TARP in the Crosshairs: Accountability in the Troubled Asset Relief Program : Accountability in the Troubled Asset Relief Program [1 ed.] 9781608767052, 9781607418078

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Copyright © 2009. Nova Science Publishers, Incorporated. All rights reserved. TARP in the Crosshairs: Accountability in the Troubled Asset Relief Program : Accountability in the Troubled Asset Relief Program, edited by Paul W.

Copyright © 2009. Nova Science Publishers, Incorporated. All rights reserved. TARP in the Crosshairs: Accountability in the Troubled Asset Relief Program : Accountability in the Troubled Asset Relief Program, edited by Paul W.

ECONOMIC ISSUES, PROBLEMS AND PERSPECTIVES SERIES

TARP IN THE CROSSHAIRS: ACCOUNTABILITY IN THE TROUBLED ASSET RELIEF PROGRAM

Copyright © 2009. Nova Science Publishers, Incorporated. All rights reserved.

No part of this digital document may be reproduced, stored in a retrieval system or transmitted in any form or by any means. The publisher has taken reasonable care in the preparation of this digital document, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained herein. This digital document is sold with the clear understanding that the publisher is not engaged in rendering legal, medical or any other professional services.

TARP in the Crosshairs: Accountability in the Troubled Asset Relief Program : Accountability in the Troubled Asset Relief Program, edited by Paul W.

ECONOMIC ISSUES, PROBLEMS AND PERSPECTIVES SERIES

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TARP in the Crosshairs: Accountability in the Troubled Asset Relief Program Paul W. O'Byrne (Editor) 2009. ISBN 978-1-60876-705-2

TARP in the Crosshairs: Accountability in the Troubled Asset Relief Program : Accountability in the Troubled Asset Relief Program, edited by Paul W.

ECONOMIC ISSUES, PROBLEMS AND PERSPECTIVES SERIES

TARP IN THE CROSSHAIRS: ACCOUNTABILITY IN THE TROUBLED ASSET RELIEF PROGRAM

PAUL W. O'BYRNE

Copyright © 2009. Nova Science Publishers, Incorporated. All rights reserved.

EDITOR

Nova Science Publishers, Inc. New York

TARP in the Crosshairs: Accountability in the Troubled Asset Relief Program : Accountability in the Troubled Asset Relief Program, edited by Paul W.

Copyright © 2009 by Nova Science Publishers, Inc. All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic, tape, mechanical photocopying, recording or otherwise without the written permission of the Publisher. For permission to use material from this book please contact us: Telephone 631-231-7269; Fax 631-231-8175 Web Site: http://www.novapublishers.com NOTICE TO THE READER The Publisher has taken reasonable care in the preparation of this book, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained in this book. The Publisher shall not be liable for any special, consequential, or exemplary damages resulting, in whole or in part, from the readers’ use of, or reliance upon, this material.

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Independent verification should be sought for any data, advice or recommendations contained in this book. In addition, no responsibility is assumed by the publisher for any injury and/or damage to persons or property arising from any methods, products, instructions, ideas or otherwise contained in this publication. This publication is designed to provide accurate and authoritative information with regard to the subject matter covered herein. It is sold with the clear understanding that the Publisher is not engaged in rendering legal or any other professional services. If legal or any other expert assistance is required, the services of a competent person should be sought. FROM A DECLARATION OF PARTICIPANTS JOINTLY ADOPTED BY A COMMITTEE OF THE AMERICAN BAR ASSOCIATION AND A COMMITTEE OF PUBLISHERS. LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA Available upon request ISBN: 978-1-60876-705-2. (E-book)

Published by Nova Science Publishers, Inc.  New York

TARP in the Crosshairs: Accountability in the Troubled Asset Relief Program : Accountability in the Troubled Asset Relief Program, edited by Paul W.

CONTENTS Preface Chapter 1

Accountability for the Troubled Asset Relief Program Elizabeth Warren, Jeb Hensarling, Richard H. Neiman, Damon Silvers and John E. Sununu

Chapter 2

Financial Stability Plan Treasury Department

Chapter 3

Testimony of Dean Baker, before the House Financial Institutions Subcommittee of the Financial Services Committee, March 4, 2009

67

Testimony of Mr. C. R. Cloutier, President and CEO, Midsouth Bank, NA, on Behalf of the Independent Community Bankers of America, before the Congress of the United States, House of Representatives Subcommittee on Financial Institutions and Consumer Credit Committee on Financial Services, Hearing on “TARP Oversight: Is TARP Working for Main Street?”, March 4, 2009, Washington, DC

73

Testimony of Robert W. Davenport, President of the National Development Council, before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, March 4, 2009

77

Testimony by Bert Ely, House Financial Institutions Subcommittee, TARP Oversight: Is TARP Working for Main Street?, March 4, 2009

85

Testimony of David S. Scharfstein, Professor of Finance, Harvard Business School on Tarp Oversight: Is Tarp Working for Main Street? before the Subcommittee on Financial Institutions and Consumer Credit, Committee on Financial Services, United States House of Representatives

97

Chapter 4

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ix

Chapter 5

Chapter 6

Chapter 7

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59

vi Chapter 8

Chapter 9 Chapter 10

Chapter 11 Chapter 12

Chapter 13

Chapter 14

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Chapter 15

Chapter 16

Chapter 17

Chapter 18

Chapter 19

Chapter 20

Contents Statement of Joseph Zucchero, to the U.S. House of Representatives, Subcommittee on Financial Institutions and Consumer Credit

113

Secretary Timothy F. Geithner, Opening Statement, Senate Banking Committee Hearing, February 10, 2009

115

Testimony of Lloyd C. Blankfein, Chairman and CEO, the Goldman Sachs Group, Inc. House Committee on Financial Services, February 11, 2009

119

Testimony of Jamie Dimon, Chairman & Ceo, JPMorgan Chase & Co. House Financial Services Committee, February 11, 2009

127

Opening Statement of Congressman Paul E. Kanjorski, Committee on Financial Services, Hearing on Tarp Accountability: Use of Federal Assistance by the First TARP Recipients, February 11, 2009

133

Statement of Robert P. Kelly, Chairman and Chief Executive Officer of the Bank of New York Mellon, before the House Financial Services Committee, February 11, 2009

135

Testimony of Kenneth D. Lewis, Chairman and Chief Executive Officer, Bank of America, before the Committee on Financial Services, U.S. House of Representatives, Washington, DC, February 11, 2009

139

Statement of Ronald E. Logue, Chairman and Chief Executive Officer, State Street Corporation, before the House Financial Services Committee, United States House of Representatives, February 11, 2009, Hearing on “TARP Accountability: Use of Federal Assistance by the First TARP Recipients”

143

Testimony of John J. Mack, Chairman and Chief Executive Officer, Morgan Stanley, before the United States House of Representatives, Committee on Financial Services, February 11, 2009

147

Testimony of Vikram Pandit, Chief Executive Officer, Citigroup, House Financial Services Committee, United States House of Representatives, Washington, D.C., February 11, 2009

149

Opening Statement of Congressman Ed Perlmutter, TARP Accountability: Use of Federal Assistance by the First TARP Recipients”, February 11, 2009

179

Opening Statement of Congressman Gary C. Peters, February 10, 2009, Financial Services Committee Hearing TARP Accountability: Use of Federal Assistance by the First TARP Recipients

181

Testimony of John Stumpf, President & CEO, Wells Fargo & Company, House Financial Services Committee, February 11, 2009

183

TARP in the Crosshairs: Accountability in the Troubled Asset Relief Program : Accountability in the Troubled Asset Relief Program, edited by Paul W.

Contents Chapter 21 Chapter 22

Opening Statement of Chairman Christopher J. Dodd, “Pulling Back the TARP: Oversight of the Financial Rescue Program”

187

Testimony of Elizabeth Warren, Congressional Oversight Panel, Senate Banking Committee, Hearing on “Pulling Back the TARP: Oversight of the Financial Rescue Program”, February 5, 2009

191

Chapter 23

February Oversight Report: Valuing Treasury's Acquisitions Congressional Oversight Panel

Chapter 24

Congressional Budget Office Cost Estimate: H.R. 384 TARP Reform and Accountability Act

237

Statement of Neil Barofsky, Special Inspector General, Troubled Asset Relief Program, before the United States House of Represenatives, Committee on Financial Services, Subcommittee on Oversight and Investigations

243

Testimony of Professor Elizabeth Warren, Chair, Congressional Oversight Panel before the House Financial Services Committee, Subcommittee on Oversight and Investigations, February 24, 2009

249

Chapter 25

Chapter 26

Chapter 27

Chapter 28

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Chapter 30

195

Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues United States Government Accountability Office

253

Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues Gene L. Dodaro

337

Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues Gene L. Dodaro

347

Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues Richard J. Hillman

357

Index

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PREFACE This book focuses on TARP, the Troubled Asset Relief Program that was signed into law under the Emergency Economic Stabilization Act on October 3, 2008. The act established the Office of Financial Stability (OFS) within the Department of the Treasury and authorized the Troubled Asset Relief Program (TARP). Among other things, the act provides Treasury with broad, flexible authorities to buy or guarantee up to $700 billion in "troubled assets," which include mortgages and mortgage-related instruments, and any other financial instrument whose purchase Treasury determines is needed to stabilize the financial markets. The act also created a number of mechanisms to oversee the implementation and operations of TARP. The U.S. Comptroller General is required to report at least every 60 days on findings resulting from oversight of TARP's performance in meeting the purposes of the act; the financial condition and internal controls of TARP, its representatives, and agents; TARP's efficiency in using the funds appropriated for the programs' operation; TARP's compliance with applicable laws and regulations and minimizing conflicts of interest of those involved in TARP's operations and the efficacy of contracting procedures. This book consists of public domain documents which have been located, gathered, combined, reformatted, and enhanced with a subject index, selectively edited and bound to provide easy access.

TARP in the Crosshairs: Accountability in the Troubled Asset Relief Program : Accountability in the Troubled Asset Relief Program, edited by Paul W.

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In: TARP in the Crosshairs Editor: Paul W. O'Byrne

ISBN: 978-1-60876-705-2 © 2009 Nova Science Publishers, Inc.

Chapter 1

ACCOUNTABILITY FOR THE TROUBLED ASSET RELIEF PROGRAM

*

Elizabeth Warren, Jeb Hensarling[1], Richard H. Neiman, Damon Silvers and John E. Sununu

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EXECUTIVE SUMMARY In its first report to Congress on December 10, 2008, the Congressional Oversight Panel (COP or the Panel) posed ten basic questions – in effect asking for an explanation of the U.S. Department of Treasury’s goals and methods for the Troubled Asset Relief Program (TARP). The Panel’s questions, in turn, included a number of subsidiary questions, which sought additional details from the Treasury. In total, the Panel sought responses to 45 separate questions about the execution of the authority granted to Treasury under the Emergency Economic Stabilization Act (EESA) and the $350 billion in taxpayer funds that has been “effectively allocated” under that program. On December 30, 2008, Treasury responded to the Panel with a 13-page letter. While the letter provided responses to some of the Panel’s questions and shed light on Treasury’s decision-making process, it did not provide complete answers to several of the questions and failed to address a number of the questions at all. To gain a more complete understanding of what Treasury is doing and why, the Panel asks Treasury to provide additional information clarifying its earlier responses. In order to exercise its legally-mandated oversight functions, the Panel has initiated a number of fact-finding efforts and independent investigations that will be the subject of future reports. But the Panel’s independent work does not eliminate the need for Treasury to respond to the Panel’s questions. Some of these questions can be answered only by Treasury (e.g., Treasury’s strategic plans) and others seek to clarify what appear to be significant gaps in Treasury’s monitoring of the use of taxpayer money (e.g., asking financial institutions to account for what they have done with taxpayer funds).

*

This is an edited, excerpted and augmented edition of The Second Report of the Congressional Oversight Panel publication.

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Elizabeth Warren, Jeb Hensarling, Richard H. Neiman et al.

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To ease the burden on Treasury and to make it clear precisely which questions remain to be answered, the Panel has constructed a grid with its original questions and Treasury’s responses. Although many questions remain outstanding, the Panel highlights four specific areas that it believes deserve special attention: 1. Bank Accountability. The Panel still does not know what the banks are doing with taxpayer money. Treasury places substantial emphasis in its December 30 letter on the importance of restoring confidence in the marketplace. So long as investors and customers are uncertain about how taxpayer funds are being used, they question both the health and the sound management of all financial institutions. The recent refusal of certain private financial institutions to provide any accounting of how they are using taxpayer money undermines public confidence.[2] For Treasury to advance funds to these institutions without requiring more transparency further erodes the very confidence Treasury seeks to restore. Finally, the recent loans extended by Treasury to the auto industry, with their detailed conditions affecting every aspect of the management of those businesses, highlights the absence of any such conditions in the vast majority of TARP transactions. EESA does not require recipients of TARP funds to make reports on the use of funds. However, it is within Treasury’s authority to make such reports a condition of receiving funding, to establish benchmarks for TARP recipient conduct, or to have formal procedures for voluntary reporting by TARP recipient institutions or formal guidelines on the use of funds. The adoption of any one of these options would further the purposes of helping build and restore the confidence of taxpayers, investors, and policy makers. 2. Transparency and Asset Evaluation. The need for transparency is closely related to the issue of accountability. The confidence that Treasury seeks can be restored only when information is completely transparent and reliable. Currently, Treasury’s strategy appears to involve allocating the majority of the $700 billion to “healthy banks,” banks that have been assessed by their regulators as viable without federal assistance. Of course, whether a bank is “healthy” depends critically on the valuation of the bank’s assets. If the banks have not yet recognized losses associated with overvalued assets, then their balance sheets – and Treasury’s assessment of their health – may be suspect. Many understood the purpose of EESA to be providing assistance to financial institutions that were “unhealthy” and at risk of failing. Such institutions were at risk, the public was told, due to so-called toxic assets that were impairing their balance sheets. EESA was designed to provide a mechanism to remove or otherwise provide clear value to those assets. The case of Citigroup illustrates this problem. Treasury provided Citigroup with a $25 billion cash infusion as part of the “healthy banks” program whereby Treasury made nine initial investments in major banks. About two months later, Treasury provided Citigroup with $20 billion in additional equity financing, apparently to avoid systemic failure, but it did not classify that investment as part of the Systemically Significant Failing Institution program (S SFI program). These events suggest that the marketplace assesses the assets of some banks well below Treasury’s assessment. To date no such mechanism to provide more transparent asset valuation has been developed, meaning that the danger posed by those toxic assets remains unaddressed. The bubble that caused the economic crisis

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has its foundations in toxic mortgage assets. Until asset valuation is more transparent and until the market is confident that the banks have written down bad loans and accurately priced their assets, efforts to restore stability and confidence in the financial system may fail. 3. Foreclosures. The crisis in the housing sector continues to affect any efforts at recovery. In enacting EESA, Congress called upon Treasury to

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“implement a plan that seeks to maximize assistance for homeowners and use the authority of the Secretary to encourage the servicers of the underlying mortgages, considering net present value to the taxpayer, to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures. In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.”[3]

When Congress authorized the Panel, it specifically requested that the Panel evaluate “the effectiveness of foreclosure mitigation efforts.”[4] While the statute contemplates that foreclosure mitigation would be accomplished through the purchase of mortgage-related assets, many believe that Treasury has clear authority to use a portion of the $700 billion to address mortgage foreclosures in other ways. For Treasury to take no steps to use any of this money to alleviate the foreclosure crisis raises questions about whether Treasury has complied with Congress’s intent that Treasury develop a “plan that seeks to maximize assistance for homeowners.”[5] 4. Strategy. The Panel’s initial concerns about the TARP have only grown, exacerbated by the shifting explanations of its purposes and the tools used by Treasury. It is not enough to say that the goal is the stabilization of the financial markets and the broader economy. That goal is widely accepted. The question is how the infusion of billions of dollars to an insurance conglomerate or a credit card company advances both the goal of financial stability and the well-being of taxpayers, including homeowners threatened by foreclosure, people losing their jobs, and families unable to pay their credit cards. It would be constructive for Treasury to clearly identify the types of institutions it believes fall under the purview of EESA and which do not and the appropriate uses of TARP funds. The need for Treasury to address these fundamental issues of strategy has only intensified since our last report. The issues related to strategy have wider implications as well. It appears that Treasury in its post-American International Group, Inc. (AIG) actions is using public dollars to support the value of equity in financial institutions. What strategy lies behind that decision? What about other alternatives? Would it be better and more cost effective to encourage private capital investors to assume control of such banks? Should those banks be required to maintain higher capital or liquidity positions or to pay higher Federal Deposit Insurance Corporation (FDIC) insurance premiums? Should we focus on ensuring that systemically significant institutions meet their fixed obligations and let the equity in such institutions be fully at risk, as we did in AIG? Should we simply let market forces work – letting sick banks fail and the healthy banks take the business? The Panel does not embrace any of these suggestions. Instead, it asks whether Treasury is involved in that re-thinking process.

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The Panel recognizes that Treasury has many pressing obligations, and the Panel appreciates Treasury’s efforts to give timely responses. Ultimately, the Panel hopes that by posing these questions and offering these comments that it can be helpful to Treasury as it attempts to find more effective tools to deal with the current financial crisis.

INTRODUCTION Under Section 125(b) of EESA, the Congressional Oversight Panel is charged with making regular reports on: • • •

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•

the use by the Secretary of the Treasury of authority under EESA, including his contracting authority and administration of the program; the impact of purchases made under EESA on the financial markets and financial institutions; the extent to which the information made available on transaction under the program has contributed to market transparency; and the effectiveness of foreclosure mitigation efforts, and the effectiveness of the program from the standpoint of minimizing long-term costs to the taxpayers and maximizing the benefits for taxpayers.

In its first report to Congress, the Panel posed ten basic questions and many subsidiary questions about Treasury’s exercise of its authority under EESA. These questions set the framework for the related areas of inquiry that the Panel intends to pursue. The Panel is seeking information and advice from noted financial experts, academics, and the public. COP also invites public contributions through field hearings or through our website (cop.senate.gov). The highlighted area of this January Oversight report is an evaluation of Treasury’s response to our December report. That section is titled, “Questions About the $700 Billion: Discussion of Treasury’s Responses.” In addition to monthly reporting, the Panel is charged with issuing a Special Report later this month on the topic of regulatory reform. The Panel also intends to issue other supplementary updates to Congress on a rolling basis, as recommendations or other findings are identified. The Panel pledges to do its best to keep Congress and the public informed on the impact of Treasury’s use of public funds and the effectiveness of the program in achieving the Congressional purposes, as stated in EESA, of (1) helping to “restore liquidity and stability to the financial system of the United States,” and (2) ensuring that taxpayer funds are used “in a manner that protects home values, college funds, retirement accounts and life savings; preserves homeownership and promotes jobs and economic growth; maximizes overall returns to the taxpayers of the United States; and provides public accountability.”[6]

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TREASURY DEPARTMENT UPDATES SINCE PRIOR REPORT In the past weeks, Treasury has created new programs and expanded the scope of institutions eligible for TARP funding. The Panel will continue to evaluate the terms and conditions of the new programs and will provide updates on the effectiveness of these efforts. •

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•

•

Automotive Industry Financing Program (AIFP). On December 19, 2008, Treasury announced a plan to make emergency TARP loans to General Motors Corporation and Chrysler LLC, to avoid bankruptcy and prevent further financial harm to the economy. In addition, on December 29, Treasury purchased $5 billion in senior preferred equity with an 8% dividend from GMAC LLC. Under the agreement, GMAC issued warrants in the form of additional preferred equity in an amount equal to 5% of the preferred stock purchase. These warrants were exercised at the close of the transaction and pay a 9% divided. Treasury has also agreed to lend up to $1 billion to General Motors to facilitate their participation in a rights offering by GMAC, to support GMAC’s reorganization as a bank holding company. These steps are part of the AIFP. The AIFP provides support both to automobile manufacturers and automobile finance companies and is a recognition by the administration of the critical importance of this key industry to economic stability. The Panel will be comparing and evaluating the appropriateness of the terms and conditions connected with the receipt of TARP funds across industries. Asset Guarantee Program (AGP). On December 31, 2008, Treasury submitted a report to Congress that outlined the AGP, which was established pursuant to Section 102 of EESA. The program will provide guarantees for assets held by systemically significant financial institutions. The previous guarantees made to Citigroup that were announced on November 23 may come under the umbrella of the AGP. The December 31 report contains an overview of Treasury’s thought process in structuring guarantees, including the relative merits of various loss positions and eligibility standards for participating institutions. An evaluation of the AGP, including additional conversations with Treasury to consider specifics of the program, will be undertaken by the Panel. Targeted Investment Program (TIP). On January 2, 2009, Treasury formalized the TIP, a new program for financial institutions at risk of a loss of market confidence due to market volatility. Eligibility considerations include whether destabilization of the institution would cause systemic disruptions to the nation’s financial markets, credit, payments and settlements systems, or would threaten asset prices or the broader economy. The terms and conditions of the TIP, a program that Treasury expects would only be used in exceptional cases, are still under development. The Panel intends to dialog with the Treasury to determine more specifically the conditions under which TIP, as opposed to the SSFI program, would be used. The Panel also intends to offer the new administration its input in the administration’s effort to design the parameters of the TIP.

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QUESTIONS ABOUT THE $700 BILLION: DISCUSSION OF TREASURY’S RESPONSES On December 17, the Panel asked Treasury to respond to the ten questions set forth in the Panel’s first report. On December 30, Treasury responded to the Panel’s December 17 request. This section sets forth a summary and analysis of the Treasury’s response, and the next section includes a grid with Treasury’s answers and COP’s response to those answers. (The full text of the Panel’s letter and Treasury’s response are included as Appendix I and II to this report.) While Treasury’s letter provided responses to some of the Panel’s questions and shed some light on Treasury’s decision-making process, it did not provide complete answers to several of the questions and failed to address some of the questions at all. The Panel is committed to making independent determinations of the answers to our questions. That work must begin, however, with an understanding of Treasury’s thinking. The Panel is concerned that Treasury’s initial response to our questions is not comprehensive and seems largely derived from earlier Treasury public statements. •

• •

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•

Treasury should provide an analysis of the origins of the credit crisis and the factors that exacerbated it. Only then will Congress be able to determine the appropriate legislative responses. Treasury should set forth the metrics by which success of the TARP in meeting the Congressional goals will be judged. The Panel believes that, to date, Treasury’s actions to minimize avoidable foreclosures have not met Congress’ expectations. An upcoming Panel report will make recommendations on the best ways to stem such foreclosures. Treasury should explain its basis for determining that all healthy banks are eligible to receive TARP funds, irrespective of whether they are in the lending business or are otherwise systemically significant.

1. What Is Treasury’s Strategy? The Panel’s first set of questions asked about Treasury’s strategy in administering the TARP. There has been much public confusion over the purpose of the TARP, and whether it has had any effect on the credit markets, helped in price discovery for frozen assets, or increased lending. The name “Troubled Asset Relief Program” indicated that original purpose of buying troubled assets, but Treasury abruptly switched course and began making direct investments in banks. Treasury’s response regarding its strategy was not limited to its use of TARP funds: Treasury’s strategy is to work in coordination with all government agencies to use all the tools available to the government to achieve the following critical objectives:

• •

Stabilize financial markets and reduce systemic risk; Support the housing market by avoiding preventable foreclosures and supporting mortgage finance; and

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Protect taxpayers.

Treasury’s response to our questions lists numerous initiatives that do not involve the use of TARP funds. While the Panel agrees with Treasury’s goals, our Congressional mandate is to oversee the use of the TARP funds to determine if these goals are met. In particular, the Panel sees no evidence that Treasury has used TARP funds to support the housing market by avoiding preventable foreclosures. For Treasury to meet the stated intentions of EESA, Treasury must strengthen its efforts in this regard. The Panel also asked Treasury for its conclusions about the nature and origins of the problem it is trying to address through TARP. Treasury did not provide any such analysis of the cause of the problem. The Panel believes, however, that it is important for Treasury and our financial services regulators to have an analysis of the causes and nature of the financial crisis to be able to craft a strategy for addressing the sources, and not solely the symptoms, of the problem or problems.

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2. Is the Strategy Working to Stabilize Markets? The Panel’s second set of questions dealt with whether Treasury’s strategy was working to stabilize financial markets and our overall economy and to fulfill the other Congressional goals. The Panel continues to believe that Treasury needs to set forth the metrics by which these goals will be judged. Treasury’s response designates an assertion and two metrics that purport to show that – in combination with other actions – Treasury’s strategy has worked. Treasury claims that the TARP capital investments stemmed a series of financial institution failures and made the financial system fundamentally more stable than it was when Congress passed the legislation. It cites the “average credit default swap spread” for the eight largest U.S. banks, which Treasury notes has declined by about 240 basis points since before Congress passed EESA. Treasury does not state the dates of their measurements or note that credit spreads have been extremely volatile over the fourth quarter. The metric Treasury cites is the spread between the London Interbank Offered Rate (LIBOR) and the Overnight Index Swap rates (OIS). Treasury notes that 1-month and 3-month LIBOROIS spreads have declined about 220 and 145 basis points, respectively since the law was signed, and about 310 and 240 basis points, respectively, from their peak levels before the Capital Purchase Program (CPP) was announced. While it is true that the short-term spreads have contracted, they remain far above historic averages. Moreover, the long-term bank spreads remain extremely elevated. And, bank spreads represent a single indicator on the broader financial crisis. There is a need to have metrics that gauge the markets more broadly, as well as other economic measures, in order to form any firm view of the effectiveness of Treasury’s strategy. Although Treasury notes that it is also monitoring the effects of capital infusions on lending, it does not state what metrics it plans to use. While both tightened credit standards and the economic slowdown undoubtedly have depressed lending, these events do not justify the failure to measure whether the TARP capital investments are having a positive effect on lending. The Panel therefore hopes to learn how Treasury plans to measure this important variable. The Panel stated in its first report that it believed Treasury should monitor lending at the individual TARP recipient level, and here the Panel again restates that recommendation.

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3. Is the Strategy Helping to Reduce Foreclosures? One of Congress’ stated goals was “foreclosure mitigation efforts.” The Panel’s third question was whether Treasury’s strategy with respect to the TARP was reducing foreclosures. Treasury responded with a resounding yes, although none of the actions they credit with reducing foreclosures have a direct connection to TARP funding. This includes (1) preventing the failure of Fannie Mae and Freddie Mac, (2) Treasury and Fed programs to purchase Government Sponsored Enterprise (GSE) mortgage- backed securities, (3) attempts by the HOPE NOW Alliance, a coalition of mortgage servicers, investors and counselors, to help struggling homeowners by negotiating loan work-outs, (4) the development by HOPE NOW and the American Securitization Forum of a fast-track loan modification program to modify loans of subprime ARM borrowers facing unaffordable rate resets, and (5) the November 2008 industry announcement, along with HOPE NOW, the Federal Housing Finance Agency (FHFA) and the GSEs, of a streamlined loan modification program that builds on the mortgage modification protocol developed by the FDIC for IndyMac. A group of state attorneys general and banking departments have criticized many existing loan modification efforts, since many do nothing to reduce mortgage rates to affordable amounts.[7] More importantly, Treasury does not cite recent statistics on re-default rates. Only if homeowners have a realistic chance to remain current on their mortgages can a modification be deemed effective.

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4. What Have Financial Institutions Done with the Taxpayers’ Money Received so Far? The Panel’s fourth area of inquiry focused on what financial institutions have done with the taxpayer money they received. As indicated in question 1 above, Treasury appears to believe the question is beside the point because their goal for the CPP is to stabilize the financial system and to restore confidence in financial institutions. This, they believe, will eventually increase the flow of credit. Treasury argues that there are several reasons why the TARP investments will be slow to produce increased lending: (1) The CPP began only in October 2008, and the money must work its way into the system before it can have the desired effect. (2) Because confidence is low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans. (3) Credit quality at banks is deteriorating, which leads banks to build up their loan loss reserves. For example, Treasury notes that the level of loan loss provisioning by banks doubled in the third quarter from one year ago. Treasury seems to be suggesting these larger trends may be obscuring the effect of TARP funds. The Panel understands the reasons why measurement of banks’ use of TARP funds may be difficult. Nevertheless, the Panel believes such direct measurements at the level of individual TARP recipient firms are important for determining the extent to which the funds are having a direct benefit to businesses and consumers.

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5. Is the Public Receiving a Fair Deal? The Panel’s fifth question dealt with whether the public is receiving a fair deal from the CPP and other investments. Treasury states that its investments are a good deal for the public for two reasons. First, the government will own shares which Treasury expects to yield a reasonable return and, second, the government will also receive warrants for common shares in participating institutions, which will allow the taxpayer to benefit from any appreciation in the market value of the institution. The Panel asked Treasury to compare the terms Treasury obtained for its investments and terms obtained by private parties investing in the same firms during the same period. Treasury did not believe this comparison was relevant and made no comparison. Treasury claims that, when measured on an accrual basis, the value of the preferred stock is at or near par. Treasury does not explain whether by “accrual basis” it means historical cost accounting, in which case its statement is a tautology, or whether it means some other method of accrual accounting. Treasury states that when measured on a mark-to-market basis, the value of some preferred stock may be judged lower than par, particularly if the valuation date is the purchase date rather than the announcement date, as equity markets have dropped since the program was first announced. Finally, Treasury argues that it is not making the CPP investments for short-term gains. Rather, Treasury claims that, over time, the taxpayers will be protected by ensuring the stability of the financial system and by earning a return on these investments when they are eventually liquidated.

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6. What Is Treasury Doing to Help the American Family? The Panel’s sixth question was whether Treasury was using its ownership position in banks to encourage them to take actions to help American families. In particular, the Panel asked whether Treasury’s actions preserved access to consumer credit, including student loans and auto loans at reasonable rates, and whether Treasury was taking action to ensure that public money could not be used to subsidize lending practices that are exploitive, predatory, or otherwise harmful to customers. Treasury answered that its TARP programs to preserve access to consumer credit do not involve encouraging or mandating banks to take consumer-friendly actions with respect to credit cards or other consumer loans.

7. Is Treasury Imposing Reforms on Financial Institutions that Are Taking Taxpayer Money? The Panel’s seventh group of questions concerned whether Treasury was requiring recipients to undertake any particular reforms, including (1) the presentation of a viable business plan, (2) the replacement of failed executives and/or directors, (3) reforms designed to prevent future crises, to increase oversight, and to ensure better accounting and transparency, and (4) other appropriate operational reforms.

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Treasury responded that it has required recipients of CPP funds to adhere to the executive compensation restrictions required by EESA. In addition, Treasury barred any increase in dividends for three years and restricted share repurchases. Both the dividend increase and share buyback restrictions are designed to prevent banks from taking capital out of the financial system. Under the SSFI program, Treasury imposed additional terms and conditions on AIG. AIG must meet additional executive compensation, corporate expenses, and lobbying restrictions. While some executives at some financial institutions have voluntarily reduced their compensation, there is no uniform program in place. Treasury has the power to set the “terms and conditions” of any purchase it makes using the TARP funds. The Panel continues to ask Treasury to explain why it has not required more of financial institutions, particularly in light of both the steps taken by the United Kingdom in similar circumstances and the extensive conditions imposed on auto companies, as a condition for receiving TARP funds.

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8. How Is Treasury Deciding which Institutions Receive the Money? The Panel’s eighth question concerned Treasury’s decisions about which institutions would receive TARP money. In response, Treasury referred the Panel to Treasury’s website, which showed the application form for TARP funds. The Panel was not seeking the information about the technical process for applying to participate in the progress, but rather whether Treasury’s approach to advance taxpayer money to all healthy banks, regardless of the bank’s business profile, constitutes an effective use of funds. If the goal of the program was to stabilize financial markets, then Treasury should have standards for determining which banks are significant participants in the capital markets. If the goal of the program was to increase consumer and small business lending, then Treasury should have standards for determining which banks are active small business and consumer lenders or have committed to lend to small businesses and consumers. The Panel was also interested in Treasury’s approach to the effect TARP transactions were having on the structure of the banking industry, and whether any such effects were the result of a deliberate strategy on Treasury’s part. Treasury did not address this aspect of the Panel’s question.

9. What Is the Scope of Treasury’s Statutory Authority? The Panel’s ninth area of inquiry sought Treasury’s opinion of the scope of its statutory authority. It also sought information about guarantees, credit insurance, joint stabilization efforts, and transparency of prices under the Term Asset-Backed Securities Loan Facility (TALF) program. In response, Treasury quoted the language of EESA and said it was working on the guaranty and credit insurance programs. The Panel posed this question in order to understand Treasury’s interpretation of the statute in relation both to the actions Treasury has taken so far under EESA and to actions Treasury might take in the future. The pending arrangements with the automobile industry suggest that more thinking must go into this question than a mere rote recitation of the statute. COP is particularly interested in what limits, if any, Treasury sees to the definition of

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“financial institution” and “troubled asset” and hopes Treasury will provide its assessment of whether those terms cover other businesses, such as commercial real estate, manufacturers of consumer products, and other businesses not directly involved in financial services.

10. Is Treasury Looking Ahead? Finally, the Panel asked whether Treasury was looking ahead. In particular, it asked about likely challenges in implementing EESA and whether Treasury believed it had adequate contingency plans if the economy suffered further disruptions. Treasury responded that it is actively engaged in developing additional programs to strengthen our financial system so that credit flows to our communities, and that it is confident that it is pursuing the right strategy to stabilize the financial system and support the flow of credit to our economy. But it did not share any future plans or explain if any strategic planning for other financial reversals is in place.

OVERSIGHT ACTIVITIES COP was established as part of EESA. It was formed on November 26, 2008, and it issued its first report on December 10, 2008. That report posed ten questions that identified central issues regarding the use of taxpayers’ funds through the TARP. Since the first report, the following developments pertaining to COP’s oversight of the TARP took place:

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On December 16, 2008, COP held a Field Hearing in Clark County, Nevada to examine the roots of the financial crisis and its impact on everyday Americans. At the hearing, scores of local residents turned out to personally voice their skepticism and concern over the TARP’s lack of transparency. On December 17, 2008, Elizabeth Warren, Chair of the Panel, sent a letter to Treasury Secretary Henry Paulson on behalf of the Panel requesting that Treasury answer the questions posed in the first report. On December 30, Treasury responded to the Panel’s December 17 request. Both the full text of Professor Warren’s letter and Treasury’s response are included in the Appendices to this report. COP has engaged consultants to help us determine if Treasury’s investments in preferred stock of various banking organizations under its Capital Purchase Program were made on terms that minimize long-term costs and maximize benefits to the taxpayers. COP has received and reviewed more than 2,500 messages with stories, comments, or suggestions through cop. senate.gov.

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TREASURY DEPARTMENT RESPONSE GRID

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Report on Field Hearing in Clark County, Nevada On December 16, 2008, COP held its first field hearing, in Clark County, Nevada. Clark County suffered from over 30,000 foreclosures in 2008, an increase of nearly 300% from 2007. Overall, Nevada has had the highest foreclosure rate in the nation for 23 months. The hearing took place at the Thomas and Mack Moot Court at the University of NevadaLas Vegas Law School. Three Panel members attended the hearing: Elizabeth Warren, Richard H. Neiman, and Damon Silvers. At the hearing, the Panel sought information from a broad spectrum of sources about the nature and cause of the current financial situation, the impact of federal government actions to date to address the economic crisis, and local initiatives to address the crisis. The Panel heard testimony from the following witnesses: • • • • • • • • • • •

George Burns, Commissioner, Nevada Financial Institutions Division R. Keith Schwer, Director, Center for Business and Economic Research, UNLV Bill Uffelman, President and Chief Executive Officer, Nevada Bankers Association Gail Burks, President and Chief Executive Officer, Nevada Fair Housing Center Julie Murray, Chief Executive Officer, Three Square Food Bank Danny Thompson, Executive Secretary-Treasurer, Nevada State AFL-CIO Alfred Estrada, Resident of Clark County The Panel also heard from the following elected officials: Harry Reid, United States Senate Majority Leader (D-NV) Shelley Berkley, Congresswoman (D-NV) Dina Titus, Congresswoman-elect (D-NV)

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Senator Harry Reid, Representative Shelley Berkley and Representative-elect Dina Titus emphasized the importance of ensuring that the use of TARP funds benefit American working families. George Burns, Keith Schwer, and Bill Uffelman discussed the collapse of the housing bubble and the current state of the Nevadan economy. The witnesses on the second panel – Gail Burks, Julie Murray, Danny Thompson, and Alfred Estrada – testified about the human consequences of the economic downturn. Video, a transcript and testimony from the Clark County Field Hearing are available at cop.senate.gov. The Panel owes a special thanks to UNLV President David Ashley, UNLV Law School Dean John White and the Boyd School of Law staff for their hospitality in hosting this event. The Panel also owes thanks to Kenneth LoBene, the local Field Office Director for the U.S Department of Housing and Urban Development, for providing them with a tour of local neighborhoods severely impacted by foreclosures following the hearing.

FUTURE OVERSIGHT ACTIVITIES Public Hearings Given its successful public hearing in Clark County, Nevada, COP will continue to hold field hearings to shine light on the causes of the financial crisis, the administration of TARP, and the anxieties and challenges of ordinary Americans. The next hearing will be on January 14, 2009 in Washington, DC.

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Upcoming Reports In January 2009, COP will release a report providing recommendations for reforms to the financial regulatory structure. The report will provide a roadmap for a regulatory system that will revitalize Wall Street, protect consumers, and ensure future stability in the financial markets. In early February, COP will release its third oversight report.

Public Participation and Comment Process The Panel encourages members of the public to visit its website at cop.senate.gov. The website provides information about COP and the text of COP’s reports. In addition, concerned citizens can share their stories, concerns, and suggestions with the Panel through the website’s comment feature. To date, COP has received more than 2,500 comments, and COP looks forward to hearing more from the American people. By engaging in this dialogue, COP aims to enhance the quality of its ideas and advocacy.

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ABOUT THE CONGRESSIONAL OVERSIGHT PANEL In response to the escalating crisis, on October 3, 2008, Congress provided the U.S. Department of the Treasury with the authority to spend $700 billion to stabilize the U.S. economy, preserve home ownership, and promote economic growth. Congress created the Office of Financial Stabilization (OFS) within Treasury to implement a Troubled Asset Relief Program (TARP). At the same time, Congress created COP to “review the current state of financial markets and the regulatory system.” The Panel is empowered to hold hearings, review official data, and write reports on actions taken by Treasury and financial institutions and their effect on the economy. Through regular reports, COP must oversee Treasury’s actions, assess the impact of spending to stabilize the economy, evaluate market transparency, ensure effective foreclosure mitigation efforts, and guarantee that Treasury’s actions are in the best interests of the American people. In addition, Congress has instructed COP to produce a special report on regulatory reform that will analyze “the current state of the regulatory system and its effectiveness at overseeing the participants in the financial system and protecting consumers.” On November 14, 2008, Senate Majority Leader Harry Reid and the Speaker of the House Nancy Pelosi appointed Richard H. Neiman, Superintendent of Banks for the State of New York, Damon Silvers, Associate General Counsel of the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), and Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School to the Panel. With the appointment on November 19 of Congressman Jeb Hensarling to the Panel by House Minority Leader John Boehner, the Panel had a quorum and met for the first time on November 26, 2008, electing Professor Warren as its chair. On December 16, 2008, Senate Minority Leader Mitch McConnell named Senator John E. Sununu to the Panel, completing the Panel’s membership. In the production of this report, COP owes special thanks to Adam Blumenthal for his help in interpreting financial statistics and to Professor Adam Levitin for his assistance in working through the foreclosure data. Ganesh Sitaraman provided important drafting help and also deserves COP’s special thanks.

ALTERNATIVE VIEWS Sen. John E. Sununu The central portion of this report presents Treasury's response to questions posed in the Panel’s first report, released on December 10, 2009, as well as an evaluation of those responses. In many cases, the report highlights areas where additional information may or should be provided to better understand Treasury’s motives in choosing specific features of the TARP, measuring its performance, and monitoring compliance. In these and other areas, the public is better served by a process that is as clear and transparent as possible. Compiling this evaluation, and creating a panel report, is a consensus process. As a result, its tone and emphasis cannot perfectly reflect the priorities and language of every member. Taken as a whole, I believe that the material presented in the January Report will help increase the public’s understanding of the process to date, and, as such, I have supported its

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release. In two areas, however, the approach taken is of particular concern and deserves additional clarification. First, in several places within the report text, language is used which can easily be interpreted as suggesting that the purpose of the TARP is to increase lending to the levels that existed before the current financial crisis. (See, e.g., page 8: “... or increased lending”; page 10: “... why the TARP investments will be slow to produce increased lending”; page 13: “... the goal of the program was to increase consumer or small business lending ....”). But the current crisis was caused, in large part, by the extension of too much credit to institutions and individuals that were not creditworthy. This, in turn, has resulted in a broad and dramatic deleveraging of the global economy. When, and as, the economy begins to recover, it will do so in an environment of lower leverage, and, thus, lower levels of aggregate borrowing than existed in 2007. This fact should not be ignored. With regard to lending, the TARP is intended to help ensure the availability of credit to individuals and businesses that are creditworthy and that credit is made available at sustainable levels over time. Language to this effect is used on page 11 (“... the Panel asked whether Treasury’s action preserved access to consumer credit ...”), but by omitting it elsewhere, readers might easily, and incorrectly, conclude that the TARP is intended to bring total borrowing back to pre-crisis levels. Second, while Treasury can and should provide additional information to the public regarding the TARP’s design, its performance, and the compliance of firms receiving capital, there are several questions posed in the Panel’s December 10 report that are enormously difficult, if not impossible, to answer with any certainty. Moreover, there are a few that are best left unanswered. Questions such as: “3.8 Will lower rates lead to a large enough pool of buyers to lead to a general increase in home prices?” and “3.10 Will lower interest rates induce demand for home ownership in the face of falling housing prices, consumer uncertainty about the future of the economy and unemployment, and the reasonable expectation that an even better deal might be available in the future?” require gross assumptions about multiple economic indicators and human behavior. In the current environment it is not practical to attempt to accurately forecast such behavior. Questions such as “4.5 Is Treasury seeking to use TARP to shape the future of the American financial system?” and “6.1 Does Treasury believe American families need to borrow more money?” contain vague and sweeping generalizations. No Treasury Secretary should be asked to assert that “American families should borrow more” or “should borrow less” as part of the TARP oversight process. Families and consumers face situations and circumstances that are unique, and those situations and circumstances should be recognized as such. The work of the Panel is important, and it should help provide the public and Congress with useful information regarding the design, operation, and performance of the TARP. Thus, it is essential that every effort be made to use unambiguous language and to ask direct and practical questions. We must redouble efforts to do so in future reports.

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APPENDIX I: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY MR. HENRY M. PAULSON, JR., DATED DECEMBER 17, 2008 Congressional Oversight Panel 732 North Capitol Street, NW Rooms: C‐320 and C‐617 Mailstop: BOC Washington, DC 20401 December 17, 2008 Mr. Henry M. Paulson, Jr. Secretary of the Treasury U. S. Department of the Treasury 1500 Pennsylvania Avenue, N.W. Washington, DC 20220

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Dear Mr. Paulson: I write as chair of the Congressional Oversight Panel established as part of the Emergency Economic Stabilization Act of 2008. On behalf of the Panel, I want to thank you for making it possible for us to meet with the staff of the Treasury in November just as we were getting underway. We appreciate the cooperation and care your staff took in helping us understand the general outlines of the TARP program. Our panel, which was established on November 26, 2008, issued its first report on December 10. A copy of that report is attached. As mandated by statute, that report will be followed by a report from the panel every thirty days. As we prepare for our January 9, 2009, report, we request your assistance in two ways. First, we ask that you help us answer the ten questions that we posed in our December 10 report. Second, we ask that you appear at a hearing called by the Panel on January 13, 2009. You will receive a formal request, of course, but we wanted you to have an opportunity to put this on your calendar now. Each of the ten questions we posed has multiple parts. So that there will be no misunderstanding, we have tried in our report to give some of the context and factual background that prompt the questions. We look forward to answers in writing so that we can carefully follow the details. We request that you send us the answers to these questions within two weeks, that is, by December 30. We know that you and your staff have many pressing duties, but we hope that many of the answers are readily available to you. We must ask for a prompt response because we cannot exercise our 30-day oversight functions in a responsible manner without pressing for timely responses.

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Secretary Henry Paulson December 17, 2008 Yours truly, Elizabeth Warren Chairperson Congressional Oversight Panel

Enclosure cc Rep. Jeb Hensarling Richard H. Neiman Damon A. Silvers Sen. John E. Sununu

APPENDIX II: TREASURY DEPARTMENT RESPONSES TO QUESTIONS OF THE FIRST REPORT OF THE CONGRESSIONAL OVERSIGHT PANEL, DATED DECEMBER 30, 2008 Responses to Questions of the First Report of the Congressional Oversight Panel for Economic Stabilization Department of the Treasury December 30, 2008

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Question 1: What is Treasury’s strategy? Answer: The Nation has been experiencing an unprecedented period of financial market turmoil with market events occurring rapidly and unpredictably. The Treasury Department has responded and adapted quickly to these events. Throughout the crisis, Treasury’s strategy has been to work in coordination with all government agencies to use all the tools available to the government to achieve the following critical objectives: • • •

Stabilize financial markets and reduce systemic risk Support the housing market by avoiding preventable foreclosures and supporting mortgage finance Protect taxpayers.

The measures taken by Treasury under the Emergency Economic stabilization Act (EESA) are part of a comprehensive strategy by Treasury and the federal regulators since the onset of the crisis to stabilize the financial system and housing markets, and strengthen our financial institutions. Treasury has acted quickly and creatively in coordination with the Federal Reserve, the FDIC, OTS, and the OCC to help stabilize the financial system. In addition, because the crisis is global in nature, Treasury and the Federal Reserve have also

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worked in close coordination with Finance Ministries and major Central Banks around the world, which have taken similar measures to stabilize their financial systems. It is clear that our coordinated actions have made an impact. Our coordinated effort to strengthen our financial institutions so they can support our economy is critical to working through the current economic downturn. The following is a list of many of the actions taken by Treasury and other federal agencies as part of our comprehensive approach. Detailed information on all of these programs is available on websites of the respective federal agencies. a) Actions to Stabilize Financial Markets •

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Term Asset-Backed Securities Loan Facility (TALF): Treasury is providing TARP support for this program, which was created by the Federal Reserve, to support consumer lending. The TALF will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. Term Auction Facility (TAF): Under the TAF, the Federal Reserve auctions term funds to depository institutions. All depository institutions that are eligible to borrow under the primary credit program are eligible to participate in TAF auctions. All advances must be fully collateralized. Term Securities Lending Facility (TSLF): Under the TSLF, the Federal Reserve lends Treasury securities to primary dealers secured by a pledge of other securities, including federal agency debt, federal agency residential mortgage-backed securities, and non- agency AAA/Aaa-rated private-label residential MBS. Primary Dealer Credit Facility (PDCF): The PDCF is an overnight loan facility that provides funding to primary dealers in exchange for a specified range of eligible collateral. On September 14, 2008, the Federal Reserve announced that collateral eligible to be pledged at the PDCF had been broadened. The program is intended to foster the functioning of financial markets more generally. Money Market Investor Funding Facility (MMIFF): The MMIFF supports a private- sector initiative designed to provide liquidity to U.S. money market investors. Under the MMIFF, the Federal Reserve Bank of New York (FRBNY) provides senior secured funding to a series of special purpose vehicles to facilitate an industry-supported private- sector initiative to finance the purchase of eligible assets from eligible investors. Temporary Guarantee Program for Money Market Mutual Funds: This program offers unprecedented government insurance in order to address concerns about the safety and accessibility of these investments and enhance market confidence. Treasury quickly set this program up after a mutual fund “broke the buck” for the second time in history. Commercial Paper Funding Facility (CPFF): The Federal Reserve created the CPFF to provide a liquidity backstop to U.S. issuers of commercial paper. The CPFF is intended to improve liquidity in short-term funding markets and thereby contribute to greater availability of credit for businesses and households. Under the CPFF,

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FRBNY finances the purchase of highly-rated unsecured and asset-backed commercial paper from eligible issuers via eligible primary dealers. Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility: The Federal Reserve established this lending facility to provide funding to U.S. depository institutions and bank holding companies to finance their purchases of high- quality asset-backed commercial paper (ABCP) from money market mutual funds under certain conditions. The program is intended to assist money funds that hold such paper in meeting demands for redemptions by investors and to foster liquidity in the ABCP market and money markets more generally. Swap Lines with Foreign Central Banks: On September 29, 2008 the Federal Reserve authorized a $330 billion expansion of its temporary reciprocal currency arrangements (swap lines). The Federal Reserve enacted this program to improve the distribution of dollar liquidity around the globe and it is available to other central banks through April 30, 2009. The program was enacted because, at the time, dollar funding rates abroad had been elevated relative to dollar funding rates available in the U.S., reflecting a structural dollar funding shortfall outside of the U.S. The increase in the amount of foreign exchange swap authorization limits enabled many foreign central banks to increase the amount of dollar funding that they can provide in their home markets.

b) Actions to Strengthen U.S. Financial Institutions •

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Temporary Increase in Deposit Insurance: On October 3, as part of the EESA, the FDIC temporarily raised the deposit insurance limit from $100,000 to $250,000 for all deposit categories until December 31, 2009. Temporary Liquidity Guarantee Program (TLGP): On October 14, 2008, the FDIC established the TLGP in the following two parts: Debt Guarantee Program (DGP): The DGP temporarily guarantees all senior unsecured debt newly issued by FDIC-insured institutions and certain holding companies on or after October 14, 2008, through June 30, 2009. Transaction Account Guarantee Program: the FDIC also temporarily provides full deposit insurance coverage to deposits in non-interest bearing transaction accounts (mainly payment processing accounts) until December 31, 2009. Capital Purchase Program (CPP): The CPP is a key component of the TARP. Treasury established this voluntary program to stabilize financial markets by providing capital to healthy institutions, increasing the flow of credit to businesses and consumers and supporting the U.S. economy. Under the CPP, Treasury will purchase up to $250 billion of senior preferred shares on standardized terms as described in the program's term sheet. The program is available to qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies engaged only in financial activities. Institutions participating in the program must adopt the Treasury Department's standards for executive compensation and corporate governance for the period during which Treasury holds equity issued under this program.

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Systemically Significant Failing Institutions Program (SSFI): The SSFI program is another key component of the TARP. Treasury will provide capital on a case-bycase basis to systemically significant institutions that are at substantial risk of failure. In determining eligibility, Treasury may consider the following, among other factors: the extent to which the failure of an institution could threaten the viability of its creditors and counterparties; the number and size of financial institutions that are seen by investors or counterparties as similarly situated to the failing institution, or that would otherwise be likely to experience indirect contagion effects from the failure of the institution; whether the institution is sufficiently important to the nation’s financial and economic system; or the extent and probability of the institution’s ability to access alternative sources of capital and liquidity.

c) Initiatives to Support the U.S. Housing Market •

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FHASecure: Announced by HUD in August 2007, the FHASecure program offers homeowners who have missed payments an opportunity to refinance into affordable FHA-insured loans. More than 450,000 homeowners have refinanced through FHASecure since the launch of the program. HOPE NOW: In October 2007, Treasury actively helped facilitate the creation of the HOPE NOW Alliance, a private sector coalition of mortgage market participants and non-profit housing counselors. HOPE NOW servicers represent more than 90 percent of the subprime mortgage market and 70 percent of the prime mortgage market. Since inception, HOPE NOW has kept roughly 2.9 million homeowners in their homes through modifications and repayment plans, and it is currently helping more than 200,000 borrowers per month. Stabilizing Fannie Mae and Freddie Mac: Treasury took aggressive actions in 2008 to stabilize and strengthen Fannie Mae and Freddie Mac, and prevent the collapse of two institutions with $5.4 trillion in debt and mortgage-backed securities held by investors and financial institutions throughout the United States and the world. The systemic importance of these two enterprises, and the systemic impact of a collapse of either, cannot be overstated. Treasury’s efforts to stabilize them by effectively guaranteeing their debt has increased the flow of mortgage credit and insulated mortgage rates from the rapid increases and fluctuations in the cost of other credit. Hope for Homeowners: On October 1, 2008, HUD implemented Hope for Homeowners, a new FHA program, available to lenders and borrowers on a voluntary basis, that insures refinanced affordable mortgage loans for distressed borrowers to support long-term sustainable homeownership. Streamlined Loan Modification Program: On November 11, 2008, Treasury joined with the FHFA, the GSEs, and HOPE NOW to announce a major streamlined loan modification program to move struggling homeowners into affordable mortgages. The program, implemented on December 15, 2008, creates sustainable monthly mortgage payments by targeting a benchmark ratio of housing payments to monthly gross household income (3 8%). Additionally, on November 20, 2008, Fannie Mae and Freddie Mac announced that they would suspend foreclosure sales

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and cease evictions of owner- occupied homes to allow time for implementation of the modification program. Subprime Fast-Track Loan Modification Framework: Treasury worked with the American Securitization Forum to develop a loan modification framework to allow servicers to modify or refinance loans more quickly and systematically. Subprime ARM borrowers who are current but ineligible to refinance may be offered a loan modification freezing the loan at the introductory rate for five years.

Treasury, working with the Federal Reserve, the FDIC and other regulators, has taken the necessary steps to prevent a financial collapse. The authorities and flexibility granted to the Treasury Department by Congress have been essential to developing the programs necessary to meet these objectives. Strong financial institutions and a stable financial system will smooth the path to economic recovery and an eventual return to prosperity.

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Question 1b: What specific facts changed that led to your change in strategy? Answer: In the discussions with the Congress in mid-September during consideration of the financial rescue package legislation, Treasury focused on an initial plan to purchase illiquid mortgage assets in order to remove the uncertainty regarding banks’ capital strength. At the same time, Treasury worked hard with the Congress to build maximum flexibility into the law to enable Treasury to adapt our policies and strategies to address market challenges that may arise. In the weeks after Secretary Paulson and Chairman Bernanke first went to the Congress, market conditions deteriorated at an unprecedented and accelerating rate. One key measure Treasury assessed was the LIBOR-OIS spread – a key gauge of funding pressures and perceived counterparty credit risk. Typically between 5 – 10 basis points, on September 1, the one month spread was 47 basis points. By September 18th, when Treasury first went to Congress, the spread had climbed 88 basis points to 135 basis points. By the time the bill passed, just two week later on October 3, the spread had climbed another 128 basis points to 263 basis points. By October 10, LIBOR-OIS spread rose another 75 basis points to 338 basis points. During this period, credit markets effectively froze. The commercial paper market shut down, 3-month Treasuries dipped below zero, and a money market mutual fund “broke the buck” for only the second time in history, precipitating a $200 billion net outflow of funds from that market. Given such market conditions, Secretary Paulson and Chairman Bernanke recognized that Treasury needed to use the authority and flexibility granted under the EESA as aggressively as possible to help stabilize the financial system. They determined the fastest, most direct way was to increase capital in the system by buying equity in healthy banks of all sizes. Illiquid asset purchases, in contrast, require much longer to execute. Treasury then began immediately designing a capital program to complement the asset purchase programs under development. Since launching the program on October 14, 2008, we have invested $162 billion in 208 institutions of all sizes across the country. As Treasury continued very serious preparations and exploration of purchasing illiquid assets, scale became a factor; for an asset purchase program to be effective, it must be done in very large scale. With $250 billion allocated for the CPP, Treasury considered whether there

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was sufficient capacity in the TARP for an asset purchase program to be effective. In addition, each dollar invested in capital can have a bigger impact on the financial system than a dollar of asset purchase; capital injections provide better “bang for the buck.” As markets continued to deteriorate through October, it became clear that the preservation of market stability would require that Treasury support non-bank financial institutions and the securitization market, both of which are crucial sources of lending for consumers and business of all sizes.

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Question 2: Is the strategy working to stabilize markets? Answer: Yes. The most important evidence that our strategy is working is that Treasury’s actions, in combination with other actions, stemmed a series of financial institution failures. The financial system is fundamentally more stable than it was when Congress passed the legislation. While it is difficult to isolate one program's effects given policymakers' numerous actions, one indicator that points to reduced risk of default among financial institutions is the average credit default swap spread for the eight largest U.S. banks, which has declined by about 240 basis points since before Congress passed the EESA. Another key indicator of perceived risk is the spread between LIBOR and OIS: 1 month and 3-month LIBOR-OIS spreads have declined about 220 and 145 basis points, respectively, since the law was signed and about 310 and 240 basis points, respectively, from their peak levels before the CPP was announced. Treasury is also monitoring the effects our strategy is having on lending, although it is important to note that nearly half the money allocated to the Capital Purchase Program has yet to be received by the banks. Treasury is executing at a rapid speed, but it will take some time to review and fund all the remaining applications. Clearly this capital needs to get into the system before it can have the desired effect. In addition, we are still at a point of low confidence – both due to the financial crisis and the economic downturn. As long as confidence remains low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans. As confidence returns, Treasury expects to see more credit extended. The increased lending that is vital to our economy will not materialize as fast as anyone would like, but it will happen much faster as a result of deploying resources from the TARP to stabilize the system and increase capital in our banks. Question 3: Is the strategy helping to reduce foreclosures? Answer: Yes. Treasury has moved aggressively to keep mortgage financing available and develop new tools to help homeowners. Specifically, Treasury has achieved the following three key accomplishments: 1. To support the housing and mortgage market, Treasury acted earlier this year to prevent the failure of Fannie Mae and Freddie Mac, the housing GSEs that affect over 70 percent of mortgage originations. These institutions are systemically critical to financial and housing markets, and their failure would have materially exacerbated

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the recent market turmoil and profoundly impacted household wealth. Mortgage finance is available today on attractive terms because of Treasury’s actions with the Federal Reserve and the Federal Housing Finance Agency to stabilize Fannie Mae and Freddie Mac. In addition, Treasury and the Federal Reserve have both announced programs to purchase GSE mortgage-backed securities. These programs are lowering borrowing rates for homeowners, to both purchase homes and to refinance into more affordable mortgages. 2. October 2007, Treasury helped establish the HOPE NOW Alliance, a coalition of mortgage servicers, investors and counselors, to help struggling homeowners avoid preventable foreclosures. HOPE NOW estimates that roughly 2.9 million homeowners have been helped by the industry since July 2007; the industry is now helping more than 200,000 homeowners a month avoid foreclosure. In addition, Treasury worked with HOPE NOW and the ASF to develop a fast-track loan modification program to modify loans of subprime ARM borrowers facing unaffordable rate resets. 3. Treasury worked with HOPE NOW, FHFA and the GSEs to achieve a major industry breakthrough in November 2008 with the announcement of a streamlined loan modification program that builds on the mortgage modification protocol developed by the FDIC for IndyMac. By targeting a benchmark ratio of housing payments to gross monthly household income, HOPE NOW servicers and the GSEs will have greater ability to quickly and efficiently create sustainable monthly mortgage payments for troubled borrowers. Potentially hundreds of thousands more struggling borrowers will be enabled to stay in their homes at an affordable monthly mortgage payment. Many private-label mortgage-backed securities pooling and servicing agreements reference the GSE servicing standards, giving this new program reach far beyond GSE loans. An important complement to those guidelines was the GSEs’ announcement on November 20, 2008 that they will suspend all foreclosures for 90 days. The foreclosure suspension will give homeowners and servicers time to utilize the new streamlined loan modification program and make it possible for more families to work out terms to stay in their homes. Question 4: What have financial institutions done with the taxpayers’ money received so far? Answer: The goal of the Capital Purchase Program is to stabilize the financial system and restore confidence in financial institutions, which will increase the flow of credit. To date, 208 financial institutions of all sizes have received investments through the CPP. These institutions include regional, small and community banks, as well as Community Development Finance Institutions, all of which play a vital role in their communities. We expect communities of all sizes to benefit from the investments into these institutions, which now have an enhanced capacity to perform their vital functions, including lending to U.S. consumers and businesses and promoting economic growth.

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As the GAO noted in its report, given the number and variety of financial stability actions being put in place by multiple entities, it will be challenging to view the impact of the Capital Purchase Program in isolation and at the institutional level. Moreover, each individual financial institution’s circumstances are different, making comparisons challenging at best, and it is difficult to track where individual dollars flow through an organization. Nonetheless, Treasury is working with the banking regulators to develop appropriate measurements and Treasury is focused on determining the extent to which the CPP is having its desired effect. The CPP began in October 2008 and the money must work its way into the system before it can have the desired effect. Moreover, we are still at a point of low confidence – both due to the credit crisis and due to the economic downturn, during which lending and borrowing levels normally drop. While confidence is low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans. As confidence returns, we expect to see more credit extended. This lending won’t materialize as fast as anyone would like, but it will happen much faster as a result of having used the TARP to stabilize the system and to increase the capital in our banks. We also know that credit quality at banks is deteriorating. This has led banks to build up their loan loss reserves and to work with troubled borrowers to restructure loans. The level of loan loss provisioning by banks doubled in the third quarter from one year ago, putting pressure on bank earnings and capital. By injecting new capital into healthy banks, the CPP has helped banks maintain strong balance sheets and eased the pressure on them to scale back their lending and investment activities. As a direct result of Treasury’s actions through TARP, all participating financial institutions in the CPP have stronger capital positions, and with higher capital levels and restored confidence, banks can continue to play their role as financial lenders in our communities. While difficult to achieve during times like this, this lending is essential to economic recovery. In the case of the SSFI program, Treasury did not provide funds to a financial institution directly. The $40 billion in Treasury funds was paid directly to the FRBNY to restructure AIG’s balance sheet. AIG did not receive those funds. The FRBNY credit facility has helped minimize the disorderly collateral effects on healthy banks, which were counterparties that bought insurance from AIG. Treasury’s investment in AIG was necessary to preserve stability in the financial system and to give AIG time to sell assets in an orderly manner to pay back taxpayers. Question 5: Is the public receiving a fair deal? Answer: Yes. The American people have benefited from the financial rescue package. The financial crisis, and the ensuing economic downturn, would have been far worse without this legislation and our implementation of it. In addition, Treasury has designed its programs, consistent with EESA, to protect the taxpayer and to provide positive return on investments to the maximum extent possible. For example, under the CPP, Treasury will purchase up to $250 billion of senior preferred shares on standardized terms, including a 5 percent dividend for 5 years, which then increases to 9 percent. The government will not only own shares which we expect to yield a reasonable return, but will also receive warrants for common

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shares in participating institutions. These warrants allow the taxpayer to benefit from any appreciation in the market value of the institution. When measured on an accrual basis, the value of the preferred stock is at or near par. Furthermore, Treasury has already started receiving required dividend payments. On a marktomarket basis, the value of some preferred stock may be judged lower when compared to the date of purchase as equity markets have experienced pressure since the program began. In addition to preferred stock, Treasury also received warrants in the institutions it has invested in to provide further value and protection to taxpayers (other than community development organizations which are exempt from warrant requirements). These warrants also have positive value. Treasury is investing in banks of all sizes around the country to help stabilize the financial system and get credit flowing to our communities. Treasury is not making these investments for short-term gains – we are not day traders. Over time, Treasury believes the taxpayers will be protected by ensuring the stability of the financial system and by earning a return on these investments when they are eventually liquidated.

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Question 6: What is Treasury doing to help the American family? Answer: Every aspect of the implementation of the financial rescue package has a single purpose – to stabilize the financial system so it can support the financing needs of the American people, as consumers and as owners and employees of businesses. American families rely on the services provided by a wide array of sound financial institutions and financial markets, such as savings and investment for retirement (e.g., 401k accounts), and access to affordable credit for education, business development, and even daily necessities. For example, when financial institutions fail and when various credit markets don’t function, every American household is impacted. A bank failure can suspend or end access to basic financial services in a community, and create enormous anxiety among individuals. As the commercial paper market came under pressure, small and large businesses had difficulty raising money to meet basic needs such as making payroll or purchasing inventory. Consumer credit relies on the securitization market, which froze this year, increasing the costs of credit cards, car loans, and student loans. All of the steps that Treasury has taken, alone and in coordination with the regulators, are benefiting Americans because they have prevented a further deterioration of the financial system. The problems facing the financial sectors here and abroad arose over a number of years and it will take time for the restoration of normal financial markets. There is no single action the federal government can take to end the financial market turmoil and the economic downturn, but Treasury is confident that we are pursuing the right strategy to stabilize the financial system and support the flow of credit to our economy. The TARP is just one of many policy measures that Treasury has taken to restore the liquidity and capital necessary to support economic growth, protect the savings of millions of individuals and restore the flow of credit to consumers and businesses. In addition, the measures we are taking are allowing the process of financial intermediation to continue- which means that banks and financial institutions can play their vital role in the economy, including providing savings, retirement and lending services. Some of the specific programs we have established to directly help American families are:

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Term Asset Backed Securities Lending Facility: Consumer credit is critical for many households as they consider purchasing a car, new appliances, or other big ticket items. Like other forms of credit, the availability of affordable consumer credit depends on ready access to a liquid and affordable secondary market – in this case, the asset backed credit market. Recent credit market stresses essentially brought this market to a halt in October 2008. As a result, millions of Americans cannot find affordable financing for their basic credit needs. And credit card rates are climbing, making it more expensive for families to finance everyday purchases. The Federal Reserve and the Treasury announced an aggressive program to support the normalization of credit markets and the availability of affordable consumer credit to support economic recovery. Treasury will invest $20 billion in a Federal Reserve facility that will provide liquidity to issuers of consumer asset backed paper, enabling a broad range of institutions to step up their lending, and enabling borrowers to have access to lower-cost consumer finance (auto loans, credit cards, student loans) and small business loans. The facility may be expanded over time and eligible asset classes may be expanded later to include other assets, such as commercial mortgagebacked securities, non-agency residential mortgage- backed securities or other asset classes. Guarantee for Money Market Mutual Funds: In September 2008, after a money market mutual fund “broke the buck” for only the second time in history, Treasury established a temporary Guarantee Program for Money Market Mutual Funds. The program will help protect the savings and pensions of individuals, as well as institutional investors. Fannie Mae and Freddie Mac: The housing correction has been at the root of the crisis. One of the most important things Treasury can do to mitigate foreclosures and progress through the housing correction is to reduce the cost of mortgage finance, so more families can afford to buy a home, and so homeowners can refinance into more affordable mortgages. Treasury took strong actions in 2008 to stabilize and strengthen Fannie Mae and Freddie Mac, and prevent the collapse of two institutions with $5.4 trillion in debt and mortgage-backed securities held by investors and financial institutions throughout the United States and the world. The systemic importance of these two enterprises, and the systemic impact of a collapse of either, cannot be overstated. Treasury’s efforts to stabilize them by effectively guaranteeing their debt has increased the flow of mortgage credit and insulated mortgage rates from the rapid increases and fluctuations in the cost of other credit. Recently, the Federal Reserve announced that it will purchase $100 billion in GSE debt and half a trillion dollars in GSE mortgage backed securities, which should have a strongly positive impact on the cost of mortgage finance. Treasury continues to look for additional ways to make mortgage credit more affordable, which will stimulate home purchases, help to stabilize prices and end this housing correction. HOPE NOW: October 2007, Treasury helped establish the HOPE NOW Alliance, a coalition of mortgage servicers, investors and counselors, to help struggling homeowners avoid preventable foreclosures. HOPE NOW estimates that roughly 2.9 million homeowners have been helped by the industry since July 2007; the industry is now helping more than 200,000 homeowners a month avoid foreclosure. In addition, Treasury worked with HOPE NOW and the ASF to develop a fast-track

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loan modification program to modify loans of subprime ARM borrowers facing unaffordable rate resets. Streamlined Loan Modification Program: On November 11, 2008, Treasury joined with the FHFA, the GSEs, and HOPE NOW to announce a major streamlined loan modification program to move struggling homeowners into affordable mortgages. The program, implemented on December 15, creates sustainable monthly mortgage payments by targeting a benchmark ratio of housing payments to monthly gross household income (3 8%). Additionally, on November 20, 2008, Fannie Mae and Freddie Mac announced that they would suspend foreclosure sales and cease evictions of owner-occupied homes to allow time for implementation of the modification program.

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Question 7: Is Treasury imposing reforms on financial institutions that are taking taxpayer money? Answer: The CPP is a voluntary program for viable institutions. The program was designed to be attractive to financial institutions of all sizes as a mechanism to increase capital in the financial system while also protecting the taxpayer. Treasury established strict executive compensation requirements on all participating institutions, as per the requirements set out in the EESA. Treasury barred any increase in dividends for 3 years and restricted share repurchases. Increasing dividends or buying back shares would undermine our policy objective by taking capital out of the financial system. In addition, Treasury is taking warrants in participating institutions so that taxpayers benefit from any appreciation in the value of these firms’ stock. Under the Systemically Significant Failing Institution program, additional terms and conditions were established for AIG. As a condition of extending an $85 billion line of credit to AIG, the Fed required a change in management at AIG. Also as a condition for Treasury assistance under TARP, AIG must meet stringent executive compensation, corporate expenses and lobbying restrictions. Treasury is committed to rigorous oversight of the restrictions pertaining to executive compensation and is continuing to develop a comprehensive compliance program to ensure that institutions adhere to executive compensation provisions. Question 8: How is Treasury deciding which institutions receive the money? Answer: All information about the terms and conditions of the CPP, including the formal application process and forms, is publically available on the Treasury website, as well as on the websites of all the primary federal regulators. •

Institutions: The Capital Purchase Program is available to a broad array of private and publically held- financial institutions of all sizes- including qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies. The program is designed for healthy banks – banks that are considered viable without government investment. It is designed to have attractive terms to

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encourage healthy banks to participate; they are best positioned to increase the flow of credit in their communities. Terms: The terms for this program are the same for all institutions. Treasury issued a term sheet for publically held banks and followed with term sheet for private depositories. The minimum subscription amount available to a participating institution is 1 percent of risk-weighted assets. The maximum subscription amount in this program is the lesser of $25 billion or 3 percent of risk-weighted assets. Treasury also created a standard investment agreement for all banks, regardless of size. Application Process: There is one common application form that all qualified and interested financial institutions used to submit to their primary regulator – the Federal Reserve, the FDIC, the OCC or the OTS. This common application form is available on the websites of all the regulatory agencies. Evaluation Process: Treasury worked closely with the banking regulators to establish a standardized evaluation process; this means that all regulators use the same standards to review all applications to ensure consistency. Once a Federal regulator has reviewed an application, it will take one of the following three actions:

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1. For applications the regulator does not recommend, it may encourage the institution to withdraw the application. 2. For applications the regulator strongly believes should be included in the program, it directly sends the application and its recommendation to the TARP Investment Committee at the Treasury Department. 3. For cases that are less clear, the regulator will forward the application to a Regulatory Council, made up of senior representatives of the four banking regulators for ajoint review and recommendation. Treasury is an observer on the Council. The Regulatory Council will make a joint recommendation of either withdrawal or approval. The Treasury TARP Investment Committee reviews all recommendations from the regulators and recommendations for CPP investment are made based on all of the information received from the above process. The Investment Committee gives considerable weight to the recommendations of the banking regulators. In some cases, the Committee will send the application back to the primary regulator for additional information, or even remand it to the Regulatory Council for further review. At the end of the evaluation process, Treasury notifies all approved institutions. Institutions then have 30 days to complete the required documents before Treasury funds the transaction. All completed transactions will be publicly announced within 2 business days of execution, as required by the law. Treasury will not, however, announce any applications that are withdrawn or denied. Treasury’s investment committee includes senior officials on financial markets, economic policy, financial institutions, and financial stability, as well as the Chief Investment Officer for the TARP. For SSFI and other programs, Treasury makes the decision on a case-by-case basis. The goal of TARP is to stabilize the financial system and restore confidence in and of financial institutions, enabling credit to flow to consumers and businesses. In March of 2008, Treasury published an extensive Blueprint for a Modernized Regulatory Structure that

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proposes a framework and many specific recommendations for reforming our financial regulatory system. Our current system is a patchwork quilt that developed over many decades and is not optimal for our complex financial system today. Treasury is using TARP to stabilize the financial system today, while regulatory modernization will likely take several years to complete.

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Question 9: What is the scope of Treasury’s statutory authority? Answer: The Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted by Congress and signed by the President with the stated purposes “(1) to immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States; and (2) to ensure that such authority and such facilities are used in a manner that (A) protects home values, college funds, retirement accounts, and life savings: (B) preserves homeownership and promotes jobs and economic growth; (C) maximizes overall returns to the taxpayers of the United States; and, (D) provides public accountability for the exercise of such authority.”[23] In order to achieve these purposes, Congress provided broad authority to the Secretary of the Treasury to establish the Troubled Asset Relief Program to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on terms and conditions determined by the Secretary in accordance with EESA and applicable policies and procedures. Recognizing the severity of the economic challenges facing the U.S. financial system, Congress incorporated a broad definition of financial institutions which covers any institution established and regulated in the United States or its territories and which has significant operations in the Unites States; the definition of financial institutions includes, but by its express terms is not limited to, banks, savings associations, credit unions, security broker or dealers and insurance companies.[24] The definition of “troubled asset” provides authority to the Secretary, in consultation with the Chairman of the Board of Governors of the Federal Reserve System, to define a “troubled asset” as any financial instrument the purchase of which is necessary to promote financial market stability.”[25] In exercising this authority, Treasury is limited by a series of requirements and directions set out in EESA. These requirements, which are found in a variety of sections of EESA including sections 101, 103, 104, 105, 107, 108, 109, 110, 111, 113, 115, 121, and 125, encompass, among other things, requirements related to transactions, conflicts of interest, executive compensation, maximizing taxpayers returns, reporting, oversight, and coordination. Treasury is working on developing an insurance program under section 102. Treasury will submit a report on Dec. 31, 2008 regarding the status of that program. Question 10: Is Treasury looking ahead? Answer: Yes. Treasury is actively engaged in developing additional programs to strengthen our financial system so that credit flows to our communities. Treasury believes that the new authorities Congress provided in October dramatically expanded the tools available to address the needs of our system. We have made significant progress, but there is no single action the

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federal government can take to end the financial market turmoil and the economic downturn. We are confident that we are pursuing the right strategy to stabilize the financial system and support the flow of credit to our economy.

REFERENCES [1] [2]

[3] [4] [5] [6] [7]

[8] [9]

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[10]

[11]

[12] [13]

[14]

[15] [16] [17]

[18]

Rep. Hensarling did not approve this report. See, e.g., Matt Apuzzo, Where’d the Bailout Money Go? Shhhh, It’s a Secret, Associated Press (Dec. 22, 2008) (online at apnews.myway.com/article/200812 22/D957QL7O0.html). Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, at § 109(a). Id., at § 125(b)(1)(A)(iv). Id., at § 109 (a). Id., at § 2. Conference of State Bank Supervisors State Foreclosure Prevention Working Group, Analysis of Subprime Mortgage Service Performance: Data Report No. 3 9-10 (Sept. 2008) (online at www.csbs.org/Content/NavigationMenu/Home/SFPWGReport3.pdf). EESA, supra note 3, at § 109(a). State of California Office of the Governor, Special Session 2008. Keeping Californians in Their Homes (Nov. 5, 2008) (online at gov.ca.gov/index.php?/fact-sheet/10961). Senate Committee on Banking, Housing, and Urban Affairs, Testimony of Martin D. Eakes and Gregory Palm, Oversight of the Emergency Economic Stabilization Act. Examining Financial Institution Use of Funding Under the Capital Purchase Program, 110th Cong. (Nov. 13, 2008) (online at banking.senate.gov/public/index.cfm?Fuse Action=Hearings.LiveStream&Hearing_id=1d38de7d -67db-46 1 4-965b-edf5749f1 fa3, at minutes 142-144). U.S. Department of the Treasury, Treasury Interim Assistant Secretary for Financial Stability Neel Kashkari Remarks on GSE, HOPE NOW Streamlined Loan Modification Program (Nov. 11, 2008) (online at www.treas.gov/press/releases/hp1264.htm). Testimony of Gregory Palm, supra note 12. Federal Deposit Insurance Corporation, FDIC Loss Sharing Proposal to Promote Affordable Loan Modifications (online at www.fdic.gov/consumers/loans/loanmod index.html) (proposed Nov. 14, 2008). California v. Countrywide Financial Corporation, No. LC083076, Slip Op., 14 (Cal. Sup. Ct., L.A. County, N.W. District, Oct. 20, 2008) (online at ag.ca.gov/cms_attachments/press/pdfs/n1618_cw_judgment.pdf) (Stipulated Judgment & Injunction). Freddie Mac, Single-Family Seller/Servicer Guide § 37.15 (online at http://www.freddiemac.com/sell/guide). Admittedly, DTI reporting is of questionable accuracy. Merrill Lynch MBS / ABS Special Report, Loan Modifications: What Investors Need to Know 7 (Nov. 21, 2008). Reliance on DTI is itself questionable; loan performance seems to correlate better to loan-to-value ratio than front-end DTI. Id. Testimony of Martin D. Eakes, supra note 12.

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[19] Alan M. White, Rewriting Contracts, Wholesale: Data on Voluntary Mortgage Modifications from 2007 and 2008 Remittance Reports, Fordham Urban Law Journal (2009) (online at ssm.com/abstract=125953). [20] See Office of the Comptroller of the Currency, Comptroller Dugan Highlights Redefault Rates on Modified Loans (Dec. 8, 2008) (online at www.occ.treas.gov/ftp/release/2008-142.htm). [21] Michael Corkery, Mortgage 'Cram-Downs' Loom as Foreclosures Mount, Wall Street Journal (Dec. 31, 2008) (online at online.wsj.com/article/SB123068005 350543971.html). [22] Id. See also, U.S. Department of Housing and Urban Development, Bush Administration to Help Nearly One-Quarter of a Million Homeowners Refinance, Keep their Homes: FHA to Implement New “FHASecure” Refinancing Product (Aug. 31, 2007) (online at www.hud.gov/news/release.cfm?content=pr07-123.cfm). [23] Emergency Economic Stabilization Act of 2008 (“EESA”), Sec. 2. [24] EESA Sec. 3(5). [25] ESA Sec. 3(9).

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Chapter 2

FINANCIAL STABILITY PLAN*

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Treasury Department The Financial Stability Plan: Deploying our Full Arsenal to Attack the Credit Crisis on All Fronts. Today, our nation faces the most severe financial crisis since the Great Depression. It is a crisis of confidence, of capital, of credit, and of consumer and business demand. Rather than providing the credit that allows new ideas to flourish into new jobs, or families to afford homes and autos, we have seen banks and other sources of credit freeze up – contributing to and potentially accelerating what already threatens to be a serious recession. Restarting our economy and job creation requires both jumpstarting economic demand for goods and services through our American Recovery and Reinvestment Act and simultaneously ensuring through our new Financial Stability Plan that businesses with good ideas have the credit to grow and expand, and working families can get the affordable loans they need to meet their economic needs and power an economic recovery. To address the financial crisis, the Financial Stability Plan is designed to attack our credit crisis on all fronts with our full arsenal of financial tools and the resources commensurate to the depth of the problem. To be successful, we must address the uncertainty, troubled assets and capital constraints of our financial institutions as well as the frozen secondary markets that have been the source of around half of our lending for everything from small business loans to auto loans. To protect taxpayers and ensure that every dollar is directed toward lending and economic revitalization, the Financial Stability Plan will institute a new era of accountability, transparency and conditions on the financial institutions receiving funds. To ensure that we are responding to this crisis as one government, Secretary Timothy Geithner — working in collaboration and joined by Federal Reserve Chairman Ben Bernanke, FDIC Chair Sheila Bair, Office of Thrift Supervision Director John Reich and Comptroller of the Currency John Dugan – is bringing the full force and full range of financial tools available to cleaning up lingering problems in our banking system, opening up credit and beginning the process of financial recovery.

*

This is an edited, excerpted and augmented edition of a Treasury Department publication.

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Treasury Department Financial Stability Plan 1. Financial Stability Trust • • •

A Comprehensive Stress Test for Major Banks Increased Balance Sheet Transparency and Disclosure Capital Assistance Program

2. Public-Private Investment Fund ($500 Billion - $1 Trillion) 3. Consumer and Business Lending Initiative (Up to $1 trillion) 4. Transparency and Accountability Agenda – Including Dividend Limitation 5. Affordable Housing Support and Foreclosure Prevention Plan 6. A Small Business and Community Lending Initiative

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1. Financial Stability Trust: A key aspect of the Financial Stability Plan is an effort to strengthen our financial institutions so that they have the ability to support recovery. This Financial Stability Trust includes: a.

A Comprehensive Stress Test: A Forward Looking Assessment of What Banks Need to Keep Lending Even Through a Severe Economic Downturn: Today, uncertainty about the real value of distressed assets and the ability of borrowers to repay loans as well as uncertainty as to whether some financial institutions have the capital required to weather a continued decline in the economy have caused both a dramatic slowdown in lending and a decline in the confidence required for the private sector to make much needed equity investments in our major financial institutions. The Financial Stability Plan will seek to respond to these challenges with:

•

Increased Transparency and Disclosure: Increased transparency will facilitate a more effective use of market discipline in financial markets. The Treasury Department will work with bank supervisors and the Securities and Exchange Commission and accounting standard setters in their efforts to improve public disclosure by banks. This effort will include measures to improve the disclosure of the exposures on bank balance sheets. In conducting these exercises, supervisors recognize the need not to adopt an overly conservative posture or take steps that could inappropriately constrain lending. Coordinated, Accurate, and Realistic Assessment: All relevant financial regulators — the Federal Reserve, FDIC, OCC, and OTS — will work together in a coordinated way to bring more consistent, realistic and forward looking assessment of exposures on the balance sheet of financial institutions.. Forward Looking Assessment – Stress Test: A key component of the Capital Assistance Program is a forward looking comprehensive “stress test” that requires an assessment of whether major financial institutions have the capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected.

•

•

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Requirement for $100 Billion-Plus Banks: All banking institutions with assets in excess of $100 billion will be required to participate in the coordinated supervisory review process and comprehensive stress test.

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b. Capital Assistance Program: While banks will be encouraged to access private markets to raise any additional capital needed to establish this buffer, a financial institution that has undergone a comprehensive “stress test” will have access to a Treasury provided “capital buffer” to help absorb losses and serve as a bridge to receiving increased private capital. While most banks have strong capital positions, the Financial Stability Trust will provide a capital buffer that will: Operate as a form of “contingent equity” to ensure firms the capital strength to preserve or increase lending in a worse than expected economic downturn. Firms will receive a preferred security investment from Treasury in convertible securities that they can convert into common equity if needed to preserve lending in a worse-than-expected economic environment. This convertible preferred security will carry a dividend to be specified later and a conversion price set at a modest discount from the prevailing level of the institution’s stock price as of February 9, 2009. Banking institutions with consolidated assets below $100 billion will also be eligible to obtain capital from the CAP after a supervisory review. c. Financial Stability Trust: Any capital investments made by Treasury under the CAP will be placed in a separate entity – the Financial Stability Trust – set up to manage the government’s investments in US financial institutions. 2. Public-Private Investment Fund: One aspect of a full arsenal approach is the need to provide greater means for financial institutions to cleanse their balance sheets of what are often referred to as “legacy” assets. Many proposals designed to achieve this are complicated both by their sole reliance on public purchasing and the difficulties in pricing assets. Working together in partnership with the FDIC and the Federal Reserve, the Treasury Department will initiate a Public-Private Investment Fund that takes a new approach. •

•

Public-Private Capital: This new program will be designed with a public-private financing component, which could involve putting public or private capital side-byside and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion. Private Sector Pricing of Assets: Because the new program is designed to bring private sector equity contributions to make large-scale asset purchases, it not only minimizes public capital and maximizes private capital: it allows private sector buyers to determine the price for current troubled and previously illiquid assets

3. Consumer & Business Lending Initiative – Up to $1 Trillion: Addressing our credit crisis on all fronts means going beyond simply dealing with banks. While the intricacies of secondary markets and securitization – the bundling together and selling of loans – may be complex, they account for almost half of the credit going to Main Street as well as Wall Street. When banks making loans for small businesses, commercial real estate or autos are able to bundle and sell those loans into a vibrant and liquid secondary market, it instantly recycles money back to financial institutions to make additional loans to other worthy

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borrowers. When those markets freeze up, the impact on lending for consumers and businesses – small and large – can be devastating. Unable to sell loans into secondary markets, lenders freeze up, leading those seeking credit like car loans to face exorbitant rates. Between 2006 and 2008, there was a net $1.2 trillion decline in securitized lending (outside of the GSEs) in these markets. That is why a core component of the Financial Stability Plan is: •

•

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•

A Bold Expansion Up to $1 Trillion: This joint initiative with the Federal Reserve builds off, broadens and expands the resources of the previously announced but not yet implemented Term Asset-Backed Securities Loan Facility (TALF). The Consumer & Business Lending Initiative will support the purchase of loans by providing the financing to private investors to help unfreeze and lower interest rates for auto, small business, credit card and other consumer and business credit. Previously, Treasury was to use $20 billion to leverage $200 billion of lending from the Federal Reserve. The Financial Stability Plan will dramatically increase the size by using $100 billion to leverage up to $1 trillion and kick start lending by focusing on new loans. Protecting Taxpayer Resources by Limiting Purchases to Newly Packaged AAA Loans: Because these are the highest quality portion of any security — the first ones to be paid — we will be able to best protect against taxpayer losses and efficiently leverage taxpayer money to support a large flow of credit to these sectors. Expand Reach – Including Commercial Real Estate: The Consumer & Business Lending Initiative will expand the initial reach of the Term Asset-Backed Securities Loan Facility to now include commercial mortgage-backed securities (CMBS). In addition, the Treasury will continue to consult with the Federal Reserve regarding possible further expansion of the TALF program to include other asset classes, such as non-Agency residential mortgage- backed securities (RMBS) and assets collateralized by corporate debt.

4. New Era of Transparency, Accountability, Monitoring and Conditions: A major and legitimate source of public frustration and even anger with the initial deployment of the first $350 billion of EESA funds was a lack of accountability or transparency as to whether assistance was being provided solely for the public interest and a stronger economy, rather than the private gain of shareholders, bondholders or executives. Going forward, the Financial Stability Plan will call for greater transparency, accountability and conditionality with tougher standards for firms receiving exceptional assistance. These will be the new standards going forward and are not retroactive. These stronger monitoring conditions were informed by recommendations made by formal oversight groups – the Congressional Oversight Panel, the Special Inspector General, and the Government Accountability Office — as well as Congressional committees charged with oversight of the banking system. a. Requiring Firms to Show How Assistance from Financial Stability Plan Will Expand Lending: The core of the new monitoring requirement is to require recipients of exceptional assistance or capital buffer assistance to show how every dollar of capital they receive is enabling them to preserve or generate new lending compared to what would have been possible without government capital assistance.

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Financial Stability Plan •

•

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•

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Intended Use of Government Funds: All recipients of assistance must submit a plan for how they intend to use that capital to preserve and strengthen their lending capacity. This plan will be submitted during the application process, and the Treasury Department will make these reports public upon completion of the capital investment in the firm. The Impact on Lending Requirement: Firms must detail in monthly reports submitted to the Treasury Department their lending broken out by category, showing how many new loans they provided to businesses and consumers and how many asset-backed and mortgage-backed securities they purchased, accompanied by a description of the lending environment in the communities and markets they serve. This report will also include a comparison to their most rigorous estimate of what their lending would have been in the absence of government support. For public companies, similar reports will be filed on an 8K simultaneous with the filing of their 10-Q or 10-K reports. Additionally, the Treasury Department will – in collaboration with banking agencies – publish and regularly update key metrics showing the impact of the Financial Stability Plan on credit markets. These reports will be put on the Treasury FinancialStability.gov website so that they can be subject to scrutiny by outside and independent experts. Taxpayers’ Right to Know: All information disclosed or reported to Treasury by recipients of capital assistance will be posted on FinancialStability.gov because taxpayers have the right to know whether these programs are succeeding in creating and preserving lending and financial stability.

b. Committing Recipients to Mortgage Foreclosure Mitigation: All recipients of capital investments under the new initiatives announced today will be required to commit to participate in mortgage foreclosure mitigation programs consistent with guidelines Treasury will release on industry standard best practices. c. Restricting Dividends, Stock Repurchases and Acquisitions: Limiting common dividends, stock repurchases and acquisitions provides assurance to taxpayers that all of the capital invested by the government under the Financial Stability Trust will go to improving banks’ capital bases and promoting lending. All banks that receive new capital assistance will be: •

•

•

Restricted from Paying Quarterly Common Dividend Payments in Excess Of $0.01 Until the Government Investment Is Repaid: Banks that receive exceptional assistance can only pay $0.01 quarterly. That presumption will be the same for firms that receive generally available capital unless the Treasury Department and their primary regulator approve more based on their assessment that it is consistent with reaching their capital planning objectives. Restricted from Repurchasing Shares: All banks that receive funding from the new Capital Assistance Program are restricted from repurchasing any privately-held shares, subject to approval by the Treasury Department and their primary regulator, until the government’s investment is repaid. Restricted from Pursuing Acquisitions: All banks that receive capital assistance are restricted from pursuing cash acquisitions of healthy firms until the government

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Treasury Department investment is repaid. Exceptions will be made for explicit supervisor-approved restructuring plans.

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d. Limiting Executive Compensation: Firms will be required to comply with the senior executive compensation restrictions announced February 4th, including those pertaining to a $500,000 in total annual compensation cap plus restricted stock payable when the government is getting paid back, “say on pay” shareholder votes, and new disclosure and accountability requirements applicable to luxury purchases. e. Prohibiting Political Interference in Investment Decisions: The Treasury Department has announced measures to ensure that lobbyists do not influence applications for, or disbursements of, Financial Stability Plan funds, and will certify that each investment decision is based only on investment criteria and the facts of the case. f. Posting Contracts and Investment Information on the Web: The Treasury Department will post all contracts under the Financial Stability Plan on FinancialStability.gov within five to 10 business days of their completion. Whenever Treasury makes a capital investment under these new initiatives, it will make public the value of the investment, the quantity and strike price of warrants received, the schedule of required payments to the government and when government is being paid back. The terms of pricing of these investments will be compared to terms and pricing of recent market transactions during the period the investment was made, if available.

5. Housing Support and Foreclosure Prevention: There is bipartisan agreement today that stemming foreclosures and restructuring troubled mortgages will help slow the downward spiral harming financial institutions and the real American economy. Many Congressional leaders, housing advocates, and ordinary citizens have been disappointed that the Troubled Asset Relief Program was not aimed at ending the foreclosure crisis. We will soon be announcing a comprehensive plan that builds on the work of Congressional leaders and the FDIC. Among other things, our plan will: •

•

•

• •

Drive Down Overall Mortgage Rates: The Treasury Department and the Federal Reserve remain committed to expand as necessary the current effort by the Federal Reserve to help drive down mortgage rates – freeing up funds for working families – through continuation of its efforts to spend as much as $600 billion for purchasing of GSE mortgage-backed securities and GSE debt. Commit $50 Billion to Prevent Avoidable Foreclosures of owner-occupied middle class homes by helping to reduce monthly payments in line with prudent underwriting and longterm loan performance. Help Bring Order and Consistency to the various efforts to address the foreclosure crisis by establishing loan modification guidelines and standards for government and private programs. Require All Financial Stability Plan Recipients to Participate in Foreclosure Mitigation Plans consistent with Treasury guidance. Build Flexibility into Hope for Homeowners and the FHA to enable loan modifications for a greater number of distressed borrowers.

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6. Small Business and Community Lending Initiative: Few aspects of our current financial crisis have created more justifiable resentment than the specter of hard-working entrepreneurs and small business owners seeing their companies hurt and even bankrupt because of a squeeze on credit they played no role in creating. Currently, the increased capital constraints of banks, the inability to sell SBA loans on the secondary market and a weakening economy have combined to dramatically reduce SBA lending at the very time our economy cannot afford to deny credit to any entrepreneur with the potential to create jobs and expand markets. Further adding to this frustration is the sense that community banks – which still engage in relationship lending that serves their local communities -- have been overlooked not just during this crisis, but over the last several years. Over the next several days, President Obama, the Treasury Department and the SBA will announce the launch of a Small Business and Community Bank Lending Initiative: This effort will seek to arrest the precipitous decline in SBA lending – down 57 percent last quarter from the same quarter a year earlier for the flagship 7(a) loans through: • •

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•

Use of the Consumer &Business Lending Initiative to finance the purchase of AAA-rated SBA loans to unfreeze secondary markets for small business loans. Increasing the Guarantee for SBA Loans to 90%: The Administration is seeking to pass in the American Recovery and Reinvestment Act an increase in the guarantee of SBA loans from as low as 75% to as high as 90%. Reducing Fees for SBA 7(a) and 504 Lending and Provide Funds for Both Oversight and Speedier and Less Burdensome Processing of Loan Applications.

