of the
waterfall). The PPIFs are also permitted to invest in certain
temporary securities, including bank deposits, U.S. Treasury
securities, and certain money market mutual funds. At least 90 percent
of the assets underlying any eligible asset must be situated in the
United States.
As of September 30, 2010 the total market value of the eligible assets
held by all PPIFs was approximately $19.3 billion. The approximate
split between RMBS and CMBS was 82% RMBS and 18% CMBS.
On January 4, 2010, the OFS entered into a Winding-up and Liquidation
Agreement with one of the PPIFs. Prior to the signing of the
agreement, the OFS had invested $356.3 million ($156.3 million equity
investment and $200.0 million loan) in the fund. Upon final
liquidation, the OFS received $377.4 million representing return of
the original investment, interest on the loan and return on the equity
investment and warrant.
As of September 30, 2010, the OFS had signed definitive limited
partnership and loan agreements with eight investment managers,
committing to disburse up to $22.1 billion. During fiscal year 2010,
OFS disbursed $4.9 billion as equity investment and $9.2 billion as
loans to PPIFs. As of September 30, 2009, no investment managers had
made any investments under PPIP and the OFS had not disbursed any
funds. During fiscal year 2010, the OFS received (excluding amounts
repaid in liquidation discussed above) $56.0 million in interest on
loans and $151.8 million (net of management fees of $7.2 million) of
income on the equity investments. In addition, the OFS received $72.0
million in loan principal repayments.
Asset Guarantee Program:
The Asset Guarantee Program (AGP) provided guarantees for assets held
by systemically significant financial institutions that faced a risk
of losing market confidence due in large part to a portfolio of
distressed or illiquid assets. The AGP was applied with extreme
discretion in order to improve market confidence in the systemically
significant institution and in financial markets broadly.
Section 102 of the EESA required the Secretary to establish the AGP to
guarantee troubled assets originated or issued prior to March 14,
2008, including mortgage-backed securities, and established the
Troubled Assets Insurance Financing Fund (TAIFF). In accordance with
Section 102(c) and (d) of the EESA, premiums from financial
institutions, are collected and all fees are recorded by the OFS in
the TAIFE In addition, Section 102(c) (3) of the EESA requires that
the original premiums assessed are "set" at a minimum level necessary
to create reserves sufficient to meet anticipated claims.
The OFS completed its first transaction under the AGP in January 2009,
when it finalized the terms of a guarantee agreement with Citigroup.
Under the agreement, the OFS, the Federal Deposit Insurance
Corporation (FDIC), and the Federal Reserve Bank of New York (FRBNY)
(collectively the USG Parties) provided protection against the
possibility of large losses on an asset pool of approximately $301.0
billion of loans and securities backed by residential and commercial
real estate and other such assets, which remained on Citigroup's
balance sheet. The OFS's guarantee was limited to $5.0 billion.
As a premium for the guarantee, Citigroup issued $7.0 billion of
cumulative perpetual preferred stock (subsequently converted to Trust
Preferred Securities with similar terms) with an 8.0% stated dividend
rate and a warrant for the purchase of common stock; $4.0 billion and
the warrant were issued to the OFS, and $3.0 billion was issued to the
FDIC. The OFS received $265.2 million and $174.8 million during the
periods ending September 30, 2010 and September 30, 2009,
respectively, in dividends on the preferred stock received as
compensation for this arrangement. These dividends have been deposited
into the TAIFF. The OFS had also invested in Citigroup through CPP and
the TIP.
As of September 30, 2009, the net present value of the estimated cash
inflows from the preferred stock and warrant received by the OFS from
Citigroup as a premium was greater than the estimated net present
value of future claims payments, resulting in an asset of $1.765
billion, after reestimates.
In December 2009, the USG Parties and Citigroup agreed to terminate
the guarantee agreement. Under the terms of the termination agreement
the OFS canceled $1.8 billion of the preferred stock previously issued
to OFS. In addition, the FDIC agreed to transfer to the OFS $800
million of their trust preferred stock holding plus dividends thereon
contingent on Citigroup repaying its previously issued FDIC guaranteed
debt. The contingent receipt of additional preferred shares from the
FDIC is included in the subsidy calculation for AGP, based on the
expected value. Termination of the agreement was not considered in the
formulation estimates of the guarantee and therefore the termination
resulted in a negative modification cost (reduction of cost) of $1.4
billion recorded in fiscal year 2010. On September 29, 2010, the OFS
exchanged its existing Trust Preferred Securities for securities
containing market terms to facilitate a sale. On September 30, 2010,
the OFS agreed to sell its Trust Preferred Securities it holds for
$2.246 billion. The Trust Preferred Securities are valued at
approximately the sales price in the financial statements. The sale
settled on October 5, 2010.
In January 2009, the USG Parties and Bank of America signed a Summary
of Terms (Term Sheet) pursuant to which the USG Parties agreed to
guarantee or lend against a pool of up to $118.0 billion of financial
instruments consisting of securities backed by residential and
commercial real estate loans and corporate debt and related
derivatives. In May 2009, prior to completing definitive
documentation, Bank of America notified the USG Parties of its desire
to terminate negotiations with respect to the guarantee contemplated
in the Term Sheet. All parties agreed that Bank of America received
value for entering into the Term Sheet with the USG Parties and that
the USG Parties should be compensated for out-of-pocket expenses and a
fee equal to the amount Bank of America would have paid for the
guarantee from the date of the signing of the Term Sheet through the
termination date. Under the terms of the settlement, the U.S. Treasury
received $276.0 million for its role in the guarantee agreement
through the OFS. All the OFS funds received for the settlement were
deposited in the TAIFF and subsequently paid to the Treasury General
Fund. The $276 million received by the OFS pursuant to the settlement
is reflected in the OFS Statement of Net Cost as a reduction of the
AGP subsidy cost in the period ended September 30, 2009.
Subsidy Reestimates:
The purpose of reestimates is to update original program subsidy cost
estimates to reflect actual cash flow experience as well as changes in
forecasts of future cash flows. Forecasts of future cash flows are
updated based on actual program performance to date, additional
information about the portfolio, additional publicly available
relevant historical market data on securities performance, revised
expectations for future economic conditions, and enhancements to cash
flow projection methods. Financial statement reestimates for all
programs were performed using actual financial transaction data
through September 30, 2010 and 2009. Market and security specific data
publicly available as of September 30, 2010, was used for the CPP,
AGP, TIP, AIG, CDCI, AIFP and SBA programs in the reestimate
calculations for fiscal year 2010. Security specific data through June
30, 2010, with market prices through September 30, 2010, was used for
the PPIP and TALF programs in the reestimate calculations for fiscal
year 2010. Market and security specific data publicly available as of
September 30, 2009, was used for the CPP, AGP, TIP and AIFP direct
loans and data through August 31, 2009, was used for the equity
portion of AIFP, AIG and TALF programs in the reestimate calculations
for the period ending September 30, 2009.
The OFS assessed using security specific data available as of
September 30, 2010 and, in its determination, there were no
significant changes to the portfolio characteristics or performance of
the PPIP and TALF programs that would require a revision to the
reestimates for fiscal year 2010.
For the period ending September 30, 2009, the OFS assessed the key
inputs of the reestimates using data publicly available as of
September 30, 2009, and in its determination, there were no
significant changes to the key inputs for the three programs for which
August 31, 2009, data was used that required a revision to the
reestimates.
Net downward reestimates for the year ended September 30, 2010 and the
period ended September 30, 2009 totaled $30.3 billion and $109.7
billion, respectively. Descriptions of the reestimates, by OFS
Program, are as follows:
CPP:
The net upward reestimate for the CPP of $3.9 billion for the year
ended September 30, 2010 is the net result of a decrease in the price
of Citigroup common stock that was partially offset by an increase in
the estimated value of the other investments within the CPP, due to
improved market conditions during the period.
