[Senate Hearing 112-81]
[From the U.S. Government Publishing Office]
S. Hrg. 112-81
TARP OVERSIGHT: EVALUATING
RETURNS ON TAXPAYER INVESTMENTS
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
ON
THE TREASURY DEPARTMENT, COP, SIGTARP AND GAO ON THE STATUS AND OVERALL
EFFECTIVENESS OF TARP IN MEETING ITS STATUTORY MANDATE, AND THE ROLE
OVERSIGHT PLAYED IN EFFORTS TO IMPROVE THE ADMINISTRATION OF THE
PROGRAM
----------
MARCH 17, 2011
----------
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
S. Hrg. 112-81
TARP OVERSIGHT: EVALUATING RETURNS ON TAXPAYER INVESTMENTS
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
ON
THE TREASURY DEPARTMENT, COP, SIGTARP AND GAO ON THE STATUS AND OVERALL
EFFECTIVENESS OF TARP IN MEETING ITS STATUTORY MANDATE, AND THE ROLE
OVERSIGHT PLAYED IN EFFORTS TO IMPROVE THE ADMINISTRATION OF THE
PROGRAM
__________
MARCH 17, 2011
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.fdsys.gov/
_____
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii JIM DeMINT, South Carolina
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia MARK KIRK, Illinois
JEFF MERKLEY, Oregon JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina
Dwight Fettig, Staff Director
William D. Duhnke, Republican Staff Director
Glen Sears, Senior Policy Advisor
Laura Swanson, Policy Director
Lisa Frumin, Legislative Assistant
Andrew Olmem, Republican Chief Counsel
Hester Peirce, Republican Senior Counsel
Michael Piwowar, Republican Senior Economist
Dawn Ratliff, Chief Clerk
William Fields, Legislative Assistant and Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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THURSDAY, MARCH 17, 2011
Page
Opening statement of Chairman Johnson............................ 1
Prepared statement........................................... 15
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 2
Prepared statement....................................... 32
WITNESSES
Ted Kaufman, former U.S. Senator from the State of Delaware and
Chairman, Congressional Oversight Panel........................ 6
Prepared statement........................................... 32
Response to written questions of:
Senator Shelby........................................... 320
Timothy G. Massad, Acting Assistant Secretary, Office of
Financial Stability, Department of the Treasury................ 5
Prepared statement........................................... 269
Response to written questions of:
Senator Shelby........................................... 581
Neil Barofsky, Special Inspector General, Troubled Asset Relief
Program........................................................ 8
Prepared statement........................................... 277
Response to written questions of:
Senator Shelby........................................... 583
Senator Wicker........................................... 583
Thomas J. McCool, Director, Center For Economics, Applied
Research and Methods, Government Accountability Office......... 10
Prepared statement........................................... 293
Response to written questions of:
Senator Shelby........................................... 584
Additional Material Supplied for the Record
Prepared statement of John B. Taylor, Stanford University........ 639
``How the Great Recession Was Brought to an End,'' by Alan S.
Blinder and Mark Zandi......................................... 645
Prepared statement on behalf of the National Multi Housing
Council and the National Apartment Association................. 668
(iii)
TARP OVERSIGHT: EVALUATING RETURNS ON TAXPAYER INVESTMENTS
----------
THURSDAY, MARCH 17, 2011
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m. in room SD-538, Dirksen Senate
Office Building, Hon. Tim Johnson, Chairman of the Committee,
presiding.
OPENING STATEMENT OF CHAIRMAN TIM JOHNSON
Chairman Johnson. I would like to call to order this Senate
Banking Committee hearing entitled ``TARP Oversight: Evaluating
Returns on Taxpayer Investments.''
Whenever the topic of TARP comes up, it is hard not to
think back to the intensity and dramatic moments of the
financial panic nearly 2 \1/2\ years ago. Treasury Secretary
Paulson and the Federal Reserve were quickly running out of
options, and legislators were faced with the difficult choice
of whether to provide hundreds of billions of taxpayer dollars
at Wall Street or possibly see the economy slide deeper into
chaos.
However, as the Congressional Oversight Panel put it in
their final report released yesterday:
It is now clear that, although America has endured a wrenching
recession, it has not experienced a second Great Depression.
The TARP does not deserve full credit for this outcome, but it
provided critical support to markets at a moment of profound
uncertainty.
COP made another point in its report that bears repeating:
TARP has become one of the most thoroughly scrutinized
Government programs in U.S. history . . . [and] in the midst of
a crisis, perfect solutions do not exist; every possible action
carries regrettable consequences, and even the best decisions
will be subject to critiques and second-guessing.
That said, the outcome of TARP was much more successful than
many ever anticipated, averting a depression and with other
emergency policies, saving 8.5 million [inaudible].
I strongly believe that tough oversight was vital to TARP's
success. Early estimates showed the program costing taxpayers
over $350 billion. Now, thanks to effective oversight, the
price tag has plummeted to $25 billion as estimated by the non-
partisan Congressional Budget Office. That's one-sixth the cost
of the savings & loan crisis in the 1980s and 1990s. Taxpayers
clearly win when oversight works.
Today, some still criticize HAMP for its inability to help
more homeowners. While I welcome a discussion of how to improve
the program, simply ending foreclosure assistance will not make
the problem go away and would limit the sustainable options for
struggling homeowners who could save their homes. Over 530,000
families have been helped through HAMP, which is not an
insignificant number. Their neighbors have been helped as well,
by preventing their home values from declining due to a nearby
foreclosure. HAMP has also led the way on loan modifications
that work, pushing the industry to follow suit and
standardizing the process. The American people deserve better
than the ``repeal everything but the kitchen sink'' approach to
governance that they are offering.
I look forward to learning more from our witnesses about
what worked in TARP, what did not work, and why. Going forward,
I believe these lessons prove the importance of tough oversight
in implementing the Dodd-Frank Act. I also believe it can be
instructive as we continue to work through the foreclosure
crisis and as we consider reforms to the mortgage finance
system.
Before I recognize Ranking Member Shelby for his statement,
I want to note that at his request there is written testimony
from Professor John Taylor of Stanford University that we will
make part of the record.
Chairman Johnson. I would also ask that the paper ``How the
Great Recession Was Brought to an End'' by Professor Alan
Blinder and Mark Zandi be made part of the record.
Chairman Johnson. I will remind my colleagues that we will
keep the record open for 7 days for statements, questions, and
any other material you would like to submit.
With that, I will turn to Ranking Member Shelby for his
opening statement.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Mr. Chairman.
In late 2008, Treasury Secretary Paulson and Federal
Reserve Chairman Bernanke came to Congress demanding $700
billion to buy so-called toxic assets from banks. They insisted
at the time that we were on the verge of a worldwide financial
meltdown. Their scare tactics worked. Congress passed
legislation creating the Troubled Asset Relief Program, or what
we call TARP. Although TARP was proposed by President Bush, his
successor was a supporter of the program.
I voted against TARP. I believed then, as I do today, that
TARP was a serious policy mistake. And while many will try to
claim it was a success, a thorough examination of TARP's record
tells us a very different story.
The design of TARP was so flawed that just weeks after the
bill was passed, Treasury had to abandon its plan to purchase
toxic assets. Purchasing assets proved to be a very difficult
plan to implement. It was also a very risky way to stabilize
the financial system.
If Treasury purchased assets at too low a price, it could
have threatened the solvency of financial institutions by
forcing them to mark down the value of their assets to reflect
the prices paid. And if Treasury paid too much, it would have
given banks a taxpayer-funded windfall.
But due to these inherent problems, right after TARP was
passed, Treasury had to switch to a direct equity injection for
banks. Accordingly, a vote for the original TARP was a vote for
a flawed plan, I believe.
And what price did we pay? Our credit markets froze and our
equity markets tanked as they saw our policy leaders panicking
and recognized that TARP would not solve our problems. I would
like to submit for the record--I want to bring it up again
because it is important, what the Chairman just did--testimony
by former Under Secretary of the Treasury and the distinguished
economist John Taylor which lays out in detail how the process
of enacting TARP worsened our economic downturn. Mr. Chairman,
I appreciate you putting that in the record.
I fear myself that the long-term damage caused by TARP will
be even more damaging to our financial system. TARP turned our
already severe too-big-to-fail problem into official policy.
Even TARP's Special Inspector General has said that perhaps,
and I will quote:
TARP's most significant legacy is the moral hazard and
potentially disastrous consequences associated with the
continued existence of financial institutions that are too-big-
to-fail.
Perhaps as concerning was the fact that our regulators used
TARP to keep even insolvent banks afloat. After TARP,
creditors, investors, and big banks have every reason to expect
that the U.S. Government will never allow these banks to fail.
Even worse, the implicit Government guarantee will make big
banks careless about the risks they take and will make the next
financial crisis and even more severe.
TARP, I believe, has created moral hazard with respect to
financial regulation. By using TARP to bail out banks, our
financial regulators were able to hide their regulatory
failures--and there were many--leading up to the crisis. Going
forward, our regulators will have reduced incentives to be
tough with the big banks if they know that their work has
little bearing on whether or not the bank fails.
Moreover, TARP sets a new standard for Government
intervention in our markets to achieve political ends. The
sloppy drafting of TARP legislation gave the Treasury Secretary
unfettered discretion on how he spent the $700 billion, and as
a result, it was used to bail out politically powerful
automakers and pour billions into a series of largely
ineffective homeowner assistance programs.
Some say that TARP is a success because TARP may yield a
so-called profit. I am not persuaded. First, claims of TARP's
profitability are premature. The taxpayer will likely still
take losses on TARP's housing programs, and many financial
institutions have yet to fully repay their TARP funds.
Moreover, TARP used taxpayers' dollars for very risky
investments. A proper evaluation of the returns on any
investment must appropriately adjust for risk. I believe such
an evaluation would show that the taxpayers were not adequately
compensated for incurring such large risk.
Second, what matters most is TARP's negative long-term
impact on the overall economy which will dwarf any profit
generated, if there is any.
On that basis, TARP's record has not been good for American
families. Since TARP was enacted, the unemployment rate has
reached and stayed at record levels, lending remains stagnant,
and millions of Americans are facing foreclosure. In light of
the vast authority granted to the Treasury Department under
TARP, I believe that this Committee had a responsibility to
conduct extensive oversight of the program. Unfortunately, the
majority once again decided to outsource the work of the
Committee to outside parties.
Today we will hear from three bodies charged by Congress
with overseeing TARP. It is especially important for us to hear
from Special Inspector General Barofsky before he leaves his
post at the end of the month.
Today we hope to learn how Treasury has managed TARP and
how effective such an oversight body was at supervising
Treasury. Were they able to obtain the information they needed
from Treasury and our financial regulators to do their
[inaudible]? What problems did they identify? How receptive
were Treasury and our financial regulators to their
recommendations? Hopefully today's hearing will help us better
understand what actually happened in this very controversial
program.
Thank you, Mr. Chairman.
Chairman Johnson. Thank you.
Timothy Massad serves as the Acting Assistant Secretary for
Financial Stability. In such capacity, he heads the Office of
Financial Stability which administers TARP. He joined the
Treasury in May 2009 as the Chief Counsel for OFS and later
became the Chief Reporting Officer for the office. Prior to
joining Treasury, Mr. Massad was a partner with the law firm of
Cravath, Swaine & Moore in New York and served as a special
legal adviser to the Congressional Oversight Panel for its
first report on TARP investments.
Senator Ted Kaufman serves as the Chair of the
Congressional Oversight Panel. He was appointed by Senate
Majority Leader Reid last fall to replace Elizabeth Warren on
the panel. Previously, Senator Kaufman was sworn in as the
junior Senator from Delaware in January 2009, taking the seat
of Vice President Joe Biden, whom he served 19 years as chief
of staff. He served in the Senate until November 15, 2010.
Special Inspector General Neil M. Barofsky was confirmed by
the Senate on December 8, 2008, and was sworn into office on
December 15, 2008. Prior to serving as SIGTARP, Mr. Barofsky
was a Federal prosecutor in the U.S. Attorney's Office for the
Southern District of New York for more than 8 years and was a
senior trial counsel who headed their mortgage fraud group.
Thomas McCool is the Director of the Center for Economics,
which is part of GAO's Applied Research and Business Group. He
has served at the GAO since 1987 and previously taught
economics at Vassar College and Georgetown University from 1977
to 1987.
Before we start the testimony, I want to note that COP
issued its final report yesterday and closes its doors in a few
weeks. Mr. Barofsky also recently announced his resignation
effective at the end of the month. So I want to say a special
word of thanks to Mr. Barofsky and Senator Kaufman for their
public service as well as excellent service provided by all the
staff from COP, SIGTARP, GAO, and Treasury.
Mr. Massad, go ahead.
STATEMENT OF TIMOTHY G. MASSAD, ACTING ASSISTANT SECRETARY,
OFFICE OF FINANCIAL STABILITY, DEPARTMENT OF THE TREASURY
Mr. Massad. Thank you, Mr. Chairman.
Chairman Johnson, Ranking Member Shelby, and other Members
of the Committee, thank you for the opportunity to testify
about the Troubled Asset Relief Program, or TARP, as it is
commonly known. As the Acting Assistant Secretary for Financial
Stability, I am responsible for overseeing the program on a
day-to-day basis.
It is now 2 \1/2\ years since TARP was created, and it is
clear that the program has been remarkably effective.
First and foremost, TARP, in conjunction with other
Government actions, helped prevent a catastrophic collapse of
our financial system and economic. In the fall of 2008, we were
starting into the abyss. We faced the very real risk of a
second Great Depression.
Now we are on the road to recovery. We no longer fear that
our financial system will fail. Businesses are able to raise
capital, and the credit markets on which consumers, and
particularly small businesses, depend have reopened.
TARP was not a solution to all of our economic problems,
and much work remains to be done. Unemployment is still
unacceptably high and the housing market is still weak. But the
worst of the storm has passed.
Second, we accomplished all this using much less money than
Congress originally provided, and we are unwinding TARP far
faster than anyone thought possible. Congress authorized $700
billion, but we will spend no more than $475 billion. And we
have already recouped two-thirds of what we have spent.
Third, the ultimate cost of TARP will be far less than any
expected. The total cost was initially projected to be
approximately $350 billion. According to the latest estimates,
both from Treasury and the Congressional Budget Office, the
overall cost of TARP will be between $25 and $50 billion, and
most of that will represent the money we spent to help
responsible American families keep their homes.
Based on current market prices, we expect that all the
other TARP programs and investments taken as a whole will
result in very little or no cost to the American taxpayers.
Moreover, the overall cost of the Government's response
efforts to this crisis is likely to be less than 1 percent of
GDP, far less than the cost to resolve the S&L crisis and far
less than the average cost of resolving other financial crises,
according to an IMF study.
Finally, our financial system is in much better shape today
than before the crisis. Banks are better capitalized, and
Congress has adopted the most sweeping overhaul of our
regulatory structure in generations, which will give us tools
we did not have in the fall of 2008 to mitigate and prevent
financial crises and to address the too-big-to-fail problem,
which you have noted. This work is not yet completed either,
but great progress has been made since TARP's inception.
We have moved quickly to reduce the dependence of the
financial system on emergency support. We have already
recovered from banks an amount equal to 99 percent of the funds
invested in the banking system. And where this Administration
provided funds to particular companies, we did so with tough
conditions. Those companies are stronger today, and we already
have begun to recoup those investments.
For example, we provided assistance to the automotive
industry on the condition that fundamental changes occur. Our
actions helped prevent the loss of as many as 1 million jobs
and have helped restore the industry to profitability. We
completed a highly successful public offering of General Motors
last November, and we are working to exit our investments in
Chrysler and Allied Financial as well.
I want to also address our efforts to help responsible but
struggling American homeowners. By reducing mortgage rates and
providing sensible incentives to prevent avoidable
foreclosures, our policies have helped hundreds of thousands of
families stay in their homes, and they have helped to change
the mortgage servicing industry generally. We have also done so
in a manner that uses taxpayer resources prudently.
There is much more work to be done. The programs we have
can continue to ease the pain of this terrible crisis, which is
why we oppose the efforts to terminate them. In all of these
efforts, TARP has been subjected to unprecedented oversight.
When Congress created TARP, it also directed that four
different oversight bodies carefully review our programs.
Representatives of three of those entities are sitting with me
today. To date, Treasury has responded to 75 reports from the
GAO, the SIGTARP, and the Congressional Oversight Panel, and we
have adopted more than 120 of their recommendations.
TARP has also been subject to vigorous congressional
oversight by this Committee and several others. We welcome this
oversight. Individually and collectively, it has helped us to
develop, implement, and improve our TARP programs.
Mr. Chairman, in short, TARP succeeded in what it was
designed to do: It helped stabilize the financial system and
laid the foundation for economic recovery. And it did so at a
fraction of the expected cost. Both political parties deserve
credit for these achievements. Congress enacted the program at
a time when the financial system was falling apart. In that
moment, leaders from both parties stood up, stood together, and
did what was best for this country.
Thank you for the opportunity to testify, and I welcome
your questions.
Chairman Johnson. Thank you, Mr. Massad.
Ted Kaufman.
STATEMENT OF TED KAUFMAN, FORMER U.S. SENATOR FROM THE STATE OF
DELAWARE AND CHAIRMAN, CONGRESSIONAL OVERSIGHT PANEL
Mr. Kaufman. Yes, thank you, Chairman Johnson, Ranking
Member Shelby, and Members of the Committee. It is truly a
pleasure to see my former colleagues, and it is a privilege to
offer my perspective on the Troubled Asset Relief Program,
TARP.
The Congressional Oversight Panel is, along with the GAO
and SIGTARP, charged by law with overseeing the TARP. Since our
former Chair testified before this Committee in September 2009,
the Panel has issued nearly 20 reports examining issues such as
TARP's support for the domestic automotive industry, the rescue
of AIG, commercial real estate, small banks, Government
contracting, executive compensation restrictions, as well as
four reports on Treasury's foreclosure prevention efforts. In
total, the Panel has authored 30 oversight reports, concluding
with our March 2011 report issued to Congress just yesterday.