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In: TARP in the Crosshairs Editor: Paul W. O'Byrne

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Chapter 3

TESTIMONY OF DEAN BAKER, BEFORE THE HOUSE FINANCIAL INSTITUTIONS SUBCOMMITTEE OF THE FINANCIAL SERVICES COMMITTEE, MARCH 4, 2009*

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Thank you, Chairman Gutierrez for inviting me to share my views on the success of the TARP to date and its impact on the broader economy. My name is Dean Baker and I am the co-director of the Center for Economic and Policy Research (CEPR). I am an economist and I have been writing about issues related to finance since 1992. I will make three main points in my testimony: 1. There are two separate issues ostensibly addressed by TARP and subsequent measures by Treasury and Federal Reserve Board. First, government involvement is needed to arrange an orderly reorganization of insolvent institutions; and second, actions are necessary to maintain the flow of credit. 2. The primary cause of the downturn is the loss of wealth as a result of the collapse of the housing bubble and the subsequent loss of value in the stock market. Credit is a secondary issue. 3. The government can help to promote a better flow of credit in this downturn by ensuring that smaller financial institutions that are in reasonably good financial health have fuller access to funds. I’ll address each of these in turn.

THE INSOLVENCY OF THE MAJOR BANKS The immediate cause of the financial crisis that prompted the drive for the TARP in midSeptember was the concern that several of the major money center banks were insolvent. As a result of these concerns, the major banks had largely stopped lending to each other. This was demonstrated most clearly by the “Ted Spread,” the gap between the interest rate charged on interbank dollar loans in the London market and Treasury notes of the same maturity. This *

This is an edited, excerpted and augmented edition of testrimony before the House Subcommittee on Financial Services.

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spread increased to almost 5.0 percentage points on 90-day loans at its peak in early October. In more normal times, it hovers in the range of 0.15 to 0.3 percentage points. This extraordinary gap implied that banks were seriously concerned that the failure of other major banks was imminent, otherwise there would be no reason not to take advantage of the much higher interest rates available on interbank loans than on Treasury bills. The banks had good reason for this concern. The major money center banks have massive quantities of bad assets on their books. Several of them would undoubtedly already be insolvent if they were forced to write down bad assets. There have been several credible estimates that place the losses of the banks at more than $2 trillion.[1] The FDIC put the capital of the commercial banking system at less than $1.2 trillion at the end of 2008. Of this, $400 billion was goodwill, the value of which would largely disappear as banks become insolvent. In short, it is very plausible that the liabilities of the banking system as a whole considerably exceed its assets. And, many of the largest banks are among those in the worst position. The TARP effectively tossed these banks a lifeline, providing capital at below market rates to banks that were essentially insolvent. The additional capital provided by the TARP, along with the more generous guarantees of deposits, eased the immediate stress on the banking system. Interbank lending resumed and the TED spread fell back closer to its normal range. (It is currently near 1 percentage point). However, these banks still must deal with the basic problem that they are insolvent. When their assets are properly valued, many of the largest banks in the country will not be able to meet all of their liabilities. At some point this situation will have to be resolved with the government determining which of the banks’ liabilities it will cover. The TARP was successful in putting off a day of reckoning for the insolvent banks. Without the TARP, several major banks likely would have failed last fall. This would have led to some sort of receivership arrangement comparable to the situation of Fannie Mae, Freddie Mac, and AIG. Many of the major banks will likely still end up in a receivership type arrangement, but the TARP did buy the government time so that in principle it can carry through a bankruptcy-like procedure in an orderly manner. It was unrealistic to expect that TARP would have led to a surge of new lending by the banks that received TARP money. In fact, the FDIC reported that the volume of outstanding loans at the 84 institutions with assets of more than $10 billion fell at an 8.8 percent annual rate between the end of the third quarter and the end of the fourth quarter of last year. While most of this decline was associated with real estate loans, loans to businesses fell at a 3.4 percent annual rate over this period. These large banks desperately need to shore up their capital position to protect against further write-downs that they know are coming. In fact, it would be irresponsible for the management of banks that are at the edge of insolvency to making large volumes of new loans, which will inevitably carry considerable risk in the current environment. In short, it was unreasonable to believe that the TARP would lead to a large volume of new lending from the recipients of TARP funds. Even if banks could not easily lend much of the money they received under the TARP, they could have taken other measures to better husband their capital, most obviously by slashing dividends and cutting executive pay. While such conditions could have been imposed as a requirement for receiving TARP funds, in the rush to pass legislation, Congress did not take the time to insert language that effectively imposed these sorts of restrictions.[2]

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As a result, in the months immediately following the TARP, the banks receiving money continued to act largely as they had previously, paying out executive bonuses and meeting their regular dividend schedule. In response to public pressure and pressure from Congress, and more recently pressure from the Obama administration, banks have begun to curtail executive compensation. Many have also reduced or eliminated dividends. The restrictions on executive compensation that were included in the American Recovery and Reinvestment Act of 2009 will also help to restrain pay at the banks receiving TARP money. Restrictions on pay and dividends at these banks are important for two reasons. First, excessive executive pay and dividends are pulling money away from the purpose of the TARP, which is to restore the banks’ capital. Every dollar that is paid out as excessive compensation or to shareholders as dividends is a dollar that could have bolstered the banks’ capital. The second reason why Congress should be concerned about excessive executive pay and shareholder dividends is a simple question of fairness. The TARP money is coming from taxpayers as a group. It can be justified by the public interest in keeping the financial system operating. If several major banks were to fail, it would severely damage the normal flow of credit in the economy. Also, the creditors of these banks (many of whom are public and private insurance funds, as well as mutual funds in individual retirement accounts) would find themselves in an uncertain situation until a bankruptcy could determine the portion of the assets that can be recovered. This would further depress economic activity. However, there is no public interest in using taxpayer dollars to compensate bank shareholders, who presumably understood the risk in owning stock when they purchased it. There is also no public interest in sustaining the compensation packages of bank executives, who are among the highest paid people in the country. For this reason, Congress is entirely justified in imposing stringent conditions on the recipients of TARP money. After all, the banks don’t’ have to take the money.

THE CREDIT SQUEEZE AND THE ECONOMY While many businesses and individuals are finding it considerably more difficult than usual to get credit, this is not the cause of the recession. The cause was the collapse of an $8 trillion dollar housing bubble. The collapse of the bubble has directly harmed the economy most immediately by sending residential construction plummeting. This sector accounted for 6.2 percent of GDP at its peak in 2005. It currently accounts for less than 3 percent of GDP. This implies a loss in annual demand of more than $450 billion. In addition, the lost wealth in housing has caused consumption to plunge. Homeowners had eagerly spent based on the run-up in wealth in their homes during the boom years. In some cases they borrowed directly against the equity in their homes, in other cases, they opted not to save for retirement because their rising home equity was providing all the saving they felt they needed. With the decline in house prices to date having destroyed approximately $6 trillion in housing wealth, consumers have radically changed their behavior. By some measures, the saving rate has increased by more than 4 percentage points, implying a further loss in annual

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demand equal to approximately $400 billion. (The collapse of the stock market, resulting in the loss of approximately $8 trillion in wealth, is also depressing consumption.) The huge falloff in residential construction coupled with the fall in consumption driven by the collapse of the bubble, are the primary causes of the downturn. The massive loss of wealth in the housing and stock market has made potential borrowers far less creditworthy than they were one or two years ago. Concretely, a homeowner with substantial equity poses much less default risk to a bank when he or she seeks a credit card, car loan, or even small business loan than a homeowner with little or no equity. As a result of the sharp decline in house prices over the last two and half years, tens of millions of homeowners now have little or no equity in their home. These people would find it much more difficult to obtain credit regardless of the finances of the banking system. Similarly, the sharp decline in consumption has made many formerly creditworthy businesses much greater risks. Businesses of all types have seen declines in demand of 20-30 percent, squeezing profits and jeopardizing their survival. Banks would be far more reluctant to lend to these businesses in current circumstances regardless of the strength of their balance sheets. One piece of evidence that would seem to refute the claim of a credit squeeze – credit worthy borrowers unable to get loans – is the decline in the Mortgage Bankers Association, mortgage applications index. If there credit squeeze story was accurate then the mortgage applications index should be rising rapidly, since potential homebuyers might have to make two or three applications to get a mortgage and some would-be buyers might make several applications and still not get a mortgage. In fact, the mortgage applications index has trended downward in step with home sales.[3] This index provides no evidence that homebuyers or potential homebuyers are having any special difficulty getting loans. There are undoubtedly cases where individuals and businesses who are in fact good credit risks are unable to get loans in the current environment because they have limited collateral and banks are being overly cautious. However, there is little clear evidence that there is a generalized problem of lack of credit beyond what would be expected given the severity of the downturn and the massive loss of wealth over the last two years.

RESTRUCTURING THE NATION’S BANKING SYSTEM While the lack of credit may not explain the downturn, it will be important to ensure that individuals have access to adequate credit to ensure a sustained recovery. In almost any scenario most of the country’s major banks are likely to be seriously impaired for at least next several years. This provides an opportunity for many smaller banks to fill a void in meeting credit needs. There is of course a wide range of divergence in the financial condition of smaller banks. As a general rule, they did not engage in the sort of reckless lending that has jeopardized the survival of the largest banks. Nonetheless, few banks could escape the impact of this downturn altogether. In areas where house prices have plummeted with the collapse of the housing bubble, loans that may have seemed very prudent based on bubble-inflated house prices may now be underwater and in danger of default. Lending institutions in these former

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bubble markets are therefore likely to be seriously stressed even if they had acted cautiously during the bubble years. However, where these banks have managed to stay relatively sound, the Treasury should seek to ensure that they have adequate access to capital to help rebuild the economy. By bank size, it is worth noting that institutions with between $100 million and $300 million in assets actually increased their lending at a 3.2 percent annual rate from the end of the third quarter to the end of the fourth quarter, according to FDIC data. This was not true for either smaller banks as a group, nor larger banks.These relatively small banks can be expected to have a much larger role in the post-recovery economy than they did prior to the recession, due to the collapse or crippling of the major money center banks. Therefore, it is entirely appropriate that Congress encourage the Treasury to use TARP funds to ensure that smaller banks have access to capital. There is no way that the country can simply abandon the large banks, because their unchecked collapse would lead to massive losses at pension funds, mutual funds, and insurance companies and likely lead to destruction of our whole financial system. However, there can be no doubt that smaller banks will play an important role in the economy in the future and the Treasury should act to ensure that they are prepared to play this role. The nation’s smaller banks should not be penalized for having made the right decisions during the bubble years.

REFERENCES [1]

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[2]

[3]

New York University professor Nouriel Roubini and Goldman Sachs have both estimated likely bank loan losses at more than $2 trillion. In this respect, it is worth noting the peculiar decision by Federal Reserve Board Chairman Ben Bernanke to wait until after Congress passed the TARP to announce that the Fed would begin buying the commercial paper of non-financial corporations. Prior to the passage of the TARP, Chairman Bernanke had identified the freezing up of the commercial paper market as one of the main reasons for a quick passage of the TARP. It is likely that many members of Congress did not know that the Fed already had the ability to direct lend in the commercial paper market prior to the vote on the TARP. The purchase applications index for the week ending February 21, 2009 was 250. It had often been over 500 during the peak years of the bubble. House sales are still at more than half their peak bubble levels.

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Chapter 4

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TESTIMONY OF MR. C. R. CLOUTIER, PRESIDENT AND CEO, MIDSOUTH BANK, NA, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA, BEFORE THE CONGRESS OF THE UNITED STATES, HOUSE OF REPRESENTATIVES SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT COMMITTEE ON FINANCIAL SERVICES, HEARING ON “TARP OVERSIGHT: IS TARP WORKING FOR MAIN STREET?”, MARCH 4, 2009, WASHINGTON, DC* Chairman Gutierrez, Representative Hensarling and members of the Committee, my name is Rusty Cloutier. I am the President and CEO of MidSouth Bancorp, Inc. MidSouth is a bank holding company located in Lafayette, LA, with total assets of $936.8 million as of December 31, 2008. Through our wholly-owned subsidiary, MidSouth Bank, NA, MidSouth offers complete banking services to commercial and retail customers in south Louisiana and southeast Texas. We have 34 locations in Louisiana and Texas. We are community oriented and focus primarily on offering commercial and consumer loan and deposit services to individuals, and small and middle market businesses. I am member and a former Chairman of the Independent Community Bankers of America. I am pleased to represent community bankers and ICBA’s 5,000 members at this important hearing on “TARP Oversight: Is TARP Working for Main Street?”

*

This is an edited, excerpted and augmented edition of testrimony before the House Subcommittee on Financial Institutions.

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COMMUNITY BANKS AND THE CAPITAL PURCHASE PROGRAM MidSouth, like the vast majority of community banks, did not engage in the irresponsible subprime lending practices that are at the heart of the current economic crisis. Moreover, MidSouth and the majority of community banks do not employ the compensation practices of the mega banks, which led to excessive and careless risk taking in these larger institutions, and that rewarded executives for abject and costly failure. As a result of prudent lending practices and other prudent business practices, MidSouth, and the majority of community banks, have remained strongly capitalized and ready to do their part to aid economic recovery. When MidSouth Bank elected to participate in the Treasury’s Capital Purchase Program, we were convinced that we could put the funds to good use in our service area in Louisiana and Texas through loans to small and mid-sized businesses and consumers. It is important to distinguish the Capital Purchase Program available to community banks and the other Troubled Asset Relief Program investments that have been used in connection with some of the largest institutions, particularly the systemically important institutions. CPP funds are only given to healthy community banks like MidSouth. Simply put, so-called systemically important institutions do not have to be healthy to receive TARP money.

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MIDSOUTH PARTICIPATES IN THE CPP The CPP is not a bail-out for community banks. MidSouth must pay an annual dividend of five percent on the $20 million in preferred shares purchased by Treasury, along with the grant of stock warrants. If MidSouth does not repay the principal in 5 years, the dividend increases to nine percent annually. The cost of this CPP capital is not inexpensive for community banks, at some 7.5% tax effective rate in the first five years with additional warrant-related costs on top. Community banks participating in the program have to relend the money in order to cover the costs of the capital. When MidSouth accepted CPP funds in early January, we viewed the government’s investment as a public-private partnership to promote lending to stimulate the economy. The $20 million infusion of capital would also provide a substantial capital cushion in case credit conditions deteriorated further.

MIDSOUTH PROMOTES AVAILABILITY OF FUNDS We saw the CPP as an opportunity to encourage and support economic expansion in every market we serve during a national recession that could last, at least, another 12 to 18 months. After completing the CPP transaction on January 9, 2009, we began to actively promote the availability of $250 million in loan opportunities to small businesses and community leaders throughout our service area. MidSouth conducted town hall meetings in 14 communities in south Louisiana and southeast Texas from the end of January through February 19th . We focused on small businesses because small businesses drive the economy and create new jobs in our communities.

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In addition to the general business community, we are also reaching out to the minority business community, through town hall meetings with the Black Chambers of Commerce of Baton Rouge and Southwest Louisiana and the Group of 100 Black Men, another AfricanAmerican business organization. Our efforts to publicize the lending program continue with more meetings scheduled with homebuilders, industrial companies and other business groups. We have also directed an ad campaign at consumers and the general public. We have placed billboards in every market in our service area advertising the availability of $250 million in loans.

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PUBLIC RESPONSE TO OUTREACH EFFORTS While attendance at these meetings was good, there seemed to be a reluctance among audience members to take on significant amounts of new debt. This is true despite small business loan rates at least two percentage points lower than a year ago. I believe that some of the reluctance in our market is due to the drop in the price of oil, which is an important driver for the economies of southwest Louisiana and southeast Texas. But, I also attribute it to unease about the general economy. Given the state of the economy, it is harder for community banks to find borrowers who are creditworthy. Lending to creditworthy borrowers is a sound banking principle that the federal banking regulators emphasized in their Interagency Statement on Meeting the Needs of Creditworthy Borrowers. Actions of bank examiners in the field are putting further restraints on lending standards through such actions as requiring write downs of performing loans – a subject the Financial Services Committee will take up on March 10, 2009. Despite the reluctance of some in the business community to take on new debt and the challenging lending environment, we believe that our outreach efforts have paid off. Our level of lending, for consumers and businesses, remains about the same as this time last year. We believe that this is quite an accomplishment in the midst of the current serious recession. Since receiving the CPP capital infusion in January, we have made approximately $13 million in new consumer and commercial loans. The lending include $1.7 million in new car loans, lending support to not only our local consumers and car dealer community, but also indirectly auto manufacturing. Included in our new loans are $8.53 million in small business loans and $3.4 million in real estate loans. Also, within MidSouth Bancorp, we have generated over $7 million in new mortgages since the first of the year. We are especially proud of two new small business loans made since MidSouth received the CPP funds. These loans to two small oil services businesses will create 50 new jobs in south Louisiana and Texas. As MidSouth Bank has shown, community banks have the know-how and desire to use the CPP to support economic recovery in communities throughout the nation.

MUTUAL TERM SHEET Allowing all community banks to participate in the TARP CPP will help boost lending to families and small businesses. No CPP term sheet exists yet for mutual institutions. Mutual institutions are important providers of credit, particularly small business and housing credit,

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in many areas of the country. In New England, mutual institutions are a primary source of loans for small businesses. We urge the Treasury to complete work on the mutual term sheet.

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MIDSOUTH KEEPING OPTIONS OPEN ON CPP Public anger over $50 million private jets and multi-million dollar bonuses and golden parachutes for CEOs who led their companies into insolvency, or near insolvency, is understandable. In response to this anger, Congress recently enacted executive compensation and corporate governance limits for TARP recipients. The new statutory restrictions in some cases went beyond restrictions put in place by the Obama Administration and took away Treasury’s discretion to focus these remedies where the problems actually occurred – in some large TARP recipient institutions. As noted above, MidSouth Bank does not engage in the compensation practices that have created the public ire. While we appreciate congressional amendments that diminished the impact of these limits on community banks, we are frustrated by being tarred by the same brush used on the large financial institutions that caused the current economic crisis and that have undermined public confidence in programs to restore the credit markets and shore up the banking system. MidSouth Bank is a solid, healthy community-minded financial institution and should be treated as a responsible partner in the effort to revitalize the economy. MidSouth entered into an agreement with the government on January 9th , which, as we have described above, carries significant monetary and other obligations. If the government changes that agreement and adds new burdensome conditions, MidSouth will have to reevaluate its continued participation in the CPP. We are pleased Chairman Frank’s idea to allow TARP participants to repay TARP funds early without penalty was included in the economic recovery bill. The provision allows MidSouth and other community banks to keep their options open. But it would be a shame if new conditions forced us to withdraw from the program. MidSouth has taken the purpose of the CPP seriously by aggressively marketing the credit opportunities afforded by Treasury’s investment in the bank. Policymakers should be encouraging the participation of more community banks like MidSouth bank who are willing and ready to be active leaders in our economic recovery.

CONCLUSION ICBA appreciates this opportunity to testify on these critical issues. We look forward to working with the Subcommittee and Congress on these and other steps that will help us emerge from this current crisis and improve our financial system for the long run.

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Chapter 5

TESTIMONY OF ROBERT W. DAVENPORT, PRESIDENT OF THE NATIONAL DEVELOPMENT COUNCIL, BEFORE THE HOUSE FINANCIAL SERVICES SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT, MARCH 4, 2009* Mr. Chairman, my name is Bob Davenport and I am the President of the National Development Council based in New York City. I am pleased to be here today, and appreciate the invitation to testify before the distinguished House Financial Services Subcommittee on Financial Institutions and Consumer Credit.

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BACKGROUND ON NDC The National Development Council (NDC) is a 501(c)(3) nonprofit organized in 1968 after the tragic deaths of Dr. Martin Luther King, and Robert F. Kennedy to eliminate discrimination and create economic opportunity in disadvantaged areas. We remain one of the oldest national nonprofit community development organizations in the country. Over the last 40 years we have worked to bring financial and technical assistance including professional training, investment in affordable housing, small business credit and direct developer services to communities across the country. Each year NDC trains more than 3,000 economic development and housing development practitioners. We have worked in all 50 states and have experience using a number of housing and small business programs. Because we are a non-profit, we do not raise our lending capital from shareholders, rather private sector lenders make lines of credit or other funding available to us at interest rates we can afford, and we in turn use those funding sources to make loans to our borrowers. NDC is a certified Community Development Financial Institution (CDFI) and Community Development Entity (CDE) as certified by the Treasury Department and a Small *

This is an edited, excerpted and augmented edition of testrimony before the House Subcommittee on Financial Services.

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Business Lending Company (SBLC) certified by the Small Business Administration. We received our SBLC license in 1992, our CDFI certification in the late 1990s, and CDE certification in 2003.

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HISTORY OF BUSINESS LENDING Recently, NDC has financed New Markets Tax Credit projects totaling $640 million, loaned over $90 million to small businesses for projects with investments of $150 million, invested $350 million in equity for affordable housing or historic preservation projects (leveraging an additional $280 million), and financed and developed $1.1 billion in public and community facilities. The reason I am testifying here today is because the downturn in the financial marketplace is having a devastating impact on our ability to continue our lending to the businesses we serve, and NDC is now operating in a drastically changed environment in which its traditional sources of capital are pulling back, which means we cannot meet client needs for a range of community development financing products. The sources of capital we have used in the past to provide debt to small businesses, as well as the equity our borrowers have counted on for affordable housing and community development projects is drying up, which leads to serious financing gaps that stall projects or destroy their viability, sacrifice quality, and constrain the ability of mission- driven organizations to meet the nation’s housing and community development needs. Notwithstanding the size of our loans and our borrowers, we have an excellent record of success and few defaults. NDC makes loans to borrowers in difficult lending markets, with smaller average loans or investments and with more complex transactions. Given the low and moderate income communities in which we work, it is simply not feasible, from a business standpoint, for us to pass on to customers the capital costs that are being proposed of late by mainstream money center banks. And our customers have few options to find a lender besides us and other community oriented lenders like us. According to an October 2008 Senior Loan Officer Opinion Survey released by the Federal Reserve Board, nearly 75% of lenders say they have tightened their credit standards for approving applications for commercial and industrial loans to small businesses. This pull back has had the curious result of our receiving even more applications for loans, from very credit-worthy businesses that are being turned down by their regular banks. Accordingly, at a time when our own customers need us, we are being asked to serve new customers, and with the credit freeze, we find it difficult to do either. I am here today because NDC wants to continue to provide debt financing for its borrowers and to do that, we need to find another source of lending capital until the banks return to this market. We believe the only source for such capital is the federal government. My testimony today outlines our recommendations for ways to strengthen the Troubled Asset Relief Program (TARP) and the Term Asset-Backed Securities Lending Facility (TALF) to increase liquidity of community financial institutions so they can continue to lend and keep pace with demand, and to use TARP and TALF as a secondary market to acquire federal business loans and those guaranteed by various federal agencies (including Treasury, Housing and Urban Development, Small Business Administration, Economic Development Administration and US Department of Agriculture). This would allow access to Treasury-rate

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financing for businesses. We recommend this new mechanism for business financing be implemented through proven local delivery system of community financial institutions in cities and states, both urban and rural, and that existing federal regulations for this lending be streamlined to ensure timely impact.

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AN NDC LENDING MODEL We have a lending unit called Grow America Fund (GAF) that is a wholly owned subsidiary of NDC. GAF’s mission is to stimulate investment in low income communities, to create jobs for the unemployed, and to spur entrepreneurship, especially among women and minority owned businesses. Over our history, GAF has made nearly $100 million of loans. We are a small lender, averaging $10 million of loans annually. Our typical loan is under $300,000. Half of our borrowers are businesses owned by minority or women entrepreneurs. Because our mission is to build entrepreneurship, we make fewer loans and work closely with our borrowers to build their capacity to succeed as a business. Our loan loss rates average six tenths of one percent, which is extremely low given the fact that more than half of all small businesses fail within five years of start-up. Because banks are not lending on the terms or at the rates of the past, loan applications to GAF have burgeoned. One business we helped finance just last month is a furniture manufacturer located in Brooklyn, New York. In 1986 a woman started her own company making custom furniture products. She formed the business to facilitate the manufacturing and sale of the pieces of furniture and accessories she created. Today, her hand made products range from chandeliers, lamps and other ornamental pieces to bedroom sets. The owner works with interior designers, decorators and architects to produce custom pieces in addition to those made for sale in her retail boutique. In 2004 the owner formed a retailing arm of her business in New York City. The company leases a 600 sq. ft. space where her pieces are for display only. A catalog is available at the store from which orders may be placed. The $488,000 GAF loan proceeds were used to refinance short-term working capital loans in the amount of $339,000 and provide $125,000 in permanent working capital to support the company’s expansion through additional showrooms and $23,897 to finance project related soft and closing costs. The company employs fourteen people and is expected to add two full time jobs as a result of this 10-year, 5% loan. GAF closed this loan in January, 2009. Recently, however, market conditions have changed.

How Bank Pullback has Affected Our Lending Last fall, a money-center bank with which NDC had a long standing borrowing relationship received TARP funds. Recently, that same bank raised our borrowing rates. In addition, the bank imposed lending conditions with which we could not legally or

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operationally comply. These actions forced us to terminate this relationship at a time when we needed the money. As an SBLC or “non-bank lender” GAF is authorized to make Small Business Administration (SBA) guaranteed loans nationwide. We are regulated by the SBA and audited for safety and soundness by the Farm Credit Administration. We have always received laudatory audits from Farm Credit Administration for safety and soundness and the policies and procedures we employ to carry out our mission. The SBA’s Overall Lender Risk Ranking for GAF is 1, the best possible rating, evidencing the lowest risk ranking in the nation. Our relationship with a particular Bank goes back more than 10 years. The Bank financed the 75% guaranteed portion of the loans made by GAF in the Bank’s CRA assessment areas. By financing only the guaranteed portions of GAF’s loans, they in essence have a 100% guarantee from the SBA on their loans to GAF. Because of the low risk and CRA credit they received, they loaned to GAF at LIBOR plus 25 basis points. They have never suffered a loss or a late payment from GAF and have always indicated to us that our relationship was very satisfactory to the Bank. In late 2008, without prior warning, the Bank raised its interest rate to GAF by 1% to LIBOR plus 1.25. No reason was given for the rate increase. We had just completed our best ever audit with Farm Credit Administration and showed a continued Overall Risk Rating of 1 from the SBA. If anything, we were expecting a decrease in the rate for the successful management of this business. We nonetheless accepted the increase, to enable us to continue our lending. Then, in January 2009 the Bank imposed two new conditions, which they were unwilling to put into writing. First, the Bank demanded a direct security interest either in the loans we made or in the SBA guarantee of the loans we made. To accommodate this request would have been a violation of SBA regulations and would lead to GAF losing its SBA license. In addition, the Bank demanded that if any GAF loan financed under the Bank’s line defaulted, GAF must pay the Bank prior to collection of the guaranteed portion from the SBA. No explanation was given for the demand beyond saying that they assumed all our loans would default and they wanted to be paid in a timely fashion. This condition was both unreasonable – the Bank in essence would not wait for its money even though it was guaranteed by the US Government – and it could not be met because we would have had to maintain idle cash balances in an amount equal to their loan to GAF. In essence, they would loan GAF money, but only if GAF kept it in cash, and did not use it to make loans. Moreover, in light of our continuing good track record of very low loan losses, we feel penalized because we have continued to serve our customers instead of sitting on our cash. As a result, we have been forced to terminate our borrowing relationship with that particular Bank, and are retiring their loan to us. The Bank claims they did not deny GAF credit. They claim GAF simply could not meet the conditions of their offer. The fact that they were demanding conditions we could not legally meet, or which made it a loan in name only seems irrelevant to them. The Bank in question changed its terms for us after it received TARP money.

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RECOMMENDATIONS Utilize the Troubled Asset Relief Program (TARP) and the Term Asset-Backed Securities Lending Facility (TALF) to Enhance Lending Congress must ensure that community based lenders have the same support from Treasury’s TARP program, and the Federal Reserve’s TALF program as regulated depository institutions do. As evidenced in my example above, community lenders cannot rely on a TARP funding trickle down effect from money center banks. There is a need for TARP funds to increase liquidity of community financial institutions like GAF to expand their lending capacity to meet increasing loan demand and fill financing gaps resulting from banks’ retrenchment. There is also a need for TALF so Treasury and the Federal Reserve can set up a facility to acquire guaranteed federal business loans. Here are ways that TARP and TALF might be used for this purpose. TARP: Congress passed the Emergency Economic Stabilization Act in October, 2008. The purpose of EESA was “to immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States.” (Section 2. Purposes). EESA authorizes the Secretary to establish a Troubled Asset Relief Program (“TARP”) in Section 101. Troubled assets are defined as including both mortgages as well as “any securities, obligations, or other instruments that are based on or related to such mortgages” and, “any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability... .” (Section 3(9)(A-B)). Treasury has created a Capital Purchase Program (CPP) through which it is purchasing securities from financial institutions, in order to provide them more capital in the expectation of promoting financial system stability. Thus far, publicly held regulated financial institutions, privately-held C corporations, and most recently, Subchapter S corporations have been able to apply. Treasury has indicated it is working on a program for mutual associations. Treasury can similarly create a version of the CPP suitable for the 3,000 to 4,000 seasoned nonprofit community oriented lenders such as the National Development Council, who have a demonstrated track record of successful lending. These lenders include Community Development Corporations, CDFIs, non-profit low income credit unions and government- sponsored community lenders. In keeping with the purpose of the CPP, these investments would be just that, a source of capital from the taxpayers which would be paid back. We believe that investments in organizations like ours are consistent with the purposes of the TARP legislation. In Section 103 the legislation states, In exercising the authorities granted in this Act, the Secretary shall take into consideration— 1. protecting the interests of taxpayers by maximizing overall returns and minimizing the impact on the national debt; 2. providing stability and preventing disruption to financial markets in order to limit the impact on the economy and protect American jobs, savings, and retirement security; 3. the need to help families keep their homes and to stabilize communities;

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4. in determining whether to engage in a direct purchase from an individual financial institution, the long term viability of the financial institution in determining whether the purchase represents the most efficient use of funds under this Act; 5. ensuring that all financial institutions are eligible to participate in the program, without discrimination based on size, geography, form of organization, or the size, type, and number of assets eligible for purchase under this Act We recommend the terms of the CPP for community lenders be adjusted, given our much smaller size, and the fact that we are committed to lending and providing technical assistance to our borrowers. Rather than basing the amount of assistance on risk-weighted assets, we believe that the amount of assistance should be based on a percentage of the weighted average lending activity in which the institution has been engaged over the last 5 years. We suggest that a percentage of average annual lending or investing activity over the last three years be used to size the subordinated debt. We propose that the subordinated debentures bear interest at a rate equal to no more than the 10-Year Treasury rate at the time of issuance, with the Secretary having the authority to set the rate at as little as 1%, payable in similar fashion to other classes of CPP investments. No one knows how long the current economic conditions and credit freeze in the private markets will persist. In its term sheet for Subchapter S corporations, Treasury proposed a maturity of 30 years, which we suggest be used for community lenders as well, with Treasury having the ability to redeem starting at the end of 7 years from the date of their issuance, which is 4 years longer than the inception of the redemption period for Subchapter S financial institutions. We believe this additional period is justified in light of the greater difficulties community financial institutions like NDC will have replacing the capital at redemption than traditional financial institutions may experience. We would agree to the other standard provisions that Treasury is using, including the executive compensation provisions, and would work with them to identify appropriate measures to determine the financial health attributes for community lenders to participate. We suggest a term that does not currently exist in the CPP agreements with regulated depository institutions, and that is that in return for this debt, we will agree to make loans and provide technical assistance to our borrowers. TALF: The TALF combines capital provided by the TARP with funding from the Federal Reserve in order to promote lending by increasing investor demand for securitized loans. As Treasury and the Federal Reserve continue to work on the TALF program we want to ensure that community financial institutions are given full consideration and a means to participate. On February 10, 2009 Treasury Secretary Geithner announced an expansion of the Term Asset- Backed Securities Lending Facility (TALF) as part of the Administration’s Financial Stability Plan. The purpose of this expansion, Secretary Geithner announced, is to “kickstart the secondary lending markets, to bring down borrowing costs, and to help get credit flowing again.” He went on to say, “In our financial system, 40% of consumer lending has historically been available because people buy loans, put them together and sell them. Because this vital source of

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lending has frozen up, no financial recovery plan will be successful unless it helps restart securitization markets for sound loans made to consumers and businesses – large and small. We have agreed to expand this program to target the markets for small business lending, student loans, consumer and auto finance, and commercial mortgages. And because small businesses are so important to our economy, we're going to take additional steps to make it easier for them to get credit from community banks and large banks. By increasing the federally guaranteed portion of SBA loans, and giving more power to the SBA to expedite loan approvals, we believe we can turn around the dramatic decline in SBA lending we have seen in recent months.” In keeping with Secretary Geithner’s proposal to increase guarantees, we recommend that all federal business guarantees be increased on the following scale until the economy recovers:

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• • • • •

95% guarantee on loans less than $150,000; 90% guarantee on loans less than $500,000 and greater than $150,000; 85% guarantee on loans less than $2 million and greater than $500,000; 80% guarantee on loans up to $5 million and greater than $2 million; and Permit SBA to guarantee loans up to $5 million

In addition to raising the amount of federal guarantees, we recommend that Treasury and the Federal Reserve permit community financial institutions to sell their direct loans to TARP or TALF to recapitalize and enhance the liquidity of these lenders who have not stopped lending to businesses. We also recommend that Treasury and the Federal Reserve permit lenders to sell their guaranteed loans at low rates to TARP or through TALF if the established secondary market will not buy the loans because of the concessionary rate. We believe that just as the Treasury Department is purchasing Fannie Mae and Freddie Mac mortgage-backed securities to promote stability and liquidity in the marketplace, TARP and TALF can and should serve as a secondary market for federal business loan guarantees for the same reason. Thank you for your consideration of these recommendations. I would be happy to answer any questions that you might have for me. Again, I appreciate the opportunity to testify here today on such an important topic. Robert W. Davenport President, National Development Council 708 Third Avenue, Suite 710 New York, New York 10017 Phone: (212) 682-1106 Fax: (212) 573-6118 Email: [email protected]  

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Chapter 6

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TESTIMONY BY BERT ELY, HOUSE FINANCIAL INSTITUTIONS SUBCOMMITTEE, TARP OVERSIGHT: IS TARP WORKING FOR MAIN STREET?, MARCH 4, 2009* Mr. Chairman Gutierrez, Ranking Member Hensarling, and members of the subcommittee, I very much appreciate the opportunity to testify today about TARP and whether it is working for Main Street. I have appended to this testimony two recent Wall Street Journal op-eds of mine pertaining to bank lending, headlined “Banks Don’t Need to be Forced to Lend” and “Don’t Push Banks to Make Bad Loans” as well as my resume. I also have appended to this testimony my answers to the eight questions posed in the letter of invitation to testify today. As will be readily evident from my answers, I am not a great fan of the TARP. Further, I greatly fear that the TARP will become a vehicle by which Congress will impose creditallocation policies on TARP investees. Such policies would be very destructive to the American economy. Harking back to resume, my early consulting experience is especially relevant to the subject of this hearing as for over a decade I consulted to small and medium-sized businesses on a broad range of financial matters, including obtaining bank credit. I often worked with business insolvencies, including serving as the operating trustee of a company in Chapter 11 bankruptcy, as a consultant to companies in Chapter 11, and as a bankruptcy examiner. Those experiences brought home to me the importance to small businesses of having sufficient equity capital on which to safely leverage bank credit. As I discussed in my Wall Street Journal op-eds, lending standards clearly are returning to earlier, prudent standards from the excessive laxness of recent years. That return to prudent standards is crucial, both for the recovery from the current recession as well as for the longerterm health of the American economy. This is absolutely the wrong time for Congress to force banks, whether through TARP rules or otherwise, to launch a new round of imprudent lending, whether to small businesses or homeowners or whomever.

*

This is an edited, excerpted and augmented edition of testrimony before the House Subcommittee on Financial Institutions.

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With regard to lending to small businesses it is important to realize that the primary reason why a business cannot obtain the credit it believes it needs is that it lacks sufficient equity capital and/or it cannot demonstrate to a lender that it can profitably employ the credit being sought. It is vitally important to realize that credit is not a substitute for equity capital. Rather, credit can only be reasonably leveraged off a sufficiently strong equity-capital base. In this regard, non-financial businesses are no different than banks, except that for good reason non-financial businesses cannot operate with as much leverage as banks and other financial intermediaries. Because lending standards are returning to normalcy, businesses of all types cannot operate with as much leverage as they could a few years ago, nor should they try. The underlying cause of insufficient credit for businesses, including small businesses, is inadequate equity capital. Rather than beating on banks to lend more, Congress should address the tax disincentives working against equity-capital accumulation within businesses. To put this another way, the Internal Revenue Code is the principal underlying cause of the current financial crisis. I address the tax laws and ten other public-policy causes of the crisis in an article which will appear shortly in the Cato Journal. I would be glad to submit that article for the record when it appears in print later this month. While there are many aspects of the tax laws which fueled the housing bubble and the gross overleveraging of the American economy, working together they encouraged businesses and individuals to overleverage by incenting overspending and undersaving, thereby discouraging the accumulation of capital denominated as equity. That is, rather than encourage saving, which builds equity capital on a balance sheet, the tax laws actively discourage savings and equity-capital accumulation through the relatively heavy taxation of profits, for profits represent the generation of equity capital. At the same time, the tax deductibility of interest expense by businesses and homeowners encourages borrowing, and therefore overleveraging. When the pre-tax cost of equity capital is easily 15% or more and the Prime Rate is 3.25%, as it is today, it is an apparent no-brainer for a business to finance as much of its balance sheet as it can with debt capital and as little as possible with equity capital. In addition to funding a portion of a business’s balance sheet, equity capital also serves as its loss cushion, the same role equity capital plays in bank balance sheets. That loss cushion becomes vital to a business’s survival during a recession, for it is equity capital, not debt capital, which must absorb any business losses and serve as the foundation on which borrowing during tough times must be based. Far too often, I have seen business owners seduced during good times by seemingly cheap debt, only to suffer losses during the tough times that exhaust their too-thin equity-capital foundation. I will close this portion of my testimony by posing this thought experiment. What would be the condition of the American economy today, and the availability of credit for businesses of all sizes, if interest was not a tax-deductible business expense and business profits were not taxed at a business level? I strongly suspect that America would not be in recession and that it would enjoy a much more profitable and much less leveraged business sector than it has today. I will close by discussing a threatened loss of bank capital, and therefore a reduction in bank lending capacity – the 20-basis-point deposit insurance special assessment that the FDIC has proposed to levy on the nation’s banks and thrifts this coming September 30. This assessment represents a $15 billion tax on bank capital and would occur as the government is

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trying to boost the banking industry’s capital and lending capacity. As FDIC chairman Sheila Bair has admitted, this assessment would be procyclical, yet she is determined to levy it. I recommend that the Financial Services Committee express its opposition, in the strongest possible terms, to this most untimely attack on bank lending capacity. As the banking industry demonstrated in the 199 1-96 period, it has the capacity to rebuild the Deposit Insurance Fund back to its statutory minimum, but that rebuilding process should wait until the economy and the banking industry have begun to recover. Mr. Chairman, I thank the Subcommittee for its time this afternoon. I welcome your questions.

RESPONSES TO QUESTIONS POSED IN THE SUBCOMMITTEE’S LETTER OF INVITATION

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1 – In general, have TALP and TALF funds/actions had measurable positive effects on the credit markets? If so, to what extent? If not, or if the positive effects have been de minimis, to what factors do you attribute these shortcomings? It is not possible to specify the effect of TARP on the credit markets, for two reasons. First, TARP investments represent an addition to bank and thrift capital, as shown in the lower right hand corner of the accompanying illustration of a typical bank balance sheet. Because of the leveraged nature of bank and thrift balance sheets, capital is not a major source of bank funding – deposits and borrowings provide most of the funding with which banks and thrifts make loans and investments. According to FDIC data, bank equity capital (common and preferred) accounted for just 9.4% of total bank and thrift funding at December 31, 2008, while deposits provided 65.2% of bank and thrift funding and borrowings provided another 19.9% of that funding. Second, because cash is fungible, the cash a bank or thrift receives when Treasury makes a TARP investment in the institution (not a gift, but an investment), it is impossible to trace the flow of the TARP investment into specific loans or investments or other bank assets. Therefore, it is impossible to draw a direct link between TARP investments and changes in bank and thrift lending to any class of borrower. It is important to recognize that the primary purpose of bank and thrift capital, including TARP investments, is to serve as a loss cushion, to protect bank liabilities, and notably deposits, from losses. Therefore, TARP investments potentially enhance the credit markets, and specifically bank and thrift lending, by increasing the capacity of banks and thrifts to lend to all classes of borrowers. 2 – Generally, have the TARP recipients used the funds in responsible ways and consistent with Congressional intent? (Assuming that Congressional intent was to unfreeze the credit markets, freeing-up capital for lending.) Banks and thrifts have used TARP investments responsibly as these investments have strengthened their capacity to lend, and lend they have in the face of an economy sliding into a potentially long and severe recession and declining loan demand because of that recession.

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As the accompanying page from the most recent Federal Reserve compilation of commercial bank assets and liabilities shows, bank lending to the non-financial sector of the U.S. economy (line 5 minus line 15) has held up amazingly well. The amount of these loans actually rose 1.8% from its September 2008 average to February 18, 2009, and has declined only 1.2% from the December 2008 average to February 18. During the first year of the present recession (January 2008 to January 2009), bank lending to the non-financial economy increased quite robustly, by 3.9%. It is patently not the case that banks have stopped lending – not only are they lending, but the ratio of their loans to GDP has steadily increased since the recession began. It also is important to note that the bank lending reported by the Fed is net of loan-loss reserves, as footnote 4 to this Federal Reserve report states. That is, the amount of loans actually outstanding has been reduced by the amount the banks have reserved for losses on those loans. Banks and thrifts have dramatically increased their loss reserves in recent months; for Fed reporting purposes, those increases offset loans, leading to an understatement of bank loan growth. For example, during the fourth quarter of 2008, banks and thrifts increased their loan-loss reserves by $16.5 billion; during all of 2008, they boosted their loanloss reserves by $70.5 billion.

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3 – Have TARP recipients increased business lending? Small business lending? If so, to what extent?. If not, what are the obstacles to lending (e.g., decreased demand, regulatory and capital requirements, inability to leverage, bank mismanagement)? Business borrowing demand will decrease during a recession as business working capital needs (principally accounts receivable and inventories) shrink, due to lower sales volumes, and as capital outlays (new equipment, building expansions, etc.) are trimmed or postponed. Despite an expected drop-off in business loan demand, due to the recession, the accompanying Federal Reserve data show that bank lending to businesses (commercial and industrial loans, line 6) increased $111 billion, or 7.7%, from January 2008 to February 18 of this year. Unfortunately, data on bank and thrift lending to small businesses is collected just once a year, on the June 30 Bank Call Reports and Thrift Financial Reports. That data will not be available until early August. It will be most interesting to see what changes in the volume of bank lending to small businesses will have occurred between June 30, 2008, and June 30, 2009. 4 – In order to increase business lending, especially small business lending, should the Treasury Department funnel more funds into the larger banks or should TARP funds be directed to smaller regional and community banks and Community Development Financial Institutions? Which would seem more effective? As explained above, it is impossible to link any type of bank and thrift lending to TARP investments. 5 – Could you suggest a way to accurately measure whether or not banks have increased lending as a result of accepting TARP funds?

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No, I cannot nor can anyone offer a credible way to measure a link between an institution’s receipt of a TARP investment and the institution’s lending. It is extremely important to note that bank lending absolutely cannot be measured by the amount of new loans extended by a bank or thrift as much of that lending is merely a rolling over of previous loans. For example, a mortgage refinance for the same amount as the old mortgage does not increase the aggregate amount of mortgage credit outstanding. Likewise, a business which draws $200,000 under a bank line of credit and then pays down that line of credit nine days later when it receives a payment from a large customer has not changed the amount it has borrowed from its bank even though the $200,000 draw on its line of credit technically would count0 as a new loan. The amount of credit that a bank, or the banking industry overall, has supplied to the economy, can only be measured by the amount of credit outstanding at any one time.

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6 – Did the Treasury Department makes its initial TARP investments in the large banks in a manner that was likely to motivate the fund recipients to lend? If not, how should those investments have been made and what can be done to correct past errors? As noted above, no linkage can credibly be drawn between a TARP investment in a large bank and its lending. Additionally, large banks, like all banks, are in the lending business, for extending credit is the principal way that banks earn profits. Because of subsequent changes in the rules governing the recipients of TARP investments, notably executive compensation limits, and the prospect of future rules, specifically lending mandates, TARP investments are becoming increasingly unattractive to banks. Not surprisingly, more and more banks which accepted a TARP investment are now preparing to buy back the preferred stock they issued to the government when they received a TARP investment. Right from the beginning, I have strongly recommended to banks and thrifts that they not seek a TARP investment because I could foresee that the rules would make a TARP investment increasingly unattractive. My prophesy unfortunately has come true. 7 – Do you believe some of the large bank TARP recipients are insolvent? If so, how should the regulators deal with those institutions? Any good accountant should be able to demonstrate that (1) all the large banks are insolvent or (2) all of them are solvent – it is just a matter of the assumptions the accountant makes. This is especially the case with determining the value accorded to investment securities under the fair-value accounting rules.

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There also is a second question which must be addressed: Is the solvency test aimed at the holding company which owns the large bank or the large bank itself. Given the existence of “double leverage” (holding company debt invested in the subsidiary bank as equity capital), it is conceivable that a large bank holding company is insolvent, but that its subsidiary bank, which has more book equity capital than its parent holding company, is not insolvent. 8 – If the Treasury Department’s proposed stress tests reveal that banks are undercapitalized, should those banks receive more TARP funds or would TARP funds be better spend on stronger banks? As an accountant, I can produce whatever outcome is desired from the proposed stress tests – it is simply a matter of the assumptions that I make. That said, the Treasury Department and the regulators must make judgments about which banks cannot survive on their own. Weak banks should be encouraged to merge with stronger banks while clearly insolvent banks should be taken over by the FDIC under its well-established procedures for dealing with failed banks. The Wall Street Journal By Bert Ely JANUARY 6, 2009

BANKS DON'T NEED TO BE FORCED TO LEND

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The Last Thing We Need Is Congress Setting Business Models Tomorrow, the House Financial Services Committee will hold a hearing to "discuss priorities" for the Obama administration's use of Troubled Asset Relief Program (TARP) funds. Those priorities could include lending and other directives to financial institutions receiving TARP investments. These directives could be disastrous for taxpayers and the economy if they force banks to engage in unwise lending, or keep weak, troubled banks from being absorbed by stronger banks. TARP has two major shortcomings. The first is a lack of political support. Congress did not explicitly authorize capital investments in financial institutions when it created the $700 billion program three months ago. The Treasury originally was supposed to buy troubled assets of banks and other financial institutions. It quickly realized that this was unworkable due to challenges in determining asset prices. It then decided to invest TARP funds in the institutions, to increase their capital. But the lack of congressional consent for these investments has understandably stoked controversy about their purpose. Second, there is widespread confusion about the role capital plays in bank balance sheets, which has exacerbated this controversy. That confusion is evident in comments such as "banks should be forced to lend the TARP monies the government has given them." Treasury invests TARP funds by purchasing preferred stock in a bank, which adds to the bank's capital. Bank capital, which also includes common stock and retained earnings, serves as a cushion to absorb losses from loans and other bank activities; it is not loaned out directly.

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Most bank lending is funded by customer deposits and borrowings from third parties (such as the Federal Home Loan Banks). Potentially, a bank could use its increased capital from TARP to absorb losses from loans and investments already on its books, to acquire banks too weak to remain independent, or to increase its lending. The higher capital boosts a bank's lending capacity because it enables the bank to safely increase its deposits -- and thus its loans -- without increasing its risk of insolvency. Unfortunately, Treasury has poorly explained the legitimacy of those uses. Congressional debate about TARP may further muddy the waters. A review of these uses show why none should be mandated or barred. First, even well-managed banks are suffering loan losses as collateral values shrink and the recession deepens. In normal times, a bank would raise new capital to offset those losses. However, the capital markets are not functioning normally, with many sound banks now unable to raise fresh capital. TARP investments, which increase a bank's capital, therefore serve as a bridge to when normality returns to the capital markets. Because of restrictions accompanying TARP investments, and a jump in the TARP dividend rate after five years to 9% from 5%, banks will have an incentive to raise private capital to finance a buyback of their TARP preferred stock. Taxpayers will profit from these TARP investments because of the dividends paid by the banks on the preferred shares the Treasury purchased. Second, weak banks need to be acquired by well-managed banks rather than being propped up by TARP investments, for weak banks are not good lenders. The continued existence of weak banks will impede the economic recovery. However, an acquirer needs to realistically account for losses buried in the other bank's balance sheet even though this accounting will reduce its own capital. The TARP investment should therefore ensure that the merged bank is well capitalized. Eventually, that bank would raise capital to retire its TARP stock. Third, while a TARP investment increases a bank's lending capacity, lending mandates -such as that a bank must increase its outstanding loans by some multiple of its TARP investment -- could force banks to make new bad loans. Unfortunately, banks accepting TARP investments must, under the contract governing Treasury's investment in the bank, agree that Treasury can "unilaterally amend" the agreement "to comply with any changes . . . in applicable federal statutes." Through this provision the new Congress can impose on banks with TARP investments lending mandates or other obligations and restrictions, such as barring the use of TARP funds to acquire weak banks. Even worse, Congress may legislate credit allocation, such as directing that a certain percentage of a mandated lending increase must go to a favored class of borrowers. Banks are in the lending business: They do not need to be forced to lend. And contrary to popular and political opinion, banks have not stopped lending. Despite the recent financial market turmoil, a declining GDP, and an increase in loan-loss reserves, commercial bank lending actually grew $336 billion, or 4.9%, from August to Dec. 24, according to Federal Reserve data. While lending dictates or other restrictions may be tempting, the Obama administration must discourage Congress from imposing them on recipients of TARP investments. Mr. Ely, the principal in Ely & Co., Inc., is a financial institutions and monetary policy consultant. © Bert Ely 2009

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Testimony by Bert Ely The Wall Street Journal By BERT ELY FEBRUARY 2, 2009

DON'T PUSH BANKS TO MAKE BAD LOANS

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Contrary to Myth, Commercial Bank Lending Is up. So Are Standards There is a widespread belief that banks are now refusing to lend as much as they should, and that Congress should pressure them to extend more credit to consumers and businesses. In reality, banks as a whole increased their lending during 2008 -- the notion they haven't is based on a misunderstanding of U.S. credit markets. Pressuring banks to lend more could backfire. Lost in too many discussions of the financial sector is that banks and other depository institutions account for only 22% of the credit supplied to the U.S. economy (down from 40% in 1982). "Shadow banking" -- notably asset securitization and money-market mutual funds -now supplies 33% (up from 14%). Insurance companies, other financial intermediaries, nonfinancial firms and the rest of the world provide the balance. As far as commercial banks go, Federal Reserve data released last week show that their lending increased 2.36% during the last quarter of 2008. For all of 2008, commercial-bank lending rose by $386 billion, or 5.63%, even as the economy slid into recession. Over that 12month period, business lending jumped $152 billion, or 10.6%, real-estate loans were up $213 billion, or 5.9%, and consumer lending rose $73.5 billion, or 9%. Other categories of bank lending such as loans to farmers, broker-dealers and governments, declined $53.2 billion, or 5.4%. Fed data also show that during the first three quarters of 2008, the total amount of credit supplied to the economy increased $1.91 trillion, or 3.8%, with $540 billion of that amount coming from foreign lenders. Nevertheless, Treasury recently demanded that the 20 largest recipients of government capital investments start providing detailed monthly reports about their lending and investment activities. This new requirement could lead to government lending mandates. That would not be a good idea. In the first place, the drop in stock-market and house prices has made millions of families feel poorer and led them to save more than in recent years. It has also encouraged them (especially Baby Boomers approaching retirement) to pay off debt. They don't need more debt. More broadly, many of the most creditworthy neither need to nor want to borrow right now. Richard Davis, CEO of U.S. Bancorp, recently said that he is seeing the demand for loans diminish at his and other banks "from people and businesses spending less and traveling less and watching their nickels and dimes." Lenders moreover have tightened lending standards, correcting an excessive laxness that contributed to our financial mess. Zero or very low down-payment mortgages are out, as are "covenant light" corporate loans. Likewise, lenders have trimmed credit-card limits and cut the amount of money available under home equity lines of credit as home values have declined.

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And contrary to the "lend more" message broadcast from inside the Washington Beltway, bank examiners are criticizing weak loans and forcing banks to tighten lending standards. Bankers are caught in a vise between politicians and examiners. A lot of the credit tightness is a reflection of the near-collapse of loan securitization. Recent Fed plans to buy asset-backed securities may help revive asset securitization, but bankers have no control over the fate of that initiative. The economy is in recession and working off the consequences of a housing bubble fed by excessive mortgage credit. Given that loan demand typically falls during a recession, it's amazing that bank lending increased as much as it did last year. It was essentially flat during the 2001 recession. Bankers should always lend prudently, as they are now doing. If they are jawboned or worse by Washington into reckless lending, the U.S. will set itself up for another debt crisis, even before the present mess has been cleaned up. Mr. Ely, the principal in Ely & Co. Inc., is a financial institutions and monetary policy consultant. © Bert Ely 2009

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BIOGRAPHICAL SKETCH FOR BERT ELY Bert Ely has consulted on deposit insurance and banking structure issues since 1981. In 1986, he became an early predictor of the S&L crisis and a taxpayer bailout of the FSLIC. In 1991, he was the first person to correctly predict the non-crisis in commercial banking. Bert continuously monitors conditions in the banking industry as well as monetary policy. In recent years, he has focused increased attention on the GSEs, notably Fannie Mae, Freddie Mac, and the Farm Credit System. He has co-authored a monograph on how to privatize the three housing-finance GSEs. Currently, Bert is focusing his attention on banking problems, the crisis in housing and housing finance and the entire U.S. financial system, and the resolution of the Fannie and Freddie conservatorships. Bert has testified on numerous occasions before congressional committees on banking issues and he often speaks on these matters to bankers and others. He is interviewed by the media on a regular basis about banking and other financial issues. Bert first established his consulting practice in 1972. Before that, he was the chief financial officer of a public company, a consultant with Touche, Ross & Company, and an auditor with Ernst & Ernst. He received his MBA from the Harvard Business School in 1968 and his Bachelor's degree in economics in 1964 from Case Western Reserve University. Bert Ely Ely & Company, Inc. P.O. Box 320700 Alexandria, Virginia 22320 Telephone; 703-836-4101 Email: [email protected] Website: www.ely-co.com

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Chapter 7

TESTIMONY OF DAVID S. SCHARFSTEIN, PROFESSOR OF FINANCE, HARVARD BUSINESS SCHOOL ON TARP OVERSIGHT: IS TARP WORKING FOR MAIN STREET? BEFORE THE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT, COMMITTEE ON FINANCIAL SERVICES, UNITED STATES HOUSE OF REPRESENTATIVES*

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2:30 p.m., March 4, 2009, Room 2128, Rayburn House Office Building Good afternoon, Chairman Gutierrez, Ranking Member Hensarling, and Members of the Subcommittee. Thank you for inviting me to speak today. I am David Scharfstein, Professor of Finance at Harvard Business School and Research Associate of the National Bureau of Economic Research. I am also a member of the Squam Lake Working Group on Financial Regulation, a nonpartisan, nonaffiliated group of fifteen academics who have come together to offer guidance on the reform of financial regulation. I speak only for myself today. I would like to make three main points. First, there has likely been a contraction in the supply of bank loans because of the poor financial condition of many large banks. This poses a challenge for most firms, but particularly for small firms, which rely on bank loans for almost all of their financing. About half their loans come from large banks, and these banks appear to be cutting their lending more than small banks. Thus, it is important to find ways to ease the supply of credit to small firms. Second, the Capital Purchase Program (CPP) of TARP should be thought of as two distinct programs. One is a support program for large, troubled financial institutions, some of which are systemically significant. The effect of this program on financial stability and credit availability is hard to measure since we cannot observe what would have happened in its *

This is an edited, excerpted and augmented edition of testrimony before the House Subcommittee on Financial Institutions.

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absence. The other part of the CPP program is targeted at small banks. This program is not a support program for troubled financial institutions, but rather a program that provides capital to banks so that they can increase their supply of credit. The effect of this program will be somewhat easier to measure, but such measurement will inevitably be imperfect. Below, I will detail a proposal to improve measurement. Third – and at the heart of my testimony – Treasury should consider expanding the Capital Purchase Program for small banks, perhaps even creating a separate program for them. The problems of the big banks have no easy solutions, and it is highly uncertain how and when their problems will be resolved. In the meantime, small firms risk losing their primary source of funding. Many small banks are well-positioned to step into the breach given their knowledge of local markets, and with an infusion of capital could do so. However, as with in any government program, one must ask: Why does the government need to be involved? In this case, one should ask: Why can’t banks with good lending opportunities raise capital on their own? The answer is that many can raise capital, but are reluctant to do so in the current financial environment. Given extreme investor uncertainty about the health of the banking sector, a bank that issues stock is likely to be perceived by investors as one that is undercapitalized or has unrecognized losses in its loan portfolio. So it is natural that banks have been reluctant to issue stock on their own given that doing so would likely drive down their stock price. In addition, most small banks are privately owned and cannot easily raise capital in illiquid private markets. The government’s commitment to purchase stock at a premium would entice small banks to participate in the program and raise capital, as many have already done. This program will attract more banks if it does not include the same sort of restrictions that are now imposed on TARP recipients. Nor should it; this program would not be designed to put taxpayer dollars at significant risk. The program will also be more effective if it targets small banks that are able to leverage the equity investments by expanding their deposits or other borrowing. And it should target banks with expertise in business lending. The existing TARP investments in small banks do appear to have gone to banks that do more business lending. It would be tempting to require participating banks to reach a target level of new lending equal to some multiple of the government’s investment. This temptation should be resisted. Mandates of this sort could result in a rash of bad loans, and we do not want to turn healthy banks into unhealthy ones. Moreover, we should probably not measure the success of the program purely on the basis of whether there is an increase in lending. It will be a success if the increased lending capacity of small banks increases competition and puts downward pressure on interest rates spreads, which are now at high levels. This would benefit the many firms that are struggling to meet expenses and to keep their doors open. Of course, it is important to keep in mind the limitations of such a program. Some of the hardest hit communities – the ones that need the most support – may also have many troubled small banks with large real estate exposures. Investments in these banks may help to stabilize them, but this is not the sort of investment I have in mind. Moreover, while many small banks are relatively healthy now, their condition could worsen appreciably. In that case, the investments are unlikely to have the desired effect. With these limitations in mind, I believe that the government should enhance its program of investment in small banks, targeting healthy banks that are well-positioned to increase

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lending. At a time when large banks appear to be retrenching, this would better enable our financial system to meet the pressing needs of small enterprise.

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I. BANK LENDING DURING THE FINANCIAL CRISIS There is no question that business lending has fallen. Some of this decline is to be expected: during a recession the demand for credit falls, as firms cut capital expenditures, reduce working capital, forgo acquisitions, and go out of business. But some of the decline in lending almost surely stems from a contraction in supply – banks and other lenders are less willing to extend credit. The contraction in the supply of bank loans is a feature of other recessions, even when banks are healthy.[1] Given that many of them are in bad financial shape – and some might even be insolvent – it is not hard to believe that there has been a contraction in supply and that it is affecting investment. Indeed, according to one study, which surveyed over 1,000 CFOs, 86% report that they are passing up valuable investment opportunities due to lack of funding.[2] Measuring the level of bank lending is tricky, particularly lending during the current financial crisis. It is tempting to measure this as the change in the total outstanding amount of commercial and industrial (C&I) loans on banks’ balance sheets. However, this amount can increase either because banks are extending new loans or because firms are drawing on their preexisting revolving credit facilities. In fact, Figure 1 A shows, during the first few weeks of the financial crisis – from the failure of Lehman Brothers to mid-October – C&I loans actually rose by roughly $100 billion. This is puzzling: Why would banks increase lending at the peak of the crisis, when many were near collapse? The answer is that C&I loans rose not because banks were voluntarily extending credit to new borrowers, but rather because firms were drawing down their revolving credit facilities – largely as a precautionary measure given turbulent financial markets. For example, on October 2, 2008, the automotive parts manufacturer, Dana Corporation, drew $200 million from its $650 million credit line. Their explanation of why they did so is typical of many firms that drew on their lines: Drawing down these funds is a prudent liquidity measure. Ensuring access to our liquidity to the fullest extent possible at a time of ambiguity in the capital markets is in the best interest of our customers, suppliers, shareholders, and employees. Table 1, reproduced from my research paper with Victoria Ivashina of Harvard Business School,[3] provides information on the firms that announced drawdowns. The total comes to $16 billion, a large fraction of the $100 billion increase in C&I loans after the Lehman failure.[4] Many of the firms had poor credit ratings -- one later went bankrupt (Tribune Company) and another is at risk of or going bankrupt (General Motors) – but the interest rates they paid were far lower than the rates they would have paid on newly issued loans. Importantly, these draw-downs for precautionary reasons may have forced banks to scale back their lending to other borrowers. Figure 1A reveals that after the initial increase in C&I loans, the amount of outstanding C&I loans of large banks fell significantly over the ensuing four months. It is telling that the rise and subsequent fall is much more pronounced for large banks (Figure 1B) than it is for small banks (Figure 1C). Interestingly, this is the exact opposite of what happens in typical recessions: C&I lending of large banks usually falls less than that of small banks.[5] The

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current poor financial condition of the large banks may explain this reversal of the normal pattern.

A. Small Business Lending

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The relative good health of small banks is good news for small firms since small banks – those with assets of less than $5 billion -- hold about 43% of small business loans (less than $1 million in size). The bad news is that big banks provide the rest of the credit to small firms. The recent bank-specific loan data do not break out loans to small business, so it is difficult to say whether large banks are specifically scaling back their loans to small firms. But if they are cutting lending across the board, then this would constitute a significant contraction in loan supply to small firms. Such a contraction would present a significant challenge to small firms because, unlike large firms, they do not have access to other sources of credit such as commercial paper, public bonds, or private placements with institutional investors. It has been shown that when banks scaled back their supply of credit during the recessions of 1974-75 and 1981-82, small firms that could not issue public bonds were more adversely affected than large firms, who generally have access to other non-bank sources of capital.[6] In addition to the decline in lending, there has almost surely been an increase in interest rate spreads (the difference between loan interest rates and safe government bonds). Some of this increase, of course, is related to the decline in credit quality, but some of it is likely related to the contraction in supply of credit. This added extra interest expense creates problems for all firms, particularly many small firms that are struggling to keep expenses down and their doors open.

B. Large Business Lending Large borrowers also face significant challenges. Their bank loans are almost always organized through the loan syndication market, which has experienced major disruptions since the middle of 2007, leading to dramatic declines in bank loans to large borrowers. Some background on this market is useful. Syndicated loans are “originated” by “lead” banks, which retain a share of the loan, and sell the remaining share to a syndicate of other lenders. This market started out in the mid-1980s with banks as the main participants (including investment banks), but grew to include numerous institutional investors including insurance companies, mutual funds, and hedge funds. Bank of America, Citigroup, and JPMorgan Chase are central to this market. Together, they originate over 60% of all syndicated loans, and are involved in 70% of all syndications. During the credit boom of 2002 to mid-2007, syndicated loans were often pooled together and packaged into collateralized debt obligations (CDOs), as was done with residential mortgages (including subprime). Funds raised from loan syndications were used for a variety of restructuring purposes including mergers and acquisitions (M&A), leveraged buyouts (LBOs), and share repurchases, as well as for the usual investments companies make in working capital and plant and equipment (real investment loans). At the peak of the credit boom, about half the loan syndications were restructuring loans (i.e. for M&A, LBOs and share repurchases).

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In mid-2007, the world became aware of the problems in subprime lending, and began to recognize that AAA tranches of securities that used subprime loans as collateral were a lot riskier than their ratings implied. Because of those concerns, the market for all kinds of securitized products dried up, including the market for CDOs of loan syndications. Since many of the loans that went into the CDOs were below-investment-grade debt primarily used to fund leveraged buyouts (LBOs) and some mergers and acquisitions (M&A), this led to a huge drop in this market. But it also led to a significant fall in real investment loans. Figure 2, which is based on my research with Victoria Ivashina of Harvard Business School, plots quarterly volumes of restructuring loans and real investment loans.[7] What this figure makes clear is that much of the reduction in lending to large borrowers pre-dates the crisis that erupted in September 2008; rather it began in mid-2007 with concerns about subprime lending. The volume of loan syndication will likely not return to its peak -- nor should it. There was clearly too much credit then. And much of that credit was going to fund restructuring activities, which is arguably a less important source of economic growth than real investments. It is more important to make sure that large firms that want to fund valuable real investments can do so at reasonable cost. Unfortunately, it is harder to do this through loan syndications than it once was for two main reasons. First, the main lead banks – JPMorgan Chase, Citigroup, and Bank of America – are among the most troubled banks in the financial system. While they earned significant fees for arranging loan syndications, they still have to hold a share of their loan originations in their portfolio and they may be increasingly reluctant to do so given their own financial troubles. Second, many of the banks that were active syndicate members have retrenched significantly – particularly investment banks. This may be putting more pressure on the lead banks to hold a larger share of the loans and cooling their appetite for originating large loans. The weakness of the loan syndication market is a problem for large borrowers but, as noted above, many of them have access to public bond markets and private placements. There is some weak evidence that some firms, particularly very large ones, are beginning to access the public bond markets. How effective firms will be at substituting away from large banks is an open question. If they can do so successfully, the negative implications of a weak banking sector will be muted.

II. THE ALLOCATION OF TARP FUNDS AND MEASURING THEIR EFFECT ON LENDING A. Allocation of TARP Funds To date, Treasury has invested over $236 billion in the preferred stock and warrants of financial institutions as part of its Capital Purchase Program ($196 billion) and Targeted Investment Program ($40 billion). Not surprisingly, most of this money ($211 billion) has gone to large banks. But relative to their size, they have received about the same amount as small banks. Banks with assets of greater than $25 billion account for 92% of bank assets, and these banks received 90% of the TARP money.[8] About 4.5% ($11 billion) of the TARP

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investments went to small banks with assets less than $5 billion, and they account for 3.5% of bank assets. The remaining 5.9% ($14 billion) went to medium sized banks with assets of $525 billion and they account for 4.8% of bank assets. This implies little about the cost of the programs since the premiums that were paid for the securities may have differed across size classes. The investments in small banks and large banks should be thought of differently. Much of the money that was invested in large banks went to institutions that are in significant financial trouble and pose systemic risks. These investments were an attempt not just to increase lending, but also to promote financial stability. Whether this program enhances financial stability in a cost-effect manner is an open question, but if it does then the benefits are significant even if they cannot be measured in a specific bank’s lending statistics. The program of investment in small banks appears to be less about propping them up to promote financial stability and more about providing capital for them to lend. It is therefore useful to look in greater detail at the characteristics of small bank TARP recipients. The Exhibit below summarizes some key characteristics.

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Characteristics of Small Bank TARP Recipients and Non‐Recipients

Domestic Loans as % of Banks Assets C&I Loans as % of Domestic Loans Commercial Real Estate as % of Domestic Loans % of Total Small Bank Assets % of Total Small Bank C&I Loans % of Total Small Bank Commercial Real Estate Loans

Small Bank Tarp Recipients 72.6% 18.3%

Small Bank Not TARP Recipients 65.7% 15.4%

29.4%

28.1%

22.8% 27.3%

77.2% 72.7%

24.8%

75.2%

There are two main points that are worth noting:

1. Small bank TARP recipients are heavily involved in business lending. C&I loans and commercial real estate loans comprise 47.7% of their domestic loan portfolios. By contrast, these business loans comprise a smaller share of the loan portfolios of small banks that did not receive TARP funds (43.5%). Small bank TARP recipients also have a larger share of their assets in domestic loans. Though not shown in the exhibit, large banks have only 29% of their loan portfolios in C&I and commercial real estate combined. In addition, a much smaller percentage of their assets on a consolidated holding company basis is invested in domestic loans. 2. TARP money invested in small banks has been invested in banks that account for 22.8% of the assets of the small bank sector, 27.3% of the C&I loans of the small bank sector, and just under a quarter of the commercial real estate loans of the small bank sector. Not surprisingly, these percentages are much higher for medium and large banks. Medium size bank TARP recipients control 53.7% of bank assets in that

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size range, and large bank recipients control 91.1% of the assets of large banks. Whether desirable or not, this suggests that if there is additional TARP money that could go to many small banks that have not yet received any funding from TARP.

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B. Measuring the Effect of TARP on Bank Lending There is great interest in determining whether TARP investments have led to an increase in bank lending. This is understandable given the magnitude of taxpayer dollars at risk. Unfortunately, measuring the effect of Treasury’s investments is difficult and – in the case of the large banks – probably impossible. Almost all large banks have received TARP funds so there are no meaningful non-recipients against which to compare recipients. We also cannot observe the counterfactual world in which large banks did not receive TARP funding as well as other significant support. While their lending does appear to have fallen after the capital infusion, as shown in Figure 1B, we do not know whether it would have fallen even more without the government’s support. There is somewhat more hope that we will be able to measure the effect of capital infusions on the lending of small and medium banks. As noted above, small bank TARP recipients make up about 23% of the assets controlled by small banks; the equivalent number is 53.7% for medium size banks. Therefore, there is a sizable set of non-recipients against which to compare the TARP recipients. However, it is important to keep in mind that TARP recipients are not randomly selected; those who applied for TARP funds, may have done so because they saw better lending opportunities. It is also possible that some TARP recipients applied for funds because they were having financial difficulties and had fewer lending opportunities. With these important caveats in mind, it may still prove useful to track lending by TARP recipients relative to banks that do not receive TARP funds. Measuring bank lending would be facilitated by a small change in the way banks report loans and loan commitments. Currently, FDIC-insured banks report C&I loans outstanding in their Reports of Condition and Income (Call Reports) filed with the Federal Financial Institutions Examination Council. But they should also be required to report the outstanding amount of C&I revolving credit facilities. Approximately 80% of all C&I loans originally start as credit facilities and are drawn from these facilities.[9] And as noted above, a big portion of the increase in C&I loans after Lehman Brothers failed was the result of precautionary credit facility drawdowns by credit-challenged borrowers rather than the result of lending to new borrowers. It would be useful to be able to track this more closely. It would not take much to add this information to Call Reports or to report this information to regulators. Banks are already required to report outstanding credit card lines, commercial real estate commitments, and home equity lines.[10] C&I credit facilities, by contrast, are subsumed in a catchall reporting item called “Other Unused Commitments” that, for many banks, is largely made up of C&I commitments, but may include other types of commitments.[11] During the fourth quarter of 2008, the three largest bank holding companies – JPMorgan Chase, Citigroup and Bank of America – had large drops in “Other Unused Commitments” totaling $173 billion, nearly 16% of the outstanding amount of these commitments. Was this large decline because firms were drawing down on existing C&I credit facilities, or because banks were cutting bank on new issues of C&I credit facilities?[12] Was this driven by other

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items including in this data item unrelated to C&I lending? Without more detailed information, it is impossible to know.

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III. INCREASING THE SUPPLY OF CREDIT TO SMALL FIRMS What can be done to increase the supply of credit to small firms? One potential solution is to improve the health of big banks. While this would help – and it is important for the stability of the financial system and the overall economy – the road to their recovery is going to be bumpy, and has no clear end in sight. In the meantime, undercapitalized (or maybe even insolvent) banks will be under pressure to “deleverage” – to sell assets or curtail lending in order to pay down debt and improve their financial health. While the big bank crisis is being worked out, we should consider making further equity investments in small banks, on top of the approximately $11 billion of TARP money that has already been invested in small banks. The goal of this program would be to increase the lending of small banks as an antidote to the reduction in lending by big banks. Ideally, banks would not just increase lending one-for-one, but rather would leverage the equity investment to increase lending. At historical ratios, each dollar of equity invested in a small bank leads to seven dollars of additional loans. Thus, for example, a $5 million investment might eventually increase loans by $35 million. Of this amount just under half – about $16 million - would end up in C&I and commercial real estate loans. Of course, there is no guarantee that banks will increase lending – they have to be able to identify good loans. But the chances are increased if troubled large banks are indeed shedding small borrowers. It is reasonable to ask why the government needs to step in to provide capital to small banks. After all, why can’t these banks raise capital on their own, particularly if they are in good financial shape? The answer is that many can raise capital, but are reluctant to do so in the current financial environment. It has been shown that investors often interpret stock issues as a signal that the issuer thinks its stock is overvalued. Investors respond by driving down the stock price. Given extreme investor uncertainty about the health of the banking sector, investors are likely to respond to a bank that issues stock by lowering the price they are willing to pay So it is natural that banks have been reluctant to issue stock on their own given the adverse stock price consequences it is likely to have. The government’s commitment to purchase stock at a premium may entice small banks to participate in the program, as many have already done.[13] Unlike the TARP investments in big banks, these investments would not be a “bailout” of shareholders and creditors. Thus, it would not be necessary to cap compensation or restrict dividend payments. The idea is simply to subsidize the expansion of healthy small banks, akin to a host of other government subsidies (such as investment tax credits) used to encourage particular behavior. It would be tempting to require participating banks to reach a target level of new lending equal to some multiple of the government’s investment. This temptation should be resisted for two reasons. First, mandates of this sort could result in a rash of bad loans; we do not want to turn healthy banks into unhealthy ones. Second, we should probably not measure the success of the program purely on the basis of whether there is an increase in lending. It will be a success if the increased lending capacity of small banks increases competition and puts

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downward pressure on interest rates spreads, which are now at high levels. This would benefit the many firms that are now struggling to meet expenses and to keep their doors open. There are at least two caveats to keep in mind. First, for this program to be successful, it is important that banks be able to leverage their equity investments. They can do this by borrowing from a variety of sources – from the Federal Home Loan Bank, by getting brokered deposits, or by trying to attract new retail deposits. Some banks may be more effective than others in tapping these sources. For example, some banks may not currently have outstanding arrangements with the FHLB; others may have a hard time expanding retail deposits. To the extent possible, any additional investments should be in banks that have the capacity to leverage the investment.

Source: Federal Reserve Board, Assets and Liabilities of Commercial Banks in the United States, (http://www.federalreserve.gov/releases/h8). Not seasonally adjusted, adjusted for mergers.

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Figure 1A. C&I Loans by Domestically Chartered Commercial Banks (Billion USD).

Source: Federal Reserve Board, Assets and Liabilities of Commercial Banks in the United States, (http://www.federalreserve.gov/releases/h8). Not seasonally adjusted, adjusted for mergers. Figure 1B. C&I Loans by Large Domestically Chartered Commercial Banks (Billion USD).

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Source: Federal Reserve Board, Assets and Liabilities of Commercial Banks in the United States, (http://www.federalreserve.gov/releases/h8). Not seasonally adjusted, adjusted for mergers.

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Figure 1C. C&I Loans by Small Domestically Chartered Commercial Banks (Billion USD).

Compiled from DealScan database of loan originations. Real Investment Loans are defined as those that are intended for general corporate purposes, capital expenditure or working capital. Restruturing Loans are defined as those that are intended for leveraged buyouts, mergers and acquisitions, or share repurchases. Figure 2. Real Investment Loans vs. Restructuring Loans (Billion USD).

A second problem is that some of the hardest hit communities – the ones that need the most support – may also have many troubled small banks with large real estate exposures (including construction loans and commercial real estate). Investment in these banks may help to stabilize them, but it is not the sort of investment I have in mind. Moreover, while many small banks are relatively healthy now, their condition could worsen appreciably in which case investments in them is unlikely to have the desired effect.

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Table 1. Revolving Lines Drawdonws, US Corporate Loans (Billion USD) Compiled from SEC filings and Reuters. Exposure to Lehman Brothers identifies loans with Lehman in the original lending syndicate Date drawn

Company

Current credit rating BB-/Ba2

Amount drawn ($MM) 1,000

Credit line ($MM) 1,000

Maturity

08/25/ 2008

Delta Air Lines

09/15/ 2008

FairPoint Communication s

BB+/Ba3

200

9/19/ 2008

Michaels Stores

B

9/22/ 2008

General Motors

9/26/ 2008

Goodyear Rubber & Tire Co.

Lead bank

2012

Spread (Undrawn/ Drawn) 50/ L+200

200

2014

37.5/ L+275

Lehman Brothers

Yes

120

1,000

2011

25/ L+150

Bank of America

No

B-/Caa3

3,400

4,100

2011

30/ L+205

Citigroup, JPM

No

BB+/ Baa3

600

1,500

2013

37.5/ L+125

JPM

No

JPM

Exposure to Lehman Brothers Yes

Comment (SEC filings)

Simply put, we have taken this action to increase our cash balance as we approach the closing of the merger. We believe this will provide us with the utmost in flexibility – at minimal cost – as we prepare for this critical transition. The Company believes that these actions were necessary to preserve its availability to capital due to Lehman Brothers’ level of participation in the Company’s debt facilities and the uncertainty surrounding both that firm and the financial markets in general. The Company took this proactive step to ensure that it had adequate liquidity to meet its cash needs while there are disruptions in the debt markets. The company said it was drawing down the credit in order to maintain a high level of financial flexibility in the face of uncertain credit markets. Temporary delay in the company's ability to access $360 million currently invested with The Reserve Primary Fund, Goodyear said in a statement. The funds also will be used to support seasonal working capital needs and to enhance the company's liquidity position.

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Table 1. Revolving Lines Drawdonws, US Corporate Loans (Billion USD) (continued) Date drawn

Company

AMR Corp

Current credit rating B-

Amount drawn ($MM) 255

Credit line ($MM) 225

2013

Spread (Undrawn/ Drawn) 50/ L+425

9/26/ 2008 9/30/ 2008

Duke Energy

A-/ Baa2

1,000

3,200

2012

9/ L+40

10/1/ 2008 10/2/ 2008

GameStop

BB+/Ba1

150

400

2012

25/ L+100

Dana Corp

BB+/Ba3

200

650

2013

Oct-2008

Six Flags

B/B2

244

275

Oct-2008

Saks

B+/B2

80.6

Oct-2008

Monster Worldwide

247

Maturity

Lead bank

GE Capital Corp. Wachovia, JPM

Exposure to Lehman Brothers No

Yes

37.5/ L+200

Bank of America Citibank

No Yes

2013

50/ L+250

JPM

Yes

500

2011

25/L+100

No

250

2012

8/L+30

Bank of America Bank of America

No

Comment (SEC filings)

Cash balance

In light of the uncertain market environment, we made this proactive financial decision to increase our liquidity and cash position and to bridge our access to the debt capital markets. This improves our flexibility as we continue to execute our business plans. Acquisition Drawing down these funds is a prudent liquidity measure. Ensuring access to our liquidity to the fullest extent possible at a time of ambiguity in the capital markets is in the best interest of our customers, suppliers, shareholders, and employees. (W)e borrowed $244.2 million under the revolving facility portion of the Credit Facility to ensure we would have sufficient liquidity to fund our off-season expenditures given difficulties in the global credit markets. Cash balance "We have always viewed our revolving credit as an insurance policy, and given the events in the market, we felt that it was appropriate

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to access that insurance," CFO Timothy Yates said in an Oct. 30 earnings call. Cash balance

10/9/ 2008 10/10/ 2008

CMS Energy

BB+/ Baa3

420

550

2012

20/ L+100

Citigroup

No

American Electric Power

BBB/ Baa2

2,000

3,000

2012

9/ L+45

JPM, Barclays

No

10/15/ 2008

Lear Corp

BB/B1

400

1,000

2012

50/ L+200

Bank of America

No

10/16/ 2008

Southwest Airlines

BBB+/ Baa1

400

1,200

2010

15/ L+75

JPM

No

10/16/ 2008

Chesapeake Energy

BB/Ba2

460

3,000

2012

20/ L+100

Yes

10/16/ 2008 10/20/ 2008

Ebay

1,000

1,840

2012

4/ L+24

Yes

Acquisition

Tribune Co.

B/Caa1

250

750

2013

75/ L+300

Union Bank of California Bank of America JPM

AEP took this proactive step to increase its cash position while there are disruptions in the debt markets. The borrowings provide AEP flexibility and will act as a bridge until the capital markets improve. Given the recent volatility in the financial markets, we believe it is also prudent to temporarily increase our cash on hand by borrowing under our revolving credit facility. Although our liquidity is healthy, we have made the prudent decision in today’s unstable financial markets to access $400 million in additional cash through our bank revolving credit facility. Cash balance

Yes

10/23/ 2008

FreeScale Semiconductor

BB/B-

460

750

2012

50/ L+200

Citibank

Tribune is borrowing under the revolving credit facility to increase its cash position to preserve its financial flexibility in light of the current uncertainty in the credit markets. We made this proactive financial decision to further enhance our liquidity and cash position. This improves the company’s financial flexibility as we continue to execute our business plans.

Yes

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Table 1. Revolving Lines Drawdonws, US Corporate Loans (Billion USD) (continued) Date drawn

Company

Current credit rating BBB-/ Ba3

Amount drawn ($MM) 249

Credit line ($MM) 250

Maturity

10/24/ 2008

Idearc

11/13/ 2008

Genworth Financial

A/A2

930

11/23/ 2008

Computer Sciences

A-/Baa1

11/25/ 2008

NXP Semiconductors

B

Lead bank

2011

Spread (Undrawn/ Drawn) 37.5/ L+150

1,700

2012

5/ L+20

Bank of America, JPM

Yes

1,500

1,500

2012

7/L+25

Citibank

No

400

600

2012

50/ L+275

Morgan Stanley

No

JPM

Exposure to Lehman Brothers No

Comment (SEC filings)

The company made this borrowing under the revolver to increase its cash position to preserve its financial flexibility in light of the current uncertainty in the credit markets. The Company intends to use the borrowings along with other sources of liquidity for the repayment of outstanding holding company debt (including the Company’s senior notes maturing in 2009) at maturity and/or the purchase and retirement of outstanding debt prior to maturity or for other general corporate purposes. The Company took the action due to the current instability of the commercial paper market and to ensure the Company’s liquidity position in light of the ongoing credit market dislocation. In view of the current global financial turmoil we are drawing USD 400 million under our revolving credit facility. This is a proactive financial decision in order to secure availability of this facility in a turbulent financial market environment.

Source: Victoria Ivashina and David Scharfstein, “Bank Lending During the Financial Crisis of 2008,” Harvard Business School working paper. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1297337.

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With these limitations in mind, I believe that the government should enhance its program of investment in small banks, targeting healthy banks that are well-positioned to increase lending. At a time when large banks appear to be retrenching, this would better enable our financial system to meet the pressing needs of small enterprise. Thank you for the opportunity to address you today. I look forward to answering any questions you may have.

REFERENCES

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[1]

See Anil K. Kashyap and Jeremy C. Stein (1995), “The Impact of Monetary Policy on Bank Balance Sheets,” Carnegie-Rochester Conference Series on Public Policy, vol. 42, pp. 151-95. [2] Murillo Campello, John Graham and Campbell Harvey (2009), “The Real Effects of the Financial Crisis: Evidence from a Financial Crisis,” working paper, http://papers.ssrn. com/sol3/papers.cfm? abstract_id=1318355 [3] Victoria Ivashina and Scharfstein, David (2008) “Bank Lending during the Financial Crisis of 2008,” Harvard Business School working paper. http://papers.ssrn.com/sol3 /papers.cfm?abstract_id=1297337 [4] This is clearly only a portion of the firms that increased their drawdowns. Using data released by The Shared National Credit Program of the Federal Reserve, it is possible to show that the $100 billion increase in C&I loans would occur if firms drew an extra 1520% of the unused portion of their credit facilities. It is not unlikely that they did this. [5] See Anil K. Kashyap and Jeremy C. Stein (1995), “The Impact of Monetary Policy on Bank Balance Sheets,” Carnegie-Rochester Conference Series on Public Policy, vol. 42, pp. 15 1-95. [6] See Anil Kashyap, Owen Lamont and Jeremy Stein (1994), “Credit Conditions and the Cyclical Behavior of Inventories,” Quarterly Journal of Economics, pp. 565-592. http://faculty.chicagobooth.edu/anil. kashyap/ research/creditconditions.pdf [7] Victoria Ivashina and Scharfstein, David (2008) “Bank Lending during the Financial Crisis of 2008,” Harvard Business School working paper. http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1297337 [8] The money was actually invested in bank holding companies, but we only measure the assets of the banks in the bank holding company and thus understate the assets of the bank holding company. In this respect, the large banks are likely to have received less of their pro-rata share. [9] Survey of Terms of Business Lending, Federal Reserve Statistical Release, http://www.federalreserve.gov/releases/E2/current/default.htm [10] These items are reported on Schedule RC-L of the Call Reports. [11] Kashyap, Rajan and Stein (2002) use item RCFD 3818, “Other Unused Commitments” as a measure of outstanding C&I credit facilities. This item also includes other commitments such as mortgages that have been committed to but have not yet closed. [12] The premium paid by Treasury has been documented in “Valuing Treasury’s Acquisitions,” February Oversight Report of the Congressional Oversight Panel, Feburary 6, 2009.

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Chapter 8

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STATEMENT OF JOSEPH ZUCCHERO, TO THE U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT* Good afternoon, Chairman Gutierrez and members of the Committee. On behalf of myself, my business partner Michael Genovise and my attorney Jim DiChristofano, I thank the Committee for inviting us to participate in this crucial hearing. I sincerely believe it is essential that during this tumultuous time, the voices of small business owners are heard and their struggles reported. I am the owner and operator of Mr. Beef on Orleans in the City of Chicago. I began the restaurant in 1979 and over the past 30 years have built a reputable and thriving business. In addition, I am an owner along with Michael Genovise of an apartment building and an Italian fine dining restaurant named Natalino’s also located in the City of Chicago. Natalino’s was opened in March, 2008 after substantial remolding of the building. Combined, both restaurants employ 50 hard-working people. We provide much needed sales tax receipts to the City, Cook County and the State of Illinois. We source our food and products from numerous small business owners. The economic downturn has had impacts on my business due to the loss of jobs and income from the local residents that live and work near downtown Chicago. Many small businesses are being starved of needed lines of credit or are having their lines of credit not renewed upon maturity. Not only have I seen and heard this from a variety of small businesses, but I have personally lived this nightmare. I have two loans of comparatively small amounts that have matured in October and November of last year. The loans have been paid every month and I continue to submit payments. I do not have the funds to give the entire loan amounts due. Midwest Bank, which received approximately $85 million in TARP funds will not re-new or extend the matured loans further. This places my business in jeopardy. Another bank will not refinance the two matured loans because the new bank would be placed in a third lien position. Thus, the banks want us to try and obtain funding to re-finance all the loans in Mr. Beef and Natalino’s. *

This is an edited, excerpted and augmented edition of testrimony before the House Subcommittee on Financial Institutions.

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Statement of Joseph Zucchero

This has severely hampered our non-stop efforts to find financing or a resolution to the problem. Small banks do not have the capital to take on a large loan. Again, big banks are not even the slightest bit interested and are using the TARP money to inflate their own revenues. We have been actively submitting loan packages to various banks and loan brokers in order to extract us from this situation. Our current loans are at an approximate 60% loan to value, based on recent appraisals. Our loans carry interest rates of 8 1/2 % and 9%. Recent rates are around 6.5% to 7%. Just lowering our interest rates would provide a dramatic savings to our business, would prevent us from letting go of more employees, and would also give us breathing room to ride out the economic turmoil out. Midwest Bank frustrates me in that they received TARP money and are not willing to either extend our loans or lower the interest rates on the non-matured loans. They have been patient with us while we seek alternative banks to finance us, but in reality that means they are doing nothing. Many bankers seem to be paying us lip service and are not actually interested in providing financing, but rather seek free publicity. We have been dealing with one small bank for six months. We keep giving them documents, we paid for expensive appraisals and tried to accommodate every request they make. To this day, we have been consistently given optimistic outcomes that have increased our hopes that an end is near to our situation. Yet, they have not approved or denied a loan. They have enjoyed the publicity. My situation is just one example. I am fortunate to have a successful business in downtown Chicago. There are other business owners who are not so fortunate. At the end of the day, we are at the mercy of the banks, who have no willingness or obligation to help us. I was approached by a local banker who found out I was coming here with my attorney to testify in front of this Committee, and he strongly suggested that we should not appear. He wanted us to “just lay low and let this situation blow over!” I politely asked him to give me the extra $84,000.00 a year that lower rates would save, and he promptly walked out of my establishment. I do fear a backlash within the local banking industry for us coming here today. I implore this honorable Committee to set my mind at ease. I do not need, nor want, a bailout from the taxpayers. I only want the banks to be fair. Congress needs to take action. Congress needs to know that small businesses drive the economy, that we are fighting everyday to keep the doors open and people employed. It is time that TARP funds come with requirements that banks must actively seek out and help lower small businesses’ interest rates or extend their matured loans or lines of credit that were performing. On behalf of myself, Michael Genovise, Jim DiChristofano and all the small businesses that run this economy I thank Chairman Gutierrez and the members of this Committee for the opportunity to come here and tell our story. I welcome any and all questions that the Committee may have at this time.

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Chapter 9

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SECRETARY TIMOTHY F. GEITHNER, OPENING STATEMENT, SENATE BANKING COMMITTEE HEARING, FEBRUARY 10, 2009* Chairman Dodd, Ranking Member Shelby, and Members of the Committee: thank you for inviting me to be here today. This morning, as the Senate continues its work on an economic recovery plan to help create jobs and lay a foundation for stronger economic future, I announced our Administration’s plan to restart the flow of credit, strengthen our financial system, and provide critical aid for homeowners and for small businesses. Right now, job losses are accelerating and credit has slowed to a trickle. On top of the financial and economic challenges we face... there is another; a lack of faith. The American people have lost faith in the leaders of our financial institutions, and are skeptical that their government has – to this point -- used taxpayers’ money in ways that will benefit them. Together we can change this. To get credit flowing again, to restore confidence in our markets, and restore the faith of the American people, we have proposed a fundamental reshaping of the government’s program to repair the financial system. It all begins with transparency. We propose to establish a new framework of oversight and governance of all aspects of our Financial Stability Plan. The American people will be able to see where their tax dollars are going and the return on their government’s investment. They will be able to see whether the conditions placed on banks and institutions are being met and enforced. They will be able to see whether boards of directors are being responsible with taxpayer dollars and how they’re compensating their executives. And they will be able to see how these actions are impacting the overall flow of lending and the cost of borrowing. These new requirements, which will be available on a new website FinancialStability.gov, will give the American people the transparency they deserve. Second, we are going to bring together the government agencies with authority over our nation’s major banks and initiate a more consistent, realistic, and forward looking assessment about the risk on balance sheets. We’re calling it a financial “stress test.” We want banks’ *

This is an edited, excerpted and augmented edition of a statement before Senate Banking Committee.

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Secretary Timothy F. Geithner

balance sheets cleaner, and stronger. And we are going to help this process by providing a new program of capital support for those institutions that need it. Institutions that need additional capital will be able to access a new funding mechanism that uses money from the Treasury as a bridge to private capital. The capital will come with conditions to help ensure that every dollar of assistance is used to generate a level of lending greater than what would have been possible in the absence of government support. Third, together with the Fed, the FDIC, and the private sector, we propose the establishment of a Public-Private Investment Fund. This program will provide government capital and government financing to help leverage private capital and get private markets working again. This fund will be targeted to the legacy loans and assets that are now burdening many financial institutions. By providing the financing the private markets cannot now provide, this will help start a market for the real estate-related assets that are at the center of this crisis. Our objective is to use private capital and private asset managers to help provide a market mechanism for valuing the assets. We are exploring a range of different structures for this program, and will seek input from this Committee as we design it. Fourth, working jointly with the Federal Reserve, we are prepared to commit up to a trillion dollars to support a Consumer and Business Lending Initiative. This initiative will kick start the secondary lending markets, to bring down borrowing costs, and to help get credit flowing again. In our financial system, 40 percent of consumer lending has historically been available because people buy loans, put them together and sell them. Because this vital source of lending has frozen up, no financial recovery plan will be successful unless it helps restart securitization markets for sound loans made to consumers and businesses – large and small. This lending program will be built on the Federal Reserve’s Term Asset Backed Securities Loan Facility, announced last November, with capital from the Treasury and financing from the Federal Reserve. And because small businesses are so important to our economy, we’re going to take additional steps to make it easier for them to get credit from community banks and large banks. Fifth, we will launch a comprehensive housing program. Just as the name of this Committee makes a link between banking and housing, so must our efforts to strengthen the financial system. The President has asked his economic team to come together with a comprehensive plan to address the housing crisis. We will announce the details of this plan in the next few weeks. Our focus will be on using the full resources of the government to help prevent avoidable foreclosures and to reduce mortgage interest rates. We will do this with a substantial commitment of resources already authorized by the Congress under the Emergency Economic Stabilization Act. We welcome the ideas and input of this Committee in this important effort. And finally, President Obama is committed to moving quickly to reform our entire system of financial regulation so that we never again face a crisis of this severity. And, again, that effort can only succeed with the collaboration and support of this Committee and other Members of Congress. Let me close by saying that our challenges in this financial crisis are more complex than any our financial system has ever faced, requiring new programs and persistent attention to

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Secretary Timothy F. Geithner

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solve. But the President, the Treasury, and the entire Administration are committed to working with you to see it through because we know how directly the future of our economy depends on it. Thank you, and with that, I’d be happy to take your questions.