The $70.7 billion in repurchases during the period ended September 30,
2009 accounted for $9.7 billion of the $72.4 billion in downward
reestimates in the CPP for the period. Projected repurchases of $30.0
billion for fiscal year 2010 accounted for approximately $5.4 billion,
with the $57.3 billion balance in downward reestimates in the CPP for
the period ended September 30, 2009 primarily due to improved market
conditions from when the original estimate was made in December 2008.
AIG:
The $12.0 billion in downward reestimates for the AIG Investment
Program for the year ended September 30, 2010 are due to an increase
in the estimated value of AIG assets and subordinated debt and
improvements in market conditions over the period.
The $1.1 billion in downward reestimates for the AIG Investment
Program in the period ended September 30, 2009 was primarily due to
improvements in market conditions from when the equities were
purchased resulting in a reduction in the projected costs of the
programs.
TIP:
The $1.9 billion in net downward reestimates in the TIP in fiscal year
2010 included $2.2 billion in downward reestimates due to the
repurchase of the program's investments by the two institutions
participating in the program. That downward reestimate amount was
partially offset by a $03 billion upward reestimate from a slight
reduction in the estimated value of outstanding warrants.
The $21.5 billion in downward reestimates in the TIP in the period
ended September 30, 2009 was primarily due to improved market
conditions from when the original estimates were made in December 2008
and January 2009. Approximately $23 billion was due to a $20.0 billion
repurchase forecast for fiscal year 2010.
AIFP:
The $193 billion in downward reestimates for the AIFP direct loan and
equity investments for the year ended September 30, 2010 was due to
$1.8 billion in payments exceeding projections, a reduction in
estimated defaults due to improvements in the domestic automotive
industry, and an increase in the bond prices and valuations used to
estimate the cost of the remaining AIFP investments.
The approximately $10.6 billion in downward reestimates for the direct
loans-AIFP in the period ended September 30, 2009 was primarily the
result of the post bankruptcy improved financial position of one of
the major companies participating in the program. The $2.7 billion in
downward reestimates for the AIFP equity programs in the period ended
September 30, 2009 were primarily due to improvements in market
conditions from when the equities were purchased resulting in a
reduction in the projected costs of the programs.
CBLI:
The TALF and SBA programs within the CBLI had a total upward
reestimate of less than $0.1 billion for the year ended September 30,
2010. The TALF program had a $23 million upward reestimate mostly due
to a projected reduction in the size of the portfolio and higher than
projected repayments. The SBA program had an upward reestimate of less
than $1 million due to an increase in projected interest rates and a
reduction in market risks. The CDCI program had $73 million in upward
reestimates for the period.
The $0.2 billion in downward reestimates for the TALF in the period
ended September 30, 2009 was due to projected improved performance of
the securities within the program versus the original estimate.
The $1.0 billion in downward reestimates for the PPIP debt and equity
programs for the year ended September 30, 2010 was the net of a $1.2
billion upward reestimate in the PPIP debt program and $2.2 billion in
downward reestimates for the PPIP equity programs mostly due to the
use of actual portfolio data for reestimates rather than the proxy
data used in developing the baseline estimates and changes in market
risks.
AGP:
The AGP had a net $0.1 billion downward reestimate for the year ended
September 30, 2010. The reestimate amounts exclude an estimated cost
savings of $1.4 billion that resulted from the cancellation of the
$5.0 billion guarantee because this transaction was reflected in the
subsidy modifications during fiscal year 2010.
The $1.2 billion in downward reestimates for the AGP in the period
ended September 30, 2009 was primarily due to improvements in market
conditions from when the guarantee was committed in January 2009. The
improved market conditions resulted in an increase in the projected
AGP asset due to the net present value of the estimated cash inflows
from the preferred stock and warrants received by the OFS from
Citigroup as a premium being greater than the estimated value of
future claim payments associated with the $5.0 billion asset guarantee.
Summary Tables:
The following detailed tables provide the net composition, subsidy
cost, modifications and reestimates, a reconciliation of subsidy cost
allowance and budget subsidy rates and subsidy by component for each
TARP direct loan, equity investment or asset guarantee program for the
year ended September 30, 2010 and the period ended September 30, 2009:
Troubled Asset Relief Program Loans And Equity Investments:
As of September 30, 2010:
(Dollars in Millions):
Direct Loans and Equity Investment Programs:
Direct Loans and Equity Investments Outstanding, Gross:
Total: $179,197;
CPP: $49,779;
AIG: $47,543;
TIP: [Empty];
AIFP: $67,238;
CBLI: $908;
PPIP: $13,729.
Subsidy Cost Allowance:
Total: ($36,745);
CPP: ($1,546);
AIG: ($21,405);
TIP: $1;
AIFP: ($14,529);
CBLI: $58;
PPIP: $676.
Direct Loans and Equity Investments Outstanding, Net:
Total: $142,452;
CPP: $48,233;
AIG: $26,138;
TIP: $1;
AIFP: $52,709;
CBLI: $966;
PPIP: $14,405.
New Loans or Investments Disbursed:
Total: $23,373;
CPP: $277;
AIG: $4,338;
TIP: [Empty];
AIFP: $3,790;
CBLI: $811;
PPIP: $14,157.
Obligations for Loans and Investments not yet Disbursed:
Total: $36,947;
CPP: [Empty];
AIG: $22,292;
TIP: [Empty];
AIFP: $2,066;
CBLI: $4,339;
PPIP: $8,250.
Reconciliation of Subsidy Cost Allowance:
Balance, Beginning of Period:
Total: $53,077;
CPP: ($7,770);
AIG: $30,054;
TIP: ($341);
AIFP: $31,478;
CBLI: ($344);
PPIP: [Empty].
Subsidy Cost for Disbursements and Modifications:
Total: $7,533;
CPP: ($16);
AIG: $4,293;
TIP: [Empty];
AIFP: $2,644;
CBLI: $275;
PPIP: $337;
Interest and Dividend Revenue:
Total: $6,977;
CPP: $3,131;
AIG: [Empty];
TIP: $1,143;
AIFP: $2,475;
CBLI: [Empty];
PPIP: $228.
Net Proceeds from Sales and Repurchases of Assets in Excess of Cost:
Total: $8,013;
CPP: $6,676;
AIG: [Empty];
TIP: $1,237;
AIFP: $99;
CBLI: [Empty];
PPIP: $1.
Net Interest Expense on Borrowings from BPD and Financing Account
Balance:
Total: ($4,690);
CPP: ($2,018);
AIG: ($981);
TIP: ($161);
AIFP: ($1,309);
CBLI: ($20);
PPIP: ($201);
Writeoffs:
Total: ($3,934);
CPP: ($2,334);
AIG: [Empty];
TIP: [Empty];
AIFP: $(1,600);
CBLI: [Empty];
PPIP: [Empty].
Balance, End of Period, Before Reestimates:
Total: $66,976;
CPP: ($2,331);
AIG: $33,366;
TIP: $1,878;
AIFP: $33,787;
CBLI: ($89);
PPIP: $365.
Subsidy Reestimates:
Total: ($30,231);
CPP: $3,877;
AIG: ($11,961);
TIP: ($1,879);
AIFP: ($19,258);
CBLI: $31;
PPIP: ($1,041).
Balance, End of Period:
Total: $36,745;
CPP: $1,546;
AIG: $21,405;
TIP: ($1);
AIFP: $14,529;
CBLI: ($58);
PPIP: ($676).
Reconciliation of Subsidy Cost:
Subsidy Cost for Disbursements:
Total: $6,067;
CPP: $16;
AIG: $4,293;
TIP: [Empty];
AIFP: $1,146;
CBLI: $275;
PPIP: $337.
Subsidy Cost for Modifications:
Total: $1,466;
CPP: ($32);
AIG: [Empty];
TIP: [Empty];
AIFP: $1,498;
CBLI: [Empty];
PPIP: [Empty].
Subsidy Reestimates:
Total: ($30,231);
CPP: $3,877;
AIG: ($11,961)
TIP: ($1,879)
AIFP: ($19,258)
CBLI: $31;
PPIP: $(1,041).
