[JPRT, 111th Congress]
[From the U.S. Government Publishing Office]



       ACCOUNTABILITY FOR THE TROUBLED ASSET RELIEF PROGRAM

                                ________

      THE SECOND REPORT OF THE CONGRESSIONAL OVERSIGHT PANEL


[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]




                 January 9, 2009.--Ordered to be printed



       ACCOUNTABILITY FOR THE TROUBLED ASSET RELIEF PROGRAM

                                ________

      THE SECOND REPORT OF THE CONGRESSIONAL OVERSIGHT PANEL


       [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]



                 January 9, 2009.--Ordered to be printed

                                ________

46-500

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) 512-2104  
Mail: Stop IDCC, Washington, DC 20402-0001






                     CONGRESSIONAL OVERSIGHT PANEL

                             Panel Members
                        Elizabeth Warren, Chair
                        Rep. Jeb Hensarling \1\
                           Richard H. Neiman
                             Damon Silvers
                          Sen. John E. Sununu

\1\ Rep. Hensarling did not approve this report.









                            C O N T E N T S

                              ----------                              
                                                                   Page
Executive Summary................................................     1
Introduction.....................................................     4
Treasury Department Updates Since Prior Report...................     5
Questions About the $700 Billion: Discussion of Treasury's 
  Responses......................................................     6
    1. What Is Treasury's Strategy?..............................     6
    2. Is the Strategy Working to Stabilize Markets?.............     7
    3. Is the Strategy Helping to Reduce Foreclosures?...........     8
    4. What Have Financial Institutions Done with the Taxpayers' 
        Money Received So Far?...................................     8
    5. Is the Public Receiving a Fair Deal?......................     9
    6. What Is Treasury Doing to Help the American Family?.......     9
    7. Is Treasury Imposing Reforms on Financial Institutions 
        that Are Taking Taxpayer Money?..........................     9
    8. How Is Treasury Deciding Which Institutions Receive the 
        Money?...................................................    10
    9. What Is the Scope of Treasury's Statutory Authority?......    10
    10. Is Treasury Looking Ahead?...............................    11
Treasury Department Response Grid................................    12
Oversight Activities.............................................    39
Future Oversight Activities......................................    40
About the Congressional Oversight Panel..........................    41
Alternative Views................................................    41
Appendix I: Letter from Congressional Oversight Panel Chair 
  Elizabeth Warren to Treasury Secretary Mr. Henry M. Paulson, 
  Jr., dated December 17, 2008...................................    44
Appendix II: Treasury Department Responses to Questions of the 
  First Report of the Congressional Oversight Panel, dated 
  December 30, 2008..............................................    47







======================================================================



 
          ACCOUNTABILITY FOR THE TROUBLED ASSET RELIEF PROGRAM

                                _______
                                

                January 9, 2009.--Ordered to be printed

                                _______
                                

                           EXECUTIVE SUMMARY

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

    (1) Bank Accountability. The Panel still does not know what 
the banks are doing with taxpayer money. Treasury places 
substantial emphasis in its December 30 letter on the 
importance of restoring confidence in the marketplace. So long 
as investors and customers are uncertain about how taxpayer 
funds are being used, they question both the health and the 
sound management of all financial institutions. The recent 
refusal of certain private financial institutions to provide 
any accounting of how they are using taxpayer money undermines 
public confidence.\2\ For Treasury to advance funds to these 
institutions without requiring more transparency further erodes 
the very confidence Treasury seeks to restore. Finally, the 
recent loans extended by Treasury to the auto industry, with 
their detailed conditions affecting every aspect of the 
management of those businesses, highlights the absence of any 
such conditions in the vast majority of TARP transactions. EESA 
does not require recipients of TARP funds to make reports on 
the use of funds. However, it is within Treasury's authority to 
make such reports a condition of receiving funding, to 
establish benchmarks for TARP recipient conduct, or to have 
formal procedures for voluntary reporting by TARP recipient 
institutions or formal guidelines on the use of funds. The 
adoption of any one of these options would further the purposes 
of helping build and restore the confidence of taxpayers, 
investors, and policy makers.
---------------------------------------------------------------------------
    \2\ See, e.g., Matt Apuzzo, Where'd the Bailout Money Go? Shhhh, 
It's a Secret, Associated Press (Dec. 22, 2008) (online at 
apnews.myway.com/article/20081222/D957QL7O0.html).