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Chapter 10

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TESTIMONY OF LLOYD C. BLANKFEIN, CHAIRMAN AND CEO, THE GOLDMAN SACHS GROUP, INC. HOUSE COMMITTEE ON FINANCIAL SERVICES, FEBRUARY 11, 2009* Chairman Frank, Ranking Member Bachus, and Members of the Committee: I appreciate the opportunity to appear before you today to provide information with respect to Goldman Sachs’ use of the investment that we received under the TARP Capital Purchase Program. It is abundantly clear that we are here amidst broad public anger at our industry. In my 26 years at Goldman Sachs, I have never seen a wider gulf between the financial services industry and the public. Many people believe – and, in many cases, justifiably so – that Wall Street lost sight of its larger public obligations and allowed certain trends and practices to undermine the financial system’s stability. The fact is that all of us are contending with the consequences of a deteriorating economy; lost jobs, lost orders, and lost confidence. Our industry simply cannot sustain itself without a healthy, resilient economy. And, Main Street cannot prosper without financial institutions that are strong enough to provide capital to entrepreneurs, businesses and consumers. We have to regain the public’s trust and do everything we can to help mend our financial system to restore stability and vitality. Goldman Sachs is committed to doing so.

THE TARP CAPITAL PURCHASE PROGRAM AND OUR ROLE IN THE CAPITAL MARKETS We take our responsibility as a recipient of TARP funds very seriously. We view the TARP as important to the overall stability of the financial system and, therefore, important to Goldman Sachs. This capital, combined with the more than $10.75 billion of capital we raised *

This is an edited, excerpted and augmented edition of testrimony before the House Subcommittee on Financial Services.

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three weeks before receiving the TARP funds, gives us an even stronger balance sheet and increases our ability to inject liquidity across markets and extend capital to our clients. In that vein, the Committee has asked for our understanding of the purpose of the TARP assistance. We understood that the capital we and other institutions received was designed to promote the safety and soundness of institutions deemed important to the functioning of the financial system. Adequately capitalized, these institutions would have the wherewithal to promote the flow of credit amidst potentially deteriorating economic conditions. In terms of the planned use for the funds prior to their receipt, we were not anticipating any injection of capital from the Treasury. On September 23rd , Goldman Sachs raised $5 billion from Warren Buffett. The following day, we raised another $5.75 billion in a common stock offering, and could have raised more as the offering was substantially oversubscribed. On October 14th , the Treasury Department announced the Capital Purchase Program (CPP). We are actively putting our capital to work. Goldman Sachs serves a number of important roles for our clients, including that of advisor, financier, market maker, asset manager and coinvestor. Our business is institutionally dominated, with the vast majority of our capital commitments made on behalf of corporations and institutional investors. We are not engaged in traditional commercial banking and are not a significant lender to consumers. As a financial institution focused on this “wholesale” client base, Goldman Sachs actively provides liquidity to institutions which helps the capital markets function. In short, our businesses require that we commit capital, and our ability to do so has been enhanced since receiving capital under the Capital Purchase Program. First, through our role as a financier, clients frequently expect our advice to be accompanied by access to the capital necessary to make that advice actionable and practical. For instance, we often provide back-stop or contingent credit, such as a commitment to make a bridge loan until other sources of more permanent capital can be arranged. Since receiving the $10 billion of capital on October 27th and through January 2009, Goldman Sachs has committed over $13 billion in new financing to support our clients. This compares with $4.5 billion in the three months prior to receiving the government’s investment. For example, we put our capital to work on behalf of Sallie Mae to allow them to provide more than $1.5 billion of student loans. We made a significant investment in the C.J. Peete Apartments Housing Complex, a mixed-income housing project in New Orleans. We also committed capital to Verizon Wireless, Pfizer and a number of other significant corporations. As a market maker, we provide the necessary liquidity to ensure that buyers and sellers can complete their trades. In dislocated markets, we are often required to deploy capital to hold client positions over a longer term while a transaction is completed. In recent months, this has been especially true as we have helped our corporate and investing clients manage their exposure to interest rate risk, swings in commodity prices and movements in currencies. More broadly, we have seen widespread de-leveraging. As institutional investors reduce their various risk exposures, they turn to firms like Goldman Sachs, which play the role of intermediary. This ability to help our clients effectively manage their risk requires the active and significant commitment of capital. Last month, for instance, we provided short-term liquidity to a portion of the mortgage market through a large agency mortgage transaction. This significant extension of our capital helped keep mortgage rates from increasing by allowing billions of dollars of mortgage securities to be financed.

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Additionally, the role we play as a specialist and market maker in NYSE listed stocks has grown increasingly significant, particularly in volatile markets when liquidity demands are higher. For instance, in certain shares, our specialist business may account for nearly onequarter of total trading in a particular stock. We also recognize the importance of being an active co-investor with our clients. Over the summer, we established a $10.5 billion senior loan fund which makes loans to companies in need of capital. The fund invests both our own capital and that of our clients. This is significant because, in many cases, the normal market mechanisms to facilitate the extension of credit in many areas have broken down. Investors are wary of credit ratings and are reluctant to invest their own money directly. They are looking for some assurance of quality before they are willing to commit capital. Through this fund, each dollar that Goldman Sachs commits is multiplied many times over as we attract capital from our clients. Already, the fund has made approximately $5 billion in loan commitments. In the next year, Goldman Sachs intends to launch additional funds to inject capital across the corporate capital structure. These funds will extend needed capital to a variety of companies whose growth opportunities would otherwise be limited in this extremely tight credit environment. In addition to how we are using the TARP funds, the Committee asked if we are tracking the investment, and if so, how. We have been tracking the level of capital we commit on behalf of our clients since we received the funds under the CPP. As I indicated earlier, we have made over $13 billion of capital commitments since October 27th, and this amount doesn’t include the capital we extend as a market intermediary and co-investor. That compares with $4.5 billion in the same period before we received the investment. First, we have a Capital Committee which reviews and approves all transactions involving commitments of the Firm’s capital. The committee is comprised of our most senior people. The Committee prepares a weekly report, tracking capital commitments made and those pending. It looks at previous week, monthly and quarterly levels to gauge the level of commitments we have made. Each week, a senior leadership group, including me, reviews the level of capital commitments. Of course, the goal is not to blindly lend or commit to lend money, but if volumes change significantly, senior management gets directly involved with the relevant businesses to understand the reasons. In terms of the expectations and conditions communicated on receipt of TARP investment, they are laid out in the Securities Purchase Agreement and encompass provisions with respect to dividend restrictions, redemptions, repurchases and executive compensation. Lastly, the Committee has asked us to address our compensation policies and practices. Since we became a public company, we have had a clear and consistent compensation policy. We pay our people based on three factors (1) the performance of the firm; (2) the performance of the business unit; and (3) the performance of the individual. We believe this approach has incentivized our people to act in a way that supports the firm as a whole and not be parochial or narrow minded about their specific division or business unit. More broadly, it has produced a strong relationship between compensation and performance.

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Since going public in 1999, Goldman Sachs has exhibited a near perfect correlation between changes in net revenues and compensation. From 2000 to 2007, Goldman Sachs has produced a compounded annual growth rate of over 20 percent in earnings per share and 16 percent in book value per share. Adjusted for increased head count over the period, aggregate compensation expense has increased less than 10 percent per year. For our nine full years as a public company, which includes an exceptionally difficult 2008, Goldman Sachs generated an average return on equity of approximately 21 percent for our shareholders. While the firm produced a profit of $2.2 billion in 2008, our revenues were down considerably. Compensation across the firm, dictated by our policies and practices, reflected that. End of year bonuses were down on average 65 percent. Our most senior people -- the firm’s approximately 417 partners -- were down approximately 75 percent. The bulk of compensation for our senior people is in the form of stock, which vests over time. I would also note that Goldman Sachs has never had golden parachutes, employment contracts or severance arrangements for its executive officers. Although we believe our policies and practices have proven to be effective in setting compensation, we also recognize that having TARP money creates an important context for compensation. That is why, in part, our executive management team requested not to receive a bonus in 2008, even though the firm produced a profit. Going forward, we should apply basic standards to how we compensate people in our industry. The percentage of the discretionary bonus awarded in equity should increase significantly as an employee’s total compensation increases. An individual’s performance should be evaluated over time so as to avoid excessive risk taking. To ensure this, all equity awards need to be subject to future delivery and/or deferred exercise. And, senior executive officers should be required to retain most of the equity they receive until at least they retire, and equity delivery schedules should continue to apply after the individual has left the firm.

CONCLUSION Mr. Chairman, our firm recognizes the extraordinary support the government has provided to the financial markets and to our industry. We will live up to the spirit and letter of the responsibilities our regulators, the Congress and the public expect of us. And we will do so whether we still have TARP funds or not. While mindful of the fragility of market conditions, Goldman Sachs’ financial position is sound. Given the reduction in our risk exposures in 2008, immaterial direct consumer exposure, and strong capital and liquidity levels, we believe we are well-positioned to continue to commit capital as a financier, market maker and co-investor to and with our clients. We appreciate that the TARP funds were never intended to be permanent capital. When conditions allow and with the support of our regulators and the Treasury, we look forward to paying back the government’s investment so that money can be used elsewhere to support our economy.

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DO NOT DESTROY THE ESSENTIAL CATALYST OF RISK

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By Lloyd Blankfein Published: February 8 2009 16:53

Since the spring, and most acutely this autumn, a global contagion of fear and panic has choked off the arteries of finance, compounding a broader deterioration in the global economy. Much of the past year has been deeply humbling for our industry. People are understandably angry and our industry has to account for its role in what has transpired. Financial institutions have an obligation to the broader financial system. We depend on a healthy, well-functioning system but we failed to raise enough questions about whether some of the trends and practices that had become commonplace really served the public’s long-term interests. As policymakers and regulators begin to consider the regulatory actions to be taken to address the failings, I believe it is useful to reflect on some of the lessons from this crisis. The first is that risk management should not be entirely predicated on historical data. In the past several months, we have heard the phrase “multiple standard deviation events” more than a few times. If events that were calculated to occur once in 20 years in fact occurred much more regularly, it does not take a mathematician to figure out that risk management assumptions did not reflect the distribution of the actual outcomes. Our industry must do more to enhance and improve scenario analysis and stress testing. Second, too many financial institutions and investors simply outsourced their risk management. Rather than undertake their own analysis, they relied on the rating agencies to do the essential work of risk analysis for them. This was true at the inception and over the period of the investment, during which time they did not heed other indicators of financial deterioration.

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This over-dependence on credit ratings coincided with the dilution of the coveted triple A rating. In January 2008, there were 12 triple A-rated companies in the world. At the same time, there were 64,000 structured finance instruments, such as collateralised debt obligations, rated triple A. It is easy and appropriate to blame the rating agencies for lapses in their credit judgments. But the blame for the result is not theirs alone. Every financial institution that participated in the process has to accept its share of the responsibility. Third, size matters. For example, whether you owned $5bn or $50bn of (supposedly) low-risk super senior debt in a CDO, the likelihood of losses was, proportionally, the same. But the consequences of a miscalculation were obviously much bigger if you had a $50bn exposure. Fourth, many risk models incorrectly assumed that positions could be fully hedged. After the collapse of Long- Term Capital Management and the crisis in emerging markets in 1998, new products such as various basket indices and credit default swaps were created to help offset a number of risks. However, we did not, as an industry, consider carefully enough the possibility that liquidity would dry up, making it difficult to apply effective hedges. Fifth, risk models failed to capture the risk inherent in off-balance sheet activities, such as structured investment vehicles. It seems clear now that managers of companies with large offbalance sheet exposure did not appreciate the full magnitude of the economic risks they were exposed to; equally worrying, their counterparties were unaware of the full extent of these vehicles and, therefore, could not accurately assess the risk of doing business. Sixth, complexity got the better of us. The industry let the growth in new instruments outstrip the operational capacity to manage them. As a result, operational risk increased dramatically and this had a direct effect on the overall stability of the financial system. Last, and perhaps most important, financial institutions did not account for asset values accurately enough. I have heard some argue that fair value accounting – which assigns current values to financial assets and liabilities – is one of the main factors exacerbating the credit crisis. I see it differently. If more institutions had properly valued their positions and commitments at the outset, they would have been in a much better position to reduce their exposures. For Goldman Sachs, the daily marking of positions to current market prices was a key contributor to our decision to reduce risk relatively early in markets and in instruments that were deteriorating. This process can be difficult, and sometimes painful, but I believe it is a discipline that should define financial institutions. As a result of these lessons and others that will emerge from this financial crisis, we should consider important principles for our industry, for policymakers and for regulators. For the industry, we cannot let our ability to innovate exceed our capacity to manage. Given the size and interconnected nature of markets, the growth in volumes, the global nature of trades and their cross-asset characteristics, managing operational risk will only become more important. Risk and control functions need to be completely independent from the business units. And clarity as to whom risk and control managers report to is crucial to maintaining that independence. Equally important, risk managers need to have at least equal stature with their counterparts on the trading desks: if there is a question about the value of a position or a disagreement about a risk limit, the risk manager’s view should always prevail. Understandably, compensation continues to generate a lot of anger and controversy. We recognise that having troubled asset relief programme money creates an important context for

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compensation. That is why, in part, our executive management team elected not to receive a bonus in 2008, even though the firm produced a profit. More generally, we should apply basic standards to how we compensate people in our industry. The percentage of the discretionary bonus awarded in equity should increase significantly as an employee’s total compensation increases. An individual’s performance should be evaluated over time so as to avoid excessive risk-taking. To ensure this, all equity awards need to be subject to future delivery and/or deferred exercise. Senior executive officers should be required to retain most of the equity they receive at least until they retire, while equity delivery schedules should continue to apply after the individual has left the firm. For policymakers and regulators, it should be clear that self-regulation has its limits. We rationalised and justified the downward pricing of risk on the grounds that it was different. We did so because our self-interest in preserving and expanding our market share, as competitors, sometimes blinds us – especially when exuberance is at its peak. At the very least, fixing a system-wide problem, elevating standards or driving the industry to a collective response requires effective central regulation and the convening power of regulators. Capital, credit and underwriting standards should be subject to more “dynamic regulation”. Regulators should consider the regulatory inputs and outputs needed to ensure a regime that is nimble and strong enough to identify and appropriately constrain market excesses, particularly in a sustained period of economic growth. Just as the Federal Reserve adjusts interest rates up to curb economic frenzy, various benchmarks and ratios could be appropriately calibrated. To increase overall transparency and help ensure that book value really means book value, regulators should require that all assets across financial institutions be similarly valued. Fair value accounting gives investors more clarity with respect to balance sheet risk. The level of global supervisory co-ordination and communication should reflect the global inter-connectedness of markets. Regulators should implement more robust information sharing and harmonised disclosure, coupled with a more systemic, effective reporting regime for institutions and main market participants. Without this, regulators will lack essential tools to help them understand levels of systemic vulnerability in the banking sector and in financial markets more broadly. In this vein, all pools of capital that depend on the smooth functioning of the financial system and are large enough to be a burden on it in a crisis should be subject to some degree of regulation. After the shocks of recent months and the associated economic pain, there is a natural and appropriate desire for wholesale reform of our regulatory regime. We should resist a response, however, that is solely designed around protecting us from the 100-year storm. Taking risk completely out of the system will be at the cost of economic growth. Similarly, if we abandon, as opposed to regulate, market mechanisms created decades ago, such as securitisation and derivatives, we may end up constraining access to capital and the efficient hedging and distribution of risk, when we ultimately do come through this crisis. Most of the past century was defined by markets and instruments that fund innovation, reward entrepreneurial risk-taking and act as an important catalyst for economic growth. History has shown that a vibrant, dynamic financial system is at the heart of a vibrant, dynamic economy. We collectively have a lot to do to regain the public’s trust and help mend our financial system to restore stability and vitality. Goldman Sachs is committed to doing so.

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Testimony of Lloyd C. Blankfein

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The writer is chief executive of Goldman Sachs Copyright The Financial Times Limited 2009

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Chapter 11

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TESTIMONY OF JAMIE DIMON, CHAIRMAN & CEO, JPMORGAN CHASE & CO. HOUSE FINANCIAL SERVICES COMMITTEE, FEBRUARY 11, 2009* Chairman Frank, Ranking Member Bachus, Members of the Committee, my name isJamie Dimon, and I am the Chairman and Chief Executive Officer of JPMorgan Chase & Co. I am pleased to be here today to assure the Committee that we at JPMorgan Chase are doing everything we can to help restore confidence in the U.S. financial system and to ensure that we are fulfilling our responsibilities under the Troubled Asset Relief Program (TARP) as Congress intended: to restore liquidity and stability to the U.S. financial system, to ensure the continued flow of credit to consumers and businesses, and to encourage modification of residential mortgages. Of course, even before TARP, JPMorgan Chase entered into two transactions to help stabilize our financial system and protect consumers and taxpayers from potentially catastrophic losses: the merger with Bear Stearns back in March of last year; and the purchase of Washington Mutual assets some six months later. While we believed that each of these transactions would produce long-term benefits for our franchise, each also entailed significant risk. Subsequent to those transactions, the government asked us to participate in the Capital Purchase Program established under TARP. As this Committee is aware, JPMorgan Chase did not seek the government’s investment. But we agreed to support the government’s goal of obtaining the participation of all major banks. The funds we received strengthened our already strong capital base, which is the foundation of all of our lending activities (including our mortgage modification efforts, described in detail below). We have paid and will continue to pay dividends on the government’s investment -- $1.25 billion on an annual basis. In this context, I want to provide the Committee with an update on JPMorgan Chase’s post-TARP lending activity. But before I do that, I want to spend a minute on who we are. While some may think of us as a Wall Street firm, we are very much a part of Main Street. Our 5,000 branches serve customers in 23 states. We employ 174,000 people in 49 states -- 125,000 of them outside the New York metropolitan area. We provide health care coverage for 417,000 people. We have *

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long-standing relationships with over 400,000 small businesses. More than 50 million Americans own JPMorgan Chase shares, often through their retirement plans. On average, we pay more than $10 billion a year in taxes to the federal government, as well as state and local jurisdictions. Last year, our Foundation made charitable contributions of approximately $100 million across the U.S. Our people are ingrained in the communities we serve. We thrive when those communities are healthy, secure and prosperous.

LENDING TO CONSUMERS, BUSINESSES AND GOVERNMENTS

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JPMorgan Chase continues to provide significant levels of credit to our customers, whether individual consumers, small businesses, large corporations, not-for-profit organizations, state and local governments or other banks. Since we received the capital investment under TARP on October 28, 2008, our lending volumes have been significant, particularly in light of the rapidly deteriorating economic environment. Whenever we lend, but especially now, we must do so in accordance with prudent risk management and underwriting standards, mindful of market and credit risks. We should not forget that eroding credit standards by many market participants played a large role in creating the current economic malaise. The challenging economic conditions we face today only elevate the importance of operating in a safe and sound manner and maintaining what we believe to be a strategic imperative: a “fortress balance sheet.” In the fourth quarter of 2008, we made over $150 billion of new loans, including the following: •

Over $50 billion in new consumer originations – representing over 5 million new loans and lines to consumers (e.g., for mortgages, home equity loans and lines, credit cards, student loans, auto loans, etc.). Through this activity, we helped more than 75,000 families acquire homes or lower the interest rate on their mortgages.

•

Over $20 billion in new credit extended1 to 8,000 small and mid-sized businesses,

•

governments and non-profits; in addition, we committed to extend an incremental $ 5 billion in lending to the government and non-profit sector over the next year and were the only investor willing to step up to purchase a recent $ 1.4 billion bond offering by the State of Illinois. An additional total of approximately $90 billion in new and renewed commitments to our corporate and other clients.

We also dramatically increased our presence in the interbank market, lending an average of $50 billion a day to other banks – which provided much needed liquidity to the system. Including interbank lending, our aggregate new lending for the fourth quarter was over $200 billion. Also during the fourth quarter, we purchased almost $60 billion of mortgage-backed and asset-backed securities, which had the benefit of supporting the agency debt markets and promoting liquidity in the housing capital markets.

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In sum, our consumer loan balances increased by 2.1 percent in the fourth quarter,2 while overall personal consumption expenditure in the country decreased by 2.3 percent over the same period. That is to say, we lent more even as consumers cut back on their spending during the quarter.3 JPMorgan Chase’s lending volumes in the fourth quarter are especially significant in light of the continued deterioration of the economy in the U.S. and globally and a steep decline in demand for credit. The stock market is down 21 percent since the passage of the Emergency Economic Stabilization Act, the United States lost 1.5 million jobs in the fourth quarter, and home values have continued to fall. This dismal picture is reflected in business and consumer sentiment: confidence of small businesses has eroded steadily to the lowest level on record since 1908; surveys of investor sentiment show investor confidence has fallen to half the level seen early last year; and consumer confidence levels as reported by the Conference Board have plummeted over the course of 2008 from 91 to 38. In short, banks like JPMorgan Chase are continuing to lend in this environment. The significant tightening of credit that we have all seen over the last several months must be understood in the wider context of the overall credit markets. Nonbank lenders, such as money market funds and hedge funds, constitute 70 percent of our nation's credit markets -providing credit, for example, through their holdings in commercial paper. Understandably, as their own investors have pulled back, these institutions have done the same, either by not extending any credit or by dramatically shortening the duration of the commercial paper they are willing to purchase. The result has been a further tightening of liquidity in the financial markets.

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KEEPING FAMILIES IN THEIR HOMES At JPMorgan Chase, we are not only continuing to lend; we are also at the forefront in doing everything we can to help families meet their mortgage obligations and keep them in their homes. Even before the current housing crisis began, we had undertaken foreclosure prevention efforts designed to do just that. We believe that it is in the best interests of both the home owner and the mortgage holder to take corrective actions as early as possible – in some cases even before default occurs. Our foreclosure prevention efforts include both the $330 billion of loans that we own and the $1.1 trillion investor-owned loans that we service. We expect to help avert 650,000 foreclosures by the end of 2010. We have already helped prevent more than 330,000 foreclosures and have done so in a way that averts re-default by achieving long-term, sustainable mortgage payments. We are well underway to implementing the commitments we made in announcing this foreclosure prevention plan. In particular, we have: •

•

Delayed starting foreclosure on over $22 billion of Chase owned mortgages held by more than 80,000 homeowners so that Chase could review those mortgages for possible modification. Commenced mailing proactive modification offers to borrowers of Chase owned loans at imminent risk of default. -

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Selected sites for 24 Chase Homeownership Centers in areas with high mortgage delinquencies where counselors can work face to face with struggling homeowners. We will have 14 centers –9 in California and 5 in Florida – open and serving borrowers by the end of the month and the remaining 10 by the end of next month. Added 300 new loan counselors to provide better help to troubled borrowers, bringing the total number of counselors to more than 2,500. Initiated an independent review process to ensure each borrower was contacted properly and, if and as appropriate, offered modification prior to foreclosure. Developed a robust financial modeling tool to analyze and compare the net present value of a home in foreclosure to the net present value of a proposed -

• • • •

•

-

Worked to help establish a non‐profit clearinghouse to join Chase and other lenders who want to donate or sell at a discount their owned real estate to non-profit and government agencies that can use these properties. Worked with Fannie Mae and Freddie Mac to implement their new Streamlined Modification Program for borrowers at least 90 days delinquent; we have mailed more than 28,000 letters in the past several weeks.

We believe that programs like ours are the right approach for the consumer and for the stability of our financial system as a whole. We would urge that the Administration adopt a uniform national standard for such programs and otherwise do whatever it can to ensure that sensible modification efforts short of bankruptcy are undertaken as broadly and consistently as possible.

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COMPENSATION POLICIES ALIGNED WITH LONG-TERM PERFORMANCE I know that many Americans are concerned about compensation practices across the financial services industry – and I think some of those concerns are quite legitimate. At JPMorgan Chase, we have long adhered to compensation practices that were designed to reward long term performance, not just revenues, and aimed to align employee and shareholder interests. Before the TARP program was conceived, we used a multi year approach to compensation, weighed risk management as part of our performance evaluations, had a bonus recoupment policy beyond that required under Sarbanes Oxley, and did not use golden parachutes or many other perquisites. We have always paid a significant percentage of our incentive compensation in stock (50 percent for our most senior management group) and require this group to hold 75 percent of their stock until retirement. And for us, incentive compensation is not a perquisite given exclusively to senior officers and investment bankers. It is part of our regular compensation given to employees across the firm, including retail branch and credit card personnel, technology experts, and compliance and support professionals. Each employee is paid based on a combination of individual performance, business unit performance and the performance of the firm as a whole. I took no bonus for 2008 in any form, cash, stock, or options. I judged that it was appropriate for me, as the leader of a major financial firm in the current environment, to forgo a bonus last year. Many of our employees took significant cuts in compensation, and the more

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senior executives took the larger percentage cuts. For our most senior management group, incentive compensation declined more than 60 percent. For the Firm as a whole, average incentive compensation per employee was down 38 percent. (Average cash incentive compensation was down by 43 percent.) This is true even though, during one of the most tumultuous periods our economy has ever experienced, we earned a profit in every quarter and executed the Bear Stearns and Washington Mutual transactions. Our employees worked harder than ever and performed admirably for the company and for clients under enormously challenging conditions in 2008. I believe the compensation we paid them was appropriate.

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STATE OF THE FINANCIAL INDUSTRY Before I conclude, I should address the Committee’s request for comment on the state of the financial industry. These are obviously challenging times. The government, in my view, has taken bold and necessary steps to keep this crisis from becoming something that none of us would want to imagine. Congress will be tackling many more challenges in the months ahead and we stand ready to work with you on the range of issues confronting the financial services sector and our economy as a whole. One issue I do want to touch on briefly is the need for regulatory modernization. For in my view, long term recovery will elude the financial industry unless we modernize our financial regulatory system and address the regulatory weaknesses that recent events have uncovered. The ongoing financial crisis has exposed significant deficiencies in our current regulatory system, which is fragmented and overly complex. Maintaining separate regulatory agencies across banking, securities and insurance businesses is not only inefficient, but also denies any one agency access to complete information needed to regulate large diversified institutions effectively and maintain stability across the financial system. It also results in uneven and inequitable regulation of similar activities and products across different institutions. I am in complete agreement with Chairman Frank that Congress and the President should move ahead quickly to establish a systemic risk regulator. In the short term, this would allow us to begin to address some of the underlying weaknesses in our system and fill the gaps in regulation that contributed to the current situation. As part of a longer term modernization discussion, we stand ready to work with Congress and others to think through any number of complex issues. But waiting for the larger debate over regulatory reform to play out could take months. Every credible regulatory modernization plan includes the creation of a systemic risk regulator, and everyone agrees that this needs to be done – and done right away. I hope Congress will act to get this critical building block in place.

CONCLUSION There are tremendous challenges facing the financial services industry and the American economy. I look forward to working with this Committee to address those challenges, to help find solutions to our current economic problems, to keep American families in their homes and to begin to restore confidence in our financial markets.

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Chapter 12

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OPENING STATEMENT OF CONGRESSMAN PAUL E. KANJORSKI, COMMITTEE ON FINANCIAL SERVICES, HEARING ON TARP ACCOUNTABILITY: USE OF FEDERAL ASSISTANCE BY THE FIRST TARP RECIPIENTS, FEBRUARY 11, 2009* Mr. Chairman, today we will learn how some of the richest and most powerful men in America are spending billions of dollars of taxpayer money. Because some of my colleagues will probably ask our witnesses to explain their enormous bonuses being issued at a time of great national suffering, I will not do so. And because my colleagues will likely inquire as to their ownership of numerous vacation homes while millions of Americans face foreclosure on the only home they have, I will leave that subject alone. Because some Members will doubtlessly seek to understand how you can underwrite frivolous junkets when most Americans would do almost anything for a job -- let alone a vacation -- I will defer that question, too. Instead, I want to know where the money has gone and why it went there. My constituents in Northeastern Pennsylvania regularly ask me why you needed their money and how you are using it. This is your opportunity to explain to them just exactly what you are doing. And for anyone who contends that you do not need the money and that you did not ask for it, please find a way to return that money to the Treasury Department before you leave town. As executives of large companies, you once lived behind a one-way mirror, unaccountable to the public at-large and often sheltered from shareholder scrutiny. But when you took taxpayer money, you moved into a fish bowl. Now, everyone is rightly watching your every move from every side. Millions are watching you today, and they would like some degree of explanation and responsibility. I do, too.

*

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Chapter 13

STATEMENT OF ROBERT P. KELLY, CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF THE BANK OF NEW YORK MELLON, BEFORE THE HOUSE FINANCIAL SERVICES COMMITTEE, FEBRUARY 11, 2009

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*

Mr. Chairman, Mr. Bachus, Members of the Committee. My name is Bob Kelly and I’m Chairman and CEO of The Bank of New York Mellon. I appreciate the opportunity to speak with you about our participation in the Capital Purchase Program. I’d like to briefly tell you about our Bank, explain how we came to participate in the program, and tell you how we’re using the capital we received to help expand the flow of credit in this extraordinarily difficult environment. The business model of The Bank of New York Mellon is very different from a traditional retail or commercial or investment bank. In contrast to most of the other companies here today, our business model does not focus on the broad retail market or products such as mortgages, credit cards or auto loans. Nor do we even do typical lending to corporate businesses. A good way to think of The Bank of New York Mellon is that we are a “bank for banks.” The lion’s share of our business is dedicated to helping other financial institutions around the world. We invest mutual fund and pension monies and administer their complex “back-office” processes. We call that securities servicing. We also provide critical infrastructure for the global financial markets by facilitating the movement of money and securities through the markets. Finally, we provide some financing to other banks so they can make mortgages and other loans available to consumers and businesses. Given this specialized focus, The Bank of New York Mellon was not involved with underwriting subprime loans or structuring the complex investments that contributed to the current market turmoil. At the time the Capital Purchase Program was initiated, The Bank of New York Mellon was a profitable, well-capitalized institution. And, we remain so today. You should know that we were profitable every quarter last year and paid over $4 billion in income and other taxes globally. While some of our assets were invested in mortgagebacked securities, which have incurred some losses, these losses have been more than offset

*

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Statement of Robert P. Kelly

by our profits. And we continue to have the highest debt ratings of U.S. banks rated by Moody’s and the second highest rating by Standard & Poor’s. In October, when the Treasury allocated to us $3 billion of the $350 billion that it has allotted to date, the financial markets were very dangerously in total gridlock and deteriorating rapidly. We understood that a key goal at the time was to have a range of institutions, including relatively healthy companies like The Bank of New York Mellon, participate in the Capital Purchase Program, removing any stigma that might be associated with accepting Treasury capital and helping reassure the markets of the stability of the financial system. So, we immediately decided to participate. In exchange for the $3 billion investment, the U.S. government received preferred stock and warrants and we agreed to pay the government $150 million a year in dividends until we repay the $3 billion. Since receiving the investment four months ago, we made our first payment to the government and immediately put the capital to work consistent with the goals of the program as we understand them, which is to increase lending, restore market confidence and get the U.S. economy moving again. The $3 billion in capital that we received from Treasury has allowed us to do more than we otherwise could have to improve the movement of funds in the financial markets. •

•

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•

We’ve purchased $1.7 billion of mortgage-backed securities and debentures issued by U.S government-sponsored agencies. This has helped to increase the amount of money available to lend to qualified borrowers in the residential housing market. We’ve purchased $900 million of debt securities of other healthy financial institutions. This has helped increase the funds available for them to lend to consumers and businesses. And, we’ve used the remaining $400 million for interbank lending to other healthy financial institutions. This has helped them increase their liquidity, funding and stability.

These activities are consistent with our business model and are primarily in the secondary markets, whose proper functioning is fundamental to the flow of credit for the U.S. economy. By adding liquidity there, we’re helping direct lenders generate the funds they need to offer more loans. And, by extension, we’re helping to lower the cost of borrowing for consumers and corporations. We have not used any of these funds to pay dividends, bonuses or compensation of any kind, nor will we. And we have not used the funds to make any acquisitions. The Bank of New York Mellon recognizes the tremendous public concern about the TARP program. As I previously noted, when the program was conceived in early fall, credit markets were essentially frozen. Our nation’s financial system was on the edge of a precipice. We believe the capital investments, along with the many other steps that the Congress, the Treasury and the Fed took during the height of the financial crisis, have helped the markets to begin to slowly emerge from the extraordinarily precarious position they faced back in October. Nevertheless, we still have a long way to go to get the credit markets – and the U.S. economy – functioning properly again. Bank capital must be rebuilt, low-quality assets must

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be sold or written off, sound lending must occur and confidence in our system must be restored. We are absolutely committed to doing our part – and working closely with the Congress, our regulators and our clients – to get the economy solidly back on its feet. As a recipient of Treasury capital and a critical part of the nation’s financial infrastructure, we recognize that we have a serious responsibility to the American people. We’ll continue to do all we can to help expand the flow of credit in this extraordinarily difficult environment. We are and will continue to be transparent about the use of these funds. And we’re focused on always retaining the public’s trust, and we will ensure The Bank of New York Mellon not only returns the $3 billion to the Treasury but also delivers a very good return on investment for taxpayers. Thank you.

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Chapter 14

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TESTIMONY OF KENNETH D. LEWIS, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, BANK OF AMERICA, BEFORE THE COMMITTEE ON FINANCIAL SERVICES, U.S. HOUSE OF REPRESENTATIVES, WASHINGTON, DC, FEBRUARY 11, 2009* Chairman Frank, Ranking Member Bachus, and members of the Committee, I appreciate the opportunity to be here. I’d like to start by making two key points: First, all of us at Bank of America understand the responsibilities that come with access to public funds. Taxpayers want us to manage our expenses carefully, and provide transparency about how we are putting their money to work to restart the economy. These expectations are appropriate, and we are working to meet them. Second, as we manage our business going forward, we are doing our best to balance the interests of customers, shareholders, and taxpayers. But the fact is, it is in all our interests that we lend as much as we responsibly can – maximizing credit while minimizing future losses. That’s how consumers and businesses can prosper. It’s how investors – including taxpayers – can earn returns. Bank of America serves more than half of all U.S. households and millions of businesses. We know that the health and strength of our company depends on the health and strength of the U.S. economy. We have every incentive to lend. And, despite recessionary headwinds, we are lending. In the fourth quarter alone, we extended more than $115 billion in new credit to consumers and businesses. Lending is how we earn returns for our shareholders, and it’s how we build relationships with customers. Our capacity to lend is restrained by: (1) demand for loans; (2) credit quality; (3) our ability to fund loans; and (4) regulatory and rating agency demands. All of these factors are under tremendous pressure. Notwithstanding these headwinds, the new loans we made in the fourth quarter included:

*

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• • • • • • •

$59 billion in commercial loans; Nearly $7 billion in commercial real estate loans; $45 billion in mortgages; Nearly $8 billion in domestic card and unsecured consumer loans; More than $5 billion in home equity products; About $2 billion in consumer Dealer Financial Services (auto, marine, RV loans). And nearly $1 billion in new credit to more than 47,000 new Small Business customers.

We also reaffirmed three ten-year, nationwide goals that are critical to the health of our communities: $1.5 trillion for community development lending; $2 billion in philanthropic giving; and $20 billion in lending and investments to support environmental sustainability. Bank of America has received investments of senior preferred stock from the Treasury under the TARP program, and is also receiving additional support in order to facilitate the acquisition of Merrill Lynch. This government support has been crucial in allowing us to continue all the lending I have just described. With capital markets still frozen, there is simply no ready substitute for government support of this size, and so in its absence, our only choice would be to lend less and thereby shrink our balance sheet. Certainly, credit conditions have tightened, as they always do in a recession, and particularly after what everyone recognizes as a period of lax credit standard. But make no mistake: We are still lending, and we are lending far more because of the TARP program. As I mentioned, we understand the special responsibilities that come with any investment of public funds into a private company, including financial accountability and operational transparency. Taxpayers have invested in our company, and they deserve to know what return they are making on their investment, and when it will be paid back. We will make our first dividend payment to the Treasury of more than $400 million next week, and we will pay the Treasury, and ultimately taxpayers, about $2.8 billion in dividends alone for the year. We intend to pay all the TARP funds back as soon as possible. Taxpayers also deserve to know how their funds are being used to support our economy. To that point, we recently announced that we will make a full report regularly to the public with information about our business activities in ten categories that are important to the nation’s economic recovery, including consumer and commercial lending, foreclosure mitigation and others. I believe this initiative will help with transparency, and I have attached at the bottom of these remarks the text of our announcement of this initiative, including examples in each category of the actions we’re taking to spur the economy. But the frequently asked question of how exactly we are using TARP funds is tougher than it sometimes seems. The U.S. government invested $15 billion in TARP funds in Bank of America in the form of preferred stock; Merrill Lynch agreed to accept another $10 billion, and the government provided an additional $20 billion to enable the closing of our transaction with Merrill Lynch. As with money provided by private investors, that investment allows us to make loans and investments to people, businesses and organizations. As a practical matter, we cannot tell you whether the next loan we make is funded by that $45 billion of TARP preferred stock, or our approximately $32 billion of preferred stock placed with other investors, or the approximately $163 billion of common equity that we

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hold, or the remaining approximately $2.2 trillion of other obligations that make up our balance sheet. But the bottom line is that we are lending significantly more with that preferred stock investment than we would be without it. As I said, we made $115 billion in new loans in the fourth quarter – $100 billion more than we had received in TARP funding at that time. That is probably the best answer to what we are doing with the TARP money. But it’s obviously not the whole story. The real issue, I believe, is this: taxpayers feel, and rightly so, that if a bank is having sufficient trouble to require public support, all its financial decisions should signal a conservative, sober and frugal approach to the financial health of the company. The real debate is about what business activities are appropriate for a company that receives an investment from the federal government. In some cases, I think public judgments on this question have been right on. There has been no shortage of examples of executives or companies spending money in ways that did not have a direct benefit to the business. In other instances, I think banks have been criticized for activities that, in fact, have very serious, and very effective, business purposes. Marketing activities, which drive sales and business growth, are just one example. I will simply say this: We know that the public will not always agree with our decisions. But Bank of America has for years been the most financially efficient bank with our business mix in the country. We have a hard-earned reputation for frugality, not extravagance. When we compensate associates, engage in marketing and advertising campaigns, or invest in green building technologies, we do so to grow our business, enhance profitability and generate returns for investors. That includes the investors that are the focus of this hearing: U.S. taxpayers. Our core business is strong – even in the midst of a recession, we earned more than $4 billion last year. Even so, that performance was disappointing, and I therefore recommended to our board of directors – and they agreed – that we would pay no yearend compensation to me or any of our most senior executives for 2008. Executives at the next tier down had their year-end incentive payments cut by an average of 80%. We also made cuts on a progressive basis – meaning that higher ranking managers with larger incentive targets took progressively larger hits in relation to more junior associates. But even lower-ranking and lower-paid associates took significant hits this year, as you would expect in this environment. This includes many people who worked desperately hard last year... and who produced excellent business results. While difficult, these cuts make possible more of the activities that will help drive economic recovery. More jobs saved, and fewer layoffs. Sustained community support. More loans. The financial services industry is undergoing wrenching change. One thing we know is that we will be a smaller industry. And that’s not a bad thing. Obviously, the rapid growth of our industry in recent years was overdone. Now is a good time to remind ourselves that we play a supporting role in the economy – not a lead role. Our job is to help the real creators of economic value – people who make things, and people who use them – get together and do business. We bankers should find some humility in that. This also is a time for getting out there in the marketplace and making every good loan we can find, to boost the economy and do our part to restore confidence to the markets. It’s a time for determination in the face of our generation’s greatest economic challenge. Thank you.

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Chapter 15

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STATEMENT OF RONALD E. LOGUE, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, STATE STREET CORPORATION, BEFORE THE HOUSE FINANCIAL SERVICES COMMITTEE, UNITED STATES HOUSE OF REPRESENTATIVES, FEBRUARY 11, 2009, HEARING ON “TARP ACCOUNTABILITY: USE OF FEDERAL ASSISTANCE BY THE FIRST TARP RECIPIENTS”* Mr. Chairman, Ranking Member Bachus and members of the Committee, thank you for inviting me to testify today regarding the participation of State Street Corporation (“State Street”) in the Treasury Department’s Capital Purchase Program (“CPP”). State Street appreciates the extraordinary support that taxpayers have provided the financial services industry, and we are pleased to have the opportunity to describe our use of the taxpayers’ investment. The Committee’s letter of invitation requested information about our understanding of the purpose of the CPP investment, our planned and actual use of CPP funds, our tracking of the use of CPP funds and our adoption of various conditions related to these funds, particularly for executive compensation. Our response to these questions, along with additional background on State Street and its role in the financial system, follows below.

STATE STREET’S ROLE IN THE FINANCIAL SYSTEM State Street provides investment servicing and investment management services to institutional investors, including pension funds, mutual funds, endowments, foundations and other collective investment pools. Unlike more traditional banks, we do not directly provide ordinary retail banking services, including mortgages, credit cards, or other consumer credit,

*

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nor do we engage in investment banking activities. Our loan activity primarily relates to the provision of credit and liquidity to our core customer base of institutional investors. Our two lines of business, Investment Servicing and Investment Management, provide products and services including custody, recordkeeping, daily pricing and administration, shareholder services, foreign exchange, brokerage and other agency trading services, securities finance, deposit and short-term investment facilities, loan and lease financing, investment manager and hedge fund operations outsourcing, performance, risk, and compliance analytics, investment research and investment management, including passive and active U.S. and non-U.S. equity and fixed-income strategies. Our core business, which can generally be described as “back-office” or “middle-office” in nature, generally results in a risk-profile lower than that of investment or commercial banks. While our customer relationships are with institutional investors, our services indirectly benefit the millions of retirees, mutual fund investors and other individuals participating in these collective investments. Our role enables the investment process to run smoothly and as intended, ultimately allowing our customers’ customers --- individual citizens with savings --access to their investments when they need it. With $12.04 trillion in assets under custody and $1.44 trillion in assets under management at December 31, 2008, State Street operates in 27 countries and more than 100 geographic markets worldwide and employs 28,275 individuals worldwide. Even in last year’s challenging environment, State Street was profitable in all four quarters of 2008. We achieved a 28% increase in revenues and a 25% gain in earnings per share versus strong financial results in 2007. We also expect to be profitable in 2009.

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OUR UNDERSTANDING OF THE PURPOSE OF CPP INVESTMENT State Street is one of the original nine banks invited by former Treasury Secretary Paulson to a meeting in Washington, DC on October 13, where we were each asked to participate in the CPP. I consulted with our Board of Directors, and we agreed to participate. As a result, on October 28th, we issued preferred stock and warrants to Treasury, in exchange for a $2 billion investment in State Street. We believe we were asked to become one of the nine original CPP banks due to our unique and critical role in the financial markets. We are a large custodian and asset manager and provide services to an institutional investor customer base. State Street is an important source of credit, liquidity and stability to the financial system. Much of the credit and liquidity we offer is provided on a temporary basis, to cover our customers’ short-term trade settlement and redemption needs. We believe our use of the CPP investment should support these core functions of our business model.

STATE STREET’S USE OF THE CPP INVESTMENT The Committee’s invitation letter requests information regarding both our “planned use” of the CPP investment prior to receipt and our actual use of the CPP funds. Due to the circumstances of our involvement in the CPP described above --- we were unaware of the

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program until asked to participate --- we had no “planned use” prior to our acceptance of the funds. It was only after we committed to participate in the program at the October 13 Treasury meeting that we began developing plans to use the CPP investment consistent with the objectives of the Emergency Economic Stabilization Act (“EESA”). Even prior to the government’s CPP investment, however, we have been an important source of stability for our customers throughout the recent market turmoil. For example, we significantly increased our provision of liquidity and credit to our core institutional investor customer base following the collapse of Lehman Brothers in September 2008. State Street is using the $2 billion government investment to add to our ability to provide credit, liquidity and stability to the financial system. Specifically, the government’s $2 billion investment has strengthened our capital base, which, in turn, increases our lending capacity. Following our commitment to participate in the CPP, I set a goal with our Asset and Liability Committee to deploy this additional capacity by increasing our credit and liquidity facilities to our customers by $2 billion. Since mid-October, we have approved more than $1.5 billion of these new facilities, and, given our strong pipeline, we expect to reach the $2 billion goal soon. We hold additional capacity in reserve, so that our mutual fund and pension fund customers can borrow for their short-term liquidity needs as they arise, due to redemption requests, trade fails and other market-driven events. The level of utilization of this type of lending capacity fluctuates considerably in line with market volatility, fund flow activity and other factors. We saw, for example, substantial increases in demand for credit following the Lehman collapse, and we generally expect high levels of demand for credit during periods of market instability. We have not used CPP funds for employee compensation, payment of dividends to investors, lobbying expenses, or acquisitions of other financial institutions.

ACCOUNTABILITY AND TRANSPARENCY We understand and agree with the Committee’s focus on accountability and transparency in the use of CPP funds and have responded promptly and openly to all Treasury and Congressional requests for information. Internally, we are tracking our use of CPP funds through our Asset and Liability Committee, which meets monthly. We recently reported on our fourth quarter use of CPP funds through the new Treasury Department system, and will, of course, respond similarly to other applicable regulatory reporting systems which may be developed.

EXECUTIVE COMPENSATION As noted above, State Street has not used CPP funds for employee compensation. We have implemented all applicable EESA executive compensation restrictions and requirements, including those related to “clawbacks” of incentive compensation based on

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materially inaccurate information, limitations on “golden parachute” payments and limitations on the tax deductibility of senior executive compensation in excess of $500,000. In January, our Executive Compensation Committee met with our senior risk officers. This group reviewed incentive compensation arrangements of our senior executive officers to ensure such arrangements do not encourage unnecessary and excessive risk-taking, and authorized the inclusion in our proxy statement of the related required certification. Additionally, in recognition of the unprecedented circumstances the industry is facing at this time, I am forgoing my incentive compensation for 2008, as are six other members of our leadership team. We are also taking a number of additional, related steps, including an acrossthe-board, company-wide salary freeze for 2009 and an approximately 50% reduction in incentive compensation for all officers, a group which includes all but our most junior employees.

CONCLUSION

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The continued, unprecedented disruption in the financial markets has had a significant effect on our customers and the communities in which we do business, as well as on State Street, its shareholders and its employees. We believe that our use of the CPP funds follows the intent of Congress in enacting the EESA, is consistent with our agreement with Treasury and aligns with our business model and role in the financial markets. We appreciate the consideration and efforts of Congress, together with Treasury, the Federal Reserve, the FDIC and other regulators, to restore stability to our financial markets, and we look forward to our continued participation in this effort. Once again, thank you for inviting me to testify today. I would be pleased to answer any questions.

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Chapter 16

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TESTIMONY OF JOHN J. MACK, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, MORGAN STANLEY, BEFORE THE UNITED STATES HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, FEBRUARY 11, 2009* Mr. Chairman, Ranking Member Bachus, Members of the Committee. My name is John Mack, and I'm the Chairman and CEO of Morgan Stanley. I appreciate the opportunity to speak with you today about our role in the TARP program and how we're using capital to help address the credit crunch squeezing the American economy. I'll also discuss some of the changes we're making at Morgan Stanley as well as broader reforms we would urge to restore confidence in our industry and the markets. The events of the past months have shaken the foundation of our global financial system. And, they've made clear the need for profound change to that system. At Morgan Stanley, we've dramatically brought down leverage, increased transparency, reduced our level of risk and made changes to how we pay people. We've maintained a high level of capital throughout this crisis. Before the TARP investment, our Tier-I capital ratio — a key measure of regulatory capital — was approximately 15%, one of the highest in the industry. We also delivered positive results for our shareholders in 2008. But we didn't do everything right. Far from it. And make no mistake: as the head of this firm, I take responsibility for our performance. I believe that both our Firm and our industry have far to go to regain the trust of taxpayers, investors and public officials. As a recipient of an investment from the U.S. government, we recognize our serious responsibilities to the American people. It's our goal and our desire to repay the taxpayers in full as soon as possible. Morgan Stanley's business — in contrast to some of our peers — has always been focused primarily on institutional and corporate clients. And our business model is less about lending than about helping companies raise debt and equity in the capital markets. *

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Between October and December, we increased the total debt raised for clients as lead manager nearly four-fold. Indeed, during the fourth quarter, we helped clients raise $56 billion in debt to invest in their businesses, including leading American companies like Pepsi and Time Warner Cable. We also helped clients raise $40 billion in equity to fund their businesses, including a major capital raise for GE. And, we made $10.6 billion in new commercial loans. In our much smaller retail business, Morgan Stanley made $650 million in new commitments to lend to consumers during the last three months of 2008. I've told you how we're putting TARP capital to work. And, we also are filing monthly reports with Treasury detailing the use of our capital. But I should also tell you what we haven't done with the TARP funds. We have NOT used it to pay compensation nor did we use it to pay any dividends or lobbying costs. I know the American people are outraged about some compensation practices on Wall Street. I can understand why. I couldn't agree more that compensation should be closely tied to performance. At Morgan Stanley, the most senior members of the firm, including myself, didn't receive any year-end bonus in 2008. I didn't receive a bonus in 2007 either. And, I've never received a cash bonus as CEO of Morgan Stanley. The only year-end compensation I've ever received was paid in Morgan Stanley equity — so my interests are aligned with shareholders. We also were the first U.S. bank to institute a "clawback" provision that goes beyond TARP requirements. It allows us to reclaim pay from anyone who engages in detrimental conduct or causes a significant financial loss to our Firm. And, we're tying future compensation more closely to multi-year performance. We have much work to do in our industry - and across the markets. Real problems remain that are preventing economic recovery. We need to find ways to increase lending and restore consumer and market confidence. Perhaps most importantly, we need to enact reforms to address the more fundamental issues laid bare by the recent turmoil:

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•

•

First, we need fundamentally improved systemic regulation, Our fragmented regulatory structure simply hasn't kept pace with increasingly complex and global markets. I agree, Mr. Chairman, with your proposal to create a systemic risk regulator. Second, we need greater transparency in our financial markets both for investors and regulators. To regain trust in the markets, investors and regulators need a fuller and clearer picture of the risks posed by increasingly complex financial instruments and contracts.

Morgan Stanley shares your desire to restore faith in our financial markets and get the American economy going again. We know that won't be easy. And, we know it will take time. But we're committed to working closely with you — as well as our regulators and other market participants — to achieve these important goals.

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Chapter 17

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TESTIMONY OF VIKRAM PANDIT, CHIEF EXECUTIVE OFFICER, CITIGROUP, HOUSE FINANCIAL SERVICES COMMITTEE, UNITED STATES HOUSE OF REPRESENTATIVES, WASHINGTON, D.C., FEBRUARY 11, 2009* Mr. Chairman, Ranking Member Bachus, Members of the Committee. I am Vikram Pandit, Chief Executive Officer of Citigroup, and I want to thank you for the opportunity to represent our Company here today. Americans from all walks of life are facing crippling economic hardship. Foreclosures, lost savings and widespread layoffs are having a devastating impact on millions of Americans and thousands of communities. Institutions, both public and private, are searching for ways to respond to this crisis. Against that backdrop, the American people are right to expect that we use TARP funds responsibly, quickly and transparently to help American families, businesses and communities. They also have a right to expect a return on this investment. As difficult as the decision to provide TARP funding was for Congress, I intend to make sure that when it comes to Citi, you will look back on it and know it was the right decision for our nation’s economy and for American taxpayers. Last week, we published this report that describes exactly how we are using TARP funds to expand the flow of credit. We have posted the report online, and we will update it each quarter. In late December, utilizing TARP capital, we authorized our line businesses to provide $36.5 billion in new lending initiatives and other new programs. These programs are expanding mortgages, personal loans and lines of credit for individuals, families and businesses and creating liquidity in the secondary markets. Our TARP report explains these efforts in detail, and I would ask to submit it as an addendum to this testimony. More generally, in the fourth quarter of 2008, we provided more than $75 billion in new loans to U.S. consumers and businesses—a significant commitment given the difficult *

This is an edited, excerpted and augmented edition of testrimony before the House Subcommittee on Financial Services.

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economic environment. We will continue our lending activities throughout 2009, in a responsible and disciplined manner. Since the start of the housing crisis in 2007, we have worked successfully with approximately 440,000 homeowners to help them avoid foreclosure. We also are adopting the FDIC’s streamlined model for post-delinquency loan modification programs. In the last year, we have kept approximately four out of five distressed borrowers whose mortgages we service in their homes. We have extended our foreclosure moratorium to help millions of other eligible homeowners whose mortgages we service. And we continue to reach out to homeowners who may be experiencing financial difficulty, despite being current on their payments. Through the efforts I have outlined, we are committed to doing the right thing by supporting American businesses and helping families stay in their homes. Equally important, we are committed to providing the American public with a return on its investment in Citi. We will pay the U.S. Government $3.4 billion in annual dividends on that investment. Our goal, my goal, is to make this a profitable investment for the American people, as soon as possible. The best way for us to make this happen is to strengthen our Company and return to profitability. When I was asked to become CEO a little more than a year ago, I demanded accountability. I removed the people responsible for Citi’s financial distress; I formed a new management team; I restructured the Company; I streamlined our core businesses; and I installed new risk processes and risk personnel. And I continue to make the tough and necessary decisions every day. Mr. Chairman, the world is changing very fast and we need to acknowledge and embrace this new world very quickly. We understand that the old model no longer works and the old rules no longer apply. Our responsibility is to support the recovery of our financial system and to benefit our shareholders. I pledge that we will continue to do everything we can in that regard at this critical moment in our Company’s—and our nation’s—history. We will hold ourselves accountable for what we do, and that starts with me. I am personally accountable: My goal is to return Citi to profitability as soon as possible. I appreciate the Committee’s attention, and I am happy to answer any questions.

ADDENDUM “What Citi is Doing to Expand the Flow of Credit, Support Homeowners and Help the U.S. Economy;” TARP Progress Report for Fourth Quarter 2008; February 3, 2009; Citigroup Inc.

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WHAT CITI IS DOING TO EXPAND THE FLOW OF CREDIT, SUPPORT HOMEOWNERS AND HELP THE U.S. ECONOMY Tarp Progress Report for Fourth Quarter 2008 February 3, 2009

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A Message from Vikram Pandit Chief Executive Officer, Citi The United States Government has made a significant investment in major financial institutions, including Citi, under the Troubled Asset Relief Program (TARP). Citi understands that TARP is about helping the American people, and supporting U.S. businesses and our communities. Our responsibility is to put these funds to work quickly, prudently, and transparently to increase available lending and liquidity. This report is the first that we will publish about the activities we are undertaking in connection with the TARP program. It also explains the many other steps Citi is taking to assist American families and individuals who face financial hardship or are at risk of losing their homes. We will update this report each quarter, following our quarterly earnings announcement, and it will be posted at www.citigroup.com. Separately from our initiatives under TARP, Citi continues to lend to clients and customers as part of our ongoing business. In the fourth quarter of 2008, we extended approximately $75 billion in new loans to people and businesses in the United States. Shortly after Citi received TARP capital late last year, we created a Special TARP Committee of senior executives to approve, monitor and track how we use it. The Committee has established specific guidelines, which are consistent with the objectives and spirit of the Treasury investment program. We will use TARP capital only for those purposes expressly approved by the Committee. TARP capital will not be used for compensation and bonuses, dividend payments, lobbying or government relations activities, or any activities related to marketing, advertising and corporate sponsorship. In the fourth quarter of 2008, the Committee considered numerous proposals and authorized initiatives to deploy $36.5 billion across five areas to help expand available credit for people and businesses and support the recovery of the U.S. economy. These investments, combined with the wide range of other initiatives detailed in this report, are central to Citi’s effort to address the pressures on individuals, families and businesses created by this very difficult economy. In this first stage, we are putting capital to work in the following areas: • • • • •

U.S. residential mortgage activities ($25.7 billion) Personal and business loans ($2.5 billion) Student loans ($1 billion) Credit card lending ($5.8 billion) Corporate loan activity ($1.5 billion)

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We also continue to focus on supporting the U.S. housing market: •

•

•

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•

Since the start of the housing crisis in 2007, we have worked successfully with approximately 440,000 homeowners to avoid potential foreclosure on combined mortgages totaling approximately $43 billion. Last year, we kept approximately four out of five distressed borrowers with mortgages serviced by Citi in their homes. We are adopting the FDIC’s streamlined model for post-delinquency loan modification programs. And, through the Citi Homeowner Assistance Program, we continue to reach out to families and individuals who may be experiencing some form of economic stress despite being current on their payments. We are also continuing our foreclosure moratorium for eligible borrowers with Citiowned mortgages who work with us in good faith to remain in their primary residence and have sufficient income to make affordable mortgage payments. To ensure that our efforts have the broadest possible impact, Citi has worked with investors and owners of more than 90 percent of the 4.3 million mortgages we service – but do not own – so that many more qualified borrowers can also benefit from this moratorium.

In addition, as municipal bond underwriters, we are working with state and local governments to help them in these difficult times, and we continue to help U.S. corporations find sources of new capital to fund their businesses through our underwriting of debt and equity offerings. The Government, on behalf of American taxpayers, has invested in Citi. We have an obligation to repay that confidence in ways that go well beyond the $3.41 billion that Citi will pay the Government each year in dividends associated with its TARP investment and a separate loss sharing agreement. We will continue to work in partnership with the Government to help put the economy back on track. As we work to expand the flow of credit and as confidence begins to return to the financial system and the U.S. economy overall, we will continue to evaluate our use of TARP capital to help ensure that we deploy it appropriately. We look forward to updating you after the end of the first quarter. Vikram Pandit Chief Executive Officer Citi

I. TARP PROGRAM ACTIVITIES A. Putting TARP Capital to Work Since October 2008, the U.S. Government has made a significant investment in major American financial institutions, including Citi. The Treasury’s $45 billion investment in Citi has helped to strengthen our capital ratios, so we are better able to fund new lending initiatives in support of the U.S. economy, homeowners and businesses. Following is a summary of Citi’s actions to date regarding our use of TARP capital.

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In early November 2008, Citi created a Special TARP Committee (the “Committee”) of senior executives, which meets frequently to review and approve the use of all TARP capital under clear guidelines. As a first step, Citi used $10 billion in November to purchase pools of mortgages secured by Fannie Mae, the government-sponsored housing finance agency, to help provide liquidity to the secondary market at a time when Fannie Mae’s funding costs had increased significantly.

o

This initial investment will mature in February 2009, when Citi will be able to redeploy the funds for other primary lending or secondary market activities.

•

In the fourth quarter of 2008, the Committee considered proposals related to TARP totaling $51.2 billion. The Committee has authorized initiatives to deploy $36.5 billion across five areas of activity in ways that help expand available credit for people and businesses and support the recovery of the U.S. economy.

o

The initiatives the Committee has approved so far are divided more or less evenly between primary lending and secondary markets activity, which are explained later in this section. Both of these sectors play an important role in the overall flow of credit in the U.S. economy.

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Some of our new initiatives are already under way, although it is important to note that new primary lending programs take time to roll out, and depend on factors that include loan demand, which declined substantially during the quarter and remains weak. The initiatives, which total $36.5 billion, are as follows:

The Treasury’s $45 billion investment in Citi has helped to strengthen our capital ratios, so we are better able to fund new lending initiatives in support of the U.S. economy, homeowners and businesses.

1. U.S. Residential Mortgage Activities - $25.7 Billion Citi is investing a total of $10 billion in securities backed by various types of conforming mortgages guaranteed by the government-sponsored housing finance agencies Fannie Mae and Freddie Mac. •

•

•

Citi is investing $5 billion of the total in 15-year fixed rate mortgages. The remaining $5 billion is divided evenly between mortgages whose interest rates adjust after three or five years. By investing in these securities in the secondary markets, we are helping to expand the flow of credit to people by providing liquidity to lenders who need to replenish funds so that they can continue to originate mortgage loans. This action can also help reduce the cost of consumer borrowing by ultimately enabling originators to lower interest rates on new mortgages, thus supporting government efforts to restore stability to the U.S. housing market.

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The Committee has authorized initiatives to deploy $36.5 billion across five areas of activity in ways that help expand available credit for people and businesses and support the recovery of the U.S. economy.

Citi is purchasing U.S. prime residential mortgages in the secondary markets with a face value of $7.5 billion that were made to qualified borrowers, based on their credit histories and verifiable ability to make their monthly payments. • •

This activity will also help to expand the flow of credit to people by providing liquidity to lenders who need to replenish funds to make new mortgage loans. This can also help reduce the cost of consumer borrowing by ultimately enabling originators to lower interest rates on new mortgages, thus supporting government efforts to restore stability to the U.S. housing market.

Citi is also making prime mortgage loans totaling $8.2 billion directly to families and individuals. •

•

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• •

These are in the form of non-conforming mortgage loans – defined as mortgages whose value exceeds the limits set for government-sponsored loans. These limits range from $417,000 to $625,500 in the continental United States, depending on the county. Non-conforming mortgage loans are frequently necessary in high-cost areas where home prices exceed the national average, even in a down market. Because Fannie Mae and Freddie Mac are not required to buy non-conforming mortgages, interest rates are higher than on conforming loans. Non-conforming mortgages also carry a higher risk to lenders, and originations on these loans have fallen far more sharply than on conforming mortgages in the past year.

2. Business and Personal Loans - $2.5 Billion Citi is making $1 billion available for tailored loans to clients or businesses facing liquidity problems. This may include loans secured by commercial real estate, or loans to businesses holding securities that have become illiquid because of the credit crisis, such as Auction Rate Securities. Citi is also offering $1.5 billion of credit to qualified customers of its consumer finance company CitiFinancial for personal loans to consolidate debts and meet unexpected expenses.

The initiatives the Committee has approved so far are divided more or less evenly between primary lending and secondary markets activity. Both of these sectors play an important role in the overall flow of credit in the U.S. economy.

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3. Student Loans - $1.0 Billion Citi is originating student loans through the Federal Family Education Loan Program (FFELP), a public-private partnership created by Congress to deliver and administer guaranteed, low-cost education loans. •

Citi expects this action will help provide needed credit for students and middle- and low-income parents who are finding it difficult to afford tuition.

4. Credit Card Lending - $5.8 Billion The special programs Citi is offering include expanded eligibility for balanceconsolidation offers, targeted increases in credit lines and targeted new account originations, subject to Citi’s customary sound lending standards. • Credit cards play a critical role in helping people and businesses purchase basic goods and services. Based on available national economic figures, Citi estimates that 20 percent of total personal spending flows through credit card transactions, often for everyday essentials. 5. Corporate Loan Activity - $1.5 Billion Citi is investing $1.5 billion in commercial loan securitizations, which have historically been a significant buyer of secured loans to U.S. companies. •

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•

This investment activity will increase demand and liquidity in the corporate loan market and help to strengthen the confidence of global investors, who in the past have been a substantial source of funding to U.S. companies. Increased investor appetite for corporate loans stimulates lending to U.S. companies and ultimately lowers the cost of borrowing for these businesses.

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B. Our TARP Guidelines The Department of the Treasury has made two preferred stock investments in Citi through the TARP program. The first investment, or TARP I, was a $25 billion purchase of preferred stock on October 28, 2008. The second investment, or TARP II, was a $20 billion purchase of preferred stock on December 31, 2008. Also, on January 16, 2009, Citi issued $7 billion in preferred stock to the Treasury and the Federal Deposit Insurance Corporation (FDIC) as part of a loss sharing program with the U.S. government on a $301 billion portfolio of assets. All of the preferred securities pay dividends to the U.S. Government totaling $3.41 billion per year. •

• •

The Committee has established specific guidelines which are consistent with the objectives and spirit of the Treasury investment program. The complete guidelines can be found in the Appendix to this report. The use of TARP capital is being tracked, and it will not be used for any purposes other than those expressly approved by the Committee. Committee approval is the final stage in a four-step review process to evaluate proposals from Citi businesses for the use of TARP capital, risk, and the potential financial impact and returns.

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Citi will meet all regulatory reporting requirements associated with TARP. We will also update this progress report each quarter, following our quarterly earnings announcement, and make it public at www.citigroup.com. The TARP securities purchase agreements stipulate that Citi will adhere to the following objectives as a condition of the Treasury’s capital investment: • •

“To expand the flow of credit to U.S. consumers and businesses on competitive terms to promote the sustained growth and vitality of the U.S. economy.” “To work diligently, under existing programs, to modify the terms of residential mortgages as appropriate to strengthen the health of the U.S. housing market.”

Permitted Uses Citi’s guidelines call for TARP capital to be deployed in a prudent and disciplined manner consistent with Citi’s strategic objectives and the Treasury’s goal of strengthening the financial system in the United States and expanding the flow of credit. TARP capital is equity, in the form of preferred stock. It will be used exclusively to support investments and not for expenses, which are covered as part of our cash flow. Prohibited Uses TARP capital may not be used for any of the following purposes: • • • •

Compensation or bonuses. Dividend payments. Lobbying or government relations activities. Marketing, advertising or corporate sponsorship activities.

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TARP capital will not be used for any purposes other than those expressly approved by Citi’s Special Committee.

TARP is about helping the American people, and supporting U.S. businesses and our communities. Our responsibility is to put these funds to work quickly, prudently, and transparently to increase available lending and liquidity.

• • •

We have not lobbied on TARP-related issues since we received TARP capital and will not do so. Citi’s businesses are required to report back to the Committee on the activities for which any TARP capital was used, as well as the performance of those investments. The Committee reports periodically to Citi’s Board of Directors on the specific uses to which TARP capital has been applied.

C. Primary Lending and Secondary Markets

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One of the biggest challenges facing governments, regulators and financial institutions today is how to energize the financial system in order to promote economic activity. In the near-term, actions need to focus on restarting the flow of credit. Secondary markets play a fundamental role in this process, which is why approximately half of the funds involved in Citi’s TARP initiatives are directed there. The following section explains the differences between primary lending and the secondary markets, and why the proper functioning of secondary markets is so important to economic recovery.

Primary Lending • Primary lending refers to the money that banks and other financial institutions extend as credit directly to people and businesses, as well as to state and local governments, and other borrowers. • Common forms of primary lending include mortgages on residential and commercial real estate, personal loans, credit card lines, student loans, lines of credit which businesses use to fund their day-to-day activities and pay suppliers and workers, and loans that businesses use to expand and grow. • Rates of interest on primary loans are governed by a number of factors. They include the level of the benchmark federal funds rate set by the Federal Reserve, the amount of credit available in general, the creditworthiness of individual borrowers and the risk associated with a particular loan. • Secured loans like mortgages are made against the underlying value of a home or certain commercial real estate, which is pledged against the loan as collateral. • Credit cards are unsecured debt. Borrowers do not have to provide collateral to support a credit card line, which results in losses for credit card issuers that are more frequent and more severe than with secured loans. Issuers charge higher interest rates to support the higher credit costs associated with unsecured loans.

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Secondary Markets • Mortgage originators and other lenders can hold the loans they make on their balance sheet, or they can securitize and sell them to investors in the secondary market, using the proceeds to originate new loans to families, individuals and businesses. • Active secondary markets in which borrowers can transfer or sell lending assets provide critical support to primary lending. • Consumers and businesses ultimately benefit from active secondary markets through the lower cost of credit and the availability of primary lending funds. • When confidence falls and liquidity disappears in the secondary market, as is now the case, the flow of credit slows and primary lending to people and businesses becomes more difficult and expensive to obtain.

II. LENDING ACTIVITY A. New Lending in the Fourth Quarter of 2008 Separately from its TARP initiatives, Citi remains committed to helping commercial clients and retail customers find workable solutions that address their financial needs responsibly and allow them to meet their obligations. While it is the case that overall bank lending and demand for credit both declined in the fourth quarter, Citi extended new loans totaling approximately $75 billion to customers and clients in the U.S. Citi's U.S. deposits at the end of the fourth quarter were $289.8 billion, meaning that approximately every four dollars we held in U.S. deposits supported one dollar of new lending initiatives. •

Citi continues to lend responsibly to individuals based on their creditworthiness. Factors we consider in reviewing loan applications include a borrower’s ability to repay, the size of a loan compared to the value of the underlying collateral, verifiable income, credit history and regional conditions.

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A company in New York state with 10 employees that manufactures home gardening supplies came to us for a $150,000 loan and a $100,000 credit line to bring a new product to market. The funding is being used to expand the business.

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We continue to provide loans, lines of credit and commercial real estate mortgages to U.S. companies, from small and medium-sized businesses to some of the largest employers in the country. As municipal bond underwriters, Citi works every day with state and local governments to help them in these difficult times. We also continue to help U.S. corporations find sources of new capital to fund their businesses through the underwriting of debt and equity offerings.

*Managed basis. 1 North America. Average Loans, Fourth Quarter 2008 = $532.6 Billion1.

LENDING TO BUSINESSES AND CORPORATIONS Citi remains engaged in helping U.S. companies of all sizes obtain the funding they need to run their businesses. Commercial and corporate loans, credit lines and mortgages help these businesses work through periods of reduced activity, pay their employees and suppliers, and also grow. TARP capital is not being used directly for these activities, but this capital does provide important support for Citi’s ongoing efforts to meet the financing needs of our commercial clients.

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We continue to lend actively to small commercial companies with credit needs of less than $100 million through our retail branch network, and through dedicated sales and relationship officers. This includes a small business segment focused on servicing companies with credit needs of less than $250,000. •

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Citi offers term loans, loans guaranteed by the Small Business Association, lines of credit, commercial mortgages and equipment financing to small businesses and other small commercial clients. Overall loan balances outstanding in small business and commercial banking have grown 22 percent to $8.9 billion in December 2008 from $7.3 billion in December 2007 primarily as a result of new loan originations and funding of previously committed lines of credit. In the small business category alone, loan balances outstanding rose over the same period from $950 million to $1.29 billion.

Here are some examples from the fourth quarter: A company in New York state with 10 employees that manufactures home gardening supplies came to us for a $150,000 loan and a $100,000 credit line to bring a new product to market. The funding is being used to expand the business, which expects to increase its sales by 40 percent in 2009. • We extended a 10-year commercial mortgage for $1.5 million and a revolving line of credit for $7 million to fund working capital needs to a wholesale distributor of consumer goods in New Jersey with 35 employees and sales of $164 million. • We extended a 10-year commercial mortgage for $1 million to a distributor of industrial supplies in New York state which employs 70 people and has sales of $18 million. Citi works primarily with large corporate and institutional borrowers to fund expansion, support strategic transactions, pursue activities in the secondary market and provide debtorin-possession financing for companies in bankruptcy. Overall lending has declined over the past year as demand for borrowing contracted and Citi remained judicious in its lending practices. However, in the fourth quarter of 2008, we were the lead underwriter for U.S. syndicated loans totaling $22 billion.

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For the full year, Citi served as the lead underwriter for U.S. syndicated loans totaling $126 billion.

Examples of our involvement included: •

• •

A $1.9 billion 364-day contingent liquidity facility for Alcoa, Inc., which the company put in place to provide additional backstop liquidity for its existing commercial paper program. A new $2 billion 364-day syndicated revolving credit facility for Abbott as a backstop for commercial paper. Joint lead and joint bookrunner on a $17 billion bridge loan to the Verizon Wireless $28 billion purchase of Alltel Corp.

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B. The Lending Environment In the past year, U.S. and world financial markets have been tested in unprecedented ways. Across the financial services industry, lending has declined markedly as banks work to reduce risks to their balance sheets and exposure to future credit losses resulting from the downturn in the housing market and the economy as a whole. Demand for borrowing has also fallen sharply as people and businesses reduce spending in the face of rising unemployment and the contraction of the economy. •

For example, consumer borrowing, which includes credit card spending and auto loans, dropped at an annual rate of $7.9 billion in November 2008, according to the Federal Reserve, the biggest decline in the 65 years since the Fed began tracking this data.

In this difficult environment, Citi will not – and cannot – take excessive risk with the capital the American public and other investors have entrusted to the company.

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U.S. households are also saving more money for the first time in many years. According to the Bureau of Economic Analysis, the personal savings rate in November 2008 was 2.8 percent of disposable income, four times the rate in the same month of 2007.

Banks and other lenders have tightened access to credit and are conserving capital in order to absorb the losses that occur when borrowers default.

We will continue to adhere to our basic sound lending principles, in a way that balances our commitment to providing support for the U.S. economy with our responsibility to manage risk appropriately.

•

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For example, Citi has seen a steady rise in loss rates on credit cards in the past year. Our net credit loss rate for North American cards was 8.0 percent in the fourth quarter of 2008, compared to 5.5 percent in the fourth quarter of 2007. Accordingly, we have taken actions in certain high risk segments to lower the company’s credit exposure by reducing open or unused credit lines.

In this difficult environment, Citi will not – and cannot – take excessive risk with the capital the American public and other investors have entrusted to the company. We will continue to adhere to our basic sound lending principles, both in our TARPrelated activities and across our businesses, in a way that balances our commitment to

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providing support for the U.S. economy with our responsibility to manage risk appropriately and deliver value for investors, including the taxpayer.

III. HELP FOR HOMEOWNERS AND OTHER BORROWERS A. Helping Homeowners Homeowner retention solutions for Citi’s U.S. mortgage lending businesses remained favorable in the fourth quarter of 2008. • •

Loss mitigation solutions outnumbered foreclosures completed by a ratio of more than six to one. Total loss mitigation actions increased 33 percent from the third quarter of 2008 to the fourth quarter of 2008.

Since the beginning of 2007, Citi has worked successfully with approximately 440,000 homeowners to avoid potential foreclosure on combined mortgages totaling approximately $43 billion.

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Citi has worked with mortgage holders since the start of the U.S. housing market crisis to help keep them in their homes. We are working to reduce or mitigate the hardships many American families face and, at the same time, contain the financial losses that Citi itself has to confront in the event of borrower default. •

• •

Since the beginning of 2007, Citi has worked successfully with approximately 440,000 homeowners to avoid potential foreclosure on combined mortgages totaling approximately $43 billion. In 2008, we kept approximately four out of five distressed borrowers with mortgages serviced by Citi in their homes using various home retention solutions. Citi was the first financial services company to report publicly on the impact of its foreclosure prevention initiatives, in its quarterly Citi U.S. Mortgage Lending Data and Servicing Foreclosure Prevention Efforts report – first published in February 2008.

As the economic downturn has continued, Citi is doing even more to help homeowners, and employs a variety of means to assist borrowers who are having trouble meeting their mortgage payments. •

A specially trained servicing unit works with homeowners to find long-term solutions and tries to ensure that, wherever possible, no borrower loses his or her home.

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We continuously evaluate our portfolios to identify those borrowers who can save money and reduce monthly payments, and offer them timely homeowner retention solutions.

o

To better meet the increased needs of at-risk borrowers and reach as many of these borrowers as possible, we have increased the number of staff dedicated to the important task of loss mitigation by more than two and a half times, compared with just a year ago.

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Citi puts a specific focus on finding long-term solutions for borrowers in need. In support of this, loan modification is a key tool in helping to prevent foreclosure. Citi has found modifications to be effective in helping borrowers avoid foreclosure.

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Citi has worked with investors and owners of more than 90 percent of the 4.3 million mortgages we service – but do not own – to make sure that many more qualified borrowers will also benefit from our foreclosure moratorium.

o

In keeping with this commitment, we are in the process of adopting the FDIC’s streamlined modification program where the borrower is at least 60 days delinquent or where a long-term modification is appropriate.

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In November 2008, we announced the Citi Homeowner Assistance Program for families, particularly in areas of economic distress and sharply declining home values, whose mortgages Citi holds.

o

For those borrowers who may be experiencing some form of economic stress, although still current on their mortgages, we are deploying a variety of means to help them remain in their homes. We are continuing our foreclosure moratorium for eligible borrowers with Citiowned mortgages who work with us in good faith to remain in their primary residence and have sufficient income to make affordable mortgage payments.

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o

To ensure that our efforts have the broadest possible impact, Citi has worked with investors and owners of more than 90 percent of the 4.3 million mortgages we service – but do not own – so that many more qualified borrowers will also benefit from this moratorium.

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In addition, in late 2008, due to falling interest rates, Citi experienced a significant increase in calls from borrowers seeking to refinance their mortgages.

o

To make sure we are being as effective as we can in providing practical help to these homeowners, we are deploying more resources to help customers who call about refinancing and are working with them to make their mortgages more affordable.

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* Includes: Extensions, HSAs, Repayment Plans, Reinstatements, Short Sales and Deeds in Lieu. See Appendix for definitions. Loss Mitigation Actions – Serviced Loans; (Total Citi).

B. Support for Credit Card Holders Credit cards play an important role in the nation’s economy by helping people and businesses complete transactions and pay for goods.

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In 2007, transactions worth $1.9 trillion were completed in the U.S. on credit cards industry-wide. Currently, there are about $4.8 trillion of open credit lines in the United States. Based on available national economic figures, Citi estimates that about 20 percent of all personal consumption – the engine of the U.S. economy – involves credit card transactions, often to purchase day-to-day essentials like groceries, clothing and gas.

Citi’s primary objective, particularly in this environment, is to fund the expansion of credit to existing card members and target new account originations, based on their ability to repay their loans. • •

In 2009, Citi Cards plans to extend a significant amount of new credit to U.S. consumers, within Citi’s customary sound lending standards. Since receiving the first installment of TARP capital, Citi has made plans to expand its lending activities further and extend affordable credit to lower risk borrowers.

In addition, we are rolling out new and incremental programs that will offer manageable terms to card members who are having financial difficulty to help them pay down their debt. For example, Citi is offering new forbearance programs with broadened eligibility criteria, affecting accounts in earlier stages of delinquency. These include payment incentives,

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match payments and balance-consolidation programs that accelerate the reduction, or amortization, of card loans without materially increasing the cost to consumers.

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We are also marketing programs to customers who, although current on their accounts, may need additional help to repay their balances. We expect to ramp up these programs through mid-2009.

* Primarily delinquent accounts (includes limited current accounts.) Note: Short-term programs include full/partial payment deferrals, reduced minimum payments, match payments; long-term programs include balance consolidation actions and adjustment of terms. Citi Cards – New Entrants to Forbearance Programs.

IV. CITI IN THE COMMUNITY A. Citi Office of Homeownership Preservation (OHP) Citi understands how critical affordable housing and credit are for all Americans. Since the start of the housing crisis, we have accelerated our efforts with our many community partners to help develop solutions that preserve homeownership. Many distressed homeowners in urban communities across the U.S. prefer to work directly with a third party who can help them understand the resources that are available to them and how to work with their lender to prevent foreclosure. To this end, Citi founded the Office of Home Ownership Preservation (OHP) in 2007 to work with counselors and borrowers to find alternatives to foreclosure, whenever possible.

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Citi offers delinquent borrowers free services such as around-the-clock access to qualified housing counselors from non-profit organizations. OHP has trained close to 600 counselors in more than 25 cities across the U.S. as part of the Citi OHP 25-City Tour. The OHP team works with local non-profit counseling organizations to reach out to thousands of at-risk borrowers. Through the OHP 25-City Tour, we have provided total grants to the non-profit in each city with the most aggressive and innovative foreclosure prevention outreach, counseling and education program. These grants, which total more than $1 million, are each for $50,000. They are part of the way we have helped local of the way we have helped local organizations provide distressed borrowers with broad-based financial education and free, on-demand non-profit counseling. In partnership with Citi’s Office of Financial Education, OHP has developed two curricula – one each for consumers and counselors – that provide training and information on financial strategies to assist homeowners. In addition, OHP has launched a Web site at www.mortgagehelp.citi.com to help borrowers and counselors obtain advice and assistance via the Internet.

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“We understand that helping to keep people in their homes sustains a community. We also understand that good intentions and hard work make up only two-thirds of the solution. Citi has stepped up tremendously to provide the final third, not just in financial support but with their people.” – Sarah Gerecke, CEO, Neighborhood Housing Services of New York City

B. Partnerships in the Community Throughout our 200-year history, Citi has been a trusted partner in the communities in which we operate. Today, we remain committed to helping people make a difference in their communities. To this end, we created the Citi Dialogue program, which is an ongoing series of meetings that serve as forums for Citi executives and community leaders to discuss issues that affect underserved communities across the country. We take a long-term view of what is in the best interests of our clients and the communities in which our employees live and work. We continue to provide capital in a responsible way that recognizes individual aspirations. •

In 2008, Citi Community Capital (CCC) provided $2.8 billion in loans for affordable housing and community revitalization projects in locations around the country.

Citi is a founding member of HOPE Now, a coalition of counselors, government, investors, lenders and servicers which was formed in 2007 to help find solutions to preserve homeownership.

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In 2008, we entered into a five-year contract to purchase up to $30 million of microloans made to small businesses by ACCION Texas, thereby enabling ACCION to expand its microfinance portfolio (already the largest in the country). •

In an agreement that is a first of its kind in the U.S., Citi will share the risks and the rewards from additional loans ACCION will make with the new funds.

Citi is a national sponsoring partner of the NeighborWorks Center for Foreclosure Solutions and the Ad Council Campaign with NeighborWorks America and Housing Preservation Foundation (HPF). We are also a founding sponsor of the NeighborWorks Center for Homeownership Education and Counseling (NCHEC). We provide both financial and technical assistance to other local and national partners who are working to prevent foreclosure through counseling, education and outreach. •

Our partners include the Association of Community Organizations for Reform Now (ACORN), Neighborhood Assistance Corporation of America (NACA), the National Community Reinvestment Coalition (NCRC), the Consumer Credit Counseling Service (CCCS), and the Consumer Counseling Resource Center (CCRC).

Citi established a $1 million grant and technical assistance program with the Housing Partnership Network and its local nonprofit partners in select cities to acquire and rehabilitate foreclosed properties in distressed neighborhoods. Through volunteerism, our employees contribute their time and talent each day to causes and organizations they care about.

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Thousands of volunteer service hours are spent each year making a difference in local communities through projects and activities that include building homes, delivering food, revitalizing schools, teaching financial education, and service on non-profit boards and advisory councils. In 2008, Citi Community Capital (CCC) provided $2.8 billion in loans for affordable housing and community revitalization projects in locations around the country.

Through its Partners in Progress (PIP) program, the Citi Foundation awarded grants totaling more than $2 million to 21 local community development organizations in January 2009 These grants, each of $100,000, support innovative physical development and rehabilitation projects – known as “place-based initiatives” – that champion the longterm or large-scale revitalization of low- and middle-income communities. Examples of the 21 initiatives include:

•

In the Boston area, PIP grants will help support construction of 1,500 new housing units, 780,000 square feet of commercial real estate, two greenjob centers and a new six-mile greenway of open space in the Dorchester

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Bay area; and assistance in a community planning program in Somerville for 2,000 primarily low- to moderate-income individuals. In New York City, a PIP grant will support construction of 774 affordable housing units, as well as community and retail facilities and a public park, through the Gowanus Green Partnership. The project, at a brownfield site along the Gowanus Canal in Brooklyn, is expected to become a national model for urban community development. In Miami, a PIP grant will help Carrfour Supportive Housing, which is underwriting a complex of 145 units of new, affordable housing for formerly homeless families, an organic produce nursery and a farmers market retail site on the former Homestead Air Force Base, which closed as a result of Hurricane Andrew.

V. COMPENSATION AND GOVERNANCE A. Executive Compensation

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This is a time of unprecedented challenges in the financial industry and one of profound change. An important area where Citi is changing is executive compensation. The principles that govern how Citi rewards our executives and employees must reflect both the company’s performance against its objectives and the economic environment in which we operate. In light of the company’s performance in 2008, Citi’s Chairman, its Chief Executive Officer and its Chief Financial Officer asked not to be paid bonuses for that year. Other members of the Senior Leadership or Executive Committees – the top 51 people at Citi – received substantially reduced bonuses. •

•

Members of the Executive Committee received a significantly larger proportion of their bonus than other employees in deferred compensation, whose ultimate value depends on an improvement in the company’s performance. For 2008, Executive Committee members also received at least 40 percent of their incentive compensation in the form of stock or options that have performance-based vesting conditions.

Citi’s executive team and Board of Directors have also conducted a thorough review of compensation practices. From 2009 and beyond, all compensation decisions will be based on the following key principles, which are consistent with our agreement with the U.S. Government as an investor: • • •

Compensation will vary based on two factors: the individual’s personal performance and the overall performance of the company. We believe in meritocracy. We will differentiate individual compensation decisions on the basis of both financial and non-financial performance. We will compensate on the basis of future performance as well as for past performance. Executive compensation will include a component that will vest based on future performance.

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In light of the company’s performance in 2008, Citi’s Chairman, its Chief Executive Officer and its Chief Financial Officer asked not to be paid bonuses for that year. •

•

Citi has introduced a policy, commonly known as a “clawback” provision. This enables the company to recoup executive compensation that, over time, proves to have been based on inaccurate financial or other information. Citi has significantly amended its severance programs for executives. In particular, the top five officers listed in the annual proxy statement will not be eligible for any severance pay. Citi’s Board of Directors receives periodic reports from the Special TARP Committee on the specific uses to which TARP capital has been applied.

B. Corporate Governance Citi is committed to the highest standards of ethical conduct: we report our results with accuracy and transparency, and we comply fully with the laws and regulations that govern the company’s businesses – including our agreements with the U.S. government.

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The Board of Directors is responsible for ensuring that effective governance and oversight of the company’s business activities benefit stockholders and other investors, including the taxpayer, while balancing the interests of Citi’s diverse constituencies of customers, employees, suppliers and local communities around the world. Twelve of the 15 members of the Board are independent Directors, exceeding the Board’s corporate governance guidelines which require that at least twothirds of the Directors should be independent. Like members of Citi’s Executive Committee, Board members are barred from selling 75 percent of any shares they receive under the company’s equity awards programs for as long as they are Directors. This ties the value of the award directly to the value Citi is able to deliver to its shareholders through its performance.

Citi’s Board of Directors receives periodic reports from the Special TARP Committee on the specific uses to which TARP capital has been applied. Approval of TARP-related initiatives at Citi is governed by a four-step process to ensure careful evaluation. •

•

A proposal to deploy TARP capital is first reviewed in the Citi business where it originated by risk management and financial professionals. The business must ensure that any TARP-related initiatives can be tracked. The proposal, if cleared at the business level, then goes to Citi’s Corporate Financial Planning and Analysis (FP&A) group for a preliminary review of the financials, potential returns, assumptions and valuation.

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A TARP Proposal Sub-Committee, which includes Citi’s Treasurer and Head of FP&A, serves as a control mechanism for all proposals. It undertakes a formal review of proposals and verifies other information, including the risk capital and risk-weighted assets of the investment. Proposals that clear these steps are submitted to the Special TARP Committee for deliberation. The Committee may accept a proposal, reject it, hold it for further consideration at a later time or request further information.

VI. SECTION VI – OUR STRATEGY A. Citi’s New Structure In order for the U.S. economy to recover and thrive, the country needs sound, responsible financial institutions. Over the last year, Citi has pursued a determined strategy to get “fit” for the future through efforts designed to reduce our balance sheet exposures, enhance our risk management function, reduce costs and put the company on a path to growth. Going into 2009, we recognized the need to accelerate the pace of change in order to put Citi on a clearer and faster pathway to profitability. That is why we announced on January 16, 2009 that the company is dividing into two distinct businesses with their own dedicated management teams: Citicorp and Citi Holdings.

The objective of our new structure is to sharpen Citi’s focus on driving performance in the businesses which are central to our strategy, while maximizing value from “noncore” assets.

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The objective of our new structure is to sharpen Citi’s focus on driving performance in the businesses which are central to our strategy, while maximizing value from “non-core” assets. This new structure will be reflected beginning with financial reporting for the second quarter of 2009. Citicorp is the relationship-focused bank to businesses and consumers – the “core” of Citi’s businesses that the company expects to deliver high returns and high growth over time. •

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Built on a strong foundation of more than 200 years in business and a presence in more than 100 countries, Citicorp is a global universal bank with deposit-taking capabilities and a broad range of banking services for consumer and institutional customers. Citicorp includes the company’s Global Institutional Bank with Citi’s world-class corporate, investment and private banking businesses, global transaction services and our retail banking franchise with branded credit cards, consumer and commercial banking services across the U.S., Asia, Latin America, Central and Eastern Europe and the Middle East. Citicorp will have estimated assets of $1.1 trillion, about two-thirds of which will be funded by deposits.

Citi Holdings comprises an estimated $860 billion in assets across three businesses – brokerage and asset management, local consumer finance and a special asset pool – all of which will be run with a continued focus on risk management and maximizing value.

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The company recently announced a plan to combine its Smith Barney business with Morgan Stanley’s Global Wealth Management Group in a joint venture to create an industry-leading global wealth management business. Citi retains a 49 percent ownership stake. Citi Holdings also contains local consumer finance businesses, including CitiFinancial and CitiMortgage in the U.S., and consumer finance operations in Western Europe, Japan, India, Mexico, Brazil, Thailand and Hong Kong. The special asset pool will manage the assets covered by the loss-sharing agreement with the U.S. government parties and other non-strategic assets.

Citi has reduced total assets by $413 billion, or 18 percent, since our peak in the third quarter of 2007. Under the new structure, the company expects to build on the significant progress made in 2008 toward reducing non-core legacy assets by divesting businesses that are no longer considered central to our strategy. In 2008, Citi announced or completed 19 divestitures including: • •

•

On June 30, 2008, Citi completed the sale of Diners Club International to Discover Financial Services. On July 1, 2008, Citi and State Street Corporation completed the sale of the CitiStreet joint venture, a benefits servicing business, to ING Group in an all-cash transaction valued at $900 million. On August 1, 2008, Citi completed the sale of CitiCapital, our equipment finance unit in North America, to GE Capital.

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On December 5, 2008, Citi completed the sale of our German retail banking operations to Crédit Mutuel for approximately $6.6 billion. On December 31, 2008, Citi completed the sale of Citigroup Global Services Limited, a business processing service, to Tata Consultancy Services Limited for $515 million.

Under our new operating structure, Citi expects to further reduce operating costs through continued expense management and re-engineering programs. •

•

In the fourth quarter of 2008, we cut expenses by $2.5 billion, or 16 percent, compared with the same period of 2007, adjusted for one-time items disclosed in our earnings press release, as a result of our ongoing focus on cost reduction and reengineering efforts. We are on track to achieve our targeted expense base of between $50 billion and $52 billion in 2009, representing a further reduction of 15 to 18 percent from 2008 reported expenses.

All these efforts will strengthen Citi’s foundation in 2009 and help put the company on the road to better performance.

VII. SECTION VII – APPENDIX A. Special TARP Committee Guidelines

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Special TARP Committee Guidelines for Use of TARP Investments As of January 6, 2009 Citigroup Inc. (“Citi”) is committed to using the capital received under the U.S. Department of the Treasury’s Troubled Assets Relief Program (“TARP”) in a manner consistent with the purposes and objectives of TARP. These guidelines set forth the principles and procedures for Citi’s use of the TARP investment. The recitals to the TARP securities purchase agreements include the following objectives: • •

“To expand the flow of credit to U.S. consumers and businesses on competitive terms to promote the sustained growth and vitality of the U.S. economy.” “To work diligently, under existing programs, to modify the terms of residential mortgages as appropriate to strengthen the health of the U.S. housing market.”

To facilitate the rigorous and transparent pursuit of these goals, Citi has designated a Special TARP Committee (the “Committee”) comprised of senior executives that is responsible for overseeing, approving and monitoring the sound use of TARP capital for its intended purposes. TARP capital will not be used for any purposes other than those expressly approved by the Committee.

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The Committee members are the following people or their designees: Lewis Kaden, Vice Chairman; Gary Crittenden, Chief Financial Officer; Michael Helfer, General Counsel; Brian Leach, Chief Risk Officer; Michael Schlein, President, International Franchise Management and Executive Director of Business Practices; and Zion Shohet, Treasurer and Head of Corporate Finance. (See Appendix A, internal memorandum establishing committee).

