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

                         CONGRESSIONAL OVERSIGHT PANEL

                            JULY OVERSIGHT REPORT *

                                   ----------

          TARP REPAYMENTS, INCLUDING THE REPURCHASE OF STOCK WARRANTS

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                     July 10, 2009.--Ordered to be printed

    *Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic
                 Stabilization Act of 2008, Pub. L. No. 110-343

                         CONGRESSIONAL OVERSIGHT PANEL

                            JULY OVERSIGHT REPORT *

                                   __________

          TARP REPAYMENTS, INCLUDING THE REPURCHASE OF STOCK WARRANTS

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                     July 10, 2009.--Ordered to be printed

    *Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic
                 Stabilization Act of 2008, Pub. L. No. 110-343

                      U.S. GOVERNMENT PRINTING OFFICE
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                         CONGRESSIONAL OVERSIGHT PANEL
                                 Panel Members
                            Elizabeth Warren, Chair
                                Sen. John Sununu
                              Rep. Jeb Hensarling
                               Richard H. Neiman
                                 Damon Silvers

                                C O N T E N T S

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                                                                       Page
    Executive Summary................................................     1
    Section One:.....................................................     4
        A. Background................................................     4
        B. Understanding Warrants....................................     5
        C. Statutory and Contractual Provisions Governing Repurchase
          and Warrants under TARP....................................     7
        D. Repayments of CPP and TIP Capital Investments.............    14
        E. Valuing TARP Warrants.....................................    16
        F. Alternatives for Disposing of TARP Warrants...............    23
        G. Issues....................................................    28
        H. Conclusion--Policy Choices and Trade-Offs.................    37
    Annexes to Section One:
        ANNEX A: Technical Explanation of Warrant Valuation Methods..    39
        ANNEX B: Analysis of the Old National Bancorp Warrants.......    46
    Section Two: Additional Views....................................    49
        A. Richard H. Neiman.........................................    49
        B. Congressman Jeb Hensarling................................    50
        H. John Sununu...............................................    59
    Section Three: Correspondence with Treasury Update...............    61
    Section Four: TARP Updates Since Last Report.....................    62
    Section Five: Oversight Activities...............................    72
    Section Six: About the Congressional Oversight Panel.............    74
    Appendices:
        APPENDIX I: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY
          TIMOTHY GEITHNER REQUESTING INFORMATION ON THE REPAYMENT OF
          TARP ASSISTANCE, DATED JUNE 12, 2009.......................    75
        APPENDIX II: LETTER FROM SECRETARY TIMOTHY GEITHNER IN
          RESPONSE TO CHAIR WARREN'S LETTER REQUESTING INFORMATION ON
          THE REPAYMENT OF TARP ASSISTANCE, DATED JULY 1, 2009.......    79
        APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN AND PANEL
          MEMBER RICHARD NEIMAN TO SECRETARY TIMOTHY GEITHNER
          REQUESTING ASSISTANCE WITH THE PANEL'S OVERSIGHT OF FEDERAL
          FORECLOSURE MITIGATION EFFORTS, DATED JUNE 29, 2009........    92

    =======================================================================
    _______________________________________________________________________

                             JULY OVERSIGHT REPORT

                                    _______

                     July 10, 2009.--Ordered to be printed

                                    _______

                              EXECUTIVE SUMMARY *

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        \*\ The Panel adopted this report with a unanimous 5-0 vote on July
    10, 2009.
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        In late 2008, our economy faced an exceptional crisis, and
    Congress created the Troubled Asset Relief Program (TARP) in an
    effort to stabilize the financial system. Through the TARP,
    taxpayers invested billions of dollars in the nation's
    financial institutions.
        These actions imposed an enormous risk on taxpayers. If the
    TARP failed to stabilize the financial system, the entire
    economy could collapse. Even if the system stabilized after
    huge infusions of taxpayer funds, if some institutions were
    unable to recover taxpayers could be paying the debts for
    generations. While these risks were looming, then-Treasury
    Secretary Henry Paulson argued that TARP assistance could be
    used to rescue the economy and generate a profit for taxpayers.
    When Congress authorized the commitment of $700 billion to
    rescue the financial system, it decided that taxpayers should
    have the opportunity to share in a potential upside if the
    banks returned to profitability.
        The opportunity to profit from TARP investments comes
    through special securities called warrants. Banks that received
    financial assistance were required to give the government
    warrants for the future purchase of some of their common
    shares. Simply put, warrants are the right to buy shares of a
    company at a set price at some point in the future. For
    example, a warrant might allow Treasury to buy shares of a bank
    for ten dollars at any time in the next ten years. If the share
    price rises above ten dollars, Treasury could pay less than
    market value for the shares, then sell them and turn a profit.
    In this way, the banks were repaying the taxpayers for their
    investment by sharing some of their future profitability.
        Currently many banks want to exit the TARP program by
    repaying their financial assistance and repurchasing their
    warrants from Treasury. Treasury is permitting ten of the
    nation's largest bank holding companies--representing more than
    one third of the nation's banking assets--to repay the
    financial assistance they received eight months ago. Any exit
    from the TARP system implicates an important policy question:
    if the banks give up federal support prematurely, will the
    economy suffer as a result? The Panel has not reached a
    consensus on whether it is wise policy to release banks from
    the TARP program at this time, but our June report on the bank
    stress tests raised key questions about whether we know enough
    about the banks' overall health.
        As Treasury makes these decisions about repayment, it is
    the Panel's mandate to determine whether the taxpayer is
    receiving maximum benefit from the TARP. Because the warrants
    that accompanied TARP assistance represent the only opportunity
    for the taxpayer to participate directly in the increase in the
    share prices of banks made possible by public money, the price
    at which the warrants are sold is critical. To determine
    whether Treasury is valuing the warrants in a way that
    maximizes the taxpayers' investments in the financial
    institutions, it is necessary to determine how much the
    warrants are worth.
        The Panel uses the most widely-accepted mathematical model,
    presenting a detailed technical valuation of the warrants
    Treasury holds. The assumptions employed in the use of any
    model are crucial, and the report offers a range of estimates
    based on high, low and best estimate assumptions for certain
    key variables. The Panel was aided in its valuation efforts by
    three renowned finance experts, Professor Robert Merton,
    Professor Daniel Bergstresser, and Professor Victoria Ivashina,
    all of the Harvard Business School. The professors reviewed
    both the technical valuation model and the assumptions that
    were built into the model; they concluded that the approaches
    reported here were reasonable and that they produced reliable
    estimates.
        Eleven small banks have repurchased their warrants from
    Treasury for a total amount that the Panel estimates to be only
    66 percent of its best estimate of their value. If the warrants
    had been sold for their market value, taxpayers would have
    recovered $10 million more.
        Treasury has to date sold warrants only from smaller banks.
    In those sales, liquidity discounts are likely to be a major
    factor in a way that they are not likely to be for large
    publicly-traded institutions. If, however, liquidity discounts
    or any other rationales are accepted as a reason for taking
    only 66 percent of market value for the full group of warrants
    Treasury holds, the shortfall to taxpayers could be as much as
    $2.7 billion.
        It is possible that policymakers may conclude that other
    objectives should override the goal of maximizing taxpayer
    returns. For example, Treasury has said that it wants to allow
    banks to operate again without TARP assistance as soon as they
    are strong enough to do so.
        Because warrant valuation is a difficult task, the Panel
    explores the possibility that Treasury should leave it to the
    markets by selling the warrants in an open, public auction.
    This has the benefit of stopping any speculation about whether
    Treasury has been too tough or too easy on the banks that want
    to repurchase their own warrants. It also permits the banks to
    bid for their own warrants--in direct competition with
    outsiders.
        The report describes key provisions in the Treasury
    contracts with the banks and statutory provisions that govern
    warrant purchases. The Panel notes that Treasury is constrained
    in some ways by the provisions of the contracts governing the
    TARP investments in the banks.
        It should be noted that Treasury is just beginning its
    warrant repurchase program. Banks have bought back only a
    fraction of one percent of all warrants issued, and the prices
    paid thus far may not be representative of what is to come. As
    always, it is critical that Treasury make the process--the
    reason for its decisions, the way it arrives at its figures,
    and the exit strategy from or future use of the TARP--
    absolutely transparent. If it fails to do so, the credibility
    of the decisions it makes and its stewardship of the TARP will
    be in jeopardy.
                                  SECTION ONE

        Ten of the nation's largest financial institutions, and
    some smaller institutions, have repaid the amounts they
    received under the TARP by redeeming the preferred shares
    Treasury received when the assistance was provided. Their
    redemption of the preferred shares entitles them to buy back
    the warrants to purchase their common shares that Treasury also
    received at that time.
        The preferred shares and pending warrant repayments raise
    important questions about the TARP:
               the extent to which repayment of TARP
            assistance is yet appropriate, and if so, on what terms
            and timing, in light of the still uncertain economic
            recovery;
               the appropriate circumstances for repayment;
               the extent to which the relationship between
            the strength of individual institutions and the
            strength of the financial system should govern timing
            of repayment;
               the price at which Treasury should dispose
            of the warrants it holds, and the way it should do so;
               the statutory and contractual obligations
            that affect Treasury's ability to set a price for
            warrant repurchase;
               the fair market value of the warrants; and
               the policy considerations that should govern
            the price that Treasury accepts for its warrants.
        In its past reports, the Panel examined questions about the
    policy, strategy and execution of the TARP's approach to bank
    assistance. This report begins an effort to evaluate the
    details of the exit strategy from the TARP that are emerging
    from the actions Treasury and the Federal Reserve Board are now
    taking.
        In doing so, the Panel recognizes that repayment of TARP
    assistance and disposition of TARP warrants raise different,
    albeit related, issues. The former is the foundation of the
    government strategy for stabilizing the nation's financial
    system. The warrants represent only 15 percent of the value of
    Treasury's investment in the banks that have received
    assistance (at the time of that investment). But Congress
    required institutions receiving TARP assistance to issue the
    warrants to permit the public to share in the increase in share
    values that investment of billions of dollars of the public's
    money made possible. Thus examination of issues relating to
    both repayment and warrants can shed light on Treasury's
    objectives and strategy during what appears to be a critical
    phase in the implementation of the TARP.

                                 A. Background

        Between October 14, 2008 and June 26, 2009, Treasury
    injected more than $240 billion into over 600 of the nation's
    bank holding companies (BHCs) and independent banking
    institutions through the TARP in exchange for preferred shares
    and warrants to buy common shares of each institution
    involved.\1\ These capital injections appear to have
    contributed to stabilizing, or at least softening, last year's
    severe downturn in the U.S. financial system, although as the
    Panel has noted elsewhere, it is not entirely clear what
    positive effects TARP assistance has had on the availability or
    terms of credit.\2\
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        \1\ U.S. Department of the Treasury, TARP Transactions Report for
    the Period Ending June 30, 2009 (July 2, 2009) (online at
    www.financialstability.gov/docs/transaction-reports/transactions-
    report_070209.pdf) (hereinafter ``July 2 TARP Transactions Report'').
    The injections were part of Treasury's Capital Purchase Program (the
    ``CPP''), except for two $20 billion transactions that were part of
    Treasury's Targeted Investment Program (the ``TIP'').
        \2\ See Congressional Oversight Panel, April Oversight Report:
    Assessing Treasury's Strategy: Six Months of TARP at 27-35 (April 7,
    2009) (online at cop.senate.gov/documents/cop-040709-report.pdf)
    (hereinafter ``Panel April Report''); Congressional Oversight Panel,
    May Oversight Report: Reviving Lending to Small Businesses and Families
    and the Impact of the TALF (May 7, 2009) (online at cop.senate.gov/
    documents/cop-050709-report.pdf) (hereinafter ``Panel May Report'');
    Congressional Oversight Panel, June Oversight Report: Stress Testing
    and Shoring Up Bank Capital at 135-139 (June 9, 2009) (online at
    cop.senate.gov/documents/cop-060909-report.pdf) (hereinafter ``Panel
    June Report'').
    ---------------------------------------------------------------------------
        During the winter and spring of this year, the Federal
    Reserve Board oversaw the Supervisory Capital Assessment
    Program (the ``stress tests'' or ``SCAP'') that was the subject
    of the Panel's June report.\3\ The stress tests' results,
    released on May 7, 2009, determined that ten of the nation's
    nineteen largest BHCs must raise an additional capital buffer
    totaling $74.6 billion in all, to meet capital requirements
    that the Federal Reserve Board has set in light of current
    economic conditions.\4\
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        \3\ Id, at 6-56.
        \4\ Board of Governors of the Federal Reserve System, The
    Supervisory Capital Assessment Program: Overview of Results (May 7,
    2009) (online at http://www.federalreserve.gov/newsevents/press/bcreg/
    bcreg20090507a1.pdf).
    ---------------------------------------------------------------------------
        On June 17, ten of the nation's largest BHCs repaid the
    TARP capital infusions they received eight months ago, spending
    a total of $68.2 billion to redeem their preferred shares from
    Treasury (with the approval of Treasury and the Federal Reserve
    Board). The institutions, and amounts repaid, included:
    JPMorgan Chase ($25 billion), Morgan Stanley ($10 billion),
    Goldman Sachs ($10 billion), US Bancorp ($6.6 billion), Capital
    One Financial ($3.5 billion), American Express ($3.4 billion),
    BB&T ($3.1 billion), Bank of New York Mellon ($3 billion),
    State Street ($2 billion), and Northern Trust ($1.6 billion).
    In addition, as of July 2, 2009, repayments have been made by
    22 small and private banks, for a total of $1.9 billion. All
    told, $70.2 billion in Capital Purchase Program (CPP)
    assistance has been repaid. The systemic risks posed by BHCs
    with $100 billion or more in assets are different than those
    posed by other BHCs or smaller community banks, but the issues
    raised in this report--the relationship of the return of
    capital assistance to the size and health of a bank, the
    policies that should govern approval of return of assistance,
    and the value of the warrants held by Treasury in the bank,
    apply equally to both.
        In May 2009, Treasury issued ``FAQs on Capital Purchase
    Program Repayment,'' which included a general statement of the
    policy used in determining whether to approve TARP repayments;
    on June 1, 2009, the Federal Reserve Board issued more detailed
    guidelines on the criteria for approval for the stress-tested
    BHCs.\5\
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        \5\ See infra note 25.
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                           B. Understanding Warrants

        A warrant is a security that permits the holder to buy a
    specified number of common shares (the ``underlying'' shares)
    at a specified price (the ``strike price'') on or before a
    specified date (the ``expiration''). With a couple of technical
    caveats,\6\ warrants can be considered a form of call option
    and are often issued as ``sweeteners'' with fixed-income
    securities, such as preferred shares or debt (much like
    employee stock options are used to enhance compensation
    packages). When warrants are issued, their strike price is
    usually set above the current share price; they generally have
    no value if exercised immediately because the holder could
    immediately buy shares on an exchange at a lower price.
    However, warrants may be traded on public or private markets,
    and they can be highly valued by investors who believe the
    share price of the issuing company is likely to rise above the
    strike price. Typically, prospective warrant investors will use
    mathematical models to calculate the value of warrants based on
    the probability of the share price rising above the warrant's
    strike price.
    ---------------------------------------------------------------------------
        \6\ Including a warrant's potential dilutive effect and its balance
    sheet treatment, discussed infra.
    ---------------------------------------------------------------------------
        When a holder exercises its rights under a warrants
    agreement, the company must issue new common shares. This
    necessarily has the effect of reducing the percentage of the
    company owned by existing shareholders (known as ``dilution'').
    The prospect of potential dilution means that the issuance of
    warrants tends to depress the trading price of the common
    shares to some extent.\7\
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        \7\ Such price declines reflect the potential for each share of
    common stock to represent less ownership control. Stock exchange rules
    temper the impact of this dilution by requiring shareholder votes in
    the event that the proposed issuance would increase the outstanding
    number of shares by more than 20 percent. See New York Stock Exchange,
    Listed Company Manual Sec. 312.03(c)(1); NASDAQ Stock Market, Equity
    Rules Sec. 5635(a)(1)(A).
    ---------------------------------------------------------------------------
        When warrants are issued in conjunction with other
    securities, as in the CPP, and valued and traded separately
    from the preferred shares (i.e., they are ``detachable''),\8\
    the issuer allocates a corresponding value as paid-in capital
    on its balance sheet.\9\ This value is based on the fair value
    of the securities relative to the fair value of the warrants at
    the time of issuance and does not change in subsequent
    financial statements.\10\
    ---------------------------------------------------------------------------
        \8\ Financial Accounting Standards Board, Accounting for Derivative
    Instruments and Hedging Activities, 12, 16 (FAS No. 133) (June 1998)
    (as amended by FAS No. 155).
        \9\ Letter from James Kroeker, Securities and Exchange Commission,
    and Russell Golden, Financial Accounting Standards Board, to Assistant
    Secretary David G. Nason, U.S. Department of the Treasury (Oct. 24,
    2008) (online at financialstability.gov/docs/CPP/secfasbletter.pdf).
        \10\ When the warrants are exercised, the value allocated to the
    warrants is removed from the ``stock warrants outstanding'' account
    and, together with the cash received on exercise, credited to the stock
    account for par or stated value, with any excess over the par value
    being credited to the ``additional paid-in capital'' account. When
    warrants are reacquired, the amount paid in excess of the amount
    assigned to warrants at issuance is charged to retained earnings. If
    warrants are reacquired at a price less than the amount originally
    assigned to them, the difference is credited to additional paid-in
    capital.
    ---------------------------------------------------------------------------
        When a company offers or sells securities, the transaction
    must be registered with the SEC under the Securities Act of
    1933,\11\ unless the transaction is exempt from registration.
    Private sales, such as the CPP transactions with Treasury, are
    exempt from registration. However, if the original holder
    wishes to have the ability to sell the warrants into the public
    markets (which is permitted in the case of the CPP warrants)
    the issuer must have agreed to register the public resale of
    the warrants.\12\
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        \11\ Securities Act of 1933, Pub. L. No. 73-22, Sec. 5 (codified at
    15 U.S.C. Sec. 77(a) et seq.).
        \12\ Securities Purchase Agreement, infra note 15 at Sec. 4.5(p).
    ---------------------------------------------------------------------------

       C. Statutory and Contractual Provisions Governing Repurchase and
                              Warrants Under TARP

        The Emergency Economic Stabilization Act of 2008 (EESA)
    authorizes Treasury to purchase financial instruments.\13\
    Through the CPP and Targeted Investment Program (TIP), Treasury
    bought $203.2 billion and $40 billion, respectively, of
    preferred shares from financial institutions. Preferred shares
    entitle the holder to a fixed rate of dividend, and in that
    respect function somewhat like a loan to the institution. EESA
    also requires that any such purchase of financial instruments
    from financial institutions must be accompanied by the issuance
    to Treasury of warrants to purchase common shares of the
    institution, so that taxpayers can benefit from a rise in the
    price of the institution's shares, presumably reflecting the
    value of the assistance Treasury has provided.\14\
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        \13\ Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-
    343 (online at frwebgate.access.gpo.gov/cgi-bin/
    getdoc.cgi?dbname=110_cong_bills&docid=f:h1424enr.txt.pdf) (codified at
    12 U.S.C. Sec. 5201 et seq.) (hereinafter ``EESA''), as amended by Pub.
    L. No. 111-5, Sec. 7001 and Pub. L. No. 111-22, Sec. 403.
        \14\ EESA, supra note 13 Sec. 113(d)(2)(a) (codified at 12 U.S.C.
    Sec. 5223(d)(2)(A)) (``[The] terms and conditions of any warrant . . .
    shall . . . at a minimum, be designed . . . to provide for reasonable
    participation by the Secretary, for the benefit of taxpayers, in equity
    appreciation in the case of a warrant or other equity security . . .
    and to provide additional protection for the taxpayer against losses
    from sale of assets by the Secretary under [EESA] and the
    administration expenses of the TARP.''); EESA, supra note 13,
    Sec. 113(d)(1) (codified at 12 U.S.C. Sec. 5223(d)(1)) (providing that
    the warrants may be to purchase either nonvoting common stock, common
    stock with respect to which Treasury agrees not to exercise voting
    power, or preferred shares of any institution from which Treasury
    purchases financial instruments. If the institution involved is
    privately-held, the warrant may be ``for common or preferred stock or a
    senior debt institution from such institution.'').
    ---------------------------------------------------------------------------
        The terms of the preferred shares and the warrants are
    governed both by statute and by individual contracts with each
    institution receiving assistance. Each bank's agreement with
    Treasury includes a Securities Purchase Agreement (SPA) and a
    Form of Warrant to Purchase Common Stock (Form of Warrant),
    which are attached to a Letter Agreement.\15\ These documents
    set out the detailed terms of each security.
    ---------------------------------------------------------------------------
        \15\ The terms of these documents vary somewhat by institution
    type--public, private, S-corporation, mutual holding company, or mutual
    bank--but are substantially similar. See, e.g., U.S. Department of the
    Treasury, Securities Purchase Agreement: Standard Terms (online at
    www.financialstability.gov/docs/CPP/spa.pdf) (hereinafter ``Securities
    Purchase Agreement''); U.S. Department of the Treasury, Form of Warrant
    to Purchase Common Stock (online at www.financialstability.gov/docs/
    CPP/warrant.pdf) (hereinafter ``Form of Warrant'').
    ---------------------------------------------------------------------------
        The statute, the contracts, and Treasury policy interact to
    shape the terms of the preferred shares and warrants, including
    terms relating to their redemption or repurchase. The statutory
    provision regarding repurchases has been amended twice since
    EESA was enacted. As discussed in more detail below, initially
    the repayment of preferred shares and warrants was made
    somewhat difficult for banks. EESA was then amended to allow a
    bank to repay with the approval of its supervisor, and to
    mandate that Treasury liquidate the warrants on redemption of
    the preferred shares.\16\ In May 2009, EESA was further amended
    to provide Treasury with discretion as to whether to hold or
    liquidate the warrants upon a bank's redemption of the
    preferred shares. Because the contracts were entered into under
    the original statutory regime, Treasury has needed to adapt to
    the amendments. It has done so through both its policy and
    changes to the contracts. The end result, as described in this
    section, is a process created by a combination of the statute,
    contract, and policy. Under this process, a bank may redeem its
    preferred shares only with the approval of its supervisor, as
    required by EESA, after which it may repurchase its warrants at
    a price determined by a specific valuation procedure, as
    required by the contracts.
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        \16\ See infra notes 23 and text accompanying note 44; Section One
    Part C(2) of this report.
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                              1. PREFERRED SHARES

    a. Terms of Preferred Shares

        The CPP preferred shares pay cumulative \17\ dividends of
    five percent per year for the first five years of the
    program.\18\ They are senior to the institution's common
    shares, have an equal preference to existing preferred shares,
    and are non-voting.\19\
    ---------------------------------------------------------------------------
        \17\ A bank that is not a subsidiary of a holding company pays non-
    cumulative dividends at the same rates. U.S. Department of the
    Treasury, TARP Capital Purchase Program Senior Preferred Stock and
    Warrants Summary of Senior Preferred Terms (online at www.treas.gov/
    press/ releases/reports/document5hp1207.pdf) (hereinafter ``CPP Term
    Sheet'').
        \18\ In the sixth year, the dividends are raised to 9 percent. U.S.
    Department of the Treasury, Factsheet on Capital Purchase Program (Mar.
    17, 2009) (online at www.financialstability.gov/roadtostability/
    CPPfactsheet.htm) (hereinafter ``CPP Factsheet'').
        \19\ The preferred stock do have ``class voting rights on (i) any
    authorization or issuance of shares ranking senior to the Senior
    Preferred, (ii) any amendment to the rights of Senior Preferred, or
    (iii) any merger, exchange or similar transaction.'' CPP Term Sheet,
    supra note 17. In addition, ``[i]f dividends on the Senior Preferred
    are not paid in full for six dividend periods, whether or not
    consecutive, the Senior Preferred will have the right to elect 2
    directors. The right to elect directors will end when full dividends
    have been paid for four consecutive dividend periods.'' CPP Term Sheet,
    supra note 17.
    ---------------------------------------------------------------------------

    b. Redemption of Preferred Shares

        In the same way that loans are repaid, preferred shares are
    ``redeemed'' by the institution paying back the ``liquidation''
    amount of the shares, equivalent to the principal amount of a
    loan.\20\ There are both statutory and contractual provisions
    that govern when and how this happens.
    ---------------------------------------------------------------------------
        \20\ In transactions of preferred shares generally, the amount paid
    for preferred shares is not always equal to their liquidation amount.
    ---------------------------------------------------------------------------
        i. Timing. EESA, as amended, sets requirements for the
    timing of redemption of these investments. Originally, under
    the SPAs, BHCs were not permitted to repay TARP funds within
    the first three years unless they had completed a qualified
    equity offering (QEO) of at least 25 percent of the issue
    price.\21\ A QEO is a sale before 2010 of shares that qualify
    as tier 1 capital that raises an amount of cash equal to the
    value of the preferred shares issued to Treasury.\22\ The
    American Recovery and Reinvestment Act of 2009 (ARRA) amended
    EESA, adding section 111(g), which now provides that, ``subject
    to consultation with the appropriate federal banking agency
    [Treasury] shall permit a TARP recipient to repay [CPP
    preferred] without regard to whether the financial institution
    has replaced such funds from any other source or to any waiting
    period. . . .'' \23\
    ---------------------------------------------------------------------------
        \21\ If the bank did such a qualified equity offering, it could
    redeem up to the amount of the proceeds that it had received in the
    qualified equity offering. CPP Term Sheet, supra note 17.
        \22\ Securities Purchase Agreement, supra note 15, 4.4.
        \23\ American Recovery and Reinvestment Act of 2009 (ARRA), Pub. L.
    111-5, Sec. 7001 (online
    at frwebgate.access.gpo.gov/cgi-bin/
    getdoc.cgi?dbname=111_cong_bills&docid=f:h1enr.txt.pdf) (hereinafter
    ``ARRA'').
    ---------------------------------------------------------------------------
        Repayment applications must be approved by the bank's
    supervisor before they are sent to Treasury.\24\ The Federal
    Reserve Board has indicated that supervisors will weigh an
    institution's desire to repay its TARP assistance against the
    contribution of that assistance to the institution's overall
    soundness, capital adequacy and ability to lend.\25\ BHCs must
    also have a comprehensive internal capital assessment
    process.\26\ In addition, prior to repayment, the eighteen
    stress-tested BHCs that received TARP funds must have a post-
    repayment capital base consistent with the stress test capital
    buffer, and must demonstrate their financial strength by
    issuing senior unsecured debt for terms greater than five
    years, not backed by FDIC guarantees, and in amounts sufficient
    to demonstrate a capacity to meet funding needs
    independently.\27\
    ---------------------------------------------------------------------------
        \24\ Id.
        \25\ Board of Governors of the Federal Reserve System, Joint
    Statement by Secretary of the Treasury Timothy F. Geithner, Chairman of
    the Board of Governors of the Federal Reserve System Ben S. Bernanke,
    Chairman of the Federal Deposit Insurance Corporation Sheila Bair, and
    Comptroller of the Currency John C. Dugan on the Treasury Capital
    Assistance Program and the Supervisory Capital Assessment Program (May
    6, 2009) (online at www.federalreserve.gov/newsevents/press/bcreg/
    20090506a.htm).
        \26\ Id.
        \27\ Id.
    ---------------------------------------------------------------------------
        The Federal Reserve summarizes the criteria that it will
    use in determining whether to allow repayment as requiring that
    stress-tested banks wishing to repay ``have a robust longer-
    term capital assessment and management process geared toward
    achieving and maintaining a prudent level and composition of
    capital commensurate with the BHC's business activities and
    firm-wide risk profile.'' \28\ Representative Hensarling, one
    of the five members of the Panel, has introduced legislation
    that would codify the Federal Reserve's criteria as part of
    EESA.\29\ The Panel takes no position on the bill.
    ---------------------------------------------------------------------------
        \28\ Id.
        \29\ H.R. 2745, TARP Repayment and Termination Act of 2009, 111th
    Cong. (hereinafter ``H.R. 2745'').
    ---------------------------------------------------------------------------
        In testimony before the Panel on April 21, 2009, Secretary
    of the Treasury Timothy Geithner said the ``ultimate test'' for
    repayment would be whether an individual bank's repayment would
    result in a reduction in the overall credit available to the
    economy.\30\ While any repayment would reduce capital and thus
    funds available for lending, some banks are raising capital
    from the private markets, thereby replenishing that capital.
    ---------------------------------------------------------------------------
        \30\ Congressional Oversight Panel, Testimony of Treasury Secretary
    Timothy Geithner (Apr. 21, 2009).
    ---------------------------------------------------------------------------
        The original contractual terms of the SPAs concerning
    approval and timing of redemption of the preferred shares have
    been superseded by the statutory amendments, as described
    above.\31\ Treasury has announced that banks can redeem CPP
    preferred under terms other than those specified in the
    SPA.\32\
    ---------------------------------------------------------------------------
        \31\ See supra notes 22, 23, and accompanying text.
        \32\ U.S. Department of the Treasury, FAQs addressing Capital
    Purchase Program (CPP) changes under the American Recovery and
    Reinvestment Act of 2009 (Feb. 26, 2009) (online at
    www.financialstability.gov/docs/CPP/CPP-FAQs.pdf).
    ---------------------------------------------------------------------------
        ii. Pricing. The statute sets no terms for the price
    Treasury must obtain for the preferred shares it holds, other
    than the general statutory injunction that it should administer
    the Act in a manner that will ``minimize any potential long-
    term negative impact on the taxpayer.'' \33\ The contractual
    provisions governing the preferred shares provide that they are
    to be redeemed at ``liquidation preference,'' essentially the
    principal amount of the debt. In addition, the institution must
    repay any dividends that are owed but unpaid on the shares.\34\
    ---------------------------------------------------------------------------
        \33\ EESA, supra note 13, Sec. 113(a)(1) (codified at 12 U.S.C.
    Sec. 5223).
        \34\ Securities Purchase Agreement, supra note 15, Sec. 4.4.
    ---------------------------------------------------------------------------