Total Direct Loan and Equity Investment Programs:
Subsidy Cost (Income):
Total: ($22,698);
CPP: $3,861;
AIG: ($7,668);
TIP: ($1,879);
AIFP: ($16,614);
CBLI: $306;
PPIP: ($704).
Troubled Asset Relief Program Loans, Equity Investments And Asset
Guarantee Program Budget Subsidy Rates:
(Dollars in Millions):
Budget Subsidy Rates, Excluding Modifications and Reestimates (see
Note below):
As of September 30, 2010:
Interest Differential
AGP: [Empty];
CPP: -25.62%;
AIG: [Empty];
TIP: [Empty];
AIFP: 37.70%;
CBLI: 30.39%;
PPIP: 11.72%.
Defaults:
AGP: [Empty];
CPP: 16.36%;
AIG: [Empty];
TIP: [Empty];
AIFP: 13.78%;
CBLI: 3.93%;
PPIP: 0.00%.
Fees and Other Collections:
AGP: [Empty];
CPP: -3.00%;
AIG: [Empty];
TIP: [Empty];
AIFP: -0.38%;
CBLI: 0.00%;
PPIP: -0.41%.
Other:
AGP: [Empty];
CPP: 18.03%;
AIG: [Empty];
TIP: [Empty];
AIFP: -20.85%;
CBLI: -0.41%;
PPIP: -10.34%.
Total Budget Subsidy Rate (See Note below):
AGP: N/A;
CPP: 5.77%;
AIG: N/A;
TIP: N/A;
AIFP: 30.25%;
CBLI: 33.91%;
PPIP: 0.97%.
Subsidy Cost by Component:
Interest Differential:
AGP: [Empty];
CPP: ($71);
AIG: $1,415;
TIP: [Empty];
AIFP: $1,429;
CBLI: $246;
PPIP: $1,880.
Defaults:
AGP: [Empty];
CPP: $45;
AIG: $2,907;
TIP: [Empty];
AIFP: $522;
CBLI: $32;
PPIP: [Empty].
Fees and Other Collections:
AGP: [Empty];
CPP: ($8);
AIG: [Empty];
TIP: [Empty];
AIFP: ($15);
CBLI: [Empty];
PPIP: ($55).
Other:
AGP: [Empty];
CPP: $50;
AIG: ($29);
TIP: [Empty];
AIFP: ($790);
CBLI: ($3);
PPIP: ($1,488).
Total Subsidy Cost, Excluding Modifications and Reestimates:
AGP: N/A;
CPP: $16;
AIG: $4,293;
TIP: N/A;
AIFP: $1,146;
CBLI: $275;
PPIP: $337.
Note: The rates reflected in the table above are FY 2010 budget
execution rates by program. The subsidy rates disclosed pertain only
to the current year's cohorts. These rates cannot be applied to the
direct loans disbursed during the current reporting year to yield the
subsidy expense. The subsidy cost (income) for new loans reported in
the current year could result from disbursements of loans from both
current year cohorts and prior year cohorts. The subsidy cost (income)
reported in the current year also includes modifications and re-
estimates.Therefore, the Total Subsidy Cost Excluding Modifications
and Reestimates will not equal the New Loans or Investments Disbursed
multiplied by the Budget Subsidy Rate.
[End of table]
Troubled Asset Relief Program Loans And Equity Investments:
As of September 30, 2009:
(Dollars in Millions):
Direct Loans and Equity Investment Programs:
Direct Loans and Equity Investments Outstanding, Gross:
Total: $290,969;
CPP: $133,901;
AIG: $43,206;
TIP: $40,000;
AIFP: $73,762;
CBLI: $100;
PPIP: [Empty].
Subsidy Cost Allowance:
Total: ($53,077);
CPP: $7,770);
AIG: ($30,054);
TIP: $341;
AIFP: ($31,478);
CBLI: $344;
PPIP: [Empty].
Direct Loans and Equity Investments Outstanding, Net:
Total: $237,892;
CPP: $141,671;
AIG: $13,152;
TIP: $40,341;
AIFP: $42,264;
CBLI: $444;
PPIP: [Empty].
New Loans or Investments Disbursed:
Total: $363,826;
CPP: $204,618;
AIG: $43,206;
TIP: $40,000;
AIFP: $75,902;
CBLI: $100;
PPIP: [Empty].
Obligations for Loans and Investments not yet Disbursed:
Total: $51,681;
CPP: [Empty];
AIG: $26,629;
TIP: [Empty];
AIFP: $5,152;
CBLI: $19,900;
PPIP: [Empty].
Reconciliation of Subsidy Cost Allowance:
Balance, Beginning of Period:
Total: [Empty];
CPP: [Empty];
AIG: [Empty];
TIP: [Empty];
AIFP: [Empty];
CBLI: [Empty];
PPIP: [Empty].
Subsidy Cost for Disbursements and Modifications:
Total: $152,179;
CPP: $57,386;
AIG: $31,552;
TIP: $19,540;
AIFP: $43,797;
CBLI: ($90);
PPIP: [Empty].
Interest and Dividend Revenue:
Total: $9,329;
CPP: $6,790;
AIG: [Empty];
TIP: $1,862;
AIFP: $677;
CBLI: [Empty];
PPIP: [Empty].
Net Proceeds from Sales and Repurchases of Assets in Excess of Cost:
Total: $2,916;
CPP: $2,901;
AIG: [Empty];
TIP: [Empty];
AIFP: $15;
CBLI: [Empty];
PPIP: [Empty].
Net Interest Income (Expense) on Borrowings from BPD and Financing
Account Balance:
Total: ($2,773);
CPP: ($2,428);
AIG: ($373);
TIP: ($276);
AIFP: $309;
CBLI: ($5);
PPIP: [Empty].
Balance, End of Period, Before Reestimates:
Total: $53,077;
CPP: ($7,770);
AIG: $30.054;
TIP: ($341);
AIFP: $31,478;
CBLI: ($344);
PPIP: [Empty].
Subsidy Reestimates:
Total: ($108,574);
CPP: ($72,419);
AIG: ($1,125);
TIP: ($21,467);
AIFP: ($13,320);
CBLI: $31;
PPIP: ($1,041).
Balance, End of Period:
Total: $53,077;
CPP: ($7,770);
AIG: $30,054;
TIP: ($341);
AIFP: $31,478;
CBLI: ($344);
PPIP: [Empty].
Reconciliation of Subsidy Cost:
Subsidy Cost for Disbursements:
Total: $151,767;
CPP: $55,520;
AIG: $31,425;
TIP: $19,540;
AIFP: $45,386;
CBLI: ($104);
PPIP: [Empty].
Subsidy Cost for Modifications:
Total: $412;
CPP: $1,866);
AIG: $127;
TIP: [Empty];
AIFP: ($1,589);
CBLI: $8;
PPIP: [Empty].
Subsidy Reestimates:
Total: ($108,574);
CPP: ($72,419);
AIG: ($1,125)
TIP: ($21,467)
AIFP: ($13,320)
CBLI: ($243);
PPIP: [Empty].
Total Direct Loan and Equity Investment Programs:
Subsidy Cost (Income):
Total: $43,605;
CPP: ($15,033);
AIG: $30,427;
TIP: ($1,927);
AIFP: $30,477;
CBLI: $339;
PPIP: [Empty].
Troubled Asset Relief Program Loans, Equity Investments And Asset
Guarantee Program Budget Subsidy Rates:
(Dollars in Millions):
Budget Subsidy Rates, Excluding Modifications and Reestimates (see
Note below):
As of September 30, 2009:
Interest Differential
AGP: 0.00;
CPP: 5.97%;
AIG: -45.52%;
TIP: 9.31%;
AIFP: 6.97%;
CBLI: 5.87%;
PPIP: [Empty].
Defaults:
AGP: 43.62%;
CPP: 25.60%;
AIG: 123.56%;
TIP: 48.38%;
AIFP: 54.21%;
CBLI: 0.00%;
PPIP: [Empty].