PRINCIPLES I. Permitted Investments TARP capital will be deployed in a prudent and disciplined manner that is consistent with Citi’s strategic objectives and Treasury’s goal of strengthening the financial system in the United States and expanding the flow of credit as stated above. TARP capital, which is in the form of preferred stock, will be used exclusively to support assets and not for expenses. Permitted uses of TARP capital may include, among other things: • • • •

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• •

Sound lending activities across Citi businesses. Financing transactions across Citi businesses. Citi’s loan modification program and other programs for homeowner avoidance of mortgage loan foreclosures. Citi’s Homeowner Assistance Program, which aims to help potential at-risk borrowers avoid delinquency. The provision of credit to Citi credit card customers. Purchases of loans and securities in the secondary market that have the effect of increasing liquidity in the credit markets or the mortgage securities markets.

II. Prohibited Uses TARP capital may not be used for any of the following purposes: • Compensation or bonuses. • Dividend payments. • Lobbying or government relations activities. • Marketing, advertising or corporate sponsorship activities.

PROCEDURES The Committee and Citi businesses will adhere to the following procedures in connection with use of TARP capital: •

The Committee may approve the deployment of TARP capital for any authorized purpose, up to a specified maximum amount, without requiring additional approval of each use within that maximum.

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• •

• • •

Businesses are required to report to the Committee at least every quarter on the activities for which any TARP capital was used, the performance of any investments, and the benefit of the activities to the flow of credit and/or the U.S. housing system. The Committee will report periodically to Citi’s Board of Directors on the specific uses to which TARP capital has been applied. Deployment of TARP capital for authorized purposes within the approved maximum amount must be reported to the Head of Financial Planning, Analysis and Capital Allocation, Nayan Kisnadwala, with appropriate supporting materials to ensure effective monitoring. The Committee will ensure that Finance establishes appropriate financial reporting concerning the uses of TARP capital. The Committee will meet as often as required, and not less than every quarter. The Committee will appoint a secretary and its decisions will be recorded. Actions may be evidenced by e-mail or in a vote taken by an in-person or telephonic meeting. Actions taken by the Committee shall require the approval of at least three of its members. ***

In addition to the foregoing, the Committee is authorized to take any and all actions in its efforts to advance any of the objectives described above.

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APPENDIX A November 4, 2008 MEMORANDUM FOR THE CITIGROUP MANAGEMENT EXECUTIVE COMMITTEE Subject: Treasury Investment in Citigroup Preferred Stock On October 28 we closed on the transaction under which the U.S Treasury Department purchased $25 billion of Citigroup Preferred Shares. We did not seek this investment, nor did the plans we developed for the remainder of 2008 and beyond anticipate this additional capital. As we think about how to use this capital to augment our plans, we must be mindful of the purposes for which it was intended and ensure that we deploy this capital appropriately. We would do this under any circumstances, but here in addition there will be intense public and governmental scrutiny on the way we and the other eight large recipients use the capital from the Treasury Department. Treasury made this investment in Citi and other institutions only as a result of special market conditions and its desire to help expand the flow of credit in the economy. While we should be proud that Citi was included among those in whom Treasury chose to invest to achieve this goal, Treasury’s public purpose creates a special responsibility with respect to how we use this investment. To ensure that we use this capital in a way that is consistent with our established strategic objectives and Treasury’s goal of strengthening the financial system in the United States and

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expanding the flow of credit, we have established a Special Committee consisting of the two of us, Brian Leach, Zion Shohet and Michael Helfer to oversee and approve how we make use of Treasury’s investment. This Committee will promptly develop a set of guidelines for the operating businesses, including guidelines on how we pursue incremental lending opportunities and how we monitor the use of these funds. The Committee will report periodically to the Citigroup Board of Directors on the uses to which we have put the proceeds of the Treasury investment. The Treasury investment may not be used for any purposes other than those approved by the Special Committee. With the goals described above in mind, if you have a particular idea or suggestion that you would like the Special Committee to consider, please contact one of the members of the Special Committee. Gary Crittenden Lewis Kaden

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B. Tarp Investments by U.S. Treasury TARP I • Citi was among nine major U.S. financial institutions which agreed on October 14, 2008 – in consultation with the Treasury, the FDIC and the Federal Reserve Board – to receive from the Treasury a combined $125 billion investment to strengthen their capital positions and to enhance the overall performance of the U.S. economy. • On October 28, 2008, Citi received a capital investment of $25 billion from the Treasury under this initiative, which is called the Capital Purchase Program. • In consideration of the investment, Citi issued $25 billion in cumulative, perpetual preferred stock to the Treasury, with a dividend of five percent per annum, payable quarterly. The first dividend payment of $371.5 million will be made on February 17, 2009. • Citi also issued the Treasury an option to purchase 210,084,034 common shares in the company at a strike price of $17.85 per share. • This option will allow the Treasury and U.S. taxpayers to earn additional returns on the investment if Citi’s common share price rises above $17.85. • A summary of the terms of the transaction is available at this link. TARP II • On November 24, 2008, Citi announced that it had reached an agreement with the Treasury, the FDIC and the Federal Reserve Board on a series of steps to strengthen Citi’s capital ratios, reduce risk and increase liquidity. • The agreement closed on December 31, 2008, when Citi received a further capital investment of $20 billion from the Treasury. This initiative is called the Target Investment Program. • In consideration of the investment, Citi issued $20 billion in cumulative, perpetual preferred stock to the Treasury, with a dividend of eight percent per annum, payable quarterly. The first dividend payment of $200 million will be made on February 17, 2009.

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Testimony of Vikram Pandit • • •

Citi also issued the Treasury an option to purchase 188,501,414 common shares in the company at a strike price of $10.61 per share. This option will allow Treasury and U.S. taxpayers to earn additional returns on the investment if Citi’s common share price rises above $10.61. A summary of the terms of the transaction is available at this link.

C. VII – Loss Sharing Program •

•

•

• •

On November 23, 2008, Citigroup entered into a loss sharing program with the U.S. Department of Treasury, The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Bank of New York. The definitive agreements, entered into on January 16, 2009, cover $301 billion of loans and securities backed by residential and commercial real estate, consumer loans and other assets. In consideration of the loss sharing program, Citi issued a combined $7.059 billion in cumulative, perpetual preferred stock to the Treasury and the FDIC, with a dividend of eight percent per annum, payable quarterly. The first dividend payment of $47 million will be made on February 17, 2009. Citi also issued the Treasury an option to purchase 66,531,728 million common shares in the company at a strike price of $10.61 per share. A summary of terms available at this link explains how the loss sharing program works.

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D. Mortgage Mitigation Terms Explained A modification agreement is typically used when the customer has a significant reduction of income that impacts his or her ability to pay and will last past the foreseeable future. Typically, the customer's loan terms are modified in order to resolve the mortgage delinquency. This agreement makes the mortgage more affordable for the customer. A repayment plan is a written agreement between the borrower and the lender to implement a payment moratorium due to unforeseen circumstances wherein the property or employment status is affected. At the expiration of the term, the customer pays the total arrearage in a lump sum payment or elects a further repayment plan. This agreement is typically used when a customer has a short term reduction of income that severely impacts his or her ability to pay for a short period of time. The repayment plan brings the customer current over time as the payment obligations are met. It can also include a repayment plan under which the customer pays the regular monthly payment and an additional amount each month to catch up delinquent payments over time. An extension is when the customer has experienced a temporary hardship and is unable to bring the loan current. The customer has the ability to continue making future payments, but does not have the funds to completely reinstate the loan. An extension may re-amortize the loan or defer the interest to the back of the loan. It brings the customer’s account current immediately. An extension is generally used in the early stages of delinquency when a

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customer is one or two payments behind; it is rarely used for serious delinquency of more than 90 days past due or in the foreclosure process. A reinstatement occurs when a customer that is 90+ days past due is able to pay all of the delinquent fees, interest and principal owed to the bank with a single payment. This brings the customer’s account current immediately and allows him or her to continue to pay off the loan according to the original amortization schedule. A Home Saver Advance (HSA) loan is an unsecured personal loan to approved Fannie Mae servicers for eligible borrowers designed to bring a cure to the delinquency on a first lien loan. HSAs provide funds to cure arrearages of PITI, as well as other advances and fees. HSAs are documented by a borrower signed promissory note, payable over 15 years at a fixed rate of 5% with no payments or interest accrual for the first six months. A short sale is when the customer does not have either the desire or ability to keep the property and is willing to sell the property to satisfy the debt. This option is utilized when the amount owed less acceptable closing costs to sell the property is more than the value of the property. A deed in lieu of foreclosure is when the customer does not have either the desire or the ability to keep the property and is unable or unwilling to sell the property but is willing to sign the property over to Citi in exchange for stopping the foreclosure action. Deeds in lieu of foreclosure are generally accepted only after all other options have been exhausted.]

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E. Useful Links citigroup.com Citi Office of Homeownership Preservation Citi Community Capital Citi U.S. Mortgage Lending Data and Servicing Foreclosure Prevention Efforts, Third Quarter 2008 Financial Information, Fourth Quarter 2008 Code of Conduct Corporate Governance Guidelines Annual Report for 2007 Corporate Citizenship Report for 2007 Citi Foundation Citi Press Room

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Chapter 18

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OPENING STATEMENT OF CONGRESSMAN ED PERLMUTTER, TARP ACCOUNTABILITY: USE OF FEDERAL ASSISTANCE BY THE FIRST TARP RECIPIENTS”, FEBRUARY 11, 2009* I read through your testimonies and each one of you describe how your individual financial institutions have increased lending to consumers, clients, small businesses and other eligible entities within your business models. However, when I travel my district talking to constituents who have had their small business credit lines cut, who can’t find student loans for their kid’s college, or reasonable terms for loans to buy a car, I have to wonder. If it were one or two incidents, I would chalk it up to sour grapes or bad credit, but its been far more prevalent. Also, I understand the role banks play within the credit markets has decreased over the last 10 years, and the hedge funds, money market accounts and other entities which usually provide liquidity are on the sidelines. However those entities rarely ever provide credit directly to small businesses, homebuyers or farmers in my communities near Denver. The relationship your banks have with the public, one in which each depends on the other, is shaky. The American taxpayer came to your aid through the actions of Congress to appropriate $700 billion to steady the financial markets last September and October when things looked bleak for the financial system. Now that the economy needs your support to loan to creditworthy businesses, homebuyers and farmers it appears that your companies have stepped back from one of your three key missions, lending. However some of you continue to pay extraordinary salaries, lavishly refurbish otherwise exquisite offices and purchase expensive jets. All of you sitting before this committee today accepted taxpayer dollars, some more than others. Regardless, when tax payer money is put at risk, the rules of the game change. Accountability and transparency take precedence. It appears through the testimony today your banks tracked the use of TARP funds received between October and December of last year. Why didn’t you show the American public how you were using their money? If you were lending on the levels all of you say you were lending, why wouldn’t you want the American *

This is an edited, excerpted and augmented edition of testrimony before the House Subcommittee on Financial Services.

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Opening Statement of Congressman Ed Perlmutter

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people to know how hard you were working? Your firms and banks are part of the broader industry which has a long way to go to regain the trust of the American public. When Congress passed the Emergency Economic Stabilization Act, America averted a collapse of our financial system. I believe in some cases your banks are too big. They’re so big they may pose a risk to our broader financial system today. In many cases the banks and firms that went under or were bought by other entities within the last year, were mismanaged. Congress can not allow for a mismanaged business to threaten the prosperity of all Americans. I look forward to working with my colleagues to create a regulatory structure for the 21st Century to prevent this downfall from happening again.

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Chapter 19

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OPENING STATEMENT OF CONGRESSMAN GARY C. PETERS, FEBRUARY 10, 2009, FINANCIAL SERVICES COMMITTEE HEARING TARP ACCOUNTABILITY: USE OF FEDERAL ASSISTANCE BY * THE FIRST TARP RECIPIENTS The federal government has gone to extraordinary lengths to alleviate the financial crisis. I believe that the government has a responsibility to help families and small businesses. Therefore the assistance provided to the financial industry cannot merely be a bailout for banks and industry executives. Those companies that receive taxpayer funds have a responsibility to use that assistance to help us rebuild our shattered economy. This is not just a statement of principle, but one of practicality – if this industry is perceived as being unhelpful to our larger efforts it will erode the political will in Congress to continue to assist you. There is a perception around the country, including in my home state of Michigan, that you are not doing your part to help support the larger economy. I have heard from small, medium, and even large businesses in my District who have said that their banks are not lending to them, are recalling their lines of credit, or are making credit so expensive that they cannot afford it. If this is true, it must be remedied. If it is not true, you need to do a better job of explaining how you are using TARP funds to the public. I am also particularly concerned by conversations that I have had with representatives of the automobile industry. A vibrant and healthy domestic automobile industry is critical to the health of the overall economy. Right now Chrysler and General Motors are working very hard to prepare their viability plans, which are due to be delivered to Congress next week. In order for the auto companies to succeed they are going to need all the stakeholders to come to the table and make concessions. If they cannot get agreement from stakeholders they will be driven into bankruptcy, and the negative consequences of that on the larger economy are enormous. Some of you here today may be holding substantial amounts of General Motors or Chrysler debt, and those of you who do must engage in meaningful discussions with those *

This is an edited, excerpted and augmented edition of testrimony before the House Subcommittee on Financial Services.

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Opening Statement of Congressman Gary C. Peters

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companies about debt restructuring. With millions of Americans already out of work, this country cannot afford to have one or more of the domestic manufacturers be forced into bankruptcy. I thank you for being here and I look forward to hearing your testimony today.

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Chapter 20

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TESTIMONY OF JOHN STUMPF, PRESIDENT & CEO, WELLS FARGO & COMPANY, HOUSE FINANCIAL SERVICES COMMITTEE, FEBRUARY 11, 2009* Mr. Chairman and Members of the Committee, I’m John Stumpf, President and CEO of Wells Fargo & Company. Our company has been serving customers for going on 158 years. We’re an American company. Virtually all our businesses and team members are in the U.S. We’re in all 50 states. We are a community bank. We have 281-thousand team members – who earn fair and competitive wages and benefits, including health care. They live and work in thousands of communities across North America – from big cities like Los Angeles and Miami to small towns like Spearfish, South Dakota and Alice, Texas. I’ve been a community banker with our company for almost three decades. I know what it’s like to be on the teller line and on the banking floor working with our customers. I personally have served customers in cities and towns across Minnesota, Colorado, Texas and now California. Across the country many of our customers are facing difficult times. Now, as always, we want to do what’s right for them. We’re very proud that Wells Fargo has been open for business for our customers. We never stopped lending. In the last 18 months – when many of our competitors retrenched – Wells Fargo made $540 billion in new loan commitments and mortgage originations. They are as follows: • • •

$63 billion commercial/commercial real estate $123 billion consumer and small business $354 billion home mortgages

Last quarter alone, we made $22 billion in new loan commitments and $50 billion in mortgages – a total of $72 billion in new loans. That’s almost three times what the U.S. Treasury invested in Wells Fargo. With the merger, we have reopened lines of credit to some Wachovia customers who previously had been denied credit. *

This is an edited, excerpted and augmented edition of testrimony before the House Subcommittee on Financial Services.

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Testimony of John Stumpf

We do business and lend money the old-fashioned way – responsibly and prudently. As a result, we earned a profit last year of almost three billion dollars. We have not used any of the government investment for dividends, bonuses, or compensation of any kind – nor will we. We have the highest credit ratings currently given to any bank in the country. We understand the very important responsibility that comes with receiving public funds. We are always careful stewards of our shareholders’ money. The investment by the government is being used in the same prudent way. We have never been wasteful. We spend money to support the business and make a profit for our investors. We are frugal. Last year, our overall corporate expenses actually declined one percent while our revenue rose over seven percent. We said from the start that we’ll use the government’s investment to help make more loans to credit-worthy customers. We said we would use the funds to find solutions for our mortgage customers who are late on their payments or facing foreclosure – so they can stay in their homes. We also said we would report on our progress. We have done just that. We recently announced our first dividend payment to the taxpayers for their investment in Wells Fargo preferred stock. Our first dividend payment on their investment was more than a third of a billion dollars. We’re Americans first and bankers second – so we see this taxpayer investment, first and foremost, as an investment in the future economic growth of our country. We’re proud to be an engine for that growth. Last quarter we made $22 billion in new loan commitments. Our average outstandings – on a linked quarter annualized basis were:

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• • • • •

Student loans, up 12 percent Agricultural loans, up 14 percent Middle Market commercial loans, up 14 percent SBA loans, up 11 percent Commercial real estate loans, up 15 percent

Now, as to mortgages. Last year we made $230 billion in mortgage loans. That made homeownership possible for more than half a million families. It also includes refinancing almost a half a million existing loans. That lowered mortgage payments for families across our country. At year-end, we had $71 billion of mortgages still in process – up threefold annualized from the third quarter – a sign of strong momentum for 2009. Our mortgage lending is built on solid underwriting and responsible servicing. Because of that, 93 of every 100 of our mortgage customers are current on their mortgage payments. That performance is consistently better than the industry average. In 2008, we nearly doubled our team dedicated exclusively to helping customers stay in their homes – which improved our outreach. Because of that, we were able to contact 94 of every 100 customers who are two or more payments past due on their mortgages. Of those we contacted, we were able to provide solutions for seven out of ten. This resulted in our being able to deliver 706,000 solutions to help Americans avoid foreclosure during the last year and a half. That is 22 percent of the 3.2 million solutions reported by the industry. Last quarter alone, we provided 165,000 solutions to our mortgage customers. That was three times as many as the last quarter of 2007.

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When we modify a loan, about seven of every ten customers remain current or less than 90-days past due, one year later. There is, however, much more work to be done. We continue to invest in more people and systems to help even more at-risk homeowners. Across the country, we’re partnering with real estate agents, cities and nonprofits to speed up the selling of bank-owned properties so they can become, once again, owneroccupied. For all these reasons, we believe the Treasury’s investment of taxpayer dollars in Wells Fargo has been – and will continue to be – a wise and profitable investment – for our neighborhoods, for our country, and for our economy. Mr. Chairman and Members of the Committee, thank you and I would be happy to answer questions.

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Chapter 21

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD, “PULLING BACK THE TARP: OVERSIGHT * OF THE FINANCIAL RESCUE PROGRAM”

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Remarks as Prepared: Today, the Committee meets to continue our oversight of the Troubled Asset Relief Program and explore how the program can be made more effective as we work to address the financial crisis. In creating TARP as part of the Emergency Economic Stabilization Act last October, Congress granted the Treasury extraordinary powers and a staggering sum of money to address the economic crisis – some 700 billion of taxpayer dollars. The TARP program’s goals are certainly as relevant today as they were then. As prescribed by EESA, the Treasury Department is supposed to use the authority for four reasons: One, to protect people’s home values, college funds, retirement accounts, and life savings. Two, to preserve homeownership and promote jobs and economic growth. Three, to maximize the returns to the taxpayers for this investment. And four, to provide some measure of public accountability for the exercise of the authority as they spend this tremendous amount of money. Unfortunately, the previous Administration failed to uphold the intent of the law in many respects. Recipients of TARP funds were effectively given a free pass – not helping homeowners and small businesses, but choosing to hoard taxpayer funds, acquire other companies, and pay lavish bonuses to executives and handsome dividends to shareholders. The public is outraged by this behavior, and with good cause. As the Congressional Oversight Panel chaired by one of our witnesses today concluded in its report, there were “what appear to be significant gaps in Treasury’s monitoring of the use of taxpayer money.” I commend the panel not only for its commitment to ensuring the TARP program achieves the objectives Congress wrote into the law, but also for its aggressive oversight, highlighting areas of weakness and the improvements Treasury can make. *

This is an edited, excerpted and augmented edition of a statement before the United States Senate Committee on Banking, Housing and Urban Affairs.

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188

Opening Statement of Chairman Christopher J. Dodd

But this hearing is not just about the problems of the past – with some $350 billion of taxpayer money on the line as our economic crisis deepens, it is very much about our future. Let me state unequivocally: I believe that the TARP program remains a critical tool our government will need to address the economic crisis – that is why I supported the release of the last batch of funding. But for the sake of our economy and the public’s confidence in our ability to address this crisis, we must see a sharp change in the direction of this program under new management. If ever there were a program in need of a sign in front that read “Under New Management,” it’s this one. Allow me to outline the changes I believe must be made. First, Secretary Geithner and the rest of the Administration’s economic team must develop and clearly communicate a long-term, comprehensive plan for using TARP funds to support the financial system. In short, they must provide a framework – why do we need TARP, and what do we hope to achieve? The previous Administration’s piecemeal, lurching interventions in the financial system contributed to the confusion and volatility that have dragged down consumer and investor confidence. Outlining a clear direction and plan as to how the government will use taxpayer money going forward will provide all Americans with the clarity and assurance they need, and help to restore the confidence and optimism essential to long-term economic growth. Second, there need to be far greater transparency and taxpayer protections to safeguard the use of taxpayer money, including stricter limits on executive compensation and bonuses. The American people have been subjected to almost weekly news accounts about TARP recipients spending lavishly, undermining the integrity of the program and the institutions it is supposed to rescue. Just this week we heard that Wells Fargo, which received $25 billion in TARP funding, planned a series of corporate junkets this month to the most extravagant Las Vegas casinos. Fortunately, the bank got the message loud and clear that this kind of behavior is an insult to every American taxpayer footing the bill, and cancelled their plans. And I applaud the Obama Administration for moving to impose new and tougher restrictions on executive compensation for companies that receive TARP funds. I intend to offer an amendment to our economic recovery package that would build on these restrictions and prohibit bonuses to the 25 most highly paid employees of companies that receive TARP funding, authorize the Treasury Secretary to limit certain other performance-based bonuses as well, require “say on pay” votes on executive compensation, and enact other safeguards. If a company accepts taxpayer assistance, it shouldn’t be offering bonuses to top executives, or rewarding shareholders with cash dividends. One of the largest banks in America paid over half of its TARP funds to stockholders in dividends. That is unacceptable. The President told the world two weeks ago that a new era of responsibility has begun – apparently, our Treasury Secretary will have to deliver that message more forcefully to some financial institutions. Fourth, Treasury should establish clear guidelines to increase lending. Too many TARP recipients use these funds for everything but lending to small businesses or helping move families into long-term affordable mortgages. As reported in the New York Times, soon after Treasury launched the TARP, an executive at JP Morgan Chase seemed to boast of plans to use TARP funds to make acquisitions or as a cushion As reported in the New York Times, soon after Treasury launched the TARP, an

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Opening Statement of Chairman Christopher J. Dodd

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executive at JP Morgan Chase seemed to boast of plans to use TARP funds to make acquisitions or as a cushion against a worsening economy, just after receiving $25 billion in federal funding. And, according to the Washington Post earlier this week, some of the institutions that have received the most federal assistance have cut their lending the sharpest. Treasury must require recipients of assistance to provide quarterly reports specifying amounts of consumer and commercial loans made, details about acquisitions, and the number and type of loan modifications made to prevent homeowners from going into foreclosure. If financial institutions refuse to abide by any of these conditions, they should not be given public funds, period. Finally, we must apply the same sharp and urgent focus to help the homeowners whose plight is at the root cause of this crisis. Two years ago, almost to the day, this Committee held its first hearing on foreclosures and predatory lending. At that time, I said, “It is time for Congress, the Administration and the lending industry to face up to the fact that predatory and irresponsible lending practices are creating a major crisis for millions of American homeowners at a time when general economic trends are good.” Stopping foreclosures must be our top priority. Failing to do so will have devastating consequences for our economy. There are several ways TARP funds could be used to address the foreclosure crisis – from making changes to the HOPE for Homeowners program, to the approach advocated by the FDIC Chairman to restructure delinquent mortgages using a streamlined process. TARP funds need not be the only means of preventing foreclosures. But with no silver bullet on the horizon to stop the rising tide of foreclosures, TARP funds can and must be used to encourage participation in these various programs. These improvements to TARP will go a long way toward not only making the program more effective at stabilizing our economy, but also bolstering public confidence in the program, which we all recognize is critical to its success. The Obama Administration has already committed to making many, if not, all of these changes, and I look forward to continuing the Committee’s close and detailed oversight of the implementation of this program. Next week we will hear directly from Secretary Geithner about the Administration’s plans for major changes to the program. With today’s hearing, I hope that we can better distinguish questions about past management of TARP from questions about the law itself. What is not in question is the need for our President to have tools at his disposal to restore stability to our economy. Ensuring that the TARP is the most effective, dynamic instrument it can be remains our goal today, and I eagerly await hearing from our witnesses as to how we can make that possible.

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Chapter 22

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TESTIMONY OF ELIZABETH WARREN, CONGRESSIONAL OVERSIGHT PANEL, SENATE BANKING COMMITTEE, HEARING ON “PULLING BACK THE TARP: OVERSIGHT OF THE FINANCIAL RESCUE PROGRAM”, FEBRUARY 5, 2009* Thank you Chairman Dodd, Ranking Member Shelby, and members of the Committee for inviting me here today to testify on Oversight of the Financial Rescue Program. My name is Elizabeth Warren, and I am chair of the Congressional Oversight Panel. The Congressional Oversight Panel was created as part of the Emergency Economic Stabilization Act of 2008 and is charged with reviewing the state of the financial markets and regulatory system and submitting regular reports to Congress. Our reports are to include oversight of the Treasury Secretary‘s use of contracting authority and program administration; the impact of TARP purchases on financial markets and financial institutions; transparency; and the effectiveness of foreclosure mitigation efforts and whether the program has minimized long term costs and maximized benefits to taxpayers. Although I am chair of the Panel, I would like to note that my testimony today reflects my own views and not necessarily those of the entire panel. I appreciate the opportunity to testify regarding the Panel’s findings as well as my recommendations to improve administration of TARP. I am also here to listen to your comments and oversight suggestions. As the head of a congressional entity charged with oversight of the TARP program, your thoughts are especially important to me. Since its inception, the TARP program has raised questions regarding its goals, methods, and program operations. It is not just Congress and the oversight bodies asking the questions, but also the public. The American people want to know what’s going on and they deserve answers. The Congressional Oversight Panel is determined to find answers to these and many other questions. Our first report, issued on December 10, 2008, identified a series of ten

*

This is an edited, excerpted and augmented edition of testimony before the United States Senate Committee on Banking, Housing and Urban Affairs.

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primary questions regarding Treasury’s goals and methods. These questions must be answered in order for TARP to be successful: 1. 2. 3. 4. 5. 6. 7.

What is Treasury’s strategy? Is the strategy working to stabilize markets? Is the strategy helping to reduce foreclosures? What have financial institutions done with the taxpayer’s money received so far? Is the public receiving a fair deal? What is Treasury doing to help the American family? Is Treasury imposing reforms on financial institutions that are taking taxpayer money? 8. How is Treasury deciding which institutions receive the money? 9. What is the scope of Treasury’s statutory authority? 10. Is Treasury looking ahead?

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As a follow up, I sent a letter to then-Treasury Secretary Paulson requesting responses to these questions, along with specific subsidiary questions. I ask to have that letter entered into the Record. An analysis of Treasury’s response provided the basis for the Panel’s second report, issued on January 9, 2009. Unfortunately, many of Treasury’s answers were nonresponsive or incomplete. The report found that Treasury particularly needs to provide more information on bank accountability as well as transparency and asset valuation. They also need to provide additional information on foreclosures and articulate a clear strategy, otherwise they are spending billions of dollars on an ad hoc basis. Congress provided substantial flexibility in the use of funds so Treasury could react to the fluid and changing nature of the financial markets; yet, with these powers goes a deeper responsibility to explain the reasons for the uses made of them. Both Congress and the American people need to understand Treasury’s conception of the problems in the economy and its comprehensive strategy to address those problems. Our money—and our economy— are on the line, and we all have a stake in the outcome. The Panel remains committed to our ongoing oversight role. While we recognize that Treasury is in the midst of a transition of personnel and policies, we believe that our initial questions and areas of concern continue to be important. On January 28, 2009, I sent a letter to newly sworn-in Treasury Secretary Timothy Geithner requesting more complete answers to the questions on TARP strategy and implementation that we had sent to his predecessor. I have not yet received a response, but I am encouraged by many recently announced initiatives, including efforts to improve transparency, clarify strategy, protect taxpayers, and address executive compensation. We will, of course, share his responses with you and with the public as we continue to monitor the details and implementation of the new initiatives. As part of our continuing mission to get answers about TARP, the Congressional Oversight Panel examined whether Treasury’s injections of cash into financial institutions have resulted in a fair deal for taxpayers. The findings are in our February report, which will formally be submitted to Congress tomorrow. Despite the assurances of then-Secretary Paulson, who said that the transactions were at par—that is, for every $100 injected into the

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banks the taxpayer received stocks and warrants from the banks worth about $100—the valuation study concludes that Treasury paid substantially more for the assets it purchased under the TARP than their then current market value. Extrapolating the results of the ten transactions analyzed to all purchases made in 2008 under TARP, Treasury paid $254 billion, for which it received assets worth approximately $176 billion, a shortfall of $78 billion. At various points Treasury has articulated policy objectives which could result in a program involved in paying substantially more for investments than they appear to have been worth at the time of the transaction. Because Treasury has failed to delineate a clear reason for such an overpayment, however, the panel is unable to determine whether these objectives have been met or whether they justified the large subsidy that was created. Once again, Treasury needs clear goals, methods, and measurements. I am deeply concerned with the lack of progress by Treasury on foreclosure mitigation. The Emergency Economic Stabilization Act of 2008 aimed to stabilize the economy both through direct support of financial institutions and through encouraging foreclosure mitigation efforts. These two endeavors are intertwined. The credit crisis was triggered by a mortgage foreclosure crisis. While stabilizing the housing market will not solve the economic crisis, the economic crisis cannot be solved without first stabilizing the housing market. The Panel intends to focus on foreclosure mitigation in our next report. Through an examination of existing foreclosure mitigation efforts, our report will consider key areas including: the need for more detailed and comprehensive information about mortgage loan performance and loss mitigation; the primary drivers in loan default, including affordability, negative equity, and fraud; impediments to successful foreclosure mitigation; and existing foreclosure programs and alternative approaches. Dealing with the foreclosure crisis will help stabilize families and the economy. As I have noted throughout my testimony with regard to TARP, you can’t manage what you can’t measure- a philosophy that applies equally well to foreclosure mitigation. A notable dearth of comprehensive or even adequate information on loan performance and loss mitigation makes progress on this point challenging. Developing sound metrics will be a key component for progress in addressing the foreclosure crisis. I am aware that the Chairman and many Committee members have voiced similar concerns with foreclosure prevention and loss mitigation, and I look forward to working closely with you as we issue our upcoming report. What have we learned thus far? In the rush to do something, it isn’t always justified or wise simply to do anything. Especially with a program of this magnitude and importance, it is critical for Treasury to articulate clear objectives, develop a precise strategy for reaching those goals, and utilize specific methods to measure progress. Despite the rush to expand both the size and scope of TARP, Treasury must delineate these fundamental points which should have been spelled out at the very beginning of the program. Treasury must also expand its current focus to incorporate its foreclosure mandate. Thank you for the opportunity to testify today. I appreciate the chance to discuss the Congressional Oversight Panel’s findings thus far, as well as my recommendations to improve the administration of TARP. I am especially pleased to be able to testify along with Special Inspector General Barofsky and Acting Comptroller General Dodaro. They have been excellent allies in the effort to provide comprehensive oversight of a large, complex program, and I believe it is noteworthy that our organizations have identified similar major concerns. I

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look forward to our continued cooperation, as well as working with this Committee to bring accountability to the TARP program. That concludes my testimony. I will be pleased to answer your questions.

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Chapter 23

FEBRUARY OVERSIGHT REPORT: VALUING TREASURY'S ACQUISITIONS* Congressional Oversight Panel

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EXECUTIVE SUMMARY A central question surrounding the Troubled Asset Relief Program (TARP) is whether the U.S. Department of the Treasury’s (Treasury) policy of injecting cash into financial institutions has resulted in a fair deal for taxpayers. The focus of this report is a financial valuation study of the terms of Treasury’s program to invest capital in financial institutions. The report was commissioned as part of the Congressional Oversight Panel’s continuing investigation into the terms of the TARP. The report was conducted for the Panel by its Advisory Committee on Finance and Valuation (Advisory Committee) and by the international valuation firm, Duff & Phelps Corporation; the Advisory Committee’s report is attached to this report and the longer complete Duff & Phelps valuation report is posted on the Panel’s website.[1] The valuation report was enhanced by an accompanying legal analysis of the terms of the TARP transactions, which is also attached to this report. The valuation report concludes that Treasury paid substantially more for the assets it purchased under the TARP than their then-current market value. The use of a one-size-fits-all investment policy,[2] rather than the use of risk-based pricing more commonly used in market transactions, underlies the magnitude of the discount. A number of reasons for this result have been suggested. The Panel has not determined whether these reasons are valid or whether they justify the large subsidy that was created. In addition, the Panel has not made judgments about whether the decision-making underlying these investments was sound. The rationale for the Treasury’s approach and the impact of this disparity will be subjects for the Panel’s continued study and consideration. It is important, however, for the public to understand that in many cases Treasury received far less value in stocks and warrants than the money it injected into financial institutions.

*

This is an edited, excerpted and augmented edition of a Congressional Oversight Panel publication.

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The legal analysis concludes that the documentation for the investments was standardized. The use of standardized documents likely contributed to Treasury’s ability to obtain speed of execution and wide participation, but it meant Treasury could not address differences in credit quality among various capital infusion recipients through variations in contractual terms governing the investments or impose specific requirements on a particular recipient that might help insure stability and soundness. The February report also provides an update on the Panel’s previous work, as well as a review of the key actions and changes at Treasury regarding the TARP since the Panel’s last report. In its initial report, on December 10, 2008, the Panel asked ten questions about the TARP and a series of sub-questions on the strategy, goals, methods, and operations of the program. In its next report, issued on January 9, 2009, the Panel analyzed Treasury’s response to the Panel’s questions and highlighted four specific areas where Treasury most needed to provide additional information: 1. Bank Accountability. The Panel pressed Treasury to collect and disclose additional information about how TARP-recipient banks are using taxpayer funds and to establish reporting requirements, formal usage guidelines, or additional benchmarks for the conduct of TARP recipients as a condition of taxpayer support. 2. Transparency and Asset Evaluation. The Panel emphasized the need for Treasury to ensure transparency both in the process of selecting TARP recipients and the relationship between an institution’s receipt of TARP funds and the value of its assets in order to increase TARP accountability and confidence in the markets. 3. Foreclosures. The Panel pressed Treasury to follow Congress’s express mandate in §§ 109-110 of the Emergency Economic Stabilization Act of 2008 (EESA) to increase federal assistance to homeowners in danger of losing their homes and make further efforts to reduce foreclosures. 4. Strategy. The Panel repeated its concern about Treasury’s shifting explanations of its strategy for using TARP funds and called for Treasury to develop and follow a coherent strategy for the future use of TARP funds. The Panel remains committed to its ongoing oversight role and will continue to seek answers to the questions presented in its previous reports. While the Panel recognizes that Treasury is in the midst of a transition of personnel and policies, it believes that the Panel’s initial questions and areas of concern maintain their importance and will help Treasury as it reshapes its policies and continues to administer the TARP. To that end, the Panel wrote a letter to Treasury on January 28, 2009, reiterating its requests for answers and asking for further response by February 18, 2009.[3] The Panel expects to discuss Treasury’s responses in its March report to Congress. In addition to following the issues raised thus far, the Panel will focus on home mortgage foreclosures in its next report. We will continue to engage the public through hearings and a public participation and comment process, as well as required monthly reports.

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VALUING TARP ACQUISITIONS In October 2008, Treasury abandoned its original strategy of purchasing “troubled” mortgage and other assets from the nation’s financial institutions, deciding instead to invest money directly into those institutions.[4] The Panel made clear in its first report to Congress and the public, on December 10, 2008, that it wanted to know if “the public is receiving a fair deal” under the TARP in general and for those investments in particular. It explained that: [A] critical aspect of [the Panel’s] mission is to determine whether the United States government has received assets comparable to its expenditures under the Emergency Economic Stabilization Act of 2008.

The Panel’s review of the ten largest TARP investments the Treasury made during 2008 raises substantial doubts about whether the government received assets comparable to its expenditures.[5] The Panel’s analysis does not explore whether these investments were the best means of achieving broader policy goals. Valuation of the transactions is critical because then-Treasury Secretary Henry Paulson assured the public that the investments of TARP money were sound, given in return for full value: “This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything.”[6] In December, he reiterated the point, “When measured on an accrual basis, the value of the preferred stock is at or near par."[7] This means, in effect, that for every $100 Treasury invested in these companies, it received stock and warrants valued at about $100. As discussed in greater detail in the remainder of this section, an extensive valuation analysis of the ten transactions that was commissioned by the Panel concluded that:

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• • • •

In the eight transactions which were made under the investment program for healthy banks, for each $100 spent, Treasury received assets worth approximately $78. In the two transactions which were made under programs for riskier banks, for each $100 spent, the Treasury received assets worth approximately $41. Overall, in the ten transactions, for each $100 spent, the Treasury received assets worth approximately $66. Extrapolating these results using appropriate weighting to all capital purchases made in 2008 under TARP, Treasury paid $254 billion, for which it received assets worth approximately $176 billion, a shortfall of $78 billion.

Three programs have been used by the Treasury to infuse capital directly into American financial institutions under TARP. The Capital Purchase Program (CPP), created in October 2008 has the most widespread bank participation.[9] This program was intended for healthy banks: those that are sound and not in need of government subsidization. While a total of 317 financial institutions have received a total of $194 billion under the CPP as of January 23, 2009, eight large early investments represent $124 billion, or 64 percent of the total. The eight were: Bank of America Corporation, Citigroup, Inc., JPMorgan Chase & Co., Morgan Stanley, Goldman Sachs Group, Inc., PNC Financial Services Group, U.S. Bancorp, and Wells Fargo & Company. In addition, the Systemically Significant Failing Institutions Program (SSFI Program), launched in November 2008,[9] and the Targeted Investment

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Program (TIP), launched in January 2009,[10] were created to deal with financial institutions that were in financial distress. Only American International Group (AIG) received money under the SSFI Program. After receiving money as a “healthy bank,” six weeks later Citigroup received a second infusion of TARP funds, an infusion that was ultimately included as part of the as yet uncreated TIP.[11] Under these three programs, Treasury made cash investments in designated financial institutions in return for a combination of preferred stock[12] and warrants[13] to purchase common stock of those institutions. The terms differed for each of the three programs—CPP, SSFI, and TIP—but they all involved the purchase of portions of the institutions. To determine whether the Treasury received its money’s worth in these transactions, the Panel commissioned a detailed valuation project in December 2008. The project and its methodology were designed by an Advisory Committee on Finance and Valuation, composed of Adam M. Blumenthal, a former First Deputy Comptroller of the City of New York, Professor William N. Goetzmann of Yale University and Professor Deborah J. Lucas of Northwestern University.[14] After a competitive bidding process, the Committee recommended the international valuation firm Duff & Phelps to work with it to implement the project design and to perform the actual valuation. To reach a conclusion about each of Treasury’s investments, it is necessary to compare the amount of the government investment with the value of the preferred stock and the warrants it received in return in each transaction. The task is made more difficult because none of the securities is publicly-traded. Instead, the valuation analysis assumed that “securities similar to those issued under the TARP were trading in the capital markets at fair values.”[15] The valuations employed multiple approaches in order to cross-check and validate the results.[16] Value was estimated for each security as of the time immediately following the announcement by Treasury of its purchase. This valuation approach takes into account investors’ perceptions about how the TARP investment and other government programs announced concurrently affected the value of the institutions. The valuation report itself was based solely on publicly available information. The ten largest investment transactions made under the three programs through November 2008 are listed in the following table.[17] This valuation analysis bears some similarities to an earlier valuation by the Congressional Budget Office (CBO). The report, titled The Troubled Asset Relief Program: Report on Transactions Through December 31, 2008, was released in January 2009. The CBO report focused on utilizing procedures similar to the Federal Credit Reform Act (FCRA) to assess the budgetary impact of all TARP transactions on the federal debt and deficit, which can be interpreted as a cost and thus a subsidy rate. By comparison, the Duff & Phelps report provides extensive, detailed company-by-company information for all major CPP participants. While both reports conclude that the fair market value of the securities received by Treasury was less than what was paid, the much deeper focus in the Duff & Phelps report provides the detailed information necessary to inform the public policy debate surrounding the future of the TARP. The Duff & Phelps report includes multiple valuation methods, an evaluation of similar private transactions, and an exploration of some of the reasoning behind the varied subsidies, including between the different programs and even between CPP participants. While the report itself does not draw any conclusions as to the validity of Treasury’s decisions or any particular goals, the information will be extremely valuable to policy makers in drawing their own conclusions.[18]

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February Oversight Report: Valuing Treasury's Acquisitions Summary of Estimated Value Conclusions

Purchase Program Participant

Valuation Date

Face Value

Total Estimated Value Subsidy Value %

$

Capital Purchase Program Bank of America Corporation

10/14/08

$15.0

$12.5

17%

$2.6

Citigroup, Inc.

10/14/08

25.0

15.5

38%

9.5

JPMorgan Chase & Co.

10/14/08

25.0

20.6

18%

4.4

Morgan Stanley

10/14/08

10.0

5.8

42%

4.2

The Goldman Sachs Group, Inc.

10/14/08

10.0

7.5

25%

2.5

The PNC Financial Services Group U.S. Bancorp

10/24/08

7.6

5.5

27%

2.1

11/03/08

6.6

6.3

5%

0.3

Wells Fargo & Company Subtotal

10/14/08

25.0 $124.2

23.2 $96.9

7% 22%

1.8 $27.3

$70.0

$54.6

22%

$15.4

11/10/08

$40.0

$14.8

63%

$25.2

11/24/08

20.0 $60.0

10.0 $24.8

50% 59%

10.0 $35.2

$254.2

$176.2

31%

$78.0

311 Other Transactions* SSFI & TIP American International Group, Inc. Citigroup, Inc. Subtotal Total

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Dollars in billions. * Extrapolates 22% subsidy rate from 8 studied CPP investments. See discussion in Part II.

In addition to a direct investigation of the market value of the transactions, the Panel’s earlier reports suggested that additional information about the value of the TARP transactions could be derived by comparing those transactions to three large transactions involving private sector investors that were undertaken in the same time period: the purchase by Berkshire Hathaway of an interest in Goldman Sachs, announced in September 2008, the investment by Mitsubishi in Morgan Stanley, also announced in September 2008, and an investment by Qatar Holding LLC and entities representing the beneficial interests of HH Sheik Mansour Bin Zayed Al Nahyan, a member of the Royal Family of Abu Dhabi (Abu Dhabi) in Barclays PLC, announced in late October 2008.[19] The Advisory Committee and Duff & Phelps concluded that these transactions could not be used to make a direct comparison with the TARP investments. But by applying the same methodology to three major investments by private investors in financial institutions which occurred near the same time as the Treasury investments (the $5 billion investment by Berkshire Hathaway in Goldman Sachs, the $9 billion investment by Mitsubishi in Morgan Stanley and the £7 billion investment by Qatar Holding and Abu Dhabi and in Barclays), the valuation report concludes that, unlike Treasury, private investors received securities with a fair market value as of the valuation dates of at least as much as they invested, and in some cases, worth substantially more. • •

For each $100 Berkshire Hathaway invested in Goldman Sachs, it received securities with a fair market value of $110. For each $100 Qatar Holding and Abu Dhabi invested in Barclays, they received securities with a fair market value of $123.

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•

For each $100 Mitsubishi invested in Morgan Stanley, it received securities with a fair market value of $102.

The way Treasury structured the CPP, SSFI Program, and TIP transactions was certain to create significant subsidies. Treasury’s emphasis on uniformity, marketability, and use of call options in structuring TARP investments helped produce a situation in which Treasury paid substantially more for its TARP investments than their then-current market value. The decision to model the far riskier investments under the TIP and SSFI Program closely on the CPP transactions also effectively guaranteed that a substantial subsidy would exist for these riskier institutions. Because Treasury decided to make all healthy bank purchases on precisely the same terms, stronger institutions received a smaller subsidy, while weaker institutions received more substantial subsidies. Two other structural factors contributed to the discount factor. First, companies have the ability to call the preferred stock at par; this option, which is not typical of publicly traded preferreds, decreased the value of the securities received by Treasury, particularly in the stronger institutions; this call feature may have reflected an attempt to limit the amount of time taxpayer funds are outstanding.[20] In addition, while the preferred stock and warrants could be registered for resale at the Treasury’s request, liquidating such a large position would entail substantial cost. The likely costs inherent in such a liquidation also contributed to the discount. In addition, the legal analysis[21] prepared for the Panel noted that for the CPP transactions: (i) Treasury will receive no premium if the issuer optionally redeems the preferred shares, (ii) the warrants and common stock held by Treasury can be repurchased, albeit at their then-fair market value, if the preferred stock is either redeemed or transferred, and (iii) the number of warrants held by Treasury are subject to an automatic 50 percent reduction if the subject institution sells equity equal in amount to Treasury’s investment and qualifying as Tier I capital. Treasury appears to have decided to be a passive investor in each of the institutions in which it invests, choosing not to receive either voting rights or seats on an institution’s board of directors if it converts its warrants to common stock, and with a few exceptions no special covenants are imposed on the institutions that receive capital infusions. This can be contrasted with the more activist approach taken by the U.K. government in its investments in banks. (The legal analysis does note that, in some respects, Treasury did obtain better terms than were reflected in the Berkshire Hathaway investment in Goldman Sachs, but that those more favorable terms did not affect value.) Additional observations in the legal analysis are also important. The analysis notes that the standard terms of the investments used in the CPP were generally within the range of what would be customary in a commercial transaction between a large financial institution and a large investor. The terms of the documents include a number of provisions that appear to be designed to encourage replacement of the Treasury investment with private capital quickly. In addition, there were no provisions in the CPP investment that restricted operations or business practices of the recipients, restricted or required reporting of use of funds, [22] or were directed at specific public policy objectives of EESA.[23] (The CPP, SSFI Program, and TIP forms do contain a “highly unusual provision ... favorable to Treasury” that allow Treasury unilaterally to amend any provision of the relevant agreements if necessary to comply with any new or

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amended federal statutes; the impact of this provision is not included in the valuations in any way and is, in any event, extremely difficult to assess.)[24] By paying the same price, regardless of the financial condition of the bank, Treasury ensured that weaker institutions would necessarily be subsidized more heavily. It may have wished to avoid the risk that more stringent CPP terms for some institutions would signal Treasury knowledge of adverse circumstances at those institutions. It is also possible that Treasury wanted to avoid the risk that failure of a weak bank could bring down stronger banks. The Panel has not determined whether these objectives have been met or whether they justified the large subsidy that was created. The Panel expects to address these broader policy objectives in its future work. Investments in AIG under the SSFI Program and the second Citigroup investment involved significantly larger subsidy levels than were seen in the CPP institutions. The reason is that, despite the higher risk, Treasury modeled these investments closely on the CPP investments that had been designed for healthy banks. In the AIG transaction, Treasury already held warrants for 79.9 percent of the equity of AIG as the result of a loan provided to AIG by the Federal Reserve Bank of New York earlier in 2008; the proceeds of the TARP investment in AIG were used to repay part of that loan. The multiple loans and investments by parts of the federal government in AIG have helped keep it out of bankruptcy. The Advisory Committee and Duff & Phelps looked only at the discount to face value that the Treasury took as a result of its TARP investment, although they recognize that that investment was part of a broader strategy by the government to prop up the company. Even in the AIG case, however, the then-Treasury Secretary insisted that the transactions were accompanied by “significant taxpayer protections and conditions.”[25] Similarly, while the first investment in Citigroup was made as part of the CPP for healthy banks, the second investment was made after the markets recognized that Citigroup was subject to a significantly increased level of risk. The second investment was originally made outside any particular TARP program, on a freestanding basis; when the TIP was subsequently created, on January 2, 2009, the second Citigroup investment was reclassified as part of the TIP, aimed at riskier institutions, in connection with other government interventions. The analysis in the valuation report and its appendices does not evaluate those other interventions (i.e., interventions other than the purchase of preferred stock and warrants). It focuses only on the value gap between the amount of capital provided by the Treasury in the second Citigroup investment, and the value of the securities the Treasury received in exchange. It is possible that the value of the investments made by Treasury may someday be worth more than the amount Treasury paid. It is also possible that they may be worth much less. This assessment demonstrates that the value received—including the market’s estimate of its future worth—was considerably less at the time of the transaction than the amount paid by Treasury. It also demonstrates that the value on an institution-by-institution basis varied substantially. Treasury may have determined that granting the subsidies described above to a group of banks, regardless of their condition, on essentially the same terms was necessary, for one or more reasons, to preserve the integrity of the financial system. Whether the subsidy provided by Treasury to financial institutions represents a fair deal for the taxpayers is a subject for policy debate and judgment, not one that can be answered in a purely quantitative way.

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In its public statements about its TARP expenditures, Treasury did not describe the program in terms of subsidization, nor did it explain why some banks should be subsidized more than others. Instead, Treasury repeatedly described investments “at or near par.” The Panel recognizes that the prudence of spending taxpayer dollars in this way may be the subject of disagreement among both experts and the public, but the Panel believes that if TARP is to garner credibility and public support, a clear explanation of the economic transaction and the reasoning behind any such expenditure of funds must be made clear to the public. The Panel will continue to investigate how Treasury spends taxpayer funds and whether these expenditures are helping the economy.

TREASURY DEPARTMENT UPDATES SINCE PRIOR REPORT In the month since the Panel’s last report, the second half of the TARP funds have been released, a new Administration has taken office, and a new Treasury Secretary, Timothy Geithner, has been sworn in. Since the new Administration began, Treasury has also extended additional assistance to financial institutions and announced new rules governing the conduct of recipients of TARP money.[26] The Panel will continue to evaluate the terms and conditions of the new programs and will provide updates on the effectiveness of these efforts. •

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•

•

Second Tranche of TARP Funds Released. On January 15, 2009, Congress voted to approve the release of the second $350 billion available from the October 2008 Emergency Economic Stabilization Act.[27] As such, Treasury now has access to the full $700 billion spending authority contemplated in EESA.[28] New Transparency Initiatives. Treasury has announced new regulations governing disclosure and mitigation of conflicts of interest in its TARP contracting.[29] In addition, Treasury has made public assurances that it will “publish a detailed description” of its criteria and process for selecting TARP recipients.[30] Treasury has also issued new guidelines that restrict contact between lobbyists and the Treasury officials who decide how to allocate TARP funds.[31] Finally, Treasury has announced a new policy of publishing investment contracts within five to ten business days of all future TARP transactions,[32] in addition to publishing additional information about past TARP transactions with financial institutions.[33] Changing TARP Strategy. Secretary Geithner has indicated that future TARP strategy will incorporate additional conditions and an emphasis on homeowner assistance and unfreezing credit markets. New TARP funding will have “tough conditions to protect the taxpayer and the necessary transparency to allow the American people to see how and where their money is being spent and the results those investments are delivering.”[34] Furthermore, Treasury will increase its emphasis on preventing foreclosures and freeing up credit for homeowners and small businesses.[35] Term Sheet for CPP investments in Subchapter S-Corporations. On January 14, 2009, Treasury released a Summary of Terms under which S-Corporation financial institutions – generally small, private banks – can apply for TARP capital

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infusions.[36] Under these terms, Treasury limits dividend repayments and receives 7.7 percent interest for the first five years and then 13.8 percent interest for the next 25 years. In exchange for capital, Treasury will receive debt senior to any stock in the company. Additional Executive Compensation Rules. On January 16, 2009, Treasury issued interim final rules for reporting and recordkeeping requirements under the executive compensation standards of the CPP.[37] Treasury originally published executive compensation standards for CPP in October 2008. The new rules require the CEOs of firms receiving funds under CPP to certify to TARP’s Chief Compliance Officer on a regular basis that the institutions are complying with the applicable TARP rules governing executive compensation. Financial institutions are also required to maintain records to substantiate these certifications for at least six years following each certification and provide these records to the TARP Chief Compliance Officer upon request. Treasury made similar revisions to the executive compensation guidelines applicable to financial institutions participating in the SSFI Program. On February 4, 2009, Treasury issued stringent new guidelines governing executive compensation for future TARP recipients.[38] Investment in Chrysler Financial. In addition to the $22.4 billion already loaned out as part of TARP’s Automotive Industry Financing Program (AIFP) in December 2008, on January 16, 2009, Treasury announced a plan to make a $1.5 billion loan under the AIFP to a special purpose entity created by Chrysler Financial.[39] The money will provide liquidity to Chrysler Financial’s program to extend new consumer auto loans to Chrysler customers. The five-year loan will require Chrysler to pay Treasury interest equal to one month LIBOR plus 100 basis points in the first year, and then one month LIBOR plus 150 basis points in years two to five. The loan will be secured by a senior secured interest in a pool of newly originated consumer auto loans, and Chrysler Holding will serve as a guarantor for certain covenants of Chrysler Financial. Finalized Terms of Citigroup Guarantee Agreement. On January 16, 2009, Treasury, in conjunction with the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), finalized the terms of a guarantee agreement with Citigroup.[40] The guarantee agreement was initially announced by Treasury on November 23, 2008. The agreement guarantees Citigroup against unusually large losses on an asset pool of $301 billion of loans and securities backed by residential and commercial real estate assets, which will remain on Citigroup’s balance sheet. The guarantee is in place for ten years for residential assets and five years for nonresidential as sets.[41] Should there be losses on the pool, Citigroup will be responsible for up to the first $29 billion. Any additional losses will be split between Citigroup and the government, with Citigroup bearing 10 percent of the losses and the government bearing 90 percent. Additional Assistance to Bank of America. On January 16, 2009, Treasury announced an agreement to provide Bank of America with a package of assistance in the form of guarantees, liquidity access, and capital under the TARP.[42] Treasury and FDIC agreed to provide Bank of America protection against the possibility of unusually large losses on an asset pool of approximately $118 billion primarily composed of securities backed by residential and commercial real estate loans. The

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Congressional Oversight Panel majority of these assets, which will remain on Bank of America’s balance sheet, were acquired as the result of its merger with Merrill Lynch.

In addition, Treasury announced it will invest $20 billion in Bank of America under the TIP. TIP was created to maintain investor confidence in financial institutions at risk of a loss due to market volatility. In exchange for its investment, Bank of America will issue Treasury preferred shares with an 8 percent dividend.

OVERSIGHT ACTIVITIES The Congressional Oversight Panel was established as part of EESA and formed on November 26, 2008. Since its establishment, the Panel has issued two oversight reports, as well as its Special Report on Regulatory Reform, which was issued on January 29, 2009. Since the release of the Panel’s January oversight report, the following developments pertaining to the Panel’s oversight of the TARP took place: •

•

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•

In late January, the Panel received reports from experts it engaged to estimate the fair market value of the securities purchased by Treasury in its eight largest purchases under the CPP, and its investments in AIG and Citigroup outside the CPP. This report includes a discussion of their findings above and a more detailed summary in Appendix III and on the Panel’s website. On January 28, 2009, Elizabeth Warren, Chair of the Panel, sent a letter to newly sworn- in Treasury Secretary Timothy Geithner requesting more complete answers to the questions the Panel posed regarding Treasury’s TARP strategy and implementation. The Panel has received and reviewed more than 3,500 messages with stories, comments, or suggestions through cop.senate.gov.

FUTURE OVERSIGHT ACTIVITIES Public Hearings Following two successful public hearings, one in Clark County, Nevada in December on the housing crisis and one in Washington, DC in January on regulatory reform, the Panel will continue to hold hearings to shine light on the causes of the financial crisis, the administration of TARP, and the anxieties and challenges of ordinary Americans.

Upcoming Reports In March 2009, the Panel will release its fourth TARP oversight report. The EESA aimed to stabilize the economy both through direct support of financial institutions and through encouraging foreclosure mitigation efforts. In the March report, the Panel will examine

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existing foreclosure mitigation efforts. The report will consider key areas including: the need for more detailed and comprehensive information about mortgage loan performance and loss mitigation efforts; the primary drivers in loan default, including affordability, negative equity and mortgage fraud; impediments to successful foreclosure mitigation efforts; and existing foreclosure programs and alternative approaches. That report will also update the public on the status of its TARP oversight activities. The Panel will continue to release oversight reports every 30 days. The Panel notes with great interest the release by the Government Accountability Office (GAO), on January 30, 2009, of a report titled Troubled Asset Relief Program: Status of Effort to Address Transparency and Accountability Issues. Independently agreeing with the Panel’s unresolved concerns, GAO highlighted Treasury’s continued need for action both to improve transparency and accountability in the TARP and to articulate and communicate a coherent overall strategy. The Panel intends to pursue these issues closely and to address them in future reports. The Panel also notes with approval the efforts of TARP Special Inspector General (SIG) Neil Barofsky to prompt TARP recipients to account for their use of taxpayer funds and satisfy the conditions and reporting requirements already in place. The Panel strongly calls on Treasury and the Office of Management and Budget to aid, rather than hinder, SIG Barofsky’ s investigation.

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Public Participation and Comment Process The Panel encourages members of the public to visit its website at cop.senate.gov. The website provides information about the Panel and the text of the Panel’s reports. In addition, concerned citizens can share their stories, concerns, and suggestions with the Panel through the website’s comment feature. To date, the Panel has received more than 3,500 comments, and the Panel looks forward to hearing more from the American people. By engaging in this dialogue, the Panel aims to enhance the quality of its ideas and advocacy.

ABOUT THE CONGRESSIONAL OVERSIGHT PANEL In response to the escalating crisis, on October 3, 2008, Congress provided the U.S. Department of the Treasury with the authority to spend $700 billion to stabilize the U.S. economy, preserve home ownership, and promote economic growth. Congress created the Office of Financial Stabilization (OFS) within Treasury to implement a Troubled Asset Relief Program. At the same time, Congress created the Congressional Oversight Panel to “review the current state of financial markets and the regulatory system.” The Panel is empowered to hold hearings, review official data, and write reports on actions taken by Treasury and financial institutions and their effect on the economy. Through regular reports, the Panel must oversee Treasury’s actions, assess the impact of spending to stabilize the economy, evaluate market transparency, ensure effective foreclosure mitigation efforts, and guarantee that Treasury’s actions are in the best interests of the American people. In addition, Congress has instructed the Panel to produce a special report on regulatory reform that will analyze “the

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current state of the regulatory system and its effectiveness at overseeing the participants in the financial system and protecting consumers.” On November 14, 2008, Senate Majority Leader Harry Reid and the Speaker of the House Nancy Pelosi appointed Richard H. Neiman, Superintendent of Banks for the State of New York, Damon Silvers, Associate General Counsel of the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), and Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School to the Panel. With the appointment on November 19 of Congressman Jeb Hensarling to the Panel by House Minority Leader John Boehner, the Panel had a quorum and met for the first time on November 26, 2008, electing Professor Warren as its chair. On December 16, 2008, Senate Minority Leader Mitch McConnell named Senator John E. Sununu to the Panel, completing the Panel’s membership. In the production of this report, the Panel owes special thanks to our Advisory Committee of Adam M. Blumenthal, Professor William N. Goetzmann, and Professor Deborah J. Lucas, to Tim Massad and Catherina Celosse for their legal analysis, as well as to the hardworking staff at Duff & Phelps. The Panel also thanks Ting Yeh for his careful research support on this report.

APPENDIX I: LETTER FROM MR. LAWRENCE SUMMERS TO CONGRESSIONAL LEADERSHIP, DATED JANUARY 15, 2009

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The Honorable Nancy Pelosi Speaker United States House of Representatives The Honorable John Boehner Republican Leader United States House of Representatives The Honorable Harry Reid Majority Leader United States Senate The Honorable Mitch McConnell Republican Leader United States Senate Dear Madam Speaker, Leader Boehner, Leader Reid and Leader McConnell: Thank you for the extraordinary efforts you have made this week to work with PresidentElect Obama in implementing the Emergency Economic Stabilization Act of 2008. In addition to the commitments I made in my letter of January 12, 2009, the President-Elect asked me to respond to a number of valuable recommendations made by members of the House and Senate as well as the Congressional Oversight Panel. We completely agree that this program must promote the stability of the financial system and increase lending, preserve

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home ownership, promote jobs and economic recovery, safeguard taxpayer interests, and have the maximum degree of accountability and transparency possible. As part of that approach, no substantial new investments will be made under this program unless President elect Obama has reviewed the recommendation and agreed that it should proceed. If the President elect concludes that a substantial new commitment of funds is necessary to forestall a serious economic dislocation, he will certify that decision to Congress before any final action is taken. As the Obama Administration carries out the Emergency Economic Stablization Act, our actions will reflect the Act's original purpose of preventing systemic consequences in the financial and housing markets. The incoming Obama Administration has no intention of using any funds to implement an industrial policy. The Obama Administration will commit substantial resources of $50-100B to a sweeping effort to address the foreclosure crisis. We will implement smart, aggressive policies to reduce the number of preventable foreclosures by helping to reduce mortgage payments for economically stressed but responsible homeowners, while also reforming our bankruptcy laws and strengthening existing housing initiatives like Hope for Homeowners. Banks receiving support under the Emergency Economic Stabilization Act will be required to implement mortgage foreclosure mitigation programs. In addition to this action, the Federal Reserve has announced a $500B program of support, which is already having a significant beneficial impact in reducing the cost of new conforming mortgages. Together these efforts will constitute a major effort to address this critical problem. In addition to these commitments, I would like to summarize some of the additional reforms we will be implementing. 1. Provide a Clear and Transparent Explanation for Investments:

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•

• •

For each investment, the Treasury will make public the amount of assistance provided, the value of the investment, the quantity and strike price of warrants received, and the schedule of required payments to the government. For each investment, the Treasury will report on the terms or pricing of that investment compared to recent market transactions. The above information will be posted as quickly as possible on the Treasury's website so that the American people readily can monitor the status of each investment.

2. Measure, Monitor and Track the Impact on Lending: • •

•

As a condition of federal assistance, healthy banks without major capital shortfalls will increase lending above baseline levels. The Treasury will require detailed and timely information from recipients of government investments on their lending patterns broken down by category. Public companies will report this information quarterly in conjunction with the release of their 10Q reports. The Treasury will report quarterly on overall lending activity and on the terms and availability of credit in the economy.

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Congressional Oversight Panel 3. Impose Clear Conditions on Firms Receiving Government Support: •

•

• •

Require that executive compensation above a specified threshold amount be paid in restricted stock or similar form that cannot be liquidated or sold until the government has been repaid. Prevent shareholders from being unduly rewarded at taxpayer expense. Payment of dividends by firms receiving support must be approved by their primary federal regulator. For firms receiving exceptional assistance, quarterly dividend payments will be restricted to $0.01 until the government has been repaid. Preclude use of government funds to purchase healthy firms rather than to boost lending. Ensure terms of investments are appropriately designed to promote early repayment and to encourage private capital to replace public investments as soon as economic conditions permit. Public assistance to the financial system will be temporary, not permanent.

4. Focus Support on Increasing the Flow of Credit: • •

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• • •

The President will certify to Congress that any substantial new initiative under this program will contribute to forestalling a significant economic dislocation. Implement a sweeping foreclosure mitigation plan for responsible families including helping to reduce mortgage payment for economically stressed but responsible homeowners, reforming our bankruptcy laws, and strengthening existing housing initiatives like Hope for Homeowners. Undertake special efforts to restart lending to the small businesses responsible for over two-thirds of recent job creation. Ensure the soundness of community banks throughout the country. Limit assistance under the EESA to financial institutions eligible under that Act. Firms in the auto industry, which were provided assistance under the EESA, will only receive additional assistance in the context of a comprehensive restructuring designed to achieve long-term viability.

The incoming Obama Administration is committed to these undertakings. With these safeguards, it should be possible to improve the effectiveness of our financial stabilization efforts. As I stressed in my letter the other day, we must act with urgency to stabilize and repair the financial system and maintain the flow of credit to families and businesses to restore economic growth. While progress will take time, we are confident that, working closely with the Congress, we can secure America's future. Sincerely,

Lawrence H. Summers Director-Designate National Economic Council

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APPENDIX II: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH WARREN TO TREASURY SECRETARY MR. TIMOTHY GEITHNER, DATED JANUARY 28, 2008 Congressional Oversight Panel 732 North Capitol Street, NW Rooms C-320 and C-617 Mailstop: COP Washington, DC 20401 January 28, 2009 Mr. Timothy F. Geithner Secretary of the Treasury U. S. Department of the Treasury 1500 Pennsylvania Avenue, NW Washington, DC 20220

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Dear Secretary Geithner: Congratulations on your successful confirmation as Treasury Secretary. I am writing as Chair of the Congressional Oversight Panel to affirm the Panel’s commitment to working with you as we carry out the duties assigned to us by Congress in Section 125 of the Emergency Economic Stabilization Act of 2008, Public Law 110-343. In your opening statement to the Senate Finance Committee during your confirmation hearing on January 21, 2009, you committed to ensuring that Troubled Asset Relief Program (TARP) funding be allocated “with tough conditions to protect the taxpayer and the necessary transparency to allow the American people to see how and where their money is being spent and the results those investments are delivering.” The Panel was encouraged by this statement and by your emphasis on transparency and accountability in your answers to the written follow-up questions you received from the Finance Committee after the hearing. Many of your proposed changes to TARP reflect the concerns we have expressed in both of our oversight reports. In our first oversight report, we sent your predecessor ten questions consisting of fortysix sub-questions, seeking more information on behalf of the American public on Treasury’s strategy, the selection process for TARP recipients, the uses to which this funding is being put, Treasury’s plan to help families through this crisis, and any metrics Treasury may have as evidence of TARP’s effectiveness. Your predecessor replied, but twenty-six of those subquestions had no response. Among the nineteen remaining sub-questions, some open questions remain as well. Our second report addressed your predecessor’s response to our original questions, and identified four key areas of critical concern for Treasury to implement TARP in accordance with the will of Congress. We focus particularly on: 1) more bank accountability for the use of funds, 2) increased transparency, 3) a plan for foreclosure mitigation, and 4) the articulation of a clear overall strategy.

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Mr. Timothy F. Geithner January 28, 2009 February 18, 2009. We also urge you to keep the American public informed on the uses and effects of TARP money and the steps being taken to safeguard the taxpayers’ investments in financial institutions. We look forward to working with you to meet the challenges posed by this crisis. If I can be of any assistance, please do not hesitate to contact me or have a member of your staff contact the Panel’s Executive Director, Naomi Baum, at or . Sincerely, Elizabeth Warren Chair Congressional Oversight Panel cc: Rep. Jeb Hensarling Sen. John E. Sununu Mr. Richard H. Neiman Mr. Damon A. Silvers

APPENDIX III: REPORT OF THE ADVISORY COMMITTEE ON FINANCE AND VALUATION TO THE CONGRESSIONAL OVERSIGHT PANEL

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REPORT TO CONGRESSIONAL OVERSIGHT PANEL EMERGENCY ECONOMIC STABLIZATION ACT OF 2008

ON

THE

Adam M. Blumenthal Managing General Partner, Blue Wolf Capital Management William N. Goetzmann Edwin J. Beinecke Professor of Finance and Management Studies and Director of the International Center for Finance at the Yale School of Management, and Research Associate of the National Bureau of Economic Research Deborah J. Lucas Donald C. Clarke HSBC Professor of Consumer Finance at the Kellogg School of Management at Northwestern University, and Research Associate of the National Bureau of Economic Research

SUMMARY A key question posed by the Congressional Oversight Panel for the Emergency Economic Stabilization Act of 2008 (“EESA”) is whether or not the investments in financial institutions made by the U. S. Department of Treasury (“Treasury”) under the Troubled Asset Relief Program (“TARP”) represent a fair deal to taxpayers. To provide insight into that question, we compared the price paid by Treasury for these securities with the values implied by the open market for some of the largest investments made under the TARP.[43]

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February Oversight Report: Valuing Treasury's Acquisitions Summary of Estimated Value Conclusions

Purchase Program Participant

Valuation Date

Face Value

Total Estimated Value Subsidy Value %

$

Capital Purchase Program Bank of America Corporation

10/14/08

$15.0

$12.5

17%

$2.6

Citigroup, Inc.

10/14/08

25.0

15.5

38%

9.5

JPMorgan Chase & Co.

10/14/08

25.0

20.6

18%

4.4

Morgan Stanley

10/14/08

10.0

5.8

42%

4.2

The Goldman Sachs Group, Inc.

10/14/08

10.0

7.5

25%

2.5

The PNC Financial Services Group U.S. Bancorp

10/24/08

7.6

5.5

27%

2.1

11/03/08

6.6

6.3

5%

0.3

Wells Fargo & Company Subtotal

10/14/08

25.0 $124.2

23.2 $96.9

7% 22%

1.8 $27.3

$70.0

$54.6

22%

$15.4

11/10/08

$40.0

$14.8

63%

$25.2

11/24/08

20.0 $60.0

10.0 $24.8

50% 59%

10.0 $35.2

$254.2

$176.2

31%

$78.0

311 Other Transactions* SSFI & TIP American International Group, Inc. Citigroup, Inc. Subtotal Total

Dollars in billions. * Extrapolates 22% subsidy rate from 8 studied CPP investments. See discussion below.

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•

•

•

Of the $184 billion of TARP funds analyzed, we estimate the securities received would have a fair market value of approximately $122 billion when Treasury announced its agreement to buy them. The eight purchases made under the TARP Capital Purchase Program, aimed at healthier banks, had a subsidy rate to those banks of 22%. The securities subsequently purchased from AIG and Citigroup under the Systemically Significant Failing Institutions Program and the Targeted Investment Program had a significantly higher subsidy rate of 59%. If one takes this discount for the investments made under the CPP and applies it to the entire $194 billion committed to capital purchases in financial institutions participating in that program, the total subsidy under the CPP would be approximately $43 billion.[44] When added to the $35 billion discount on $60 billion invested in AIG and in Citigroup outside of the CPP, we estimate that of the $254 billion invested to date in securities of non-automotive financial institutions, and exclusive of the most recent Bank of America investment, the amount that represents a subsidy to those institutions is $78 billion.

A value was estimated for each security as of the time immediately following the announcement by Treasury of its purchase. This valuation approach takes into account investors’ perceptions about how the TARP investment itself, and other government programs announced concurrently, affected value.

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Whether the subsidy provided by Treasury to financial institutions represents a fair deal for the taxpayers is a question for policy debate and judgment, not one that can be answered in a purely quantitative way. The Treasury Department has pointed out that the loss of wealth and diminution in asset values that would accompany failure of one or more major financial institutions could represent a far larger sum. A substantial portion of the subsidy under the CPP program can be attributed to the decision by Treasury to provide capital on the same terms to all participants. Treasury chose to offer “one size fits all” pricing in order to encourage all institutions to participate, and in so doing disregarded apparent differences in their financial condition. A consequence is that Treasury effectively offered weaker participants greater subsidies than it offered to stronger participants. For example, the analysis in the report suggests that Treasury received securities from Wells Fargo worth an estimated $23.2 billion as of the valuation date for its investment of $25.0 billion, or 93% of face value, while from Morgan Stanley, it received securities worth an estimated $5.8 billion as of the valuation date for its investment of $10.0 billion, or 58% of face value. The TIP and SSFI programs were intended to assist institutions under more stress than those participating in the CPP. Under these programs AIG and Citigroup received funds on terms that were only slightly more stringent than those offered to CPP participants, and the resulting subsidy rates were much higher in these two transactions. It is worth noting that at the time of these two investments, there were numerous government commitments to these institutions; we focused only on the value of the TARP investments. By applying the same methodology to three major investments by private investors in financial institutions which occurred in the same time frame as the Treasury investments (the $5 billion investment by Berkshire Hathaway in The Goldman Sachs Group, the $9 billion investment by Mitsubishi in Morgan Stanley and the £7 billion investment by Abu Dhabi and Qatar Holding in Barclays plc), it was estimated that the private investors received securities with a fair market value as of the valuation dates of at least as much as they invested, and in some cases worth substantially more. (Berkshire Hathaway received Goldman Sachs securities with a fair market value of 110% of the amount paid, Abu Dhabi and Qatar Holding received securities with a fair market value of 123% of the amount paid, and Mitsubishi received securities with a fair market value of 102% of the amount paid.) Such comparisons are offered only as a benchmark. The question of whether Treasury could have negotiated investments that had comparable pricing and satisfied its public policy objectives at the same time is not one that the report can answer.

A. INTRODUCTION The U.S. Department of Treasury (“Treasury”) used almost all of the $350 billion of taxpayer dollars provided to it to in the first installment of the the Troubled Asset Relief Program (“TARP”) created by the Emergency Economic Stabilization Act of 2008 (“EESA”). Of this amount, Treasury has spent, or committed to spend, approximately $310 billion to purchase preferred stock and warrants of financial institutions. Most of these purchases were made pursuant to a program developed by Treasury called the Capital Purchase Program (“CPP”). In addition, outside of the CPP, Treasury had invested

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an additional $60 billion in two financial institutions, Citigroup and AIG, through other programs as of the date of our study (an additional investment in Bank of America has since been announced, but we did not review it). The CPP, announced on October 14, 2008, was implemented through a series of Treasury cash investments in exchange for preferred shares and warrants from a broad range of financial companies. All participating institutions obtained essentially the same terms on the preferred shares (a 5% dividend, increasing to 9% after five years) and warrants to purchase common stock equal to 15% of the face value of the preferred investment, with the companies having the right to cancel half of these warrants under certain circumstances. Terms differed somewhat for non-publicly traded institutions and for the investments outside of the CPP. Treasury allocated $250 billion of the funds under EESA to CPP. To date, it has spent or committed to spend $194 billion of that amount to purchase preferred stock and warrants of 319 financial institutions under this program. In this report, we focus on the value of Treasury’s investments in a set of the largest participants in the CPP program, and the value of Treasury’s investments in Citigroup and AIG made under related programs. In order to provide information helpful in assessing whether the public is receiving a fair deal under the TARP program, we asked two questions in particular: (i) what was the fair market value of the preferred stock and warrants Treasury received in exchange for these cash infusions to financial institutions and (ii) how do these values compare to what was received in several privately negotiated transactions, including the earlier investment made by Warren Buffett’s Berkshire Hathaway Inc. (“Berkshire Hathaway”) in The Goldman Sachs Group (“Goldman”) and the investment made by Mitsubishi UFJ Financial Group (“Mitsubishi”) in Morgan Stanley, two of the institutions that received TARP funds, and by Qatar Holdings and other middle eastern entities in Barclays plc (“Barclays”) at the end of October 2008. To answer these questions, on the Panel’s behalf, we designed the scope and methodology for a valuation project and selected Duff & Phelps (“D&P”), one of the largest valuation firms in the world, to conduct a rigorous valuation study implementing that plan. D&P frequently conducts arms-length, independent valuations of securities like the TARP investments for which no active trading market exists. We directed D&P to provide an analysis of the likely fair market value of the securities received by Treasury in the ten largest investments made under the TARP. Given the particular details of Treasury’s investments and the desire to comprehensively review how they relate to publicly traded securities as well as to comparable private investments, we judged that the professional experience and judgment of a major firm such as D&P would most effectively interpret market information and yield reliable, quantitative answers. In the sections that follow, we describe the scope, methodology and conditions of the D&P analysis, and summarize their basic findings. We then apply the estimates made by D&P to the question posed by the Panel.

B. PROCESS Immediately after the Congressional Oversight Panel was formed, the Panel created an Advisory Committee on Finance and Valuation to create a valuation study. The members of the Advisory Committee are: Adam M. Blumenthal, Managing General Partner of Blue Wolf

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Capital Management and Former First Deputy Comptroller of the City of New York; Professor William N. Goetzmann, Edwin J. Beinecke Professor of Finance and Management Studies and Director of the International Center for Finance at the Yale School of Management, and Research Associate of the National Bureau of Economic Research; and Professor Deborah J. Lucas, Donald C. Clarke HSBC Professor of Consumer Finance at the Kellogg School of Management at Northwestern University, and Research Associate of the National Bureau of Economic Research, and the former Chief Economist of the Congressional Budget Office. Members of the Advisory Committee created a detailed scope for the valuation project, and identified and interviewed or had discussions with five firms who were considered as candidates to perform the valuation work. The Advisory Committee recommended the selection of Duff & Phelps, LLC (D&P), one of the largest valuation firms in the world, based on a number of factors. D&P and the Advisory Committee then designed a methodology to be used to implement the project design. The Advisory Committee periodically reviewed with D&P their application of the valuation methodologies and the assumptions underlying them.

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C. SCOPE The valuation project was designed to provide an estimate of the fair market value of the securities purchased by Treasury in its eight largest purchases under the CPP, and its investments in AIG and Citigroup outside the CPP. The Panel focused on these investments because they were among the largest commitments made under the TARP.[45] Collectively, they represent a total expenditure of $184 billion, or 53% of the first $350 billion authorized by Congress for the TARP. The scope called for D&P to take into account in its analysis only information that was publicly available. They were asked what an arm’s length investor would pay for the securities. This presupposed that an investor would not have access to material nonpublic information, but would have comprehensive access to public filings, analyst reports, and trading information on all of the publicly traded securities issued by the companies. Importantly, by basing estimates on the market price immediately following the announcement by Treasury of a purchase, the valuation takes into account investors’ perceptions about how the intervention itself affects value going forward. The scope also called for the firm to take into account major privately negotiated investments that occurred around the same time as the TARP investments under consideration, in particular, investments by Warren Buffet’s Berkshire Hathaway in Goldman Sachs, by Mitsubishi in Morgan Stanley, and by Qatar Holding and Abu Dhabi in Barclays, all of which occurred in September and October of 2008. The scope specifically excludes any effort to place a value on the policy objectives of Treasury in making these investments, apart from those reflected directly in security prices. It also excludes consideration of any indirect effects of the purchases on other governmental or private interests. For instance, interdependencies between institutions may mean that helping one enhances the value of others, as was thought to be important with AIG. Those objectives, as well as the broader implications for the financial system and the economy, obviously must be considered in the policy debate on whether the TARP investments were a good use of

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public funds, but they are outside the scope of the valuation analysis, which addresses only the subsidies to the institutions as measured by the difference between the prices paid for the securities and estimated fair market values. We do not attempt to value other broad financial interventions which Treasury, the Federal Reserve Bank, the FDIC, or other government affiliated entities made in the financial markets, in some cases simultaneously or in close proximity to the TARP investments. We also do not value other government investments in the same companies. For example, at the time of the TARP investment, Treasury already owned 79.9% of AIG, as the result of a prior loan to AIG by the Federal Reserve Bank of New York, and the proceeds of the AIG loan were used to repay part of the Fed’s loan to AIG. In this case, we valued the TARP securities, not the Fed’s loan, or the government’s pre-existing equity interest in AIG. The scope includes only the value of the securities at the time of the announcement of the investment. As such, it does not consider their current market value, which may be considerably different than the values reported. Finally, the scope provides for an estimate of the subsidy received by each institution as a whole, but it does not cover how the subsidy will be divided among different classes of stakeholders (e.g., stock holders, bond holders, employees, suppliers and customers).

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D. METHODOLOGY The methodology used in the valuation report is discussed below and is described at much greater length in D&P’s report. The Advisory Committee and D&P developed a general approach, which was to evaluate the preferred shares and the warrants obtained by Treasury separately, company by company. Recognizing that any single valuation approach might provide a limited perspective on the factors influencing the value of the securities, the Advisory Committee asked D&P to consider multiple methods that offered a means to crossvalidate their estimates. All of these approaches rely on some basic assumptions, the most important of which is that the prices for securities similar to those issued under the TARP were trading in the capital markets at fair values, which as defined by D&P is “the price at which they would change hands between a willing buyer and a willing seller when neither is acting under compulsion and when both have a reasonable knowledge of the relevant facts.” Despite the turmoil in the capital markets, the Advisory Committee believes, and D&P confirmed through analysis, that there was sufficient liquidity and market volume in the trading of securities at that time to rely on market pricing for analysis. D&P was not asked to consider whether these market prices were consistent with other notions of fundamental economic value. D&P’s results are provided as a range of values. The midpoints of those ranges were selected as representative values for this report.

E. PREFERRED STOCK VALUATION Preferred shares are legally a type of equity, but they have several characteristics that are similar to bonds. They are senior in priority to the common shares of a company, but junior to the debt of the firm. The preferred shares issued under CPP are non-voting securities which

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provide for a 5% dividend for a five-year period and a 9% dividend in perpetuity thereafter. A company can choose not to pay a preferred dividend without declaring bankruptcy, but the dividends on the preferred shares issued by bank holding companies under CPP are cumulative, meaning that any missed dividends must be paid in full before common stockholders can receive dividends. The preferred shares are callable under certain conditions described in full in D&P’s report. As a check on the robustness of the estimates, D&P used several methodologies to value the preferred stock issued in the investments: two based on the market values of different types of comparable publicly traded securities and one using a contingent claims analysis approach.

1. Discounted Cash Flow Analysis Using Market Yields (“Yield-Based Discounted Cash Flow Approach”)

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This approach involves estimating the future expected cash flows (dividend payments and return of principal) on the preferred securities, and discounting those projected cash flows at a market yield derived from the prices of comparable securities. Finding the appropriate discount rate involved analyzing the yields of the publicly traded preferred stock and debt securities of each institution based on transaction prices in the days following Treasury’s announcement of the investments. In those instances where sufficiently liquid preferred securities were available for comparison, D&P used them as the primary basis for determining a discount rate. In either case, D&P then systematically adjusted yields to take into account the differences between the terms of the CPP preferred shares and the terms of the publicly traded securities. Adjustments were made for the call options, the cumulative dividend, and other factors.

2. Discounted Cash Flow Analysis Using Risk Adjusted Survival Probabilities Derived from CDS Spreads (“CDS-Based Discounted Cash Flow Approach”) Like the yield-based method, this approach is based on future contractual cash flows adjusted for expected losses, a risk premium, and the time value of money. In this case, the adjustments are based on information about default and the price of credit risk implied by the premiums charged on credit default swaps (“CDS”). Values estimated in this manner were compared to those derived from the Yield-Based Discounted Cash Flow Approach. An advantage of the CDS prices is that they are generally determined in a more liquid market, and thus they may better capture the market assessment of risk. However, CDS prices reflect the market’s required return on debt securities, not on preferred shares, and thus valuation requires an adjustment for the differences between the two types of securities. Because of the difficulty of determining the appropriate adjustment, this method was used primarily as a check on whether the other two approaches were generating reasonable estimates of value.

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3. Contingent Claims Analysis This methodology is distinctly different from the yield-based approaches. It relies on a probabilistic model of how the firm’s asset value, and therefore, its ability to pay claimants, evolves over time. The model is calibrated using data on stock prices and their volatility, and on the book value of debt. Preferred shares are assumed to receive dividend payments as long as the solvency condition is satisfied, but to recover little or nothing in bankruptcy. Default occurs when assets drop below a trigger point based on debt outstanding. The value of the preferred shares is based on the discounted present value of dividends and any return of principal, averaged over simulations of a large number of possible time paths of a firm’s asset value. This mathematical framework is used in the private sector for credit risk modeling and has also been used in a government context for the valuation of government guarantees. This approach allows for sensitivity analysis of the quantitative importance of various assumptions. The results of the contingent claims analysis are consistent with the yield-based approaches, and in addition, make apparent the sensitivity of estimated value to assumptions about the volatility of the firm’s underlying assets and the events that trigger bankruptcy.

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F. WARRANT VALUATION A warrant confers the right to acquire a share of stock from a company within a specified time period for a predetermined price, called the exercise price. Warrants allow an investor to participate in potential stock price increases since they generate a gain whenever share prices rise above the exercise price of the warrant. Treasury required each publicly held institution receiving an investment to issue warrants at an exercise price equal to the average trading price for the 20 days prior to the day of Treasury’s approval of the institution’s participation in the CPP. The number of common shares to be acquired was set at a number which, when multiplied by the exercise price, was equal to 15% of the total amount of Treasury’s investment in the preferred shares. Thus, if Treasury invested $10 billion in the institution, Treasury would receive warrants for $1.5 billion of common stock. If the exercise price of the warrants was $15 per share, then Treasury would receive warrants for 100 million shares. The warrants are subject to a reduction feature whereby half of the warrants may be cancelled by the issuing institution if it meets certain conditions involving sale of common stock to investors in private sector transactions prior to year-end 2009, a feature which should reduce the upside to Treasury. These warrants have a value independent of the preferred shares themselves. D&P valued the warrants using a widely used option pricing methodology, a Monte Carlo model, which allowed them to take into account the conditions of the warrant contract. Warrant values depend on a number of inputs, including the current stock price, the exercise price, the risk free rate of return, the expected future volatility of the stock price, the dividend yield on common stock, and the number of warrants issued in relation to the outstanding shares of stock and other features specific to the TARP offerings. The D&P valuation used the stock price of the company on the chosen date of valuation, a forwardlooking set of short-term discount rates based upon the current Treasury yield curve, an

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estimation of volatility drawn from historical stock price fluctuations, as well as a comparison to volatilities implied by prevailing market prices of long-dated equity options and the appropriate ratio of exercised warrants to outstanding shares. In most instances, the value of the warrants was small relative to the value of the preferred stock itself.

G. REDUCED MARKETABILITY DISCOUNT Under all of the methodologies, and for both preferred stocks and warrants, D&P applied a “reduced marketability discount factor” to reflect the fact that the large size of Treasury positions made them potentially costly to liquidate and hence less valuable. Based on academic and industry studies, they estimated this factor to be between 5% and 10% for the preferred stocks and between 5% and 20% for the warrants.

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H. COMPARABLE TRANSACTIONS Utilizing similar methodologies, D&P also analyzed three transactions which were concluded around the time of the TARP investments: the $5 billion Berkshire Hathaway investment in Goldman Sachs announced on September 23, 2008 and closed on October 1, 2008; the $9 billion Mitsubishi investment in Morgan Stanley, which was announced on September 22, 2008, amended, and then closed on October 13, 2008; and the £7.billion investment by Abu Dhabi and Qatar Holding in Barclays plc which was announced on October 31, 2008 and completed on November 27, 2008. D&P estimated that Berkshire Hathaway received securities with a fair market value between 108% and 112% of the actual amount paid, based on prevailing market prices for similar securities; that Mitsubishi received securities with a fair market value between 100% to 105% of the amount paid; and that Qatar Holdings and Abu Dhabi received securities with a fair market value of between 122% to 125% of the amount paid. Stated differently, Berkshire Hathaway, Qatar Holding and Abu Dhabi paid less for their securities than what one would expect other investors to pay; all of the private investors received relatively more valuable securities for their investments than did Treasury. D&P concluded that this broad range of outcomes reflects unique circumstances at individual financial institutions, and in some cases contractual terms that severely limited marketability. In addition, there may also be some value accruing from Warren Buffett’s reputation as a canny investor which enabled him sufficient leverage to purchase securities in Goldman Sachs at a significant discount to the prevailing market value of similar securities. Because of such special circumstances, they concluded that the individual transactions should not be taken as a benchmark for valuation of the TARP securities but rather as an indicator of the potential for investors to extract price concessions below prevailing market values in certain circumstances. The issue of whether the government could have obtained similar discounts from prevailing market values on similar securities remains a question for Treasury. The question also remains of whether, even if it could have negotiated a transaction benchmarked to these

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transactions, such a deal would have met policy objectives, but this question is outside of the scope of the valuation report. As a result, the D&P analysis uses public market trading data that assumes no positive strategic advantage that might accrue to a large shareholder. The analysis of comparable transactions does, however, provide information about the relative discounts that accrued to some other major private actors so that the Panel may understand their magnitude.

I. CONCLUSIONS OF THE VALUATION ANALYSIS The table below lists the TARP investments reviewed in the valuation showing institution, amount, date announced and the Treasury program under which the investment was made.

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Purchase Program Participant Capital Purchase Program Bank of America Corporation Citigroup, Inc. JPMorgan Chase & Co. Morgan Stanley The Goldman Sachs Group, Inc. The PNC Financial Services Group U.S. Bancorp Wells Fargo & Company Subtotal SSFI & TIP American International Group, Inc. Citigroup, Inc. Subtotal Total

Date

Amount

10/14/08 10/14/08 10/14/08 10/14/08 10/14/08 10/24/08 11/03/08 10/14/08

$15.0 25.0 25.0 10.0 10.0 7.6 6.6 25.0 $124.2

11/10/08 11/24/08

$40.0 20.0 $60.0 $184.2

Dollars in billions.

The next table shows D&P’s estimates of the fair market value of each of the investments, in each case as of the respective dates the investments were announced. Taken as a whole, D&P concluded that the fair market value of the investments as of such dates, in the aggregate, was between $112 and $132 billion, or between 61% and 71% of the amount Treasury paid for them. Thus, of the total $184 billion invested in these transactions, between $53 and $73 billion, represented overpayment relative to the estimated fair market value of the securities. a.

In the case of two of the eight largest investments under the CPP, U.S. Bancorp and Wells Fargo & Company, which the market deemed least risky, and for which Treasury paid $31.6 billion in the aggregate, D&P concluded that the fair market value of the investments was at or somewhat below the amount paid for them by Treasury, with a range of 87% to 99% of Treasury’s cost. That is, D&P believes that a third party buyer would have paid between $27.6 billion and $31.3 billion for securities for which Treasury paid $31.6 billion. b. In the case of the other six CPP investments, in Bank of America, JP Morgan Chase & Co., Goldman Sachs, the PNC Financial Services Group, Citigroup, and Morgan

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c.

Stanley, which the market deemed riskier, D&P concluded that the fair market value of the investments was significantly below the price paid by Treasury, with a value range of 47% to 68% of face for Morgan Stanley, which bore the greatest discount, to 77% to 89% of face at Bank of America. In the aggregate for these six investments, for which Treasury paid $92.6 billion, D&P estimated a value range of $61.6 to $73.2 billion. In the case of the $60 billion in investments outside the CPP program, consisting of the November investments in AIG under the SSFI program and in Citigroup under the TIP, D&P concluded that the government received value equal to between $22.5 and $27.1 billion, or 37% to 45% of the amount invested.

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Summary of Estimated Value Conclusions

Purchase Program Participant Capital Purchase Program Bank of America Corporation Citigroup, Inc. JPMorgan Chase & Co. Morgan Stanley The Goldman Sachs Group, Inc. The PNC Financial Services Group U.S. Bancorp Wells Fargo & Company Subtotal SSFI & TIP American International Group, Inc. Citigroup, Inc. Subtotal Total

Total Estimated Value* Discount to Face Midpoint % $

Duff & Phelps Value Range Values % of Face Low

High

Low

High

Valuation Date

Face Value

10/14/08

15.0

12.5

17%

2.6

11.6

13.3

77%

89%

10/14/08 10/14/08

25.0 25.0

15.5 20.6

38% 18%

9.5 4.4

14.2 19.0

16.8 22.2

57% 76%

67% 89%

10/14/08 10/14/08

$10.0 10.0

$5.8 7.5

42% 25%

$4.2 2.5

$4.7 6.8

$6.8 8.2

47% 68%

68% 82%

10/24/08

7.6

5.5

27%

2.1

5.2

5.8

69%

77%

11/03/08 10/14/08

6.6 25.0

6.3 23.2

5% 7%

0.3 1.8

5.9 21.7

6.7 24.6

89% 87%

102% 99%

$124.2

$96.9

22%

$27.3

$89.2

$104.5

72%

84%

11/10/08

$40.0

$14.8

63%

$25.2

$14.2

$15.4

36%

38%

11/24/08

20.0 $60.0 $184.2

10.0 $24.8 $121.6

50% 59% 34%

10.0 $35.2 $62.6

8.3 $22.5 $111.7

11.7 $27.1 $131.6

41% 37% 61%

59% 45% 71%

Dollars in billions. All values are after applicable discounts due to reduced marketability. * As of the respective valuation dates. Midpoint is midpoint of Duff & Phelps range.