By statute, the Panel will end on April 3, 2011.
As the Congressional Oversight Panel concludes our work, we
should recall where America stood when the TARP was enacted in
2008. The stock market endured triple-digit swings. Major
financial institutions had collapsed. The economy was
hemorrhaging jobs. Foreclosures were escalating with no end in
sight. In the words of Ben Bernanke, America was on a course
for ``a cataclysm that could have rivaled or surpassed the
Great Depression.''
The good news is that America did not suffer another
Depression. The TARP does not deserve full credit, but it
provided critical support at a time of great uncertainty.
The further good news is that the TARP's projected costs
have fallen sharply. The Congressional Budget Office now
projects taxpayers will lose $25 billion. Now, $25 billion is a
lot of money, but down from the initial estimate of $356
billion, which is mind-boggling.
Unfortunately, while there is no question that the TARP
rescued Wall Street, its programs for Main Street have been far
less effective. Its main foreclosure prevention program, which
was designed to help 3 to 4 million homeowners, is now on track
to help fewer than 800,000. In fact, the TARP's failure to
address foreclosures is one of the reasons why its costs are
coming in so low. The TARP will cost less than expected in part
because it will accomplish far less than envisioned for
American homeowners.
The TARP also distorted markets. It created profound moral
hazard and led to a deep stigma, a sense among the public that
policymakers cared more about bailing out Wall Street than
helping ordinary families.
Some degree of moral hazard and stigma was unavoidable. The
Treasury clearly could have done more to rein in these
problems.
For example, many senior managers of TARP recipient banks
maintained their jobs and their high salaries, and shareholders
maintained significant ownership stakes. To the public, it
looks as though Wall Street banks and bankers can retain their
profits in boom years but shift their losses to taxpayers
during a bust--an arrangement that cannot help but undermine
our free market system.
Finally, as the Panel has noted for over 2 years, the lack
of transparency and clear goals has rendered the public unable
to hold Treasury fully accountable. Most significantly,
Treasury decided in the TARP's early stage to push tens of
billions of dollars out the door to very large financial
institutions without requiring banks to reveal how the money
was being used. The TARP's transparency has improved
dramatically, and it has improved dramatically since then. When
it comes to these very early and very large type investments,
the public will never know to what purpose this money was put.
I would like to say a few words about the importance of
oversight. The TARP has been, as expressed by the Members, one
of the most thoroughly scrutinized Government programs in
history, and there can be no doubt that oversight has improved
the program and increased taxpayers' returns.
For example, in July 2009, the Panel reported that
Treasury's method for selling warrants purchased through TARP
appeared to be recovering 66 percent of their estimated worth.
Due in part to pressure generated by the Panel's work, Treasury
changed its approach, and subsequent sales recovered 103 cents
on the dollar, contributing to $8.6 billion in returns. Other
substantial improvements in TARP--such as Treasury's heightened
focus on second liens, the increased transparency of
contracting, and the greater release of data--are all partly
the result of pressure exerted by the Panel and the other
oversight bodies.
Clearly, careful scrutiny is an indispensable step to
preserving the public trust and ensuring the effective use of
taxpayers' money.
Thank you again. I genuinely thank you for the opportunity
to testify. I would be happy to answer any questions you may
have. As Chair of the Panel, I will endeavor to convey the
views of the Panel; however, ultimately my words are my own.
Thank you, Mr. Chairman.
Chairman Johnson. Thank you, Senator Kaufman.
Mr. Barofsky.
STATEMENT OF NEIL BAROFSKY, SPECIAL INSPECTOR GENERAL, TROUBLED
ASSET RELIEF PROGRAM
Mr. Barofsky. Thank you, Mr. Chairman, Ranking Member
Shelby, Members of the Committee. It is a privilege to appear
before you once again and to testify today about the role of
oversight in the Troubled Asset Relief Program. In that vein,
it is also a pleasure for me today to be testifying alongside
my oversight colleagues--Senator Kaufman of the Panel and Tom
McCool of GAO.
As has been noted, TARP has been a historic program in many
respects, but one has been the unprecedented oversight assigned
to this program by Congress as embodied by the three
representative organizations for oversight present here today.
By working together closely and coordinating our activities, I
believe that collectively we have well served the American
people by making sure that we could cover the broadest coverage
possible and ensuring unprecedented transparency and
accountability in the 13 different programs that make up TARP.
At SIGTARP, as the lone oversight body with law enforcement
authority, part of our focus has been on policing and
investigating TARP-related criminal activity. And in our short
timeframe, we have had a major impact. Fifty-two different
individuals and 18 different entities have been the subject of
civil and criminal actions, and perhaps more significantly, 18
defendants have already been convicted of TARP-related frauds,
including just yesterday a senior official from Colonial Bank.
Colonial had applied for and received conditional approval
for more than $550 million in TARP funds before SIGTARP
investigators stopped a massive, ongoing, multi-billion-dollar
accounting fraud dead in its track. All told, SIGTARP's
investigations have led to the recovery of funds and the
avoidance of loss from fraud of more than $700 million, making
sure that SIGTARP as an agency over its lifetime will more than
pay for itself.
Another example of the collective benefits of our oversight
actions, as the Senator just mentioned, have been the tangible
results from one of the pieces of good news from TARP: the
lowering expectations of the financial costs of the program. As
the Senator mentioned, my oversight colleagues deserve credit
for those lowering numbers, as does Treasury for its efficient
management of its portfolio of assets.
At SIGTARP, our approach to limiting losses has been
focusing on limiting the amount of losses from fraud, and we
have done that in two areas: deterring criminals from making
applications to TARP in the first place, and working with
Treasury to develop strong anti-fraud provisions within the
program itself. For a program the size and scope of TARP, one
would normally expect a loss from fraud in the area of 8 to 12
percent, in the neighborhood of $50 billion. I am very proud to
say today that we will come nowhere close to that number, in no
small part thanks to the willingness of Treasury and the
Federal Reserve, particularly in the early days of this
program, to work with SIGTARP to put in effective anti-fraud
provisions that help limit the vulnerability of the programs to
fraud.
As for deterrence, I recall a conversation I had in late
2009 with Secretary Geithner. After a somewhat heated
discussion on another topic, he took me aside and told me that
he believed that SIGTARP has scared away many banks and others
from participating in the TARP program. And after a pause, he
told me he thought that was a good thing because it meant that
some bad actors did not apply for TARP funds. And he was right.
Strong deterrence and better program design have been
instrumental in tamping down potential TARP losses.
On a final note, as Members have noted, today is likely my
last time testifying before the U.S. Senate as Special
Inspector General. And I remember one of the initial times I
appeared before this Committee. I think it was my confirmation
hearing, and, Ranking Member Shelby, you gave me some advice
and a warning, and you told me that this was a great
opportunity and that if I did my job well, I would never be
able to work again.
[Laughter.]
Mr. Barofsky. And you told me you thought it was a good
thing, which my wife disagreed.
Senator Shelby. I meant work with some people you do not
need to work for.
Mr. Barofsky. I am very happy to say that in this very,
very limited circumstance, Senator, circumstances have proven
you wrong, and I have been able to get a job. And I will be
working--I am very thrilled to be joining New York University's
School of Law as an adjunct professor and senior fellow at its
Center on the Administration of Criminal Law. And I thank you,
Ranking Member Shelby, I thank you, Mr. Chairman, and I thank
all of the Members of this Committee for your strong,
unwavering, continuous, and bipartisan support of SIGTARP. We
would not have been able to come close to achieving the
successes that we have had on behalf of the American taxpayer
without that support.
I thank you, and I thank you for the opportunity to testify
today, and I look forward to answering any questions that you
may have.
Chairman Johnson. Thank you, Mr. Barofsky. We will miss
you.
Mr. McCool.
STATEMENT OF THOMAS J. McCOOL, DIRECTOR, CENTER FOR ECONOMICS,
APPLIED RESEARCH AND METHODS, GOVERNMENT ACCOUNTABILITY OFFICE
Mr. McCool. Thank you, Chairman Johnson, Ranking Member
Shelby, Members of the Committee, for inviting us here to talk
about TARP, and I am pleased to be here to do that.
Under TARP, a broad range of activities have been
initiated, from injecting capital into key financial
institutions to addressing securitization, market problems,
providing assistance to the automobile industry and to AIG, and
offering incentives to modify residential mortgages. As TARP
passes its 30-month mark, U.S. financial markets appear to be
less volatile than they were in 2008, but certain areas of the
economy still face significant challenges, especially the
mortgage markets and, to a lesser extent, small business
lending.
While many programs have ended and begun winding down, some
participating institutions have repaid part or all of their
TARP funds, the prospect of repayment from other institutions,
large and small, remain somewhat uncertain.
Some TARP programs have been terminated. Others, like the
Capital Purchase Program, have closed and are winding down
operations. And several programs that focus on preserving home
ownership and providing assistance to auto companies and AIG
remain active. The Capital Purchase Program, of course, we know
a lot of that has been repaid. Thirty-point-eight billion still
remains outstanding. And one of the issues that we have tried
to focus Treasury's attention on, and they have responded, is
that there are a number of institutions that are still in the
Capital Purchase Program who have potential issues. Almost 200
of them have missed at least one dividend payment and there are
issues, again, with some other institutions that may not be as
sound as they were thought to be when they initially applied
for the program. This just means that they require continued
monitoring.
The Home Affordable Modification Program, or HAMP, remains
Treasury's primary program to assist homeowners facing
foreclosure. The program had a slow start and some of its newer
programs are having even a slower start getting off the ground,
and so far, as we have already stated, it has not spent much
money, but that is not necessarily a sign of success.
There are issues with HAMP going forward. We issued a
report just today that will look at the programs that go beyond
the firstly modification program, and particularly the Second
Lien Modification Program, the Foreclosure Alternative Program,
and the Principal Reduction Program. And again, there have been
some movements in the right direction, but we still have some
areas where we think Treasury can improve those programs.
The Automotive Industry Financing Program has an
outstanding balance of just a little over $44 billion.
Approximately $29 billion has been repaid, and clearly, the
auto industry, at least GM and Chrysler in particular, are
doing much better than they were back in 2008 and early 2009.
But whether they will be able to fully repay the Treasury
investment is still up in the air. It is going to depend a lot
on what the share price of GM does, and because of the IPO,
which was a success by many standards, the fact that they sold
below their break-even price means that their remaining shares
are going to have to bring in an even higher price to actually
make the program break even. So the Treasury has gone from a 60
percent owner to a 33 percent owner, and that is probably a
good thing, but it needs to make a lot of money in future sales
to be able to make the program actually break even.
AIG has continued to receive assistance over the last year
from an equity capital line. It has repaid $6.9 billion just
last week, and this reduced the Treasury's balance to about
$58.7 billion. Treasury owns 92 percent of AIG, and again, the
extent to which it is going to be able to be repaid is going to
depend very much on its ability to sell shares in AIG over time
at a reasonable price, and there is, I think, a lot of
uncertainty to that.
And last, just let me point out that one of the
recommendations we made in our most recent report, which we
issued in January, is to try to focus Treasury's attention on
staffing going forward. Currently, it is in very good shape in
terms of staffing, has great, qualified people under term
contracts. Our concern is as the programs wind down, it may be
harder and harder to retain staff, especially if the job market
gets any better, and so we just think that there is the need
for them to update their workforce plan and take into account
alternative scenarios for retaining staff as the program winds
down.
I would like to thank you and appreciate the opportunity to
testify and I am happy to answer any questions you might have.
Chairman Johnson. Thank you, Mr. McCool. Thank you for your
testimony.
As we begin questioning the witnesses, I will have the
Clerk put 5 minutes on the clock for each Member's questions.
Mr. Barofsky, you recently testified on HAMP, saying we
have advocated tirelessly that Treasury should fix the program.
So if we should not repeal the program, how do we fix it? Is
one option to have Treasury focus on the earlier part of the
process, encouraging servicers to reach out to homeowners
sooner?
Mr. Barofsky. I think that HAMP is a fundamentally broken
program and does need--if it is going to be permitted to
continue, Treasury needs to finally stop defending the status
quo of the program, as it continues to do, and lay out a plan
on how to fix the program. And there are a number of, I think,
good ideas out there.
I think you start with something that Secretary Geithner
has acknowledged before the Senate a couple weeks ago, that the
very incentive structure of the program is broken. This whole
program is a voluntary program. It is designed by encouraging
services to participate by making incentive payments. So it is
largely a carrot program where discipline would presumably be
provided by sticks and financial penalties, and initially,
Treasury announced that it would impose financial penalties on
servicers for not complying with the guidelines. They issued a
press release in late 2009.
But now, with Secretary Geithner acknowledging that the
incentives are insufficient, not powerful enough to overcome, I
think the word he used, the muck, I will say the conflicts of
interest that the servicers operate under. And Treasury's
refusal to impose a single sanction on the servicers, is it
really all that surprising that the program has been a failure?
So I think the place to start is let us address what
Secretary Geithner acknowledged was a problem, the incentive
structure, and what is universally regarded as a problem, the
lack of penalty, lack of financial penalties on servicers whose
performance that Secretary Geithner and Mr. Massad have both
acknowledged has been abysmal under the program. I think that
is a starting point.
I think they need to be far more transparent. I think for
those who are seeking to defend the existence of the HAMP
program, one of the most basic pieces of information that I
think that you need to have is what is Treasury's projection of
how many people it is going to help through permanent
modifications over the life of this program. I have been
calling for this for more than a year. The COP panel has been
calling for it more than a year. GAO has been calling for this
for more than a year. Members of Congress have been doing that.
The Congressional Oversight Panel went so far as to have to
give its own analysis and its own estimate of 700,000 to
800,000. Moody's has provided an estimate. CBO has provided an
estimate. They will not. And I think at a certain point, for
those who are criticizing the program, have every right to
conclude that the reason why they will not provide a number is
that their internal projections must be so abysmal and so
terrifying that they will not provide this level of
transparency.
So I think to have an informed debate, Treasury needs to
finally be transparent about its expectation, not putting out a
number of the total number of people potentially eligible, not
the total number of offers that they intend to make. How many
people when this program ends are going to be in sustained
permanent modifications? And their failure to do so is
inexplicable, and, frankly, indefensible.
Chairman Johnson. Mr. McCool, do you agree that servicers
should reach out to homeowners sooner? And another suggestion,
should Treasury explore creating a single point of contact so
that borrowers know who to communicate with?
Mr. McCool. Well, we have made recommendations and some of
them have actually been at least either implemented or
partially implemented on the front of having Treasury issue
better guidance about how servicers deal with customers, how
they deal with complaints, and I think that there has been some
improvement in that arena, but I think there is still work to
be done.
Sort of to echo Mr. Barofsky's point, I think what we have
been pushing for from the very beginning is performance
standards, and in particular, performance standards for the
servicers, that we think the Treasury needs to come up with
performance standards, hold the servicers accountable to those
performance standards, and until they do that, again, we think
some of the problems are going to continue to fester.
Chairman Johnson. Mr. Massad, what is your response to
these suggestions?
Mr. Massad. Thank you, Mr. Chairman. I would be happy to
respond. First, on the issue of performance standards, that is
precisely what we have done. Let us remember, first of all,
this is a crisis that was a decade in the making and for 2
years nothing was done. When we launched this program, no
modifications were occurring. We launched the program on a
voluntary basis. It had to be that way under the law.
In terms of performance standards, we have forced the
servicers to do a lot of things they simply were not doing.
Those include a whole range of borrower protections, like the
issue on dual track, for example, the practice where servicers
were discussing a modification or considering a modification at
the same time as they were proceeding to a foreclosure sale. We
stopped that. We put in other borrower protections, as well.
Now, we agree, as the Secretary has said, that there is a
need for national servicing standards. This is a servicing
model that was set up to collect payments on performing loans.
It was not equipped to deal with this crisis. And far more is
needed than the HAMP program to fix that. The regulators are
now paying attention to it. The FHFA, the conservator of the
GSEs is paying attention to it. And I think we will see that.
Second, in terms of estimates, it is very difficult to make
estimates as to how many we will ultimately serve, but the
facts are that, number one, the cost of this program is
directly related to how many we serve. So it is not a matter
that we will spend the same amount of money regardless.
Number two, we publish reams of information about this
program, including how many people we are reaching every month
in permanent modifications, in trial modifications, how many
fall out of that, how many redefault. We publish information by
servicer. Anybody can see how this program is doing. It is not
a matter of not being able to evaluate it. It is a matter of
the fact that this is a very difficult housing market to fix
and this program is at least helping fix it. It is not enough,
but it needs to be continued so that we can try to ease the
pain for millions of American families.
Chairman Johnson. Senator Shelby?
Senator Shelby. Thank you, Mr. Chairman.
Mr. Barofsky, first of all, I want to thank you for a great
job you have done as Inspector General. I remember when you
were up for confirmation and I told you, among other things,
right here in this Committee, that I hoped that you would do
something very good for the American people and that you would
stand up for the American people, and you have and I am glad
that you are employable. My reference then was probably that
you did not need to be employed by some of the people that you
were going after, and they would never hire you anyway, thank
God. But you will leave that post with a lot of help, a lot of
thanks from the American people for the job you have done and
you will always do well, I know that.
I would like to ask you a couple of questions, if I could.
In your written testimony, you state, ``Unfortunately''--I am
quoting you--``TARP's most significant legacy may be the
exacerbation of the problems posed by too-big-to-fail.'' You go
on to quote Secretary Geithner from a December 2010 hearing
before the Congressional Oversight Panel in which he states
that ``in the future, the Federal Government may have to do
exceptional things,'' he says, ``again if we face a large
shock.'' In your view, do financial markets still believe that
the Federal Government will not allow big banks to fail?