Fees and Other Collections:
AGP: -53.23%;
CPP: 0.00%;
AIG: 0.00%;
TIP: 0.00%;
AIFP: 0.00%;
CBLI: 0.00%;
PPIP: [Empty].
Other:
AGP: -5.37%;
CPP: -4.58%;
AIG: 4.74%;
TIP: -8.84%;
AIFP: -3.13%;
CBLI: -110.10%;
PPIP: [Empty].
Total Budget Subsidy Rate (See Note below):
AGP: -14.98%;
CPP: 26.99%;
AIG: 82.78%;
TIP: 48.85%;
AIFP: 58.05%;
CBLI: -104.23%;
PPIP: N/A.
Subsidy Cost by Component:
Interest Differential:
AGP: [Empty];
CPP: $12,279;
AIG: ($17,280);
TIP: $3,724;
AIFP: $5,446;
CBLI: $6;
PPIP: [Empty].
Defaults:
AGP: $2,181;
CPP: $52,655;
AIG: $46,906;
TIP: $19,352;
AIFP: $42,384;
CBLI: [Empty];
PPIP: [Empty].
Fees and Other Collections:
AGP: ($2,663);
CPP: [Empty];
AIG: [Empty];
TIP: [Empty];
AIFP: [Empty];
CBLI: [Empty];
PPIP: [Empty].
Other:
AGP: ($270);
CPP: ($9,414);
AIG: $1,799);
TIP: ($3,536);
AIFP: ($2,444);
CBLI: ($110);
PPIP: [Empty].
Total Subsidy Cost, Excluding Modifications and Reestimates:
AGP: ($751);
CPP: $55,520;
AIG: $31,425;
TIP: $19,540;
AIFP: $45,386;
CBLI: ($104);
PPIP: N/A.
Note: The rates reflected in the "Budget Subsidy Rate" table above are
weighted rates for the program. To compensate for the weighting of the
various risk category subsidy rates, the "by component" dollar amounts
reflected were computed as a ratio of the component rate to the total
weighted subsidy rate multiplied by the subsidy cost (income) for the
program. Therefore, the Total Subsidy Cost (Income) Excluding
Modifications and Reestimates will not equal the New Loans or
Investments Disbursed multiplied by the Budget Subsidy Rate.
[End of table]
Troubled Asset Relief Program Asset Guarantee Program:
(Dollars in Millions):
Asset Guarantees Outstanding:
Outstanding Principal Amount of Guaranteed Loans, Face Value:
As of September 30, 2010: [Empty];
As of September 30, 2009: $301,000.
Amount of Outstanding Principal Guaranteed:
As of September 30, 2010: [Empty];
As of September 30, 2009: $5,000.
Asset Guarantee Program:
Intragovernmental Portion (See Note):
As of September 30, 2010: $815;
As of September 30, 2009: [Empty].
Portion held by OFS, net:
As of September 30, 2010: $2,240;
As of September 30, 2009: $1,765.
Total Asset Guarantee Program:
As of September 30, 2010: $3,055;
As of September 30, 2009: $1,765.
Reconciliation of Asset Guarantee Program:
Balance, Beginning of Period:
As of September 30, 2010: ($1,765);
As of September 30, 2009: [Empty].
Subsidy Income for Disbursements and Modifications:
As of September 30, 2010: ($1,418);
As of September 30, 2009: ($751).
Dividend Revenue:
As of September 30, 2010: $265;
As of September 30, 2009: $175.
Net Interest Income on Borrowings from BPD and Financing Account
Balance:
As of September 30, 2010: ($50);
As of September 30, 2009: ($15).
Balance, End of Period, Before Reestimates:
As of September 30, 2010: ($2,968);
As of September 30, 2009: ($591).
Subsidy Reestimates:
As of September 30, 2010: ($87);
As of September 30, 2009: ($1,174).
Balance, End of Period:
As of September 30, 2010: ($3,055);
As of September 30, 2009: ($1,765).
Reconciliation of Subsidy Cost (Income):
Subsidy Income for Disbursements:
As of September 30, 2010: [Empty];
As of September 30, 2009: ($751).
Subsidy Income for Modifications:
As of September 30, 2010: ($1,418)
As of September 30, 2009: [Empty].
Subsidy Reestimates:
As of September 30, 2010: ($87);
As of September 30, 2009: ($1,174).
Cancellation Fees Collected:
As of September 30, 2010: [Empty];
As of September 30, 2009: ($276).
Total Asset Guarantee Program Subsidy Income:
As of September 30, 2010: ($1,505)
As of September 30, 2009: ($2,201).
Note: The net present value of the future cash flows for the Asset
Guarantee Program consists of (i) $800 million of Citigroup trust
preferred securities, plus dividends thereon, that the FDIC agreed to
transfer to OFS contingent on Citigroup repaying previously issued
FDIC guaranteed debt and (ii) additional Citigroup trust preferred
securities valued at $2240, for a total of $3,055.
Note 7. Commitments And Contingencies:
The OFS is party to various legal actions and claims brought by or
against it. In the opinion of management and the Chief Counsel, the
ultimate resolution of these legal actions and claims will not have a
material effect on the OFS financial statements. The OFS has not
incurred any loss contingencies that would be considered probable or
reasonably possible for these cases. Refer to Note 6 for additional
commitments relating to the TARP's Direct Loan and Equity Investments
and Asset Guarantee Program.
Note 8. Principal Payable To The Bureau Of The Public Debt (BPD):
Equity investments, direct loans, and the asset guarantee program
accounted for under credit reform accounting are funded by subsidy
appropriations and borrowings from the BPD. The OFS also borrows funds
to pay the Treasury General Fund for negative subsidy costs and
downward reestimates in advance of receiving the expected cash flows
that cause the negative subsidy or downward reestimate. The OFS makes
periodic principal repayments to the BPD based on the analysis of its
cash balances and future
disbursement needs. All debt is intragovemmental and covered by
budgetary resources. See additional details on borrowing authority in
Note 10, Statement of Budgetary Resources.
Debt transactions for the year ended September 30, 2010 and the period
ended September 30, 2009 were as follows:
(Dollars in Millions):
Beginning Balance, Principal Payable to the Bill:
2010: $143,335;
2009: [Empty].
New Borrowings:
2010: $49,025;
2009: $215,593.
Repayments:
2010: ($51,956);
2009: ($72,258).
Ending Balance, Principal Payable to the BPD:
2010: $140,404;
2009: $143,335.
Borrowings from the BPD by the TARP program, outstanding as of
September 30, 2010 and 2009, were as follows:
(Dollars in Millions):
Capital Purchase Program:
2010: $49,503;
2009: $77,232.
American International Group, Inc. Investment Program:
2010: $23,061;
2009: $12,531.
Targeted Investment Program:
2010: $710;
2009: $20,460.
Automotive Industry Financing Program:
2010: $45,706;
2009: $32,134.
Consumer & Business Lending Initiative:
2010: $1,073;
2009: $204.
Public-Private Investment Program:
2010: $17,918;
2009: [Empty].
Asset Guarantee Program:
2010: $2,433;
2009: $774.
Total Borrowings Outstanding:
2010: $140,404;
2009: $143,335.
Borrowings are payable to the BPD as collections are available. As of
September 30, 2010, borrowings carried terms ranging from 5 to 31
years. Interest rates on borrowings ranged from 2.2% to 4.7%. At
September 30, 2009, borrowing terms ranged from 2 to 30 years, and
interest rates were from 1.0% to 4.5%.
Note 9. Statement Of Net Cost:
The Statement of Net Cost (SNC) presents the net cost of operations
for the OFS under the Department of the Treasury's strategic goal of
ensuring that U.S. and World economies perform at full economic
potential. The OFS has determined that all initiatives and programs
under the TARP fall within this strategic goal.
The OFS SNC reports the accumulated full cost of the TARP's output,
including both direct and indirect costs of the program services and
output identifiable to TARP, in accordance with SFFAS No. 4,
Managerial Cost Accounting Concepts and Standards.