J. DISCUSSION There were significant differences in the risk of the institutions that received funds under the TARP, as evidenced by the very different yields on their securities that investors demanded in the capital markets and documented by D&P. In financial institutions which the markets judged to be relatively less risky, Treasury received securities with values slightly

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below what was paid for them. In institutions which the market viewed to have greater risk, the value of securities received by Treasury was further below fair market value. The Advisory Committee believes that this result is a consequence of the policy decision by Treasury to offer uniform terms under the CPP to all financial institutions irrespective of their relative financial condition. For firms with a relatively high probability of default, the 5% dividend rate on the preferred shares was substantially below their market cost of capital, whereas for the healthier firms, it offered a smaller advantage over market rates. Further, the option for an institution to extend the financing beyond the fifth year at a 9% rate only had substantial value to the weaker institutions. A further benchmark for understanding the results of the valuation exercise is that the CPP facility was structured to be voluntary. To induce the relatively healthy financial institutions to participate, the terms for them had to be set so that they did not surrender more value than they received. The decision by Treasury to treat everyone equally led to the best institutions more or less breaking even and weaker entities benefiting from receiving financing on the same terms as their stronger peers. A potential reason to refrain from discriminating among TARP borrowers is the potential adverse effect on public expectations about particular institutions. Put simply, if the public thinks that Treasury knows something about a bank that the public does not know, the markets may interpret any signal from Treasury as a positive or negative indication about the health of the firm. Avoiding this type of signaling may have been a concern in crafting the program. On the other hand, as the report illustrates, the market was aware of the differential risk profile of these banks at the time the investments were made. To the extent that adverse signaling was a concern, risk-based pricing based only on public information may have been possible. However, proposing alternative mechanisms ex post is outside of the scope of this report.

K. CONCLUSION Our report concludes, based on analysis set forth in great detail in D&P’s report, that the fair market value of the securities received was, in most cases, significantly less than what Treasury paid; and we identify the structural reasons in the program that led this to be true. We are not attempting in this report to answer the question of whether the investments were good or bad from a policy perspective, or whether Treasury will eventually recover its investment or even come out ahead. Whether they were of positive benefit to the nation requires an assessment of their effects on the functioning of the U.S. economy. Consequently, this involves a policy debate and requires an assessment as to whether these investments are part of a coherent strategy to achieve the objectives of EESA. The fundamental question is whether the actions taken by Treasury are working to stabilize financial markets and institutions and helping American families. This report provides information on the value conveyed to these institutions at the time of the intervention, which should be a useful input into a broader cost-benefit analysis of the TARP. We hope that by quantifying the cost of the initial largest investments made to date, we have made a contribution to that debate.

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APPENDIX IV SUMMARY OF THE LEGAL REPORT TO THE CONGRESSIONAL OVERSIGHT PANEL FOR ECONOMIC STABILIZATION CONCERNING THE TARP INVESTMENTS IN FINANCIAL INSTITUTIONS, SUMMARY OF THE LEGAL REPORT TO THE CONGRESSIONAL OVERSIGHT PANEL FOR ECONOMIC STABILIZATION CONCERNING THE TARP INVESTMENTS IN FINANCIAL INSTITUTIONS Timothy G. Massad

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A. Scope and Methodology of Legal Report The Panel asked Timothy G. Massad, a corporate lawyer with a New York-based law firm for almost 25 years, including 17 as a partner, to prepare a legal analysis of the TARP investments. He specializes in corporate finance. Mr. Massad took a leave of absence from his firm in late December in order to serve as special legal advisor to the Panel on a pro bono basis and to prepare the report. Catherina Celosse acted as counsel for the Panel in the development of the legal report. The legal analysis focuses on the Capital Purchase Program (“CPP”) created by Treasury as a whole and the largest investments thereunder, as well as the AIG, second Citigroup and most recent Bank of America investment made outside of the CPP. The CPP was for healthy banks. The AIG investment in November 2008 was made under the Systemically Significant Failing Institutions (“SSFI”) program and the Citigroup and Bank of America investments were made under the Targeted Investment Program (“TIP”), which were programs for institutions in greater difficulty or at risk of failure. The legal analysis provides an explanation of the structure and terms of these investments. It also considers whether the terms received by Treasury were customary and consistent with market practice from a legal (but not a valuation) standpoint. There is a wide range of market practice, and terms vary depending on many factors including in particular the credit-worthiness of the issuer, the relative strength of the parties and the preferences of investors. Opinions also vary as to what is customary, and the analysis cannot be reduced to a quantitative assessment as with the valuation analysis. While the legal analysis reviews the material terms of the agreements individually, an investment decision by a private investor to purchase securities of this type is usually made on the basis of the terms as a whole, and an investor’s willingness to agree to a particular set of non-economic terms usually is greatly influenced by the attractiveness of the economic terms. In examining whether the terms were consistent with market practice, the analysis considers in particular the terms of a set of recent transactions agreed upon with the Panel. These include the investments by Berkshire Hathaway Inc. in The Goldman Sachs Group, Inc. (“Goldman Sachs”) and by Mitsubishi UFJ Financial Group (“Mitsubishi”) in Morgan Stanley in the fall of 2008, as well as four other investments in Citigroup, Merrill Lynch and Morgan Stanley that were made between late 2007 and the fall of 2008 (the “U.S. comparative transactions”). In addition, these transactions include the investments by the

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government of the United Kingdom in Royal Bank of Scotland and Lloyds TSB-- HBOS in October 2008 (the “U.K. government investments”) and the investment in Barclays Bank PLC by Qatar Holdings and Sheikh Mansour of Abu Dhabi. The scope and methodology of the report was agreed upon with the Panel, including that the report would be based solely on review of publicly available information concerning the investments. As with the valuation analysis, the legal analysis does not address whether the investments were good or bad investments. Because they were investments by the government seeking to fulfill certain public policy purposes, that conclusion requires not only a consideration of the terms of the investments but also an evaluation of the public policy objectives and whether the investments contributed to achieving those objectives, matters which are beyond the scope of the legal report. The assessment of whether the terms were consistent with market practice is only intended to provide a benchmark. It is not intended to judge whether Treasury made the right public policy choices or suggest that public policy objectives should not influence those terms. The legal report does not consider the other actions that were taken by the U.S. government in response to the financial crisis concurrently with the making of these investments, including specific arrangements made with particular institutions that received TARP funds. Although these actions are relevant to evaluating the effectiveness of the investments from a policy standpoint, they are beyond the scope of the report.

B. Findings

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The summary below highlights some of the findings of the legal report.

(I) Documentation of TARP Investments--Use of Standard Forms Treasury created standard documentation for the CPP investments. In the transactions reviewed, there were no variations in terms from the standard forms other than those contemplated by the forms themselves, such as those related to size of the investment, number of shares issued and strike price of the warrants. Treasury created two sets of forms, one for publicly held qualified financial institutions or “QFIs” (the Public QFI forms) and one for non-publicly held qualified financial institutions excluding S corporations and mutual organizations (the Non-Public QFI forms). Of the total $194.2 billion invested as of January 23, 2009, approximately $1.7 billion has been invested in 90 institutions that are privately held or are community development institutions. Similarity to Berkshire Hathaway Papers The CPP standard forms are quite similar to, and appear to have been based on, the papers used by Berkshire Hathaway for its investment in Goldman Sachs. The pricing-related terms (such as dividend rate, number and exercise price of warrants (including the warrant reduction feature discussed below) and optional redemption premium) of the Treasury agreements are not nearly as favorable to Treasury as the terms that Berkshire Hathaway received, as discussed in the valuation report. In most other areas the terms obtained by Treasury are as good as, and in some cases better than, those in the Berkshire Hathaway

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agreements (such as voting rights of the preferred stock, restrictions on dividends and stock repurchases, warrant anti-dilution protection and exercise period, transfer restrictions, representations and warranties and amendments), although such other provisions generally are not as important to the average investor. One other area where the terms obtained by Treasury are not as good, though it could be thought of as a pricing-related term, is the issuer’s right to repurchase the warrants and underlying common shares at fair market value following redemption or transfer by Treasury of the preferred.

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Incentives to Replace Treasury Investment In order to meet regulatory requirements, Treasury could not require the issuer to redeem the securities (that is, repay Treasury) at a fixed date. However, Treasury included a number of provisions, as discussed below, that appear to be designed to encourage the QFI to replace the Treasury investment with private capital, which was presumably one of Treasury’s objectives. These include the dividend step-up provision, the lack of a premium on optional redemption and (in the Public QFI form) the QFI’s right to reduce the number of warrants in certain circumstances and to repurchase the warrants and underlying common shares at fair market value once the preferred stock is redeemed or transferred. (The common stock dividend restrictions may also encourage replacement of the Treasury investment.) Some of these provisions have a negative impact on valuation as indicated by the valuation report; that is, they make the security less attractive to an average investor. Passive Investor Philosophy The contracts generally provide for Treasury to be a passive investor. This is evidenced by providing for only limited voting rights, not having any board seats or board observers, agreeing not to exercise voting rights on common shares acquired under the warrants and (in the CPP investments) not imposing any covenants other than those that are customary for passive preferred stock investments. There are, for example, few covenants that restrict operations or that are directed at the public policy objectives of EESA. This approach can be contrasted with the more activist approach of the U.K. government as well as the approach taken by Treasury in the TARP loans made to the automotive companies, as discussed in the report. Consequences of Using Standard Forms The legal analysis also considered the implications of Treasury’s decision to structure the program by creating standard forms that were used for all transactions, which implications are relevant to the debate as to whether the investments were good policy choices. First, the design of the program enabled Treasury to avoid having to negotiate any of the terms with any institution, which would have required substantially more Treasury resources and many policy or credit choices. That would have made it difficult to complete as many transactions as quickly as Treasury did. The program design also may have contributed to a perception that the program was fair at least as among financial institutions that were deemed eligible. That may have encouraged participation. Speed of execution and wide participation were important Treasury objectives in October 2008 when the program was launched. The absence of individually negotiated terms meant also that completed transactions did not suggest to the marketplace that, because of the inclusion of more restrictive terms in one case versus another, Treasury had determined that one institution was weaker than another; such signals

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could have in turn affected confidence in, or market prices of the securities of, particular institutions. Treasury also avoided subjecting itself to criticism for why it required or did not require particular terms for an institution. On the other hand, the program design meant that Treasury could not address differences in credit quality or risk among institutions, or in their need for capital, by varying the terms of each investment.[46] Insofar as the standard terms were set for strong institutions, they may have been too lenient for weaker institutions. The program design also meant that Treasury could not impose specific requirements on a recipient to take certain actions that it deemed necessary for the stability or soundness of an institution (The Treasury view may have been that the government could use its power as a regulator to do so). It meant Treasury’s only choice was to decide whether an institution was eligible and what the size of the investment would be within the range of 1 - 3% of riskweighted assets. A determination that an institution was not eligible had potentially harsh consequences for the institution. A major question for the policy debate is therefore whether the basic design of the program--provide capital to a large number of institutions by using standard terms designed for “healthy” banks--made sense, because so many issues follow from the answer to that question.

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TIP/SSFI Investments Treasury used the CPP forms with modifications for the TIP/SSFI investments. The CPP was a voluntary program for healthy banks; TIP and SSFI are for institutions experiencing more difficulty or at risk of failure. The two institutions funded under the TIP also received funds under CPP, and the TIP program was not created until months after the first investment now grouped under that program was announced. The Panel may wish to consider whether these various programs fit together into a coherent overall strategy. (II) Basic Structure of the Investments Treasury acquired preferred stock and warrants. In the CPP investments, Treasury purchased senior preferred stock in an amount equal to 1-3% of risk weighted assets of the institution but not more than $25 billion. Risk-weighted assets are the total assets weighted for credit risk and are a measure used to determine adequacy of capital. The preferred stock qualified as Tier 1 capital, which is a core measure of capital for a financial institution, as a result of a contemporaneous regulatory change by the Federal Reserve Board. The structure of the investment was consistent with Treasury’s goal of bolstering the capital of institutions, which had been depleted by, among other things, losses on mortgage-related assets. Priority of Preferred Stock Preferred stock provides Treasury with priority over common stock as to payment of dividends and in liquidation. The TARP preferred stock pays dividends at a fixed rate, and the dividends are cumulative (except for banks that are not subsidiaries of bank holding companies), which means the dividends, even if not declared by the board of directors in a particular period, continue to accrue, thus enhancing the investor’s return. Unpaid cumulative dividends also compound at the dividend rate then in effect, which is favorable to the investor. The preferred stock is senior, which insures that no other preferred stock can have a higher priority as to payment of dividends or in liquidation.

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Blank Check Preferred Another reason preferred stock may have been attractive to Treasury and to the financial institutions seeking CPP funds is that many public corporations have what is known as “blank-check preferred” which allows the board of directors to issue preferred stock having the desired terms without having to obtain approval (in most cases) from common stockholders, thus facilitating a quick transaction. Stockholder approval can nevertheless be necessary pursuant to the rules of the national securities exchanges if the common shares underlying the warrants equal 20% or more of the total outstanding common shares. Treasury provided that in this case, the institution was not only required to get approval, but the exercise price of the warrants would decline if approval was not obtained quickly.

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Warrants--Basic Terms In the CPP investments, Treasury received warrants to acquire common shares equal to 15% of the value of the preferred investment, which give it an opportunity to realize upside, without giving up its fixed return, if the common stock price of the institution increases. The exercise or strike price of the warrants was set at the current market price of the common stock. Sometimes, warrant exercise prices are set at a premium to current market price of the common stock, which would be less favorable to Treasury as it would require greater price appreciation in order to realize a gain. The warrants were immediately exercisable (subject to a reduction feature) and had a term of ten years, which potentially gives Treasury a long time to realize any gain. The Non-Public QFI form for the CPP program differs in that Treasury acquires a warrant for a preferred stock that pays a 9% dividend, which it exercises immediately. There is no provision for reduction of warrants. Warrant Reduction One unusual feature of the Public QFI forms is that the issuer is entitled to reduce the number of common shares which may be acquired on exercise of the warrants by 50% if it sells equity that qualifies as Tier 1 capital in an amount equal to Treasury’s investment before December 31, 2009. This feature could eliminate much of Treasury’s upside with respect to the warrants. However, it may serve a public policy goal of creating an incentive for the issuer to raise capital which could be used to replace the Treasury investment (although actual redemption of the preferred is not required in order to reduce the warrants). Structure of TIP/SSFI Intvestments The basic structures of the TIP/SSFI investments were similar to the CPP forms— Treasury acquired nonconvertible senior preferred stock paying cumulative dividends as well as warrants. There were differences in pricing-related terms (such as dividend rates, numbers and exercise prices of warrants and absence of the warrant reduction feature found in the CPP investments) as well as in non-pricing terms as described below. Treasury has the unilateral power to change the dividend rate in the AIG transaction, which is highly unusual. Structures of Comparative Transactions The basic structure of the CPP investments was quite similar to the Berkshire Hathaway investment in Goldman Sachs. Berkshire Hathaway purchased cumulative perpetual preferred

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stock paying a fixed dividend, plus warrants to acquire common stock that were exercisable for five years. The structures used in the other U.S. comparative transactions were somewhat different. Mitsubishi purchased noncumulative convertible preferred stock. Noncumulative dividends do not accrue if not paid. However, noncumulative perpetual preferred stock can be treated as Tier 1 capital without limit. Convertible preferred stock gives the holder the right to convert into common stock at a price (and thus realize an upside that is tied to common stock price appreciation as with the warrant), although it must give up the fixed return of the preferred stock to do so. Two of the other U.S. comparative transactions also involved purchases of noncumulative convertible preferred stock. The other two U.S. comparative transactions involved sales of units in which the investor acquired common stock and trust preferred securities. These latter two investments are more complex transactions that have certain tax advantages for the issuers, although they also involve acquiring a combination of a fixed return and a potential to realize upside in the common stock price. The U.K. government transactions are quite different in structure. The U.K. banks made open offers to their existing shareholders to purchase ordinary shares (the equivalent of common shares), and the U.K. government agreed to purchase the ordinary shares to the extent existing shareholders did not take them up, and to buy preference shares that pay noncumulative dividends. Because few shareholders took up the offers, the U.K. government purchased almost all the ordinary shares offered. As a result, it owns 57.9% of one of the banks and 43.4% of the other. The Barclays transaction involved the sale of three securities: perpetual reserve capital instruments which pay a fixed return in cash or common shares, warrants for common stock and mandatorily convertible notes.

III. Dividends The dividend rate on the CPP investments increases from 5% to 9% per annum after five years. This creates the potential for higher returns, and it may also create an incentive for the issuer to redeem the preferred stock. The dividend rates in the TIP/SSFI investments are higher to begin with and do not increase. IV. Redemption and Repurchase In order for the preferred stock to be treated as Tier 1 capital for regulatory purposes, it must be perpetual; the issuer cannot be required to redeem it (that is, repay Treasury) at a fixed date or upon the occurrence of certain events. However, the CPP forms provide for redemption at the option of the issuer in the first three years if the issuer receives proceeds from a qualified equity offering (essentially a sale of equity securities constituting Tier 1 capital for cash) equaling at least 25% of the investment price. After three years, the issuer can redeem at any time. Redemption is at par (without a premium). The absence of a premium, and the fact that the issuer can redeem so early, is not advantageous to an investor who wishes to lock in a rate of return (and negatively impacts the valuation of the securities), but it may serve a public policy objective of encouraging institutions to replace Treasury investment with private capital. The CPP forms also give the issuer the right to repurchase the warrants and any common shares acquired upon exercise of the warrants at fair market value once the preferred shares are redeemed or transferred by Treasury. (Fair market value is determined initially by the issuer’s board of directors but is subject to an appraisal process if Treasury disagrees.) This provision is very unusual and again negatively affects valuation, but it may serve the public

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policy objective of encouraging replacement of the Treasury investment. It may also reflect past experience in U.S. government bailouts, such as in the Chrysler bailout when, after Chrysler recovered and paid off the government loans, there was debate over whether the government should realize a profit on the warrants it received or give them back to Chrysler. The repurchase right sets up a procedure that may avoid a similar controversy. The TIP/S SFI investments contain redemption provisions at par and a repurchase right that are similar to the CPP forms.

V. Covenants The Panel requested that the legal analysis review the covenants included in the TARP investments from the standpoint of not only what was found in the comparative transactions, but also from the standpoint of whether there were provisions that addressed the public policy purposes of the investments. The analysis noted that that there is a wide range of market practice in commercial transactions when it comes to covenants. Well- known, seasoned investment grade issuers generally face lighter covenants when raising funds in normal circumstances than do less credit-worthy companies. Covenants may also vary depending on, among other things, the form of the investment, the context of the transaction and the leverage of the investor. There are generally fewer covenants in purchase agreements for equity securities as compared to loans and other debt financing arrangements, in part because there is a more practical remedy for a covenant violation in a debt financing (the investor can call a default and accelerate the debt) than in an equity investment. The analysis summarized the covenants in the TARP investments as follows. Whether the covenants in any particular area, including those pertaining to dividends, executive compensation, lending and use of proceeds, are appropriate or adequate is a matter for the policy debate. That debate should consider in particular whether covenants should be more restrictive if the economics of the investments provide less than fair value to Treasury, and whether the use of standard forms created an inherent risk of covenants that were too lenient for some, as discussed earlier. (a) Dividend Restrictions and Stock Repurchases The TARP investments include restrictions which insure the priority of dividends on the preferred stock that are similar to those in the comparative transactions. This is a standard covenant in a preferred stock transaction. They also include a covenant that prohibits increases in the dividends on common stock, which is not as common (none of the U.S. comparative transactions or the Barclays transaction has such a restriction). By contrast, the U.K. government transactions and the TARP investments in the automotive companies prohibit all dividends on common shares. The TARP investments also restrict repurchases of common stock, which can be thought of as economically equivalent to a dividend payment in terms of the interests of the preferred stock investor. These covenants are subject to exceptions. The covenants regarding dividends and stock repurchases are more restrictive in the TIP/S SFI investments than in the CPP forms, in that dividends are prohibited in AIG’s case for five years and limited to $0.01 per share per quarter for up to three years in the case of Bank of America and Citigroup.

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(b) Executive Compensation The CPP forms contain a covenant implementing the executive compensation provisions of EESA but do not contain more detailed restrictions or any reporting requirements, though Treasury has recently published rules to require certain reports and certifications. The TIP/S SFI investments contain slightly more restrictive executive compensation covenants (which apply to a larger group of executives and cover more payments) and related reporting requirements. (c) Lending/Foreclosure Mitigation/Use of Proceeds Because the TARP investments were made with public funds to achieve certain policy objectives, one must consider whether there were covenants directed at those policy objectives. The CPP forms contain recitals — introductory language—that state that the QFI “agrees to expand the flow of credit to U.S. consumers and businesses” and agrees to work to “modify the terms of residential mortgages to strengthen the health of the U.S. housing market.” However, no specific covenants concerning these issues were included in the CPP investments. There are also no covenants in the CPP investments restricting use of the proceeds nor any requirements to report how the funds are used. There are no covenants requiring the issuer to take actions with respect to the problems that may have led to the need for the Treasury investment, such as covenants to develop a restructuring plan (as in the U.K. transactions and the automotive investments), to sell certain assets, to not engage in or limit particular types of business, etc. Except for the other matters noted below, there were generally no other covenants or provisions in the CPP investments that imposed restrictions on, or required changes to, operations or business practices or that were directed at the specific public policy objectives cited by Treasury for making the investments. The legal report notes that the use of standard forms meant Treasury could not include customized covenants that required particular institutions to take particular actions that Treasury felt were desirable to improve strength and stability. The legal report also speculates as to why Treasury chose not to include general covenants directed at policy objectives, which may have been because Treasury believed that it was more important to get large numbers of institutions to participate in the program and such covenants would have discouraged participation. It could also be because Treasury wished to be a passive investor and exercise its authority as a regulator rather than an investor (which passive approach, as noted earlier, was also evidenced by having only limited voting rights, not voting the warrant shares, and not having board seats or board observers). It could also be that Treasury believed contractual covenants cannot address the policy objectives effectively. The TIP/SSFI investments contain a few more restrictions. In the case of the AIG investment, the proceeds were applied directly to pay down loans provided by the Federal Reserve Board of New York. In the case of the second Citigroup and third Bank of America investments, there are no restrictions on use of the proceeds but there are reporting requirements concerning use of the proceeds. Citigroup also agreed to implement the FDIC’s mortgage modification program with respect to certain assets. All three TIP/SSFI investments contain covenants that pertain to policies on lobbying, governmental ethics, political activity and corporate expenses. There are no covenants on lending. Although there are no other significant restrictions, the analysis noted that the credit agreement between the Federal Reserve Bank of New York and AIG imposes more restrictive covenants on AIG with respect

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to operation of its business. In addition, a trust for the benefit of Treasury holds almost 80% of the voting equity of AIG, which gives the trust the ability to direct management. The approach taken by Treasury can be contrasted with that taken by the U.K. government. The U.K. banks are required to maintain lending to the mortgage market and to small and medium enterprises at their respective 2007 levels, although this is subject to a caveat that appears to relieve them of any obligation to engage in uncommercial practices. The U.K. banks are also required to submit restructuring plans. Treasury’s approach can also be contrasted with what Treasury did in the case of the loans to the automotive companies, where extensive covenants restricting the companies were included. These included prohibitions on all dividends, restrictions on executive compensation, restrictions on material transactions outside the ordinary course of business, a requirement to divest corporate aircraft, reporting requirements, and a requirement to develop a restructuring plan meeting certain public policy objectives. While it is more common to see restrictions of this sort in debt financings than in preferred stock investments, one could take the view that the use of preferred stock for the banking institution investments was driven by the need to satisfy capital requirements, not to realize higher equity returns, and should not dictate the covenant package. The differences between the covenants in the automotive loans (and AIG credit facility) on the one hand versus the banking institution investments on the other may have been driven more by the overall design of the program--that is, it was a voluntary program intended for large numbers of “healthy” banks, not a rescue of a single institution, and it was for institutions which the government already regulates.

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(d) Other The CPP forms contain a limited right of access to information that relies on the information received by the U.S. government in its capacity as regulator. The Non-Public QFI forms contain restrictions on affiliate transactions. VI. Voting and Control Rights All the investments provide that the holders of the preferred stock have the right to vote on amendments to the charter and certain material transactions if their interests could be adversely affected. These are customary voting rights for preferred stock, and are contained in the four U.S. comparative transactions in which preferred stock was issued as well as in the U.K. government investments. In addition, the investments provide that if dividends are not paid for six quarterly periods (in the case of the CPP) or four quarterly periods (in the case of the TIP/SSFI investments), the holders of preferred stock have the right to elect two directors. This is a provision that is very frequently, but not always, included in preferred stock investments. For example, Mitsubishi obtained such right but Berkshire Hathaway did not, and it was included in one of the other two U.S. comparative transactions in which preferred stock was issued. In the U.K. government transactions, the preference shares also obtained additional voting rights upon a failure to pay dividends. Treasury agreed not to exercise voting rights with respect to any common shares acquired on exercise of the warrants. This is a very unusual term. However, it does not apply to any person to whom Treasury transfers the warrants (or underlying shares) and thus does not affect resale value of the warrants or underlying shares.

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In the U.K. government transactions, the government obtained the contractual right to designate two or three directors. Because the U.K. government ended up acquiring 58% and 43% of the common equity of the two banks in the open offers, it has the practical ability to designate the entire board of directors without the benefit of these contractual provisions. In one of the U.S. comparative transactions the investor acquired the right to designate a director. The legal analysis notes that although the voting rights obtained by Treasury in the TARP investments are customary for preferred stock investments, the issue of what type of voting rights, or influence over management, Treasury should have in an investment made with taxpayer funds raises public policy concerns that the Panel may wish to consider. Treasury may not have sought greater contractual rights of influence because of a view that the government should exercise influence as a regulator but not as a shareholder.

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VII. Transfer Restrictions Treasury did not agree to any contractual restrictions on its ability to transfer the preferred stock or the warrants, other than agreeing not to transfer more than 50% of the warrants during the warrant reduction period. There were transfer restrictions in all the U.S. comparative transactions, including a five year restriction in the case of the Berkshire Hathaway investment in Goldman Sachs. Treasury also received registration rights for public QFIs, which facilitates its ability to resell the securities because such rights enable it to do so in a public offering, and it can require the issuer to list the preferred stock on a national securities exchange. Registration rights were granted in only three of the U.S. comparative transactions. VIII. Representations and Warranties and Conditions to Closing Treasury required the issuers to make far more extensive representations and warranties in the purchase agreements than was the case in the Berkshire Hathaway deal or the other U.S. comparative transactions. (Representations and warranties assist the parties to a transaction in performing due diligence and in allocating risk. If an inaccuracy is discovered prior to closing, Treasury would have a right not to purchase the securities; once the securities are purchased, Treasury may have a claim for damages but the value of this is limited since it would reduce the value of the issuer.) The Treasury forms also impose conditions to closing including receipt of legal opinions and officers certificates. Although these are not unusual and should not be difficult to meet, they are not always obtained by an investor and were not included in the Goldman-Berkshire Hathaway transaction, for example. IX. Other The CPP forms provide that Treasury has the unilateral right to amend any provision of the purchase agreement to the extent required to comply with any changes after the signing date in federal statutes. This is a highly unusual provision that is favorable to Treasury and could be used, for example, to remedy deficiencies in reporting requirements. It is also included in the TIP/SSFI investments.

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REFERENCES

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[1] [2]

Congressional Oversight Panel (online at cop.senate.gov). That policy includes creation of a uniform capital infusion program, acceptance of a limit on the marketability of the securities Treasury received, and terms that encourage institutions to replenish their private capital. [3] See Appendix II, infra. [4] U.S. Department of the Treasury, Statement by Secretary Henry M. Paulson, Jr. on Actions to Protect the U.S. Economy (Oct. 14, 2008) (online at www.treasury.gov/ press/releases/hp1205.htm). [5] This valuation analysis does not include the approximately $24 billion in loans to General Motors, Chrysler, Chrysler Financial, and GMAC made as part of the Automotive Industry Finance Program. [6] U.S. Department of the Treasury, Statement by Secretary Henry M. Paulson, Jr. on Capital Purchase Program (Oct. 20, 2008) (online at www.treas.gov/press/releases/ hp1223.htm). [7] U.S. Department of the Treasury, Responses to Questions of the First Report of the Congressional Oversight Panel for Economic Stabilization (Dec. 30, 2008). [8] U.S. Department of the Treasury, Treasury Announces TARP Capital Purchase Program Description (Oct. 14, 2008) (online at www.treas.gov/press/releases/ hp1207.htm). [9] U.S. Department of the Treasury, Treasury to Invest in AIG Restructuring Under the Emergency Economic Stabilization Act (Nov. 10, 2008) (online at www.treasury.gov/ press/releases/hp1261.htm). [10] U.S. Department of the Treasury, Treasury Releases Guidelines for Targeted Investment Program (Jan. 2, 2009) (online at www.treasury.gov/press/releases /hp1338.htm). [11] Id. Treasury made it clear retroactively when it announced the TIP guidelines that its November 23 investment in Citigroup fell under TIP. Id. See also U.S. Department of the Treasury, Joint Statement by Treasury, Federal Reserve and the FDIC on Citigroup (Nov. 23, 2008) (online at www.treasury.gov/press/releases/hp1287.htm). Treasury used TIP again in January 2009 to make additional investments in Bank of America. U.S. Department of the Treasury, Treasury, Federal Reserve and the FDIC Provide Assistance to Bank of America (Jan. 16, 2008) (online at www.treas.gov/press/ releases/hp1356.htm). [12] The preferred stock in the CPP investments paid a dividend of 5 percent for five years and 9 percent thereafter; it was so-called “perpetual preferred” (that is, it did not have a fixed term), although it could be redeemed by the issuer under certain conditions. Preferred stock is a form of security that lies halfway between a corporation’s common stock and its formal debt. The preferred stock bears a fixed dividend rate that is payable out of earnings, it must receive its dividend before any dividends can be paid to common shareholders, and its dividend rights are often cumulative (as was the case with the Treasury investments), which means that if a dividend is missed, the holder of the preferred stock has a right to receive the missed dividend as part of its payment in future years. In a liquidation, the preferred shareholders must be paid before any

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[13]

[14]

[15]

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[16]

[17] [18]

[19] [20]

[21]

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amount can be paid to the common shareholders, but preferred shareholders themselves cannot receive any funds if there is not enough first to pay all of the corporation’s creditors. The warrants allowed the Treasury to buy common stock of each institution for an additional amount - called the “exercise price” - that was calculated so that Treasury benefit if the value of the common stock increased. The exercise price for the Treasury warrants is the average trading price of a share of the institution’s stock for the 20 days prior to the selection of the institution for the CPP, and the shares that could be purchased were set at 15 percent of the face value of the Treasury’s preferred stock investment. (So that if the Treasury made a $100 billion investment, the warrants would permit it to purchase $15 billion of common stock.) The warrant values differed for the other two programs, but the principle remained the same. Mr. Blumenthal is now the Managing General Partner of Blue Wolf Capital Management in New York. Professor Goetzmann is Edwin J. Beinecke Professor of Finance and Management Studies and Director of the International Center for Finance at the Yale School of Management. Professor Lucas is Donald C. Clarke HSBC Professor of Consumer Finance at the Kellogg School of Management at Northwestern University. Both Professor Goetzmann and Professor Lucas are Research Associates of the National Bureau of Economic Research. Adam M. Blumenthal, William N. Goetzmann, and Deborah J. Lucas, Report to the Congressional Oversight Panel on the Emergency Economic Stabilization Act of 2008, at 7 (Feb. 4, 2009) (hereinafter “Advisory Committee Report”). The Advisory Committee Report is attached as Appendix III to this report. The valuation methods are summarized on pages 7-10 of the Advisory Committee Report. The complete valuation report conducted by Duff & Phelps, which runs to some 697 pages, has been posted on the Panel’s web site, www.cop.senate.gov, and a link to the report is attached as Appendix V to this report. Advisory Committee Report, supra note 15, at 2. Like the Duff & Phelps report, the CBO report uses only publicly available information to value capital purchases. Advisory Committee Report, supra note 15, at 7-10; Congressional Budget Office, The Troubled Asset Relief Program: Report on Transactions Through December 31, 2008, at 4-5 (Jan. 16, 2009). Advisory Committee Report, supra note 15, at 10. The ability of a recipient of TARP assistance to call at par the preferred stock it has issued to Treasury accounts for slightly less than one-third of the total subsidy involved in the TARP transactions valued and slightly less than one-half of the subsidy in the CPP transactions alone. The liquidation costs associated with the preferred stock and warrants Treasury received accounted for about 20 percent of the total subsidy, or about a quarter of the subsidy in the CPP transactions alone. Looking at the benchmark transactions, private sector investors were, in those cases, able to offset this discount through a combination of higher interest rate, by taking more shares, or by insisting on other terms that balanced the impact of the market overhang. The legal analysis was prepared by Timothy G. Massad, Esq., a New York City corporate lawyer with close to 25 years’ experience, who took an unpaid leave of absence from his law firm to serve as special legal advisor to the Panel on a pro bono

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[22] [23]

[24] [25]

[26]

[27]

[28] [29]

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[30]

[31] [32]

[33]

[34]

[35]

[36]

Congressional Oversight Panel basis. Catherina Celosse, Esq., acted as counsel for the Panel in the development of the legal analysis. The lack of such reporting requirements is especially hard to understand. Timothy G. Massad, Summary of the Legal Report to the Congressional Oversight Panel for Economic Stabilization Concerning the TARP Investments in Financial Institutions, at 8 (Feb. 4, 2009) (hereinafter “Legal Analysis”). The Legal Analysis is attached as Appendix IV to this report. Id. at 11. U.S. Department of the Treasury, Remarks by Secretary Henry M. Paulson, Jr. on Financial Rescue Package and Economic Update (Nov. 12 2008) (online at www.treas.gov/press/releases/hp1265.htm). The Panel appreciates the new administration’s responsiveness to the concerns raised in its oversight reports as evidenced by National Economic Council Director Lawrence H. Summers’ January 15, 2009 letter to the Congressional leadership, see Appendix I infra, and its recent TARP initiatives discussed in this report. Lori Montgomery and Paul Kane, Senate Votes to Release Bailout Funds to Obama, Washington Post (Jan. 16, 2009) (online at www.washington post.com/wpdyn/content/article/ 2009/01/15/AR2009011504253.html). Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. No. 110-343 at § 115(a). TARP Conflicts of Interest, Interim Rule, 74 Fed. Reg. 3431-3436 (Jan. 21, 2009) (codified at 31 C.F.R. §§ 31.200-31.218). Brady Dennis, Treasury Moves to Restrict Lobbyists from Influencing Bailout Program, Washington Post (Jan. 28, 2009) (online at www.washingtonpost.com/wpdyn/content/article/2009/01/27/AR2009012703500.html); U.S. Department of the Treasury, Treasury Secretary Opens Term with New Rules To Bolster Transparency, Limit Lobbyist Influence in Federal investment Decisions (Jan. 27, 2009) (online at www.ustreas.gov/ press/releases/tg02.htm). Id. U.S. Department of the Treasury, Treasury Announces New Policy to Increase Transparency in Financial Stability Program (Jan. 28, 2009) (online at www.ustreas.gov/press/releases/tg04.htm). See, e.g., David Enrich and Damian Paletta, Agreement Boosts Citi Oversight, Wall Street Journal (Jan. 29, 2009) (online at online.wsj.com/article/SB12331895529 1026821.html). Senate Committee on Finance, Testimony of Timothy F. Geithner, Hearing To Consider the Nomination of Timothy F. Geithner To Be Secretary of the Treasury, 111th Cong. (Jan. 21, 2009) (online at finance.senate.gov/hearings/testimony/2009 test/012109tgtest.pdf) Id. See also Rebecca Christie, Summers Says TARP To Be ‘Very Different’ Under Obama, Bloomberg (Jan. 25, 2009) (online at www.bloomberg.com/apps/news? pid=20601068&sid=ayehJsUpnfGg); Andrew Ross Sorkin, Geithner Says TARP Would Force Banks To Lend More (Jan. 23, 2009) (online at dealbook.blogs.nytimes.com/ 2009/01/23/geithner-says-tarp-will-force-banks-to-lend-more/). U.S. Department of the Treasury, TARP Capital Purchase Program (Jan. 14, 2009) (online at www.treas.gov/initiatives/eesa/docs/scorp-term-sheet.pdf).

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[37] U.S. Department of the Treasury, Treasury Issues Additional Executive Compensation Rules Under TARP (Jan. 16, 2009) (online at www.treas.gov/press/releases /hp1364.htm). [38] U.S. Department of the Treasury, Treasury Announces New Restrictions On Executive Compensation (Feb. 4, 2009) (online at http://www.ustreas.gov/press/releases /tg15.htm). [39] U.S. Department of the Treasury, Treasury Announces TARP Investments in Chrysler Financial (Jan. 16, 2009) (online at www.treas.gov/ press/releases/hp1362.htm); U.S. Department of the Treasury, Treasury Announces TARP Investment in GMAC (Dec. 29, 2008) (online at www.treasury.gov/press/releases/hp1335.htm); U.S. Department of the Treasury, Indicative Summary of Terms for Secured Term Loan Facility (Dec. 19, 2008) (Chrysler Term Sheet); U.S. Department of the Treasury, Indicative Summary of Terms for Secured Term Loan Facility (Dec. 19, 2008) (GM Term Sheet). [40] U.S. Department of the Treasury, U.S. Government Finalizes Terms of Citi Guarantee Announced in November (Jan. 16, 2009) (online at www.treas.gov/press/releases/ hp1358.htm). [41] U.S. Department of the Treasury, Summary of Terms, (Nov. 23, 2008) (online at www.treasury.gov/press/releases/reports/cititermsheet_112308.pdf). [42] U.S. Department of the Treasury, Treasury, Federal Reserve and the FDIC Provide Assistance to Bank of America (Jan. 16, 2009) (online at www.treas.gov/press/releases /hp1356.htm). [43] The investments chosen represent the largest investments made in non-automotive financial institutions other than the second and third investments in Bank of America (of $10 billion and $20 billion) which occurred in January 2009, too recently to be included. [44] Treasury’s subsequent investments under the CPP were to institutions that differed from those analyzed by Duff & Phelps in several important respects such as size and scope of activities, and the transactions took place under different market conditions. In extrapolating the costs, we did not attempt to evaluate the effect of these differences. [45] The additional $20 billion investment in Bank of America on January 16, 2009 occurred too late to be included in the valuation report. [46] In customary market practice, there are often differences in pricing-related terms as well as non-economic terms depending on the credit-worthiness of the issuer. In theory, Treasury could have incorporated a customized, risk-based approach to setting the dividend rate at least for large public companies, for example by reference to the yields on other publicly traded securities or credit default swap rates (or perhaps they could have varied the number of warrants taken), and still have maintained the general standardized terms of the documents. But this would have left the question of how to price the securities for less widely-traded institutions, and its effects on speed of execution and participation rates are impossible to know.

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In: TARP in the Crosshairs Editor: Paul W. O'Byrne

ISBN: 978-1-60876-705-2 © 2009 Nova Science Publishers, Inc.

Chapter 24

CONGRESSIONAL BUDGET OFFICE COST ESTIMATE: H.R. 384 TARP REFORM AND ACCOUNTABILITY ACT* ABSTRACT

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H.R. 384 would establish new requirements and provide additional guidance for administering the Troubled Asset Relief Program (TARP) established by the Emergency Economic Stabilization Act of 2008 (EESA). It also would modify the Hope for Homeowners loan guarantee program authorized by the Housing and Economic Recovery Act of 2008. In addition, the bill would permanently increase the amount of deposits insured by the Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) from $100,000 to $250,000 and modify other terms of the FDIC’s deposit insurance program. The effects on direct spending and revenues over the 2009-2013 and 2009-2018 periods are relevant for enforcing pay-as-you-go rules under the current budget resolution. CBO estimates that enacting this legislation would increase deficits by $14.8 billion over the five-year period from 2009 through 2013, but would reduce deficits by $13.3 billion over the 2009-2018 period. (In total, CBO estimates that the legislation would reduce deficits by $13.9 billion through 2019.) Implementing H.R. 384 would not affect spending subject to appropriation. H.R. 384 contains intergovernmental and private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA). The bill would prevent governmental and private-sector entities that invest in pooled residential mortgages from seeking damages from servicers of those mortgages on grounds that they violated their duty to maximize the value of the loans. The bill also could prevent private entities from seeking damages under certain antitrust laws for negotiations authorized under the bill. In addition, the bill would preempt some state laws. CBO estimates that the costs of the intergovernmental and private-sector mandates would be small and would fall below the annual thresholds established in UMRA ($69 million for intergovernmental mandates and $139 million for private-sector mandates in 2009, adjusted annually for inflation).

*

This is an edited, reformatted and augmented version of a Congressional Budget Office Cost Estimate, dated January 13, 2009, as introduced in the House of Representatives on January 9, 2009.

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ESTIMATED COST TO THE FEDERAL GOVERNMENT The costs of this legislation fall within budget function 370 (commerce and housing credit).

BASIS OF ESTIMATE

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Troubled Asset Relief Program H.R. 384 would modify the EESA to establish new requirements and provide additional guidance for administering the Troubled Asset Relief Program. Generally, the bill would clarify the authority broadly granted in the initial legislation; it also would specify that foreclosure prevention on home mortgages should be an explicit focus of future disbursements of TARP funding. Title I would add reporting requirements for recipients of TARP funding, place some restrictions on the use of that funding, set standards for executive compensation, and increase the size of the Financial Stability Oversight Board. CBO estimates that those provisions would have a negligible impact on direct spending. Title II would require the Secretary of the Treasury to present a plan to prevent and mitigate foreclosures on residential properties. That plan should commit between $40 billion and $100 billion to foreclosure relief from the remaining TARP funding. In its baseline, CBO assumed that the Treasury would receive the second installment of the $700 billion provided in the EESA and estimated that purchasing additional troubled assets with those funds would result in a net long-term cost to the government of $88 billion (that cost is estimated on a netpresent-value basis, as specified in EESA). CBO expects that directing some of the TARP funds be used to prevent home foreclosures would not add to the costs already expected to occur under current law. Title III would add specific requirements for current and any future loans to the automobile industry. It also would require the President to designate one or more people to oversee the credit provided to automobile manufacturers and the plans submitted as a condition of that financial assistance; that oversight includes several reporting directives. Furthermore, the bill would require the Government Accountability Office to monitor the activities of the President’s designee for auto loans and to report its findings every 60 days or less. Title IV would clarify that the Treasury has authority to use TARP funds to invest in consumer loans, municipal securities, and commercial real estate loans.

HOPE for Homeowners Program Title V would make certain changes to the Hope for Homeowners loan guarantee program authorized by the Housing and Economic Recovery Act of 2008. Those changes, which are aimed at increasing the number of loans refinanced through the program, include:

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By Fiscal Year, in Millions of Dollars 2009 2010 2011 2012 2013

2014

2015

2016

2017

2018

2019

20092014

20092019

CHANGES IN DIRECT SPENDING Hope for Homeowners Estimated Budget Authority Estimated Outlays FDIC Amendments Estimated Budget Authority Estimated Outlays Total Changes Estimated Budget Authority Estimated Outlays

304

225

146

0

0

0

0

0

0

0

0

675

675

274

233

154

15

0

0

0

0

0

0

0

675

675

0

0

0

0

0

0

0

0

0

0

0

0

0

0

1,700

5,500

4,700

2,200

-6,100

-8,900

-6,900

-6,100

-100

-600

8,000

-14,600

304

225

146

0

0

0

0

0

0

0

0

675

675

274

1,933

5,654

4,715

2,200

-6,100

-8,900

-6,900

-6,100

-100

-600

8,675

-13,925

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Congressional Oversight Panel • • • •

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•

Eliminating the payment of an up-front insurance premium; Reducing the annual insurance premium; Increasing the maximum loan to value ratio of the refinanced mortgage to 93 percent; • Eliminating the government’s share of any appreciation in the homes’ value at sale; and Authorizing a payment to the servicer of the existing mortgage.

The Federal Credit Reform Act requires the federal budget to record the up-front cost of subsidizing loan guarantees on a net-present-value basis. CBO estimates that enacting this legislation, which would directly appropriate the subsidy cost of loan guarantees would increase direct spending by $675 million over the 2009-2019 period. To determine this subsidy cost, CBO estimated the volume of loans that would be refinanced under this voluntary program and the likelihood that borrowers would default on their refinanced mortgages. Based on participation in the current Hope for Homeowners program, the FHASecure program, and information from mortgage industry participants, CBO estimates that as many as 25,000 additional loans could be refinanced as a result of the proposed changes, representing a loan volume of about $5 billion over the next four years. (As of January 12, 2008, no loans have been guaranteed under the Hope for Homeowners program. In addition, about 4,000 delinquent borrowers refinanced their loans under FHASecure over the 16-month lifetime of the program.) CBO estimates that the program, as modified by the bill, would have a subsidy rate of about 15 percent of the loan value. This estimated subsidy rate assumes that the cumulative default rate for the program would be about 40 percent and that recoveries on defaulted mortgages would be about 60 percent of the outstanding loan amount. Those rates reflect CBO’s view that mortgage holders would have an incentive to direct their highest-risk loans to the program, and are based on the expectation that the underwriting standards established for the new program would be less restrictive than those currently in place for FHA’s singlefamily loan-guarantee program, thereby allowing FHA to insure loans with a greater risk of default.

Federal Deposit Insurance Programs Title VII would increase the amount of federal deposit insurance coverage and make other changes to the FDIC’s programs. Specifically, the bill would: •

• • • •

Permanently increase the amount of deposits insured by the FDIC and NCUA from $100,000 to $250,000 (the EESA raised the limit to $250,000 through December 31, 2009); Adjust the limit on insured deposits for inflation beginning in 2015 instead of 2010; Lengthen the amount of time available to restore the size of the FDIC’s insurance fund from five years to eight years; Modify how the FDIC recovers costs resulting from actions taken to reduce systemic risks; and Increase the FDIC’s borrowing authority from $30 billion to $100 billion and allow for additional borrowing under certain conditions.

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Congressional Budget Office Cost Estimate

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Raising the limit on insured deposits would increase the FDIC’s and NCUA’s liabilities for failed institutions, but the cost of any additional losses would be offset over time by higher insurance premiums. In addition, depository institutions would pay higher premiums to cover newly insured deposits. Because the legislation also would extend the period for the FDIC to collect premiums and recover costs from systemic actions, CBO expects that the agency’s net outlays would increase over the 2009-20 13 period because of higher losses and slower collections but would end the 2009-20 19 period significantly lower than under current law because higher premium income would be available from new deposits and could be used to offset additional losses. Credit unions, by contrast, would be obligated to pay premiums for the newly insured deposits immediately. CBO estimates that implementing this title would increase direct spending by $14.1 billion over the next five years but would reduce direct spending by about $14.6 billion over the 11-year period from 2009 through 2019. Based on information from the FDIC and NCUA, CBO estimates that raising deposit insurance coverage from $100,000 to $250,000 would increase insured deposits by 15 percent and 10 percent, respectively. Applying those increases to CBO’s baseline assumptions for deposit growth, we estimate that enacting this legislation would increase deposits insured by the FDIC by about $1.1 trillion by 2019 and by the NCUA by almost $100 billion. Assuming the agencies would charge premiums of 1.25 percent and 1 percent, respectively, for insured deposits, CBO estimates that enacting this title would reduce net outlays by about $14.6 billion by 2019.

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INTERGOVERNMENTAL AND PRIVATE-SECTOR IMPACT H.R. 384 contains intergovernmental and private-sector mandates as defined in UMRA, but CBO estimates that the costs of those mandates would fall below the annual thresholds established in UMRA ($69 million and $139 million, respectively, in 2009, adjusted annually for inflation).

Mandates that Apply to Both Public and Private Entities H.R. 384 would impose a mandate on both intergovernmental and private-sector entities that invest in residential mortgages by prohibiting those entities from suing servicers of those loans in some circumstances. The bill would provide a safe harbor for servicers of mortgages when they modify mortgages in ways that may violate their duty to maximize the value of the loans. Removing the existing right of investors to seek damages would be a mandate under UMRA. CBO concludes, however, that servicers would be unlikely to alter mortgages in ways that would be significant enough to cause investors to seek damages because they would still be required to maximize returns for investors under their fiduciary obligations. Therefore, CBO estimates that the cost of the mandate (the forgone net value of awards and settlements) would be small.

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Mandates that Apply to Public Entities Only Several provisions of H.R. 384 would preempt state laws; those preemptions constitute intergovernmental mandates as defined in UMRA. By exempting communications between auto manufacturers and interested parties regarding negotiated plans from some state antitrust laws, the bill would preempt state law. The bill also would preempt state laws that allow individuals to seek compensation from entities that issue certain securities. CBO estimates that such preemptions would not result in additional spending for governments.

Mandates that Apply to Private-Sector Entities Only H.R. 384 could impose a private-sector mandate by preventing private entities from seeking damages under certain antitrust laws for negotiations authorized under the bill. The direct cost of the mandate would be the forgone net value of the awards and settlements in such claims. Because the Attorney General and the Federal Trade Commission would retain the authority to enforce antitrust laws, CBO expects the cost of such a mandate would likely be small relative to the annual threshold for the private sector.

Other Impacts

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The bill also would allow federal entities to insure or purchase municipal debt, which would benefit state, local, and tribal governments.

ESTIMATE PREPARED BY: Federal Costs: TARP – Jeffrey Holland Housing Programs – Susanne Mehlman and Chad Chirico FDIC – Kathleen Gramp Impact on State, Local, and Tribal Governments: Elizabeth Cove Delisle Impact on the Private Sector: Paige Piper/Bach ESTIMATE APPROVED BY: Peter H. Fontaine Assistant Director for Budget Analysis

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Chapter 25

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STATEMENT OF NEIL BAROFSKY, SPECIAL INSPECTOR GENERAL, TROUBLED ASSET RELIEF PROGRAM, BEFORE THE UNITED STATES HOUSE OF REPRESENATIVES, COMMITTEE ON FINANCIAL SERVICES, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS* Chairman Moore, Ranking Member Biggert, and Members of the Subcommittee, I am honored to appear before you today. The Office of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) was created under the Emergency Economic Stabilization Act of 2008 (“EESA”), Pub. Law No. 110-343. More than $300 billion has already been expended under TARP, and, recently, Secretary Geithner outlined his plans for how Treasury will spend the balance of the $700 billion approved by Congress. In addition to the six programs previously announced, Treasury has announced several new programs that will be implemented in the coming weeks, including efforts to deal with rampant foreclosures, to infuse additional capital to struggling banks, and to address the toxic assets that remain on many financial institutions’ books. As announced, the total amount of money potentially at risk in these programs, as well as the TARP related programs that are funded in part by the Federal Reserve and FDIC, is approximately $2.875 trillion. These huge investments of taxpayers’ money, made over a relatively short time period, will invariably create opportunities for waste, fraud and abuse for those seeking to profit criminally and thus require strict oversight. It is SIGTARP’s mission to report on the activities of TARP and make recommendations that can facilitate, through effective oversight, the success of the program. I have focused on three areas since our inception, just a little more than two months ago: transparency, coordinated oversight and robust enforcement. Transparency has been an area of focus for SIGTARP since day one. In late December, I formally recommended that Treasury post all TARP agreements, whether with recipients of TARP funds or with its vendors, on the Treasury website. Shortly after his confirmation, *

This is an edited, excerpted and augmented edition of a statement before the United States House of Representatives Committee on Financial Services.

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Statement of Neil Barofsky

Secretary Geithner adopted this recommendation in full. Similarly, I asked for and obtained oversight language in the Citigroup and Bank of America agreements that require those banks to account for and report on their use of the TARP funds. I was pleased to see that Citigroup recently reported on its use of funds and its announcement that it was using more than $34 billion in TARP funds for lending. SIGTARP is also using its audit function to bring increased transparency to the TARP. For example, we have sent letter requests to each of the TARP recipients asking them to report on how they have used TARP funds and how they plan to use the funds that they have received but not yet spent. We have already begun to receive responses to these requests and look forward to providing an interim report to Congress on this audit project after we receive the responses. In that same survey, we also asked TARP fund recipients to provide details on their plans to comply with applicable executive compensation restrictions and whether they have altered their compensation structure in response to these rules. We believe that this important project will shed light on what has been one of the most opaque areas of the TARP. We have initiated two other audits that will also bring increased transparency to the TARP. First, we are looking into the impact of outside influences on the TARP application process, and we will report back to Congress on our finding as to what impact, if any, that lobbyists or other outside influences have had. Additionally, if necessary, we will make recommendations on dealing with such outside influences going forward. Second, we have begun an audit into the process under which Bank of America received $45 billion in capital investment and is to receive a guarantee relating to approximately $100 billion of toxic assets in four separate TARP transactions under three different TARP programs. As to coordinated oversight, it has been and will continue to be a privilege and a pleasure to work closely with my co-panelists, Acting Comptroller General Gene Dodaro and Professor Elizabeth Warren, Chair of the Congressional Oversight Panel. Over the past two months, we have worked effectively together coordinating oversight efforts to provide maximum oversight coverage while avoiding unnecessary or duplicative burdens on those charged with managing TARP. I have also founded and chair the TARP-IG Council, which has, as its members, a GAO representative and the Inspectors General of the other agencies involved in aspects of the administration of TARP programs: the Inspectors General of the FDIC, SEC, FHFA, Federal Reserve, HUD, Tax Administration and Treasury. Through all of these coordinating efforts, we are establishing protocols and sharing ideas for comprehensive audits and investigations. In conducting oversight, one focus of SIGTARP has been to attempt to have a positive impact on TARP programs before the money goes out the door. Because I did not take office until mid- December, I was not able to do so with respect to the early TARP transactions. However, we have been active in providing recommendations concerning the programs and contracts that followed. Among other things, pursuant to our recommendations, the Auto Industry, Targeted Invested Program and Asset Guarantee Program agreements all contain explicit acknowledgement of SIGTARP’s oversight authority over the contracts, and require that, for many of the significant conditions imposed by the agreements, the recipient be required to establish an internal control to comply with that condition, that they are required to report on their compliance, and that they certify, under criminal penalty, that the reporting was accurate. Collectively, these agreements – representing approximately $465 billion of TARP investments and guarantees – are a significant step forward from an oversight perspective as compared to earlier agreements and programs. We have also made a series of

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Statement of Neil Barofsky

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recommendations pertaining to the first part of the $200 billion Term Asset-Backed Securities Lending Facility (“TALF”), and have met extensively with the Federal Reserve and Treasury to discuss those recommendations. I anticipate making similar recommendations and look forward to working with both Treasury and the Federal Reserve to help protect against waste, fraud and abuse of the more than approximately $2 trillion that is anticipated to be committed in the newly announced TARP programs. The scope and variety of the announced TARP programs, now involving eight different programs and more than $2.8 trillion, leads to our third area of focus, enforcement. Of the four primary oversight bodies set forth in EESA, SIGTARP stands alone as the sole TARP oversight body charged with criminal law enforcement authority – as the cop on the beat. This is obviously one of our most important functions, and we have met this unprecedented challenge head on. We stand on the precipice of the largest infusion of Government funds over the shortest period of time in our Nation’s history. History teaches us that an outlay of so much money in such a short period of time will inevitably draw those seeking to profit criminally. Hurricane relief, Iraq reconstruction, and the savings and loan bailout serve as important and difficult lessons. If, by percentage terms, some of the estimates of fraud in those programs apply to the TARP programs, we are looking at the potential exposure of tens if not hundreds of billions of dollars in taxpayer money lost to fraud. We must be vigilant. As we build, we have focused on developing relationships with other law enforcement and prosecutorial agencies to leverage those resources and to provide proactive leadership. For example, I have joined the President’s Corporate Fraud Task Force and have initiated coordinated planning efforts with the FBI, the Criminal and Civil Divisions of the Department of Justice, the Internal Revenue Service, and U.S. Attorney’s offices from coast to coast. We have already opened several criminal investigations involving multiple jurisdictions. We have also teamed up with the SEC, and have provided assistance to them in shutting down a securities fraud scam in Tennessee that had reaped millions by illegally trading on the TARP name. Based on a meeting we had last week with the Chairman, Mary Schapiro, I am confident that our partnership with a reinvigorated SEC will generate important investigations and serve as a powerful deterrent to those contemplating fraud in connections with TARP programs. Finally, we have been coordinating closely with the New York State Attorney General’s investigation into executive compensation issues, including issues surrounding the year-end bonuses paid by Merrill Lynch. Through these relationships, we are exploring task force and similar regional relationships throughout the country to deter criminal activity before it occurs, and to investigate and prosecute any and all who attempt to profit criminally from this National crisis. We have begun our outreach to potential whistleblowers and those who may have tips about ongoing waste, fraud and abuse. The SIGTARP Hotline is operational and can be accessed through the SIGTARP website at www.SIGTARP.gov, and by telephone at (877) SIG-2009. Plans are being formulated to develop a fraud awareness program with the objective of informing potential whistleblowers of the many ways available to them to provide key information to SIGTARP on fraud, waste and abuse involving TARP operations and funds, and explaining how they will be protected. Training programs are being developed to instruct law enforcement at a variety of agencies to assist in the oversight of the TARP, particularly with respect to the recently announced programs.

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Statement of Neil Barofsky

The proactive cooperation and coordination that is at the heart of our investigative strategy is resource intensive, and while I believe that SIGTARP is effectively establishing a framework that will permit us to meet our oversight obligations with respect to the nearly $3 trillion at risk in the TARP programs, we face serious challenges. Most significantly, we have had significant difficulties in meeting our hiring needs. Currently, I have nine permanent staff members, nine detailees on loan from other federal agencies and six individuals who have accepted positions but not yet started. In hiring, we face many of the same problems faced by Treasury itself as it hires TARP managers, as outlined by Mr. Dodaro in his recent report to Congress, including the limitations on pay, the difficulties of hiring into a demanding federal agency, and our conflict of interest rules, which, of course, limit our ability to hire employees who have represented or worked for the entities that we investigate and oversee or have a financial interest in them. We also face additional challenges given our need to identify highly trained and experienced government investigators and auditors and to convince them to join what is, by definition, a temporary agency. With the passage of the recent stimulus bill, which provides more than $300 million in new funding to other law enforcement agencies and Inspectors General to provide oversight for programs funded by the bill, we are also facing stiff competition for a limited pool of experienced investigators and auditors. We desperately need more hiring flexibility, the type of which is contained in S. 383, the Special Inspector General for the Trouble Asset Relief Program Act of 2009. This bill was unanimously approved in the Senate on February 4, 2009, the same day it was introduced, by a bipartisan group led by Senators McCaskill, Bunning, Dodd, Lieberman, Schumer, Grassley, Snowe, Nelson, Shaheen and Collins S. 383 would address our most pressing need by permitting SIGTARP to hire up to 25 retired investigators and auditors, without them having to offset their pensions. It would similarly enable us to use temporarily the hiring authority permitted under 5 U.S.C. 3161. These authorities have been given on a blanket basis to the other Special Inspectors General, and have proven to be essential to their efforts to stand up their offices. Similarly, when the Inspector General for the Office of the Director of National Intelligence was stood up several years ago, that office was also given the authority to rehire annuitants. I have spoken to these Inspectors General, and they have informed me that it was absolutely vital to their efforts to build their offices to have this authority, which is also currently available to the entire Department of Defense, FDIC, and even the FBI (in emergency situations). The TARP program has changed significantly since EESA was passed last October. Originally intended to purchase and manage $700 billion of toxic assets, that task is now just a portion of one of the eight intended programs, and the total number of programs and dollars to be overseen dwarf the original amounts contemplated when Congress created my office. Quick passage of this important and essential legislation will allow me to hire rapidly the essential personnel to meet the challenge of providing effective oversight. Because of the great importance of this bill for SIGTARP, I am requesting the Subcommittees’ help to move S. 383 to the House floor as quickly as possible. I believe that this bill will help provide the necessary resources for us to meet our obligation to help protect the U.S. taxpayer’s investments. Chairman Moore, Ranking Member Biggert, and Members of the Subcommittee, I commend you for your efforts to insure that the trillions of dollars being expended under TARP-related programs receive close oversight scrutiny. Your support for prompt House

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approval of S. 383 will be very helpful in allowing my office to meet the aggressive goals set by Congress. This concludes my statement and I would be happy to answer any questions you may have.

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Chapter 26

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TESTIMONY OF PROFESSOR ELIZABETH WARREN, CHAIR, CONGRESSIONAL OVERSIGHT PANEL BEFORE THE HOUSE FINANCIAL SERVICES COMMITTEE, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, FEBRUARY 24, 2009* Thank you, Chairman Moore, Ranking Member Biggert, and members of the Subcommittee, for inviting me to testify about the work of the Congressional Oversight Panel. My name is Elizabeth Warren, the Panel’s Chair. My testimony before you today reflects my own views and not necessarily those of the Panel. This Subcommittee has an important responsibility for overseeing the operation and regulation of the nation’s financial system, and I want to begin by acknowledging your continuing efforts to highlight the critical need for accountability and transparency in our financial markets. I am pleased to assist your efforts in any way that I can. I am especially happy to be testifying today alongside my colleagues Gene Dodaro, the Acting Comptroller General of the United States, and Neil Barofsky, the Special Inspector General for the Troubled Assets Relief Program, who is already called simply the “SIGTARP.” Together we are charged with ensuring that the tax dollars of the American people are used prudently and effectively to ameliorate and ultimately reverse the deepening financial crisis in which our country – and much of the world – now finds itself. The Oversight Panel was created as part of the TARP in last year’s Emergency Economic Stabilization Act. The job of the Panel is to “review the current state of the financial markets and the financial regulatory system” and report to Congress every 30 days. The Panel has submitted reports to Congress on December 10, January 9, and February 6, and it is preparing its fourth report for submission in early March. The Panel also submitted a special report on regulatory reform to Congress, as required by the legislation, at the end of January. The Oversight Panel is one of three organizations to which the TARP legislation gives oversight responsibilities. The Special Inspector General for the TARP has a broad responsibility, and matching authority, to audit and investigate any part of the Program. GAO *

This is an edited, excerpted and augmented edition of testimony Representatives Committee on Financial Services.

before the United States House of

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Testimony of Professor Elizabeth Warren

is given an even more detailed set of instructions for “ongoing oversight of the activities and performance of the TARP,” as well as responsibility for an annual audit of the TARP’s financial statements. Between the Oversight Panel’s obligation to report to Congress every 30 days, the GAO’s obligation to report every 60 days, and the obligation of the Special Inspector General to report every 90 days, Congress will receive an average of two TARP oversight reports every month. The three oversight organizations are working to complement, not duplicate, one another. We have begun regular meetings with the office of the Special Inspector General and with GAO senior staff responsible for TARP oversight, and we have discussed scheduling threeway meetings at appropriate intervals. We have begun sharing ideas and information, and we have discussed sharing, where possible, preliminary work product. If GAO or the SIGTARP identify questions for the Oversight Panel, they will pass them to us and give us access to data that we can synthesize to inform our work; similarly, when our analysis or information indicates a significant instance of non-compliance with the terms or spirit of the TARP legislation, we will inform GAO, the SIGTARP, or both. We all want to make the whole of our work greater than the sum of its parts. The Oversight Panel is the smallest of the three organizations. We see our contribution as fact-based analysis that will raise issues about the operation and direction of the TARP and about the broader effort to restore stability to the financial system. In the Emergency Economic Stabilization Act, Congress specifically asked that the Oversight Panel conduct oversight on: the use of Treasury authority under the TARP; the Program’s effect on the financial markets, financial institutions, and market transparency; the effectiveness of foreclosure mitigation efforts; and the TARP’s effectiveness in minimizing long-term costs and maximizing long-term benefits for the nation’s taxpayers. Our ultimate question is whether the TARP is operating to benefit the American family and the American economy. If we believe the answer is no, we will ask “why not,” and try to suggest alternatives. I would like to give the Subcommittee two examples of our Panel’s approach. The Panel’s February 6 report asked whether the public was receiving a “fair deal” when Treasury used TARP funds to make capital infusions into financial institutions last year. We worked with recognized independent experts to assemble multiple valuation models to see if the securities Treasury received had a fair market value equal to the amount of the infusions. With minimal variation, the models all demonstrated that Treasury made its infusions at a discount – it received securities that were worth substantially less than the amounts it had paid in return, given the financial institutions involved. In all, the Panel’s report found that Treasury had overpaid by an estimated $78 billion. Treasury had received back about 66 cents worth of obligations for each dollar it paid. We believe this is an important issue. Our report does not explore why such discounts may – or may not – have been appropriate as a matter of policy, although it hopes Congress will keep the issue in mind, and the Panel continues to explore the matter. But Treasury has not given the public an explanation, and the most important lesson we draw from our analysis is that without a clearer explanation from Treasury about its overall plan for each capital infusion, and without more transparency and accountability for how that plan was carried out, it is not possible to exercise meaningful oversight over Treasury’s actions. Congress has given Treasury substantial discretion, as befits this fast-moving crisis. But that discretion carries with it an equivalent obligation to explain, in real time, why the discretion is exercised as it is. Congress and the American people need to understand Treasury’s conception of the problems in the

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financial system and its comprehensive strategy to address those problems. Our collective financial security is on the line, and we all have a stake in the outcome. The Oversight Panel is also focused on another extremely serious policy question: the lack of progress on mortgage foreclosure mitigation. The Panel’s next report will focus on this issue, with particular regard to impediments to mitigation efforts. I was very pleased to hear President Obama announce the Administration’s Homeowner Affordability and Stability Plan last week, and I hope that the Panel’s report will be useful to the federal government and to local and state governments as they develop and implement plans to address the nation’s mortgage crisis. I remain concerned, however, about the lack of adequate information on loan performance and loss mitigation. Without accurate data, measuring the success or failure of mitigation efforts is at best a “hit-or-miss” proposition. As part of our report, we plan to focus on a checklist of features that will be critical to developing any successful plan to stem the rising number of mortgage foreclosures. The TARP legislation is almost five months old, and Treasury has spent or committed nearly $350 billion under its terms. Both the Oversight Panel and GAO have called on Treasury to articulate a clear strategy for its use of TARP funds; the absence of such a baseline hampers effective oversight. A month ago I sent a letter to Secretary Geithner requesting that the Department complete its responses to a set of questions the Oversight Panel had posed to then- Secretary Paulson in its December Report. The Secretary has not yet responded, but the initiatives he has announced in the last several weeks, including the Financial Stability Plan announced on February 10, 2009, have described his commitment to transparency and accountability in the future administration of the TARP, for which I commend the Secretary. Even so, the Financial Stability Plan lacks crucial details, particularly about the manner in which the Treasury proposes to deal with “toxic assets” on financial institution balance sheets. These general frameworks do not provide an adequate foundation to oversee Treasury’s activities or to measure the success of the TARP or the Stability Plan. I hope the Secretary will provide the necessary details soon. What have we learned thus far? Even in a crisis such as we are experiencing, transparency, accountability and a strategy with clearly delineated goals are necessary to maintain public confidence and the confidence of the capital markets. Sophisticated metrics to measure the success and failure of program initiatives are also essential. Assuring that the TARP reflects these elements underlies all of our oversight efforts. Thank you again for the opportunity to appear before you to explain the work of the Oversight Panel. That concludes my testimony, and I will be pleased to answer your questions.

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In: TARP in the Crosshairs Editor: Paul W. O'Byrne

ISBN: 978-1-60876-705-2 © 2009 Nova Science Publishers, Inc.

Chapter 27

TROUBLED ASSET RELIEF PROGRAM: STATUS OF EFFORTS TO ADDRESS TRANSPARENCY AND ACCOUNTABILITY ISSUES* United States Government Accountability Office

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WHAT GAO FOUND As of January 23, 2009, Treasury had disbursed about $293.7 billion of the $700 billion in program funds (see table). Most of the funds (about $194.2 billion) went to purchase preferred shares of 317 financial institutions under the Capital Purchase Program (CPP)— Treasury’s primary vehicle under TARP for stabilizing financial markets. GAO’s previous report emphasized the lack of monitoring and reporting for CPP investments and recommended stronger measures for ensuring that participating institutions use the funds to meet the program’s purpose and comply with CPP requirements on, for example, executive compensation and dividend payments. In response to our recommendation, Treasury developed plans to survey the largest twenty institutions monthly to monitor lending and other activities and analyze quarterly monitoring data (call reports) for all institutions. While the monthly survey is a step toward greater transparency and accountability for the largest institutions, we continue to believe that additional action is needed to better ensure that all participating institutions are accountable for their use of program funds. Treasury has continued to develop a system for detecting noncompliance with key requirements of the program but has not yet finalized its plans. Further, Treasury has made limited progress in formatting articulating and communicating an overall strategy for TARP, continuing to respond to institution- and industry-specific needs by, for example, making further capital purchases and offering loans to the automobile industry. In addition, it has not yet developed a strategic approach to explain how its various programs work together to fulfill TARP’s purposes or how it will use the remaining TARP funds. While GAO does not question the need for swift responses in the current economic environment, the lack of a

*

This is an edited, excerpted and augmented edition of a.GAO Report GAO-09-296, dated January 2009.

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clearly articulated vision has complicated Treasury’s ability to effectively communicate to Congress, the financial markets, and the public on the benefits of TARP and has limited its ability to identify personnel needs. Status of TARP Funds as of January 23, 2009 (dollars in billions) Program Capital Purchase Program Systemically Significant Failing Institutions Targeted Investment Program Term Asset-backed Securities Loan Facility Automotive Industry Financing Program Citigroup Asset Guarantee Bank of America Asset Guarantee Totals

Disbursed $194.2 40.0 40.0 0.0 19.5 0.0 0.0 $293.7

Source: Treasury OFS, unaudited.

WHY GAO DID THIS STUDY

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This is the second GAO report on the Troubled Asset Relief Program (TARP). It follows up on the nine recommendations from the December 2, 2008, report (GAO-09- 161). It also reviews (1) the nature and purpose of activities that had been initiated under TARP as of January 23, 2009; (2) Treasury’s Office of Financial Stability (OFS) hiring and transition efforts, use of contractors, and progress in developing a system of internal control; and (3) preliminary indicators of TARP’s performance. To do this work, GAO reviewed signed agreements and other relevant documentation and met with officials from OFS, contractors, federal agencies, and some participating institutions.

WHAT GAO RECOMMENDS Treasury has taken important steps to implement all nine previous recommendations, but has yet to fully address eight. This report includes recommendations that Treasury further expand its efforts to monitor how CPP recipients are using program funds and more clearly articulate and communicate a strategic vision for the program. Addressing these and other recommendations would help ensure greater accountability and transparency and better enable Treasury to effectively manage TARP. Treasury generally agreed with the contents of the report and noted that while progress has been made in overseeing the program, it agreed that more work needs to be done. GAO’s previous report also included recommendations about OFS’s management infrastructure, including hiring, contract oversight, and internal controls. Treasury has taken steps to address our recommendations, but still faces several challenges. First, it took proactive steps to help ensure a smooth transition to the new administration by keeping positions filled and using an expedited hiring process, including direct hire authority. Moreover, after losing some potential candidates because of conflicts of interest, Treasury is

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asking candidates to address potential conflicts earlier in the recruitment process to avoid unnecessary delays in finalizing employment offers. However, it continues to face difficulty providing competitive salaries to attract skilled employees. Also, given the program’s evolving nature and the likelihood of changes under the new administration, Treasury will need to identify OFS’s long-term organizational needs. OFS continues to rely on detailees and contractors to carry out program functions. Second, consistent with our recommendation about contracting oversight, Treasury has enhanced such oversight by tracking costs, schedules, and performance and addressing the training requirements of personnel who oversee the contracts. As we previously recommended, Treasury needs to continue to identify and mitigate conflicts of interest in contracting. Similarly, OFS has adopted a framework for organizing the development and implementation of its system of internal control for TARP activities, which is consistent with our recommendation. OFS plans to use this framework to develop specific standards and policies, drive communications on expectations, and measure effectiveness of internal control policies and procedures. However, it has yet to implement a disciplined risk-assessment process. Given the recency of program actions and time lags in the reporting of available data, GAO continues to believe that it is too early in the program’s implementation to see measurable results in many areas. Even with more time and better data, it will remain difficult to separate the impact of TARP activities from the effect of other economic forces. Some indicators suggest that the cost of credit has declined in interbank, mortgage, and corporate debt markets since the December report. However, while perceptions of risk (as measured by premiums over Treasury securities) have declined in interbank markets, they changed very little in corporate bond and mortgage markets. Finally, as GAO also noted in December, these indicators may be suggestive of TARP’s ongoing impact, but no single indicator or set of indicators can provide a definitive determination of the program’s effects because of the range of actions that have been and are being taken to address the current crisis. GAO will continue to refine and monitor the indicators going forward.

ABBREVIATIONS ABS AIG AGP AIFP CBOE CDFI CICA COP COTR CPP FDIC FAR FHFA FHA

asset-backed security American International Group, Inc. Asset Guarantee Program Automotive Industry Financing Program Chicago Board Options Exchange Community Development Financial Institutions Fund The Competition in Contracting Act Congressional Oversight Panel Contracting Officer’s Technical Representatives Capital Purchase Program Federal Deposit Insurance Corporation Federal Acquisition Regulation Federal Housing Finance Agency Federal Housing Administration

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United States Government Accountability Office FinSOB FRBNY GAO GSA GSE GM HUD IDIQ LIBOR MBS OCC OFS OMB OPM OTS PEO QFI SEO SES SSFI TARP TALF TIP

Financial Stability Oversight Board Federal Reserve Bank of New York Government Accountability Office General Services Administration government-sponsored enterprise General Motors Corporation Department of Housing and Urban Development indefinite delivery indefinite quantity London Interbank Offered Rate mortgage-backed security Office of the Comptroller of the Currency Office of Financial Stability Office of Management and Budget Office of Personnel Management Office of Thrift Supervision principal executive officer qualified financial institution senior executive officer Senior Executive Service Systemically Significant Failing Institutions Troubled Asset Relief Program Term Asset-backed Securities Loan Facility Targeted Investment Program

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January 30, 2009 Congressional Committees: On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the act) was signed into law. The act established the Office of Financial Stability (OFS) within the Department of the Treasury (Treasury) and authorized the Troubled Asset Relief Program (TARP).[1] Among other things, the act provides Treasury with broad, flexible authorities to buy or guarantee up to $700 billion in “troubled assets,” which include mortgages and mortgage-related instruments, and any other financial instrument whose purchase Treasury determines is needed to stabilize the financial markets.[2] The act also created a number of mechanisms to oversee the implementation and operations of TARP. The U.S. Comptroller General is required to report at least every 60 days on findings resulting from oversight of TARP’s performance in meeting the purposes of the act; the financial condition and internal controls of TARP, its representatives, and agents; the characteristics of both asset purchases and the disposition of assets acquired, including any related commitments that are entered into; TARP’s efficiency in using the funds appropriated for the program’s operation; TARP’s compliance with applicable laws and regulations; efforts to prevent, identify, and minimize conflicts of interest of those involved in TARP’s operations; and the efficacy of contracting procedures.[3] Since December 2, 2008, when we issued our first 60-day report on TARP, OFS has continued to take actions intended to stabilize the U.S. financial markets, such as purchasing equity in financial institutions and providing loans to the automobile industry.[4] This report, the second in response to this mandate, follows up on the nine recommendations we made in

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our December 2008 report and addresses (1) the nature and purpose of activities that have been initiated under TARP as of January 23, 2009; (2) the status of the transition to the new administration at OFS and its hiring efforts, use of contractors, and system of internal controls; and (3) preliminary indicators of TARP’s performance.

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SCOPE AND METHODOLOGY To determine the nature and purpose of TARP activities from December 2, 2008, through January 23, 2009, we reviewed documents from OFS that described the amounts, types, and terms of Treasury’s purchases of preferred stocks and warrants under the Capital Purchase Program (CPP), the Systemically Significant Failing Institutions Program (SSFI), the Automotive Industry Financing Program (AIFP), and the Targeted Investment Program (TIP).[5] We reviewed documentation and interviewed officials from OFS responsible for selecting financial institutions to participate in CPP. We also contacted officials from the four federal banking regulators—the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (the Federal Reserve), and the Office of Thrift Supervision (OTS)—to identify any changes in their procedures for reviewing CPP applications and determine their plans for assessing participating institutions’ compliance with TARP requirements. For the first eight institutions that received CPP funds, we followed up with senior officials to identify any changes in how they planned to use the capital injections and whether they intended to report separately on their activities associated with the capital investments. The institutions included in this review were the Bank of America Corporation (Bank of America), Bank of New York Mellon Corporation (Bank of New York Mellon), Citigroup, Inc. (Citigroup), The Goldman Sachs Group, Inc., JPMorgan Chase & Company, Morgan Stanley, State Street Corporation, and Wells Fargo & Company. We discussed with OFS and regulatory officials their plans for ensuring compliance with the requirements of the agreements between Treasury and CPP participants, including those limiting executive compensation and restricting CPP participants from increasing dividend payments or repurchasing common stock. We reviewed Treasury’s proposed interim final rule and notices implementing the act’s executive compensation rules. We coordinated with the Special Inspector General for TARP to discuss his planned work in this area and participated in Interagency Taskforce meetings and met with FDIC’s Inspector General about relevant work.[6] For SSFI and TIP, we reviewed program terms and closing documentation and contacted officials from OFS. To describe the status of Treasury’s efforts to identify and implement a homeownership prevention strategy, we reviewed relevant sections of the act, reviewed reports by the Congressional Oversight Panel for Economic Stabilization and Treasury’s response to the panel’s first report, and gathered testimonial and documentary information from OFS’s Office of Homeownership Preservation.[7] We reviewed proposals and inquiries submitted to Treasury related to the development of a homeownership preservation strategy. We also obtained documents from and held meetings with representatives of the following organizations: the Federal Housing Administration (FHA), Federal Housing Finance Agency (FHFA), Fannie Mae, Freddie Mac, FDIC, OCC, OTS, American Securitization Forum, Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, HOPE NOW Alliance,

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NeighborWorks, Moody’s Investors Service, Standard & Poor’s, and Conference of State Bank Supervisors.[8] To determine OFS’s progress in establishing a program to guarantee troubled assets—a program that Treasury was required to establish under section 102 of the act and has chosen to implement through OFS in conjunction with TARP—we reviewed OFS’s request for public comments on potential program design and analyzed comments Treasury received from various industry stakeholders. In addition, we reviewed and summarized Treasury’s mandated report on establishing a program to guarantee troubled assets and discussed the program’s potential use with OFS officials. Finally, we reviewed documentation relevant to OFS’s AIFP and interviewed appropriate OFS officials. To determine the status of OFS’s hiring and transition efforts, we reviewed interagency agreements on detailees, OFS’s updated organizational chart, and a sample of position descriptions used by Treasury to recruit permanent new hires to OFS. We used our prior work on human capital flexibilities, organizational transformation, and strategic workforce planning to assess OFS’s performance. In addition, we met with a variety of Treasury and OFS officials to discuss their approach to staffing the office in the short term, as well as any strategies used to recruit individuals with the set of skills and competencies needed to administer TARP. We also discussed any recent actions taken to help ensure a smooth transition to the new administration. To assess Treasury’s approaches to acquiring services in support of TARP, we reviewed the contracts Treasury awarded since our last report and all new task orders awarded under all contracts and other agreements, as well as related amendments and modifications. In addition, we reviewed Treasury’s solicitations and other agency documents related to those actions. We reviewed the steps Treasury has taken to enhance oversight of contractors and move toward a greater reliance on fixed-price arrangements. We also reviewed steps Treasury has taken to promote the use of small business concerns—including those owned and controlled by women, minorities, veterans, and socially and economically disadvantaged individuals—in carrying out TARP. In addition, we examined documentation outlining actual and potential conflicts of interest identified by the contractors, as well as their proposed plans for mitigation of conflicts. We also reviewed Treasury’s guidelines and interim regulation on conflicts of interest related to the authorities granted under the act and the steps Treasury has taken to enhance management and monitoring of conflicts of interest. To assess the status of internal controls related to TARP activities, we conducted interviews with and made inquiries to officials from OFS, including the Chief Financial Officer, Deputy Chief Financial Officer, Deputy Cash Management Officer, and their representatives. We also reviewed documents provided by Treasury and those publicly available on Treasury’s Web site. Finally, we conducted interviews with and reviewed documents provided by contractors, including PricewaterhouseCoopers and Ernst & Young. For this report, our work was limited to the review of OFS’s documentation related to internal controls. In future, we plan to evaluate the design of the controls and their operating effectiveness. To identify a preliminary set of indicators on the state of credit and financial markets that might be suggestive of the performance and effectiveness of TARP, we consulted Treasury officials and other experts and analyzed available data sources and the academic literature. We selected a set of preliminary indicators that offered perspectives on different facets of credit and financial markets, including perceptions of risk, cost of credit, and flows of credit to businesses and consumers.[9] We assessed the reliability of the data upon which the

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indicators are based and found that, despite certain limitations, they were sufficiently reliable for our purposes. The data used to construct the indicators in this report came largely from the Federal Reserve. As these data are widely used, including by GAO and the Federal Reserve, and are considered to be a reliable and often definitive source for banking sector data, we conducted only a limited review of the data but ensured that the trends we found were consistent with other research. We also relied on data from the Chicago Board Options Exchange (CBOE), Inside Mortgage Finance, and Global Insight. We have relied on CBOE and Global Insight data for past reports, and we determined that considered together, these auxiliary data were sufficiently reliable for the purpose of presenting and analyzing trends in financial markets. We conducted this performance audit in December 2008 and January 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions, based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

BACKGROUND This section provides general information about the structure and roles of the entities that oversee TARP. In addition, figure 1 provides a timeline of the evolution of the various programs created under TARP, which are discussed in detail in the first section of this report.

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Congressional Oversight Panel Section 125 of the act established the Congressional Oversight Panel (COP) as a legislative branch entity to help provide broad oversight of the financial markets and financial regulatory system and to provide various reports to Congress on these matters.[10] More specifically, the act requires that COP submit regular reports to Congress on TARP every 30 days. In its first regular report submitted on December 10, 2008, COP posed a series of questions to Treasury on the events that had taken place since the adoption of the act. Topics covered in these questions included the reason for Treasury’s shift in strategy from purchasing mortgage-backed securities to providing capital injections to banks; the extent to which Treasury’s strategies helped stabilize the markets and reduce home foreclosures; the funds spent to date and whether they were used as intended; the criteria used to determine CPP participation; and any reforms imposed by Treasury on financial institutions receiving TARP funds. On December 30, 2008, Treasury responded to COP’s first report, but COP said that Treasury did not provide complete answers to several of its questions and failed to address others. Consequently, in its second report of January 9, 2009, the panel asked Treasury to supplement its earlier responses, highlighting four areas that required additional detail. First, the panel asked Treasury to provide more information on CPP participants’ use of TARP

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funds. The panel said that Treasury needs to make the banks receiving TARP funds accountable in order to restore investor and taxpayer confidence in the markets. COP encouraged Treasury to use its authority to make funding conditional upon banks reporting their use of funds and use of reporting to create performance benchmarks. COP said that Treasury should either establish formal procedures for voluntary reporting or create guidelines for participating institutions’ use of funds. Second, the panel addressed the transparency of information that would indicate the health of banks receiving TARP funds. Third, it asked about Treasury’s plans to address foreclosure mitigation. Fourth, the panel addressed the viability of Treasury’s strategy to stabilize the financial markets and the broader economy. COP recommended that Treasury (1) provide an analysis of the origin of the credit crisis; (2) establish a set of metrics for evaluating the success of the TARP strategy; and (3) explain the rationale for making TARP funds available to all healthy banks, regardless of their lending practices or systemic significance. Moreover, COP said that it did not believe that Treasury had made significant efforts to minimize foreclosures and that it would provide recommendations on how to address this issue in an upcoming report. COP plans to submit its next report on February 10, 2009.

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Financial Stability Oversight Board Section 104 of the act created the Financial Stability Oversight Board (FinSOB), which consists of the Chairman of the Federal Reserve (who has been elected board chairman), the Secretary of the Treasury, the Director of FHFA, the Chairman of the Securities and Exchange Commission (SEC), and the Secretary of HUD.[11] FinSOB’s purpose is to review Treasury’s exercise of authority under the act, including the appointment of financial agents, assets to be purchased, and the structure of vehicles used to purchase troubled assets. FinSOB is to make recommendations to Treasury about use of its authority and report any suspected fraud, waste, or abuse to the Special Inspector General for TARP or the Attorney General of the United States, as appropriate. In addition, FinSOB must report quarterly on its oversight of Treasury’s exercise of authority. FinSOB’s first report covered Treasury’s policies to implement TARP as of December 31, 2008. FinSOB stated that the actions Treasury took to implement TARP improved the ability of financial institutions to avoid severe funding market pressures that could have led to an escalation of stresses and disorderly failures. More generally, FinSOB reported that Treasury’s actions taken under TARP and the authorities granted by the act helped promote confidence in the financial markets and in U.S. financial institutions, which it noted was a critical first step to the restoration of more normal financial market and economic activity. However, FinSOB noted that significant challenges lay ahead for TARP, particularly in light of the continuing stresses in the financial sector and the weakened outlook for the U.S. economy. Given the disproportionate consequences that instability in the nation’s financial institutions and markets may have for the broader economy, the board stated that it will be important for Treasury to continue to take actions under TARP to stabilize financial markets, help strengthen financial institutions, improve the functioning of the credit markets, and address systemic risks. Moreover, as additional resources become available it will be important for TARP to pursue effective strategies for providing resources in support of

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reducing preventable foreclosures, due to the harm that foreclosures may have on the affected borrowers, communities, the housing market, and the financial system and broader economy. Finally, FinSOB stated that as the program evolves, it will be important for TARP to pursue strategies designed to allow it to exit from its financial interests in a timely manner consistent with the objectives of the act.

Special Inspector General for TARP Section 121 of the act created the Office of the Special Inspector General for TARP. The Special Inspector General’s responsibilities include conducting audits and investigations of the purchase, management, and sale of assets under TARP, as well as of the management of the asset guarantee program mandated under Section 102 of the act. Additionally, the Special Inspector General must submit quarterly reports to Congress summarizing purchases, obligations, and revenues associated with the various TARP activities authorized under the act. The first report is due no later than 60 days after the confirmation of the Special Inspector General, which occurred on December 8, 2008. Therefore, the first report is due to Congress by February 6, 2009.

Summary of Program Activities under TARP

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Figure 1 summarizes program activity under TARP for programs such as CPP, as well as newer programs such as AIFP. As noted earlier, we examine these activities in greater detail in the first section of this report.

TREASURY CONTINUED TO FOCUS ON CPP, BUT A VARIETY OF OTHER PROGRAMS HAVE BEEN CREATED OR ARE IN PROGRESS As of January 23, 2009, Treasury had announced several programs under TARP with a projected total funding level of $387.4 billion. As shown in table 1, although the dollar amount of announced initiatives exceeded the $350 billion limit initially set by Congress, in fact Treasury has reported entering into agreements legally obligating it to purchase or guarantee troubled assets totaling only $300 billion.[12] In addition, Treasury reported making actual disbursements for completed purchases of about $293.7 billion. Officers and employees of Treasury may not obligate[13] or expend appropriated funds in excess of the amount apportioned by the Office of Management and Budget (OMB) on behalf of the President.[14] Of the funding levels announced for TARP, Treasury stated that OMB had apportioned about $339.9 billion as of January 23, 2009. Based on this information, it appears Treasury has not exceeded the troubled asset purchase limit or obligated funds in excess of those OMB has apportioned.[15] We are continuing to obtain additional information from Treasury as well as to review the controls that Treasury has in place to ensure that it complies with these restrictions. We will discuss these issues in subsequent reports.

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.

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Source: GAO. Figure 1. Timeline of Programs and Selected Actions under TARP, October 2008–January 2009

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Table 1. Status of TARP Funds as of January 23, 2009 (Dollars in billions) Program

Capital Purchase Program Systemically Significant Failing Institutions Targeted Investment Program Term Asset-backed Securities Loan Facility Automotive Industry Financing Program Citigroup Asset Guarantee Bank of America Asset Guarantee Total

Announced Program Funding Levela $250.0 40.0

Apportioned

$230.0 40.0

Asset Purchase Price $194.2 40.0

$194.2 40.0

40.0 20.0

40.0 0.0

40.0 0.0

40.0 0.0

24.9

24.9

20.8

19.5

5.0 7.5

5.0 0.0

5.0 0.0

0.0 0.0

$387.4

$339.9

$300.0

$293.7

Disbursed

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Source: Treasury OFS, unaudited. a Some of Treasury’s announced transactions are not yet legal obligations.

As Treasury has continued to create programs in an effort to craft an effective response to challenging institution-specific developments, many observers believe that it has not effectively communicated its overall strategy or explained how the various programs work together to meet TARP’s goals. For example, we noted in our December report that the shift in focus from buying troubled mortgage-related assets to making investments in financial institutions underscored the need for an effective communication strategy that would explain the reasoning behind this change. Similarly, the programs that have been created to address specific developments often have similar guidelines and terms that can make it difficult for Congress, the markets, and the public to understand the differences between programs and the rationale for each. Further, Treasury has not yet implemented a program for homeownership preservation, but according to Treasury officials, they have been in discussions with the transition team. These issues continue to highlight the importance of effective communication with participants, the Congress, and the general public.

CPP Continues to Be the Primary Vehicle under TARP for Attempting to Stabilize Financial Markets Treasury has continued to rely on CPP as the primary vehicle under TARP for attempting to stabilize financial markets. As of January 23, 2009, Treasury had disbursed more than 75 percent of the $250 billion it had allocated for CPP to purchase more than $194 billion in preferred shares of 317 qualified financial institutions (see table 2).[16] These purchases ranged from about $1 million to $25 billion per institution. About $42.7 billion in preferred stock shares of 265 financial institutions has been purchased since our December report. Appendix II gives a detailed listing of banks that have received funds as of January 23, 2009.

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Initially, Treasury approved $125 billion in capital purchases for nine of the largest public financial institutions that federal banking regulators and Treasury considered to be systemically significant to the operation of the financial system.[17] At the time, these nine institutions held about 55 percent of U.S. banking assets. Subsequent purchases were made in qualified institutions of various sizes (in terms of total assets) and types. Total assets of participating qualified institutions ranged from about $8 million to more than $2 trillion (see app. I). As of January 23, 2009, the types of institutions that received CPP capital included 226 publicly held institutions, 83 privately held institutions, and 8 community development financial institutions (CDFI).[18] These purchases represented investments in state-chartered and national banks and bank holding companies located in 43 states and Puerto Rico.

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Table 2. Capital Investments Made through the Capital Purchase Program, as of January 23, 2009 Closing date of transaction

Amount of CPP capital investment

10/28/2008 11/14/2008 11/21/2008 12/5/2008 12/12/2008 12/19/2008 12/23/2008 12/31/2008 1/9/2009 1/16/2009 1/23/2009 Total

$115,000,000,000 33,561,409,000 2,909,754,000 3,835,635,000 2,450,054,000 2,791,950,000 1,911,751,000 15,078,947,000 14,771,598,000 1,479,938,000 385,965,000 $194,177,001,000

Cumulative percent of allocated fund used for CPP capital investment 46.0% 59.4 60.6 62.1 63.1 64.2 65.0 71.0 76.9 77.5 77.7 77.7%

Number of qualified financial institutions receiving CPP capital 8 21 23 35 28 49 43 7 43 39 23 317a

Source: Treasury and GAO. a The total number of financial institutions was reduced by two because SunTrust Banks, Inc. (SunTrust) and Bank of America both received two capital investments under CPP. SunTrust received a partial capital investment of $3.5 billion on November 14, 2008, and another of $1 .35 billion on December 31, 2008. Bank of America received $15 billion on October 28, 2008, and, after merging with Merrill Lynch & Co., Inc. (Merrill Lynch), an additional $10 billion on January 9, 2008. As discussed later in this report, Treasury has made an additional purchase of $20 billion in preferred shares under TIP.

According to OFS and the bank regulators, thousands of applications are under review. As of January 16, 2009, Treasury was in the process of reviewing approval recommendations from bank regulators for less than 150 qualified financial institutions.[19] The bank regulators reported that they are reviewing applications from more than 2,000 institutions that have not yet been forwarded to Treasury. Qualified financial institutions generally have 30 calendar days after Treasury notifies them of preliminary approval for CPP funding to submit investment agreements and related documentation. According to OFS officials, there is a backlog of pending closings, largely because of the time required for institutions to obtain approval from their shareholders and boards of directors or finalize closing documents. OFS

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stated that more than 50 financial institutions that received preliminary approval have withdrawn their CPP applications. Moreover, according to OFS officials, some of the institutions said that their boards of directors had elected not to participate in the program for various reasons, including the cost of closing and concerns over what they viewed as onerous reporting and compliance requirements that may be imposed on participants. OFS officials also stated that some institutions want to show that they qualified for CPP funds but did not need the funds. As of January 23, 2009, Treasury had not denied an application. Institutions that are not likely to meet the requirements for funding under the CPP are encouraged not to apply by their appropriate bank regulator. In the coming months, OFS staff resources will be further strained as they continue to review and approve recommendations from the banking regulators for more than 2,000 applications that the regulators have not forwarded to OFS and, as discussed later in this report, new applications for CPP funds from other types of financial institutions, such as S corporations and mutual organizations (mutuals).[20]

Treasury Developed Additional Standard Terms to Reflect Different Ownership Structures of Financial Institutions Early on, Treasury created standardized terms for the publicly held institutions that received CPP funds. Treasury has finalized or begun work on terms for other types of financial institutions, including privately held institutions, S corporations, and mutuals. On November 17, 2008, Treasury established standardized terms for making capital investments in privately held financial institutions, which were required to submit applications for CPP funds by December 8, 2008. The terms for privately held institutions are generally similar to those for publicly held institutions.[21] Like the terms for publicly held institutions, those for privately held institutions stipulate that

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the preferred shares pay dividends at a rate of 5 percent annually for the first 5 years and 9 percent annually thereafter; such shares be nonvoting, except with respect to protecting investors’ rights; financial institutions may redeem their shares at their face value after 3 years and earlier if the financial institution has received a minimum amount from “qualified equity offerings” of any Tier 1 perpetual preferred or common stock;[22] and Treasury generally may transfer the preferred shares to a third party at any time.