                                  2. WARRANTS

    a. Terms of warrants

        The warrants have a ten year life. Treasury can exercise or
    transfer half of the warrants it holds at any time; the other
    half can be exercised after 2009 if the bank has not engaged in
    a QEO.\35\
    ---------------------------------------------------------------------------
        \35\ Form of Warrant, supra note 15, Sec. 13(H). As a contractual
    condition to a bank's redemption of its preferred stock, Treasury
    requires that the bank sign a ``cross-receipt.'' This cross-receipt has
    the effect of exchanging the original warrants issued to Treasury for
    ``substitute warrants'' that are identical to the original warrants
    except for the removal of the qualified equity offering 50 percent
    warrant decrease provision. The cross-receipt also eliminates the
    warrant transfer restrictions contained in the Securities Purchase
    Agreement. A bank is not, however, required to provide a substitute
    warrant if it informs Treasury of its plans to repurchase the warrants
    immediately.
    ---------------------------------------------------------------------------
        For BHCs that are public companies,\36\ the warrants must
    be exercisable for an amount of common shares of the bank with
    a value, at the time of the investment, equal to 15 percent of
    the amount of the preferred shares purchased by Treasury from
    the issuer. Because the maximum amount of preferred shares
    eligible for the CPP is generally the lesser of $25 billion and
    three percent of the bank's risk-weighted assets, warrants for
    $3.75 billion in value of the bank's common shares are the
    maximum amount that may be issued by a single institution. The
    bank's shareholders must approve the issuance of the warrant
    shares, the increase in the number of underlying shares to
    cover the warrants, or both.
    ---------------------------------------------------------------------------
        \36\ Private banks issue warrants to purchase preferred shares
    ``having an aggregate liquidation preference equal to 5 percent of the
    Preferred amount on the date of investment.'' The underlying shares of
    a private bank warrant have the same rights as the preferred shares,
    except that they pay dividends of 9 percent per year. U. S. Department
    of the Treasury, TARP Capital Purchase Program (Non-Public QFIs,
    excluding S Corps and Mutual Organizations) Preferred Securities
    Summary of Preferred Terms (Nov. 19, 2008) (online at
    www.financialstability.gov/docs/CPP/Term%20Sheet%20-
    %20Private%20C%20Corporations.pdf) (hereinafter ``CPP Term Sheet for
    Private Banks'').
    ---------------------------------------------------------------------------
        The actual number of shares subject to the warrants is set
    by reference to the market price for the common shares of the
    issuer on the date of the preferred share investment,
    calculated on a 20-trading day trailing average. Thus, if
    warrants for common shares equal to $1 billion in value were to
    be issued and the 20-trading day average stock price was $10,
    then the bank must issue warrants for 100 million shares of the
    common shares.
        The number of underlying shares covered by the warrants is
    subject to two possible adjustments. First, the shares subject
    to warrant could be changed by standard anti-dilution
    adjustments. Thus, if the issuer splits its stock on a two for
    one basis (issuing two shares in place of every existing
    share), the number of shares subject to the CPP warrants in the
    previous example would be increased from 100 to 200 million. On
    the other hand, the number of shares subject to the warrants is
    decreased by 50 percent if the issuer engages, before December
    31, 2009, in a QEO in which it receives gross proceeds of at
    least 100 percent of the liquidation price of the preferred
    shares.\37\
    ---------------------------------------------------------------------------
        \37\ Form of Warrant, supra note 15, Sec. 13(H). See text
    accompanying supra note 35 for a definition of ``Qualified Equity
    Offering.''
    ---------------------------------------------------------------------------
        The strike price of the warrants is determined in the same
    way as the number of shares subject to warrant, that is, the
    price is set at the 20-trading day trailing average price of
    the common shares on the date Treasury's investment is made.
    Thus, if the 20-day average stock price is $10, the holder of
    the warrant must pay $10 for each share of stock when it
    exercises the warrant.\38\ Private bank warrants carry an
    exercise price of $0.01 per share. Treasury has announced that
    it will immediately exercise private bank warrants.\39\
    ---------------------------------------------------------------------------
        \38\ The exercise price, however, is subject to reduction if
    necessary shareholder consents are not obtained; the maximum reduction
    is 45 percent.
        \39\ CPP Term Sheet for Private Banks, supra note 36.
    ---------------------------------------------------------------------------
        Treasury agrees to waive its voting rights with respect to
    any voting stock it receives when it exercises its
    warrants.\40\ This restriction does not apply to any person to
    whom Treasury transfers the shares or warrants.
    ---------------------------------------------------------------------------
        \40\ Securities Purchase Agreement, supra note 15, Sec. 4.6. This
    provision reflects the requirements of EESA. See 12 U.S.C.
    Sec. 5223(d)(1)(A).
    ---------------------------------------------------------------------------

    b. Repurchase of warrants

        i. Timing of Repurchase. Timing of repurchase is governed
    by both statutory and contractual provisions. Treasury is of
    the opinion that the contractual provisions are the more
    constraining.
        The statute originally permitted Treasury to convert a
    warrant to cash or exercise it when Treasury decided that doing
    so would allow the public reasonable gain from an increase in
    the price of the stock involved, and that ``the market [was]
    optimal for such assets, in order to maximize the value for
    taxpayers.'' \41\ The amendment that eliminated conditions on
    redemption of preferred shares also required Treasury to
    ``liquidate'' the warrants it held when the assistance was
    repaid (i.e., when the preferred shares Treasury held were
    redeemed).\42\ A further amendment to the same provision
    resulted in language that attempts to restore Treasury's
    discretion regarding the timing of warrant repurchases.\43\
    EESA now provides that Treasury ``may liquidate warrants
    associated with such assistance.'' \44\
    ---------------------------------------------------------------------------
        \41\ EESA, supra note 13, Sec. 113(a)(2)(A) (codified at 12 U.S.C.
    Sec. 5223(a)(2)(A)).
        \42\ ARRA, supra note 23, Sec. 7001.
        \43\ Helping Families Save Their Homes Act of 2009, Pub.L. 111-22,
    Sec. 403 (May 20, 2009) (online at frwebgate.access.gpo.gov/cgi-bin/
    getdoc.cgi?dbname=111_cong_ bills&docid=f:s896enr.txt.pdf) (amending 12
    U.S.C. Sec. 5221). Floor statements made by the provision's sponsor and
    the committee chairman support a plain meaning analysis and explain
    that the sponsors' intentions were to grant Treasury authority to time
    warrant repurchases in order to maximize financial returns on the
    warrants to taxpayers. See Statement of Senator Jack Reed,
    Congressional Record S5114 (May 5, 2009); Statement of Senator
    Christopher Dodd, Congressional Record, S5115 (May 5, 2009).
        \44\ ARRA, supra note 23, Sec. 7001.
    ---------------------------------------------------------------------------
        The SPAs governing Treasury's purchase of preferred shares
    and warrants were executed before the EESA amendment concerning
    the timing of warrant repurchases became law. The SPAs grant
    the redeeming financial institution the right to repurchase the
    warrants upon notice to Treasury (after it has redeemed its
    preferred shares).\45\ Treasury staff has informed the Panel
    that Treasury is contractually bound by the timing provisions
    of the SPAs. In addition, Treasury staff has stated that it is
    Treasury's policy to dispose of the government's investments as
    soon as practicable.\46\ Therefore, a bank may repurchase its
    warrants as soon as it has redeemed its preferred shares.
    ---------------------------------------------------------------------------
        \45\ Securities Purchase Agreement, supra note 15, Sec. 4.9(a).
    Though the amended section 111(g) of EESA expressly provides Treasury
    discretion as to when to allow repurchase of the warrants, it does not
    explicitly override the contracts.
        \46\ See U.S. Department of the Treasury, Treasury Announces
    Warrant Repurchase and Disposition Process for the Capital Purchase
    Program (June 26, 2009) (online at www.financialstability.gov/latest/
    tg_06262009.html) (hereinafter ``Treasury Warrant Repurchase
    Announcement'') (``The President has clearly stated that his objective
    is to dispose of the government's investments in individual companies
    as quickly as is practicable.'').
    ---------------------------------------------------------------------------
        Although Treasury is bound by the statute and the
    contracts, it does have flexibility both in the negotiation
    process and in the inputs used in modeling value. As noted
    above, EESA provides that the terms and conditions of the
    warrants be designed ``at a minimum . . . to provide for
    reasonable participation by the Secretary, for the benefit of
    taxpayers, in equity appreciation'' and ``that the Secretary
    may sell, exercise, or surrender a warrant . . . based on
    [these] conditions.'' \47\ The negotiation step of the
    contractual valuation procedure (discussed in detail in the
    next section), requires that Treasury and the bank ``promptly
    meet to resolve the objection and agree on the Fair Market
    Value.'' \48\ In order to provide for ``reasonable
    participation in equity appreciation,'' Treasury could take a
    tougher negotiating position, possibly resulting in a higher
    fair market value. Treasury is not bound as to the basis on
    which it will agree or disagree with the bank's proposed fair
    market value. Of course, there are many considerations that
    Treasury must balance in its decision making, and this is only
    one of them.
    ---------------------------------------------------------------------------
        \47\ EESA, supra note 13, Sec. 113(d)(2) (codified at 12 U.S.C.
    Sec. 5223(d)(2)).
        \48\ Securities Purchase Agreement, supra note 15, Sec. 4.9(c)(ii).
    ---------------------------------------------------------------------------
        If the bank informs Treasury that it will repurchase the
    warrants, then it must go through the valuation procedure in
    the SPA, described below.
        ii. Repurchase Price. From a statutory point of view,
    Treasury is required to repurchase warrants ``at market
    price.'' \49\ As discussed below, the SPAs executed for each
    TARP transaction provide for repurchase of the warrants at
    ``fair market value,'' reflecting the statutory requirement
    that TARP assets are to be sold ``at a price that the Secretary
    determines, based on available financial analysis, will
    maximize return on investment for the Federal Government.''
    \50\
    ---------------------------------------------------------------------------
        \49\ ARRA, supra note 23, Sec. 7001. Initially the statute required
    repurchase at a price set by the Secretary, subject to the overriding
    condition specified above, namely that the price constitutes ``a
    reasonable participation . . . in equity appreciation,'' and
    ``additional protection against losses from the sale of [TARP] assets .
    . .'' ARRA overrode that language to require that warrants be
    liquidated at ``current market price,'' and the subsequent amendment
    produced the language in the text, calling for liquidation at ``market
    price.''
        \50\ EESA, supra note 13, Sec. 113(a)(2)(B) (codified at 12 U.S.C.
    Sec. 5223(a)(2)(B)).
    ---------------------------------------------------------------------------
        The SPAs set out a procedure for valuing the warrants of a
    public bank when the bank invokes its right to repurchase its
    warrants.\51\ After a bank has redeemed 100 percent of its
    preferred shares (or Treasury has transferred the preferred
    shares to an unaffiliated third party), the bank may repurchase
    the warrants issued in conjunction with those preferred
    shares.\52\
    ---------------------------------------------------------------------------
        \51\ Securities Purchase Agreement, supra note 15, Sec. 4.9.
        \52\ Securities Purchase Agreement, supra note 15, Sec. 4.9(a).
    ---------------------------------------------------------------------------
        The first step in this procedure is that the bank's board
    of directors must propose the fair market value of the
    warrants, using the opinion of an independent, nationally-
    recognized investment banking firm. (The Panel assumes that
    none of the firms used have, or is an affiliate of a BHC or
    bank that has, received TARP assistance and issued TARP
    warrants. Were this assumption to prove incorrect, serious
    conflict of interest questions would arise.)
        The bank's board presents the valuation to Treasury, which
    has ten days to object to the valuation. Though it is not
    specified in the SPA, Treasury will have determined its own
    fair market value, working with outside investment banks and
    consultants. Treasury uses several methods to determine fair
    market value. These include obtaining quotes from a group of
    investment banks and investment companies that have volunteered
    their time,\53\ creating their own model using a binomial
    American-style options model, performing a fundamental analysis
    of the bank, and using outside, paid consultants, who use a
    slightly different binomial American style options model.\54\
    ---------------------------------------------------------------------------
        \53\ These investment banks' and investment consultants' names are
    not disclosed to the public. They include both domestic and global
    entities. Some of the domestic entities' parent companies received CPP
    funds. Treasury staff has informed Panel staff that when Treasury
    solicits quotes for the warrants, it uses a mix of banks whose parents
    have received CPP and those that have not. Treasury has put into place
    careful conflict of interest rules governing firms that assist Treasury
    with the warrant valuation process.
        \54\ The Panel's methodology for determining the fair market value
    of the CPP and TIP warrants, and its comparison to Treasury's
    methodology, is discussed in detail in Annex A of this report.
    ---------------------------------------------------------------------------
        If Treasury objects to the bank's proposed fair market
    value, then representatives of Treasury and the bank have ten
    days to meet to resolve the objection and agree on a fair
    market value. If Treasury and the bank cannot agree on a fair
    market value during that period, either party may invoke the
    Appraisal Procedure.
        By invoking the appraisal process a bank can require
    Treasury to allow it to repurchase the warrants, so long as the
    repurchase is made ``as soon as practicable'' after the fair
    market value has been determined. The Appraisal Procedure
    provides that each party chooses an independent appraiser.\55\
    If within 30 days after their appointment, the independent
    appraisers cannot agree on a fair market value, a third
    appraiser is chosen by mutual consent of the two appraisers.
    This third appraiser will provide its fair market value within
    30 days of its appointment. The average of all three appraisals
    is binding on both Treasury and the bank.\56\ If the bank
    wishes to repurchase the warrants, the bank and Treasury are
    bound by the appraised value. Treasury staff has told Panel
    staff that the bank, however, is not bound to repurchase the
    warrants and may revoke its notice exercising its right to
    repurchase the warrants; the bank may restart the repurchase
    process at any time--unless Treasury has disposed of the shares
    in the interim--by initiating a new round of valuations and
    subject to the same terms.
    ---------------------------------------------------------------------------
        \55\ The costs of the appraisal process are borne by the bank.
    Securities Purchase Agreement, supra note 15, Sec. 4.9(c)(i).
        \56\ Securities Purchase Agreement, supra note 15, Sec. 4.9(c)(ii).
    If one of the three appraisals is disparate from the middle appraisal
    by more than twice the amount that the other appraisal is disparate
    from the middle appraisal, such appraisal is disregarded in the
    determination of the average.
    ---------------------------------------------------------------------------
        Like a public bank, a private bank may repurchase its
    warrants once it has redeemed its preferred shares. Private
    bank warrants' values are established in the SPAs at a
    specified dollar amount, so they do not go through the same
    valuation procedure. As mentioned earlier, Treasury exercises
    private bank warrants immediately upon issuance. Private bank
    warrants have a liquidation amount of the full value of the
    preferred shares that Treasury received on exercise. Therefore,
    to repurchase the underlying shares of the warrant, a private
    bank must pay five percent of Treasury's non-warrant equity
    investment.\57\ H.R. 2745 would, for the period through the end
    of September 2009, allow private banks to repurchase the
    underlying shares associated with the warrants issued at the
    time of the CPP investment at the price that Treasury paid for
    the warrants, i.e., one cent per share.\58\
    ---------------------------------------------------------------------------
        \57\ CPP Term Sheet for Private Banks, supra note 36, at 2; See
    also Schedule A to Warrant to Purchase Preferred Stock, First Southwest
    Bancorporation (Mar. 6, 2009) (online at www.financialstability.gov/
    docs/agreements/03202009/First%20Southwest%20Bancorpation.pdf).
        \58\ H.R. 2745, supra note 29.
    ---------------------------------------------------------------------------
        If the bank chooses not to repurchase its warrants,
    Treasury may sell them to third party investors.\59\ Treasury
    has told the Panel that the Secretary had discretion to
    determine the time period for liquidating the warrants, and
    that in accordance with Treasury policy to dispose of ownership
    interests as soon as possible, it will auction the warrants
    within several months of a bank's delivery of a substitute
    warrant.\60\
    ---------------------------------------------------------------------------
        \59\ At this point, Treasury may sell all the warrants. This is
    because when the bank determines that it will repurchase the preferred
    shares, it must deliver to Treasury a substitute warrant instrument
    that eliminates the 50 percent qualified equity offering adjustment.
    See U.S. Department of the Treasury, Acknowledgment of Repurchase
    (Public Issuers) (online at www.financialstability.gov/docs/CPP/
    UST%20Acknowledgement%20of%20Repurchase%20 (Public%20Issuers).pdf).
        \60\ Letter from Secretary Timothy Geithner, U.S. Department of the
    Treasury, to Chair Elizabeth Warren, Congressional Oversight Panel
    (July 1, 2009) (attached as Appendix II of this report, infra).
    ---------------------------------------------------------------------------
        Alternately, Treasury may choose to exercise the warrant at
    any time.\61\ If Treasury has exercised the warrants and still
    holds the shares received on exercise, the bank may repurchase
    the shares on the open market, or Treasury may sell the shares
    to a third party.\62\
    ---------------------------------------------------------------------------
        \61\ If Treasury exercises the warrants before December 31, 2009
    and before the preferred shares are repurchased, it may only exercise
    half of the warrants, as the other half are subject to cancellation if
    the bank makes a qualified equity offering before that date. Securities
    Purchase Agreement, supra note 15, Sec. 4.4.
        \62\ Securities Purchase Agreement, supra note 15, Sec. 4.9(a).
    ---------------------------------------------------------------------------

                D. Repayments of CPP and TIP Capital Investments

        On June 17, nine of the stress-tested BHCs and one other
    BHC redeemed their CPP preferred shares from Treasury, in
    aggregate returning almost $68.2 billion of taxpayer funds
    provided under the TARP. The annualized return on Treasury's
    investments in these banks is at least five percent, due to the
    required five percent annual dividends paid to CPP preferred
    shares.\63\ It will not be possible to calculate an internal
    rate of return (IRR) with any precision until Treasury has sold
    the warrants it holds for these banks' shares (or sells its
    shares after exercising the warrants). However, even after
    Treasury sells the warrants for these banks, the IRR realized
    on these particular investments--likely the safest of the whole
    program--would not be representative of the potential return on
    the entire TARP portfolio. (IRRs for the few small banks that
    have repurchased their warrants are presented in Section E
    below.)
    ---------------------------------------------------------------------------
        \63\ Accrued dividends are paid upon the repurchase of the CPP
    preferred shares.
    ---------------------------------------------------------------------------
        Following the results of the stress tests, and the
    subsequent capital-raising by BHCs which required a
    strengthened capital buffer, the appropriate bank supervisor or
    supervisors authorized repayments based on their determination
    that these banks possessed adequate capital safety buffers to
    absorb losses through 2010 if economic conditions continue to
    deteriorate.\64\ Additionally, the banks were required to
    satisfy a number of conditions set by the Federal Reserve,
    notably the demonstrated ability to access public equity
    markets and raise five-year debt without an FDIC guarantee.\65\
    The Federal Reserve also evaluated whether repayment would have
    an adverse effect on the future operations of the bank or
    financial markets.\66\
    ---------------------------------------------------------------------------
        \64\ Only the results of the stress tests under the adverse
    scenario were published, which assumed for 2009: a 3.3 percent decline
    in GDP, 8.9 percent unemployment, and a 22 point decline in the Case-
    Shiller 10-city composite index of housing prices.
        \65\ Board of Governors of the Federal Reserve System, Federal
    Reserve Outlines Criteria It Will Use to Evaluate Applications to
    Redeem U.S. Treasury Capital from Participants in Supervisory Capital
    Assessment Program (June 1, 2009) (online at www.federalreserve.gov/
    newsevents/press/bcreg/20090601b.htm).
        \66\ Id.
    ---------------------------------------------------------------------------
        It should be noted, however, that although these banks are
    no longer being supported directly by the TARP, they remain
    eligible to use the FDIC's Temporary Liquidity Guarantee
    Program,\67\ as well as other indirect support through the
    Federal Reserve's various liquidity programs. Except for the
    Term Asset-Backed Securities Loan Facility (TALF), which is
    currently set to expire at the end of 2009, these programs were
    recently extended through February 2010.\68\ All told, the
    Federal Reserve's balance sheet has expanded by almost $1.2
    trillion since August 2007.\69\
    ---------------------------------------------------------------------------
        \67\ The FDIC's Temporary Liquidity Guarantee Program (TLGP)
    essentially guarantees the senior unsecured debt issued by financial
    institutions, allowing them in effect to obtain financing at reduced
    rates; without the threat of default, the risk premium included in the
    interest charged for the debt is reduced substantially. Currently, the
    TLGP guarantees some $285 billion of debt of 34 BHCs, thrift holding
    companies, and other non-FDIC-insured financial institutions.
        \68\ Board of Governors of the Federal Reserve System, Federal
    Reserve Announces Extensions of and Modifications to a Number of its
    Liquidity Programs (June 25, 2009) (online at www.federalreserve.gov/
    newsevents/press/monetary/20090625a.htm).
        \69\ See Board of Governors of the Federal Reserve System, Federal
    Reserve Statistical Release H.4.1: Factors Affecting Reserve Balances
    (July 2, 2009) (online at www.federalreserve.gov/releases/h41/Current/)
    (accessed July 2, 2009) (hereinafter ``Fed Balance Sheet July 2'').

                                       FIGURE 1: CPP REPAYMENTS AS OF JULY 2, 2009
    ----------------------------------------------------------------------------------------------------------------
                      Date                            Institution          Repurchase amount     Bank or BHC type
    ----------------------------------------------------------------------------------------------------------------
    3/31/2009...............................  Signature Bank............        $120,000,000  Public
    3/31/2009...............................  Old National Bancorp......         100,000,000  Public
    3/31/2009...............................  Iberiabank................          90,000,000  Public
    3/31/2009...............................  Bank of Marin Bancorp.....          28,000,000  Public
    3/31/2009...............................   Centra Financial                   15,000,000   Private
                                               Holdings, Inc./Centra
                                               Bank, Inc..
    4/8/2009................................   Sun Bancorp, Inc.........          89,310,000   Public
    4/15/2009...............................   Shore Bancshares.........          25,000,000   Public
    4/22/2009...............................   TCF Financial Corporation         361,172,000   Public
    4/22/2009...............................   Firstmerit Bank, National         125,000,000   Public
                                               Association.
    4/22/2009...............................   Independent Bank Corp....          78,158,000   Public
    4/22/2009...............................   First ULB Corp...........           4,900,000   Private
    5/5/2009................................   Sterling Bancshares, Inc.         125,198,000   Public
    5/13/2009...............................   Texas Capital Bancshares,          75,000,000   Public
                                               Inc..
    5/13/2009...............................   Alliance Financial                 26,918,000   Public
                                               Corporation.
    5/20/2009...............................   SCBT Financial                     64,779,000   Public
                                               Corporation.
    5/20/2009...............................   Somerset Hills Bancorp...           7,414,000   Public
    5/27/2009...............................   Washington Federal Inc...         200,000,000   Public
    5/27/2009...............................   First Niagara Financial           184,011,000   Public
                                               Group.
    5/27/2009...............................   Berkshire Hills Bancorp,           40,000,000   Public
                                               Inc..
    5/27/2009...............................   First Manitowoc Bancorp            12,000,000   Private
                                               Inc..
    6/3/2009................................   Valley National Bancorp..          75,000,000   Public
    6/3/2009................................   HF Financial Corp........          25,000,000   Public
    6/17/2009...............................   JPMorgan Chase & Co......      25,000,000,000   Public
    6/17/2009...............................   Morgan Stanley...........      10,000,000,000   Public
    6/17/2009...............................   The Goldman Sachs Group..      10,000,000,000   Public
    6/17/2009...............................   US Bancorp...............       6,599,000,000   Public
    6/17/2009...............................   Capital One Financial           3,555,199,000   Public
                                               Corporation.
    6/17/2009...............................   American Express Company.       3,388,890,000   Public
    6/17/2009...............................   BB&T Corp................       3,133,640,000   Public
    6/17/2009...............................   Bank of New York Mellon..       3,000,000,000   Public
    6/17/2009...............................   State Street Corporation.       2,000,000,000   Public
    6/17/2009...............................   Northern Trust                  1,576,000,000   Public
                                               Corporation.
                                                                         --------------------
          Total.............................  32 Banks..................      70,124,589,000
    ----------------------------------------------------------------------------------------------------------------

                            E. Valuing TARP Warrants

        Before presenting the Panel's estimates of the value of
    Treasury's CPP, TIP and Asset Guarantee Program (AGP) warrants,
    it is useful to briefly note the major conceptual approaches to
    making such estimates and to explain the methodology used by
    the Panel. A more detailed discussion of the most widely-used
    warrant valuation methodologies and the choices and assumptions
    made by the Panel in the approach it used is provided in Annex
    A.

                            1. CONCEPTUAL APPROACHES

        An important consideration in valuing a warrant is its
    intrinsic value, given by the difference between the current
    share price and the warrant's strike price. Intrinsic value
    represents the value of the warrant if it were exercised at the
    current moment, and is a useful measure of a warrant's worth if
    it is close to expiration or if it will be exercised early.
    However, intrinsic value reveals only a snapshot value at the
    current moment, not what the value of the warrant may be when
    it expires or at any other time. It does not take into account
    the likelihood that the stock price will increase prior to the
    warrant's expiration, a particularly important consideration
    given the ten-year term of the TARP warrants. Because intrinsic
    value ignores the value of future stock movement, it is not
    used by market participants to value the TARP warrants. More
    likely, potential investors will value warrants using either
    the binomial options pricing model or the Black-Scholes model.
        The binomial options pricing model \70\ values a warrant
    based on how the price of its underlying shares may change over
    the warrant's term.\71\ The binomial model has a number of
    advantages that stem from breaking down a warrant's term into a
    number of discrete time increments. An analyst using a binomial
    model may change his input assumptions at different periods of
    the evaluation--for example, the assumed volatility of the
    underlying shares' price movements can be varied over time.
    Similarly, a binomial model can account for the possibility
    that a warrant will be exercised early if the share price
    exceeds a certain threshold.
    ---------------------------------------------------------------------------
        \70\ John Cox, Stephen Ross & Mark Rubinstein, Option Pricing: A
    Simplified Approach, Journal of Financial Economics (Mar. 1979)
    (hereinafter ``CRR Binomial Paper'').
        \71\ The binomial model produces a tree of stock prices at
    specified time increments, calculates the intrinsic value of the
    warrant at expiration (based on the estimated stock price
    distribution), and then works backwards through earlier branches to
    calculate the current value of the warrant.
    ---------------------------------------------------------------------------
        The Black-Scholes model \72\ has been the industry standard
    for option valuation since it was first published in 1973.\73\
    The popularity of Black-Scholes is largely based on its ease of
    use; it can be calculated on a hand-held calculator with only a
    few inputs.\74\ A Black-Scholes valuation is a specific version
    of the binomial model in which it is assumed that all inputs
    are constant over time. Both derive an expected value for a
    warrant based on the probability of the warrant's underlying
    share price exceeding its strike price.
    ---------------------------------------------------------------------------
        \72\ Fischer Black & Myron Scholes, The Pricing of Options and
    Corporate Liabilities, Journal of Political Economy (1973) (online at
    www.math.uwaterloo.ca/mboudalh/BS1973.pdf) (hereinafter ``Black-Scholes
    Paper'').
        \73\ Mark Rubinstein, Implied Binomial Trees, Journal of Finance
    (July 1994) (online at www.haas.berkeley.edu/groups/finance/WP/
    rpf232.pdf) (hereinafter ``Implied Binomial Trees'') (``This [the
    Black-Scholes] model is widely viewed as one of the most successful in
    the social sciences and has [sic] perhaps (including its binomial
    extension) the most widely used formula, with embedded probabilities,
    in human history.'').
        \74\ The inputs of the Black-Scholes model are the strike price of
    the option, the underlying stock price, the time to expiration of the
    option, the risk-free interest rate, the volatility of the underlying
    stock price, and the dividend yield of the underlying stock.
    ---------------------------------------------------------------------------
        As is true of all models, the validity of either a Black-
    Scholes or a binomial analysis depends on the input assumptions
    used. If one uses equivalent assumptions, these models tend to
    produce very similar results.\75\ The most significant cause of
    divergence between different warrant valuations comes from the
    assumptions made about the future volatility and dividend yield
    of the underlying shares. Future volatility is particularly
    difficult to predict. Nonetheless, nearly all market
    participants, government agencies, specialist firms and
    corporations value warrants through models that use future
    volatility as an input.\76\ Future volatility can be estimated
    in a number of ways, resulting in a range of possible
    volatility assumptions and a range of possible warrant
    values.\77\
    ---------------------------------------------------------------------------
        \75\ Mathematically, Black-Scholes is essentially the limit of the
    binomial model as the number of steps taken approaches infinity. A
    binomial valuation, given the same assumptions, thus converges on the
    Black-Scholes valuation.
        \76\ See,  e.g.,  Congressional  Oversight  Panel,  Duff  &  Phelps
     Final  Valuation  Report  to  the  Congressional  Oversight  Panel
    (Feb.  4,  2009)  (online  at  cop.senate.gov / documents / cop-020609-
    report-dpvaluation.pdf); Financial  Accounting  Standards  Board,
    Statement  of  Financial  Accounting Standards No. 123 (Oct. 1995) (FSP
    FAS 157-4) (online at www.fasb.org / cs / BlobServer? blobcol =
    urldata&blobtable = MungoBlobs&blobkey = id&blobwhere =
    1175818755677&blobheader=application%2Fpdf); Congressional Budget
    Office, The Troubled Asset Relief Program: Report on Transactions
    Through June 17, 2009 (June 2009) (online at www.cbo.gov/ftpdocs/100xx/
    doc10056/06-25-TARP.pdf).
        \77\ Consider the example of a warrant to buy one share of Company
    X at $150 that expires in one year. X's common stock is currently
    trading at $100 and the risk free rate (i.e., the Treasury rate) is one
    percent. Under Black-Scholes, if X's stock price volatility is modeled
    at 30 percent, the warrant would be valued at $1.59; with volatility at
    60 percent, the warrant would be valued at $10.91. If the volatility is
    below 15 percent, the warrant is estimated to be worth less than three
    cents.
    ---------------------------------------------------------------------------
        There are two commonly used methods for estimating the
    future volatility of a stock. The first is to calculate
    volatility from historical prices changes. Many different
    volatility assumptions for the binomial or Black-Scholes Models
    can be justified from historical figures. An analyst's choice
    of the time period over which he or she will measure historical
    volatility as an estimate of future volatility can have a large
    effect on a valuation. As the past two years have been
    particularly turbulent, the volatility figures derived from
    this period are high and may not be representative of the
    volatility of bank stock prices over the next ten years, and
    will likely overvalue the warrants. On the other hand, using
    volatilities calculated from the past ten years may undervalue
    warrants if one believes that bank shares will be more volatile
    over the next decade than they have been in the previous one.
        The second approach to estimating future stock price
    volatility is to use implied volatility from the market. While
    implied volatility has certain drawbacks, particularly the fact
    that the market's implied volatility may be over a different
    future time period than the term of the warrant being
    valued,\78\ using implied volatility to value a warrant
    provides a better picture of ``fair market value'' because it
    uses actual market information to estimate this important input
    assumption.
    ---------------------------------------------------------------------------
        \78\ For example, across most banks for which there are data, the
    market is expecting volatility to decrease over time. Thus, using short
    term implied volatility to value long term warrants would overvalue the
    warrants.
    ---------------------------------------------------------------------------

