[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/ _____ U.S. GOVERNMENT PRINTING OFFICE 67-400 PDF WASHINGTON : 2011 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001 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 ---------- 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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. ------ 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). --------------------------------------------------------------------------- \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 --------------------------------------------------------------------------- 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.