The OFS SNC for fiscal year 2010 includes $5.9 billion of
intragovemmental costs relating to interest expense on borrowings from
the BPD and $1.2 billion in intragovemmental revenues relating to
interest income on financing account balances. The SNC for the period
ended September 30, 2009 included $6.4 billion of cost and $3.6
billion of revenues for intragovemmental borrowings and interest
income.
Subsidy allowance amortization on the SNC is the difference between
interest income on financing fund account balances, dividends and
interest income on direct loans, equity investments, and the asset
guarantee program from TARP participants, and interest expense on
borrowings from the BPD. Credit reform accounting requires that only
subsidy cost, not the net of other costs (interest expense and
dividend and interest income), be reflected in the SNC. The subsidy
allowance account is used to present the loan or equity investment at
the estimated net present value of future cash flows.
Note 10. Statement Of Budgetary Resources:
The Statement of Budgetary Resources (SBR) presents information about
total budgetary resources available to the OFS and the status of those
resources. For the year ended September 30, 2010, the OFS's total
resources in budgetary accounts were $34.5 billion and resources in
non-budgetary financing accounts, including borrowing authority and
spending authority from collections of loan principal, liquidation of
equity investments, interest and fees, were $160.8 billion. For the
period ended September 30, 2009, budgetary resources totaled $2383
billion and resources in non-budgetary financing accounts totaled
$461.1 billion.
Permanent Indefinite Appropriations:
The OFS receives permanent indefinite appropriations annually, if
necessary, to fund increases in the projected subsidy costs of direct
loans, equity investment and asset guarantee programs as determined by
the reestimation process required by the FCRA.
Additionally, Section 118 of the EESA states that the Secretary may
issue public debt securities and use the resulting funds to carry out
the Act and that any such funds expended or obligated by the Secretary
for actions authorized by this Act, including the payment of
administrative expenses, shall be deemed appropriated at the time of
such expenditure or obligation.
Borrowing Authority:
The OFS is authorized to borrow from the BPD when funds needed to
disburse direct loans and equity investments, and to enter into asset
guarantee arrangements, exceed subsidy costs and collections in the
non-budgetary financing accounts. For the year ended September 30,
2010, the OFS had borrowing authority of $69.4 billion. Of this total,
$10.2 billion was available as of September 30, 2010. For the period
ended September 30, 2009, the OFS had borrowing authority of $310.0
billion, and of that, $45.8 billion was available.
The OFS uses dividends and interest received as well as principal
repayments on direct loans and liquidation of equity investments
to repay debt in the non-budgetary direct loan, equity investment and
asset guarantee program financing accounts. These receipts are not
available for any other use per credit reform accounting guidance.
Apportionment Categories of Obligations Incurred: Direct versus
Reimbursable Obligations:
All of the OFS apportionments are Direct and are Category B. Category
B apportionments typically distribute budgetary resources on a basis
other than calendar quarters, such as by activities, projects, objects
or a combination of these categories. The OFS obligations incurred are
direct obligations (obligations not financed from intragovemmental
reimbursable agreements).
Undelivered Orders:
Undelivered orders as of September 30, 2010 were $68.7 billion in
budgetary accounts, and $41.9 billion in non-budgetary financing
accounts. At September 30, 2009, undelivered orders were $56.1 billion
in budgetary accounts, and $79.2 billion in non-budgetary financing
accounts.
Explanation of Differences Between the Statement of Budgetary
Resources and the Budget of the United States Government:
Federal agencies and entities are required to explain material
differences between amounts reported in the Statement of Budgetary
Resources and the actual amounts reported in the Budget of the U. S.
Government (the President's Budget).
The President's Budget for 2012, with the "Actual" column completed
for fiscal year 2010, has not yet been published as of the date of
these financial statements. The Budget is currently expected to be
published and delivered to Congress in early February 2011. The Budget
will be available from the Government Printing Office.
The 2011 Budget of the U. S. Government, with the "Actual" column
completed for the period ended September 30, 2009, was published in
February 2010 and reconciled to the SBR. The only differences between
the two documents were due to rounding.
Note 11. Reconciliation Of Obligations Incurred To Net Cost Of (Income
From) Operations:
The OFS presents the SNC using the accrual basis of accounting. This
differs from the obligation-based measurement of total resources
supplied, both budgetary and from other sources, on the SBR. The
reconciliation of obligations incurred to net cost of operations shown
below categorizes the differences between the two, and illustrates
that the OFS maintains reconcilable consistency between the two types
of reporting.
The Reconciliation of Obligations Incurred to Net Cost of (Income
from) Operations for the Year Ended September 30, 2010 and the Period
Ended September 30, 2009 is as follows:
Dollars in Millions:
Resources Used to Finance Activities:
Budgetary Resources Obligated:
Obligations Incurred:
2010: $173,631;
2009: $662,296.
Spending Authority from Offsetting Collections and Recoveries:
2010: ($191,538);
2009: ($271,999).
Offsetting Receipts:
2010: ($118,860);
2009: ($2,720).
Net obligations:
2010: ($136,767);
2009: $387,577.
Other Resources
2010: $1;
2009: [Empty].
Total Resources Used to Finance Activities
2010: ($136,766);
2009: $387,577.
Resources Used to Finance Items Not Part of Net Cost (Income from)
Operations:
Net Obligations in Direct Loan, Equity Investment and Asset Guarantee
Financing Funds:
2010: $40,139;
2009: ($180,185).
Increase in Resources Obligated for Goods, Services and Benefits
Ordered but not yet Provided:
2010: ($12,639);
2009: ($56,073).
Resources that Fund Prior Period Expenses and Downward Reestimates:
2010: $109,747;
2009: [Empty].
Total Resources Used to Finance Items Not Part of Net Cost of (Income
from) Operations:
2010: $137,247;
2009: $(236,258).
Total Resources Used to Finance the Net Cost of (Income from)
Operations:
2010: $481;
2009: $151,319.
Components of Net Cost of (Income from) Operations that Will Not
Require or Generate Resources in the Current Period:
Accrued Downward Reestimate and Modification of Subsidy Cost, Net of
Unfunded Upward Reestimates:
2010: ($23,563);
2009: ($109,748).
Other:
2010: [Empty];
2009: $2.
Total Components of Net Cost of (Income from) Operations that Will Not
Require or Generate Resources in the Current Period:
2010: ($23,563);
2009: ($109,746).
Net Cost of (Income from) Operations
2010: ($23,082);
2009: $41,573.