Mr. Barofsky. Senator, first of all, thank you for your
comments. I really do appreciate them. They mean a lot to me
and my family, so thank you.
Senator Shelby. Thank you.
Mr. Barofsky. The answer to your question, absolutely and
unambiguously, the financial markets believe more than ever
that the United States Government will step in and save the
too-big-to-fail institutions should there be another financial
shock.
Senator Shelby. Is that not what helped bring the GSEs to
where they are today, sitting in the Government's lap? In other
words, that was the implicit guarantee that we would never let
them----
Mr. Barofsky. It is nearly the identical toxic cocktail of
implicit guarantees and market distortions that the too-big-to-
fail banks have today as Fannie and Freddie did leading into
the financial crisis, yes.
Senator Shelby. Let me, if I can, some of your words, I
just want to read it into the record and share it with you, and
this is on page six of your testimony, and I will quote you:
Regardless of whether all the required regulations are properly
calibrated and fully implemented, the ultimate success of the
Dodd-Frank Act depends to a certain degree on market
perception. Thus far, the Act has clearly not solved the
perception problem. Reflecting on Secretary Geithner's candid
assessment of the likely limits of Dodd-Frank in the event of
another full-blown financial crisis, the largest institutions
continue to enjoy access to cheaper credit based on the
existence of this implicit Government guarantee against
failure.
And I will quote you again:
Standard and Poors and Moody's Investors Services, two of the
world's most influential credit rating agencies, recently
reinforced this significant advantage for those institutions.
In January of this year, S&P announced its intention to make
permanent the prospect of Government support as a factor in
determining a bank's credit rating, a radical change from pre-
TARP practice, stating its expectation, quote, `this pattern of
banking sector boom and bust and Government support to repeat
itself in some fashion regardless of Government's recent
emergency policy response.' Similarly, Moody's stated its
belief that the proposed resolution regime, quote, `will not
work as planned, posing a contagion risk and most likely
forcing the Government to provide support in order to avoid a
systemic risk . . . '
and so forth.
And I want to quote former Secretary of the Treasury and
National Economic Counsel Director Lawrence Summers, what he
said a number of years back, and I will quote: ``A healthy
financial system cannot be built on the expectation of
bailouts.'' Do you disagree with that?
Mr. Barofsky. No, I do not, Senator.
Senator Shelby. Thank you for that.
Mr. Massad, I would like to direct a question to you with
my time. In October 2010, in an editorial, Secretary Geithner
stated, quote, ``The TARP is over.'' The TARP Inspector
General's, who we have here, most recent quarterly report
clarifies that although no new TARP funds may be obligated,
$59.7 billion remain obligated and available to be spent, and
$149.4 billion in TARP funds remain outstanding. Do you have
differences with those figures?
Mr. Massad. Thank you, Senator Shelby. I think what the
Secretary was referring to in October of 2010 was that the
purchase authority, the authority to make new commitments under
TARP, expired. We do still have about $150 billion in
investments outstanding, which we are working every day to get
back, and we do still have commitments, particularly with
respect to our housing program, that will allow us to disperse
money for the housing program. Those are the programs we want
to continue.
If I could, Senator, I would also like to respond to the
too-big-to-fail issue, if you would let me. Would that be all
right?
Senator Shelby. Absolutely.
Mr. Massad. First of all, I share your concern about the
issue. We obviously have to have a financial system where
companies fail when they take excessive risks----
Senator Shelby. The too-big-to-fail doctrine is a flawed
doctrine from the beginning, is it not?
Mr. Massad. Well, it is an unfortunate doctrine, that is
for sure, but----
Senator Shelby. Well----
Mr. Massad.----let us remember, TARP did not create the
problem. It existed before TARP.
Senator Shelby. We know.
Mr. Massad. And we needed TARP because we did not have the
tools to fix it, and I do think Dodd-Frank has given us some
tools to address it and now the task is to implement those.
Senator Shelby. Mr. Barofsky, in an editorial in the Wall
Street Journal, two current members and one former member of
the Congressional Oversight Panel explained why TARP was not a
win for taxpayers. They criticize the Administration's claim
that TARP was successful because the money may be repaid. They
state, and I quote:
The focus on repayment of TARP is deceptive because it fails to
consider the huge taxpayer cost from non-start programs that
directly and indirectly enable many of the large banks to repay
their TARP funds.
They list several programs that provided significant aid to
banks, including the Federal Reserve's purchase of $1 trillion
of GSE-guaranteed MBSs, Treasury's $150 billion bailout of the
GSEs, and other Fed and FDIC programs which place another $2
trillion in taxpayers' money at risk. Do you disagree with that
conclusion?
Mr. Barofsky. No. I think it is very important to view TARP
in the context of the broader scope of the Government's
response to the financial crisis, and each July, SIGTARP
publishes a comprehensive overview of all those programs. And
what we saw this past summer was an actual increase in the
total amount of outstanding commitments year over year, from $3
trillion to $3.7 trillion. So our job here at SIGTARP is to
focus on the TARP, but, of course, the TARP does not exist in
isolation and any overall accounting would necessarily have to
include those other things. That is outside the scope of our
jurisdiction, but we always do try to put it in context. I
think that is important.
Senator Shelby. Thank you. Thank you, Mr. Chairman.
Chairman Johnson. Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman. I
was listening closely to the recollections of both you and the
Ranking Member about September 2008 because I was also there.
What I recall in the room was not so much scare tactics but
palpable fear that we were on the cusp of a significant
financial collapse, that the tools available had been
exhausted, and that we needed to provide assistance, and that
in the context of the legislative debate, which was a
bipartisan debate and ultimately with bipartisan support, we
crafted something that, as the Ranking Member pointed out, it
was not the initial proposal of Secretary Paulson to acquire
assets and securities in the marketplace but it gave Secretary
Paulson the flexibility to make essentially equity injections.
I think so far this has proven to at least stabilize the
situation, and in fact, I would argue, has probably avoided a
significant financial deterioration which would still be
plaguing us.
And Mr. Barofsky, I am just going to ask, because you have
done remarkably good work--and let me join my colleagues in
saluting you as you leave. You have been not only thoughtful,
but your independence and your integrity and your commitment
has been so clear, indeed, inspiring.
But let me ask you, putting aside too-big-to-fail and all
those discussions, if we had not acted decisively in September
of 2008, where would we be today, basically? Do you have a
sense of the magnitude that we were facing?
Mr. Barofsky. Senator, thank you for your comments earlier.
I think I could best report on the extensive work we have done
of interviewing all of the major participants, and I think
there was universal agreement that we were on the brink of a
cataclysmic failure and that this was a very significant crisis
that we had not seen since the Great Depression and that there
was certainly a sense of widespread panic among regulators and
that the reaction was a kitchen sink response, not just with
TARP, but with the FDIC's programs, the Federal Reserve's
programs, the trillions and trillions of dollars that were
thrown at the situation. And I think that accurately reflects
the deep level of panic that was felt by the regulators and the
market participants, as well, to the severity of the problem.
Senator Reed. But having done all this work, that reaction
was not irrational, given what they were seeing in the
marketplace, given the contagion, given the fear. In fact,
frankly, I think, particularly for Chairman Bernanke, his
studies of the Great Depression and the lead-up to it, the very
tentative response in the 1920s and 1930s to an evolving
international crisis prompted him and others to say this is the
only way we can do it, and he has been very clear about this,
let us go all out, let us hit it hard, let us hit it fast.
Mr. Barofsky. No, and I think there is no doubt that
financial crises are, in part, psychological, and that fear was
universal and it was widely held. What specific--and one of the
things I think the Congressional Oversight Panel really hits
the nail right on the head is that while we do believe that
TARP was a very important component of calming the markets, it
is, of course, impossible to say which one of the myriad
programs was responsible for helping calm the markets
eventually----
Senator Reed. Right.
Mr. Barofsky.----and which ones did not. But we believe,
and we have long been an advocate for the position that the
broad statement by Secretary Paulson, and then later in the
spring an almost identical statement by Secretary Geithner that
they would not let these large financial institutions fail and
they had the TARP funds to back it up, while it certainly then
caused a lot of the problems, Senator Shelby, that you were
discussing about moral hazard and too-big-to-fail, it was an
instrumental tool in calming the markets and avoiding that
cataclysmic potential second Great Depression.
Senator Reed. Thank you. I also have to salute Senator
Kaufman for his service, both here in the Senate, for putting
up with a lot of my bad jokes as we traveled around the world,
and many other things, so thank you, Senator.
In the process of taking the proposal that Secretary
Paulson and Chairman Bernanke offered a one-page sketchy kind
of outline--we did some things that I think not only gave them
the flexibility to respond, but there is also one critical
aspect which is often overlooked. This is the inclusion of the
warrants provision, which I insisted on being included with the
support of my colleagues because I knew that if any Wall Street
investment bank was going to do this, they would not only take
preferred stock, but they would also insist on warrants, which
we did. Those warrants to date, and for those who may not be
familiar with this, it is essentially a right to buy their
stock at a fixed price, and as they improved and the stock
price went up, we got a second payback, which is about $8.6
billion, which might be seen as another dividend from the
improving banks to the taxpayers. Can you comment on that,
Secretary Massad?
Mr. Massad. Thank you, Senator, for the question, and thank
you for your push for that provision. It was very, very
important, and you are absolutely right on your figures and
your analysis of it. We have today recovered about $9 billion
from the warrants, because we had a recent repurchase this
week. That is from about 15 or 20 auctions as well as about 45
repurchases, and we still have more positions that we will sell
over time. So it was an excellent provision and I thank you for
it.
Senator Reed. Thank you.
Just to, if I may, Mr. Chairman, a quick and very brief
comment from Senator Kaufman and Mr. Barofsky is that this
issue of moral hazard is not unique to this time and this place
in financial history. It seems to be any time a Government
provides support--we do it through Federal Deposit Insurance. I
know in the 1930s there was a great debate on this. Franklin
Roosevelt did not like deposit insurance because it was a moral
hazard, et cetera. But, it has proven to be effective.
And I think one of the reasons it has been effective, even
though there is an issue of moral hazard, is it has been very
well regulated, and the sense of Dodd-Frank, I hope, is that if
we accurately and aggressively and with the resources regulate,
understanding that moral hazard is implicit, we will do a lot
to avoid a potential crisis, and Senator Kaufman, please
respond just very briefly, because my time has expired.
Senator Kaufman. No, and I think it is really quite
extraordinary. This panel that I am on has five members, two
appointed by Republican members and three by Democrats. But
there was a consensus, and this is a very difficult issue, it
is a very political issue, but there was a solid consensus that
the TARP with the other pieces that went through it stopped
what could have been a very bad situation, number one.
And number two is that moral hazard was one of the
decisions. When you sat there and made the decision whether you
were going to go ahead with the TARP, you were faced with the
fact of moral hazard. And I think the moral hazard part, you
see it now in terms of what is going on with the rating
agencies. If you are running an organization and you know that
if there is a sine curve of this is positive and this is
negative and you know you cut that negative section off, and
you know that if you increase your risk, there is no price to
be paid, then you can increase the risk because we know return
is directly related to risk. The higher the risk, the higher
the return. You just go for the moon with the understanding
that if you fail, the taxpayers are there to bail you out.
So this is not some theoretical economic business school
analysis. I think the real concern, as stated, is the rating
agencies are now saying essentially they believe that there are
firms who are too-big-to-fail, and very big firms that are too-
big-to-fail.
Senator Reed. Mr. Barofsky, please take this for the
record, because my time expired. The Chairman has been very
gracious. Thank you.
Chairman Johnson. Senator Moran.
Senator Moran. Mr. Chairman, thank you very much.
Perhaps this is directed to Mr. Barofsky, but I am not
certain. I am troubled by the long-time assertion that the
success of TARP is determined by the return of taxpayer dollars
as if that is the criteria by which we can judge success or
failure. And I am troubled by that because I think it fails to
take into account other consequences. Even if all the money is
repaid to the Treasury, there were consequences of TARP not
accounted for in that accounting. And I think of things in your
testimony that the Ranking Member indicated about large
institutions continuing to enjoy access to cheaper credit.
There is a consequence to that. My small community banks in
Kansas feel a consequence of that occurrence, particularly when
you couple that with Dodd-Frank and increasing regulations. So
larger institutions have cheaper access to credit and a better
ability to spread the costs of additional regulation among
larger economies of scale. My smaller banks are disadvantaged
in both instances. As Congress responds by providing money to
large institutions and increasing regulations on all
institutions, there is a consequence, an economic consequence
certainly in places like Kansas for our community banks.
So if the criteria is the money got repaid, I think we have
failed to take into account that and many other consequences of
this legislation. It also fails to take into account was there
a better way to do it than what we did. Could there have been a
greater return? So the fact that--and Mr. Reed talked about the
warrants. I wonder--and I have heard several in your testimony
talk about the--as compared to the credit union--I am sorry.
Forgive me, to the credit unions--for the savings and loan
bailout. That was the criteria in which we are judging success
today, and the indication was, well, this is better than--we
are going to lose less money than we did then.
But I wonder about Continental Illinois, for example. Was
that not a better example where we were able to reap return and
prohibit investors from getting a return as well?
One of the things that I think was a consequence of TARP is
that those who invested in these institutions, they were held a
lot less accountable for their investment than, for example, in
Continental. And so my question is, I suppose, a broad one, but
my assertion is that I am not satisfied when I hear that just
because the money has been repaid this was a good idea.
Mr. Barofsky. Nor should you be, and I think that a tunnel
vision focus on financial costs and a declaration of mission
accomplished because of the return to profitability and
strength of Wall Street ignores the important non-financial
costs of TARP, which are just as important and may in time
prove to be more important. So it includes, as you identified,
Senator, the moral hazard and the legacy of too-big-to-fail
that TARP has left. It includes the very real harm to
Government credibility through mismanagement of this program.
It includes the failure of TARP to meet its very important Main
Street goals as well as Wall Street goals, including, as we
have discussed earlier, the very important goal and very
prominent reason why many Members of Congress voted for TARP--
the goal of preserving homeownership.
So I think that you have good reason to say that this is
not a simple black-and-white answer, did it work, did it not
work, and that financial costs are the only determinant of its
success. It is a much deeper issue.
Mr. Kaufman. The one thing to keep in mind is that while we
talked about a $356 billion cost estimate, the original number
in the legislation was $700 billion, and I will guarantee you
that 80 percent of the news articles that talk about TARP talk
about the $700 billion. I totally agree with what you said. I
totally agree with what the member said, and I totally agree
with the rest of the panel. Clearly, there are a lot of
concerns, moral hazard being one of the really gigantic causes.
But the thing that is amazing is, according to a recent
Bloomberg poll, 60 percent of Americans think we lost it all.
Sixty percent think we lost all $700 billion.
So I think spending a little bit of time saying, OK, we had
a problem here, clearly this was all part of a big thing,
clearly all the questions you raised are legitimate concerns.
But let us start out with the fact that we did not lose $700
billion; it looks like it was $25 to $50 billion. Now, $25 to
$50 billion is a lot of money. But, part of running a
Government is the perception of the Government. You have a
perception out there that the Government lost $700 billion on
TARP, again, not talking about the Fed and all the other things
the Ranking Member has raised and the Chair has raised. But it
actually turns out to be $25 to $50 billion. That is an
important point to make, I think.
Senator Moran. Senator, thank you. Is there any analysis by
those of you who are doing oversight in regard to was there a
better way to do it? Was there a greater opportunity for return
as compared to the way that TARP was structured?
Mr. Kaufman. Well, we have got 30 reports you can take a
look at, but the best thing is we have a final report in terms
of lessons learned, and you can look through that.
Now, again, remember, we are all oversight so we do not
write the rules. We start with the basic premise that Congress
has passed a law and we have oversight on that law. But I think
you would find, if you go back and read our reports and others,
there is a rich area to ask: on a calm day, without the panic,
without the concern that everyone has raised, could we have
done this a little differently? And are there things we could
have done as we went along? There is a lot of meat in those 30
reports.
Senator Moran. I appreciate that only a former Senator
would attribute the responsibility back to Congress.
[Laughter.]
Chairman Johnson. Senator Hagan.
Senator Hagan. Thank you, Mr. Chairman, very much, and I
want to welcome all of you here today and thank you for your
testimony.
Senator Kaufman, it is certainly a pleasure to see you
again. You were certainly instrumental during the debate of the
Dodd-Frank bill, and you certainly added so much to the work
that has taken place in that situation. We certainly do thank
you for your oversight in this new position, also, and I am
thrilled to hear you are going to be back at Duke University
Law School doing your good work there. So it is great to see
you again.
One of the things that you talked about in your testimony
is the reference to the higher cost of funds for our small and
community banks relative to the larger banks, and sort of what
Senator Moran was talking about, too, is that the smaller
community banks in North Carolina consistently are very
concerned about, one, their capital requirements, the
regulation, sort of their inability to do so much of the
lending that they have done in the past, and it is so adversely
affecting so many of the smaller communities where these banks
have been the mainstay in those areas.
One of my concerns is what can we be doing in Congress to
reverse this trend, and here I guess I am talking primarily
about the higher cost of funds that you mentioned to ensure
that we maintain a vibrant network of community banks in our
Main Street communities.
