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United States Government Accountability Office:
GAO:
Report to Congressional Addressees:
January 2011:
Troubled Asset Relief Program:
Status of Programs and Implementation of GAO Recommendations:
GAO-11-74:
GAO Highlights:
Highlights of GAO-11-74, a report to congressional addressees.
Why GAO Did This Study:
Since the Troubled Asset Relief Program (TARP) was implemented, GAO
has issued more than 40 reports containing more than 60
recommendations to the Department of the Treasury (Treasury). This
report assesses the status of Treasury’s implementation of GAO’s
recommendations and current condition of TARP. Specifically, this 60-
day report provides information on (1) the condition and status of
active TARP programs; (2) Treasury’s progress in implementing an
effective management structure, including staffing for the Office of
Financial Stability (OFS), overseeing contractors, and establishing a
comprehensive system of internal control; and (3) trends in the status
of key relevant economic indicators. GAO reviewed relevant
documentation from various TARP programs and met with OFS officials
and financial regulators. GAO also used information from existing
reports and ongoing work.
What GAO Found:
TARP programs implemented over the last 2 years covered a broad range
of activities, including injecting capital into financial
institutions; addressing issues in the securitization markets;
providing assistance to the automobile industry and American
International Group, Inc. (AIG); and offering incentives for modifying
residential mortgages, among other things. While some programs have
been terminated, others remain active, including those that focus on
preserving homeownership and providing assistance to AIG, and require
continued monitoring. Further, the Homeownership Preservation Office
has not yet conducted a workforce assessment, despite the recent
addition of several new programs. In prior work GAO has identified a
number of weaknesses in Treasury’s implementation of the Home
Affordable Modification Program (HAMP), and a number of homeowner
preservation initiatives have not yet reported activity. Other TARP
programs have ended or are winding down. Table 1 provides an overview
of selected outstanding programs, key GAO findings, and the status of
the implementation of GAO recommendations. As of September 30, 2010,
OFS reported $179.2 billion in gross outstanding direct loans and
equity investments with a subsidy cost allowance of $36.7 billion
resulting in a net balance of $142.5 billion. The reported net cost of
TARP transactions from inception through September 30, 2010, was $18.5
billion; however, the ultimate cost of TARP will change as a result of
(1) differences between the estimated values and the amounts that OFS
will ultimately realize (as the assumptions and estimates underlying
the valuation of direct loans and equity investments are inherently
subject to substantial uncertainty); and (2) further disbursements,
such as those relating to the housing programs which are not subject
to repayment. For example, the proposed restructuring of AIG, if
implemented, will likely affect TARP’s ultimate cost.
Although OFS staffing has become more stable over the past year, with
more than 200 employees, its stability remains fragile as it faces new
challenges. For example, while it has filled key leadership positions,
the Assistant Secretary of Financial Stability resigned in September
2010 and this key leadership position is temporarily filled. Staffing
remains important as some programs are still being implemented, while
others have closed or been terminated but have assets that must be
managed, repaid, and divested. OFS has begun to take steps that will
help to retain staff. But staff retention could be a challenge for OFS
going forward, because more than half of OFS’s employees, including
key leaders, are term appointments (many with 4-year term limits). OFS
has also begun to address succession planning for critical senior
positions, but its workforce plan has not been updated since March
2009. Without a plan that considers various scenarios, OFS may find
itself unprepared to adequately manage and oversee the remaining TARP
investments and programs. OFS has strengthened its management and
oversight of contractors and financial agents and its system of
internal control for financial reporting and compliance with program
requirements. Continued progress will depend on retaining qualified
staff.
Table 1: Status of Selected Programs and GAO Recommendations and Gross
Outstanding Program Balance as of September 30, 2010:
Program: Capital Purchase Program (CPP). To provide capital to viable
banks through the purchase of preferred shares and subordinated
debentures. While many institutions have repaid Treasury, a growing
number of institutions still participating have missed dividend
payments or requested restructuring of CPP investments. Treasury has
addressed many of GAO’s concerns regarding transparency and
accountability, but more needs to be done to monitor regulators’
decisions on repayments and withdrawals. GAO previously recommended
that to the extent future Treasury programs (e.g., Small Business
Lending Fund) are modeled after CPP, Treasury should collect
information on and monitor regulators’ recommendations that applicants
withdraw. Without this information, Treasury risks not having a basis
for determining whether decisions involving similar institutions were
being made consistently and thus whether participants were being
treated equitably. Moreover, GAO recommended that OFS periodically
collect and review certain information from the bank regulators
supporting their decisions on CPP repayment requests and provide
feedback for the regulators’ consideration to help ensure that similar
institutions are treated consistently. Treasury has not yet
implemented these recommendations;
Gross outstanding balance: $49.8 billion.
Program: Automotive Industry Financing Program (AIFP). To prevent a
significant disruption of the American automotive industry. GM and, to
a lesser extent, Chrysler have repaid some of their AIFP funding;
however, the ability of the government to fully recoup its investments
in these companies will depend on the companies’ profitability and the
success of future public stock offerings. GAO previously recommended
that Treasury ensure it had adequate staff on board to monitor the
government’s investment in the auto companies and to report to
Congress on how it planned to assess the companies’ performance.
Treasury has hired additional staff but has not yet provided
information to Congress on its future monitoring plans;
Gross outstanding balance: $67.2 billion.
Program: AIG (formerly Systemically Significant Failing Institutions
Program). To provide stability in financial markets and avoid
disruptions to the markets from the failure of a systemically
significant institution. While AIG has announced plans to
significantly restructure its outstanding assistance, several
conditions will need to be met for the plan to work as intended. These
include repaying the outstanding balance on the Federal Reserve
Revolving Credit Facility, drawing down Treasury’s equity capital
facility, amending and creating new equity purchase agreements, and
converting some preferred stock for common equity. However, whether
Treasury will fully recoup its investment will not be known for some
time and therefore, requires continued monitoring and oversight;
Gross outstanding balance: $47.6 billion.
Program: HAMP. To offer assistance to homeowners through a cost-
sharing arrangement with mortgage holders and investors to reduce the
monthly mortgage payment amounts of those at risk of foreclosure to
affordable levels. The program had a slow start and has not performed
as anticipated. Further, the Homeownership Preservation Office has not
yet conducted a workforce assessment, despite the recent addition of
several new programs. Despite program changes that are intended to
increase the number of mortgage loan modifications made under HAMP,
more borrowers have had their trial modifications canceled than have
received permanent modifications. Further, while Treasury has added
TARP-funded housing program enhancements in an effort to reach more
borrowers and address persistently high default and foreclosure
levels, the newly announced programs have had very limited activity to
date and Treasury continues to face challenges in expeditiously
implementing a prudent design for these programs, as GAO recommended
in a June 2010 report. Treasury has not yet fully implemented all of
our prior recommendations to increase the transparency,
accountability, and consistency of the program;
Gross outstanding balance: n/a.
Program: Public-Private Investment Program. To address the challenge
of “legacy assets” as part of Treasury’s efforts to repair balance
sheets throughout the financial system and increase the availability
of credit to households and businesses. The program, though slow to
start, has resulted in positive returns but continued monitoring is
necessary because market prices can fluctuate, and Treasury still
holds oversight responsibility for the fund managers;
Gross outstanding balance: $13.7 billion.
Program: Consumer and Business Lending Initiative. Several programs
designed to provide capital to certain financial institutions or
liquidity to secondary markets for small business loans and other
asset classes, and thereby improve access to credit for consumers and
businesses. Although the purpose of the Community Development Capital
Initiative was initially unclear to some participants, public
communications about the dual purposes of the program—to assist small
business lending and to support the mission of Community Development
Financial Institutions—was clarified towards the end of the program.
Treasury has addressed concerns that GAO raised about Treasury’s role
in the Term Asset-Backed Securities Loan Facility, including
monitoring risks related to commercial mortgage-backed securities,
formalizing the decision-making process with the Board of Governors of
the Federal Reserve System, and conducting an assessment of how to
track and report on assets that might be surrendered;
Gross outstanding balance: $0.9 billion.
Program: Total;
Gross outstanding balance: $179.2 billion.
Source: GAO analysis of Treasury’s OFS information.
[End of table]
Some credit markets are beginning to show signs of a sustained
recovery, even as other areas of the economy, particularly housing
markets and job starts, remain fragile. Indicators that GAO monitors
to assess the effectiveness of TARP showed that credit markets have
largely held the gains they achieved since October 2008. While the
degree of effectiveness has varied across programs, some programs have
reportedly had the desired effects, especially if stabilizing and
restoring confidence in the financial system are considered the
principal goals of the government’s interventions. GAO noted in prior
reports that while isolating the impact of TARP from various other
significant federal efforts is impossible, many of the anticipated
effects on credit markets and the economy had materialized. These
effects included declines in perceptions of risks in various financial
markets, including asset spreads in asset-backed securities; declines
in interest rates in interbank, mortgage, and bond markets; a renewed
ability by banks to access capital markets; increasing
securitizations; and price recovery for some legacy or “troubled”
assets.
What GAO Recommends:
As TARP enters its next phase and winds down, GAO recommends that OFS
take action to further enhance its ongoing operations by finalizing a
plan for addressing how it will manage its workforce, in particular
term-appointed and key Senior Executive Service employees. While
Treasury agreed with our recommendation, we have differing views on
the status of prior recommendations. We will continue to update the
status of recommendations as appropriate.
View [hyperlink, http://www.gao.gov/products/GAO-11-74] or key
components. For more information, contact Thomas J. McCool, (202) 512-
2642 or mccoolt@gao.gov.
[End of section]
Contents:
Letter:
Scope and Methodology:
Background:
Only TARP Programs Focused on Housing Foreclosures, AIG,
Securitizations, and Legacy Assets Remain Active:
OFS has Made Progress in Staffing Key Positions, Managing Its
Contracts, and Maintaining Internal Controls:
Indicators Suggest That Credit Markets Have Largely Held the Gains
They Achieved since October 2008:
Conclusions:
Agency Comments and Our Evaluation:
Recommendation for Executive Action:
Appendix I: Status of GAO Recommendations, as of December 30, 2010:
Appendix II: Small Business Credit:
Appendix III: Econometric Analysis of the TED Spread:
Appendix IV: Department of the Treasury Comment Letter:
Appendix V: GAO Contacts and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Status of TARP Programs, as of September 30, 2010:
Table 2: TARP Additional Cash Proceeds Received from inception through
September 30, 2010:
Table 3: Composition of U.S. Government Efforts to Assist AIG and the
Government's Approximate Remaining Exposures, as of September 30,
2010, or Latest Available Data as Noted:
Table 4: TARP-Funded Housing Programs:
Table 5: PPIFs and Investable Funds as of September 30, 2010:
Table 6: TARP Small Business-Related Programs:
Table 7: Changes in TARP Small Business Program Commitments and
Comparisons to Expenditures:
Table 8: Financial Agent Involvement in TARP Programs:
Table 9: TARP Contracts, Financial Agency Agreements, and Subcontracts
with Minority-Owned, Women-Owned, and Other Small Businesses:
Table 10: Treasury's Actions since September 2009 to Enhance
Management and Oversight of TARP Financial Agents:
Table 11: Select Credit Market Indicators, as of November 1, 2010A:
Table 12: Advantages and Limitations of Selected Small Business Data
Sources:
Figures:
Figure 1: Timeline for the Implementation of TARP, October 3, 2008
through December 30, 2010:
Figure 2: Number of Institutions Missing Scheduled Dividend or
Interest Payments, as of September 30, 2010:
Figure 3: GSE and Non-GSE HAMP Trial and Permanent Modifications Made
Each Month, through November 2010:
Figure 4: National Default and Foreclosure Trends, 2005 through June
2010:
Figure 5: PPIF Assets By Market Value and Asset Class, as of September
30, 2010:
Figure 6: TALF Loan Categories, March 2009 through June 2010:
Figure 7: Number of Employees and Detailees, November 21, 2008 through
September 25, 2010:
Figure 8: TED Spread and Banking Sector Credit Default Swap Index,
January 1, 2008 through November 1, 2010:
Figure 9: Small Commercial and Industrial and Small Commercial Real
Estate Loans at Banks, as a Percent of Total Loans, 1993 through First
Quarter 2010:
Figure 10: Outstanding Value of Small Business Loans by Commercial and
Savings Bank Asset Size, as of December 31, 2009:
Figure 11: Outstanding Value of Small Member Business Loans at Credit
Unions, as a Percent of Total Loans, 1994 through First Quarter 2010:
Figure 12: SBA 7(a) Gross Loan Approvals, Fiscal Year 1990 through
Fiscal Year 2010:
Figure 13: Proportion of 7(a) Guaranteed Loan Amount Sold on Secondary
Market, Fiscal Year 1990 through Fiscal Year 2010:
Figure 14: SBA 7(a) Securities Purchase Program Purchases, as of
October 6, 2010:
Figure 15: Interest Rate Spreads for Small Loans (Less Than $1
Million), by Bank Size, and Small Business Borrowing Needs, Second
Quarter 1993 through Second Quarter 2010:
Abbreviations:
ABS: asset-backed securities:
AGP: Asset Guarantee Program:
AIA: American International Assurance Company, LTD:
AIFP: Automotive Industry Financing Program:
AIG: American International Group, LLC:
ALICO: American Life Insurance Company:
CAP: Capital Assistance Program:
CDCI: Community Development Capital Initiative:
CDFI: Community Development Financial Institution:
Chrysler: Chrysler Group, LLC:
CMBS: commercial mortgage-backed securities:
CPP: Capital Purchase Program:
Dodd-Frank Act: Dodd-Franck Wall Street Reform and Consumer Protection
Act:
EESA: Emergency Economic Stabilization Act of 2008:
FDIC: Federal Deposit Insurance Corporation:
Federal Reserve: Board of Governors of the Federal Reserve System:
FHA: Federal Housing Administration:
FRBNY: Federal Reserve Bank of New York:
GM: General Motors Company:
GSE: government-sponsored enterprise:
HAMP: Home Affordable Modification Program:
MHA: Making Home Affordable:
NCUA: National Credit Union Administration:
NFIB: National Federation of Independent Business:
OFS: Office of Financial Stability:
OTS: Office of Thrift Supervision:
PPIF: Public-Private Investment Fund:
PPIP: Public-Private Investment Program:
Recovery Act: American Recovery and Reinvestment Act of 2009:
RMBS: residential mortgage-backed securities:
SBA: Small Business Administration:
SBLF: Small Business Lending Fund:
SCAP: Supervisory Capital Assessment Program:
SLOOS: Senior Loan Officer Opinion Survey on Bank Lending Practices:
Special Master: Office of the Special Master for TARP Executive
Compensation:
SPV: special purpose vehicle:
TARP: Troubled Asset Relief program:
TALF: Term Asset-Backed Securities Loan Facility:
Treasury: Department of the Treasury:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
January 12, 2011:
[End of section]
Congressional Addressees:
Just more than 2 years ago, the U.S. financial system and broader
economy faced the most severe financial crisis since the Great
Depression, and in 2011 the economy remains fragile. The crisis, which
threatened the stability of the financial system and the solvency of
many financial institutions, prompted the United States to initiate
extraordinary interventions aimed at moderating any economic impact.
Among these interventions was the Troubled Asset Relief Program
(TARP), which was authorized by the Emergency Economic Stabilization
Act of 2008 (EESA). EESA gave the Department of the Treasury
(Treasury) the authority to purchase or guarantee "troubled
assets," such as mortgages and mortgage-backed securities, that
were deemed to be at the heart of the crisis, along with any other
financial instrument Treasury determined that it needed to purchase to
help stabilize the financial system.[Footnote 1] The Secretary of the
Treasury exercised the authority provided under EESA to extend the
sunset date for purchases of and commitments to purchase troubled
assets through October 3, 2010; however, the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act)--signed into law
on July 21, 2010--set a new spending ceiling for TARP, in effect
prohibiting Treasury from incurring any additional obligations for
programs that were not initiated prior to June 25, 2010.[Footnote 2]
A broad range of activities have been initiated under TARP. Specific
initiatives have injected capital into key financial institutions;
implemented programs to address problems in the securitization
markets; provided assistance to the automobile industry and American
International Group, Inc. (AIG); and offered incentives for modifying
residential mortgages, among other things. As TARP passes the 2-year
mark, U.S. financial markets are less volatile than they were in 2008;
however, questions about a sustained economic recovery continue, and
certain areas of the economy still face significant challenges. For
example, foreclosures and mortgage delinquencies continue to linger
and small businesses still face tight credit conditions. As a result,
TARP has been transformed to a program focused primarily on preserving
homeownership and improving financial conditions for small financial
institutions and businesses. While many other programs have ended or
begun winding down and some participating institutions have repaid
part or all of their TARP funds, the prospect of repayment from some
other institutions, both large and small, is less certain.
EESA provided us with broad oversight authorities for actions taken
under TARP and requires that we report at least every 60 days on TARP
activities and performance.[Footnote 3] Our reports have focused on:
* findings resulting from our oversight of TARP's performance in
meeting the purposes of EESA;
* the financial condition and internal controls of TARP, its
representatives, and agents;
* the characteristics of both asset purchases and the disposition of
assets acquired, including any related commitments that were entered
into;
* TARP's efficiency in using the funds appropriated for the program's
operation;
* TARP's compliance with applicable laws and regulations;
* efforts to prevent, identify, and minimize conflicts of interest
among those involved in TARP's operations;
* the efficacy of contracting procedures; and:
* the process for making decisions related to unwinding TARP programs.
This report assesses the status of Treasury's implementation of our
recommendations and the current condition of TARP. Specifically, this
60-day report provides information on (1) the condition and status of
active TARP programs; (2) Treasury's progress in implementing an
effective management structure, including staffing for the Office of
Financial Stability (OFS), overseeing contractors, and establishing a
comprehensive system of internal control; and (3) trends in the status
of key relevant economic indicators.
Scope and Methodology:
To determine the status of active TARP programs that are still being
implemented or utilized, we obtained information from OFS, including
disbursements, dividend payments, repurchases, and warrant
liquidations as of September 30, 2010 (unless otherwise noted). In
addition, we also obtained information on the status of actions
Treasury has taken in response to recommendations from our previous
TARP reports, including its progress in developing a comprehensive
system of internal control.[Footnote 4] We also reviewed documents
provided by OFS and conducted interviews with officials from its
Office of the Chief Financial Officer. In addition, we obtained and
reviewed relevant program documents from OFS and leveraged our
previous reports and reports by the Special Inspector General for TARP
and the Congressional Oversight Panel, as appropriate.
For the Capital Purchase Program (CPP), we leveraged work completed as
part of our detailed review of the program. We used OFS's reports to
identify the participants that had repurchased their preferred shares
and paid dividends when due, among other things. To update the status
of the Targeted Investment Program (TIP), we reviewed relevant
documents related to its termination, including repayments by the
participants.
To update the status of the Automotive Industry Financing Program
(AIFP) and obtain information on the current financial condition of
General Motors Company (GM), Chrysler Group LLC (Chrysler), and Ally
Financial, Inc. (formerly GMAC, Inc.) and Treasury's plans for
managing its investment in the companies, we leveraged our past work;
reviewed information on the companies' finances and operations,
including financial statements, selected documents from their
bankruptcy proceedings, and company-provided data; and interviewed
representatives of the companies. To determine how Treasury was
managing its investment in GM and Chrysler, we reviewed information on
Treasury's plans for overseeing its ownership interests in the
companies, including congressional testimonies and White House and
Treasury press releases. In addition, we interviewed OFS officials
about their plans to monitor the government's financial interests in
the auto companies and Treasury's plans to divest its interest in GM,
including their preparation for GM's initial public offering (IPO). We
also updated key information about Ally Financial, Inc., and the
status of additional assistance provided under AIFP. For this
information, we primarily relied on our recently issued report on the
bank holding company stress tests.[Footnote 5]
To update the status of the AIG Investment Program (formerly the
Systemically Significant Failing Institutions Program) and the Public-
Private Investment Program (PPIP), we reviewed relevant documents from
Treasury and other parties. For the AIG Investment Program, these
documents included periodic reports provided to Congress by Treasury,
the Board of Governors of the Federal Reserve System (Federal
Reserve), and the Federal Reserve Bank of New York (FRBNY), and other
relevant documentation such as AIG's financial disclosures, among
other things. We also interviewed officials from each agency and AIG.
For PPIP, we reviewed and analyzed Treasury's announcements concerning
the program and its reports on PPIP allocations, expenditures, and
fund performance, along with program operation and design documents
published by Treasury and the Federal Deposit Insurance Corporation
(FDIC).
To determine the status of the Home Affordable Modification Program
(HAMP) and our previous recommendations to the program, we obtained
and reviewed Treasury's published reports on HAMP and servicer
performance, documentation on cost estimates for and guidelines issued
to each TARP-funded housing program, and written responses to our July
2009 recommendations. In addition, we interviewed Treasury officials
about the status of TARP-funded housing programs, including
anticipated implementation dates, numbers of borrowers to be helped,
and the actions Treasury had taken to address our July 2009
recommendations. We also analyzed data on changes in default and
foreclosure activity before and during HAMP's implementation.
For the programs aimed at assisting small businesses, we analyzed OFS
transaction and budget documents and reviewed program terms for the
Community Development Capital Initiative (CDCI), the Term Asset-Backed
Securities Loan Facility (TALF), and the Small Business Administration
(SBA) 7(a) Securities Purchase Program. We interviewed officials and
collected data, when available, on the credit problems of small
businesses and the impact of TARP programs from Treasury (OFS and
Community Development Financial Institutions (CDFI) Fund), the Federal
Reserve, SBA, small business trade groups, industry associations for
banks and credit unions, and federal regulators for depository
institutions.
* For CDCI, we interviewed federal depository institution supervisors--
FDIC, the Federal Reserve, the National Credit Union Administration,
the Office of the Comptroller of the Currency, and the Office of
Thrift Supervision (OTS)--about their processes for reviewing CDCI
applications. We also analyzed bank, thrift, and credit union
regulatory data to compare CDFIs to other depository institutions. We
analyzed OTS and National Credit Union Administration data on CDCI
applicants' intended use of capital. Finally, we spoke with advocacy
groups for CDFIs to obtain their views on CDCI.
* For the SBA 7(a) Securities Purchase Program, we reviewed documents
on OFS's internal processes.
To understand the types of depository institutions that lend to small
businesses, we collected bank, thrift, and credit union regulatory
financial data using SNL Financial and discussed this data with
experts from federal regulators for depository institutions.[Footnote
6] We determined that SNL Financial was sufficiently reliable for the
purposes of our review.
For TALF, we reviewed program announcements and loan volume data to
determine the amount of loans issued and the proportions that were
related to SBA-related securities. We also reviewed TALF impact
analyses from FRBNY. In addition, we obtained information from
Treasury officials in OFS about their progress in addressing
recommendations related to TALF. To determine the status of the
Capital Assistance Program (CAP) and the Asset Guarantee Program
(AGP), we reviewed relevant information from OFS and leveraged our
past work.
To determine OFS's mix of permanent and detailee staff and the number
of vacancies, we reviewed the totals for each type of staff over time
and within each OFS office. To examine changes in composition of OFS's
organizational structure since the office was established, we reviewed
past GAO reports on TARP and various documents OFS provided to us,
including an updated organizational chart. To assess Treasury's
workforce planning effort, we met with officials from its Office of
the Deputy Assistant Secretary for Human Resources and Chief Human
Capital Officer and OFS to discuss workforce planning, including staff
retention efforts and plans for managing its workforce as TARP winds
down. In these interviews, we obtained information from officials on
the various actions for retaining individuals with the skill sets and
competencies needed to administer TARP, including succession planning
for filling management and leadership positions and staff development
efforts. We reviewed various documents that OFS provided to us,
including its human capital strategy and workforce plan. We also
reviewed GAO reports related to workforce planning.
To assess OFS's use of financial agents and contractors since TARP was
established in October 2008, we reviewed information from a Treasury
database of financial agents and contractors and interviewed Treasury
contract officials about financial agency agreements, contracts, and
blanket purchase agreements as of September 30, 2010, that support OFS
administration and operation of TARP. We analyzed information from the
database to update key details on the status of TARP financial agents
and contractors, such as total number of agreements and contracts,
type of services being performed, potential dollar amount, periods of
performance, and share of work by small businesses. To assess OFS's
progress in maintaining the appropriate infrastructure to manage and
oversee the performance of TARP financial agents and contractors and
address conflicts of interest that could arise with the use of private
sector sources, we reviewed various documents and interviewed OFS
officials regarding recent changes in organizational roles and
responsibilities within OFS and its policies and procedures regarding
(1) management and oversight of TARP financial agents and contractors
and (2) monitoring and oversight activities by the OFS team
responsible for financial agent and contractor compliance with TARP
conflicts-of-interest requirements.
As noted in our initial TARP report under the mandate, we identified a
preliminary set of indicators on the state of credit and financial
markets that might be suggestive of the performance and effectiveness
of TARP.[Footnote 7] We consulted Treasury officials and other experts
and analyzed available data sources and academic literature. We
selected a set of indicators that offered perspectives on different
facets of credit and financial markets, including perceptions of risk,
cost of credit, and flows of credit to businesses and
consumers.[Footnote 8] To update the indicators in this report, we
used data from Thomson Reuters, the Federal Reserve, the National
Federation of Independent Business, and a broker-dealer to assess the
state of the economy and financial markets. We believe that despite
certain limitations, these data considered as a whole, are
sufficiently reliable for the purpose of presenting and analyzing
trends in the economy and financial markets.
We conducted this performance audit from March 2010 to January 2011 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
Background:
When EESA was signed on October 3, 2008, the U.S. financial system and
the broader economy faced the most severe crisis since the Great
Depression. The dramatic correction in the U.S. housing market had
precipitated a decline in the price of financial assets associated
with housing, in particular mortgage assets based on subprime loans
that lost value as the housing boom ended and the market underwent a
dramatic correction. Some institutions found themselves so exposed
that they were threatened with failure--and some failed--because they
were unable to raise the necessary capital as the value of their
portfolios declined. Other institutions, ranging from government-
sponsored enterprises (GSE)—such as Fannie Mae and Freddie Mac—to Wall
Street firms, were left holding “toxic” or “legacy” assets that became
increasingly difficult to value, were illiquid, and potentially had
little worth. Moreover, investors not only stopped buying mortgage-
backed securities but also became reluctant to buy securities backed
by many other types of assets. Because of uncertainty about the
financial condition and solvency of financial entities, the prices
banks charged each other for funds rose dramatically, and interbank
lending effectively came to a halt. The resulting credit crunch made
the financing on which businesses and individuals depend increasingly
difficult to obtain as cash-strapped banks held on to their assets. By
late summer of 2008, the potential ramifications of the financial
crisis ranged from the continued failure of financial institutions to
increased losses of individual savings and corporate investments, and
further tightening of credit would exacerbate the emerging global
economic slowdown that was beginning to take shape.
The passage of EESA and its authorization of TARP provided Treasury
with a framework to implement a course of action that ultimately
resulted in the development of a variety of new programs. Soon after
EESA was enacted in October 2008, Treasury decided to change its
strategy from purchasing mortgage-backed securities to recapitalizing
financial institutions. This tactical shift raised questions about
TARP's transparency and the direction of the program. Amid these
concerns, Treasury attempted to provide a more strategic direction for
using the remaining funds and created a number of programs aimed at
stabilizing the securitization markets, among other things. The
extension of TARP, announced by the Treasury on December 9, 2009, has
allowed Treasury to reallocate existing commitments and make
additional funds available for programs focused primarily on
preserving homeownership and providing assistance to community banks
and small businesses. The Dodd-Frank Act reduced the amount of
available TARP funds, and in response, Treasury has reduced
allocations for a number of programs. Figure 1 provides an overview of
key dates for TARP implementation.
Figure 1: Timeline for the Implementation of TARP, October 3, 2008
through December 30, 2010:
[Refer to PDF for image: time line]
10/3/08: Congress passes P.L. 110-343, EESA (the act), which
authorized TARP.
10/14/08: Treasury announces that it will purchase up to $250 billion
in financial firms’ preferred stock via CPP.
10/28/08: Under CPP, Treasury purchases $115 billion in preferred
stock and warrants from eight financial institutions.
11/10/08: Treasury announces AIG assistance through SSFI.
11/23/08: Treasury, FDIC, and the Federal Reserve provide Citigroup
assistance through guarantees, liquidity access, and capital,
including an equity investment through TIP.
11/25/08: Treasury announces support for the Federal Reserve’s TALF to
assist asset-backed securities.
12/19/08: Treasury announces a plan to stabilize the automotive
industry under AIFP.
12/29/08: Treasury announces assistance to GMAC LLC.
1/16/09: Treasury, the Federal Reserve, and FDIC assist Bank of
America through guarantees, liquidity access, and capital, including
protection on certain losses and the purchase of preferred stock under
TIP.
2/10/09: Treasury announces the Financial Stability Plan.
2/18/09: Treasury announces the Homeowner Affordability and Stability
Plan.
2/25/09: Treasury announces the terms and conditions for CAP.
3/23/09: Treasury, FDIC, and the Federal Reserve announce details on
PPIP.
5/7/09: Stress test results are announced.4/17: Treasury provides an
Equity Capital Facility to AIG in exchange for Series F preferred
stock.
6/17/09: Five of the eight largest financial institutions to first
participate in CPP repurchase their preferred stock from Treasury.
9/14/09: Treasury issues report on status and next phase of financial
stabilization efforts.
9/30/09: Treasury announces that two PPIP funds have raised at least
the minimum $500 million to invest in legacy securities.
10/21/09: Treasury announces new efforts under TARP to assist small
businesses and CDFIs.
2/3/10: Treasury announces terms for the Community Development Capital
Initiative to provide capital to CDFIs.
3/26/10: Treasury announces additional mortgage assistance for
unemployed homeowners and those who owe more on their mortgage than
their home’s value.
7/21/10: Dodd-Frank Act prohibits TARP funds from being obligated for
new programs and Treasury reduces available funds for existing
programs.
10/3/10: On the second anniversary of EESA, Treasury's authorization
ends to make new financial commitments for programs under TARP.
11/17/10: Treasury participates in GM’s initial public offering,
reducing its ownership stake in GM.
12/8/10: Treasury, FRBNY, Trustees, AIG, AIA, and ALICO sign master
agreement to recapitalize AIG.
Source: GAO.
[End of figure]
In response to EESA's mandate that we report at least every 60 days on
TARP programs, we have issued more than 40 reports and testimonies
related to TARP and made more than 60 recommendations to Treasury and
the Federal Reserve to improve the transparency and accountability of
TARP operations.[Footnote 9] Some of our recommendations applied to
OFS in general, while others involved specific programs, such as CPP,
HAMP, and TALF. Our recommendations to Treasury generally fell into
three broad categories: (1) transparency, reporting, and
accountability; (2) management infrastructure; and (3) communication.
Other TARP oversight entities, such as Special Inspector General for
TARP and Congressional Oversight Panel, have also made numerous
recommendations aimed at improving TARP.
Transparency, reporting, and accountability. Initially, we made a
series of recommendations aimed at improving the transparency of
several programs and related processes, including CPP and the warrant
repurchase process. We also made a number of recommendations
addressing the basis for and design of HAMP. Treasury has taken a
variety of steps to implement our recommendations. We also made
recommendations aimed at strengthening the process for making
decisions about the use of TARP funds for TALF. We also recommended
that Treasury improve the transparency of and analytical basis for its
decisions to wind down the remaining programs and liquidate
investments. And we recommended that Treasury implement metrics to
measure the performance of HAMP's first-lien modification program and
small business lending programs. Treasury has started to address many
of these recommendations.
Management infrastructure. To ensure that OFS established a robust
management structure, comprehensive system of internal control, and
risk assessment process, we initially made a series of recommendations
aimed at addressing challenges associated with establishing a federal
program in a short period of time, including staffing, contractor
oversight, and internal controls. More recently, we recommended that
Treasury finalize a comprehensive system of internal control over
HAMP, ensure that it had the expertise needed to adequately monitor
and divest the government's investment in Chrysler and GM, and develop
criteria for evaluating the optimal method and timing for divesting
the government's ownership stake in these two automakers. Treasury has
taken steps to address most of these recommendations.
Communication. We have made a number of recommendations for improving
communication with stakeholders, including the public, about TARP.
These recommendations are designed to help ensure that Treasury
develops a comprehensive communication strategy and clearly
articulated vision for TARP that goes beyond simply providing
information. Treasury continues to take steps to address these
recommendations, including hiring a communications officer,
integrating communications into TARP operations, maintaining regular
contact with congressional committees and members, and attempting to
leverage technology. In the second year of TARP, we continued to
identify opportunities for better communication. For instance, we
recommended that Treasury more clearly inform borrowers that they
could use the HOPE Hotline if they were having difficulty with their
HAMP application or servicers, among other things, and that Treasury
report to Congress on its plans to assess and monitor the auto
companies' performance and ability to repay their loans.
Only TARP Programs Focused on Housing Foreclosures, AIG,
Securitizations, and Legacy Assets Remain Active:
Treasury has managed TARP programs at every stage of development, from
implementation to termination. In the last 2 years Treasury disbursed
about $387 billion under the various TARP programs, and about $179
billion remained outstanding as of September 30, 2010 (see table 1).
Some TARP programs have repaid their balances and have been
terminated, while others that closed in the last year have outstanding
balances that expose Treasury to risk. Furthermore, these outstanding
balances require ongoing attention and monitoring to help ensure that
participating institutions comply with the terms of the agreements and
that Treasury stays abreast of any issues that would impact
participants' ability to repurchase their assets or repay their debts.
Specifically:
* CPP, which closed in December 2009, had $49.8 billion outstanding as
of September 30, 2010.
* AIFP had an outstanding balance of just more than $67.2 billion as
of September 30, 2010.
* AIG has continued to receive assistance over the last year via an
equity capital line established in 2009 and as of September 30, 2010,
Treasury's assistance to AIG had a balance of $47.6 billion.
* While HAMP remains Treasury's primary program to assist homeowners
facing foreclosure, Treasury announced several new programs in 2010.
As of September 30, 2010, $543 million had been disbursed for TARP
housing programs, which is not recoverable.
* PPIP continues to be an active program with $14.1 billion disbursed
as of September 30, 2010, and $13.7 billion outstanding.
* Small business programs like CDCI and the SBA 7(a) Securities
Purchase Program account for a small portion of TARP funding and
Treasury has shifted the focus of its small business efforts outside
of TARP.
* Funding of TALF loans by FRBNY closed in June 2010, and no TARP
funds had been expended as of September 30, 2010 to purchase
collateral from the FRBNY because no collateral had been surrendered
to TALF LLC. TALF will continue to pose potential risks to Treasury
until all loans are repaid to FRBNY and the program is terminated.