    (2) Transparency and Asset Evaluation. The need for 
transparency is closely related to the issue of accountability. 
The confidence that Treasury seeks can be restored only when 
information is completely transparent and reliable. Currently, 
Treasury's strategy appears to involve allocating the majority 
of the $700 billion to ``healthy banks,'' banks that have been 
assessed by their regulators as viable without federal 
assistance. Of course, whether a bank is ``healthy'' depends 
critically on the valuation of the bank's assets. If the banks 
have not yet recognized losses associated with over-valued 
assets, then their balance sheets--and Treasury's assessment of 
their health--may be suspect.
    Many understood the purpose of EESA to be providing 
assistance to financial institutions that were ``unhealthy'' 
and at risk of failing. Such institutions were at risk, the 
public was told, due to so-called toxic assets that were 
impairing their balance sheets. EESA was designed to provide a 
mechanism to remove or otherwise provide clear value to those 
assets. The case of Citigroup illustrates this problem. 
Treasury provided Citigroup with a $25 billion cash infusion as 
part of the ``healthy banks'' program whereby Treasury made 
nine initial investments in major banks. About two months 
later, Treasury provided Citigroup with $20 billion in 
additional equity financing, apparently to avoid systemic 
failure, but it did not classify that investment as part of the 
Systemically Significant Failing Institution program (SSFI 
program). These events suggest that the marketplace assesses 
the assets of some banks well below Treasury's assessment. To 
date no such mechanism to provide more transparent asset 
valuation has been developed, meaning that the danger posed by 
those toxic assets remains unaddressed. The bubble that caused 
the economic crisis has its foundations in toxic mortgage 
assets. Until asset valuation is more transparent and until the 
market is confident that the banks have written down bad loans 
and accurately priced their assets, efforts to restore 
stability and confidence in the financial system may fail.

    (3) Foreclosures. The crisis in the housing sector 
continues to affect any efforts at recovery. In enacting EESA, 
Congress called upon Treasury to

        implement a plan that seeks to maximize assistance for 
        homeowners and use the authority of the Secretary to 
        encourage the servicers of the underlying mortgages, 
        considering net present value to the taxpayer, to take 
        advantage of the HOPE for Homeowners Program under 
        section 257 of the National Housing Act or other 
        available programs to minimize foreclosures. In 
        addition, the Secretary may use loan guarantees and 
        credit enhancements to facilitate loan modifications to 
        prevent avoidable foreclosures.\3\
---------------------------------------------------------------------------
    \3\ Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-
343, at Sec. 109(a).

    When Congress authorized the Panel, it specifically 
requested that the Panel evaluate ``the effectiveness of 
foreclosure mitigation efforts.'' \4\ While the statute 
contemplates that foreclosure mitigation would be accomplished 
through the purchase of mortgage-related assets, many believe 
that Treasury has clear authority to use a portion of the $700 
billion to address mortgage foreclosures in other ways. For 
Treasury to take no steps to use any of this money to alleviate 
the foreclosure crisis raises questions about whether Treasury 
has complied with Congress's intent that Treasury develop a 
``plan that seeks to maximize assistance for homeowners.'' \5\
---------------------------------------------------------------------------
    \4\ Id., at Sec. 125(b)(1)(A)(iv).
    \5\ Id., at Sec. 109(a).

    (4) Strategy. The Panel's initial concerns about the TARP 
have only grown, exacerbated by the shifting explanations of 
its purposes and the tools used by Treasury. It is not enough 
to say that the goal is the stabilization of the financial 
markets and the broader economy. That goal is widely accepted. 
The question is how the infusion of billions of dollars to an 
insurance conglomerate or a credit card company advances both 
the goal of financial stability and the well-being of 
taxpayers, including homeowners threatened by foreclosure, 
people losing their jobs, and families unable to pay their 
credit cards. It would be constructive for Treasury to clearly 
identify the types of institutions it believes fall under the 
purview of EESA and which do not and the appropriate uses of 
TARP funds. The need for Treasury to address these fundamental 
issues of strategy has only intensified since our last report.
    The issues related to strategy have wider implications as 
well. It appears that Treasury in its post-American 
International Group, Inc. (AIG) actions is using public dollars 
to support the value of equity in financial institutions. What 
strategy lies behind that decision? What about other 
alternatives? Would it be better and more cost effective to 
encourage private capital investors to assume control of such 
banks? Should those banks be required to maintain higher 
capital or liquidity positions or to pay higher Federal Deposit 
Insurance Corporation (FDIC) insurance premiums? Should we 
focus on ensuring that systemically significant institutions 
meet their fixed obligations and let the equity in such 
institutions be fully at risk, as we did in AIG? Should we 
simply let market forces work--letting sick banks fail and the 
healthy banks take the business? The Panel does not embrace any 
of these suggestions. Instead, it asks whether Treasury is 
involved in that re-thinking process.