Mr. Kaufman. I think you have just got to stay on the
regulator and Dodd-Frank and make sure we do not have too-big-
to-fail. I mean, it is very, very difficult to compete in a
market if some of the people in the market have lower credit
ratings, and if they know when they go into it they can compete
in businesses. So really the key thing is we have got to get
away from this too-big-to-fail. It is bad in so many different
ways in terms of the concept. And we have done a lot, and there
are a lot of things in Dodd-Frank, and a lot of things in the
hands of the regulators. But, look at our local banks, small
banks right now. It was really interesting being on the Panel
and finding out how many small banks are now in commercial real
estate. We have a real problem, the commercial real estate
overhang over there on our small banks. Why are our small banks
in commercial real estate? They are in commercial real estate
because the big banks now come in and can do all the other
services that they used to do--the checking accounts, all the
rest of this stuff. They can come in there and do it at a much
lower price than they can because of the advantages that they
have. The small banks never want to get up and say, you know,
the big banks really are not treating me as well as I might
like to be treated, and they are causing me competitive
problems, and they are keeping me in businesses that I do not
want to be in. They kind of all hang together. But I think it
is time for the small banks in candor to come out and point out
what some of the problems there are when you have these major,
major, major banks that feel like they are too-big-to-fail,
and, therefore, they can get rates at a low rate. And I think
it is up to Congress and I think it is up the Treasury and I
think it is up to the other regulators to make sure that the
Dodd-Frank provisions in there--to make sure that we do not
have too-big-to-fail, you know, that the capital requirements
and the rest of it that we have to do so we do not have too-
big-to-fail. Because how are small and medium banks going to
survive when they have got these giants coming to town with
lower interest rates. It is very, very difficult to have a
positive picture unless you go into things like commercial real
estate, and now we see what happens. They are so heavily into
commercial real estate that it makes it tough for them to make
money, and they are in danger and they are failing at an
incredible rate of speed.
Mr. Massad. If I may, yes, thank you, Senator, if I may add
to that. We agree very strongly that we have to have a thriving
community bank, small bank industry in this country. That is
why when the Obama administration took office, we did not
provide any additional funds to the largest banks in the
country. We provided funds to about 400 very small banks. Most
of the funds under the Republican administration were provided
to the large banks.
Now, I agree with the decisions they made. They were
necessary to prevent the collapse of our system. But we have
tried to work with the smaller banks.
I also would point out that while we have had some weakness
in that sector, those banks are getting stronger, and actually
those banks that took the TARP money overall are in a much
better place than the industry average.
Finally, I would agree with Senator Kaufman that the task
now is to implement the tools under Dodd-Frank. You know, you
have to distinguish between what you have to do in a crisis to
put the fire out and then what you do to look at what were the
causes of the fire, how do we prevent this from happening
again. And that is the phase now that we are in with Dodd-
Frank.
Senator Hagan. Well, it appears that some of the smaller
banks are having trouble paying some of the TARP money back.
Are we setting them up for problems by continuing to ask them
to pay at a higher rate?
Mr. Massad. That is a very good question, Senator. First of
all, they are not obligated to pay it, and they have to have
the approval of their regulators in order to pay it. And as a
result, many of the regulations have said you should not pay
this, you need to conserve your capital, and that is fine with
us.
I would point out again, though, that while we do have a
number of banks who have not been paying the dividend, when we
looked at the rate at which banks that are in the program are
paying dividends on preferred stock versus those outside of the
program, to the extent there is data--and there is not data for
all the banks--what we found was that 11 percent of the banks
in the program were not able to pay the dividends. The rate
among those banks outside of the program who were not paying
dividends on preferred stock was 43 percent.
Senator Hagan. I wanted to turn to the HAMP program, and I
know several of you all have talked about how it has not been
operating the way you would have liked it to, and I would just
like, Mr. Barofsky, could you speak a little bit on what you
would see changes going forward in that program to certainly
help the homeowner at this point in time?
Mr. Barofsky. Well, again, I think the important thing is
there has to be initially an acknowledgment from Treasury that
this program is failing and the cessation of continuing to
defend the status quo.
Senator Hagan. Well, aside from that, going forward what
can we be doing?
Mr. Barofsky. Well, again, as an example, as I mentioned
before to the Chairman, I would say you start with reassessing
the incentive structure and the penalty structure. So if the
current system is not working, as the Secretary has
acknowledged, revisit that structure with both penalties as
well as taking a look at the incentive structure.
We have made other recommendations as well as fixing the
program, recommendations regarding principal reduction and the
approach to principal reduction, which appears to not be
working; increasing transparency. There are a number of
things--we have a number of recommendations. GAO, the
Congressional Oversight Panel, there is a whole host of
recommendations that could help improve this program, but it
starts with an acknowledgment that there is a problem. And as
long as there is this continued defense of the status quo, it
is not going to happen.
Senator Hagan. Senator Kaufman, do you have some thoughts
on that?
Mr. Kaufman. Obviously the program is over, you cannot do
things, but I think you have got the reality of the situation.
It started out with the idea that borrowers and lenders, like
it used to be, sit across the table from each other and modify
a loan. That is pretty simple. Now you have got the servicers
in there, and one of the things that is very difficult to deal
with and it is very difficult for Treasury to deal with--but we
have to deal with it--and that is, there are two really big
elephants in the room. One is some servicers get higher
incentives by going to foreclosure. And, remember, these
servicers are not--some people have this view that servicers
are these third parties or whatever else. The servicers are the
big banks. They are the servicers. So the first thing is you
have a conflict of interest. How do you get a bank that really
is going to make more money doing a foreclosure not to do
foreclosures?
The second big one, which the Treasury addressed in, I
think it was, April of 2009, is the second lien. So think about
it. If you are a first servicer on a bank and you have a second
lien on a mortgage, and the first mortgage is with someone
else, do you want to modify that first mortgage? Because when
you modify that first mortgage, your second lien goes to zero
or very close to zero.
So those are two gigantic conflicts that have got to be
overcome if you are going to deal with the program, and
Treasury has a second lien modification program.
And the third piece, of course, is the whole thing was
designed for the subprime problem. In fact, really it became
quickly a prime unemployed problem. And Treasury also has a
program for unemployed.
So I think, you know, it is trying to catch up with all the
different things, and I think it is pretty well identified, and
we have pretty well identified it. We have had four reports on
HAMP and one report just on the irregularities. We have
identified what the changes are. But it has to be a program
that recognizes the realities of what is out there.
Mr. Massad. Thank you, Senator. First of all, I think we
have implemented most of the specific suggestions that have
been made by the oversight bodies with respect to the program.
As far as the basic structure, which Mr. Barofsky has alluded
to, that is determined by the law and the powers that we had.
It had to be a voluntary program.
I do not think it is a matter of acknowledging that it is
failing. I do not consider the fact that we have gotten 600,000
people into permanent modifications or the fact that we have
helped another 1.4 million at least get some breathing room
through a temporary modification, many of whom then went on to
get other forms of modifications outside of our program--very
few went to foreclosure--or the fact that this program has
resulted in significant changes in the industry is a failure.
And since he and I testified before the House Oversight
Committee, we have gotten in about another 40,000 families. In
the time that this hearing is running, we will have a couple
hundred more.
Now, that is not enough. We need to do more. One of the
things we have done in response to the Congressional Oversight
Panel's suggestions was we did implement programs that
addressed unemployment and falling house prices, negative
equity. In particular, we set up the hardest-hit program where
we are sending money to a number of States hardest hit,
including North Carolina. And those programs take time to ramp
up, but, again, I think the important thing is to keep at it.
This is, again, a crisis that took a long time to develop, so
it is not going to be fixed overnight.
Chairman Johnson. The Senator's time has expired.
Mr. Barofsky, can you elaborate about the HAMP program and
what you advise us to do with the penalties?
Mr. Barofsky. Sure, and I think the numbers just presented
by Mr. Massad are potentially misleading, to use no better
word. There may have been 40,000 initial permanent
modifications, but how many--is that really a net number? I
mean, how many of those ongoing permanent modifications have
dropped out in the period since we last testified? To suggest
that 1.4 million people have been assisted by this program
frankly demeans the real harm that many of those people who got
failed trial modifications have suffered. We have documented
it, and it has been documented time and time again.
Chairman Johnson. But can you come up with some examples of
penalties?
Mr. Barofsky. Absolutely. I think that one place where we
can start is by Treasury living up to its commitment that it
made in late 2009 about imposing financial penalties by
withholding payments to mortgage servicers under the terms of
their agreement. This is what they said in late 2009:
Recently Treasury has been saying, well, we do not have that
ability legally under the contracts that we negotiated with the
servicers. We did not give ourselves the ability to impose
financial penalties for failures in conduct.
--conduct that they have described as being abysmal.
So we sent a letter, and we asked them to detail to us the
changes in their legal position. So far they have ignored that.
But I think going back to the agreements and trying to withhold
payments and impose some financial penalty, that would be the
easiest thing to do to work within the contracts. And, frankly,
if it is, as they suggest, ambiguous, try it. Let us go to
court. Let us have servicers sue Treasury under the idea that
they are allowed to willfully violate the terms of their
agreement with no consequences.
So I think that is a good starting point. I think that here
in Congress, as far as financial penalties, encouraging--and if
Mr. Massad believes that he does not have the necessary tools
under these agreements, he should tell you what tools he needs
in order to compel servicers to abide by the terms of their
agreement. If the complaint is that Congress has not given them
the tool, well, tell them what tools that they--tell you what
tools they need so that they can have those tools and bring
about servicer accountability.
Chairman Johnson. Mr. Massad?
Mr. Massad. I am happy to respond. Thank you, Senator.
Let me just say there is always more that can be done with
respect to compliance. This is an industry that was not
working. Particularly it was not equipped to deal with this
crisis.
Number two, we have not changed our legal position. We have
the ability to withhold payments. What we have always said and
what is the law is we cannot impose fines and penalties in the
manner a regulator would for violations of the law.
Number three, our compliance efforts have been extremely
aggressive. We have over 200 people working on compliance. We
are in the servicers' shops all the time. Frankly, the things
we have made a lot of them do, they would have preferred to
write a check. We have made, for example, servicers go back and
solicit 150,000 people--one servicer in particular solicit
150,000 people that they had overlooked. We made them go back,
not just do telephone calls and letters but door knocking. We
made them go back and re-evaluate people that they wrongly
evaluate for HAMP mods.
Is there more we can do? Yes. I think you will see us
withhold more payments. But what we were working on initially
was getting the servicers' systems in a place where they could
implement this program.
Chairman Johnson. Senator Menendez.
Senator Menendez. Well, thank you, Mr. Chairman. Sorry, I
had another hearing, but I have been reading the testimony in
advance, so I thank you all for your testimony.
Let me start off with a question that I am happy to have
any one of you answer, and I am thrilled to see my former
colleague here sitting at the table. Now I get to ask you all
those questions that you would not answer for me when you were
on the other side here. No, I am just kidding.
If we did not do TARP, as some suggested we should not
have, what would have been the consequences?
Mr. Massad. I am happy to answer. I think we would have
faced the very real risk of a Great Depression, as has been
noted by many economists and others. It was not just TARP. It
was all the Federal Government interventions. It was a broad-
based action, and the keys to it were it was coordinated, it
was powerful, and it was swift.
I think all the oversight agencies have recognized that,
and, you know, I was chatting the other day with Elizabeth
Warren, who obviously had plenty of criticism for how we did
things, but she put it rather simply. She said, ``Well, it is
obvious. If we had not done these things, we would have been
back in the Stone Age.''
Mr. Kaufman. The Congressional Oversight Panel never came
up with an answer specifically, but what they did say and what
is in an op-ed today--and I think Neil Barofsky had the perfect
metaphor, and that is, when you were faced with a situation,
they threw everything but the kitchen sink at it, and I think
the kitchen sink, too. I think trying to find out, you know,
whether TARP specifically stopped terrible things, go back to
the Stone Age, I believe that, and I believe that this was the
kind of financial crisis that would have taken up back to
``Grapes of Wrath,'' at least, if not the Stone Age.
And so, you know, the Panel agreed, which is a bipartisan
panel, that TARP in conjunction with a bunch of other things
that were done--by the Fed, by FDIC, by everybody else--really
did stop a panic and keep us from a complete, absolute
financial meltdown.
Clearly, the Panel also points out a number of negative
things we have talked at length today and we should talk about
at length and even more length and even more length about the
moral hazard with the Government getting involved in this and
the fact that--I think it is not just a perception. The reality
is that Wall Street came out a lot better than Main Street in
terms of the program. But in terms of the Panel felt as a group
of things that the Federal Government did at that time helped
us avoid a major problem.
Senator Menendez. I wonder if it is not moral hazard to
allow a nation to go into a depression?
Mr. Kaufman. Absolutely. I was on a show today, and they
asked me about what lessons were learned, and we have got a
great report we just came out with that I recommend to
everybody. It is over 200 pages, and we have lessons learned in
each section. You know the one lesson I have learned from this,
Senator? Prevention. Everybody can sit here and we can talk
about if we had done this or we had done that, or it worked
here, we shot this, or who did that or how did we do that, and
the rest of that stuff, and I will sit right with them on the
panel and discuss what we could have done. But when you get
faced with the ultimate Hobson's Choice, which is the moral
hazard of putting people back in the street, losing their homes
on a scale like the Great Depression, and the moral hazard of
creating institutions too-big-to-fail, there is no win in that
one. What you have got to do is you have to make sure you just
never have to face that again.
Senator Menendez. I raise those questions because when I go
back home to New Jersey, I often have average citizens stop me
and say, ``Senator, I do not get it. When I make a mistake, I
have to pay for my mistakes. And when they make a mistake''--
meaning these financial institutions--``I have to pay for their
mistakes.'' And explaining systemic risks and the consequences
to their savings, their livelihood, and their opportunities is
a tough proposition. But that is the essence of what we face,
because I do not--I am not thrilled with TARP as it was both
devised and executed. But by the same token, having listened to
Ben Bernanke in 2008 coming to Members of this Committee and
members of the leadership and largely describe the series of
events that were unfolding that would have had a series of
financial institutions collapse, and if they collapsed, create
systemic risk to the entire country's economy. And I will never
forget the answer to the question.
Well, surely you must have enough tools at the Federal Reserve
to get us through this period of time so we can think more
proactively about how we respond and how we do it.
And the answer: ``If you do not act in the next 2 weeks, we
will have a global financial meltdown.'' And basically the
response to that, ``That would mean a new depression.'' And in
essence the answer to that was, ``Yes, if we allow it to
happen.''
So I think, you know, back home in New Jersey and across
the country, as we talk about an economy that is coming out of
a deep recession, we were really on the verge of a new
depression. And had market forces just been allowed to act on
their own without any governmental intervention, I think we
would be--not because of any of my expertise but Ben Bernanke,
while, you know, I may not always agree with him, his expertise
is in Depression Era economics, how this country got into the
last depression, what worked for Roosevelt to get out of it. He
is not a politician. He is an academician. And so I think it
had some weight to it, and I think that sometimes we need a
little bit of a sobering understanding of where we started,
what we had to face, the timeframe in which we had to face it
in order to understand where we have been and where we have
come from.
Now, that does not mean there are not a series of things
that I hope we have learned that we can prevent, as Senator
Kaufman suggests, for the future but also understand that when
we need to act, how we need to do it in a more effective and
efficient way.
But I just wanted to take this opportunity to just put this
in the right frame because I think it is very easy, people
gloss over that moment in history, and it was a tipping point
in terms of how we responded to what would have happened to
this country.
Thank you, Mr. Chairman, for the opportunity.
Chairman Johnson. Senator Shelby?
Senator Shelby. Mr. McCool, if you would, walk us back
through what happened at AIG, what we got in--what we did to
get into it, where we are today. You alluded to it earlier in
your testimony, and----
Mr. McCool. Yes. Yes, Senator.
Senator Shelby.----because we hear all kind of reports that
everything is over with, everything is great. I do not believe
that is true, but go ahead.
Mr. McCool. Well, I mean, what I alluded to in my testimony
is that, at least in the recent past with the recapitalization
program that has been announced, there is at least some chance
of us exiting AIG, and we will see whether we----
Senator Shelby. How much money have we put into AIG?
Mr. McCool. Well, umm----
Senator Shelby. Directly and indirectly, roughly.
Mr. McCool. I think it was as high as $150 billion at one
point. There was a----
Senator Shelby. Have they paid that back yet?
Mr. McCool. They paid a fair amount of it back.
Senator Shelby. What is a fair amount?
Mr. McCool. Well, as I said, I think we are down to about
$96 billion----
Senator Shelby. So they paid----
Mr. McCool. Something like $50 or $60 billion, primarily by
paying back----
Senator Shelby. A little over a third, they have paid back.
Mr. McCool. Yes, by paying back----
Senator Shelby. So they owe about two-thirds, more or less?
Mr. McCool. More or less. More or less.
Senator Shelby. So they still owe a substantial amount of
money, nearly $100 billion.
Mr. McCool. If you include the assets in the Maiden Lanes--
--
Senator Shelby. Sure.
Mr. McCool.----as well as the money----
Senator Shelby. OK. Tell us where we are today.
Mr. McCool. Well, I am just saying that the key is going to
be, since the Treasury owns 92 percent of the common stock,
what kind of a price they are going to be able to get as they
sell that stock over time----
Senator Shelby. That is a lot of money, is it not?
Mr. McCool. It is a lot of money, and there are a lot of
questions about just how deep the market is going to be and
things like that. I mean, we are actually doing some work to
look at that, but that is an ongoing issue for the future----
Senator Shelby. To recoup $90-something-billion in a sell,
you are going to have to have a pretty good stock price there,
are you not?
Mr. McCool. Well, no, I mean, it is not $96 billion for
equity. There is about $25 billion of that that is financing
for the troubled assets----
Senator Shelby. OK.
Mr. McCool.----that the Fed has put in the Maiden Lanes.
But there is about $60 billion worth----
Senator Shelby. Sixty.
Mr. McCool.----of equity that they have to sell.
Senator Shelby. Still, you are going to have to have a
pretty good stock price.
Mr. McCool. Exactly. Exactly.
Senator Shelby. And when do you think that might happen, if
it will?
Mr. McCool. Well, I think they are going to be starting to
sell, or at least they cannot start to sell until, is it May, I
think, Tim? Tim can actually----
Mr. Massad. Happy to respond. Today, there is the following
outstanding. Under TARP, there is about $60 billion, which is
represented by common stock and preferred.