The terms of the warrants, however, differ for publicly and privately held institutions.[23] Treasury receives warrants to purchase common stock in publicly held financial institutions. But for privately held institutions, Treasury receives warrants to purchase a specified number of shares of preferred stock, called warrant preferred, that pay dividends at 9 percent annually.[24] The exercise price for the warrants is $0.01 per share unless the financial institution’s charter requires otherwise. Unlike for publicly held institutions, Treasury exercised these warrants immediately for warrant preferred because there were no downside risks to exercising the warrants immediately and it can begin receiving dividends, according to OFS officials. On January 14, 2009, Treasury established standardized terms for making capital investments in S corporations but was still crafting terms for mutuals. The deadline for S corporations to submit applications to Treasury for CPP funds is February 13, 2009. The terms for S corporations are generally similar to those for publicly held institutions, with the

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exception that debt (senior securities) is being issued instead of preferred stock.[25] Treasury structured the terms this way to preserve the tax status of these corporations, which would lose their tax status if they issued a second class of stock, such as preferred stock, to Treasury. In addition, the senior securities will count as Tier 1 capital when held at the holding company level and Tier 2 capital when held by a bank or savings association. Before Treasury invests in the senior securities issued by a holding company, it will be necessary for bank regulators to issue an interim final rule designating the senior securities as Tier 1 capital. The senior securities will pay interest at a rate of 7.7 percent annually for 5 years and 13.8 percent thereafter.[26] Holding companies may defer interest on the senior securities for up to 5 years, but any unpaid interest will accumulate and compound at the then-applicable interest rate in effect. In addition, these companies cannot pay dividends on shares of equity or trust preferred securities as long as any interest is deferred. Treasury is developing standardized terms for mutuals, but OFS officials noted that there are challenges associated with structuring terms for these types of organizations and they do not have an expected date for releasing final terms. While credit unions also are covered under the act, Treasury has not yet created a program that would enable them to participate in CPP.

Treasury Continues to Rely on Regulators’ Recommendations for Approving CPP Applications Qualified financial institutions seeking CPP capital continue to be directed to send their applications directly to their primary federal bank regulators, and Treasury continues to rely extensively on these regulators’ recommendations in its decision to allow an institution to participate in CPP.[27] Because the program is intended to provide capital to those institutions that can demonstrate overall financial strength and long-term viability, OFS is relying on the banking regulators’ examinations and experience with these institutions in making a final determination regarding their financial condition and participation. As we noted in our December 2008 report, Treasury and the banking regulators developed a standardized process for evaluating the financial strength and viability of applicants. Banking regulators evaluate applications based on factors such as examination ratings and selected performance ratios. The regulators give presumptive approval to institutions with the higher examination ratings and recommend these institutions to OFS’s Investment Committee, which makes recommendations to the Treasury Assistant Secretary for Financial Stability for final approval.[28] Institutions with lower examination ratings or other considerations requiring further review are referred to the CPP Council, which may consider other factors, such as confirmed private equity investment, that may offset the effect of lower examination ratings.[29] These institutions may also be recommended to the Investment Committee. Finally, those institutions with the lowest examination ratings receive presumptive denials and may be encouraged to withdraw their applications. In December 2008, we also reported that differences exist in the extent to which bank regulators provided internal guidance (in addition to Treasury’s guidance) on processing CPP applications that might not be approved. For example, three bank regulators provided additional written guidance to staff on how to handle applications that were not likely to be recommended for approval, while one bank regulator did not provide any additional guidance. The bank regulators we contacted stated that no new additional guidance had been developed since our December report.

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We are continuing to examine the process for accepting and approving CPP applications. Specifically, we are developing a methodology to sample CPP applications that have been funded from October 2008 through January 2009 to determine the extent to which the regulators and OFS are consistently applying established criteria for reviewing applications and adequately documenting the regulators’ recommendations and OFS’s final decisions. We will also continue to coordinate and leverage the work of other agencies and offices involved in the oversight of CPP, including the Congressional Oversight Panel, FDIC’s Office of the Inspector General, Treasury’s Office of the Inspector General, and the Office of the Special Inspector General for TARP, all of which have work underway in monitoring the implementation of CPP. In addition, we will be examining FDIC’s recent requirement that state nonmember banks implement a process to monitor their use of capital injections, liquidity support or financing guarantees obtained through financial stability programs established by Treasury, FDIC, and the Federal Reserve.[30] The monitoring process is intended to show how participation in these federal programs has assisted institutions in supporting prudent lending and efforts to work with existing borrowers to avoid unnecessary foreclosures. FDIC indicated that institutions should include a summary of this information in shareholder and public reports, annual reports, and financial statements, as applicable. While we are encouraged by FDIC’s initiative, CPP would benefit from the four federal bank regulators, in collaboration with Treasury, developing a common approach to ensure that participants are treated the same. As part of our ongoing review of this program, we will leverage work of FDIC’s Office of the Inspector General, which has work underway on this issue, and coordinate our activities with the Special Inspector General for TARP. We will report our results in subsequent reports. Treasury Has Made Some Progress in Monitoring Banks’ Use of CPP Funds and Ensuring Compliance with Purchase Agreements but Has Not Finalized Its Plans Our December 2008 report recommended that Treasury work with bank regulators to establish a systematic means of monitoring and reporting on financial institutions’ activities to ensure that they are consistent with the goals of the CPP standard agreement, including expansion of the flow of credit and the modification of the terms of residential mortgages. Treasury has made some progress in responding to the recommendation, but more needs to be done to ensure an appropriate level of accountability and transparency.[31] Specifically, Treasury has taken several steps in responding to our recommendation: •

•

Treasury has worked with the regulators and CPP participants to develop a survey for the 20 largest institutions that will collect monthly data on loan balances, new loan originations by different categories (that is, consumer and commercial lending), and purchases of mortgage-backed and asset-backed securities. The survey will also require institutions to provide a narrative discussion of trends in their lending activities and changes in their lending standards and terms. OFS officials said that they have begun surveying these institutions. Working with the bank regulators, Treasury announced that it was developing an approach to analyzing quarterly call report data for all financial institutions that received CPP funds to gauge changes in lending activity and compare them with changes at nonparticipating financial institutions.

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Treasury has also taken steps to establish a team focused on monitoring and reporting issues.

Treasury’s efforts will provide some useful insights on lending activities of the participating institutions, but because only the 20 largest participants will be surveyed, analysis for most of the participants will come from quarterly data submitted by the institutions and will have a significant reporting lag, thereby limiting its usefulness as a monitoring mechanism for the vast majority of CPP participants. Depending on the results of the call report and survey analysis, Treasury said that it will also work with the regulators as they develop examination procedures to collect information about how the funds are being used by participating institutions. During this period, we again contacted representatives of the eight large institutions that initially received funds under CPP to discuss any changes in their strategy for using and tracking CPP funds. One of the two institutions that track CPP funds reported that it had used the funds to increase interbank lending and purchase mortgage-backed securities and provided us with a report on its planned use of funds. The other institution stated that it would use CPP funds primarily to support consumer banking (for example, credit cards and mortgages) and also to purchase mortgages in the secondary market to increase market liquidity. This institution will be providing us with a management report detailing the status of the use of CPP funds. Officials from all eight institutions discussed using the funds in a manner that they viewed as generally consistent with the goals of CPP, such as increasing the flow of credit to consumers and businesses and modifying the terms of existing residential mortgages. However, as we reported previously, six of these institutions did not intend to track or report CPP capital separately. Further, the institutions continued to note that CPP capital would not be viewed any differently from other capital— that is, the additional capital would be used to strengthen the institutions’ capital bases, make business investments and acquisitions, and lend to individuals and businesses—and all of the institutions stated this is what they have done. For example, officials described and have publicly reported that the additional funds have enabled them to increase or maintain lending, invest in projects (such as housing projects), increase capital base, and support secondary market activities. Treasury also has made some progress in addressing our recommendation that it should develop a way to ensure that institutions participating in CPP are complying with key requirements of program agreements, including limitations on executive compensation, dividend payments, and repurchase of stock. OFS officials told us that certification by senior executives will be a key part of ensuring compliance. Specifically, Treasury proposed interim regulations establishing reporting and recordkeeping procedures that will require that the principal executive officers (PEO) of participating institutions certify compliance with the compensation restrictions and that the certification be provided to the TARP Chief Compliance Officer. According to Treasury officials, they have identified options for detecting noncompliance and taking enforcement actions but have not finalized their plans in this regard. In addition, Treasury is implementing a plan to ensure that financial institutions are making accurate and timely dividend payments to Treasury by reconciling anticipated dividend payments with actual amounts received from the institution. However, Treasury has not selected equity asset managers that could be responsible for monitoring these other aspects of compliance. Each of the four federal bank regulators also is developing procedures for bank examiners to monitor and assess compliance with program requirements, such as

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limitations and restrictions on executive compensation and dividend payments, through their bank examination process. These procedures are still in the development phase, and one of the regulators expects to complete its work before the end of the first quarter of 2009. As noted previously, Treasury has made some progress in establishing specific guidance on executive compensation. Treasury plans to issue additional interim final rules on executive compensation that provide a technical amendment and two clarifications to the interim final rules issued in October and provide new reporting and recordkeeping requirements for the CPP executive compensation standards.[32] The new rules will require that the PEO of the financial institution provide certifications to the TARP Chief Compliance Officer regarding compliance with the CPP executive compensation restrictions applicable to senior executive officers (SEO),[33] as follows: •

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Within 120 days of the purchase of securities by Treasury, the PEO must certify that the compensation committee has reviewed the SEOs’ incentive compensation arrangements with the senior risk officers to ensure that these arrangements do not encourage unnecessary risk- taking that could threaten the value of the institution. Within 135 days of the end of each fiscal year, the PEO must certify that (1) the compensation committee has met at least once during the year with the senior risk officers to review the relationship between risk management policies and practices and the SEOs’ incentive compensation arrangements, and the compensation committee has certified to this review; (2) the financial institution has complied with the requirements of the interim regulations for recovery or “clawback” of SEOs’ bonus or incentive compensation based on earnings, gains, or other measures that are later proven to be based on materially inaccurate performance metric criteria; (3) the financial institution has prohibited “golden parachute” payments to SEOs; and (4) the financial institution has instituted procedures to limit the income tax deduction for payments to each senior executive officer to $500,000. The PEO must also provide the names of individuals who are the financial institution’s SEOs for the current fiscal year. Within 135 days of the completion of each annual fiscal year, the PEO must certify that the income tax deduction for payments to each SEO was in fact limited to $500,000.

If the PEO is unable to provide any of these certifications in a timely manner, the PEO must provide an explanation to the TARP Chief Compliance Officer. Financial institutions must preserve appropriate documentation and records to substantiate each certification for at least 6 years after the certification, and for the first 2 years these documents must be in an easily accessible place. Any individual providing false information or certifications to Treasury relating to a purchase under the act’s executive compensation restrictions or required under the interim final rules is subject to criminal penalties.

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Treasury Has Established the Auto Industry Financing Program to Stabilize Auto Makers and Auto Financing Companies Treasury established the Auto Industry Financing Program in December 2008 to prevent a disruption of the domestic automotive industry that would pose systemic risk to the nation’s economy. Treasury established the program in response to business plans that General Motors Corporation (GM) and Chrysler Holding LLC (Chrysler) submitted to congressional committees and public statements made by GM and Chrysler officials indicating that their companies needed immediate federal financial assistance to remain solvent.[34] On December 19, 2008, Treasury announced it had agreed to lend up to $18.4 billion under this program—including $13.4 billion to GM and $4 billion to Chrysler.[35] According to program guidelines, eligibility for AIFP is determined on a case-by-case basis and takes into account the following factors: • •

•

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the importance of the institution to production by, or financing of, the American automotive industry; the likelihood that a major disruption of the institution’s operations would have a materially adverse effect on employment and produce negative spillover effects to the overall economy; the likelihood that the institution is important enough to the nation’s financial and economic system that a major disruption of its operations could cause major disruptions to credit markets and significantly increase uncertainty or cause a loss of confidence that would materially weaken overall economic performance; and the extent and probability of the institution’s ability to access alternative sources of capital and liquidity.

Treasury’s loan agreements with GM and Chrysler include a number of provisions to protect taxpayers’ interests and put the companies on the path to financial viability. For example, the agreements limit executive compensation; require concessions from parties including management, labor, and debt holders; subject the companies to periodic reviews by government entities including GAO; require collateral for the loans; and subject business and other transactions of more than $100 million to government approval. In addition, the agreements call for the appointment of a “President’s Designee” to oversee the restructuring of the American auto manufacturers (an appointment not yet made). As a condition of receiving the loans, GM and Chrysler must submit restructuring plans and term sheets to the President’s Designee by February 17, 2009. The restructuring plans must include a business plan for repaying the loans, evidence of the companies’ ability to comply with federal corporate average fuel economy standards, evidence of a new product mix and cost structure that is competitive in the U.S. marketplace, and evidence that the companies can become financially viable. The terms sheets must include agreements between the companies and their unions, public debt holders, and voluntary employees’ benefit associations on labor modifications, debt restructuring, and benefit modifications, respectively. By March 31, 2009, GM and Chrysler must report to the President’s Designee on their progress in implementing these restructuring plans, including showing final agreements with union and other stakeholders. The President’s Designee will then determine

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whether the companies have made sufficient progress in implementing the restructuring plans; if they have not, the loans are automatically accelerated and become due 30 days later. As part of our responsibilities for providing oversight of TARP, we plan to monitor Treasury’s implementation and oversight of AIFP, including the auto manufacturers’ use of federal funds and development of the required restructuring plans. We plan to issue a separate report on the program early this spring.

AIFP Loans Related to GMAC On December 29, 2008, after the Federal Reserve approved an application by GMAC LLC to become a bank holding company, Treasury committed to lend up to $1 billion of TARP funds to GM (one of GMAC’s owners), to enable GM to participate in GMAC’s new rights offering related to its reorganization as a bank holding company. [36] The actual level of TARP funding to GM was to depend on the level of current investor participation in GMAC’s offering, and on January 22, 2009, Treasury announced the final loan amount to GM of $884,024,131. At Treasury’s option, this loan can be exchanged at any time for the GMAC ownership interests acquired by GM in the new rights offering. On December 29, 2008, Treasury purchased $5 billion of senior preferred membership interests from GMAC with an annual 8 percent dividend, payable quarterly. Under the agreement, GMAC issued warrants to Treasury to purchase, for a nominal price, additional preferred interests in an amount equal to 5 percent of the preferred interests purchased. The warrant preferred shares provide an annual 9 percent dividend payable quarterly. According to Treasury, because the exercise price for the warrants is equal to one cent per $1,000 ownership unit (equivalent to a share) and there were no downside risks to exercising the warrants immediately, Treasury exercised the warrants at closing so that it could begin receiving the dividends.[37] Under the funding agreement, GMAC must comply with all executive compensation restrictions applicable to qualifying financial institutions under CPP, except that the definition of a “golden parachute” payment is broader: it generally means any payment to an SEO on account of severance from employment. GMAC also must comply with enhanced restrictions as long as Treasury owns any preferred interests or warrant interests. In particular, GMAC •

• •

must reduce by about 40 percent the aggregate amount of bonus compensation that may be paid to SEOs or senior employees in 2008 and 2009 from the 2007 bonus level;[38] cannot adopt or maintain any compensation plan that would encourage manipulation of its reported earnings to enhance the compensation of any of its employees; and must maintain all suspensions and other restrictions of contributions to benefit plans that are in place or initiated as of the closing date of the transaction.

Treasury also has the right to require GMAC to clawback any bonuses or other compensation (including golden parachutes) that are paid in violation of the agreement. Finally, GMAC must certify in writing to the TARP Chief Compliance Officer that the compensation committee has reviewed the compensation arrangements of the SEOs with its senior risk officers and determined that the compensation arrangements do not encourage these officers to take unnecessary and excessive risks that threaten the value of the company.

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AIFP Loans to Chrysler On January 16, 2009, as part of a broader program to assist the domestic automotive industry in becoming financially viable, Treasury announced that it would make a $1.5 billion loan to a special purpose entity created by Chrysler Financial Services Americas LLC (Chrysler Financial) to finance the extension of new consumer automotive loans. The loan will be payable over 5 years and will be secured by a senior secured interest in a pool of newly originated consumer automotive loans, with Chrysler serving as guarantor for certain covenants of Chrysler Financial.[39] Under the agreement, Chrysler Financial must be in compliance with the executive compensation and corporate governance requirements of Section 111 of the act, as well as enhanced restrictions on executive compensation.[40] In lieu of warrants, the special purpose entity created by Chrysler Financial will issue additional notes to Treasury in an amount equal to 5 percent of the total size of the loan. The additional notes will vest 20 percent on the closing date and 20 percent on each anniversary of the closing date and will have other terms similar to the loan terms.

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Treasury Has Established Programs to Address Problems at Specific Financial Institutions Although CPP has remained the primary vehicle under TARP to assist financial institutions, Treasury has several other programs that target specific types of financial institutions in response to changing conditions in the markets. However, Treasury has yet to clearly articulate and communicate a vision for TARP, which has adversely affected its ability to communicate with Congress, financial markets, and the public. For example, a number of the programs established under TARP have similar guidelines and terms, which highlights the need to effectively articulate and communicate the overall strategy behind creating each program and show how the programs will work together to achieve TARP’s goals.

Systemically Significant Failing Institutions Program As we previously reported, on November 25, 2008, Treasury issued guidelines for the SSFI Program. According to Treasury, this program is designed to provide stability in financial markets and prevent disruption caused by the failure of an institution of significant size that is deemed to be important to the financial system. Unlike CPP, SSFI has no deadlines for participation, which is determined on a case-by-case basis, and terms are generally more stringent. Treasury considers a variety of factors when assessing an institution for participation in SSFI, including • •

•

the extent to which the institution’s failure could threaten the viability of its creditors and counterparties because of their direct exposure to the institution; the number and size of financial institutions that investors or counterparties see as situated similarly to the failing institution, or that they believe would otherwise be likely to experience indirect contagion effects from the institution’s failure; the institution’s importance to the nation’s financial and economic system—for example, whether a disorderly failure would, with a high probability, cause major disruptions to credit markets or payments and settlement systems, seriously

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destabilize key asset prices, and significantly increase uncertainty or losses of confidence, thereby materially weakening overall economic performance; and the extent and probability of the institution’s ability to access alternative sources of capital and liquidity from either the private sector or other sources.

In November 2008, American International Group, Inc. (AIG) became the first institution assisted under this program. Treasury’s concerns about AIG predated the establishment of TARP. In mid-September 2008, the Federal Reserve Board, the Federal Reserve Bank of New York (FRBNY), and Treasury agreed that the failure of AIG—a diversified financial services company that provides asset management, general insurance, life insurance and retirement services through its subsidiaries—would pose a systemic risk to the global financial markets and the economy. On September 22, 2008, FRBNY and AIG entered into a credit agreement and a guarantee and pledge agreement. Under these agreements, FRBNY established a 2-year revolving credit facility that could lend AIG up to an aggregate of $85 billion outstanding at any one time. All outstanding balances under the credit agreement were secured by a pledge of a substantial portion of the assets of AIG and its primary nonregulated subsidiaries, including its ownership in its regulated U.S. and foreign subsidiaries. AIG’s obligations under the credit facility also are guaranteed by certain of AIG’s domestic subsidiaries. AIG also agreed to issue 100,000 shares of a new series of convertible preferred stock to a trust that will hold the stock for FRBNY, with Treasury designated as the ultimate beneficiary. The preferred stock was originally to be convertible into 79.9 percent of the shares of AIG’s common stock, later reduced to 77.9 percent. Outstanding advances made to AIG under the credit facility bore interest at a quarterly rate equal to 3-month LIBOR plus 8.5 percent.[41] On October 6, 2008, the Federal Reserve Board also authorized FRBNY to engage in securities borrowing transactions with AIG through which FRBNY could lend up to $37.8 billion to AIG in exchange for collateral in the form of investment-grade debt obligations. On November 10, 2008, the Federal Reserve Board, acting in conjunction with Treasury, announced the restructuring of these AIG credit facilities. FRBNY restructured the credit facility established in September in three ways: by increasing the loan maturity from 2 to 5 years; by reducing the interest rate payable on outstanding advances to 3-month LIBOR plus 3 percent; and by reducing the maximum credit that AIG could have outstanding to $60 billion. The reductions went into effect after the Treasury’s investment of $40 billion in TARP funds to pay down the credit facility. The investment was made pursuant to Treasury’s agreement to purchase $40 billion in perpetual senior preferred shares from AIG as part of SSFI. The senior preferred shares will accrue dividends at an annual rate of 10 percent and the dividends are payable quarterly in arrears. Treasury also will receive a warrant to purchase a number of shares of common stock equal to 2 percent of the AIG common stock on the date of Treasury’s purchase. The warrant has a 10-year term and an initial exercise price of $2.50 per share. Treasury’s consent will be required for increases in dividends on common stock and repurchases of certain securities until 5 years after the date of purchase. The senior preferred stock is nonvoting except for class-voting rights on certain corporate actions that may affect the value of the stock or the investors’ rights. Additional restrictions include AIG’s agreement to

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limit any golden parachute payments to employees of AIG and subsidiaries who participate in AIG’s senior partners plan to the amounts permitted under the restrictions for CPP; forego increases to the annual bonus pools payable to SEOs and senior partners for 2008 and 2009 beyond the average of the 2006 and 2007 annual bonus pools, with certain exclusions; confirm that none of the proceeds of the purchase of preferred stock will be used to pay annual bonuses or other future cash performance awards to executives or senior partners (Treasury and AIG agreed that this confirmation should be auditable);[42] ensure that none of the proceeds of the purchase price will be used to pay any electively deferred compensation resulting from termination of the certain deferred compensation plans by AIG; maintain and implement a comprehensive written policy on lobbying, government ethics, and political activity; and give Treasury the right to consent to material amendments to AIG’s written policies on corporate expenses.

We will continue to monitor implementation of this agreement between Treasury and AIG in subsequent reports. We have recently initiated an effort to, among other things, assess any impact of the assistance to AIG on insurance markets and to determine, to the extent possible, whether the rescue package has achieved its desired goals.

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Targeted Investment Program On January 2, 2009, Treasury released the program description, eligibility considerations, and justification for TIP. According to Treasury’s announcement, the program is designed to prevent a loss of confidence in financial institutions that could result in significant market disruptions, threaten the financial strength of similarly situated financial institutions, impair broader financial markets, and undermine the overall economy. Treasury will determine the forms, terms, and conditions of any investments made under this program and will consider institutions for approval on a case-by-case basis based on the threats posed by the potential destabilization of the institution, the risks caused by a loss of confidence in the institution, and the institution’s importance to the nation’s economy. In evaluating applications, Treasury will obtain and consider information from a variety of sources and take into account recommendations from the institution’s primary federal regulator, other regulatory bodies, and private parties that could provide insight into the potential consequences if confidence in a particular institution deteriorated.

TIP Transactions with Citigroup On January 2, 2009, Treasury stated that the previously announced purchase of senior preferred shares of Citigroup would fall under TIP. As we previously reported, on November 23, 2008, Treasury had announced that it would invest $20 billion in senior preferred shares of Citigroup. Citigroup, which already had received $25 billion on October 28, 2008, under CPP, was the first participant in this program. This investment was part of a multi-pronged federal approach to stabilizing the financial markets. Treasury also indicated that it

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guaranteed qualified assets under AGP as discussed later in this report. Treasury and Citigroup signed the final agreement on January 15, 2009. We are in the process of reviewing that agreement and will report on its terms and conditions in our next report. Treasury will require any institution participating in TIP to provide Treasury with warrants or alternative consideration, as necessary, to minimize the long-term costs and maximize the benefits to the taxpayers in accordance with the act. Treasury also will require any institution participating in the program to adhere to more rigorous executive compensation standards than those required under CPP. In addition, Treasury will consider other measures to protect the taxpayers’ interests, including limitations on the institution’s expenditures or other corporate governance requirements. As the agreement requires, under TIP Citigroup • • •

will pay dividends at an annual rate of 8 percent, payable quarterly; can redeem shares only after the preferred shares received in the October CPP purchase have been redeemed; and will provide warrants to Treasury to purchase shares of common stock equal to 10 percent of the total preferred shares issued.

Citigroup also agrees to use its reasonable best efforts to account for use of the $20 billion purchase price and to report to Treasury on a quarterly basis until use of all of the purchase price has been accounted for. In addition, Citigroup will be subject to executive compensation requirements that are more stringent than those under CPP. The additional executive compensation standards include the following:

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Limits on bonus compensation. Unless all debt and equity securities owned by Treasury are redeemed, Citigroup must implement a bonus pool cap for SEOs and employees who are members of the Senior Leadership Committee for fiscal years 2008 and 2009 that may not exceed 60 percent of the prior year’s bonus compensation.[43] For 2009, the bonus pool cap may be increased with Treasury’s approval.[44] Limits on golden parachutes payable to senior leadership members. The limits on golden parachute payments that apply under CPP will apply to members of the Senior Leadership Committee. Clawback requirements. If any senior executive officer or senior leadership member receives a payment in contravention of the restrictions on executive compensation, Citigroup promptly must provide the individual with written notice that payment must be repaid within 15 business days and inform Treasury of the repayment. Restrictions on lobbying. Citigroup is required to maintain and implement a comprehensive lobbying policy that is distributed to and implemented by all company employees and lobbying firms doing business with the institution.[45] Restrictions on expenses. Citigroup is required to implement and maintain a policy on corporate expenses and a wide range of company expenditures that is distributed to all employees.[46] Compliance certifications. Citigroup is required to submit a certification on the last day of each fiscal quarter stipulating that it has complied with and is in compliance with the executive compensation provisions set forth in the agreement. The

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United States Government Accountability Office certification will be issued to the TARP Compliance Officer by a senior executive officer of Citigroup and will commence on the last day of the first fiscal quarter of 2009.

TIP Transactions with Bank of America On January 16, 2009, Treasury announced that Bank of America would receive $20 billion under TIP. Under CPP, Bank of America had previously received $15 billion on October 28, 2008, and $10 billion on January 9, 2009.[47] Similar to the terms for the Citigroup transaction under TIP, Bank of America will make dividend payments of 8 percent to Treasury and will comply with enhanced executive compensation restrictions.[48] We plan to provide more information on the terms of this transaction in our next report, once we obtain and review executed closing documents.

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Treasury and Federal Reserve Established a Program to Improve Availability of Consumer Credit As we previously reported, on November 25, 2008, Treasury and FRBNY announced the creation of the Term Asset-backed Securities Loan Facility (TALF) program. TALF is intended to increase the availability of credit for consumers. The Federal Reserve is setting up a $200 billion program to support consumer finance securitization markets—specifically, credit cards, auto loans, student loans, and small business loans—and Treasury would provide $20 billion of TARP funds to this facility. FRBNY believes this facility will enable a broad range of institutions to increase their lending and will give borrowers access to lower-cost consumer and small business loans. The credit facility is intended to support consumer credit by providing liquidity to issuers of asset-backed securities so that they can issue new consumer credit-driven securities. The credit facility may expand to include other asset classes, such as commercial and certain residential mortgage-backed assets. Treasury and the Federal Reserve continue to develop the specific structure and terms of TALF. The program consists of two related but distinct parts: a lending facility and an asset disposition facility. Both will be established and operated by FRBNY, and through its TARP authority, Treasury will participate only in the asset disposition facility. Under the lending facility, FRBNY will make available up to $200 billion for nonrecourse loans secured by consumer asset-backed securities.[49] Borrowers will be required to pay monthly interest on loans and to repay the outstanding principal balance at the end of the loan term. If the borrower makes all interest payments and repays the loan, FRBNY will release its lien on the asset-back securities and return them to the borrower. If the borrower defaults, FRBNY will foreclose on the asset- back securities. Treasury will have no role in any of the transactions under the TALF lending facility. The asset disposition facility is intended to purchase, hold, and ultimately liquidate assetbacked securities that were posted as collateral under the loan facility but were later foreclosed on by FRBNY. Following foreclosure, FRBNY can sell the asset-backed securities to a special purpose vehicle owned and managed by FRBNY. Treasury will make a subordinated loan to the special purpose vehicle for up to $20 billion in TARP funds, but will not have any ownership interest in it. If purchases of foreclosed assets exceed $20 billion, FRBNY will make a senior loan to the special purpose vehicle to fund the additional

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purchases. All cash flows from special purpose vehicle-owned assets will be used first to repay FRBNY’s senior loan and then Treasury’s subordinated loans. FRBNY has agreed to impose executive compensation requirements under TALF that are comparable to those imposed on financial institutions that receive CPP investment. The requirements will be imposed on sponsors of asset-backed securities as a condition of allowing their securities to be pledged as collateral for loans made by FRBNY. Further, Treasury will require that the business records and management of the special purpose vehicle be available to Treasury and its agents, to the Comptroller of the Currency, and to the Special Inspector General for TARP. Treasury expects to have the program operational in February 2009. Unless otherwise extended, the facility will cease making new loans on December 31, 2009.

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Treasury Deferred Action on a Program to Preserve Homeownership until the Incoming Administration One of the stated purposes of the act is to ensure that the authorities and facilities provided by the act are used in a manner that, among other things, preserves homeownership. While OFS has taken steps to identify and implement a homeownership preservation strategy, as of January 20, 2009, Treasury had neither specified its strategy for preserving homeownership nor announced any specific program. According to Treasury officials, Treasury has deferred taking action on a program until the new administration was in place. The act authorized the Secretary of the Treasury to purchase and insure troubled mortgagerelated assets held by financial institutions and to the extent that such assets were acquired, required Treasury to implement a plan that sought to “maximize assistance for homeowners.” When recently asked by COP to describe its strategy under TARP to reduce foreclosures, Treasury pointed to actions it has taken in collaboration with other entities outside of the TARP program— for example, working with the Federal Reserve and FHFA to prevent the failure of Fannie Mae and Freddie Mac; helping to establish the HOPE NOW Alliance, a coalition of mortgage market participants and housing counselors; and working with the HOPE NOW Alliance, FHFA, Fannie Mae, and Freddie Mac to develop the Streamlined Loan Modification Program, through which servicers can modify existing loans into a Fannie Mae or Freddie Mac loan.[50] Examples of these and other programs to preserve homeownership are described in Appendix III. As we previously reported, OFS has established the Office of Homeownership Preservation, and efforts to hire permanent staff are ongoing.[51] Currently, the Office of Homeownership Preservation operates with an interim chief and interim staff in all but one administrative position. According to its chief, the office has received and evaluated more than 70 proposals and inquiries related to TARP-sponsored homeownership preservation strategies or actions from private-sector, nonprofit, and governmental organizations and individuals. These proposals have covered a range of suggested approaches, including direct federal purchase of residential whole loans held by financial institutions, an insurance program to provide credit support for community development loans and securities, a proposal to identify troubled mortgages before they default, direct payments to borrowers to pay down mortgages to an affordable rate, and a federally sponsored loan modification program. According to Treasury officials, they have discussed homeownership preservation

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options with the transition team. The transition team has mentioned a variety of proposed actions involving homeownership preservation, including setting aside from $50 billion to $100 billion for this program. We plan to continue to monitor Treasury’s actions related to homeownership preservation under TARP in subsequent reports.

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Treasury Has Established the Asset Guarantee Program but Plans to Limit Its Use As the act requires, Treasury has taken steps to establish an insurance program—AGP— to guarantee troubled assets.[52] Treasury has flexibility in structuring the insurance program but must meet several specific requirements. For example, Treasury must collect premiums from any participating financial institution and use actuarial analysis to set premium rates to ensure that the expected value of the premium is no less than the expected value of the losses to TARP from the guarantee and that taxpayers will be fully protected. The act also requires that Treasury adjust its purchase authority under TARP to reflect use of the guarantee program.[53] As required by the act, on December 31, 2008, Treasury provided a report to Congress on the establishment of its insurance program. The report includes a proposal for the AGP’s structure, including program objectives and eligibility considerations, but does not define specific terms of how a guarantee would be structured and other aspects of the program. Based on Treasury’s December 2008 report, the program appears to be limited in scope. Specifically, Treasury plans to limit participation to systemically significant institutions and other select institutions chosen to participate on a case-by-case basis. In determining which institutions will be eligible, Treasury plans to consider a variety of factors, including (1) the extent to which destabilization of the institutions could present counterparty risks; (2) whether an institution is at risk of a loss of confidence and the extent to which such stress might be caused by a portfolio of troubled assets; (3) the number and size of institutions that would likely by affected by destabilization of the institution; (4) whether the institution is sufficiently important to the nation’s financial and economic system; and (5) the extent to which the institution has access to alternative forms of capital. Treasury also plans to coordinate with the institution’s primary federal regulator in determining eligibility for program participation. Treasury also stated that guarantees provided under AGP may be used in coordination with other programs or with a broader guarantee involving one or more agencies of the U. S. government. Prior to issuing its December 2008 report, Treasury sought input from the general public on how to structure the insurance program. On October 10, 2008, Treasury posted a notice inviting the general public to provide comments on the program by October 28, 2008. The notice listed specific issues on which Treasury sought comment, including what types of assets it should insure under the program, how to structure premiums, and what administrative and operational challenges the program might create. According to Treasury, it received 85 comments from a wide variety of individuals, academics, financial institutions, municipalities, and trade groups. While most respondents suggested that Treasury use the program primarily to guarantee existing individual whole loans, mortgage-backed securities, or both, other respondents suggested including asset-backed securities (including those backed by student loans, auto loans, and credit card receivables), collateralized debt

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obligations, auction rate securities, municipal bonds, reinsurance, and transit leasing agreements in the program. Many respondents suggested that Treasury consider assets for the guarantee program that differed from those assets purchased under section 101 of the act (thus far, primarily capital purchases from financial institutions) and that the guarantee program could be more efficient than asset purchases under some circumstances. For example, one industry group commented that some assets that might be purchased under TARP would not be suitable for guarantees, such as loans that lack good collateral, adding that the guarantee should be used to increase confidence in the markets for buying and selling assets that generally are performing well. Also, several respondents commented that a guarantee program could offer more flexibility than an asset purchase program because it could limit the risk taken on by Treasury, such as by incorporating loss- sharing into guarantees. Several respondents acknowledged a variety of challenges that Treasury would encounter in setting up the program. For example, while the majority of respondents recommended that Treasury set the premiums to reflect the risk assumed by insuring each asset, many stated that determining risk and pricing premiums based on risk would be very difficult. Moreover, respondents acknowledged that managing the program would itself be challenging, including the selection and monitoring of institutions and assets to be guaranteed. Treasury used AGP for the first time to guarantee certain Citigroup assets as part of an agreement it announced on November 23, 2008. The guarantee agreement, finalized in January 2009, provides protection against the possibility of unusually large losses on an asset pool of approximately $301 billion in loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup’s balance sheet. On January 16, 2009, Treasury announced its development of a similar agreement with Bank of America for providing protection against approximately $118 billion in loans, securities and other assets. We plan to discuss the final terms of these agreements more fully in our next report.

EFFORTS TO ESTABLISH THE OFFICE OF FINANCIAL STABILITY ARE ONGOING Treasury has made efforts to ensure that key leadership positions remain filled after the transition to the new administration. In our last 60-day report, we noted that soon after establishing OFS and appointing an Interim Assistant Secretary of Financial Stability as its head in October 2008, Treasury created several functional areas within the office and hired interim chiefs from across government and the private sector to manage each of the major OFS functions.[54] We recommended that Treasury develop a definitive transition plan, including steps to ensure that key OFS leadership positions remain filled during and after the transition to the new administration. In general, Treasury has taken steps either to (1) confirm that the interim chief will stay for a period covering the transition to the new administration; or (2) in cases where a leader was unlikely to stay beyond the transition, to work with the interim chief to find potential candidates to serve in the role on a permanent basis. As of January 16, 2009, Treasury confirmed the following:

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•

•

•

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•

The Interim Chief Investment Officer will serve in this role until the new administration identifies a permanent successor. According to Treasury, the transition team asked the Interim Chief Investment Officer to remain in his post for up to 2 months, or until Treasury hires sufficient permanent staff to help run the office. Treasury anticipates that the permanent successor may be a political appointee. The Interim Chief Homeownership Officer will serve in this role through the transition.[55] Treasury anticipates that the new administration will identify a permanent successor who may be a political appointee. The Deputy Chief Compliance Officer, who is on detail from Treasury’s Bureau of the Public Debt, temporarily has assumed the role and responsibilities of the Interim Chief Compliance Officer until Treasury identifies a permanent successor. The Interim Chief Risk Officer may not stay in this role until a permanent successor is found. OFS has interviewed potential replacements for the Chief Risk Officer position but has not made a selection. While aggressively searching for a permanent successor, Treasury anticipates that it will take time to find a candidate with the right balance of public- and private-sector expertise to serve in this position. According to Treasury, the transition team agreed with this approach and agreed that OFS could administer risk-management functions sufficiently if the position were unfilled for a brief period, because a permanent Deputy Risk Officer has been appointed. The Interim Chief Financial Officer recently was replaced by an individual who will serve as the Chief Financial Officer on a permanent basis.

Treasury has facilitated continuity of operations through the transition for a number of other key positions. In particular, Treasury said that the Interim Assistant Secretary for Financial Stability has agreed to the transition team’s request to stay on in the position until a successor is in place. Also, when Treasury replaced the interim manager for CPP with a permanent successor in early January, it was able to keep the interim manager for a short time to ensure seamless administration of the program. Treasury also identified individuals to fill a number of other senior positions within OFS. In our prior work, we have noted that key practices of successful organizations include taking steps to ensure continuity of leadership and sustain a learning environment that drives continuous improvement in performance.[56] We will continue to monitor OFS’s leadership positions and OFS’s efforts to establish a performance- oriented culture. As another approach to help ensure continuity in operations, OFS continues to use staff and other existing resources from other parts of Treasury and the federal government, as well as from the private sector. In our last 60-day report, we described how Treasury employed a short-term strategy for staffing high-level officials in OFS by identifying government employees within Treasury and other federal agencies who could fill senior positions on a temporary basis. As of January 26, 2009, OFS had approximately 52 detailees and 38 permanent staff on board, indicating significant growth in the number of OFS positions filled since our last report (see table 3). Current detailees include staff from Treasury departmental offices and bureaus, including the U.S. Mint, the Bureau of the Public Debt, the Internal Revenue Service, OTS, OCC, and the Office of Domestic Finance. Also, Treasury arranged for several employees from other federal agencies—including SEC, FDIC, Federal Reserve, HUD, and the Overseas Private Investment Corporation—to serve as detailees to OFS.

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According to Treasury, some detailees served short-term organizational needs while others filled longer-term needs until permanent staff replaced them. According to Treasury, these staff exhibit a high level of competence in performing the work required of them and, in some cases, have accepted offers to stay in OFS permanently. Treasury officials also noted that detailees may be especially appropriate for certain OFS positions because TARP is not a permanent Treasury function and that its program activities are still evolving. In addition to detailees, numerous other Treasury employees support OFS by taking on responsibilities to help administer TARP. According to Treasury, these staff dedicate significant portions of their time to OFS activities. For example, personnel providing assistance in human resources administration, legal support, financial reporting and budgeting, and information technology spend varying amounts of time supporting OFS’s dayto-day operations. While Treasury officials said that OFS is becoming more self-reliant, certain staff always will provide part-time assistance to OFS (in such areas as human resources), as they do for every office within Treasury. Table 3. Number of Treasury and Other Federal Employees Assigned to OFS Type of Staff

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Staff detailed to OFS from other areas of Treasury and other federal agencies (temporary)a Permanent staff (includes limitedterm appointments) Total

Approximate number of positions filled as of November 21, 2008 43

Approximate number of positions filled as of January 26, 2009 52

5

38

48

90

Source: Treasury. a As of January 16, 2009, Treasury reported that it had finalized interagency agreements with SEC, HUD, and OTS that provide for four employees from these agencies to support OFS for periods ranging from 30 days to 2 years. Treasury officials said that the agreements address how Treasury will reimburse the agencies for detailed employees.

OFS’s financial agents and contractors also have remained in place throughout the transition, providing institutional knowledge of past practices, continuity of operations, and expertise needed to carry out OFS policies and operations. For example, Treasury awarded a contract to PricewaterhouseCoopers to help establish a comprehensive set of internal controls, and the firm will continue to support this effort. Treasury has taken a variety of other measures to support the transition to the new administration. In our last 60-day report, we recommended that Treasury facilitate a smooth transition to the new administration by building on and formalizing ongoing activities. According to Treasury, since our last report, Treasury has continued to provide updates to the transition team on TARP developments, and the team has met with key leaders, including each of the Interim Chiefs described above. An official from the new administration’s transition team confirmed that OFS officials have briefed transition team members regularly on operational and policy issues in an effective manner. In addition, and as discussed in more detail below, OFS continues to establish processes and document internal controls used to

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carry out the various new programs established under TARP and the associated financial transactions. Specifically, Treasury documented processes used to administer CPP and established program guidelines for TARP investments to guide the next administration’s use of TARP funds. OFS management is still in the preliminary stages of developing and implementing a comprehensive set of policies and procedures to manage TARP activities.

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Treasury Has Used Hiring Flexibilities to Staff the Organization, but the Hiring Process Still Presents Challenges Although Treasury has used hiring flexibilities to expedite the process for finding permanent employees for OFS, Treasury still faces challenges in hiring the full complement of staff needed to administer the office. In our last report, we recommended that Treasury expedite OFS’s hiring efforts to ensure that the office has the personnel needed to carry out and oversee TARP. OFS officials stated that they continue to aggressively hire additional permanent staff at the highest levels of the organization to provide a corporate culture and stabilize leadership within OFS. As of January 26, 2009, Treasury had brought 38 permanent staff on board through a variety of mechanisms, including direct-hire authority, merit promotion appointments, limited-term Senior Executive Service (SES), and Schedule A appointments, and reassignments.[57] This level of staffing is a substantial increase from the five permanent hires that were in place approximately at the time of our last report. Nonetheless, according to Treasury’s January 8, 2009, organizational chart for OFS, Treasury estimates that OFS will need approximately 131 staff on board to operate at full capacity, although hiring for some aspects of the projected organization will be dependent upon further program developments. Treasury may be able to fill several of these positions with detailees; however, in its organizational chart, Treasury identified a number of unfilled positions best suited for permanent staff. In order to continue to fill key vacancies within the organization, OFS has used its direct-hire authority in coordination with OPM, which Congress explicitly authorized for TARP under section 101(c) of the act.[58] Such direct-hire authority helps to expedite the hiring process by exempting OFS from certain competitive examination requirements. While Treasury is required to publicly announce all jobs for which it uses direct-hire authority, the department may interview and hire candidates without conducting a formal rating and ranking process normally required for competitive service appointments. Also, Treasury has worked with OPM to obtain specific Schedule A authority to make appointments exempt from examination requirements for positions requiring unique or highly specialized qualifications. According to Treasury, direct-hire and Schedule A authorities have permitted the department to recruit individuals from a pool of candidates who have submitted their resumes directly to Treasury via e-mail, as discussed below, as well as in response to specific vacancy announcements. In addition, Treasury has used other tools to enhance its recruitment efforts, such as its existing automated recruitment system, and is working with information technology staff to automate categorization of candidates who have submitted resumes. Despite making use of these human capital flexibilities, Treasury continues to face challenges in hiring. First, conflict-of-interest considerations have increased the time needed to recruit and hire individuals for OFS, and, in some cases, have caused qualified candidates to withdraw their names from consideration for positions within the organization. According

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to Treasury, it requires all senior executives and senior-level staff to complete a form listing their financial interests to identify potential conflicts of interest. Treasury also requires all general schedule-level positions, with the exception of administrative support staff, to complete a similar form. Some qualified candidates were unaware when they applied for an OFS position that their financial investments could pose conflicts and subsequently made the decision not to pursue employment with OFS. According to Treasury, ethics reviews of this information can add substantial time to the hiring process. To avoid unnecessary delays and complications in finalizing offers of employment, Treasury is obtaining information on potential conflicts as early as possible in the recruitment process. Second, Treasury said that candidates with the right skills and abilities to fill positions in OFS often work for a financial regulator that can offer a more competitive salary than OFS.[59] OFS may be competing for the same candidates as the financial regulators because these organizations recruit individuals with skills and experience similar to those needed to administer TARP. For example, regulatory agencies recruit financial economists with expertise in risk measurement and quantitative analysis. Treasury’s Human Resources division continues to consider other hiring flexibilities that may help them offer enhancements needed to recruit the right talent for OFS, but officials said they are limited by the terms of current law and OPM regulations. Furthermore, Treasury has hired a contractor to provide human capital support to the organization and has used a variety of methods to recruit talent to the organization, but it is unclear when Treasury will begin to develop a more formal human capital plan for OFS. In prior work, we have noted that aligning an organization’s human capital program with its mission and programmatic goals requires identification of the critical skills and competencies needed to achieve current and future programmatic results.[60] Thus far, Treasury’s main strategy for identifying these skills has been to write position descriptions for key OFS vacancies, and the primary work of the human capital services contractor most recently has been writing such position descriptions for OFS. As of January 26, 2009, Treasury finalized 28 position descriptions. Treasury noted that it previously drafted other position descriptions, but because of the evolution of strategies under TARP, it determined that several of the positions were no longer relevant. In addition, to help recruit talented individuals before position descriptions are finalized, Treasury posted information on its Emergency Economic Stabilization Act Web page requesting that individuals interested in working for OFS transmit their resumes directly to Treasury at a specific e-mail address, without having to respond to job announcements through OPM’s Web site.[61] Treasury later refined this strategy by creating a series of email boxes organized by area of expertise-–such as compliance, risk management, and economic analysis—and asked individuals to transmit resumes by using the addresses that best aligned with their background and experience. Treasury officials said that this approach enhanced Treasury’s recruitment efforts, but that it still did not eliminate the submission of resumes by individuals that were not qualified. They still required time to review the resumes and identify those that reflect the needed skills and abilities for OFS. Although it is likely that OFS will continue to need both temporary and permanent staff to administer TARP, Treasury has not yet developed a formal workforce plan that balances the need for long- and short-term assistance because the program is still evolving. As noted above, some temporary staff will serve the short-term needs of the organization, while others may continue to serve long-term needs until permanent hires can replace them. As described

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in table 3, of the 90 staff working in OFS as of January 26, 2009, 52, or 58 percent, have been detailed to OFS from other areas of Treasury and the federal government. In addition, Treasury has relied on a number of financial agents and contractors to conduct the day- to-day operations of OFS. In prior work, we have found that temporary employees can provide the flexibility needed to effectively manage an agency’s workforce by fulfilling the short-term needs of the organization.[62] Because TARP has added many new programs since it was first established in October 2008 and that the number and types of program activities may expand or change under the new administration, we recognize that Treasury may find it difficult to determine OFS’s long-term organizational needs at this time. For example, it is not clear how many staff will be needed to work on CPP efforts once the transactions are all completed. However, such considerations will be vital to retaining institutional knowledge within the organization as programs evolve. We will continue to track OFS efforts to engage in workforce planning, including any workforce planning efforts undertaken by OFS’s contractor.

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Treasury Has Continued to Rely on Contractor Support, While Taking Steps to Improve Contracting Practices and Enhance Oversight Treasury has continued to award contracts in support of TARP and has taken steps to improve its contracting practices and enhance its oversight of contractors. In one recent case, Treasury awarded a contract using other than full and open competition procedures, as permitted by the Federal Acquisition Regulation (FAR), but it took steps to promote competition and received multiple offers as a result. Treasury also continues to use contract structures and pricing arrangements, such as time-and-materials pricing, that allow for flexibility in ordering the services it requires. In part because these pricing arrangements are inherently risky, Treasury has taken measures to enhance contract oversight. In addition, Treasury has continued its efforts to promote small business participation in TARP.

Additional Contracts Have Been Awarded to Help Implement TARP Since TARP was established, Treasury has entered into one financial agency agreement and awarded a total of 14 contracts and blanket purchase agreements. It has issued a total of 10 task orders under those instruments. Since November 25, 2008, the cut-off date for our last report, Treasury has awarded a contract for legal services related to TALF, [63] one to advertise for TARP position openings, and two leases for space.[64] In addition, since November 25, Treasury issued three task orders for a range of services related to the implementation of TARP, and has modified existing contracts and task orders. Details of the agreement and all contracts, task orders, and modifications are summarized in table 4. As of December 31, 2008, Treasury had expended $8,987,153 for the financial agency agreement and contract actions.[65]

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Table 4. Financial Agency Agreement, Contracts, and Blanket Purchase Agreements Awarded, as of January 20, 2009 Action

Purpose

Date of Action

Value/Obligation

Period of Performance

Pricing Structure

Custodian and cash management

10/14/2008

Estimated $20 million over 3 years

10/14/2008 – 10/14/2011

Flat fee and fixed percentage of asset values

Legal services for the implementation of TARP

10/10/2008

Maximum value of $500,000.00

10/10/2008 – 04/09/2009

Time and materialsc or fixedprice task orders

To initiate workd

10/10/2008

$300,000.00

Time and materials

1st Modification to Task Order 0001 1st Modification to Contract TOS09007 2nd Modification to Task Order 0001 2nd Modification to Contract TOS09007

To add funds

11/26/2008

To increase contract ceiling To add funds

12/19/2008 12/19/2008

Net increase: $200,000.00 Net increase: $400,000.00 $400,000.00

To increase contract ceiling

01/09/2009

$125,000.00

10/10/2008 – 04/09/2009 10/10/2008 – 04/09/2009 10/10/2008 – 04/09/2009 10/10/2008 – 04/09/2009 10/10/2008 – 04/09/2009

3rd Modification to Task Order 0001

To add funds

01/09/2009

$125,000.00

10/10/2008 – 04/09/2009

N/A

Indefinite Delivery Indefinite Quantity (IDIQ) Contract T0S09008 Task Order 0001

Investment and advisory services

10/11/2008

$2,495,190.00

10/11/2008 – 10/11/2009

Fixed-price task orders

To initiate work

10/11/2008

$227,387.30

Fixed price

To extend the period of performance and add funds

10/26/2008

Net increase: $356,831.00

10/11/2008 – 10/25/2008 Extended period of performance: 10/11/2008 – 11/30/2008

Financial Agency Agreement Bank of New York Financial Agency Mellon Agreementa Contracts and Blanket Purchase Agreements Simpson, Thacher & Indefinite Delivery Bartlett, LLP Indefinite Quantity (IDIQ) Contractb TOS09007 Task Order 0001

EnnisKnupp & Assoc., Inc.

1st Modification to Task Order 0001

N/A N/A N/A N/A

Fixed price

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Table 4. Financial Agency Agreement, Contracts, and Blanket Purchase Agreements Awarded, as of January 20, 2009 (Continued)

PricewaterhouseCoopers, LLP

Action

Purpose

Date of Action

Value/Obligation

2nd Modification to Task Order 0001

To extend the period of performance and add funds

12/01/2008

Net increase: $356,831.00

3rd Modification to Task Order 0001

To extend the period of performance and add funds Internal control services

12/31/2008

Net increase: $178,416.00

10/16/2008

N/A

To initiate work

10/16/2008

$191,469.00

11/02/2008

Net increase: $384,894.00

2nd Modification to Task Order 1

To add funds and modify period of performance To extend the period of performance

11/17/2008

N/A

Task Order 0002

To continue work

12/01/2008

$930,133.98

Modification to Task Order 0002 Blanket Purchase Agreement BPA-2009TARP-0002 Task Order 1

For additional services and funding Accounting services

01/08/2009

$57,490.40

10/18/2008

N/A

To initiate work

10/18/2008

$492,006.95

Task Order 2

To continue work

01/02/2009

$1,476,005.33

Lease GS-11B-02059

Property lease

10/23/2008

$168,308 (negotiated settlement agreement)f

Blanket Purchase Agreemente BPA-2009TARP-0001 Task Order 1 1st Modification to Task Order 1

Ernst & Young, LLP

Regus

Period of Performance Extended period of performance: 10/11/2008 – 12/31/2008 Extended period of performance through 1//31/2009 10/16/2008 – 09/30/2011 10/16/2008 – 02/01/2009 10/16/2008 – 11/14/2008 Extended period of performance: 10/16/2008 – 12/05/2008 12/01/2008 – 01/31/2009 12/01/2008 – 01/31/2009 10/18/2008 – 09/30/2011 10/18/2008 – 01/17/2009 01/02/2009 – 09/30/2009 10/27/2008 – 12/10/2008

Pricing Structure Fixed price

Fixed price

Time and materials or fixed-price task orders Time and materials

Time and

Time and materials N/A Time and materials or fixed-price task orders Time and materials

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Turner Consulting Group, Inc.

Interagency Agreement with General Services Administration (GSA) 08PA224 Blanket Purchase Agreement 09BPA002

For process mapping consultant services

10/23/2008

$9,000.00

10/24/2008 – 11/07/2008

Time and materials

Legal services

10/29/2008

$5,645,161.75

10/29/2008 – 04/28/2009

Task Order 01

To initiate work

10/29/2008

$1,411,300.00

Blanket Purchase Agreement 09BPA001

10/29/2008

$5,520,000.00

Task Order 01

Legal services for the Capital Purchase Program To initiate work

10/29/2008 – 04/28/2009 10/29/2008 – 04/28/2009

Time and materials or fixed-price task orders Time and materials

10/29/2008

$1,380,000.00

Lindholm & Associates

DO-TARP-2009- 0003, under GS-15F-0056M

Human resources services

10/31/2008

Base period

10/31/2008

Sonnenschein, Nath & Rosenthal, LLP I

Task Order DO-TARP2009- 0003 Contract TOS09010

$710,528.00 total value including options $174,720.00

Legal services related to auto industry loans

11/07/2008

$233,662.84

1st Modification to TOS09010

12/10/2008

3rd Modification to TOS09010

To incorporate statement of work and contractor’s proposal into contract and to add funds To clarify language in Modification 1 to increase contract ceiling price Increase contract ceiling amount

Purchase Order TD009040

Human resources advertisement

12/05/2008

Hughes Hubbard & Reed, LLP

Squire Sanders & Dempsey, LLP

2nd Modification to TOS09010

Washington Post

10/29/2008 – 04/28/2009 10/31/2008 – 09/30/2010

Time and materials or fixed-price task orders Time and materials Labor hours

10/31/2008 – 04/29/2009 11/07/2008 – 02/28/2009

Labor hours

Net increase: $223,662.84

12/10/2008 – 02/28/2009

N/A

12/11/2008

Increase in contract ceiling price to: $457,325.68

N/A

N/A

12/31/2008

Increase in contract ceiling price to: $1,457,325.68 $395.00

N/A

N/A

12/07/2008 – 01/07/2009

Fixed price

Labor hours

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Table 4. Financial Agency Agreement, Contracts, and Blanket Purchase Agreements Awarded, as of January 20, 2009 (Continued)

Sonnenschein, Nath & Rosenthal, LLP II

Action

Purpose

Date of Action

Value/Obligation

IDIQ contract TOS09014B

Legal services or the purchase of assetbacked securities To initiate work

12/12/2008

1,300 hours ceiling

12/12/2008

$249,999.00

12/31/2008

N/A

GSA Lease, GS-11B02075

To incorporate novation agreement and new conflictofinterest disclosures Property lease, 9month term

12/16/2008

$1,047,672

12/30/2008– 09/30/2009

Fixed price

12/16/2008

$3,028,642

10/01/2009 – 09/30/2010

Action

Property lease for expanded space, 1year term Purpose

Date of Action

Value/Obligation

Fixed price per annum plus annual operating costs Pricing Structure

Task Order 0001 1st Modification to TOS09014B

Eleven Eighteen LLP c/o Cushman & Wakefield

Period of Performance 12/10/2008 – 06/09/2009 12/10/2008 – 03/10/2009 N/A

Pricing Structure Time and materials or fixed-price task orders Time and materials N/A

Period of Performance Colonial Parking Contract with Options, Lease of parking 01/07/2009 $75,850.00 01/02/2009 – Fixed price TOS09017 spaces 09/30/2009 a This agreement has been amended five times to add additional responsibilities as the different TARP programs, such as CPP, SSFI, TALF, TIP, and AIFP, were established. b Indefinite-delivery/indefinite-quantity contracts provide for an indefinite quantity, within stated limits, of supplies or services during a fixed period. These contracts establish the basic terms of the contracts in advance, enabling agency personnel to issue subsequent task or delivery orders for specific services or goods expeditiously. Orders must be within the contract’s scope, issued within the period of performance, and be within the contract’s maximum value. c A time-and-material pricing mechanism provides for payments to the contractors based on set labor rates and the number of hours worked, plus the cost of any materials. Our prior work on such contracts recognized both the inherent flexibility of such arrangements and the need for close government supervision to ensure that costs are contained. Specifically, time-andmaterials contracts are considered high-risk for the government because they provide no positive incentive to the contractor for cost control or labor efficiency. Thus, the onus is on the government to monitor contractors to ensure that they are performing the work efficiently and controlling costs. d The initial task order initiates the contract work. e A blanket purchase agreement is a method of filling anticipated repetitive needs for supplies or services by establishing charge accounts with qualified sources of supply. The agreement contains the basic terms and conditions governing the types of services the firms will provide. As specific needs arise, blanket purchase agreements allow Treasury to issue task orders to the firms describing the specific services required, establishing time frames, and setting pricing arrangements. f This contract has been terminated. The Government has agreed to a one-time lease termination settlement of $168,308.

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Treasury Has Continued to Use Expedited Contract Award Procedures and Has Taken Steps to Ensure Competition The Competition in Contracting Act (CICA) requires, with certain limited exceptions, that contracting officers shall promote and provide for full and open competition in soliciting offers and awarding government contracts.[66] The process is intended to permit the government to rely on competitive market forces to obtain needed goods and services at fair and reasonable prices. Treasury has continued to expedite the award of contracts using other than full and open competition based on one of the limited exceptions provided for by statute. The statutory exception Treasury generally utilizes is “unusual and compelling urgency.” Since our last report, it cited this authority as a basis for awarding a contract for legal services. CICA and FAR provide that, even when agencies meet the requirements for other than full and open competition, such as in the case of unusual and compelling urgency, they nonetheless are required to request offers from as many potential sources as is practicable under the circumstances.[67] To aid in the solicitation of offers, agencies conduct market research to identify potential sources.[68] Treasury has conducted market research to identify potential vendors to solicit, which resulted in the receipt of multiple offers for each solicitation, including the most recent solicitation for legal services. In addition, Treasury generally used a best-value approach for evaluating offers received, based on a number of technical evaluation factors such as experience, management and staffing plans, small business utilization, and mitigation of identified conflicts of interest. These factors were reviewed by technical evaluation panels and, taken together, were considered by Treasury as more important than price. Treasury also generally sought and received from its contractors discounts from their standard commercial prices. Furthermore, where it has awarded contracts using other than full-and-open competition procedures, Treasury has stated its intention to procure future requirements using full and open competition. Treasury intends to transition ongoing services to more competitively awarded contracts, if feasible, within 3–6 months after award.

Treasury Has Continued to Use Flexible Contract Arrangements Treasury has continued to use contract structures and pricing arrangements designed to allow for flexibility in ordering the services required. For example, Treasury awarded an indefinite delivery/indefinite quantity contract for legal services, allowing it to issue task orders as specific needs arise. In addition, Treasury has continued to use time-andmaterials pricing arrangements for most of the task orders it awards. Because of the inherent risk in such pricing arrangements, we recommended in our prior report that Treasury move toward greater reliance on fixed-price arrangements, whenever possible, as program requirements were better defined over time. A Treasury procurement official stated that Treasury plans to convert work requirements to fixed- priced orders where appropriate and when the extent of the work involved becomes more predictable. Since our last report, Treasury has yet to issue any new task orders on a fixed-price basis. Treasury Has Taken Initial Steps to Enhance Contract Management In part because of Treasury’s use of time-and-materials pricing arrangements, we recommended in our last report that Treasury ensure that sufficient personnel were assigned

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and appropriately trained to oversee contractor performance. In addition to a number of planned hiring actions, ranging from contracting officer to senior management positions, Treasury has taken steps to improve its oversight of contractors during the implementation of TARP. For example, Treasury convened a Procurement Summit in early December 2008 on a number of contract management issues, including training requirements and the initiation of contract management reviews to address the use of time-and-materials pricing arrangements. Treasury originally assigned a number of its executive-level officials as Contracting Officer’s Technical Representatives (COTR).[69] In addition to their other responsibilities, Treasury’s internal guidance requires that COTRs be trained in their acquisition-related responsibilities prior to their appointment, with certain limited exceptions. While not all of the COTRs have received formal training (certification), given the limited time frame for executing the program, a Treasury procurement official believes the current COTRs have the experience necessary to perform their duties. Treasury has begun to replace the executivelevel COTRs with certified COTRs, and we plan to continue to monitor Treasury’s efforts in this area. To facilitate the COTRs’ oversight of contracts, Treasury developed and has begun to use a Contract Management Reporting Form to track the cost, schedule, and performance of the contracts awarded under TARP. The forms are prepared by the COTRs and submitted to the contracting officers at the middle and end of each month. These forms cover a number of issues we raised in the last report, including the status of COTR certification, the use of fixedprice pricing arrangements, and the review of contractor conflicts of interest. At the end of the second contract management reporting period, which ran through December 31, 2008, Treasury determined that the majority of contracts were performing on schedule and within budget, but it identified COTR certification, the move toward fixed-price requirements, and higher-than-anticipated costs on two contracts as issues in need of additional attention by Treasury.

Treasury Has Continued Efforts to Promote Small Business Participation As we noted in our previous report, for its financial agency agreement and some of its contracts, Treasury considered offerors’ efforts to utilize small businesses as part of its contract award selection criteria in an effort to promote the use of small businesses in carrying out TARP. As of January 20, 2009, Treasury has contracted directly with two small businesses—one for human resources support and another for a budget formulation model— while other entities have become involved through subcontracting opportunities with Treasury contractors and its financial agent. Specifically, Treasury’s financial agent engaged the support of two individual consultants to provide advice on asset purchase protocols, and one of Treasury’s legal services contractors subcontracted legal support to a minority- and women-owned small disadvantaged business. Treasury’s financial agent also has identified several disadvantaged or minority- owned small businesses to provide temporary services if necessary. Treasury currently is reviewing proposals from the firms that responded to its solicitation for equity asset managers. Treasury officials noted that they developed an inclusive approach to acquiring the services of equity asset managers to allow both large and small firms to compete for business, including minority- and women-owned firms. Specifically, Treasury’s solicitation requires prospective asset managers to have an existing portfolio of at least $100 million in assets under management, a threshold that Treasury officials say is high enough to

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ensure that an asset manager can handle a large portfolio, but not so high as to preclude participation by institutions of modest size. Treasury also announced that in connection with its original solicitations for managers of troubled mortgage-backed securities and whole loans, it may decide to issue separate notices targeted at smaller institutions that would serve as submanagers within a portfolio of assets.

Treasury Has Been Addressing Conflicts of Interest Issues and Plans to Continue that Effort In our prior report, we noted that Treasury had issued guidelines on conflicts of interest but had not yet issued a related regulation. We recommended that Treasury issue regulations on conflicts of interest involving its agents, contractors, and their employees and related entities as expeditiously as possible. On January 21, 2009, Treasury issued an interim regulation on TARP conflicts of interest, which was effective immediately.[70] The notice in the Federal Register solicits public comments by March 23, 2009, and says that Treasury will consider all comments before issuing a final regulation. Treasury’s interim regulation outlines the process for reviewing and addressing actual or potential conflicts of interest reported by the entities retained to perform services in connection with the act. The interim regulation covers only contractors and financial agents. Among various other issues, the regulation addresses the following: •

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•

•

• • • •

organizational conflicts of interest, which can arise when, for example, an entity has a business relationship potentially inconsistent with the entity’s obligations to Treasury or that calls into question the entity’s objectivity or judgment; personal conflicts of interest, which can be triggered by stock ownership or other financial interests on the part of an entity’s management officials, key individuals, or certain immediate family members, and which could adversely affect an individual’s objectivity or judgment; limitations on the conduct of entities retained by Treasury, which include restrictions on giving and accepting gifts, making unauthorized promises, and improper uses of government property; the obligation to keep nonpublic information confidential; the applicability of conflict-of-interest requirements to subcontractors; the criteria for granting waivers of the application of the conflict-ofinterest restrictions where a conflict cannot be adequately mitigated; and measures available to Treasury to enforce the regulation, including default terminations, debarments, and referrals for criminal prosecution.

The interim regulation establishes a continuing obligation to monitor and report conflicts should they arise during the performance of a contract or agreement. We plan to monitor Treasury’s implementation of this regulation. The interim regulation became effective on January 21, 2009, and will apply to all actions occurring on or after that date. In our first report, we recommended that Treasury review and renegotiate as necessary existing mitigation plans to ensure conformity with the new

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regulation once issued. We continue to believe that such a review and renegotiation would be appropriate, and Treasury officials informed us that they intend to conduct such a review. The regulation does not cover some administrative services, as identified by the TARP Chief Compliance Officer, because they do not involve “substantial decision-making authority.” The Chief Compliance Officer said such administrative services include, for example, the design of office space for OFS. In addition, as noted in Treasury’s supplemental information to the interim regulation, the regulation does not address post- employment restrictions on Treasury employees because Treasury believes this issue is already adequately covered by existing law.[71] We note that section 207 of title 18 of the U.S. Code imposes restrictions on post- federal employment for certain former federal employees.[72] These restrictions apply to all covered federal employees, including those formerly employed by Treasury or detailed to Treasury from other agencies to work on TARP.[73] In response to another recommendation from our prior report, Treasury has taken some steps to institute a system to manage and monitor conflicts of interest. Treasury has focused many of its efforts to date on preventing potential conflicts from becoming actual conflicts requiring mitigation. For example, Treasury contracted with two legal firms to conduct closings under CPP. If one legal firm has a potential conflict related to the institution involved in the closing, Treasury may assign the other legal firm to conduct the closing. If both legal firms have a potential conflict of interest with the institution involved, Treasury may assign a third legal firm to conduct the closing. In addition, the TARP Chief Compliance Officer has assigned staff to review TARP contracts with all legal firms to ensure that confidentiality agreements and conflict-of-interest disclosures are in place, and ensure that required ethics training is being delivered. As it brings new staff on board, Treasury intends to perform the same review for other contracted services. Treasury also is developing a set of internal procedures for its compliance personnel to apply if conflicts arise as contractors or agents are carrying out their responsibilities.

OFS’s Internal Control System Continues to Evolve Since our last report, OFS has taken some important steps toward developing a system of internal control over TARP activities. Effective internal control is a major part of managing any organization to achieve desired outcomes and manage risk. Internal controls include the program’s policies, procedures, and guidance that help management ensure effective and efficient use of resources; compliance with laws and regulations; prevention and detection of fraud, waste, and abuse; and the reliability of financial reporting. Using GAO’s standards for internal control and the guidance in OMB Circular No. A-123, Management’s Responsibility for Internal Control, OFS has adopted a framework for organizing the development and implementation of its system of internal control for TARP activities.[74] OFS anticipates that this framework will continue to evolve as new programs are added and as its internal control infrastructure matures. OFS plans to use this framework to develop specific policies, drive communications on expectations, and measure compliance with internal control standards and policies. As shown in figure 2, this framework currently includes three identified business functions and five support functions. Figure 2 also depicts how the OFS framework incorporates the five key elements of internal control that are defined in GAO’s standards for

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internal control: control environment, risk assessment, control activities, information and communication, and monitoring.

Source: Treasury. Figure 2. OFS’s Framework for Internal Control.

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Table 5 defines these five key elements of internal control. The progress OFS has made in each of these elements of internal control is discussed below. Table 5. GAO’s Standards for Internal Control in the Federal Government Control environment—creating a culture of accountability by establishing a positive and supportive attitude toward improvement and the achievement of established program outcomes. Risk assessment—performing comprehensive reviews and analyses of program operations to determine if risks exist and the nature and extent of risks have been identified. Control activities—taking actions to address identified risk areas and help ensure that management’s decisions and plans are carried out and program objectives are met. Information and communication—using and sharing relevant, reliable, and timely financial and nonfinancial information in managing programs. Monitoring—tracking improvement initiatives over time and identifying additional actions needed to further improve program efficiency and effectiveness.

Source: GAO.

Control Environment OFS has developed an organizational structure that defines lines of authority and hired permanent staff to fill most of its key management positions, including a permanent Chief Financial Officer, who has experience with government internal controls and credit reform

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accounting. At the recommendation of PricewaterhouseCoopers, contracted by OFS to assist in the design and implementation of a system of internal control for TARP, OFS is creating a Middle Office function (under the Chief Operating Officer) to segregate important reconciliation controls.[75] OFS believes this separation will enhance the current control environment for the different types of investment program transactions (for example, CPP, SSFI, TIP). Middle Office responsibilities include validating transaction approvals, reconciling daily transaction activities, and monitoring Bank of New York Mellon activities concerning the securing of the government’s shares of stock and related warrants. OFS officials told us an informal Middle Office function has been in place and maturing since the initial CPP transaction was completed on October 28, 2008. OFS acknowledges that a key action item for OFS senior management will be to develop and implement comprehensive policies and procedures for the office that will include provisions for training and periodic assessment.

Risk Assessment OFS officials told us that they recognize the need for an effective risk-management process, but that the process has not yet been documented. OFS has established an Office of the Chief Risk Officer and has begun to fill the senior-level positions in that office. As shown in figure 2, OFS also has established a Senior Management Committee and the Deputy-level Senior Assessment Team (OFS indicated that the name of this group will likely change). The management committee includes the Assistant Secretary for Financial Stability and all chiefs (and others as deemed appropriate). OFS officials stated that they anticipate establishing responsibilities and authorities for the committee more formally in the coming months. The Deputy-level Assessment Team will include all deputy chiefs and others if deemed appropriate. This team is charged with planning and executing OFS’s A-123 review process. OFS stated that this working group will be formalized with a charter and will become active in the next few months as more deputy positions are filled and the A-123 process gets underway. If properly structured and implemented, these two groups will be essential to establishing a disciplined approach to TARP’s overall risk-assessment process and will complement the activities of its Office of the Chief Risk Officer. Since OFS recently adopted its framework for organizing the development and implementation of its system of internal control, it is still too early to assess whether OFS’s risk assessment process for using TARP funds include consideration of all significant interactions between OFS and other parties (including banks receiving funds under CPP and the custodian for TARP activities), as well as internal factors that increase risk, which were concerns we raised in our last report. A key component to managing risk within TARP is determining how to implement Treasury’s $700 billion troubled asset purchase authority and ensure that the department does not exceed the authorized amount. OFS officials told us that they have mechanisms to ensure that TARP purchases do not exceed the $700 billion limit. One mechanism that OFS officials provided to us was a tracking spreadsheet that, they asserted, maintains current data of the status of TARP funds. One aspect of an effective risk assessment process would be to establish and re-evaluate, as needed, the original estimates and funding levels for the various programs. Early on, OFS decided to apply $250 billion of the initially authorized $350 billion to CPP, but there was no documented methodology followed to establish that targeted amount, and no subsequent estimates or updates to address whether that amount will be sufficient to achieve the objectives of CPP. OFS officials told us that the combination of

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applications submitted from several large insurance and bank holding companies, S corporations and mutuals may require additional funding that exceeds the $250 billion already estimated and allocated to CPP. It is important that OFS develop and implement a welldefined and disciplined risk-assessment process because such a process is essential to monitoring program status and identifying any risks of potentially inadequate funding of announced programs. We will begin evaluation and testing of key elements needed in OFS’s risk-assessment process, including controls and procedures that OFS has in place to help ensure that OFS programs do not exceed their authorized funding amounts.

Control Activities OFS initially identified three business functions and five support functions that constitute TARP’s control activities. The business functions include asset purchases/guarantees, asset management, and asset sales. An OFS official told us that, given the quick time frames associated with TARP initiatives, one of OFS’s goals and challenges in establishing and implementing internal controls is working in a just-in-time environment as business decisions are made and implemented. Consequently, because the business functions are at various stages of activity, so is the development of control activities for each of these business functions. For example, most of OFS’s activity to date has occurred in the asset purchase/guarantee function and control activities associated with the asset purchase/guarantee function are the most developed. Although OFS still needs to develop written policies and procedures governing asset purchases, OFS officials informed us that they have established alternative mechanisms or controls over the purchases until such policies and procedures can be developed. For example, OFS, in close coordination with PricewaterhouseCoopers, has developed or is developing desk procedures, key control points, risk matrixes, and process flows for CPP acquisition activity and the monitoring and receipt of dividends. OFS officials told us they were confident that internal controls over the asset purchase transactions have been identified and documented. OFS officials also told us that for asset purchases, OMB has approved the cash flow models for all credit reform initiatives to date, and Investment Committee decisions, such as approving institutions and the equity purchase amounts in CPP, have been reconciled to completed transactions.[76] OFS officials noted they are addressing other activities related to the asset purchases, including developing budget and accounting controls, coordinating with Treasury on internal control requirements under OMB Circular No. A-123, and filling management and staff Middle Office positions. Ernst & Young, contracted by OFS to perform accounting support functions, is preparing position papers on the accounting methodology and policies for equity investments in financial institutions and other entities and on credit reform accounting. Accounting position papers are a first step in assisting OFS in determining accounting policies that will govern financial reporting for TARP. For the functional areas of asset management, OFS officials told us that they are hiring asset managers and are drafting or have drafted the corporate actions and dividend process flows and controls. OFS is scheduled to receive significant dividend payments in February 2009. We plan to evaluate and test OFS’s controls and procedures for this process as part of our next review. As the asset manager positions are filled, it will be important that the valuation of previous transactions be completed promptly and future transactions valued on a timely basis. At this time, there has been no activity related to the business function pertaining to asset sales. Accordingly, OFS has deemed this area a lower priority and has not addressed it. OFS currently is relying primarily on

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Treasury’s departmental offices for the support functions of procurement, budget/accounting, reporting/compliance, human resources, and information technology.

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Information and Communication OFS has put in place mechanisms for communicating internal control matters and the ongoing development of internal control policies. For example, internally, OFS conducts informal weekly meetings with PricewaterhouseCoopers and Ernst & Young to discuss progress in establishing and documenting internal controls and financial accounting processes. Externally, OFS officials told us they are in constant communication with OMB and Treasury officials on the availability of TARP funds prior to incurring an obligation. OFS also has met with officials from FinSOB on various topics including internal controls. In addition, OFS posts information on Treasury’s Web site, speaks at industry events, and testifies at congressional hearings. According to OFS, as of January 23, 2009, they have issued all reports required under the act. Monitoring OFS officials stated they are in the planning stage of developing and implementing comprehensive policies and procedures for monitoring. OFS plans to include provisions for periodic assessments by management to determine if the policies, procedures, and established controls are operating effectively. They expect this will occur formally through the A-123 review and assurance statement process and informally on an ongoing basis through information provided during the course of normal business operations. In addition, OFS officials told us they are continuing to leverage the work of PricewaterhouseCoopers to actively monitor the execution of controls by OFS in relation to each CPP transaction. OFS believes such active monitoring results in a regular evaluation of control design and effectiveness, which is necessary to ensure controls are appropriate and working as intended. Continuing to develop a comprehensive system of internal control is a key challenge facing OFS because it has had to develop internal controls while simultaneously reacting quickly to financial market events and implementing TARP initiatives. OFS recognizes there may be situations in which the organization will be unable to fully execute the controls as designed. Therefore, OFS plans for its internal control design to include compensating controls for such situations. By adopting a framework for organizing the development and implementation of its system of internal control, OFS has made an important start to providing a common understanding of, and clear structure for, that system. This framework, although still evolving, should provide OFS with the ability to communicate expectations and measure performance on internal controls and develop mechanisms for compliance with internal control standards. Our ongoing monitoring efforts will focus on the steps OFS is taking to develop and implement an effective internal control structure. We also plan to test the design, implementation, and operating effectiveness of internal controls over TARP activities, such as the approval and recording of CPP transactions and the receipt of dividends on preferred stock.

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MEASURING THE IMPACT OF TARP ON CREDIT MARKETS AND THE ECONOMY CONTINUES TO BE CHALLENGING TARP’s activities could improve market confidence in banks that choose to participate and have beneficial effects on credit markets, but several factors will complicate efforts to measure any impact. If TARP is having its intended effect, a number of developments might be observed in credit and other markets over time, such as reduced risk spreads, declining borrowing costs, and lending activity higher than it would have been in the absence of TARP. Credit market indicators we have identified suggest that the cost of credit has declined since our last report in interbank, mortgage, and corporate debt markets, while perceptions of risk (as measured by premiums over Treasury securities) have declined in interbank markets, but changed very little in corporate debt and mortgage markets. Several factors will make isolating and measuring the impact of TARP challenging, including changes in monetary and fiscal policy, other programs introduced by Treasury, the Federal Reserve, FDIC, and FHFA, and general market forces. For example, the Federal Reserve’s announcement that it will purchase mortgage-backed securities has been associated with a large drop in mortgage rates. As a result, any changes in capital markets cannot be attributed solely to TARP. Similarly, slow recovery does not necessarily reflect its failure because of the effects of market forces and economic conditions. We have identified a number of other indicators that we are monitoring and may include in future reports.

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TARP Could Have a Number of Effects on Credit Markets and the Economy TARP activities as of January 22, 2009—specifically CPP—could continue to improve market confidence in participating banks by improving their balance sheets, cash flows, and capital positions; reducing their perceived risk; and allowing them to borrow and raise capital at more favorable rates. To the extent that confidence in participating banks improves, the banks should be able to pass on some of their lower funding costs to their own customers in the form of lower rates. Moreover, the capital infusions also could increase the willingness and ability of participating banks to increase lending to creditworthy businesses and consumers rather than hoarding the capital or using it to purchase low-risk assets. Some tension exists between the goals of improving banks’ capital positions and promoting lending—that is, the more capital banks use for lending, the less their overall capital positions will improve. The current crisis involves issues of liquidity and solvency and it is difficult to determine which factor most challenges the viability of a given financial institution, especially since the values of the underlying mortgage-related securities at the root of the turmoil are unknown. A financial institution experiencing liquidity problems may have adequate capital (the value of its assets significantly outweighs liabilities) and therefore might be expected to use CPP capital to increase lending. Some institutions likely would use CPP capital to improve their capital ratios by holding the additional capital as Treasuries or other safe assets, rather than leveraging new capital to support additional lending. Using the capital in this manner could allow institutions to absorb losses or write down troubled assets. Since the onset of the crisis, it appears that banks have experienced liquidity and capital adequacy problems, complicating expectations about the immediate impact of TARP on

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lending. While Treasury has stated that CPP funds are intended for healthy institutions, continued uncertainty in financial markets, deteriorating economic conditions, and difficulty determining solvency suggest that some apparently healthy institutions may not leverage new capital at the expense of their own capital adequacy. For example, while Citigroup received $25 billion in CPP funds in October 2008, Treasury, the Federal Reserve, and FDIC provided additional capital in November 2008 and insured a pool of approximately $300 billion in assets against large losses, amidst concerns about Citigroup’s viability. Similarly, it was announced on January 16, 2009, that Bank of America would receive an additional $20 billion in TARP funds as well as additional insurance assistance from Treasury and FDIC on an asset pool of $118 billion. However, if CPP funds contribute to improving solvency rather than increasing lending, overall financial stability likely still would improve in the near term, as systemic or disruptive institutional failures could be prevented. As discussed in our last report, if TARP does have its intended impact, a number of effects should appear in credit and other markets over time, including declining risk premiums (the difference between risky and risk- free interest rates, such as rates on U.S. Treasury securities) for interbank lending and bank debt and lower borrowing costs for business and consumers. While these developments may raise volumes of consumer and business lending and permit some households to avoid foreclosures, the impact on overall lending could be diminished by the decline in the creditworthiness of borrowers or a tightening of lending standards. Given that credit quality in the economy is deteriorating and confidence remains low, banks may remain cautious about extending credit, lending only to low-risk borrowers and converting the additional funds into low-yield, safe assets. Similarly, with confidence low, consumers and business will remain cautious about taking on new loans. Under these circumstances, low interest rates and lower premiums may not translate into increased lending. Additionally, as Treasury has acknowledged, it may take more time before the injections have the desired effect. According to a Treasury statement on January 13, 2009, $189 billion of the initial $250 billion allocated to CPP has been invested. Because the economy is experiencing a downturn, during which lending and borrowing levels normally drop, lending may not occur immediately but may occur faster than would be the case if the equity injections had not taken place. Overall, determining the specific effect of TARP will be a challenge, because no one can know with confidence what would have happened in its absence. Changes in credit market conditions may not provide conclusive evidence of TARP’s effectiveness, as other important policies and interventions can influence these markets. We discussed the collaborative efforts government agencies have undertaken to restore financial stability, as well as the general market forces that also will complicate a determination of TARP’s specific effectiveness. Both factors continue to affect markets. For example, since our last report the Federal Reserve lowered the federal funds target and the discount rate partially in response to strained financial markets and tight credit conditions. Additionally, on November 25, 2008, the Federal Reserve announced that it would begin to purchase up to $500 billion in mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae and $100 billion in government- sponsored enterprise debt to support the mortgage and housing markets and foster improved conditions in financial markets more generally.[77] Moreover, FHFA, in partnership with Treasury, continues to implement a supplemental loan modification program for at-risk borrowers to prevent foreclosures and mitigate default-related losses. To these ends, Fannie Mae and Freddie Mac—under FHFA

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conservatorship—announced that they would extend the suspension of foreclosure sales and evictions from some single-family properties through January 31, 2009.[78] Moreover, housing values may continue to fall to levels consistent with incomes and rents in local areas, possibly leading to additional foreclosures, asset write-downs, and an increase in the perceived risk of banks and other financial institutions with exposure to mortgage assets.

Changes in Select Indicators Suggest Improvement in Credit Market Conditions, but These Changes Cannot Be Attributed Exclusively to TARP

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We considered a number of indicators that, although imperfect, may be suggestive of TARP’s impact on credit and other markets. Currently, we have identified preliminary indicators that are likely to capture interbank, mortgage, and nonbank lending activity as well as financial market risk perceptions and variables that are predictive of future real economic activity. At the very least, improvements in these measures would indicate improving conditions in credit markets. Further, given that CPP’s goal is to improve the capital position of banks and promote lending, we expect to monitor indicators that can provide some insight into the potential effects of the plan on capital ratios, the structure of liabilities, and net changes in lending at participating institutions. We continue to consider a variety of additional indicators, and as more data become available and economic and credit conditions evolve, we plan to include them in future reports.

Treasury-London Interbank Offered Rate Spread As noted in our last report, the TED spread is the difference between an average of LIBOR and the interest rate on U.S Treasury bills with the same maturity. It is considered a key indicator of credit risk that gauges the willingness of banks to lend to other banks. Increases in the TED spread imply a bigger aversion to risk. That is, investors have a preference for safe investments (such as Treasury securities) and charge a higher premium for loans to other institutions to compensate for greater perceived default risk. Figure 3 shows the 3-month LIBOR, 3-month Treasury, and TED spread. The daily TED spread peaked at more than 450 basis points on October 10, 2008.[79] Between October 13, 2008 (the day before the announcement of the creation of CPP), and January 20, 2009, the spread declined by more than 350 basis points to its lowest level since August 2008. Decreases in the TED spread could reflect that banks are more willing to lend to other banks on terms that reflect greater confidence in the banking system (that is, without demanding a large interest rate premium) for the time being. LIBOR itself has declined to levels not seen since 2004. These declines could be attributed to TARP, the collaborative efforts government agencies have undertaken to restore financial stability, or both. Since falling below 100 basis points on January 20, the TED spread has begun to rise somewhat reaching 1.06 percent as of January 22, 2009.

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Source: Global Insight and Federal Reserve System. Note: Rates and yields are daily percentages. Area between LIBOR and Treasury yield is the TED spread. The Federal Reserve announced an early January start for MBS and GSE debt purchases on December 30, 2008.

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Figure 3. TED Spread, 3-Month LIBOR, and 3-Month Treasury Bill Yield, as of January 22, 2009.

Corporate Spreads The economy-wide risk premium is measured in a number of ways, most commonly as the spread between Moody’s Investors Service (Moody’s) Baa bond rate and Moody’s Aaa rate or between these rates and the relevant government bond yield.[80] These spreads represent a premium lenders demand for taking on risk—that is, when spreads are high, market participants perceive more risk, warranting a higher rate of return. When credit market conditions improve, some narrowing of these spreads would be expected.[81] Moody’s describes Aaa bonds as “of the highest quality, with minimal credit risk” and Baa bonds as “subject to moderate credit risk” that “may possess certain speculative characteristics.” As shown in figure 4, the various interest rate spreads show a common pattern—an increase in negative perceptions about risk, resulting in increasing spreads as seen over the past year. Declines in these spreads would be indicative of improving credit conditions, but because these spreads may have been too narrow during the period leading up to the credit market turmoil (risk was underpriced), it is not clear that these premiums would decline to those previous levels. Since our last report, which reported data as of the week of November 21, 2008, perceptions of risk (represented by the Aaa- and Baa-Treasury spreads) in corporate debt markets have declined modestly (roughly 10-35 basis points), while the cost of credit has fallen more markedly (roughly 90-1 15 basis points).

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Source: Federal Reserve System. Note: Rates and yields are weekly percentages.

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Figure 4. Yields on Corporate Bonds (Aaa and Baa) Relative to 10-year Treasury, as of January 16, 2009.

Sources: Federal Reserve System and Global Insight. Note: Rates and yields are weekly percentages. The Federal Reserve announced an early January start for MBS and GSE debt purchases on December 30, 2008.2009 Figure 5. Mortgage Rates (30-Year Fixed Rate, Conforming), Mortgage Applications Index, and Treasury Yields, as of January 16, 2009

Mortgage Rates The credit turmoil has raised concern about consumers’ abilities to obtain funds, including mortgages, at rates consistent with economic fundamentals and individual risk characteristics. One of TARP’s explicit goals is to enhance liquidity and promote lending to consumers, but high spreads between mortgage rates and Treasury yields indicate relatively

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high risk and low liquidity. Therefore, to the extent that credit and economic conditions improve, these spreads would narrow. Figure 5 shows that since our last report, which reported data as of the week of November 21, 2008, perceptions of risk (represented by the mortgage- Treasury spread) in mortgage markets are unchanged. However, conforming mortgage rates have fallen dramatically—by more than 90 basis points.[82] As figure 5 shows, a significant drop in mortgage rates occurred shortly after the Federal Reserve’s announcement that it would purchase mortgage-backed securities, suggesting that stabilization policies outside of TARP may have been an important force behind this significant decline. The figure also illustrates that mortgage applications increased significantly after mortgage rates declined. However, the biggest increase in applications was for borrowers attempting to refinance existing properties rather than purchase new homes. Although not illustrated here, the refinance application index grew roughly 418 percent from November 21, 2008, to January 16, 2009, while the purchase application index rose by approximately 16 percent.

Sources: Inside Mortgage Finance estimates and Global Insight. Note: Estimates of originations are based on information from the Federal Housing Administration, Veterans Administration, and mortgage-backed securities and lenders and include refinances. Figure 6. Mortgage Originations and Mortgage Applications Index, as of September 30, 2008.

Mortgage Originations Like other bank interest rates, mortgage rates may reflect the customers to whom banks choose to lend, rather than the cost of credit for all potential customers. As such, the volume of new mortgage lending also may indicate the availability of credit, changes in credit risk, or demand for credit. As shown in figure 6, quarterly mortgage originations in the United States have fallen by more than 50 percent since 2005.[83] While mortgage interest rates have fallen, mortgage lending has decreased. To the extent that credit and economic conditions improve over time and interest rates remain stable, we would expect mortgage originations to stop declining and eventually rise, although it is not clear that this measure would or should return to the level seen in the period leading up to the credit market turmoil. As figure 6 shows, the decline in origination was associated with a decline in mortgage applications— from the first quarter to the third quarter of 2008 both the average applications index and mortgage originations declined by 39 percent. While mortgage applications increased

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significantly during the fourth quarter of 2008, we do not have recent data on originations for comparative purposes. In subsequent reports, we will provide an update on mortgage originations as the quarterly data become available.[84] Mortgage Foreclosures and Defaults We will continue to report on trends in foreclosures and delinquencies. As we have testified, foreclosures not only affect those losing their homes but also their neighborhoods, and have contributed to increased volatility in the financial markets.[85] Treasury officials have urged banks to modify and restructure loans whenever reasonable to avoid preventable foreclosures.[86] Moreover, if TARP is effective, banks may be more able to refinance mortgage loans for creditworthy borrowers to keep monthly payments affordable. While it is too early to expect material changes in foreclosures, and the most recent data preclude an assessment of trends since TARP began, figure 7 establishes the historical context for continued monitoring. As the figure shows, the percentage of total loan foreclosures reached 2.97 percent at the end of the third quarter of 2008—a level unseen in the 29 years for which complete data on defaults and foreclosures have been kept. As noted earlier, a variety of parties outside of TARP are taking actions to address the rising foreclosure rate.

Source: GAO analysis of Global Insight data Figure 7. Percentage of Loans in Foreclosure, as of September 30, 2008.

In addition to the preliminary indicators previously identified, we continue to evaluate the potential usefulness of other indicators. This list is not definitive or exhaustive, and we expect to add new indicators and modify or drop others as we engage with Treasury, the Federal Reserve, and other informed market participants. Moreover, some measures included may become more appropriate indicators as time progresses. The indicators we are monitoring include the federal funds and prime lending rates, the Federal Reserve’s survey of lending standards, commercial paper interest rates, changes in assets held by commercial banks, changes in household and business debt, stock prices and volatility, and housing prices. Many data sources are updated only on a quarterly basis and with a lag (for example, the Federal Reserve’s flow of funds); thus, we are not yet able to assess the impact of TARP from many of these sources.