Three programs were terminated--CAP, AGP, and TIP. Treasury sold the
Citigroup trust preferred securities it received as a guarantee fee
for AGP.[Footnote 10] TIP was terminated and its $40 billion
outstanding balance was repaid in December 2009.
Table 1: Status of TARP Programs, as of September 30, 2010:
Program[A]: CPP provides capital to viable banks through the purchase
of preferred shares and subordinated debentures;
Asset purchase price[B]: $204.9 billion;
Total cash disbursed: $204.9 billion;
Repayments[C]: $152.2 billion;
Additional proceeds[C]: $19.7 billion;
Outstanding balance[D]: $49.8 billion.
Program[A]: TIP fosters market stability and thereby strengthens the
economy by making case-by-case investments in institutions that
Treasury deems are critical to the functioning of the financial system;
Asset purchase price[B]: $40.0 billion;
Total cash disbursed: $40.0 billion;
Repayments[C]: $40.0 billion;
Additional proceeds[C]: $4.2 billion;
Outstanding balance[D]: $0.0.
Program[A]: AIFP prevents a significant disruption of the American
automotive industry;
Asset purchase price[B]: $81.8 billion;
Total cash disbursed: $79.7 billion;
Repayments[C]: $11.2 billion;
Additional proceeds[C]: $2.9 billion;
Outstanding balance[D]: $67.2 billion.
Program[A]: AIG provides stability in financial markets and avoids
disruptions to the markets from the failure of a systemically
significant institution;
Asset purchase price[B]: $69.8 billion;
Total cash disbursed: $47.6 billion;
Repayments[C]: $0.0;
Additional proceeds[C]: $0.0;
Outstanding balance[D]: $47.6 billion.
Program[A]: HAMP offers assistance to homeowners through a cost-
sharing arrangement with mortgage holders and investors to reduce the
monthly mortgage payment amounts of those at risk of foreclosure to
affordable levels;
Asset purchase price[B]: $45.6 billion;
Total cash disbursed: $0.5 billion;
Repayments[C]: n/a;
Additional proceeds[C]: n/a;
Outstanding balance[D]: n/a.
Program[A]: PPIP addresses the challenge of “legacy assets” as part of
Treasury’s efforts to repair balance sheets throughout the financial
system and increase the availability of credit to households and
businesses;
Asset purchase price[B]: $22.4 billion;
Total cash disbursed: $14.1 billion;
Repayments[C]: $0.4 billion;
Additional proceeds[C]: $0.2 billion;
Outstanding balance[D]: $13.7 billion.
Program[A]: SBA 7(a) Securities Purchase Program provides liquidity to
secondary markets for government-guaranteed small business loans in
SBA’s 7(a) loan program;
Asset purchase price[B]: $0.4 billion;
Total cash disbursed: $0.2 billion;
Repayments[C]: less than $0.1 billion;
Additional proceeds[C]: less than $0.1 billion;
Outstanding balance[D]: $0.2 billion.
Program[A]: CDCI provides capital to Community Development Financial
Institutions by purchasing preferred stock;
Asset purchase price[B]: $0.6 billion;
Total cash disbursed: $0.2 billion;
Repayments[C]: $0.0;
Additional proceeds[C]: $0.0;
Outstanding balance[D]: $0.6 billion.
Program[A]: TALF provides liquidity in securitization markets for
various asset classes to thereby improve access to credit for
consumers and businesses;
Asset purchase price[B]: $4.3 billion;
Total cash disbursed: $0.1 billion;
Repayments[C]: $0.0;
Additional proceeds[C]: $0.0;
Outstanding balance[D]: $0.1 billion.
Program[A]: AGP provides federal government assurances for assets held
by financial institutions that are viewed as critical to the
functioning of the nation’s financial system;
Asset purchase price[B]: $5.0 billion;
Total cash disbursed: $0.0;
Repayments[C]: $0.0;
Additional proceeds[C]: $0.7 billion;
Outstanding balance[D]: $0.0 billion.
Program[A]: Total;
Asset purchase price[B]: $474.8 billion;
Total cash disbursed: $387.3 billion;
Repayments[C]: $203.8 billion;
Additional proceeds[C]: $27.8 billion;
Outstanding balance[D]: $179.2 billion.
Source: GAO analysis of Treasury (OFS) data.
[A] CAP was terminated in November 2009. No funds were disbursed under
this program.
[B] Asset purchase price reflects the aggregate amount Treasury agreed
to pay to purchase outstanding troubled assets subject to the $475
billion limit in section 115 of EESA, as amended by Section 1302 of
the Dodd-Frank Act. This amount includes signed contract amounts not
yet disbursed.
[C] “Additional proceeds” include dividends from equity securities,
interest income from loans and securities, proceeds from repurchases
of warrants and warrant preferred stock, and proceeds from warrant
auctions. Treasury also received $16.1 billion in proceeds from sales
of 4 billion shares of Citigroup common stock, of which $13.1 billion
is included at cost in “repayments,” and $3.0 billion of net proceeds
in excess of cost is included in “additional proceeds.” As of
September 30, 2010, Treasury still held approximately 3.7 billion
shares of Citigroup common stock.
[D] During fiscal year 2010 OFS wrote-off $2.3 billion in CPP
investments (primarily relating to CIT Group) and wrote-off $1.6
billion in loans to Chrysler pursuant to a settlement agreement. The
“outstanding balance” has been reduced for these write-offs. In
addition, the outstanding balance is affected by other noncash events.
[E] As of December 15, 2010, approximately $51.6 billion of the $79.7
billion for AIFP is outstanding after considering the proceeds from
GM’s IPO in November 2010 and payment for Treasury’s preferred stock
in December 2010, which is discussed later in this report.
[End of table]
As shown in table 1, participants have repaid more than $200 billion.
This amount includes repurchases of preferred stock and repayments of
loans. Treasury also received additional proceeds totaling more than
$27 billion as of September 30, 2010, which includes dividends from
equity securities, interest income from loans and securities, and net
proceeds in excess of cost on the sale or repurchase of common stock
and warrants.[Footnote 11]
As of September 30, 2010, Treasury had received approximately $16.7
billion in dividend payments, interest payments and fees relating
primarily to assets acquired through CPP, TIP, AIFP, PPIP, and AGP
(see table 2).[Footnote 12] Treasury's agreements under these programs
entitled it to receive dividend payments on varying terms and at
varying rates. The dividend payments to Treasury are contingent on
each institution declaring dividends. As we discuss later in the
report, dozens of institutions have not paid dividends, primarily
institutions participating in CPP. Treasury has also entered into
certain loan agreements and invested in subordinate debentures which
generate interest. Further, Treasury auctioned its first securities in
December 2009 and has been selling its Citigroup common stock
throughout 2010.
Table 2: TARP Additional Cash Proceeds Received from inception through
September 30, 2010:
Program: CPP;
Warrant proceeds/gain on sale of common stock[A]: $9,818;
Dividend, interest and fees: $9,921;
Total additional proceeds: $19,739.
Program: TIP;
Warrant proceeds/gain on sale of common stock[A]: $1,237;
Dividend, interest and fees: $3,005;
Total additional proceeds: $4,242.
Program: AIFP;
Warrant proceeds/gain on sale of common stock[A]: $114;
Dividend, interest and fees: $2,800;
Total additional proceeds: $2,916.
Program: AGP:
Warrant proceeds/gain on sale of common stock[A]: n/a;
Dividend, interest and fees: $716;
Total additional proceeds: $716.
Program: PPIP;
Warrant proceeds/gain on sale of common stock[A]: $1;
Dividend, interest and fees: $228;
Total additional proceeds: $229.
Program: Total;
Warrant proceeds/gain on sale of common stock[A]: $11,170;
Dividend, interest and fees: $16,670;
Total additional proceeds: $27,842.
Source: GAO analysis of Treasury (OFS) data.
[A] Warrant proceeds includes cash received from Treasury's auction of
warrants, TARP participants' repurchase of warrants, and warrant
preferred stock issued to Treasury.
[End of table]
As of September 30, 2010, OFS had valued these TARP direct loans and
equity investments at $142.5 billion and the asset guarantee program
at $3 billion for a total of $145.5 billion based on estimates using
economic and financial credit subsidy models. The estimates used
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 costs reported in the financial
statements. 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. These differences will also affect the ultimate cost of
TARP. The estimated value of TARP's $142.5 billion in direct loans and
equity investments is net of a $36.7 billion subsidy cost allowance--
primarily the difference between the amounts paid by OFS for the
direct loans and equity investments and the reported value of such
assets. The reported net cost of TARP transactions from inception
through September 30, 2010, was $18.5 billion. However, the ultimate
cost will change as OFS continues to purchase troubled assets and
incur related subsidy costs as well as incur costs under other TARP
initiatives relating to Treasury housing programs under TARP.
Treasury Faces Oversight Challenges in Managing CPP Investments:
Under CPP, Treasury provided capital to qualifying financial
institutions by purchasing preferred shares or subordinated
debentures.[Footnote 13] In return for its investment, Treasury
received preferred stock or debentures, which provided for dividend
payments (if declared by the issuer) or interest payments as well as
warrants. As we recently reported, Treasury disbursed about $205
billion to 707 financial institutions nationwide from October 2008
through December 2009.[Footnote 14] Increasing numbers of CPP
participants have missed scheduled dividend or interest payments
resulting in Treasury developing a plan for exercising its right to
appoint directors as it deems appropriate. Over the last 2 years,
Treasury has restructured the assistance provided to 12 CPP
participants by swapping cumulative preferred stock for other forms of
equity securities or selling the preferred stock to an institution
involved in a merger or capital restructuring with a CPP institution.
Through September 2010, Treasury had received about $152 billion in
full and partial repayments from 89 institutions, and 28 institutions
exchanged $363 million of their CPP investments for investments under
Treasury's CDCI program. However, questions about the health of
smaller banks continue, and small institutions participating in CPP
may face challenges in fulfilling the terms needed to exit the program.
The Growing Number of CPP Participants with Missed Dividend or
Interest Payments Creates Oversight Challenges for Treasury:
As the number of institutions that have missed scheduled dividend or
interest payments increases, Treasury faces various oversight and
management challenges (see figure 2). As of September 30, 2010, 144
institutions had not made at least one scheduled dividend or interest
payment by the end of the reporting month in which the payments were
due, for a total of 413 missed payments.[Footnote 15] The total amount
of missed dividend and interest payments was $235 million, although
some of these payments were later made prior to the end of the
reporting month. From February 2009 through August 2010, the number of
institutions missing dividend or interest payments due on their CPP
investments increased steadily from 8 to 123, or about 20 percent of
existing CPP participants. Institutions can elect whether to pay
dividends and may choose not to pay for a variety of reasons,
including decisions that they or their federal and state regulators
make to conserve cash and maintain (or increase) capital levels.
Institutions are required to pay dividends only if they declare
dividends, although unpaid cumulative dividends generally accrue and
the institution must pay them before making payments to other types of
shareholders, such as holders of common stock.
Figure 2: Number of Institutions Missing Scheduled Dividend or
Interest Payments, as of September 30, 2010:
[Refer to PDF for image: vertical bar graph]
Number of missing scheduled dividend or interest payments:
At least one:
Institutions: 114.
2 or more:
Institutions: 109.
3 or more:
Institutions: 79
4 or more:
Institutions: 48.
5 or more:
Institutions: 24.
6 or more:
Institutions: 8.
Source: GAO analysis of Treasury data.
[End of figure]
Generally, if an institution has not paid in full a total of six
dividend or interest payments, Treasury has the right to elect two
members to the institution’s board of directors. As of September 30,
2010, eight institutions had missed at least six payments, and these
payments remained unpaid for seven of the institutions. For these
seven institutions, Treasury had not yet exercised its right to
nominate directors. However, it has elected two members to AIG’s board
of directors under the AIG Investment program. As more institutions
miss scheduled dividend payments, Treasury faces a significant
challenge of determining the extent to which it plans to exercise its
right to nominate board members. In August 2010, Treasury began
addressing this challenge by publicly releasing a “fact sheet” and “
frequently asked questions” regarding the nomination of board members
to these institutions. In nominating directors, Treasury said that it
would proceed in two steps. First, after an institution misses five
dividend or interest payments, Treasury plans, with the institutions’
approval, to send qualified members of OFS staff to observe board
meetings. The information gleaned will not only help Treasury
understand any special conditions and challenges that the institution
is facing, but will also support Treasury’s ongoing monitoring of its
investment. The observers’ activities generally will be limited to
listening and asking clarifying questions regarding materials
presented at the board meetings. Second, once an institution has
missed six dividend payments, Treasury will decide whether to nominate
a board member based on a variety of considerations, including what it
learns from the board meetings, the institution’s financial condition,
and the function of its board of directors. Further, Treasury will
prioritize the institutions it is monitoring for possible appointments
to the board, in part based on the size of its investment, with
institutions with investments of more than $25 million receiving
priority.
Treasury reported that it may not nominate directors immediately after
an institution misses six payments but plans to develop a pool of
candidates screened by executive search firms engaged by Treasury.
Unlike observers, board members nominated by Treasury cannot be
government employees. They will have the same fiduciary duties and
obligations to the shareholders of the financial institution as any
other member of the board and will receive the same compensation from
the institution. They will serve until the institution pays its
dividends or interest (when Treasury's right to appoint them expires)
or Treasury chooses to nominate a replacement director.[Footnote 16]
Going forward, we will continue to monitor Treasury's development and
implementation of policies and procedures for nominating board members
and assess the extent to which the process is efficient and consistent
with all applicable requirements and goals of CPP.
Treasury Has Developed Policies and Procedures for Exchanging Assets:
In the last year, Treasury has participated in a limited, but growing,
number of exchanges of CPP preferred stock for other securities or in
direct dispositions of CPP investments to new investors that can
provide new equity, conduct capital restructurings, or otherwise
strengthen the capital position of the institution. Treasury said that
it took these actions to protect the taxpayers' interest in the CPP
investments and promote financial stability. In October 2009, OFS
finalized policies and procedures governing these exchanges and
dispositions.[Footnote 17] In considering an institution's proposal
for an asset exchange, OFS stated that it assesses various factors,
including:
* the impact on the quality of the institution's capital, especially
in light of any concurrent efforts to raise capital and exchanges or
recapitalizations involving other securities;
* the possible impact on Treasury's position relative to the holders
of securities that are in equal standing with Treasury;
* the U.S. government's overall economic position; and:
* whether any premium paid over the current market price of the
securities to induce holders to participate in other transactions as
part of a larger capital restructuring is reasonable and consistent
with other similar third party transactions in the marketplace.
As of September 30, 2010, Treasury had completed 12 restructurings.
These restructurings included exchanges of CPP preferred shares for
other securities, such as mandatory convertible preferred shares,
trust preferred securities, or common shares.[Footnote 18] In two
restructurings, Treasury sold its CPP preferred stock and warrants to
third party institutions as part of a merger agreement and a capital
raising investment with the CPP institutions. One institution with a
restructured investment subsequently filed bankruptcy and had its
banking subsidiary placed in receivership by its banking regulator,
and it is unlikely that Treasury will receive any significant recovery.
Treasury Does Not Monitor Regulators' Decisions to Approve or Deny CPP
Repayments:
As of September 30, 2010, Treasury had received full repayments from
80 institutions and partial repayments from 9 additional institutions,
and we have closely monitored the process for repaying CPP
investments.[Footnote 19] Our recent report on CPP identified
weaknesses in Treasury's monitoring of regulators' decisions to
approve or deny requests to repay CPP investments.[Footnote 20] Under
the original terms of the program, Treasury prohibited institutions
from repaying CPP funds within 3 years unless the firm had completed a
"qualified equity offering" to replace a minimum amount of the
capital, but the American Recovery and Reinvestment Act of 2009
(Recovery Act) included provisions modifying the terms of CPP
repayments.[Footnote 21] These provisions require that Treasury allow
any institution to repay its CPP investment subject only to
consultation with the appropriate federal bank regulator, without
considering whether the institution has replaced such funds from any
other source or applying any waiting period. Treasury officials
indicated that, as a result of these changes, they had not provided
guidance or criteria to regulators on deciding when to allow
institutions to repay CPP investments and had not collected
information on the reasons for these decisions. However, according to
Treasury, it helped facilitate meetings among the regulators in the
spring of 2009 at which they discussed what would be in the standards
for permitting TARP recipients to repay. Bank regulatory officials
said that they used existing supervisory procedures that were
generally applicable to capital reductions as a basis for reviewing
CPP repurchase requests and that they approached the decision from the
perspective of achieving regulatory rather than CPP goals.[Footnote
22] Regulators also said that they provided a brief e-mail
notification to Treasury indicating whether they objected or agreed to
allow an institution to repay its CPP investment. Treasury, in turn,
communicated the regulators' decisions to the CPP firms and informed
them whether it was able to process their request to repay.
While the decision to allow repayment ultimately lies with the bank
regulators, the statute does not prohibit Treasury, as administrator
of CPP, from monitoring regulators' decision-making process and
collecting information or providing feedback about the regulators'
decisions. While the regulators prepare a case decision memo to
document their analysis of repayment requests that is similar to the
memo that was used to document their evaluations of CPP applicants,
officials from both Treasury and the regulators said that Treasury did
not request or review the memo or other analyses supporting
regulators' decisions. In our recent report, we found that while the
decision ultimately lies with the regulators, without collecting
information on or monitoring regulators' decisions, Treasury had no
basis for determining whether decisions involving similar institutions
were being made consistently and thus whether CPP participants were
being treated equitably. Furthermore, absent information on why
regulators made repayment decisions, Treasury cannot provide feedback
to regulators. Accordingly, we recommended that Treasury periodically
collect and review certain information from bank regulators on the
analysis and conclusions supporting their decisions on CPP repayment
requests and provide feedback for the regulators' consideration on the
extent to which regulators are evaluating similar institutions
consistently. In its response, Treasury stated that it would consider
ways to address the objectives of our recommendations while also
noting the constraints presented by the law and principles of
regulatory independence.
Treasury Has Responded to Our Recommendations for Improving
Transparency and Accountability of CPP:
We have made seven recommendations to strengthen transparency and
accountability of CPP, a key TARP program, over the last 2 years and
Treasury has largely addressed many of these recommendations. For
example, responding to our recommendations for improving the program's
transparency, Treasury required all CPP participants to participate in
some form of monthly lending survey. However, as institutions leave
the program, which includes the largest banks, they no longer report
information on lending to Treasury. We also recommended that Treasury
consider making the warrant valuation process transparent to the
public by disclosing details of the warrant repurchase process.
Treasury has addressed these recommendations by releasing bank survey
information on lending and detailed reports on warrant repurchases.
Consistent with our past recommendations, Treasury has also taken
steps to ensure compliance with CPP requirements, which include
limitations on dividends, stock repurchase restrictions, and executive
compensation. Treasury tracks the number of missed payments in the
monthly Dividends and Interest Report, which it posts on [hyperlink,
http://www.financialstability.gov]. Treasury, in conjunction with its
outside asset managers and custodian (Bank of New York Mellon),
monitors corporate actions, such as restrictions on stock repurchases
and dividends. Instances of noncompliance with CPP requirements are
reported to OFS Compliance within the Office of Internal Review, which
evaluates them to determine if further action is required. Treasury
has also created policies for ensuring that CPP institutions comply
with restrictions on executive compensation and excessive or luxury
expenditures.[Footnote 23] For example, Treasury's interim final rule
requires that the principal executive officer and principal financial
officer certify to actions to be taken by the compensation committee,
board of directors, and the company itself with regard to executive
compensation.[Footnote 24] Certifications from these officers are
required to be filed within 90 days after the recipient's fiscal year-
end. As of August 2010, 97 percent of all recipients have filed their
certifications. Nine recipients have a fiscal year end of June 30 and
are expected to submit their certification by September 30, 2010. All
certifications and disclosures as well as correspondences are tracked
and monitored by OFS Compliance within the Office of Internal Review.
Treasury's Office of the Special Master for TARP Executive
Compensation (Special Master) reviewed payments that taxpayer-assisted
firms made to its "top 25" executives prior to February 17, 2009,
when the Recovery Act introduced additional compensation and
corporate governance standards for TARP recipients. The Special Master
conducted the "lookback" review beginning in March 2010 by requesting
compensation data from all 419 institutions that received taxpayer
assistance prior to the passage of the Recovery Act.[Footnote 25] All
419 institutions responded to the request, and the Special Master
issued the results of the lookback review on July 23, 2010. Although
the Recovery Act and Treasury rules later imposed much stricter limits
on pay among participating institutions, the Special Master found that
compensation, such as cash bonuses and retention awards, for the
institutions reviewed was permitted by the rules in place at the time.
Treasury has hired nine asset management firms to provide market
advice about its portfolio of investments in financial institutions
participating in CPP and other TARP programs. These management firms
are also responsible for helping Treasury monitor compliance with the
key terms of the program. In past reports we noted that Treasury had
not finalized specific guidance and performance measures for the asset
managers' oversight responsibilities or identified the process for
monitoring the asset managers' performance.[Footnote 26] Treasury
finalized its oversight policies for asset managers in April 2010 and
developed qualitative and quantitative performance metrics based on
the managers' core functions and responsibilities in July 2010.
Finally, in our June 2009 report, we recommended that Treasury ensure
that the primary federal banking regulators use generally consistent
criteria when considering repayment decisions under TARP.[Footnote 27]
Unless Treasury takes steps to help promote consistency in regulatory
decisions to approve or deny repayment requests, regulators may not
treat comparable TARP institutions equitably. In response, Treasury
stated that it would consult with the primary federal regulators
regarding their criteria and suggest that they follow consistent
criteria unless they have valid regulatory reasons for using different
standards.
Outstanding Balances Under TIP Were Repaid and the Program Terminated:
TIP was designed to foster market stability and thereby strengthen the
economy by investing in institutions on a case-by-case basis that
Treasury deemed critical to the functioning of the financial system.
Only two institutions--Bank of America and Citigroup--participated in
this program, and each received $20 billion in capital investment,
which both repaid in December 2009. Both of these institutions also
received $25 billion each in exchange for preferred shares under CPP.
Bank of America repurchased these shares in December 2009. Treasury
started selling its Citigroup common shares in April 2010 and
finalized such disposition in December 2010.
AIFP Illustrates Both Progress and Ongoing Uncertainty in Recouping
Assistance:
Although Chrysler's and GM's financial performance has improved over
the last year, the government's ability to fully recover its
investments in these companies depends on a variety of factors.
Further, the government's ability to recoup its investment in Ally
Financial rests not only on economic conditions but on the company's
ability to compete with other credit providers. From December 2008
through December 2009, Treasury announced $86.3 billion in funding
available to help stabilize the auto industry and disbursed $79.7
billion of this funding, including about $62 billion to fund Chrysler
and GM while they restructured, about $17 billion to provide capital
assistance to Ally Financial, and $1.5 billion to a special purpose
vehicle (SPV) created by Chrysler Financial.[Footnote 28] In return
for its assistance to Chrysler and GM, Treasury received 9.85 percent
equity in the reorganized Chrysler, 60.8 percent equity and $2.1
billion in preferred stock in the reorganized GM, and $13.8 billion in
debt obligations between the two companies. In return for its
investment in Ally Financial, Treasury received preferred shares. As
of December 15, 2010, approximately $26.9 billion of the $79.7 billion
had been repaid.
The federal government's ability to fully recoup its investments will
depend on the profitability of Chrysler, GM, and Ally Financial and
the success of future public stock offerings. Since we last reported
on the financial condition of the auto industry in November 2009,
Chrysler and GM have shown signs of progress in returning to
profitability.[Footnote 29] For example:
* Positive financial statements. In 2010, both the new Chrysler and
new GM released financial statements for 2009 and the first three
quarters of 2010. Thus far, according to Treasury officials, both
companies are doing better than they had projected in the companies'
viability plans during the bankruptcies and that Treasury had
initially projected in terms of revenues, operating earnings, and cash
flow. We are in the process of reviewing the financial statements in
more detail for a subsequent report.
* Repayment of GM's loans. In April 2010, GM repaid the remaining $4.7
billion of the $6.7 billion in debt it owed to Treasury from an escrow
account that was created for the company through the restructuring
process in summer 2009. According to Treasury officials, the escrow
account was GM property and the funds in the account came from a
portion of the proceeds of a loan made by both Treasury and the
Canadian government. After the full repayment of this loan,
approximately $6.6 billion was left in the account and these funds
became available for GM's general use. As of November 2010, Chrysler
had made about $440 million in interest payments on its loans from
Treasury.
* IPO held for GM and plans for a Chrysler offering. In August 2010,
Treasury announced that it had agreed to be named a selling
shareholder of common stock in GM's registration statement for the
company's IPO. On November 17, 2010, GM held an IPO with 478 million
common stock shares held by several stockholders, including Treasury.
On November 26, 2010, the underwriters for the IPO exercised the
overallotment option, bringing the total number of shares sold to
almost 550 million. The proceeds from the sale of common shares
combined with those from the sale of the mandatory convertible
preferred shares raised $23.1 billion. Treasury sold more than 412
million of its shares, for which it received $13.5 billion in net
proceeds to repay the government's initial investment in GM. As a
result of selling these shares, Treasury's ownership stake in GM has
decreased from 60.8 percent to 33.3 percent. According to Treasury,
the exact timing of further divestments in GM has not yet been
determined. In December 2010, GM also repurchased Treasury's shares of
preferred GM stock for $2.1 billion. Chrysler has indicated that it
expects to hold an IPO but not before the second half of 2011, subject
to approval from its Board of Directors.
While these steps indicate progress in the companies' journey towards
profitability, the government's ability to recoup its investment in
the auto industry is uncertain, and the companies face several
challenges in the coming years. These challenges will require Treasury
to provide ongoing oversight. For instance:
* Pension obligations and other future cash payments could be
significant. In April 2010, we reported on the impact of restructuring
on Chrysler's and GM's pension plans.[Footnote 30] We found that
although the new companies had assumed sponsorship of the pension
plans, the future of the plans remained uncertain, in part because the
companies might need to make large contributions to comply with
federal pension funding requirements and their ability to make such
contributions was largely dependent on their ability to become
profitable again. As of the most recent valuation, GM's U.S. and non-
U.S. defined benefit pension plans were underfunded by more than $27
billion as of December 31, 2009, due to a number of factors, including
significant declines in financial markets and the deterioration of the
value of plan assets.[Footnote 31] In December 2010, GM announced that
it had contributed $4 billion in cash into its U.S. defined benefit
pension plans and planned to contribute $2 billion in stock to its
U.S. plans in order to move these plans closer to being fully funded.
Although determining exactly how much funding the plans will need in
the future is reliant upon various assumptions and therefore difficult
to pinpoint, GM's latest estimates indicate that the company may need
to make billions of dollars in contributions to these plans in 2014
and beyond in order to meet minimum funding requirements.[Footnote 32]
As of December 31, 2009, Chrysler's worldwide defined benefit pension
plans were underfunded by approximately $3.9 billion.
* Future sales levels for new vehicles remain uncertain. While
Chrysler and GM U.S. sales, and industry sales as a whole, were up
substantially in 2010 from 2009--up 17 percent and 21 percent,
respectively--seasonal trends were not uniformly positive. For
example, compared with May 2010 levels, June 2010 U.S. sales for both
companies decreased--12 percent for Chrysler and 13 percent for GM's
core brands--which was more than the usual seasonal change of 3
percent between these months, while July 2010 U.S. sales for both
Chrysler and GM were up about 5 percent over July 2009.[Footnote 33]
In August 2010, Chrysler's U.S. sales increased 7 percent over August
2009 levels while GM's U.S. core brand sales decreased 11 percent. Yet
in December 2010, U.S. sales for both companies were up over December
2009 levels (16 percent for Chrysler and 16 percent for GM's core
brands). Vehicle sales volumes are highly dependent on economic and
market conditions such as unemployment levels, consumer confidence,
and credit availability. Improved economic conditions and, in turn,
improved vehicle sales are critical to the future profitability of the
companies and the timing and success of future public stock offerings,
but current economic conditions remain fragile.
* Ally Financial's financial health depends, in part, on the health of
the auto industry and its ability to continue to diversify its
portfolio. Treasury's AIFP assistance to Ally Financial, a bank
holding company, resulted in the government owning more than half of
Ally Financial by the end of 2009. Recognizing the interconnectedness
of auto financing companies and vehicle sales, Treasury purchased $5
billion in preferred shares and received warrants from Ally Financial
in December 2008 and purchased an additional $7.5 billion in
convertible preferred shares in 2009. Despite this infusion of
capital, Ally Financial was required to raise additional capital by
November 2009 based on the results of the Federal Reserve's stress
test. Unable to raise sufficient additional capital in the private
market, on December 30, 2009, Treasury provided Ally Financial with a
capital investment of $3.8 billion to fulfill its capital buffer
requirement under the stress test, drawing funds from AIFP. Treasury
did so through the purchase of mandatory convertible preferred shares
and trust preferred securities.[Footnote 34] Also, in December 2009,
Treasury converted $3 billion of existing mandatory convertible
preferred shares into common stock, increasing its equity stake from
35 percent to 56.3 percent of Ally Financial common stock. As of
September 30, 2010, Treasury owned $11.4 billion of Ally Financial
mandatory convertible preferred shares, $2.7 billion of its trust
preferred securities, and 56.3 percent of its common stock. As part of
its rebranding and growth efforts, GMAC changed its name to Ally
Financial, Inc. in May 2010. However, Ally Financial may face
increased competition for its business in the future, including
potentially from GM, which acquired Americredit, an auto finance
company. On December 30, 2010, Treasury converted $5.5 billion of its
preferred stock in Ally Financial into common stock, raising its total
common equity stake in the company to 74 percent. Ally Financial's
chief executive officer noted that the conversion of these shares
should help the company in its efforts to conform its capital
structure to that more typical of a bank holding company. Treasury
also reported that the conversion may improve Ally Financial's ability
to raise debt financing.
To help address these challenges, we made several recommendations in
our November 2009 report.[Footnote 35] For example, we recommended
that Treasury ensure that it had adequate staffing to monitor the
government's investment in the auto companies. Subsequent to our
recommendation, Treasury hired additional staff to monitor the
government's investment in the auto companies. We also recommended
that Treasury report to Congress on how it planned to assess and
monitor the companies' performance. While Treasury agreed with the
recommendation and has provided various updates and other information
to Congress and to the public about the status of the taxpayers'
investments in the auto companies, it has yet to report to Congress on
its plans to assess and monitor the companies' performance. Treasury
noted that it uses monthly financial and operating information from
the companies, as set forth in the credit agreements, to closely
monitor the companies' financial condition and that Congress has not
requested additional information on the agency's efforts to assess and
monitor the companies. While we recognize there is a wide range of
publicly available information on the companies' financial
performance, Treasury has not reported to Congress how it is using
this information to ensure the companies are on track to further
improve their financial condition and maximize taxpayer return on its
investment. We will continue to work with Treasury on the
implementation of this recommendation and review Treasury's actions in
response to our recommendation on developing criteria for evaluating
options for divesting the government's ownership stake in Chrysler and
GM. We are continuing to monitor the financial condition of the
industry and in ongoing work are reviewing the current financial
condition and outlook of Chrysler and GM. As part of that ongoing
work, we are also reviewing the status of the federal government's
efforts to assist workers and communities that depend on the auto
industry for their economic viability.
Treasury's Exposure to AIG Under TARP Is Tied to the Current and
Future Health of the Company and the Insurance Industry:
Treasury's exposure to AIG increased slightly in 2010, and its ability
to fully recoup its assistance remains contingent on a number of
factors related to the health of AIG and the insurance industry. Since
September 2, 2009, Treasury has increased its level of assistance to
AIG, funding an additional $4.2 billion drawdown on the Equity Capital
Facility. This brings Treasury's total assistance to AIG as of
September 30, 2010, to about $47.4 billion, not including $1.6 billion
in unpaid dividends exchanged for preferred stock.[Footnote 36]
Treasury's initial wave of assistance to AIG began in November 2008
under TARP's Systemically Significant Failing Institutions Program
(now known as the AIG Investment Program) when the agency agreed to
purchase $40 billion in shares of AIG Series D cumulative preferred
stock and received a warrant to purchase approximately 2 percent of
the shares of AIG's common stock.[Footnote 37] The proceeds were used
by AIG to pay down part of the FRBNY Revolving Credit Facility. FRBNY
also created and funded two special purpose vehicles--Maiden Lane II
and Maiden Lane III--to purchase assets from AIG's securities lending
portfolio and AIG Financial Product's credit default swap
counterparties, respectively, both of which were contributing to AIG's
liquidity problems.[Footnote 38] Treasury provided additional
assistance in April 2009 by agreeing to exchange this Series D stock
for Series E fixed-rate noncumulative preferred stock and by providing
a $29.84 billion Equity Capital Facility to AIG to help the company
meet its liquidity and capital needs, in exchange for its purchase of
300,000 shares of fixed-rate noncumulative perpetual preferred stock
(Series F) and a warrant to purchase up to 3,000 shares of AIG common
stock.[Footnote 39] As of September 30, 2010, AIG had drawn about $7.4
billion from this equity facility, up from $3 billion as of September
30, 2009. By comparison, the level of credit FRBNY has provided AIG
through its Revolving Credit Facility has fallen from peaks reached in
late 2008, when Treasury's assistance was just beginning, to September
30, 2010--from $72.3 billion to about $20.5 billion for the Revolving
Credit Facility primarily because the debt was restructured into
equity (see table 4). For example, FRBNY accepted preferred interests
in SPVs holding the American Life Insurance Company (ALICO) and
American International Assurance Company, Ltd. (AIA), two life
insurance holding company subsidiaries, and reduced the outstanding
balance on the revolving facility by $25 billion. As of September 30,
2010, the federal government's total exposure to AIG was $124.6
billion, up from $120.7 billion as of September 2, 2009, but lower
than $129.1 billion as of December 31, 2009.
Table 3: Composition of U.S. Government Efforts to Assist AIG and the
Government's Approximate Remaining Exposures, as of September 30,
2010, or Latest Available Data as Noted:
Federal Reserve:
Revolving Credit Facility:
Amount authorized: $29.175 billion;
Direct AIG assistance: AIG debt owed to government: $14.288 billion[A];
Direct AIG assistance: Government equity: n/a;
Indirect AIG assistance: Other debt owed to government: n/a;
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: $6.182 billion;
Total government exposure: $20.470 billion[A].
Maiden Lane II:
Amount authorized: $22.5 billion;
Direct AIG assistance: AIG debt owed to government: n/a;
Direct AIG assistance: Government equity: n/a;
Indirect AIG assistance: Other debt owed to government: $13.656[B]
billion;
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: $0.408 billion;
Total government exposure: $14.064 billion.