Senator Shelby. OK.
Mr. Massad. The preferred is about $10 billion and it is
secured by assets that exceed that value, so we fully expect
that we will----
Senator Shelby. Is that all part of that $60 billion?
Mr. Massad. That is part of that 60.
Senator Shelby. All right.
Mr. Massad. And then the common, about $50 billion or so
today----
Senator Shelby. OK.
Mr. Massad.----and I am including all of the AIG shares.
Senator Shelby. Sure.
Mr. Massad. There is a little bit of technicality there,
but today, the stock price is above the value of our
investment.
In addition to that, there is about $32 billion that Mr.
McCool referred to of the Maiden Lane vehicles. Those are
technically not obligations of AIG today. Those are special
purpose vehicles. They are secured by assets that exceed the
value of the Federal Reserve's loans today. So they are in the
money, if you will. AIG has also offered to take the Fed out of
one of those vehicles.
So as of today, current market prices, we expect to recover
the entire investment. Now, that represents--sorry.
Senator Shelby. When will this happen, generally? When do
you expect that to happen?
Mr. Massad. It will take some time----
Senator Shelby. Two years, five?
Mr. Massad. We do not have a specific time table, but I
would think a couple of years.
Senator Shelby. Mr. McCool, it is my understanding that on
several occasions, the GAO has asked Treasury to release their
internal projections for the number of mortgages they expect to
be successfully modified under the TARP Mortgage Modification
Programs. Have you received all the internal projections from
Treasury that you requested?
Mr. McCool. Yes, we have. [Mr. McCool subsequently expanded
on his response.]
Although it is true that Treasury has provided GAO the internal
projections used to establish funding caps for servicers
participating in the Making Home Affordable Program, these
internal projections are not used as goals or benchmarks to
hold servicers accountable for their performance. According to
Treasury, these projections are not the best measures for
holding servicers accountable. As we reported in July 2009,
June 2010, and March 2011, Treasury must establish specific and
relevant performance measures that will enable it to evaluate
HAMP and its other TARP-funded housing programs success against
stated goals in order to hold itself and servicers accountable.
Treasury does measure performance of servicers participating in
the first lien program. It measures conversion rates and
redefault rates, for example. But it has not established goals
to indicate what would be acceptable conversion and redefault
rates. Further, as we reported last June, Treasury has neither
established performance measures for the second-lien,
foreclosure alternative, and principal reduction programs nor
established benchmarks or goals, including benchmarks or goals
for the number of homeowners these programs are expected to
help. We continue to believe that it is important for Treasury
to develop benchmarks for performance measures under the first-
lien modification program, and develop measures and benchmarks
for other HAMP-funded homeowner assistance programs, as we
recommended in June 2010.
Senator Shelby. You have. And Mr. Massad, I assume in his
answer that you provided that information to them.
Mr. Massad. Yes.
Senator Shelby. How can we measure the success of the
Mortgage Modification Program now? How can we measure it, Mr.
McCool?
Mr. McCool. Well, again, I think that, as some of us have
been saying, I think we have not seen benchmarks for some of
the programs, and that is one of the things I think we would
like to see. The fact that they have given us the analysis they
have done does not mean that they have necessarily done all the
analysis that we would like them to do. And so the question, I
think, is, you know, to try to come up with benchmarks for the
programs in terms of how many homeowners you think you are
going to be able to help or not going forward, and again,
releasing that to the public so the public can actually be able
to hold them accountable.
Senator Shelby. Well, you have to do the metrics. You have
got to measure this, have you not?
Mr. McCool. Mm-hmm.
Senator Shelby. And you are in the process of doing that?
Mr. McCool. We are not currently in the process of doing
that, no.
Senator Shelby. When will you do that?
Mr. McCool. Well, I do not know that we had plans to do
that, but maybe we will look forward to doing that in the
future. But again----
Senator Shelby. And what does the future mean? Do you
mean----
Mr. McCool. Well, we have ongoing work on this program----
Senator Shelby. OK.
Mr. McCool. Until the program goes away, we are not going
away.
Senator Shelby. OK. All of you have made recommendations to
the Administration during the course of your oversight of TARP.
Mr. Barofsky, how many recommendations have you made to the
Administration regarding TARP, or let us say the top three.
What would they be?
Mr. Barofsky. Those that have not yet been implemented, are
you referring to, Senator?
Senator Shelby. Yes.
Mr. Barofsky. Well----
Senator Shelby. Are not implemented yet.
Mr. Barofsky. Not implemented. I would go back to some of
the ones we were talking about today. What is ongoing today and
what is the biggest failure so far right now as we are speaking
is related to HAMP. So I would go back to our HAMP
modifications, publishing realistic estimates, stop accepting
the status quo, fix the incentive structure, impose financial
claw-backs or penalties. If they have the power to do so, why
on earth have they not done so yet given the abysmal
performance----
Senator Shelby. Have you heard from Treasury, why they have
not done that yet?
Mr. Barofsky. They have several explanations, but they have
not implemented these recommendations.
Senator Shelby. Mr. Massad, do you want to respond to that?
Why have you not worked on these recommendations?
Mr. Massad. Certainly. First of all, I think we have
implemented their recommendations with respect to the structure
of the program, by and large.
Number two, with respect to the compliance issue, we have
withheld payments in some cases. All we can do is withhold the
payments that the servicers are entitled to when they actually
enter into the permanent modifications. Our problem--the
problem for the first year and a half was the servicers were
not getting the permanent modifications done, so we were in
their shops forcing them to take corrective action because we
felt that was a better result. I think you will see us impose
more financial withholding where we feel it is appropriate in
the future.
Senator Shelby. OK. Thank you, Mr. Chairman.
Chairman Johnson. One more quick question. Senator Kaufman,
before HAMP, when servicers were left to their own devices,
what kind of modifications were servicers offering to
struggling homeowners?
Senator Kaufman. That is out of our jurisdiction. What they
were doing outside of HAMP is something that we have not looked
into. I know that this is a systemic problem, a systemic
problem regarding the servicers due to the fact that the
servicers have these incredible conflicts of interest. It is
true whether they are in the HAMP program or any other program.
If you are a servicer and you also hold a lot of mortgages,
like the big servicers do, there are conflicts. The main two
conflicts we talked about were: one, they may make more money
out of foreclosure than any kind of incentive that we had
offered them. And two is they are very concerned about
modifying a primary mortgage where they hold a second lien.
Chairman Johnson. Mr. Massad?
Mr. Massad. Thank you, Senator. That is a very good
question and a very important issue. Prior to the launch of the
HAMP program, there were very, very few modifications that were
occurring, and this was a crisis that had been acute for 2
years and very little had been done. The few modifications that
were happening generally did not reduce people's payments.
One of the things HAMP accomplished was it set standards as
to how to go about modifying mortgages. It set what we called
an affordability standard as well as a calculation of where it
makes sense to modify the mortgage. We do not try to prevent
every foreclosure. We do not pay for every modification. We do
it where, based on an economic analysis, it makes sense to do
as the alternative to foreclosure.
What we have seen since is the servicers have now done a
lot of what we call proprietary modifications outside of the
HAMP program using many of our standards. So that volume of
modifications has increased dramatically as a result of this
program.
Senator Kaufman. Mr. Chairman, can I say one other thing?
Chairman Johnson. Yes.
Senator Kaufman. It has to do with potential Congressional
action, which I did not realize when I was here. I voted for
cram down. But I was talking to someone who was in merger and
acquisitions and he said to me, I do not understand why there
is a problem here. He said, if this was a commercial deal, the
lender would reduce the price of the asset, in this place the
house, because they know as soon as they go into bankruptcy,
the bankruptcy judge is going to lower their price. The reason
why the lenders do not reduce the price and come in for a loan
modification is because they know that if they go into
bankruptcy, the bankruptcy judge cannot put the real asset.
One of the real problems we have, systemic problems we have
in getting lenders to actually go ahead with this is they know
they do not have to make a deal. If it was a commercial loan,
they would deal because they know the first thing the
bankruptcy judge would do is say, hey, what is the real value
of your asset, and that is what the value it is. So it is just
something for you to think about in terms of legislation.
I know cram down is a very political issue and that there
are a lot of other things. But the biggest difference between
commercial and residential, and one of the biggest reasons why
we have a problem reaching a modification with a lender is
because they know when they go into bankruptcy, the house price
cannot be reduced. Thank you.
Chairman Johnson. Well, there are many lessons we can take
from TARP, but one of the key ones is that oversight, when done
aggressively and responsibly, improves outcomes.
As Chairman, I intend to follow that example and push for
tough oversight in all that we do, whether it is Dodd-Frank
implementation, monitoring the foreclosure crisis, housing
finance reform, and other key issues, so that we can better
protect consumers, investors, and taxpayers while promoting
economic growth.
Thanks again to my colleagues and our panelists for being
here today.
This hearing is adjourned.
[Whereupon, at 11:39 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN JOHNSON
I'd like to call to order this Senate Banking Committee hearing
entitled: ``TARP Oversight: Evaluating Returns on Taxpayer
Investments.''
Whenever the topic of TARP comes up, it's hard not to think back to
the intensity and dramatic moments of the financial panic nearly 2 \1/
2\ years ago. Treasury Secretary Paulson and the Federal Reserve were
quickly running out of options, and legislators were faced with the
difficult choice of whether to provide hundreds of billions of taxpayer
dollars at Wall Street or possibly see the economy slide deeper into
chaos.
I did not support the legislation because I was concerned there
were too few strings attached, and it sent a message that the
Government would always step in and save large financial institutions
from their own bad decisions. However, as the Congressional Oversight
Panel put it in their final report released yesterday: ``It is now
clear that, although America has endured a wrenching recession, it has
not experienced a second Great Depression. The TARP does not deserve
full credit for this outcome, but it provided critical support to
markets at a moment of profound uncertainty.''
COP (pronounced ``cop'') made another point in its report that
bears repeating: ``TARP has become one of the most thoroughly
scrutinized Government programs in U.S. history . . . [and] in the
midst of a crisis, perfect solutions do not exist; every possible
action carries regrettable consequences, and even the best decisions
will be subject to critiques and second-guessing.'' That said, the
outcome of TARP was much more successful than many ever anticipated,
averting a depression and with other emergency policies, saving 8.5
million jobs.
I strongly believe that tough oversight was vital to TARP's
success. Early estimates showed the program costing taxpayers over $350
billion. Now, thanks to effective oversight, the price tag has
plummeted to $25 billion as estimated by the non-partisan Congressional
Budget Office. That's one-sixth the cost of the Savings & Loan crisis
in the 80s and 90s. Taxpayers clearly win when oversight works.
Today, some still criticize HAMP for its inability to help more
homeowners. While I welcome a discussion of how to improve the program,
simply ending foreclosure assistance won't make the problem go away and
would limit the sustainable options for struggling homeowners who could
save their homes. Over 530,000 families have been helped through HAMP,
which is not an insignificant number. Their neighbors have been helped
as well, by preventing their home values from declining due to a nearby
foreclosure. HAMP also led the way on loan modifications that work,
pushing the industry to follow suit and standardizing the process. The
American people deserve better than the ``repeal everything but the
kitchen sink'' approach to governance the Republicans are offering.
I look forward to learning more from our witnesses about what
worked in TARP, what did not work, and why. Going forward, I believe
these lessons prove the importance of tough oversight in implementing
the Dodd-Frank Act. I also believe it can be instructive as we continue
to work through the foreclosure crisis and as we consider reforms to
the mortgage finance system.
______
PREPARED STATEMENT OF TED KAUFMAN
Former Senator from the State of Delaware and
Chairman, Congressional Oversight Committee
May 5, 2011
Thank you, Chairman Johnson, Ranking Member Shelby, and Members of
the Committee for inviting me to testify today. It is a pleasure to see
so many former colleagues, and it is a privilege to offer my
perspective on the Troubled Asset Relief Program (TARP).
I am the chairman of the Congressional Oversight Panel, which was
established by the Emergency Economic Stabilization Act of 2008 (EESA).
The Panel is one of three organizations, along with the Government
Accountability Office and the Special Inspector General for TARP,
charged by law with overseeing the TARP. In particular, Congress
instructed the Panel to 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 acted in the best interests of the American people. The Panel
has pursued these goals through 30 oversight reports, including our
March 2011 report, which we issued to Congress just yesterday.
Our former chair last testified in front of this committee in
September 2009. Since then, much has changed in the financial markets
and in TARP itself. The Panel has issued nearly 20 reports in the
ensuing months, including four reports on Treasury's foreclosure
mitigation efforts. Additionally, the Panel has looked at issues such
as TARP support for the domestic automotive industry, the rescue of
AIG, commercial real estate, small banks and small business lending,
Government contracting, and executive compensation restrictions under
the TARP.
Treasury's authority under the TARP expired on October 3, 2010. By
statute, the Panel terminates 6 months after the expiration of the
TARP. Thus, the Panel's most recent report concludes our oversight
work.
I believe that, in order to evaluate the TARP's impact, one must
first recall the extreme fear and uncertainty that infected the
financial system in late 2008. The stock market had endured triple-
digit swings. Major financial institutions, including Bear Stearns,
Fannie Mae, Freddie Mac, and Lehman Brothers, had collapsed, sowing
panic throughout the financial markets. The economy was hemorrhaging
jobs, and foreclosures were escalating with no end in sight. Federal
Reserve Chairman Ben Bernanke has said that the Nation was on course
for ``a cataclysm that could have rivaled or surpassed the Great
Depression.''
It was in this climate that the Congressional Oversight Panel began
its oversight work. The unprecedented financial crisis and the
corresponding Government intervention left many questions. What steps
would be taken to ensure accountability from TARP recipients? How would
Treasury make certain that its actions were transparent and that the
taxpayer would be fairly compensated for the risk they were taking?
What steps would Treasury take to stem the tide of foreclosures that
was having a debilitating effect on American families and
neighborhoods? These questions have informed all of our work.
It is now clear that, although America has endured a wrenching
recession, it has not experienced a second Great Depression. The TARP
does not deserve full credit for this outcome, but it did provide
critical support to markets at a moment of profound uncertainty. It
achieved this effect in part by providing capital to banks but, more
significantly, by demonstrating that the United States would take any
action necessary to prevent the collapse of its financial system.
The Cost of the TARP. The Congressional Budget Office (CBO) today
estimates that the TARP will cost taxpayers $25 billion--an enormous
sum, but vastly less than the $356 billion that CBO initially
estimated. Although this much-reduced cost estimate is encouraging, it
does not necessarily validate Treasury's administration of the TARP.
Treasury deserves credit for lowering costs through its diligent
management of TARP assets and, in particular, its careful restructuring
of AIG, Chrysler, and GM. However, a separate reason for the TARP's
falling cost is that Treasury's foreclosure prevention programs, which
could have cost $50 billion, have largely failed to get off the ground.
Viewed from this perspective, the TARP will cost less than expected in
part because it will accomplish far less than envisioned for American
homeowners. In addition, non-TARP Government programs, including
efforts by the FDIC and the Federal Reserve, have shifted some of the
costs of the financial rescue away from the TARP's balance sheet.
Further, accounting for the TARP from today's vantage point--at a time
when the financial system has made great strides toward recovery--
obscures the risk that existed in the depths of the financial crisis.
At one point, the Federal Government guaranteed or insured $4.4
trillion in face value of financial assets. If the financial system had
suffered another shock on the road to recovery, taxpayers would have
faced staggering losses.
``Too Big To Fail.'' The Panel has always emphasized that the
TARP's cost cannot be measured merely in dollars. Other costs include
its distortion of the financial marketplace through its implicit
guarantee of ``too-big-to-fail'' banks. At the height of the financial
crisis, 18 very large financial institutions received $208.6 billion in
TARP funding almost overnight, in many cases without having to apply
for funding or to demonstrate an ability to repay taxpayers. In light
of these events, it is not surprising that markets have assumed that
``too-big-to-fail'' banks are safer than their ``small enough to fail''
counterparts. Credit rating agencies continue to adjust the credit
ratings of very large banks to reflect their implicit Government
guarantee. Smaller banks receive no such adjustment, and as a result,
they pay more to borrow relative to very large banks.
By protecting very large banks from insolvency and collapse, the
TARP also created moral hazard: very large financial institutions may
now rationally decide to take inflated risks because they expect that
if their gamble fails, taxpayers will bear the loss. These inflated
risks may create even greater systemic risk and increase the likelihood
of future crises and bailouts.
In addition, Treasury's intervention in the automotive industry,
rescuing companies that were not banks and were not particularly
interconnected within the financial system, extended the ``too-big-to-
fail'' guarantee and its associated moral hazard to non-financial
firms. The implication was that any company in America can receive a
Government backstop, so long as its collapse would cost enough jobs or
deal enough economic damage.
Stigma. As the TARP evolved, Treasury found its options
increasingly constrained by public anger about the program. The TARP is
now widely perceived as having restored stability to the financial
sector by bailing out Wall Street banks and domestic automotive
manufacturers while doing little for the 13.9 million workers who are
unemployed, the 2.4 million homeowners who are at immediate risk of
foreclosure, or the countless families otherwise struggling to make
ends meet. As a result of this perception, the TARP is now burdened by
a public ``stigma.''
Because the TARP was designed for an inherently unpopular purpose--
rescuing Wall Street banks from the consequences of their own actions--
stigmatization was likely inevitable. Treasury's implementation of the
program has, however, made this stigma worse. For example, many senior
managers of TARP-recipient banks maintained their jobs and their high
salaries, and although shareholders suffered dilution of their stock,
they were not wiped out. To the public, this may appear to be evidence
that Wall Street banks and bankers can retain their profits in boom
years but shift their losses to taxpayers during a bust--an arrangement
that undermines the market discipline necessary to a free economy.