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CONCLUSIONS Treasury has taken important steps to implement all nine recommendations in our previous report. In particular, our recommendation calling for Treasury to facilitate a smooth transition to the new administration largely has been completed. However, due in part to the short time frame since our last report, continued action is needed to fully address the remaining eight. Appendix IV provides a high-level summary prepared by Treasury of the progress it has made on each recommendation since our last report as well as some planned next steps. During this period, Treasury has begun to take a number of important steps toward better reporting and monitoring of CPP, in accordance with our prior recommendations that Treasury bolster its ability to determine whether institutions were using the proceeds consistent with the purposes of the act and that it establish mechanisms to monitor compliance with program requirements, but more needs to be done. First, while Treasury has announced plans to survey the largest institutions monthly to monitor their lending and other activities by collecting qualitative and quantitative information, Treasury plans to rely on quarterly financial (call report) data from the other participating institutions. While the monthly survey is a step toward greater transparency and accountability for the largest institutions, we continue to believe that additional action is needed to better ensure that all participating institutions are accountable for their use of the funds. Without more frequent information on all participants, Treasury will have little timely information about the effectiveness of the overall program and the changing condition of the institutions and may limit the ability of its newly created team of analysts to analyze how the infusions are being used by the institutions and the effectiveness of the program. In addition, without ensuring that future CPP agreements include a mechanism that will better enable Treasury to track the use of capital infusions and seeking to obtain similar information from existing CPP participants, Treasury may have difficulty taking action should it later determine that an institution has not used the funds in a manner consistent with the intent of the program. Second, Treasury has continued to take steps to increase its planned oversight of compliance with terms of agreements such as executive compensation and limitations on dividends and stock repurchases, including plans to issue new interim final rules that amend and clarify the past interim rules on executive compensation and naming an Interim Chief Compliance Officer. However, Treasury has not yet finalized these plans. Without a more structured mechanism in place to ensure compliance with all CPP requirements, including limitations on dividends and stock repurchases—and as more institutions continue to participate in the program— ensuring compliance with these aspects of the program will become increasingly important and challenging. Treasury has made less progress in improving the transparency of the program and has not yet articulated a clear strategic vision for TARP. In our December 2008 report, we raised questions about the effectiveness of Treasury’s communication strategy for TARP with Congress, the financial markets, and the public. These questions were further heightened in COP’s January report, which also raised questions about Treasury’s strategy for TARP. In response to our recommendation about its communication strategy, Treasury noted numerous publicly available reports, testimonies, and speeches. However, even after reviewing these items collectively, Treasury’s strategic vision for TARP remains unclear. For example, early

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on Treasury outlined a strategy and approach to purchase whole loans and mortgage-backed securities from financial institutions, but changed direction to making capital investments in qualifying financial institutions as the global community opted to move in this direction. Moreover, once Treasury determined that capital infusions were preferable to purchasing whole mortgages and mortgage-backed securities, Treasury did not clearly articulate how the various programs (such CPP, SSFI, and TIP) would work collectively to help stabilize financial markets. For instance, Treasury has used similar approaches—capital infusions—to stabilize healthy institutions under CPP as well as SSFI and TIP, albeit with more stringent requirements. Moreover, with the exception of institutions selected for TIP being viewed as able to raise private capital, both SSFI and TIP share similar selection criteria. Finally, the same institution may be eligible for multiple programs—at least two institutions currently participate in more than one program—and this has added to confusion about Treasury’s strategy and vision for the implementation of TARP. Other actions have raised additional questions about Treasury’s strategy. First, the funding of the first institution to receive funding under TIP was announced weeks before the program was established. Similarly, the Asset Guarantee Program was established after Treasury announced that it would guarantee assets under such a program, and many of the details of the program have yet to be worked out. Second, Treasury’s efforts to mitigate residential foreclosures, which have contributed to increased volatility in financial markets, remain in the design phase with no clearly articulated strategy. Finally, while Treasury has continued to publicly report on individual issues, testify, and make speeches about the program, it continues to struggle to convey a clearly articulated and overarching message about its efforts, potentially hampering TARP’s effectiveness and underscoring ongoing questions about its communication strategy. Without a clearly articulated strategic vision, Treasury’s effectiveness in helping to stabilize markets may be hampered. Treasury also has made progress in establishing its management infrastructure, which included hiring, contracting oversight, and internal controls. •

•

In the hiring area, Treasury took steps to help maintain leadership within OFS during and after the transition to the new administration, one of the areas we highlighted in our first report. Specifically, Treasury ensured that interim chief positions would be filled to ensure a smooth transition and used direct-hire and various other appointments to bring a number of career staff on board quickly. While making progress since our last report in establishing the TARP organization, the number of temporary and contract staff who will be needed to serve long-term organizational needs remains unknown. Because TARP has added many new programs since it was first established in October and the number and types of program activities may expand or change under the new administration, we recognize that Treasury may find it difficult to determine OFS’s long-term organizational needs at this time. However, such considerations will be vital to retaining institutional knowledge within the organization as programs evolve. Treasury’s use of existing contract flexibilities has enabled it to enter into agreements and award contracts quickly in support of TARP. However, Treasury’s use of timeand-materials contracts, although authorized when flexibility is needed, can increase the risk of wasted government dollars without adequate oversight of contractor performance. Although Treasury has improved its oversight of contractors, the

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•

department itself has identified COTR certification and the use of time-and-materials pricing to be high-risk issues that still need attention. In addition, while Treasury has taken the important step of recently issuing an interim regulation outlining the process for reviewing and addressing conflicts of interest among new contractors and financial agents, it is still reviewing contracts or agreements that existed prior to issuance to ensure conformity with the new regulation. We believe this is a necessary component of a comprehensive and complete system to ensure that all conflicts are fully identified and appropriately addressed. In the area of internal controls, Treasury has taken some important steps, including OFS adopting a framework for organizing the development and implementation of its system of internal control for TARP activities. OFS plans to use this framework to develop specific policies, drive communications on expectations, and measure compliance with internal control standards and policies. However, it has yet to develop comprehensive written policies and procedures governing TARP activities or implement a disciplined risk-assessment process.

Finally, because TARP is still in the early stages of implementation as well as other complicating factors, isolating its impact on credit markets continues to be difficult. However, some indicators demonstrate that since our last report, the cost of credit has declined in interbank, mortgage, and corporate debt markets. Conversely, while perceptions of risk (as measured by premiums over Treasury bonds) have declined in interbank markets, they appear to have changed little in the corporate bond and mortgage markets. Attributing any of these changes directly to TARP continues to be problematic because of the range of actions that have been and are being taken to address the current crisis. For example, a large drop in mortgage rates occurred shortly after the Federal Reserve announced it would purchase up to $500 billion in mortgage-backed securities, highlighting that policies outside of TARP may have important effects on credit markets. While these indicators may be suggestive of TARP’s ongoing impact, no single indicator or set of indicators will provide a definitive determination of the program’s impact.

RECOMMENDATIONS FOR EXECUTIVE ACTION As with our previous 60-day report, we continue to identify a number of areas that warrant Treasury’s ongoing attention concerning TARP. Therefore, we recommend that Treasury take the following nine actions to further improve the integrity, transparency, and accountability of the program and more clearly articulate and communicate a strategic vision: • •

•

Expand the scope of planned monthly CPP surveys to include collecting at least some information from all institutions participating in the program. Ensure that future CPP agreements include a mechanism that will better enable Treasury to track the use of the capital infusions and seek to obtain similar information from existing CPP participants. Establish a process to ensure compliance with all CPP requirements, including those associated with limitations on dividends and stock repurchase restrictions.

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•

•

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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. Continue to expeditiously hire personnel needed to carry out and oversee TARP. Expedite efforts to ensure that sufficient personnel are assigned and properly trained to oversee the performance of all contractors, especially for contracts priced on a time-and-materials basis, and move toward fixed-price arrangements whenever possible as program requirements are better defined over time. Develop a comprehensive system of internal control over TARP activities, including policies, procedures, and guidance that are robust enough to ensure that the program’s objectives and requirements are met. Develop and implement a well-defined and disciplined risk-assessment process, as such a process is essential to monitoring program status and identifying any risks of potential inadequate funding of announced programs. Review and renegotiate existing conflict-of-interest mitigation plans, as necessary, to enhance specificity and conformity with the new interim conflicts of interest regulation, and take continued steps to manage and monitor conflicts of interest and enforce mitigation plans.

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AGENCY COMMENTS AND OUR ANALYSIS We provided a draft of this report to the Department of the Treasury for review and comment. We also provided segments of the draft to the Federal Reserve, FDIC, OCC, and OTS for review and comment. In written comments, Treasury generally agreed with the report and noted that the recommendations were constructive (see app. I). They also noted that while TARP has only been in existence for 120 days, Treasury had made significant progress implementing internal controls, promulgating regulations, hiring staff, and communicating its activities to the public. Moreover, they noted that Treasury has taken steps to measure lending activities of the banks that have received TARP capital. However, they agreed that more work remains to be done in each of the areas highlighted in the report. Treasury also mentioned its recent actions involving the auto industry and additional investments in Citigroup and Bank of America. While we describe the programs established to make these investments, we have not evaluated the need for any of the programs. In subsequent reports we plan to focus on the process used to make the decisions to establish those programs, whether Treasury has systems in place to ensure that the institutions are complying with the terms and conditions of the agreements, and whether the programs are achieving their stated goals. Treasury and three of the federal regulators also provided technical comments that we incorporated, as appropriate. We are sending copies of this report to the Special Inspector General for TARP and interested congressional committees and members, Treasury, the federal banking regulators, and others. The report also is available at no charge on the GAO Web site at http://www.gao.gov.

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If you or your staff have any questions about this report, please contact Richard J. Hillman at (202) 512-8678 or [email protected], Thomas J. McCool at (202) 512-2642 or [email protected], or Orice M. Williams at (202) 512-8678 or [email protected]. 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. Gene L. Dodaro Acting Comptroller General of the United States

LIST OF CONGRESSIONAL COMMITTEES The Honorable Daniel K. Inouye Chairman The Honorable Thad Cochran Vice Chairman Committee on Appropriations United States Senate The Honorable Christopher J. Dodd Chairman The Honorable Richard C. Shelby Ranking Member Committee on Banking, Housing, and Urban Affairs United States Senate

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The Honorable Kent Conrad Chairman The Honorable Judd Gregg Ranking Member Committee on the Budget United States Senate The Honorable Max Baucus Chairman The Honorable Charles E. Grassley Ranking Member Committee on Finance United States Senate The Honorable David R. Obey Chairman The Honorable Jerry Lewis Ranking Member Committee on Appropriations House of Representatives The Honorable John M. Spratt, Jr. Chairman

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Troubled Asset Relief Program: Status of Efforts… The Honorable Paul Ryan Ranking Member Committee on the Budget House of Representatives The Honorable Barney Frank Chairman The Honorable Spencer Bachus Ranking Member Committee on Financial Services House of Representatives The Honorable Charles B. Rangel Chairman The Honorable Dave Camp Ranking Member Committee on Ways and Means House of Representatives

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APPENDIX I: COMMENTS FROM THE DEPARTMENT OF THE TREASURY

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APPENDIX II: CPP TRANSACTIONS AS OF JANUARY 23, 2009 Date

Bank

State

Capital Purchase

10/28/08 10/28/08 10/28/08 10/28/08 10/28/08 10/28/08 10/28/08 10/28/08

Bank of America Corporation Bank of New York Mellon Corporation Citigroup Inc. JPMorgan Chase & Co. Morgan Stanley State Street Corporation The Goldman Sachs Group, Inc. Wells Fargo & Company Subtotal 1st FS Corporation Bank of Commerce Holdings BB&T Corp. Broadway Financial Corporation Capital One Financial Corporation Comerica Inc. First Horizon National Corporation Huntington Bancshares KeyCorp Marshall & Ilsley Corporation Northern Trust Corporation Provident Bancshares Corp. Regions Financial Corp. SunTrust Banks, Inc. TCF Financial Corporation U.S. Bancorp UCBH Holdings, Inc. Umpqua Holdings Corp. Valley National Bancorp Washington Federal Inc. Zions Bancorporation Subtotal Ameris Bancorp Associated Banc-Corp

NC NY NY NY NY MA NY CA

$15,000,000,000 3,000,000,000 25,000,000,000 25,000,000,000 10,000,000,000 2,000,000,000 10,000,000,000 25,000,000,000 115,000,000,000 16,369,000 17,000,000 3,133,640,000 9,000,000 3,555,199,000 2,250,000,000 866,540,000 1,398,071,000 2,500,000,000 1,715,000,000 1,576,000,000 151,500,000 3,500,000,000 3,500,000,000 361,172,000 6,599,000,000 298,737,000 214,181,000 300,000,000 200,000,000 1,400,000,000 33,561,409,000 52,000,000 525,000,000

11/14/08 11/14/08 11/14/08 11/14/08 11/14/08 11/14/08 11/14/08 11/14/08 11/14/08 11/14/08 11/14/08 11/14/08 11/14/08 11/14/08 11/14/08 11/14/08 11/14/08 11/14/08 11/14/08 11/14/08 11/14/08 11/21/08 11/21/08

NC CA NC CA VA TX TN OH OH WI IL MD AL GA MN MN CA OR NJ WA UT GA WI

Total assets as of 9/30/08 $1,831,000,000,000 268,000,000,000 2,050,000,000,000 2,251,000,000,000 987,000,000,000 286,000,000,000 1,082,000,000,000 1,371,000,000,000 10,126,000,000,000 670,000,000 651,000,000 137,041,000,000 $404,000,000 154,803,000,000 65,153,000,000 32,804,000,000 54,661,000,000 101,290,000,000 63,501,000,000 79,244,000,000 6,410,000,000 144,292,000,000 174,777,000,000 16,511,000,000 247,055,000,000 13,044,000,000 8,328,000,000 14,288,000,000 11,795,000,000 53,974,000,000 1,380,696,000,000 2,258,000,000 22,487,000,000

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11/21/08 11/21/08 11/21/08 11/21/08 11/21/08 11/21/08 11/21/08 11/21/08 11/21/08 11/21/08 11/21/08 11/21/08 11/21/08 11/21/08 11/21/08 11/21/08 11/21/08 11/21/08 11/21/08 11/21/08 11/21/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08 12/5/08

Banner Corporation Boston Private Financial Holdings, Inc. Cascade Financial Corporation Centerstate Banks of Florida Inc. City National Corporation Columbia Banking System, Inc. First Community Bankshares Inc. First Community Corporation First Niagara Financial Group First PacTrust Bancorp, Inc. Heritage Commerce Corp. Heritage Financial Corporation HF Financial Corp. Nara Bancorp, Inc. Pacific Capital Bancorp Porter Bancorp Inc. Severn Bancorp, Inc. Taylor Capital Group Trustmark Corporation Webster Financial Corporation Western Alliance Bancorporation Subtotal Bank of Marin Bancorp Bank of North Carolina Blue Valley Ban Corp. Cathay General Bancorp Central Bancorp, Inc. Central Federal Corporation Coastal Banking Company, Inc. CVB Financial Corp. Eagle Bancorp, Inc. East West Bancorp, Inc. Encore Bancshares, Inc. First Defiance Financial Corp. First Financial Holdings, Inc. First Midwest Bancorp, Inc. FPB Bancorp, Inc. Great Southern Bancorp, Inc. IBERIABANK Corporation Manhattan Bancorp MB Financial, Inc. Midwest Banc Holdings, Inc. Oak Valley Bancorp Old Line Bancshares, Inc. Popular, Inc. Sandy Spring Bancorp, Inc. Southern Community Financial Corporation Southern Missouri Bancorp, Inc. Southwest Bancorp, Inc. State Bancorp, Inc. Sterling Financial Corporation Superior Bancorp Inc. The South Financial Group, Inc.

WA MA WA FL CA WA VA SC NY CA CA WA SD CA CA KY MD IL MS CT NV CA NC KS CA MA OH FL CA MD CA TX OH SC IL FL MO LA CA IL IL CA MD PR MD

124,000,000 154,000,000 38,970,000 27,875,000 400,000,000 76,898,000 41,500,000 11,350,000 184,011,000 19,300,000 40,000,000 24,000,000 25,000,000 67,000,000 180,634,000 35,000,000 23,393,000 104,823,000 215,000,000 400,000,000 140,000,000 2,909,754,000 28,000,000 31,260,000 21,750,000 258,000,000 10,000,000 7,225,000 9,950,000 130,000,000 38,235,000 306,546,000 34,000,000 37,000,000 65,000,000 193,000,000 5,800,000 58,000,000 90,000,000 1,700,000 196,000,000 84,784,000 13,500,000 7,000,000 935,000,000 83,094,000

4,650,000,000 7,022,000,000 1,552,000,000 1,235,000,000 16,331,000,000 3,105,000,000 1,967,000,000 634,000,000 9,008,000,000 846,000,000 1,512,000,000 905,000,000 1,128,000,000 2,598,000,000 7,689,000,000 1,596,000,000 964,000,000 4,075,000,000 9,086,000,000 17,516,000,000 5,229,000,000 123,393,000,000 985,000,000 1,263,000,000 788,000,000 11,055,000,000 542,000,000 281,000,000 441,000,000 6,422,000,000 1,458,000,000 11,722,000,000 1,478,000,000 1,922,000,000 2,974,000,000 8,247,000,000 231,000,000 2,528,000,000 5,351,000,000 72,000,000 8,359,000,000 3,583,000,000 490,000,000 286,000,000 40,390,000,000 3,195,000,000

NC

42,750,000

1,798,000,000

MO OK NY WA AL SC

9,550,000 70,000,000 36,842,000 303,000,000 69,000,000 347,000,000

429,000,000 2,832,000,000 1,593,000,000 12,623,000,000 3,104,000,000 13,695,000,000

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United States Government Accountability Office TIB Financial Corp. United Community Banks, Inc. Unity Bancorp, Inc. Wesbanco Bank Inc. Subtotal Bank of the Ozarks, Inc. Capital Bank Corporation Center Financial Corporation Citizens Republic Bancorp, Inc. Citizens South Banking Corporation Fidelity Bancorp, Inc. First Litchfield Financial Corporation HopFed Bancorp Independent Bank Corporation Indiana Community Bancorp LNB Bancorp Inc. LSB Corporation National Penn Bancshares, Inc. NewBridge Bancorp Northeast Bancorp Old National Bancorp Pacific International Bancorp Pinnacle Financial Partners, Inc. Signature Bank Sterling Bancshares, Inc. Susquehanna Bancshares, Inc. SVB Financial Group The Bancorp, Inc. TowneBank Valley Financial Corporation Virginia Commerce Bancorp Wilmington Trust Corporation Wilshire Bancorp, Inc. Subtotal Alliance Financial Corporation AmeriServ Financial, Inc. Bancorp Rhode Island, Inc. BancTrust Financial Group, Inc. Berkshire Hills Bancorp, Inc. Bridgeview Bancorp, Inc. Citizens First Corporation CoBiz Financial Inc. Community Bankers Trust Corporation Community Financial Corporation Community West Bancshares Enterprise Financial Services Corp. Exchange Bank FCB Bancorp, Inc. FFW Corporation Fidelity Financial Corporation Fidelity Southern Corporation First California Financial Group, Inc Flushing Financial Corporation Hawthorn Bancshares, Inc.

FL GA NJ WV AR NC CA MI NC PA CT KY MI IN OH MA PA NC ME IN WA TN NY TX PA CA DE VA VA VA DE CA NY PA RI AL MA IL KY CO VA VA CA MO CA KY IN KS GA CA NY MO

37,000,000 180,000,000 20,649,000 75,000,000 3,835,635,000 75,000,000 41,279,000 55,000,000 300,000,000 20,500,000 7,000,000 10,000,000 18,400,000 72,000,000 21,500,000 25,223,000 15,000,000 150,000,000 52,372,000 4,227,000 100,000,000 6,500,000 95,000,000 120,000,000 125,198,000 300,000,000 235,000,000 45,220,000 76,458,000 16,019,000 71,000,000 330,000,000 62,158,000 2,450,054,000 26,918,000 21,000,000 30,000,000 50,000,000 40,000,000 38,000,000 8,779,000 64,450,000 17,680,000 12,643,000 15,600,000 35,000,000 43,000,000 9,294,000 7,289,000 36,282,000 48,200,000 25,000,000 70,000,000 30,255,000

1,563,000,000 8,073,000,000 864,000,000 5,150,000,000 165,787,000,000 3,071,000,000 1,594,000,000 2,035,000,000 13,116,000,000 823,000,000 727,000,000 507,000,000 843,000,000 3,139,000,000 943,000,000 1,110,000,000 729,000,000 9,317,000,000 2,108,000,000 605,000,000 7,568,000,000 247,000,000 4,338,000,000 6,699,000,000 4,947,000,000 13,636,000,000 8,071,000,000 1,781,000,000 3,016,000,000 643,000,000 2,662,000,000 12,134,000,000 2,387,000,000 108,796,000,000 1,347,000,000 911,000,000 1,490,000,000 2,089,000,000 2,566,000,000 1,428,000,000 360,000,000 2,606,000,000 695,000,000 491,000,000 640,000,000 2,236,000,000 1,666,000,000 353,000,000 316,000,000 1,854,000,000 1,760,000,000 1,125,000,000 3,617,000,000 1,285,000,000

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12/19/08 12/19/08 12/19/08 12/19/08 12/19/08 12/19/08 12/19/08 12/19/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08 12/23/08

Heartland Financial USA, Inc. Horizon Bancorp Intermountain Community Bancorp Marquette National Corporation Mid Penn Bancorp, Inc. Monadnock Bancorp, Inc. Monarch Financial Holdings, Inc. NCAL Bancorpa OneUnited Bank Pacific City Finacial Corporation Patapsco Bancorp, Inc. Patriot Bancshares, Inc. Plains Capital Corporation Santa Lucia Bancorp Seacoast Banking Corporation of Florida Security Federal Corporation StellarOne Corporation Summit State Bank Synovus Financial Corp. Tennessee Commerce Bancorp, Inc. The Connecticut Bank and Trust Company The Elmira Savings Bank, FSB Tidelands Bancshares, Inc. Tri-County Financial Corporation Union Bankshares Corporation VIST Financial Corp. Wainwright Bank & Trust Company Whitney Holding Corporation Wintrust Financial Corporationa Subtotal 1st Constitution Bancorp BCSB Bancorp, Inc. Bridge Capital Holdings Cache Valley Banking Companya Capital Bancorp, Inc.a Capital Pacific Bancorpa Cecil Bancorp, Inc. Central Jersey Bancorp Citizens Bancorpa Citizens Community Bank Community Investors Bancorp, Inc.a Emclaire Financial Corp. Financial Institutions, Inc. First Community Bank Corporation of America First Financial Bancorp First Sound Bank Fulton Financial Corporation Green Bankshares, Inc. HMN Financial, Inc. International Bancshares Corporation Intervest Bancshares Corporation Leader Bancorp, Inc.a

IA IN ID IL PA NH VA CA MA CA MD TX TX CA FL SC VA CA GA TN

81,698,000 25,000,000 27,000,000 35,500,000 10,000,000 1,834,000 14,700,000 10,000,000 12,063,000 16,200,000 6,000,000 26,038,000 87,631,000 4,000,000 50,000,000 18,000,000 30,000,000 8,500,000 967,870,000 30,000,000

3,446,000,000 1,189,000,000 1,049,000,000 1,644,000,000 552,000,000 111,000,000 595,000,000 407,000,000 625,000,000 566,000,000 262,000,000 934,000,000 3,343,000,000 254,000,000 2,225,000,000 905,000,000 2,986,000,000 350,000,000 34,339,000,000 1,106,000,000

CT

5,448,000

223,000,000

NY SC MD VA PA MA LA IL NJ MD CA UT MD OR MD NJ CA VA OH PA NY

9,090,000 14,448,000 15,540,000 59,000,000 25,000,000 22,000,000 300,000,000 250,000,000 2,791,950,000 12,000,000 10,800,000 23,864,000 4,767,000 4,700,000 4,000,000 11,560,000 11,300,000 10,400,000 3,000,000 2,600,000 7,500,000 37,515,000

463,000,000 668,000,000 677,000,000 2,448,000,000 1,182,000,000 980,000,000 10,987,000,000 9,865,000,000 113,216,000,000 514,000,000 567,000,000 855,000,000 200,000,000 198,000,000 136,000,000 457,000,000 555,000,000 366,000,000 150,000,000 143,000,000 357,000,000 1,946,000,000

FL

10,685,000

476,000,000

OH WA PA TN MN TX NY MA

80,000,000 7,400,000 376,500,000 72,278,000 26,000,000 216,000,000 25,000,000 5,830,000

3,512,000,000 267,000,000 16,136,000,000 3,012,000,000 1,129,000,000 11,545,000,000 2,181,000,000 240,000,000

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12/31/08 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09

United States Government Accountability Office M&T Bank Corporation Magna Bank Mission Valley Bancorpa MutualFirst Financial, Inc. Nicolet Bankshares, Inc. Pacific Coast Bankers’ Bancshares Pacific Commerce Bank Park National Corporation Parkvale Financial Corporation Peoples Bancorp of North Carolina, Inc. Saigon National Bank Seacoast Commerce Bank Sterling Bancorp TCNB Financial Corp.a Tennessee Valley Financial Holdings, Inc. The Little Bank, Incorporated Timberland Bancorp, Inc. United Bancorporation of Alabama, Inc. Uwharrie Capital Corp. Western Community Bancshares, Inc.a Western Illinois Bancshares Inc.a Subtotal CIT Group Inc. Fifth Third Bancorp First Banks, Inc. Hampton Roads Bankshares, Inc. SunTrust Banks, Inc. The PNC Financial Services Group Inc. West Bancorporation, Inc. Subtotal American Express Company American State Bancshares, Inc. Bank of America Corporation C&F Financial Corporation Cadence Financial Corporation Carolina Bank Holdings, Inc. Center Bancorp, Inc. Central Pacific Financial Corp. Centrue Financial Corporation Codorus Valley Bancorp, Inc. Colony Bankcorp, Inc. Commerce National Bank Community Trust Financial Corporation Congaree Bancshares, Inc. Crescent Financial Corporation Eastern Virginia Bankshares, Inc. F.N.B. Corporation Farmers Capital Bank Corporation First Bancorp First Financial Service Corporation

NY TN CA IN WI CA CA OH PA NC CA CA NY OH

600,000,000 13,795,000 5,500,000 32,382,000 14,964,000 11,600,000 4,060,000 100,000,000 31,762,000 25,054,000 1,549,000 1,800,000 42,000,000 2,000,000

65,247,000,000 530,000,000 220,000,000 1,399,000,000 641,000,000 555,000,000 165,000,000 6,800,000,000 1,828,000,000 964,000,000 55,000,000 75,000,000 2,117,000,000 96,000,000

TN

3,000,000

204,000,000

NC WA AL NC CA IL NY OH MO VA GA

7,500,000 16,641,000 10,300,000 10,000,000 7,290,000 6,855,000 1,911,751,000 2,330,000,000 3,408,000,000 295,400,000 80,347,000 1,350,000,000

317,000,000 682,000,000 464,000,000 425,000,000 323,000,000 346,000,000 128,395,000,000 80,845,000,000 116,294,000,000 10,833,000,000 918,000,000 174,777,000,000

PA

7,579,200,000

145,610,000,000

IA NY KS NC VA MS NC NJ HI MO PA GA CA

36,000,000 15,078,947,000 3,388,890,000 6,000,000 10,000,000,000 20,000,000 44,000,000 16,000,000 10,000,000 135,000,000 32,668,000 16,500,000 28,000,000 5,000,000

1,464,000,000 530,741,000,000 127,218,000,000 271,000,000 1,831,177,000,000 846,000,000 1,985,000,000 591,000,000 1,043,000,000 5,504,000,000 1,342,000,000 650,000,000 1,215,000,000 639,000,000

LA

24,000,000

945,000,000

SC NC VA PA KY NC

3,285,000 24,900,000 24,000,000 100,000,000 30,000,000 65,000,000

131,000,000 956,000,000 1,031,000,000 8,457,000,000 2,154,000,000 2,701,000,000

KY

20,000,000

991,000,000

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Troubled Asset Relief Program: Status of Efforts… 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/9/09 1/16/2009 1/16/2009 1/16/2009 1/16/2009 Copyright © 2009. Nova Science Publishers, Incorporated. All rights reserved.

1/16/2009 1/16/2009 1/16/2009 1/16/2009 1/16/2009 1/16/2009 1/16/2009 1/16/2009 1/16/2009 1/16/2009 1/16/2009 1/16/2009 1/16/2009 1/16/2009 1/16/2009 1/16/2009 1/16/2009 1/16/2009 1/1 6/2009 1/16/2009

First Security Group, Inc. FirstMerit Corporation GrandSouth Bancorporation Independence Bank Independent Bank Corp. LCNB Corp. MidSouth Bancorp, Inc. Mission Community Bancorp New York Private Bank & Trust Corporation North Central Bancshares, Inc. Peapack-Gladstone Financial Corporation Redwood Financial Inc. Rising Sun Bancorp Security Business Bancorp Security California Bancorp Shore Bancshares, Inc. Sound Banking Company Sun Bancorp, Inc. Surrey Bancorp Texas National Bancorporation The First Bancorp, Inc. The Queensborough Company Valley Community Bank Subtotal Bank of Commerce Bar Harbor Bankshares/Bar Harbor Bank & Trust BNCCORP, Inc. Carver Bancorp, Inc. Centra Financial Holdings, Inc./Centra Bank, Inc. Citizens & Northern Corporation Community 1st Bank Community Bank of the Bay Dickinson Financial Corporation II ECB Bancorp, Inc./East Carolina Bank First BanCorp First Bankers Trustshares, Inc. First Manitowoc Bancorp, Inc. Home Bancshares, Inc. Idaho Bancorp MainSource Financial Group, Inc. MetroCorp Bancshares, Inc. Morrill Bancshares, Inc. New Hampshire Thrift Bancshares, Inc. OceanFirst Financial Corp. Old Second Bancorp, Inc. Pacific Coast National Bancorp Puget Sound Bank Pulaski Financial Corp

TN OH SC RI MA OH LA CA

33,000,000 125,000,000 9,000,000 1,065,000 78,158,000 13,400,000 20,000,000 5,116,000

1,282,000,000 10,685,000,000 377,000,000 66,000,000 3,477,000,000 667,000,000 917,000,000 219,000,000

NY

267,274,000

13,693,000,000

IA

10,200,000

475,000,000

NJ

28,685,000

1,369,000,000

MN MD CA CA MD NC NJ NC TX ME GA CA NC

2,995,000 5,983,000 5,803,000 6,815,000 25,000,000 3,070,000 89,310,000 2,000,000 3,981,000 25,000,000 12,000,000 5,500,000 14,771,598,000 3,000,000

141,000,000 236,000,000 215,000,000 238,000,000 1,037,000,000 127,000,000 3,425,000,000 206,000,000 166,000,000 1,311,000,000 848,000,000 211,000,000 2,031,235,000,000 125,000,000

ME

18,751,000

942,000,000

ND NY

20,093,000 18,980,000

838,000,000 791,000,000

WV

15,000,000

1,204,000,000

PA CA CA MO

26,440,000 2,550,000 1,747,000 146,053,000

1,289,000,000 97,000,000 69,000,000 5,602,000,000

NC

17,949,000

768,000,000

PR IL WI AR ID IN TX KS

400,000,000 10,000,000 12,000,000 50,000,000 6,900,000 57,000,000 45,000,000 13,000,000

19,304,000,000 489,000,000 768,000,000 2,651,000,000 239,000,000 2,867,000,000 1,594,000,000 660,000,000

NH

10,000,000

829,000,000

NJ IL CA WA MO

38,263,000 73,000,000 4,120,000 4,500,000 32,538,000

1,876,000,000 2,950,000,000 138,000,000 154,000,000 1,304,000,000

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1/16/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009 1/23/2009

United States Government Accountability Office Redwood Capital Bancorp S&T Bancorp, Inc. SCBT Financial Corporation Somerset Hills Bancorp Southern Bancorp, Inc. State Bankshares, Inc. Syringa Bancorp TCB Holding Company, Texas Community Bank Texas Capital Bancshares, Inc. The Baraboo Bancorporation Treaty Oak Bancorp, Inc. United Bancorp, Inc. United Financial Banking Companies, Inc. Washington Banking Company/ Whidbey Island Bank Yadkin Valley Financial Corporation Subtotal 1st Source Corporation AB&T Financial Corporation Alarion Financial Services, Inc. BankFirst Capital Corporation California Oaks State Bank Calvert Financial Corporationa CalWest Bancorp Ranchoa Commonwealth Business Bank Crosstown Holding Company Farmers Bank First Citizens Banc Corp. First ULB Corp. FPB Financial Corp.a Fresno First Bank Liberty Bancshares, Inc. Midland States Bancorp, Inc. Moscow Bancshares, Inc.a Pierce County Bancorp Princeton National Bancorp, Inc. Seaside National Bank & Trust Southern Illinois Bancorp, Inc.a Stonebridge Financial Corp. WSFS Financial Corporation Subtotal Grand total

CA PA SC NJ AR ND ID

3,800,000 108,676,000 64,779,000 7,414,000 11,000,000 50,000,000 8,000,000

147,000,000 4,461,000,000 2,767,000,000 287,000,000 586,000,000 1,969,000,000 293,000,000

TX

11,730,000

432,000,000

TX WI TX MI

75,000,000 20,749,000 3,268,000 20,600,000

4,743,000,000 781,000,000 122,000,000 815,000,000

VA

5,658,000

227,000,000

WA

26,380,000

912,000,000

NC

36,000,000

1,469,000,000

IN NC FL MS CA MO CA CA MN VA OH CA LA CA AR IL TN WA IL FL IL PA DE

1,479,938,000 111,000,000 3,500,000 6,514,000 15,500,000 3,300,000 1,037,000 4,656,000 7,701,000 10,650,000 8,752,000 23,184,000 4,900,000 3,240,000 1,968,000 57,500,000 10,189,000 6,216,000 6,800,000 25,083,000 5,677,000 5,000,000 10,973,000 52,625,000 385,965,000

67,559,000,000 4,410,000,000 174,000,000 254,000,000 672,000,000 123,000,000 47,000,000 208,000,000 296,000,000 N/A 345,000,000 1,100,000,000 247,000,000 155,000,000 96,000,000 2,573,000,000 409,000,000 248,000,000 272,000,000 1,124,000,000 243,000,000 233,000,000 493,000,000 3,255,000,000 16,977,000,000

$194,177,001,000

$14,792,795,000,000

Sources: Treasury, SEC (10-Qs, 10-Ks), iBanknet.com (Call Reports) and company press releases. a Total assets were reported from the related bank rather than the banking holding company.

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APPENDIX III: EXAMPLES OF PROGRAMS TO PRESERVE HOMEOWNERSHIP Institution Federal Government Federal Deposit Insurance Corporation (FDIC)

Program or Effort

Selected Program Characteristics

IndyMac Loan Modification Programa

Eligible borrowers are those with loans owned or serviced by IndyMac Federal Bank

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FDIC Loss Sharing Proposal

Federal Housing Administration (FHA)

Hope for Homeowners

• Affordable mortgage payment achieved for the seriously delinquent or in default borrower through interest rate reduction, amortization term extension, and principal forbearance • Payment must be no more than 38 percent of the borrower’s monthly gross income • Losses to investor minimized through a net present value test that confirms that the modification will cost the investor less than foreclosure Proposal is designed to promote wider adoption of a systematic loan modification program by paying servicers $1,000 to cover expenses for each loan modified according to the required standards; and sharing up to 50 percent of losses incurred if a modified loan should subsequently default again • Eligible borrowers need to have loans secured by owneroccupied properties • Government loss sharing would be available only after the borrower has made six payments on the modified mortgage • Affordability standards are provided based on a 31 percent borrower mortgage debt-to-income ratio • For loan-to-values (LTV) above 100 percent, the government loss share will be progressively reduced from 50 percent to 20 percent as the current LTV rises. If the LTV for the first lien exceeds 150 percent, no loss sharing would be provided. • The loss sharing guarantee ends 8 years after the modification Borrowers can refinance into an affordable loan insured by FHA • Eligible borrowers are homeowners who did not intentionally default, do not have an ownership interest in other residential real estate, have not been convicted of fraud in the last 10 years under federal and state law, and have not provided false information to obtain the mortgage • Eligible borrowers are those who, as of March 2008, had total monthly mortgage payments due of more than 31 percent of their gross monthly income • New insured mortgages cannot exceed 96.5 percent of the current LTV for borrowers whose mortgage payments do not exceed 31 percent of their monthly gross income and total household debt not to exceed 43 percent; alternatively, the program allows for a 90 percent LTV for borrowers with debtto-income ratios as high as 38 (mortgage payment) and 50 percent (total household debt) • Requires lenders to write down the existing mortgage amounts to either of the two LTV options mentioned above • Simplifying the process to remove subordinate liens by permitting up-front payments to lien holders • Allowing lenders to extend mortgage terms from 30 to 40 years

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APPENDIX III: CONTINUED Institution

Federal Housing Finance Agency (FHFA)

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Private Sector HOPE NOW Alliance

Program or Effort FHASecure

Streamlined Loan Modification Programb

Foreclosure prevention assistance programs

Selected Program Characteristics FHASecure is a refinancing option that gives homeowners with non-FHA adjustable rate mortgages (ARM), current or delinquent and regardless of reset status, the ability to refinance into a FHA-insured mortgage • If the borrower is delinquent, the default must have been due to the payment shock of an interest rate reset or, in the case of an option ARM, the recasting of the mortgage to fully amortizing • Program ended December 31, 2008 Eligible borrowers are those who have missed three payments or more, own and occupy their property as a primary residence, and are not in active bankruptcy • Servicers can modify existing loans into a Freddie Mae or Fannie Mac loan, or a portfolio loan with a participating investor • An affordable mortgage payment, of no more than 38 percent of the borrower’s monthly gross income, is achieved for the borrower through reducing the mortgage interest rate, extending the life of the loan, or deferring payment on part of the principal • The borrower will be required to remit the proposed affordable payment for a threepayment trial period prior to the modification of the mortgage, to demonstrate his or her capacity and desire to sustain those payments under the modified mortgage HOPE NOW is an alliance between Department of Housing and Urban Development (HUD) certified-counseling agents, servicers, investors, and other mortgage market participants that provides free assistance for foreclosure prevention • Forms of assistance include hotline services to provide information on foreclosure prevention, and access to HUD approved housing counselors for debt management, credit, and overall foreclosure counseling. According to HOPE NOW, the hotline receives an average of more than 8,000 calls per day • Coordinates a nationwide outreach campaign to at-risk borrowers and states that it has sent nearly 3 million outreach letters • According to HOPE NOW, since March 2008, it has hosted workshops in 27 cities involving homeowners, lenders, and HUD-certified counselors

Source: Publicly available information from agencies and organizations listed above. a On December 31, 2008, FDIC signed a letter of intent to sell the banking operations of IndyMac Federal Bank to a thrift holding company controlled by IMB Management Holdings LP. b This program was created in consultation with Fannie Mae, Freddie Mac, HOPE NOW and its 27 servicer partners, the Department of the Treasury, FHA, and FHFA.

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APPENDIX IV: TREASURY’S SUMMARY RESPONSE TO PRIOR RECOMMENDATIONS

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REFERENCES [1] [2]

[3]

Pub. L. No. 110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C. §§ 5201 et seq. Section 102 of the act, 12 U.S.C. § 5212, authorizes Treasury to guarantee troubled assets originated or issued prior to March 14, 2008, including mortgage-backed securities. Section 116 of the act, 12 U.S.C. § 5226.

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Troubled Asset Relief Program: Status of Efforts… [4]

[5] [6]

[7] [8]

[9]

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[10]

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[13] [14]

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GAO, Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency, GAO-09-161 (Washington, D.C.: Dec. 2, 2008). A warrant is an option to buy shares of common stock or preferred stock at a predetermined price on or before a specified date. As discussed below, section 121 of the act, 12 U.S.C. § 5231, established the Office of the Special Inspector General for TARP. The Special Inspector General has established an Interagency Taskforce consisting of representatives from the Offices of Inspector General at FDIC, the Federal Reserve, OCC, OTS, and Treasury, and a representative from GAO. As discussed later, section 125 of the act, 12 U.S.C. § 5233, established the Congressional Oversight Panel. HOPE NOW is an alliance between Department of Housing and Urban Development (HUD)-certified counseling agents, servicers, investors, and other mortgage market participants. It provides free assistance to prevent foreclosures. NeighborWorks is a national nonprofit organization created by Congress to provide financial support, technical assistance, and training for community-based revitalization efforts. No indicator on its own provides a definitive perspective on the state of markets; collectively, the indicators should provide a broad sense of stability and liquidity in the financial system and could be suggestive of the program’s impact. However, it is difficult to draw conclusions about causality. The Congressional Oversight Panel consists of five members, with the Speaker of the House, the House Republican Leader, the Senate Majority Leader, and the Senate Republican Leader each selecting one member. The Speaker of the House and the Senate Majority Leader select the fifth member jointly. The current members are Richard H. Neiman, Superintendent of Banks in New York (appointed by the Speaker of the House); Representative Jeb Hensarling (appointed by the House Republican Leader); Elizabeth Warren (Chair), Harvard Law School (appointed by the Senate Majority Leader); former Senator John Sununu (appointed by the Senate Republican Leader); and Damon Silvers, AFL-CIO Associate General Counsel (jointly appointed by the Speaker of the House and the Senate Majority Leader). Others with oversight responsibilities include the Congressional Budget Office and the Office of Management and Budget. 12 U.S.C. § 5214. Section 115(a)(1) and (2) of the act, 12 U.S.C. §§ 5225(a)(1), (a)(2), set an initial limit of $350 billion on the amount of troubled asset purchases Treasury was authorized to make. That limit has increased to $700 billion under section 115(a)(3) of the act because the President has requested the remainder of the TARP funds from Congress and Congress has not enacted specific legislation within the specified time required by the act to disapprove the President’s request. An obligation is a definite commitment that creates a legal liability of the government, such as an agreement to purchase troubled assets. 31 U.S.C. §§ 1513, 1517. Under section 118 of the act, 12 U.S.C. § 5228, Treasury is authorized to issue Treasury securities and use the proceeds to pay for TARP program and administrative expenses, and the funds obligated or expended for such expenses are

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[15] [16]

[17]

[18]

[19]

[20]

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[21]

[22]

[23]

United States Government Accountability Office deemed to be appropriated. Apportionment is an action by which OMB distributes amounts available for obligation in an appropriation or fund account. The total of the asset purchase prices may not be the same as the amount of obligations. For purposes of CPP, financial institutions generally include qualifying U.S.-controlled banks, savings associations, and bank holding companies and savings and loan holding companies. While Treasury approved $125 billion to the nine largest institutions, as table 2 shows, it initially disbursed funds to eight of the nine institutions. The $10 billion to Merrill Lynch was not disbursed until January 9, 2009, after its merger with Bank of America was completed. A CDFI is a specialized financial institution that works in market niches that are underserved by traditional financial institutions. CDFIs provide a range of financial products and services such as mortgage financing for low-income and first-time homebuyers and not-for-profit developers; flexible underwriting and risk capital for needed community facilities; and technical assistance, commercial loans and investments to small start-up or expanding businesses in low-income areas. This figure excludes applications that were withdrawn by the financial institution, were referred to the bank regulators for further consideration, or were for institutions for which term sheets have not yet been issued. An S corporation makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code and thus does not pay any income taxes. Instead, the corporation’s income or losses are divided among and passed through to its shareholders. A mutual organization is a company that is owned by its customers rather than by a separate group of stockholders. Many thrifts and insurance companies (for example, Metropolitan and Prudential) are mutuals. For a detailed discussion of the CPP terms for publicly held institutions, see GAO-09161, 2 1-22. The terms relating to dividends and rankings, as well as the limitations on executive compensation, are similar to those for publicly traded financial institutions. However, the limitations on common dividends and repurchases are generally extended until the tenth anniversary of the date of issuance. Private financial institutions are also prohibited from paying any common dividends or repurchasing any equity securities or trust-preferred securities after the tenth anniversary, unless the preferred stock has been redeemed or transferred to a third party. Tier 1 capital is the core measure of a bank’s financial strength from a regulator’s point of view. It consists of the types of capital considered the most reliable and liquid, primarily common stock and preferred stock. 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. The preferred stock may be redeemed before 3 years has elapsed only if the institution’s aggregate gross proceeds from “qualified equity offerings” are at least 25 percent of the stock’s issue price. If Treasury purchases troubled assets under the act from a publicly traded financial institution, section 113(d) of the act, 12 U.S.C. § 5223(d), requires that it receive a warrant giving Treasury the right to receive nonvoting common stock or preferred stock, or voting stock for which Treasury agrees not to exercise voting power. In the case of any other financial institution, Treasury must receive a warrant for common or preferred stock or a senior debt instrument. The act requires that the warrant or senior

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[24]

[25]

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[26]

[27]

[28]

[29] [30] [31]

[32]

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debt instrument be designed to provide for the reasonable participation in equity appreciation (in the case of a warrant) or a reasonable interest rate (in the case of a debt instrument). The warrant is also to provide additional protection for taxpayers against losses from the sale of assets by Treasury and the administrative expenses of TARP. Section 113 of the act contains additional requirements that apply to conversion of warrants, required protections of the value of the securities, and requirements concerning the exercise price and the shares authorized by the financial institution to fulfill its obligations with respect the warrants. Treasury is required to establish de minimis exceptions to the requirements applicable to warrants and to establish appropriate alternative requirements for institutions that are legally prohibited from issuing securities or debt instruments The warrant preferred shares have a 9 percent return compared to 5 percent on the preferred shares. Also, to promote participation of CDFIs in CPP, Treasury does not require those institutions to provide warrants if the size of the investment is $50 million or less. Treasury has established this exception under section 113(d)(3) of the act, 12 U.S.C. § 5223(d)(3). The term sheet for S corporations specifies that the senior securities are to be senior to the institution’s common stock and that senior securities issued by a bank or savings association must be expressly subordinated to claims of depositors and to the institution’s other debt obligations to its general and secured creditors, unless the debt obligations are explicitly made equal to or subordinated to the senior securities. Senior securities issued by a holding company must be subordinated to senior indebtedness in accordance with holding company regulation, unless the senior indebtedness is explicitly made equal to or subordinated to the senior securities. According to the term sheet, S corporations’ senior securities have 7.7 percent and 13.8 percent interest rates. The higher rates will equate to after-tax effective rates (assuming a 35 percent tax rate) of 5 percent and 9 percent, respectively—the same rates applied to securities issued by other classes of institutions participating in CPP. The primary federal regulator is generally the regulator overseeing the lead bank of the institution. Where the institution is a bank holding company, the primary federal regulator also consults with the Federal Reserve. For a more thorough discussion of the approval process, see GAO-09-161, 22-24. The committee membership includes the OFS’s Chief Investment Officer (committee chair) and the Treasury Assistant Secretaries for Financial Markets, Economic Policy, Financial Institutions, and Financial Stability. The CPP Council is made up of representatives from the four federal bank regulators, with Treasury officials as observers. See FDIC, “Monitoring the Use of Funding from Federal Financial Stability and Guaranty Programs,” FIL-1-2009, January 12, 2009. The standard terms of the CPP Securities Purchase Agreement between Treasury and participating institutions include provisions in the “recitals” section stating “the Company agrees to expand the flow of credit to U.S. consumers and businesses on competitive terms” and “agrees to work diligently, under existing programs, to modify the terms of residential mortgages.” The new interim final rule will amend the October rule to mandate that the required compensation committee certifications be provided in a different section of an

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[33] [34]

[35] [36]

[37]

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[38] [39]

[40] [41] [42]

[43]

[44]

[45]

United States Government Accountability Office institution’s SEC filing. The new rule also will clarify that for purposes of the “clawback” or recovery requirements, bonus and incentive compensation is considered paid to a senior executive officer when the officer obtains a legally binding right to the payment, even if the payment is not made during a period when Treasury holds an interest in the financial institution. Finally, the new rule will clarify the comparison of the act’s and Treasury’s rules on the clawback provisions with the clawback provisions in section 304 of the Sarbanes-Oxley Act of 2002, 15 U.S.C. § 7243. Senior executive officers are generally the PEO, the chief financial officer, and the three most highly compensated executive officers. GM, Chrysler, and Ford Motor Company (Ford) officials testified before the Senate Committee on Banking, Housing, and Urban Affairs on December 4, 2008, and before the House Committee on Financial Services on December 5, 2008. In the testimony statements and business plans submitted to the committees, the GM, Chrysler, and Ford CEOs reported that their companies needed $18 billion, $7 billion, and $9 billion, respectively, in federal assistance. Ford subsequently determined that it would not request assistance from Treasury at this time. Specifically, Treasury agreed to purchase GM and Chrysler debt securities—TARP “troubled assets” under section 3(9) of the act, 12 U.S.C. § 5202(9). GMAC specializes in automotive finance, real estate finance, insurance, commercial finance, and online banking. As of September 30, 2008, GMAC had $211 billion in total assets. This loan commitment is in addition to the $13.4 billion loan announced on December 19, 2008. GMAC is a limited liability corporation, and its warrants are not publicly traded and have no ready markets. Senior employees are the 20 most highly compensated employees, other than the SEOs Accrued interests will be payable by the end of the five-year term on January 16, 2014. The loan’s interest rate will be equal to the one-month LIBOR plus 100 basis points for the first year and one-month LIBOR plus 150 basis points for the remaining four years. LIBOR is the interest rate offered for dollar deposits in the London interbank market for 3-month, dollar-denominated loans. 12 U.S.C. § 5221. LIBOR is the interest rate offered for dollar deposits in the London interbank market for 3-month, dollar-denominated loans. The agreement requires that no funds from the stock purchase agreement or the Federal Reserve Bank of New York Credit Agreement be used to pay annual bonuses or other performance awards, and establishes a methodology for auditing and confirming compliance with this requirement, whereby the dividends from subsidiaries or net income to the company must exceed the bonus payment amounts. The Senior Leadership Committee includes anyone who is a member of the policy committee composed of senior officers from various Citigroup subsidiaries (covering 52 senior executives) and the SEOs. Citigroup must submit a written detailed recommendation to Treasury’s Assistant Secretary for Financial Stability describing the basis for any proposed change in the bonus pool cap. The lobbying policy will be applied to Citigroup and its subsidiaries and will relate to the provision of items of value to U.S. government officials, lobbying of U.S.

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[47] [48]

[49]

[50]

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[51] [52]

[53]

[54] [55] [56] [57]

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government officials, U.S. political activities, and contributions. The policy must provide for internal reporting, oversight, and enforcement mechanisms for noncompliance. Any material amendments to the policy require Treasury’s written approval. The expense policy will be applied to Citigroup and its subsidiaries and will govern the hosting and sponsoring of or payment for conferences and events, the use of corporate aircraft, travel accommodations and expenditures, consulting arrangements with outside service providers, any new lease or acquisition of real estate, expenses relating to office or facility renovations or relocations, and expenses relating to entertainment or holiday parties. The policy must provide for internal reporting, oversight, and enforcement mechanisms for noncompliance. Bank of America received the additional $10 billion once its merger with Merrill Lynch was completed on January 1, 2009. In addition, Treasury announced that Bank of America’s pool of specific assets (including residential mortgages) would be protected against unusually large losses. We discuss the announced guarantee program in a later section of this report. A nonrecourse loan is one in which, in the event the loan is not repaid, the lender is repaid by taking the collateral. The unpaid balance on the loan must be absorbed by the lender. Department of the Treasury, Responses to Questions of the First Report of the Congressional Oversight Panel for Economic Stabilization (Washington, D.C.: December 30, 2008). See GAO-09-161. Section 102 of the act, 12 U.S.C. § 5212, requires Treasury to create an insurance program to guarantee the timely payment of principal and interest for troubled assets originated or issued prior to March 14, 2008, including mortgage-backed securities. The requirement for a program to guarantee troubled assets is contingent on Treasury establishing a program to purchase troubled assets. Specifically, Treasury’s purchase authority would be reduced by the total value of the outstanding guaranteed assets minus the balance of the Troubled Asset Insurance Financing Fund, or any cash premiums received. The act requires that Treasury establish this fund to collect premiums for the program. The Secretary must invest the amounts collected in Treasury securities or keep cash on hand or on deposit. See GAO-09-161, 32-34. According to Treasury officials, they were able to retain this individual in the position partly because she was already a Treasury official. GAO, Securities and Exchange Commission: Some Progress Made in Strategic Human Capital Management, GAO-06-86 (Washington, D.C.: Jan. 10, 2006) Under authorization by the Office of Personnel Management (OPM), agencies may make appointments for positions which are not of a confidential or policy-determining character, not in the SES, and not practical to examine. These are referred to as Schedule A appointments, and are exempt from examination requirements typically required for competitive service positions. See 5 C.F.R. §§ 213.3101-3102. 12 U.S.C. § 52 11(c). The financial regulatory agencies have authority to establish their own compensation programs without regard to statutory requirements on classification and pay applicable

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[60] [61] [62] [63]

[64]

[65]

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[66]

[67] [68] [69] [70] [71] [72] [73]

[74] [75]

United States Government Accountability Office to executive branch agencies under Title 5 of the U.S. Code. See GAO, Financial Regulators: Agencies Have Implemented Key Performance Management Practices, but Opportunities for Improvement Exist, GAO-07-678 (Washington, D.C.: Jun. 18, 2007). GAO, Human Capital: Key Principles for Effective Strategic Workforce Planning, GAO-04-39 (Washington, D.C.: Dec. 11, 2003). See http://www.treas.gov/initiatives/eesa/jobs.shtml, last visited on January 24, 2009. GAO, Human Capital: Effective Use of Flexibilities Can Assist Agencies in Managing Their Workforces, GAO-03-2 (Washington, D.C.: Dec. 6, 2002). As a result of this contract award, Treasury had two contracts for legal services with the same law firm (Thacher, Profitt & Wood). The first contract was for legal services related to providing TARP funds to companies in the auto industry, and the second was for services in connection with TALF. It is not unusual for the government to have multiple contracts for different purposes with the same entity. In January, 2009, Thacher, Proffitt, & Wood dissolved and its responsibilities under existing contracts were transferred to another firm (Sonnenschein, Nath & Rosenthal). Treasury agreed to this transfer through a novation agreement. Additionally, Treasury has entered into agreements with other agencies for a variety of other services, such as personnel detailees, and awarded a contract for the painting of leased space. This total excludes the interagency agreements for such services as personnel detailees and the contract for the painting of leased space. CICA authorizes agencies to limit competition when an unusual and compelling urgency precludes the use of full and open competition and delaying the contract would result in serious financial or other harm to the government. 10 U.S.C. § 2304; 41 U.S.C. § 253. 41 U.S.C. § 253(c)(2); 48 C.F.R. § 6.302-2(c)(2) (2008). 48 C.F.R. § 10.001 (2008). COTRs act as the contracting officer’s technical experts and representatives in the administration and monitoring of contracts. Fed. Reg. 3431 (Jan. 21, 2009) (to be codified in 31 C.F.R. Part 31). Fed. Reg. 3431 (Jan. 21, 2009). GAO, Defense Contracting: Post-Government Employment of Former DOD Officials Needs Greater Transparency, GAO-08-485 (Washington, D.C.: May 21, 2008). These and other restrictions that apply to federal employees do not apply to contractor employees. See GAO, Defense Contracting: Additional Personal Conflict of Interest Safeguards Needed for Certain DOD Contractor Employees, GAO-08-169 (Washington, D.C.: Mar. 7, 2008). Nevertheless, Treasury’s TARP contracts impose post-employment restrictions on contractor employees in areas such as nondisclosure of nonpublic information. GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-0021.3.1 (Washington, D.C.: November 1999). According to PricewaterhouseCoopers, it is using the Committee of Sponsoring Organizations of the Treadway Commission’s—Enterprise Risk Management– Integrated Framework as the basis for providing assistance in developing the internal control model. The committee is a voluntary private-sector organization whose purpose is to help businesses and other entities assess and enhance their internal control

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[80]

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systems. As of January 24, 2009, this framework was consistent with GAO’s Standards for Internal Control. Accounting for troubled assets under the Federal Credit Reform Act, 2 U.S.C. § 661c, involves the estimation of cash flows over time. The relevant government-sponsored enterprises are Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The original announcement occurred on November 20, 2008, suspending foreclosures and evictions through January 9, 2009. A basis point is a common measure used in quoting yield on bills, notes, and bonds and represents 1/100 of a percent of yield. It should be noted that while the spread is large, the actual LIBOR rate is lower than the average rate from 2005 through mid-2007. Moody’s Investors Service performs financial research and analysis on commercial and government entities. It also ranks the creditworthiness of borrowers using a standardized rating scale. These spreads also can reflect a liquidity or prepayment premium. Moreover, economic research also suggests that such interest rate spreads have predictive power for several real economy variables, such as industrial production, durable orders, the unemployment rate, personal income, capacity utilization, and consumption. Conforming mortgages are mortgage loans that can be purchased by Fannie Mae and Freddie Mac. This dropoff is consistent with the change in household mortgage debt as measured by the Federal Reserve’s flow of funds data. The mortgage application index is not seasonally adjusted here to provide a more appropriate comparison to the unadjusted mortgage origination data. Because the seasonal patterns in the data might be different for each series, we also analyzed yearover-year changes. Originations were roughly 47 percent lower in the third quarter of 2008 than in the third quarter of 2007, while the average mortgage application index fell 24 percent. GAO, Troubled Asset Relief Program: Status of Efforts to Address Defaults and Foreclosures on Home Mortgages, GAO-09-231T (Washington D.C.: Dec. 4, 2008). FDIC, Treasury, and the Federal Reserve have stated that lenders and servicers should (1) determine whether a loan modification would enhance the net present value of the loan before proceeding to foreclosure; and (2) ensure that loans currently in foreclosure have been subject to such analysis.

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In: TARP in the Crosshairs Editor: Paul W. O'Byrne

ISBN: 978-1-60876-705-2 © 2009 Nova Science Publishers, Inc.

Chapter 28

TROUBLED ASSET RELIEF PROGRAM: STATUS OF EFFORTS TO ADDRESS TRANSPARENCY AND ACCOUNTABILITY ISSUES*

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Gene L. Dodaro Mr. Chairman and Members of the Committee: I am pleased to be here today to discuss our work on the Troubled Asset Relief Program (TARP), under which the Department of the Treasury (Treasury) has the authority to purchase and insure up to $700 billion in troubled assets held by financial institutions through the Office of Financial Stability (OFS).[1] As you know, Treasury was granted this authority in response to the financial crisis that has threatened the stability of the U.S. banking system and the solvency of numerous financial institutions. The Emergency Economic Stabilization Act (the act) that authorized TARP on October 3, 2008, requires GAO to report at least every 60 days on findings resulting from our oversight of the status of actions taken under the program.[2] My statement today is based on our January 30, 2009, report, which is the second under the act’s mandate, covers the actions taken as part of TARP through January 23, 2009, and follows up on the nine recommendations we made in our December 2008 report.[3] Our oversight work under the act is ongoing, and our next report will be issued by March 31, 2009. Like the report, this statement focuses on (1) the nature and purpose of activities that have been initiated under TARP as of January 23, 2009; (2) the status of the transition to the new administration at OFS and its hiring efforts, use of contractors, and development of a system of internal control; and (3) preliminary indicators of TARP’s performance. To do this work, we reviewed documents related to TARP, including contracts, agreements, guidance, and rules. We also met with OFS, contractors, federal agencies, and officials from all 8 of the first large institutions that had received disbursements. We plan to continue to monitor the issues highlighted in the report, as well as future and ongoing capital purchases, other more recent transactions undertaken as part of TARP (for *

This is an edited, excerpted and augmented edition of a GAO Report GAO-09-359T, dated February 5, 2009.

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example, guarantees on assets of Citigroup and Bank of America), and the status of other aspects of TARP. We conducted this performance audit in December 2008 and January 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

SUMMARY Treasury has announced a number of new programs to try to stabilize financial markets but most of its activity during this period has continued to be through its Capital Purchase Program (CPP). As of January 23, Treasury had disbursed about $294 billion in TARP funds, about $194 billion of which was for CPP. It also announced a new Targeted Investment Program and an Automotive Industry Financing Program. Treasury also has taken important steps since our last report to implement all nine of our recommendations. However, due in part to the short time frame since our last report, we continued to identify a number of areas that warrant Treasury’s ongoing attention concerning TARP. Therefore, we recommended that Treasury continue to take action to further improve the transparency and accountability of the program and more clearly articulate and communicate a strategic vision. Specifically, we recommended that Treasury: •

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•

• •

• •

•

•

Expand the scope of planned monthly CPP surveys to include collecting at least some information from all institutions participating in the program. Ensure that future CPP agreements include a mechanism that will better enable Treasury to track the use of the capital infusions and seek to obtain similar information from existing CPP participants. Establish a process to ensure compliance with all CPP requirements, including those associated with limitations on dividends and stock repurchase restrictions. Communicate a clearly articulated vision for TARP and how all individual programs are intended to work in concert to achieve that vision. This vision should incorporate actions to preserve homeownership. Once this vision is clearly articulated, document skills and competencies needed within Treasury. Continue to expeditiously hire personnel needed to carry out and oversee TARP. Expedite efforts to ensure that sufficient personnel are assigned and properly trained to oversee the performance of all contractors, especially for contracts priced on a time-and-materials basis, and move toward fixed- price arrangements whenever possible as program requirements are better defined over time. Develop a comprehensive system of internal control over TARP, including policies, procedures, and guidance for program activities that are robust enough to ensure that the program’s objectives and requirements are met. Develop and implement a well-defined and disciplined risk-assessment process, as such a process is essential to monitoring program status and identifying any risks of potential inadequate funding of announced programs.

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•

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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.

Treasury has taken steps to address our recommendations, but still faces several challenges. First, our previous report emphasized the lack of monitoring and reporting for CPP investments and recommended stronger measures for ensuring that participating institutions use the funds to meet the program’s purpose and comply with CPP requirements on, for example, executive compensation and dividend payments. In response to our recommendation, Treasury began monthly surveys of the largest 20 institutions to monitor lending and other activities and analyze quarterly monitoring data (call reports) for all institutions.[4] While the monthly survey is a step toward greater transparency and accountability for the largest institutions, we continue to believe that additional action is needed to better ensure that all participating institutions are accountable for their use of program funds. Second, Treasury has continued to develop a system to ensure compliance with CPP requirements, including executive compensation, dividend payments, and repurchase of stocks, but it has not finalized its plans for detecting noncompliance and taking enforcement actions. Third, Treasury has made limited progress in articulating and communicating an overall strategic vision for TARP, while continuing to respond to institution- and industry-specific needs. It has yet to develop a strategic approach to explain how its various programs work together to fulfill TARP’s purposes or how it will use the remaining funds. This lack of clarity has complicated Treasury’s ability to effectively communicate to Congress, the financial markets, and the public. Treasury has taken proactive steps to help ensure a smooth transition by keeping positions filled and using an expedited hiring process. However, it continues to face difficulty providing competitive salaries to attract skilled employees. Also, given the program’s evolving nature and the likelihood of changes under the new administration, Treasury will need to identify OFS’s long-term organizational needs. Additionally, consistent with our recommendation about contracting oversight, Treasury has enhanced such oversight by tracking costs, schedules, and performance and addressing the training requirements of personnel who oversee the contracts. However, as we previously recommended, Treasury needs to continue to identify and mitigate conflicts of interest in contracting. Similarly, OFS has adopted a framework for organizing the development and implementation of its system of internal control for TARP activities, which is consistent with our recommendation. However, it has yet to implement a disciplined risk-assessment process. Finally, given the fact that program actions have only recently occurred and that there are time lags in the reporting of available data, GAO continues to believe that it is too early in the program’s implementation to see measurable results in many areas. Even with more time and better data, it will remain difficult to separate the impact of TARP activities from the effects of other economic forces. Credit market indicators we have identified demonstrate that since our last report, the cost of credit has declined in interbank, mortgage, and corporate debt markets. Conversely, while perceptions of risk (as measured by premiums over Treasury bonds) have declined in interbank markets, they appear to have changed little in the corporate bond and mortgage markets. Attributing any of these changes directly to TARP continues to be problematic because of the range of actions that have been and are being taken to address

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the current crisis. While these indicators may be suggestive of TARP’s ongoing impact, no single indicator or set of indicators can provide a definitive determination of the program’s impact.

TREASURY HAS CONTINUED TO FOCUS ON CPP, BUT A VARIETY OF OTHER PROGRAMS HAVE BEEN CREATED OR ARE IN PROGRESS Treasury has continued to focus on CPP, but a variety of other programs have been created or are in progress, as shown in table 1. As of January 23, 2009, Treasury had disbursed more than 75 percent of the $250 billion it had allocated for CPP to purchase more than $194 billion in preferred shares of 317 qualified financial institutions. About $42.7 billion in preferred stock shares of 265 financial institutions has been purchased since our December report. Table 1. Status of TARP Funds as of January 23, 2009 (dollars in billions)

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Program

Disbursed

Capital Purchase Program

$194.2

Systemically Significant Failing Institutions

40.0

Targeted Investment Program

40.0

Term Asset-backed Securities Loan Facility

0.0

Automotive Industry Financing Program

19.5

Citigroup Asset Guarantee

0.0

Bank of America Asset Guarantee

0.0

Totals

293.7

Source: Treasury OFS, unaudited.

Initially, Treasury approved $125 billion in capital purchases for nine of the largest public financial institutions that federal banking regulators and Treasury considered to be systemically significant to the operation of the financial system.[5] At the time, these nine institutions held about 55 percent of U.S. banking assets. Subsequent purchases were made in qualified institutions of various sizes (in terms of total assets) and types. As of January 23, 2009, the types of institutions that received CPP capital included 226 publicly held institutions, 83 privately held institutions, and 8 community development financial institutions (CDFI).[6] Treasury has taken a number of important steps toward better reporting on and monitoring of CPP, in accordance with our prior recommendations that it bolster its ability to determine whether institutions were using the proceeds consistent with the purposes of the act and that it establish mechanisms to monitor compliance with program requirements. However, more needs to be done. First, while Treasury has begun monthly survey of the largest institutions to monitor their lending and other activities, Treasury plans to rely on quarterly call report data from the other participating institutions. While the monthly survey is a step toward greater transparency and accountability for the largest institutions, we continue

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to believe that additional actions are needed to better ensure that all participating institutions are accountable for their use of the funds. Without more frequent information on all participants, Treasury will have little timely information about the changing condition of the institutions, which may limit the ability of its newly created team of analysts to understand how the institutions used the funds and the effectiveness of the program. In addition, without ensuring that future CPP agreements include a mechanism that will enable Treasury to track the use of capital infusions and by not seeking to obtain similar information from existing CPP participants, Treasury may have difficulty determining that an institution had not used the funds in a manner consistent with the intent of the program. Therefore, we recommended that Treasury expand the scope of planned monthly CPP surveys to include collecting at least some information from all participating institutions. We also recommended that it ensure that future CPP agreements include a mechanism that will enable Treasury to track the use of capital infusions and seek to obtain similar information from existing CPP participants. We will continue to monitor Treasury’s oversight efforts as well as the consistency of the approval process in future work. Second, Treasury has continued to take steps to increase its planned oversight of compliance with terms of agreements such as limitations on executive compensation, dividends, and stock repurchases. These steps include plans to implement new interim final rules that amend and clarify the past interim rules on executive compensation and naming an Interim Chief Compliance Officer. However, Treasury has not finalized its plans for detecting noncompliance with these requirements and taking enforcement actions. Without a more structured mechanism in place to ensure compliance with all CPP requirements—and as more institutions continue to participate in the program— ensuring compliance with these aspects of the program will become increasingly important and challenging. We will also continue to monitor the system that Treasury develops to ensure compliance with their agreements. Treasury has made less progress in improving the transparency of the program and has not yet articulated a clear strategic vision for TARP. In our December 2008 report, we raised questions about the effectiveness of Treasury’s communication strategy for TARP with Congress, the financial markets, and the public. These questions were further heightened in the Congressional Oversight Panel’s (COP) January report, which raised similar questions about Treasury’s strategy for TARP. In response to our recommendation about its communication strategy, Treasury noted numerous publicly available reports, testimonies, and speeches. However, even after reviewing these items collectively, we found that Treasury’s strategic vision for TARP remains unclear. For example, early on Treasury outlined a strategy and approach to purchase whole loans and mortgage- backed securities from financial institutions, but changed direction to make capital investments in qualifying financial institutions as the global community opted to move in this direction. However, once Treasury determined that capital infusions were preferable to purchasing whole mortgages and mortgage-backed securities, Treasury did not clearly articulate how the various programs—such as CPP, the Systemically Significant Failing Institutions Program (SSFI) , and the Targeted Investment Program (TIP)—would work collectively to help stabilize financial markets. For instance, Treasury has used similar approaches— capital infusions—to stabilize healthy institutions under CPP as well as SSFI and TIP, albeit with more stringent requirements. Moreover, with the exception of institutions selected for TIP being viewed as able to raise private capital, both SSFI and TIP share similar selection criteria. Treasury also created the Auto Industry Financing Program in December 2008 to prevent a disruption of the

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domestic automotive industry that would pose systemic risk to the nation’s economy and provided loans to two auto companies and two financing companies that, among other business lines, provide consumer automotive loans. Finally, the same institution may be eligible for multiple programs—at least two institutions (Citigroup and Bank of America) currently participate in more than one program—and this has added to confusion about Treasury’s strategy and vision for the implementation of TARP. Other actions have raised additional questions about Treasury’s strategy. First, Treasury announced the first institution under TIP weeks before the program was established. Similarly, the Asset Guarantee Program was established only after Treasury announced that it would guarantee assets under such a program, and many of the details of the program have yet to be worked out. Second, Treasury’s efforts to mitigate residential foreclosures, which have contributed to increased volatility in financial markets, remain in the design phase with no clearly articulated strategy. Finally, while Treasury has continued to publicly report on individual issues, testify, and make speeches about the program, it continues to struggle to convey a clearly articulated and overarching message about its efforts, potentially hampering TARP’s effectiveness and underscoring ongoing questions about its communication strategy. Without a clearly articulated strategic vision, Treasury’s effectiveness in stabilizing markets may be hampered. We recommended that Treasury communicate a clearly articulated vision for TARP and explain how the individual programs are intended to work in concert to achieve that vision. This is another area that we will continue to monitor.

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EFFORTS TO ESTABLISH THE OFFICE OF FINANCIAL STABILITY ARE ONGOING Treasury has made progress in establishing its management infrastructure, which included hiring, contracting oversight, and internal controls. However, hiring for the Office of Financial Stability is still ongoing and Treasury is still developing an oversight structure for contractors and its development of a system of internal control is still evolving. •

In the hiring area, Treasury took steps to help maintain continuity of leadership within OFS during and after the transition to the new administration, one of the areas we highlighted in our first report. Specifically, Treasury ensured that interim chief positions would be filled to ensure a smooth transition and used direct-hire and various other appointments to bring a number of career staff on board quickly. OFS has increased its overall staff since our December 2008 report from 48 to 90 employees as of January 26, which includes an increase of permanent staff from 5 to 38. While progress has been made since our last report, the number of temporary and contract staff who will be needed to serve longterm organizational needs remains unknown. Because TARP has added many new programs since it was first established in October and program activities may expand or change under the new administration, we recognize that Treasury may find it difficult to determine OFS’s long-term organizational needs at this time. However, such considerations will be vital to retaining institutional knowledge in the organization.

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Treasury’s use of existing contract flexibilities has enabled it to enter into agreements and award contracts quickly in support of TARP. However, Treasury’s use of timeand-materials contracts, although authorized when flexibility is needed, can increase the risk of wasted government dollars without adequate oversight of contractor performance. Although Treasury has improved its oversight of contractors, the department itself has identified certification of its Contracting Officer Technical Representatives and the use of time-and-materials pricing to be high-risk issues that still need attention. In addition, while Treasury has taken the important step of recently issuing an interim regulation outlining the process for reviewing and addressing conflicts of interest among new contractors and financial agents, it is still reviewing contracts or agreements that existed prior to issuance to ensure conformity with the new regulation. We believe this is a necessary component of a comprehensive and complete system to ensure that all conflicts are fully identified and appropriately addressed. In the area of internal controls, OFS has adopted a framework for organizing the development and implementation of its system of internal control for TARP activities. OFS plans to use this framework to develop specific policies, drive communications on expectations, and measure compliance with internal control standards and policies. However, it has yet to develop comprehensive written policies and procedures governing TARP activities or implement a disciplined risk assessment process.

In each of these areas, we made additional recommendations. Specifically, we recommended that Treasury continue to expeditiously hire personnel needed to carry out and oversee TARP. For contracting oversight, we recommended that Treasury expedite efforts to ensure that sufficient personnel are assigned and properly trained to oversee the performance of all contractors, especially for contracts priced on a time-and-materials basis, and move toward fixed-price arrangements whenever possible as program requirements are better defined over time. We also recommended that Treasury review and renegotiate existing conflict-of-interest mitigation plans, as necessary, to enhance specificity and conformity with the new interim conflicts of interest regulation, and take continued steps to manage and monitor conflicts of interest and enforce mitigation plans. Finally, we recommended that Treasury, in addition to developing a comprehensive system of internal control, develop and implement a well- defined and disciplined risk assessment process, as such a process is essential to monitoring program status and identifying any risks of potential inadequate funding of announced programs. We will continue to monitoring OFS’s hiring and contracting practices as well as its implementation of the internal control framework, which is vital to the effectiveness of the program.

MEASURING THE IMPACT OF TARP ON CREDIT MARKETS AND THE ECONOMY CONTINUES TO BE CHALLENGING Given the fact that program actions have only recently occurred and that there are time lags in the reporting of available data, GAO continues to believe that it is too early in the

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program’s implementation to see measurable results in many areas. Even with more time and better data, it will remain difficult to separate the impact of TARP activities from the effects of other economic forces. Some indicators suggest that the cost of credit has declined in interbank, mortgage, and corporate debt markets since the December report. However, while perceptions of risk (as measured by premiums over Treasury securities) have declined in interbank markets, they have changed very little in corporate bond and mortgage markets. Finally, as GAO also noted in December, these indicators may be suggestive of TARP’s ongoing impact, but no single indicator or set of indicators can provide a definitive determination of the program’s effects because of the range of actions that have been and are being taken to address the current crisis. These include coordinated efforts by U.S. regulators—namely, the Federal Deposit Insurance Corporation, the Federal Reserve, and the Federal Housing Finance Agency—as well as actions by financial institutions to mitigate foreclosures. For example, a large drop in mortgage rates occurred shortly after the Federal Reserve announced it would purchase up to $500 billion in mortgage-backed securities, highlighting that policies outside of TARP may have important effects on credit markets. We will continue to refine and monitor the indicators. Mr. Chairman and Members of the Committee, I appreciate the opportunity to discuss this critically important issue and would be happy to answer any questions that you may have. Thank you.

REFERENCES

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[1]

[2]

[3] [4]

[5]

GAO, Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues, GAO-09-296 (Washington D.C.: Jan. 30, 2009) and Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency, GAO-09-161 (Washington, D.C.: Dec. 2, 2008). The Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, 122 Stat. 3765 (2008). The act requires the U.S. Comptroller General to report at least every 60 days, as appropriate, on findings resulting from oversight of TARP’s performance in meeting the act’s purposes; the financial condition and internal controls of TARP, its representatives, and agents; the characteristics of asset purchases and the disposition of acquired assets, including any related commitments entered into; TARP’s efficiency in using the funds appropriated for its operations; its compliance with applicable laws and regulations; and its efforts to prevent, identify, and minimize conflicts of interest among those involved in its operations. All information is as of January 23, 2009, unless otherwise noted in the statement. Call reports are quarterly reports that collect basic financial data of commercial banks in the form of a balance sheet and income statement (formally known as Report of Condition and Income). While Treasury approved $125 billion to the nine largest institutions, as table 2 shows, it initially disbursed funds to eight of the nine institutions. The $10 billion to Merrill

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Lynch was not disbursed until January 9, 2009, after its merger with Bank of America was completed. CDFI is a specialized financial institution that works in market niches that are underserved by traditional financial institutions. CDFIs provide a range of financial products and services such as mortgage financing for low-income and first-time homebuyers and not-for-profit developers; flexible underwriting and risk capital for needed community facilities; and technical assistance, commercial loans and investments to small start-up or expanding businesses in low-income areas.

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[6]

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In: TARP in the Crosshairs Editor: Paul W. O'Byrne

ISBN: 978-1-60876-705-2 © 2009 Nova Science Publishers, Inc.

Chapter 29

TROUBLED ASSET RELIEF PROGRAM: STATUS OF EFFORTS TO ADDRESS TRANSPARENCY AND ACCOUNTABILITY ISSUES*

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Gene L. Dodaro Mr. Chairman and Members of the Subcommittee: I am pleased to be here today to discuss our work on the Troubled Asset Relief Program (TARP), under which the Department of the Treasury (Treasury) has the authority to purchase and insure up to $700 billion in troubled assets held by financial institutions through the Office of Financial Stability (OFS).[1] As you know, Treasury was granted this authority in response to the financial crisis that has threatened the stability of the U.S. banking system and the solvency of numerous financial institutions. The Emergency Economic Stabilization Act (the act) that authorized TARP on October 3, 2008, requires GAO to report at least every 60 days on findings resulting from our oversight of the status of actions taken under the program.[2] We are also responsible for auditing OFS’s annual financial statements and for issuing special reports on any issues that emerge from our oversight. To carry out these oversight responsibilities, we have assembled interdisciplinary teams with a wide range of technical skills, including financial market and public policy analysts, accountants, lawyers, and economists who represent combined resources from across GAO. In addition, we are building on our in-house technical expertise with targeted new hires, re-employed annuitants with related expertise, and outside experts. The act also created additional oversight entities— the Congressional Oversight Panel (COP) and the Special Inspector General for TARP (SIGTARP)—that also have reporting responsibilities. We are coordinating our work with COP and SIGTARP and are meeting with officials from both entities to share information and coordinate our oversight efforts. These meetings help to ensure that we are collaborating as appropriate and not duplicating efforts. My statement today is based primarily on our January 30, 2009 report, the second under the act’s mandate, which covers the actions taken as part of TARP through January 23, 2009, and follows up on the nine recommendations we made in our December 2, 2008 report.[3] *

This is an edited, excerpted and augmented edition of a .GAO Report GAO-09-417T, dated February 24, 2009.

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This statement also provides additional information on some recent program developments, including Treasury’s new financial stability plan. Our oversight work under the act is ongoing, and our next report is due to be issued by March 31, 2009, as required. Like the report, this statement focuses on (1) the nature and purpose of activities that have been initiated under TARP; (2) the status of the transition to the new administration at OFS and its hiring efforts, use of contractors, and development of a system of internal control; and (3) preliminary indicators of TARP’s performance. To do this work, we reviewed documents related to TARP, including contracts, agreements, guidance, and rules. We also met with OFS, contractors, federal agencies, and officials from all eight of the first large institutions to receive disbursements. We plan to continue to monitor the issues highlighted in the report, as well as future and ongoing capital purchases, other more recent transactions undertaken as part of TARP (for example, guarantees on assets of Citigroup and Bank of America), and the status of other aspects of TARP. We conducted this performance audit between December 2008 and February 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

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SUMMARY Treasury has announced a number of new programs to try to stabilize financial markets, but most of its activity during this period has continued to be through its Capital Purchase Program (CPP). As of February 19, Treasury had disbursed about $300 billion in TARP funds, about $196 billion of which was for CPP. Treasury has recently announced the Financial Stability Plan, which outlines a set of measures to address the financial crisis and restore confidence in the U.S. financial and housing markets, and a Homeowner Affordability and Stability Plan to mitigate foreclosures and preserve homeownership. Treasury also has taken important steps since our first report to implement all nine of our recommendations. However, due in part to the short time frame since our first report, we continued to identify a number of areas that warrant Treasury’s ongoing attention concerning TARP. Therefore, we recommended in our latest report that Treasury continue to take action to further improve the transparency and accountability of the program and more clearly articulate and communicate a strategic vision. Specifically, we recommended that Treasury • •

• •

expand the scope of the monthly CPP surveys for the 20 largest banks to include collecting at least some information from all institutions participating in the program. ensure that future CPP agreements include a mechanism that will better enable Treasury to track the use of the capital infusions and seek to obtain similar information from existing CPP participants. establish a process to ensure compliance with all CPP requirements, including those associated with limitations on dividends and stock repurchase restrictions. communicate a clearly articulated vision for TARP and how all individual programs are intended to work in concert to achieve that vision. This vision should incorporate

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• •

•

•

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actions to preserve homeownership. Once this vision is clearly articulated, Treasury should document skills and competencies needed within the department. continue to expeditiously hire personnel needed to carry out and oversee TARP. expedite efforts to ensure that sufficient personnel are assigned and properly trained to oversee the performance of all contractors, especially for contracts priced on a time-and-materials basis, and move toward fixed- price arrangements whenever possible as program requirements are better defined over time. develop a comprehensive system of internal control over TARP, including policies, procedures, and guidance for program activities that are robust enough to ensure that the program’s objectives and requirements are met. develop and implement a well-defined and disciplined risk-assessment process, as such a process is essential to monitoring program status and identifying any risks of potential inadequate funding of announced programs. • review and renegotiate existing conflict of interest mitigation plans, as necessary, to enhance specificity and conformity with the new interim conflicts of interest regulation, and take continued steps to manage and monitor conflicts of interest and enforce mitigation plans.

Consistent with our recommendations, Treasury’s recently announced Financial Stability Plan outlines some steps it is taking to improve the transparency and accountability of new programs going forward, but Treasury still faces several challenges. First, our first report emphasized the lack of monitoring and reporting for CPP investments and recommended stronger measures for ensuring that participating institutions use the funds to meet the program’s purpose and comply with CPP requirements on, for example, executive compensation and dividend payments. In response to our recommendation, Treasury completed its initial survey of the 20 largest institutions to monitor lending and other activities and announced plans to analyze quarterly monitoring data (call reports) for all reporting institutions.[4] While the monthly survey is a step toward greater transparency and accountability for the largest institutions, we continue to believe that additional action is needed to better ensure that all participating institutions are accountable for their use of program funds. Second, Treasury has continued to develop a system to ensure compliance with CPP requirements, including executive compensation, dividend payments, and repurchase of stocks, but it has not yet finalized its plans for detecting noncompliance and taking enforcement actions. Third, we noted that Treasury had made limited progress in articulating and communicating an overall strategic vision for TARP, while continuing to respond to institution- and industry-specific needs. This lack of clarity has complicated Treasury’s ability to effectively communicate to Congress, the financial markets, and the public. However, Treasury has announced a plan to address foreclosure mitigation and homeownership preservation, and as Treasury provides more details on its new Financial Stability Plan, its strategic approach to addressing the financial crisis may become clearer. Treasury has taken proactive steps to help ensure a smooth transition to a new administration by keeping positions filled and using an expedited hiring process. However, it continues to face difficulty providing competitive salaries to attract skilled employees. Also, given the program’s evolving nature and the likelihood of changes under the new administration, Treasury will need to identify OFS’s long-term organizational needs. Additionally, consistent with our recommendation about contracting oversight, Treasury has

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enhanced such oversight by tracking costs, schedules, and performance and addressing the training requirements of personnel who oversee the contracts. However, as we previously recommended, Treasury needs to continue to identify and mitigate conflicts of interest in contracting. Similarly, OFS has adopted a framework for organizing the development and implementation of its system of internal control for TARP activities, which is consistent with our recommendation. However, as of our January report, it had yet to implement a disciplined risk-assessment process. Finally, given the fact that program actions have only recently occurred and that there are time lags in the reporting of available data, it is too early in the program’s implementation to see measurable results in many areas. Even with more time and better data, it will remain difficult to separate the impact of TARP activities from the effects of other economic forces. Credit market indicators we have identified demonstrate that between our December and January reports, the cost of credit declined in interbank, mortgage, and corporate debt markets. Conversely, while perceptions of risk (as measured by premiums over Treasury bonds) have declined in interbank markets, they appear to have changed little in the corporate bond and mortgage markets. However, attributing any of these changes directly to TARP continues to be problematic because of the range of actions that have been and are being taken to address the current crisis. While these indicators may be suggestive of TARP’s ongoing impact, no single indicator or set of indicators can provide a definitive determination of the program’s impact.

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TREASURY HAS CONTINUED TO FOCUS ON CPP, BUT A VARIETY OF OTHER PROGRAMS HAVE BEEN CREATED OR ARE IN PROGRESS Treasury has continued to focus on CPP, but a variety of other programs have been created or are in progress, as shown in table 1. As of February 19, 2009, Treasury had disbursed almost 80 percent of the $250 billion it had allocated for CPP to purchase almost $196 billion in preferred shares of 416 qualified financial institutions. Treasury has begun to receive dividend payments relating to capital purchases under CPP and other programs. According to Treasury, as of February 17, 2009, it has received about $2.4 billion. Table 1. Status of TARP Funds as of February 19, 2009 (dollars in billions) Program

Disbursed

Capital Purchase Program Systemically Significant Failing ITargeted i i Investment Program

$196.0 40.0 40.0

Term Asset-backed Securities Loan F ili Automotive Industry Financing Program

0.0

Citigroup Asset Guarantee

0.0

23.7

Bank of America Asset Guarantee

0.0

Totals

299.7

Source: Treasury OFS, unaudited.

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Initially, Treasury approved $125 billion in capital purchases for nine of the largest public financial institutions that federal banking regulators and Treasury considered to be systemically significant to the operation of the financial system.[5] At the time, these nine institutions held about 55 percent of U.S. banking assets. Subsequent purchases were made in qualified institutions of various sizes (in terms of total assets) and types. As we noted in our January report, most of the institutions that received CPP capital were publicly held institutions, while a limited number of privately held institutions and community development financial institutions (CDFI) also received funds.[6] Treasury has taken a number of important steps toward better reporting on and monitoring of CPP, in accordance with our prior recommendations that it bolster its ability to determine whether institutions were using the proceeds consistent with the purposes of the act and that it establish mechanisms to monitor compliance with program requirements. However, more needs to be done. First, Treasury has initially surveyed the largest institutions to monitor their lending and other activities and announced plans to analyze quarterly monitoring data (call reports) for all reporting institutions. While the monthly survey is a step toward greater transparency and accountability for the largest institutions, we continue to believe that additional actions are needed to better ensure that all participating institutions are accountable for their use of the funds. Without more frequent information on all participants, Treasury will have little timely information about the changing condition of the institutions, which may limit the ability of its newly created team of analysts to understand the institutions’ use of the funds and the effectiveness of the program. In addition, without ensuring that future CPP agreements include a mechanism that will enable Treasury to track the use of capital infusions and without seeking to obtain similar information from existing CPP participants, Treasury may have difficulty determining that an institution has used the funds in a manner consistent with the purposes of the program. Therefore, we recommended that Treasury expand the scope of planned monthly CPP surveys to include collecting at least some information from all participating institutions. We also recommended that it ensure that future CPP agreements include a mechanism that will enable Treasury to track the use of capital infusions and seek to obtain similar information from existing CPP participants. We will continue to monitor Treasury’s oversight efforts as well as the consistency of the approval process in future work. Second, Treasury has continued to take steps to increase its planned oversight of compliance with terms of agreements such as limitations on executive compensation, dividends, and stock repurchases. These steps include naming an Interim Chief Compliance Officer. However, Treasury has not finalized its plans for detecting noncompliance with these requirements and taking enforcement actions. Without a more structured mechanism in place to ensure compliance with all CPP requirements—and as more institutions continue to participate in the program— ensuring compliance with these aspects of the program will become increasingly important and challenging. In its recently announced Financial Stability Plan, Treasury called for banks receiving future government funds to be held responsible for appropriate use of those funds through (1) stronger restrictions on lending, dividend payment, and executive compensation and (2) enhanced reporting to the public. In addition, Treasury is in the process of drafting new regulations to implement the executive compensation requirements in the American Recovery and Reinvestment Act of 2009.[7] We will also continue to monitor the system that Treasury develops to ensure compliance with their

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agreements and the implementation of additional oversight and accountability efforts under its new plan. Treasury has continued to make some progress in improving the transparency of the program and a few weeks ago announced its plans for the remaining TARP funds. In our December 2008 report, we first raised questions about the effectiveness of Treasury’s communication strategy for TARP with Congress, the financial markets, and the public. These questions were further heightened in the COP’s January report, which raised similar questions about Treasury’s strategy for TARP. In response to our recommendation about its communication strategy, Treasury noted numerous publicly available reports, testimonies, and speeches. However, even after reviewing these items collectively, we found that Treasury’s strategic vision for TARP remained unclear. For example, Treasury initially outlined a strategy to purchase whole loans and mortgage-backed securities from financial institutions, but changed direction to make capital investments in qualifying financial institutions as the global community opted to move in this direction. However, once Treasury determined that capital infusions were preferable to purchasing whole mortgages and mortgage-backed securities, Treasury did not clearly articulate how the various programs— such as CPP, the Systemically Significant Failing Institutions Program (SSFI) , and the Targeted Investment Program (TIP)—would work collectively to help stabilize financial markets. For instance, Treasury has used similar approaches— capital infusions—to stabilize healthy institutions under CPP as well as SSFI and TIP, albeit with more stringent requirements. Moreover, with the exception of institutions selected for TIP being viewed as able to raise private capital, both SSFI and TIP share similar selection criteria. Treasury also created the Auto Industry Financing Program in December 2008 to prevent a disruption of the domestic automotive industry that would pose systemic risk to the nation’s economy and provided loans to two auto companies and two financing companies that, among other business lines, provide consumer automotive loans. Finally, the same institution may be eligible for multiple programs—at least two institutions (Citigroup and Bank of America) currently participate in more than one program—and this has added to confusion about Treasury’s strategy and vision for the implementation of TARP. Other actions also have raised additional questions about Treasury’s strategy. For example, Treasury announced the first institution under TIP weeks before the program was established. Similarly, the Asset Guarantee Program was established only after Treasury announced that it would guarantee assets under such a program, and many of the details of the program have yet to be worked out. Since our January report, Treasury has taken two key actions related to our recommendation about the need for a clearly articulated vision for the program. On February 10, Treasury announced the Financial Stability Plan, which outlines a set of measures to address the financial crisis and restore confidence in U.S. financial and housing markets. The plan appears to be an approach designed to resolve the credit crisis by restarting the flow of credit to consumers and businesses, strengthening financial institutions, and providing aid to homeowners and small businesses. On February 18, Treasury unveiled its Homeowner Affordability and Stability Plan, which, in part, is based on the use of TARP funds. Specifically, the plan will use $75 billion of TARP funds to modify the loans of up to 3-4 million homeowners to avoid potential foreclosure. The plan also includes a number of other components, including an initiative to help an additional 4-5 million homeowners with loans owned or guaranteed by Freddie Mac and Fannie Mae refinance their loans at current market

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rates.[8] We will continue to monitor the development and implementation of Treasury’s plan. In addition, we will assess the extent to which the plan addresses the need for a clearly articulated vision for TARP and explains how the individual programs are intended to work in concert to achieve that vision.

EFFORTS TO ESTABLISH OFS ARE ONGOING Treasury has made progress in establishing its management infrastructure, which included hiring, contracting oversight, and internal controls. However, hiring for the Office of Financial Stability is still ongoing, Treasury is working to improve its oversight of contractors, and its development of a system of internal control is still evolving.

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•

•

•

In the hiring area, Treasury took steps to help maintain continuity of leadership within OFS during and after the transition to the new administration, one of the areas we highlighted in our first report. Specifically, Treasury ensured that interim chief positions would be filled to ensure a smooth transition and used direct-hire authority and various other appointments to bring a number of career staff on board quickly. OFS has increased its overall staff since our December 2008 report from 48 to 90 employees as of January 26, which includes an increase of permanent staff from 5 to 38. While progress has been made since our last report, the number of temporary and contract staff who will be needed to serve long-term organizational needs remains unknown. Because TARP has added many new programs since it was first established in October and program activities may expand or change under the new administration, we recognize that Treasury may find it difficult to determine OFS’s long-term organizational needs at this time. However, such considerations will be vital to retaining institutional knowledge in the organization. Treasury’s use of existing contract flexibilities has enabled it to enter into agreements and award contracts quickly in support of TARP. However, Treasury’s use of timeand-materials contracts, although authorized when flexibility is needed, can increase the risk of wasted government dollars without adequate oversight of contractor performance. Although Treasury has improved its oversight of contractors, the department itself has identified certification of its Contracting Officer Technical Representatives and the use of time-and-materials pricing to be high-risk issues that still need attention. In addition, while Treasury has taken the important step of recently issuing an interim regulation outlining the process for reviewing and addressing conflicts of interest among new contractors and financial agents, it is still reviewing contracts or agreements that existed prior to issuance to ensure conformity with the new regulation. We believe this is a necessary component of a comprehensive and complete system to ensure that all conflicts are fully identified and appropriately addressed. OFS has adopted a framework for organizing the development and implementation of its system of internal control for TARP activities. OFS plans to use this framework to develop specific policies, drive communications on expectations, and measure compliance with internal control standards and policies. However, it has yet to

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Gene L. Dodaro develop comprehensive written policies and procedures governing TARP activities or implement a disciplined risk assessment process.

In each of these areas, we made additional recommendations. Specifically, we recommended that Treasury continue to expeditiously hire personnel needed to carry out and oversee TARP. For contracting oversight, we recommended that Treasury expedite efforts to ensure that sufficient personnel are assigned and properly trained to oversee the performance of all contractors, especially for contracts priced on a time-and-materials basis, and move toward fixed-price arrangements whenever possible as program requirements are better defined over time. We also recommended that Treasury review and renegotiate existing conflict-of-interest mitigation plans, as necessary, to enhance specificity and conformity with the new interim conflicts of interest regulation, and take continued steps to manage and monitor conflicts of interest and enforce mitigation plans. Finally, we recommended that Treasury, in addition to developing a comprehensive system of internal control, develop and implement a well- defined and disciplined risk assessment process, as such a process is essential to monitoring program status and identifying any risks of potentially inadequate funding of announced programs. We will continue to monitor OFS’s hiring and contracting practices as well as its implementation of the internal control framework, which is vital to the effectiveness of the program.