                    2. METHODOLOGY USED IN THIS REPORT \79\
    ---------------------------------------------------------------------------

        \79\ A full discussion of the Panel's methodology is included in
    Annex A.
    ---------------------------------------------------------------------------
        The Panel adopted a modified Black-Scholes analysis to
    value the warrants held by Treasury.\80\ As discussed in Annex
    A, the modifications were necessary to account for two aspects
    of the TARP warrants that distinguish them from the type of
    options Black-Scholes was designed to analyze: dilution \81\
    and dividend yield.\82\ The Panel did not apply a liquidity
    discount in its valuation. If Treasury can hold the warrants to
    expiration, then the value of the warrants to Treasury should
    not include a liquidity discount because Treasury does not need
    to sell them. Further, any liquidity discount for the larger
    institutions, whose warrants constitute the bulk of Treasury's
    portfolio by value, would likely be small since their shares
    are heavily traded.
    ---------------------------------------------------------------------------
        \80\ In applying the Black-Scholes model rather than a binomial
    model, the Panel assumed that the risk free rate, the dividend yield,
    and the stock price volatility of each bank would be constant through
    time. Market participants and finance professors with whom Panel staff
    consulted thought these were reasonable assumptions given the purposes
    of the analysis.
        \81\ Unlike options, which grant a claim to already-issued stock,
    the exercise of a warrant requires the company to issue new common
    shares, which has the effect of reducing the percentage of the company
    owned by existing shareholders (known as ``dilution'').
        \82\ Dividend yield represents an investor's return on investment
    if the stock is not sold, calculated by the ratio of annual dividends
    per share to share price.
    ---------------------------------------------------------------------------
        The Panel developed high, low and best estimates for the
    value of the warrants that Treasury held on July 6, 2009, based
    on varying estimates of stock price volatility. In the high
    estimate, the volatility input for each bank was the maximum of
    several historical and implied volatility measures of its stock
    price.\83\ In the low estimate, the volatility input for each
    bank was the minimum of the same set of volatility measures. In
    the best estimate, the volatility input for 18 of the banks was
    derived from the implied volatility of publicly-traded, long
    dated options on those banks' shares. The warrants for these 18
    banks' shares represent 89 percent of the total value of
    Treasury's warrant portfolio. For the remaining banks, the best
    estimate volatility input for each bank was the longest of the
    available one, two, five and ten year historical volatility
    measures of the bank's share price.\84\ For all estimates, each
    bank's dividend yield input was set equal to its five-year
    average dividend yield. The only difference in assumptions for
    the three estimates was the volatility input.\85\
    ---------------------------------------------------------------------------
        \83\ These Panel's measures were: the (i) two, (ii) five and (iii)
    ten year historical volatilities ending on July 2, 2009; the ten year
    historical volatilities ending on (iv) July 2, 2008, (v) July 2, 2007,
    (vi) July 3, 2006, (vii) July 4, 2005, (viii) July 2, 2004, (ix) July
    2, 2003, (x) July 2, 2002, (xi) July 2, 2001, (xii) July 3, 2000,
    (xiii) July 2, 1999; and (xiv) the midpoint of implied volatilities of
    call and put options on the underlying stock expiring after Dec 31,
    2010 as calculated on July 2, 2009. When any of these measures was
    unavailable, it was removed from the set of possible volatility inputs.
    All historical volatilities were calculated from daily returns,
    adjusted for dividends and capital changes.
        \84\ The implied volatility input for each bank was set equal to
    the midpoint of implied volatilities of call and put options on the
    bank's shares expiring after Dec. 31, 2010 as calculated on July 2,
    2009.
        \85\ All three estimates used each bank's closing price on July 2,
    2009 as the model's share price input. The risk free rate input was
    calculated as the yield on ten year Treasury bonds on July 2, 2009,
    adjusted to be made continuous.
    ---------------------------------------------------------------------------
        As noted above in Section C, the CPP warrants have a
    reduction provision such that if a recipient bank has a QEO of
    100 percent of the CPP investment by the date of the preferred
    redemption or December 31, 2009, whichever comes sooner, then
    half of Treasury's warrants are eliminated.\86\ To simplify the
    analysis, the Panel assumed that unless a BHC had already
    redeemed its preferred and held a QEO by July 2, 2009, then it
    would not do so by the end of this year. This seems a
    reasonable assumption considering that of the 32 banks which
    had redeemed their preferred shares by July 2, 2009, only three
    had a QEO prior to repayment.\87\ To the extent that there is a
    possibility that CPP-recipient banks will have QEOs prior to
    redeeming their TARP preferred shares or the end of the year,
    the Panel's valuation of the warrants should be discounted
    accordingly.
    ---------------------------------------------------------------------------
        \86\ See supra notes 34, 35, and accompanying text.
        \87\ These three banks were State Street, First Niagara and
    Iberiabank. U.S. Department of the Treasury, Troubled Asset Relief
    Program: Transactions Report For Period Ending June 30, 2009 (July 2,
    2009) (online at www.financialstability.gov/docs/transaction-reports/
    transactions-report_070209.pdf).
    ---------------------------------------------------------------------------
        Using Black-Scholes, the Panel also estimated the value of
    the warrants that Treasury has already sold.\88\ These
    valuations were performed as of the date of the sale to enable
    a comparison between the fair market value of the repurchased
    warrants, as calculated by Black-Scholes, and the compensation
    Treasury actually received for them.\89\ Other than adjusting
    for the transaction dates, the Panel used the same methodology
    for valuing the past sales as that applied to outstanding TARP
    warrants.
    ---------------------------------------------------------------------------
        \88\ As of July 2, 2009, 11 banks have repurchased their warrants:
    Treasury sold its warrants in Old National Bank, Iberiabank,
    FirstMerit, Sun Bancorp, Alliance Financial, Independent Bank Co.,
    First Niagara Financial Group, Berkshire Hills Bancorp, Somerset Hills
    Bancorp, HF Financial and SCBT Financial. No third party buyers were
    involved in these transactions--Treasury sold the warrants back to the
    banks which originally issued them--and only Iberiabank and First
    Niagara had conducted a QEO by the time the warrants were sold. Id.
        \89\ The valuations of Treasury's remaining portfolio of warrants
    on July 6, 2009 cannot be compared against future transactions that
    involve these warrants as the values of the warrants can change over
    time. Transactions can only be evaluated against fair market value on
    the date of the transaction.
    ---------------------------------------------------------------------------
        The Panel was aided in its valuation efforts by three
    finance experts, Professor Robert Merton, Professor Daniel
    Bergstresser and Professor Victoria Ivashina, all of the
    Harvard Business School. These three professors independently
    reviewed both the technical valuation model and the assumptions
    that were built into the models; they concluded that the
    approaches reported here were reasonable and that they produced
    reliable estimates.

                                   3. RESULTS

        The Panel's high, low and best estimates for the aggregate
    value of Treasury's warrants as of July 6, 2009 are $12.3
    billion, $4.7 billion and $8.1 billion, respectively. The range
    between the Panel's high and low estimates is driven by
    different volatility assumptions in the Black-Scholes model.
    The future volatility and dividend yield of the banks'
    underlying shares are difficult to predict.\90\ The Panel
    accounted for this uncertainty by casting a wide net across
    what it considers reasonable boundaries in developing high and
    low volatility estimates.
    ---------------------------------------------------------------------------
        \90\ Conversely, strike price, expiration date, underlying share
    price and the risk free rate are all known or easy to estimate.
    ---------------------------------------------------------------------------
        As shown in figure 2, the Panel's valuation of the warrants
    falls within the same broad ranges as the estimates of Credit
    Suisse, University of Louisiana at Lafayette Assistant
    Professor Linus Wilson, and Bloomberg.\91\ It is important to
    remember that these studies were performed on different dates,
    so some variation would be expected. Among other reasons for
    these studies being incompatible, the value of Treasury's
    warrants is highly correlated to the fluctuating share prices
    of CPP-recipient banks. To the extent that these shares have
    changed in value between the dates of the different valuation
    analyses, the warrants have altered in value accordingly.
    ---------------------------------------------------------------------------
        \91\ See Linus Wilson, Valuing the First Negotiated Repurchase of
    the TARP Warrants (May 23, 2009) (online at http://papers.ssrn.com/
    sol3/papers.cfm?abstract_id=1404069) (Professor Wilson examines Old
    National Bancorp, the first of the CPP recipient banks to repurchase
    its CPP warrants. He concludes that the warrants were sold back to Old
    National Bancorp at a discounted price.); Linus Wilson, A Model for
    Estimating the Cancellation Probabilities of TARP Warrants, University
    of Louisiana at Lafayette (June 16, 2009) (online at http://
    papers.ssrn.com/sol3/papers.cfm?abstract_id=1413442) (hereinafter
    ``Wilson Cancelation Probabilities'') (Professor Wilson creates a model
    for estimating the value, and likelihood of cancelation, of TARP
    warrants. The established formula can be used in evaluating Treasury's
    negotiation performance.); Edward Tom and Sveinn Palsson, The Valuation
    of TARP Warrant (Part I and II)s, Credit Suisse Research Report (May
    26, 2009, June 2, 2009) (hereinafter ``Credit Suisse Warrant Report'')
    (Credit Suisse used 10 year mean realized volatility to calculate a
    Black-Scholes value for the CPP investments in the 19 stress-tested
    banks, coming up with a median estimate of $5.7 billion, and a range of
    $5.2 to $7.8 billion); Mark Pittman, TARP Warrants Show Banks May Reap
    ``Ruthless Bargain'', Bloomberg (May 22, 2009) (online at
    www.bloomberg.com/apps/news?pid=20601206&sid=ae2fQFMrDer4) (hereinafter
    ``Bloomberg Warrant Article'').

                             FIGURE 2: COMPARISON OF PANEL'S VALUATION WITH OTHER VALUATIONS
                                         [All values are presented in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                                                     COP Valuation of Comparable (as
                                                                                                of 7/6/09)
                  Valuation by                       Valuation of           Result  --------------------------------
                                                                                        Low        Best       High
    ----------------------------------------------------------------------------------------------------------------
    Credit Suisse 92 (6/2/09)...............  Stress Test Banks ex.          $5,680     $3,470     $5,590     $8,410
                                               Keycorp (CPP Warrants
                                               only).
    Linus Wilson 93 (6/10/09)...............  Stress Test Banks (CPP,         9,900      3,930      6,960     10,630
                                               TIP, and AGP).
    Bloomberg 94 (5/22/09)..................  JPMorgan, Morgan Stanley,       4,000      2,400      2,830      4,120
                                               and Goldman Sachs.
    CBO 95 (6/17/09)........................  CPP Warrants Only.........      6,000      4,310      6,940    10,520
    ----------------------------------------------------------------------------------------------------------------
    \92\ Credit Suisse Warrant Report, supra note 91. Credit Suisse used standard volatilities to calculate a Black-
      Scholes value for the CPP investments in the 18 of the 19 stress tested BHCs (it did not value warrants in
      Keycorp), producing a median estimate of $5.7 billion, and a range of $5.2 to $7.8 billion.
    \93\ Wilson Cancelation Probabilities, supra note 91. Wilson estimates the value of the warrants held by the
      government for the 19 stress test banks using the same model as the Panel (Black-Scholes-Merton modified with
      Galai-Schneller). The higher estimates he obtained are likely the result of differing volatility assumptions.
      Wilson calculates implied volatilities derived from short term options, which represent the market's
      prediction of variations in stock price over the next few months. For most securities, such short-term
      predictions tend to be much higher than what the market's prediction of volatility would be for longer periods
      such as those for which the warrants are available to be exercised (10 years). Wilson's methodology also
      adjust for the predicted likelihood of qualified equity offerings by BHCs, a step considered unnecessary by
      the Panel.
    \94\ Bloomberg Warrant Article, supra note 91. Information on methodology is unavailable. Bloomberg does not
      break down its valuations by individual BHC.
    \95\ The CBO analysis did not consider the effect of Treasury's requirement that banks which repay their
      preferred before Dec. 31, 2009 must sell their warrants immediately or replace Treasury's warrants with
      substantially similar ones that are stripped of the QEO provision.

        Most of the value of Treasury's portfolio of warrants comes
    from only a few banks. By value, the warrants in JP Morgan
    Chase, Bank of America, Morgan Stanley, Goldman Sachs,
    Citigroup and Wells Fargo account for 70 percent of the total
    value. Figure 3 below shows high, low and best estimates for
    Treasury's ten most valuable holdings of warrants.

                                      FIGURE 3: PANEL ESTIMATE OF VALUE OF WARRANTS
                                         [All values are presented in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                                                   Low          High         Best
                    Institution                        Investment date           estimate     estimate     estimate
    ----------------------------------------------------------------------------------------------------------------
    Bank Of America...........................  10/28/08, 1/9/09 & 1/16/09...         $430       $1,850       $1,130
    JP Morgan Chase...........................  10/28/08.....................          660        1,560        1,020
    Wells Fargo & Co..........................  10/28/08.....................          340        1,480        1,020
    Goldman Sachs Group.......................  10/28/08.....................          940        1,250          940
    Morgan Stanley............................  10/28/08.....................          800        1,310          870
    Citigroup.................................  10/28/08, 12/31/08 & 1/16/09.           70        1,030          560
    American Express..........................  1/9/09.......................          220          370          300
    PNC Financial Services Group..............  12/31/08.....................           70          330          190
    Bank Of New York Mellon...................  10/28/08.....................          120          240          160
    Capital One Financial.....................  11/14/08.....................          110          210          140
    All Other Banks...........................  .............................          950        2,640        1,720
                                               --------------------------------
    ----------------------------------------------------------------------------------------------------------------

        In its analysis of warrants already repurchased, the Panel
    finds that, in general, Treasury has been selling its warrants
    back to banks at below market value. In the aggregate, Treasury
    sold its warrants in these banks for $18.7 million. Figure 4
    below compares the repurchase price paid by these 11 banks and
    the Panel's valuation of the warrants on the date of
    repurchase. It also shows Treasury's total internal rate of
    return (IRR) on its investments in each of these banks,
    including its return on preferred shares and warrants. A more
    complete discussion of the sources of the difference between
    Treasury's results and the Panel's estimates of the value of
    the warrants sold to date in the context of one particular such
    warrant sale, Old National Bancorp, can be found in Annex B.

                                                        FIGURE 4: WARRANT REPURCHASES AS OF JULY 2, 2009
                                                               [All values presented in thousands]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                          Panel
                 Institution                      Inv. date                  QEO 96           Repurchase   Repurchase   valuation    Price/est.     IRR 97
                                                                                                 date        amount    (best est.)   (percent)    (percent)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Old National.........................  12/12/08...............  No.....................       5/8/09       $1,200       $2,150           56          9.3
    Iberiabank...........................  12/5/08................  Yes....................      5/20/09        1,200        2,010           60          9.4
    FirstMerit...........................  1/9/09.................  No.....................      5/27/09        5,052        4,260          118         20.3
    Sun Bancorp..........................  1/9/09.................  No.....................      5/27/09        2,100        5,580           38         15.3
    Independent Bank.....................  1/9/09.................  No.....................      5/27/09        2,200        3,870           57         15.6
    Alliance Financial...................  12/19/08...............  No.....................      6/17/09          900        1,580           57         13.8
    First Niagara Financial..............  11/21/08...............  Yes....................      6/24/09        2,700        3,050           89          8.0
    Berkshire Hills......................  12/19/08...............  No.....................      6/24/09        1,040        1,620           64         11.3
    Somerset Hills.......................  1/16/09................  No.....................      6/24/09          275          580           48         16.6
    SCBT Financial.......................  1/16/09................  No.....................      6/24/09        1,400        2,290           61         11.7
    HF Financial.........................  1/21/09................  No.....................      6/30/09          650        1,240           52         10.1
                                                                                                         --------------------------
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \96\The issue is discussed infra Part C Section one of this report. Upon a qualified equity offering, the number of shares underlying Treasury's
      warrants is halved.
    \97\This is the total return Treasury has received on its investment in each bank. The calculation includes returns from dividends, preferred shares
      repayments and warrant repurchases. The IRRs in this figure very slightly underestimate the actual rate of return because the Panel assumed that all
      dividends were paid on the date of repurchase of the preferred, when in fact they were paid quarterly.

        The results show that in its sales of warrants Treasury has
    received about 66 percent of the Panel's best estimate of fair
    market value. These results may suggest that Treasury has not
    been successful in receiving fair market value for its warrants
    and in maximizing taxpayer returns. On the other hand, factors
    not included in the Panel's model, such as the illiquidity of
    the warrants--especially for smaller institutions--may explain
    the difference between the amount that Treasury has received
    for its sold warrants and the Panel's valuation of those
    warrants.
        In interpreting these results, it is important to bear in
    mind the scale of the warrant repurchases as compared to the
    total warrant portfolio. The sold warrants represent less than
    one quarter of one percent of the Panel's best estimate of the
    value of Treasury's warrant portfolio on July 6, 2009. Thus,
    these sold warrants represent a very small slice of the
    outstanding warrants, and Treasury's relative performance in
    selling them may not accurately predict its success in selling
    the balance of the warrants it holds.
        The results also show that Treasury received a 12 percent
    rate of return on the 11 CPP investments in public banks that
    have fully exited the TARP. However, this rate of return is not
    predictive of the rate of return Treasury will receive across
    its entire TARP portfolio because it only reflects the return
    on these 11 early repaying banks. These banks are among the
    healthiest of the TARP-recipient banks and thus Treasury's
    return on these banks is likely to be higher than its return on
    its aggregate TARP investment.\98\ Further, this rate of return
    does not factor in the likelihood that some banks, including
    systemically significant institutions, may be unable to repay
    their TARP investments.
    ---------------------------------------------------------------------------
        \98\ Each bank's TARP repayment is conditioned on that bank's
    supervisors finding that the bank is sufficiently capitalized to no
    longer need a government investment. Thus, only healthy banks have been
    able to repay. Supra note 23.
    ---------------------------------------------------------------------------

                 F. Alternatives for Disposing of TARP Warrants

        Although, thus far, Treasury has sold warrants back only to
    the banks which issued them, as discussed in Section C it may
    sell the warrants to any party subject to the following two
    restrictions: first, before December 31, 2009, or, if earlier,
    the date when a bank redeems its preferred, Treasury may sell
    only half of its warrants in that bank; second, after a bank
    redeems its preferred it may negotiate to repurchase its
    warrants, and, if this fails, the bank may invoke an appraisal
    procedure which leads to a binding price at which Treasury must
    sell.\99\
    ---------------------------------------------------------------------------
        \99\ The issue is discussed supra in Part C of Section One of this
    report.
    ---------------------------------------------------------------------------
        Thus, Treasury's options are dictated by whether a bank has
    redeemed its preferred shares. Before a bank redeems its
    preferred, Treasury can sell half of its warrants in that bank
    to any party. After a bank redeems its preferred, Treasury must
    allow that bank a chance to negotiate the repurchase of its
    warrants if the bank wishes to do so. If the negotiations reach
    an impasse and the appraisal procedure is not invoked, or if
    the procedure is invoked but the bank is not willing to
    purchase at the resulting binding price, then Treasury can sell
    all of its warrants in that bank on the open market. In other
    words, if the parties cannot agree on a price and if the bank
    is unwilling to purchase at the price determined by the
    appraisers, then Treasury may sell its warrants through a
    public auction or other public sale.

                          1979 CHRYSLER LOAN GUARANTEE

        The federal government has received warrants before in
    exchange for providing credit support to ensure a company's
    viability. The federally-guaranteed loan made to a teetering
    Chrysler Corporation in 1980 is one example. In that case, the
    federal government seemed to make a profit on its loan to
    Chrysler when the warrants were sold.
        The Chrysler Corporation Loan Guarantee Act of 1979 was
    officially signed into law on January 7, 1980. It created the
    Chrysler Corporation Loan Guarantee Board, which was
    responsible for determining the conditions for making a
    commitment to guarantee third party loans to Chrysler. Any
    loans made under the Act had to be repaid by December 30, 1990,
    and the amount outstanding at any time was not to exceed $1.5
    billion.\100\
    ---------------------------------------------------------------------------
        \100\ Chrysler Corporation Loan Guarantee Act of 1979, Pub. L. No.
    96-185.
    ---------------------------------------------------------------------------
        Chrysler used $1.2 billion of the $1.5 billion in loan
    guarantees. In return for the loan guarantees, the federal
    government received warrants to purchase 14.4 million shares of
    Chrysler stock at $13 per share until 1990.\101\ At the time
    they were granted in 1980, Chrysler stock was selling for about
    $5 a share.
    ---------------------------------------------------------------------------
        \101\ Id.
    ---------------------------------------------------------------------------
        After receiving the loans, Chrysler's fortunes changed for
    the better. Between 1980 and 1982, the corporation downsized a
    significant amount of its operations, cutting roughly half of
    its work force,\102\ and quickly returned to
    profitability.\103\ By the first half of 1982, the company made
    a profit of $482.2 million. It repaid its government guaranteed
    notes in June and August of 1982.\104\
    ---------------------------------------------------------------------------
        \102\ Thomas J. Lueck, Chrysler Tops Bids to Buy Back Stock Rights,
    New York Times (Sep. 13, 1983).
        \103\ Id.
        \104\ Id.
    ---------------------------------------------------------------------------
        The U.S. government auctioned the Chrysler warrants on
    September 12, 1983. At the auction, Chrysler purchased the
    warrants for $311 million.\105\ Chrysler officials said that
    they sought to avoid having the warrants converted into common
    shares because conversion would dilute the value of the current
    shares. The stocks that the warrants purchased represented 12
    percent of Chrysler's shares outstanding. Chrysler also had the
    option of retiring the warrants at no cost. It chose not do so,
    though, because it did not want to forgo $187 million in income
    it could earn from the exercise of the warrants.\106\
    ---------------------------------------------------------------------------
        \105\ Id.
        \106\ Id.
    ---------------------------------------------------------------------------
        Whether or not Treasury actually made a profit on the sale
    of its Chrysler warrants is subject to debate. Prior to 1992,
    federal loan guarantees were treated as a contingent liability
    of the U.S. government for budgetary purposes. As a result, a
    loan guarantee resulted in no cost to the budget unless and
    until the guarantee was called and resulted in an actual loss.
    Under this budgeting convention, the federal government could
    show a $311 million profit on its loan guarantees and warrant
    for Chrysler Corporation in the early 1980s. Today, however,
    the cost of a similar loan guarantee would require an upfront
    appropriation to cover the possibility of default. No such
    estimate was made at the time, however, so it cannot be
    determined whether such an estimate would have been greater or
    less than the $311 million the government received upon sale of
    the warrants.

          1. SELLING TARP WARRANTS THROUGH NEGOTIATION WITH THE BANKS

        Treasury sold its warrants in Old National Bank,
    Iberiabank, FirstMerit, Sun Bancorp, Alliance Financial,
    Independent Bank Co., First Niagara Financial Group, Berkshire
    Hills Bancorp, Somerset Hills Bancorp, HF Financial and SCBT
    Financial through exclusive negotiations with the issuing
    banks. These banks initiated the negotiations by first
    redeeming Treasury's preferred shares and then invoking their
    right to repurchase the warrants they had issued to Treasury.
    None of these banks invoked the appraisal procedure; they all
    reached a negotiated agreement with Treasury on the price to be
    paid for the warrants.
        When negotiating with a bank on the repurchase price of
    that bank's warrants, Treasury makes an assessment of the
    warrant's fair market value. Treasury's valuation process has
    four inputs: comparable market data, warrant pricing models,
    fundamental company analysis and an outside consultant's
    appraisal.\107\ First, Treasury finds comparable securities
    that are publicly traded and solicits quotes from market
    participants on the warrants being valued to develop a market
    perspective of their fair value. Second, Treasury utilizes an
    American-style binomial option pricing model and a Black-
    Scholes option pricing model to develop a theoretical value for
    the warrants. Treasury calculates the volatility input for this
    model from both implied and historical volatility measures--
    Treasury uses the average 60-day trailing volatility for the
    last ten years to determine a stock's historical volatility.
    For each bank, Treasury develops a dynamic volatility curve,
    which generally shows volatility decreasing over time from
    current levels to historic norms.\108\ Third, Treasury performs
    a fundamental analysis of the repurchasing bank's performance,
    looking at growth projections, price-to-book ratios, and other
    indicators of financial health. Fourth, Treasury obtains an
    outside consultant's appraisal of the warrants. In addition to
    the four inputs, Treasury may also include a liquidity discount
    in its valuation of the warrants. This discount ranges from
    zero to 50 percent and is determined by analyzing factors such
    as (1) a potential buyer's ability to hedge its warrant
    position by shorting the company's stock, and (2) the volume of
    shares traded. An additional discount may be applied for
    insolvency risk over the ten-year period. Using these inputs,
    Treasury develops a range of acceptable values at which it will
    sell the warrants. It should also be noted that Treasury has
    devoted a team to valuing the warrants and that each warrant
    sale must meet the approval of a four-person committee and the
    Assistant Secretary for Financial Stability.\109\
    ---------------------------------------------------------------------------
        \107\ On June 26, 2009 Treasury released information on its
    valuation procedure. In conversations with Panel staff, Treasury
    provided further insight into its method. Treasury Warrant Repurchase
    Announcement, supra note 46.
        \108\ Generally, the blended volatility of this curve is slightly
    above the historical ten-year volatility of repurchasing bank's shares.
        \109\ U.S. Department of the Treasury, Treasury Announces
    Repurchase and Disposition Process for the Capital Purchase Program
    (June 26, 2009) (online at www.financialstability.gov/docs/CPP/Warrant-
    Statement.pdf).
    ---------------------------------------------------------------------------
        This is a sophisticated valuation procedure and likely
    results in a reasonable valuation for the warrants.
    Nonetheless, it may not produce a maximization of taxpayers'
    return on the warrants. As discussed above, for the warrants it
    had sold by July 2, 2009, Treasury only received 66 percent of
    the Panel's best estimate valuation. There are several reasons
    why this may be the case.
        Treasury may be generous to banks in its valuation of the
    warrants. Treasury is restricted by the terms of its warrant
    contracts, which require it to give banks the right to
    repurchase their warrants at ``fair market value.'' This is a
    nebulous term in the absence of market exchanges, so Treasury
    has considerable leeway in determining the fair market value
    for which it will sell the warrants. Treasury's model may lead
    to a lower valuation than is necessary in at least two ways.
    First, Treasury's use of average 60-day trailing volatility
    over ten years as its measure of historical volatility leads to
    a lower volatility model input and a lower warrant valuation
    than would the use of other historical volatility
    measures.\110\ Other measures, such as historical daily
    volatility, as used by the Panel, result in higher volatility
    inputs and higher valuations. These other, higher volatility
    measures are in common use and are legitimate inputs for option
    pricing models. Second, Treasury includes significant liquidity
    discounts in valuing the warrants. If Treasury can hold the
    warrants to expiration, it is not clear that their valuation
    should include a liquidity discount at all.\111\ Even if a
    liquidity discount is merited, the discount Treasury applies is
    significantly larger than that used by other accredited
    valuation firms.\112\
    ---------------------------------------------------------------------------
        \110\ Treasury's measure of historic volatility, average 60-day
    trailing volatility for ten years, is distinct from ten year historic
    volatility. When calculated for the same time period, the two measures
    will vary significantly because they are different mathematical
    computations. Inputting Treasury's measure of historic volatility, the
    average 60-day trailing volatility for ten years, into the Panel's
    model results in a valuation of $5.5b for Treasury's outstanding
    warrants. By comparison, the Panel derived its volatility assumptions
    from implied volatilities for some banks and ten year historical
    volatilities for the rest of the banks, valuing the warrants at $8.1b.
    Using only the ten year historic volatilities for all of the banks
    results in a valuation of $7.5b.
        \111\ The issue is discussed infra in Part C of Section One and
    Annex B of this report.
        \112\ In its February report to the Panel on the value of
    Treasury's TARP assets, the valuation firm Duff and Phelps' used a zero
    to 20 percent liquidity discount range. Duff and Phelps, Valuation
    Report to the Congressional Oversight Panel (Feb. 4, 2009) (online at
    cop.senate.gov/documents/cop-020609-report-dpvaluation.pdf).
    ---------------------------------------------------------------------------
        Further, banks may not be willing to pay as much as other
    market participants for warrants in their own equity. The only
    way Treasury can maximize taxpayers' return on their investment
    is to sell its warrants to the buyers who are willing to pay
    the best price. To the extent that a bank is unwilling to pay
    as much as other market participants, a two-party exclusive
    negotiation process necessarily fails to maximize returns
    because it excludes other buyers who may be willing to pay
    higher prices. On the other hand, it is possible that a bank
    will actually pay a premium over other market participants to
    keep its warrants from trading into unknown hands in the
    market.
        Finally, in conversations with Panel staff, Treasury staff
    has explained that its valuation model is designed to arrive at
    a ``correct and reasonable'' valuation, not a valuation that
    maximizes taxpayer returns. Treasury then uses this valuation
    as its first bid in negotiations with each repurchasing bank.
    To the extent that Treasury's initial valuation is then lowered
    as part of the negotiation process, Treasury's good faith
    effort to reach agreement is resulting in valuations that are
    below its own model's valuation of fair market value. On the
    other hand, Treasury is contractually obligated to negotiate.
    The warrant contracts stipulate that if Treasury rejects a
    bank's valuation of its warrants, then it must work to
    ``resolve the objection[s] and to agree upon a Fair Market
    Value.'' \113\
    ---------------------------------------------------------------------------
        \113\ Securities Purchase Agreement, supra note 15, at Sec. 4.9.
    ---------------------------------------------------------------------------

                       2. SELLING WARRANTS TO THE MARKET

        Treasury would be more likely to maximize taxpayer returns
    if it sold the warrants through auctions. The reason is
    straightforward: an auction would cause the warrants to be
    allocated to the buyers willing to pay the highest price, and
    competitive pressures in the bidding process may push bids up.
    By setting proper reserve values, Treasury can protect itself
    against a failed auction and ensure that it will at least
    receive fair market value. Equally important, auctions can put
    upward pressure on negotiated transactions by setting new,
    higher transaction precedents and by showing that a secondary
    market for these warrants exists, leading to a smaller
    liquidity discount in the negotiated transactions.
        Selling the warrants through auctions would have auxiliary
    policy benefits to Treasury. Auctions would enable Treasury to
    sell at least half of its warrants immediately. By returning
    these warrants to the private market, auctions would further
    Treasury's aim of exiting its equity positions in TARP-
    recipient banks as soon as possible. Auctions would also
    require significantly less time commitment from Office of
    Financial Stability (OFS) staff and could easily be outsourced
    if Treasury preferred. Finally, auctions would have the
    additional benefit of promoting transparency in Treasury's
    disposition of the warrants.
        To be sure, there are obstacles to using an auction
    process. Banks have the contractual right to an exclusive
    negotiation for their warrants following the redemption of
    their preferred shares. Thus, there is a period following a
    bank's redemption of its preferred shares when Treasury cannot
    auction its warrants in that bank. However, Treasury may
    auction half a bank's warrants even before the bank redeems its
    preferred. Treasury could initiate this process immediately.
    More importantly, Treasury could use the threat of an auction
    as a bargaining chip in discussions with banks to ensure that
    negotiated transactions are consummated at fair market value.
    Selling some warrants through auctions would make it clear to
    all banks that Treasury has well-developed and viable options
    if the bank does not offer an adequate price for the warrants.
        Other obstacles are related to whether there are sufficient
    bidders for auctions to be successful. It is possible that the
    illiquidity of these securities--especially for smaller
    institutions--will cause investors to stay away, and many
    potential bidders are banks that may be restricted from bidding
    because of regulations on inter-bank ownership. Interest may be
    further depressed by investor concerns regarding the risk of
    bank insolvency over the warrants' ten year horizon, the
    limited ability of investors to hedge the warrants, and
    pessimism about the bank sector in general. Further, rather
    than buy Treasury's warrants in any given bank, an investor may
    find it much simpler to invest in the bank directly or to buy
    call options. On the other hand, it is hard to believe that an
    auction with a proper reserve value would ever achieve a lower
    valuation than a negotiation.
        Ultimately, open market transactions are the only way to
    determine true ``fair market value.'' In his testimony before
    the Panel on June 24, 2009, Assistant Secretary Allison
    explained this in relation to the toxic assets on bank balance
    sheets: ``We can have our theories, [but] in the last analysis
    that's why you have financial markets. You have to have liquid
    interchanges and then the truth will come out as to what the
    assets are actually worth.''\114\ The same should be said about
    pricing Treasury's warrants.
    ---------------------------------------------------------------------------
        \114\ Congressional Oversight Panel, Testimony of Assistant
    Treasury Secretary for Financial Stability Herbert Allison, Jr.,
    Hearing with Assistant Treasury Secretary Herbert Allison (June 24,
    2009) (online at cop.senate.gov/hearings/library/hearing-062409-
    allison.cfm).
    ---------------------------------------------------------------------------

                                   G. Issues

        In reaching a judgment with the bank supervisors to allow a
    particular bank to repay its TARP assistance and in determining
    the price, time and manner at which it will sell the warrants
    it holds in that bank, Treasury must take into account two
    overriding statutory considerations:

              (1) protecting the interests of taxpayers by
            maximizing overall returns and minimizing the impact on
            the national debt; [and] (2) providing stability and
            preventing disruption to financial markets in order to
            limit the impact on the economy and protect American
            jobs, savings, and retirement security.\115\
    ---------------------------------------------------------------------------
        \115\ EESA, supra note 13, Sec. 103 (1) and (2) (codified at 12
    U.S.C. Sec. 5213(1) and (2)). Sec. 5213 lists seven additional facts
    that Treasury must take into consideration in administering EESA.