Maiden Lane III:
Amount authorized: $30 billion;
Direct AIG assistance: AIG debt owed to government: n/a;
Direct AIG assistance: Government equity: n/a;
Indirect AIG assistance: Other debt owed to government: $14.638[B]
billion;
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: $0.499 billion;
Total government exposure: $15.137 billion.
AIA and ALICO:
Amount authorized: $25 billion;
Direct AIG assistance: AIG debt owed to government: n/a;
Direct AIG assistance: Government equity: $25.955 billion[C];
Indirect AIG assistance: Other debt owed to government: n/a;
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: n/a;
Total government exposure: $25.955 billion.
Treasury:
Series D and E:
Amount authorized: $40 billion;
Direct AIG assistance: AIG debt owed to government: n/a;
Direct AIG assistance: Government equity: $40.000 billion[D];
Indirect AIG assistance: Other debt owed to government: n/a;
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: $1.605 billion;
Total government exposure: $41.605 billion[D].
Series F:
Amount authorized: $29.835 billion;
Direct AIG assistance: AIG debt owed to government: n/a;
Direct AIG assistance: Government equity: $7.378 billion[E];
Indirect AIG assistance: Other debt owed to government: n/a;
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: n/a;
Total government exposure: $7.378 billion[E].
Total direct assistance:
Amount authorized: n/a;
Direct AIG assistance: AIG debt owed to government: $14.288 billion;
Direct AIG assistance: Government equity: $73.333 billion;
Indirect AIG assistance: Other debt owed to government: n/a;
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: $7.787 billion;
Total government exposure: $95.408 billion.
Total indirect assistance:
Amount authorized: n/a;
Direct AIG assistance: AIG debt owed to government: n/a;
Direct AIG assistance: Government equity: n/a;
Indirect AIG assistance: Other debt owed to government: $28.294
billion;
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: $0.907 billion;
Total government exposure: $29.201 billion.
Total direct and indirect assistance to benefit AIG:
Amount authorized: $176.510 billion;
Direct AIG assistance: AIG debt owed to government: $14.288 billion;
Direct AIG assistance: Government equity: $73.333 billion;
Indirect AIG assistance: Other debt owed to government: $28.294
billion;
Indirect AIG assistance: Government equity: n/a;
Accrued interest dividends and fees: $8.694 billion;
Total government exposure: $124.609 billion.
Source: GAO analysis of AIG Securities and Exchange Commission
filings, and Federal Reserve Statistical Release H.4.1.
Note: Data as of September 30, 2010, or latest available.
[A] FRBNY created a revolving credit facility to provide AIG a
revolving loan that AIG and its subsidiaries could use to enhance
their liquidity positions. In exchange for the facility and $0.5
million, a trust received Series C preferred stock for the benefit of
the Treasury, which gave the trust a 77.9 percent voting interest in
AIG. FRBNY reduced the amount of the commitment fee on the revolving
credit facility by $500,000 to pay for the Series C stock. The AIG
loan balance reported in the H.4.1 reflects the outstanding principal
balance, capitalized interest, unamortized deferred commitment fees,
and the allowance for the loan restructuring, which was initially
recorded in July 2009.
[B] FRBNY created an SPV--Maiden Lane II LLC--to alleviate liquidity
and capital pressures on AIG by purchasing residential mortgage-backed
securities from AIG U.S. insurance subsidiaries, and another SPV
called Maiden Lane III LLC to alleviate liquidity and capital
pressures on AIG by purchasing collateralized debt obligations from
AIGFP's counterparties in connection with the termination of credit
default swaps. Principal owed as of September 29, 2010, was $13.656
billion for Maiden Lane II LLC and $14.638 billion for Maiden Lane III
LLC.
[C] AIG created two SPVs to hold the shares of certain of its foreign
life insurance businesses (AIA and ALICO). In November 2010, the
company announced that it sold ALICO to MetLife for approximately
$16.2 billion (including approximately $7.2 billion in cash and the
remainder in MetLife securities) and in October 2010 it announced that
it had raised more than $20.5 billion in the IPO of two-thirds of the
shares of AIA. AIG announced that it expects to use the cash proceeds
from the ALICO and AIA transactions to repay the FRBNY revolving
credit facility and make payments on other interests owned by the
government, per the terms in the recapitalization plan announced in
September 2010.
[D] Treasury purchased Series D cumulative preferred stock of AIG. AIG
used the proceeds to pay down part of the revolving credit facility.
Series D stock was later exchanged for Series E noncumulative
preferred stock. Unpaid dividends on the Series D shares were added to
the liquidation preference amount of Series E stock that Treasury
received. When the Series D preferred shares were exchanged for Series
E preferred shares, $1.605 billion of accrued but unpaid dividends
were included in the liquidation preference of Series E preferred
stock. As part of the recently announced recapitalization of AIG and
restructuring plan, Treasury's shares of AIG's Series E preferred
stock will be exchanged for approximately 924.5 million shares of AIG
common stock.
[E] Treasury purchased Series F noncumulative preferred stock of AIG.
Treasury has committed to provide AIG with up to $29.835 billion
through an equity capital facility to meet its liquidity and capital
needs in exchange for an increase in the aggregate liquidation
preference of the Series F shares. As part of the recently announced
recapitalization of AIG and restructuring plan, AIG is to draw down
amounts remaining on the Series F preferred stock and use them to
repurchase all or a portion of FRBNY's preferred interests in the AIA
and ALICO SPVs. In addition, AIG and Treasury will amend and restate
the Series F securities purchase agreement to provide for the issuance
of Series G preferred stock by AIG to Treasury, after which AIG's
right to draw on Treasury's equity capital facility will be
terminated. Treasury's shares of the Series F preferred stock then
will be exchanged for (1) preferred interests in the AIA and ALICO
SPVs transferred to Treasury, (2) newly issued shares of Series G
preferred stock, and (3) approximately 167.6 million shares of AIG
common stock.
[End of table]
While AIG's financial condition over the past year has remained
relatively stable or showed signs of improvement, as measured by
several indicators, federal assistance has played a key role in
stabilizing AIG's liquidity, equity structure, and credit ratings.
[Footnote 40] The government's prospect for recouping the assistance
it has provided largely rests with the December 8, 2010, master
agreement to restructure the federal assistance and recapitalize AIG
as agreed to by AIG, FRBNY, Treasury, the AIG Credit Facility Trust,
AIA, and ALICO. First, AIG is to repay FRBNY in cash all the amounts
owed under the FRBNY revolving credit facility, which as of September
30, 2010, was approximately $20.5 billion, and the credit facility
will be terminated. The funds for repayment are to come from loans to
AIG from the SPVs that hold the AIA and ALICO net cash proceeds from
the IPO of AIA and the sale of ALICO. Second, AIG is to draw down an
amount available under Treasury's equity capital facility established
pursuant to the Series F preferred stock securities purchase, less an
amount up to $2 billion. AIG will use the amount drawn down to
repurchase all or a portion of FRBNY's preferred interests in the AIA
and ALICO SPVs and then transfer the repurchased preferred interests
to Treasury in partial consideration for the Series F shares.[Footnote
41] Third, AIG and Treasury will amend and restate the securities
purchase agreement related to the Series F preferred stock so that AIG
can issue to Treasury Series G preferred stock at closing, and AIG's
right to draw on the Series F preferred stock will be terminated.
AIG's right to draw on the Series G preferred stock will be subject to
terms and conditions substantially similar to those in the current
agreement.[Footnote 42] Fourth, the various preferred stock held by
the Trust and Treasury will be exchanged for common stock. Treasury
will then hold approximately 1.655 billion shares of AIG common stock,
representing approximately 92.1 percent of the AIG common stock that
will be outstanding as of the closing. Fifth, AIG is to issue to
holders of AIG common stock, by means of a dividend, 10-year warrants
to purchase up to 75 million shares of AIG common stock at an exercise
price of $45 per share.[Footnote 43] Completion of the plan depends on
a number of conditions, such as FRBNY is not to hold preferred
interests in AIA and ALICO with an aggregate liquidation preference
exceeding $2 billion immediately after closing.
In addition, AIG must have achieved its year-end 2010 targets for the
derisking (unwinding) of AIGFP. Also, the trustees of the Trust must
be reasonably satisfied with the insurance and indemnification
arrangements provided to them in connection with the recapitalization.
Also, the closing will be subject to regulatory approvals in many of
the more than 130 countries and jurisdictions where AIG operates. Any
of the parties may terminate the recapitalization agreement if it is
not completed by March 15, 2011. We will continue to monitor the
government's investment and the status of AIG's repayment efforts. Our
ongoing work on AIG also include a review of the Federal Reserve
facilities implemented to assist AIG.
HAMP Trial Modifications Have Declined and Some TARP-Funded Housing
Programs Are Still In the Early Stages of Implementation:
As we have noted in our past reports, Treasury has continued to make
efforts to help borrowers facing potential foreclosures, but its
efforts have continued to face challenges.[Footnote 44] In particular,
Treasury's cornerstone effort under TARP to meet EESA's purposes of
preserving homeownership and protecting home values--HAMP--had a slow
start and has not performed as anticipated. Moreover, a number of key
TARP-funded housing programs are still in the early stages of
implementation. In February 2009, Treasury announced that HAMP would
use up to $75 billion--including $50 billion of TARP funds--to help
three to four million homeowners struggling to stay in their homes by
modifying their mortgages to reduce the monthly payments to affordable
levels (31 percent of their gross monthly income).[Footnote 45]
However, through the end of November 2010, fewer than 550,000
permanent modifications had begun.[Footnote 46] Furthermore, Treasury
had not yet begun reporting activity for other key components of HAMP
and other TARP-funded housing programs, such as the Second Lien
Modification Program and the Principal Reduction Alternative.
As shown in figure 3, the number of trial modifications started each
month peaked in October 2009 and then declined from roughly 118,000
new trials in December 2009 to about 31,000 new trials in November
2010. According to Treasury, this decline may be due, in part, to the
new program requirement that lenders determine HAMP eligibility using
verified information rather than the verbal financial information that
was initially accepted for all HAMP trial periods starting June 1,
2010. Additionally, the number of trial modifications canceled
exceeded the number of conversions to permanent modification from the
program's inception through November 2010. Of the about 1.4 million
trial modifications started, roughly 729,000 were canceled and roughly
550,000 trials were converted to permanent modifications during this
period. The number of new permanent modifications started each month
increased from roughly 36,000 in December 2009 to more than 68,000 in
April 2010 and then decreased to about 31,000 in November 2010.
Figure 3: GSE and Non-GSE HAMP Trial and Permanent Modifications Made
Each Month, through November 2010:
[Refer to PDF for image: multiple line graph]
Date: May 2009;
Trial modifications started: 55,375.
Date: June 2009;
Trial modifications started: 109,409.
Date: July 2009: Treasury announces goal of 500,000 trials by November
1, 2009;
Trial modifications started: 119,736.
Date: August 2009;
Trial modifications started: 144,381.
Date: September 2009;
Trial modifications started: 134,566;
Permanent modifications started: 4,742.
Date: October 2009;
Trial modifications started: 159,153;
Permanent modifications started: 10,907.
Date: November 2009: Start of Treasury's Conversion Campaign;
Trial modifications started: 114,942;
Permanent modifications started: 15,775.
Date: December 2009;
Trial modifications started: 118,197;
Permanent modifications started: 35,514.
Date: January 2010;
Trial modifications started: 94,050;
Permanent modifications started: 50,364.
Date: February 2010;
Trial modifications started: 87,444;
Permanent modifications started: 52,905.
Date: March 2010;
Trial modifications started: 70,059;
Permanent modifications started: 60,594.
Date: April 2010;
Trial modifications started: 47,482;
Permanent modifications started: 68,291.
Date: May 2010;
Trial modifications started: 25.694;
Permanent modifications started: 47,724.
Date: June 2010;
Trial modifications started: 21,119;
Permanent modifications started: 51,205.
Date: July 2010;
Trial modifications started: 23,684;
Permanent modifications started: 36,695.
Date: August 2010;
Trial modifications started: 22,238;
Permanent modifications started: 33,342.
Date: September 2010;
Trial modifications started: 29,047;
Permanent modifications started: 27,840.
Date: October 2010;
Trial modifications started: 27,709;
Permanent modifications started: 23,750.
Date: November 2010;
Trial modifications started: 22,548;
Permanent modifications started: 29,972.
Source: GAO analysis of Treasury data.
[End of figure]
Further, recent data on default and foreclosure rates indicate that
many borrowers continue to struggle with making their mortgage
payments (see figure 4). As of June 2010, an estimated 4.6 percent of
all mortgages nationwide were in some stage of foreclosure. Default
rates (loans 90 days or more past due) in the second quarter of 2010
were still more than five times higher than they were at the start of
2005, increasing from less than 1 percent to roughly 4.5 percent of
all mortgages. In addition, foreclosure starts grew from about 0.4
percent to about 1.1 percent during this period, meaning roughly
490,000 mortgages entered the foreclosure process in the second
quarter of 2010, compared with about 165,000 in the first quarter of
2005. Finally, as of the end of the second quarter of 2010, loans in
the foreclosure inventory have increased more than three times since
the first quarter of 2005, to more than 2 million loans.
Figure 4: National Default and Foreclosure Trends, 2005 through June
2010:
[Refer to PDF for image: multiple line graph]
Fiscal quarter: Q1, 2005;
Mortgages 90 Days Delinquent: 0.81%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 1.08%.
Fiscal quarter: Q2, 2005;
Mortgages 90 Days Delinquent: 0.83%;
Foreclosure Starts: 0.38%;
Foreclosure Inventory: 1%.
Fiscal quarter: Q3, 2005;
Mortgages 90 Days Delinquent: 0.85%;
Foreclosure Starts: 0.41%;
Foreclosure Inventory: 0.97%.
Fiscal quarter: Q4, 2005;
Mortgages 90 Days Delinquent: 1.09%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 0.99%.
Fiscal quarter: Q1, 2006;
Mortgages 90 Days Delinquent: 0.95%;
Foreclosure Starts: 0.42%;
Foreclosure Inventory: 0.98%.
Fiscal quarter: Q2, 2006;
Mortgages 90 Days Delinquent: 0.9%;
Foreclosure Starts: 0.4%;
Foreclosure Inventory: 0.99%.
Fiscal quarter: Q3, 2006;
Mortgages 90 Days Delinquent: 0.95%;
Foreclosure Starts: 0.47%;
Foreclosure Inventory: 1.05%.
Fiscal quarter: Q4, 2006;
Mortgages 90 Days Delinquent: 1.02%;
Foreclosure Starts: 0.57%;
Foreclosure Inventory: 1.19%.
Fiscal quarter: Q1, 2007;
Mortgages 90 Days Delinquent: 0.95%;
Foreclosure Starts: 0.59%;
Foreclosure Inventory: 1.28%.
Fiscal quarter: Q2, 2007;
Mortgages 90 Days Delinquent: 1.07%;
Foreclosure Starts: 0.59%;
Foreclosure Inventory: 1.4%.
Fiscal quarter: Q3, 2007;
Mortgages 90 Days Delinquent: 1.26%;
Foreclosure Starts: 0.78%;
Foreclosure Inventory: 1.69%.
Fiscal quarter: Q4, 2007;
Mortgages 90 Days Delinquent: 1.58%;
Foreclosure Starts: 0.88%;
Foreclosure Inventory: 2.04%.
Fiscal quarter: Q1, 2008;
Mortgages 90 Days Delinquent: 1.56%;
Foreclosure Starts: 1.01%;
Foreclosure Inventory: 2.47%.
Fiscal quarter: Q2, 2008;
Mortgages 90 Days Delinquent: 1.75%;
Foreclosure Starts: 1.08%;
Foreclosure Inventory: 2.75%.
Fiscal quarter: Q3, 2008;
Mortgages 90 Days Delinquent: 2.2%;
Foreclosure Starts: 1.07%;
Foreclosure Inventory: 2.97%.
Fiscal quarter: Q4, 2008;
Mortgages 90 Days Delinquent: 3%;
Foreclosure Starts: 1.08%;
Foreclosure Inventory: 3.3%.
Fiscal quarter: Q1, 2009: HAMP program starts;
Mortgages 90 Days Delinquent: 3.39%;
Foreclosure Starts: 1.37%;
Foreclosure Inventory: 3.85%.
Fiscal quarter: Q2, 2009;
Mortgages 90 Days Delinquent: 3.67%;
Foreclosure Starts: 1.36%;
Foreclosure Inventory: 4.3%.
Fiscal quarter: Q3, 2009;
Mortgages 90 Days Delinquent: 4.38%;
Foreclosure Starts: 1.42%;
Foreclosure Inventory: 4.47%.
Fiscal quarter: Q4, 2009;
Mortgages 90 Days Delinquent: 5.09%;
Foreclosure Starts: 1.2%;
Foreclosure Inventory: 4.58%.
Fiscal quarter: Q1, 2010;
Mortgages 90 Days Delinquent: 4.91%;
Foreclosure Starts: 1.23%;
Foreclosure Inventory: 4.63%.
Fiscal quarter: Q2, 2010;
Mortgages 90 Days Delinquent: 4.54%;
Foreclosure Starts: 1.11%;
Foreclosure Inventory: 4.57%.
Source: GAO analysis of MBA data.
[End of figure]
Treasury's initial HAMP guidelines in March 2009 included programs to
modify the first and second liens of borrowers facing financial
hardship. In addition, Treasury noted that compensation would be
provided to investors, servicers, and borrowers to help when borrowers
transition to more affordable housing and avoid the stigma of a
foreclosure in cases where borrowers meet basic HAMP eligibility
criteria (single-family dwelling, owner-occupied, primary residence,
etc.) but did not qualify for or defaulted under HAMP.[Footnote 47]
While the HAMP first-lien modification program was implemented in
April 2009, specific guidelines for the second lien and foreclosure
alternatives programs were not issued until March and April 2010,
respectively. Seventeen servicers signed agreements to modify second
liens when the corresponding first lien had been modified under HAMP,
and the largest servicers had begun offering alternatives to
foreclosure under the Home Affordable Foreclosure Alternatives
program. As of the end of December 2010, Treasury had not begun
reporting activity under the second-lien modification program. In
addition, Treasury had not specified the number of people these
programs were expected to help, and servicers were still in the early
stages of implementation. As we noted in June 2010, to improve the
transparency and accountability of these programs, Treasury will need
to develop performance measures and benchmarks for the recently
announced TARP-funded housing programs, including measures to assess
the extent to which the programs are helping additional borrowers.
In an effort to reach a broader range of borrowers, including those
who are unemployed or have mortgages with high loan-to-value ratios,
Treasury announced four additional TARP-funded homeowner assistance
programs in March 2010 (see table 4):
* The Home Affordable Unemployment Program, implemented in July 2010,
would require servicers to offer eligible unemployed borrowers
temporary reduction or suspension of monthly payments for the lesser
of a minimum of 3 months or until the borrower finds employment.
* The HAMP Principal Reduction Alternative Program requires servicers
to consider principal reductions for HAMP-eligible borrowers with loan-
to-value ratios above 115 percent. However, while this program was
implemented, as of October 1, 2010, servicers will not be required to
offer principal reduction, even when it is more beneficial for
mortgage holders and investors to do so.
* The Federal Housing Administration Short Refinance Option would
allow certain borrowers to refinance their mortgages into loans
insured by the Federal Housing Administration (FHA). Treasury has
designated up to $11 billion for this program, which is effective for
loans issued on or after September 7, 2010, and are closed on or
before December 31, 2012.
* The Housing Finance Agency Innovation Fund for the Hardest-Hit
Housing Markets designates funds to be used by eligible entities of 19
housing finance agencies (18 states and Washington, D.C.) to develop
more localized programs to preserve homeownership and protect home
values. The implementation time frames and number of borrowers to be
helped by these programs will vary by state. Treasury designated $7.6
billion of the $45.6 billion intended for housing programs to this
program.
Table 4: TARP-Funded Housing Programs:
Program: HAMP First-Lien Modification;
Program description: First-lien loan modifications;
Program status:
* Announced in March 2009;
* Implemented in April 2009;
* 117 participating servicers;
* About 1.4 million trials started—505,000 active permanent
modifications, 148,000 active trials, 729,000 trial cancellations, and
45,000 permanent cancellations through November 2010;
* Roughly $474 million disbursed in incentive payments as of September
30, 2010.
Program: Second-Lien Modification;
Program description: Second-lien loan modifications for HAMP first-
lien borrowers;
Program status:
* Announced in March 2009;
* Implemented in March 2010;
* 17 servicers have signed agreements;
* Roughly $11,000 in incentive payments have been made as of the end
of September 2010;
* Expected cost and number of borrowers to be helped unknown.
Program: Home Affordable Foreclosure Alternatives;
Program description: Incentives for short sales or deeds-in-lieu of
foreclosure;
Program status:
* Announced in March 2009;
* Implemented in April 2010;
* $1.6 million in incentive payments have been made as of the end of
September 2010;
* Expected cost and number of borrowers to be helped unknown.
Program: HAMP Principal Reduction Alternative;
Program description: Principal reduction for HAMP-eligible borrowers
with high loan-to-value ratios;
Program status:
* Announced in March 2010;
* Implemented October 2010;
* Expected cost and number of borrowers to be helped unknown.
Program: Home Affordable Unemployment Program;
Program description: Temporary reduction or suspension of monthly
payments for unemployed borrowers;
Program status:
* Announced in March 2010;
* Implemented in July 2010;
* No expected TARP funds and number of borrowers to be helped unknown.
Program: FHA Short Refinance Option;
Program description: Partial loss coverage for first liens refinanced
into FHA insured loans, and full or partial extinguishment of second
liens in conjunction with FHA refinance;
Program status:
* Announced in March 2010;
* Implemented September 2010;
* 14 servicers have signed agreement;
* Up to $11 billion designated and number of borrowers to be helped
unknown.
Program: Housing Finance Agency Hardest-Hit Fund;
Program description: Funding for state housing finance agencies in 18
states and Washington, D.C., hardest-hit by the foreclosure crisis;
Program status:
* Announced in February, March, and August 2010;
* Implementation dates will vary by state;
* $7.6 billion designated for 19 HFAs;
* Expected number of borrowers to be helped unknown.
Source: Treasury.
[End of table]
As with other TARP-funded programs, Treasury was required to finalize
the total amount of TARP funds allocated to housing programs by
October 3, 2010. However, Treasury officials said that at any point
before the program ends on December 31, 2012, HAMP servicers will be
able to use their allocated amount for any of the TARP-funded programs
they have implemented, with the exception of the Hardest-Hit Fund and
the loss coverage portion of the FHA Refinance program. Additionally,
after October 3, 2010, Treasury will still be able to modify TARP-
funded housing programs, as long as Treasury does not enter into any
new servicer agreements.
In July 2009 and June 2010, we reported on the challenges Treasury
faced in implementing HAMP and made recommendations to improve the
transparency and equitable implementation of the program.[Footnote 48]
For example, in July 2009 we noted that while Treasury required
borrowers with high levels of total debt to agree to obtain counseling
before receiving a HAMP modification, it was not monitoring whether
these borrowers in fact received counseling. In addition, we noted
that Treasury had yet to establish a comprehensive system of internal
control for HAMP, including metrics and benchmarks for servicers'
performance. Three out of the six recommendations we made in July 2009
have yet to be fully implemented and remain open.
In June 2010, we reported that while HAMP's goal was to create clear,
consistent, and uniform guidance for loan modifications across the
industry, we found wide variation in servicers' practices with respect
to tracking HAMP complaints and evaluating borrowers who were current
or not yet 60 days delinquent on mortgage payments ("imminent default"
borrowers). In addition, while Treasury had taken some steps to
address ongoing challenges, such as limiting redefaults and addressing
potential foreclosures among those who owe more than the value of
their homes, it urgently needed to finalize and fully implement the
various components of HAMP and better ensure the transparency and
accountability of these efforts. We reported that as Treasury
continues with its first-lien mortgage loan modification program and
implements the second-lien modification, foreclosure alternatives, and
other TARP-funded housing programs, adhering to standards for
effective program management and establishing sufficient program
planning and implementation capacity will be critical. We have an
ongoing engagement focused on the implementation of a few of the
recently announced TARP-funded housing programs, as well as the
outcomes of borrowers who are denied or canceled from HAMP
modifications, and will continue to monitor Treasury's implementation
and management of TARP-funded housing programs as part of our ongoing
oversight of TARP to help ensure that these programs are appropriately
designed and operating as intended. At the request of several members
of Congress, we are also beginning an engagement examining federal
oversight of mortgage servicers in light of recent reports about
potential shortcomings in the processing of foreclosure documents.
Assets under PPIP Have Shown Positive Returns, but Continued
Monitoring is Important Given That Returns on Assets Can Fluctuate and
Treasury Must Still Oversee the Program's Asset Managers:
The legacy securities program of PPIP, announced in March 2009, was
designed to facilitate price discovery in markets for these assets,
repair balance sheets throughout the financial system, and increase
the availability of credit to households and businesses through the
purchase of "legacy" residential mortgage-backed securities (RMBS) and
commercial mortgage-backed securities (CMBS). Through the program,
Treasury and private sector fund managers and investors partnered to
purchase eligible securities from banks, insurance companies, mutual
funds, pension funds, and other eligible sellers--though the fund
managers have sole discretion in making purchases and investment
decisions according to the terms of the agreements between Treasury
and the PPIFs. PPIP, as originally conceived, was also to include a
partnership between Treasury and FDIC to purchase and hold legacy
loans (the legacy loans program). FDIC has conducted a pilot sale of
receivership assets to test the funding mechanism contemplated for
this program but the program itself was never implemented as part of
TARP.
PPIP is similar to what was envisioned when TARP was first conceived
as an asset-purchase program, but it faced delays in the
implementation and did not reach the announced levels of
participation. First announced as a program that could account for up
to $100 billion, Treasury reduced the PPIP allocation to about $30
billion for the legacy securities program.[Footnote 49] Subsequently
the PPIP allocation decreased further to about $22 billion. As of
September 30, 2010, Treasury had used about $14 billion to fund PPIP.
The eight Public Private Investment Funds (PPIF) of PPIP have had
positive returns as of September 30, 2010, and have invested in a
variety of legacy assets (see table 5). As of September 30, 2010,
Treasury has invested a total of $14.1 billion in debt and equity into
the PPIFs. Of this investment, $13.7 billion remained outstanding and
Treasury had seen unrealized capital gains of approximately $750
million. In addition, the PPIFs had paid $228 million in interest and
dividends to Treasury over fiscal year 2010.[Footnote 50] However,
returns could fluctuate over time, as they are subject to market risk
factors until the PPIFs close.
Table 5: PPIFs and Investable Funds as of September 30, 2010:
PPIF: AG GECC PPIF Master Fund;
Maximum Treasury equity available (matched with private equity):
$1.243 billion;
Maximum Treasury debt available: $2,487 billion;
Total investable funds available (maximum Treasury and private equity
plus maximum Treasury debt): $4,973 billion.
PPIF: AlianceBernstein Legacy Securities Master Fund;
Maximum Treasury equity available (matched with private equity):
$1.150 billion;
Maximum Treasury debt available: $2.301 billion;
Total investable funds available (maximum Treasury and private equity
plus maximum Treasury debt): $4.602 billion.
PPIF: BlackRock PPIF;
Maximum Treasury equity available (matched with private equity): $695
million;
Maximum Treasury debt available: $1,390 billion;
Total investable funds available (maximum Treasury and private equity
plus maximum Treasury debt): $2,780 billion.
PPIF: Invesco Legacy Securities Master Fund;
Maximum Treasury equity available (matched with private equity): $856
million;
Maximum Treasury debt available: $1,712 billion;
Total investable funds available (maximum Treasury and private equity
plus maximum Treasury debt): $3,424 billion.
PPIF: Marathon Legacy Securities Public-Private Investment Partnership;
Maximum Treasury equity available (matched with private equity): $475
million;
Maximum Treasury debt available: $949 million;
Total investable funds available (maximum Treasury and private equity
plus maximum Treasury debt): $1.898 billion.
PPIF: Oaktree PPIP Fund;
Maximum Treasury equity available (matched with private equity):
$1.161 billion;
Maximum Treasury debt available: $2.322 billion;
Total investable funds available (maximum Treasury and private equity
plus maximum Treasury debt): $4.643 billion.
PPIF: RLJ Western Asset Public/Private Master Fund;
Maximum Treasury equity available (matched with private equity): $621
million;
Maximum Treasury debt available: $1.241 billion;
Total investable funds available (maximum Treasury and private equity
plus maximum Treasury debt): $2.482 billion.
PPIF: Wellington Management Legacy Securities PPIF Master Fund;
Maximum Treasury equity available (matched with private equity):
$1.149 billion;
Maximum Treasury debt available: $2.299 billion;
Total investable funds available (maximum Treasury and private equity
plus maximum Treasury debt): $4.598 billion.
PPIF: Total;
Maximum Treasury equity available (matched with private equity):
$7.350 billion;
Maximum Treasury debt available: $14.700 billion;
Total investable funds available (maximum Treasury and private equity
plus maximum Treasury debt): $29.400 billion.
[End of table]
Source: Treasury.
PPIFs are invested mostly in legacy RMBS, representing 82 percent of
market value held in all PPIFS as of September 30, 2010, with the
remaining 18 percent invested in CMBS (see figure 5).
Figure 5: PPIF Assets By Market Value and Asset Class, as of September
30, 2010:
[Refer to PDF for image: pie-chart]
Alt-A RMBS: 37%; $7,187 billion;
Prime RMBS: 31%; $5,900 billion;
CMBS: 18$; $3,420 billion;
Subprime RMBS: 9%; $1.651 billion;
Option adjustable rate mortgage RMBS: 6%; $1.123 billion.
Source: GAO analysis of Treasury data.
Note: Total does not add to 100 percent due to rounding.
[End of figure]
In June 2010, we reported improvements in RMBS and CMBS markets as
indicated by an increase in prices for highly rated CMBS after PPIP
was announced.[Footnote 51] Specifically, highly-rated CMBS prices
rebounded from their lows in late-2008, and average spreads tightened
in the same time period. According to Treasury, improvements in
certain CMBS and RMBS prices are indications of the program's success.
However, market prices can fluctuate while the funds are still
managing assets, and Treasury will need to maintain oversight
responsibility for the program's asset managers until the funds no
longer hold assets.
Treasury Initially Launched TARP Programs to Assist Small Businesses
but Has Shifted Primary Focus to Efforts outside of TARP:
Given the importance of small businesses to the overall economy,
Treasury created several programs to help address small business
credit constraints. Subsequently, Treasury decided to shift its
primary focus to establishing a program outside of TARP. The existing
TARP programs that are intended to assist small businesses focus on
capitalizing certain depository institutions and stabilizing secondary
markets for SBA-guaranteed loans, including the CDCI, SBA 7(a)
Securities Purchase Program, and TALF. Table 6 provides a brief
description and status of each program.
Table 6: TARP Small Business-Related Programs:
Program: CDCI;
Program description: Provides capital to CDFIs that have a federal
depository institution supervisor.[A] The program is structured like
CPP but expands to credit unions and provides more favorable capital
terms;
Program status:
* Announced in October 2009 and closed in September 2010;
* As of September 2010, Treasury provided about $570 million to 84
CDFIs, 28 of which had already participated in CPP.[C]
Program: SBA 7(a) Securities Purchase Program;
Program description: Purchases securities backed by SBA 7(a)
guaranteed loans to provide market liquidity;
Program status:
* Announced in March 2009 and closed in September 2010;
* As of September 30, 2010, Treasury has made 31 purchases of SBA 7(a)
securities totaling about $357 million.
Program: TALF
Program description: Provided loans to investors to purchase;
securitizations for various asset classes to improve access to credit
for consumers and businesses. Treasury provides credit protection for
TALF[B];
Program status:
* Announced in November 2008 and closed in June 2010;
* TALF loans secured by SBA 7(a) and 504 securitizations represented 3
percent of TALF loans;
* The Federal Reserve Board estimates that about 850,000 small
business loans were financed in part by securities supported by TALF.
Sources: GAO analysis of information from the Department of the
Treasury, Office of Financial Stability, and the Federal Reserve.
[A] CDFIs are financial institutions that provide financing and
related services to communities and populations that lack access to
credit, capital, and financial services. The CDFI Fund provides the
designation, which allows CDFIs to apply for CDFI Fund's financial
assistance. The federal depository institution supervisors for this
program include the FDIC, the Federal Reserve, the Office of the
Comptroller of the Currency, the OTS, and the National Credit Union
Administration.
[B] Treasury's credit protection takes the form of loans to TALF LLC
in the event that TALF loans are not repaid and the asset-backed
securities or CMBS collateral securing the loans is surrendered to
TALF LLC. TALF LLC is an SPV created by FRBNY to purchase the
underlying collateral. Treasury originally provided $20 billion of
credit protection, but the Federal Reserve announced on July 20, 2010,
that Treasury and the Federal Reserve had agreed to reduce the credit
protection to $4.3 billion.
[C] Of this amount, about $207 million is new funds, while the
remainder was already disbursed through CPP.
[End of table]
Although these programs were intended to increase the amount of credit
available to small businesses, their impact has been limited for
several reasons. First, the amount of funding announced for these
programs was small in comparison to other TARP programs and the amount
expended on these programs as of September 30, 2010, has been even
less. As table 7 shows, while OFS originally announced almost $66
billion in funding for TARP programs for small business-related
initiatives, over the last year that commitment has been cut to about
$5.3 billion. As of September 30, 2010, about $548 million has been
expended. Treasury noted that the small expenditures for these
programs were not a sign of program failure, but an indication that
the markets were functioning on their own.
Table 7: Changes in TARP Small Business Program Commitments and
Comparisons to Expenditures:
TALF:
Original Announcement: $20.000 billion;
Current commitment: $4.300 billion;
Expenditures (as of September 30, 2010): $100 million;
Expenditures as percent of original announcement: 0.5%;
Expenditures as percent of current commitment: 2.3%.
Small Business Lending Fund[A]:
Original Announcement: $30.000 billion;
Current commitment: $0;
Expenditures (as of September 30, 2010): $0;
Expenditures as percent of original announcement: n/a;
Expenditures as percent of current commitment: n/a.
CDCI:
Original Announcement: $800 million;
Current commitment: $570 million;
Expenditures (as of September 30, 2010): $207 million;
Expenditures as percent of original announcement: 25.9%;
Expenditures as percent of current commitment: 36.3%.
SBA7(a) and 504 Securities[B]:
Original Announcement: $15.000 billion;
Current commitment: $400 million;
Expenditures (as of September 30, 2010): $241 million;
Expenditures as percent of original announcement: 1.6%;
Expenditures as percent of current commitment: 60.3%.
Total:
Original Announcement: $65.800 billion;
Current commitment: $5.270 billion;
Expenditures (as of September 30, 2010): $548 million;
Expenditures as percent of original announcement: less than 1%;
Expenditures as percent of current commitment: 10.4%.