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

                              INTRODUCTION

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

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

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

             TREASURY DEPARTMENT UPDATES SINCE PRIOR REPORT

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

     Automotive Industry Financing Program (AIFP). On 
December 19, 2008, Treasury announced a plan to make emergency 
TARP loans to General Motors Corporation and Chrysler LLC, to 
avoid bankruptcy and prevent further financial harm to the 
economy. In addition, on December 29, Treasury purchased $5 
billion in senior preferred equity with an 8% dividend from 
GMAC LLC. Under the agreement, GMAC issued warrants in the form 
of additional preferred equity in an amount equal to 5% of the 
preferred stock purchase. These warrants were exercised at the 
close of the transaction and pay a 9% dividend. Treasury has 
also agreed to lend up to $1 billion to General Motors to 
facilitate their participation in a rights offering by GMAC, to 
support GMAC's reorganization as a bank holding company. These 
steps are part of the AIFP. The AIFP provides support both to 
automobile manufacturers and automobile finance companies and 
is a recognition by the administration of the critical 
importance of this key industry to economic stability. The 
Panel will be comparing and evaluating the appropriateness of 
the terms and conditions connected with the receipt of TARP 
funds across industries.

     Asset Guarantee Program (AGP). On December 31, 
2008, Treasury submitted a report to Congress that outlined the 
AGP, which was established pursuant to Section 102 of EESA. The 
program will provide guarantees for assets held by systemically 
significant financial institutions. The previous guarantees 
made to Citigroup that were announced on November 23 may come 
under the umbrella of the AGP. The December 31 report contains 
an overview of Treasury's thought process in structuring 
guarantees, including the relative merits of various loss 
positions and eligibility standards for participating 
institutions. An evaluation of the AGP, including additional 
conversations with Treasury to consider specifics of the 
program, will be undertaken by the Panel.

     Targeted Investment Program (TIP). On January 2, 
2009, Treasury formalized the TIP, a new program for financial 
institutions at risk of a loss of market confidence due to 
market volatility. Eligibility considerations include whether 
destabilization of the institution would cause systemic 
disruptions to the nation's financial markets, credit, payments 
and settlements systems, or would threaten asset prices or the 
broader economy. The terms and conditions of the TIP, a program 
that Treasury expects would only be used in exceptional cases, 
are still under development. The Panel intends to dialog with 
the Treasury to determine more specifically the conditions 
under which TIP, as opposed to the SSFI program, would be used. 
The Panel also intends to offer the new administration its 
input in the administration's effort to design the parameters 
of the TIP.

  QUESTIONS ABOUT THE $700 BILLION: DISCUSSION OF TREASURY'S RESPONSES

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

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

    1. What Is Treasury's Strategy? The Panel's first set of 
questions asked about Treasury's strategy in administering the 
TARP. There has been much public confusion over the purpose of 
the TARP, and whether it has had any effect on the credit 
markets, helped in price discovery for frozen assets, or 
increased lending. The name ``Troubled Asset Relief Program'' 
indicated that original purpose of buying troubled assets, but 
Treasury abruptly switched course and began making direct 
investments in banks.
    Treasury's response regarding its strategy was not limited 
to its use of TARP funds:
          Treasury's strategy is to work in coordination with 
        all government agencies to use all the tools available 
        to the government to achieve the following critical 
        objectives:
                   Stabilize financial markets and 
                reduce systemic risk;
                   Support the housing market by 
                avoiding preventable foreclosures and 
                supporting mortgage finance; and
                   Protect taxpayers.
    Treasury's response to our questions lists numerous 
initiatives that do not involve the use of TARP funds. While 
the Panel agrees with Treasury's goals, our Congressional 
mandate is to oversee the use of the TARP funds to determine if 
these goals are met. In particular, the Panel sees no evidence 
that Treasury has used TARP funds to support the housing market 
by avoiding preventable foreclosures. For Treasury to meet the 
stated intentions of EESA, Treasury must strengthen its efforts 
in this regard.
    The Panel also asked Treasury for its conclusions about the 
nature and origins of the problem it is trying to address 
through TARP. Treasury did not provide any such analysis of the 
cause of the problem. The Panel believes, however, that it is 
important for Treasury and our financial services regulators to 
have an analysis of the causes and nature of the financial 
crisis to be able to craft a strategy for addressing the 
sources, and not solely the symptoms, of the problem or 
problems.