        EESA also recognizes that the two objectives complement one
    ---------------------------------------------------------------------------
    another:

              The Secretary shall use the authority under this Act
            in a manner that will minimize any potential long-term
            negative impact on the taxpayer, taking into account
            the direct outlays, potential long-term returns on
            assets purchased, and the overall economic benefits of
            the program, including economic benefits due to
            improvements in economic activity and the availability
            of credit, the impact on the savings and pensions of
            individuals and reductions in losses to the Federal
            Government.\116\
    ---------------------------------------------------------------------------
        \116\ 12 U.S.C. 5223 Sec. 113(a)(1).
    ---------------------------------------------------------------------------
        The public has a strong interest in recovering the money
    spent to provide assistance to the financial system. But it
    also has an important stake in restoration of stability to the
    financial markets as part of a general economic recovery.
    Treasury must balance the public interests in financial
    stabilization and economic growth.
        In this section, the Panel examines issues Treasury faces
    in trying to reach such a balance. It looks in turn at the
    problem from the perspective of the financial stabilization
    program and of the BHCs and banks subject to the program.

                       1. FINANCIAL STABILIZATION PROGRAM

        Treasury has consistently stated that the decision by the
    government to take ownership positions in financial
    institutions was a result of emergency conditions, and,
    consequently, it intends to limit its involvement in management
    of those institutions and to divest itself of its preferred
    shares ownership positions in financial institutions \117\ as
    soon as financial conditions normalize.\118\ As referenced
    above, the Federal Reserve Board has indicated that its
    approval for repayment (and hence to a substantial degree its
    determination that emergency conditions no longer affect the
    BHC or bank whose repayment is permitted) is based on (i)
    capital to lend, (ii) ability to maintain the capital levels
    that supervisors expect, and (iii) ability to satisfy
    counterparty risk while reducing reliance on government
    capital. Three important additional considerations not
    mentioned prominently in Treasury statements are (i) various
    regulatory and related considerations involving Treasury's
    maintenance of bank ownership interests (ii) the status of
    funds repaid to Treasury, and (iii) the remaining period of
    Treasury's TARP authority.
    ---------------------------------------------------------------------------
        \117\ Treasury owns common stock in Chrysler LLC and is in the
    process of converting preferred stock into common stock for Citicorp.
    Treasury contains convertible preferred shares in AIG and GMAC and is
    in the process of receiving common stock in GM (NewCo). The origin and
    terms of disposition for those equity interests are outside the scope
    of this report.
        \118\ See, e.g., Treasury Warrant Repurchase Announcement, supra
    note 46 (``The President has clearly stated that his objective is to
    dispose of the government's investments in individual companies as
    quickly as is practicable.''); U.S. Department of the Treasury.
    Secretary Geithner Introduces Financial Stability Plan (Feb. 10, 2009)
    (online at www.treasury.gov/press/releases/tg18.htm) (``We believe our
    policies must be designed to mobilize and leverage private capital, not
    to supplant or discourage private capital. When government investment
    is necessary, it should be replaced with private capital as soon as
    possible.''); U.S. Department of Treasury, Treasury White Paper: The
    Capital Assistance Program and Its Role in the Financial Stability Plan
    (February 9, 2009) (online at http://www.ustreas.gov/press/releases/
    reports/tg40_ capwhitepaper.pdf) (``[T]o the extent that significant
    government stake in a financial institution is an outcome of the
    program [Capital Assistance Program], our goal will be to keep the
    period of government ownership as temporary as possible and encourage
    the return of private capital to replace government investment.'').
    ---------------------------------------------------------------------------

    a. Financial Stability and the Stress Tests

        The ``restor[ation] of liquidity and stability to the
    financial system of the United States'' is a primary purpose
    for Congressional authorization of the TARP.\119\ The critical
    judgment in approving repayment, as the Federal Reserve Board
    criteria for approval for stress-tested BHCs recognize, is the
    ability of those BHCs to ``maintain core capital levels
    consistent with supervisory expectations.'' \120\ The Board has
    also linked adequate capital to ability to lend.\121\
    ---------------------------------------------------------------------------
        \119\ EESA, supra note 13, 2 (1).
        \120\ Board of Governors of the Federal Reserve System, Federal
    Reserve outlines criteria it will use to evaluate applications to
    redeem U.S. Treasury capital from participants in Supervisory Capital
    Assessment Program, supra note 65.
        \121\ Board of Governors of the Federal Reserve System, The
    Supervisory Capital Assessment Program: Overview of Results (May 7,
    2009) (online at www.federalreserve.gov/newsevents/press/bcreg/
    bcreg20090424a1.pdf)() (``Given the heightened uncertainty about the
    economy and potential losses in the banking system, and the potential
    in the current environment for adverse economic outcomes to be
    magnified through the banking system, supervisors believe it prudent
    for large BHCs to hold substantial capital to absorb losses should the
    economic downturn be longer and deeper than now anticipated.'').
    ---------------------------------------------------------------------------
        In its evaluation of the stress tests,\122\ the Panel cited
    the finding of its academic experts that the economic modeling
    used to conduct the tests was generally soundly conceived and
    conservative (based on the information available). It stated
    that ``the addition of capital to ten of the tested BHCs is
    certainly a good step forward,'' although it also concluded
    that the tests ``should not be taken for more than they are''
    because ``they do not project the capital necessary to prevent
    banks from being stressed to near the breaking point.'' \123\
    ---------------------------------------------------------------------------
        \122\ Panel June Report, supra note 2, at 30-35.
        \123\ The Panel gave the supervisors themselves credit for not
    over-emphasizing the scope of the tests, which they made clear were
    conducted within ``the present supervisory framework.'' Panel June
    Report, supra note 2, at 49-50 (``[I]t would be as much a mistake to
    dismiss the stress tests as it would be to assign them greater value
    than they merit or in fact that the supervisors claim for them.'').
    ---------------------------------------------------------------------------
        When one turns to repayment of TARP assistance, two of the
    Panel's observations about the stress tests are particularly
    relevant. The first is that ``the stress-testing regimen can be
    valuable if it is firmly instituted by the supervisors
    themselves for future periods and is repeated by the
    supervisors if bank or economic conditions worsen to a greater
    degree than assumed in the stress test modeling.'' \124\
    Second, it emphasized that ``[t]he fact that the holding
    companies have added certain amounts of capital on certain
    assumptions does not mean that the financial crisis is over or
    that the holding companies are now free from the risk of the
    sort of crisis-laden conditions many found themselves
    experiencing during 2008 and early 2009.'' \125\
    ---------------------------------------------------------------------------
        \124\  Panel June Report, supra note 2, at 50.
        \125\  Panel June Report, supra note 2, at 50.
    ---------------------------------------------------------------------------
        Because the Federal Reserve Board's repayment standards
    require the institution involved to be able to maintain the
    capital ratios set by the stress tests, it is important that no
    repayments compromise that ability. Some commentators believe
    that U.S. banks are unlikely to experience a ``lost decade''
    that beset banks in Japan in the 1990s because, unlike Japan,
    U.S. banks will have well performing loans and will be able to
    ``earn'' their way out of future solvency problems.\126\ In
    this respect, the various loan facilities and guarantees on
    bank debt that have been instituted by the FDIC can be viewed
    not simply as an effort to restore confidence and liquidity in
    the banking system, but also as a mechanism to aid banks'
    efforts to earn their way to solvency. Other commentators are
    less sanguine and have argued that the possibility of further
    or renewed economic decline, insufficient private investment,
    and immense commercial real estate and other debts to be
    refinanced will limit the ability of the banking system to earn
    its way to health.\127\
    ---------------------------------------------------------------------------
        \126\ Mark Trumbull, Ten US Banks To Repay TARP Money, The
    Christian Science Monitor (June 9, 2009) (online at
    features.csmonitor.com/economyrebuild/2009/06/09/ten-us-banks-to-repay-
    tarp-money/) (citing Goldman Sachs economist Jan Hatzius that U.S.
    banks should have sufficient profit streams on good loans ``to offset
    even a rising tide of losses through 2010.'').
        \127\ See, e.g., The Economist, Less Wobbly Now: The Process of
    Returning Banks to Private Ownership Begins (June 9, 2009) (online at
    www.economist.com/businessfinance/displayStory.cfm?story--id=13811147);
    Martin Neil Baily and Douglas J. Elliott, Brookings Institution, The US
    Financial and Economic Crisis: Where Does It Stand and Where Do We Go
    from Here?, at 11-13 (June 2009) (online at www.brookings.edu//media/
    Files/rc/papers/2009/0615_economic_crisis_baily_elliott/
    0615_economic_crisis_baily_elliott.pdf) (concluding that there is
    ``wide band of uncertainty'' regarding future bank capital requirements
    given future credit losses in categories such as commercial real
    estate, commercial and industrial loans, and credit cards).
    ---------------------------------------------------------------------------

    b. Macroeconomic conditions

        The goal of the stress tests was the ability of the tested
    institutions to maintain current levels of activity based on an
    ``adverse scenario'' for deterioration of economic conditions
    through the end of 2010.\128\ Thus, the state of the economy is
    a crucial element for any decision to approve repayment of TARP
    assistance.
    ---------------------------------------------------------------------------
        \128\ Board of Governors of the Federal Reserve System, The
    Supervisory Capital Assessment Program: Overview of Results, at 2 (May
    7, 2009) (online at www.federalreserve.gov/newsevents/press/bcreg/
    bcreg20090507a1.pdf). ; Panel June report, supra note 2.
    ---------------------------------------------------------------------------
        As shown in the table below, two key economic measures used
    in the stress test continue to show troublesome trends and
    pessimistic IMF forecasts.

    ----------------------------------------------------------------------------------------------------------------
                                              Baseline            More adverse         IMF projections      Current
                                       ------------------------------------------------------------------ data \129\
                  Metric                                                                                 -----------
                                           2009       2010       2009       2010       2009       2010       (Most
                                                                                                            recent)
    ----------------------------------------------------------------------------------------------------------------
    GDP Growth........................       -2.0        2.1       -3.3        0.5  -2.6 \130        0.0  -5.5 \131\
                                                                                            \
    Unemployment Rate.................        8.4        8.8        8.9       10.3  8.9 \132\       10.1  9.5 \133\
    ----------------------------------------------------------------------------------------------------------------
    \129\ Because the baseline and adverse scenarios are projected as annual averages, they are not directly
      comparable to monthly or quarterly data.
    \130\ International Monetary Fund, World Economic Outlook: Update, at 2 (July 8, 2009) (online at www.imf.org/
      external/pubs/ft/weo/2009/ update/02/pdf/0709.pdf).
    \131\ First quarter 2009, percent change from preceding quarter in chained 2000 dollars (final figure, revised
      from the preliminary estimate of -5.7 percent). U.S. Department of Commerce, Bureau of Economic Analysis,
      Gross Domestic Product, 1st quarter 2009 (final) (June 25, 2009) (online at www.bea.gov/newsreleases/national/
      gdp/gdpnewsrelease.htm) (accessed July 9, 2009). This figure is up from the 6.3 percent decline in the fourth
      quarter of 2008. Id.
    \132\ International Monetary Fund, World Economic Outlook: Crisis and Recovery, at 65 (Apr. 2009) (online at
      www.imf.org/external/pubs/ft/weo/2009/01/pdf/text.pdf).
    \133\ U.S. Department of Labor, Bureau of Labor Statistics, The Employment Situation: June 2009 (July 2, 2009)
      (USDL 09-0742) (online at www.bls.gov/news.release/pdf/empsit.pdf) (accessed July 6, 2009) (hereinafter
      ``Employment Situation''). This figure is the unemployment rate through June 2009. The year-to-date average
      unemployment rate stands at 8.67 percent. See Id. at 11.

        Thus, the supervisors must consider the possibility of
    unrealized losses in commercial real estate, credit card, and
    other sectors that have not yet shown up on bank balance
    sheets. This issue is particularly important in the case of
    small commercial and regional banks, some of which have
    extensive commercial real estate loans on their portfolios that
    are not now mature, but may face defaults upon maturity.\134\
    ---------------------------------------------------------------------------
        \134\ Panel June Report, supra note 2 at 41-42; Richard Parkus and
    Jing An, The Future Refinancing Crisis in Commercial Real Estate, at 3-
    4 (Apr. 23, 2009) (online at cop.senate.gov/documents/report-042309-
    parkus.pdf); Maurice Tamman and David Enrich, Local Banks Face Big
    Losses, Wall Street Journal (May 19, 2009) (online at online.wsj.com/
    article/SB124269114847832587.html).
    ---------------------------------------------------------------------------

    c. Government's dual role

        A benefit from repayment of TARP assistance is the end of
    the government's conflicting roles as regulator of the very
    institutions in which it owns shares and on whose profitability
    repayment of public funds depends. Specific regulatory
    policies, for example those affecting capital levels, the
    application of accounting conventions to financial reporting by
    BHCs or banks, and conflicts among regulators of various parts
    of BHCs, are complicated by the government's dual interests.

    d. Future of the TARP

        The most difficult problem raised by repayment of TARP
    assistance may prove to be its impact on Treasury's ability to
    respond to a second wave of financial distress. Treasury
    believes that it can maintain TARP assistance up to a ceiling
    of $700 billion until expiration of its authority to make new
    TARP purchases.\135\ But its authority to expend funds to
    reinfuse capital into the nation's financial institutions
    through the purchase of bank securities or of assets on an
    institution's books terminates at the end of 2009, unless the
    Secretary of the Treasury extends that authority until October
    3, 2010.\136\ But at that point any additional expenditure
    depends on Congressional action further extending EESA.\137\
    ---------------------------------------------------------------------------
        \135\ Treasury's position, as most recently been expressed in a
    letter from Secretary Geithner to Senator David Vitter, is that the
    interaction of various sections of EESA produces the following result:
    (i) Treasury's authority to purchase ``troubled assets'' is ``limited
    to $700 billion outstanding at any one time,'' (ii) amounts repaid to
    Treasury must be returned to the government's general accounts, and
    (iii) repaid funds free up an additional amount of space under the
    ceiling, and Treasury can use the proceeds of the sale of government
    securities to restore that amount to the fund from which TARP
    expenditures can be made, so long as the fund does not somehow exceed
    $700 billion. See EESA, supra note 13, Sec. 106 (d), 115(a), 118
    (codified at 12 U.S.C. Sec. Sec. 5216(d), 5225(a), 5228). Treasury's
    reading is disputed. An attempt to amend EESA to make it clear that all
    repayments simply reduce remaining expenditure authority failed in the
    Senate 48-47. S. Amend. 1030, (May 5, 2009) (online at http://
    thomas.loc.gov/cgi-bin/bdquery/z?d111:SP1030:). H.R. 2745 would amend
    EESA to reach the same result. H.R. 2745, supra note 29, adding
    Sec. 137(d)(2) to EESA.
        \136\ H.R. 2745, supra note 29, would amend EESA to eliminate the
    ability of the Secretary to extend Treasury's TARP authority.
        \137\ EESA, supra note 13, Sec. 120. Expiration of the authority to
    make new expenditures does not affect Treasury's ability to hold or
    repurchase preferred stock. EESA, supra note 13, 106(e) (codified at 12
    U.S.C. Sec. 5216(e)). 12 USC 5216(e).
    ---------------------------------------------------------------------------
        Treasury has evidently made the decision that repayment of
    TARP assistance will not affect the government's ability to
    respond to future crises, and Secretary Geithner has stated
    that the decision whether or not to extend the TARP or seek
    Congressional approval for a further extension of the TARP has
    not been made.\138\ However, the lack of a publicly-expressed
    position about the future is worrisome. The Panel noted in its
    June report that both its own independent experts and other
    commentators have expressed a concern that the results of the
    tests understate the risks that existing loans will result in
    substantial losses in 2011, following the two-year period for
    which the stress testing occurred.
    ---------------------------------------------------------------------------
        \138\ U.S. Treasury Secretary Timothy Geithner, Testimony to the
    Senate Committee on Banking, Housing, and Urban Affairs (June 18,
    2009).
    ---------------------------------------------------------------------------

                             2. WARRANT REPURCHASE

        The issues surrounding warrant repurchase are relatively
    simple. Although they may constitute only a limited portion of
    the value of Treasury's total investment in the institutions
    involved, the warrants are the only vehicle through which the
    public can realize a return on its investment in addition to
    the dividends paid on the preferred shares for the relatively
    short period for which the stock will prove to have been held.
    The warrants cover a ten-year period, however, and as noted in
    the valuation discussion above, their value likely more
    accurately reflects the market's long-term assessment of the
    prospects of institutions whose operations Treasury stabilized.
        As indicated above, Treasury's choices in continuing to
    hold the warrants it now holds are limited by the SPAs. But
    even if it continues to hold warrants in institutions that
    repay their assistance but do not opt to repurchase their
    warrants, Treasury should consider carefully its alternative
    courses of action. There is, of course, a chance for equity
    appreciation greater than that predicted by present valuation;
    but there is likewise a chance that by continuing to hold
    warrants their potential value will drop, wiping out any upside
    that can be captured by taxpayers. However, the scenario in
    which bank stock prices fall is also likely to be a scenario in
    which banks' capital positions are weaker than they are today.
        The disposition of the warrants is of direct financial
    interest to the public. For that reason, it is especially
    important that Treasury be absolutely transparent about the
    nature and substance of the decisions it is making and the
    reasons for those decisions. The Panel has emphasized the need
    for transparency in administration of the TARP since its first
    report, and it is disheartening to have received the following
    response from Secretary Geithner about warrant valuation data:

              It is not Treasury's policy to publish estimates of
            the fair market value of its investments made under the
            Troubled Asset Relief Program (``TARP''). In the
            present case, Treasury believes it would not be in the
            taxpayer's interest for Treasury to disclose any
            valuations it has performed in connection with warrants
            whose repurchase is currently pending or that may be
            repurchased in the near term.\139\
    ---------------------------------------------------------------------------
        \139\ Letter from Secretary Timothy Geithner to Congressional
    Oversight Panel Chair Elizabeth Warren (July 1, 2009) (attached as
    Appendix II to this report).

        However, warrants are still only 15 percent of the original
    CPP investment. Since it is the healthy banks that are
    currently repaying, the value of their respective warrants has
    no doubt gone up. In this respect, early sales of these
    warrants may leave Treasury holding the warrants of weaker
    institutions with lower stock prices and less likelihood of
    appreciation in the value of their warrants, at least in the
    immediate future.
        The Panel recognizes that Treasury must protect proprietary
    information and use care to avoid giving other institutions
    information that would prejudice the interests of the taxpayer,
    but it must make any decision to restrict disclosure for these
    reasons only in the most thoughtful and judicious manner.
    Transparency throughout the negotiation process is essential
    for accountability and acceptance of the valuations.

                   3. THE FINANCIAL INSTITUTIONS' PERSPECTIVE

        Financial institutions, especially large ones, appear to
    want to repay their TARP assistance as soon as they can obtain
    approval to do so. In some cases, of course, they may feel that
    they simply do not need the money any longer. However, there
    are likely several additional reasons for pursuing prompt
    repayment of the TARP investments.
        Despite the Administration's consistent statements that its
    policy is not to be involved in bank management and to cease to
    hold ownership positions in banks as soon as practicable,\140\
    Treasury retains influence over the business decisions and
    internal governance of institutions in which it holds
    substantial preferred shares and warrant interests. Although
    ownership of preferred shares or warrants convertible into
    nonvoting common shares does not provide the sort of leverage
    that common shares ownership does, holding a substantial block
    of preferred shares with the terms of the Treasury preferred
    (discussed below) significantly constrains aspects of the
    issuing institution. Such constraints, for example, hinder the
    ability to pay dividends or engage in certain capital
    transactions, in exchange for bolstering the institution's
    capital. Replacing the Treasury investment with independently
    raised equity frees the institution from those constraints. At
    the same time, however, repayment of TARP assistance will not
    free an institution from the scope of the enhanced supervisory
    regime that has evolved during the worst months of the crisis
    as that regime would apply to the institution in any event.
    ---------------------------------------------------------------------------
        \140\ See supra note 46 Congrerssional Oversight Panel Hearing,
    Testimony of Herbert Allison, Assistant Secretary of the Treasury for
    Financial Stability (June 24, 2009) (``We are very reluctant
    shareholders in corporations. We don't want to be in that position.'').
    ---------------------------------------------------------------------------
        The second motivation for prompt repayment of TARP
    investments has to do with the specific rules or conditions to
    which TARP recipients are subject. The prime examples involve
    executive compensation and corporate governance restrictions
    applicable to TARP recipients. While banks were aware that they
    were subject to restrictions upon entrance into the CPP,\141\
    they point to new provisions established in ARRA and by
    subsequent Treasury regulatory action\142\ that are
    retroactively applicable to past recipients of TARP financial
    assistance who have not yet repaid Treasury. As the American
    Bankers Association explained in a letter sent to the House of
    Representatives opposing additional restrictions on executive
    compensation for CPP recipients because of the impact of
    uncertainty on business operations, ``the risk of unilateral
    changing of the rules at any time . . . is extremely disruptive
    to sound business planning.'' \143\
    ---------------------------------------------------------------------------
        \141\ CPP contracts contained a covenant obligating recipients to
    implement the executive compensation provisions required under section
    111(b) of the EESA and any Treasury regulations implementing the
    section promulgated by the closing date of the investments. Section
    111(b) provisions included: (1) a prohibition on TARP recipients from
    receiving tax deductions for bonuses above $500,000 for top five senior
    executives; (2) a clawback provision for any top five executives who
    knowingly engage in providing inaccurate information that is used to
    calculate their bonuses; and (3) a golden parachute restriction that
    prevents top five top executives from receiving severance bonuses in
    excess of three years' compensation.
        By contract, Treasury imposed more stringent requirements on SSFI
    program and TIP investments beyond those required by the section 111(b)
    regulations. Most notably, the size of the 2008 and 2009 bonus pools
    for AIG, Citigroup, and BofA were capped. In February 2009, Treasury
    imposed new compensation requirements for future CAP recipients that
    were slightly more restrictive than those applicable to their CPP
    counterparts and retroactively applicable requirements for recipients
    of ``exceptional assistance,'' including restricting non-restricted
    stock compensation to $500,000 for senior executives, imposition of
    non-binding say-on-pay shareholder votes, expanding the number of
    executives subject to clawback and golden parachute payments, and
    mandating exposure on company policy on luxury expenditures. U.S.
    Department of the Treasury, Press Release: Treasury Announces New
    Restrictions on Executive Compensation (Feb. 4, 2009) (available at
    www.treasury.gov/press/releases/tg15.htm).
        \142\ Robin Sidel, U.S. Gets TARP Payback from 10 Banks, Wall
    Street Journal (June 18, 2009) (http://online.wsj.com/article/
    SB124524619467123215.html) (``some bankers complained it had outlived
    its purpose and imposed needless complications on compensation and
    other decisions.'').
        \143\ See Memorandum from Floyd Stoner, American Bankers
    Associations to Members of the House of Representatives (March 30,
    2009) (online at www.aba.com/NR/rdonlyres76DCD307-2D7E-48A6-A10F-
    623175F0AEAD/59034/ExecComp_ABAHouseLetter_033009.pdf).
    ---------------------------------------------------------------------------
        With respect to employee compensation, ARRA's amendment of
    EESA's executive compensation and corporate governance
    restrictions and Treasury's subsequent regulatory action has
    subjected CPP recipients to restrictions that are, in many
    respects, stronger and more far reaching than those that they
    faced under the CPP contracts and pre-ARRA regulations.\144\ In
    one respect, however, ARRA's amendment to section 111 of EESA
    has benefitted banks seeking to be free from executive
    compensation regulations: if a bank redeems all of its CPP
    preferred shares, it is immediately free from these conditions
    regardless of whether Treasury still holds warrants for the
    purchase of its common shares.\145\
    ---------------------------------------------------------------------------
        \144\ As compared to EESA's original provisions, the new
    requirements cover more employees (in some cases expanding their scope
    from five senior executives to twenty and, in cases of exceptional
    assistance recipients, an additional 100 most highly compensated
    employees). They also contain stricter restrictions on bonus and
    severance payments, encompass additional corporate governance
    standards, and are in part enforced by the new Treasury office of
    Special Master for TARP Executive Compensation. In addition, by
    regulation, Treasury has created a Special Master for TARP Executive
    Compensation who has authority to review any compensation (payments)
    for senior executive officers and next 20 most highly compensated
    employees at firms receiving exceptional assistance; to approve the
    compensation structure for the next 100 highly compensated employees of
    such firms; and to issue advisory opinions on the compensation and
    compensation structure at non-exceptional assistance TARP recipients.
    See ARRA, supra note 23, Sec. 7001; U.S. Department of the Treasury,
    Interim Final Rule on TARP Standards for Compensation and Corporate
    Governance (accessed June 12, 2009) (online at www.treas.gov/press/
    releases/reports/ec%20ifr%20fr%20web%206.9.09tg164.pdf); U.S.
    Department of the Treasury, Press Release: U.S. Department of the
    Treasury, Interim Final Rule on TARP Standards for Compensation and
    Corporate Governance (June 10, 2009) (online at www.treas.gov/press/
    releases/tg165.htm).
        \145\ ARRA, supra note 23, Sec. 7001.
    ---------------------------------------------------------------------------
        Banks have argued that TARP-related executive compensation
    restrictions are making it difficult for them to attract or
    retain talented executives and employees because these
    employees can be better compensated by financial services firms
    free of the restrictions. These include private equity and
    hedge funds,\146\ large international financial institutions
    such as HSBC or Barclays that are ineligible to receive TARP
    funds, and firms that have freed themselves of the restraints
    by redeeming their CPP preferred shares.
    ---------------------------------------------------------------------------
        \146\ Edmund Andrews and Eric Dash, Stimulus Plan Places New Limits
    on Wall St. Bonuses, New York Times (Feb. 13, 2009) (online at
    www.nytimes.com/2009/02/14/business/economy/14pay.html) (``Top economic
    advisers to President Obama adamantly opposed the pay restrictions,
    according to Congressional officials, warning lawmakers behind closed
    doors that they went too far and would cause a brain drain in the
    financial industry during an acute crisis. . . . Others warned that
    because of the rules, firms might lose their best traders and managers
    to hedge funds and foreign banks.'').
    ---------------------------------------------------------------------------
        In addition to executive compensation and corporate
    governance restrictions, TARP-recipient banks are subject to
    restrictions on hiring foreign workers. The Employ American
    Workers Act (EAWA), section 1611 of ARRA, prohibits any
    recipient of funding under Title I of EESA or section 13 of the
    Federal Reserve Act from hiring new H-1B workers unless they
    had offered positions to equally- or better-qualified U.S.
    workers, and it prevents recipients from hiring H-1B workers in
    occupations in which they have laid off U.S. workers.\147\
    Hence, while EAWA applies to CPP recipients, repayments will
    not necessarily free banks from its restrictions such as
    restraints on hiring foreign workers.
    ---------------------------------------------------------------------------
        \147\ ARRA, supra note 23, Sec. 1611(b).
    ---------------------------------------------------------------------------
        Banks also explain that they are motivated to repay TARP
    funds as soon as possible so they can be free of conditions
    currently imposed by contract, statute, or regulation on
    recipients and the uncertainty related to the possibility of
    new conditions in the future.\148\
    ---------------------------------------------------------------------------
        \148\ Eric Dash, 10 Large Banks Allowed to Exit U.S. Aid Program,
    New York Times (June 10, 2009) (online at www.nytimes.com/2009/06/10/
    business/economy/10tarp.html) (``The banks are eager to escape TARP and
    the restrictions that come with it, particularly the limits on how much
    they can pay their 25 most highly compensated workers.''); Deborah
    Solomon, Nine Banks to Repay TARP Money, Wall Street Journal (June 9,
    2009) (online at online.wsj.com/article/SB124450458046896047.html)
    (``many [TARP recipients] are uncomfortable with the restrictions that
    come with the government's investment, including on pay, dividends and
    stock buybacks''); Robin Sidel, U.S. Gets TARP Payback from 10 Banks,
    Wall Street Journal (June 18, 2009) (online at online.wsj.com/article/
    SB124524619467123215.html ) (``some bankers complained it had outlived
    its purpose and imposed needless complications on compensation and
    other decisions''); Stephen Labaton, Some Banks, Feeling Chained, Want
    to Return Bailout Money, New York Times (Mar. 10, 2009) (online at
    www.nytimes.com/2009/03/11/business/economy/11bailout.html) (``One of
    the biggest concerns of the banks is that the program lets Congress and
    the administration pile on new conditions at any time.'').
    ---------------------------------------------------------------------------
        The SPA places restrictions on a bank's dividend and
    repurchase abilities. These restrictions apply until the
    earlier of the date the bank redeems its shares, when the
    shares are transferred to a third party, or three years after
    the CPP preferred shares' issuance.\149\ There are two dividend
    restrictions. The first is a common restriction for preferred
    shares that gives dividend payments to preferred shareholders
    priority over dividend payments to common or junior preferred
    shares. The second dividend restriction is much less common,
    and quite favorable to Treasury. It caps for a period of time
    the amount of dividends that the bank can pay on its common
    shares The cap is set at the amount of the last regular
    quarterly cash dividend prior to October 14, 2008.\150\ The
    stock repurchase restrictions are parallel to the dividend
    restrictions.\151\ The bank may not redeem common or junior
    preferred shares if dividends on the preferred have not yet
    been paid. Redemption of common and junior preferred shares is
    prohibited during the times in which dividends are capped.
    ---------------------------------------------------------------------------
        \149\ Securities Purchase Agreement, supra note 15, Sec. 4.8(a).
        \150\ Securities Purchase Agreement, supra note 15, Sec. 4.8(a)(i).
    The dividend amount is subject to certain adjustments, for stock
    splits, etc.
        \151\ The repurchase of common stock is economically equivalent to
    a dividend.
    ---------------------------------------------------------------------------
        These restrictions improve the value of the warrants by
    preventing banks from paying excessive dividends, which, in
    turn, could impair the bank's capital structure and ultimately
    negatively impact the value of its shares. Moreover, these
    restrictions protect the value of the preferred shares by
    prioritizing dividend payments to preferred shareholders over
    those of junior preferred and common shareholders.
        Finally, a number of institutions argue that they were
    forced directly or indirectly by Treasury and their supervisors
    to participate in the CPP in the interests of stability of the
    financial system as a whole. They may be worried that,
    especially after the stress tests, their failure to repay the
    assistance they receive will have unfair consequences in the
    way the markets assess their strength. Some, especially small,
    banks may worry about general public anger at ``bailout
    banks.'' \152\
    ---------------------------------------------------------------------------
        \152\ Eric Dash, Four Small Banks Are the First to Pay Back TARP
    Funds, New York Times (Mar. 10, 2009) (online at www.nytimes.com/2009/
    04/01/business/01bank.html) (``About 500 small banks have received
    $73.7 billion. But the purpose of the TARP money and the public
    perception of the fund have changed since then. What was billed as a
    program intended to help healthy banks increase lending and swallow up
    troubled rivals widened to include a number of struggling banks. . .
    `We don't want to be touched by the stigma attached to firms that had
    taken money,' said Scott A. Shay, the chairman of Signature Bank.'');
    David Segal, We're Dull, Small Banks Say, but Have Profits, New York
    Times (May 11, 2009) (online at http://www.nytimes.com/2009/05/12/
    business/12small.html) (``[C]ommunity bankers have felt compelled in
    recent months to mount public relations campaigns to emphasize their
    fiscal health and in some cases to announce they rejected Troubled
    Asset Relief Program, or TARP, funds. Some have held cookouts, others
    have held `reassurance' meetings in their lobbies, hoping to educate
    customers and prevent panics. All are dealing with banker jokes and the
    occasional wisecrack.''); Bob Davis and Jon Hilsenrath, Federal
    Intervention Pits `Gets' vs. `Get-Nots,' Wall Street Journal (June 15,
    2009) (online at http://online.wsj.com/article/
    SB124501974568613573.html) (``Some businesses are trying to tap this
    antibailout sentiment. Worthington National Bank has erected billboards
    around Fort Worth, Texas, boasting that it hasn't been bailed out--a
    shot at a crosstown rival that took federal cash.'').
    ---------------------------------------------------------------------------
        The reasons why many banks may be seeking to repay their
    CPP investments promptly may also help to explain why some
    institutions have declined to participate in the TARP. Since
    the introduction of the CPP, a total of 372 banks have
    withdrawn their applications after receiving preliminary
    approval by Treasury. On occasion, this situation has arisen
    when Treasury or the regulator had reason to believe that a
    bank would not receive final approval, and therefore encouraged
    it to withdraw voluntarily (so as not to create a disclosable
    event). In the vast majority of cases, however, it was entirely
    the bank's decision not to take the funds.\153\
    ---------------------------------------------------------------------------
        \153\ Weekly data reported to the Panel by Treasury do not
    distinguish between banks that withdrew after receiving approval and
    those that withdrew at any time, but it would appear that voluntary
    withdrawals, rare occurrences in the last months of 2008, increased in
    frequency starting around the second week of January.
    ---------------------------------------------------------------------------