Transparency, Data Collection, and Accountability. Beginning with
its very first report, the Panel has expressed concerns about the lack
of transparency in the TARP. In perhaps the most profound violation of
the principle of transparency, Treasury decided in the TARP's earliest
days to push tens of billions of dollars out the door to very large
financial institutions without requiring banks to reveal how the money
was used. As a result, the public will never know to what purpose its
money was put.
In some cases, public understanding of the TARP has suffered not
because Treasury refused to reveal useful information but because
relevant data were never collected in the first place. Without adequate
data collection, Treasury has flown blind; it has lacked the
information needed to spot trends, determine which programs are
succeeding and which are failing, and make necessary changes. A related
concern is Treasury's failure to articulate clear goals for many of its
TARP programs or to update its goals as programs have evolved. For
example, when the Home Affordable Modification Program was announced in
early 2009, the Administration said that it would prevent three to four
million foreclosures. The program now appears on track to help only
700,000 to 800,000 homeowners, yet Treasury has never formally
announced a new target. Absent meaningful goals, the public has no
meaningful way to hold Treasury accountable, and Treasury has no clear
target to strive toward in its own deliberations.
On the Role of Oversight. Between the efforts of the Congressional
Oversight Panel, SIGTARP, the GAO, the U.S. Congress, and many
journalists and private citizens, the TARP has become one of the most
thoroughly scrutinized Government programs in U.S. history. Such close
scrutiny inevitably begets criticism, and in the case of the TARP--a
program born out of ugly necessity--the criticism was always likely to
be harsh. After all, in the midst of a crisis, perfect solutions do not
exist; every possible action carries regrettable consequences, and even
the best decisions will be subject to critiques and second-guessing.
Yet there can be no question that oversight has improved the TARP
and increased taxpayer returns. For example, in July 2009, the Panel
reported that Treasury's method for selling stock options gained
through the CPP appeared to be recovering only 66 percent of the
warrants' estimated worth. Due in part to pressure generated by the
Panel's work, Treasury changed its approach, and subsequent sales
recovered 103 cents on the dollar, contributing to $8.6 billion in
returns to taxpayers. Other substantial improvements in the TARP--such
as Treasury's heightened focus on the threat to HAMP posed by second
liens, the increased transparency of the TARP contracting process, and
the greater disclosure of TARP-related data--are all partly the result
of pressure exerted by the Panel and other oversight bodies.
Thus, an enduring lesson of the TARP is that extraordinary
Government programs can benefit from, and indeed may require,
extraordinary oversight. This lesson remains relevant in the context of
the Government's extraordinary actions in the 2008 financial crisis:
The public will continue to benefit from intensive, coordinated efforts
by public and private organizations to oversee Treasury, the FDIC, the
Federal Reserve, and other Government actors. Careful, skeptical review
of the Government's actions and their consequences--even when this
review is uncomfortable--is an indispensable step toward preserving the
public trust and ensuring the effective use of taxpayer money.
Before I close, I would like to take a moment to acknowledge my
fellow Panel members. We were three Democrats and two Republicans,
often coming from very different directions in thinking about the
issues surrounding TARP. Yet we worked hard to negotiate through our
differences, without compromising on our principles, and as a result
produced many unanimous reports. It was a pleasure working with such
thoughtful, principled, and smart colleagues.
I also want to pay tribute to our excellent bipartisan staff. Their
determination to help us reach bipartisan agreements was critical to
the success of our work. They worked many, many late nights to help the
Panel produce in-depth reports every 30 days, and they did so with
tremendous professionalism in their dealings with each other and
Treasury. I want to commend them for their deep and varied knowledge,
for their attention to detail, and for the dedication they brought to
our oversight mandate. Our work would not have been possible without
them.
Thank you again for the opportunity to testify. I would be happy to
answer any questions you may have. As the chair of the Panel, I will
endeavor to convey the views of all the Panel members; however,
ultimately, my words are my own.
PREPARED STATEMENT OF TIMOTHY G. MASSAD
Acting Assistant Secretary, Office of Financial Stability,
Department of the Treasury
March 17, 2011
Chairman Johnson, Ranking Member Shelby, and other Members of the
Committee, thank you for the opportunity to testify about the Troubled
Asset Relief Program (``TARP''). As the Acting Assistant Secretary for
Financial Stability, I am responsible for overseeing the program on a
day-to-day basis. I would like to provide you today with Treasury's
assessment of the impact of TARP on the U.S. economy and financial
sector.
Introduction
Two and a half years after Congress created TARP through the
Emergency Economic Stabilization Act (``EESA''), it is clear that this
program has been remarkably effective by any objective measure.
First, TARP, in conjunction with the other emergency programs
initiated by the Government and the Federal Reserve, helped prevent a
catastrophic collapse of our financial system and helped pave the way
for an economic recovery. Today, banks are better capitalized, and the
weakest parts of the financial system no longer exist. The credit
markets on which small businesses and consumers depend--for auto loans,
for credit cards, and other financing--have reopened. Businesses can
raise capital, and mortgage rates are at historic lows. There is still
more work ahead, of course. TARP was not a solution to all our economic
problems, nor was it designed to be. Unemployment remains unacceptably
high and the housing market remains weak. But the worst of the storm
has passed and our economy is on the road to recovery.
Second, we accomplished all this with fewer funds than were
originally appropriated, and we are unwinding TARP faster than anyone
thought possible. Congress originally authorized $700 billion for the
program. We will spend no more than $475 billion. Of the $411 billion
disbursed to date, we have already received back a total of $287
billion. Taxpayers have now recovered an amount equal to 70 percent of
total TARP disbursements, and I am hopeful that we will recover most of
the outstanding amount within the next few years, market conditions
permitting.
Third, the ultimate cost of TARP will be far less than ever
contemplated. The total cost was initially projected to be
approximately $356 billion. That number has steadily declined over the
past 2 \1/2\ half years. The latest estimates, both from Treasury and
from the Congressional Budget Office (``CBO''), are that the overall
cost of TARP will be between $25 and $50 billion. The TARP investment
programs taken as a whole--including financial support for banks, AIG,
the domestic auto industry, and targeted initiatives to restart the
credit markets--are expected to result in very little or no cost to the
taxpayer.
And finally, our financial system is in better shape today than
before the crisis. Congress has adopted the most sweeping overhaul of
our regulatory structure in generations, which will give us tools we
did not have in the fall of 2008. This work is not yet completed
either, but great progress has been made since TARP's inception.
Overview of the Government's Actions
Before I review in more detail the impact of TARP and the results
of our actions, I think it is helpful to go back to where we were in
the fall of 2008 and review the actions taken.
In September 2008, we faced the risk of a second Great Depression.
The forces that led to that moment had been building for years, but had
accelerated in the preceding 6 months. As the crisis spread, the Bush
administration and the Federal Reserve took a series of unprecedented
steps to stabilize a financial system that teetered at the edge of
catastrophic collapse. These steps included:
Provision of broad-based guarantees to the financial system
through programs such as the Federal Deposit Insurance
Corporation's (``FDIC'') Temporary Liquidity Guarantee Program
and the Treasury Money Market Fund guarantee program;
Initiation of extraordinary facilities through the Federal
Reserve to support liquidity across the financial system; and
Support for Government-Sponsored Enterprises (``GSEs'')
pursuant to the Housing and Economic Recovery Act.
But, the severe conditions required additional resources and
authorities. Therefore, the Bush administration proposed EESA, which
created TARP. It was enacted into law on October 3, 2008, with
bipartisan support in Congress.
Actions Taken by the Bush Administration Under TARP
The Bush administration originally proposed TARP as a mechanism for
the Government to buy mortgage loans, mortgage-backed securities, and
certain other ``troubled assets'' from banks. By early October 2008,
lending between banks had practically stopped, credit markets had shut
down, and many financial institutions were under severe stress. It was
clear that there was insufficient time to implement a new program in
order to buy mortgage-related assets. The Bush administration
determined that the financial system required immediate capital
injections in order to stabilize the banks and to avert a potential
catastrophe. EESA provided this authority because Congress had
broadened the statute during the legislative process.
During the fall and winter of 2008, the Bush administration
employed approximately $300 billion of TARP authority as follows:
$234 billion was invested in banks and thrifts, including
$165 billion in eight of the largest financial institutions
(plus commitments of additional funds to two of those banks);
$40 billion was invested in American International Group
(``AIG'') along with additional funds from the Federal Reserve;
and
Approximately $20 billion was provided to the domestic auto
industry.
The combined effect of the actions taken by Treasury, the Federal
Reserve, and the FDIC helped to stop the panic and to slow the
financial crisis. Despite these efforts, when President Obama took
office in early 2009, the financial system remained paralyzed and the
economy continued to contract at an accelerating rate.
The nation had already lost 3.5 million jobs in 2008, and was
losing additional jobs at the rate of 750,000 per month. Home prices
were falling and foreclosures were increasing. Household wealth had
fallen by 20 percent from December 2007 to December 2008, more than
five times the decline in 1929. Businesses were cutting back on
investments and could not raise capital. For individual families who
needed credit--to buy a house or a new car--it was more difficult to
borrow money than at any time since the Great Depression.
Actions Taken by the Obama Administration Under TARP
Against this backdrop, the Obama administration, working alongside
the Federal Reserve, adopted a broad strategy to restore economic
growth, free up credit, and return private capital to the financial
system. The Administration's strategy combined the American Recovery
and Reinvestment Act (``Recovery Act''), a powerful mix of targeted tax
measures and investments, with a comprehensive plan to repair the
financial system.
The Administration's Financial Stability Plan had three central
components:
To recapitalize and rebuild confidence in the banking
system;
To restart the credit markets that are critical to
borrowing for businesses, individuals, and State and local
governments; and
To stabilize the crisis in the housing market.
The Financial Stability Plan represented an important change in
strategy. It shifted the focus from supporting individual institutions
to restarting the broad markets for capital and credit that are
critical for economic growth. It was designed to maximize the chance
that private capital would bear the burden of solving the crisis. To
facilitate broader economic recovery, we provided support for the
housing market and for homeowners. And when we provided extraordinary
assistance to individual firms, it came with tough conditions.
Recapitalizing the Banking System
Our financial system needed to be recapitalized. But private
capital could not be raised until the condition of the major financial
institutions was made clear. Treasury worked with the Federal banking
regulators to conduct the Supervisory Capital Assessment Program
(``SCAP''), a comprehensive, forward-looking ``stress test'' for the 19
largest U.S.-owned bank holding companies. The stress test determined
which institutions would need more capital to remain well-capitalized
if economic conditions deteriorated significantly more than expected.
It was conducted with unprecedented openness and transparency, which
helped restore market confidence in our financial system. Treasury
allowed banks needing capital to reapply for further assistance under
TARP, but only one did so. Since completion of the stress test, these
banks have raised $150 billion in private capital, saving hundreds of
billions of TARP dollars, restoring market confidence, reopening credit
markets, and laying the groundwork for recovery and economic growth.
Jumpstarting the Credit Markets
A second key aspect of the Financial Stability Plan was to commit
resources to restart critical channels of credit to households and
businesses.
Through the Term Asset-Backed Securities Loan Facility
(``TALF''), a joint program with the Federal Reserve, we helped
to restart the asset-backed securitization markets that provide
credit to consumers and small businesses. Since TALF was
launched in March 2009, new issuances of asset-backed
securities have averaged $10.5 billion per month, compared to
less than $2 billion per month at the height of the crisis.
Through the Public-Private Investment Program (``PPIP'')
for legacy securities, we matched TARP funds with private
capital to purchase legacy mortgage-related securities. This
program returned liquidity to key markets for financial assets
and cleaned up the balance sheets of major financial
institutions. Since the announcement of PPIP in March 2009,
prices for eligible residential and commercial mortgage-backed
securities have increased by as much as 75 percent. The program
continues to mature. Each of the Public-Private Investment
Funds are now approximately halfway through their investment
periods and have each generated positive returns to the
taxpayer to date.
Through the SBA 7(a) Securities Purchase Program, we
unlocked credit for small business by purchasing securities
backed by small business loans. Markets for these securities
have since returned to healthy levels.
Easing the Housing Crisis
Finally, the Administration took aggressive steps to address the
crisis facing many American homeowners. Our strategy has focused on
providing stability to housing markets and giving Americans who are
struggling but, with a little help, could afford to stay in their homes
a chance to do so. TARP provided sensible incentives for mortgage
modifications to prevent avoidable foreclosures, and Treasury and the
Federal Reserve worked to keep interest rates at historic lows.
Together, these policies have put a floor under housing prices and have
enabled millions of Americans to stay in their homes.
The Economic Impact of Our Policies
In any assessment of a response to a financial crisis, there are
several important measures of success. What is the effect on
availability of credit and economic growth? How quickly is the
Government able to return the financial system to private hands? What
was the direct financial cost of the interventions? Has the response
left the financial system able to support--rather than impede--economic
growth? On all of these measures, I believe TARP and the Government's
other emergency actions have succeeded.
Macroeconomic Impact
Treasury has discussed various measures of the effectiveness of
these programs in the TARP Retrospective that we published on the 2-
year anniversary of the program, as well as in recent testimony. Let me
briefly recap our views, and then review in more detail the impact of
the major TARP programs.
At the peak of the crisis, banks were not making new loans to
businesses, or even to one another. Businesses could not get financing
in our capital markets. Municipalities and State governments could not
issue bonds at reasonable rates. The asset-backed securitization
markets, which provide financing for credit cards, auto loans, and
other consumer financing, had stopped functioning. And where credit was
available, it was prohibitively expensive.
Due to the combined actions under TARP and the other Government
interventions, the cost of credit has fallen dramatically. For
businesses, the cost of long-term investment grade borrowing has fallen
from a peak of approximately 570 basis points to just 125 basis points
over benchmark Treasury securities today.\1\ Non-investment grade
corporate bond spreads have fallen from approximately 2,200 basis
points to 440 basis points over benchmark Treasuries.\2\
---------------------------------------------------------------------------
\1\ Based upon 10-year Treasury yield and FINRA/Bloomberg
Investment Grade U.S. Corporate Bond Index yield as of February 25,
2011 according to Bloomberg LP.
\2\ Based upon 10-year Treasury yield and FINRA/Bloomberg High
Yield U.S. Corporate Bond Index yield as of February 25, 2011 according
to Bloomberg LP.
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American families are spending less on mortgage payments. At the
peak of the crisis, a family with an average 30-year, $180,000 mortgage
was borrowing at approximately 6.40 percent a year.\3\ Today, that
family is borrowing at approximately 4.85 percent, saving about $2,100
each year.\4\
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\3\ The U.S. average mortgage balance was $181,225 in 2007
according to the Federal Reserve Bank of Kansas City.
\4\ The U.S. 30-year fixed mortgage average rate was 4.85 percent
as of February 25, 2011 according to BankRate (www.bankrate.com).
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The securitization markets have also restarted. Although volumes
have not reached pre-crisis levels, auto lending in particular has
recovered, with spreads now below pre-crisis levels.
The economy as a whole has made substantial progress since the
recession ended last summer. Real GDP has risen for six straight
quarters, and GDP growth was stronger in the fourth quarter of 2010
than in the fourth quarter of 2007. Private sector firms have started
hiring again. The housing market remains weak, although certain
measures are stabilizing.
Although we can never be sure where we would have been today
without these emergency policies, one of the most comprehensive
independent analyses of the overall impact of our response, by
economists Mark Zandi and Alan Blinder, concluded that without the
Recovery Act, TARP, and other Government actions, GDP would have
contracted further in 2010 at the astonishing rate of 3.7 percent,
unemployment would have reached 16.5 percent, and we would be
experiencing deflation. In short, they say, ``this dark scenario
constitutes a 1930s-like depression.''
Impact of Particular TARP programs
Let me now turn to review the status of the major programs and
initiatives taken under TARP.
Support for the Banking System
We have moved very quickly to reduce the dependence of the
financial system on emergency support and to return our financial
institutions to private hands as quickly as possible. Under the Capital
Purchase Program (``CPP'') and the Targeted Investment Program
(``TIP''), Treasury invested $245 billion in our financial
institutions, including $165 billion in eight of the largest financial
institutions and an additional $80 billion in another 700 banks.
Treasury further committed to guarantee certain assets of Bank of
America and Citigroup under the Asset Guarantee Program (``AGP'').
We have already recovered a total of $243 billion from banks,
including $211 billion in repayments and $32 billion in additional
income. From today on, practically every dollar we recover from banks
will constitute a positive return to the taxpayer-one that we estimate
will ultimately total around $20 billion. When President Obama took
office, the U.S. Government had made investments in financial
institutions representing 75 percent of the entire banking system by
assets. Today, our remaining investments in banks represent only about
10 percent of the banking system.
The stress test in particular was critical to facilitating this
recapitalization. The 19 banks subject to the stress test have raised
$150 billion in new equity, and 13 of the institutions that received
TARP assistance have fully repaid.
Citigroup was one of the largest recipients of TARP assistance; we
invested a total of $45 billion. At the time, many doubted whether
Citigroup would survive and be able to repay the Government. As of last
December, we recovered the entire $45 billion, and we realized a
positive return in excess of $12 billion on our overall investment. As
a recent report by the Special Inspector General for TARP concluded,
the Government assistance provided to Citigroup was carefully designed
and achieved its primary goal of restoring market confidence.
I want to address in particular the status of the smaller banks
which have received TARP funds. While Treasury under the Obama
administration made no further investments in the nation's largest
banks, Treasury did invest an additional $11 billion in more than 400
other banks and thrifts, most of which were small and community banks.
The Obama administration focused on small banks not only because EESA
required that assistance be made available to financial institutions
regardless of size, but also because of the critical role small banks
play in our nation's communities. Small banks finance small businesses,
which generate a large percentage of our private sector jobs, as well
as serve the needs of many families. While it may ultimately take
longer for Treasury to recoup its investment in these small banks, the
fact remains that without TARP, many more of these institutions, and
the communities they serve, would have been in jeopardy.