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

    3. Is the Strategy Helping to Reduce Foreclosures? One of 
Congress' stated goals was ``foreclosure mitigation efforts.'' 
The Panel's third question was whether Treasury's strategy with 
respect to the TARP was reducing foreclosures. Treasury 
responded with a resounding yes, although none of the actions 
they credit with reducing foreclosures have a direct connection 
to TARP funding. This includes (1) preventing the failure of 
Fannie Mae and Freddie Mac, (2) Treasury and Fed programs to 
purchase Government Sponsored Enterprise (GSE) mortgage-backed 
securities, (3) attempts by the HOPE NOW Alliance, a coalition 
of mortgage servicers, investors and counselors, to help 
struggling homeowners by negotiating loan work-outs, (4) the 
development by HOPE NOW and the American Securitization Forum 
of a fast-track loan modification program to modify loans of 
subprime ARM borrowers facing unaffordable rate resets, and (5) 
the November 2008 industry announcement, along with HOPE NOW, 
the Federal Housing Finance Agency (FHFA) and the GSEs, of a 
streamlined loan modification program that builds on the 
mortgage modification protocol developed by the FDIC for 
IndyMac. A group of state attorneys general and banking 
departments have criticized many existing loan modification 
efforts, since many do nothing to reduce mortgage rates to 
affordable amounts. \7\ More importantly, Treasury does not 
cite recent statistics on re-default rates. Only if homeowners 
have a realistic chance to remain current on their mortgages 
can a modification be deemed effective.
---------------------------------------------------------------------------
    \7\ Conference of State Bank Supervisors State Foreclosure 
Prevention Working Group, Analysis of Subprime Mortgage Service 
Performance: Data Report No. 3 9-10 (Sept. 2008) (online at 
www.csbs.org/Content/NavigationMenu/Home/SFPWGReport3.pdf).

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

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

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

    7. Is Treasury Imposing Reforms on Financial Institutions 
that Are Taking Taxpayer Money? The Panel's seventh group of 
questions concerned whether Treasury was requiring recipients 
to undertake any particular reforms, including (1) the 
presentation of a viable business plan, (2) the replacement of 
failed executives and/or directors, (3) reforms designed to 
prevent future crises, to increase oversight, and to ensure 
better accounting and transparency, and (4) other appropriate 
operational reforms.
    Treasury responded that it has required recipients of CPP 
funds to adhere to the executive compensation restrictions 
required by EESA. In addition, Treasury barred any increase in 
dividends for three years and restricted share repurchases. 
Both the dividend increase and share buyback restrictions are 
designed to prevent banks from taking capital out of the 
financial system. Under the SSFI program, Treasury imposed 
additional terms and conditions on AIG. AIG must meet 
additional executive compensation, corporate expenses, and 
lobbying restrictions.
    While some executives at some financial institutions have 
voluntarily reduced their compensation, there is no uniform 
program in place. Treasury has the power to set the ``terms and 
conditions'' of any purchase it makes using the TARP funds. The 
Panel continues to ask Treasury to explain why it has not 
required more of financial institutions, particularly in light 
of both the steps taken by the United Kingdom in similar 
circumstances and the extensive conditions imposed on auto 
companies, as a condition for receiving TARP funds.

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

    9. What Is the Scope of Treasury's Statutory Authority? The 
Panel's ninth area of inquiry sought Treasury's opinion of the 
scope of its statutory authority. It also sought information 
about guarantees, credit insurance, joint stabilization 
efforts, and transparency of prices under the Term Asset-Backed 
Securities Loan Facility (TALF) program. In response, Treasury 
quoted the language of EESA and said it was working on the 
guaranty and credit insurance programs.
    The Panel posed this question in order to understand 
Treasury's interpretation of the statute in relation both to 
the actions Treasury has taken so far under EESA and to actions 
Treasury might take in the future. The pending arrangements 
with the automobile industry suggest that more thinking must go 
into this question than a mere rote recitation of the statute. 
COP is particularly interested in what limits, if any, Treasury 
sees to the definition of ``financial institution'' and 
``troubled asset'' and hopes Treasury will provide its 
assessment of whether those terms cover other businesses, such 
as commercial real estate, manufacturers of consumer products, 
and other businesses not directly involved in financial 
services.