Source: GAO analysis of OFS data.
[A] As discussed in greater detail below, the Small Business Lending
Fund was initially planned to be part of TARP, but was ultimately
funded apart from TARP.
[B] Treasury officials noted that the original announcement included
plans to purchase both SBA 7(a) and SBA 504 securities. Subsequently,
Treasury did not purchase SBA 504 securities. Currently, this program
is known as the SBA 7(a) Securities Purchase Program.
[End of table]
Second, these TARP programs targeted markets and institutions that
represent a small percentage of small business lending. Part of the
TALF portfolio and all of the SBA 7(a) Securities Purchase Program
focused on SBA lending markets, which represent a small proportion of
small business financing overall, further limiting the impact the
programs might have on small business lending more broadly. CDCI
focuses on CDFIs, which represent about 1 percent of regulated
depository institutions and less than 1 percent of total assets of
regulated depositories. Total lending related to small businesses--as
measured by business loans of $1 million or less for banks and
thrifts, and loans more than $50,000 for credit unions--is also a
relatively small percentage compared with such loans at other
regulated depositories, at about 0.5 percent.[Footnote 52] Moreover,
Treasury does not require CDFIs to use the capital to increase small
business lending as a condition of participating in CDCI, according to
a Treasury official. Reports from the National Credit Union
Association (NCUA) and OTS--regulators of certain CDFIs--on how CDCI
applicants intend to use their funds indicate that most CDFIs did not
specifically state they had a plan to increase small business lending.
However, two of the three thrifts recommended by OTS and half of the
credit unions recommended by NCUA indicated they would increase or
maintain lending in general.[Footnote 53]
Finally, Treasury officials told us that TARP requirements and the
public's negative opinion of TARP have curtailed overall interest and
participation in TARP programs. The reduced interest in TARP programs
stems from what Treasury officials refer to as "TARP stigma"--that is,
financial institutions dislike of participating in TARP programs
because doing so exposed them to criticism and they were not willing
to comply with TARP requirements. For example, as we previously
reported, concerns about TARP requirements slowed implementation of
the SBA 7(a) Securities Purchase Program because participants did not
agree with the terms.[Footnote 54] Treasury attempted to mitigate the
concerns by making the program terms on executive compensation and
warrants (in this case, known as senior securities) less onerous.
[Footnote 55] According to Treasury officials, TARP stigma also became
an obstacle to introducing additional TARP small business programs.
Communication about Small Business Programs Initially Lacked Clarity
but Has Improved:
Treasury has not always been clear or consistent in describing the
intent of its TARP small business programs, although recent
communications have been clearer about the purpose of the CDCI
program. Treasury officials told us that CDCI's purpose was mainly to
capitalize CDFIs so they could achieve their economic development
goals. However, early public announcements and congressional testimony
about the program emphasized that the goal of the program was to
increase small business lending. Based on some of these public
statements, NCUA and officials from a credit union industry group
raised concerns about the program's focus on small business lending,
pointing out that some of their institutions do not make many small
business loans. However, NCUA and credit union officials said that in
subsequent discussions Treasury officials assured them that CDCI
participants would not need to demonstrate an increase in small
business lending, because CDCI also aims to capitalize CDFIs to carry
out their other economic development goals. A recent announcement on
CDCI closing, along with Treasury's Two-Year Retrospective report on
TARP, provided more clarity on the purpose of CDCI that is consistent
with concerns we had about the goals of CDCI being clear. As we
previously reported, clear and transparent communication about TARP
programs is important.
Treasury Is Now Focusing Efforts to Assist Small Businesses outside of
TARP:
Given concerns about TARP stigma, Treasury shifted its efforts to
assist small businesses outside of TARP by creating a separate Small
Business Lending Fund (SBLF). The administration first announced SBLF
in October 2009 and originally planned to use TARP to fund it.
However, Treasury officials told us that they repeatedly heard from
potential participants that they were reluctant to participate in any
program associated with TARP. After considering a variety of options
and getting input from potential participants, Treasury officials
concluded that SBLF would not ultimately succeed unless it was
completely separated from TARP. Therefore, Treasury announced in
spring 2010 that it was seeking a separate appropriation to establish
SBLF outside of TARP.
Under the Small Business Jobs Act of 2010, enacted on September 27,
2010, SBLF will be a $30 billion bank capital support program
encouraging small and midsize banks to lend to small businesses.
[Footnote 56] The program will set benchmarks for increasing banks'
lending to small businesses, in part by measuring changes in the
amount of loans of $10 million or less for commercial and industrial
lending, certain kinds of commercial real estate, and farm-related
lending. The more a bank can demonstrate increased lending based on
such measures, the lower the dividend it will pay to Treasury. The
Small Business Jobs Act of 2010 established SBLF and contains metrics
for measuring increases in small business lending. We will be
reviewing SBLF in the future, as required by the act.
Assets in the TALF will Require Continued Monitoring to Allow Treasury
to Anticipate Future Needs for Credit Support:
TALF provided loans to private investors to purchase asset-backed
securities (ABS) and CMBS to encourage the issuance of new
securitizations and provide liquidity for new consumer and business
loans.[Footnote 57] To assist in this effort, Treasury provides credit
protection for TALF as part of TARP's Financial Stability Plan under
the Consumer and Business Lending Initiative.[Footnote 58] TALF made
about $71 billion in loans from March 2009 through June 2010, with
most of them secured by credit card ABS, auto loan ABS, legacy CMBS,
and student loan ABS (see figure 6). According to the Federal Reserve,
although none of the loans have come due, more than half of these
loans have been repaid. Moreover, Treasury has not had to disburse any
TARP funds to cover losses from unpaid loans.
Figure 6: TALF Loan Categories, March 2009 through June 2010:
[Refer to PDF for image: pie-chart]
Credit card: 37%; $26.32 billion;
Auto: 18%; $12.79 billion;
Legacy CMBS: 17%; $11.99 billion;
Student loan: 13%; $8.97 billion;
Floor plan: 5%; $3.89 billion;
Small business: 3%; $21.5 billion;
Insurance premium finance: 3%; $1.98 billion;
Equipment: 2%; $1.61 billion;
Servicing advances: 2%; $1.31 billion;
New-issue CMBS: 0%; $0.07 billion.
Source: GAO analysis of FRBNY data.
[End of figure]
In February and June 2010, we reported that the ABS markets had
improved largely due to TALF's activity for the more frequently traded
TALF-eligible sectors after the program's first activity in March
2009.[Footnote 59] The dollar volume of TALF issuance peaked in the
third quarter of 2009 and until that point represented a significant
portion of all ABS issued. But by the fourth quarter of 2009, TALF
volume decreased significantly and at a faster rate than the total ABS
volume, indicating that ABS markets were relying less on TALF
financing. TALF's impact on credit rates is less clear, however, as we
did not find clear evidence that most consumer credit rates changed
significantly after TALF started with the exception of auto loans from
finance companies. FRBNY officials said that interest rates on
consumer and small business loans could have been much higher without
TALF.
Treasury has addressed the recommendations we made in our February
2010 TALF report. First, we recommended that Treasury give greater
attention to risks in commercial real estate and CMBS markets, and
Treasury developed internal tracking reports to assess such trends.
Second, we found that Treasury had not fully documented the rationale
for final decisions on managing TALF risks, and we recommended that
Treasury develop a formal decision-making policy to strengthen
transparency and internal controls. In response, Treasury created a
process for assessing changes to TALF program terms and outside
analyses and now has a process for documenting such analyses. Third,
because Treasury bears the first-loss risk from assets that TALF
borrowers surrender in conjunction with unpaid loans, we recommended
that Treasury review the data it might collect and publicly report in
the event that any collateral was surrendered to TALF LLC. Treasury
responded that if assets are surrendered, its plan is to direct the
public to the Federal Reserve for public reports it maintains about
its securities holdings. Treasury officials also stated that Treasury
has the ability to retain a third party to advise and assist it in
making asset disposition decisions and noted that Treasury was
committed to transparency regarding such assets.[Footnote 60] Finally,
we issued a matter for consideration requesting that Congress provide
us with audit authority over all Federal Reserve operational and
administrative actions taken with respect to TALF so that we could
audit TARP support for TALF most effectively. Congress provided
authority in the Dodd-Frank Act for us to review various aspects of
Federal Reserve facilities initiated in response to the financial
crisis. This related work is underway, and we will issue a future
report on the results.
Outstanding Funds under Other TARP Programs Have Been Repaid and the
Programs Terminated:
Treasury had created two other programs that were terminated in 2009
and the funds repaid.
* CAP was terminated without any funds being used. CAP was designed to
further improve confidence in the banking system by helping ensure
that the largest 19 U.S. bank holding companies had sufficient capital
to cushion themselves against larger than expected future losses, as
determined by the Supervisory Capital Assessment Program (SCAP)--or
"stress test"--conducted by the federal banking regulators. CAP made
TARP funds available to any institution not able to raise private
capital to meet SCAP requirements. In the end, 9 of the 10
institutions that needed additional capital as a result of SCAP raised
more than $70 billion from private sources, and as mentioned
previously, Ally Financial received additional capital from Treasury
under AIFP.[Footnote 61]
* AGP was terminated and Treasury retained a guarantee fee. AGP was
established as the Treasury insurance program, which provided federal
government assurances for assets held by financial institutions that
were deemed critical to the functioning of the U.S. financial system.
Citigroup and Bank of America were the only two institutions that
participated in the Treasury program before it was terminated. As
previously reported, Bank of America paid Treasury and others a fee
for terminating the term sheet before any assets were segregated.
Treasury entered into a loss sharing arrangement with Citigroup under
which Treasury assumed $5 billion of exposure and in exchange received
cumulative nonvoting preferred shares and warrants to purchase common
shares.[Footnote 62] In December 2009, FRBNY (which has made a loan
commitment to Citigroup in connection with the Treasury guarantee),
FDIC, Treasury, and Citigroup agreed to terminate the Citigroup AGP
agreement. Like FDIC, Treasury retained a portion of the trust
preferred shares received as payment for the asset protection provided
under AGP as well as warrants associated with this assistance.
Treasury sold its interest in the trust preferred securities on
September 30, 2010, for approximately $2.25 billion. The FRBNY
obtained a termination fee for agreeing to terminate its loan
commitment.
OFS has Made Progress in Staffing Key Positions, Managing Its
Contracts, and Maintaining Internal Controls:
OFS has continued to make progress in staffing key positions, managing
its contracts, and maintaining internal controls. While OFS's
organization structure has stabilized as it moves into maintenance
mode, more could be done to address retention of key staff as TARP
winds down. Treasury continued to rely on a network of financial
agents and contractors for certain activities and will likely do so as
the program comes to a close. Finally, Treasury has taken steps to
develop a system of internal control.
OFS Staffing Has Stabilized, but OFS Has Not Finalized a Plan for
Addressing Staff Retention Challenges as TARP Winds Down:
In the last year, OFS staffing has stabilized. Over the past two
years, the number of OFS employees has increased steadily with the
number of employees increasing and the number of detailees decreasing
(see figure 7). In addition, Treasury has filled key leadership
positions in OFS, including the position of Chief of the Homeownership
Preservation Office.[Footnote 63] However, this stability is fragile.
For example, on September 30, 2010, the Assistant Secretary of
Financial Stability resigned and this key leadership position is
temporarily filled.
Figure 7: Number of Employees and Detailees, November 21, 2008 through
September 25, 2010:
[Refer to PDF for image: stacked vertical bar graph]
Date: November 21, 2008;
Employees (including term appointments): 5;
Staff detailed to OFS from other areas of Treasury and other federal
agencies: 43;
Total: 48.
Date: January 26, 2009;
Employees (including term appointments): 38;
Staff detailed to OFS from other areas of Treasury and other federal
agencies: 52;
Total: 90.
Date: March 16, 2009;
Employees (including term appointments): 77;
Staff detailed to OFS from other areas of Treasury and other federal
agencies: 36;
Total: 113.
Date: June 8, 2009;
Employees (including term appointments): 137;
Staff detailed to OFS from other areas of Treasury and other federal
agencies: 29;
Total: 166.
Date: September 15, 2009;
Employees (including term appointments): 184;
Staff detailed to OFS from other areas of Treasury and other federal
agencies: 12;
Total: 196.
Date: September 25, 2010;
Employees (including term appointments): 216;
Staff detailed to OFS from other areas of Treasury and other federal
agencies: 3;
Total: 219.
Source: GAO analysis of Treasury data.
[End of figure]
In general, the organizational structure of OFS has also remained
stable. We reported in October 2009 that the Assistant Secretary of
Financial Stability was establishing an Office of Internal Review that
would perform the functions of the former Chief Risk and Compliance
Officer, among other duties. This office, which has been established,
is responsible for identifying risks that TARP faces and works with
relevant program offices to develop procedures for overall compliance
with EESA. The compliance staff monitors TARP recipients to help
ensure they are adhering to program requirements and financial agents
and contractors to help ensure they are complying with the TARP
conflict-of-interest requirements. In addition, OFS now has an Office
of Reporting that includes a senior communications officer and
director of oversight and reporting.[Footnote 64] This office helps to
ensure that OFS is meeting all of its reporting requirements and
coordinates OFS's work with oversight entities such as GAO, Special
Inspector General for TARP, Congressional Oversight Panel, and the
Financial Stability Oversight Board.
In August 2010, Treasury officials estimated that OFS would need 275
full-time equivalents to be fully staffed. As of August 14, 2010, the
office had 59 vacancies. Treasury officials told us that they were
actively seeking candidates for about half of the vacancies, most
(about 23) in the Office of Internal Review, and reassessing whether
the remaining positions were still needed. For example, the Chief of
Operations Officer is in the process of determining whether a vacant
administrative officer position that would report directly to her is
still needed given that division managers within the office already
report directly to her. OFS continues to use direct-hire and other
appointment authorities to expedite hiring of qualified candidates.
Treasury officials said that hiring for the Office of Internal Review
has been difficult because of competition for auditors who could
conduct internal assessments and compliance reviews. In addition, they
noted that these OFS positions are temporary positions and under the
federal government pay scale, which can make competing with other
employers more challenging.
Although TARP's authority to establish new programs has expired, OFS
will have to operate existing programs going forward. However,
eventually OFS will need to hire fewer staff as TARP programs continue
to wind down. Treasury officials said that while the expiration of
TARP authority has not yet resulted in employees leaving, they noted
that the Assistant Secretary recently emphasized to staff that OFS
still have significant responsibilities and that OFS employees are
still needed. To address concerns about staff retention, OFS officials
told us that they had started to take steps to help address employee
satisfaction. For example, in April 2010 OFS conducted its first
employee satisfaction survey. Officials told us that the survey
results had generally been positive but had highlighted two areas--
communication and staff development--that OFS plan to focus on going
forward:
* Internally, OFS has several methods for communicating across the
organization, including a monthly staff meeting and monthly employee
newsletter. In addition, the Assistant Secretary has two weekly
meetings with the chiefs, and the chiefs also meet once a week.
Treasury officials told us that a key initiative to improve
communication was to revamp its internal Web site using more
collaborative software that would make Figure 75: sharing information
easier. In addition, OFS will identify communications training for OFS
managers and employees.
* To enhance staff development, OFS is drafting a training policy and
will soon have staff fill out individual development plans. OFS is
also planning to develop a "Government 101" course for employees new
to the federal government and re-establish an OFS mentoring program.
[Footnote 65] In addition, OFS allows staff to rotate among positions
within the office, enabling employees to gain additional knowledge and
skills and helping to keep them engaged in OFS's mission.
Treasury officials also said that OFS could use the retention
incentives that are available to all government agencies if necessary
to help ensure that the office retained key skills and competencies.
OFS is also beginning to address the concerns of employees who were
hired under term appointments. Because OFS is a temporary office, more
than half of its employees (115 as of September 25, 2010) are term
appointed. Most of these employees were hired under 1-or 2-year
appointments that can be extended but are limited to a total of 4
years.[Footnote 66] In addition, several leadership positions were
filled with limited-term Senior Executive Service appointments that
are limited to 3 years, including the Chief Investment Officer, Chief
of Operations Officer, Chief Counsel, and Chief of Homeownership
Preservation.[Footnote 67] Although the use of term appointments is
appropriate for a temporary organization such as OFS, these employees
may also be difficult to retain for the full period of their term
appointment. For example, Treasury officials told us that some of
these employees have stated that they wanted to seek permanent career
positions in the federal government, and Treasury's Office of Human
Resources has offered seminars on the federal hiring process. OFS's
employee survey also confirmed that some staff are considering
employment elsewhere. For example, Treasury officials stated that
about one-third of staff responded affirmatively to a question asking
whether the employees planned to leave OFS in the next 6 months.
However, Treasury officials noted that in the last 6 months (between
April and September 2010), only about 6 percent of employees have left
OFS.
Workforce planning for OFS has presented and continues to present some
unique challenges. When OFS was initially created, it staffed the
office largely by relying on detailees until it could hire more
permanent employees, and as we have seen, more than half of its
employees have been hired under term appointments. Early in 2009, OFS
developed a Strategic Workforce Plan that generally focused on the
issues related to acquiring qualified staff. Along with its fiscal
year 2011 budget request issued February 1, 2010, Treasury included a
broad human capital strategy for OFS that included:
* using hiring authorities to recruit new employees for short- and
long-term assignments,
* hiring experts or consultants and detailees for temporary or
intermittent employment,
* establishing training and development interventions to ensure that
existing staff are engaged and possess the requisite skill set, and:
* performing regular strategic workforce assessments to refine the
organization and identify and eliminate competency gaps in OFS's
workforce.
The human capital strategy does not provide any details for these
various efforts. According to Treasury officials, this strategy is in
the process of being modified to emphasize staff retention and will be
issued along with OFS's fiscal year 2012 budget submission. They also
told us that OFS no longer had regular workforce assessment meetings
because staffing had stabilized. For staffing-related decisions, OFS
has created a staffing board that consists of the Chief of Operations
Officer, Chief Financial Officer, and a senior representative from
Treasury's Office of Human Resources. The board meets as needed to
approve new positions and incentive payments, among other things.
We have reported on the importance of strategic workforce planning to
address two critical needs: (1) aligning an organization's human
capital program with its current and emerging mission and programmatic
goals and (2) developing long-term strategies for acquiring,
developing, and retaining staff to achieve programmatic goals.
[Footnote 68] Although Treasury has established a human capital
strategy for OFS, OFS has not updated its strategic workforce plan to
reflect its changing environment as TARP moves from largely
implementing to maintaining and terminating programs or to address the
unique challenges associated with maintaining high-quality staff in a
temporary organization. As we have seen, OFS continues to have many
responsibilities and some programs may need staff for years to come.
For example, HAMP could be in operation until 2017.[Footnote 69] In
addition, when Treasury will completely divest its TARP investments in
entities such as GM, and Chrysler is unclear. In 2013, term employees
may be at the 4-year limit, and even before then some term employees
may choose to leave OFS rather than accept an extension. Further,
filling key leadership positions that are under limited-term Senior
Executive Service appointments will be a challenge. Treasury officials
told us that the chiefs in OFS have begun to discuss future staff
needs and various options for addressing these needs but have not yet
fully developed a plan. For example, they said although staff needs
may be somewhat lower by 2014, OFS will still be performing many of
the same functions, and they have considered options, such as creating
permanent positions that will be around for some time.
OFS has undertaken succession management planning in order to better
ensure that leadership positions remain filled and is participating in
a succession planning pilot program. According to OFS officials, the
succession planning pilot began on September 1, 2010, and its purpose
is to help ensure that OFS can fill leadership positions with
qualified staff. The pilot is to include a review of senior positions
to identify the key skills and competencies and a review of OFS
employees who could move into these positions and to identify any
skills gaps. Addressing these gaps should help to inform developmental
and training opportunities for individual development plans. The pilot
will also assess whether any of the leadership positions are at risk
of being vacant in the next 6 months.
In past reports, we raised concerns about Treasury having enough staff
with the appropriate skills to effectively support certain TARP
programs. For example, we noted in a July 2009 report on HAMP that
having enough staff with appropriate skills was essential to governing
HAMP effectively and recommended that Treasury place a high priority
on fully staffing Homeownership Preservation Office.[Footnote 70]
Since then, the Home Ownership Preservation Office has not yet
conducted a workforce assessment, despite the recent addition of
several new programs. In November 2009, we reported that Treasury was
planning to disband the auto team and would lose dedicated staff with
industry-and company-specific knowledge and expertise. We raised
concerns that OFS would not have adequate staff resources with the
expertise needed to adequately monitor and divest the government's
investment in Chrysler and GM and recommended that it obtain needed
expertise in areas where gaps are identified.[Footnote 71]
Subsequently, Treasury has hired two additional analysts dedicated
solely to monitoring Treasury's investments in Chrysler and GM, and
plans to hire one more. OFS will likely continue to face such
scenarios going forward. Without a workforce plan that considers
various scenarios, particularly the potential outflow of term
employees, OFS risks not being adequately prepared to manage and
oversee ongoing TARP investments and programs.
Treasury Continues to Rely on a Growing Network of Financial Agents
and Contractors to Support TARP Administration and Operations:
Since the inception of TARP in October 2008, Treasury has continued to
rely on private sector resources to assist OFS with a variety of
activities. These include providing the infrastructure needed to
inject capital into key financial institutions, implementing programs
to address problems in the financial markets, providing assistance to
the automobile industry and AIG, and working to help homeowners
struggling to keep their homes. Treasury has used two mechanisms for
engaging private sector firms. First, Treasury has exercised its
statutory authority to retain 15 financial agents (depository and
related financial institutions designated to perform assigned
functions on its behalf).[Footnote 72] Second, Treasury has entered
into contracts and blanket purchase agreements under the Federal
Acquisition Regulation for a variety of legal, investment consulting,
accounting, and other services and supplies. According to Treasury's
data, as of September 30, 2010, Treasury had 81 contracts and blanket
purchase agreements, up from 39 about a year ago.[Footnote 73] In
total, Treasury had 96 financial agency agreements and contractual
arrangements with a total potential value of almost $841 million as of
September 30, 2010.[Footnote 74]
Treasury Increased Its Use of Financial Agents and Small Business
Contractors:
As shown in table 8, the majority of financial agent agreements were
awarded in 2009, many in late December. According to OFS procedures,
financial agents are used for services that cannot be provided with
existing Treasury, financial agent, or contractor resources.
Treasury's decision to use a financial agent as opposed to a
contractor or other provider is generally based on the inherently
governmental or fiduciary nature of the required service. According to
Treasury, all of its financial agents provide vital support in
managing billions of dollars in disbursements, repayments, and
additional proceeds for a variety of TARP programs, some of them
ongoing and some winding down.[Footnote 75] The functions that
Treasury has assigned these financial agents include asset management
for Treasury's purchase of "troubled assets," custodial and
infrastructure support services, and program administration services
for OFS's homeownership preservation programs.
Table 8: Financial Agent Involvement in TARP Programs:
Financial agent and award date: AllianceBernstein (4/21/2009);
TARP investment program:
* CPP;
* AIFP;
* AIG Investments (SSFI);
Role of financial agent:
* CPP Asset Manager;
* GM Asset Manager;
* AIG Asset Manager.
Financial agent and award date: Avondale Investments (12/22/2009);
TARP investment program: CPP;
Role of financial agent: CPP Asset Manager.
Financial agent and award date: Bank of New York Mellon (10/14/2008);
TARP investment program: All programs;
Role of financial agent: Custodian.
Financial agent and award date: Bell Rock Capital (12/22/2009);
TARP investment program: CPP;
Role of financial agent: CPP Asset Manager.
Financial agent and award date: EARNEST Partners (3/16/2009);
TARP investment program: SBA 7(a) Securities Purchase Program;
Role of financial agent: SBA 7(a) Asset Manager.
Financial agent and award date: Fannie Mae (2/18/2009);
TARP investment program: HAMP;
Role of financial agent: HAMP Program Administrator.
Financial agent and award date: Freddie Mac (2/18/2009);
TARP investment program: HAMP;
Role of financial agent: HAMP Compliance Agent.
Financial agent and award date: FSI Group (4/21/2009);
TARP investment program:
* CPP;
* ABP;
Role of financial agent: CPP Asset Manager, Citi TRuPS Asset Manager.
Financial agent and award date: Howe Barnes Hoefer & Arnett
(12/22/2009);
TARP investment program: CPP;
Role of financial agent: CPP Asset Manager.
Financial agent and award date: KBWAM (12/23/2009);
TARP investment program:
* CPP;
* AIFP;
Role of financial agent: CPP Asset Manager; GMAC Asset Manager; AIFP
Transaction Structuring Support.
Financial agent and award date: Lazard Freres (5/17/2010);
TARP investment program: AIFP;
Role of financial agent: AIFP Transaction Structuring.
Financial agent and award date: Lombardia Capital Partners
(12/22/2009);
TARP investment program: CPP;
Role of financial agent: CPP Asset Manager.
Financial agent and award date: Morgan Stanley (3/29/2010);
TARP investment program:
* CPP;
* TIP;
Role of financial agent: Disposition Agent for Citigroup Common Stock.
Financial agent and award date: Paradigm Asset Management (12/22/2009);
TARP investment program: CPP;
Role of financial agent: CPP Asset Manager.
Financial agent and award date: Piedmont Investment Advisors
(4/21/2009);
TARP investment program: CPP;
Role of financial agent: CPP Asset Manager.
Source: Treasury.
[End of table]
The share of work by small businesses and minority-and women-owned
businesses under TARP contracts and financial agency agreements has
grown substantially since November 2008, when only one of Treasury's
prime contracts was with a small business and only one minority small
business firm had teamed as a subcontractor with a large business
contractor. Since we reported in October 2009, the number of prime
contracts and financial agency agreements with small and/or minority
firms has grown from 8 to 20, according to Treasury's data. From the
outset, Treasury encouraged small businesses to pursue opportunities
for TARP contracts and financial agency agreements. For example, in
2010 Treasury resolicited all OFS legal services contracts. It
received and evaluated 81 proposals and awarded 13 indefinite-
delivery/indefinite-quantity contracts, including two small
businesses. As shown in table 9, the majority of small and/or minority-
and women-owned businesses participating in TARP are subcontractors.
Table 9: TARP Contracts, Financial Agency Agreements, and Subcontracts
with Minority-Owned, Women-Owned, and Other Small Businesses:
Socioeconomic business category: Minority-owned[C];
Prime contracts[A]: 2;
Financial agency agreements[A]: 5;
Subcontracts under prime contracts and contracts under financial
agency agreements[B]: 16;
Total participation by small businesses: 23.
Socioeconomic business category: Woman-owned;
Prime contracts[A]: 2;
Financial agency agreements[A]: 1;
Subcontracts under prime contracts and contracts under financial
agency agreements[B]: 14;
Total participation by small businesses: 17.
Socioeconomic business category: Other small;
Prime contracts[A]: 8;
Financial agency agreements[A]: 2;
Subcontracts under prime contracts and contracts under financial
agency agreements[B]: 29.
Socioeconomic business category: Total;
Prime contracts[A]: 12;
Financial agency agreements[A]: 8;
Subcontracts under prime contracts and contracts under financial
agency agreements[B]: 49;
Total participation by small businesses: 69.
Source: GAO analysis of Treasury data.
[A] Data as of September 30, 2010. GAO's analysis does not include
task orders.
[B] As of June 30, 2010, TARP financial agents and prime contractors
have awarded 95 subcontracts.
[C] Includes both small and nonsmall minority-owned businesses and
minority woman-owned businesses.
[D] Includes small businesses, service-disabled veteran-owned small
businesses, and small disadvantaged businesses.
[End of table]
Treasury Continues to Strengthen Management and Oversight of Financial
Agents and Contractors and Conflicts-of-Interest Requirements:
When Treasury set up OFS in 2008 and quickly began to implement
numerous TARP initiatives in response to the nation's financial
crisis, OFS had not yet finalized its procurement oversight procedures
and lacked comprehensive internal controls for its growing number of
contractors and financial agents. Further OFS did not have a
comprehensive compliance system to monitor and fully address vendor-
related conflicts of interest. Recognizing Treasury's substantial
reliance on the private sector and the challenging contracting
environment, we made a series of recommendations between December 2008
and June 2009 intended to strengthen Treasury's management and
oversight of its vendors and improve the transparency of contracted
operations. By 2009, when the financial crisis focus shifted to
stimulating economic recovery and TARP program priorities had already
significantly evolved, we noted OFS's sustained progress in overcoming
the initially challenging contracting environment. One year after
implementation, OFS had put in place an appropriate infrastructure to
manage and monitor its network of financial agents and contractors. As
we have previously reported, OFS took a number of actions to address
our recommendations, including:
* ensuring that sufficient OFS personnel were assigned and properly
trained to oversee the performance of all contractors and financial
agents;
* expeditiously issuing regulations on conflicts of interest involving
Treasury's financial agents, contractors, and their employees and
related entities;[Footnote 76] and:
* issuing guidance requiring that key communications and decisions
concerning potential or actual vendor-related conflicts of interest be
documented.
Our discussions with OFS officials and a review of supporting
documentation revealed that since September 2009 OFS has continued to
strengthen key aspects of its infrastructure for managing and
overseeing the cost and performance of TARP financial agents and the
compliance system for conflicts-of-interest requirements. Particularly
noteworthy are OFS's actions since fall 2009 to define organizational
roles and responsibilities and establish written policies and
procedures for the management and oversight of TARP financial agents,
which have doubled in number since September 2009. Specifically,
according to the Director of the Office of Financial Agents (OFA), the
office was reorganized in fall 2009 where common oversight processes
are centralized for consistency across financial agents. According to
a Treasury official, installing full-time leadership and providing
adequate staffing and organization within OFS for more active
oversight of the financial agents has enabled this office to more
effectively manage the billion-dollar TARP programs and Treasury
operations that the financial agents support. The ongoing enhancement
of management and oversight for financial agents is expected to help
support Treasury's goals of helping ensure the overall stability and
liquidity of financial systems and protecting taxpayer interests.
Highlights of OFS's actions to strengthen the management and oversight
of financial agents are presented in table 10.
Table 10: Treasury's Actions since September 2009 to Enhance
Management and Oversight of TARP Financial Agents:
Category: Organization;
Actions: The Office of the Fiscal Assistant Secretary reorganized the
Office of Financial Agents into four teams—Investment Program Agent
Services, Financial Agent Operations, Home Ownership Program Services,
and Financial Agent Information Technology. This structure supports
the office’s mission to support OFS TARP programs and exercise
oversight to ensure that the financial agents (1) perform the scope of
work defined by OFS; (2) adhere to guidance and direction provided by
OFS; (3) deliver quality services that meet OFS’s expectations; (4)
submit payment claims that are accurate, justified, and reasonable;
and (5) ensure financial agents’ information technology systems meet
OFS’s information needs and comply with Treasury requirements.
Category: Staffing;
Actions: Treasury’s Office of the Fiscal Assistant Secretary installed
a permanent full-time OFA director in September 2009 and hired six
full-time staff between November 2009 and June 2010 for its four teams
in order to apply dedicated resources to each financial agent. Each
financial agent now has a dedicated OFA staff contact for questions on
the administration and budgeting of financial agency agreements.
Category: Guidance;
Actions: OFS issued written policy and procedures that identified the
roles and responsibilities of various Treasury and OFS offices in
regard to financial agents, including (1) selection and designation,
(2) oversight, (3) guidance and direction, (4) performance
measurement, (5) subcontractor (i.e. vendor) approvals, and (6)
payment and compensation.
Category: Oversight;
Actions: OFS established the Council of Asset Managers for quarterly
scheduled conferences for CPP asset managers and Chief Investment
Officer staff to meet with the CPP asset managers to set broad
direction and share common practices and solutions together. OFS also
established the Budget and Compensation Review Committee established
for the HAMP financial agents. The committee, chaired by the Director,
OFA, serves as a weekly OFS forum where staff from OFA, Office of the
Chief Financial Officer, Homeownership Preservation Office, and
Internal Review Office coordinate direction of Fannie Mae and Freddie
Mac on issues concerning their agreements and Treasury’s funding of HAMP
’s administration and compliance costs. OFS has installed qualitative
and quantitative financial agent performance measures for Bank of New
York Mellon and the CPP asset managers each developed and managed by
OFS staff on behalf of OFS. Agents that exceed performance measures in
quarterly reviews can earn a maximum 5 percent incentive payment. The
idea is to measure the financial agent’s delivery of products on-
schedule objectively and their performance and responsiveness
subjectively. OFS also installed similar performance measurement and
incentive compensation structures, each developed and managed by OFA
staff on behalf of OFS, for Lazard Frères and Freddie Mac.[A]
Source: GAO analysis of OFS information.
[A] According to Treasury officials, after September 2010, OFA issued
performance measures for other financial agents--EARNEST Partners,
Morgan Stanley, Greenhill and Co., LLC., and Fannie Mae. In addition,
Treasury officials commented in January 2011, that only Bank of New
York Mellon and the CPP asset managers will have the ability to
receive incentive payments for exceeding performance measures.
Incentive payments for exceeding performance measures are not
applicable to Freddie Mac, Fannie Mae, Lazard Frères, EARNEST
Partners, Morgan Stanley, and Greenhill.
[End of table]
Finally, since 2009 and consistent with our prior recommendations, OFS
has continued to implement its comprehensive system of oversight for
conflicts of interest that may arise with financial agents or
contractors seeking or performing work under TARP. For example,
between October 2009 and January 2010, the compliance team within
OFS's Office of Internal Review completed complex renegotiations of
the remaining three contracts that predated the TARP conflicts-of-
interest regulations.[Footnote 77] In addition, the steps OFS took in
2009 to develop and implement conflicts-of-interest procedures,
guidance documents, and an internal reporting database enable staff to
document and track all vendor conflict-of-interest certifications,
inquiries, and requests for waivers. These actions also have helped
OFS automate the workflow process and monitor vendor compliance in
submitting periodic conflict-of-interest certifications on time. Also,
according to OFS officials, these management and oversight
enhancements since 2009 enabled them to manage the conflict-of-
interest inquiries they receive--which totaled more than 700 by
December 2010--in a timely manner.
According to OFS, when conflict-of-interest inquiries arise with TARP
contractors or financial agents, they are brought to the attention of
the Office of Internal Review's compliance team. The team determines
whether an actual or potential conflict-of-interest exists, and if so,
whether it can be addressed with a conflict-of-interest mitigation
plan. All conflict-of-interest inquiries are handled in as timely a
manner as possible and are usually resolved within a few days,
according to OFS. OFS provided examples of personal and organizational
conflict-of-interest issues that have arisen among external financial
agents:
* A financial agent requested approval of a personal conflicts-of-
interest mitigation plan for an employee it was seeking to move from a
business area that did not provide TARP-related services to one that
did. However, the employee owned financial holdings in various TARP
recipients. OFS concluded that considering the employee's financial
holdings and the contemplated scope of the employee's work, the
proposed mitigation plan was not adequate to address the potential
conflicts of interest. OFS did not approve the mitigation plan, and
the employee did not move to the group providing support to Treasury.