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MEASURING THE IMPACT OF TARP ON CREDIT MARKETS AND THE ECONOMY CONTINUES TO BE CHALLENGING Given the fact that program actions have only recently occurred and that there are time lags in the reporting of available data, it continues to be too early in the program’s implementation to see measurable results in many areas. Even with more time and better data, it will remain difficult to separate the impact of TARP activities from the effects of other economic forces. Some indicators suggest that the cost of credit has declined in interbank, mortgage, and corporate debt markets since the December report. However, while perceptions of risk (as measured by premiums over Treasury securities) have declined in interbank markets, they have changed very little in corporate bond and mortgage markets. Finally, as noted in December, these indicators may be suggestive of TARP’s ongoing impact, but no single indicator or set of indicators can provide a definitive determination of the program’s effects because of the range of actions that have been and are being taken to address the current crisis. These include coordinated efforts by U.S. regulators—namely, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Federal Housing Finance Agency—as well as actions by financial institutions to mitigate foreclosures. For example, a large drop in mortgage rates occurred shortly after the Federal Reserve announced it would purchase up to $500 billion in mortgage-backed securities, highlighting that policies outside of TARP may have important effects on credit markets. We will continue to refine and monitor the indicators. Additionally, we plan to use the Treasury survey data in our efforts to evaluate changes in lending activity resulting from CPP. We recognize that the data has certain limitations—primarily that it is self-reported and difficult

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to benchmark because it is unique. Nonetheless, we think it will prove valuable in future analyses. Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity to discuss this critically important issue and would be happy to answer any questions that you may have. Thank you.

REFERENCES [1]

[2]

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[3] [4]

[5]

[6]

[7] [8]

GAO, Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues, GAO-09-296 (Washington D.C.: Jan. 30, 2009) and Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency, GAO-09-161 (Washington, D.C.: Dec. 2, 2008). The Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, 122 Stat. 3765 (2008). The act requires the U.S. Comptroller General to report at least every 60 days, as appropriate, on findings resulting from oversight of TARP’s performance in meeting the act’s purposes; the financial condition and internal controls of TARP, its representatives, and agents; the characteristics of asset purchases and the disposition of acquired assets, including any related commitments entered into; TARP’s efficiency in using the funds appropriated for its operations; its compliance with applicable laws and regulations; and its efforts to prevent, identify, and minimize conflicts of interest among those involved in its operations. Information is current as of January 23, 2009, unless otherwise noted in the statement. Call reports are quarterly reports that collect basic financial data of commercial banks in the form of a balance sheet and income statement (formally known as Report of Condition and Income). While Treasury approved $125 billion to the nine largest institutions, it initially disbursed funds to eight of the nine institutions. The $10 billion to Merrill Lynch was not disbursed until January 9, 2009, after its merger with Bank of America was completed. CDFI is a specialized financial institution that works in market niches that are underserved by traditional financial institutions. CDFIs provide a range of financial products and services such as mortgage financing for low-income and first-time homebuyers and not-for-profit developers; flexible underwriting and risk capital for needed community facilities; and technical assistance, commercial loans and investments to small start-up or expanding businesses in low-income areas. Pub. L. No. 111-5, 123 Stat. 115 (2009). As part of its Homeowner Affordability and Stability Plan, Treasury announced that it was increasing its funding commitment to Fannie Mae and Freddie Mac to ensure the strength and security of the mortgage market and to help maintain mortgage affordability. The $200 billion funding commitment is based on authority granted to Treasury under the Housing and Economic Recovery Act of 2008 Pub. L. No. 110-289, 122 Stat.2654 (2008).

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In: TARP in the Crosshairs Editor: Paul W. O'Byrne

ISBN: 978-1-60876-705-2 © 2009 Nova Science Publishers, Inc.

Chapter 30

TROUBLED ASSET RELIEF PROGRAM: STATUS OF EFFORTS TO ADDRESS TRANSPARENCY AND ACCOUNTABILITY ISSUES*

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Richard J. Hillman Mr. Chairman and Members of the Subcommittee: I am pleased to be here today to discuss our work on the Troubled Asset Relief Program (TARP), under which the Department of the Treasury (Treasury) has the authority to purchase and insure up to $700 billion in troubled assets held by financial institutions through its Office of Financial Stability (OFS).[1] As you know, Treasury was granted this authority in response to the financial crisis that has threatened the stability of the U.S. banking system and the solvency of numerous financial institutions. The Emergency Economic Stabilization Act (the act) that authorized TARP on October 3, 2008, requires GAO to report at least every 60 days on findings resulting from our oversight of the actions taken under TARP.[2] We are also responsible for auditing OFS’s annual financial statements and for producing special reports on any issues that emerge from our oversight. To carry out these oversight responsibilities, we have assembled interdisciplinary teams with a wide range of technical skills, including financial market and public policy analysts, accountants, lawyers, and economists who represent combined resources from across GAO. In addition, we are building on our in-house technical expertise with targeted new hires, re-employed annuitants with related expertise, and outside experts. The act also created additional oversight entities—the Congressional Oversight Panel (COP) and the Special Inspector General for TARP (SIGTARP)—that also have reporting responsibilities. We are coordinating our work with COP and SIGTARP and are meeting with officials from both entities to share information and coordinate our oversight efforts. These meetings help to ensure that we are collaborating as appropriate and not duplicating efforts. My statement today is based primarily on our January 30, 2009 report, the second under the act’s mandate, which covers the actions taken as part of TARP through January 23, 2009, *

This is an edited, excerpted and augmented edition of a GAO Report GAO-09-474T, dated March 11, 2009.

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and follows up on the nine recommendations we made in our December 2, 2008 report.[3] This statement also provides additional information on some recent developments related to TARP, including Treasury’s new financial stability plan. Our oversight work under the act is ongoing, and our next report is due to be issued by March 31, 2009, as required. This statement focuses on (1) the nature and purpose of activities that have been initiated under TARP; and (2) Treasury’s efforts to establish a management structure for TARP, including a system of internal controls over the use of TARP funds. To do this work, we reviewed documents related to TARP, including contracts, agreements, guidance, and rules. We also met with OFS, contractors, federal agencies, and officials from all eight of the first large institutions to receive disbursements. We plan to continue to monitor the issues highlighted in the report, as well as future and ongoing capital purchases, other more recent transactions undertaken as part of TARP (for example, guarantees on assets of Citigroup and Bank of America), and the status of other aspects of TARP. We conducted this performance audit between December 2008 and March 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

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SUMMARY Treasury has announced a number of new programs to try to stabilize financial markets, but most of its activities during this period have continued to fall under its Capital Purchase Program (CPP). As of March 5, 2009, Treasury had disbursed approximately $300 billion in TARP funds, about $197 billion of it for CPP. Treasury has recently announced the Financial Stability Plan, which outlines a set of measures to address the financial crisis and restore confidence in the U.S. financial and housing markets, and a Homeowner Affordability and Stability Plan to mitigate foreclosures and preserve homeownership. Treasury also has taken important steps since our first report to implement all nine of our recommendations. However, due in part to the short time that has elapsed since our first report, we continued to identify a number of areas that warrant Treasury’s ongoing attention. We recommended in our latest report that Treasury continue to take action to further improve TARP’s transparency and accountability and more clearly articulate and communicate a strategic vision for TARP. Specifically, we recommended that Treasury: • •

• •

expand the scope of the monthly CPP surveys for the 20 largest banks to include collecting at least some information from all institutions participating in the program; ensure that future CPP agreements include a mechanism that will better enable Treasury to track the use of the capital infusions and seek to obtain similar information from existing CPP participants; establish a process to ensure compliance with all CPP requirements, including those associated with limitations on dividends and stock repurchase restrictions; communicate a clearly articulated vision for TARP that incorporates actions to preserve homeownership and describes how all individual programs are intended to

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•

• •

•

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•

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work in concert to achieve that vision; and once this vision is clearly articulated, document the skills and competencies needed within the department to carry it out; develop a comprehensive system of internal controls over TARP, including policies, procedures, and guidance for program activities that are robust enough to ensure that the program’s objectives and requirements are met; continue to expeditiously hire personnel needed to carry out and oversee TARP; expedite efforts to ensure that sufficient personnel are assigned and properly trained to oversee the performance of all contractors, especially for contracts priced on a time-and-materials basis, and move toward fixed- price arrangements whenever possible as requirements are better defined over time; develop and implement a well-defined and disciplined risk-assessment process, which is essential to monitoring the status of programs and identifying any risks that previously announced programs will not be adequately funded; and review and renegotiate existing conflict-of-interest mitigation plans, as necessary, to enhance specificity and conformity with the new interim conflict-of-interest regulation and take continued steps to manage and monitor conflicts of interest and enforce mitigation plans.

Consistent with our recommendations, the recently announced Financial Stability Plan outlines some steps that Treasury is taking to improve the transparency and accountability of new programs going forward. But Treasury still faces several challenges. First, our initial report emphasized the lack of monitoring and reporting for CPP investments and recommended stronger measures for ensuring that participating institutions used the funds to meet the program’s purpose and comply with CPP requirements on, for example, executive compensation and dividend payments. In response to our recommendation, Treasury completed its initial survey of the 20 largest institutions to monitor lending and other activities and announced plans to analyze quarterly monitoring data (call reports) for all reporting institutions.[4] While the monthly survey is a step toward greater transparency and accountability for the largest institutions, we continue to believe that additional action is needed to better ensure that all participating institutions are accountable for their use of TARP funds. Second, Treasury has continued to develop a system to ensure compliance with CPP requirements, including executive compensation, dividend payments, and repurchase of stocks, but it has not yet finalized its plans for detecting noncompliance and taking enforcement actions. Third, we noted that Treasury had made limited progress in articulating and communicating an overall strategic vision for TARP and continued to respond to institution- and industry-specific needs. This lack of clarity has complicated Treasury’s ability to effectively communicate to Congress, the financial markets, and the public. As Treasury provides more details on its new Financial Stability Plan, its strategic approach to addressing the financial crisis may become clearer. Treasury has made progress in establishing a management structure for TARP, including adopting a framework for developing and implementing its system of internal control for TARP activities that is consistent with our recommendation. However, as of our January report, OFS had yet to implement a disciplined risk-assessment process. Treasury has taken steps to help ensure a smooth transition to a new administration by keeping positions filled and using an expedited hiring process. However, it continues to face difficulty providing competitive salaries to attract skilled employees. Also, given the TARP’s evolving nature and

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the changes under the new administration, Treasury needs to identify OFS’s long-term organizational needs. Additionally, consistent with our recommendation on contracting oversight, Treasury has enhanced such oversight by tracking costs, schedules, and performance and addressing the training requirements of personnel who oversee the contracts. However, as we previously recommended, Treasury needs to continue to identify and mitigate conflicts of interest in contracting.

Treasury Has Continued to Focus on CPP, but a Variety of Other Programs Have Been Created or Are Being Planned Treasury has continued to focus on CPP, but a variety of other programs have been created or are in progress, as shown in table 1. As of March 5, 2009, Treasury had disbursed almost 80 percent of the $250 billion it had allocated for CPP to purchase almost $197 billion in preferred shares of 467 qualified financial institutions (table 1).[5] Treasury has begun to receive dividend payments relating to capital purchases under CPP and other programs. According to Treasury, as of February 17, 2009, it had received about $2.4 billion.

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Table 1. Status of TARP Funds as of March 5, 2009 (dollars in billions) Program

Disbursed

Capital Purchase Program

$ 196.8

Systemically Significant Failing Institutions

40.0

Targeted Investment Program

40.0

Automotive Industry Financing Program

23.7

Citigroup Asset Guarantee

0.0

Bank of America Asset Guarantee

0.0

Making Home Affordable Program

0.0

Term Asset-backed Securities Loan Facility – 1

0.0

Consumer & Business Lending Initiative

0.0

Totals

$ 300.5

Source: Treasury OFS, unaudited.

Initially, Treasury approved $125 billion in capital purchases for nine of the largest public financial institutions that federal banking regulators and Treasury considered to be systemically significant to the operation of the financial system.[6] At the time, these nine institutions held about 55 percent of U.S. banking assets. Subsequent purchases were made for qualified institutions of various sizes (in terms of total assets) and types. As we noted in our January report, most of the institutions that received CPP capital were publicly held institutions, although a limited number of privately held institutions and community development financial institutions (CDFI) also received funds.[7] Treasury has taken a number of important steps toward better reporting on and monitoring of CPP. These steps are in keeping with our prior recommendations that Treasury bolster its ability to determine whether institutions are using CPP proceeds in ways that are consistent with the act’s purposes and establish mechanisms to monitor compliance with program requirements. However, Treasury needs to take further steps in this area. Treasury

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has done an initial survey of the largest institutions to monitor their lending and other activities and announced plans to analyze quarterly monitoring data (call reports) for all reporting institutions. While the monthly survey is a step toward greater transparency and accountability for the largest institutions, we continue to believe that additional actions are needed to better ensure that all participating institutions are held accountable for their use of the funds. Without more frequent information on all participants, Treasury will have little timely information about the changing financial condition of participating institutions, potentially limiting the ability of its newly created team of analysts to understand how the institutions are using CPP funds and whether the program is having the desired effect. In addition, without ensuring that future CPP agreements include a mechanism that enables Treasury to track the use of capital infusions and that existing CPP participants provide similar information, Treasury may have difficulty determining whether an institution has used the funds in a manner consistent with TARP’s purposes. Therefore, we recommended that Treasury expand the scope of planned monthly CPP surveys to include collecting at least some information from all participating institutions. We also recommended that future CPP agreements include a mechanism that enables Treasury to track the use of capital infusions and that Treasury seek to obtain similar information from existing CPP participants. We will continue to monitor Treasury’s oversight efforts as well as the consistency of the approval process in future work. Treasury has also continued to take steps to increase its planned oversight of compliance with terms of the CPP agreements, including limitations on executive compensation, dividends, and stock repurchases. Among these steps, Treasury has named an Interim Chief Compliance Officer. However, Treasury has not finalized its plans for detecting noncompliance with CPP requirements or for taking enforcement actions. Without a more structured mechanism in place to ensure compliance and with a growing number of institutions participating in the program, ensuring compliance with these important aspects of the program will become increasingly challenging. In its recently announced Financial Stability Plan, Treasury called for banks receiving government funds in the future to be held responsible for appropriate use of those funds through (1) stronger restrictions on dividend payment and executive compensation, and (2) enhanced reporting to the public, including reporting on lending activity. In addition, Treasury is in the process of drafting new regulations to implement the executive compensation requirements in the American Recovery and Reinvestment Act of 2009, which amended the requirements in the Emergency Economic Stabilization Act related to executive compensation and corporate governance of TARP fund recipients.[8] Among these amendments is a requirement for the boards of directors of any TARP fund recipient to have in place a company-wide policy regarding excessive or luxury expenditures, as identified by Treasury. These may include excessive expenditures on entertainment or events, office and facility renovations, aviation or other transportation services, or other activities or events that are deemed unreasonable. We plan to monitor how Treasury defines excessive or luxury expenditures and how Treasury assures that TARP fund recipients adopt reasonable policies and practices to control against such expenditures. We will also continue to monitor both the system that Treasury develops to ensure compliance with the agreements and the implementation of additional oversight and accountability efforts under its new plan. Treasury has also continued to make some progress in improving the transparency of TARP and a few weeks ago announced its plans for the remaining TARP funds. In our

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December 2008 report, we first raised questions about the effectiveness of Treasury’s communication strategy for TARP with Congress, the financial markets, and the public. These questions were further heightened in the COP’s January report, which raised similar questions about Treasury’s strategy for TARP. In response to our recommendation about its communication strategy, Treasury noted numerous publicly available reports, testimonies, and speeches. However, even after reviewing these items collectively, we found that Treasury’s strategic vision for TARP remained unclear. For example, Treasury initially outlined a strategy to purchase whole loans and mortgage-backed securities from financial institutions, but changed direction to make capital investments in qualifying financial institutions as the global community opted to move in this direction. However, once Treasury determined that capital infusions were preferable to purchasing whole mortgages and mortgage-backed securities, it did not clearly articulate how the various programs—including CPP, the Systemically Significant Failing Institutions Program (SSFI) , and the Targeted Investment Program (TIP)—would work collectively to help stabilize financial markets. For instance, Treasury has used similar approaches—capital infusions—to stabilize healthy institutions under CPP as well as SSFI and TIP, albeit with more stringent requirements. Moreover, with the exception of institutions selected for TIP being viewed as able to raise private capital, both SSFI and TIP share similar selection criteria. Treasury also created the Auto Industry Financing Program in December 2008 to prevent a disruption of the domestic automotive industry that would pose systemic risk to the nation’s economy and provided loans to two auto companies and two financing companies that, among other business lines, provide consumer automotive loans. Further, the same institution may be eligible for multiple programs. At least two institutions (Citigroup and Bank of America) currently participate in more than one program, adding to the confusion about Treasury’s strategy and vision for implementing TARP. Other actions also have raised additional questions about Treasury’s strategy. For example, Treasury announced the first institution under TIP weeks before the program was established. Similarly, the Asset Guarantee Program was established after Treasury announced that it would guarantee assets under such a program, but many of the details of the program have yet to be worked out. Since our January report, Treasury has taken three key actions related to our recommendation about the need for a clearly articulated vision for the program. First, on February 10, Treasury announced the Financial Stability Plan, which outlined a set of measures to address the financial crisis and restore confidence in U.S. financial and housing markets. The plan appears to be an approach designed to resolve the credit crisis by restarting the flow of credit to consumers and businesses, strengthening financial institutions, and providing aid to homeowners and small businesses. Next, on February 25, Treasury provided the standardized terms and conditions for eligible financial institutions participating in the Capital Assistance Program (CAP). Under CAP, an eligible institution that is found by its primary banking regulator to need additional capital to continue lending and absorb losses in a severe economic downturn will be eligible to participate in CAP.[9] Such institutions will be eligible to receive a capital investment from Treasury in the form of preferred securities that can be converted into common equity to help absorb losses and serve as a bridge to receiving private capital. A key element of Treasury’s Financial Stability Plan, CAP is designed to ensure that, in severe economic conditions, the largest U.S. bank holding companies have sufficient capital to support lending to creditworthy homeowners and businesses. As part of this effort, the federal banking regulators—the Board of Governors of

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the Federal Reserve System, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Office of Thrift Supervision— announced that they will begin conducting a one-time forward-looking capital assessment (or stress test) of the balance sheets of the 19 largest bank holding companies with assets exceeding $100 billion. These institutions are required to participate in the coordinated supervisory capital assessment and may obtain additional capital from CAP if necessary.[10] Regulators noted that the capital assessment process for all eligible institutions was expected to be completed by April 30, 2009. In addition, on March 4, 2009, Treasury unveiled its Making Home Affordable program, which is based in part on the use of TARP funds. Among other things, the plan is designed to do the following: •

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•

•

It will use $75 billion to modify the loans of up to 3-4 million homeowners to avoid potential foreclosure. The goal of modifying the mortgages of these homeowners is to reduce the amount owed per month to sustainable levels (a mortgage debt-toincome ratio of 31 percent). Treasury will share the cost of restructuring the mortgages with the other stakeholders (e.g., financial institutions holding whole loans or investors if loans have been securitized). Treasury announced a series of financial incentives for the loan servicers, mortgage holders/investors, and borrowers that are intended to “pay for success,” encourage borrowers to continue paying on time under the modified loan, and encourage servicers and mortgage holders/investors to modify at-risk loans before the borrower falls behind on a payment. It includes an initiative to help up to 4-5 million homeowners to refinance loans that are owned or guaranteed by Freddie Mac and Fannie Mae at current market rates. According to Treasury, these homeowners would not otherwise be able to refinance their loans at the conforming loan rates because the declining value of their homes has left them with little or no equity. Refinancing at current mortgage rates could help homeowners save thousands of dollars in their annual mortgage payments. It increases Treasury’s funding commitment to Fannie Mae and Freddie Mac to ensure the strength and security of the mortgage market and to help maintain mortgage affordability. The $200 billion funding commitment is based on authority granted to Treasury under the Housing and Economic Recovery Act of 2008.[11]

We will continue to monitor the development and implementation of Treasury’s plan, including how its actions address the challenges we have previously identified.[12]

Efforts to Establish a Management Structure for TARP, including a System of Internal Control, Are Ongoing Treasury has made progress in establishing its management infrastructure for TARP. However, its development of a system of internal control is still evolving, hiring for OFS is still ongoing, and Treasury is working to improve its oversight of contractors.

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Richard J. Hillman •

•

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•

OFS has adopted a framework for developing and implementing its system of internal control for TARP activities. OFS plans to use this framework to develop specific policies, drive communications on expectations, and measure compliance with internal control standards and policies. However, OFS has yet to develop comprehensive written policies and procedures governing TARP activities or implement a disciplined risk- assessment process. In the hiring area, Treasury took steps to help maintain continuity of leadership within OFS during and after the transition to the new administration. Specifically, Treasury ensured that interim chief positions would be filled to ensure a smooth transition and used direct-hire authority and various other appointments to bring a number of career staff on board quickly. OFS has increased its overall staff since our December 2008 report from 48 to 90 employees as of January 26, which includes an increase of permanent staff from 5 to 38. Treasury officials recently told us that the number of permanent staff had increased to 60. While progress has been made since our last report, the number of temporary and contract staff who will be needed to serve long-term organizational needs remains unknown. Because TARP has added many new programs since it was first established in October and program activities are changing under the new administration, we recognize that Treasury may find it difficult to determine OFS’s long-term organizational needs at this time. However, such considerations will be vital to retaining institutional knowledge in the organization. Treasury’s use of existing contract flexibilities has enabled it to enter into agreements and award contracts quickly in support of TARP. However, Treasury’s use of timeand-materials contracts, although authorized when flexibility is needed, can increase the risk that government dollars will be wasted unless adequate mechanisms are in place to oversee contractor performance. Although Treasury has improved its oversight of contractors, the department itself has identified both certification of its Contracting Officer Technical Representatives and its use of time-and- materials pricing as high-risk issues that still need attention. In addition, while Treasury has taken the important step of recently issuing an interim regulation outlining the process for reviewing and addressing conflicts of interest among new contractors and financial agents, it is still reviewing existing contracts or agreements to ensure conformity with the new regulation. We believe this step is a necessary component of a comprehensive and complete system to ensure that all conflicts are fully identified and appropriately addressed.

In each of these areas, we made additional recommendations. Specifically, we recommended that Treasury, in addition to developing a comprehensive system of internal controls, develop and implement a well- defined and disciplined risk-assessment process, because such a process is essential to monitoring the status of TARP programs and identifying any risks that announced programs will not be adequately funded. We also recommended that Treasury continue to expeditiously hire personnel needed to carry out and oversee TARP. For contracting oversight, we recommended that Treasury expedite efforts to ensure that sufficient personnel are assigned and properly trained to oversee the performance of all contractors, especially for contracts priced on a time-and-materials basis, and move toward fixed-price arrangements whenever possible as program requirements are better

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defined over time. We also recommended that Treasury review and renegotiate existing conflict-of-interest mitigation plans, as necessary, to enhance specificity and conformity with the new interim conflicts of interest regulation and that it take continued steps to manage and monitor conflicts-of-interest and enforce mitigation plans. We will continue to monitor OFS’s implementation of the internal control framework and hiring and contracting practices, both of which are vital to TARP’s effectiveness. Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity to discuss these critically important issues and would be happy to answer any questions that you may have.

REFERENCES [1]

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[2]

[3] [4]

[5]

GAO, Troubled Asset Relief Program: Status of Efforts to Address Transparency and Accountability Issues, GAO-09-296 (Washington D.C.: Jan. 30, 2009) and Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency, GAO-09-161 (Washington, D.C.: Dec. 2, 2008). Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, 122 Stat. 3765. The act requires the U.S. Comptroller General to report at least every 60 days, as appropriate, on findings resulting from oversight of TARP’s performance in meeting the act’s purposes; the financial condition and internal controls of TARP, its representatives, and agents; the characteristics of asset purchases and the disposition of acquired assets, including any related commitments entered into; TARP’s efficiency in using the funds appropriated for its operations; its compliance with applicable laws and regulations; and its efforts to prevent, identify, and minimize conflicts of interest among those involved in its operations. Information is current as of January 23, 2009, unless otherwise noted in the statement. Call reports are quarterly reports that collect basic financial data of commercial banks in the form of a balance sheet and income statement (formally known as Report of Condition and Income). Through December 31, 2008, TARP capital purchases and loans totaled $247 billion. The Congressional Budget Office (CBO) estimated the subsidy cost for these transactions at $64 billion, or 26 percent, using valuation procedures similar to those specified in the Federal Credit Reform Act and adjusted for market risk as specified in the Emergency Economic Stabilization Act. See Congressional Budget Office, The Troubled Asset Relief Program: Report on Transactions Through December 31, 2008 (Jan. 2009). COP estimated the subsidy cost at $78 billion, or 31 percent, using multiple valuation methods and an evaluation of similar private transactions. See Congressional Oversight Panel, February Oversight Report: Valuing Treasury’s Acquisitions (Feb. 6, 2009). In connection with our audit of TARP’s financial statements, we will be evaluating and testing the credit subsidy model that TARP uses to value capital purchases and loans for financial reporting purposes.

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While Treasury approved $125 billion to the nine largest institutions, it initially disbursed funds to eight. The $10 billion to Merrill Lynch was not disbursed until January 9, 2009, after its merger with Bank of America was completed. [7] CDFIs are specialized financial institution working in market niches that are underserved by traditional financial institutions. CDFIs provide a range of financial products and services such as mortgage financing for low-income and first-time homebuyers and not-forprofit developers; flexible underwriting and risk capital for needed community facilities; and technical assistance, commercial loans and investments to small start-up or expanding businesses in low-income areas. [8] Pub. L. No. 111-5, div. B, title VII, § 7001 (Feb. 17, 2009) (amending section 111 of EESA). [9] According to Treasury and the federal banking regulators, eligibility will be consistent with the criteria and deliberative process that has been established for identifying qualified financial institutions in the existing CPP. [10] Eligible institutions with less than $100 billion in risk-weighted assets are also eligible to participate in CAP. Risk-weighted assets are the total of all assets held by the bank that are weighted for credit risk according to a formula established in regulation by the Federal Reserve. [11] Pub. L. No. 110-289, 122 Stat. 2654 (2008). [12] See GAO, Troubled Asset Relief Program: Status of Efforts to Address Defaults and Foreclosures in Home Mortages, GAO-09-231T (Washington, D.C.: Dec. 4, 2008) for a discussion of challenges facing loan modification programs.

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[6]

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INDEX

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A AAA, 44, 62, 65, 99 Abu Dhabi, 197, 210, 212, 216, 221 academic, 216, 256 academics, 4, 95, 276 access, vii, 9, 41, 46, 51, 52, 61, 67, 70, 71, 78, 97, 98, 99, 105, 106, 107, 114, 118, 123, 129, 137, 142, 159, 164, 200, 201, 212, 228, 248, 268, 271, 274, 276, 316 accessibility, 44 accountability, 2, 4, 55, 59, 62, 64, 138, 143, 148, 185, 190, 192, 194, 203, 205, 207, 247, 248, 249, 251, 252, 265, 291, 302, 304, 336, 337, 338, 346, 347, 349, 350, 356, 357, 359 accounting, 2, 9, 60, 88, 92, 122, 123, 292, 293, 294 accuracy, 56, 167 achievement, 291 acquisitions, 63, 97, 98, 99, 104, 134, 143, 186, 266 actuarial, 276 ad hoc, 190 adjustment, 163, 214 administration, 4, 5, 39, 69, 92, 142, 189, 191, 202, 242, 249, 252, 255, 256, 275, 277, 278, 279, 282, 302, 303, 332, 335, 337, 340, 346, 347, 351, 357, 362 administrative, 275, 276, 281, 290, 327, 329 advertisement, 285 advertising, 75, 139, 149, 154, 171 advocacy, 39, 203 AEP, 107 African-American, 75 afternoon, 86, 95, 111 agent, 288 agents, vii, 183, 254, 258, 275, 279, 282, 289, 290, 304, 316, 327, 341, 342, 351, 353, 362, 363 aid, 74, 113, 177, 203, 216, 287, 350, 360

Airlines, 107 Alabama, 312 allies, 191 alternative, 46, 112, 191, 203, 219, 268, 271, 273, 276, 293, 329 alternatives, 3, 163, 248 ambiguity, 97, 106 amendments, 76, 222, 228, 256, 272, 331, 359 American Express, 312 amortization, 163, 175, 315 AMR, 106 analysts, 302, 339, 345, 349, 355, 359 anger, 62, 76, 117, 122 annual rate, 68, 71, 159, 271, 273 antitrust, 234, 239 antitrust laws, 234, 239 anxiety, 51 appendix, 306 appetite, 99, 153 application, 10, 53, 54, 63, 212, 242, 263, 269, 289, 300, 333 appraisals, 112 arrest, 65 arteries, 121 articulation, 207 Asia, 169 assessment, 2, 11, 60, 63, 80, 85, 113, 199, 214, 219, 220, 221, 253, 291, 292, 293, 301, 304, 305, 336, 337, 347, 348, 357, 361, 362 assets, vii, 2, 3, 5, 6, 44, 47, 50, 52, 54, 55, 59, 60, 61, 62, 68, 69, 71, 73, 81, 82, 86, 87, 91, 98, 99, 100, 101, 102, 109, 114, 122, 123, 125, 133, 134, 142, 154, 156, 168, 169, 171, 174, 191, 193, 194, 195, 201, 202, 215, 223, 227, 235, 241, 242, 244, 249, 254, 256, 258, 259, 261, 262, 271, 273, 274, 275, 276, 277, 288, 295, 296, 297, 301, 303, 308, 314, 326, 327, 328, 330, 331, 333, 335, 336, 338,

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340, 342, 345, 346, 349, 350, 353, 355, 356, 358, 360, 361, 363, 364 assumptions, 41, 88, 91, 121, 167, 212, 213, 215, 238 Attorney General, 239, 243, 258 attractiveness, 220 auditing, 257, 330, 336, 345, 346, 355, 356 authority, 1, 2, 3, 4, 10, 40, 47, 55, 81, 82, 113, 185, 189, 190, 200, 203, 227, 235, 237, 239, 242, 243, 244, 247, 248, 252, 258, 274, 276, 280, 287, 290, 291, 292, 331, 335, 345, 351, 353, 355, 361, 362 availability, 41, 44, 52, 74, 75, 85, 95, 105, 108, 156, 205, 274, 294, 300 averaging, 79 aversion, 297 aviation, 359 avoidance, 171 awareness, 243

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B backfire, 93 backlash, 112 bail, 74 bail-out, 74 balance sheet, 2, 50, 60, 61, 70, 85, 86, 91, 92, 97, 113, 118, 122, 123, 126, 138, 139, 156, 159, 168, 201, 202, 249, 277, 295, 342, 353, 361, 363 bank account, 190, 207 bank debt, 296 bank failure, 51 Bank of America, 98, 99, 101, 105, 106, 107, 108, 137, 138, 139, 195, 197, 201, 202, 209, 211, 217, 218, 220, 226, 227, 230, 233, 242, 252, 255, 261, 262, 274, 277, 296, 305, 308, 312, 328, 331, 336, 338, 340, 343, 346, 348, 350, 353, 356, 358, 360, 364 bankers, 73, 94, 112, 139, 182 banking, 8, 10, 11, 50, 54, 56, 59, 61, 62, 63, 68, 70, 73, 75, 76, 86, 88, 93, 94, 96, 99, 102, 112, 114, 123, 129, 141, 169, 170, 181, 228, 255, 257, 262, 263, 264, 266, 297, 305, 314, 316, 330, 335, 338, 345, 349, 355, 358, 360, 364 Banking Committee, 113, 189 banking department, 8 banking industry, 10, 86, 88, 94, 112 bankruptcy, 5, 68, 69, 84, 128, 158, 179, 199, 205, 206, 214, 215, 316 banks, 2, 3, 6, 7, 8, 9, 10, 45, 47, 48, 49, 50, 51, 53, 54, 55, 59, 60, 61, 63, 65, 67, 68, 69, 70, 71, 74, 75, 76, 78, 79, 81, 83, 84, 85, 86, 87, 88, 91, 92, 93, 94, 95, 96, 97, 98, 99, 100, 101, 102, 103, 104, 109, 111, 112, 113, 114, 125, 126, 127, 133,

134, 139, 141, 142, 155, 159, 177, 178, 179, 186, 191, 194, 195, 198, 199, 200, 205, 206, 209, 219, 220, 223, 225, 228, 229, 232, 241, 242, 257, 258, 261, 262, 265, 292, 295, 296, 297, 300, 301, 305, 328, 342, 346, 349, 353, 356, 359, 363 basic needs, 51 basis points, 7, 47, 48, 80, 201, 297, 298, 300, 330 BBB, 107, 108 beating, 85 behavior, 41, 69, 102, 185, 186 benchmark, 46, 49, 53, 155, 210, 216, 219, 221, 231, 353 benchmarks, 2, 123, 194, 258 beneficial effect, 295 benefits, 4, 11, 100, 125, 169, 181, 189, 248, 252, 273 binding, 329 bipartisan, 64, 244 blame, 122 blogs, 232 Board of Governors, 55, 81, 255, 352, 360 bond market, 99 bondholders, 62 bonds, 98, 213, 277, 298, 304, 333, 337, 348 bonus, 120, 123, 128, 146, 166, 267, 269, 272, 273, 329, 330 borrowers, 8, 46, 47, 49, 50, 52, 53, 60, 62, 64, 70, 75, 77, 78, 79, 82, 86, 92, 97, 98, 99, 101, 102, 127, 128, 134, 148, 150, 152, 155, 156, 158, 159, 160, 161, 162, 163, 164, 171, 175, 219, 237, 259, 265, 274, 275, 296, 300, 301, 315, 316, 333, 361 borrowing, 41, 49, 50, 79, 80, 82, 85, 87, 96, 103, 107, 108, 113, 114, 134, 151, 152, 153, 158, 159, 237, 271, 295, 296 Boston, 165, 309 Brazil, 169 breathing, 112 broad spectrum, 38 brokerage, 142, 169 Brooklyn, 79, 165 bubble, 2, 39, 67, 69, 70, 71, 85, 94 budget resolution, 234 buffer, 61, 62 bundling, 61 Bureau of Economic Analysis, 159 Bush Administration, 57 business model, 133, 134, 142, 144, 145, 177 buyer, 153, 213, 217

C campaigns, 139 candidates, 212, 252, 277, 280, 281

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Index CAP, 61, 360, 364 capacity, 48, 49, 63, 79, 81, 85, 86, 92, 96, 102, 103, 122, 137, 143, 228, 280, 316, 333 capital accumulation, 85 capital cost, 78 capital expenditure, 97, 104 capital markets, 10, 92, 97, 106, 107, 118, 126, 138, 145, 196, 213, 218, 249, 295 cash flow, 154, 214, 275, 293, 295, 333 catalyst, 123 categorization, 280 category a, 158 causality, 327 CCC, 164, 165 central bank, 45 Central Bank, 44, 45 CEO, 73, 93, 117, 133, 145, 146, 148, 164, 181 certification, 78, 144, 201, 266, 267, 273, 288, 304, 341, 351, 362 certifications, 201, 227, 267, 273, 329 Chad, 239 Chrysler, 5, 179, 201, 226, 230, 233, 268, 270, 330 citizens, 39, 64, 142, 203 classes, 52, 62, 82, 86, 100, 213, 274, 329 classification, 331 cleaning, 59 clients, 118, 119, 120, 126, 129, 135, 145, 146, 149, 152, 156, 157, 158, 164, 177 collaboration, 59, 63, 114, 265, 275 collateral, 44, 50, 70, 92, 99, 155, 156, 268, 271, 274, 275, 277, 331 Colorado, 181 Columbia, 309 commerce, 235 commercial bank, 68, 87, 92, 93, 94, 118, 142, 158, 169, 301, 342, 353, 363 Committee of Sponsoring Organizations of the Treadway Commission, 332 Committee on Appropriations, 306 commodity, 118 communication, 123, 261, 291, 294, 302, 303, 339, 340, 350, 360 communities, 11, 49, 50, 51, 54, 55, 63, 65, 74, 75, 77, 78, 79, 81, 96, 104, 126, 138, 144, 147, 149, 155, 163, 164, 165, 167, 177, 181, 259 community, 49, 51, 65, 73, 74, 75, 76, 77, 78, 81, 82, 83, 87, 114, 138, 139, 163, 164, 165, 181, 206, 221, 262, 275, 303, 327, 328, 338, 339, 343, 349, 350, 353, 358, 360, 364 community support, 139 compensation, 10, 45, 53, 55, 64, 69, 74, 76, 82, 88, 102, 119, 120, 122, 123, 128, 134, 139, 141, 143, 144, 146, 149, 166, 167, 182, 186, 190, 201, 206,

369

226, 227, 228, 235, 239, 242, 243, 251, 255, 266, 267, 268, 269, 270, 272, 273, 274, 275, 302, 328, 329, 331, 337, 339, 347, 349, 357, 359 compensation package, 69 competence, 279 competition, 96, 102, 244, 282, 287, 332 compilation, 87 complement, 47, 49, 248, 280, 292 complexity, 122 compliance, vii, 40, 41, 53, 128, 142, 242, 248, 254, 255, 263, 266, 267, 270, 273, 281, 290, 294, 302, 304, 330, 331, 336, 337, 338, 339, 341, 342, 346, 347, 349, 351, 353, 356, 357, 358, 359, 362, 363 complications, 281 components, 350 Comptroller of the Currency, 57, 59, 254, 255, 275, 361 compulsion, 213 conception, 190, 248 confidence, 2, 3, 5, 8, 44, 48, 49, 50, 54, 59, 60, 76, 113, 117, 125, 127, 129, 134, 135, 139, 145, 146, 150, 153, 156, 186, 187, 194, 202, 223, 249, 258, 268, 271, 272, 276, 277, 295, 296, 297, 346, 350, 356, 360 confidentiality, 290 conflict, 244, 280, 286, 289, 290, 305, 337, 341, 347, 352, 357, 363 conflict of interest, 244, 290, 337, 347 conformity, 289, 304, 305, 337, 341, 347, 351, 352, 357, 362, 363 confusion, 6, 91, 186, 303, 340, 350, 360 Congress, 1, 3, 4, 5, 6, 7, 40, 41, 47, 48, 55, 68, 69, 71, 73, 76, 81, 84, 85, 91, 92, 93, 112, 114, 120, 125, 129, 134, 135, 144, 147, 153, 177, 178, 179, 185, 187, 189, 190, 194, 195, 200, 203, 204, 205, 206, 207, 212, 241, 242, 244, 245, 247, 248, 252, 257, 259, 261, 270, 276, 280, 302, 327, 337, 339, 347, 350, 357, 360 Congressional Budget Office, 196, 212, 231, 234, 327, 363 Connecticut, 311 consensus, 40 consent, 91, 271, 272 consolidation, 163 constitution, 311 constraints, 59, 65 construction, 69, 70, 104, 165 consultants, 11, 288 consulting, 84, 94, 331 consumer goods, 158 consumers, 8, 10, 39, 40, 41, 45, 48, 49, 50, 51, 54, 56, 62, 63, 69, 74, 75, 83, 93, 114, 117, 118, 125, 126, 127, 133, 134, 137, 146, 147, 154, 162, 163,

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Index

164, 169, 170, 177, 204, 227, 256, 266, 274, 295, 296, 299, 329, 350, 360 consumption, 69, 70, 127, 162, 333 contingency, 11 continuity, 278, 279, 340, 351, 362 contractors, 252, 253, 255, 256, 279, 282, 286, 287, 288, 289, 290, 303, 305, 335, 336, 340, 341, 346, 347, 351, 352, 356, 357, 361, 362 contracts, 64, 120, 146, 200, 222, 242, 253, 256, 282, 286, 287, 288, 290, 303, 305, 332, 335, 336, 337, 341, 346, 347, 348, 351, 352, 356, 357, 358, 362 control, 3, 94, 100, 122, 168, 242, 252, 253, 284, 286, 290, 291, 292, 293, 294, 304, 305, 332, 335, 336, 337, 340, 341, 346, 347, 348, 351, 352, 357, 359, 361, 362, 363 conversion, 61, 329 Cook County, 111 cooling, 99 COP, 1, 4, 10, 11, 38, 39, 40, 207, 253, 257, 258, 275, 339, 345, 355, 363 corporate average fuel economy, 268 corporate finance, 220 corporate governance, 45, 76, 167, 270, 273, 359 corporations, 71, 81, 82, 118, 126, 134, 150, 157, 221, 263, 293, 329 correlation, 120 cost accounting, 9 cost of equity, 85 cost-benefit analysis, 219 costs, 4, 11, 51, 74, 78, 79, 82, 114, 146, 151, 155, 168, 170, 175, 189, 198, 231, 233, 234, 235, 237, 238, 248, 253, 273, 286, 288, 295, 296, 337, 348, 358 counsel, 220, 232 counseling, 164, 165, 316, 327 coverage, 45, 125, 237, 238, 242 covering, 277, 330 credibility, 200 credit card, 3, 9, 44, 51, 52, 62, 70, 101, 126, 128, 133, 141, 153, 155, 159, 162, 169, 171, 266, 274, 276 credit market, 6, 47, 51, 52, 63, 76, 86, 93, 105, 106, 107, 108, 127, 134, 171, 177, 200, 258, 268, 270, 295, 296, 297, 298, 300, 304, 342, 352 credit rating, 97, 105, 106, 108, 119, 122, 182 credit squeeze, 70 credit unions, 55, 81, 264 creditors, 46, 69, 102, 231, 270, 329 criminal activity, 243 critical infrastructure, 133 criticism, 223 culture, 278, 280, 291 currency, 45

current account, 163 customers, 2, 9, 73, 78, 80, 97, 106, 125, 126, 137, 138, 142, 143, 144, 149, 152, 156, 161, 163, 167, 169, 171, 181, 182, 183, 201, 213, 295, 300, 328

D danger, 2, 70, 194 database, 104 deaths, 77 debentures, 82, 134 debt, 44, 45, 46, 52, 62, 64, 75, 78, 82, 85, 91, 93, 94, 98, 99, 102, 105, 106, 107, 108, 122, 126, 134, 145, 146, 150, 155, 157, 162, 175, 179, 196, 201, 213, 214, 215, 226, 228, 230, 239, 253, 264, 268, 271, 273, 276, 295, 296, 298, 299, 301, 304, 315, 316, 328, 329, 330, 333, 337, 342, 348, 352, 361 debts, 152 decision-making process, 1, 6 decisions, 10, 71, 139, 148, 166, 172, 196, 265, 291, 293, 305 deduction, 267 deficit, 196 deficits, 234 definition, 10, 55, 244, 269 delinquency, 148, 150, 162, 171, 174, 175 delivery, 79, 120, 123, 254, 286, 287 demand, 41, 59, 69, 70, 78, 80, 81, 82, 86, 87, 93, 94, 97, 127, 137, 143, 151, 153, 156, 158, 164, 298, 300 Department of Agriculture, 78 Department of Defense, 244 Department of Housing and Urban Development (HUD), 39, 57, 254, 316, 327 Department of Justice, 243 deposits, 45, 68, 86, 92, 96, 103, 156, 169, 234, 237, 238, 330 depressed, 7 derivatives, 123 designers, 79 desire, 75, 123, 145, 146, 172, 175, 211, 316 destruction, 71 detection, 290 direct cost, 239 direct investment, 6 direct measure, 8 directives, 91, 235 Director of National Intelligence, 244 discipline, 60, 122 disclosure, 60, 64, 123, 200 discount rate, 214, 215, 296 Discounted Cash Flow, 214

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Index discounting, 214 discounts, 216, 218, 248, 287 Discover, 169 discretionary, 120, 123 discrimination, 77, 82 dislocation, 108, 205, 206 disposable income, 159 disposition, 254, 274, 342, 353, 363 distress, 161 distribution, 45, 121, 123 divergence, 70 dividends, 10, 53, 63, 68, 69, 92, 125, 134, 138, 143, 146, 148, 150, 154, 182, 185, 186, 206, 214, 215, 222, 223, 224, 225, 226, 228, 230, 263, 264, 269, 271, 273, 293, 294, 302, 304, 328, 330, 336, 339, 346, 349, 356, 359 division, 119, 281 doors, 96, 98, 103, 112 draft, 305 drying, 78 duration, 127 duties, 42, 207, 288

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E earnings, 50, 106, 120, 142, 149, 154, 170, 230, 267, 269 Eastern Europe, 169 economic activity, 69, 155, 258, 297 economic crisis, 2, 38, 74, 76, 185, 186, 191 economic development, 77 Economic Development Administration, 78 economic fundamentals, 299 economic growth, 4, 40, 49, 51, 55, 99, 123, 182, 185, 186, 203, 206 economic indicator, 41 economic performance, 268, 271 economic policy, 54 economic problem, 129 economic stability, 5 economically disadvantaged, 256 economics, 94, 226 education, 153, 164, 165 election, 328 eligibility criteria, 162 eligibility standards, 5 emerging markets, 122 employee compensation, 143 employees, 51, 97, 106, 112, 128, 144, 157, 158, 164, 165, 166, 167, 186, 213, 244, 253, 259, 269, 272, 273, 278, 279, 280, 282, 289, 290, 330, 332, 337, 340, 347, 351, 357, 362 employers, 157

employment, 120, 174, 253, 268, 269, 281, 290, 332 employment status, 174 empowered, 40, 203 enterprise, 97, 109, 254, 296 entertainment, 331, 359 entrepreneurs, 65, 79, 117 entrepreneurship, 79 environment, 41, 61, 63, 68, 70, 75, 78, 96, 102, 106, 108, 119, 126, 127, 128, 133, 135, 139, 142, 148, 159, 162, 166, 251, 291, 292, 293 environmental sustainability, 138 equity, 2, 3, 5, 9, 45, 47, 51, 60, 61, 69, 70, 78, 84, 85, 86, 91, 93, 96, 101, 102, 103, 120, 123, 126, 138, 142, 145, 146, 150, 154, 157, 167, 191, 198, 199, 203, 213, 216, 224, 225, 226, 228, 229, 254, 263, 264, 266, 273, 288, 293, 296, 328, 360, 361 equity market, 9, 51 estimating, 214 ethics, 227, 272, 281, 290 evolution, 257, 281 examinations, 264 execution, 1, 54, 194, 222, 233, 294 exercise, 1, 4, 42, 55, 120, 123, 185, 215, 219, 221, 222, 224, 225, 227, 228, 229, 231, 248, 258, 263, 269, 271, 328 expansions, 87 expenditures, 106, 195, 200, 273, 331, 359 expertise, 96, 278, 279, 281, 345, 355 exposure, 105, 106, 108, 118, 120, 122, 159, 243, 270, 297

F failure, 2, 7, 8, 46, 48, 68, 74, 97, 199, 210, 220, 223, 228, 249, 270, 271, 275, 295 fairness, 69 faith, 113, 146, 150, 161 family, 51, 190, 237, 248, 289, 297 family members, 289 Fannie Mae, 8, 46, 48, 52, 53, 68, 83, 94, 128, 151, 152, 175, 255, 275, 296, 316, 333, 350, 353, 361 farmers, 93, 165, 177 FBI, 243, 244 fear, 84, 112, 121 February, 39, 61, 64, 71, 74, 82, 87, 109, 113, 117, 121, 125, 131, 133, 137, 141, 145, 147, 148, 149, 151, 160, 173, 174, 177, 179, 181, 189, 190, 193, 194, 201, 208, 244, 247, 248, 249, 258, 259, 263, 268, 275, 293, 335, 345, 346, 348, 350, 358, 360, 363 federal budget, 237 Federal Deposit Insurance Corporation (FDIC), 3, 8, 43, 45, 47, 49, 54, 56, 59, 60, 61, 64, 68, 71, 85,

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Index

86, 91, 101, 114, 144, 154, 173, 174, 187, 201, 213, 230, 233, 234, 236, 237, 238, 239, 241, 242, 244, 253, 255, 265, 278, 295, 296, 305, 315, 316, 327, 329, 333, 342, 352, 361 Federal Family Education Loan, 153 federal funds, 155, 269, 296, 301 federal government, 38, 51, 56, 78, 126, 139, 179, 199, 249, 278, 282 Federal Home Loan Banks, 92, 333 Federal Housing Administration (FHA), 46, 57, 64, 237, 253, 255, 300, 315, 316 Federal Register, 289 Federal Reserve, 43, 44, 45, 47, 49, 52, 54, 55, 59, 60, 61, 62, 64, 67, 71, 78, 81, 82, 83, 87, 92, 93, 103, 104, 109, 114, 123, 144, 155, 159, 173, 174, 199, 201, 205, 213, 223, 227, 230, 233, 241, 242, 243, 254, 255, 257, 258, 265, 269, 271, 274, 275, 278, 295, 296, 298, 299, 300, 301, 304, 305, 327, 329, 330, 333, 342, 352, 361, 364 Federal Reserve Bank, 44, 174, 199, 213, 227, 254, 271, 330 Federal Reserve Board, 67, 71, 78, 103, 104, 173, 223, 227, 271 Federal Trade Commission, 239 fee, 283 fees, 99, 175 feet, 135, 165 finance, 5, 6, 43, 44, 45, 49, 52, 65, 67, 79, 83, 85, 92, 94, 111, 112, 121, 122, 142, 151, 152, 169, 232, 270, 274, 330 financial crisis, 4, 7, 11, 39, 41, 48, 50, 59, 65, 67, 85, 97, 114, 122, 129, 134, 179, 185, 202, 221, 247, 335, 345, 346, 347, 350, 355, 356, 357, 360 financial difficulty, 148, 162 financial distress, 148, 196 financial intermediaries, 85, 93 financial loss, 146, 160 financial markets, vii, 3, 4, 5, 6, 7, 10, 39, 40, 43, 44, 45, 51, 54, 60, 81, 97, 105, 107, 120, 123, 127, 129, 133, 134, 142, 144, 146, 159, 177, 189, 190, 203, 213, 219, 247, 248, 251, 252, 254, 256, 257, 258, 261, 270, 271, 272, 296, 301, 302, 303, 336, 337, 339, 340, 346, 347, 350, 356, 357, 360 financial performance, 166 financial regulation, 95, 114 financial sector, 51, 87, 93, 258 financial stability, 3, 50, 54, 63, 95, 100, 265, 296, 297, 346, 356 financial support, 164, 327 financial system, 3, 4, 7, 8, 9, 10, 11, 40, 41, 43, 47, 48, 49, 50, 51, 53, 54, 55, 69, 71, 76, 81, 82, 94, 97, 99, 102, 109, 113, 114, 117, 118, 121, 122, 123, 125, 128, 129, 134, 141, 142, 143, 145, 148,

150, 154, 155, 171, 172, 177, 178, 186, 199, 204, 206, 212, 247, 248, 249, 259, 262, 270, 327, 338, 349, 358 financing, 2, 48, 51, 52, 61, 62, 78, 79, 80, 81, 95, 112, 114, 118, 133, 142, 157, 158, 219, 226, 265, 268, 328, 340, 343, 350, 353, 360, 364 firms, 8, 9, 41, 61, 62, 63, 93, 95, 96, 97, 98, 99, 101, 103, 109, 118, 178, 201, 206, 211, 212, 219, 273, 286, 288, 290 first-time, 328, 343, 353, 364 fiscal policy, 295 fish, 131 fixed rate, 151, 175, 223 flexibility, 47, 105, 106, 107, 108, 190, 244, 276, 277, 282, 286, 287, 303, 341, 351, 362 flow, 8, 11, 45, 46, 49, 50, 51, 52, 54, 56, 62, 67, 69, 86, 113, 118, 125, 133, 134, 135, 143, 147, 150, 151, 152, 154, 155, 156, 170, 171, 172, 173, 206, 227, 265, 266, 293, 301, 329, 333, 350, 360 fluctuations, 46, 52, 216 fluid, 190 focusing, 62, 94 food, 111, 165 Ford, 330 foreclosure, 3, 4, 8, 38, 40, 46, 49, 52, 53, 63, 64, 127, 128, 131, 138, 148, 150, 160, 161, 163, 164, 165, 175, 182, 187, 189, 191, 202, 203, 205, 206, 207, 235, 248, 249, 258, 274, 297, 301, 315, 316, 333, 347, 350, 361 foreign exchange, 45, 142 fragility, 120 franchise, 125, 169 fraud, 191, 203, 241, 243, 258, 290, 315 Freddie Mac, 8, 46, 48, 52, 53, 56, 68, 83, 94, 128, 151, 152, 255, 275, 296, 316, 333, 350, 353, 361 freezing, 47, 71 frustration, 62, 65 full capacity, 280 funding, 2, 5, 8, 44, 45, 47, 63, 77, 81, 82, 85, 86, 96, 97, 101, 111, 114, 134, 139, 147, 151, 153, 157, 158, 186, 187, 200, 207, 235, 244, 258, 259, 262, 269, 284, 292, 295, 303, 305, 336, 341, 347, 352, 353, 361 furniture, 79

G gas, 162 gauge, 7, 47, 119, 265 GDP, 69, 87, 92 gene, 41 General Motors, 5, 97, 105, 179, 230, 254, 268 General Services Administration (GSA), 254, 285

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Index generalizations, 41 generation, 85 geography, 82 gift, 86 gifts, 289 global economy, 41, 121 global insight, 257, 298, 299, 300, 301 global markets, 146 goals, 1, 6, 7, 8, 134, 138, 146, 170, 173, 185, 189, 190, 191, 194, 195, 196, 245, 249, 261, 265, 266, 270, 272, 281, 293, 295, 299, 305 good faith, 150, 161 goods and services, 59, 153, 287 governance, 113, 167 government intervention, 199 grants, 164, 165 grapes, 177 Great Depression, 59 groups, 62, 75, 276, 292 growth, 4, 40, 49, 51, 55, 87, 99, 119, 120, 122, 123, 139, 154, 168, 169, 170, 182, 185, 186, 203, 206, 238, 278 growth rate, 120 guidance, 64, 95, 234, 235, 264, 267, 288, 290, 305, 335, 336, 346, 347, 356, 357 guidelines, 2, 49, 63, 64, 149, 151, 154, 167, 170, 173, 186, 194, 200, 201, 230, 256, 258, 261, 268, 270, 280, 289

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H hands, 213 hardships, 160 harm, 5, 259, 332 Harvard, 40, 94, 95, 97, 99, 108, 109, 204, 327 health, 2, 67, 82, 84, 96, 98, 102, 125, 137, 138, 139, 154, 170, 179, 181, 219, 227, 258 health care, 125, 181 hearing, 11, 38, 39, 42, 73, 84, 91, 111, 139, 180, 186, 187, 203, 207 heart, 74, 96, 123, 244 hedge funds, 98, 127, 177 hedging, 123 height, 134 Henry Paulson, 11, 43, 195 high-level, 278, 302 high-risk, 159, 286, 300, 304, 341, 351, 362 hiring, 244, 252, 255, 256, 280, 281, 288, 293, 303, 305, 335, 337, 340, 341, 346, 347, 351, 352, 357, 361, 362, 363 holding company, 5, 73, 91, 100, 108, 109, 264, 269, 314, 316, 329 Holland, 239

home ownership, 40, 41, 203, 205 home value, 4, 55, 93, 127, 161, 185 homeless, 165 homeowners, 3, 8, 46, 48, 49, 52, 53, 70, 84, 85, 113, 127, 128, 148, 150, 151, 160, 161, 163, 164, 183, 185, 187, 194, 200, 205, 206, 275, 315, 316, 350, 360, 361 Hong Kong, 169 horizon, 187 hospitality, 39 host, 102 house, 40, 67, 71, 73, 77, 84, 91, 95, 111, 117, 125, 133, 137, 141, 145, 147, 181, 204, 234, 241, 244, 247, 306, 307, 327, 330 household, 46, 49, 51, 53, 301, 315, 333 household income, 46, 49, 53 households, 44, 52, 137, 159, 296 housing, 3, 6, 7, 39, 41, 43, 46, 48, 49, 52, 53, 64, 67, 69, 70, 75, 77, 78, 85, 94, 114, 118, 126, 127, 134, 148, 150, 151, 152, 154, 159, 160, 163, 164, 165, 170, 172, 191, 202, 205, 206, 227, 235, 259, 266, 275, 296, 301, 316, 346, 350, 356, 360 Housing and Urban Development (HUD), 46, 78, 242, 254, 258, 278, 279, 316 human, 39, 41, 256, 279, 280, 281, 288, 294 human behavior, 41 human capital, 256, 280, 281 human resources, 279, 288, 294 humility, 139 Hurricane Andrew, 165 husband, 68

I Idaho, 313 identification, 281 Illinois, 111, 126, 312, 314 illiquid asset, 47, 61 implementation, vii, 47, 50, 51, 53, 187, 190, 202, 253, 254, 265, 269, 272, 282, 283, 288, 289, 290, 292, 294, 303, 304, 337, 340, 341, 342, 348, 350, 351, 352, 359, 361, 363 incentive, 92, 128, 129, 137, 139, 143, 144, 166, 224, 225, 237, 267, 286, 329 incentives, 162, 361 inclusion, 144, 222 income, 46, 49, 53, 78, 79, 81, 111, 118, 133, 142, 150, 153, 156, 159, 161, 165, 174, 238, 267, 315, 316, 328, 330, 333, 342, 343, 353, 361, 363, 364 income tax, 267, 328 incomes, 297 indebtedness, 329 independence, 122

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India, 169 Indiana, 310 indication, 219 indicators, 121, 252, 253, 255, 256, 295, 297, 301, 304, 327, 335, 337, 342, 346, 348, 352 indices, 122 indirect effect, 212 individual retirement account, 69 industrial, 75, 78, 87, 97, 158, 205, 333 industrial policy, 205 industrial production, 333 industry, 2, 5, 8, 10, 44, 49, 52, 63, 86, 88, 94, 112, 117, 120, 121, 122, 123, 128, 129, 139, 141, 144, 145, 146, 159, 162, 166, 169, 178, 179, 182, 187, 206, 216, 235, 237, 251, 254, 256, 268, 270, 277, 285, 294, 305, 332, 337, 340, 347, 350, 357, 360 inflation, 234, 237, 238 information sharing, 123 information technology, 279, 280, 294 infrastructure, 133, 135, 252, 290, 303, 340, 351, 361 infusions, 7, 101, 198, 201, 211, 248, 295, 302, 303, 304, 336, 339, 346, 349, 350, 356, 359, 360 initiation, 288 injection, 118 injections, 48, 190, 255, 257, 265, 296 innovation, 123 insight, 208, 272, 297 Inspector General, 62, 191, 203, 241, 244, 247, 248, 255, 258, 259, 265, 275, 305, 327, 345, 355 instability, 108, 143, 258 instruments, vii, 81, 122, 123, 146, 225, 254, 282, 329 insurance, 3, 10, 44, 45, 50, 55, 69, 71, 85, 94, 98, 106, 129, 234, 237, 238, 271, 272, 275, 276, 293, 296, 328, 330, 331 insurance companies, 55, 71, 98, 328 integrity, 186, 199, 304 intentions, 7, 164 interactions, 292 interbank market, 126, 253, 295, 304, 330, 337, 342, 348, 352 interdisciplinary, 345, 355 interest rates, 41, 62, 68, 77, 96, 97, 98, 103, 112, 114, 123, 151, 152, 155, 161, 296, 300, 301, 329 interim regulations, 266, 267 internal controls, vii, 252, 254, 255, 256, 279, 291, 293, 294, 303, 304, 305, 340, 341, 342, 351, 353, 356, 357, 362, 363 Internal Revenue Code, 85, 328 Internal Revenue Service, 243, 278 Internet, 164 interpretation, 10 intervention, 212, 219

interview, 280 interviews, 256 inventories, 87 investigations, 241, 247 investigative, 244 investment, 2, 50, 51, 53, 54, 61, 63, 64, 74, 76, 77, 79, 86, 88, 92, 93, 96, 97, 98, 99, 100, 102, 103, 104, 109, 113, 117, 118, 119, 120, 121, 122, 125, 126, 128, 133, 134, 135, 138, 139, 141, 142, 143, 145, 147, 148, 149, 150, 151, 153, 154, 168, 169, 170, 172, 173, 174, 182, 183, 185, 193, 195, 196, 197, 198, 199, 200, 202, 205, 209, 210, 211, 213, 215, 216, 217, 219, 220, 221, 222, 223, 224, 225, 226, 227, 229, 230, 231, 232, 233, 242, 262, 264, 271, 272, 275, 292, 329, 360 investment bank, 98, 99, 128, 133, 142 investors, 2, 3, 8, 44, 45, 46, 49, 52, 62, 96, 98, 102, 118, 121, 123, 127, 137, 138, 139, 141, 142, 143, 145, 146, 150, 153, 156, 159, 160, 161, 164, 167, 182, 197, 210, 215, 216, 218, 220, 231, 238, 270, 297, 316, 327, 361 Iraq, 243 isolation, 50

J January, 4, 5, 39, 40, 42, 74, 75, 76, 79, 80, 87, 118, 122, 144, 154, 165, 168, 170, 174, 190, 194, 195, 196, 199, 200, 201, 202, 203, 204, 207, 208, 221, 230, 232, 233, 234, 237, 247, 251, 252, 254, 255, 257, 259, 260, 261, 262, 263, 265, 269, 270, 272, 274, 275, 277, 278, 279, 280, 281, 282, 283, 284, 286, 288, 289, 294, 295, 296, 297, 298, 299, 300, 302, 308, 328, 329, 330, 331, 332, 333, 335, 336, 338, 339, 340, 342, 343, 345, 348, 349, 350, 351, 353, 355, 357, 358, 360, 362, 363, 364 Japan, 169 job creation, 59, 206 job loss, 113 jobs, 3, 4, 55, 59, 65, 74, 75, 79, 81, 111, 113, 117, 127, 139, 185, 205, 280, 332 judge, 221 judgment, 56, 199, 210, 211, 289 Jun, 332 jurisdictions, 126, 243 justification, 272

K King, 77

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L labor, 268, 286 Lafayette, 73 language, 10, 40, 41, 68, 227, 242, 285 large banks, 68, 71, 83, 88, 95, 97, 98, 99, 100, 101, 102, 109, 114 large-scale, 61, 165 Latin America, 169 law, vii, 7, 47, 48, 54, 185, 187, 220, 231, 235, 238, 239, 243, 244, 254, 281, 290, 315, 332 law enforcement, 243, 244 laws, vii, 85, 167, 205, 206, 234, 239, 254, 290, 342, 353, 363 lawyers, 345, 355 layoffs, 139, 147 lead, 41, 68, 71, 80, 93, 98, 99, 139, 146, 158, 329 leadership, 119, 144, 232, 243, 273, 277, 278, 280, 303, 340, 351, 362 learning, 278 learning environment, 278 legislation, 7, 47, 48, 50, 68, 81, 234, 235, 237, 238, 244, 247, 248, 249, 327 legislative, 6, 257 lenders, 10, 46, 50, 62, 77, 78, 81, 82, 83, 92, 93, 97, 98, 127, 128, 134, 151, 152, 156, 159, 164, 298, 300, 315, 316, 333 lien, 111, 175, 274, 315 liens, 315 lifetime, 237 likelihood, 122, 237, 253, 268, 337, 347 limitations, 96, 109, 144, 244, 257, 266, 273, 289, 302, 304, 328, 336, 339, 346, 349, 352, 356, 359 limited liability, 330 linkage, 88 liquidate, 216, 274 liquidation, 198, 223, 230, 231 liquidity, 3, 4, 44, 45, 46, 51, 52, 55, 78, 81, 83, 97, 105, 106, 107, 108, 118, 119, 120, 122, 125, 126, 127, 134, 142, 143, 147, 149, 151, 152, 153, 155, 156, 158, 171, 173, 177, 201, 213, 265, 266, 268, 271, 274, 295, 299, 327, 333 loan guarantees, 3, 83, 237 lobbying, 10, 53, 143, 146, 149, 227, 272, 273, 330 lobbyists, 64, 200, 242 local community, 165 local government, 126, 150, 155, 157 London, 7, 67, 254, 297, 330 long-term, 4, 7, 11, 46, 121, 125, 127, 160, 161, 163, 164, 186, 206, 235, 248, 253, 264, 273, 281, 303, 337, 340, 347, 351, 358, 362 Los Angeles, 181

losses, 2, 60, 61, 62, 68, 71, 80, 85, 86, 87, 91, 92, 96, 122, 125, 133, 137, 155, 159, 201, 214, 223, 238, 271, 276, 277, 295, 296, 315, 328, 329, 331, 360 Louisiana, 73, 74, 75 low risk, 80 low-income, 153, 328, 343, 353, 364

M mainstream, 78 malaise, 126 management, 2, 53, 68, 80, 119, 120, 121, 123, 126, 128, 129, 141, 142, 148, 167, 168, 169, 170, 186, 187, 228, 229, 252, 256, 259, 266, 267, 268, 271, 275, 278, 280, 281, 283, 287, 288, 289, 290, 291, 292, 293, 294, 303, 316, 340, 351, 356, 357, 361 management committee, 292 mandates, 88, 92, 93, 102, 234, 238, 239 Manhattan, 309 manipulation, 269 manufacturer, 79, 97 manufacturing, 75, 79 mapping, 285 market discipline, 60 market disruption, 272 market prices, 122, 213, 216, 223 market share, 123 market stability, 48, 55, 81 market value, 9, 51, 191, 193, 196, 197, 198, 202, 209, 210, 211, 212, 213, 214, 216, 217, 218, 219, 222, 225, 248 marketability, 198, 216, 218, 230 marketing, 76, 139, 149, 163 markets, 7, 43, 44, 45, 48, 52, 59, 61, 63, 65, 71, 78, 82, 83, 96, 99, 105, 107, 113, 114, 118, 119, 122, 123, 126, 127, 133, 134, 139, 142, 144, 145, 146, 147, 151, 152, 155, 156, 171, 189, 190, 194, 199, 205, 213, 218, 219, 253, 256, 257, 258, 261, 270, 272, 274, 277, 295, 296, 297, 298, 300, 303, 304, 327, 330, 337, 339, 340, 342, 346, 348, 350, 352, 356, 360 measurement, 8, 96, 281 measures, 7, 43, 51, 60, 64, 67, 68, 69, 82, 251, 267, 273, 279, 282, 289, 297, 301, 337, 346, 347, 350, 356, 357, 360 media, 94 membership, 40, 204, 269, 329 men, 131 mergers, 98, 99, 103, 104 meritocracy, 166 messages, 11, 202 metric, 7, 267

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Index

metropolitan area, 125 Mexico, 169 Miami, 165, 181 middle class, 64 Middle East, 169 Minnesota, 181 minorities, 256 minority, 75, 79, 288 mirror, 131 missions, 177 Missouri, 309 misunderstanding, 42, 93 Mitsubishi, 197, 198, 210, 211, 212, 216, 220, 225, 228 modeling, 128, 215 models, 122, 177, 248, 293 modernization, 55, 129 momentum, 182 monetary policy, 92, 94 money, 1, 2, 3, 8, 9, 10, 41, 44, 45, 47, 48, 49, 50, 51, 52, 53, 61, 62, 67, 68, 69, 71, 74, 78, 79, 80, 81, 93, 99, 100, 102, 109, 112, 113, 114, 119, 120, 122, 127, 131, 133, 134, 137, 138, 139, 155, 159, 161, 177, 182, 185, 186, 190, 193, 195, 196, 200, 201, 207, 208, 214, 241, 242, 243 money markets, 45 monograph, 94 Monte Carlo, 215 Moody’s, 134, 256, 298, 333 moratorium, 148, 150, 161, 174 morning, 113 mortgages, vii, 3, 8, 46, 49, 52, 53, 64, 75, 81, 83, 93, 98, 109, 125, 126, 127, 133, 138, 141, 147, 148, 150, 151, 152, 154, 155, 157, 158, 160, 161, 170, 181, 182, 186, 187, 205, 227, 234, 235, 237, 238, 254, 265, 266, 275, 299, 303, 315, 316, 329, 331, 333, 339, 350, 360, 361 Moscow, 314 motives, 40 movement, 133, 134 MRA, 234 mutual funds, 45, 69, 71, 93, 98, 141

N naming, 302, 339, 349 nation, 38, 59, 75, 80, 219 national, 74, 77, 81, 128, 131, 152, 153, 162, 165, 224, 229, 262, 327 National Credit Union Administration, 234 national debt, 81 National Economic Council, 206, 232 natural, 96, 102, 123

negative consequences, 179 negative equity, 191, 203 negotiating, 8 net income, 330 net present value, 3, 128, 315, 333 network, 158 Nevada, 11, 38, 39, 202 New England, 76 New Jersey, 158 New Orleans, 118 New York, 40, 44, 71, 77, 79, 83, 125, 133, 134, 135, 157, 158, 164, 165, 174, 186, 196, 199, 204, 212, 213, 220, 227, 231, 243, 254, 255, 271, 283, 292, 308, 313, 327, 330 New York Times, 186 nondisclosure, 332 non-profit, 46, 77, 81, 126, 128, 164, 165 normal, 51, 68, 69, 92, 98, 119, 226, 258, 294 normalization, 52 North America, 157, 159, 169, 181 North Carolina, 309, 312 Northeast, 310 not-for-profit, 126, 328, 343, 353 NYSE, 119

O objectivity, 289 obligate, 259 obligation, 112, 121, 150, 228, 244, 248, 289, 294, 327 obligations, 3, 4, 76, 81, 92, 98, 117, 122, 127, 139, 156, 174, 238, 244, 248, 259, 261, 271, 277, 289, 327, 329 observations, 198 Office of Management and Budget (OMB), 203, 254, 259, 290, 293, 294, 327 Office of Personnel Management (OPM), 254, 280, 281, 331 Office of Thrift Supervision, 59, 254, 255, 361 Offices of Congressional Relations and Public Affairs, 306 OFS, vii, 40, 203, 252, 253, 254, 255, 256, 261, 262, 263, 264, 265, 266, 275, 277, 278, 279, 280, 281, 290, 291, 292, 293, 294, 303, 304, 335, 337, 338, 340, 341, 345, 346, 348, 351, 355, 356, 357, 358, 361, 362 oil, 75 old-fashioned, 182 online, 56, 57, 147, 230, 232, 233, 330 open space, 165 operator, 111 opposition, 86

TARP in the Crosshairs: Accountability in the Troubled Asset Relief Program : Accountability in the Troubled Asset Relief Program, edited by Paul W.

Index optimism, 186 organic, 165 organization, 50, 75, 82, 280, 281, 290, 294, 303, 327, 328, 332, 340, 351, 362 organizations, 11, 51, 77, 78, 81, 126, 138, 164, 165, 191, 221, 247, 248, 255, 263, 264, 275, 278, 281, 316 outsourcing, 142 Overseas Private Investment Corporation, 278 oversight, vii, 1, 9, 11, 39, 41, 42, 53, 55, 62, 113, 167, 185, 187, 189, 190, 191, 194, 202, 203, 207, 232, 235, 241, 242, 243, 244, 247, 248, 249, 252, 254, 256, 257, 258, 265, 269, 282, 288, 302, 303, 327, 330, 331, 335, 337, 339, 340, 341, 342, 345, 346, 347, 349, 351, 352, 353, 355, 356, 358, 359, 361, 362, 363 ownership, 9, 131, 169, 205, 269, 271, 274, 289, 315 Ozarks, 310

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P Pacific, 309, 310, 311, 312, 313 pain, 123 paper, 44, 45, 47, 51, 52, 71, 97, 98, 108, 109, 127, 158, 301 parents, 153 partnership, 61, 74, 150, 153, 164, 243, 296 passive, 142, 198, 222, 227 pay off, 93, 175 pay-as-you-go, 234 payroll, 51 peers, 145, 219 penalties, 267 penalty, 76, 242 Pennsylvania, 42, 131, 207 pension, 71, 133, 141, 143 pensions, 52, 244 perception, 179, 222 perceptions, 196, 209, 212, 253, 256, 295, 298, 300, 304, 337, 342, 348, 352 performance, vii, 40, 41, 56, 64, 119, 120, 123, 128, 139, 142, 145, 146, 155, 166, 167, 168, 169, 170, 172, 173, 182, 186, 191, 203, 248, 249, 252, 253, 254, 255, 256, 257, 258, 264, 267, 268, 271, 272, 278, 283, 284, 286, 288, 289, 294, 303, 305, 330, 335, 336, 337, 341, 342, 346, 347, 348, 351, 352, 353, 356, 357, 358, 362, 363 periodic, 167, 268, 292, 294 permit, 83, 206, 231, 244, 287, 296 personal, 127, 147, 152, 153, 155, 159, 162, 166, 175, 289, 333 philanthropic, 138 philosophy, 191

377

planning, 11, 63, 165, 243, 256, 282, 292, 294 play, 49, 50, 51, 71, 118, 119, 129, 139, 151, 152, 153, 155, 162, 177 PLC, 197, 221 pleasure, 242 policy choice, 221, 222 policymakers, 2, 121, 122, 123, 196 politicians, 94 pools, 123, 141, 151, 272 poor, 95, 97, 98 portfolio, 96, 99, 154, 165, 276, 288, 316 portfolios, 100, 161 posture, 60 power, 10, 59, 83, 123, 223, 224, 328, 333 powers, 185, 190 pre-existing, 213 preference, 225, 228, 297 premium, 96, 102, 109, 198, 214, 221, 222, 224, 225, 237, 238, 276, 297, 298, 333 premiums, 3, 100, 214, 238, 253, 276, 277, 295, 296, 298, 304, 331, 337, 342, 348, 352 present value, 3, 128, 215, 315, 333 pressure, 50, 51, 69, 93, 96, 99, 102, 103, 137 prevention, 127, 160, 164, 191, 235, 255, 290, 316 prices, 5, 10, 41, 52, 69, 70, 91, 93, 118, 122, 152, 212, 213, 214, 215, 216, 223, 224, 271, 287, 301, 327 priorities, 40, 91 private, 2, 3, 9, 44, 46, 49, 53, 54, 60, 61, 62, 64, 69, 74, 76, 77, 82, 92, 96, 98, 99, 114, 138, 147, 153, 169, 196, 197, 198, 200, 206, 210, 211, 212, 215, 216, 217, 220, 222, 225, 230, 231, 234, 238, 239, 264, 271, 272, 275, 277, 278, 303, 332, 339, 350, 360, 363 private banks, 200 private investment, 211 private sector, 46, 60, 61, 77, 114, 197, 215, 231, 239, 271, 277, 278 private-sector, 234, 238, 239, 275, 278, 332 proactive, 105, 106, 107, 108, 127, 243, 244, 252, 337, 347 probability, 46, 219, 268, 270, 271 production, 40, 204, 268, 333 profit, 46, 77, 81, 92, 120, 123, 126, 128, 129, 164, 165, 182, 226, 241, 243, 328, 343, 353 profitability, 139, 148, 168 profits, 70, 85, 88, 126, 134 program administration, 189 program outcomes, 291 promote, 40, 55, 67, 74, 81, 82, 83, 100, 118, 154, 155, 170, 185, 203, 204, 206, 256, 258, 282, 287, 288, 297, 299, 315, 329 property, 174, 175, 289, 316

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proposition, 249 prosperity, 47, 178 protection, 51, 201, 222, 277, 328 protocol, 8, 49 protocols, 242, 288 proxy, 144, 167 prudence, 200 public capital, 61 public companies, 63, 233 public corporations, 224 public debt, 268 public domain, vii public financing, 61 public funds, 4, 137, 138, 182, 187, 213, 227 public interest, 62, 69 public investment, 206 public money, 9 public policy, 196, 198, 210, 221, 222, 224, 225, 226, 227, 228, 229, 345, 355 public support, 139, 200 Puerto Rico, 262

Q Qatar, 197, 210, 211, 212, 216, 221 qualifications, 280 quorum, 40, 204

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R range, 44, 52, 59, 68, 70, 78, 79, 84, 101, 114, 129, 134, 149, 152, 169, 198, 211, 213, 216, 217, 218, 220, 223, 226, 253, 273, 274, 275, 282, 304, 328, 337, 342, 343, 345, 348, 352, 353, 355, 364 rash, 96, 102 rate of return, 215, 225, 298 rating agencies, 121, 122 rating scale, 333 ratings, 99, 134, 264 real estate, 11, 61, 68, 75, 96, 100, 101, 102, 104, 114, 128, 138, 152, 155, 157, 165, 174, 181, 182, 183, 201, 235, 277, 315, 330, 331 real time, 248 reality, 93, 112 reasoning, 196, 200, 261 recalling, 179 recession, 59, 69, 71, 74, 75, 84, 85, 86, 87, 92, 93, 94, 97, 138, 139 recessions, 97, 98 recognition, 5, 144 reconciliation, 292 reconstruction, 243

recovery, 3, 47, 50, 52, 59, 60, 70, 71, 74, 75, 76, 83, 84, 92, 102, 113, 114, 129, 138, 139, 146, 148, 149, 151, 152, 155, 186, 205, 267, 295, 329 reduction, 85, 99, 102, 120, 144, 163, 170, 174, 198, 215, 221, 224, 229, 315 reflection, 94 Reform Act, 196, 234, 237, 333, 363 reforms, 9, 39, 53, 145, 146, 190, 205, 257 regional, 49, 87, 156, 243 regular, 4, 40, 69, 78, 94, 128, 174, 189, 201, 203, 248, 257, 294 regulation, 95, 114, 123, 129, 146, 247, 256, 289, 290, 304, 305, 329, 337, 341, 347, 351, 352, 357, 362, 363, 364 regulations, vii, 79, 80, 167, 200, 254, 281, 289, 290, 305, 342, 349, 353, 359, 363 regulators, 2, 7, 43, 47, 50, 51, 53, 54, 60, 75, 88, 91, 101, 120, 121, 122, 123, 135, 144, 146, 155, 255, 262, 264, 265, 266, 281, 305, 328, 329, 338, 342, 349, 352, 358, 360, 364 regulatory bodies, 272 regulatory capital, 145 regulatory requirements, 222 rehabilitate, 165 rehabilitation, 165 reinsurance, 277 relationship, 65, 79, 80, 119, 158, 169, 177, 194, 267, 289 relationships, 126, 137, 142, 243 reliability, 256, 290 repair, 113, 206 Republican, 204, 327 reputation, 139, 216 resale, 198, 228 research, 97, 99, 109, 142, 204, 257, 287, 333 resentment, 65 reserves, 8, 50, 87, 92 residential, 44, 52, 62, 69, 70, 98, 125, 134, 149, 152, 154, 155, 170, 174, 201, 227, 234, 235, 238, 265, 266, 274, 275, 277, 303, 315, 329, 331, 340 resolution, 94, 112, 234 resources, 48, 59, 62, 114, 161, 163, 205, 222, 243, 244, 258, 263, 278, 279, 285, 288, 290, 294, 345, 355 responsibilities, 120, 125, 137, 138, 145, 247, 259, 269, 278, 279, 286, 288, 290, 292, 327, 332, 345, 355 responsiveness, 232 restaurant, 111 restaurants, 111 restructuring, 64, 98, 99, 180, 206, 227, 228, 268, 269, 271, 361

TARP in the Crosshairs: Accountability in the Troubled Asset Relief Program : Accountability in the Troubled Asset Relief Program, edited by Paul W.

Index retail, 73, 79, 103, 128, 133, 141, 146, 156, 158, 165, 169, 170 retail deposit, 103 retained earnings, 91 retention, 160, 161 retirees, 142 retirement, 4, 51, 55, 69, 81, 93, 108, 126, 128, 185, 271 retrenchment, 81 returns, 4, 48, 50, 55, 81, 92, 135, 137, 139, 154, 167, 169, 173, 174, 185, 225, 228, 238 revenue, 182 rewards, 165, 166 Rhode Island, 310 risk assessment, 291, 292, 341, 352 risk management, 121, 126, 128, 167, 168, 169, 267, 281 risk perception, 297 risk profile, 219 risks, 70, 100, 122, 126, 146, 159, 165, 237, 258, 263, 269, 272, 276, 291, 293, 305, 336, 341, 347, 352, 357, 362 risk-taking, 123, 144 roadmap, 39 Roads, 312 robustness, 214 rolling, 4, 88, 162 Rubber, 105 rural, 79

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S S&T, 314 sacrifice, 78 safeguard, 186, 205, 208 safeguards, 186, 206 safety, 44, 80, 118 salaries, 177, 253, 337, 347, 357 salary, 144, 281 sales, 46, 53, 70, 71, 87, 111, 139, 158, 225, 293, 297 sample, 256, 265 Sarbanes-Oxley Act, 330 saving rate, 69 savings, 4, 45, 51, 52, 53, 55, 81, 85, 112, 142, 147, 159, 185, 243, 264, 328, 329 savings rate, 159 SBA, 65, 80, 83, 182 scaling, 98 scheduling, 248 school, 165 scores, 11 searching, 147, 278

379

seasonal pattern, 333 Secretary of the Treasury, 4, 42, 55, 81, 207, 232, 235, 258, 275 securities, 8, 44, 46, 49, 52, 61, 62, 63, 64, 81, 83, 88, 94, 99, 100, 118, 126, 129, 133, 134, 142, 151, 152, 154, 170, 171, 174, 196, 197, 198, 199, 201, 202, 208, 209, 210, 211, 212, 213, 214, 216, 217, 218, 219, 220, 222, 223, 224, 225, 226, 229, 230, 233, 235, 239, 243, 248, 253, 257, 264, 265, 266, 267, 271, 273, 274, 275, 276, 277, 286, 289, 295, 296, 297, 300, 303, 304, 326, 327, 328, 329, 330, 331, 339, 342, 350, 352, 360 Securities and Exchange Commission (SEC), 60, 258, 331 security, 55, 61, 62, 80, 81, 196, 209, 212, 222, 230, 249, 253, 254, 353, 361 selecting, 194, 200, 255, 327 self-interest, 123 self-regulation, 123 self-report, 352 Senate, 4, 11, 38, 39, 40, 56, 113, 189, 202, 203, 204, 207, 230, 231, 232, 244, 306, 327, 330 Senate Finance Committee, 207 sensitivity, 215 separation, 292 series, 7, 44, 48, 55, 164, 173, 186, 189, 194, 211, 242, 257, 271, 281, 333, 361 service provider, 331 services, 7, 11, 51, 59, 73, 75, 77, 117, 128, 129, 139, 141, 142, 153, 159, 160, 164, 169, 256, 271, 281, 282, 283, 284, 285, 286, 287, 288, 289, 290, 316, 328, 332, 343, 353, 359, 364 SES, 254, 280, 331 settlements, 5, 238, 239 severity, 55, 70, 114 shame, 76 shape, 41, 97, 102 shareholders, 62, 69, 77, 97, 102, 106, 120, 137, 144, 145, 146, 148, 167, 185, 186, 206, 225, 230, 262, 328 shares, 9, 45, 50, 53, 63, 74, 92, 119, 126, 146, 167, 173, 174, 198, 202, 211, 213, 214, 215, 219, 221, 222, 224, 225, 226, 227, 228, 231, 251, 261, 262, 263, 264, 269, 271, 272, 273, 292, 327, 329, 338, 348, 358 sharing, 123, 150, 154, 169, 174, 242, 248, 277, 291, 315 shock, 316 shocks, 123 short period, 174, 243 shortage, 139 short-term, 7, 9, 44, 51, 79, 118, 142, 143, 163, 215, 278, 281

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380

Index

sign, 175, 182, 186 signaling, 219 signals, 222 silver, 187 simulations, 215 sites, 128 skills, 256, 281, 305, 336, 345, 347, 355, 357 small banks, 71, 95, 96, 97, 98, 99, 100, 101, 102, 104, 109 Small Business Administration, 44, 78, 80 small firms, 95, 96, 98, 102, 288 solutions, 96, 129, 156, 160, 161, 163, 164, 182 solvency, 91, 215, 295, 296, 335, 345, 355 solvent, 88, 268 South Dakota, 181 Speaker of the House, 40, 204, 327 specificity, 305, 337, 341, 347, 352, 357, 363 specter, 65 spectrum, 38 speed, 48, 183, 194, 233 spillover effects, 268 sponsor, 165 stability, 3, 4, 5, 9, 39, 48, 50, 51, 54, 55, 63, 81, 83, 95, 100, 102, 117, 122, 123, 125, 128, 129, 134, 142, 143, 144, 151, 152, 187, 194, 204, 223, 227, 248, 265, 270, 296, 297, 327, 335, 345, 346, 355, 356 stabilization, 3, 10, 43, 206, 300 stabilize, vii, 7, 8, 10, 11, 40, 43, 45, 46, 47, 48, 49, 50, 51, 52, 54, 56, 81, 96, 104, 125, 190, 191, 202, 203, 206, 219, 254, 257, 258, 261, 280, 303, 336, 339, 346, 350, 356, 360 staffing, 256, 278, 280, 287 stages, 162, 174, 280, 293, 304 stakeholders, 179, 213, 256, 268, 361 standard deviation, 121 standards, 5, 7, 10, 45, 49, 54, 62, 64, 75, 78, 84, 85, 93, 94, 120, 123, 126, 153, 162, 167, 201, 235, 237, 253, 257, 265, 267, 268, 273, 290, 294, 296, 301, 304, 315, 336, 341, 346, 351, 356, 362 Standards, 93, 291, 332, 333 state laws, 234, 239 statistics, 8, 40, 100 statutes, 92, 199, 229 statutory, 10, 55, 76, 86, 190, 287, 331 stigma, 134 stimulus, 244 stock, 5, 9, 11, 51, 53, 61, 63, 64, 67, 69, 70, 74, 88, 91, 92, 93, 96, 99, 102, 118, 119, 120, 127, 128, 134, 138, 142, 154, 166, 171, 173, 174, 182, 195, 196, 198, 199, 201, 206, 210, 211, 213, 214, 215, 216, 222, 223, 224, 225, 226, 228, 229, 230, 231, 255, 261, 263, 264, 266, 271, 272, 273, 289, 292,

294, 301, 302, 304, 327, 328, 329, 330, 336, 338, 339, 346, 349, 356, 359 stock price, 61, 96, 102, 215, 224, 225, 301 strategic, 1, 11, 126, 154, 158, 169, 171, 172, 217, 251, 252, 256, 302, 303, 304, 336, 337, 339, 340, 346, 347, 350, 356, 357, 360 strategic planning, 11 strategies, 47, 142, 164, 256, 257, 258, 275, 281 strength, 47, 61, 70, 137, 220, 227, 264, 272, 328, 353, 361 stress, 60, 61, 68, 91, 113, 121, 150, 161, 210, 276, 361 structuring, 5, 133, 198, 264, 276 students, 153 sub-prime, 99 subsidies, 102, 196, 198, 199, 210, 213 subsidization, 195, 200 subsidy, 191, 193, 196, 197, 198, 199, 209, 210, 213, 231, 237, 363 suffering, 92, 131 summer, 119 Sun, 313 supervision, 286 supervisor, 64 supervisors, 60 supplemental, 290, 296 suppliers, 97, 106, 155, 157, 167, 213 supply, 95, 96, 97, 98, 102, 286 support staff, 281 survival, 70, 85 suspensions, 269 sustainability, 138 symptoms, 7 syndicated, 98, 158 systemic risk, 6, 43, 100, 129, 146, 237, 258, 268, 271, 340, 350, 360 systems, 5, 44, 143, 183, 270, 305, 333

T talent, 165, 281 targets, 96, 139 task force, 243 tax credits, 102 tax receipt, 111 taxation, 85 taxes, 126, 133, 328 taxpayers, 2, 3, 4, 7, 9, 11, 43, 50, 51, 53, 55, 59, 63, 69, 81, 91, 112, 125, 135, 137, 138, 139, 141, 145, 147, 150, 173, 174, 182, 185, 189, 190, 193, 195, 199, 208, 210, 248, 273, 276, 328 teaching, 165 team members, 181, 279

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Index technical assistance, 77, 82, 165, 327, 328, 343, 353, 364 technology, 128 telephone, 243 Tennessee, 243, 311, 312 tension, 295 testimony, 38, 39, 67, 78, 84, 85, 96, 147, 177, 180, 189, 191, 192, 232, 247, 249, 330 Texas, 73, 74, 75, 165, 181, 313, 314 Thailand, 169 theory, 233 thinking, 3, 6, 10 third party, 163, 217, 263, 328 threatened, 3, 85, 335, 345, 355 threats, 272 threshold, 206, 239, 288 thresholds, 234, 238 thrifts, 85, 86, 87, 88, 328 time frame, 210, 286, 288, 293, 302, 336, 346 time lags, 253, 337, 341, 348, 352 Time Warner, 146 TIP, 5, 196, 197, 198, 199, 202, 209, 210, 217, 218, 220, 223, 224, 225, 226, 227, 228, 229, 230, 254, 255, 262, 272, 273, 274, 286, 292, 303, 339, 340, 350, 360 title, 238, 290, 364 Title III, 235 toxic, 2, 241, 242, 244, 249 tracking, 119, 141, 143, 159, 253, 266, 291, 292, 337, 348, 358 trade, 142, 143, 276 trading, 119, 122, 142, 196, 211, 212, 213, 215, 217, 231, 243 training, 77, 164, 253, 288, 290, 292, 327, 337, 348, 358 tranches, 99 transaction value, 169 transactions, 2, 10, 54, 55, 64, 78, 119, 125, 129, 153, 158, 162, 171, 190, 193, 195, 196, 197, 198, 199, 200, 205, 210, 211, 215, 216, 217, 220, 221, 222, 225, 226, 227, 228, 229, 231, 233, 242, 261, 268, 271, 274, 280, 282, 292, 293, 294, 335, 346, 356, 363 transcript, 39 transfer, 156, 222, 229, 263, 332 transformation, 256 transition, 105, 190, 194, 252, 255, 256, 261, 276, 277, 278, 279, 287, 302, 303, 335, 337, 340, 346, 347, 351, 357, 362 transparency, 2, 4, 9, 10, 11, 40, 59, 60, 62, 113, 123, 137, 138, 143, 145, 146, 167, 177, 186, 189, 190, 194, 200, 203, 205, 207, 241, 242, 247, 248, 249,

251, 252, 258, 265, 302, 304, 336, 337, 338, 339, 346, 347, 349, 350, 356, 357, 359 transparent, 2, 40, 135, 170 transportation, 359 travel, 177, 331 Treasury bills, 68, 297 Treasury Department, 5, 12, 43, 45, 47, 54, 59, 60, 61, 63, 64, 65, 77, 83, 87, 88, 91, 118, 131, 141, 143, 172, 185, 200, 210 trial, 316 tribal, 239 trickle down, 81 trust, 84, 117, 123, 135, 145, 146, 178, 225, 228, 264, 271, 328 tuition, 153 turbulent, 97, 108

U U.S. Department of the Treasury, 40, 56, 170, 193, 203, 230, 232, 233 U.S. economy, 40, 45, 87, 93, 134, 137, 149, 150, 151, 152, 154, 159, 160, 162, 168, 170, 173, 203, 219, 258 U.S. Treasury, 173, 181, 296 uncertainty, 41, 47, 59, 60, 96, 102, 105, 107, 108, 268, 271, 296 underwriters, 150, 157 unemployment, 41, 159, 333 unemployment rate, 333 unforeseen circumstances, 174 uniform, 10, 128, 219, 230 unions, 55, 81, 238, 264, 268 United Kingdom, 10, 221 United States, 4, 38, 46, 52, 55, 73, 81, 95, 103, 104, 127, 141, 145, 147, 149, 152, 154, 162, 171, 172, 195, 204, 241, 247, 251, 258, 300, 306 updating, 150

V vacancies, 280, 281 vacation, 131 validity, 196 values, 4, 55, 92, 93, 122, 127, 161, 185, 196, 208, 210, 211, 213, 214, 215, 216, 218, 231, 283, 295, 297, 315 variable, 7 variables, 297, 333 variation, 248 vehicles, 44, 122, 258 vein, 118, 123

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Index

Verizon, 118, 158 veterans, 256 Victoria, 97, 99, 108, 109 vision, 252, 270, 302, 303, 304, 305, 336, 337, 339, 340, 346, 347, 350, 356, 357, 360 voice, 11 volatility, 5, 107, 143, 186, 202, 215, 301, 303, 340 volunteerism, 165 voting, 198, 213, 222, 227, 228, 229, 271, 328 vulnerability, 123

W

Y yield, 9, 50, 211, 214, 215, 296, 298, 333 yield curve, 215

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wages, 181 Wall Street Journal, 57, 84, 232 warrants, 5, 9, 50, 51, 53, 64, 74, 99, 134, 142, 191, 193, 195, 196, 198, 199, 205, 210, 211, 213, 215, 216, 221, 222, 223, 224, 225, 228, 229, 231, 233, 255, 263, 269, 270, 273, 292, 329, 330

Washington Post, 187, 232, 285 weakness, 99, 185 wealth, 49, 67, 69, 70, 169, 210 web, 231 websites, 44, 53, 54 well-being, 3 Western Europe, 169 wholesale, 118, 123, 158 withdrawal, 54 witnesses, 38, 39, 131, 185, 187 women, 79, 256, 288 workers, 155 workforce, 256, 281 writing, 42, 67, 80, 207, 269, 281

TARP in the Crosshairs: Accountability in the Troubled Asset Relief Program : Accountability in the Troubled Asset Relief Program, edited by Paul W.