Today, Treasury maintains investments in 539 small banks and
thrifts. Their path to recovery is longer because these institutions
have less access to the capital markets and greater exposure to the
commercial real estate (``CRE'') market. Although these institutions
continue to face challenges, there are signs that the sector is
strengthening. Over the past year, the CRE market and credit conditions
have shown signs of stabilization and, in some areas, modest signs of
improvement. With the launch of the Small Business Lending Fund
(``SBLF''), which is outside of TARP, Treasury will provide capital to
qualified small banks. Treasury has received many applications from
small banks across the country including from eligible TARP recipients
who wish to refinance into SBLF. Treasury plans to announce the first
round of SBLF investments in the coming weeks.
Stabilizing the Auto Industry
The Bush administration provided loans to old GM and old Chrysler
in December 2008 to prevent their uncontrolled liquidations and the
loss of as many as one million jobs. The Obama administration
thereafter provided additional assistance, but only on the condition
that fundamental changes occur.
These changes involved sacrifices from all stakeholders--
shareholders, unions, auto dealers, and creditors--and they enabled the
industry to become more competitive. This assistance also helped the
many suppliers and ancillary businesses that depend on the automotive
industry. Our actions saved jobs across the country--as many as one
million, by one estimate--and created many new ones.
Our strategy is helping to restore the domestic auto industry to
profitability, and we have already begun to recoup our investments.
Recently, General Motors reported net income of $4.7 billion for 2010.
Old GM had not reported an annual profit since 2004. Chrysler reported
four consecutive quarters of operating profit in 2010 totaling $763
million. Ford's 2010 net income reached $6.6 billion, its best level in
more than 10 years.
To date, we have recovered a total of almost $30 billion of the $80
billion invested in the domestic auto industry (including the recently
sold Ally securities). We completed a highly successful initial public
offering of General Motors in November of last year, and the Government
has recovered almost half of its $50 billion investment and has reduced
its stake in GM from 60.8 percent to 33.3 percent. We now have a
pathway for exiting the remaining investment. We also are working to
exit our investments in Chrysler and Ally Financial.
Restructuring AIG
One of the most controversial actions taken by the Government in
response to the crisis in the fall of 2008 was the assistance provided
to AIG. That assistance was provided because the failure of AIG, in the
circumstances we faced in September of 2008, would have been
catastrophic to our financial system and our economy. Many doubted
whether we would ever recover those funds. Now, 2 \1/2\ years later, we
have not only helped restructure the company but the Government is
potentially in position to recover every dollar we invested.
Over the last 2 years, Treasury and the Federal Reserve have worked
with AIG as it has taken aggressive steps to stabilize its business and
sell its non-core assets. As part of this effort, Treasury and the
Federal Reserve worked with AIG to recruit an almost entirely new board
of directors and several new members of senior management, including
the Chief Executive Officer. The management team, in turn, has taken a
variety of steps to reduce risk and to focus on AIG's core insurance
businesses.
In January, AIG, the Treasury, and the Federal Reserve Bank of New
York closed a major restructuring plan, which represented the
culmination of 2 years of efforts to resolve AIG. This plan will
accelerate the repayment of U.S. taxpayer funds and puts us in a
position to recover our entire investment. AIG has since repaid the
Federal Reserve $47 billion, converted Treasury's preferred stock
investment into common shares, and repaid Treasury $9.1 billion.
Since market prices will fluctuate, there is no guarantee of what
the ultimate returns will be. However, if we are able to sell our
investments in AIG at current market values, including the AIG shares
that Treasury received from the trust established by the Federal
Reserve, taxpayers will get back every dollar put into AIG and will
realize a positive return. This is a dramatic turnaround, and a result
that stands in sharp contrast to what most observers expected in the
fall of 2008.
Helping Responsible but Struggling Homeowners
We acknowledge that our housing programs have not been without
criticism, and that housing is an area where there is still much work
to be done. It should be remembered, however, that the forces that
created this housing crisis had been building for nearly a decade. In
particular, when the Obama administration took office in January 2009,
home prices had fallen for 30 consecutive months. Home values had
fallen by nearly one-third and were expected to fall by another 5
percent by the end of 2009. Stresses in the financial system had
reduced the supply of mortgage credit and crippled the ability of
Americans to buy homes. Fannie Mae and Freddie Mac had been in
conservatorship for over 4 months. Millions of American families could
not make their monthly mortgage payments--having lost jobs or income--
and were unable to sell, refinance, or find meaningful modification
assistance.
The Obama administration took several actions to confront this
situation, including: the purchase of agency mortgage backed securities
in order to help keep mortgage rates low; efforts to provide
refinancing opportunities to homeowners; and the launch, under TARP, of
the Making Home Affordable (``MHA'') Program to help responsible
homeowners avoid foreclosure. The Home Affordable Modification Program
(``HAMP''), the largest MHA program, has helped more than 600,000
struggling homeowners secure permanent modifications of their mortgages
and stay in their homes. HAMP has reduced these homeowners' mortgage
payments by a median of more than $500 each month, bringing their total
savings to approximately $5 billion. Currently, an average of 25,000 to
30,000 additional homeowners receive assistance from HAMP permanent
modifications each month. Beyond direct assistance, many more
homeowners have been helped by the standards that HAMP has catalyzed
across mortgage modifications industry-wide.
As the housing crisis evolved, Treasury responded with additional
actions, including several at the suggestion of our oversight bodies.
The suggestion that we focus more on the problems of unemployed
homeowners and negative equity were particularly valuable. We expanded
MHA to: address the problem of second liens; provide incentives for
other alternatives to foreclosure, such as short sales; provide
additional help to the unemployed; and encourage targeted principal
reduction. In addition:
Treasury launched the Housing Finance Agency Hardest Hit
Fund to help State housing finance agencies provide additional
relief to homeowners in the States hit hardest by unemployment
and house price declines.
Treasury and the Department of Housing and Urban
Development created the FHA Short Refinance program to enable
homeowners whose mortgages exceed the value of their homes to
refinance into more affordable mortgages.
Many have criticized HAMP because it will not achieve 3 million to 4
million permanent modifications. It is important to remember that the
program was not intended to prevent all foreclosures. Today, there are
approximately 5 million delinquent mortgages. Yet, about 1.4 million
seriously delinquent homeowners are currently eligible for HAMP because
the program's eligibility requirements exclude:
High cost mortgages in excess of $729,750;
Mortgages on vacation, second homes or investor-owned
properties;
Mortgages on vacant homes;
Homeowners who can afford to pay their mortgage without
Government assistance; and
Homeowners with mortgages that are unsustainable even with
Government assistance.
To further protect taxpayer resources, HAMP and most of our other
housing initiatives have pay-for-success incentives: funds are spent
only when transactions are completed and continue only for as long as
those modifications remain in place. Accordingly, most of the funds
have not yet been disbursed.
Beyond those immediately helped, TARP housing programs also have
had a positive impact on mortgage servicing. At the outset of the
crisis, we faced a mortgage industry that was ill-equipped and
unwilling to respond to the foreclosure crisis. Mortgage servicers
lacked sufficient resources to meet the needs of a market reeling from
increasing foreclosures. In addition, their servicing expertise and
infrastructure were focused on overseeing collections and foreclosing
on those who failed to pay. HAMP provided servicers with standards that
could be applied to all modifications, such as the need to make
modifications affordable for the homeowner. As a result, these
standards soon became national, industry-wide models that also have
been applied to many servicers' own proprietary modifications.
Over the past 2 \1/2\ years, we developed policies and procedures
in the MHA program to ensure that responsible homeowners who meet the
eligibility criteria are offered meaningful modifications, or where
appropriate, other alternatives to foreclosure. To address servicer
shortcomings, we urged servicers to increase staffing and to improve
customer service. We developed specific guidelines and certifications
on how and when homeowners must be evaluated for HAMP and other options
before foreclosure. We developed a defined process for escalating
homeowner complaints to be resolved promptly and fairly. We also have a
comprehensive compliance program to ensure that homeowners are fairly
evaluated for HAMP, and that servicer operations comply with Treasury
guidance.
We faced many challenges in developing and implementing these
programs. We often must balance conflicting policy goals--such as how
to design programs that encourage the participation of struggling
borrowers and help them get back on their feet, while minimizing the
cost to the Government, moral hazard, adverse selection, and
operational and financial risks and complexity. Implementation has been
difficult, and much work remains to ease the housing crisis. But that
should not obscure the importance of what has been accomplished, nor
the fact that these programs can continue to help ease the pain of this
terrible crisis. Struggling families from around the country have
avoided the intense pain, cost, and disruption of losing their homes
because of these programs. Their neighbors and their local communities
have also benefited, since a vacant home is dangerous and costly to a
neighborhood.
Congress is considering legislation to end HAMP. We strongly oppose
any efforts to end our necessary housing programs. Terminating HAMP
would prevent us from helping tens of thousands of additional families
each month, relax the pressure on mortgage companies to offer better
assistance to struggling homeowners, and damage the prospects of
recovery in our still-fragile housing market. In addition, the House
has already passed bills that would terminate the FHA Refinance
Program, and the Emergency Homeowners' Relief Program, and is scheduled
to vote on a bill to terminate the Neighborhood Stabilization Program
this week. Ending these essential programs would further destabilize an
already weak housing market.
Reform
It is important to also take stock of the fact that our financial
system is stronger today. The weakest parts no longer exist, the system
has substantially higher levels of capital relative to risk than before
the crisis, and our financial institutions are better capitalized than
their international competitors. Moreover, Congress has enacted a
comprehensive overhaul of financial industry regulation. The Dodd-Frank
Act provides the Government with critical tools that will help us fix
the fundamental failures that led to this crisis. These include
consolidated supervision of the largest, most inter-connected financial
companies and the ability to liquidate in an orderly manner firms that
pose a significant threat to our financial system.
TARP Achieves Results at Fraction of Anticipated Costs
In terms of direct financial cost, TARP will rank as one of the
most effective crisis response programs ever implemented. Independent
observers, such as the CBO, initially estimated that TARP would cost
$356 billion or more. Now, because of the success of the program, TARP
is likely to cost only a fraction of that amount. Most recently, CBO
estimated that the cost of the program would be as little as $25
billion.
The cost of TARP is likely to be roughly equal to the amount spent
on the program's housing initiatives--expenditures that were necessary
to prevent even greater losses and hardships to American families and
local communities and that were never intended to be returned. The
remainder of the programs under TARP--the investments in banks, AIG,
credit markets, and the auto industry--likely will result in very
little or no cost.
Furthermore, the cost of the Government's broader response efforts
is remarkably low when compared to past systemic crises. An
International Monetary Fund study found that the average net fiscal
cost of resolving roughly 40 banking crises since 1970 was 13 percent
of GDP. The Government Accountability Office (``GAO'') estimates that
the cost of the U.S. Savings and Loan Crisis was 2.4 percent of GDP. In
contrast, the direct fiscal cost of all our interventions, including
the actions of the Federal Reserve, the FDIC, and our efforts to
support the GSEs, is likely to be less than 1 percent of GDP. The true
cost of this crisis to the economy, however--the jobs, wealth, and
growth that it erased--is much higher than previous crises, but that
damage would have been far worse without the Government's emergency
response.
Robust and Effective Oversight
TARP has been subjected to unprecedented oversight since its
inception. ESSA established four separate oversight avenues for TARP:
the Financial Stability Oversight Board (``FinSOB''); specific
responsibilities for the GAO; the Special Inspector General for TARP
(``SIGTARP''); and Congressional Oversight Panel (``COP'').
Treasury cooperates with each oversight body's efforts to review
TARP programs and to produce periodic audits and reports. To date,
Treasury has responded to 75 reports from GAO, COP, and SIGTARP; and
Treasury has participated in at least 25 Congressional hearings on
TARP. Individually and collectively, the work performed by TARP's
oversight bodies has made, and continues to make, important
contributions to the development, strength, and transparency of TARP
programs. Treasury welcomes this oversight and, to date, has adopted
more than 120 of the recommendations made by the oversight bodies.
In addition, Treasury has taken many steps that have made TARP one
of the most transparent programs in the Federal Government. Pursuant to
EESA, Treasury prepares separate, audited financial statements for
TARP. In its first 2 years of operations, TARP's financial statements
received unqualified (``clean'') audit opinions from the GAO, and
separate reports on internal control over financial reporting were
unqualified and found no material weaknesses-unprecedented achievements
for a startup operation with an extraordinary emergency mission. As a
result of these efforts, the Office of Financial Stability received a
Certificate of Excellence in Accountability Reporting (``CEAR'') award
from the Association of Government Accountants.
In addition, Treasury has published hundreds of comprehensive
reports and other information about TARP, so that the public knows how
its money was spent, who received it, and on what terms. This includes:
A monthly report to Congress that details how TARP funds
have been used, the status of recovery of such funds by
program, and information on the estimated cost of TARP;
A monthly housing report containing detailed metrics on the
housing programs;
A quarterly report on the PPIP program that provides
detailed information on the funds, their investments, and
returns;
A report on each transaction (such as an investment in or
repayment by an institution) within two business days of its
completion;
A quarterly report that details all dividend and interest
payments;
Periodic reports on the sale of warrants, including
information on auctions as well as on how the sale price was
determined in the case of any repurchase of warrants by a TARP
recipient;
Monthly lending and use-of-capital surveys that contain
detailed information on the lending and other activities of
banks that have received TARP funds;
A list of all the institutions participating in TARP
programs and of all the investments Treasury has made; and
Publishing every contract and financial agency agreement it
has entered into.
In a further commitment to transparency, Treasury publishes
valuations of the TARP investments in its annual financial statements
and periodically during the year. Treasury has introduced new
disclosures in its monthly reports that make it easier to track TARP
funds and the current cost of the programs. These disclosures allow the
public to understand the value of the investments that Treasury has
made.
Conclusion
TARP succeeded in what it was designed to do: it brought stability
to the financial system and laid the foundation for economic recovery.
And it did so at a fraction of the expected cost. TARP was not designed
to solve all our economic problems. The damage from this financial
crisis has not yet been completely repaired, and many American families
are still struggling in its aftermath. We will continue to manage our
exit from our remaining investments in the interest of the taxpayer and
the recovery. Nevertheless, today, thanks to a comprehensive and
careful strategy to address the financial crisis, we are in a much
stronger position to address remaining economic challenges.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM TED
KAUFMAN
Q.1. Did you ask the Treasury Department to submit a
comprehensive analysis of its legal authority to bail out
automobile companies with TARP funds? If so, please provide any
analysis you received.
A.1. Yes, the Panel requested on several occasions that
Treasury provide a comprehensive analysis of its legal
authority to use TARP funds to intervene in the domestic
automotive industry. For example, in his questions for the
record for Secretary Geithner following the Panel's September
10, 2009 hearing, former Panel member Jeb Hensarling requested
``a formal written legal opinion justifying the: (i) use of
TARP funds to support Old Chrysler and Old GM prior to their
bankruptcies; [and] (ii) use of TARP funds in the Chrysler and
GM bankruptcies.''
The Secretary responded; in relevant part:
We believe the Secretary had the authority under the Emergency
Economic Stabilization Act (EESA) to make the investments in
the auto industry, both with respect to old Chrysler and old GM
and in connection with the new companies that acquired their
assets.
The purpose of EESA was to provide the Secretary of Treasury
with the flexibility to take the actions necessary to restore
U.S. financial stability. Congress provided the Secretary broad
authority by including broad definitions of ``troubled'' assets
and financial institution.'' Providing assistance to the auto
companies at the time the determinations were made was
consistent with both the language and intent of the statute.
The auto companies were and are interrelated with entities
extending credit to consumers and dealers and because of the
effects a disruption in the industry would have had at such
time to financial stability employment and the market as a
whole.
The GAO noted in testimony before the Senate Banking Committee
last December that the authority was sufficient to permit the
purchase of troubled assets from the auto companies.
In addition to Congressman Hensarling's request, the Panel
recommended in its September 2009 oversight report ``that
Treasury provide a legal opinion justifying the use of TARP
funds for the automotive bailout.'' As the Panel reported in
March 2011; ``In response, Treasury directed the Panel to
certain materials associated with the automotive companies'
bankruptcies. These materials did not provide a sufficiently
robust analysis of Treasury's legal justification and so
constitute, at most, only a partial response to the Panel's
recommendation.''
I should note that I joined the Panel in October 2010, so I
did not participate in any of the Panel's deliberations prior
to that date.
Q.2. Were members of the Congressional Oversight Panel afforded
the opportunity to hire a dedicated staff member paid for out
of the Panel's budget? If not, did any Panelist ask to hire a
dedicated staff member? If so, what was the process by which
the decision was made not to allow panelists to hire a staffer
to assist them with their work on the Panel?
A.2. Although the Panel adopted its procedural rules before my
appointment my understanding is that the Panel considered it a
priority to ensure that all members had access to the staff
resources required to ensure that their needs were met and
their ideas were reflected in the Panel's work. As such, the
Panel's final rules state:
The Panel's Executive Director shall assign to each Panel
member an existing member of the Panel staff acceptable to the
Panel member who, as part of his or her Panel responsibilities,
shall serve as a liaison with and as a source of support for
the assigned Panel member. The staff member's support to the
Panel member shall include responding to the member's requests
for information, seeking the member's views on the matters to
the staff and representing the Panel member at external
meetings where requested by the member.
In accordance with this rule, each Panel member had ready
access upon request to a member of the staff able to assist
with his or her needs.
My understanding is that prior to the adoption of this
rule, the Panel's staff consulted with the staff of nearly a
dozen past Federal or Congressional commissions and panels to
learn about their practices. The Panel's approach was in
keeping with the model followed by virtually all of the bodies
consulted. This approach I believe, greatly contributed to the
Panel's success in reaching a bipartisan consensus in the vast
majority of its oversight reports.