Required Supplementary Information:
Office Of Financial Stability (Troubled Asset Relief Program) Combined
Statement Of Budgetary Resources For The Year Ended September 30, 2010
(Unaudited):
Dollars in Millions:
Budgetary Resources:
Unobligated Balances Brought Forward:
Combined Budgetary Accounts: $28,156;
Combined Nonbudgetary Financing Accounts: $8,945;
2010 TARP Programs Budgetary Accounts: $28,126;
2010 TARP Programs Nonbudgetary Financing Accounts: $8,945;
TARP Administrative Budgetary Accounts: $30;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Recoveries of Prior Year Unpaid Obligations:
Combined Budgetary Accounts: $1,173;
Combined Nonbudgetary Financing Accounts: $39,364;
2010 TARP Programs Budgetary Accounts: $1,118;
2010 TARP Programs Nonbudgetary Financing Accounts: $39,364;
TARP Administrative Budgetary Accounts: $55;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Budget Authority:
Appropriations:
Combined Budgetary Accounts: $5,151;
Combined Nonbudgetary Financing Accounts: [Empty];
2010 TARP Programs Budgetary Accounts: $4,745;
2010 TARP Programs Nonbudgetary Financing Accounts: [Empty];
TARP Administrative Budgetary Accounts: $406;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Borrowing Authority:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: $69,440;
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: $69,440;
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Spending Authority from Offsetting Collections:
Earned: Collected:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: $156,112;
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: $156,112;
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Change in Unfilled Orders Without Advance:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: ($5,111);
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: ($5,111);
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Total Budget Authority:
Combined Budgetary Accounts: $34,480;
Combined Nonbudgetary Financing Accounts: $268,750;
2010 TARP Programs Budgetary Accounts: $33,989;
2010 TARP Programs Nonbudgetary Financing Accounts: $268,750;
TARP Administrative Budgetary Accounts: $491;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Permanently Not Available:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: ($107,976);
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: ($107,976);
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Total Budgetary Resources (Note 10):
Combined Budgetary Accounts: $34,480;
Combined Nonbudgetary Financing Accounts: $160,774;
2010 TARP Programs Budgetary Accounts: $33,989;
2010 TARP Programs Nonbudgetary Financing Accounts: $160,774;
TARP Administrative Budgetary Accounts: $491;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Status Of Budgetary Resources:
Obligations Incurred - Direct:
Combined Budgetary Accounts: $23,405;
Combined Nonbudgetary Financing Accounts: $150,226;
2010 TARP Programs Budgetary Accounts: $23,040;
2010 TARP Programs Nonbudgetary Financing Accounts: $150,226;
TARP Administrative Budgetary Accounts: $365;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Unobligated Balance:
Apportioned and Available:
Combined Budgetary Accounts: $142;
Combined Nonbudgetary Financing Accounts: $7,692;
2010 TARP Programs Budgetary Accounts: $101;
2010 TARP Programs Nonbudgetary Financing Accounts: $7,692;
TARP Administrative Budgetary Accounts: $41;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Not Available:
Combined Budgetary Accounts: $10,933;
Combined Nonbudgetary Financing Accounts: $2,856;
2010 TARP Programs Budgetary Accounts: $10,848;
2010 TARP Programs Nonbudgetary Financing Accounts: $2,856;
TARP Administrative Budgetary Accounts: $85;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Total Status Of Budgetary Resources:
Combined Budgetary Accounts: $34,480;
Combined Nonbudgetary Financing Accounts: $160,774;
2010 TARP Programs Budgetary Accounts: $33,989;
2010 TARP Programs Nonbudgetary Financing Accounts: $160,774;
TARP Administrative Budgetary Accounts: $491;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Change In Obligated Balances:
Obligated Balance Brought Forward:
Unpaid Obligations:
Combined Budgetary Accounts: $56,151;
Combined Nonbudgetary Financing Accounts: $79,202;
2010 TARP Programs Budgetary Accounts: $55,992;
2010 TARP Programs Nonbudgetary Financing Accounts: $79,202;
TARP Administrative Budgetary Accounts: $159;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Uncollected Customer Payments from Federal Sources:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: ($28,927);
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: ($28,927);
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Obligated Balance, Net, Brought Forward:
Combined Budgetary Accounts: $56,151;
Combined Nonbudgetary Financing Accounts: $50,275;
2010 TARP Programs Budgetary Accounts: $55,992;
2010 TARP Programs Nonbudgetary Financing Accounts: $50,275;
TARP Administrative Budgetary Accounts: $159;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Obligations Incurred:
Combined Budgetary Accounts: $23,405;
Combined Nonbudgetary Financing Accounts: $150,226;
2010 TARP Programs Budgetary Accounts: $23,040;
2010 TARP Programs Nonbudgetary Financing Accounts: $150,226;
TARP Administrative Budgetary Accounts: $365;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Gross Outlays:
Combined Budgetary Accounts: ($9,255);
Combined Nonbudgetary Financing Accounts: ($148,146);
2010 TARP Programs Budgetary Accounts: ($9,016);
2010 TARP Programs Nonbudgetary Financing Accounts: ($148,146);
TARP Administrative Budgetary Accounts: ($239);
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Recoveries of Prior Year Unpaid Obligations:
Combined Budgetary Accounts: ($1,173);
Combined Nonbudgetary Financing Accounts: ($39,264);
2010 TARP Programs Budgetary Accounts: ($1,118);
2010 TARP Programs Nonbudgetary Financing Accounts: ($39,264);
TARP Administrative Budgetary Accounts: (55);
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Change in Uncollected Customer Payments from Federal Sources:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: $5,111;
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: $5,111;
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Obligated Balance, Net, End of Period:
Unpaid Obligations:
Combined Budgetary Accounts: $69,128;
Combined Nonbudgetary Financing Accounts: $41,918;
2010 TARP Programs Budgetary Accounts: $68,898;
2010 TARP Programs Nonbudgetary Financing Accounts: $41,918;
TARP Administrative Budgetary Accounts: $230;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Uncollected Customer Payments from Federal Sources:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: ($23,816):
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: ($23,816);
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Obligated Balance, Net, End of Period:
Combined Budgetary Accounts: $69,128;
Combined Nonbudgetary Financing Accounts: $18,102;
2010 TARP Programs Budgetary Accounts: $68,898;
2010 TARP Programs Nonbudgetary Financing Accounts: $18,102;
TARP Administrative Budgetary Accounts: $230;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Net Outlays:
Gross Outlays:
Combined Budgetary Accounts: $9,255;
Combined Nonbudgetary Financing Accounts: $148,146;
2010 TARP Programs Budgetary Accounts: $9,016;
2010 TARP Programs Nonbudgetary Financing Accounts: $148,146;
TARP Administrative Budgetary Accounts: $239;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Offsetting Collections:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: ($156,112);
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: ($156,112);
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Distributed Offsetting Receipts:
Combined Budgetary Accounts: ($118,860);
Combined Nonbudgetary Financing Accounts: [Empty];
2010 TARP Programs Budgetary Accounts: ($118,860);
2010 TARP Programs Nonbudgetary Financing Accounts: [Empty];
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Net Outlays:
Combined Budgetary Accounts: ($109,605);
Combined Nonbudgetary Financing Accounts: ($7,966);
2010 TARP Programs Budgetary Accounts: ($109,844);
2010 TARP Programs Nonbudgetary Financing Accounts: ($7,966);
TARP Administrative Budgetary Accounts: $239;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Required Supplementary Information:
Office Of Financial Stability (Troubled Asset Relief Program)
Combined Statement Of Budgetary Resources:
For The Period Ended September 30, 2009 (Unaudited):
Dollars in Millions:
Budgetary Resources:
Unobligated Balances Brought Forward:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: [Empty];
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: [Empty];
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Recoveries of Prior Year Unpaid Obligations:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: [Empty];
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: [Empty];
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Budget Authority:
Appropriations:
Combined Budgetary Accounts: $238,268;
Combined Nonbudgetary Financing Accounts: [Empty];
2010 TARP Programs Budgetary Accounts: $237,989;
2010 TARP Programs Nonbudgetary Financing Accounts: [Empty];
TARP Administrative Budgetary Accounts: $279;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Borrowing Authority:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: $309,971;
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: $309,971;
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Spending Authority from Offsetting Collections:
Earned: Collected:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: $243,072;
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: $243,072;
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Change in Unfilled Orders Without Advance:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: $28,927;
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: $28,927;
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Total Budget Authority:
Combined Budgetary Accounts: $238,268;
Combined Nonbudgetary Financing Accounts: $461,129;
2010 TARP Programs Budgetary Accounts: $237,989;