                  H. Conclusion--Policy Choices and Trade-Offs

        The repayment of more than one-third of the financial
    assistance provided under the CPP portion of the TARP, by
    financial institutions comprising approximately one-third of
    bank and bank holding company assets, marks a turning point in
    the TARP and requires careful examination of Treasury's exit
    strategy for the program. If the program has contributed to the
    restoration of stability in the nation's financial system,
    forming an important piece of the broader economic recovery
    effort, then the timing and manner in which the TARP is wound
    down is as important as the way it was begun.
        The judgments involved in the timing of the decision to
    permit repayment of financial assistance are not simple.
    Government ownership of substantial interests in the financial
    institutions that it is supposed to regulate presents
    substantial challenges, in part because it runs the risk of
    appearing to prefer some institutions in which it has made
    investments over others. However, that difficulty has been
    inherent in the TARP from the beginning. The question now is
    whether there have been sufficient changes in the last eight
    months in the condition of the nation's largest financial
    institutions and the state of the nation's economic recovery to
    justify repayment of TARP assistance.
        The banks that have been permitted to repay have for the
    most part been able to raise funds in the equity markets. But
    there is little firm evidence that their lending figures have
    improved or that their capital condition will remain firm. The
    stress tests, as the Panel's June report made clear, are a step
    forward, but do not resolve the issue. Moreover, there are
    questions about whether the economy has improved to a
    sufficient degree to eliminate the capital buffer the
    assistance created, or whether weak loans and similar assets
    have been sufficiently eliminated from the institutions'
    balance sheets. In addition, the desire of banks to free
    themselves of various regulatory restrictions imposed on TARP
    recipients cannot in any way influence the policy of Treasury
    and the Federal Reserve Board in determining whether and when
    to allow TARP assistance to be repaid.
        The Panel's valuations offer reasonable estimates of the
    fair market value of the warrants. They may help Treasury as it
    balances the return to the taxpayer indicated by its own
    estimates of value and the host of other relevant market,
    regulatory and economic factors applicable to the disposition
    of sophisticated financial instruments. In addition, Treasury
    should promptly provide written reports to the American
    taxpayers analyzing in sufficient detail the fair market value
    determinations for any warrants either repurchased by a TARP
    recipient from Treasury or sold by Treasury through an auction,
    and it should disclose the rationale for its choice of an
    auction or private sale. Most important, Treasury should
    undertake to negotiate the disposition of the warrants in a
    manner that is as transparent and fully accountable as
    possible.
        As the Panel has made clear since its beginning,
    transparency is essential--perhaps now more than ever. Treasury
    and the Federal Reserve Board must explain fully and clearly to
    the public the reasons for approval for repayment of financial
    assistance. Treasury must be equally transparent about the way
    warrants are valued, the exit strategy for, or future use of
    the TARP. Without such transparency, the credibility of the
    decisions of Treasury and the Federal Reserve Board and of
    Treasury's stewardship of the TARP can only fall into serious
    question.

          ANNEX A: Technical Explanation of Warrant Valuation Methods

        This annex provides background on the most commonly used
    methods of valuing warrants and an explanation of the
    assumptions the Panel made in applying one such method to
    calculate the value of the TARP warrants.
        The most prominent warrant valuation model is Black-
    Scholes, which has been the method of choice since it was first
    published in 1973.\154\ Since that time, it has seen many
    extensions and modifications, but the main theoretical and
    mathematical basis for the method has remained the same.
    Another method, the binomial options pricing model, introduced
    by Cox, Ross and Rubinstein in 1979,\155\ relies on many of the
    ideas set forth in Black-Scholes while approaching the
    mathematical calculations in a very different manner. Finally,
    the simplest valuation of an option is its intrinsic value,
    which values the option solely on its moneyness.\156\ These
    three methods are representative of the majority of valuation
    techniques used today, and most traders use models based on one
    of these three models.
    ---------------------------------------------------------------------------
        \154\ Fischer Black & Myron Scholes, The Pricing of Options and
    Corporate Liabilities, Journal of Political Economy, Vol. 81 No. 3
    (May/June 1973) 637-654.
        \155\ John Cox, Stephen Ross & Mark Rubinstein, Option Pricing: A
    Simplified Approach, Journal of Financial Economics (July 1979) Vol. 7
    229-263.
        \156\ Moneyness is the property of an option that describes the
    relationship between its strike price and the current share price of
    the underlying stock. An option is ``In The Money'' when its strike
    price is less than the underlying's current share price, ``At The
    Money'' when its strike is equal to it the underlying's share price,
    and ``Out of The Money'' when its strike is above the current share
    price.
    ---------------------------------------------------------------------------
        The intrinsic value of a warrant is calculated by the
    simple equation:

           Warrant Price = Current Share Price - Strike Price     (1)

        The resultant value is the net gain a trader would realize
    upon exercising the warrant and selling the underlying stock at
    any given moment. This value is very useful in determining the
    prices of warrants very near the end of their terms, and for
    modeling hypothetical early executions of non-European
    options.\157\ However, in valuing warrants that are not near
    their expiration date, and especially in valuing Long-Term
    Equity Anticipation Securities (LEAPs) \158\ such as the
    warrants issued under the TARP, using intrinsic value to model
    fair market value presents significant problems. These problems
    stem from its one major flaw--the assumption that no matter the
    term, a warrant's value is the difference between the
    underlying share price and the warrant's strike price. While
    intrinsic value can provide useful information about the value
    of a warrant if exercised immediately, it says very little
    about the future value of that warrant or its value on the open
    market, as there is always a positive probability that the
    underlying stock price will increase. Since intrinsic value
    ignores the value of future stock movement and the time option
    captured in a warrant, the TARP warrants must be worth more
    than their intrinsic value.
    ---------------------------------------------------------------------------
        \157\ European options are options which can only be exercised on
    the day they expire. The most prevalent type of non-European option is
    the American option, which can be exercised on any day until it
    expires.
        \158\ Long-Term Equity AnticiPation securities are options that
    have an expiry date more than one year away.
    ---------------------------------------------------------------------------
        The binomial options pricing model and the Black-Scholes
    model rely on many of the same assumptions: efficient markets,
    no transaction costs, Brownian motion,\159\ and lognormal
    growth.\160\ For the binomial model, these assumptions allow a
    binomial tree to be constructed that follows a random walk of
    the underlying share prices, where the term of the option is
    split into different periods. The first period consists of one
    point that represents the current share price. From this, using
    the model inputs,\161\ a possible increase in the share price
    and a possible decrease are calculated. These newly calculated
    points represent the two possible prices which could be
    attained by the stock in the next period. This process is
    continued through all of the periods in the model until the
    warrant's term is complete. This process creates a lattice of
    interconnecting possible future paths of the underlying share
    price. From this result, option prices are calculated backward
    from the final period to determine the appropriate price, given
    the statistical probabilities of the outcomes, of the option in
    the original period.
    ---------------------------------------------------------------------------
        \159\ A theory developed by Robert Brown to describe the random
    movements of particles in suspensions, which was later quantified by
    Einstein and Smoluchowski and used to prove the existence of atoms. The
    mathematical model describes random movement and is often used in many
    fields to mathematically describe random events. In this context, it is
    used to describe the random motion of stock prices.
        \160\ At this limit, or after a large number of periods, the result
    of the Binomial Options Pricing Model becomes equivalent to the pricing
    of the Black-Scholes model with respect to the valuation of European
    Options. Lognormal growth, an underlying tenant of Black-Scholes, is
    found to be a property at the limit as well.
        \161\ The assumption of no arbitrage allows the model to assume
    that all of the stocks information is appropriately incorporated into
    the share price.
    ---------------------------------------------------------------------------
        While a Black-Scholes valuation relies on a continuous
    model of share prices, the binomial model operates in discrete
    periods of time. Because of this, the binomial model has a
    number of beneficial features, all of which stem from its
    ability to incorporate different assumptions at different
    periods in a warrants term. Further, it allows for the modeling
    of American options which can be exercised early.\162\ However,
    the ability to add these features results in a more
    sophisticated set of inputs, creating a more complicated and
    less reproducible model as a result.
    ---------------------------------------------------------------------------
        \162\ An American option can be exercised at any time until the
    expiration date. By contrast, a European option can only be exercised
    on the expiration date.
    ---------------------------------------------------------------------------
        The lack of reproducibility caused by the use of
    sophisticated and complex inputs is one of the major problems
    of the binomial model. Since the Panel attempted a transparent
    valuation of the TARP warrants, it used a Black-Scholes model,
    which uses only a few simple inputs.
        The most popular option pricing model is Black-Scholes,
    which has been an industry standard since it was first
    introduced and is routinely used by options traders. To value
    an option, the Black-Scholes model sets up a fully hedged
    portfolio, which is long the underlying stock and short the
    option. Since in an efficient market a portfolio cannot exist
    with a guaranteed return greater than the risk free rate, this
    perfectly hedged portfolio must earn the risk free rate. This
    parity can be expanded out through stochastic calculus to a
    partial differential equation which has the closed-form
    solution:\163\
    ---------------------------------------------------------------------------
        \163\ This expansion is made possible by a number of assumptions
    including: the assumption that stock prices ``follow a random walk, in
    continuous time with a variance rate proportional to the square of the
    stock price. Thus the distribution of possible stock prices at the end
    of any finite interval is lognormal.'' Black-Scholes Paper, supra 72,
    at 640. In equations (2) (3) and (4), N(d) refers to cumulative normal
    density function, w(x,t) refers to the price of the warrant with
    respect to the share price of the underlying(x) and time(t). (r) refers
    to the risk free interest rate, and (c) refers to the strike price. (v)
    refers to the volatility of the underlying.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The popularity of the Black-Scholes model is driven by its
    ease of use, which is the product of its closed form solution.
    Anyone can plug in the standard inputs required for valuing any
    option and then solve the equation for the value of the option.
    The model is also preferred by options traders because it has a
    high degree of accuracy. Although some believe that the
    binomial model is more accurate, the Black-Scholes model's ease
    of use has made it the industry standard for valuing warrants,
    as acknowledged by many respected options experts, including
    Mark Rubinstein, the co-creator of the binomial method.\164\
    ---------------------------------------------------------------------------
        \164\ Rubinstein Implied Binomial Trees Paper, supra note 73 (``The
    [Black-Scholes] formula can be implemented in a fraction of a second on
    widely available low-cost computers and calculators. In many situations
    of practical relevance, the inputs can be easily measured and the
    related securities are traded in highly efficient markets. This model
    is widely viewed as one of the most successful in the social sciences
    and has perhaps (including its binomial extension) the most widely used
    formula, with embedded probabilities, in human history.'').
    ---------------------------------------------------------------------------
        It is important to note that the Black-Scholes model, as
    well as every other popular options pricing model, was created
    to reflect the prices of options with short terms, ranging from
    days to months. As no options are traded on the Chicago Board
    Options Exchange (CBOE) with terms longer than three
    years,\165\ it is very difficult to come up with a ``fair
    market value'' of the TARP warrants which have terms of ten
    years. The lack of publicly traded comparable derivatives makes
    any valuation of ten-year warrants difficult.
    ---------------------------------------------------------------------------
        \165\ Chicago Board Options Exchange, Product Specification: Equity
    LEAPS (online at www.cboe.com/Products/EquityLEAPS.aspx) (accessed July
    8, 2009) (``Expirations Months: May be up to 39 months from the date of
    initial listing, January expiration only.'' However, there may be some
    FLEX options with terms as long as 15 years, however these are custom
    instruments, and not traded, listed, or priced like regular options,
    and therefore unusable for the purposes of this analysis.).
    ---------------------------------------------------------------------------
        More generally, there is the problem of lack of knowledge
    about most of the inputs to the model. For example, while ten-
    year Treasury bills factor in what the market expects the
    interest rate risk for the next ten years to be, it is
    impossible to know the validity of the market's expectations.
    Thus, once again, it is important to note that the value that
    we are searching for here is not based on our expectations of
    the future, but rather our estimate of the market's
    expectations. Because the goal of the Panel's valuations was to
    estimate the value the financial markets would place on these
    warrants, we tried to use the inputs most likely to be used by
    prospective buyers.
        The input that is the least defined in the Black-Scholes
    model and has the largest effect on the price of the warrant is
    the volatility of the underlying stock price. Volatility is
    defined as the standard deviation of the continuously
    compounding returns of a stock. It is clear from this
    definition that there are an almost infinite number of
    variations of the calculation of this number. The volatility is
    important in the Black-Scholes model because it features
    prominently in both of the probability calculations in the
    closed-form solution, meaning that differing values of
    volatility can create substantial differences in the final
    valuations of the warrants. The following example illustrates
    this point with respect to the Black-Scholes model. Assume that
    a warrant to buy one share of company XYZ at $150 expires in
    one year, that XYZ is currently trading at $100 and that the
    risk free rate is one percent. If XYZ's volatility is 30
    percent, the warrant is worth $1.59, but if the volatility is
    60 percent, the warrant is worth $10.91. In fact, if the
    volatility is below 15 percent, the warrant is virtually
    worthless.
        There are two main ways to estimate the future volatility
    of a stock. The first is to calculate it from historical
    prices. Any time period can be used to measure volatility,
    although standard practice dictates that the time period chosen
    be at least three months and at most ten years backward from
    the valuation day. An analyst's choice of the time period over
    which he or she will measure historical volatility as an
    estimate of future volatility can have a large effect on a
    valuation. For example, since the past two years have been
    particularly turbulent, the volatility figures derived from
    this period are high and may not be representative of the
    volatility of stocks over the next ten years. Using these
    volatility figures to value the TARP warrants would likely lead
    to an overvaluation. On the other hand, using volatilities
    calculated from the past ten years may undervalue the warrants
    if one believes that shares will be more volatile over the next
    decade than they have been in the previous one. Modulating the
    time period over which historical volatility is calculated can
    affect the valuation of the warrants in some banks by more than
    an order of magnitude. Apart from the time period over which
    volatility is measured, historical volatility measures also
    differ based on the time increments from which they calculate
    variance in returns: days, weeks, months, or other lengths of
    time.
        The second method of determining volatility of a stock is
    to derive its ``implied volatility.'' Implied volatility of a
    stock is calculated by solving the Black-Scholes equation for
    volatility after plugging in the market price of a publicly
    traded option on that stock. This process yields the market's
    estimate of the stock's volatility, following from the Black-
    Scholes assumption that all of a security's information is
    incorporated into its price. While this number has its
    drawbacks, particularly because publicly traded options do not
    have terms nearly as long as the TARP warrants, it is the best
    estimate of the market's current perception of volatility.
        While these two methods of calculating volatility are the
    most widely used, and thus the most useful in estimating the
    fair market value of the TARP warrants, there are a number of
    other methods that can be used to calculate volatility. One
    example is the calculation of volatility from credit default
    swaps (CDS). Using Merton's model, which defines an option on a
    stock as an option on the underlying firm's assets, it is
    possible to translate CDS spreads into implied volatilities,
    which is useful, since the market for ten-year CDSs is more
    liquid than the market for ten-year options. However,
    calculations based on CDSs rely on the Merton model's
    characterization of equity, which may be incorrect due to the
    different tiers debt and equity represent in a firm's capital
    structure. This method for calculating volatility is most
    appropriately used ``when the long-term prospects of a company
    are driven by downside credit concerns rather than upside
    growth potential.'' \166\ In today's market of relatively low
    stock prices and extensive government support for the financial
    sector, it appears that share prices for banks are more likely
    to be determined by the potential for rebound, as opposed to
    potential failures due to credit problems. This means that CDS
    spreads are not likely to be as useful in calculating the value
    of TARP warrants.
    ---------------------------------------------------------------------------
        \166\ Credit Suisse Valuation Report, supra note 91.
    ---------------------------------------------------------------------------
        While the lack of a specific method for calculating
    volatility creates uncertainty in the determination of Black-
    Scholes values, the model may also fail to account for a number
    of other factors which affect the value of options. One
    overlooked factor is the dividend yield. Dividend yield is
    calculated as the ratio of annual dividends per share to share
    price. The dividend yield represents an investor's return on
    investment if the stock is not sold. While the Black-Scholes
    model assumes that companies do not issue dividends, most do,
    and dividends create a premium for holding the underlying stock
    compared to the warrant. As a result, all other things being
    equal, the higher the dividend yield of the underlying stock,
    the lower the value of the warrant. Since many of the companies
    for which Treasury holds warrants issue dividends, it is
    necessary to adjust for this factor in any valuation of its
    holdings.
        While the Black-Scholes model provides insight into the
    pricing of short term European call options on stocks that do
    not pay dividends, it does not provide a proper valuation for
    American LEAPs on companies that pay dividends, like the TARP
    warrants. In order to price these securities, it is necessary
    to use some of the many extensions that have been developed for
    Black-Scholes since its inception. The first extension was
    created by Robert C. Merton in 1973 before the Black-Scholes
    paper was published. This extension allows for the integration
    of dividends into the Black-Scholes model by making the
    assumption that ``since the warrant owner is not entitled to
    any part of the dividend return, he only considers that part of
    the expected dollar return to the common stock due to price
    appreciation.'' \167\ This extension is used as the standard
    for pricing options that have a dividend-issuing underlying
    stock, and has been adopted in the methodology used by the
    Panel in this report.
    ---------------------------------------------------------------------------
        \167\ Robert C. Merton, Theory of Rational Option Pricing, The Bell
    Journal of Economics and Management Science, at 170 (Spring 1973).
    ---------------------------------------------------------------------------
        The other extension that the Panel used is that of Galai
    and Schneller.\168\ This extension accounts for the fact that
    warrants are fundamentally different from call options, since
    exercising a warrant causes an increase in the number of
    outstanding shares, diluting common equity holders. This means
    that--all other things being equal--a stock is worth less after
    the exercise of a warrant than it was before exercise. In order
    to account for this, the Black-Scholes value of the option is
    calculated, multiplied by the ratio of the number of warrants
    to the number of fully diluted shares, and then this value is
    added to the share price to create a new share price input. The
    Black-Scholes value is calculated again, using this new share
    price input. This process is carried out repeatedly until the
    Black-Scholes values converge, at which point dilution has been
    sufficiently factored out of the warrant's price. This final
    value is then multiplied by the ratio of the number of shares
    outstanding to the number of shares outstanding plus the number
    of warrants to arrive at a warrant valuation that considers the
    effect of dilution.
    ---------------------------------------------------------------------------
        \168\ Dan Galai and Meir I. Schneller, Pricing of Warrants and the
    Value of the Firm, The Journal of Finance, at 1333-1342 (Dec. 1978).
    ---------------------------------------------------------------------------

       A FINAL NOTE ON THE CONVERGENCE OF THE BINOMIAL AND BLACK-SCHOLES
                                    METHODS

        The binomial method and the Black-Scholes model are both
    used extensively to model the values of warrants. In fact, FAS
    123(R) states that, ``A lattice model (for example, a binomial
    model) and a closed-form model (for example, the Black-Scholes-
    Merton formula) are among the valuation techniques that meet
    the criteria required by this Statement for estimating the fair
    values of employee share options and similar instruments,''
    acknowledging both Black-Scholes-Merton and the binomial method
    as valid in pricing stock options issued as compensation.\169\
    The Panel has chosen to use the Black-Scholes method for the
    reasons described above. In fact, however, the choice does not
    matter, because, given the same inputs, the binomial method
    converges on Black-Scholes as the number of nodes in the
    binomial tree grows (see Figure 5). In fact, the Black-Scholes
    equations are merely the closed form solution of the binomial
    model in the special case that inputs are constant and that the
    number of nodes is taken to the limit. From this, it is clear
    that any difference in the valuations of warrants is due not to
    the choice of the binomial or Black-Scholes model, but rather
    the input assumptions that are made.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        \169\ While executive compensation options are not the same as TARP
    warrants, they share certain characteristics, such as their long terms.
    Thus, methods acceptable for valuing executive compensation options are
    also probably appropriate for valuing TARP warrants. Financial
    Accounting Standards Board, Statement of Financial Accounting Standards
    No. 123(R): Share-Based Payment (October 1995).