Q.3. Please provide minutes of all Congressional Oversight
Panel meetings and conference calls.
A.3. Minutes of all of the Panel's internal meetings and
conference calls are attached. These minutes have also been
provided, along with other Panel materials, to the National
Archives.
Q.4. Many of the duties of the Congressional Oversight Panel
required panel members to have access to sensitive financial
information from financial institutions as well as the auto
Companies. While participating on the panel however, many of
the panelists continued to work in areas where conflicts may
have arisen. For example, a Bloomberg article stated that
Elizabeth Warren was paid $90,000 to be an expert witness in a
class action lawsuit against several major TARP banks. Senator
Kaufman, what is the COP's recusal policy for conflicts of
interest?
A.4. Panel members are generally subject to the Senate Code of
Official Conduct including the strict prohibition against
providing compensated or uncompensated service to outside
entities when such service creates a conflict with an
individual's official duties. To further ensure public trust
and confidence in the Panel's work, the Panel employed a full-
time Ethics Counsel to examine all potential or apparent
conflicts of interest, and the Panel consulted regularly with
the Senate Select Committee on Ethics. In cases where a
conflict of interest was determined to exist, Panel members
were required to recuse themselves from all related official
work.
It is important to note that, due to the fact that Panel
members were part-time Congressional employees who were
expected to continue their outside employment, the Senate
Select Committee on Ethics chose to waive very specific
provisions of the Senate Code of Official Conduct that would
otherwise create significant, if not insurmountable, obstacles
to the service of Panel members. In a letter dated December 31,
2008, Chairman Barbara Boxer and Vice Chairman John Cornyn
notified the Panel of a limited waiver to:
Senate Rule 36 (limiting outside earned income); Senate Rule
37, paragraphs 5 (a), (b), and 6 (prohibiting affiliation with
a firm, providing compensated professional services, and
serving as an officer or board member for compensation); and
Senate Rule 41, paragraphs 4 and 6 (agreeing to comply with the
Code of Official Conduct and reporting on individuals who
perform Senate services) . . . This decision reflects the
Committee's recognition that the Panel members are individuals
with special expertise and the task at hand is one that needs
to be undertaken expeditiously and will be of a limited
duration. Furthermore, the Committee considered the fact that
the services provided by the Panel are not solely to the
Senate, but to Congress as a whole.
I should note that I joined the Panel in October 2010, so I
did not participate in any deliberations related to Panel
activities prior to that date.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM TIMOTHY
MASSAD
Q.1. How many mortgages do you expect to be successfully
modified under TARP mortgage modification programs?
A.1. Your question asks about all TARP mortgage modification
programs. As you know, Treasury has implemented a variety of
different housing programs to help responsible homeowners avoid
foreclosure and keep their homes. These programs are affected
by many factors outside of Treasury's control, and some were
launched only recently. As a result, we do not believe it is
possible to provide a meaningful estimate of the total number
of mortgages that will be modified under all of Treasury's
housing programs. Nonetheless, I am happy to describe the
various programs and the status of our respective efforts.
As an initial matter, the Making Home Affordable Program
(``MHA'') includes Treasury's most well-known program, the Home
Affordable Modification Program (``HAMP''). As of the end of
February 2011, over 630,000 permanent HAMP mortgage
modifications had been completed; and, for the past 6 months,
approximately 28,000 new permanent modifications were completed
each month.
It is difficult to predict whether the general ``run rate''
for HAMP will continue, because it will depend upon numerous
variables, including the overall state of the economy and the
housing market, the performance of participating mortgage
servicers, and the impact of any future changes to program
terms and procedures. For example, if the economy continues to
improve, we expect that the number of homeowners delinquent on
their mortgages will decline. This in turn will decrease the
pool of eligible homeowners, which may result in a lower number
of additional permanent modifications. On the other hand, if
servicers improve their performance--particularly in soliciting
and promptly evaluating homeowners--the overall number of
permanent HAMP modifications could increase. Treasury is trying
to encourage such improvements by making certain changes to the
program, such as mandating that all HAMP servicers adopt a
single point of contact model.
Despite these uncertainties, if one assumes that the recent
HAMP ``run rate'' continues until the end of the program in
2012, the total number of additional permanent modifications
using simple math would equal about 500,000, resulting in
approximately 1 million permanent modifications for the
program. Again, this is not a prediction or an official
Treasury estimate, because we cannot predict whether the run
rate will continue for the reasons noted above.
MHA includes not only HAMP, but also the Second Lien
Modification Program, the Home Affordable Foreclosures
Alternative Program, and the Home Affordable Unemployment
Program. These programs provide additional assistance to
homeowners and should be included in any overall measurement of
how many homeowners are assisted by TARP housing programs.
However, these programs were implemented more recently, and we
do not have sufficient data to estimate their future run rates.
In addition to MHA, Treasury's TARP housing programs also
include the Hardest Hit Fund and the Federal Housing
Administration (``FHA'') Short Refinance Program. The Hardest
Hit Fund provides assistance to 18 States and the District of
Columbia to support programs designed to help homeowners in the
States hit hardest by the housing crisis. State housing finance
agencies administer these programs, and each agency has
estimated the maximum number of people that could receive
assistance under that State's Hardest Hit Fund programs.
Treasury has published these plans on FinancialStability.gov.
The FHA Short Refinance Program is administered by the FHA and
provides incentives to refinance underwater mortgages. As with
some of the MHA programs, however, it is still in the early
stages of implementation and it is difficult to estimate how
many homeowners it ultimately will help. Our goal for all these
program has been--and continues to be--to help as many
struggling, responsible homeowners as possible.
In evaluating Treasury's housing programs, it is important
to emphasize two final points. First, taxpayer dollars are
spent only for success--i.e., for permanent modifications, as
long as homeowners continue to make their monthly payments, and
for other successful forms of homeowner assistance. Treasury
provides cost data on all of its TARP housing programs in a
monthly report to Congress, which is available on
FinancialStability.gov. Second, Treasury's housing programs
have helped to create new industry-wide standards for how
mortgage servicers evaluate and assist struggling homeowners.
These new standards have led the industry to modify the
mortgages of about two million additional homeowners, at no
cost to taxpayers.
Q.2. The SIGTARP's most recent quarterly report discussed how
Treasury may attempt to move some of these banks off the TARP
books and into the Small Business Lending Fund. Will Treasury
follow all of the SIGTARP's recommendations with respect to
moving financial institutions out of TARP and into the Small
Business Lending Fund? If not, why not?
A.2. As you know, Treasury's Small Business Lending Fund
(``SBLF'') is not a TARP program, and the Office of Financial
Stability is not responsible for standing up or implementing
the SBLF. Nonetheless, I am generally familiar with the
program, especially as it relates to institutions that received
TARP funding.
The SBLF is a $30 billion fund created by Congress that
encourages lending to small businesses by providing capital to
qualified community banks with assets of less than $10 billion.
The Small Business Jobs Act of 2010, which created the SBLF,
expressly directs Treasury to allow TARP recipients to
participate:
The Secretary shall . . . issue regulations and other guidance
to permit eligible institutions to refinance securities issued
to Treasury under [TARP programs] for securities to be issued
under the Program.
To receive SBLF funds, TARP recipients must satisfy all of
the eligibility criteria that apply to non-TARP recipients.
Moreover, Treasury has established various additional
requirements that apply only to TARP recipients. For example,
TARP recipients will be eligible for SBLF only if they have
satisfied their existing TARP obligations, and they will be
subject to a special ``lending incentive fee'' if they fail to
increase their small business lending. Treasury will break out
and report separately any TARP investments repaid using SBLF
funds.
In response to your specific question, SIGTARP made one new
recommendation regarding SBLF in its January 2011 Quarterly
Report. Treasury has agreed to adopt this recommendation and
already has begun providing SIGTARP with the names of
institutions that participated in TARP programs and have
applied for SBLF funding. SIGTARP previously made three other
recommendations regarding SBLF. Treasury responded to these
recommendations in a detailed letter dated January 18, 2011,
which is included in SIGTARP's January 2011 Quarterly Report.
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RESPONSE TO WRITTEN QUESTION OF SENATOR SHELBY FROM NEIL
BAROFSKY
Q.1. Did you ask the Treasury Department to submit a
comprehensive analysis of its legal authority to bail out
automobile companies with TARP funds? If so, please provide any
analysis you received.
A.1. We have not requested a comprehensive analysis of the
Treasury Department's legal authority to use TARP funds to bail
out automobile companies. SIGTARP's audit on Factors Affecting
the Decisions of GM and Chrysler to Reduce Their Dealership
Networks focused on the Treasury Auto Task Force's view about
the need for GM and Chrysler to reduce their dealership
networks rapidly, but did not focus on the Treasury
Department's use of TARP funds for the auto manufacturers.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR WICKER FROM NEIL
BAROFSKY
Q.1. Last year, Speaker Boehner and I initiated an ongoing GAO
audit into the treatment of Delphi employees. In specific, we
asked GAO to investigate whether Delphi union members received
preferential pension treatment over their non-union
counterparts with TARP funds. I understand that the GAO is
coordinating parts of their investigation with your office. Can
you please tell me the status of the investigation and what you
have learned thus far?
A.1. Under the Emergency Economic Stabilization Act of 2008
(``EESA''), SIGTARP is responsible for coordinating audits and
oversight with other oversight entities to ensure that there is
not a duplication of effort and that the full playing field is
covered. Pursuant to that coordination, the oversight entities
agreed that the Government Accountability Office (``GAO'')
would take the lead on pension issues, given its historical
expertise. SIGTARP agreed, in coordination with GAO, to examine
issues related to the ``topping up'' of the Delphi hourly
retiree pension plans and announced the commencement of the
audit in November 2010. Specifically, we are reviewing:
(1) LTreasury's role in General Motors' (``GM'') decision to
top up the pension plan for hourly workers, and
(2) LWhether the Administration or the Automotive Task Force
pressured GM to provide additional funding for the
plan.
We are still in the stages of collecting information and
conducting interviews with various stakeholders, including the
Treasury Department, the Pension Benefit Guaranty Corporation,
GM, Delphi, the United Auto Workers (``UAW''), and other
unions. We are not in a position currently to offer conclusions
or findings at this time. We will be in a far better position
to respond to your questions once the audit is further underway
and will work with GAO in developing a coordinated response.
Q.2.-1. I understand that some unions had preexisting pension
agreements with General Motors in the event of a Delphi
bankruptcy. In essence, the agreements said that if the Delphi
Corporation failed, GM would take over the pension obligations
under certain conditions.
Would you agree that one of the largest expenses for GM is
their pension obligations?
Q.2.-2. Would it make sense for a company restructuring itself
through the bankruptcy process to restructure its pension
obligations?
Q.3.-3. Are preexisting pension agreements routinely altered
during bankruptcies?
A.2.1.-3. Pension obligations represent a large financial
obligation for GM. In its most recent annual report, filed with
the SEC on March 1, 2011, GM made cash contributions of $4.0
billion in December 2010 to its U.S. hourly and salaried
pension plans, consisting of a $2.7 billion contribution to the
hourly plan and a $1.3 billion contribution to the salaried
plan. In January 2011, GM also contributed 61 million shares of
its common stock to the U.S. hourly and salaried pension plans
valued at $2.2 billion for funding purposes. (GM 10-K, p. 30).
Overall, GM reported liabilities and equity from pensions and
post-retirement benefits of $36.6 billion in 2009 and $31.8
billion in 2010. (GM 10-K, p. 80). GM's total liabilities in
2009 and 2010 were $107.3 billion and $101.7 billion,
respectively. We are not in a position to offer conclusions or
findings related to the structuring of pension obligations or
pension agreements in bankruptcy generally. However, as we
collect information from various stakeholders, we will be
better able to answer these questions as they relate to GM's
decision to ``top up'' the Delphi hourly retiree pension plan.
Q.3. Are there any indications that political considerations
played a role in the Government protecting Delphi union
pensions while their non-union counterparts lost nearly
everything?
A.3. As part of our audit, we will review whether the
Administration or the Automotive Task Force pressured GM to
provide additional funding for the hourly workers' pension
plan. However, we are not in a position currently to comment or
to offer conclusions or findings on this objective. We will be
in a better position to respond to your question once the audit
is further underway.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM THOMAS J.
McCOOL
Q.1. Did you ask the Treasury Department to submit a
comprehensive analysis of its legal authority to bail out
automobile companies with TARP funds? If so, please provide any
analysis you received.
A.1. The Treasury Department has in several instances provided
a detailed analysis of its legal authority under the Emergency
Economic Stabilization Act of 2008 (EESA) to use TARP funds to
support the Automotive Industry Financing Program (AIFP), and
GAO has obtained and examined these analyses as part of our
continuing oversight responsibilities. In general, Treasury
concluded that the loans provided to the automakers were
authorized by EESA because they consisted of the ``purchase''
of ``troubled assets from any financial institution.'' 12
U.S.C. 5211(a)(1). EESA broadly defines the term ``troubled
assets''\1\ and the term includes any financial instrument
whose purchase the Secretary of the Treasury, after
consultation with the Chairman of the Federal Reserve Board,
determines is ``necessary to promote financial market
stability,'' provided that the Secretary first transmits his
determination in writing to appropriate congressional
committees. 12 U.S.C. 5202(9)(B). Treasury has noted its
compliance with this consultation and reporting requirement;
Former Treasury Secretary Paulson made such a determination for
GM and Chrysler in December 2008 and transmitted his
determination to Congress later that month. Treasury Secretary
Geithner issued a second determination in April 2009. EESA also
broadly defines ``financial institution''\2\ and lists
traditional institutions such as banks and insurance companies
as examples, but the term is expressly not limited to those
examples: it also includes ``any institution'' established and
regulated under Federal or State law that has ``significant
operations in the United States.'' Finally, Treasury has noted
that its guidelines for the AIFP are consistent with the
purposes of EESA: to ``restore liquidity and stability to the
financial system of the United States,'' and to ensure that the
expenditure of taxpayer funds ``protects home values, college
funds, retirement accounts and life savings.'' 12 U.S.C.
5201. See, e.g., Statement of the United States of America Upon
the Commencement of General Motors Corporation Chapter 11 Case,
at 9-12 (December 19, 2008); In re Chrysler LLC, 576 F. 3d 108,
121-22 (2d Cir. 2009), judgment vacated on other grounds as
moot, 130 S. Ct. 1015 (2009); Guidelines for Automotive
Industry Financing Program (copies enclosed).
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\1\ ``Troubled assets'' is defined as ``(A) residential or
commercial mortgages or any securities, obligations, or other
instruments that are based on or related to such mortgages, that in
each case was originated or issued on or before March 14, 2008, the
purchase of which the Secretary determines promotes financial market
stability; and (B) 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, but only upon transmittal of
such determination, in writing, to the appropriate committees of
Congress.'' 12 U.S.C. 5202(9).
\2\ ``Financial institution'' is defined as ``any institution,
including, but not limited to, any bank, savings association, credit
union, security broker or dealer, or insurance company, established and
regulated under the laws of the United States or any State, territory,
or possession of the United States, the District of Columbia,
Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands,
Guam, American Samoa, or the United States Virgin Islands, and having
significant operations in the United States, but excluding any central
bank of, or institution owned by, a foreign government.'' 12 U.S.C.
5202(5).
Q.2. Has Treasury prepared and provided to GAO internal
metrics, benchmarks, or projections by which Treasury, GAO, and
other outside observers can assess the HAMP program's
effectiveness? What types of metrics, benchmarks, and
projections would be useful for an objective assessment of
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HAMP's effectiveness?
A.2. Treasury's lack of performance measures that can be used
to assess HAMP's program effectiveness has been an issue that
GAO has raised in our July 2009, June 2010, and March 2011
reports. Treasury reports some aspects of HAMP performance in
its public monthly servicer performance reports, such as
numbers of trial and permanent numbers made, redefaults of
permanent modifications, and the median amount of payment
reduction borrowers have received. However, Treasury has not
provided GAO with benchmarks, or goals for these measures, nor
has it provided performance measures or benchmarks for the more
recently announced Making Home Affordable Programs such as the
Second-Lien Modification Program, Home Affordable Foreclosure
Alternatives, and the Principal Reduction Alternative. For
example, Treasury has not established a goal for the total
number of permanent HAMP first-lien modifications that it
expects to be successfully completed under the program or the
rate of redefault for loans that have been permanently modified
that it would not find acceptable on a program or servicer-
specific basis. According to Treasury, measures such as
redefault rates for those with second-lien modifications would
be evaluated once data are available, but Treasury has not
provided GAO with goals for these measures. Treasury noted that
the programs were launched under challenging circumstances,
making it extremely difficult to predict how many homeowners
will respond to servicer solicitations, provide requisition
documentation, or accept the modification when offered. In
addition, Treasury noted that if it focused only on numbers of
borrowers in programs, there may be a misdirected incentive to
get borrowers into programs at the expense of ensuring
sustainable results for those borrowers. However, as we, the
Congressional Oversight Panel, and Special Inspector General
for the Troubled Assets Relief Program have previously noted,
establishing key performance metrics and reporting on
individual servicers' performance with respect to those metrics
are critical to the transparency and accountability of HAMP.
While we have not specified the measures and benchmarks
Treasury should use to assess the effectiveness of HAMP, we
noted in July 2009 that annual performance goals are the major
means for gauging progress toward accomplishment of longer-term
goals. We further noted that in developing performance
measures, it will be important for Treasury to be able to
evaluate HAMP's progress toward its goals, including preserving
homeownership, and to define outcome measures that are
objective, measurable, and reflective of the goals and mission
of HAMP. In particular, it is important that Treasury establish
performance measures that have numerical targets to allow for
easier comparison with actual performance. As we noted in our
June 2010 and March 2011 reports, without pre-established
performance measures and goals, Treasury will not be able to
effectively assess the outcomes of its Making Home Affordable
programs or hold servicers accountable for their performance.