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

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

                          OVERSIGHT ACTIVITIES

    COP was established as part of EESA. It was formed on 
November 26, 2008, and it issued its first report on December 
10, 2008. That report posed ten questions that identified 
central issues regarding the use of taxpayers' funds through 
the TARP.
    Since the first report, the following developments 
pertaining to COP's oversight of the TARP took place:
           On December 16, 2008, COP held a Field 
        Hearing in Clark County, Nevada to examine the roots of 
        the financial crisis and its impact on everyday 
        Americans. At the hearing, scores of local residents 
        turned out to personally voice their skepticism and 
        concern over the TARP's lack of transparency.
           On December 17, 2008, Elizabeth Warren, 
        Chair of the Panel, sent a letter to Treasury Secretary 
        Henry Paulson on behalf of the Panel requesting that 
        Treasury answer the questions posed in the first 
        report.
           On December 30, Treasury responded to the 
        Panel's December 17 request. Both the full text of 
        Professor Warren's letter and Treasury's response are 
        included in the Appendices to this report.
           COP has engaged consultants to help us 
        determine if Treasury's investments in preferred stock 
        of various banking organizations under its Capital 
        Purchase Program were made on terms that minimize long-
        term costs and maximize benefits to the taxpayers.
           COP has received and reviewed more than 
        2,500 messages with stories, comments, or suggestions 
        through cop.senate.gov.

            REPORT ON FIELD HEARING IN CLARK COUNTY, NEVADA

    On December 16, 2008, COP held its first field hearing, in 
Clark County, Nevada. Clark County suffered from over 30,000 
foreclosures in 2008, an increase of nearly 300% from 2007. 
Overall, Nevada has had the highest foreclosure rate in the 
nation for 23 months.
    The hearing took place at the Thomas and Mack Moot Court at 
the University of Nevada-Las Vegas Law School. Three Panel 
members attended the hearing: Elizabeth Warren, Richard H. 
Neiman, and Damon Silvers.
    At the hearing, the Panel sought information from a broad 
spectrum of sources about the nature and cause of the current 
financial situation, the impact of federal government actions 
to date to address the economic crisis, and local initiatives 
to address the crisis.
    The Panel heard testimony from the following witnesses:
           George Burns, Commissioner, Nevada Financial 
        Institutions Division
           R. Keith Schwer, Director, Center for 
        Business and Economic Research, UNLV
           Bill Uffelman, President and Chief Executive 
        Officer, Nevada Bankers Association
           Gail Burks, President and Chief Executive 
        Officer, Nevada Fair Housing Center
           Julie Murray, Chief Executive Officer, Three 
        Square Food Bank
           Danny Thompson, Executive Secretary-
        Treasurer, Nevada State AFL-CIO
           Alfred Estrada, Resident of Clark County
    The Panel also heard from the following elected officials:
           Harry Reid, United States Senate Majority 
        Leader (D-NV)
           Shelley Berkley, Congresswoman (D-NV)
           Dina Titus, Congresswoman-elect (D-NV)
    Senator Harry Reid, Representative Shelley Berkley and 
Representative-elect Dina Titus emphasized the importance of 
ensuring that the use of TARP funds benefit American working 
families. George Burns, Keith Schwer, and Bill Uffelman 
discussed the collapse of the housing bubble and the current 
state of the Nevadan economy. The witnesses on the second 
panel--Gail Burks, Julie Murray, Danny Thompson, and Alfred 
Estrada--testified about the human consequences of the economic 
downturn.
    Video, a transcript and testimony from the Clark County 
Field Hearing are available at cop.senate.gov.
    The Panel owes a special thanks to UNLV President David 
Ashley, UNLV Law School Dean John White and the Boyd School of 
Law staff for their hospitality in hosting this event. The 
Panel also owes thanks to Kenneth LoBene, the local Field 
Office Director for the U.S. Department of Housing and Urban 
Development, for providing them with a tour of local 
neighborhoods severely impacted by foreclosures following the 
hearing.