* A financial agent requested approval of a revised conflicts-of-
interest mitigation plan for one of its subcontractors to broaden the
scope of the work the subcontractor performed under TARP. The revised
mitigation plan included a provision stating that the subcontractor
would not maintain any kind of relationship with any current, former,
or future entity that helped manage or administer the added programs
without the prior written consent of OFS. OFS determined that the
revisions to the mitigation plan adequately mitigated the potential
conflicts and thus approved the plan.
These examples illustrate the ongoing nature of conflicts-of-interest
scenarios. OFS officials told us that with the conflicts-of-interest
compliance infrastructure they have in place--including dedicated
resources, consistent policies and procedures, and an internal
reporting database for tracking the disposition of each action item--
OFS was positioned and committed to remaining vigilant in overseeing
contractors' and financial agents' compliance with conflict-of-
interest requirements.
OFS Maintained Effective Internal Control over Its Financial Reporting
as of September 30, 2010, and Has Taken Steps to Develop a System of
Internal Control for TARP Programs:
In our December 2008 report, shortly after TARP was created, we
highlighted the importance of internal control and recommended that
Treasury continue to develop a comprehensive system of internal
control over TARP, including policies and procedures for program
activities that were robust enough to ensure that the objectives and
requirements of TARP programs were being met.[Footnote 78] Over the
last 2 years, Treasury has taken steps to address our recommendation
for both financial reporting and program activities. As part of its
control environment, OFS established an organizational structure that
provides management's framework for planning, directing, and
controlling operations to achieve its goals. OFS implemented a risk
assessment process that it uses as a basis to identify, analyze and
manage its risks. OFS has also implemented a monitoring function to
verify whether internal controls are designed and operating
effectively. As discussed below, we issued an opinion on OFS's
internal control over financial reporting as of September 30, 2010,
and we have reviewed specific control activities over compliance with
certain program requirements.
Internal Control over Financial Reporting:
Our 2010 financial audit report[Footnote 79] concluded that 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.
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 80] 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 Management's
Discussion and Analysis 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
Management's Discussion and Analysis 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 81] 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 82]
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 Management's Discussion and
Analysis, 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 83] The significant deficiency identified
for fiscal year 2010, although not considered to be a material
weakness, is important enough to merit management's attention. We will
be reporting additional details concerning this significant deficiency
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.
Internal Control for Program Activities:
Treasury has taken steps to develop an internal control system to
ensure compliance with program requirements, including limitations on
executive compensation, stock repurchases, and dividends. For example,
as noted earlier in this report, Treasury's interim final rule
requires that the principal executive officer and principal financial
officer at firms that received TARP funds certify to actions to be
taken by the compensation committee, board of directors, and the
company itself with regard to executive compensation. All
certifications and disclosures are monitored by compliance staff
within the Office of Internal Review. Also, Treasury relies on
financial agents--including the custodian and individual asset
managers--to perform additional oversight responsibilities. For
example, Treasury, in conjunction with its outside asset managers and
custodian (Bank of New York Mellon) monitor corporate actions, such as
restrictions on stock repurchases and dividends. Further, Treasury has
retained nine asset management firms to provide oversight of CPP
participants. Treasury finalized its oversight policies for financial
agents in April 2010 and developed qualitative and quantitative
performance metrics based on the managers' core functions and
responsibilities in July 2010.
OFS's Office of Internal Review has a key role in helping to ensure
compliance with program requirements. As noted earlier, this office is
responsible for identifying risks to TARP, working with program
offices to develop procedures for compliance with EESA, monitoring
recipients' compliance with program requirements, monitoring financial
agents' and contractors' compliance with the conflict of interest
interim rule, and reviewing controls to help ensure that they are in
compliance with program requirements. In particular, instances of
noncompliance with program requirements are evaluated to determine if
further action is required.
Though Treasury has generally developed an overall system of internal
control for compliance with program requirements, we have continued to
monitor internal controls and identify areas in which certain controls
for specific programs, such as HAMP, could be improved. In particular,
Treasury has not fully implemented our recommendation to develop a
comprehensive system of internal control for HAMP. For example, though
Treasury, in conjunction with Fannie Mae as the HAMP program
administrator, has developed risk control matrixes that identify
various risks associated with the first-lien modification process,
such as potential inaccuracies in the accruals of incentive payments,
additional areas of internal control may be needed. For example,
Treasury has yet to develop benchmarks, or goals, for specific HAMP
performance measures such as conversion and redefault rates. In the
absence of benchmarks to indicate acceptable levels of performance,
assessing the results of these measures will be difficult. We will
continue to monitor Treasury's actions to address these deficiencies.
Indicators Suggest That Credit Markets Have Largely Held the Gains
They Achieved since October 2008:
The concerted actions by Treasury, the Federal Reserve, and others
since the crisis began have been credited with helping to avert a more
severe financial crisis, but the ultimate impact of the interventions
on the economy as a whole remains to be seen. The panic that stressed
financial markets in October 2008 has largely disappeared along with
the prospect that systemically significant financial institutions
would fail and precipitate widespread financial instability. Although
the long-term implications of the interventions remain unknown and no
one can know what would have happened without the actions that were
taken, some quantitative evidence indicates that the economy would be
worse off today had the government not acted.[Footnote 84] Critics,
however, question the rationale for particular programs, point to
policy missteps early on in the crisis that may have exacerbated the
situation, or believe that the long-term effects of the massive
interventions will eventually outweigh the short-term benefits.
[Footnote 85]
Nevertheless, 2 years after the passage of EESA, some credit markets
are beginning to show signs of a sustained recovery, even as other
areas of the economy remain fragile (see table 11). While the
effectiveness of the programs has varied, some have reportedly had the
desired effects, especially if stabilizing the financial system and
restoring confidence was considered to be the principal goal of the
intervention. We have noted in prior reports that many of the
anticipated effects of TARP on credit markets and the economy have
materialized including:
* declines in perceptions of risks in various financial markets,
including asset spreads in ABS markets;
* declines in the cost of credit in interbank, mortgage and corporate
debt markets;
* renewed ability by banks to access private capital markets and issue
new equity;
* increasing issuance in ABS markets; and:
* recovery in prices from some legacy or "troubled" assets.
For example, the cost of credit and perceptions of risk (as measured
by premiums over Treasury securities) fell significantly in interbank,
mortgage, and corporate debt markets, while the volume of credit, as
measured by new mortgage loans, increased from October 2008 to October
2009. Although the recovery in securitization markets was more
tentative than that in the broader financial market, spreads for most
TALF-eligible assets tightened significantly from their heights at the
beginning of 2009, and new asset-back security issuances began to
occur in larger volumes.[Footnote 86] Treasury has said that banks'
renewed ability to access capital markets and improvements in
securitization markets helped motivate the decision to close bank
capital programs and TALF even before the Dodd-Frank Act ended its
authority to incur new obligations under TARP.[Footnote 87] Since
October 2009, perceptions of risk in these markets were up slightly in
some cases although these trends appear to be more related to concerns
about sovereign debt in the European Union and other market dynamics.
Table 11: Select Credit Market Indicators, as of November 1, 2010[A]:
Credit market rates and spreads:
Indicator: LIBOR;
Description: Three-month London interbank offered rate (an average of
interest rates offered on dollar-denominated loans);
Basis point change from October 13, 2008 to October 12, 2009: Down 447;
Basis point change since October 12, 2009: Unchanged.
Indicator: TED Spread;
Description: Spread between 3-month LIBOR and 3-month Treasury yield;
Basis point change from October 13, 2008 to October 12, 2009: Down 429;
Basis point change since October 12, 2009: Down 6.
Indicator: Aaa bond rate;
Description: Rate on highest quality corporate bonds;
Basis point change from October 13, 2008 to October 12, 2009: Down 124;
Basis point change since October 12, 2009: Down 43.
Indicator: Aaa bond spread;
Description: Spread between Aaa bond rate and 10-year Treasury yield;
Basis point change from October 13, 2008 to October 12, 2009: Down 75;
Basis point change since October 12, 2009: Up 31.
Indicator: Baa bond rate;
Description: Rate on corporate bonds subject to moderate credit risk;
Basis point change from October 13, 2008 to October 12, 2009: Down 239;
Basis point change since October 12, 2009: Down 57.
Indicator: Baa bond spread;
Description: Spread between Baa bond rate and 10-year Treasury yield;
Basis point change from October 13, 2008 to October 12, 2009: Down 190;
Basis point change since October 12, 2009: Up 17.
Indicator: Mortgage rate;
Description: 30-year conforming loan rate;
Basis point change from October 13, 2008 to October 12, 2009: Down 154;
Basis point change since October 12, 2009: Down 69.
Indicator: Mortgage spread;
Description: Spread between 30-year conforming loan rate and 10-year
Treasury yield;
Basis point change from October 13, 2008 to October 12, 2009: Down 95;
Basis point change since October 12, 2009: Up 7.
Indicator: ABS spreads;
Description: Spread between the yields on AAA-rated securities backed
by auto, credit card, student and commercial real estate loans and
Treasury, LIBOR, or interest rate swap, yields of a similar maturity.
Indicator: Auto;
Description: Spread for AAA-rated securities backed by Auto Loans;
Basis point change from October 13, 2008 to October 12, 2009: Down 220;
Basis point change since October 12, 2009: Down 20.
Indicator: Credit cards;
Description: Spread for AAA-rated securities backed by credit cards;
Basis point change from October 13, 2008 to October 12, 2009: Down 225;
Basis point change since October 12, 2009: Down 28.
Indicator: Student loans;
Description: Spread for AAA-rated securities backed by student loans;
Basis point change from October 13, 2008 to October 12, 2009: Down 50;
Basis point change since October 12, 2009: Down 213.
Indicator: CMBS;
Description: Spread for AAA-rated securities backed by commercial
mortgages;
Basis point change from October 13, 2008 to October 12, 2009: Down 119;
Basis point change since October 12, 2009: Down 253.
Indices:
Indicator: ABX-AAA;
Description: Index referencing a basket of 20 subprime mortgage-backed
securities that were issued in 2006 and originally rated AAA;
Percent change from October 13, 2008 to October 12, 2009: Down 13.6%;
Percent change since October 12, 2009: Up 12.3%.
Indicator: ABX-BBB;
Description: Index referencing a basket of 20 subprime mortgage-backed
securities that were issued in 2006 and originally rated BBB;
Percent change from October 13, 2008 to October 12, 2009: Down 54.6%;
Percent change since October 12, 2009: Up 58.9%.
Quarterly mortgage and ABS volumes, and mortgage defaults:
Indicator: Mortgage originations;
Description: New mortgage loans;
Change from fourth quarter 2008 to fourth quarter 2009: Up $130
billion to $390 billion;
Change from fourth quarter 2009 to third quarter 2010[B]: Up $20
billion to $410 billion.
Indicator: Asset-backed security issuance;
Description: New securities backed by auto loans, credit cards,
student loans, and commercial mortgages;
Change from fourth quarter 2008 to fourth quarter 2009: Up $18 billion
to $20 billion;
Change from fourth quarter 2009 to third quarter 2010[B]: Up $3
billion to $23 billion.
Indicator: Foreclosure rate;
Description: Percentage of homes in foreclosure;
Change from fourth quarter 2008 to fourth quarter 2009: Up 128 basis
points to 4.58;
Change from fourth quarter 2009 to third quarter 2010[B]: Down 19
basis points to 4.39.
Source: GAO analysis of data from the Federal Reserve, Thomson
Reuters, a broker-dealer, and Inside Mortgage Finance.
[A] Rates and yields are daily except mortgage rates, which are
weekly. Interest rate swaps are contracts in which one party agrees to
pay a fixed interest rate to another party in exchange for a floating
rate. Higher spreads (measured as premiums over Treasury securities,
LIBOR, or swaps of comparable maturity) represent higher perceived
risk in lending to certain borrowers. Higher rates represent increases
in the cost of borrowing for relevant borrowers. As a result, "down"
suggests improvement in market conditions for credit market rates and
spreads. Foreclosure, asset-backed security issuance and mortgage
origination data are quarterly. See previous TARP reports for a more
detailed discussion (GAO-09-161 and GAO-09-296).
[B] Asset backed security issuance data are through the second quarter
of 2010 due to data availability.
[End of table]
While the movements in most of these indicators since October 2009 are
likely more reflective of market developments outside of TARP, some
metrics we have monitored for programs with later start dates like
PPIP, HAMP, and to a lesser extent TALF, remain relevant. PPIP
indicators show substantial improvements during the second year of the
TARP program. For example during the second year of the TARP program
the price of AAA and BBB tranches of certain RMBS rose significantly.
As we noted in our June 2010 report, Treasury stated that the
stabilization of certain legacy asset prices, namely those in RMBS and
CMBS markets, was one indicator that the PPIP had achieved its stated
purpose and influenced the decision not to commit additional funds to
the program. Similarly, TALF-eligible ABS spreads have continued to
narrow since October 2009 (see table 11).[Footnote 88]
Over the last 2 years indicators for the Making Home Affordable (MHA)
program continued to highlight challenges in the area of residential
housing. The nationwide foreclosure rate reached an unprecedented high
of 4.63 percent in March 2010.[Footnote 89] Estimates of the total
mortgages outstanding suggest that this percentage amounts to roughly
2.5 million loans that were in some stage of the foreclosure process.
[Footnote 90] While the foreclosure inventory increased by 128 basis
points to 4.58 percent from December 2008 to December 2009, it has
decreased by 19 basis points between December 2009 and October 2010,
suggesting a leveling off of the foreclosure inventory and some signs
of stabilization.[Footnote 91] However, the reasons for the change in
the foreclosure inventory are unclear. For example, the slowdown could
be driven by any combination of (1) the foreclosure mitigation
programs, including those under MHA; (2) banks forbearing or delaying
foreclosures; and (3) other forces related to the economic
fundamentals of the housing market. Analysis of delinquency and
foreclosure data suggests that mortgages are not rolling from
delinquency to foreclosure as expected and that lenders are not
initiating foreclosures on many loans that would normally be subject
to such actions. A recent International Monetary Fund report estimated
that this "shadow inventory" could be as much as 1.7 million homes.
[Footnote 92]
In our October 2009 report, we recommended that any decision to extend
TARP be made in coordination with relevant agencies and that Treasury
use quantitative analysis whenever possible to support its rationale.
[Footnote 93] Treasury subsequently dedicated additional funds to
preserving homeownership and improving financial conditions for small
banks and businesses while winding down and terminating other
programs. We reviewed the analytical process underpinning the decision
to extend TARP and in June 2010 reported on Treasury's process. We
found that Treasury had coordinated and consulted with other agencies
and considered a number of qualitative and quantitative factors, as we
recommended.[Footnote 94] Although we found Treasury's framework for
deciding to extend TARP sufficient, we recommended that the Secretary
(1) formalize coordination with FDIC for future TARP decisions and (2)
improve the transparency and analytical basis for TARP program
decisions. Because TARP will be winding down concurrently with other
important interventions by federal regulators, decisions about the
sequencing of the exits from these programs will require bringing a
larger body of regulators to the table to plan and sequence the
continued withdrawal of federal support.
Although the economy is still fragile and potential threats remain,
U.S. financial regulators have begun to shift their focus from
stabilizing the economy to exiting from crisis-driven interventions
and transferring risk back into the hands of the private sector. As a
result, even as some programs have ramped up to address specific
issues, many others have either expired or are already winding down.
As discussed earlier, TARP recipients have begun to repay loans and
repurchase shares and warrants; however, signs that the recovery is
not robust raise some concerns about the government withdrawing
support rapidly and completely. For example, in addition to weak
housing markets, consumer spending, private investment and employment
growth have remained weak and real gross domestic product growth is
estimated to be about one-half of its full potential.[Footnote 95]
Moreover, sovereign debt issues in Europe may have led to an increase
in risk aversion that translated into strains in short-term U.S.
dollar funding markets.
As table 11 shows, interest rates have generally continued to decline
since October 2009. Despite the unwinding of TARP, its early
termination, the general exit from other government interventions, and
the turmoil in Europe, credit spreads, while rising slightly for the
mortgage and bond markets, are down in the interbank market and all
remain well below their October 2008 peaks. In particular, the average
value for the TED spread for 2010 through November 1, 2010, is 32
basis points below its 2009 average and 131 basis points below its
value in 2008 (see figure 8). Similarly the banking sector credit
default swap index, which provides an indicator of the credit risk
associated with U.S. banks (as judged by the market), is well below
its value in 2008 and 2009, despite increasing in response to
sovereign debt issues in May 2010.[Footnote 96] Collectively, our
indicators suggest that recovery in credit markets has thus far
withstood the unwinding of government interventions.[Footnote 97]
Figure 8: TED Spread and Banking Sector Credit Default Swap Index,
January 1, 2008 through November 1, 2010:
[Refer to PDF for image: multiple line graph]
August, 2008:
CDS index: 269.2;
TED Spread: 1.13.
September 2008:
CDS index: 366.96;
TED Spread: 1.09.
Lehman bankruptcy; Merrill Lynch purchase announced; AIG debt
downgraded:
CDS index: 343.18;
TED Spread: 2.04.
October 2008:
CDS index: 247.58;
TED Spread: 3.3.
November 2008:
CDS index: 147.58;
TED Spread: 2.23.
December 2008;
CDS index: 204.13;
TED Spread: 2.15.
January 2009:
CDS index: 142.05;
TED Spread: 1.33.
February 2009:
CDS index: 185.02;
TED Spread: 1.28.
Treasury announces a Financial Stability Plan involving the creation
of PPIP, expansion of TALF, and new initiatives to stem residential
mortgage foreclosures and to support small business lending:
CDS index: 160.87;
TED Spread: 0.96.
March, 2009:
CDS index: 283.42;
TED Spread: 0.96.
April 2009:
CDS index: 363.08;
TED Spread: 1.02.
May 2009:
CDS index: 291.61;
TED Spread: 0.95.
June 2009:
CDS index: 157.53;
TED Spread: 0.82.
July 2009:
CDS index: 195.68;
TED Spread: 0.50.
August 2099:
CDS index: 131.29;
TED Spread: 0.36.
September 2009:
CDS index: 139.95;
TED Spread: 0.29.
October 2009:
CDS index: 116.57;
TED Spread: 0.17.
November 2009:
CDS index: 114.46;
TED Spread: 0.20.
December 2009:
CDS index: 116.03;
TED Spread: 0.22.
Treasury announces that several TARP programs would be terminated but
additional funds would be made available for housing and small
business programs and remaining funds would be retained to respond to
threats to financial stability:
CDS index: 99.04;
TED Spread: 0.20.
January 2010:
CDS index: 93.92;
TED Spread: 0.20.
February 2010:
CDS index: 116.76;
TED Spread: 0.17.
March 2010:
CDS index: 122.16;
TED Spread: 0.15.
April 2010:
CDS index: 98.10;
TED Spread: 0.11.
Euro zone sovereign debt issues intensify:
CDS index: 114.22;
TED Spread: 0.13.
May 2010:
CDS index: 107.53;
TED Spread: 0.12.
June 2010:
CDS index: 135.20;
TED Spread: 0.21.
Media reports surface on the early termination of TARP as part of the
Dodd-Frank Act:
CDS index: 134.67;
TED Spread: 0.40.
July 2010:
CDS index: 137.06.
TED Spread: 0.40.
August 2010:
CDS index: 103.91;
TED Spread: 0.36.
September 2010:
CDS index: 136.40;
TED Spread: 0.27.
October 2010:
CDS index: 118.66;
TED Spread: 0.15.
November 2010:
CDS index: 130.26;
TED Spread: 0.17.
Source: GAO analysis of Thomson Reuters data.
[End of figure]
We tested whether the announcement of a deal to pass financial
regulatory reform (the Dodd-Frank Act) and end Treasury's authority to
incur new obligations under TARP several months early had an impact on
perceptions of risk in the interbank lending market as measured by
changes in the TED spread. [Footnote 98] The TED spread has declined
modestly since June 29, 2010, media reports of the early end of TARP.
In theory, the early end of TARP could, in isolation, increase
perceptions of risk in lending to banks, as Treasury would no longer
be able to use TARP funds to respond to new threats to financial
stability--an authority that has allowed it to respond to urgent
problems in the banking sector several times over the life of TARP.
[Footnote 99] Alternatively, the early end of TARP could have no
effect if financial institutions were perceived to have built up
adequate capital and liquidity to weather a new shock to the financial
system. In several versions of our model, we consistently found that
the announcement of the early end of TARP had no statistically or
economically significant impact on the interbank market. Given the
substantial impact of the initiation of TARP and other crisis
programs, this result may indicate some durability of the improvements
in the interbank market. However, the extent to which this result
reflected purely the market response to the end of TARP is unclear, as
the response may have been muted by the passage of regulatory reform,
or other factors. For example, the early end of TARP could have
increased credit risk in the interbank market, while the passage of
financial regulatory reform could have simultaneously reduced credit
risk, yielding the no net impact we found in the interbank market.
Furthermore, this test assesses market participants' initial
expectations and not the ultimate impact of the early end of TARP and
passage of regulatory reform. Over time, analysis of the exits from
remaining TARP programs will provide a more complete assessment of the
resilience of the financial system.
Conclusions:
TARP programs implemented over the last 2 years covered a broad range
of activities: they were designed to inject capital into financial
institutions, address issues in the securitization markets, provide
assistance to the automobile industry and AIG, and offer incentives
for modifying residential mortgages, among other things. Many credit
markets have shown signs of a sustained recovery even as other areas
of the economy, particularly housing markets and jobs starts, remain
fragile. While the degree of effectiveness has varied across programs,
some programs reportedly have had the desired effects, especially
where stabilizing the financial system and restoring market confidence
are considered to be the principal goals of the government's
interventions.
Going forward, Treasury continues to face unique oversight and
monitoring challenges, as TARP programs are currently at every phase
of development and significant investments remain that must be
managed. Treasury is attempting to address ongoing challenges in
certain areas, including home foreclosures and small business lending.
Thus far, the existing TARP programs in these areas have been far less
successful than other TARP initiatives. While we and others have
argued that some of these programs have been ill-designed, the
complexity of the issues involved have contributed to ongoing
difficulties in designing programs that achieve desired goals.
Although HAMP was first announced in February 2009 as Treasury's
primary effort to preserve homeownership and protect home values, the
program has had a slow start and has not performed as anticipated.
Despite program changes that were intended to increase the number of
mortgage loan modifications made under HAMP, more borrowers have had
their trial modifications canceled than have received permanent
modifications. Further, while Treasury has added TARP-funded program
enhancements in an effort to reach more borrowers and address
persistently high default and foreclosure levels, the newly announced
programs are in the early stages of implementation and the number of
additional borrowers they will ultimately help remains unclear.
Treasury has not yet fully implemented all of our prior
recommendations to increase the transparency, accountability, and
consistency of the program:
Treasury also has two remaining TARP programs aimed at increasing
lending to small businesses--CDCI and the SBA 7(a) Securities Purchase
Program. But given the relatively small amount of funding allocated
for these programs and the fact that SBA and CDFIs account for a small
proportion of total small business lending, the question of whether
these programs will have a significant impact is debatable. Moreover,
the success of the SBA 7(a) Securities Purchase Program and other
potential small business programs appeared to have been hampered by
lenders' reluctance to participate due to concerns about the stigma of
participating in a TARP program and objections to TARP requirements
such as executive compensation restrictions. Given these types of
concerns, whether TARP could have created an effective small business
program is unclear. CDCI was also plagued with initial confusion about
whether the program's primary goal was to increase small business
lending. Treasury officials and early public statements placed
different emphasis on the two goals of CDCI: (1) to assist in small
business lending and (2) to capitalize certain small financial
institutions, some of which do not lend much to small businesses.
However, in more recent communications about CDCI, Treasury clarified
the importance of both goals of the program. Now that SBLF has been
signed into law, using the experience learned from TARP small business
programs to clearly articulate how SBLF complements and differs from
ongoing TARP small business programs will be important.
While additional programs--AIG and PPIP--remain active, others have
closed but have substantial outstanding balances that will require
Treasury's ongoing attention and oversight. For programs with
outstanding balances, the prospect for repayment from some
institutions, both large and small, and the ultimate cost of TARP
remain unknown. For example:
* Reflecting continued improvements in its financial condition, AIG
has announced plans to restructure its assistance from the federal
government. While a number of transactions associated with the
restructuring will occur throughout the first quarter of 2011, to the
extent the plan is successful, it will eliminate the Federal Reserve's
exposure to AIG. However, for Treasury, the ultimate return that OFS
will realize from its investments in AIG will be determined by the
long-term health of AIG and subject to uncertainty arising from the
likelihood of future changes in general economic, regulatory, and
market conditions.
* CPP, one of TARP's oldest and most widely used programs, had
recouped more than $152 billion in payments and almost $20 billion in
additional proceeds but continued to have $49.8 billion outstanding as
of September 30, 2010, and faces growing questions about the ability
of some participants, especially small participants, to repurchase
their preferred shares. A growing number of institutions that have
also missed at least one dividend payment could mean that Treasury
will be appointing members to some institutions' boards of directors.
While institutions continue to repurchase their preferred shares, the
program will require ongoing oversight and monitoring until all these
assets are divested.
The remaining programs will require ongoing oversight, and Treasury
will have to manage the remaining investments. For example, AIFP,
which closed, continues to pose a number of challenges, and the health
and ultimate ability of the participants--GM, Chrysler, and Ally
Financial--to repay Treasury depends on a number of external factors,
including substantial uncertainty arising from the likelihood of
future changes in general economic and market conditions. Conversely,
while no TARP funds have been disbursed to purchase TALF collateral as
of September 2010, ongoing challenges in commercial real estate
markets warrant ongoing attention. Finally, while AGP was terminated
in December 2009, Treasury kept a portion of the trust preferred
securities issued under this program in exchange for the guarantee
provided to Citigroup.
Although OFS has become a more stable organization over the past year,
with more than 200 employees, it faces new challenges as the TARP
authority to make new commitments has expired, some programs wind
down, and others continue to operate. For example:
* OFS has begun to take steps that will help to retain staff, but
staff retention could be a significant challenge for OFS, as term
appointees making up more than half of its workforce. Most of these
employees can be extended only up to 4 years, and some may seek more
permanent employment elsewhere. Moreover, several key leadership
positions were filled under limited-term Senior Executive Service
appointments. Positions could become more difficult to fill, given
that TARP authority has expired and most programs are winding down.
While OFS has begun to assess options for future staff needs,
including succession planning for senior positions, its workforce plan
has not been updated since March 2009 to reflect the changing
environment. Without a plan that considers various scenarios,
particularly the potential outflow of term employees, OFS may find
itself unprepared to adequately manage and oversee the TARP
investments and programs that remain.
* OFS has overcome an initially challenging contracting environment.
It has strengthened its management and oversight of a growing network
of contractors and financial agents to support TARP administration and
operations. With an appropriate infrastructure in place, Treasury
should remain vigilant in monitoring and managing performance issues
and conflicts of interests that may arise with the use of private
sector sources.
* Treasury's development of a system of internal control for financial
reporting and compliance with program requirements has evolved over
the last two years and will continue to be an important area for
oversight. Although certain internal controls could be improved, OFS
has in all material respects maintained 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.[Footnote 100] Treasury has
also developed a system of internal control to ensure compliance with
program requirements, including limitations on executive compensation,
stock repurchases, and dividends. However, we have continued to
identify areas where certain controls for specific programs, such as
HAMP, could be improved.
Two years after the passage of EESA, indicators generally suggest that
credit markets have improved and that many of the anticipated effects
of TARP have materialized. However, the economy remains fragile, and
the ultimate impact of the interventions on the real economy remains
to be seen. While movements in most of these indicators during the
second year of TARP are likely more reflective of other non-TARP
market developments, some metrics we have monitored for programs with
later start dates (PPIP, HAMP, and to a lesser extent TALF) show some
improvements. For example, PPIP indicators show substantial
improvement and TALF indicators continue to improve. However,
indicators for MHA continue to highlight the challenges in the area of
residential housing. During the second year of TARP, Treasury made
decisions about winding down particular programs and making additional
funds available to others. In our July 2010 TARP report, we found that
the framework Treasury used in making these decisions was sufficient
but offered additional recommendations to enhance and formalize
coordination with FDIC and improve the transparency and analytical
basis for remaining TARP program decisions. Our indicators suggest
that credit markets have largely held the gains achieved since October
2008, despite the unwinding of TARP programs, the early termination of
TARP's authority, the general exit from other government
interventions, and the turmoil in Europe.
While Treasury has taken a number of steps to help ensure that TARP
programs are operating effectively and being adequately overseen, it
has yet to fully implement all of our previous recommendations. These
recommendations are generally aimed at improving communication,
working with regulators to ensure consistency of repurchase decisions,
and numerous aspects of HAMP. Moreover, the Federal Reserve has yet to
implement 5 recommendations related to SCAP.
Agency Comments and Our Evaluation:
We provided a draft of this report to Treasury for its review and
comment. We also provided the draft report to the FDIC, Federal
Reserve, OCC, OTS, and the SBA to verify the factual information they
provided about certain TARP programs and small business trends.
Treasury provided written comments that we have reprinted in appendix
IV. Treasury, the Federal Reserve, and FDIC also provided technical
comments that we have incorporated as appropriate.
In its comments, Treasury noted that TARP and other government actions
have contributed to stabilizing the financial system and restoring
market confidence. While we agree that there have been broad
improvements in the financial system and the economy, the economy
remains fragile and there continues to be notable uncertainty in areas
such as the housing markets and employment. Further, as we note in the
draft report, Treasury continues to face unique oversight and
monitoring challenges, as TARP programs are currently at every phase
of development and significant investments remain that must be
managed. In addition, each TARP program has demonstrated varying
degrees of success in meeting its goals. For example, we acknowledged
the role of TALF in restarting frozen securitization markets, but we
also pointed out that HAMP has not fulfilled its intended goal of
addressing the foreclosure crisis and while conditions appear to be
improving, the ultimate success of OFS's interventions into AIG and
the auto industry continues to be unknown. We will continue to monitor
active TARP programs in our future work.
Treasury also had a differing view on the number of our prior
recommendations that it had fully or partially implemented. While
Treasury continues to make progress in addressing our prior
recommendations, in some cases, we have a different view about whether
sufficient actions have been taken to fully address our prior
recommendations. For example, Treasury believes that our
recommendation that Treasury communicate to Congress its plans to
monitor the companies' performance should be considered closed, noting
that it uses monthly financial and operating information from the
companies to monitor the companies' financial condition and that
Congress has not requested additional information on the agency's
efforts to assess and monitor the companies. While we recognize that
Treasury and the auto companies have made a range of information on
the companies' financial performance publicly available, Treasury has
not reported to Congress how it is using this information to ensure
the companies are on track to further improve their financial
condition and maximize taxpayer return on Treasury's investment. As we
stated in our previous report on Treasury's oversight of its financial
interests in the auto companies, transparency as to how the companies
are being monitored is important to ensuring accountability and
providing assurances that the taxpayers' investment is being
appropriately safeguarded. In other cases, Treasury has yet to provide
sufficient documentation for us to fully ascertain the status of open
recommendations. For example, for the TARP-funded housing programs,
Treasury noted that it has considered methods of monitoring whether
borrowers with total household debt of more than 55 percent of their
income have received housing counseling, but Treasury has not provided
us with documentation to show the methods that were considered and the
analysis conducted to determine the feasibility of these methods.
Reconciliation of the status of our recommendations was ongoing at the
close of our review and going forward, as we have previously discussed
with OFS officials, we will continue to review and consider any
additional support and documentation related to the progress of
actions taken to address our recommendations and will continue to
update the status of the recommendations as appropriate.
Finally, Treasury agreed with our recommendation on OFS workforce
planning, and stated that it will continue to refine this document and
other staffing initiatives.
Recommendation for Executive Action:
As TARP enters its next phase, OFS must continue to build on its past
experiences and take steps to better ensure that it is effectively
managing its programs and resources. Therefore, we recommend that OFS
take the following action:
* OFS should finalize a plan for addressing how it will manage its
workforce, in particular term-appointed employees and key SES
positions, including plans for various staffing scenarios.
We are sending copies of this report to the Congressional Oversight
Panel, Financial Stability Oversight Board, Special Inspector General
for TARP, interested congressional committees and members, Treasury,
the federal banking regulators, and others. The report also is
available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact Thomas J. McCool at (202) 512-2642 or mccoolt@gao.gov. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this report. GAO staff who made major
contributions to this report are listed in appendix V.
Signed by:
Thomas J. McCool:
Director:
Center for Economics, Applied Research and Methods:
List of Addressees:
The Honorable Max Baucus:
The Honorable Thad Cochran:
The Honorable Kent Conrad:
The Honorable Orrin Hatch:
The Honorable Daniel K. Inouye:
The Honorable Tim Johnson:
The Honorable Jeff Sessions:
The Honorable Richard C. Shelby:
United States Senate:
The Honorable Hal Rogers:
Chairman:
The Honorable Norm Dicks:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable Paul Ryan:
Chairman:
The Honorable Chris Van Hollen:
Ranking Member:
Committee on the Budget:
House of Representatives:
The Honorable Spencer Bachus:
Chairman:
The Honorable Barney Frank:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Dave Camp:
Chairman:
The Honorable Sander M. Levin:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Status of GAO Recommendations, as of December 30, 2010:
December 2, 2008:
GAO Recommendation: Work with the bank regulators to establish a
systematic means of determining and reporting in a timely manner
whether financial institutions’ activities are generally consistent
with the purposes of Capital Purchase Program (CPP) and help ensure an
appropriate level of accountability and transparency;
Status: Implemented.
GAO Recommendation: Develop a means to ensure that institutions
participating in CPP comply with key program requirements (for
example, executive compensation, dividend payments, and the repurchase
of stock);
Status: Implemented.
GAO Recommendation: Formalize the existing communication strategy to
ensure that external stakeholders, including Congress, are informed
about the program’s current strategy and activities and understand the
rationale for changes in this strategy to avoid information gaps and
surprises;
Status: Partially implemented.
GAO Recommendation: Facilitate a smooth transition to the new
administration by building on and formalizing ongoing activities,
including ensuring that key Office of Financial Stability (OFS)
leadership positions are filled during and after the transition;
Status: Implemented.
GAO Recommendation: Expedite OFS’s hiring efforts to ensure that the
Department of the Treasury (Treasury) has the personnel needed to
carry out and oversee the Troubled Asset Relief Program (TARP);
Status: Implemented.