             ANNEX B: Analysis of the Old National Bancorp Warrants

        This annex compares Treasury's valuation and sale of its
    Old National Bancorp warrants with the Panel's valuation of
    those warrants and illustrates the general valuation processes
    carried out by Panel staff and Treasury. As noted in the text,
    11 BHCs have already repurchased their warrants for $18.69
    million. Old National Bancorp was the first BHC to do so.
        Headquartered in Evansville, Indiana, Old National Bancorp
    is a BHC with $8.3 billion in assets.\170\ Its stock is traded
    on the New York Stock Exchange under the ticker ONB. ONB
    received a $100 million CPP investment on December 12, 2008.
    The bank then repaid its CPP investment on March 31, 2009 at
    par value. In the interim, it paid over $1.5 million in
    dividends to Treasury. Upon repayment of its CPP investment,
    ONB entered into negotiations with Treasury to buy back
    warrants for 813,008 shares of its stock, which it had issued
    to Treasury in conjunction with the initial CPP investment in
    December. On May 8, ONB completed the repurchase of these
    warrants for $1.2 million. Using a Black-Scholes-Merton model
    extended by Galai-Schneller, as described in Annex A of this
    report, the Panel staff valued these warrants at $2.15 million.
    ---------------------------------------------------------------------------
        \170\ Board of Governors of the Federal Reserve System, Bank
    Holding Company Peer Group Reports: Peer Group 2, at 28 (Mar. 31, 2009)
    (online at www.ffiec.gov/nicpubweb/content/BHCPRRPT/REPORTS/BHCPR_PEER/
    March2009/PeerGroup_2_March2009.pdf).
    ---------------------------------------------------------------------------
        The standard inputs to any warrant valuation model are the
    strike price of the warrant, the expiration date, the
    underlying share price, the future dividend yield, the future
    volatility of the underlying shares, and the risk free rate
    over the term of the warrant. The Panel staff and Treasury used
    the same strike price and expiration date, $18.45 and December
    12, 2018 respectively, as inputs to their models for the ONB
    warrants. The Panel staff used the closing share price on May
    7, 2009, the day before the ONB transaction closed, for the
    underlying share price input. The share price on this day was
    $13.78. Treasury used the 20-day trailing average share price
    on April 22, $13.15. It is unclear to the Panel staff why
    Treasury used this unconventional input, particularly when it
    yields a lower valuation than the most recent closing share
    price would.
        Dividend yield, which is the ratio of dividends paid to
    share price, must be forecast for the term of the warrant being
    valued. Obviously, in the case of the TARP warrants, predicting
    the dividend issuances of TARP recipients for the next ten
    years is difficult. Market participants informed Panel staff
    that they would typically seek the input of securities analysts
    who follow the company in question in order to obtain
    predictions for dividend yield. To preserve the clarity and
    reproducibility of the Panel's methodology, Panel staff elected
    to forgo this process.
        Instead, the Panel staff used an alternative standard
    practice, predicting future dividends from average historical
    dividend yields. This number is calculated by averaging the
    dividends paid over a particular period of time and then
    dividing them by the average market price per share during that
    period.\171\ The Panel used ONB's five-year average dividend
    yield, 4.19 percent. Treasury used ONB's ten-year average
    dividend yield, 3.69 percent. Treasury's assumption may seem
    more logical as the historical period it analyzes mirrors the
    duration of the TARP warrants. However, the Panel staff
    believes that the more recent past is more indicative of future
    bank dividend policy.\172\ Thus, the Panel staff, in
    consultation with academics and market participants, used a
    five-year average dividend yield to predict the future dividend
    performance of ONB and the other TARP recipients. In the case
    of ONB, the difference between the five and ten-year average
    dividend yields was only 50 basis points.
    ---------------------------------------------------------------------------
        \171\ Average Dividend Yield = Average Dividends Over Period
    Average Share Price Over Period  100
        \172\ It is also important to note that TARP recipients' dividend
    payments are capped at the amount of the last regular quarterly cash
    dividend prior to October 14, 2008 while the government continues to
    hold preferred shares in them. Therefore, dividend yields for banks
    which have not repaid their TARP investments are likely to be lower
    than they have been in the past.
    ---------------------------------------------------------------------------
        The choice of volatility input has a large effect on any
    warrant valuation. There are two main ways to predict future
    volatility, implied volatility and historical volatility.
    Implied volatility is derived from publicly traded comparable
    options, through solving an extended Black-Scholes model for
    volatility. Implied volatility is what the market predicts
    volatility will be over the term of the comparable option.
        Historical volatility is calculated from the historical
    returns of a stock. It assumes a log normal distribution of
    returns. The historical volatility of a stock over a period of
    time is calculated as the standard deviation of the natural log
    of the interim returns in that period. Different interim
    returns can be used: daily, weekly, or monthly returns, for
    example, would all be acceptable.\173\
    ---------------------------------------------------------------------------
        \173\ Theoretically the choice of interim period should not have an
    effect on the volatility measurement.
    ---------------------------------------------------------------------------
        Both methods of calculating volatility are valid. However,
    as many TARP recipients have only thinly traded options with
    short durations, Panel staff believes that the implied
    volatilities calculated from these options are unreflective of
    the market's long term volatility expectations. For example,
    the implied volatility calculated from ONBLW call options on
    ONB, which had a strike price of $17.50 and a maturity date of
    December 12, 2009, was estimated by the Panel to be 57.2%.\174\
    The Panel staff believes that this figure is more indicative of
    the market's expectations for ONB short term volatility than
    its volatility over the next ten years.
    ---------------------------------------------------------------------------
        \174\ Option price was calculated from the average of the closing
    bid and ask prices.
    ---------------------------------------------------------------------------
        The drawbacks in using implied volatility to value the ONB
    warrants led Panel staff to use historical volatility instead.
    The most important assumption in calculating historical
    volatility is the period over which it will be measured. In
    this case, the most standard choice is to calculate the
    historical volatility from the date of the valuation backward
    for the term of the option. For example, the TARP warrants all
    have terms of ten years, so the ten-year historical volatility
    would be the most appropriate estimate of volatility over the
    next ten years. Following standard practice, the Panel staff
    calculated ONB's ten-year historical volatility from daily
    returns for the period ending May 7, 2009 at 34.12%. This value
    was used in the Panel's model to arrive at a best estimate of
    the value of the ONB warrants.
        Treasury also calculated volatility over a ten-year period
    for the TARP recipients, but used a very different and
    unorthodox method. Treasury used ``the average 60-day trailing
    volatility for the last ten years'' to determine each BHC's
    historical volatility.'' \175\ Specifically, Treasury's ten-
    year volatility measure is calculated by taking the arithmetic
    average of the 60-day trailing historical volatilities for each
    day over the past ten years.\176\ According to calculations
    performed by Panel staff, Treasury's procedure results in a
    ten-year volatility measure for ONB of 27.5%, more than 650
    basis points lower than the Panel's ten-year volatility
    measure. In consultation with academics and market
    participants, Panel staff has determined that over any time
    period Treasury's estimation of historical volatility will, in
    almost all cases, yield volatilities that are lower than those
    calculated by more standard methods. As a result of this
    difference, ceteris paribus, Treasury's valuation of the TARP
    warrants will be significantly lower than valuations using more
    standard volatility inputs.
    ---------------------------------------------------------------------------
        \175\ U.S. Department of Treasury, Treasury Announces Warrant
    Repurchase and Disposition Process for the Capital Purchase Program,
    supra note 46.
        \176\ Treasury further adjusts this number downward to compensate
    for unusual volatility during the financial crisis beginning in late
    2007. Treasury also considers implied volatility numbers, but has not
    given the Panel any guidance on how.
    ---------------------------------------------------------------------------
        Some portion of the difference between the Panel's estimate
    of the value of the ONB warrants, $2.15 million, and the price
    actually received by Treasury, $1.2 million, can be explained
    by the differing share price, dividend yield and volatility
    assumptions as discussed above. However, in its final
    determination of the ONB warrants' fair market value, Treasury
    also applied a liquidity discount. For thinly traded stocks,
    such as ONB, Treasury believes that its warrant positions are
    too large to be sold for their model value on the open market.
    Therefore, Treasury applies a liquidity discount to better
    approximate what they believe the warrants' fair market value
    would be. Treasury staff has told Panel staff that these
    liquidity discounts range from zero to 50 percent depending on
    the recipient institution. Treasury staff has also indicated
    that they have applied discounts from 15 to 35 percent in
    transactions to date. As discussed above,\177\ it is unclear
    whether liquidity discounts of this magnitude should be applied
    in valuing TARP warrants or even if they should be applied at
    all.
    ---------------------------------------------------------------------------
        \177\ See Section One Part F of this report.
    ---------------------------------------------------------------------------
        One final observation, based upon market data, calls into
    question the adequacy of the price Treasury received for its
    ONB warrants. On May 7, 2009, the day before ONB repurchased
    its warrants, the last bid on the ONBLW option--an option on
    ONB stock with a strike price of $17.50 and a duration of 7
    months--was $0.75, while the last asking price was $1.35.
    Backing out Treasury's sale price for the ONB warrants yields a
    value of $1.48 per warrant. This means that Treasury sold the
    ten-year warrants it held in ONB for 13 cents per share more
    than the asking price of a comparable option with a term of
    only seven months.
                         SECTION TWO: ADDITIONAL VIEWS

                              A. Richard H. Neiman

        I agree with the main thrust of this month's report that
    the warrants need to be valued carefully and at fair market
    value by Treasury and that the process should be conducted with
    as much transparency as possible. While I voted for the report,
    I am providing these Additional Views to clarify my positions
    and to add some perspective, particularly on issues where the
    Panel did not reach consensus.

                        1. BENEFITS TO THE U.S. TAXPAYER

        The total benefit to the American taxpayer has to take into
    account the non-financial as well as the financial returns. The
    financial returns include repayment of the principal of the
    preferred stock loans, the dividends received, and the value of
    the warrants. The non-financial benefits include the important
    policy objectives that have been achieved on behalf of the
    American people of stabilizing and reviving the financial
    system during a very difficult period of time. The CPP program
    has achieved and continues to achieve objectives and we should
    not lose sight of this. I think that this report focuses at
    times too narrowly on the warrants to the exclusion of other
    important components of return.

                                2. EXIT STRATEGY

        I support the Administration's and Treasury's stated policy
    objective to exit the warrant holdings as soon as practicable
    after the banks have repaid their preferred stock under the
    CPP. Government capital support for the banks was the product
    of crisis conditions and the government should exit these
    investments as soon as conditions stabilize. I would not
    support selling the warrants while the preferred stock is
    outstanding; nor do I think it would be wise to hold the
    warrants for any protracted period after the preferred stock is
    repaid in an effort to maximize value by trying to time the
    markets.
        I think it is sound policy that the banks have the
    opportunity to elect to repurchase their warrants at market
    prices, as they do under the Security Purchase Agreements,
    before a market auction is held. The Chrysler sidebar in the
    report demonstrates that the warrant issuer (in that case
    Chrysler; in this case the banks) will often have the greatest
    motivation to purchase its warrants in order to prevent share
    dilution. Then, if the banks elect not to repurchase or if a
    fair market value cannot be agreed upon, a fully transparent
    auction should be held.
        I also believe that the Federal Reserve and other banking
    regulators have described a very reasonable and robust process
    to screen banks for eligibility to repay the taxpayer's
    investment, as outlined at pages 9-10 of the report. Therefore
    I think that this process should be allowed to work and that
    the return of the banks to private capital markets should be
    encouraged wherever it is deemed appropriate.

                      3. IMPACT OF SMALL BANK REPURCHASES

        The report draws certain conclusions based on an analysis
    of the warrants of eleven small banks that have already been
    repurchased. I believe that reasonable minds can disagree about
    the appropriateness of liquidity discounts and complex
    volatility measures. As the report points out these warrants
    were a fraction of one percent of the value of all warrants
    outstanding. We should be cautious before extrapolating too
    many conclusions about the entire repurchase program based on
    these early and small redemptions. Hopefully lessons can be
    learned from these early efforts.

                        4. NEED FOR GREATER TRANSPARENCY

        I believe it is vital from this point forward, especially
    with the very large repaying banks' warrants coming up for
    repurchase or auction in the near future, that there be greater
    disclosure and transparency than there has been until now. In
    this regard I am encouraged by Treasury's June 26 commitment to
    greater transparency by:

              [P]ublishing additional information on each warrant
            that is repurchased, including a bank's initial and
            subsequent determinations of fair market value, if
            applicable. Following the completion of each
            repurchase, Treasury will also publish the independent
            valuation inputs used to assess the bank's
            determination of fair market value.\178\
    ---------------------------------------------------------------------------
        \178\ See, Treasury Warrant Repurchase Announcement, supra note 46.

        Disclosure as described above should substantially improve
    the transparency of the warrant repurchase process going
    forward.

                             B. Rep. Jeb Hensarling

        I concur with the issuance of the July report subject to
    the following observations.\179\ Treasury should accept the
    panel's estimates of fair market value as good faith guidance
    worthy of careful consideration along with its own estimates of
    value and the host of other relevant market, regulatory and
    economic factors applicable to the disposition of sophisticated
    financial instruments. I object, however, to any inference that
    (i) the panel's estimates reflect ``the'' fair market value of
    the warrants, instead of an estimate of such value, (ii) the
    panel's estimates should necessarily serve as the ``floor'' in
    a negotiated private party transaction or the ``reserve price''
    in an auction, (iii) an auction of the warrants will
    necessarily yield a more favorable return to Treasury than a
    privately negotiated sale, and (iv) holding the warrants for
    the intermediate to long-term will necessarily yield a more
    favorable return to Treasury.
    ---------------------------------------------------------------------------
        \179\ I commend the panel and its staff for their efforts in
    producing the report.
    ---------------------------------------------------------------------------
        The determination of ``fair market value'' for financial
    instruments as complex as the warrants issued by the TARP
    recipients to Treasury requires a thoughtful and judicious
    mixture of science--financial models such as Black-Scholes--and
    art--an appreciation of the dynamics that influence the actions
    of market participants. Treasury should resist the temptation
    to rely upon science to the exclusion of art. It is worthwhile
    to recall the lessons of the past year or so and the hubris of
    financial modelers who asserted with profound conviction that,
    for example, credit default swaps issued over mortgage backed
    securities were virtually free of risk and that AAA-rated
    tranches of collateralized debt obligations were investment
    grade securities. Financial analysts may counter by claiming
    that their models incorporate an appropriate mixture of inputs
    and risk analysis and as such may be trusted to yield market
    ready results. In many instances that is no doubt true but in
    other cases it is critical for the decision makers to leave the
    models and sit down at the table and engage in the art of
    negotiation. I encourage Treasury to reflect upon the lessons
    of this financial crisis in negotiating the disposition of its
    warrants.

         1. PANEL'S ATTEMPT TO ESTIMATE THE VALUE OF THE TARP WARRANTS

        The warrant valuation process involves more than merely
    plugging numbers into a financial model, Black-Scholes or
    otherwise. Such determination requires the careful exercise of
    judgment which comes from a seasoned understanding of the
    business operations and prospects for each TARP recipient.
    Experienced investment professionals may disagree on
    fundamental concepts such as volatility and other subjective
    inputs as well as whether Treasury should pursue a negotiated
    private sale or an auction of the warrants. Given the various
    permutations of potential inputs it is generally
    counterproductive to argue that one professionally rendered
    well-vetted assumption or approach is more reasonable than or
    inherently preferable to another. What is clear, however, is
    that Treasury should adopt a surgical approach that focuses on
    each particular transaction and not on a one-size-fits-all
    approach that misses the subtle distinctions that certainly
    exist among the various TARP recipients.
        At this time it appears that Treasury and the TARP
    recipients are reasonably well positioned to appreciate the
    multitude of factors that influence a negotiated determination
    of fair market value pursuant to the terms of the Securities
    Purchase Agreements (SPAs). Specifically, the SPAs, under
    certain circumstances, provide each TARP recipient with the
    right to repurchase its warrants granted to Treasury at a fair
    market value price. If the parties fail to agree on the
    valuation price an appraisal process is triggered. If the fair
    market value price established by the appraisers is not
    acceptable to a TARP recipient such recipient may reject the
    price and not purchase its warrants from Treasury. In addition
    and under certain circumstances, Treasury has the right to sell
    the TARP warrants to third-parties through an auction process.
    Under both procedures the fair market value of the warrants
    will be determined pursuant to market oriented terms by well-
    advised adverse parties who are negotiating at arm's length
    without a compelling need to purchase or sell. I am concerned
    that the TARP recipients and market participants may view the
    panel's report as an attempt to prospectively second-guess
    future determinations of fair market value undertaken in
    accordance with the SPAs and the policies adopted by
    Treasury.\180\ Any such perception may disrupt an otherwise
    orderly valuation process.\181\
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        \180\ Although I do not object to the undertaking, I nevertheless
    question the necessity of the Panel's attempt to determine the fair
    market value of the warrants since the procedures provided in the SPAs
    for the disposition of the warrants as well as the internal procedures
    adopted by Treasury for the valuation of the warrants appear market
    oriented and reasonable in form and substance. Since the report does
    not provide any indication that the process outlined in the SPAs is
    inherently flawed (i.e., substantially off-market or subject to
    manipulation or abuse) or that Treasury or any TARP recipient is not
    acting in good faith, it is arguably premature for the Panel to attempt
    to value the warrants.
        In the February report I concurred with the Panel's attempt to
    value the preferred stock and warrants acquired by Treasury from the
    TARP recipients. As with the February report, I concur with the
    issuance of this report. However, I believe the circumstances have
    changed considerably since then. At the time the February report was
    written, no TARP recipient was prepared or permitted to redeem its
    warrants issued to Treasury and the valuation served an appropriate
    purpose. Since February 6, 2009, when the Panel's report on ``Valuing
    Treasury's Assets'' was released, events have materially changed. The
    American Recovery and Reinvestment Act of 2009 was signed into law on
    February 17, 2009, which requires Treasury to permit TARP recipients to
    repay Capital Purchase Plan assistance without replacement of capital
    from other sources. Since then, several TARP recipients have either
    redeemed or are preparing to redeem their warrants. As such, I believe
    that any attempt to value the warrants on a prospective basis is far
    more nuanced than the approach taken in February and much more likely
    to influence in an inappropriate and unintentional manner the actions
    of Treasury, the TARP recipients and market participants as they
    negotiate the redemption and sale of the warrants pursuant to the SPAs.
        \181\ It is worth noting that although the TARP warrants have also
    been valued by Credit Suisse, Bloomberg, Professor Linus Wilson and the
    CBO, the Panel's report will most likely receive greater media
    attention and become the de facto third-party appraisal.
    ---------------------------------------------------------------------------
        If the panel's determination of fair market value is too
    low, the American taxpayers may not receive the benefit of
    their bargain, and if the panel's determination is too high,
    Treasury may fail in its efforts to sell the warrants back to
    the TARP recipients or to third-parties pursuant to the market
    oriented procedures provided in the SPAs. The latter result may
    cause Treasury to hold the warrants for the intermediate to
    long-term even though the President has clearly stated that his
    objective is to dispose of the warrants ``as quickly as is
    practicable.'' \182\ Although I disagree with the President on
    many issues, I concur with this determination given (i) the
    profound difficulty in valuing the warrants and advantageously
    timing the market, (ii) the inherent risk associated with
    holding investments of this nature, (iii) the clear desire of
    the American taxpayers for the TARP recipients to repay all
    TARP related investments sooner rather than later, (iv) the
    troublesome corporate governance and regulatory conflict of
    interest issues raised by Treasury's continued ownership of the
    TARP warrants, and (v) the stigma associated with continued
    participation in the TARP program by the recipients.\183\ If
    the panel disagrees with the President on this issue the report
    should clearly indicate such dissent, but the valuation process
    itself should not directly or indirectly work to influence
    Treasury's holding period of the TARP warrants. Such result
    will occur if the panel accepts input metrics and assumptions
    that overvalue the warrants and chill the resale market.\184\
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        \182\ On June 26, 2009 Treasury released information on its
    valuation procedure. The release contains the following statement:
    ``The President has clearly stated that his objective is to dispose of
    the government's investments in individual companies as quickly as is
    practicable. In reaching the judgment to dispose of the warrants in the
    manner described, Treasury considered a range of options including
    holding the warrants for a longer term or until their expiration. Under
    those alternate scenarios, there was no certainty that we would realize
    higher values, and it was not appropriate for the government to be
    exercising discretionary judgment on timing market sales.'' U.S.
    Department of Treasury, Treasury Announces Warrant Repurchase and
    Disposition Process for the Capital Purchase Program, supra note 46.
        \183\ More precisely, I believe that Treasury should promptly/
    immediately dispose of its TARP warrants. If the somewhat vague notion
    of ``as quickly as is practicable'' is interpreted by Treasury to
    encompass an intermediate to long-term holding period for the TARP
    warrants, then I disagree with such approach.
        \184\ I do not intend to imply that the Panel has intentionally
    attempted to overvalue the TARP warrants. Instead, I believe the Panel
    may have taken the perspective of the ``seller'' of the warrants and as
    such the Panel should appreciate that the ``buyer'' may have a
    materially different perspective regarding fair market value.
    ---------------------------------------------------------------------------
        Evidence of my concern may be found in the panel's report.
    In a passage destined to grab its share of media attention the
    panel concludes that ``Treasury has received about 66% of the
    Panel's best estimate of fair market value'' from the sale of
    its warrants back to eleven TARP recipients (the ``Redeeming
    Issuers'').\185\ The implication is clear--Treasury is
    virtually giving the warrants back to the issuers. What should
    the American taxpayers make of this claim? Should they conclude
    that Treasury and its advisors are incompetent or that they
    negotiated the repurchase of the warrants in bad faith and in
    contravention of the letter and spirit of the SPAs? If the
    panel believes that Treasury acted in an untoward manner or is
    simply not up to the task then it should clearly state such
    position and promptly investigate.
    ---------------------------------------------------------------------------
        \185\ See Section E.3. of the report.
    ---------------------------------------------------------------------------
        If we assume that Treasury discharged is duties and
    responsibilities in good faith (and the report does not suggest
    to the contrary) then we are left with a fairly pedestrian
    disagreement between Treasury and the panel regarding the
    valuation of the warrants; that is, a good faith difference of
    opinion exists between Treasury's experts and the panel's
    experts regarding the fair market value of the warrants issued
    to Treasury by the Redeeming Issuers. As stated above,
    reasonable minds may differ regarding these matters and
    modestly different assumptions may materially affect the
    valuation of warrants with a ten-year term. It is possible that
    the panel selected inputs destined to yield the highest
    possible ``reasonable'' set of valuations for the warrants of
    the Redeeming Issuers. Such approach, however, is of little
    benefit if it yields fair market value prices for the warrants
    that neither the TARP recipient nor the market is willing to
    pay. The panel should appreciate that the use of financial
    models to value ten-year term warrants will at best only offer
    a ``sticker price'' and, like careful consumers, sophisticated
    market participants seldom pay ``sticker.'' \186\
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        \186\ It is not at all surprising that the negotiated sales prices
    fell short of the estimates generated by the financial models,
    particularly those that do not incorporate liquidity discounts and
    other appropriate adjustments. It appears reasonable to conclude that
    in the context of the TARP warrants (and other sophisticated financial
    instruments) any estimate of fair market value derived from financial
    models will merely serve as the starting point for the negotiation of a
    mutually agreeable valuation and under limited circumstances will such
    price be accepted by an adverse party without challenge. It also
    appears that Treasury terminated negotiations with two or so TARP
    recipients and that the recipients did not invoke the appraisal
    process. As such, Treasury will most likely seek to dispose of those
    warrants in an auction in accordance with its current policy. Such
    action indicates that Treasury will not accept a significantly off-
    market price and will employ an auction where appropriate.
        It is worth noting that the Panel states in Section E.3. of the
    report that ``These results may suggest that Treasury has not been
    successful in receiving fair market value for its warrants and in
    maximizing taxpayer returns. On the other hand, factors not included in
    the Panel's model, such as the illiquidity of the warrants especially
    for smaller institutions may explain the difference between the amount
    that Treasury has received for its sold warrants and the Panel's
    valuation of those warrants.''
        Since it appears that liquidity discounts and other adjustments may
    be applicable to some or all of the Redeeming Issuers, it is
    interesting that the Panel did not attempt to incorporate such
    discounts into their fair market estimates. It seems that any statement
    by the Panel regarding the price received by Treasury for the warrants
    of the Redeeming Issues should note such qualification.
        In the same section the Panel also states that the warrants
    redeemed by the Redeeming Issuers represent ``less that one quarter of
    one percent of the Panel's best estimate of the value of Treasury's
    warrant portfolio as of July 6, 2009'' and that ``Treasury's relative
    performance in selling them may not accurately predict its success in
    selling the balance of the warrants it holds.''
    ---------------------------------------------------------------------------
        The report also suggests that Treasury may receive a
    greater return on its investment if it disposes of its warrants
    pursuant to an auction process rather than privately negotiated
    transactions with the TARP recipients.\187\ While I generally
    subscribe to the panel's reasoning it is important to note that
    such approach should not be applied on a de facto basis. For
    example, with respect to the disposition of the warrants issued
    by the Redeeming Issuers it is entirely possible that a viable
    auction market did not exist for the warrants of such
    institutions and may not exist for the warrants of any other
    TARP recipient the common stock of which is thinly traded. It
    is also possible that similar liquidity, marketability,
    minority interest and other appropriate discounts and
    adjustments were demanded by the Redeeming Issuers as well as
    the group of potential auction participants and that Treasury
    after analyzing these inputs simply elected to proceed with the
    least burdensome and costly approach.\188\
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        \187\ See Section F.2. of the report.
        \188\ In Section E.2. of the report the Panel states ``[i]f
    Treasury can hold the warrants to expiration, then the value of the
    warrants to Treasury does not include a liquidity discount because
    Treasury does not need to sell them.'' It does not follow that
    Treasury's ability (which it clearly has) to hold the warrants for
    their full ten-year term should dictate such a holding period. As
    noted, several compelling public policy issues favor an early
    disposition of the warrants.
    ---------------------------------------------------------------------------
        Treasury will not be served by any ``failed auctions'' and
    it should only go to market when its investment advisors are
    all but assured of a successful disposition at an appropriate
    price. Simply rolling out an auction with a Black-Scholes
    generated ``reserve price'' without conducting a thoughtful
    market-check is fraught with peril. I cannot help but wonder
    how the markets would have responded if Treasury had set a
    reserve price at or near the panel's ``Best Estimate'' price
    for the warrants of the Redeeming Issuers. It is not
    unreasonable to suspect that Treasury may have suffered one or
    more failed auctions. This is a serious concern because
    Treasury cannot afford to lose credibility with market
    participants or TARP recipients. It will be interesting to note
    how the fair market value determinations provided by the panel
    will appear in a year or so and how many market dispositions
    will occur at or near the panel's ``Best Estimate'' price.
        It is also not unreasonable to expect that a TARP recipient
    may be the highest bidder for its warrants. A repurchasing
    institution may possess material inside information regarding
    its business operations and prospects that permits it to pay a
    premium over a pure market price. In addition, a TARP recipient
    may pay a premium over market so as to cancel its warrants,
    increase its earning per share and, perhaps, its market
    capitalization.\189\ These complex matters must be considered
    on a case-by-case basis. It is certainly no secret that the
    public shares of many TARP recipients have traded at steep
    discounts over the past year or so and, as such, it is not
    unreasonable to think that the market will apply a similar
    discount to the warrants of such institutions. Treasury and its
    advisors should consider these factors in analyzing its exit
    strategy and should select the approach that best fits the
    particular facts and circumstances. I disagree with any
    inference in the report to the effect that an auction of the
    TARP warrants will necessarily yield a more favorable return to
    Treasury than a privately negotiated sale.
    ---------------------------------------------------------------------------
        \189\ Warrants sold in an auction remain outstanding while warrants
    repurchased by the issuer may be cancelled. Warrants sold in an
    auction, however, do not deplete the resources of the issuer since the
    acquisition price is funded by the third-party purchaser and not by the
    issuer. In addition, financial accounting, regulatory and tax
    considerations may favor one approach over the other.
    ---------------------------------------------------------------------------
        Although I am willing to grant Treasury and the TARP
    recipients reasonable latitude in discharging their duties and
    responsibilities under the SPAs, Treasury should promptly
    provide written reports to the American taxpayers analyzing in
    sufficient detail the fair market value determinations for any
    warrants either repurchased by a TARP recipient from Treasury
    or sold by Treasury through an auction. Since an auction may
    yield the most favorable result for Treasury in some instances
    and a privately negotiated sale in others, Treasury should
    disclose its rationale for pursuing one method instead of the
    other. Treasury should also undertake to negotiate the
    disposition of the warrants in a transparent and fully
    accountable manner with the stipulation that Treasury should
    not be required to place itself (and the American taxpayers) in
    an adverse negotiating position by disclosing proprietary
    information that TARP recipients could use to their advantage
    in subsequent negotiations. If Treasury finds it necessary to
    omit from disclosure certain information that could be harmful
    to negotiations were it made public, it must do so in only in
    the most thoughtful and judicious manner.

               2. TREASURY'S HOLDING PERIOD FOR THE TARP WARRANTS

        The report may be interpreted to reflect the theme that
    Treasury will somehow ``leave money on the table'' at the
    expense of the American taxpayers unless it holds the TARP
    warrants for the intermediate to long-term. Such impression is
    misguided since (among other reasons) it is exceedingly
    difficult to predict the value of financial securities and time
    the markets over the short term much less the ten-year term of
    the TARP warrants.\190\
    ---------------------------------------------------------------------------
        \190\ If we look back ten years to the summer of 1999 our economy
    was in the middle of the dot com expansion and many (if not most)
    investors viewed the financial markets as exceedingly robust. Just a
    few months later the economy commenced a significant contraction--the
    dot com collapse. September 11 followed with yet another material
    disruption in the markets. The economy recovered and the value of
    investment securities (such as the TARP warrants) steadily rose in
    value only to fall dramatically beginning around the summer of 2007. To
    say that the past ten years have yielded unpredictable results in the
    financial markets is an understatement.
        As such, any attempt by Treasury to time the disposition of its
    ten-year term warrants with any degree of meaningful precision may be
    met with disappointment. It is also possible that Treasury may sell the
    warrants in a few years at a greater price than is available in the
    near term but actually earn a lower return on a risk adjusted present
    value basis.
    ---------------------------------------------------------------------------
        I appreciate that modern corporate finance has developed
    many fascinating econometric models whereby certain securities
    may be valued with some degree of relative precision. The
    report does a fine job of describing many of these techniques,
    such as the binomial options pricing and Black-Scholes models.
    While these models are remarkably sophisticated, they suffer
    from the same problem endemic to all mathematical equations--
    they are entirely dependent upon the input variables selected.
    A thoughtful (and, perhaps, lucky) selection of variables may
    yield meaningful results; otherwise the old adage of ``garbage
    in, garbage out'' will prevail.\191\ Predicting inputs, such as
    ``volatility,'' and market adjustments, such as ``liquidity
    discounts,'' over the next ten years for incorporation into the
    TARP warrant valuation models is problematic at best.\192\ In
    addition, valuations have a short shelf life. What may appear
    reasonable today may look hopelessly out of date within a
    relatively short period of time.\193\ As such, any attempt to
    reflect or represent the panel's valuations as ``the'' fair
    market value of the warrants is misguided.\194\ Decision makers
    at Treasury should not subjugate their exercise of judgment
    regarding the disposition or retention of any of the TARP
    warrants solely to the results generated by financial models.
    ---------------------------------------------------------------------------
        \191\ Many trading strategies adopted by hedge funds and other
    alternative investment vehicles employ sophisticated econometric
    models. They often perform as advertised and yield superior risk
    adjusted returns, but occasionally they fail in a spectacular and
    public manner as occurred with Long Term Capital Management in 1998 and
    other investment funds over the past two years.
        \192\ See Annex A to the report which includes: ``It is important
    to note that the Black-Scholes model, as well as every other popular
    options model, was created to reflect the prices of options with short
    terms, ranging from days to months. As no options are traded on the
    CBOE with terms longer than three years, it is very difficult to come
    up with a ``fair market value'' of the TARP warrants which have terms
    of ten years. The lack of publicly traded comparable derivatives makes
    any valuation of ten year warrants difficult.
        ``More generally, there is the problem of lack of knowledge about
    most of the inputs to the model. For example, while ten year Treasury
    bills factor in what the market expects the interest rate risk for the
    next ten years to be, it is impossible to know the validity of the
    market's expectations. Thus, once again, it is important to note that
    the value that we are searching for here is not based on our
    expectations of the future, but rather our estimate of the market's
    expectations. The goal of the Panel's valuations is to estimate the
    value the financial markets would place on these warrants, and thus for
    the inputs to our model, we try to use the inputs most likely to be
    used by prospective buyers.
        ``The input that is the least defined in the Black-Scholes model
    and has the largest effect on the price of the warrant is the
    volatility of the underlying stock price. Volatility is defined as the
    standard deviation of the continuously compounding returns of a stock.
    It is clear from this definition that there are an almost infinite
    number of variations of the calculation of this number. The volatility
    is important in the Black-Scholes model because it features prominently
    in both of the probability calculations in the closed-form solution,
    meaning that differing values of volatility can create substantial
    differences in the final valuations of the warrants. The following
    example illustrates this point with respect to the Black-Scholes model.
    Assume that a warrant to buy one share of company XYZ at $150 expires
    in one year, that XYZ is currently trading at $100 and that the risk
    free rate is one percent. If XYZ's volatility is 30 percent, the
    warrant is worth $1.59, but if the volatility is 60 percent, the
    warrant is worth $10.91. In fact, if the volatility is below 15
    percent, the warrant is virtually worthless.''
        The preceding example emphasizes the sensitivity of financial
    models to changes in the various input variables. Since it is my
    understanding that financial models may be ``manipulated'' or ``gamed''
    but still yield ``perfectly defensible results,'' Treasury should
    remain circumspect regarding fair market value determinations generated
    by financial models without a real world market-check.
        \193\ As an example, according to The New York Times, Citigroup
    closed at $52.52 on July 9, 2007 and at $2.62 on July 8, 2009. Who
    would have predicted such results?
        \194\ The report reflects this concept in Section H as follows:
    ``The Panel's valuations offer reasonable estimates of the fair market
    value of the warrants. They may help Treasury as it balances the return
    to the taxpayer indicated by its own estimates of value and the host of
    other relevant market, regulatory and economic factors applicable to
    the disposition of sophisticated financial instruments.''
        Although quite helpful, I remain concerned that others may construe
    the Panel's estimates as somehow reflective of a single set of
    ``correct'' values.
    ---------------------------------------------------------------------------
        The report also correctly notes that many recipients have
    been stigmatized by their association with TARP and wish to
    leave the program as soon as their regulators permit. Some of
    the adverse consequences that have arisen for TARP recipients
    include, without limitation, executive compensation
    restrictions, corporate governance and conflict of interest
    issues, employee retention difficulties and the distinct
    possibility that TARP recipients (including those who have
    repaid all CPP advances but have warrants outstanding to
    Treasury) may be subjected to future adverse rules and
    regulations.\195\
    ---------------------------------------------------------------------------
        \195\ See Sections G(1)(c) and G(3) of the report.
    ---------------------------------------------------------------------------
        For these and other reasons, I recommend that Treasury not
    operate under any inherent bias in favor of holding the TARP
    warrants for the intermediate to long-term as opposed to
    disposing of the warrants over the near term.\196\ Fortunately,
    Treasury concurs with this perspective.\197\ In electing to
    dispose of its warrants it appears that Treasury appreciates
    that the warrants represent high risk, difficult to value
    investment securities that are subject to the vagaries of the
    markets and may materially diminish in value. The panel should
    not discourage Treasury from promptly selling its warrants back
    to the TARP recipients or from offering the warrants for sale
    in the market pursuant to the SPAs. As noted, the exit strategy
    undertaken by Treasury with respect to the warrants of each
    TARP recipient must be carefully crafted to the facts and
    circumstances of that recipient as well as the prevailing
    market conditions in effect at the time of the proposed
    disposition.\198\
    ---------------------------------------------------------------------------
        \196\ As noted above, I believe that Treasury should promptly
    dispose of its warrants for the following reasons: (i) the profound
    difficulty in valuing the warrants and advantageously timing the
    market, (ii) the inherent risk associated with holding investments of
    this nature, (iii) the clear desire of the American taxpayers for the
    TARP recipients to repay all TARP related investments sooner rather
    than later, (iv) the troublesome corporate governance and regulatory
    conflict of interest issues raised by Treasury's continued ownership of
    the TARP warrants, and (v) the stigma associated with continued
    participation in the TARP program by the recipients.
        \197\ See footnote 184.
        \198\ I recently introduced legislation (H.R. 2745, supra note 29
    that would require Treasury to divest its warrants in each TARP
    recipient following the redemption of all outstanding TARP-related
    preferred shares issued by such recipient and the payment of all
    accrued dividends on such preferred shares.
    ---------------------------------------------------------------------------

                                3. OTHER ISSUES

        In Section G.1.c. of the report the Panel states:

              A benefit from repayment of TARP assistance is the
            end of the government's conflicting roles as regulator
            of the very institutions in which it owns shares and on
            whose profitability repayment of public funds depends.
            Specific regulatory policies, for example those
            affecting capital levels, the application of accounting
            conventions to financial reporting by BHCs or banks,
            and conflicts among regulators of various parts of
            BHCs, are complicated by the government's dual
            interests.

        In Section G.3. of the report the Panel states:

              Despite the Administration's consistent statements
            that its policy is not to be involved in bank
            management and to cease to hold ownership positions in
            banks as soon as practicable, Treasury retains
            influence over the business decisions and internal
            governance of institutions in which it holds
            substantial preferred stock and warrant interests.
            Although ownership of preferred shares or warrants
            convertible into nonvoting common shares does not
            provide the sort of leverage that common stock
            ownership does, holding a substantial block of
            preferred stock with the terms of the Treasury
            preferred (discussed below) significantly constrains
            aspects of the issuing institution. Such constraints,
            for example, hinder the inability to pay dividends or
            engage in certain capital transactions, in exchange for
            bolstering the institution's capital). Replacing the
            Treasury investment with independently raised equity
            frees the institution from those constraints.

        The second motivation for prompt repayment of TARP
    investments has to do with the specific rules or conditions to
    which TARP recipients are subject. The prime examples involve
    executive compensation and corporate governance restrictions
    applicable to TARP recipients. While banks were aware that they
    were subject to restrictions upon entrance into the CPP, banks
    point to new provisions established in ARRA and by subsequent
    Treasury regulatory action that are retroactively applicable to
    past recipients of TARP financial assistance who have not yet
    repaid Treasury.''
        I concur with these remarks and recommend that Treasury
    promptly proceed to dispose of its TARP warrants.

                             4. TERMINATION OF TARP

        I reject any implication contained in the report to the
    effect that the TARP program should be extended, or that well
    capitalized TARP recipients should be prevented from redeeming
    their preferred stock and warrants issued to Treasury.

                        5. TARP AS A REVOLVING FACILITY

        From my review of the EESA statute I am not convinced that
    Treasury may re-advance funds that have been repaid by the TARP
    recipients. The panel should ask Treasury to provide a formal
    written legal opinion regarding the matter.

                            6. PRIVATE BANK WARRANTS

        The report briefly notes several of the unique issues that
    have arisen with respect to the repurchase of private bank
    warrants. I introduced legislation (H.R. 2745) to end the TARP
    program on December 31, 2009. In addition, the legislation (i)
    requires Treasury to accept TARP repayment requests from well
    capitalized banks, (ii) requires Treasury to divest its
    warrants in each TARP recipient following the redemption of all
    outstanding TARP-related preferred shares issued by such
    recipient and the payment of all accrued dividends on such
    preferred shares, (iii) provides incentives for private banks
    to repurchase their warrant preferred shares from Treasury, and
    (iv) reduces spending authority under the TARP program for each
    dollar repaid. The legislation enables private banks to
    repurchase the exercised warrant preferred shares on or before
    September 30, 2009 at their pre-exercise price. As such,
    private banks that typically issued warrant preferred shares to
    Treasury for $0.01 per share may repurchase the shares for
    $0.01 per share. This legislation provides that each bank must
    be current on all dividends to be eligible for repayment. The
    policy objective for economically encouraging private banks to
    repurchase their warrant preferred shares relates to the
    structural differences between private and public bank
    warrants. Pursuant to the SPAs, private banks are economically
    encouraged to delay the repurchase of their warrant preferred
    shares so as to decrease the overall cost to the private banks
    of their participation in the TARP program.

                                 C. John Sununu

        This Report represents a good faith attempt to describe the
    factors that must be weighed by Treasury, Regulators, Congress,
    and Financial Institutions as the capital issued under the TARP
    is returned to the Treasury. By offering a detailed examination
    of these issues at the beginning of this process, the
    Congressional Oversight Panel will help ensure that Treasury
    and Congress place the maximum value on transparency and
    consistency in the management of the CPP. These two qualities
    are essential to sustaining public confidence in both
    government and the financial marketplace.
        In his Additional Views, Panel member Richard Neiman
    highlights several key questions for policy makers: considering
    the non-financial returns of the TARP, maintaining a clear
    policy for exiting Treasury's warrant holdings in a timely
    fashion, and exercising caution in drawing conclusions based
    upon repayments by just a few small banks. These are very
    important issues, and in each area I share the concerns he
    describes in detail. I also wish to add several points of
    emphasis and clarification:
         Treasury and Congress should be particularly
    mindful that retroactive changes in policy, process, or
    contracts undermine confidence in TARP programs and discourages
    participation. Both effects make any given program less likely
    to fulfill its objectives. As Treasury works to protect
    taxpayer interests during the CPP repayment process, it should
    work to increase transparency while operating within the spirit
    and letter of agreements that govern the CPP transactions.
         Both the current and previous administrations have
    made clear policy determinations to exit their warrant holdings
    as soon as is practicable as banks redeem preferred shares
    under the CPP. This policy is consistent with the original
    intent of the legislation, reduces downside risk to taxpayers,
    and conforms to the original share purchase agreements. Equally
    important, this policy sends an important signal to the public
    and to investors that the Federal Government does not wish to
    exert undue control or influence over firms that are on solid
    financial footing.
         In most cases, the value of warrants held by
    Treasury will prove difficult to calculate with precision due
    to the broad assumptions that must be made with regard to both
    the volatility and liquidity of the underlying securities. In
    such an event, Treasury has taken important steps in defining a
    clear process for repayments under CPP, utilizing independent
    firms for valuation, and establishing an approach for resolving
    differences in valuations that may arise.
         As a final point, it should be noted that the
    Executive Summary states that ``The Panel has not reached a
    consensus on whether it is wise policy to release banks from
    the TARP program at this time . . .'' This phrase suggests that
    the Treasury has (or should have) the power to force healthy
    banks that meet all regulatory requirements to hold CPP issued
    securities. I do not believe that such powers were ever
    contemplated by Congress in authorizing TARP. Nor do I believe
    that it is the responsibility of the Congressional Oversight
    Panel to determine which banks should be eligible (or required)
    to participate in TARP.
        As can be seen in the Panel Report, taxpayers will see a
    positive rate of return for all repayments that have been
    approved to date by Treasury under the CPP--even if the value
    of warrants were excluded. While it is important that taxpayers
    receive fair value for these securities, it is equally
    important that the principal objectives of TARP, namely a
    stable financial system, be realized and sustained. The best
    way to ensure balance between these goals is to allow the
    principles of transparency and consistency to guide the hand of
    policy makers in the months ahead.
               SECTION THREE: CORRESPONDENCE WITH TREASURY UPDATE

        On behalf of the Panel, Chair Elizabeth Warren sent a
    letter to Secretary Geithner on June 12, 2009, requesting
    information about Treasury's announcement on June 9, 2009, to
    allow ten of the largest U.S. financial institutions
    participating in the CPP to repay their TARP funds.\199\ The
    letter seeks answers to several key questions raised by the
    TARP repayments and additional information relating to
    Treasury's valuations of warrants outstanding, repurchased, and
    of those ten institutions with which it is in warrant
    repurchase negotiations. The letter specifically requests a
    meeting between Panel staff and Treasury staff about the TARP
    repayments and the treatment of warrants as part of those
    repayments. On July 1, 2009, Secretary Geithner responded by
    letter \200\ to this request. The letter, noting that Treasury
    staff has recently held two meetings with Panel members Richard
    H. Neiman and Damon Silvers and Panel staff concerning these
    issues, represented Treasury's response to the Panel's
    questions and information requests. Treasury provided copies of
    the recently issued warrants policy press release and FAQ and a
    written responses to each of the Panel's questions and
    information requests, which Panel staff is currently reviewing.
    ---------------------------------------------------------------------------
        \199\ See Appendix I of this report, infra.
        \200\ See Appendix II of this report, infra.
    ---------------------------------------------------------------------------
        Chair Elizabeth Warren and Panel member Richard H. Neiman
    sent a letter to Secretary Geithner on June 29, 2009,
    requesting assistance with the Panel's oversight of federal
    foreclosure mitigation efforts.\201\ In particular, the letter
    references how the lack of adequate mortgage data has hampered
    policymaking and notes Secretary Geithner's decision to include
    data collection requirements for mortgage loans participating
    in President Obama's Making Home Affordable (MHA) program,
    announced on February 18, 2009. In order to evaluate the
    effectiveness of foreclosure mitigation efforts, the letter
    requests copies of the data collected under the MHA program, as
    well as relevant reports, to be delivered on a monthly basis.
    ---------------------------------------------------------------------------
        \201\ See Appendix III of this report, infra.
                  SECTION FOUR: TARP UPDATES SINCE LAST REPORT

    A. INTERIM FINAL RULE ON TARP STANDARDS FOR COMPENSATION AND CORPORATE
                                   GOVERNANCE

        On June 10, 2009, Treasury released interim regulations
    implementing the executive compensation and corporate
    governance provisions governing TARP recipients set forth in
    the American Recovery and Reinvestment Act of 2009 (ARRA),
    announced a set of principles for future executive compensation
    reform for all public corporations, and proposed two
    legislative initiatives designed to advance these principles.
    In announcing the interim rule, Secretary Geithner outlined
    five principles for reform of executive compensation: (1)
    compensation plans should properly measure and reward
    performance; (2) compensation should be structured to account
    for the time horizon of risks; (3) compensation practices
    should be aligned with sound risk management; (4) retirement
    packages should align with executive and shareholder interests;
    (5) and compensation process should be transparent and
    accountable. The Administration also indicated that it would
    propose new legislation to provide compensation committees with
    independence similar to the independence of audit committees
    under Sarbanes-Oxley, and to provide the SEC authority to
    require non-binding annual say-on-pay votes on compensation for
    the top five executives and golden parachutes for executives at
    all public companies.

                         B. REGULATION REFORM PROPOSAL

        On June 17, 2009, Treasury released the Administration's
    proposal entitled ``Financial Regulatory Reform: A New
    Foundation,'' detailing its agenda and recommendations for
    rebuilding financial supervision and regulation. The
    Administration's plan touches almost every corner of financial
    markets, from tougher consumer protection policies to stricter
    rules over exotic financial products, such as credit
    derivatives. The plan would bring many of the financial
    products and companies that previously operated outside of the
    banking system under federal scrutiny. In its proposal,
    Treasury announced five principles for financial regulatory
    reform: (1) promote robust supervision and regulation of
    financial firms; (2) establish comprehensive regulation of
    financial markets; (3) protect consumers and investors from
    financial abuse; (4) provide the government with the tools it
    needs to manage financial crises; and (5) raise international
    regulatory standards and improve international cooperation.
        On June 30, 2009, the Obama Administration sent a 150-page
    proposal to Congress for a new agency to oversee consumer
    lending and other financial activity, the Consumer Financial
    Protection Agency. The proposed agency would consolidate
    regulatory authority now spread over multiple agencies and
    would have the authority to monitor and introduce regulation
    aimed at ensuring transparency in consumer financial products.

    C. CONFIRMATION OF HERBERT ALLISON AS ASSISTANT SECRETARY FOR FINANCIAL
                                   STABILITY

        On June 19, 2009, the Senate confirmed Herbert Allison as
    Assistant Secretary for Financial Stability. In this role, Mr.
    Allison will develop and coordinate Treasury programs related
    to financial stability, including the TARP. Mr. Allison's prior
    positions include President and Chief Executive Officer of
    Fannie Mae, Chairman, President, and Chief Executive Officer of
    TIAA-CREF, and President and Chief Operating Officer of Merrill
    Lynch.

               D. TREASURY ANNOUNCES PROCESS FOR REPAYMENT OF CPP

        On June 9, 2009, Treasury announced that ten of the largest
    Capital Purchase Program (CPP) participants had been approved
    to repay the TARP funds they had received. The repayment is
    expected to be approximately $68 billion.
        On June 26, 2009, Treasury announced the process by which
    TARP recipients would be able to repurchase the warrants issued
    as part of the Capital Purchase Program in 2008. Under these
    terms, once a bank has repaid the TARP money, it has 15 days to
    submit a determination of fair market value to Treasury.
    Treasury, within 10 days, may either accept the determination
    or, if it is unable to reach agreement on the value with the
    bank, may use the appraisal process outlined in the relevant
    transaction documents. According to the appraisal process,
    Treasury and the bank each select an independent appraiser.
    Once the appraisers have conducted their own valuations, they
    will attempt to agree on a fair market price. If they fail to
    agree, a third appraiser is hired and a composite value from
    the three appraisers is used as the fair market price.

              E. TERM ASSET-BACKED SECURITIES LOAN FACILITY (TALF)

        The Federal Reserve Bank of New York held a special
    subscription on June 16, 2009, for TALF loans secured by new
    commercial mortgage-backed securities (CMBS). There were no
    requests made for loans on that date. The Bank intends to hold
    a special subscription for legacy CMBS (those issued before
    January 1, 2009) in late July.
        During the regular TALF subscription on July 7, 2009, $5.4
    billion in loans was requested. As a point of comparison, there
    were $11.5 billion in loans requested at the June facility,
    $10.6 billion requested at the May facility, $1.7 billion at
    the April facility, and $4.7 billion at the March facility. The
    July 7 subscription included requests for loans secured by
    asset-backed securities in the auto, credit card, servicing
    advances, small business, and student loan sectors. There were
    no requests for loans in the equipment, floor plan, or premium
    finance sectors. The July 7 subscription was not available for
    loans secured by CMBS; a special CMBS subscription is planned
    for later this month.

                   F. GENERAL MOTORS BANKRUPTCY PLAN APPROVED

        On July 5, 2009, Judge Robert Gerber of the Bankruptcy
    Court for the Southern District of New York approved a
    bankruptcy plan for General Motors that would permit the auto
    maker to emerge from bankruptcy as soon as mid-July. Under the
    plan, NGMCO, Inc., an entity funded by the U.S. Treasury, would
    purchase substantially all of GM's assets. NGMCO would then
    change its name to General Motors Company and continue most of
    former GM's business with a more streamlined product portfolio.
    The new GM will remain headquartered in Detroit, Michigan, and
    will be led by Fritz Henderson as president and CEO, and Edward
    Whitacre as chairman of the board of directors. Of the common
    stock for the new GM, 60.8 percent will be owned by the US
    Treasury, 17.5 percent by the UAW Retiree Medical Benefits
    Trust; 11.7 percent by the governments of Canada and Ontario,
    and ten percent by old GM.

                         G. CPP MONTHLY LENDING REPORT

        Treasury releases a monthly lending report showing loans
    outstanding for CPP recipients. The most recent report includes
    data up through the end of April 2009 and shows that CPP
    recipients had $5.15 billion in loans outstanding as of April
    30, 2009. This represents a 0.67 percent decline in loans
    between the end of March and the end of April.

           H. FUND MANAGERS FOR PPIP LEGACY SECURITIES FUNDS SELECTED

        On July 8, 2009, Treasury, the Federal Reserve, and the
    FDIC issued a joint release announcing the selection of nine
    applicants for pre-qualification as PPIP fund managers. Ten
    small, veteran-, minority-, and/or women-owned firms were also
    selected to partner with the fund managers to provide asset
    management, capital raising, broker-dealer, research, advisory,
    investment sourcing, and fund administration services. The pre-
    qualified firms will have twelve weeks to raise $500 million in
    equity, $20 million of which must be provided by the firms
    themselves. Once this money has been raised, the PPIP funds
    will receive matching $500 million in Treasury equity, and will
    be eligible for additional government-sponsored financing.

                                   I. METRICS

        In recent months, the Panel's oversight reports have
    highlighted a number of metrics that the Panel and others,
    including Treasury, the Government Accountability Office (GAO),
    Special Inspector General for the Troubled Asset Relief Program
    (SIGTARP), and the Financial Stability Oversight Board,
    consider useful in assessing the effectiveness of the
    Administration's efforts to restore financial stability and
    accomplish the goals of the EESA. This section discusses
    changes that have occurred in several indicators since the
    release of the Panel's June report.
         Interest Rate Spreads. Key interest rate spreads
    have leveled off to some extent following precipitous drops
    between the Panel's May and June oversight reports. While there
    was no general pattern in interest rate spread movement in
    recent weeks (some decreased modestly while others increased
    modestly), spreads remain well below the crisis levels seen
    late last year, and Treasury and Federal Reserve officials
    continue to cite the moderation of these spreads as a key
    indicator of a stabilizing economy.\202\
    ---------------------------------------------------------------------------
        \202\ See Congressional Oversight Panel, Testimony of Assistant
    Treasury Secretary for Financial Security Herbert Allison, Jr., Hearing
    with Assistant Treasury Secretary Herbert Allison (June 24,
    2009)(online at cop.senate.gov/hearings/library-062409-
    allison.cfm)(``There are tentative signs that the financial system is
    beginning to stabilize and that our efforts have made an important
    contribution. Key indicators of credit market risk, while still
    elevated, have dropped substantially.'')

                         FIGURE 6: INTEREST RATE SPREADS
    ------------------------------------------------------------------------
                                                             Percent Change
                 Indicator                Current Spread   Since Last Report
                                          (as of 7/9/09)        (6/8/09)
    ------------------------------------------------------------------------
    3 Month LIBOR-OIS Spread \203\....               0.31             -24.39
    1 Month LIBOR-OIS Spread \204\....               0.11              10.00
    TED Spread \205\ (in basis points)              32.94             -31.03
    Conventional Mortgage Rate Spread                1.79              14.01
     \206\............................
    Corporate AAA Bond Spread \207\...               1.87              -6.50
    Corporate BAA Bond Spread \208\...               3.65              -9.88
    Overnight AA Asset-backed                        0.18               0.00
     Commercial Paper Interest Rate
     Spread \209\.....................
    Overnight A2/P2 Nonfinancial                     0.27            -15.63
     Commercial Paper Interest Rate
     Spread \210\.....................
    ------------------------------------------------------------------------
    \203\ 3 Mo LIBOR-OIS Spread, Bloomberg (online at www.bloomberg.com/apps/
      quote?ticker=.LOIS3:IND1) (accessed July 9, 2009).
    \204\ 1 Mo LIBOR-OIS Spread, Bloomberg (online at www.bloomberg.com/
      apps;/quote?ticker=.LOIS1:IND1) (accessed July 9, 2009).
    \205\ TED Spread, Bloomberg (online at www.bloomberg.com/apps/
      quote?ticker=.TEDSP:IND) (accessed July 9, 2009).
    \206\ Board of Governors of the Federal Reserve System, Federal Reserve
      Statistical Release H.15: Selected Interest Rates: Historical Data
      (Instrument: Conventional Mortgages, Frequency: Weekly) (online at
      www.federalreserve.gov/releases/h15/data/Weekly_Thursday_/
      H15_MORTG_NA.txt) (accessed July 9, 2009); Board of Governors of the
      Federal Reserve System, Federal Reserve Statistical Release H.15:
      Selected Interest Rates: Historical Data (Instrument: U.S. Government
      Securities/Treasury Constant Maturities/Nominal 10-Year, Frequency:
      Weekly) (online at www.federalreserve.gov/releases/h15/data/
      Weekly_Friday_/H15_TCMNOM_Y10.txt) (accessed July 9, 2009)
      (hereinafter ``Fed H.15 10-Year Treasuries'').
    \207\ Board of Governors of the Federal Reserve System, Federal Reserve
      Statistical Release H.15: Selected Interest Rates: Historical Data
      (Instrument: Corporate Bonds/Moody's Seasoned AAA, Frequency: Weekly)
      (online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/
      H15_AAA_NA.txt) (accessed July 9, 2009); Fed H.15 10-Year Treasuries,
      supra note 206.
    \208\ Board of Governors of the Federal Reserve System, Federal Reserve
      Statistical Release H.15: Selected Interest Rates: Historical Data
      (Instrument: Corporate Bonds/Moody's Seasoned BAA, Frequency: Weekly)
      (online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/
      H15_BAA_NA.txt) (accessed July 9, 2009); Fed H.15 10-Year Treasuries,
      supra note 206.
    \209\ Board of Governors of the Federal Reserve System, Federal Reserve
      Statistical Release: Commercial Paper Rates and Outstandings: Data
      Download Program (Instrument: AA Asset-Backed Discount Rate,
      Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
      Choose.aspx?rel=CP) (accessed July 9, 2009); Board of Governors of the
      Federal Reserve System, Federal Reserve Statistical Release:
      Commercial Paper Rates and Outstandings: Data Download Program
      (Instrument: AA Nonfinancial Discount Rate, Frequency: Daily) (online
      at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed
      July 9, 2009) (hereinafter ``Fed CP AA Nonfinancial Rate'').
    \210\ Board of Governors of the Federal Reserve System, Federal Reserve
      Statistical Release: Commercial Paper Rates and Outstandings: Data
      Download Program (Instrument: A2/P2 Nonfinancial Discount Rate,
      Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
      Choose.aspx?rel=CP) (accessed July 9, 2009).

         Commercial Paper Outstanding. Commercial paper
    outstanding, a rough measure of short-term business debt, is an
    indicator of the availability of credit for enterprises. While
    financial commercial paper outstanding saw an increase last
    month, asset-backed and nonfinancial commercial paper levels
    have continued to drop, with both falling by nearly 20 percent
    since early June.

                     FIGURE 7: COMMERCIAL PAPER OUTSTANDING
    ------------------------------------------------------------------------
                                        Current Level (as
                                            of 7/9/09)       Percent Change
                 Indicator                   (dollars      Since Last Report
                                            billions)           (6/8/09)
    ------------------------------------------------------------------------
    Asset-Backed Commercial Paper                 $456.75             -18.06
     Outstanding (seasonally adjusted)
     \211\............................
    Financial Commercial Paper                     554.15               4.46
     Outstanding (seasonally adjusted)
     \212\............................
    Nonfinancial Commercial Paper                  125.49            -19.89
     Outstanding (seasonally adjusted)
     \213\............................
    ------------------------------------------------------------------------
    \211\ Board of Governors of the Federal Reserve System, Federal Reserve
      Statistical Release: Commercial Paper Rates and Outstandings: Data
      Download Program (Instrument: Asset-Backed Commercial Paper
      Outstanding, Frequency: Weekly) (online at www.federalreserve.gov/
      DataDownload/Choose.aspx?rel=CP) (accessed July 9, 2009).
    \212\ Board of Governors of the Federal Reserve System, Federal Reserve
      Statistical Release: Commercial Paper Rates and Outstandings: Data
      Download Program (Instrument: Financial Commercial Paper Outstanding,
      Frequency: Weekly) (online at www.federalreserve.gov/DataDownload/
      Choose.aspx?rel=CP) (accessed July 9, 2009).
    \213\ Board of Governors of the Federal Reserve System, Federal Reserve
      Statistical Release: Commercial Paper Rates and Outstandings: Data
      Download Program (Instrument: Nonfinancial Commercial Paper
      Outstanding, Frequency: Weekly) (online at www.federalreserve.gov/
      DataDownload/Choose.aspx?rel=CP) (accessed July 9, 2009).

         Lending by the Largest TARP-recipient Banks.
    Treasury's Monthly Lending and Intermediation Snapshot tracks
    loan originations and average loan balances for the 21 largest
    recipients of CPP funds across a variety of categories, ranging
    from mortgage loans to commercial and industrial loans to
    credit card lines. Originations decreased across nearly all
    categories of bank lending in April when compared to
    March.\214\ Lenders surveyed by Treasury attribute this decline
    in originations to seasonality and a decrease in demand.\215\
    The dramatic drop in commercial and industrial and commercial
    real estate originations is particularly noteworthy, with
    originations in both categories decreasing by over 30 percent.
    Banks reported that demand for these commercial loans was well
    below normal levels; further, banks predicted that this lower
    demand would continue through the remainder of the second
    quarter of 2009.\216\ Average loan balances fell across all
    categories from March to April, with banks reporting that
    borrowers are paying down existing debt.\217\ The data below
    exclude lending by two large CPP-recipient banks, PNC Bank and
    Wells Fargo, because significant acquisitions by those banks
    since last October make comparisons difficult.
    ---------------------------------------------------------------------------
        \214\ U.S. Department of the Treasury, Treasury Department Monthly
    Lending and Intermediation Snapshot Data for October 2008-April 2009
    (June 15, 2009) (online at www.financialstability.gov/docs/surveys/
    Snapshot_Data_April%202009.xls)(hereinafter ``Treasury Snapshot April
    Summary Data'').
        \215\ U.S. Department of the Treasury, Treasury Department Monthly
    Lending and Intermediation Snapshot: Summary Analysis for April 2009
    (June 15, 2009) (online at www.financialstability.gov/docs/surveys/
    SnapshotAnalysisApril2009.pdf)(hereinafter ``Treasury April Lending
    Snapshot'').
        \216\ Id.
        \217\ Id.

              FIGURE 8: LENDING BY THE LARGEST TARP-RECIPIENT BANKS
    ------------------------------------------------------------------------
                                       Most recent
                                           data       Percent      Percent
                                          (April       change       change
                Indicator                 2009)     since March     since
                                       (dollars in      2009       October
                                        millions)                    2008
    ------------------------------------------------------------------------
    Total Loan Originations..........     $199,284        -9.48        -8.66
    C&I New Commitments..............       32,488       -37.15       -44.89
    CRE New Commitments..............        3,470       -30.78       -67.03
    Mortgage Refinancing.............       49,009        -7.74       161.13
                                      ---------------------------
    ------------------------------------------------------------------------

         Loans and Leases Outstanding of Domestically-
    Chartered Banks. Weekly data from the Federal Reserve Board
    track fluctuations among different categories of bank assets
    and liabilities. The Federal Reserve Board data are useful in
    that they separate out large domestic banks and small domestic
    banks. Loans and leases outstanding for large and small
    domestic banks both fell last month.\218\ However, total loans
    and leases outstanding at small domestic banks remain slightly
    above last October's level, while total loans and leases
    outstanding at large banks have dropped by over 4.4 percent
    since that time.\219\
    ---------------------------------------------------------------------------
        \218\ Board of Governors of the Federal Reserve System, Federal
    Reserve Statistical Release H.8: Assets and Liabilities of Commercial
    Banks in the United States: Historical Data (Instrument: Assets and
    Liabilities of Large Domestically Chartered Commercial Banks in the
    United States, Seasonally adjusted, adjusted for mergers, billions of
    dollars) (online at www.federalreserve.gov/releases/h8/data.htm)
    (accessed July 9, 2009).
        \219\ Board of Governors of the Federal Reserve System, Federal
    Reserve Statistical Release H.8: Assets and Liabilities of Commercial
    Banks in the United States: Historical Data (Instrument: Assets and
    Liabilities of Small Domestically Chartered Commercial Banks in the
    United States, Seasonally adjusted, adjusted for mergers, billions of
    dollars) (online at www.federalreserve.gov/releases/h8/data.htm)
    (accessed July 9, 2009).

                     FIGURE 9: LOANS AND LEASES OUTSTANDING
    ------------------------------------------------------------------------
                                                                   Percent
                                         Current      Percent       change
                                        level  (as     change     since ESSA
                Indicator               of 7/9/09)   since last     signed
                                       (dollars in  report (6/8/   into law
                                        billions)       09)       (10/3/08)
    ------------------------------------------------------------------------
    Large Domestic Banks--Total Loans      3,939.9        -1.13        -4.41
     and Leases......................
    Small Domestic Banks--Total Loans      2,449.0        -1.26         0.09
     and Leases......................
    ------------------------------------------------------------------------

         Housing Indicators. Foreclosure filings fell by
    roughly six percent from April to May, while remaining nearly
    15 percent above the level of last October. Housing prices, as
    illustrated by the S&P/Case-Shiller Composite 20 Index,
    continued to dip in April. The index remains down over ten
    percent since October 2008.

                          FIGURE 10: HOUSING INDICATORS
    ------------------------------------------------------------------------
                                                      Percent
                                                    change from    Percent
                                       Most recent      data        change
                Indicator                monthly     available      since
                                           data      at time of    October
                                                    last report      2008
                                                      (6/8/09)
    ------------------------------------------------------------------------
    Monthly Foreclosure Filings \220\      321,480        -6.01        14.99
    Housing Prices-S&P/Case-Shiller          140.1        -0.88       -10.82
     Composite 20 Index \221\........
    ------------------------------------------------------------------------
    \220\ RealtyTrac, Foreclosure Activity Press Releases (online at
      www.realtytrac.com//ContentManagement/PressRelease.aspx) (accessed
      July 9, 2009).
    \221\ Standard & Poor's, S&P/Case-Shiller Home Price Indices
      (Instrument: Seasonally Adjusted Composite 20 Index) (online at
      www2.standardandpoors.com/spf/pdf/index/
      SA_CSHomePrice_History_063055.xls (accessed July 9, 2009).

                              J. FINANCIAL UPDATE

        In its April oversight report, the Panel assembled a
    summary of the resources the federal government has committed
    to economic stabilization. The following provides (1) an
    updated accounting of the TARP, including a tally of dividend
    income and repayments the program has received as of July 2,
    2009, and (2) an update of the full federal resource commitment
    as of July 2, 2009.

                                    1. TARP

    a. Costs: Expenditures and Commitments

        Through an array of programs used to purchase preferred
    shares in financial institutions, offer loans to small
    businesses and auto companies, and leverage Federal Reserve
    loans for facilities designed to restart secondary
    securitization markets, Treasury has committed to spend $645.5
    billion, leaving $60.8 billion available for new programs or
    other needs.\222\ Of the $645.5 billion that Treasury has
    committed to spend, $441 billion has already been allocated and
    counted against the statutory $698.7 billion limit.\223\ This
    includes purchases of preferred shares, warrants and/or debt
    obligations under the CPP, TIP, SSFI Program, and AIFP, a $20
    billion loan to TALF LLC, the special purpose vehicle used to
    guarantee Federal Reserve TALF loans, and the $5 billion
    Citigroup asset guarantee already exchanged for a guarantee fee
    composed of additional preferred shares and warrants.\224\
    Additionally, Treasury has allocated $18 billion to the Home
    Affordable Modification Program, out of a projected total
    program level of $50 billion, but has not yet distributed any
    of these funds. Treasury will release its next tranche report
    when transactions under the TARP reach $450 billion.
    ---------------------------------------------------------------------------
        \222\ EESA limits Treasury to $700 billion in purchasing authority
    outstanding at any one time as calculated by the sum of the purchases
    prices of all troubled assets held by Treasury. EESA, supra note 13,
    Sec. 115(a)-(b) (codified at 12 U.S.C. 5225(a)-(b)); Helping Families
    Save Their Homes Act of 2009, Pub. L. No. 111-22, sec. 402(f) (online
    at frwebgate.access.gpo.gov/cgi-bin/
    getdoc.cgi?dbname=111_cong_bills&docid=f:s896enr.txt.pdf) (reducing by
    $1.26 billion the authority for the TARP originally set under EESA at
    $700 billion).
        \223\ This figure does not include the repurchases of CPP preferred
    shares.
        \224\ U.S. Department of the Treasury, Troubled Asset Relief
    Program: Transactions Report For Period Ending June 30, 2009. (July 2,
    2009) (online at www.financialstability.gov/docs/transaction-reports/
    transactions-report_070209.pdf) (hereinafter ``July 2 TARP Transaction
    Report'').
    ---------------------------------------------------------------------------

    b. Income: Dividends and Repayments

        Following the repayments of CPP infusions by nine of the
    stress-tested BHCs, the total amount of TARP repayments surged
    from just under $2 billion to over $70 billion.\225\ In
    addition, Treasury's investment in preferred shares entitles it
    to dividend payments from the institutions in which it invests,
    usually five percent per annum for the first five years and
    nine percent per annum thereafter.\226\ Treasury has not yet
    begun to officially report dividend payments on its transaction
    reports.
    ---------------------------------------------------------------------------
        \225\ Id. See also Section One, Part F of this report (providing a
    table with detailed information on repurchases to date).
        \226\ See, e.g., Securities Purchase Agreement, supra note 15.
    ---------------------------------------------------------------------------

    c. TARP Accounting as of July 2, 2009

                                     FIGURE 11: TARP ACCOUNTING (AS OF July 2, 2009)
                                                  [Dollars in billions]
    ----------------------------------------------------------------------------------------------------------------
                                                         Announced      Purchase
                      TARP Initiative                     Funding        Price         Repayments    Dividend Income
    ----------------------------------------------------------------------------------------------------------------
    Total.............................................          638    \227\ 441       \228\ 70.124      \229\ 6.651
        CPP...........................................          218          203.2           70.124            5.255
        TIP...........................................           40           40              0                1.128
        SSFI Program..................................           70           69.8            0                0
        AIFP..........................................           80           80              0                0.160
        AGP...........................................            5            5              0                0.108
        CAP...........................................          TBD            0              0                0
        TALF..........................................           80           20              0                0
        PPIP..........................................           75            0              0                0
        Supplier Support Program......................            5            5              0                0
        Unlocking SBA Lending.........................           15            0              0                0
        HAMP..........................................           50     \230\ 18.0            0               0
    ----------------------------------------------------------------------------------------------------------------
    \227\ See July 2 TARP Transaction Report, supra note 224.
    \228\ See July 2 TARP Transaction Report, supra note 224.
    \229\ As of June 30, 2009. This information was provided to the Panel by Treasury staff.
    \230\ Reflects the cap set on payments to each mortgage servicer. See July 2 TARP Transactions Report, supra
      note 224.

                      2. OTHER FINANCIAL STABILITY EFFORTS

    Federal Reserve, FDIC, and Other Programs

        In addition to the more direct expenditures Treasury has
    undertaken through the TARP, the federal government has also
    engaged in a much broader program directed at stabilizing the
    U.S. financial system. Many of these programs explicitly
    augment Treasury funds, like FDIC guarantees of securitization
    of PPIP Legacy Loans or asset guarantees for Citigroup, or
    operate in tandem with Treasury programs, such as the
    interaction between PPIP and TALF. Other programs, like the
    Federal Reserve's extension of credit through its Sec. 13(3)
    facilities and special purpose vehicles or the FDIC's Temporary
    Liquidity Guarantee Program, stand independent of the TARP and
    seek to accomplish different goals.

           3. TOTAL FINANCIAL STABILITY RESOURCES AS OF JULY 2, 2009

        Beginning in its April report, the Panel broadly classified
    the resources that the federal government has devoted to
    stabilizing the economy through a myriad of new programs and
    initiatives, as outlays, loans, or guarantees. Although the
    Panel has calculated the total value of these resources at over
    $4 trillion, this would translate into the ultimate ``cost'' of
    the stabilization effort only if: (1) assets do not appreciate,
    (2) no dividends are received, no warrants are exercised, and
    no TARP funds are repaid, (3) all loans default and are written
    off, and (4) all guarantees are exercised and subsequently
    written off.

                      FIGURE 12: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF JULY 2, 2009)
                                                  [Dollars in billions]
    ----------------------------------------------------------------------------------------------------------------
                                                             Treasury       Federal
                           Program                            (TARP)        Reserve          FDIC          Total
    ----------------------------------------------------------------------------------------------------------------
    Total...............................................          698.7        2,197.2        1,372.7  \233\ 4,268.6
        Outlays \231\...................................          516.6            0             37.7          554.3
        Loans...........................................           36.3         1967.4            0          2,003.7
        Guarantees \232\................................           85            230          1,335          1,649.8
        Uncommitted TARP Funds..........................           60.8            0              0             60.8
    AIG.................................................           70            100              0            170
        Outlays.........................................     \234\ 70              0              0             70
        Loans...........................................            0      \235\ 100              0            100
        Guarantees......................................            0              0              0              0
    Bank of America.....................................           45              0              0             45
        Outlays.........................................     \237\ 45              0              0              0
        Loans...........................................            0              0              0              0
        Guarantees \236\................................            0              0              0              0
    Citigroup...........................................           50            229.8           10            289.8
        Outlays.........................................     \238\ 45              0              0             45
        Loans...........................................            0              0              0              0
        Guarantees......................................      \239\ 5      \240\ 229.8     \241\ 10            244.8
    Capital Purchase Program (Other)....................          168              0              0            168
        Outlays.........................................    \242\ 168              0              0            168
        Loans...........................................            0              0              0              0
        Guarantees......................................            0              0              0              0
    Capital Assistance Program..........................          TBD            TBD            TBD      \243\ TBD
    TALF................................................           80            720              0            800
        Outlays.........................................            0              0              0              0
        Loans...........................................            0      \245\ 720              0            720
        Guarantees......................................     \244\ 80              0              0              0
    PPIF (Loans) \246\..................................           45              0            540            585
        Outlays.........................................           45              0              0             45
        Loans...........................................            0              0              0              0
        Guarantees......................................            0              0      \247\ 540            540
    PPIF (Securities)...................................           30              0              0             30
        Outlays.........................................     \248\ 12.5            0              0             12.5
        Loans...........................................           17.5            0              0             17.5
        Guarantees......................................            0              0              0              0
    Home Affordable Modification Program................           50              0              0       \250\ 50
        Outlays.........................................     \249\ 50              0              0             50
        Loans...........................................            0              0              0              0
        Guarantees......................................            0              0              0              0
    Automotive Industry Financing Program...............     \251\ 80              0              0             80
        Outlays.........................................     \252\ 66.1            0              0             66.1
        Loans...........................................           13.8            0              0             13.8
        Guarantees......................................            0              0              0              0
    Auto Supplier Support Program.......................            5              0              0              5
        Outlays.........................................            0              0              0              0
        Loans...........................................      \253\ 5              0              0              5
        Guarantees......................................            0              0              0              0
    Unlocking SBA Lending...............................           15              0              0             15
        Outlays.........................................      \254\15              0              0             15
        Loans...........................................            0              0              0              0
        Guarantees......................................            0              0              0              0
    Temporary Liquidity Guarantee Program...............            0              0            785            785
        Outlays.........................................            0              0              0              0
        Loans...........................................            0              0              0              0
        Guarantees......................................            0              0      \255\ 785            785
    Deposit Insurance Fund..............................            0              0             37.7           37.7
        Outlays.........................................            0              0       \256\ 37.7          037.7
        Loans...........................................            0              0              0              0
        Guarantees......................................            0              0              0              0
    Other Federal Reserve Credit Expansion..............            0          1,147.4            0          1,147.4
        Outlays.........................................            0              0              0              0
        Loans...........................................            0    \257\ 1,147.4            0          1,147.4
        Guarantees......................................            0              0              0              0
    Uncommitted TARP Funds..............................     \258\ 60.8            0              0             60.8
    ----------------------------------------------------------------------------------------------------------------
    \231\ The term ``outlays'' is used here to describe the use of Treasury funds under the TARP, which are broadly
      classifiable as purchases of debt or equity securities (e.g., debentures, preferred stock, exercised warrants,
      etc.). The outlays figures are based on: (1) Treasury's actual reported expenditures; and (2) Treasury's
      anticipated funding levels as estimated by a variety of sources, including Treasury pronouncements and GAO
      estimates. Anticipated funding levels are set at Treasury's discretion, have changed from initial
      announcements, and are subject to further change. The outlays concept used here represents cash disbursements
      and commitments to make cash disbursements and is not the same as budget outlays, which under Sec.  123 of
      EESA are recorded on a ``credit reform'' basis.
    \232\ While many of the guarantees may never be exercised or exercised only partially, the guarantee figures
      included here represent the federal government's greatest possible financial exposure.
    \233\ This figure differs substantially from the $2,476-2,976 billion range of ``Total Funds Subject to SIGTARP
      Oversight'' reported during testimony before the Senate Finance Committee on March 31, 2009. Senate Committee
      on Finance, Testimony of SIGTARP Neil Barofsky, TARP Oversight: A Six Month Update, 111th Cong. (Mar. 31,
      2009). SIGTARP's accounting, designed to capture only those funds potentially under its oversight authority,
      is both less and more inclusive than the Panel's, and thus the two are not directly comparable. Among the
      differences, SIGTARP does not account for Federal Reserve credit extensions outside of the TALF or FDIC
      guarantees under the Temporary Liquidity Guarantee Program and sets the maximum Federal Reserve guarantees
      under the TALF at $1 trillion.
    \234\ This number includes investments under the SSFI program: a $40 billion investment made on November 25,
      2008, and a $30 billion investment committed on April 17, 2009 (less a reduction of $165 million representing
      bonuses paid to AIG Financial Products employees). July 2 TARP Transaction Report, supra note 224.
    \235\ This number represents the full $60 billion that is available to AIG through its revolving credit facility
      with the Federal Reserve ($43.5 billion had been drawn down as of July 1) and the outstanding principle of the
      loans extended to the Maiden Lane II and III special purpose vehicles (AIG SPVs) to buy AIG assets (as of July
      1, $17.5 billion and $22.4 billion respectively). See Fed Balance Sheet July 2, supra note 69. The Panel
      continues to calculate the exposure attributable to the revolving credit facility at $60 billion. However,
      whereas previously the Panel had calculated the exposure attributable to the AIG SPVs at the initially
      announced amount of Federal Reserve loans to the SPVs, we have changed our methodology. Based on its review of
      new Federal Reserve documents, the Panel now believes that its previous methodology overstated the Federal
      Reserve's exposure to AIG. The initially announced amount of loans was based on the Federal Reserve's
      estimated cost to purchase a particular pool of AIG assets. However, the value of these assets declined by the
      time the AIG SPVs purchased them, necessitating a smaller loan than was initially announced. Furthermore,
      income from the purchased assets is used to pay down the loan, reducing the taxpayers' exposure to losses over
      time. See Board of Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit
      and Liquidity Programs and the Balance Sheet, at 14-16 (June 2009) (online at www.federalreserve.gov/
      newsevents/monthlyclbsreport200906.pdf ); Letter from Federal Reserve Chairman Benjamin Bernanke to
      Congressional Oversight Panel Chair Elizabeth Warren (June 26, 2009).
    \236\ Based on its review of newly available information from the Federal Reserve, the Panel has revised its
      calculation of support provided to Bank of America by excluding from the total the $118 billion asset
      guarantee agreement between Bank of America, the Federal Reserve, Treasury, and the FDIC. U.S. Department of
      the Treasury, Summary of Terms: Eligible Asset Guarantee (Jan. 15, 2009) (online at www.treas.gov/press/
      releases/reports/011508bofatermsheet.pdf). The reason for the change is that it is now clear that, despite
      preliminary agreement, the asset guarantee was never signed; it is not currently in effect, and will likely
      not be consummated. House Committee on Oversight and Government Reform, Testimony of Federal Reserve Chairman
      Ben Bernanke, Bank of America and Merrill Lynch: How Did a Private Deal Turn Into a Federal Bailout? Part II,
      111th Cong. (June 25, 2009).
    \237\ July 2 TARP Transaction Report, supra note 224. This figure includes: (1) a $15 billion investment made by
      Treasury on October 28, 2008 under the CPP; (2) a $10 billion investment made by Treasury on January 9, 2009
      also under the CPP; and (3) a $20 billion investment made by Treasury under the TIP on January 16, 2009.
    \238\ July 2 TARP Transaction Report, supra note 224. This figure includes: (1) a $25 billion investment made by
      Treasury under the CPP on October 28, 2008; and (2) a $20 billion investment made by Treasury under TIP on
      December 31, 2008.
    \239\ Citigroup Asset Guarantee (granting a 90 percent federal guarantee on all losses over $29 billion of a
      $306 billion pool of Citigroup assets, with the first $5 billion of the cost of the guarantee borne by
      Treasury, the next $10 billion by FDIC, and the remainder by the Federal Reserve). See also U.S. Department of
      the Treasury, U.S. Government Finalizes Terms of Citi Guarantee Announced in November (Jan. 16, 2009) (online
      at www.treas.gov/press/releases/hp1358.htm) (reducing the size of the asset pool from $306 billion to $301
      billion).
    \240\ Id.
    \241\ Id.
    \242\ This figure represents the $218 billion Treasury has anticipated spending under the CPP, minus the $50
      billion investment in Citigroup ($25 billion) and Bank of America ($25 billion) identified above. This figure
      does not account for anticipated repayments or redemptions of CPP investments, nor does it account for
      dividend payments from CPP investments.
    \243\ Funding levels for the CAP have not yet been announced but will likely constitute a significant portion of
      the remaining $60.8 billion of TARP funds.
    \244\ Senate Committee on Banking, Housing, and Urban Affairs, Testimony of Secretary Geithner, Oversight of the
      Troubled Asset Relief Program, 111th Cong., at 1 (May 20, 2009) (online at banking.senate.gov/public/
      index.cfm?FuseAction=Files.View&FileStore_id=b64da0f5-9f9b-448a-a352-ad0590543ef9) (hereinafter ``May 20
      Geithner Testimony''); July 2 TARP Transactions Report, supra note 224. This figure represents: a $20 billion
      allocation to the TALF special purpose vehicle on March 3, 2009; Treasury's announcement of an additional $35
      billion dedicated to the TALF; and $25 billion dedicated to supporting TALF loans to purchase legacy
      securities under the PPIP.
    \245\ This number derives from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value
      of Federal Reserve loans under the TALF. See U.S. Department of the Treasury, Fact Sheet: Financial Stability
      Plan (Feb. 10, 2009) (online at www.financialstability.gov/docs/fact-sheet.pdf) (describing the initial $20
      billion Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential expansion
      to a $100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Because Treasury is
      responsible for reimbursing the Federal Reserve Board for $80 billion of losses on its $800 billion in loans,
      the Federal Reserve Board's maximum potential exposure under the TALF is $720 billion.
    \246\ Because PPIP funding arrangements for loans and securities differ substantially, the Panel accounts for
      them separately. Treasury has not formally announced either total program funding level or the allocation of
      funding between the PPIP Legacy Loans Program and Legacy Securities Program. Treasury has indicated that, of
      the $100 billion maximum allocation to the PPIP, it plans to disburse $25 billion to the TALF for the
      financing of the PPIP Legacy Securities program, and $30 billion to the Legacy Securities Program as initial
      equity and debt funding (leaving at most $45 billion to be allocated to the Legacy Loans Program). U.S.
      Department of the Treasury, Joint Statement By Secretary Of The Treasury Timothy F. Geithner, Chairman Of The
      Board Of Governors Of The Federal Reserve System Ben S. Bernanke, And Chairman Of The Federal Deposit
      Insurance Corporation Sheila Bair: Legacy Asset Program (July 8, 2009) (online at www.financialstability.gov/
      latest/tg_07082009.html). However, the FDIC has postponed the implementation of the Legacy Loans program, see
      Federal Deposit Insurance Corporation, FDIC Statement on the Status of the Legacy Loans Program (June 3, 2009)
      (online at www.fdic.gov/news/news/press/2009/pr09084.html). It is not yet clear how this postponement will
      affect the allocation of TARP funds for the PPIP.
    \247\ Id at 2-3 (explaining that, for every $1 Treasury contributes in equity matching $1 of private
      contributions to public-private asset pools created under the Legacy Loans Program, FDIC will guarantee up to
      $12 of financing for the transaction to create a 6:1 debt to equity ratio). If Treasury ultimately allocates a
      smaller proportion of funds to the Legacy Loans Program (i.e., less than $45 billion), the amount of FDIC loan
      guarantees will be reduced proportionally.
    \248\ Id at 4-5 (outlining that, for each $1 of private investment into a fund created under the Legacy
      Securities Program, Treasury will provide a matching $1 in equity to the investment fund; a $1 loan to the
      fund; and, at Treasury's discretion, an additional loan up to $1). In the absence of further Treasury
      guidance, this analysis assumes that Treasury will allocate funds for equity co-investments and loans at a
      1:1.5 ratio, a formula that estimates that Treasury will frequently exercise its discretion to provide
      additional financing.
    \249\ Government Accountability Office, Troubled Asset Relief Program: June 2009 Status of Efforts to Address
      Transparency and Accountability Issues, at 2 (June 17, 2009) (GAO09/658) (online at www.gao.gov/new.items/
      d09658.pdf). Of the $50 billion in announced TARP funding for this program, only $18.0 billion has been
      allocated as of June 30, and no funds have yet been disbursed. See July 2 TARP Transactions Report, supra note
      224.
    \250\ Fannie Mae and Freddie Mac, government-sponsored entities (GSEs) that were placed in conservatorship of
      the Federal Housing Finance Housing Agency on September 7, 2009, will also contribute up to $25 billion to the
      Making Home Affordable Program, of which the HAMP is a key component. See U.S. Department of the Treasury,
      Making Home Affordable: Updated Detailed Program Description (Mar. 4, 2009) (online at www.treas.gov/press/
      releases/reports/housing_fact_sheet.pdf).
    \251\ Figures do not total due to rounding.
    \252\ July 2 TARP Transactions Report, supra note 224. A substantial portion of the total $80.0 billion in loans
      extended under the AIFP has since been converted to common equity and preferred shares in restructured
      companies. Only $13.8 billion has been retained as first lien debt (with $6.7 billion committed to GM and $7.1
      billion to Chrysler), which is classified below as loans.
    \253\ July 2 TARP Transactions Report, supra note 224.
    \254\ May 20 Geithner Testimony, supra note 244, at 15.
    \255\ This figure represents the current maximum aggregate debt guarantees that could be made under the program,
      which, in turn, is a function of the number and size of individual financial institutions participating.
      $345.8 billion of debt subject to the guarantee has been issued to date, which represents about 44 percent of
      the current cap. Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary
      Liquidity Guarantee Program: Debt Issuance Under Guarantee Program (May 31, 2009) (online at www.fdic.gov/
      regulations/resources/TLGP/total_issuance5-09.html) (updated June 17, 2009).
    \256\ This figure represents the FDIC's provision for losses to its deposit insurance fund attributable to bank
      failures in the third and fourth quarters of 2008 and the first quarter of 2009. See Federal Deposit Insurance
      Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income Statement (Fourth Quarter 2008)
      (online at www.fdic.gov/about/strategic/corporate/cfo_report_4qtr_08/income.html); Federal Deposit Insurance
      Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income Statement (Third Quarter 2008)
      (online at www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_08/income.html); Federal Deposit Insurance
      Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income Statement (First Quarter 2009)
      (online at www.fdic.gov/about/strategic/corporate/cfo_report_1stqtr_09/income.html).
    \257\ This figure is derived from adding the total credit the Federal Reserve Board has extended as of June 3,
      2009 through the Term Auction Facility (Term Auction Credit), Discount Window (Primary Credit), Primary Dealer
      Credit Facility (Primary Dealer and Other Broker-Dealer Credit), Central Bank Liquidity Swaps, loans
      outstanding to Bear Stearns (Maiden Lane I LLC), GSE Debt (Federal Agency Debt Securities), Mortgage Backed
      Securities Issued by GSEs, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, and
      Commercial Paper Funding Facility LLC. See Fed Balance Sheet July 2, supra note 69. The level of Federal
      Reserve lending under these facilities will fluctuate in response to market conditions and independent of any
      federal policy decisions.
    \258\ One potential use of uncommitted funds is Treasury's obligation to reimburse the Exchange Stabilization
      Fund (ESF), currently valued at $52.1 billion. See U.S. Department of Treasury, Exchange Stabilization Fund,
      Statement of Financial Position, as of May 31, 2009 (online at www.ustreas.gov/offices/international-affairs/
      esf/esf-monthly-statement.pdf) (accessed July 2, 2009). Treasury must reimburse any use of the fund to
      guarantee money market mutual funds from TARP money. See EESA, supra note 13, at Sec.  131. In September 2008,
      Treasury opened its Temporary Guarantee Program for Money Mutual Funds, U.S. Department of Treasury, Treasury
      Announces Temporary Guarantee Program for Money Market Mutual Funds (Sept. 29, 2008) (online at www.treas.gov/
      press/releases/hp1161.htm). This program uses assets of the ESF to guarantee the net asset value of
      participating money market mutual funds. Id. Sec.  131 of EESA protected the ESF from incurring any losses
      from the program by requiring that Treasury reimburse the ESF for any funds used in the exercise of the
      guarantees under the program, which has been extended through September 18, 2009. U.S. Department of Treasury,
      Treasury Announces Extension of Temporary Guarantee Program for Money Market Funds (Mar. 31, 2009) (online at
      www.treas.gov/press/releases/tg76.htm).

                       SECTION FIVE: OVERSIGHT ACTIVITIES

        The Congressional Oversight Panel was established as part
    of EESA and formed on November 26, 2008. Since then, the Panel
    has issued seven oversight reports, as well as its special
    report on regulatory reform, which was issued on January 29,
    2009. Since the release of the Panel's June oversight report,
    the following developments pertaining to the Panel's oversight
    of the TARP took place:
         Chair Elizabeth Warren, on behalf of the Panel,
    and Special Inspector General for the Troubled Asset Relief
    Program Neil M. Barofsky sent a joint letter on June 10, 2009
    to Chairman Christopher J. Dodd and Ranking Member Richard C.
    Shelby of the Senate Committee on Banking, Housing, and Urban
    Affairs, and Chairman Barney Frank and Ranking Member Spencer
    Bachus of the House Financial Services Committee, to notify
    them of a special coordinated effort between SIGTARP and the
    Panel to examine the pricing of warrants in the context of the
    repayment of TARP funds by TARP-recipient institutions.\259\
    The letter discusses the Panel's plans to release its valuation
    estimates and analysis relating to the pricing of warrants
    which Treasury holds in relation to its Capital Purchase
    Program (``CPP'') investments with its July monthly report, and
    SIGTARP's plans to conduct an audit of Treasury's warrant
    repurchase/sale process.
    ---------------------------------------------------------------------------
        \259\ See Appendix IV of this report, infra.
    ---------------------------------------------------------------------------
         The Panel held a hearing on June 24, 2009 with
    newly confirmed Assistant Secretary of the Treasury for
    Financial Stability Herbert Allison regarding the Troubled
    Asset Relief Program. Written testimony and video from the
    hearing can be found on the Panel's website at http://
    cop.senate.gov/hearings/library/hearing-062409-allison.cfm.
         The Helping Families Save Their Homes Act of 2009
    (P.L. 111-22), signed into law on May 20, 2009, requires the
    Congressional Oversight Panel to issue a special report on farm
    loan restructuring. To assist in this mandate, the Panel held a
    hearing on July 7, 2009 in Greeley, Colorado, on the subject of
    commercial farm credit markets and the use of farm loan
    restructuring as an alternative to foreclosure. It heard
    testimony from representatives of the USDA, farm credit
    lenders, and farmers themselves. It also had the opportunity to
    hear from the Greeley community on issues related to farm
    credit. Written testimony and audio from the hearing can be
    found on the Panel's website at http://cop.senate.gov/hearings/
    library/hearing-070709-farmcredit.cfm.
         At a Panel hearing on April 21, 2009, Secretary
    Geithner pledged to arrange weekly Treasury briefings on TARP
    activities for Panel staff. Based on the Secretary's pledge,
    Panel staff has since received numerous briefings on topics
    including banks' repayment of preferred shares and warrants,
    TALF and PPIP, the stress tests, and Treasury's plan to
    purchase directly securities backed by Small Business
    Administration (SBA) 7(a) loans.
         Panel staff has reviewed documents pertaining to
    the stress tests, provided by both Treasury and the Federal
    Reserve Board of Governors. Several other document requests
    sent to Treasury are still pending.
         The Panel has sent letters to the largest mortgage
    servicing companies that have not yet signed a contract to
    formally participate in the Making Home Affordable foreclosure
    mitigation program. This letter inquires, among other things,
    if the servicer intends to participate, how it is handling loan
    modifications, and what barriers and obstacles might limit
    participation in the program. This is part of the Panel's
    continuing oversight of foreclosure mitigation efforts.

                         Upcoming Reports and Hearings

         The Panel will release its next oversight report
    in August. The report will provide an updated review of TARP
    activities and continue to assess the program's overall
    effectiveness. The report will also examine the issue of
    troubled assets, their role in the economic crisis, and how the
    TARP addresses them.
         On July 21, 2009, the Panel will release a report
    in which it provides an analysis of the state of the commercial
    farm credit markets and considers the use of farm loan
    restructuring as an alternative to foreclosure. This report is
    pursuant to section 501 of the Helping Families Save Their
    Homes Act of 2009 (P.L. 111-22).
         The Panel is planning a field hearing in Detroit
    on July 27, 2009 to hear testimony on Treasury's administration
    of the Automotive Industry Financing Program.
              SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL

        In response to the escalating crisis, on October 3, 2008,
    Congress provided Treasury with the authority to spend $700
    billion to stabilize the U.S. economy, preserve home ownership,
    and promote economic growth. Congress created the Office of
    Financial Stabilization (OFS) within Treasury to implement a
    Troubled Asset Relief Program. At the same time, Congress
    created the Congressional Oversight Panel to ``review the
    current state of financial markets and the regulatory system.''
    The Panel is empowered to hold hearings, review official data,
    and write reports on actions taken by Treasury and financial
    institutions and their effect on the economy. Through regular
    reports, the Panel must oversee Treasury's actions, assess the
    impact of spending to stabilize the economy, evaluate market
    transparency, ensure effective foreclosure mitigation efforts,
    and guarantee that Treasury's actions are in the best interests
    of the American people. In addition, Congress instructed the
    Panel to produce a special report on regulatory reform that
    analyzes ``the current state of the regulatory system and its
    effectiveness at overseeing the participants in the financial
    system and protecting consumers.'' The Panel issued this report
    in January 2009.
        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.

      APPENDIX I: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY
     GEITHNER REQUESTING INFORMATION ON THE REPAYMENT OF TARP ASSISTANCE,
                              DATED JUNE 12, 2009

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      APPENDIX II: LETTER FROM SECRETARY TIMOTHY GEITHNER IN RESPONSE TO
     CHAIR WARREN'S LETTER REQUESTING INFORMATION ON THE REPAYMENT OF TARP
                         ASSISTANCE, DATED JULY 1, 2009

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       APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN AND PANEL MEMBER
    RICHARD NEIMAN TO SECRETARY TIMOTHY GEITHNER REQUESTING ASSISTANCE WITH
    THE PANEL'S OVERSIGHT OF FEDERAL FORECLOSURE MITIGATION EFFORTS, DATED
                                 JUNE 29, 2009

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