                      FUTURE OVERSIGHT ACTIVITIES


                            PUBLIC HEARINGS

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

                            UPCOMING REPORTS

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

                PUBLIC PARTICIPATION AND COMMENT PROCESS

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

                ABOUT THE CONGRESSIONAL OVERSIGHT PANEL

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

                           ALTERNATIVE VIEWS


                          SEN. JOHN E. SUNUNU

    The central portion of this report presents Treasury's 
response to questions posed in the Panel's first report, 
released on December 10, 2009, as well as an evaluation of 
those responses. In many cases, the report highlights areas 
where additional information may or should be provided to 
better understand Treasury's motives in choosing specific 
features of the TARP, measuring its performance, and monitoring 
compliance. In these and other areas, the public is better 
served by a process that is as clear and transparent as 
possible.
    Compiling this evaluation, and creating a panel report, is 
a consensus process. As a result, its tone and emphasis cannot 
perfectly reflect the priorities and language of every member. 
Taken as a whole, I believe that the material presented in the 
January Report will help increase the public's understanding of 
the process to date, and, as such, I have supported its 
release. In two areas, however, the approach taken is of 
particular concern and deserves additional clarification.
    First, in several places within the report text, language 
is used which can easily be interpreted as suggesting that the 
purpose of the TARP is to increase lending to the levels that 
existed before the current financial crisis. (See, e.g., page 
8: ``. . . or increased lending''; page 10: ``. . . why the 
TARP investments will be slow to produce increased lending''; 
page 13: ``. . . the goal of the program was to increase 
consumer or small business lending . . .''). But the current 
crisis was caused, in large part, by the extension of too much 
credit to institutions and individuals that were not 
creditworthy. This, in turn, has resulted in a broad and 
dramatic de-leveraging of the global economy. When, and as, the 
economy begins to recover, it will do so in an environment of 
lower leverage, and, thus, lower levels of aggregate borrowing 
than existed in 2007. This fact should not be ignored.
    With regard to lending, the TARP is intended to help ensure 
the availability of credit to individuals and businesses that 
are creditworthy and that credit is made available at 
sustainable levels over time. Language to this effect is used 
on page 11 (``. . . the Panel asked whether Treasury's action 
preserved access to consumer credit . . .''), but by omitting 
it elsewhere, readers might easily, and incorrectly, conclude 
that the TARP is intended to bring total borrowing back to pre-
crisis levels.
    Second, while Treasury can and should provide additional 
information to the public regarding the TARP's design, its 
performance, and the compliance of firms receiving capital, 
there are several questions posed in the Panel's December 10 
report that are enormously difficult, if not impossible, to 
answer with any certainty. Moreover, there are a few that are 
best left unanswered.
    Questions such as: ``3.8 Will lower rates lead to a large 
enough pool of buyers to lead to a general increase in home 
prices?'' and ``3.10 Will lower interest rates induce demand 
for home ownership in the face of falling housing prices, 
consumer uncertainty about the future of the economy and 
unemployment, and the reasonable expectation that an even 
better deal might be available in the future?'' require gross 
assumptions about multiple economic indicators and human 
behavior. In the current environment it is not practical to 
attempt to accurately forecast such behavior.
    Questions such as ``4.5 Is Treasury seeking to use TARP to 
shape the future of the American financial system?'' and ``6.1 
Does Treasury believe American families need to borrow more 
money?'' contain vague and sweeping generalizations. No 
Treasury Secretary should be asked to assert that ``American 
families should borrow more'' or ``should borrow less'' as part 
of the TARP oversight process. Families and consumers face 
situations and circumstances that are unique, and those 
situations and circumstances should be recognized as such.
    The work of the Panel is important, and it should help 
provide the public and Congress with useful information 
regarding the design, operation, and performance of the TARP. 
Thus, it is essential that every effort be made to use 
unambiguous language and to ask direct and practical questions. 
We must redouble efforts to do so in future reports.
 APPENDIX I: LETTER FROM CONGRESSIONAL OVERSIGHT PANEL CHAIR ELIZABETH 
WARREN TO TREASURY SECRETARY MR. HENRY M. PAULSON, JR., DATED DECEMBER 
                                17, 2008

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

 APPENDIX II: TREASURY DEPARTMENT RESPONSES TO QUESTIONS OF THE FIRST 
  REPORT OF THE CONGRESSIONAL OVERSIGHT PANEL, DATED DECEMBER 30, 2008

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]