2010 TARP Programs Nonbudgetary Financing Accounts: $461,129;
TARP Administrative Budgetary Accounts: $279;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Permanently Not Available:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: ($120,841);
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: ($120,841);
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Total Budgetary Resources (Note 10):
Combined Budgetary Accounts: $238,268;
Combined Nonbudgetary Financing Accounts: $461,129;
2010 TARP Programs Budgetary Accounts: $237,989;
2010 TARP Programs Nonbudgetary Financing Accounts: $$461,129;
TARP Administrative Budgetary Accounts: $279;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Status Of Budgetary Resources:
Obligations Incurred - Direct:
Combined Budgetary Accounts: $210,112;
Combined Nonbudgetary Financing Accounts: $452,184;
2010 TARP Programs Budgetary Accounts: $209.863;
2010 TARP Programs Nonbudgetary Financing Accounts: $452,184;
TARP Administrative Budgetary Accounts: $249;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Unobligated Balance:
Apportioned and Available:
Combined Budgetary Accounts: $28,156;
Combined Nonbudgetary Financing Accounts: $7,009;
2010 TARP Programs Budgetary Accounts: $28,126;
2010 TARP Programs Nonbudgetary Financing Accounts: $7,009;
TARP Administrative Budgetary Accounts: $30;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Not Available:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: $1,936;
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: $1,936;
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Total Status Of Budgetary Resources:
Combined Budgetary Accounts: $238,268;
Combined Nonbudgetary Financing Accounts: $461,129;
2010 TARP Programs Budgetary Accounts: $237,989;
2010 TARP Programs Nonbudgetary Financing Accounts: $461.129;
TARP Administrative Budgetary Accounts: $279;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Change In Obligated Balances:
Obligated Balance Brought Forward:
Unpaid Obligations:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: [Empty];
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: [Empty];
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Uncollected Customer Payments from Federal Sources:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: [Empty];
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: [Empty];
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Obligated Balance, Net, Brought Forward:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: [Empty];
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: [Empty];
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Obligations Incurred:
Combined Budgetary Accounts: $210,112;
Combined Nonbudgetary Financing Accounts: $452,184;
2010 TARP Programs Budgetary Accounts: $209.863;
2010 TARP Programs Nonbudgetary Financing Accounts: $453,184;
TARP Administrative Budgetary Accounts: $249;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Gross Outlays:
Combined Budgetary Accounts: ($153,961);
Combined Nonbudgetary Financing Accounts: ($372,982);
2010 TARP Programs Budgetary Accounts: ($153,871);
2010 TARP Programs Nonbudgetary Financing Accounts: ($372,982);
TARP Administrative Budgetary Accounts: ($90);
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Recoveries of Prior Year Unpaid Obligations:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: [Empty];
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: [Empty];
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Change in Uncollected Customer Payments from Federal Sources:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: ($28,927);
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: ($28,927);
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Obligated Balance, Net, End of Period:
Unpaid Obligations:
Combined Budgetary Accounts: $56,151;
Combined Nonbudgetary Financing Accounts: $79,202;
2010 TARP Programs Budgetary Accounts: $55,992;
2010 TARP Programs Nonbudgetary Financing Accounts: $79,202;
TARP Administrative Budgetary Accounts: $159;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Uncollected Customer Payments from Federal Sources:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: ($28,927);
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: ($28,927);
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Obligated Balance, Net, End of Period:
Combined Budgetary Accounts: $69,128;
Combined Nonbudgetary Financing Accounts: $18,102;
2010 TARP Programs Budgetary Accounts: $68,898;
2010 TARP Programs Nonbudgetary Financing Accounts: $18,102;
TARP Administrative Budgetary Accounts: $230;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Net Outlays:
Gross Outlays:
Combined Budgetary Accounts: $153,961;
Combined Nonbudgetary Financing Accounts: $372,962;
2010 TARP Programs Budgetary Accounts: $153,871;
2010 TARP Programs Nonbudgetary Financing Accounts: $153,871;
TARP Administrative Budgetary Accounts: $372,962;
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Offsetting Collections:
Combined Budgetary Accounts: [Empty];
Combined Nonbudgetary Financing Accounts: ($243,072);
2010 TARP Programs Budgetary Accounts: [Empty];
2010 TARP Programs Nonbudgetary Financing Accounts: ($243,072);
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Distributed Offsetting Receipts:
Combined Budgetary Accounts: ($2,720);
Combined Nonbudgetary Financing Accounts: [Empty];
2010 TARP Programs Budgetary Accounts: ($2,720);
2010 TARP Programs Nonbudgetary Financing Accounts: [Empty];
TARP Administrative Budgetary Accounts: [Empty];
TARP Administrative Nonbudgetary Financing Accounts: [Empty].
Footnotes from Financial Statements:
[1] The OFS invested in SPVs under the Consumer and Business Lending
Initiative, the Automotive Industry Financing Program and the Public-
Private Investment Program.
[2] For the At Guarantee Program, OFS has established the Troubled
Assets Insurance Financing Fund, which is the program's financing
account under the FCRA, as required by Section 102(d) of the EESA.
[3] This consists of equity investments made under CPP, CDCI, and TIP.
[4] See further discussion of sale under Asset Guarantee Program below.
[5] A Qualified Equity Offering is defined as the sale by the QFI dip,
the dam of the senior preferred stock investment of Tier 1 perpetual
preferred stock or common stock for cash.
[6] The assumed debt contains the same terms as the Tranche C loan
with respect to mandatory prepayment, interest and maturity.
[7] For both Tranche B and C, an Alternative Base Rate (defined in
agreement) is available at the option of the OFS in certain situations
defined in the agreement.
[8] The additional not bear the same interest rate and maturity as the
Tranche C loan.
[9] Interest begins to accrue on this note after certain events,
defined in the credit agreement, have taken place.
[10] The Lender is OFS.
[End of section]
Appendix I: Management's Report on Internal Control over Financial
Reporting:
Department of the Treasury:
Washington, DC 20220:
Management's Report on Internal Control over Financial Reporting:
The Office of Financial Stability's (OFS) internal control over
financial reporting is a process effected by those charged with
governance, management, and other personnel, the objectives of which
arc to provide reasonable assurance that (1) transactions are properly
recorded, processed. and summarized to permit the preparation of
financial statements in accordance with U.S. generally accepted
accounting principles, and assets are safeguarded against loss from
unauthorized acquisition, use, or disposition; and (2) transactions
are executed in accordance with the laws governing the use of budget
authority and other laws and regulations that could have a direct and
material effect on the financial statements.
OFS management is responsible for establishing and maintaining
effective internal control over financial reporting. OFS management
evaluated the effectiveness of OFS's internal control over financial
reporting as of September 30, 2010, based on the criteria established
under 31 U.S.C. 3512(c), (d) (commonly known as the Federal Managers'
Financial Integrity Act).
Based on that evaluation, we conclude that, as of September 30, 2010,
OFS's internal control over financial reporting was effective.
Office of Financial Stability:
Signed by:
Timothy G. Massad:
Acting Assistant Secretary for Financial Stability:
Signed by:
Lorenzo Rasetti:
Chief Financial Officer:
November 5, 2010:
[End of section]
Appendix II: Comments from the Office of Financial Stability:
Department of the Treasury:
Assistant Secretary:
Washington, D.C. 20220
November 10, 2010:
Mr. Gary T. Engel:
Director, Financial Management and Assurance:
U.S. Government Accountability Office:
Dear Mr. Engel:
We have reviewed the Independent Auditor's Report concerning your
audit of the Office of Financial Stability's (OFS) fiscal year 2010
financial statements. As an organization in its second year executing
complex programs unique to the Federal government, OFS is proud to
receive an unqualified opinion on our financial statements and an
unqualified opinion on management's assertion that our internal
controls were operating effectively. We are also pleased that there
were no reportable instances of noncompliance with laws or regulations.
Your audit report did identify one significant deficiency in internal
controls in the area of accounting and financial reporting processes.
We concur with this finding and are committed to pursuing remediation
plans until the deficiency is corrected.
We appreciate the professionalism and commitment demonstrated by your
staff throughout the audit process. The audit process was valuable for
us and resulted in concrete improvements in our operations and
financial management efforts.
OFS is committed to maintaining the high standards and transparency
reflected in these audit results as we carry out our responsibilities
for managing the Troubled Asset Relief Program (TARP).
Sincerely,
Signed by:
Timothy G. Massad:
Acting Assistant Secretary:
Office of Financial Stability:
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Gary T. Engel, (202) 512-3406 or engelg@gao.gov.