GAO Recommendation: Ensure that sufficient personnel are assigned and
properly trained to oversee the performance of all contractors,
especially for contracts priced on a time and materials basis, and
move toward fixed-price arrangements whenever possible;
Status: Implemented.
GAO Recommendation: Continue to develop a comprehensive system of
internal control over TARP, including policies, procedures, and
guidance that are robust enough to protect taxpayers’ interests and
ensure that the program objectives are being met;
Status: Implemented.
GAO Recommendation: Issue final regulations on conflicts of interest
involving Treasury’s agents, contractors, and their employees and
related entities as expeditiously as possible and review and
renegotiate mitigation plans, as necessary, to enhance specificity and
compliance with the new regulations once they are issued;
Status: Implemented.
GAO Recommendation: Institute a system to effectively manage and
monitor the mitigation of conflicts of interest;
Status: Implemented.
January 30, 2009:
GAO Recommendation: Expand the scope of planned monthly CPP surveys to
include collecting at least some information from all institutions
participating in the program;
Status: Implemented.
GAO Recommendation: Ensure that future CPP agreements include a
mechanism that will better enable Treasury to track the use of the
capital infusions and seek to obtain similar information from existing
CPP participants;
Status: Implemented.
GAO Recommendation: Establish a process to ensure compliance with all
CPP requirements, including those associated with limitations on
dividends and stock repurchase restrictions;
Status: Implemented.
GAO Recommendation: Communicate a clearly articulated vision for TARP
and how all individual programs are intended to work in concert to
achieve that vision. This vision should incorporate actions to
preserve homeownership. Once this vision is clearly articulated,
Treasury should document needed skills and competencies;
Status: Implemented.
GAO Recommendation: Continue to expeditiously hire personnel needed to
carry out and oversee TARP;
Status: Implemented.
GAO Recommendation: Expedite efforts to ensure that sufficient
personnel are assigned and properly trained to oversee the performance
of all contractors, especially for contracts priced on a time-and-
materials basis, and move toward fixed-price arrangements whenever
possible as program requirements are better defined over time;
Status: Implemented.
GAO Recommendation: Develop a comprehensive system of internal control
over TARP activities, including policies, procedures, and guidance
that are robust enough to ensure that the program’s objectives and
requirements are met;
Status: Implemented.
GAO Recommendation: Develop and implement a well-defined and
disciplined risk-assessment process, as such a process is essential to
monitoring program status and identifying any risks of potential
inadequate funding of announced programs;
Status: Implemented.
GAO Recommendation: Review and renegotiate existing conflict-of-
interest mitigation plans, as necessary, to enhance specificity and
conformity with the new interim conflicts of interest regulation, and
take continued steps to manage and monitor conflicts of interest and
enforce mitigation plans;
Status: Implemented.
March 31, 2009:
GAO Recommendation: Develop a communication strategy that includes
building an understanding and support for the various components of
the program. Specific actions could include hiring a communications
officer, integrating communications into TARP operations, scheduling
regular and ongoing contact with congressional committees and members,
holding town hall meetings with the public across the country,
establishing a counsel of advisors, and leveraging available
technology;
Status: Implemented.
GAO Recommendation: Require that the American International Group,
Inc. (AIG) seek concessions from stakeholders, such as management,
employees, and counterparties, including seeking to renegotiate
existing contracts, as appropriate, as it finalizes the agreement for
additional assistance;
Status: Closed, not implemented.
GAO Recommendation: Update OFS documentation of certain internal
control procedures and the guidance available to the public on
determining warrant exercise prices to be consistent with actual
practices applied by OFS;
Status: Implemented.
GAO Recommendation: Improve transparency pertaining to TARP program
activities by reporting publicly the monies, such as dividends, paid
to Treasury by TARP participants;
Status: Implemented.
GAO Recommendation: Complete the review of, and as necessary
renegotiate, the four existing vendor conflicts-of-interest mitigation
plans to enhance specificity and conformity with the new interim
conflicts-of-interest rule;
Status: Implemented.
GAO Recommendation: Issue guidance requiring that key communications
and decisions concerning potential or actual vendor-related conflicts
of interest be documented;
Status: Implemented.
June 17, 2009:
GAO Recommendation: Ensure that the warrant valuation process
maximizes benefits to taxpayers and consider publicly disclosing
additional details regarding the warrant repurchase process, such as
the initial price offered by the issuing entity and Treasury’s
independent valuations, to demonstrate Treasury’s attempts to maximize
the benefit received for the warrants on behalf of the taxpayer;
Status: Implemented.
GAO Recommendation: In consultation with the Chairman of the Federal
Deposit Insurance Corporation (FDIC), the Chairman of the Board of
Governors of the Federal Reserve System (Federal Reserve), the
Comptroller of the Currency, and the Acting Director of the Office of
Thrift Supervision, ensure consideration of generally consistent
criteria by the primary federal regulators when considering repurchase
decisions under TARP;
Status: Open.
GAO Recommendation: Fully implement a communication strategy that
ensures that all key congressional stakeholders are adequately
informed and kept up to date about TARP;
Status: Partially implemented.
GAO Recommendation: Expedite efforts to conduct usability testing to
measure the quality of users’ experiences with the financial stability
Web site and measure customer satisfaction with the site, using
appropriate tools such as online surveys, focus groups, and e-mail
feedback forms;
Status: Implemented.
GAO Recommendation: Explore options for providing to the public more
detailed information on the costs of TARP contracts and agreements,
such as a dollar breakdown of obligations and/or expenses;
Status: Implemented.
GAO Recommendation: Finally, to help improve the transparency of
Capital Assistance Program (CAP)—in particular the stress tests
results—we recommend that the Director of Supervision and Regulation
of the Federal Reserve consider periodically disclosing to the public
the aggregate performance of the largest 19 U.S. bank holding
companies against the more adverse scenario forecast numbers for the
duration of the 2-year forecast period and whether or not the scenario
needs to be revised. At a minimum, the Federal Reserve should provide
the aggregate performance data to OFS program staff for any of the 19
institutions participating in CAP or CPP;
Status: Implemented.
July 23, 2009:
GAO Recommendation: Consider methods of monitoring whether borrowers
with total household debt of more than 55 percent of their income who
have been told that they must obtain housing counseling do so, and
assessing how this counseling affects the performance of modified
loans to see if the requirement is having its intended effect of
limiting redefaults;
Status: Closed, not implemented.
GAO Recommendation: Re-evaluate the basis and design of the Home Price
Decline Protection (HPDP) program to ensure that Home Affordable
Modification Program (HAMP) funds are being used efficiently to
maximize the number of borrowers who are helped under HAMP and to
maximize overall benefits of utilizing taxpayer dollars;
Status: Implemented.
GAO Recommendation: Institute a system to routinely review and update
key assumptions and projections about the housing market and the
behavior of mortgage-holders, borrowers, and servicers that underlie
Treasury’s projection of the number of borrowers whose loans are
likely to be modified under HAMP and revise the projection as
necessary in order to assess the program’s effectiveness and structure;
Status: Partially implemented.
GAO Recommendation: Place a high priority on fully staffing vacant
positions in the Homeownership Preservation Office—including filling
the position of Chief Homeownership Preservation Officer with a
permanent placement—and evaluate the office’s staffing levels and
competencies to determine whether they are sufficient and appropriate
to effectively fulfill its HAMP governance responsibilities;
Status: Partially implemented.
GAO Recommendation: Expeditiously finalize a comprehensive system of
internal control over HAMP, including policies, procedures, and
guidance for program activities, to ensure that the interests of both
the government and taxpayer are protected and that the program
objectives and requirements are being met once loan modifications and
incentive payments begin;
Status: Partially implemented.
GAO Recommendation: Expeditiously develop a means of systematically
assessing servicers’ capacity to meet program requirements during
program admission so that Treasury can understand and address any
risks associated with individual servicers’ abilities to fulfill
program requirements, including those related to data reporting and
collection;
Status: Implemented.
October 8, 2009:
GAO Recommendation: Consider TARP in a broad market context, and as
part of determining whether to extend TARP work with the Chairmen of
the Federal Reserve and FDIC to develop a coordinated framework and
analytical basis to determine whether an extension is needed. And if
so, clearly spell out what objectives and measures of any extended
programs would be, along with anticipated costs and safeguards;
Status: Implemented.
GAO Recommendation: Document its analytical decision-making process
and clearly communicate the results to Congress and the American
people for determining whether an extension is needed;
Status: Implemented.
GAO Recommendation: Update its projected use of funds and if the
program is extended, continue to reevaluate them on a periodic basis.
Status: Implemented;
November 2, 2009:
GAO Recommendation: Ensure that Treasury has the expertise needed to
adequately monitor and divest the government’s investment in Chrysler
Group LLC (Chrysler) and General Motors Company (GM), and obtain
needed expertise in areas where gaps are identified (either through in-
house or external means);
Status: Implemented.
GAO Recommendation: Report to Congress on Treasury’s plans to assess
and monitor the auto companies’ performance and ability to repay their
loans. When reporting, balance the need for transparency with need to
protect proprietary information;
Status: Open.
GAO Recommendation: Develop criteria for evaluating the optimal method
and timing for divesting the government’s ownership stake in Chrysler
and GM, including evaluating the full range of available options, such
as initial public offerings or private sales;
Status: Open.
February 5, 2010:
GAO Recommendation: To enable GAO to audit TARP support for Term Asset-
Backed Securities Loan Facility (TALF) most effectively, Congress may
wish to provide GAO with audit authority over all Federal Reserve
operational and administrative actions taken with respect to TALF,
together with appropriate access authority;
Status: Implemented.
GAO Recommendation: To improve transparency of decision making on the
use of TARP funds for TALF and to ensure adequate monitoring of risks
related to TALF collateral, given the distressed conditions in the
commercial real estate market, as part of its ongoing monitoring of
TALF collateral, the Secretary of the Treasury should direct the OFS
to continue to give greater attention to reviewing risks posed by
commercial mortgage-backed securities;
Status: Implemented.
GAO Recommendation: To improve transparency of decision making on the
use of TARP funds for TALF and to ensure adequate monitoring of risks
related to TALF collateral, the Secretary of the Treasury should
direct the OFS to strengthen the process for making major program
decisions for TALF and document how it arrives at final decisions with
the Federal Reserve and Federal Reserve Bank of New York (FRBNY). Such
decisions should include how Treasury considers expert and contractor
recommendations and resolves those recommendations that differ from
those of the Federal Reserve and FRBNY;
Status: Implemented.
GAO Recommendation: To improve transparency of decision making on the
use of TARP funds for TALF and to ensure adequate monitoring of risks
related to TALF collateral, the Secretary of the Treasury should
direct the OFS to conduct a review of what data to track and metrics
to disclose to the public in the event that TALF LLC purchases
surrendered assets from FRBNY. Such data and metrics should relate to
the purchase, management, and sale of assets in TALF LLC that
potentially impact TARP funds. Metrics related to TALF LLC could
include periodic reports on the date and purchase price of assets;
fluctuations in the market value of assets held; the date, price, and
rationale when assets are sold; and the total amount of loans
outstanding to Treasury;
Status: Implemented.
June 24, 2010:
GAO Recommendation: Establish clear and specific criteria for
determining whether a borrower is in imminent default to ensure
greater consistency across servicers;
Status: Open.
GAO Recommendation: Develop additional guidance for servicers on their
quality assurance programs for HAMP, including greater specificity on
how to categorize loans for sampling and what servicers should be
evaluating in their reviews;
Status: Open.
GAO Recommendation: Specify which complaints servicers should track to
ensure consistency and to facilitate program oversight and compliance;
Status: Open.
GAO Recommendation: More clearly inform borrowers that the HOPE
Hotline may also be used if they are having difficulty with their HAMP
application or servicer or feel that they have been incorrectly denied
HAMP, monitor the effectiveness of the HOPE Hotline as an escalation
process for handling borrower concerns about potentially incorrect
HAMP denials, and develop an improved escalation mechanism if the HOPE
Hotline is not sufficiently effective;
Status: Open.
GAO Recommendation: Finalize and issue consequences for servicer
noncompliance with HAMP requirements as soon as possible;
Status: Open.
GAO Recommendation: Report activity under the principal reduction
program, including the extent to which servicers determined that
principal reduction was beneficial to investors but did not offer it,
to ensure transparency in the implementation of this program feature
across servicers;
Status: Open.
GAO Recommendation: Finalize and implement benchmarks for performance
measures under the first-lien modification program, as well as develop
measures and benchmarks for the recently announced TARP-funded
homeowner assistance programs;
Status: Open.
GAO Recommendation: Implement a prudent design for remaining TARP-
funded housing programs;
Status: Open.
June 30, 2010:
GAO Recommendation: Formalize and document coordination with the
Chairman of the FDIC for decisions associated with the expiration of
TARP (1) by including the Chairman at relevant FinSOB meetings, (2)
through formal bilateral meetings, or (3) by utilizing other forums
that accommodate more structured dialogue;
Status: Partially implemented.
GAO Recommendation: Publicly identify clear program objectives, the
expected impact of programs, and the level of additional resources
needed to meet those objectives. Set quantitative program objectives
for its small business lending programs and identify any additional
data needed to make program decisions;
Status: Open.
September 29, 2010[A]:
GAO Recommendation: To gain a better understanding of the Supervisory
Capital Assistance Program (SCAP) and inform the use of similar stress
tests in the future, the Federal Reserve should compare the
performance of the 19 largest bank holding companies against the more
adverse scenario projections following the completion of the 2-year
period covered in the SCAP stress test ending December 31, 2010, and
disclose the results of the analysis to the public;
Status: Open.
GAO Recommendation: The Federal Reserve, in consultation with the
other banking regulators, should develop a plan that reconciles the
divergent views on transparency and allows for increased transparency
in the regular supervisory process. Such a plan should, at a minimum,
outline steps for releasing supervisory methodologies and analytical
results for stress testing;
Status: Open.
GAO Recommendation: The Federal Reserve, in consultation with the
other banking regulators, should develop more specific criteria to
include in its guidance to examiners for assessing the quality of
stress tests and how these tests inform bank holding companies capital
adequacy planning. These guidelines should clarify the stress testing
procedures already incorporated into banking regulations and
incorporate lessons learned from SCAP;
Status: Open.
GAO Recommendation: The Federal Reserve, in consultation with the
other banking regulators, should fully develop its plan for
maintaining and improving the use of data, risk identification and
assessment infrastructure, and requisite systems in implementing its
supervisory functions and new responsibilities under the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). This
plan should also ensure the dissemination of these enhancements
throughout the Federal Reserve System and other financial regulators,
as well as new organizations established in the Dodd-Frank Act;
Status: Open.
GAO Recommendation: The Federal Reserve, in consultation with the
other banking regulators, should take further steps to more
effectively coordinate and communicate among the banking regulators,
including that all applicable agencies are included in discussions and
decisions regarding multi-agency activities, such as horizontal
examinations of financial institutions;
Status: Open.
October 4, 2010:
GAO Recommendation: Apply lessons learned from the implementation of
CPP to similar programs, such as Small Business Lending Fund, and
enhance procedural controls for addressing the risk of inconsistency
in regulators’ decisions on withdrawals. Specifically, establish a
process for collecting information from federal bank regulators on all
applicants that withdraw from consideration in response to a regulator’
s recommendation, including the reasons behind the recommendation.
Evaluate the information to identify trends or patterns that may
indicate whether similar applicants were treated inconsistently across
different regulators and take action, if necessary, to help ensure a
more consistent treatment;
Status: Open.
GAO Recommendation: Periodically collect and review certain
information from federal bank regulators on the analysis and
conclusions supporting their decisions on CPP repayment requests and
provide feedback for the regulators’ consideration on the extent to
which regulators are evaluating similar institutions consistently;
Status: Open.
Source: GAO.
Notes: This table does not include 20 recommendations related to the
fiscal year 2009 financial audit as detailed in GAO-10-743R. For the
latest status on the two significant deficiencies included in GAO-10-
743R, see GAO-11-174.
[A] These recommendations were made to the Federal Reserve.
[End of table]
[End of section]
Appendix II: Small Business Credit:
Large Banks Devote a Small Percentage of Total Lending to Small
Business Loans, although the Total Dollar Value of the Loans Is
Significant:
As a proportion of their outstanding value of total loans, large banks
have the smallest percentage of small business loans of all lenders.
[Footnote 101] In examining the proportion of the outstanding value of
small business loans at banks and credit unions, we found that the
largest banks--banks with $10 billion or greater in total assets--
consistently held the smallest share of small business loans as a
percentage of their total loans (see figure 9).
Figure 9: Small Commercial and Industrial and Small Commercial Real
Estate Loans at Banks, as a Percent of Total Loans, 1993 through First
Quarter 2010:
[Refer to PDF for image: 2 multiple line graphs]
Commercial real estate loans:
Year: 1993;
Less than $100 million in assets: 7.1%;
$100 million-$1 billion in assets: 10.2%;
$1-$10 billion in assets: 5.6%;
$10 billion or more in assets: 2.4%.
Year: 1994;
Less than $100 million in assets: 9%;
$100 million-$1 billion in assets: 12%;
$1-$10 billion in assets: 5.7%;
$10 billion or more in assets: 2.4%.
Year: 1995;
Less than $100 million in assets: 9.2%;
$100 million-$1 billion in assets: 12.6%;
$1-$10 billion in assets: 5.5%;
$10 billion or more in assets: 2.6%.
Year: 1996;
Less than $100 million in assets: 9.2%;
$100 million-$1 billion in assets: 12.7%;
$1-$10 billion in assets: 6%;
$10 billion or more in assets: 2.6%.
Year: 1997;
Less than $100 million in assets: 9%;
$100 million-$1 billion in assets: 12.9%;
$1-$10 billion in assets: 5.9%;
$10 billion or more in assets: 2.4%.
Year: 1998;
Less than $100 million in assets: 9%;
$100 million-$1 billion in assets: 13.3%;
$1-$10 billion in assets: 6.4%;
$10 billion or more in assets: 2.6%.
Year: 1999;
Less than $100 million in assets: 9.5%;
$100 million-$1 billion in assets: 13.7%;
$1-$10 billion in assets: 7.3%;
$10 billion or more in assets: 2.9%.
Year: 2000;
Less than $100 million in assets: 10.5%;
$100 million-$1 billion in assets: 14.1%;
$1-$10 billion in assets: 7.3%;
$10 billion or more in assets: 2.7%.
Year: 2001;
Less than $100 million in assets: 10.8%;
$100 million-$1 billion in assets: 14.4%;
$1-$10 billion in assets: 7.3%;
$10 billion or more in assets: 2.8%.
Year: 2002;
Less than $100 million in assets: 12.1%;
$100 million-$1 billion in assets: 15.4%;
$1-$10 billion in assets: 7.2%;
$10 billion or more in assets: 3%.
Year: 2003;
Less than $100 million in assets: 12.8%;
$100 million-$1 billion in assets: 15.8%;
$1-$10 billion in assets: 8%;
$10 billion or more in assets: 2.9%.
Year: 2004;
Less than $100 million in assets: 13.4%;
$100 million-$1 billion in assets: 15.9%;
$1-$10 billion in assets: 8.5%;
$10 billion or more in assets: 2.9%.
Year: 2005;
Less than $100 million in assets: 13.7%;
$100 million-$1 billion in assets: 15.8%;
$1-$10 billion in assets: 8.4%;
$10 billion or more in assets: 2.7%.
Year: 2006;
Less than $100 million in assets: 13.2%;
$100 million-$1 billion in assets: 15.4%;
$1-$10 billion in assets: 8.7%;
$10 billion or more in assets: 2.6%.
Year: 2007;
Less than $100 million in assets: 13.1%;
$100 million-$1 billion in assets: 14.7%;
$1-$10 billion in assets: 8.3%;
$10 billion or more in assets: 2.8%.
Year: 2008;
Less than $100 million in assets: 16.4
$100 million-$1 billion in assets: 14.5
$1-$10 billion in assets: 8.6
$10 billion or more in assets: 2.8%.
Year: 2009;
Less than $100 million in assets: 17%;
$100 million-$1 billion in assets: 14.5%;
$1-$10 billion in assets: 8.8%;
$10 billion or more in assets: 2.7%.
Year: 2010;
Less than $100 million in assets: 17.2%;
$100 million-$1 billion in assets: 15%;
$1-$10 billion in assets: 9.2%;
$10 billion or more in assets: 2.4%.
Commercial and industrial loans:
Year: 1993;
Less than $100 million in assets: 6.9%;
$100 million-$1 billion in assets: 9.4%;
$1-$10 billion in assets: 6.6%;
$10 billion or more in assets: 3.2%.
Year: 1994;
Less than $100 million in assets: 8.3%;
$100 million-$1 billion in assets: 10.3%;
$1-$10 billion in assets: 6.2%;
$10 billion or more in assets: 3.3%.
Year: 1995;
Less than $100 million in assets: 8.8%;
$100 million-$1 billion in assets: 10.5%;
$1-$10 billion in assets: 6.2%;
$10 billion or more in assets: 3.4%.
Year: 1996;
Less than $100 million in assets: 8.9%;
$100 million-$1 billion in assets: 10.8%;
$1-$10 billion in assets: 6.7%;
$10 billion or more in assets: 3.5%.
Year: 1997;
Less than $100 million in assets: 8.8%;
$100 million-$1 billion in assets: 11%;
$1-$10 billion in assets: 6.5%;
$10 billion or more in assets: 4.2%.
Year: 1998;
Less than $100 million in assets: 9%;
$100 million-$1 billion in assets: 11.3%;
$1-$10 billion in assets: 6.8%;
$10 billion or more in assets: 3.7%.
Year: 1999;
Less than $100 million in assets: 9.1%;
$100 million-$1 billion in assets: 11.4%;
$1-$10 billion in assets: 7.3%;
$10 billion or more in assets: 3.9%.
Year: 2000;
Less than $100 million in assets: 10.2%;
$100 million-$1 billion in assets: 11.4%;
$1-$10 billion in assets: 7.5%;
$10 billion or more in assets: 3.7%.
Year: 2001;
Less than $100 million in assets: 10.8%;
$100 million-$1 billion in assets: 11.7%;
$1-$10 billion in assets: 7.3%;
$10 billion or more in assets: 3.6%.
Year: 2002;
Less than $100 million in assets: 10.8%;
$100 million-$1 billion in assets: 11.2%;
$1-$10 billion in assets: 7.8%;
$10 billion or more in assets: 3.9%.
Year: 2003;
Less than $100 million in assets: 10.7%;
$100 million-$1 billion in assets: 10.8%;
$1-$10 billion in assets: 7.6%;
$10 billion or more in assets: 3.5%.
Year: 2004;
Less than $100 million in assets: 10.9%;
$100 million-$1 billion in assets: 10.5%;
$1-$10 billion in assets: 7.5%;
$10 billion or more in assets: 3.3%.
Year: 2005;
Less than $100 million in assets: 10.7%;
$100 million-$1 billion in assets: 10.1%;
$1-$10 billion in assets: 7.3%;
$10 billion or more in assets: 3.2%.
Year: 2006;
Less than $100 million in assets: 10.3%;
$100 million-$1 billion in assets: 9.7%;
$1-$10 billion in assets: 6.8%;
$10 billion or more in assets: 2.7%.
Year: 2007;
Less than $100 million in assets: 10.4%;
$100 million-$1 billion in assets: 9.5%;
$1-$10 billion in assets: 6.8%;
$10 billion or more in assets: 3.2%.
Year: 2008;
Less than $100 million in assets: 12.8%;
$100 million-$1 billion in assets: 9.5%;
$1-$10 billion in assets: 6.4%;
$10 billion or more in assets: 3.1%.
Year: 2009;
Less than $100 million in assets: 12.1%;
$100 million-$1 billion in assets: 8.9%;
$1-$10 billion in assets: 6.4%;
$10 billion or more in assets: 3%.
Year: 2010;
Less than $100 million in assets: 11.7%;
$100 million-$1 billion in assets: 8.8%;
$1-$10 billion in assets: 6%;
$10 billion or more in assets: 3.1%.
Source: GAO analysis of FDIC call report data accessed through SNL
Financial.
[End of figure]
Despite the small number of small business loans to total loans,
larger banks consistently deliver the largest dollar amount of loans
to small businesses (see figure 10).
Figure 10: Outstanding Value of Small Business Loans by Commercial and
Savings Bank Asset Size, as of December 31, 2009:
[Refer to PDF for image: stacked horizontal bar graph]
Total small business loans by type: Commercial real estate:
$10 billion or more in assets: 39.7%;
$1-$10 billion in assets: 20.8%;
$100 million-$1 billion in assets: 34.8%;
Less than $100 million in assets: 4.7%.
Total small business loans by type: Commercial and industrial:
$10 billion or more in assets: 52.5%;
$1-$10 billion in assets: 18.1%;
$100 million-$1 billion in assets: 25.4%;
Less than $100 million in assets: 4.0%.
Source: GAO analysis of FDIC call report data accessed through SNL
Financial.
[End of figure]
Credit Unions Overall Devote a Small Percentage of Total Lending to
Small Business Loans, though Larger Credit Unions Do More Small
Business Lending:
Credit unions have smaller business loan portfolios than other
depository institutions, in part because they are restricted in the
dollar value of small business loans they can extend.[Footnote 102] By
2009, the largest credit unions had significantly increased their
value of small business loans to 6.5 percent (see figure 11). The
National Credit Union Association has noted in a supervisory letter to
their credit unions that business loans have grown by 60 percent from
2005 to 2009. The smallest credit unions--those with less than $20
million in assets--hold less than 2 percent of member business loans
to total loans.
Figure 11: Outstanding Value of Small Member Business Loans at Credit
Unions, as a Percent of Total Loans, 1994 through First Quarter 2010:
[Refer to PDF for image: multiple line graph]
Year: 1994;
Less than $5 million in assets: 0.48%;
$5-$20 million in assets: 0.76%;
$20-$100 million in assets: 1.45%;
Greater than $100 million in assets: 1.27%.
Year: 1995;
Less than $5 million in assets: 0.43%;
$5-$20 million in assets: 0.78%;
$20-$100 million in assets: 1.31%;
Greater than $100 million in assets: 1.32%.
Year: 1996;
Less than $5 million in assets: 0.42%;
$5-$20 million in assets: 0.7%;
$20-$100 million in assets: 1.32%;
Greater than $100 million in assets: 1.36%.
Year: 1997;
Less than $5 million in assets: 0.44%;
$5-$20 million in assets: 0.76%;
$20-$100 million in assets: 1.3%;
Greater than $100 million in assets: 1.31%.
Year: 1998;
Less than $5 million in assets: 0.42%;
$5-$20 million in assets: 0.73%;
$20-$100 million in assets: 1.42%;
Greater than $100 million in assets: 1.46%.
Year: 1999;
Less than $5 million in assets: 0.38%;
$5-$20 million in assets: 0.75%;
$20-$100 million in assets: 1.43%;
Greater than $100 million in assets: 1.58%.
Year: 2000;
Less than $5 million in assets: 0.34%;
$5-$20 million in assets: 0.66%;
$20-$100 million in assets: 1.38%;
Greater than $100 million in assets: 1.72%.
Year: 2001;
Less than $5 million in assets: 0.33%;
$5-$20 million in assets: 0.66%;
$20-$100 million in assets: 1.42%;
Greater than $100 million in assets: 1.86%.
Year: 2002;
Less than $5 million in assets: 0.47%;
$5-$20 million in assets: 0.79%;
$20-$100 million in assets: 1.56%;
Greater than $100 million in assets: 2.35%.
Year: 2003;
Less than $5 million in assets: 0.39%;
$5-$20 million in assets: 0.74%;
$20-$100 million in assets: 1.55%;
Greater than $100 million in assets: 2.83%.
Year: 2004;
Less than $5 million in assets: 0.67%;
$5-$20 million in assets: 1.04%;
$20-$100 million in assets: 2.37%;
Greater than $100 million in assets: 4.28%.
Year: 2005;
Less than $5 million in assets: 0.48%;
$5-$20 million in assets: 1.19%;
$20-$100 million in assets: 2.82%;
Greater than $100 million in assets: 5.15%.
Year: 2006;
Less than $5 million in assets: 0.45%;
$5-$20 million in assets: 1.15%;
$20-$100 million in assets: 3.15%;
Greater than $100 million in assets: 5.93%.
Year: 2007;
Less than $5 million in assets: 0.44%;
$5-$20 million in assets: 1.22%;
$20-$100 million in assets: 3.51%;
Greater than $100 million in assets: 6.48%.
Year: 2008;
Less than $5 million in assets: 0.32%;
$5-$20 million in assets: 1.53%;
$20-$100 million in assets: 3.53%;
Greater than $100 million in assets: 6.96%.
Year: 2009;
Less than $5 million in assets: 0.34%;
$5-$20 million in assets: 1.83%;
$20-$100 million in assets: 3.44%;
Greater than $100 million in assets: 7.47%.
Year: 2010;
Less than $5 million in assets: $0.38%;
$5-$20 million in assets: 1.72%;
$20-$100 million in assets: 3.6%;
Greater than $100 million in assets: 7.64%.
Source: GAO analysis of NCUA financial report data accessed through
SNL Financial.
[End of figure]
The Small Business Administration Also Provides Financing to Small
Businesses, and Those Markets Are Beginning to Recover after Sharp
Declines:
The Small Business Administration's (SBA) 7(a) and 504 loan programs
are intended to facilitate the capacity of small businesses to raise
financing they cannot obtain from other private lending
institutions.[Footnote 103] Originations of government-guaranteed
small business loans (by dollar value) faced steep declines during the
onset of the financial crisis, though volumes have since recovered.
SBA loan approvals sharply declined in 2009 from 2008 levels but
increased guarantees and reduced fees on 7(a) loans initiated through
the American Recovery and Reinvestment Act (Recovery Act) helped
increase loan volumes from fiscal year 2009 to fiscal year 2010 (see
figure 12).[Footnote 104]
Figure 12: SBA 7(a) Gross Loan Approvals, Fiscal Year 1990 through
Fiscal Year 2010:
[Refer to PDF for image: line graph]
Year: 1990;
Gross Loan Approvals: $4.14 billion.
Year: 1991;
Gross Loan Approvals: $4.38 billion.
Year: 1992;
Gross Loan Approvals: $5.95 billion.
Year: 1993;
Gross Loan Approvals: $6.77 billion.
Year: 1994;
Gross Loan Approvals: $8.24 billion.
Year: 1995;
Gross Loan Approvals: $8.31 billion.
Year: 1996;
Gross Loan Approvals: $7.77 billion.
Year: 1997;
Gross Loan Approvals: $9.57 billion.
Year: 1998;
Gross Loan Approvals: $9.1 billion.
Year: 1999;
Gross Loan Approvals: $10.24 billion.
Year: 2000;
Gross Loan Approvals: $10.62 billion.
Year: 2001;
Gross Loan Approvals: $9.98 billion.
Year: 2002;
Gross Loan Approvals: $12.32 billion.
Year: 2003;
Gross Loan Approvals: $11.4 billion.
Year: 2004;
Gross Loan Approvals: $13.76 billion.
Year: 2005;
Gross Loan Approvals: $15.43 billion.
Year: 2006;
Gross Loan Approvals: $14.7 billion.
Year: 2007;
Gross Loan Approvals: $14.43 billion.
Year: 2008;
Gross Loan Approvals: $12.76 billion.
Year: 2009;
Gross Loan Approvals: $9.25 billion.
Year: 2010;
Gross Loan Approvals: $12.45 billion.
Source: GAO analysis of SBA data.
[End of figure]
The SBA data also show that secondary markets have recently
stabilized. For example, figure 13 illustrates that the guaranteed
portion of 7(a) loans sold on the secondary market averaged about 45
percent from fiscal years 2006 through 2008, but declined to 35
percent in fiscal year 2009 and increased to 37 percent in fiscal year
2010.
Figure 13: Proportion of 7(a) Guaranteed Loan Amount Sold on Secondary
Market, Fiscal Year 1990 through Fiscal Year 2010:
[Refer to PDF for image: vertical bar graph and subgraph]
Year: 1990;
Proportion of 7(a) Guaranteed Loan Amount Sold: 38%.
Year: 1991;
Proportion of 7(a) Guaranteed Loan Amount Sold: 44%.
Year: 1992;
Proportion of 7(a) Guaranteed Loan Amount Sold: 39%.
Year: 1993;
Proportion of 7(a) Guaranteed Loan Amount Sold: 42%.
Year: 1994;
Proportion of 7(a) Guaranteed Loan Amount Sold: 32%.
Year: 1995;
Proportion of 7(a) Guaranteed Loan Amount Sold: 33%.
Year: 1996;
Proportion of 7(a) Guaranteed Loan Amount Sold: 46%.
Year: 1997;
Proportion of 7(a) Guaranteed Loan Amount Sold: 54%.
Year: 1998;
Proportion of 7(a) Guaranteed Loan Amount Sold: 59%.
Year: 1999;
Proportion of 7(a) Guaranteed Loan Amount Sold: 61%.
Year: 2000;
Proportion of 7(a) Guaranteed Loan Amount Sold: 63%.
Year: 2001;
Proportion of 7(a) Guaranteed Loan Amount Sold: 59%.
Year: 2002;
Proportion of 7(a) Guaranteed Loan Amount Sold: 49%.
Year: 2003;
Proportion of 7(a) Guaranteed Loan Amount Sold: 59%.
Year: 2004;
Proportion of 7(a) Guaranteed Loan Amount Sold: 56%.
Year: 2005;
Proportion of 7(a) Guaranteed Loan Amount Sold: 66%.
Year: 2006;
Proportion of 7(a) Guaranteed Loan Amount Sold: 44%.
Year: 2007;
Proportion of 7(a) Guaranteed Loan Amount Sold: 44%.
Year: 2008;
Proportion of 7(a) Guaranteed Loan Amount Sold: 45%.
Year: 2009;
Proportion of 7(a) Guaranteed Loan Amount Sold: 35%.
Year: 2010;
Proportion of 7(a) Guaranteed Loan Amount Sold: 37%.
2010 Monthly data:
January: 39%;
February: 25%;
March: 27%;
April: 31%;
May: 18%;
June: 173%;
July: 57%; 3%; 2.89
September: 91%.
Source: GAO analysis of SBA data.
Note: According to an SBA official, at the end of the second quarter
of 2010 many active lenders sold substantial portfolios of SBA loans
because of concerns related to the publication of Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 166:
Accounting for Transfers of Financial Assets, an amendment of FASB
Statement No. 140. This sales activity resulted in an unusual spike in
loans coming to the secondary market in June 2010.
[End of figure]
Since the Department of the Treasury (Treasury) began its purchases of
SBA 7(a) securities (see figure 14), the market has improved but
whether this trend will continue remains unknown.
Figure 14: SBA 7(a) Securities Purchase Program Purchases, as of
October 6, 2010:
[Refer to PDF for image: illustrated vertical bar graph]
Month: March;
Purchase price: $21.37 million;
Number of purchases: 3.
Month: April;
Purchase price: $35.64 million;
Number of purchases: 2.
Month: May;
Purchase price: $63.48 million;
Number of purchases: 5.
Month: June;
Purchase price: $69.97 million;
Number of purchases: 2.
Month: July;
Purchase price: $42.19 million;
Number of purchases: 5.
Month: August;
Purchase price: $52.57 million;
Number of purchases: 6.
Month: September;
Purchase price: $72.09 million;
Number of purchases: 8.
Source: GAO analysis of Treasury data.
Note: Though Treasury has committed to these transactions, it has yet
to fund all of them.
[End of figure]
Data Suggest that Small Businesses Face Credit Constraints:
During the recent financial crisis, many financial institutions faced
severe capital shortfalls that threatened their solvency and limited
their ability to lend. In addition, the securitization markets came to
a virtual halt, freezing sources of funds for new lending to consumers
and businesses.[Footnote 105] This contraction has affected many
businesses, but in particular small businesses. For example, the
Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending
Practices (SLOOS) in April 2010 showed somewhat larger net fractions
of banks having tightened loan terms for small firms than had done so
for medium-sized and large firms. However, the July 2010 survey showed
a slight easing of standards for credit to small firms--the first such
loosening since 2006.[Footnote 106] Further, the August 2010 Small
Business Economic Trends survey from the National Federation of
Independent Business (NFIB) shows that 9 percent of small businesses
reported their borrowing needs had not been satisfied, an increase
from about 6 percent since the fourth quarter of 2007.[Footnote 107]
In comparison, during the recession in 2001, there was no change in
this number.
Since the recent financial crisis, bank lending trends suggest that
access to credit for small businesses has become more restricted.
Because small banks tend to be concentrated in small business lending,
measuring lending trends at small banks should provide particular
insight into credit conditions facing small businesses.[Footnote 108]
The Board of Governors of the Federal Reserve (Federal Reserve)
calculates interest rate spreads (a measure of the risk and other
costs banks perceive in making loans) on loans from large and small
banks based on the Survey of Terms of Business Lending.[Footnote 109]
Spreads for loans less than $1 million--a proxy for loans to small
businesses--made by small banks have risen 181 basis points from their
precrisis lows (see figure 15) and remain among the highest levels
recorded since 1986.[Footnote 110] Increased spreads at small banks--
more so than large banks--are likely to indicate increased perceptions
of risk for small business loans.[Footnote 111]
Figure 15: Interest Rate Spreads for Small Loans (Less Than $1
Million), by Bank Size, and Small Business Borrowing Needs, Second
Quarter 1993 through Second Quarter 2010:
[Refer to PDF for image: multiple line graph]
Loan interest rates (spread over federal funds rate):
1993: Q2;
Small business borrowing needs not satisfied: 10%;
Small loans at small banks: 4.29%;
Small loans at large banks: 3.58%.
1993: Q3;
Small business borrowing needs not satisfied: 7%;
Small loans at small banks: 4.12%;
Small loans at large banks: 3.66%.
1993: Q4;
Small business borrowing needs not satisfied: 8.67%;
Small loans at small banks: 4.19%;
Small loans at large banks: 3.53%.
1994: Q1;
Small business borrowing needs not satisfied: 6.67%;
Small loans at small banks: 3.94%;
Small loans at large banks: 3.26%.
1994: Q2;
Small business borrowing needs not satisfied: 7.33%;
Small loans at small banks: 4.02%;
Small loans at large banks: 3.50%.
1994: Q3;
Small business borrowing needs not satisfied: 6.67%;
Small loans at small banks: 4.00%;
Small loans at large banks: 3.46%.
1994: Q4;
Small business borrowing needs not satisfied: 6.67%;
Small loans at small banks: 4.05%;
Small loans at large banks: 3.47%.
1995: Q1;
Small business borrowing needs not satisfied: 6%;
Small loans at small banks: 3.85%;
Small loans at large banks: 3.37%.
1995: Q2;
Small business borrowing needs not satisfied: 6.33%;
Small loans at small banks: 3.90%;
Small loans at large banks: 3.40%.
1995: Q3;
Small business borrowing needs not satisfied: 7.33%;
Small loans at small banks: 3.91%;
Small loans at large banks: 3.53%.
1995: Q4;
Small business borrowing needs not satisfied: 5%;
Small loans at small banks: 3.93%;
Small loans at large banks: 3.47%.
1996: Q1;
Small business borrowing needs not satisfied: 6%;
Small loans at small banks: 3.89%;
Small loans at large banks: 3.35%.
1996: Q2;
Small business borrowing needs not satisfied: 6.67%;
Small loans at small banks: 3.87%;
Small loans at large banks: 3.49%.
1996: Q3;
Small business borrowing needs not satisfied: 6.33%;
Small loans at small banks: 3.89%;
Small loans at large banks: 3.56%.
1996: Q4;
Small business borrowing needs not satisfied: 6%;
Small loans at small banks: 3.89%;
Small loans at large banks: 3.44%.
1997: Q1;
Small business borrowing needs not satisfied: 6%;
Small loans at small banks: 3.92%;
Small loans at large banks: 3.40%.
1997: Q2;
Small business borrowing needs not satisfied: 5.33%;
Small loans at small banks: 3.95%;
Small loans at large banks: 3.36%.
1997: Q3;
Small business borrowing needs not satisfied: 6.33%;
Small loans at small banks: 3.90%;
Small loans at large banks: 3.44%.
1997: Q4;
Small business borrowing needs not satisfied: 5.67%;
Small loans at small banks: 3.92%;
Small loans at large banks: 3.39%.
1998: Q1;
Small business borrowing needs not satisfied: 5%;
Small loans at small banks: 3.83%;
Small loans at large banks: 3.33%.
1998: Q2;
Small business borrowing needs not satisfied: 5.67%;
Small loans at small banks: 3.83%;
Small loans at large banks: 3.26%.
1998: Q3;
Small business borrowing needs not satisfied: 5.33%;
Small loans at small banks: 3.73%;
Small loans at large banks: 3.25%.
1998: Q4;
Small business borrowing needs not satisfied: 5.33%;
Small loans at small banks: 3.80%;
Small loans at large banks: 3.21%.
1999: Q1;
Small business borrowing needs not satisfied: 4.67%;
Small loans at small banks: 3.86%;
Small loans at large banks: 3.25%.
1999: Q2;
Small business borrowing needs not satisfied: 5%;
Small loans at small banks: 3.87%;
Small loans at large banks: 3.27%.
1999: Q3;
Small business borrowing needs not satisfied: 3.67%;
Small loans at small banks: 3.84%;
Small loans at large banks: 3.27%.
1999: Q4;
Small business borrowing needs not satisfied: 4.33%;
Small loans at small banks: 3.75%;
Small loans at large banks: 3.27%.
2000: Q1;
Small business borrowing needs not satisfied: 4.67%;
Small loans at small banks: 3.59%;
Small loans at large banks: 3.23%.
2000: Q2;
Small business borrowing needs not satisfied: 5.33%;
Small loans at small banks: 3.69%;
Small loans at large banks: 3.36%.
2000: Q3;
Small business borrowing needs not satisfied: 4.67%;
Small loans at small banks: 3.65%;
Small loans at large banks: 3.32%.
2000: Q4;
Small business borrowing needs not satisfied: 4.67%;
Small loans at small banks: 3.66%;
Small loans at large banks: 3.28%.
2001: Q1;
Small business borrowing needs not satisfied: 5.67%;
Small loans at small banks: 3.78%;
Small loans at large banks: 3.23%.
2001: Q2;
Small business borrowing needs not satisfied: 5.33%;
Small loans at small banks: 3.8%;
Small loans at large banks: 3.15%.
2001: Q3;
Small business borrowing needs not satisfied: 5.67%;
Small loans at small banks: 3.90%;
Small loans at large banks: 3.13%.
2001: Q4;
Small business borrowing needs not satisfied: 5.67%;
Small loans at small banks: 4.37%;
Small loans at large banks: 3.19%.
2002: Q1;
Small business borrowing needs not satisfied: 5.33%;
Small loans at small banks: 4.47%;
Small loans at large banks: 3.10%.
2002: Q2;
Small business borrowing needs not satisfied: 5.67%;
Small loans at small banks: 4.38%;
Small loans at large banks: 3.14%.
2002: Q3;
Small business borrowing needs not satisfied: 5.33%;
Small loans at small banks: 4.23%;
Small loans at large banks: 3.13%.
2002: Q4;
Small business borrowing needs not satisfied: 5.33%;
Small loans at small banks: 4.52%;
Small loans at large banks: 3.25%.
2003: Q1;
Small business borrowing needs not satisfied: 6%;
Small loans at small banks: 4.44%;
Small loans at large banks: 3.08%.
2003: Q2;
Small business borrowing needs not satisfied: 5.67%;
Small loans at small banks: 4.47%;
Small loans at large banks: 3.05%.
2003: Q3;
Small business borrowing needs not satisfied: 6%;
Small loans at small banks: 4.35%;
Small loans at large banks: 3.05%.
2003: Q4;
Small business borrowing needs not satisfied: 5.67%;
Small loans at small banks: 4.31%;
Small loans at large banks: 3.06%.
2004: Q1;
Small business borrowing needs not satisfied: 6.67%;
Small loans at small banks: 4.44%;
Small loans at large banks: 3.02%.
2004: Q2;
Small business borrowing needs not satisfied: 5.33%;
Small loans at small banks: 4.33%;
Small loans at large banks: 3.01%.
2004: Q3;
Small business borrowing needs not satisfied: 5.67%;
Small loans at small banks: 4.25%;
Small loans at large banks: 3.02%.
2004: Q4;
Small business borrowing needs not satisfied: 4%;
Small loans at small banks: 4.22%;
Small loans at large banks: 2.97%.
2005: Q1;
Small business borrowing needs not satisfied: 4.33%;
Small loans at small banks: 3.98%;
Small loans at large banks: 2.92%.
2005: Q2;
Small business borrowing needs not satisfied: 5%;
Small loans at small banks: 3.86%;
Small loans at large banks: 2.92%.
2005: Q3;
Small business borrowing needs not satisfied: 4.33%;
Small loans at small banks: 3.81%;
Small loans at large banks: 2.97%.
2005: Q4;
Small business borrowing needs not satisfied: 4.67%;
Small loans at small banks: 3.70%;
Small loans at large banks: 2.93%.
2006: Q1;
Small business borrowing needs not satisfied: 6%;
Small loans at small banks: 3.61%;
Small loans at large banks: 2.90%.
2006: Q2;
Small business borrowing needs not satisfied: 5%;
Small loans at small banks: 3.57%;
Small loans at large banks: 2.98%.
2006: Q3;
Small business borrowing needs not satisfied: 4%;
Small loans at small banks: 3.46%;
Small loans at large banks: 2.92%.
2006: Q4;
Small business borrowing needs not satisfied: 6%;
Small loans at small banks: 3.43%;
Small loans at large banks: 2.89%.
2007: Q1;
Small business borrowing needs not satisfied: 5%;
Small loans at small banks: 3.52%;
Small loans at large banks: 2.85%.
2007: Q2;
Small business borrowing needs not satisfied: 4.67%;
Small loans at small banks: 3.35%;
Small loans at large banks: 2.85%.
2007: Q3;
Small business borrowing needs not satisfied: 4.67%;
Small loans at small banks: 3.30%;
Small loans at large banks: 2.80%.
2007: Q4;
Small business borrowing needs not satisfied: 5.67%;
Small loans at small banks: 3.45%;
Small loans at large banks: 2.78%.
2008: Q1;
Small business borrowing needs not satisfied: 5%;
Small loans at small banks: 3.84%;
Small loans at large banks: 2.74%.
2008: Q2;
Small business borrowing needs not satisfied: 5.67%;
Small loans at small banks: 3.97%;
Small loans at large banks: 2.90%.
2008: Q3;
Small business borrowing needs not satisfied: 6.33%;
Small loans at small banks: 4.03%;
Small loans at large banks: 2.85%.
2008: Q4;
Small business borrowing needs not satisfied: 6.33%;
Small loans at small banks: 4.62%;
Small loans at large banks: 3.24%.
2009: Q1;
Small business borrowing needs not satisfied: 8.67%;
Small loans at small banks: 4.89%;
Small loans at large banks: 3.11%.
2009: Q2;
Small business borrowing needs not satisfied: 9%;
Small loans at small banks: 4.89%;
Small loans at large banks: 3.25%.
2009: Q3;
Small business borrowing needs not satisfied: 9%;
Small loans at small banks: 5.14%;
Small loans at large banks: 3.44%.
2009: Q4;
Small business borrowing needs not satisfied: 9%;
Small loans at small banks: 5.00%;
Small loans at large banks: 3.74%.
2010: Q1;
Small business borrowing needs not satisfied: 10.33%;
Small loans at small banks: 5.06%;
Small loans at large banks: 3.72%.
2010: Q2;
Small business borrowing needs not satisfied: 9%;
Small loans at small banks: 5.10%;
Small loans at large banks: 3.83%.
Source: GAO analysis of data from the Federal Reserve and National
Federation of Independent Business.
[End of figure]
Interest rate spreads for small loans are highly correlated with the
percentage of small businesses that reported in NFIB's monthly survey
that their borrowing needs had not been satisfied. This correlation is
somewhat higher for small banks than for large banks.[Footnote 112] In
addition, both interest rate spreads and small businesses reporting
unsatisfied borrowing needs show a substantial increase in recent
years. Moreover, the high correlation between interest rate spreads
for small loans, especially at small banks, and the proportion of
small businesses able to satisfy their borrowing needs suggests that
the perceived deterioration in credit quality is contributing to the
reduced access to credit for small businesses. In essence, small
businesses are finding it harder to get credit in part because banks
believe those firms are at increased risk of default.
Whether the supply of or the demand for credit plays a larger role in
explaining the tighter credit conditions for small businesses remains
unclear. According to the recent NFIB Economic Trends survey, the
majority of respondents cited poor sales, taxes, and government
requirements as their single most important problem, with only a small
fraction of respondents citing access to credit--indicating that
concerns about credit access are important but not the most important
issue facing small businesses. SLOOS survey responses in July 2010
also point to weaker demand for credit across both small firms and
medium-sized and large firms. With declining sales, these results
indicate that many small businesses are not growing and therefore have
less need for credit. In contrast, some small businesses that are
growing may face challenges in accessing credit or may not seek it for
fear of being denied, according to some small businesses.[Footnote 113]
Small Business Data Have a Number of Limitations:
We and others have noted that limitations in the available data hinder
a complete analysis of the credit constraints facing small businesses,
which creates challenges in trying to address this issue.[Footnote
114] First, definitions of small businesses vary across data sources
and many sources are survey-based and not always nationally
representative.[Footnote 115] Second, because banks are not generally
required to collect and report information on lending to small
businesses, certain data sources use proxies for such lending. Some
quantitative loan origination data are available, but these data are
also limited. For example, the largest Capital Purchase Program (CPP)
recipients were required to report loan origination information on
their small business lending until they fully repaid their capital;
thus Treasury only received this type of information for a short
period of time for most of these institutions. Based on our analysis
of the data and interviews with Treasury and Federal Reserve
officials, table 11 summarizes the key benefits and limitations of the
sources considered to assess small business credit conditions for
small business programs.[Footnote 116]
Table 12: Advantages and Limitations of Selected Small Business Data
Sources:
Data source: Call report data—-Federal Deposit Insurance Corporation
(banks), National Credit Union Association (credit unions), and Office
of Thrift Supervision (thrifts);
Source description: Outstanding loan balances for commercial real
estate loans and commercial and industrial loans under $1 million for
banks and thrifts, and member loans more than $50,000 for credit unions
Source advantages:
* Commercial loan size is used as a proxy for loans to small
businesses, making reporting consistent among institutions;
* Effective the first quarter 2010 Treasury requested small loans be
reported quarterly rather than annually;
Source limitations:
* Does not track whether a small business receives the loan, and may
include certain small loans to large businesses;
* Proxies do not account for loans to small businesses that are larger
than these established thresholds;
* Decreases in loan balances may not represent a decrease in credit to
small businesses but could reflect realized losses on these loans and
loan repayments.[A]
Data source: SLOOS;
Source description: Surveys approximately 60 large domestic banks,
which hold two-thirds of all business loans;
Source advantages:
* The most recent version of the survey dates to 1990 and is generally
conducted quarterly;
* Reflects supply and demand trends;
Source limitations:
* Small firms are categorized as having less than $50 million in
revenue regardless of industry;
* Survey includes only banks with more than $1 billion in assets,
though smaller banks also provide a significant amount of credit to
small businesses.
Data source: Federal Reserve Survey of Terms of Business Lending
(STBL, E.2);
Source description: Surveys interest rates and other terms on business
loans during the first business week in the middle month of each
quarter over the federal funds rate on C&I loans originated during the
survey week at a sample of large and small commercial banks and
branches and agencies of foreign banks;
Source advantages:
* Spreads indicate the risk banks perceive in making loans;
* The survey has a consistent panel with a high response rate;
Source limitations:
* Spreads for small loans may not represent small business loans and
may instead be small amounts drawn on larger loans. For example, a
small $900,000 loan could be a draw off a $50 million credit line;
* According to a Federal Reserve official, the survey is a poor
indicator of the volume of bank lending because it does not
distinguish between multiple loans of short maturities or a single
loan with a long maturity.
Data source: NFIB surveys;
Source description:
* Monthly survey addresses a range of questions to participating NFIB
members;
* Conducted a recent study of a nationally representative sample of
small employers entitled Small Business Credit In A Deep Recession;
Source advantages:
* Survey dates to 1970s and is conducted monthly;
* Captures supply and demand side credit trends;
Source limitations:
* The monthly survey over-represents some industries, including
manufacturing and construction, while under-representing some skilled
service industries. As such, respondents may not be representative of
the credit experiences of all firms in the economy[B];
* Some surveys are periodic and not collected over time, limiting the
analysis of historical trends.
Data source: National Small Business Association (NSBA) Surveys;
Source description: Periodically surveys members to show conditions of
small businesses;
Source advantages: Provides information on the types of credit used by
small businesses;
Source limitations: Responses are limited to members who tend to be
older firms.
Data source: Federal Reserve Flow of Funds Account (Z.1);
Source description: A quarterly account that tracks the flow of money
within various sectors of an economy. The account analyzes economic
data on borrowing, lending, and investment;
Source advantages: Loans to non-corporate, nonfinancial businesses are
a proxy for credit to small businesses;
Source limitations: Presents net flows, which do not isolate loan
originations.
Data source: Federal Reserve Assets and Liabilities of Commercial
Banks in the United States (H.8);
Source description: Estimates weekly balance sheet data for all
commercial banks with a breakdown for large and small domestic
commercial banks;
Source advantages: Source for high frequency bank balance sheet data;
Source limitations: Small banks are defined as those not included in
the top 25 commercial banks, which may overstate the impact of lending
by small banks.
Data source: Federal Reserve Survey of Small Business Finances (SSBF);
Source description: Series of four surveys on the use of bank credit
and other means of financing by small businesses;
Source advantages: Comprehensive, historical survey reflecting
multiple credit sources for small businesses;
Source limitations:
* Survey was last published in 2006 based on 1998-2003 data;
* The survey was discontinued because of its cost and the data
collection burden placed on small businesses.
Data source: Federal Reserve Survey of Consumer Finances;
Source description: Beginning April 2010, this triennial survey will
provide questions on households’ small businesses;
Source advantages: Soon to include an in-depth look at small business
access to credit;
Source limitations: Summary results of the addition will not be
published until 2012.
Data source: SBA 7(a) and 504 loan approval and secondary market
volumes[C];
Source description: Monthly gross value of loan approvals and value of
7(a) guaranteed portions sold by lenders in the secondary market;
Source advantages:
* Comprehensive measure of loan originations for SBA applicants;
* Comprehensive state of secondary market trends;
Source limitations:
* SBA loans represent only about four percent of small business
financing overall[D];
* Because the profile of SBA borrowers differs from other small
business borrowers, trends in SBA loan originations do not necessarily
provide information on overall trends in small business loan
originations.
Source: GAO analysis of data sources and interviews with Treasury and
Federal Reserve officials.
[A] GAO-10-531.
[C] The 7(a) program is the SBA's primary program used for working
capital and other business needs, while the 504 program is typically
used for purchasing long-term, fixed assets.
[D] In a previous report, we estimated the percent of SBA loans to
total small business loans at about 4 percent. See GAO, Small Business
Administration, Additional Measures Needed to Assess 7(a) Loan
Program's Performance, GAO-07-769 (Washington, D.C.: July 2007).
[End of table]
[End of section]
Appendix III: Econometric Analysis of the TED Spread:
We conducted an econometric analysis to assess the impact of the early
end of the Department of Treasury's (Treasury) authority to incur new
obligations under the Troubled Asset Relief Program (TARP) (for
brevity we denote this "the early end of TARP") and the passage of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act) on the TED spread, an indicator of risk in the interbank lending
market.[Footnote 117] Our multivariate econometric model uses an event
study design (with elements of a difference-in-difference model) using
daily data on the TED spread. In lieu of relying on graphing and
identifying trends in the data before and after the announcement, the
goal of this exercise was to determine whether the decline in the TED
spread in the near term after the deal to end TARP early and pass
financial regulatory reform was statistically significant when other
important variables were also considered, in particular, other
measures of short term credit risk. Economic theory offers no unified
or straightforward predictions about the impact of such a simultaneous
change in policy. The early end of TARP could, in isolation, (1)
increase perceptions of risk in lending to banks as Treasury would
lose the ability to use TARP funds to respond new threats to financial
stability or (2) have no effect if the market perceived financial
institutions had built up adequate capital and liquidity to weather a
new shock to the financial system. Alternatively, if markets took the
early end of TARP as a signal that the government believed that
financial institutions were sound, it could reduce perceptions of risk
in the interbank market. The passage of regulatory reform could reduce
perceptions of risk in the interbank market to the extent that it
implies increases in capital and liquidity at financial institutions
or otherwise enhances financial stability, or increase perceptions of
risk if, for example, a new "orderly liquidation authority" reduced
the necessity to bail out creditors in systemically important
financial institutions. In short, the multitude of potential
theoretical channels for the early end of TARP and passage of
regulatory reform imply that their ultimate impact is an empirical
question.
The primary regressions model changes in the 3-month TED spread as a
function of contemporaneous changes in the spread between 90-day
nonfinancial commercial paper and 3-month Treasury bonds. The
nonfinancial commercial paper spread should have favorable properties
as a control variable: it has the same maturity as the TED spread, and
is likely to capture general credit risk in the economy but does not
cover financial firms and thus is less apt to be confounded by
(although is not fully insulated from) reverse causality.[Footnote
118] Other control variables we used were daily changes in the S&P 500
and the term spread (measured as the difference between the 10-year
and 3-month Treasury bonds). We used a dummy variable to indicate news
of the deal to end TARP early and pass financial regulatory reform. To
carry out the exercise as validly as possible, we conducted tests to
ensure the stationarity of the variables in the model, used
heteroskedasticity and autocorrelation-consistent standard errors, and
conducted sensitivity analysis.[Footnote 119] To help ensure that our
results were not sensitive to the main specification we chose, we ran
the model with a number of variations, including:
* a variety of event start dates, including June 29, 2010, when news
of the likely passage of financial regulatory reform was reported;
June 30, 2010, one day after (when the conference report passed in the
House of Representatives); June 22, 2010, one week before (to address
the possibility that information became available to market
participants before media reports of the deal); and July 15, 2010,
(when the conference report passed in the Senate),
* two different nonfinancial commercial paper rates, AA and the higher
credit risk A2/P2 rate,
* longer maturity (6-month and 12-month) TED spreads,
* a time trend, and:
* an autoregressive model where changes in the TED spread were modeled
as a function of lagged values of itself rather than control variables.
In numerous specifications we found that news of the early end of TARP
and likely passage of financial regulatory reform did not have a
statistically significant impact on the TED spread. The effect is also
economically inconsequential, less than four-tenths of a basis point
(itself one one hundredth of a percent) deterioration in the TED
spread (per day) in our primary specification. Whether the muted
response to news of the early end of TARP is because market
participants did not view it as a meaningful event, or because the
simultaneous increase in the likelihood of financial regulatory reform
counteracted any effect, is unknown. Because we may not have captured
all important factors that might explain movements in the TED spread,
omitted variable bias remains a possibility. Furthermore, this test
assesses market participants' initial expectations and not the
ultimate impact of the early end of TARP and passage of financial
regulatory reform. In addition, ending TARP less than 3 months early,
along with previous announcements related to TARP exits beginning in
late 2009, could have limited informational content relevant for
interbank markets in the June 29, 2010, announcement. Finally, because
we use contemporaneous variables, in particular the nonfinancial
commercial paper spread, it is possible that reverse causation would
result in our model being misspecified.
[End of section]
Appendix IV: Department of the Treasury Comment Letter:
Department Of The Treasury:
Assistant Secretary:
Washington, D.C. 20220:
January 10, 2011:
Thomas J. McCool:
Director, Center for Economics:
Applied Research and Methods:
U.S. Government Accountability Office:
441 G Street, N.W. Washington, D.C. 20548:
Dear Mr. McCool:
The Department of the Treasury (Treasury) appreciates the opportunity
to review the GAO's latest draft report on Treasury's Troubled Asset
Relief Program (TARP), titled Status of Programs and Implementation of
GAO Recommendations (Draft Report).
While we recognize that the economic recovery is not complete,
Treasury is pleased that the GAO's report acknowledges the success of
TARP and other government actions taken to stabilize the financial
system and the economy. Thanks to our comprehensive and careful
strategy to address the financial crisis, the financial system is much
better capitalized today, credit markets have improved, confidence has
been restored, economic growth has resumed, and the projected cost of
TARP and other actions is much lower than originally anticipated.
As stated in the Draft Report, Treasury has addressed or has taken
steps to address many of the GAO's previous recommendations. Although
Appendix I indicates that we have fully or partially implemented 40 of
the 56 recommendations to Treasury, our review indicates that Treasury
has fully or partially implemented 53 — or approximately 95% - of the
recommendations and the only open recommendations are those issued
within approximately the last six months. We will continue to meet
with GAO staff to reconcile the data.
The GAO's sole new recommendation is that "OFS should finalize a plan
for addressing how it will manage its workforce, in particular term-
appointed employees and key SES positions, including plans for various
staffing scenarios." As stated in the Draft Report, Treasury has a
human capital strategy for OFS and has undertaken succession planning
management. OFS continues to refine those and other staffing
initiatives as it manages its workforce during TARP's continued
evolution.
We look forward to continuing to work with you and your team in our
ongoing efforts to stabilize the financial system.
Sincerely,
Signed by:
Timothy G. Massed:
Acting Assistant Secretary for Financial Stability:
[End of section]
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Orice Williams Brown, (202) 512-8678 or williamso@gao.gov:
Richard J. Hillman, (202) 512-8678 or hillmanr@gao.gov:
Thomas J. McCool, (202) 512-2642 or mccoolt@gao.gov:
Staff Acknowledgments:
In addition to the contacts named above, A. Nicole Clowers, Gary
Engel, Mathew J. Scirè, and William T. Woods (lead Directors);
Lawrance Evans, Jr., Dan Garcia-Diaz, Lynda Downing, Carolyn Kirby,
Kay Kuhlman, Harry Medina, Joseph O'Neill, Raymond Sendejas, and Karen
Tremba (lead Assistant Directors); Kevin Averyt; Ken Bombara; Tania
Calhoun; Emily Chalmers; William Chatlos; Rachel DeMarcus; Sharon
Dyer; Sarah Farkas; John Forrester; Michael Hoffman; Christine Houle;
Joe Hunter; Karen Jarzynka; Elizabeth Jimenez; Charles Jones; John
Karikari; Tory Klepacz; Heather Krause; Damian Kudelka; Robert Lee;
Grant Mallie; Karine McClosky; Tim Mooney; Susan Michal-Smith; Daniel
Newman; Lauren Nunnally; Anna Maria Ortiz; Jared Sippel; Winnie Tsen;
Jim Vitarello; Letisha Watson; and Chris Yfantis have made significant
contributions to this report.
[End of section]
Related GAO Products:
Financial Audit: Office of Financial Stability (Troubled Asset Relief
Program) Fiscal Years 2010 and 2009 Financial Statements. [hyperlink,
http://www.gao.gov/products/GAO-11-174]. November 15, 2010.
Troubled Asset Relief Program: Opportunities Exist to Apply Lessons
Learned from the Capital Purchase Program to Similarly Designed
Programs and to Improve the Repayment Process. [hyperlink,
http://www.gao.gov/products/GAO-11-47]. October 4, 2010.
Troubled Asset Relief Program: Bank Stress Test Offers Lessons as
Regulators Take Further Actions to Strengthen Supervisory Oversight.
[hyperlink, http://www.gao.gov/products/GA0-10-861]. September 29,
2010.
Financial Assistance: Ongoing Challenges and Guiding Principles
Related to Government Assistance for Private Sector Companies.
[hyperlink, http://www.gao.gov/products/GA0-10-719]. August 3, 2010.
Troubled Asset Relief Program: Continued Attention Needed to Ensure
the Transparency and Accountability of Ongoing Programs. [hyperlink,
http://www.gao.gov/products/GAO-10-933T]. July 21, 2010.
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]. June 30, 2010.
Troubled Asset Relief Program: Treasury's Framework for Deciding to
Extend TARP Was Sufficient, but Could be Strengthened for Future
Decisions. [hyperlink, http://www.gao.gov/products/GA0-10-531]. June
30, 2010.
Troubled Asset Relief Program: Further Actions Needed to Fully and
Equitably Implement Foreclosure Mitigation Programs. [hyperlink,
http://www.gao.gov/products/GA0-10-634]. June 24, 2010.
Debt Management: Treasury Was Able to Fund Economic Stabilization and
Recovery Expenditures in a Short Period of Time, but Debt Management
Challenges Remain. [hyperlink,
http://www.gao.gov/products/GA0-10-498]. May 18, 2010.
Troubled Asset Relief Program: Update of Government Assistance
Provided to AIG. [hyperlink, http://www.gao.gov/products/GA0-10-475].
April 27, 2010.
Troubled Asset Relief Program: Automaker Pension Funding and Multiple
Federal Roles Pose Challenges for the Future. [hyperlink,
http://www.gao.gov/products/GA0-10-492]. April 6, 2010.
Troubled Asset Relief Program: Home Affordable Modification Program
Continues to Face Implementation Challenges. [hyperlink,
http://www.gao.gov/products/GAO-10-556T]. March 25, 2010.
Troubled Asset Relief Program: Treasury Needs to Strengthen Its
Decision-Making Process on the Term Asset-Backed Securities Loan
Facility. [hyperlink, http://www.gao.gov/products/GAO-10-25]. February
5, 2010.
Troubled Asset Relief Program: The U.S. Government Role as Shareholder
in AIG, Citigroup, Chrysler, and General Motors and Preliminary Views
on its Investment Management Activities. [hyperlink,
http://www.gao.gov/products/GAO-10-325T]. December 16, 2009.
Financial Audit: Office of Financial Stability (Troubled Asset Relief
Program) Fiscal Year 2009 Financial Statements. [hyperlink,
http://www.gao.gov/products/GAO-10-301]. December 9, 2009.
Troubled Asset Relief Program: Continued Stewardship Needed as
Treasury Develops Strategies for Monitoring and Divesting Financial
Interests in Chrysler and GM. [hyperlink,
http://www.gao.gov/products/GAO-10-151]. November 2, 2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions
for October 28, 2008, through September 25, 2009, and Information on
Financial Agency Agreements, Contracts, Blanket Purchase Agreements,
and Interagency Agreements Awarded as of September 18, 2009. GAO-10-
24SP. October 8, 2009.
Troubled Asset Relief Program: One Year Later, Actions Are Needed to
Address Remaining Transparency and Accountability Challenges.
[hyperlink, http://www.gao.gov/products/GAO-10-16]. October 8, 2009.
Debt Management: Treasury Inflation Protected Securities Should Play a
Heightened Role in Addressing Debt Management Challenges. [hyperlink,
http://www.gao.gov/products/GAO-09-932]. September 29, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-1048T]. September 24, 2009.
Troubled Asset Relief Program: Status of Government Assistance
Provided to AIG. GAO-09-975. September 21, 2009.
Troubled Asset Relief Program: Treasury Actions Needed to Make the
Home Affordable Modification Program More Transparent and Accountable.
[hyperlink, http://www.gao.gov/products/GAO-09-837]. July 23, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-920T]. July 22, 2009.
Troubled Asset Relief Program: Status of Participants' Dividend
Payments and Repurchases of Preferred Stock and Warrants. [hyperlink,
http://www.gao.gov/products/GAO-09-889T]. July 9, 2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions
for October 28, 2008, through March 20, 2009, and Information on
Financial Agency Agreements, Contracts, Blanket Purchase Agreements,
and Interagency Agreements Awarded as of June 1, 2009. [hyperlink,
http://www.gao.gov/products/GAO-09-707SP]. June 17, 2009.
Troubled Asset Relief Program: June 2009 Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-658]. June 17, 2009.
Auto Industry: Summary of Government Efforts and Automakers'
Restructuring to Date. [hyperlink,
http://www.gao.gov/products/GAO-09-553]. April 23, 2009.
Small Business Administration's Implementation of Administrative
Provisions in the American Recovery and Reinvestment Act. [hyperlink,
http://www.gao.gov/products/GAO-09-507R]. April 23, 2009.
Troubled Asset Relief Program: March 2009 Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-539T]. March 31, 2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions
for the Period October 28, 2008 through March 20, 2009 and Information
on Financial Agency Agreements, Contracts, and Blanket Purchase
Agreements Awarded as of March 13, 2009. [hyperlink,
http://www.gao.gov/products/GAO-09-522SP]. March 31, 2009.
Troubled Asset Relief Program: March 2009 Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-504]. March 31, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-484T]. March 19, 2009.
Federal Financial Assistance: Preliminary Observations on Assistance
Provided to AIG. [hyperlink, http://www.gao.gov/products/GAO-09-490T].
March 18, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-474T]. March 11, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-417T]. February 24, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-359T]. February 5, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. [hyperlink,
http://www.gao.gov/products/GAO-09-296]. January 30, 2009.
High-Risk Series: An Update. [hyperlink,
http://www.gao.gov/products/GAO-09-271]. January 22, 2009.
Troubled Asset Relief Program: Additional Actions Needed to Better
Ensure Integrity, Accountability, and Transparency. [hyperlink,
http://www.gao.gov/products/GAO-09-266T]. December 10, 2008.
Auto Industry: A Framework for Considering Federal Financial
Assistance. [hyperlink, http://www.gao.gov/products/GAO-09-247T].
December 5, 2008.
Auto Industry: A Framework for Considering Federal Financial
Assistance. [hyperlink, http://www.gao.gov/products/GAO-09-242T].
December 4, 2008.
Troubled Asset Relief Program: Status of Efforts to Address Defaults
and Foreclosures on Home Mortgages. [hyperlink,
http://www.gao.gov/products/GAO-09-231T]. December 4, 2008.
Troubled Asset Relief Program: Additional Actions Needed to Better
Ensure Integrity, Accountability, and Transparency. [hyperlink,
http://www.gao.gov/products/GAO-09-161]. December 2, 2008.
[End of section]
Footnotes:
[1] EESA, Pub. L. No. 110-343, 122 Stat. 3765 (2008) (codified at 12
U.S.C. §§ 5201 et seq.). EESA originally authorized Treasury to
purchase or guarantee up to $700 billion in troubled assets. The
Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-22,
Div. A, 123 Stat. 1632 (2009), amended EESA to reduce the maximum
allowable amount of outstanding troubled assets under EESA by almost
$1.3 billion, from $700 billion to $698.741 billion. EESA requires
that the appropriate committees of Congress be notified in writing
when the Secretary of the Treasury, after consultation with the
Chairman of the Board of Governors of the Federal Reserve System,
determines that it is necessary to purchase other financial
instruments to promote financial market stability. Section 3(9) of
EESA (codified at 12 U.S.C. § 5202(9)).
[2] The Dodd-Frank Act, Pub. L. No. 111-203, 124 Stat. 1376 (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 additional obligations for a program or initiative
unless the program or initiative had already been initiated prior to
June 25, 2010.
[3] Section 116 of EESA, 12 U.S.C. § 5226 (codified at 12 U.S.C. §
5226).
[4] GAO, Financial Audit: Office of Financial Stability (Troubled
Asset Relief Program) Fiscal Year 2010 and 2009 Financial Statements,
[hyperlink, http://www.gao.gov/products/GAO-11-174] (Washington, D.C.:
Nov. 15, 2010); Troubled Asset Relief Program: Opportunities Exist to
Apply Lessons Learned from the Capital Purchase Program to Similarly
Designed Programs and to Improve the Repayment Process, [hyperlink,
http://www.gao.gov/products/GAO-11-47] (Washington, D.C.: Oct. 4,
2010); Troubled Asset Relief Program: Bank Stress Test Offers Lessons
as Regulators Take Further Actions to Strengthen Supervisory
Oversight, [hyperlink, http://www.gao.gov/products/GAO-10-861]
(Washington, D.C.: Sept. 23, 2010); Financial Assistance: Ongoing
Challenges and Guiding Principles Related to Government Assistance For
Private Sector Companies, [hyperlink,
http://www.gao.gov/products/GAO-10-719] (Washington, D.C.: Aug. 3,
2010); Troubled Asset Relief Program: Treasury's Framework for
Deciding to Extend TARP Was Sufficient, but Could be Strengthened for
Future Decisions, [hyperlink, http://www.gao.gov/products/GAO-10-531]
(Washington, D.C.: June 30, 2010); 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); Troubled Asset Relief Program: Further Actions Needed to Fully
and Equitably Implement Foreclosure Mitigation Programs, [hyperlink,
http://www.gao.gov/products/GAO-10-634] (Washington, D.C.: June 24,
2010); Troubled Asset Relief Program: Update of Government Assistance
Provided to AIG, [hyperlink, http://www.gao.gov/products/GAO-10-475]
(Washington D.C.: Apr. 27, 2010); Troubled Asset Relief Program:
Automaker Pension Funding and Multiple Federal Roles Pose Challenges
for the Future, [hyperlink, http://www.gao.gov/products/GAO-10-492]
(Washington D.C.: Apr. 6, 2010); Troubled Asset Relief Program: Home
Affordable Modification Program Continues to Face Implementation
Challenges, [hyperlink, http://www.gao.gov/products/GAO-10-556T]
(Washington, D.C.: Mar. 25, 2010); Troubled Asset Relief Program:
Treasury Needs to Strengthen Its Decision-Making Process on the Term
Asset-Backed Securities Loan Facility, [hyperlink,
http://www.gao.gov/products/GAO-10-25] (Washington, D.C.: Feb. 5,
2010); Financial Audit: Office of Financial Stability (Troubled Asset
Relief Program) Fiscal Year 2009 Financial Statements, [hyperlink,
http://www.gao.gov/products/GAO-10-301] (Washington, D.C.: Dec. 9,
2009); and Troubled Asset Relief Program: Continued Stewardship Needed
as Treasury Develops Strategies for Monitoring and Divesting Financial
Interests in Chrysler and GM, [hyperlink,
http://www.gao.gov/products/GAO-10-151] (Washington, D.C.: Nov. 2,
2009).
[5] [hyperlink, http://www.gao.gov/products/GAO-10-861].
[6] SNL Financial is a database that collects, standardizes, and
disseminates corporate, financial, market, and mergers and
acquisitions data.
[7] See GAO, Troubled Asset Relief Program: Additional Actions Needed
to Better Ensure Integrity, Accountability, and Transparency,
[hyperlink, http://www.gao.gov/products/GAO-09-161] (Washington, D.C.:
Dec. 2, 2008).
[8] No indicator on its own provides a definitive perspective on the
state of markets; collectively, the indicators should provide a broad
sense of the stability and liquidity of the financial system and could
be suggestive of the program's impact. However, it is difficult to
draw conclusions about causality, because a variety of actions have
been taken to address the economic downturn, and determining what
would have happened in the absence of TARP is difficult.
[9] Appendix I provides a list of the recommendations by report and
their status as of December 30, 2010. The list does not include 20
recommendations from the TARP Management Report (GAO-10-743R) that was
issued in connection with the audit of TARP's fiscal year 2009
financial statements.
[10] Treasury, the Federal Reserve, FDIC, FRBNY, and Citigroup agreed
to terminate Treasury's guarantee commitment. In consideration for
early termination of the guarantee, FDIC and Treasury would keep $3
billion and $2.2 billon respectively of the $7 billion of Citigroup
preferred securities issued as a premium for the guarantee and the
Federal Reserve Bank of New York would receive a $50 million
termination fee. On September 30, 2010, Treasury agreed to sell the
$2.2 billion of Citigroup preferred securities and received the
proceeds of the sale in October 2010. FDIC may transfer $800 million
in Citigroup trust preferred securities to Treasury at the close of
Citigroup's participation in FDIC's Temporary Liquidity Guarantee
Program.
[11] In addition to preferred stock, Treasury also received from
privately held institutions warrants to purchase a specified number of
shares of preferred stock--called warrant preferred stock--that pay
quarterly dividends at a rate of 9 percent per year. A warrant is an
option to buy shares of common stock or preferred stock at a
predetermined price on or before a specified date. The exercise price
for the warrant preferred stock is $0.01 per share unless the
financial institution's charter requires otherwise. Treasury exercised
these warrants immediately for privately held institutions.
[12] Under the CPP terms, institutions pay cumulative dividends on
their preferred shares except for banks that are not subsidiaries of
holding companies, which pay noncumulative dividends. Some of the
other types of institutions, such as S-corporations, received their
CPP investment in the form of subordinated debt and pay Treasury
interest rather than dividends.
[13] For the purposes of CPP, financial institutions generally include
qualifying U.S.-controlled banks, savings associations, and both bank
and savings and loan holding companies.
[14] [hyperlink, http://www.gao.gov/products/GAO-11-47].
[15] These figures differ from the number of dividend or interest
payments outstanding because some institutions made their payments
after the end of the reporting month. CPP dividend and interest
payments are due on February 15, May 15, August 15, and November 15 of
each year, or the first business day subsequent to those dates. The
reporting period ends on the last day of the calendar month in which
the dividend or interest payment is due.
[16] Even after Treasury's right to nominate a director expires, a
financial institution could voluntarily choose to retain the director
if it believes that doing so would be in the institution's best
interests.
[17] The policy and procedures broadly apply to securities under
various TARP programs.
[18] Mandatory convertible preferred is a type of preferred share that
must be converted to common stock at the issuer's request if specific
criteria are met by a certain date. A trust preferred security is a
cumulative preferred stock instrument that is considered a hybrid
security because it possesses features of both debt and equity and is
created by establishing a trust and issuing debt to it.
[19] An additional 28 institutions had exchanged their CPP investments
for investments under Treasury's CDCI.
[20] [hyperlink, http://www.gao.gov/products/GAO-11-47].
[21] A "qualified equity offering" is the sale and issuance of tier 1
qualifying perpetual preferred stock, common stock, or a combination
of such stock for cash. Prior to enactment of the Recovery Act, Pub.
L. No. 111-5, 123 Stat. 115 (2009), CPP investments in the form of
senior preferred shares could only be repurchased prior to 3 years
from the date of investment with the proceeds of the "qualified equity
offering" resulting in aggregate gross proceeds to the financial
institution of not less than 25 percent of the issue price of the
senior preferred. Section 7001 of the Recovery Act provides, in part,
that "Subject to consultation with the appropriate Federal banking
agency...Treasury shall permit a TARP recipient to repay any
assistance previously provided under the TARP to such financial
institution, without regard to whether the financial institution has
replaced the funds from any other source or to any waiting period"
(emphasis added).
[22] Regulatory goals focus on safety and soundness considerations,
such as capital adequacy and financial condition.
[23] Executive compensation requirements generally include limits on
compensation that exclude incentives for senior executive officers to
take unnecessary and excessive risks that threaten the value of TARP
recipients and provide for the recovery of any bonus, retention award,
or incentive compensation paid to certain employees based on
materially inaccurate statements of earnings, revenues, gains, or
other criteria.
[24] 31 C.F.R. Part 30.
[25] Although authority to conduct the review and obtain compensation
information was provided under the statute and regulations, the
Special Master had no authority to force reimbursements from firms or
executives, or require any other remedy.
[26] See GAO, Troubled Asset Relief Program: One Year Later, Actions
Are Needed to Address Remaining Transparency and Accountability
Challenges, [hyperlink, http://www.gao.gov/products/GAO-10-16]
(Washington, D.C.: Oct. 8, 2009).
[27] See GAO, Troubled Asset Relief Program: June 2009 Status of
Efforts to Address Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-658] (Washington, D.C.: June 17,
2009).
[28] The total announced amount includes $5 billion for the Supplier
Support Program announced in March 2009. In July 2009 the commitment
for the Supplier Support Program was reduced by $1.5 billion, and in
July 2010 about $3 billion was deobligated for this program, resulting
in the difference between the asset purchase price referenced earlier
in this report and the announced amount in this section.
[29] [hyperlink, http://www.gao.gov/products/GAO-10-151].
[30] [hyperlink, http://www.gao.gov/products/GAO-10-492].
[31] According to the registration statement GM filed with the
Securities and Exchange Commission on August 18, 2010, the U.S.
defined benefit pension plans were underfunded by $17.1 billion and
the non-U.S. plans by about $10.3 billion, as of December 31, 2009.
According to GM, adverse equity and credit markets reduced the market
value of the plan assets, while the present value of pension
liabilities rose significantly in response to declines in the discount
rate, the effect of separation programs and increases in the level of
pension benefits and number of beneficiaries.
[32] Statutorily prescribed pension funding requirements for single-
employer plans specify how much a sponsor must contribute to its
defined benefit plans each year. 26 U.S.C. §§ 412 and 430. In general,
the minimum required contribution reflects the value of the plan's
assets compared with the plan's benefit obligations, as measured by
the present value of all benefits accrued or earned as of the
beginning of the plan year (the plan's funding target) and the present
value of all benefits that are expected to accrue or be earned under
the plan during the plan year (the target normal cost).
[33] GM's "core brands" include GMC, Chevrolet, Cadillac, and Buick
but exclude brands GM has discontinued since 2009, such as Saturn,
Pontiac, and Hummer. According to Edmunds.com, auto sales typically
decrease by approximately 3 percent from May to June each year.
[34] Specifically, on December 30, 2009, Treasury purchased an
additional $1.25 billion of mandatory convertible preferred shares and
received warrants that Treasury exercised at closing for an additional
$62.5 million in mandatory convertible preferred shares. Treasury also
purchased $2.54 billion in Ally Financial trust preferred securities
and received warrants that Treasury exercised at closing for an
additional $127 million in Ally Financial trust preferred securities,
which were all investments under AIFP.
[35] [hyperlink, http://www.gao.gov/products/GAO-10-151].
[36] The $47.4 billion is provided by AIG's third quarter 2010 10Q
filing, which we have used in previous reports on AIG, whereas the
amounts cited earlier in this report, including Table 1, are based on
our 2010 Audit of OFS's Financial Statements.
[37] Cumulative preferred stock is a form of capital stock in which
holders of preferred stock receive dividends before holders of common
stock, and dividends that have not been paid must be paid to preferred
shareholders before common shareholders can receive dividends.
[38] From July through early September 2008, AIG was experiencing
declines in the value and market liquidity of the residential mortgage-
backed security assets that comprised the collateral for its
securities lending program and declining values of collateralized debt
obligations against which AIG Financial Product had written credit
default swap protection. These losses forced AIG to use its cash
reserves to repay securities lending counterparties that terminated
existing agreements and to post additional collateral required by
trading counterparties of AIG Financial Product. The rating agencies
downgraded AIG's debt rating, which resulted in additional collateral
demands.
[39] Unpaid dividends on the Series D shares were added to the
principal amount of Series E shares that Treasury received.
[40] [hyperlink, http://www.gao.gov/products/GAO-10-475].
[41] In connection with the issuance of the Series E and F preferred
stocks and as a participant in TARP, AIG had agreed to a number of
covenants with Treasury related to corporate governance, executive
compensation, political activity, and other matters. These covenants
will continue to apply after the closing. Also, AIG will agree to
provide Treasury and FRBNY with certain control and information rights.
[42] AIG may not directly redeem the Series G preferred stock while
FRBNY continues to hold any preferred interests in AIA and ALICO, but
AIG will have the right to use cash to repurchase a corresponding
amount of the preferred interests in the SPVs from FRBNY, which will
then be transferred to Treasury to reduce the aggregate liquidation
preference of the Series G preferred stock. If FRBNY no longer holds
preferred interests in AIA and ALICO, AIG may redeem in cash the
Series G preferred stock, at the liquidation preference plus accrued
and unpaid dividends.
[43] Exercise price is the price at which the option holder may buy or
sell the underlying asset.
[44] See [hyperlink, http://www.gao.gov/products/GAO-10-634];
[hyperlink, http://www.gao.gov/products/GAO-10-556T]; and GAO,
Troubled Asset Relief Program: Treasury Actions Needed to Make the
Home Affordable Modification Program More Transparent and Accountable,
[hyperlink, http://www.gao.gov/products/GAO-09-837] (Washington, D.C.:
July 23, 2009).
[45] To do this, servicers are required to follow a sequential
modification process that begins with reducing interest rates to a
minimum of 2 percent. Then, if the target payment amount is not
reached, the servicer extends the maturity and/or amortization period
of the loan in 1-month increments up to 40 years. Finally, if needed,
the servicer forbears, or defers, principal.
[46] Under HAMP, servicers and mortgage holders or investors can
receive various financial incentive payments to encourage the
modification of mortgage loans. According to Treasury, up to
approximately $30 billion in TARP funds will be used primarily to
encourage the modification of mortgages that financial institutions
own and hold in their own portfolios and mortgages held in private-
label securitization trusts. In addition, Fannie Mae and Freddie Mac,
two GSEs, are expected to provide up to $25 billion in additional
funding to encourage servicers to modify loans they own or guarantee.
In order to receive a permanent loan modification, borrowers must meet
the HAMP eligibility requirements (single-family dwelling, owner-
occupied, primary residence, etc.) and must successfully complete a 3-
month trial modification period.
[47] These foreclosure alternatives include deeds-in-lieu of
foreclosure and short sales. Under a deed-in-lieu of foreclosure, the
homeowner voluntarily conveys all ownership interest in the home to
the lender. In a short sale, the homeowner sells the house for less
than the balance on the mortgage. The lender must give permission to
such a transaction and can agree to forgive the shortfall between the
loan balance and the net sales proceeds. Under the Home Affordable
Foreclosure Alternatives program, accepting a deed-in-lieu must
satisfy the borrower's entire mortgage obligation in addition to
releasing the lien on the subject property.
[48] [hyperlink, http://www.gao.gov/products/GAO-09-837] and
[hyperlink, http://www.gao.gov/products/GAO-10-634].
[49] Treasury officials pointed out that this initial $100 billion
amount included the PPIP legacy securities program along with PPIP
legacy loans (a partnership with the FDIC), and an anticipated PPIP
expansion related to TALF.
[50] A ninth PPIF was liquidated in the first quarter of 2010.
According to Treasury, the return to the Treasury was about $20
million on Treasury's equity investment of about $156 million, and the
interest earned by Treasury amounted to approximately $342,000 on the
$200 million in loans disbursed.
[51] [hyperlink, http://www.gao.gov/products/GAO-10-531].
[52] For this analysis, we selected commercial and industrial and
commercial real estate loans of $1 million or less for banks, and
thrifts and business loans of $50,000 or more at credit unions, which
are considered proxies for small business lending. For further
details, see appendix II.
[53] Treasury does not require the depository institution regulators
to collect this information. However, OTS and NCUA collect it for
internal purposes, including anticipation of reporting for post-award
requirements.
[54] [hyperlink, http://www.gao.gov/products/GAO-09-658].
[55] For senior securities, Treasury allowed any SBA securities
sellers to immediately repurchase senior securities issued to
Treasury. Senior securities and warrants are issued to Treasury, as
required by EESA, when Treasury purchases assets under TARP. For
executive compensation, Treasury officials told us that they drafted a
legal determination that compensation limits were not required because
the senior securities are immediately purchased and therefore there is
no period of time for Treasury to apply the executive compensation
restrictions.
[56] Small Business Jobs Act of 2010, Pub. L. No. 111-240, Title IV,
Subtitle A, 124 Stat. 2504 (2010).
[57] The program provided nonrecourse loans to investors to purchase
AAA-rated ABS and CMBS, which were in turn pledged as collateral for
the loans.
[58] Treasury's credit protection takes the form of loans to TALF LLC,
a special-purpose vehicle created to purchase TALF's underlying
collateral, in the event that TALF loans are not repaid and the ABS or
CMBS collateral securing the loans is surrendered to TALF LLC.
Treasury originally provided $20 billion of credit protection, but the
Federal Reserve announced on July 20, 2010, that Treasury and the
Federal Reserve had agreed to reduce the credit protection to $4.3
billion.
[59] [hyperlink, http://www.gao.gov/products/GAO-10-25] and
[hyperlink, http://www.gao.gov/products/GAO-10-531].
[60] As of September 30, 2010, no TALF assets have been surrendered to
TALF LLC.
[61] On June 30, 2009, GMAC LLC changed its corporate structure and
was renamed GMAC Inc., and on May 10, 2010, GMAC Inc. changed its name
to Ally Financial Inc.
[62] Under the AGP agreement, Treasury, FDIC, and FRBNY provided
protection against the possibility of large losses on an asset pool of
approximately $301 billion which remained on Citigroup's balance
sheet. The following loss-sharing terms applied to the transaction:
(1) Citigroup was to absorb the first $39.5 billion in losses and (2)
losses more than the $39.5 billion were to be shared by the U.S.
government (90 percent) and Citigroup (10 percent) with the U.S.
government piece being paid in the following order and amounts: First,
Treasury in an amount up to $5 billion, then FDIC in an amount up to
$10 billion, and lastly had Treasury and FDIC paid out the full amount
of their commitments, Citigroup would have been able to obtain a one-
time non-recourse (except with respect to interest and Citigroup's 10
percent share of loss) loan from FRBNY. The Citigroup AGP agreement
has been terminated and no losses were paid by the U.S. government,
and stock, warrants, and fees were obtained by the government and
FRBNY in exchange for entering into the agreement.
[63] See [hyperlink, http://www.gao.gov/products/GAO-09-837]. In July
2009, we emphasized that the lack of a permanent head of the
Homeownership Preservation Office, along with the number of vacancies
in the office itself, could impact Treasury's ability to effectively
monitor HAMP and recommended that these staffing needs be given high
priority.
[64] The other divisions within OFS include the Office of the Chief
Investment Officer, Office of the Chief Financial Officer, Office of
the Chief Homeownership Preservation Officer, and Office of the Chief
of Operations Officer.
[65] OFS officials said that the office had a formal mentor program in
early 2009 that included training for all participants and matched up
mentors and employees who met regularly every 2 weeks.
[66] 5 C.F.R. part 316, subpart C. At an agency's request, the Office
of Personnel Management may authorize exceptions beyond the 4-year
limit when the extension is clearly justified and consistent with
applicable statutory provisions.
[67] 5 U.S.C. §§ 3132(a)(5) and 3134.
[68] GAO, Human Capital: Key Principles for Effective Strategic
Workforce Planning, [hyperlink, http://www.gao.gov/products/GAO-04-39]
(Washington, D.C.: Dec. 11, 2003).
[69] Servicers can sign up for HAMP until October 3, 2010 and
borrowers can sign up until December 31, 2012. After 2012, servicers
can continue to receive incentives, funded by TARP, for 5 years, until
December 31, 2017.
[70] [hyperlink, http://www.gao.gov/products/GAO-09-837].
[71] [hyperlink, http://www.gao.gov/products/GAO-10-151].
[72] To implement TARP, Treasury used its authorities to enter into
financial agency agreements with financial institutions. Section
101(c)(3) of EESA (codified at 12 U.S.C. §5211(c)(3)); see also 31
C.F.R. Part 202. The financial agency agreements have been completed
through Treasury's Office of the Fiscal Assistant Secretary. Financial
agency agreements are not federal procurement contracts and are
therefore not subject to the provisions of the Federal Property and
Administrative Services Act (41 U.S.C. §§ 251-260), the Federal
Acquisition Regulation (48 C.F.R. Chapter 1), or any other federal
procurement law.
[73] The 81 contracts and blanket purchase agreements include 7
interagency agreements for contractual arrangements in which OFS is
engaging vendors that have existing contracts with other Treasury
offices or bureaus or other federal agencies.
[74] The potential award value of all 96 TARP financial agency
agreements and contracts--some completed and some scheduled to run
until April 2019--totals almost $841 million ($435 million in FAA and
$406 million in contracts.) The dollar amount does not include the
seven interagency agreement contract values. Consistent with our prior
recommendation to improve transparency and accountability, Treasury
now publishes information on active and completed procurement
contracts and financial agency agreements online. A listing of TARP
procurement contracts and agreements can be viewed at [hyperlink,
http://www.financialstability.gov/impact/contractDetail2.html].
[75] Treasury's additional proceeds include dividends from equity
securities, proceeds from repurchases of warrants and warrant
preferred stock, and proceeds from warrant auctions. According to
Treasury officials, with financial agent Morgan Stanley's Capital
Markets Disposition support to dispose of shares as instructed by the
Treasury, Treasury has sold all of its 7.7 billion shares of Citigroup
common stock.
[76] TARP Conflicts of Interest, 74 Fed. Reg. 3431-3436 (Jan. 21,
2009) (codified at 31 C.F.R. Part 31). With this action, Treasury put
in place a set of clear requirements to address conflicts that may
arise during the selection of retained entities seeking a contract or
financial agency agreement with Treasury, particularly those involved
in the acquisition, valuation, management, and disposition of troubled
assets.
[77] Consistent with our prior recommendations to renegotiate
mitigation plans that predated the TARP conflicts-of-interest
regulation, Treasury renegotiated contracts and mitigation plans with
Ernst & Young, LLP and PricewaterhouseCoopers LLP, and the financial
agency agreement and mitigation plan with Bank of New York Mellon.
[78] GAO-09-161. We repeated this recommendation in Troubled Asset
Relief Program: Status of Efforts to Address Transparency and
Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-296] (Washington, D.C.: Jan. 30,
2009).
[79] See [hyperlink, http://www.gao.gov/products/GAO-11-174].
[80] 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.
[81] 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.
[82] 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.
[83] [hyperlink, http://www.gao.gov/products/GAO-10-743R].
[84] For example see Blinder, A. and M. Zandi, "How the Great
Recession was Brought to an End", Unpublished Working Paper, (July
2010). The crisis-driven interventions--both within and outside of
TARP--can be roughly categorized into programs that: (1) provided
capital directly to financial institutions, (2) enhanced financial
institutions' access to liquid assets through collateralized lending
or other credit facilities, (3) purchased nonperforming or illiquid
assets, (4) guaranteed liabilities, (5) intervened in specific
financial markets, and (6) mitigated home foreclosures. Some programs
involved exceptional assistance to particular institutions such as AIG
because of their systemic importance or supported particular markets,
while others involved assistance to individuals through refinance or
loan modification programs.
[85] While there is general agreement that financial crises can result
in costly interruptions to economic growth and the road to recovery
can be long, economists differ in their views on the appropriate role
for government policy. Therefore the debate is likely to continue on
the effectiveness of the government response to this crisis.
[86] Eligible TALF ABS include those backed by credit cards; auto,
student, and equipment loans and leases; insurance premium finance
loans; mortgage servicer advances; and floorplan loans, as well as SBA
7a and SBA 504 securities as well as certain pre-existing, or "legacy"
CMBS. Considering the excesses of the recent credit expansion, the
desirability of returning to precrisis lending levels is debatable.
[87] "Closed" means that no new agreements will be made but does not
necessarily mean that no activity is occurring. Many programs involved
equity investments, loans, and commitments that remain outstanding.
[88] TALF expired on March 31, 2010, for loans backed by ABS and
legacy CMBS, and in June 30, 2010, for loans backed by newly issued
CMBS.
[89] While we discuss the foreclosure inventory here, by any measure
foreclosure and delinquency statistics for housing remain well above
their historical averages.
[90] As Treasury notes, not all foreclosures are preventable, given
that many homeowners overextended themselves by purchasing homes that
were not affordable to them in the long run or suffering from
unanticipated life events that left them unable to pay their
mortgages. It is possible that a large number of the trial
modifications under HAMP and other MHA programs represent unavoidable
foreclosures, complicating the ability to assess HAMP's effectiveness
using foreclosure rates.
[91] As of June 2010 the foreclosure rate was 4.57 percent, down 6
basis points from March 2010.
[92] See International Monetary Fund, United States: 2010 Article IV
Consultation (July 2010).
[93] [hyperlink, http://www.gao.gov/products/GAO-10-16].
[94] [hyperlink, http://www.gao.gov/products/GAO-10-531].
[95] International Monetary Fund (2010).
[96] A credit default swap index is a credit derivative used to hedge
credit risk or to take a position on a basket of credit entities.
Unlike a credit default swap, which is an over the counter credit
derivative, a credit default swap index is a completely standardized
credit security and may therefore be more liquid and trade at a
smaller bid-offer spread.
[97] These indicators, although imperfect, might inform the proper
timing for winding down the remaining programs and liquidating any
investments.
[98] See appendix III for more information on our econometric model.
[99] Because the economy was still fragile and downside risks
remained, Treasury identified the need to retain resources to respond
to threats to financial stability as an important consideration in
deciding to extend TARP in December 2009.
[100] See [hyperlink, http://www.gao.gov/products/GAO-11-174].
[101] We defined the outstanding value of small business loans at
banks as commercial and industrial (C&I) and commercial real estate
(CRE) loans of $1 million or less, and refer to these as small C&I and
small CRE loans. At credit unions, the proxy for small business
lending is the outstanding value of member business loans more than
$50,000. These proxies for small business lending are consistent with
reporting on the small business schedules of bank and credit union
call reports. C&I loans, as defined by the Federal Financial
Institutions Examination Council in the commercial bank call reports,
include loans for commercial and industrial purposes to sole
proprietorships, partnerships, corporations, and other business
enterprises, whether secured (other than by real estate) or unsecured,
single-payment, or installment. Also included are loans to individuals
for commercial, industrial, and professional purposes, but not for
investment or personal expenditure purposes. Commercial real estate
loans are defined as loans for financing commercial and multifamily
residential properties such as business and industrial properties,
hotels, motels, churches, hospitals, and apartment buildings. The data
we analyzed dates to 1993 for banks and 1997 for credit unions and was
downloaded from SNL Financial.
[102] Pursuant to the Credit Union Membership Access Act, enacted in
1998, a credit union's member business loans may generally not exceed
1.75 times its net worth or 12.25 percent of total assets.
[103] The 7(a) program is the SBA's primary program used for working
capital and other business needs, while the 504 program is typically
used for purchasing long-term, fixed assets.
[104] As reported in GAO-10-298R, under the Recovery Act enacted on
February 17, 2009, SBA was required to implement eight new authorities
to primarily help facilitate small business lending and enhance
liquidity in the secondary markets. (Pub. L. No. 111-5, Division A,
Title V, 123 Stat. 115, 151-161 (2009)). ARRA appropriated to SBA $730
million to help small businesses, including $375 million to increase
the SBA guarantee on 7(a) loans from 85 to 90 percent and to reduce or
eliminate program fees on most 7(a) and 504 loans. The funds for the
7(a) and 504 loan programs were exhausted on November 23, 2009. Since
then, SBA has received $305 million in supplemental appropriations to
support these programs. By May 26, 2010, SBA exhausted these
supplemental appropriations. Recently passed legislation provides
additional funding to further support these programs (Small Business
Jobs Act of 2010, Pub. L. No. 111-240, § 1704, 124 Stat. 2504 (2010)).
[105] Securitization is a process in which financial assets, such as
loans or leases, are brought together into interest-bearing securities
that are sold to investors. These securities, known as asset-backed
securities, provide a source of liquidity for consumers and small
businesses because financial institutions can take assets that they
would otherwise hold on their balance sheets, sell them as securities,
and use the proceeds to originate new loans, among other purposes.
[106] The SLOOS Survey asks banks about demand and supply changes for
loans to businesses and households over the past 3 months prior to the
survey's publication. Questions to respondents include whether lending
standards and terms have tightened or eased for commercial and
industrial loans to small firms and to medium-sized and large firms.
[107] The NFIB Research Foundation has collected Small Business
Economic Trends data with quarterly surveys since 1974 and monthly
surveys since 1986. The survey asks NFIB members about economic
outlook, employment, earnings, sales, prices, credit conditions,
interest rates, inventories, and capital outlays. The specific
question used in our analysis is "During the last three months,
was your firm able to satisfy its borrowing needs?" Respondents
are NFIB members, with nearly half of all respondents from firms with
five or fewer employees. In previous work we found that the
composition of NFIB survey respondents is broadly representative of
the size distribution of firms in the United States. However, we found
that the survey over-represents some industries, including
manufacturing and construction, while under-representing some skilled
service industries. As such, respondents may not reflect the credit
experiences of all firms in the economy.
[108] Small businesses generally rely on depository institutions in
part because they have difficulty directly accessing capital markets
as an alternative source of financing, relative to larger
corporations. We previously reported on this in GAO-10-531. In
addition, according to our analysis in this appendix, small banks had
a larger portion of their balance sheet devoted to small loans than
large banks, although the total value of small loans was greater at
large banks.
[109] A spread is a difference between two numbers. In this case, it
is the difference between the interest rate on small loans and the
federal funds rate. The spread is the weighted-average effective loan
rate for each category of loans over the average federal funds rate
during the survey week. The weights are a function of the face amount
of the loan, the outstanding C&I loans of the surveyed bank, the
number of days during the week that the bank reports, and the fraction
of the bank branches that report. The federal funds rate measures the
cost of credit in the overnight market for balances at the Federal
Reserve.
[110] A basis point is a common measure used in quoting yields on
bills, notes, and bonds. A basis point represents .01 percent, or one-
hundredth of a percent. In other words, 100 basis points equals 1
percent. For example, the difference between 1 percent and 1.5 percent
would be expressed as 50 basis points.
[111] Spreads for small loans at large banks have risen less
dramatically--110 basis points from recent lows. However, these loans
may not represent small business loans and may instead be small
amounts drawn on loan commitments to large firms.
[112] In both cases the correlations were significantly different from
zero, well beyond conventional levels. The correlation was higher for
small banks than large banks (0.69 vs. 0.59); however, based on a test
for correlated correlations, the small bank correlation was not
significantly different from the large bank correlation at the 10
percent level.
[113] Participants of the Federal Reserve System's Small Business
Meeting Series, reported in a summary paper in July 2010 titled
"Addressing the Financing Needs of Small Businesses," raised
concerns that small businesses that are growing may not be able to
access credit. NFIB survey data show 34.5 percent of respondents did
not seek the credit that they wanted because they thought they would
be denied. The question asked in NFIB's February 2010 "Small
Business Credit In A Deep Recession," is "Since the beginning
of the year, was there credit you wanted, but did not apply for
because you didn't think you could get it?" In this same survey,
respondents answered questions about whether they were denied certain
kinds of credit. Denials included 20.6 percent for new credit cards,
46.3 percent for loans, 49.7 percent for new lines of credit, and 22
percent for extensions and renewals on lines of credit.
[114] [hyperlink, http://www.gao.gov/products/GAO-10-531] and
Congressional Oversight Panel, May Oversight Report: The Small
Business Credit Crunch and the Impact of the TARP (Washington, D.C.,
May 13, 2010).
[115] Federal law also has varying definitions of small business for
different purposes. The Small Business Act defines "small business
concern" for the purpose of federal small business programs as one
that is independently owned and operated and is not dominant in its
field of operation. 15 U.S.C. § 632(a)(1). The act authorizes SBA to
establish size standards that further define small business for the
purpose of these programs by such criteria as industry, number of
employees, and annual receipts. 15 U.S.C. § 632(a)(2); 13 C.F.R. Part
121. However, the U.S. bankruptcy code defines "small business debtor"
as a person engaged in commercial or business activities with
liquidated secured and unsecured debts not exceeding $2,000,000. 11
U.S.C. § 101(51C).
[116] This table represents the major sources of small business data
but is not exhaustive of all publicly available small business data.
[117] Pub. L. No. 111-203, 124 Stat. 1376 (2010).
[118] This makes the analysis quite similar to a difference-in-
difference approach. Changes in the TED spread also reflected in
changes in the nonfinancial commercial paper spread are more likely to
represent shocks specific to the banking system rather than systemic
shocks to short term credit risk in the overall economy.
[119] Carrying out an HAC adjustment in an event study context with
dichotomous event variables (pulse dummies) can result in inconsistent
standard errors and spurious findings under certain conditions. For
example, see T. Fromby and J. Murfin, "Inconsistency of HAC
Standard Errors in Event Studies with i.i.d. errors," Applied
Financial Letters, vol. 1 (2005). Our results were not sensitive to
this adjustment.
[120] In one specification the announcement effect was marginally
significant but remains economically quite small.
[End of section]
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