Acknowledgments:
The following individuals made key contributions to this report:
Marcia L. Carlsen, Lynda E. Downing, Joseph P. O'Neill (lead Assistant
Directors); and Tulsi Bhojwani, Grace Chiang, Cheryl E. Clark, Janaya
Davis-Lewis, Jennifer E. Dent, Francis L. Dymond, Lawrance L. Evans,
Vincent Gomes, Cynthia L. Grant, Natasha F. Guerra, Rosanna Guerrero,
Cole D. Haase, Tyrone D. Hutchins, Charles E. Jones, Jason S. Kirwan,
Jeffrey L. Knott, Aaron M. Livernois, John A. Long, Dragan Matic,
Matthew P. McDonald, Diane M. Monticchio-Koch, Timothy Mooney, Carol
T. Nguyen, Mary V. Osorno, Grant L. Simmons, Anne Y. Sit-Williams,
Monique B. Williams, Tsz Cheung Wong, and Chris G. Yfantis.
[End of section]
Footnotes:
[1] Fiscal year 2009 for TARP covers the period October 3, 2008 (date
of the Office of Financial Stability's inception) through September
30, 2009.
[2] Pub. L. No. 110-343, Div. A, 122 Stat 3765 (Oct. 3, 2008),
codified in part, as amended, at 12 U.S.C. §§ 5201-5261.
[3] Section 101 of EESA, 12 U.S.C. § 5211, established OFS within
Treasury to implement TARP.
[4] Section 116(b) of EESA, 12 U.S.C. § 5226(b).
[5] Section 116(b) of EESA, 12 U.S.C. § 5226(b).
[6] Section 116 of EESA, 12 U.S.C. § 5226, requires the Comptroller
General to report at least every 60 days, as appropriate, on findings
resulting from oversight of TARP's performance in meeting the act's
purposes; the financial condition and internal controls of TARP, its
representatives, and agents; the characteristics of asset purchases
and the disposition of acquired assets, including any related
commitments entered into; TARP's efficiency in using the funds
appropriated for its operations; its compliance with applicable laws
and regulations; and its efforts to prevent, identify, and minimize
conflicts of interest among those involved in its operations.
[7] A significant deficiency is a deficiency, or combination of
deficiencies, in internal control that is less severe than a material
weakness, yet important enough to merit attention by those charged
with governance. A material weakness is a deficiency, or combination
of deficiencies, in internal control such that there is a reasonable
possibility that a material misstatement of the entity's financial
statements will not be prevented, or detected and corrected on a
timely basis. A deficiency in internal control exists when the design
or operation of a control does not allow management or employees, in
the normal course of performing their assigned functions, to prevent,
or detect and correct misstatements on a timely basis.
[8] Section 120 of EESA, 12 U.S.C. § 5230, established that the
authorities under Sections 101(a), excluding Section 101(a)(3), and
Section 102, shall terminate on December 31, 2009. Section 120 of EESA
further established that the Secretary of the Treasury, upon
submission of a written certification to Congress, may extend the
authority provided under these sections of EESA to expire no later
than 2 years from the date of the enactment of EESA (Oct. 3, 2008). On
December 9, 2009, the Secretary provided written certification to
extend EESA to October 3, 2010.
[9] The Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. No. 111-203, 124 Stat. 1376 (July 21, 2010), (1) reduced
Treasury's authority to purchase or insure troubled assets to a
maximum of $475 billion and (2) prohibited Treasury, under EESA, from
incurring any obligations for a program or initiative unless the
program or initiative had already been initiated prior to June 25,
2010.
[10] The subsidy income/cost is composed of (1) the change in the
subsidy cost allowance, net of write-offs; (2) net intragovernmental
interest cost; (3) certain inflows from the direct loans and equity
investments (e.g., dividends, interest, net proceeds from sales and
repurchases of assets in excess of cost, and other realized fees); and
(4) the change in the estimated discounted net cash flows related to
the asset guarantee program.
[11] Under EESA, as amended, OFS is authorized to purchase or insure
up to almost $700 billion in troubled assets. Under the Dodd-Frank
Wall Street Reform and Consumer Protection Act, this authority was
reduced to $475 billion.
[12] Section 116(b) of EESA, 12 U.S.C. § 5226(b), requires that the
Department of the Treasury (Treasury) annually prepare and submit to
Congress and the public audited fiscal year financial statements for
TARP that are prepared in accordance with generally accepted
accounting principles. Section 116(b) further requires that GAO audit
TARP's financial statements annually in accordance with generally
accepted auditing standards.
[13] Section 101 of EESA, 12 U.S.C. § 5211, established OFS within
Treasury to implement TARP.
[14] Fiscal year 2009 for TARP covers the period October 3, 2008 (date
of the Office of Financial Stability's inception) through September
30, 2009.
[15] Section 116 of EESA, 12 U.S.C. § 5226, requires the Comptroller
General to report at least every 60 days, as appropriate, on findings
resulting from oversight of TARP's performance in meeting the act's
purposes; the financial condition and internal controls of TARP, its
representatives, and agents; the characteristics of asset purchases
and the disposition of acquired assets, including any related
commitments entered into; TARP's efficiency in using the funds
appropriated for its operations; its compliance with applicable laws
and regulations; and its efforts to prevent, identify, and minimize
conflicts of interest among those involved in its operations.
[16] The subsidy income/cost is composed of (1) the change in the
subsidy cost allowance, net of write-offs; (2) net intragovernmental
interest cost; (3) certain inflows from the direct loans and equity
investments (e.g., dividends, interest, net proceeds from sales and
repurchases of assets in excess of cost, and other realized fees): and
(4) the change in the estimated discounted net cash flows related to
the asset guarantee program.
[17] Section 120 of EESA, 12 U.S.C. § 5230, established that the
authorities under sections 101(a), excluding Section 101(a)(3), and
Section 102, shall terminate on December 31, 2009. Section 120 of EESA
further established that the Secretary of the Treasury, upon
submission of a written certification to Congress, may extend the
authority provided under these sections of EESA to expire no later
than 2 years from the date of the enactment of EESA (Oct. 3, 2008). On
December, 9, 2009, the Secretary provided the written certification to
extend EESA to October 3, 2010. However, the Dodd-Frank Wall Street
Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat.
1376 (July 21,2010), (1) reduced Treasury's authority to purchase or
insure troubled assets to a maximum of $475 billion and (2) prohibited
Treasury, under EESA, from incurring any obligations for a program or
initiative unless the program or initiative had already been initiated
prior to June 25, 2010.
[18] A significant deficiency is a deficiency, or a combination of
deficiencies, in internal control that is less severe than a material
weakness, yet important enough to merit attention by those charged
with governance. A material weakness is a deficiency, or a combination
of deficiencies, in internal controls such that there is a reasonable
possibility that a material misstatement of the entity's financial
statements will not be prevented, or detected and corrected on a
timely basis. A deficiency in internal control exists when the design
or operation of a control does not allow management or employees, in
the normal course of performing their assigned functions, to prevent
or detect and correct misstatements on a timely basis.
[19] Informed opinion refers to the judgment of agency staff or others
who make subsidy estimates based on their programmatic knowledge,
experience, or both. Informed opinion is considered an acceptable
approach under Federal Accounting Standards Advisory Board Technical
Release 6 when adequate historical data does not exist
[20] The tool and related guidance used by OFS in its TARP asset
valuation process is provided to federal agencies for performing
valuations under the Federal Credit Reform Act of 1990.
[21] GAO, Management Report: Improvements Are Needed in Internal
Control Over Financial Reporting for the Troubled Asset Relief
Program, [hyperlink, http://www.gao.gov/products/GAO-10-743R]
(Washington, D.C.: June 30, 2010).
[End of section]
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of newly
posted products every afternoon, go to [hyperlink, http://www.gao.gov]
and select "E-mail Updates."
Order by Phone:
The price of each GAO publication reflects GAO’s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black and
white. Pricing and ordering information is posted on GAO’s Web site,
[hyperlink, http://www.gao.gov/ordering.htm].
Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537.
Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional
information.
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Ralph Dawn, Managing Director, dawnr@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548: