[JPRT, 111th Congress]
[From the U.S. Government Publishing Office]
CONGRESSIONAL OVERSIGHT PANEL
NOVEMBER OVERSIGHT REPORT *
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GUARANTEES AND CONTINGENT
PAYMENTS IN TARP AND RELATED
PROGRAMS
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November 6, 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 NOVEMBER OVERSIGHT REPORT
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CONGRESSIONAL OVERSIGHT PANEL
NOVEMBER OVERSIGHT REPORT *
__________
GUARANTEES AND CONTINGENT
PAYMENTS IN TARP AND RELATED
PROGRAMS
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
November 6, 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
Panel Members
Elizabeth Warren, Chair
Rep. Jeb Hensarling
Paul S. Atkins
Richard H. Neiman
Damon Silvers
C O N T E N T S
Page
Executive Summary................................................ 1
Section One:
A. Overview.................................................. 5
B. The Nature of a Guarantee................................. 6
1. Legal Aspects of Guarantees........................... 6
2. How Guarantees Are Treated on Government Agencies'
Books.................................................. 8
3. How Guarantees Are Treated on the Books of the Entity
Benefitted............................................. 10
C. The Programs.............................................. 11
1. The Asset Guarantee Program........................... 11
2. Treasury's Temporary Guarantee Program for Money
Market Funds........................................... 22
3. FDIC Guarantees Under the Temporary Liquidity
Guarantee Program...................................... 29
4. Other Programs That Have ``Guarantee'' Aspects........ 32
D. Analysis of the Creation and Structure of the Guarantee
Programs................................................... 33
1. AGP Guarantees for Citigroup and Bank of America...... 33
2. TGPMMF................................................ 43
3. FDIC Guarantee Program................................ 48
E. Cost/Benefit to Taxpayers of the Guarantee Programs....... 52
1. Direct Cost/Benefit from the Programs................. 53
2. Moral Hazard Considerations........................... 60
F. Market Impact............................................. 62
G. The Guarantee Programs as Part of Broader Stabilization
Effort..................................................... 63
1. The TARP and the Guarantee Programs................... 63
2. Interaction with Stress Tests......................... 66
3. The Guarantees and Exit from TARP..................... 67
H. Transparency Issues....................................... 68
1. Asset Guarantee Program............................... 68
2. TGPMMF................................................ 69
3. Temporary Liquidity Guarantee Program................. 72
I. Conclusions and Recommendations........................... 73
Annex to Section One............................................. 75
Section Two: Additional Views.................................... 80
A. Damon Silvers............................................. 80
B. Paul S. Atkins............................................ 80
C. Rep. Jeb Hensarling....................................... 81
Section Three: TARP Updates Since Last Report.................... 89
Section Four: Oversight Activities............................... 101
Section Five: About the Congressional Oversight Panel............ 102
Appendices:
APPENDIX I: LETTER FROM FEDERAL RESERVE BOARD CHAIRMAN BEN S.
BERNANKE TO PANEL MEMBERS, RE: COMMENTARY ON JULY GAO
REPORT ON FINANCIAL CRISIS, DATED OCTOBER 8, 2009.......... 103
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NOVEMBER OVERSIGHT REPORT
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November 6, 2009.--Ordered to be printed
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EXECUTIVE SUMMARY *
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* The Panel adopted this report with a 5-0 vote on November 5,
2009. Additional views are available in Section Two of this report.
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In creating the Troubled Asset Relief Program (TARP) in
late 2008, Congress provided Treasury with a wide range of
tools to combat the financial crisis. In addition to purchasing
assets directly from financial institutions, Treasury was also
authorized to support the value of assets indirectly by issuing
guarantees.
In the legal sense, a guarantee is simply a promise by one
party to stand behind a second party's obligation to a third.
For example, when a worker deposits his paychecks in an account
at his local bank, his money is guaranteed by the U.S.
government through the Federal Deposit Insurance Corporation
(FDIC). If a bank fails--that is, if the bank cannot give the
worker his money later, when he needs it--then the FDIC will
step in to fill in the gap. The FDIC guarantees the bank's debt
to its customer.
During the financial crisis of late 2008 and early 2009,
the federal government dramatically expanded its role as a
guarantor. Congress raised the maximum guaranteed value of
FDIC-insured accounts from $100,000 to $250,000 per account,
and the FDIC also established the Debt Guarantee Program (DGP),
standing behind the debt that banks issued in order to raise
funds that they could use to lend to customers. Treasury
reassured anxious investors by guaranteeing that money market
funds would not fall below $1.00 per share, and Treasury, the
FDIC, and the Federal Reserve Board together negotiated to
secure hundreds of billions of dollars in assets belonging to
Citigroup and Bank of America. All told, the federal
government's guarantees have exceeded the total value of TARP,
making guarantees the single largest element of the
government's response to the financial crisis.
From the taxpayers' perspective, guarantees carry several
advantages over the direct purchases of bank assets. Most
significantly, guarantees bear no upfront price tag. When
government agencies agreed to guarantee $300 billion in
Citigroup assets in late 2008, taxpayers paid no immediate
price--and now appear likely to earn a profit from fees
assuming economic conditions do not deteriorate further.
The low upfront cost of guarantees also allowed Treasury,
in coordination with other federal agencies, to leverage a
limited pool of TARP resources to guarantee a much larger pool
of assets. The enormous scale of these guarantees played a
significant role in calming the financial markets last year.
Lenders who were unwilling to risk their money in distressed
and uncertain markets became much more willing to participate
after the U.S. government promised to backstop any losses.
Despite these advantages, guarantees also carry
considerable risk to taxpayers. In many cases, the American
taxpayer stood behind guarantees of high-risk assets held by
potentially insolvent institutions. It was possible that, if
the guaranteed assets had radically declined in value,
taxpayers could have suffered enormous losses.
At its high point, the federal government was guaranteeing
or insuring $4.3 trillion in face value of financial assets
under the three guarantee programs discussed in this report.
(The majority of that exposure came from Treasury's guarantee
of money market accounts that held high concentrations of
government debt in the form of Treasury securities. Therefore,
the total exposure is less than the full face value guaranteed
because government debt is already backed by the full faith and
credit of the United States.) Despite the likelihood that the
U.S. government will receive more revenue in fees than will
ultimately be paid out under the guarantees, the taxpayers bore
a significant amount of risk.
Just as significantly, guarantees carry moral hazard. By
limiting how much money investors can lose in a deal, a
guarantee creates price distortion and can lead lenders to
engage in riskier behavior than they otherwise would. In
addition to the explicit guarantees offered by Treasury, the
FDIC, and the Federal Reserve, the government's broader
economic stabilization effort may have signaled an implicit
guarantee to the marketplace: the American taxpayer would bear
any price, and absorb any loss, to avert a financial meltdown.
To the degree that lenders and borrowers believe that such an
implicit guarantee remains in effect, moral hazard will
continue to distort the market in the future. The cost of moral
hazard is not as easily measured as the price of guarantee
payouts or the income from guarantee fees, but it remains a
real and significant force influencing the financial system
today. As Treasury contemplates an exit strategy for TARP and
similar financial stability efforts such as these explicit
guarantees, unwinding the implicit guarantee of government
support is critical to ensuring an efficiently functioning
marketplace.
After a wide-ranging review of TARP and related guarantees,
the Panel has not identified significant flaws in Treasury's
implementation of the programs. To the contrary, the Panel has
noted a trend towards a more aggressive and commercial stance
on the part of Treasury in safeguarding the taxpayers' money.
Nonetheless, in light of these guarantees' extraordinary scale
and their risk to taxpayers, the Panel believes that these
programs should be subject to extraordinary transparency. The
Panel urges Treasury to disclose greater detail about the
rationale behind guarantee programs, the alternatives that may
have been available and why they were not chosen, and whether
these programs have achieved their objectives.
Finally, the Panel recommends that Treasury provide regular
disclosures relating to Citigroup's asset guarantee--the single
largest TARP guarantee offered to date. These disclosures
should be detailed enough to provide a clear picture of what is
happening, including information on the status of the final
composition of the asset pool and total asset pool losses to
date, as well as what the projected losses of the pool are and
how they have been calculated.
The following table summarizes the principal elements of
the programs that the Panel has examined for the purposes of
this report:
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Who is What is Sum currently
Agency Program Authority protected? guaranteed? guaranteed Fees earned Losses to date
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Treasury..................... Asset Guarantee Emergency Citigroup (Bank Specified asset Up to $5 $3.8 billion... $0
Program (AGP). Economic of America-- classes of billion.
Stabilization never used). Citigroup.
Act of 2008
(EESA).
Treasury..................... Temporary Gold Reserve Act Money market Investors' $0 (current) $1.2 billion... $0
Guarantee of 1934, as fund investors. holdings in ($3.22
Program for amended EESA, participating trillion peak
Money Market Sec. 131. funds as of commitment).
Funds (TGPMMF). September 19,
2008.
Federal Reserve Board........ Asset Guarantee Federal Reserve Citigroup (Bank Specified assets Undetermined; $57 million.... $0
Program (AGP). Act, Sec. of America-- of Citigroup. non-recourse
13(3). never used). loans to be
made available.
Federal Deposit Insurance Temporary Federal Deposit Holders of debt Debt issued by $307 billion $9.6 billion... $2 million \1\
Corporation (FDIC). Liquidity Insurance Act. issued by banks banks and other principal,
Guarantee and other financial plus interest.
Program (TLGP)-- financial institutions.
includes Debt institutions
Guarantee issuing debt.
Program (DGP).
FDIC......................... Asset Guarantee Federal Deposit Citigroup (Bank Specified assets Up to $10 $2.7 billion... $0
Program (AGP). Insurance Act. of America-- of Citigroup. billion.
never used).
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\1\ According to the Federal Deposit Insurance Corporation, as of October 22, 2009, there has been one failure of a Temporary Liquidity Guarantee
Program-participating institution, an affiliate of which had issued guaranteed debt. While the FDIC anticipates up to a $2 million loss on that
issuance, no losses have been paid out yet with respect to the Debt Guarantee Program.
SECTION ONE:
A. Overview
Guarantees of the assets and liabilities of banks and bank
holding companies (BHCs) form an essential part of the Troubled
Asset Relief Program (TARP) and broader financial stabilization
efforts. Unlike direct payments or purchases, guarantees do not
require the immediate outlay of cash (and if the guarantees
expire without having been triggered, cash may never be
needed), but they expose taxpayer funds to potential risk--in
some cases, a great deal of risk. This report examines the role
played by guarantees and other contingent payments under TARP
and related programs.
The Emergency Economic Stabilization Act of 2008 (EESA),
the legislation that established TARP, authorized Treasury not
only to purchase assets of financial institutions,\2\ but also
to guarantee existing troubled assets.\3\ Under EESA and TARP,
Treasury participates with the Federal Reserve Board and the
FDIC in the Asset Guarantee Program (AGP), which includes a
three-way guarantee of Citigroup assets. In addition to $45
billion in direct investment under two separate TARP programs
and an FDIC guarantee of $37.3 billion of Citigroup
obligations, Treasury, the Federal Reserve Board, and the FDIC
have guaranteed a pool of Citigroup assets valued at
approximately $301 billion. A similar guarantee under the AGP
was arranged for Bank of America but never finalized.
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\2\ See Emergency Economic Stabilization Act of 2008 (EESA), Pub.
L. No. 110-343, Sec. 101 (authorizing the Treasury Secretary to
purchase troubled assets from financial institutions).
\3\ See EESA Sec. 102 (authorizing the Treasury Secretary to
establish ``a program to guarantee troubled assets originated or issued
prior to March 14, 2008, including mortgage-backed securities'' if a
troubled asset purchase program is created).
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EESA directed Treasury to reimburse the Exchange
Stabilization Fund (ESF) for any funds that are used for
Treasury's guarantee of money market funds through the
Temporary Guarantee Program for Money Market Funds (TGPMMF).\4\
At the program's height, it guaranteed $3.2174 trillion in
money market funds.\5\
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\4\ See EESA Sec. 131(a) (stating that the required EESA
reimbursement of the ESF for any funds that are used for the TGPMMF is
to be made ``from funds under this Act,'' meaning that it is funded by
EESA, but not out of the $700 billion appropriated to TARP). See
Section D(2)(a), infra, for a discussion of issues relating to the
legal authority for TGP.
\5\ This raw number overstates the true amount at risk; a large
proportion of money market funds are invested in Treasury securities.
See discussion of the ``real'' amount at risk in Section E.
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The FDIC created its Temporary Liquidity Guarantee Program
(TLGP) less than two weeks after the enactment of EESA, under
authority of the Federal Deposit Insurance Act.\6\ The Debt
Guarantee Program portion of the TLGP (DGP) guarantees debt
issued by banks and BHCs.\7\ The FDIC currently guarantees
approximately $307 billion in outstanding financial institution
obligations, and has the authority to guarantee an additional
$312 billion under the DGP.\8\ Through both the TLGP and its
deposit insurance program, the FDIC has increased insurance for
bank guarantees.\9\
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\6\ See Federal Deposit Insurance Act of 1950, Pub. L. No. 81-797,
Sec. 13(c)(4)(G) (authorizing the FDIC, upon the determination of
systemic risk, to take actions ``to avoid or mitigate serious adverse
effects on economic conditions or financial stability'').
\7\ The TLGP has a second program, the Transaction Guarantee
Program, which provides temporary full guarantees for funds held at
FDIC-insured depository institutions in noninterest-bearing transaction
accounts. This guarantee is in addition to and separate from the
$250,000 coverage provided under the FDIC's general deposit insurance
regulations through June 30, 2010. Unless stated otherwise, discussion
of TLGP in this report refers to the DGP aspect of the program.
\8\ See Federal Deposit Insurance Corporation, Monthly Reports on
Debt Issuance Under the Temporary Liquidity Guarantee Program (as of
Sept. 30, 2009) (online at www.fdic.gov/
regulations/resources/TLGP/total_issuance9_09.html) (hereinafter
``FDIC, September Monthly TLGP Report'') (while as of September 30,
2009, $307 billion was outstanding under the program, the FDIC's
current cap is $620 billion).
\9\ Congress has temporarily increased the deposit insurance
program to insure accounts up to $250,000. In addition, banks that
choose to participate in the TLGP's Transaction Account Guarantee will
have the entirety of their customers' non-interest bearing deposit
accounts insured.
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Treasury has committed the vast majority of its EESA funds
for purchases under Section 101, and the Panel's reports to
date have focused on that particular use of funds. Examining
the relatively smaller amounts committed under Section 102,
however, reveals several important findings.
First, guaranteeing liabilities or backstopping losses on
assets can play as important a role in establishing financial
stability as purchasing assets.
Second, despite the guarantees' significant impact, the
contingent nature of guarantees, coupled with the limited
transparency in implementing these programs, means that the
total amount of money that is being placed at risk is not
always readily apparent. Some financial stabilization
initiatives outside of TARP, such as the FDIC's DGP and
Treasury's TGPMMF, carry greater potential for exposure of
taxpayer funds than TARP itself. The U.S. government was at
risk for a considerable amount of money while these programs
were in full effect and some of that exposure continues.
Finally, the programs examined in this report raise
substantial moral hazard concerns. Explicit guarantees
incentivize managers and investors to ignore or downplay risk.
More broadly, stabilization initiatives as a whole risk
implicitly signaling that the government will provide
extraordinary support whenever economic conditions deteriorate
in the future.
This report will examine in detail the TARP programs that
have guaranteed rather than purchased assets (the Citigroup and
Bank of America guarantees under the AGP), as well as
Treasury's money market fund guarantee, the TGPMMF, and the
FDIC's DGP, which significantly benefited many of the financial
institutions that were the recipients of TARP funds.
Some of these guarantees will extend beyond the end of TARP
and will continue to serve as government backstops to the
financial system. By devoting a report to the way the
guarantees work, the way they relate to the health of the
financial institutions involved, and their potential cost, the
Panel examines another important part of TARP strategy and
implementation. This topic touches on the Panel's mandate to
examine the Secretary of the Treasury's authority under the
TARP, the impact of the TARP on the markets, the protection of
taxpayers' money and transparency issues.
B. The Nature of a Guarantee
1. Legal Aspects of Guarantees
A guarantee is an agreement by one person to satisfy
another person's obligation if the latter person does not do
so. A guarantee involves three parties: the person who owes the
original obligation (the debtor or obligor), the person to whom
that obligation is owed (the creditor), and the guarantor.\10\
Guarantees can be absolute--meaning that the guarantor is
immediately liable--or they can require that other conditions
are met before they take effect. Guarantees may also be limited
to less than 100 percent of the original liability.\11\
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\10\ A guarantee is a form of suretyship. The Restatement (Third)
of Suretyship and Guaranty provides a formal description:
1. [A] secondary obligor has suretyship status whenever:
(a) pursuant to contract (the ``secondary obligation''), an obligee
has recourse against a person (the ``secondary obligor'') or that
person's property with respect to the obligation (the ``underlying
obligation'') of another person (the ``principal obligor'') to that
obligee.
2. An obligee has recourse against a secondary obligor or its
property with respect to an underlying obligation:
(a) whenever the principal obligor owes performance of the
underlying obligation; and
(b) pursuant to the secondary obligation, either:
(i) the secondary obligor has a duty to effect, in whole or in
part, the performance that is the subject of the underlying obligation;
or
(ii) the obligee has recourse against the secondary obligor or its
property in the event of the failure of the principal obligor to
perform the underlying obligation; or
(iii) the obligee may subsequently require the secondary obligor to
either purchase the underlying obligation from the obligee or incur the
duties described in subparagraph (i) or (ii).
Restatement (Third) of Suretyship and Guaranty Sec. 1 (1996).
\11\ See Restatement (Third) of Suretyship and Guaranty Sec. 1 cmt.
k (1996). As indicated in the text, a guarantee may contain many
additional conditions and limitations about triggers for the
guarantor's obligation and precise definitions of the liabilities to
which that obligation applies. See id. at Sec. 1 cmt. j.
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General contract rules govern guarantees.\12\ For example,
guarantees are usually required to be instruments,\13\ and are
construed with the aid of a number of substantive rules
protecting guarantors.\14\ A guarantor who makes good on a
guarantee is normally entitled to collect the amount it paid
(or whatever part it can) from the original debtor \15\ unless
the guarantor waived that right in the guarantee agreement.\16\
This is known as ``subrogation.''
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\12\ See Restatement (Third) of Suretyship and Guaranty Sec. 5
(1996); Louis Dreyfus Energy Corp. v. MG Refining & Marketing, Inc.,
812 N.E.2d 936, 939 (N.Y. 2004).
\13\ Restatement (Third) of Suretyship and Guaranty Sec. 11 (1996).
\14\ See, e.g., Restatement (Third) of Suretyship and Guaranty
Sec. Sec. 37-49 (1996).
\15\ Restatement (Third) of Suretyship and Guaranty Sec. 27 (1996);
see Chemical Bank v. Meltzer, 712 N.E.2d 656, 661 (N.Y. 1999)
(explaining the guarantor is technically said to have been
``subrogated'' to the rights of the obligee).
\16\ See Restatement (Third) of Suretyship and Guaranty Sec. 6
(1996).
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A two-party agreement that one party will pay the other a
defined amount under certain circumstances (e.g., if a pool of
assets does not prove to be worth a defined amount) is not
technically a guarantee contract. The party entitled to payment
cannot look to a third party to obtain the promised amount, so
no additional assets exist to protect the former's ability to
obtain what it is owed.\17\ All the same, such agreements are
sometimes called guarantees.
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\17\ Again, more than one party may be involved on either side of
such a direct agreement. For example, A, B, and C may promise directly
to pay D (or D, E, and F) under certain conditions.
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The FDIC's obligations under its TLGP are true guarantees.
Treasury's TGPMMF, on the other hand, does not technically
create a guarantee relationship, nor do the agreements between
Treasury, the Federal Reserve, and the FDIC, in one regard, or
Citigroup and Bank of America, respectively, in another.\18\
But these are minor distinctions, given the fact that the
obligations of the three government agencies are backed by the
full faith and credit of the United States. While the
government agencies and
the beneficiaries of the arrangements refer to the government
support by several different terms, including ``loss-sharing''
and ``ring-fencing,'' this report refers to these contingent
arrangements as guarantees.
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\18\ The TGPMMF is perhaps better understood as an insurance
program designed to protect MMF investors and, in so doing, support the
commercial paper market.
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Typical provisions in guarantee contracts include: \19\
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\19\ Cf. Langdon Owen, Real Property Lender Security, Lease, and
Other Downside Concerns (June 5, 2008) (online at
www.bankerresource.com/articles/view.php?article_id=624#) (discussing
lender security provisions for real property transactions). The list is
non-exhaustive.
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the nature of the obligation;
the conditions for its performance (e.g.,
whether a guarantee can be enforced if payment
obligations on the underlying debt are accelerated);
the proportionate obligations and rights of
multiple parties (for example, whether obligations to
pay are proportionate or any party can be required to
pay the entire amount owed);
ongoing responsibilities of the obligor or
obligors, including provision of security for
performance;
whether the obligation is continuing or
terminable;
the terms on which subrogation (in the case
either of a true guarantee or a direct agreement) can
occur;
the terms of any waivers, by one or more
parties, of contract, statutes of limitation, or other
defenses that might otherwise be asserted;
allocation of expenses (of enforcement,
protecting collateral, etc.); and
costs of bankruptcy proceedings of one or
more parties to the arrangement.
2. How Guarantees Are Treated on Government Agencies' Books
a. Standard Accounting Treatment
The Financial Accounting Standards Board (FASB) specifies
accounting rules for guarantees issued by institutions that
follow generally accepted accounting principles (GAAP) in the
United States. FASB provides guidance on how to account for the
initial liability that the guarantor (issuer) records to
recognize fair value of the guarantee, as well as on how to
address any liability exposure created over the course of the
guarantee.
The issuance of a guarantee obligates the guarantor in two
respects: (1) the guarantor undertakes an obligation to stand
ready to perform over the term of the guarantee in the event
that the specified triggering events or conditions occur \20\
and (2) the guarantor undertakes a contingent obligation to
make future payments if those triggering events or conditions
occur.
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\20\ U.S. GAAP Codification of Accounting Standards: Codification
Topic 460--Guarantees.
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According to the rules as part of accrual accounting,\21\
fees received and not yet earned are recorded as deferred
revenue which is a liability and is reduced over the life of
the guarantee as revenue is earned. This deferred revenue for
guarantee purposes is called an ``initial stand-ready
liability,'' which reflects the fair value of the guarantee
(expected cash flows over the life of the guarantee). If losses
are expected on the guaranteed assets, guarantee expense must
be accrued as a charge to the guarantor's income if both of the
following conditions are met: (1) it is probable the asset
guaranteed is impaired or the liability guaranteed had been
incurred; and (2) the amount of loss is estimable.
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\21\ U.S. GAAP Codification of Accounting Standards: Codification
Topic 450--Contingencies.
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The initial stand-ready liability for the fee received for
the guarantee but not yet earned, reflecting the fair value of
the guarantee of the loan, is recorded even when it is not
probable that payments will be required under that guarantee,
as that may change over the term of the loan.
b. Accounting Practices of Federal Agencies
The Federal Reserve and the FDIC follow GAAP accounting
rules in preparing their accounting statements while Treasury
follows similar Government Accounting Standards. FASB issues
guidance for adapting GAAP for use by government agencies.
Treasury and the FDIC submit audited financial statements to
the Office of Management and Budget (OMB), and Treasury
subsequently consolidates these statements into a government-
wide financial report. While this report attempts to provide a
balance sheet for the federal government, it is not the federal
budget, and it is not a forecasting document. The financial
report also includes a modified version of an income statement
for the federal government. The federal budget is on a cash
basis and thus provides cash flow information.
From a consolidated, government-wide perspective, the
federal budget treats the guarantee transactions of the three
agencies in three different ways:
Treasury/TARP. Section 123 of EESA requires that
TARP transactions, including asset guarantees undertaken
pursuant to Section 102, be recorded on a ``credit reform''
basis. This means that the cost of the program measures the
discounted present value of the cash flows involved. For most
federal direct loan and guarantee programs, the discount rate
used in the credit reform subsidy calculation is simply the
government's cost of funds. However, EESA requires that the
discount rate used for TARP be the government cost of funds
modified to reflect market risk.
Federal Reserve. The Federal Reserve is excluded
from the federal budget except that its net earnings are paid
to Treasury at the end of each year and are recorded as a
budget receipt. Hence, the only impact of the Federal Reserve's
guarantee activities on the federal budget would be in reducing
its net earnings should the Federal Reserve absorb any losses
on its guarantees.
FDIC. Only the cash flows associated with the FDIC
guarantees are reflected in the federal budget, not the
discounted present value of those flows. This means that no
``cost'' is recorded for the FDIC guarantees under the AGP and
the TLGP unless there is an actual default and payment of a
guarantee claim, in which case the full, undiscounted amount of
that claim is included in the budget.
The following table shows the amounts that each individual
agency and the federal budget have recorded so far for the
three major guarantee programs. Note that the differences
between the Congressional Budget Office (CBO) and OMB budget
estimates for the AGP are not as large as they first appear
because CBO does not include the guarantee fees received in the
cash flows used to calculate the credit reform subsidy figure,
whereas OMB does.
FIGURE 1: SUMMARY OF AGENCY AND FEDERAL BUDGET TREATMENT OF GUARANTEE PROGRAMS
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Treasury/TARP Federal Reserve FDIC
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Agency accounts Federal budget Agency accounts Federal budget Agency accounts Federal budget
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AGP............................. Receipts of $1,028 Receipts of $1,028 Receipts of $57 Not included...... Receipts of $2.7 Receipts of $2.7
million.\22\ million.\23\ million. billion. billion.
TGPMMF.......................... Receipts of $1.2 Receipts of $1.2 -- -- -- --
billion. billion.
TLGP............................ -- -- -- -- Receipts of $9.6 Receipts of 9.6
billion; 2 billion; $2
million million
disbursement.\24\ disbursement.\25\
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\22\ Represents initial credit reform estimate of $752 million in receipts for the AGP transactions in FY 2009, which is subject to end of year
reestimate, plus receipts for the Bank of America termination fee of $276 million.
\23\ Id.
\24\ According to the FDIC, as of October 22, 2009 there has been one failure of a TLGP-participating institution, an affiliate of which had issued
guaranteed debt. While the FDIC anticipates up to a $2 million loss on that issuance, no losses have been paid out yet with respect to the DGP.
\25\ Id.
3. How Guarantees Are Treated on the Books of the Entity Benefitted
a. Guarantee of Assets
For the institutions that receive a guarantee, the fair
value of the guarantee (the fee paid) is recorded as an initial
asset (as a prepaid expense equivalent to the initial liability
recorded by the guarantor) adjusted (through the income
statement as an other operating expense) over the life of the
guarantee to reflect the reduced risk. If and when cumulative
losses (impairment) based on GAAP for the covered assets exceed
an agreed amount or deductible, an asset is recorded
(reflecting expected receipt of payment for the claim) that is
equal to the losses recorded in the relevant period.
b. Guarantee of Liabilities
When a bank issues debt (a liability to the bank) that has
been guaranteed by a third party, the guarantee benefits the
holder of the bank's debt (the lender) rather than the bank.
The bank pays a guarantee premium to the guarantor at the time
of issuance of the debt which is carried as part of the
carrying basis of the underlying debt. This premium is
recognized as an asset and amortized over the life of the
guaranteed debt as an interest expense.
The guarantee in such a case is in effect a debt discount
(i.e., it lowers the borrowing cost). If the bank defaults, a
payment from the guarantor goes directly to the lender,
bypassing the bank. Unlike an asset guarantee, in the case of a
liability guarantee, the bank is not the guaranteed party and
hence it does not record an asset if it defaults on the
guaranteed debt. Rather, the guarantor is liable to the holder
of the underlying debt of the bank.\26\
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\26\ See discussion of asset guarantees and liability guarantees
supra Section B(1).
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Though the accounting of the guaranteed party is similar to
that of the guarantor in terms of the initial recording of the
guarantees, there is significant difference in the treatment of
guarantees of assets versus guarantees of liabilities when a
payment is due from the guarantor. For guarantees of assets,
the guarantor pays the guaranteed party according to the loss
agreement. For guarantees of liabilities, the guarantor pays
the creditor directly (bypassing the obligor).
C. The Programs
1. The Asset Guarantee Program
By the fall of 2008, financial markets were in significant
turmoil. In October 2008, Treasury provided $125 billion in
Capital Purchase Program (CPP) funds--half of the TARP funds
then available--to nine financial institutions selected due to
their perceived importance to the capital markets and the
greater financial system.\27\ At the time, the nine financial
institutions held, in aggregate, approximately 55 percent of
all assets held by U.S.-owned banks.\28\ Treasury maintained
that these institutions were ``healthy'' and that the infusion
of capital was intended primarily to restore market confidence
and stimulate the economy by helping banks increase lending to
consumers and businesses.\29\
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\27\ Bank of America, Citigroup, Wells Fargo, JPMorgan Chase,
Goldman Sachs, Morgan Stanley, Merrill Lynch, State Street Corporation,
and the Bank of New York Mellon were the nine initial financial
institutions to receive the first government capital injections.
Settlement with Merrill Lynch was deferred pending its merger with Bank
of America. The purchase of Merrill Lynch by Bank of America was
completed on January 1, 2009, and this transaction under the CPP was
funded on January 9, 2009. U.S. Department of the Treasury, Troubled
Asset Relief Program Transactions Report for Period Ending October 30,
2009, at 5 (Nov. 3, 2009) (online at www.financialstability.gov/docs/
transaction-reports/11-3-09%20Transactions%20 Report%20as%20of%2010-30-
09.pdf) (hereinafter ``October 30 TARP Transactions Report'').
\28\ U.S. Department of the Treasury, Remarks by Secretary Henry M.
Paulson, Jr. on Financial Rescue Package and Economic Update (Nov. 12,
2008) (online at www.financialstability.gov/latest/hp1265.html)
(stating that ``nine of the largest U.S. financial institutions,
holding approximately 55 percent of U.S. banking assets . . . .'').
\29\ See U.S. Department of the Treasury, Statement by Secretary
Henry M. Paulson, Jr., on Actions to Protect the U.S. Economy (Oct. 14,
2008) (online at www.treasury.gov/press/releases/ hp1205.htm) (stating
that the financial institutions receiving emergency injections of
capital, including Citigroup and Bank of America, were ``healthy
institutions,'' and that they were accepting federal assistance ``for
the good of the U.S. economy'').
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The continuation of significant disruptions in the capital
markets and the banking industry experiencing ``one of the most
financially devastating earnings quarters in recent
history''\30\ during the fourth quarter of 2008, meant that CPP
infusions were not enough for some institutions. In a matter of
weeks, two of the nine institutions--Citigroup and Bank of
America--needed additional support.
---------------------------------------------------------------------------
\30\ SIGTARP, Emergency Capital Injections Provided to Support the
Viability of Bank of America, Other Major Banks, and the U.S. Financial
System, at 1 (Oct. 5, 2009) (online at www.sigtarp.gov/reports/audit/
2009/Emergency_Capital_Injections_Provided_to_Support
_the_Viability_of_Bank_of_America..._100509.pdf ) (hereinafter
``Emergency Capital Injections'').
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Some of this support was provided through the Asset
Guarantee Program (AGP). On December 31, 2008, Treasury issued
a report detailing its Asset Guarantee Program (AGP),\31\ which
Treasury created pursuant to Section 102 of EESA. Under the
AGP, Treasury may guarantee \32\ certain distressed or illiquid
assets that are held by systemically significant financial
institutions.\33\ In exchange, participating financial
institutions pay premiums to Treasury, which are supposed to
cover any losses under the program.\34\ Participating financial
institutions also agree to manage the guaranteed assets
according to certain guidelines.\35\ Treasury's stated
objective for the AGP is to bolster confidence in participating
institutions and to stabilize financial markets,\36\ thereby
strengthening the broader economy.\37\
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\31\ U.S. Department of the Treasury, Report to Congress Pursuant
to Section 102 of the Emergency Economic Stabilization Act, at 2 (Dec.
31, 2008) (online at www.financialstability.gov/docs/AGP/
sec102ReportToCongress.pdf) (hereinafter ``Treasury AGP Report''). For
practical purposes, the AGP was created when the government agreed, in
November 2008, to guarantee certain Citigroup assets. See 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) (hereinafter ``Treasury AGP
Terms Release''). (announcing the federal government's intention to
guarantee Citigroup assets, without specifying AGP as the programmatic
source of the guarantee). There is no evidence that AGP existed prior
to that announcement as a program, but funds were allocated to
Citigroup that were later attributed to AGP. It was not until Treasury
issued its report to Congress in December 2008, however, that it
formally linked the agreement with Citigroup to the AGP. See Treasury
AGP Report, supra note 31, at 1 (announcing that Treasury intended to
``explor[e] use of the Asset Guarantee Program to address the guarantee
provisions of the agreement with Citigroup announced on November 23,
2008'').
\32\ Treasury guarantees assets under the AGP by ``assum[ing] a
loss position with specified attachment and detachment points on
certain assets held by [a] qualifying financial institution[.]''
Treasury AGP Report, supra note 31, at 1. The insured assets are
selected by the financial institution receiving the guarantee and
reviewed for eligibility by Treasury. Id.
\33\ Treasury AGP Report, supra note 31. Treasury regards a
financial institution as ``systemically significant'' if its ``failure
would impose significant losses on creditors and counterparties, call
into question the financial strength of other similarly situated
financial institutions, disrupt financial markets, raise borrowing
costs for households and businesses, and reduce household wealth.''
U.S. Department of the Treasury, Decoder (Sept. 18, 2009) (online at
www.financialstability.gov/roadtostability/decoder.htm) (hereinafter
``Treasury Decoder''). Treasury has stated that, in determining whether
to provide aid under the AGP, it will consider the following factors,
among others:
1. The extent to which destabilization of the institution could
threaten the viability of creditors and counterparties exposed to the
institution, whether directly or indirectly;
2. The extent to which an institution is at risk of a loss of
confidence and the degree to which that stress is caused by a
distressed or illiquid portfolio of assets;
3. The number and size of financial institutions that are similarly
situated, or that would be likely to be affected by destabilization of
the institution being considered for the program;
4. Whether the institution is sufficiently important to the
nation's financial and economic system that a loss of confidence in the
firm's financial position could potentially cause major disruptions to
credit markets or payments and settlement systems, destabilize asset
prices, significantly increase uncertainty, or lead to similar losses
of confidence or financial market stability that could materially
weaken overall economic performance;
5. The extent to which the institution has access to alternative
sources of capital and liquidity, whether from the private sector or
from other sources of government funds.
Treasury AGP Report, supra note 31.
\34\ U.S. Department of the Treasury, Asset Guarantee Program (Mar.
2, 2009) (online at www.financialstability.gov/roadtostability/
assetguaranteeprogram.htm) (hereinafter ``AGP Overview'').
\35\ Treasury AGP Report, supra note 31, at 1; see, e.g., Master
Agreement Among Citigroup Inc., Certain Affiliates of Citigroup Inc.
Identified Herein, Department of the Treasury, Federal Deposit
Insurance Corporation and Federal Reserve Bank of New York at Exhibit
B, Governance and Asset Management Guidelines (Jan. 15, 2009) (online
at www.sec.gov/Archives/edgar/data/831001/000095010309000098/
dp12291_ex1001.htm) (hereinafter ``Citigroup Master Agreement'')
(guidelines governing Citigroup's management of the covered assets).
\36\ Treasury stated that AGP and its Targeted Investment Program,
discussed below, were components of a coordinated effort to counteract
any potential systemic risks. Treasury conversations with Panel staff
(Oct. 22, 2009).
\37\ Treasury AGP Report, supra note 31, at 2.
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From the beginning, Treasury stated that AGP assistance
would not be ``widely available.'' \38\ To date, Treasury has
offered AGP assistance to only two institutions: Citigroup and
Bank of America. In both cases, Treasury offered this
assistance in coordination with the Federal Reserve and the
FDIC, both of which, like Treasury, agreed to absorb certain
losses arising from the guaranteed assets.
---------------------------------------------------------------------------
\38\ Treasury AGP Report, supra note 31, at 1.
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Although the AGP program was jointly announced by Treasury,
the Federal Reserve, and the FDIC, Treasury is the only agency
that refers to this tripartite initiative as AGP. (The latter
two agencies instead refer to this agreement as ``a package of
guarantees, liquidity access and capital.'') \39\ Treasury is
also the only agency whose authority to participate in the
initiative emanates from EESA\40\--an issue discussed in
greater depth in section D of this report.
---------------------------------------------------------------------------
\39\ See, e.g., AGP Overview, supra note 34; U.S. Department of the
Treasury, Joint Statement by Treasury, Federal Reserve and FDIC on
Citigroup (Nov. 23, 2008) (online at financialstability.gov/latest/
hp1287.html); Board of Governors of the Federal Reserve System, Joint
Statement by Treasury, Federal Reserve, and the FDIC on Citigroup (Nov.
23, 2008) (online at www.federalreserve.gov/newsevents/press/bcreg/
20081123a.htm); Federal Deposit Insurance Corporation, Joint Statement
by Treasury, Federal Reserve and the FDIC on Citigroup (Nov. 23, 2008)
(online at www.fdic.gov/news/news/press/2008/pr08125.html).
\40\ The Federal Reserve states its authority derives from
Sec. 13(3) of the Federal Reserve Act of 1913, Pub. L. No. 63-43,
Sec. 13(3); see also Board of Governors of the Federal Reserve System,
Report Pursuant to Section 129 of the Emergency Economic Stabilization
Act of 2008: Authorization to Provide Residual Financing to Bank of
America Corporation Relating to a Designated Asset Pool (online at
www.federalreserve.gov/monetarypolicy/files/129BofA.pdf) (accessed Nov.
2, 2009) (referencing Sec. 13(3) of the Federal Reserve Act as the
source of the Federal Reserve's authority to act).
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a. Citigroup
i. Background
On October 28, 2008, Treasury purchased Citigroup preferred
shares and warrants valued at $25 billion under its CPP.\41\ As
discussed above, at the time, Treasury maintained that CPP
recipients were ``healthy.'' \42\
---------------------------------------------------------------------------
\41\ U.S. Department of the Treasury, Capital Purchase Program
Transaction Report (Nov. 17, 2008) (online at
www.financialstability.gov/docs/transaction-reports/TransactionReport-
11172008.pdf).
\42\ Notwithstanding these statements that the nine financial
institutions were healthy, a recent SIGTARP audit suggests that there
were concerns about the health of at least several of the institutions
at that time, and that ``their overall selection was far more a result
of the officials' belief in their importance to a system that was
viewed as being vulnerable to collapse than concerns about their
individual health and viability.'' SIGTARP, SIGTARP Survey Demonstrates
that Banks Can Provide Meaningful Information On Their Use of TARP
Funds, at 17 (July 20, 2009) (online at www.sigtarp.gov/reports/audit/
2009/SIGTARP_Survey_ Demonstrates_That_
Banks_Can_Provide_Meaningfu_%20Information_On_
Their_Use_Of_TARP_Funds.pdf) (hereinafter ``SIGTARP Bank Audit'').
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On Friday, November 21, 2008, Citigroup approached the
federal government and requested assistance over and above the
$25 billion direct capital infusion it had received in November
under the CPP. In response to rapidly deteriorating market
conditions and Citigroup's position,\43\ the federal government
announced that it would provide additional aid to Citigroup.
---------------------------------------------------------------------------
\43\ See, e.g., Vikram Pandit, Chief Executive Officer of
Citigroup, Citi Reports Fourth Quarter Net Loss of $8.29 Billion, Loss
Per Share of $1.72 (Jan. 16, 2009) (online at www.citibank.com/citi/
press/2009/090116a.htm); Bradley Keoun & Mark Pittman, Citigroup's
Asset Guarantees to be Audited by TARP, Bloomberg (Aug. 19, 2009)
(online at www.bloomberg.com/apps/news?pid=20601087&sid=aiWZXE5RKSCc)
(reporting that Citigroup's shares fell below $5 in November 2008,
raising concerns of a destabilizing run on the bank).
---------------------------------------------------------------------------
This second wave of aid took two forms. First, Treasury
agreed to purchase an additional $20 billion in Citigroup
preferred stock under its Targeted Investment Program
(TIP).\44\ Second, three government agencies (Treasury, the
Federal Reserve, and the FDIC) agreed to share with Citigroup
potential losses on a pool of Citigroup assets that Citigroup
identified as some of its riskiest and most high-profile
assets.\45\ Initially, that pool was valued at up to $306
billion.\46\
---------------------------------------------------------------------------
\44\ 44 U.S. Department of the Treasury, Treasury Releases
Guidelines for Targeted Investment Program (Jan. 2, 2009) (online at
www.treasury.gov/press/releases/hp1338.htm) (hereinafter ``Treasury TIP
Guidelines''). The TIP ``was created to stabilize the financial system
by making investments in institutions that are critical to the
functioning of the financial system. Investments made through the TIP
seek to avoid significant market disruptions resulting from the
deterioration of one financial institution that can threaten other
financial institutions and impair broader financial markets and pose a
threat to the overall economy.'' U.S. Department of the Treasury,
Decoder, supra note 34. As the Panel has before noted, there is no
evidence that the TIP existed as a program prior to that announcement,
but funds were disbursed to Citigroup that were later attributed to the
TIP. See Congressional Oversight Panel, February Oversight
Report:Valuing Treasury's Acquisitions, at 5 (Feb. 6, 2009) (online at
cop.senate.gov/documents/cop-020609-report.pdf).
Treasury states, ``[t]his program description is required by
Section 101(d) of the Emergency Economic Stabilization Act,'' but does
not provide the date TIP was created. TIP is not referred to by name in
EESA. Treasury asserts its authority for this program arises from
Section 101, which authorizes Treasury to purchase troubled assets. See
Treasury TIP Guidelines, supra note 44; see also EESA Sec. 101.
\45\ Generally speaking, the assets in the guarantee pool are loans
and securities backed by residential and commercial real estate and
other such assets, which will remain on Citigroup's balance sheet. U.S.
Dept. of the Treasury, Press Release, Joint Statement by Treasury,
Federal Reserve and the FDIC on Citigroup (Nov. 23, 2008) (online at
www.treas.gov/press/releases/hp1287.htm) (hereinafter ``Treasury
Citigroup Press Release''). For a more detailed breakdown of the asset
pool, see Figure 2, infra. Citigroup, Treasury and the Federal Reserve
have indicated that the assets were valued at the amounts shown on
Citigroup's books at the date of the agreement (or January 15, 2009 for
assets added later). The whole loans within the asset pool are carried
at face value and adjusted for permanent impairments (write-downs) and
any repayments of principal. The securities within the asset pool are
carried at their mark-to-market value. This was confirmed by Citigroup.
(In the notes to its financial statements, Citigroup, as a BHC, is
required to show the market value of these assets, which includes mark-
to-market valuation.) As shown in Figure 2, most of the assets covered
were in the form of whole loans. Citigroup uses the same valuation
principles it uses in its financial statements for the calculation of
losses under the guarantee. See Congressional Oversight Panel, August
Oversight Report, The Continued Risk of Troubled Assets at Section B
(Aug. 11, 2009) (hereinafter ``COP August Oversight Report'') (online
at financialservices.house.gov/cop-081109-report.pdf ) (discussing the
changes in accounting rules that move away from mark-to-market
accounting).
\46\ The terms of the asset guarantee agreement were finalized in
January 2009, at which time the size of the guaranteed pool was reduced
to $301 billion. Treasury AGP Terms Release, supra note 31. The reason
for this reduction was largely the result of certain accounting
corrections as well as the exclusion from the pool of certain asset-
backed collateralized debt obligations. As discussed below, the asset
pool has since shrunk even further due to sales of assets, principal
amortization, and charge-offs. It now stands at approximately $266
billion.
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ii. Structure of the Guarantee
The structure of Citigroup's asset guarantee is relatively
simple. According to the Citigroup Master Agreement,\47\
Citigroup will absorb initial losses arising from the covered
pool up to $39.5 billion.\48\ Citigroup will then absorb 10
percent of any losses in excess of that amount, while the
federal government will absorb the remainder of the losses.
Treasury will absorb the first $5 billion in federal liability,
the FDIC will absorb the second $10 billion in federal
liability, and the Federal Reserve will cover any further
federal liability by way of a non-recourse loan to
Citigroup.\49\ The guarantee runs for up to ten years for
residential assets and five years for non-residential assets.
---------------------------------------------------------------------------
\47\ Citigroup Master Agreement, supra note 35 (setting forth the
agreement by Treasury, the FDIC, and FRBNY to protect Citigroup and
certain of its affiliates from certain losses on an asset pool, as
originally announced on November 23, 2008).
\48\ Citigroup Master Agreement, supra note 35, at 2, 28.
Citigroup's so-called ``deductible'' was ``determined using (i) an
agreed-upon $29 billion of first losses [on the asset pool], (ii)
Citigroup's then-existing reserve with respect to the portfolio of
approximately $9.5 billion, and (iii) an additional $1.0 billion as an
agreed-upon amount in exchange for excluding the effects of certain
hedge positions from the portfolio.'' U.S. Securities and Exchange
Commission, Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for Citigroup Inc. (Aug. 7, 2009), at
35 (online at www.sec.gov/Archives/edgar/data/831001/
000104746909007400/a2193853z10-q.htm) (hereinafter ``Citigroup Second
Quarter 2009 Report''). When the guarantee was first announced on
November 23, 2008, it was announced that the deductible would be $29
billion ``plus reserves.'' When these reserves and the $1 billion for
the hedge position are factored in, the amount becomes the $39.5
billion reflected in the final agreement signed in January.
During a call with Panel staff, Citigroup stated there was
disagreement between the federal government and Citigroup as to the
value of certain hedge positions during negotiations of the deductible.
Since determining which assets were a hedge for other assets to some
degree of precision was extremely difficult, if at all possible,
Citigroup and the government settled on the figure of $1 billion to
account for the existence of these hedges in calculating the
deductible. Citigroup conversations with Panel staff (Oct. 26, 2009).
\49\ Citigroup Master Agreement, supra note 35, at 6-8, 28-30; see
also U.S. Department of the Treasury, The Next Phase of Government
Financial Stabilization and Rehabilitation Policies, at 44 (Sept. 2009)
(online at www.treas.gov/press/releases/docs/
Next%20Phase%20of%20Financial%20Policy,%20Final,%202009-09-14.pdf)
(hereinafter ``Next Phase Report'').
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On a quarterly basis, Citigroup is required to calculate a
number of figures, including the adjusted baseline value of
each asset, the aggregate losses incurred by asset class, and
the aggregate recoveries and gains recognized by the ring-
fenced portfolio.\50\ The losses reported are equal to the
amount of any charge-offs or other realized losses (such as
sales at a loss) taken on covered assets over the quarterly
period. These losses generally count against Citigroup's
deductible under the agreement.\51\ If assets in the pool have
increased in value, then upon their sale or disposition gain
offsets the losses, and the amount the federal government is
liable for decreases. On a monthly basis, Citigroup prepares an
AGP report for senior management and the audit committee that
includes updates on the current value of the ring-fenced assets
and provides a month-to-month change as well as a year-to-date
change (since the inception of the AGP). These monthly reports
also describe the drivers of the change in the value of the
ring-fenced assets and include Citigroup's stress test on these
assets projecting the expected losses over the life of the
guarantee. Citigroup submits this report to Treasury. Net
losses, if any, on the portfolio after Citigroup's losses
exceed its deductible will be paid out by the U.S. government
in a specified manner. If Citigroup's recoveries or gains on
the asset pool exceed its losses, then certain clawback
provisions within the Master Agreement require it to reimburse
the U.S. government for any outstanding advances on a quarterly
basis.
---------------------------------------------------------------------------
\50\ Federal Reserve conversations with Panel staff (Oct. 22,
2009); Citigroup Master Agreement, supra note 35, at 20-21.
\51\ As the FDIC has noted, ``the specific requirements for claims
under the agreement result in some differences between GAAP charge-offs
and recognition of losses under the agreement which would be covered
(first going against Citigroup's deductible and then as an allowed
claim).'' Federal Deposit Insurance Corporation, Responses to Panel
Questions on AGP (Oct. 30, 2009).
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As consideration for this asset guarantee, Citigroup agreed
to issue to Treasury $4.034 billion of perpetual preferred
stock, which pays dividends at 8 percent, and warrants to
purchase 66,531,728 shares of common stock at a strike price of
$10.61.\52\ Citigroup also issued to the FDIC $3.025 billion of
the same perpetual preferred stock issued to Treasury.\53\
(Citigroup was required to reimburse the government for
expenses incurred in negotiating the guarantees.) \54\ Should
Citigroup draw on the Federal Reserve's non-recourse loan
facility, the funds will be subject to a floating Overnight
Index Swap Rate plus 300 basis points.\55\
---------------------------------------------------------------------------
\52\ Citigroup accounts for the loss-sharing program as an
indemnification agreement; it was recorded on Citigroup's Consolidated
Financial Statements as follows:
Per U.S. Generally Accepted Accounting Principles (GAAP), an asset
of $3.617 billion (equal to the initial fair value of the consideration
issued to Treasury) was recorded as ``Other Assets'' on the
Consolidated Balance Sheet and, correspondingly, the issuance of
preferred stock and warrants resulted in an increase of stockholder's
equity by $3.617 billion during the first quarter of 2009.
During the 3rd quarter of 2009, the preferred stock was
subsequently exchanged for ``Trust Preferred Securities'' as part of
the ``Exchange Offer.'' Accordingly, the ``Trust Preferred Securities''
were classified as debt and the Preferred Stock issued in Q1 2009 was
derecognized.
The initially recorded asset will be amortized as an ``Other
Operating Expense'' in the Consolidated Income Statement on a straight-
line basis over the coverage periods (i.e., 10 years for residential
assets and 5 years for non-residential assets) based on the initial
principal amounts of each group.
If cumulative losses in the covered asset pool exceed $39.5
billion, any recoveries on the guarantee will be recorded as an asset
(on the loss sharing program) equal to the losses recorded in the
relevant period.
U.S. Securities and Exchange Commission, Citigroup Inc, Form 10-Q
for the Quarterly Period Ended March 31, 2009 (online at www.sec.gov/
Archives/edgar/data/831001/000104746909005290/a2192899z10-q.htm)
(accessed Nov. 2, 2009).
\53\ U.S. Securities and Exchange Commission, Summary of Terms of
USG/Citigroup Loss Sharing Program at 1-2 (Jan. 15, 2009) (hereinafter
``Citigroup Summary'') (online at www.sec.gov/Archives/edgar/data/
831001/000095010309000098/dp12291_8k.htm). Should Citigroup draw on the
Federal Reserve's non-recourse loan facility, the funds will be subject
to a floating Overnight Index Swap Rate plus 300 basis points. Id.
According to Citigroup, ``the approximately $7.1 billion of
preferred stock issued to the [Treasury] and FDIC in consideration for
the loss-sharing agreement was [subsequently] exchanged for newly
issued 8 percent trust preferred securities.'' Citigroup Second Quarter
2009 Report, supra note 48, at 35.
\54\ Treasury has informed the Panel that no such expenses were
incurred by TARP. However, the Federal Reserve Bank of New York did
incur expenses in connection with the Citigroup ring fence, including
contracts for outside legal counsel and financial advisory services.
See Federal Reserve Bank of New York, Citigroup Ringfencing
Arrangement, Blackrock Contract (Dec. 14, 2008) (online at
www.newyorkfed.org/aboutthefed/Blackrock_Redacted.PDF); Federal Reserve
Bank of New York, ``Citigroup Ringfencing Arrangement,''
PricewaterhouseCoopers Contract (online at www.newyorkfed.org/
aboutthefed/pricewaterhousecoopers_redacted.pdf); Federal Reserve Bank
of New York, ``Citigroup Ringfencing Arrangement,'' Cleary Gottlieb
Stein & Hamilton Contract, at 13-21 (online at www.newyorkfed.org/
aboutthefed/ClearlyGottliebSteinHamilton_LLP.pdf). According to the
FRBNY, Citigroup has repaid all expenses incurred by these contracts in
connection with the Citigroup AGP.
\55\ Citigroup Summary, supra note 53, at 1-2.
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The Citigroup Master Agreement also addresses certain
governance issues. For example, it provides that Citigroup may
not pay common stock dividends in excess of $.01 per share
perquarter until November 20, 2011, except with the government's
consent; that Citigroup will follow certain government-approved
executive compensation guidelines; that Citigroup will follow certain
government-approved asset management guidelines for the covered pool;
and that the federal government may demand a change in management of
the pool if losses in the pool exceed $27 billion.\56\
---------------------------------------------------------------------------
\56\ See Citigroup Master Agreement, supra note 35, at 30, Exhibit
B, Governance and Asset Management Guidelines, Exhibit C, Executive
Compensation; Section D of this report below, which discusses the
creation and structure of the guarantee programs.
---------------------------------------------------------------------------
iii. The Guaranteed Pool
The Master Agreement does not specify the precise value or
composition of the guaranteed asset pool; rather, it sets forth
the criteria for covered assets \57\ and a post-signing process
for negotiating and finalizing those details.
---------------------------------------------------------------------------
\57\ The requirements include: (1) that each asset was owned by a
Citigroup affiliate and included on its balance sheet as of the
agreement date (January 15, 2009); (2) that no foreign assets are to be
included; (3) that no equity securities or derivatives of such equity
securities are to be included; (4) that all assets in the pool must
have been issued or originated prior to March 14, 2008; (5) that
Citigroup or any of its affiliates would not serve as an obligor of any
of the assets; and (6) that the assets are not guaranteed by any
governmental authority pursuant to another agreement. The Panel has
confirmed with Treasury and Citigroup that all assets were originally
on the balance sheet of Citigroup.
Citigroup stated during a conversation with Panel staff that in
determining the assets to be guaranteed, it included mainly ``high
headline exposure'' categories of assets, not necessarily the
technically riskiest, but the types of assets that the markets were
most worried about and the guarantee of which would attract the most
market attention. Citigroup also stated that it included in its initial
proposal all of the assets in each of these categories in an effort to
demonstrate it was not ``cherry-picking'' assets and to reflect moral
hazard concerns. Citigroup conversations with Panel staff, October 26,
2009.
---------------------------------------------------------------------------
Pursuant to the terms of the Master Agreement, the
composition of the asset pool is subject to final confirmation
by the U.S. government.\58\ Citigroup submitted its proposed
asset pool to the U.S. government on April 15, 2009 in
compliance with the Master Agreement,\59\ and the three
agencies had 120 days--until August 13, 2009--to complete their
review.\60\ Treasury, the Federal Reserve, and the FDIC have 90
days after completing their review of the asset pool (i.e.,
until November 11, 2009) to finalize the pool's
composition.\61\ Treasury expects that the asset pool will be
finalized by early November, after the review of the remaining
$2 billion, or roughly one percent of covered assets, is
completed.
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\58\ See Citigroup Master Agreement, supra note 35, at 17.
\59\ See Citigroup Master Agreement, supra note 35, at 17.
\60\ See Citigroup Master Agreement, supra note 35, at 17.
\61\ See Citigroup Master Agreement, supra note 35, at 17.
---------------------------------------------------------------------------
According to Citigroup, the covered asset pool currently
includes approximately $99 billion of assets considered
``replacement'' assets--that is, assets that were added to the
pool to replace assets that were determined not to meet the
criteria set forth in the Master Agreement.\62\ When the idea
of a guarantee of assets was first proposed, the government
agencies agreed to the guarantee in principle, but required
that the assets meet specified criteria. The parties agreed to
these criteria, also referred to as ``filters,'' and started a
due diligence review \63\ to ascertain whether the initial
assets proposed for the pool passed the filters. Many of the
assets in the initial pool were rejected as a result of the
filtering process. As a result of this process (as well as
voluntary exclusions, accounting corrections, and confirmation
of covered asset balances), the total value of the asset pool
fell below the $306 (adjusted to $301) billion amount that was
agreed to initially. Thus, new asset classes (not among the
asset classes initially proposed) were added, such as certain
corporate loans.\64\ This ``swapping'' process is governed by
the terms of the Master Agreement.\65\
---------------------------------------------------------------------------
\62\ Citigroup Master Agreement, supra note 35, at 36. For further
discussion on the criteria for assets in the covered pool, see Section
C(a)(ii), infra.
\63\ The FRBNY, along with PricewaterhouseCoopers (PwC) and
Blackrock, analyzed Citigroup's books (not available to the market)
including the models and assumptions used to value these assets. FRBNY
looked at non-public information relating to Citigroup's assets. The
valuation question also requires the assumption of discount rates and
interest rate levels (on which the value of many of the pool assets are
likely, in part, to depend).
\64\ Citigroup conversations with Panel staff (Oct. 22, 2009);
Treasury conversations with Panel staff (Oct. 19, 2009); Federal
Reserve Bank of New York conversations with Panel staff (Oct. 22,
2009).
\65\ The definitions of ``covered assets'' and ``replacement
covered assets'' are both included in the definitions section of the
Master Agreement. Section 5 of the agreement sets forth detailed
guidelines for how each of the assets must be ``mutually agreed to by
each of the U.S. Federal Parties.'' In particular, Section 5.1(d) sets
out the swapping process. See Citigroup Master Agreement, supra note
35, at 17 (``Citigroup shall have the right to substitute or add, as
the case may be, new assets that qualify as Covered Assets up to the
amount of any such decrease; provided such assets are acceptable to the
U.S. Federal Parties acting in good faith . . . following any such
substitution or addition of new assets, such assets shall be subject to
this Master Agreement and shall be deemed to be `Covered Assets' in all
respects.''). On July 23, 2009 SIGTARP announced it is initiating an
audit of the Citigroup asset guarantee to determine: ``(1) the basis on
which the decision was made to provide asset guarantees to Citigroup,
and the process for selecting the loans and securities to be
guaranteed; (2) what were the characteristics of the assets deemed to
be eligible to be `ring-fenced', i.e., covered under the program, how
do they compare with other such assets on Citigroup's books, and what
risk assessment measures were considered in their acquisition; (3)
whether effective risk management and internal controls and related
oversight processes and procedures are in place to mitigate risks to
the government under this guarantee program with Citigroup; and (4)
what safeguards exist to protect the taxpayer's [sic] interests in the
government's investment in the asset guarantees provided to Citigroup,
and the extent of losses to date.'' See SIGTARP, Engagement Memo--
Review of Citigroup's Participation in the Asset Guarantee Program
(July 23, 2009) (online at www.sigtarp.gov/reports/audit/2009/
EM_Review_of_Citigroup's_Participation_in_the_Asset_Guarantee_Program.pd
f).
---------------------------------------------------------------------------
The most recent description of the asset pool appears in
Citigroup's second quarter 2009 earnings report. According to
that report, the value of assets in the guaranteed pool has
declined from $301 billion to $266.4 billion as a result of
principal repayments and charge-offs. The following table
describes the composition of the asset pool (as of June 30,
2009), including replacement assets, and reflects decreases by
reason of amortization, charge-offs or asset sales.
FIGURE 2: ASSETS COVERED BY CITIGROUP AGP
[Dollars in billions]
------------------------------------------------------------------------
June 30, 2009 November 21, 2008
------------------------------------------------------------------------
Loans:
First mortgages............. $ 86.0 $ 98.0
Second mortgages............ 52.0 55.4
Retail auto loans........... 12.9 16.2
Other consumer loans........ 18.4 19.7
---------------------------------------
Total consumer loans............ 169.3 189.3
Commercial real estate loans 11.4 12.0
Highly leveraged loans...... 1.3 2.0
Other corporate loans....... 12.2 14.0
---------------------------------------
Total corporate loans........... 24.9 28.0
Securities:
``Alt-A'' mortgage 9.5 11.4
securities.................
Special investment vehicles. 5.9 6.1
Commercial real estate...... 1.6 1.4
Other....................... 9.0 11.2
---------------------------------------
Total securities................ 26.0 30.1
Unfunded Lending Commitments:
Second mortgages............ 19.6 22.4
Other consumer loans........ 2.6 3.6
Highly leveraged finance.... 0 0.1
Commercial real estate...... 4.2 5.5
Other commitments........... 19.8 22.0
---------------------------------------
Total unfunded lending 46.2 53.6
commitments....................
---------------------------------------
Total covered assets............ 266.4 301.0
------------------------------------------------------------------------
As of June 30, 2009, Citigroup had announced approximately
$5.3 billion in losses on the guaranteed asset pool--far short
of the $39.5 billion in losses required to trigger any
obligation on the part of the government.\66\ Even though the
final composition of the pool has not yet been determined, the
government considers itself committed to cover any losses
specified by the agreement that occurred after November 23,
2008. Whether a specific loss would be eligible for coverage,
however, cannot be determined until the asset pool is
finalized.
---------------------------------------------------------------------------
\66\ See Citigroup Second Quarter 2009 Report, supra note 48, at
10, 36; see also Section E, infra, which discusses financial
projections for Citigroup made by the Federal Reserve and Citigroup.
---------------------------------------------------------------------------
While the size of the asset pool will diminish over time as
the assets are amortized or sold, the ``deductible'' means that
losses on the pool will not result in losses to Treasury, if at
all, until later in the term of the guarantee.
b. Bank of America
i. Background
Like Citigroup, Bank of America was one of the first
financial institutions to receive substantial infusions of
government capital. Treasury invested $15 billion in the
company under the CPP on October 28, 2008 and another $10
billion under the same program on January 9, 2009.\67\
---------------------------------------------------------------------------
\67\ See October 30 TARP Transactions Report, supra note 27.
---------------------------------------------------------------------------
On September 15, 2008, Bank of America announced plans to
buy Merrill Lynch. At the time, Merrill Lynch was already
experiencing significant losses.\68\ Those losses continued to
mount, largely due to declining asset prices.\69\
---------------------------------------------------------------------------
\68\ See Emergency Capital Injections, supra note 30, at 7-8.
\69\ Public Broadcasting Service, Interview: John Thain (Apr. 17,
2009) (online at www.pbs.org/wgbh/pages/frontline/breakingthebank/
interviews/thain.html) (former CEO of Merrill Lynch stating Merrill's
``operating losses were almost entirely from existing positions and
from the market dislocations that were occurring in that
environment.'').
---------------------------------------------------------------------------
Despite apparent misgivings,\70\ Bank of America chose to
complete the merger, which was finalized in January 2009. Soon
thereafter, CEO Kenneth Lewis requested further federal
assistance in order to cope with larger-than-expected losses at
both Merrill Lynch and Bank of America.\71\ Federal officials
agreed and, as they had done with Citigroup, they decided to
offer Bank of America two additional forms of aid.\72\ First,
Treasury agreed to purchase $20 billion of preferred stock from
Bank of America under the TIP.\73\ Second, Treasury, the
Federal Reserve, and the FDIC agreed to guarantee ``an asset
pool of approximately $118 billion of loans, securities backed
by residential and commercial real estate loans, and other such
assets[.]'' \74\ Most of these assets were acquired by Bank of
America in the Merrill Lynch acquisition.
---------------------------------------------------------------------------
\70\ On December 17, 2008, Bank of America CEO Kenneth Lewis
informed Treasury and the Federal Reserve that, in his view, the
substantial losses suffered by Merrill Lynch could justify invocation
of the ``material adverse change'' clause in the merger agreement
between Bank of America and Merrill Lynch. In response, federal
officials told Mr. Lewis that such action would be ``ill advised, would
likely be unsuccessful, and could potentially destabilize Merrill
Lynch, Bank of America, and the broader financial markets.'' Then-
Treasury Secretary Paulson asked Mr. Lewis to take no action
immediately and to allow the government to consider its options. On
December 21, 2008, Mr. Lewis reiterated his view that Bank of America
would be justified in invoking the material adverse change clause.
House Oversight and Government Reform Committee, Subcommittee on
Domestic Policy. Testimony of Mr. Kenneth D. Lewis, Bank of America and
Merrill Lynch: How Did a Private Deal Turn Into a Federal Bailout?,
111th Cong., (June 11, 2009) (online at oversight.house.gov/
story.asp?ID=2474); Emergency Capital Injections, supra note 30.
The Panel notes that there has been widespread speculation as to
the possibility of a ``deal'' between Bank of America and the U.S.
government, under which the bank would acquire Merrill Lynch and
instead receive the opportunity to obtain the guarantee. This
speculation also includes numerous questions about the acquisition and
whether government officials exerted pressure on Bank of America to
complete the acquisition. While they raise interesting policy
questions, these issues are beyond the scope of the Panel's report.
These issues are, however, the subject of investigations by the House
Oversight and Government Reform Committee, the Securities and Exchange
Commission, and the Office of New York State Attorney General Andrew
Cuomo. On Thursday, April 23, 2009, Attorney General Cuomo sent a
letter to congressional leaders, including Chair Elizabeth Warren of
the Congressional Oversight Panel, discussing legal issues relating to
corporate governance and disclosure practices at Bank of America. In
addition, SIGTARP released a recent audit discussing the basis for the
decision by Treasury, the Federal Reserve Board, and FDIC to provide
Bank of America with additional assistance. See Emergency Capital
Injections, supra note 30.
\71\ See Emergency Capital Injections, supra note 30, at 26-28.
\72\ See Emergency Capital Injections, supra note 30, at 30
(reporting that federal officials decided to offer additional
assistance to Bank of America to ``help ensure that the bank remained a
viable financial institution after the merger and to avert what they
thought could be another market-destabilizing event'').
\73\ Board of Governors of the Federal Reserve System, Treasury,
Federal Reserve, and the FDIC Provide Assistance to Bank of America
(Jan. 16, 2009) (online at www.federalreserve.gov/newsevents/press/
bcreg/20090116a.htm).
\74\ Id. In contrast to the Citigroup pool of assets, much of Bank
of America's asset pool was derivatives, a different type of security
which was very difficult to value and which made efforts to reach a
definitive agreement more challenging.
---------------------------------------------------------------------------
ii. Structure of the Guarantee
A Provisional Term Sheet was drafted reflecting the
outlines of Bank of America's asset guarantee agreement.\75\
The Bank of America guarantee resembled the Citigroup guarantee
in many ways and the parties acknowledge that this was the
intention. According to the Provisional Term Sheet, Bank of
America would absorb initial losses in the guaranteed pool up
to $10 billion. Bank of America would then absorb 10 percent of
any losses in excess of that amount, while the federal
government would absorb the remainder of the losses.\76\
Specifically, Treasury's AGP Program and the FDIC would absorb
the first $10 billion in federal liability (with Treasury
absorbing 75 percent and the FDIC absorbing 25 percent of that
$10 billion loss), while the Federal Reserve would cover any
further federal liability by way of a non-recourse loan to Bank
of America.\77\ The guarantee would run for up to 10 years for
residential assets and five years for non-residential assets.
Bank of America, however, could terminate the guarantee at any
time subject only to the consent of the government and ``an
appropriate fee or rebate in connection with any permitted
termination.'' \78\
---------------------------------------------------------------------------
\75\ See generally 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)
(hereinafter ``Bank of America Provisional Term Sheet'').
\76\ This is different from the Citigroup guarantee structure. In
particular, Citibank must first absorb $39.5 billion in losses compared
to $10 billion by Bank of America.
\77\ See Bank of America Provisional Term Sheet, supra note 75, at
2; see also Congressional Oversight Panel, June Oversight Report:
Stress Testing and Shoring Up Bank Capital, at 15 n.41 (June 9, 2009)
(hereinafter ``COP June Oversight Report'').
\78\ Bank of America Provisional Term Sheet, supra note 75, at 1.
---------------------------------------------------------------------------
In exchange for this guarantee, the Federal Reserve would
receive a commitment fee, while Treasury and the FDIC
collectively would receive (1) $4 billion of preferred stock
paying dividends at 8 percent; and (2) warrants to purchase
Bank of America stock in an amount equal to 10 percent of the
total amount of preferred shares (i.e., $400 million).\79\ The
Provisional Term Sheet explicitly acknowledged that this fee
arrangement could be revised in light of any later
modifications to the guaranteed pool.\80\
---------------------------------------------------------------------------
\79\ The Bank of America Provisional Term Sheet also appeared to
contemplate that Bank of America, like Citigroup, would be subject to
guidelines related to corporate governance, asset management, dividend
disbursement and executive compensation. See Bank of America
Provisional Term Sheet, supra note 75, at 2-3.
\80\ See Bank of America Provisional Term Sheet, supra note 75, at
3.
---------------------------------------------------------------------------
The parties never agreed upon a finalized term sheet.
iii. The Guaranteed Pool
According to Treasury, the pool of Bank of America assets
that the federal government agreed in principle to guarantee
consisted primarily of derivatives--specifically, credit
default swaps--most of which Bank of America acquired when it
merged with Merrill Lynch. Bank of America proposed a list of
assets to be covered by the guarantee, and the agencies and
Pacific Investment Management Company (PIMCO) performed an
initial loss estimate on the assets. The Federal Reserve Board
hired Ernst & Young to ``filter'' the assets. The asset pool
also included (in descending order of value) commercial real
estate loans, corporate loans, residential loans, certain
investment securities, and collateralized debt obligations.\81\
Treasury estimated on a preliminary basis that the asset pool
comprised 72 percent derivatives (including credit default
swaps), 15 percent loans and 13 percent securities.\82\ This
pool conforms to the description of eligible assets as
contained in the January 15, 2009 term sheet.\83\
---------------------------------------------------------------------------
\81\ Treasury conversations with Panel staff (Oct. 22, 2009).
\82\ Id.
\83\ Bank of America Provisional Term Sheet, supra note 75, at 1
(describing the eligible assets as ``financial instruments consisting
of securities backed by residential and commercial real estate loans
and corporate debt, derivative transactions that reference such
securities, loans, and associated hedges, as agreed, and such other
financial instruments as the U.S. government has agreed to guarantee or
lend against (the Pool)'').
---------------------------------------------------------------------------
iv. Termination of the Guarantee
On May 6, 2009, Bank of America notified the federal
government that it wished to terminate ongoing negotiations
surrounding the as-yet-unfinalized guarantee, stating the
market conditions had improved such that the guarantee
agreement was no longer necessary.\84\ The parties proceeded to
negotiate a fee to compensate the government.\85\
---------------------------------------------------------------------------
\84\ See House Committee on Oversight and Government Reform,
Testimony of Federal Reserve Chairman Ben S. Bernanke, Acquisition of
Merrill Lynch by Bank of America, at 3 (June 25, 2009) (online at
oversight.house.gov/documents/20090624185603.pdf) (explaining that Bank
of America chose to terminate the guarantee agreement because ``Bank of
America now believes that, in light of the general improvement in the
markets, this protection is no longer needed'').
\85\ Even though no agreement had been memorialized in writing and
the parties were still negotiating certain terms (i.e., there was no
explicit guarantee) both Bank of America and the government issued
press releases stating the intent to enter such agreement.
---------------------------------------------------------------------------
Initially, Bank of America maintained that it owed the
government only its fees and expenses because the government
suffered no losses, Bank of America received no quantifiable
benefit, and the agreement was never finalized. The government
disagreed, asserting that it should be reimbursed for the fees
contemplated by the Provisional Term Sheet, including the value
of the preferred shares, the warrants, the dividends, and the
commitment fee.\86\ The government conceded, however, that the
fee should be adjusted to reflect (1) the parties' agreement to
set the value of the guaranteed asset pool at $83 billion as
opposed to $118 billion; \87\ and (2) the abbreviated time
period between the announcement of the guarantee and Bank of
America's decision to terminate the guarantee.
---------------------------------------------------------------------------
\86\ Treasury conversations with Panel staff (Sept. 30, 2009).
\87\ The pool was reduced for two reasons. First, the parties
agreed to reduce the pool by $14 billion after the Provisional Term
Sheet was signed to account for assets that were already insured and
which Bank of America believed were being undervalued. Treasury
conversations with Panel staff (Oct. 19, 2009). Second, at the time
Bank of America decided to terminate, the parties had not yet reached
agreement regarding the eligibility of losses on other assets worth
approximately $42 billion. Thus, the parties accounted for the
uncertainty surrounding the latter assets by reducing the size of the
pool by an additional $21 billion (that is, 50 percent of $42 billion).
As a result, for purposes of the Termination Agreement, the parties
agreed that the guaranteed asset pool stood at $83 billion ($118
billion-$14 billion-$21 billion = $83 billion). See Termination
Agreement By and Among Bank of America Corporation, the United States
Department of the Treasury, the Board of Governors of the Federal
Reserve System, On its Own Behalf and on Behalf of the Federal Reserve
System, and the Federal Deposit Insurance Corporation, Schedule A, at 2
(Sept. 21, 2009) (hereinafter ``Termination Agreement'') (online at
online.wsj.com/public/resources/documents/BofA092109.pdf).
---------------------------------------------------------------------------
One key issue in determining the amount of the fee was
determining what would constitute the full duration of the
anticipated guarantee, since it would have run 10 years for
residential assets and five years for non-residential assets.
The parties eventually agreed to base the fee on a 5.7 year
duration for the full guarantee,\88\ reflecting the fact that a
large proportion of the asset pool was non-residential assets.
---------------------------------------------------------------------------
\88\ Treasury stated it anticipated losses would increase during
the later part of the program, thereby increasing its risk exposure
over time. Thus, Treasury believes that 5.7 years was a fair term for
the time based proration. Treasury conversations with Panel staff (Oct.
22, 2009).
---------------------------------------------------------------------------
Ultimately, Bank of America agreed to pay $425 million to
terminate the guarantee,\89\ broken down as follows:
---------------------------------------------------------------------------
\89\ Termination Agreement, supra note 87, at 2.
---------------------------------------------------------------------------
$159 million for the preferred shares, $119
million of which was allocated to Treasury and $40 million of
which was allocated to the FDIC.\90\
---------------------------------------------------------------------------
\90\ Termination Agreement, supra note 87, at 2.
---------------------------------------------------------------------------
$140 million for the warrants, $105 million of
which was allocated to Treasury and $35 million of which was
allocated to the FDIC.\91\
---------------------------------------------------------------------------
\91\ The value of the warrants was calculated using the Black-
Scholes method on the basis of a $13.30 strike price, which was the
price of Bank of America shares on the day it received TIP funds.
Termination Agreement, supra note 87, at 2.
---------------------------------------------------------------------------
$69 million for foregone dividends on the
preferred shares, $52 million of which was allocated to
Treasury and $17 million of which was allocated to the
FDIC.\92\
---------------------------------------------------------------------------
\92\ Termination Agreement, supra note 87, at 2.
---------------------------------------------------------------------------
$57 million to the Federal Reserve for the
commitment fee contemplated by the Provisional Term Sheet.\93\
---------------------------------------------------------------------------
\93\ Termination Agreement, supra note 87, at 1.
---------------------------------------------------------------------------
All told, Treasury received $276 million, the Federal
Reserve received $57 million, and the FDIC received $92 million
from Bank of America.
2. Treasury's Temporary Guarantee Program for Money Market Funds
a. Background
A money market fund (MMF) is a type of mutual fund that
invests only in highly-rated, short-term debt instruments.\94\
Government funds invest primarily in government securities such
as U.S. Treasuries, while prime funds invest primarily in non-
government securities such as the commercial paper (i.e.,
short-term debt) of businesses. Investors use MMFs as a safe
place to hold short-term funds that may pay higher interest
rates than a bank account. Unlike bank deposits, however, MMFs
traditionally have not been insured, nor is a fund's sponsor
legally obligated to provide support.\95\
---------------------------------------------------------------------------
\94\ According to SEC regulations, MMFs may invest in debt
instruments including government securities, certificates of deposit,
commercial paper of companies, Eurodollar deposits, and repurchase
agreements. 17 C.F.R. 270.2a-7 (2008) (SEC Rule 2a-7).
\95\ To preserve its business interests, a fund's sponsor may seek
SEC approval to purchase underperforming securities at par or provide
guarantees agreeing to cover that security at par. This is sometimes
referred to as ``parental support.'' Since July 2007, around one-third
of the top U.S. MMFs have received sponsor support to shore up their
operations. See Bank for International Settlements, US Dollar Money
Market Funds and Non-US Banks, BIS Quarterly Review, at 68-69 (Mar.
2009) (hereinafter ``BIS, US Dollar Money Market Funds and Non-US
Banks'') (online at www.bis.org/publ/qtrpdf/r_qt0903.pdf); see also
Mercer Bullard, Federally Insured Money Market Funds and Narrow Banks
the Path of Least Insurance (Mar. 2, 2009) (online at papers.ssrn.com/
sol3/papers.cfm?abstract_id=1351987 ) (hereinafter ``Bullard,
Federally-Insured Money Market Funds'').
---------------------------------------------------------------------------
MMFs are structured to be highly liquid and protect
principal by maintaining a stable net asset value (NAV) of
$1.00 per share.\96\ If the securities that a fund holds
decrease in value, the MMF's NAV may drop below $1.00.\97\ In
this case, the MMF is said to have ``broken the buck,'' a
``rare and significant event'' given the widespread perception
of the safety of these funds.\98\
---------------------------------------------------------------------------
\96\ U.S. Securities and Exchange Commission, Net Asset Value (Mar.
26, 2009) (online at www.sec.gov/answers/nav.htm).
\97\ See Bullard, Federally-Insured Money Market Funds, supra note
95, at 8 (``A decline of 0.51 percent in the value of an MMF's holdings
lowers its per share value to $0.9949, which rounds down to a per share
price of $0.99.'').
\98\ See Emergency Capital Injections, supra note 30. Sponsor
support has historically prevented MMFs from ``breaking the buck.''
Prior to the Reserve Primary Fund event discussed infra, only one other
fund in 30 years had done so. See, e.g., BIS, US Dollar Money Market
Funds and Non-US Banks, supra note 95. In 1994, the Community Bankers
US Government Fund (US Government Fund) became the first MMF in history
to ``break the buck.'' See Investment Company Institute, Report of the
Money Market Working Group, at 39 (Mar. 17, 2009) (online at
www.ici.org/pdf/ppr_09_mmwg.pdf) (hereinafter ``ICI Money Market
Working Group Report''). US Government Fund had invested a large
percentage of its assets in risky derivatives. See Saul S. Cohen, The
Challenge of Derivatives, 63 Fordham L. Rev. 1993, 1995 n.15 (1995)
(internal citations omitted). The fund's ``breaking the buck'' caused
widespread concern by anxious investors. Sharon R. King, After Fund's
Death, Managers Reassure Municipal Investors (Oct. 3, 1994) (online at
www.americanbanker.com/issues/159_115/-47018-1.html). Many fund
executives took defensive measures such as sending investors flyers
explaining the company's guidelines on monitoring derivatives
investments and education brochures on derivatives. Id. Although they
assured investors US Government Fund was an ``isolated incident,''
executives nevertheless declined to comment on the record for fear of
publicity causing heightened concern among investors. Investors
ultimately received $0.96 per share. Id.
---------------------------------------------------------------------------
Leading into July 2007, as the credit crisis intensified,
investment managers reallocated their portfolios away from
riskier pooled investment funds and into MMFs.\99\ Between July
2007 and August 2008, more than $800 billion in new capital
poured into MMFs.\100\ Inflows largely came from institutional
investors who favored government funds over prime funds.\101\
Both prime funds and government funds generally shifted their
holdings away from higher risk investments (e.g., commercial
paper) and into lower risk investments, (e.g., Treasury and
agency securities).\102\
---------------------------------------------------------------------------
\99\ See ICI Money Market Working Group Report, supra note 98 (this
partly reflects industry trends whereby, ``institutional share classes
of money market funds typically see strong inflows when the Federal
Reserve lowers short-term interest rates, as they did after July
2007.'').
\100\ ICI Money Market Working Group Report, supra note 98.
\101\ See BIS, US Dollar Money Market Funds and Non-US Banks, supra
note 95, at 70.
\102\ See BIS, US Dollar Money Market Funds and Non-US Banks, supra
note 95, at 70.
---------------------------------------------------------------------------
Stress in the money markets began to emerge by mid-2007 as
indicated by spreads between yields on one-month commercial
paper of financial companies and Treasury bills. These spreads
widened substantially, climbing to nearly 400 basis points at
one time.\103\ Despite those strains, MMFs continued to
maintain stable NAVs of $1.00 per share and honor redemption
requests within the seven days in which they must return funds
to investors. That changed on September 16, 2008, when the
Reserve Primary Fund broke the buck. A day earlier, Lehman
Brothers had filed for bankruptcy. Because of the Reserve
Primary Fund's exposure to Lehman's short-term debt, its NAV
fell to $0.97 per share.\104\ This event quickly triggered a
broad-based run of investor redemptions in prime funds and the
reinvestment of capital into government funds.\105\ On
September 15, 2008, redemption orders for the Reserve Primary
Fund totaled $25 billion. Over the next two days, contagion
spread. Although no other fund's NAV dipped below $1.00 per
share, investors liquidated $169 billion from prime funds and
reinvested $89 billion into government funds.\106\ By September
19, 2008, withdrawal requests had climbed to 95 percent of the
Reserve Primary Fund's $62 billion portfolio, necessitating
approval from the SEC to delay redemption payments beyond the
seven-day requirement.\107\
---------------------------------------------------------------------------
\103\ See ICI Money Market Working Group Report, supra note 98, at
50.
\104\ See Emergency Capital Injections, supra note 30, at 9; BIS,
US Dollar Money Market Funds and Non-US Banks, supra note 95. Primary
held $785 million in Lehman short-term debt, meaning that 1.2 percent
of its assets were in Lehman debt.
\105\ See BIS, US Dollar Money Market Funds and Non-US Banks, supra
note 95, at 72 (reflecting the events set off ``broad-based but
selective shareholder redemptions, like a bank run . . .'').
\106\ See Appendix, Figure 12; see BIS, US Dollar Money Market
Funds and Non-US Banks, supra note 95, at 72.
\107\ Securities and Exchange Commission, In the Matter of The
Reserve Fund, On Behalf of Two of Its Series, the Primary Fund and the
U.S. Government Fund (Sept. 22, 2008) (online at www.sec.gov/rules/ic/
2008/ic-28386.pdf).
---------------------------------------------------------------------------
In normal markets, MMFs can liquidate their holdings to
meet investors' withdrawal requests. The events of the previous
days, however, had brought the commercial paper market to a
virtual standstill.\108\ Credit spreads on commercial paper
relative to U.S. Treasuries rose significantly.\109\ In the
distressed market, MMFs could not sell their commercial paper
to meet investor redemptions, nor could corporations and
financial institutions easily access the market for their
financing needs.\110\
---------------------------------------------------------------------------
\108\ Collectively, MMFs carry a concentrated share of the
commercial paper market. Consequently, when MMFs shift away from these
securities and into safer ones (as discussed infra), funding liquidity
for commercial paper issuers can be affected and their cost of capital
can rise. See BIS, US Dollar Money Market Funds and Non-US Banks, supra
note 95, at 69 ( ``MMFs held nearly 40% of the outstanding volume of CP
in the first half of 2008.''); see also Senior Supervisors Group, Risk
Management Lessons from the Global Banking Crisis of 2008, at 13 (Oct.
2009) (hereinafter ``Senior Supervisors Group'') (online at
www.occ.treas.gov/ftp/release/2009-125b.pdf) (``Firms indicated that
most of the [MMF] sector would not invest in unsecured commercial paper
of financial institutions and would provide funds only rarely, on an
overnight basis and at extremely high cost.'').
\109\ See Appendix, Figure 14.
\110\ See Senior Supervisors Group, supra note 108, at 12-13.
---------------------------------------------------------------------------
On September 19, 2008, two weeks before EESA was signed
into law, Treasury announced the TGPMMF. Treasury relied on the
Exchange Stabilization Fund (ESF) to fund the TGPMMF.\111\ The
program's stated purpose was to ``enhance market confidence by
alleviating investors' concerns about the ability of money
market mutual funds to absorb losses.'' \112\ According to
Treasury, the TGPMMF was intended specifically to ``stop a run
on money market mutual funds in the wake of the failure of
Lehman Brothers'' and to alleviate concerns regarding the
industry because MMFs ``are an important investment vehicle for
many Americans and a fundamental source of financing for our
capital markets and financial institutions. Maintaining
confidence in the money market mutual fund industry is critical
to protecting the integrity and stability of the global
financial system.'' \113\
---------------------------------------------------------------------------
\111\ The ESF, which is controlled by the Secretary of the
Treasury, holds U.S. dollars, foreign currencies, and Special Drawing
Rights (SDR). It is typically used to purchase or sell foreign
currencies, to hold U.S. foreign exchange and SDR assets, and to
provide financing to foreign governments pursuant to the requirements
of 31 U.S.C. Sec. 5302. See U.S. Department of the Treasury, Exchange
Stabilization Fund: Introduction (Aug. 6, 2007) (online at
www.treas.gov/offices/international-affairs/esf/). Treasury's legal
authority to use the ESF in this way is discussed supra in section H.
\112\ Next Phase Report, supra note 49, at 46.
\113\ Next Phase Report, supra note 49, at 46.
---------------------------------------------------------------------------
After two extensions, the TGPMMF expired on September 18,
2009.\114\
---------------------------------------------------------------------------
\114\ See Next Phase Report, supra note 49, at 46; U.S. Department
of the Treasury, Treasury Announces Extension of Temporary Guarantee
Program for Money Market Funds (Nov. 24, 2008) (online at
www.treas.gov/press/releases/hp1290.htm); U.S. Department of the
Treasury, Treasury Announces Extension of Temporary Guarantee Program
for Money Market Funds (Mar. 31, 2009) (online at www.treas.gov/press/
releases/tg76.htm).
---------------------------------------------------------------------------
Treasury's launch of the TGPMMF was coordinated with
Federal Reserve Board initiatives focused on preventing the
collapse of, and restoring health to, the commercial paper
market. These efforts included the launch of the Asset-Backed
Commercial Paper Money Market Mutual Fund Liquidity Facility
(AMLF), which grants non-recourse loans to financial
institutions to purchase asset-backed commercial paper from
MMFs,\115\ and the Commercial Paper Funding Facility (CPFF),
which purchases three-month unsecured commercial paper directly
from eligible issuers.\116\
---------------------------------------------------------------------------
\115\ Board of Governors of the Federal Reserve System, Asset-
Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
(Sept. 2, 2009) (online at www.federalreserve.gov/monetarypolicy/
abcpmmmf.htm).
\116\ Federal Reserve Board of New York, Commercial Paper Funding
Facility (online at www.federalreserve.gov/monetarypolicy/
20081021a.htm) (accessed Oct. 29, 2009). The Federal Reserve also
announced the creation of the Money Market Investor Funding Facility
(MMIFF), which was designed to provide senior secured funding to
facilitate the private-sector purchase of eligible assets from eligible
investors, but was never used and terminated on October 30, 2009. See
Federal Reserve Bank of New York, Money Market Investor Funding
Facility: Program Terms and Conditions (online at www.newyorkfed.org/
markets/mmiff_terms.html) (accessed Oct. 29, 2009); Board of Governors
of the Federal Reserve System, Federal Reserve Statistical Release
(online at www.federalreserve.gov/releases/h41/) (accessed Oct. 29,
2009) (weekly H.4.1 releases showing zero balances for MMIFF).
---------------------------------------------------------------------------
One Treasury intervention in the MMF market occurred
outside the TGPMMF.\117\ On November 20, 2008, Treasury
announced that it would serve as the buyer of last resort to
facilitate an ``orderly and timely'' liquidation of the Reserve
Fund's U.S. Government Fund (USGF).\118\ Contagion caused by
the Reserve Primary Fund led investors to request redemptions
equaling 60 percent of USGF's $10 billion portfolio.\119\ The
SEC had permitted Reserve Fund to suspend share redemptions in
the USGF.\120\ A November 19, 2008 letter agreement between
Treasury and Reserve Fund granted USGF a 45-day window to
continue to sell its assets, at or above their amortized cost,
to raise capital for investor redemptions.\121\ At the
conclusion of this period, Treasury agreed to purchase from its
ESF ``any remaining securities at amortized cost, up to an
amount required to ensure that each shareholder receives $1 for
every share they own.'' \122\ A sizeable portion of USGF's
assets consisted of variable- and floating-rate agency
securities,\123\ which compounded the difficulty in meeting
investor redemption requests. In the constrained market,
``borrowings with variable interest rates [were] particularly
unattractive'' to investors, and Treasury was reportedly
concerned that the problems with the USGF ``could tip the
market for agency debt into an even worse condition if it sold
its assets at steep discounts.'' \124\
---------------------------------------------------------------------------
\117\ Treasury's position with respect to this point is discussed
below. See infra note 2(c).
\118\ U.S. Department of the Treasury, Treasury Enters Into
Agreement To Assist the Reserve Fund's US Government Money Market Fund
(Nov. 20, 2008) (online at www.treas.gov/press/releases/hp1286.htm)
(hereinafter ``Treasury Reserve Fund Release'').
\119\ See Diya Gullapalli, Treasury Will Help Liquidate Reserve
Fund, Wall Street Journal (Nov. 21, 2008) (online at online.wsj.com/
article/SB122722728577846211.html).
\120\ See U.S. Securities and Exchange Commission, Investment
Company Act of 1940 Release No. 28386 (Sept. 22, 2008) (online at
www.sec.gov/rules/ic/2008/ic-28386.pdf).
\121\ See Treasury Reserve Fund Release, supra note 118.
\122\ See id.
\123\ See U.S. Department of the Treasury, Letter Agreement
Relating to the Guarantee Agreement, Dated as of September 19, 2008,
Between the Treasury and The Reserve Fund, at 25-26 (Nov. 19, 2008)
(online at www.treas.gov/press/releases/reports/
reservefundletteragreement.pdf) (hereinafter ``Treasury-Reserve Fund
Letter Agreement'') (listing USGF portfolio investments in Fannie Mae,
Federal Farm Credit Bank, Federal Home Loan Bank, and Federal Home
Mortgage Corp.).
\124\ See Diya Gullapalli, Treasury Will Help Liquidate Reserve
Fund (Nov. 21, 2008) (online at online.wsj.com/article/
SB122722728577846211.html). The presence of a substantial number of
illiquid assets with relatively long maturities in a government MMF is
attributable to an SEC provision that allows a fund to use the interest
rate reset date of variable- and floating-rate securities (VROs),
rather than the security's final maturity or demand date in calculating
a fund's maximum dollar-weighted average portfolio maturity (WAM),
which must be less than 90 days. SEC Rule 2a-7(c)(2) & (d)(1). The SEC
has proposed amendments to this rule. See Money Market Fund Reform, 74
Fed. Reg. 32688 at 32701, 32738-39 (proposed July 8, 2009) (to be
codified at 17 C.F.R. pts. 270 & 274) (online at www.sec.gov/rules/
proposed/2009/ic-28807fr.pdf) (hereinafter ``SEC Proposed Money Market
Fund Reform Rule'') (applying maturity/demand date for long-term (397
days or less) variable and long-term floating rate securities but
preserving reset date rule for comparable short-term securities).
---------------------------------------------------------------------------
On January 15, 2009, Treasury purchased the remaining $3.6
billion of securities from the USGF pursuant to the letter
agreement.\125\ Although the USGF participated in the TGPMMF,
and, while this asset purchase did not represent a claim under
the TGPMMF, it appears Treasury provided support to this fund
in order to prevent a TGPMMF claim. At the time Treasury
purchased USGF securities in January, the market value was
below the purchase price due to market illiquidity.\126\
Because Treasury likely purchased the USGF assets at an amount
above their market value, it provided a subsidy to the Reserve
Fund equivalent to the difference. Treasury has informed Panel
staff that the assets were all highly-rated GSE securities,
posing a very low risk of default, and that the last of the
assets are expected to reach maturity in November 2009 without
incurring any losses to Treasury.
---------------------------------------------------------------------------
\125\ See also U.S. Department of the Treasury, Department of
Treasury Fiscal Year 2010 Budget Request, at 975-76 (online at
www.whitehouse.gov/omb/budget/fy2010/assets/tre.pdf) (accessed Oct. 22,
2009); U.S. Department of the Treasury, Exchange Stabilization Fund
Policy and Operations Statements Fiscal Year 2008, at 27 (online at
www.treas.gov/offices/international-affairs/esf/congress_reports/
final_22509wdc_combined_esf_auditreports.pdf) (accessed Nov. 2, 2009).
\126\ Treasury has provided Panel staff with a list of the
securities purchased by Treasury from the USGF, which includes their
market value ($3,618,533,450), amortized cost ($3,625,000,000), and
purchase price as of January 14, 2009 ($3,629,795,815). See Treasury-
Reserve Fund Letter Agreement, supra note 123, at 25 (showing similar
narrow spreads (about 0.2 percent) as of November 14, 2008, between
market value and amortized cost for a pool of USGF securities including
securities later purchased by Treasury). The difference between the
purchase price and amortized cost is attributable to $4.795 million of
interest received on the securities as of that date.
---------------------------------------------------------------------------
b. Structure of the Guarantee
The TGPMMF was a voluntary program; Treasury allowed all
publicly offered MMFs meeting certain criteria to
participate.\127\ Participating MMFs were required to sign
guarantee agreements with the federal government and to pay
fees, as discussed below. Under the guarantee, payments would
be triggered by a ``guarantee event,'' which occurred if the
NAV of an MMF fell below $0.995, unless promptly cured.\128\ If
a guarantee event did occur, Treasury would use the ESF to
ensure that investors in that MMF would receive $1.00 per
covered MMF share up to the extent of their holdings in that
MMF on September 19, 2008.\129\ A guarantee event would result
in the liquidation of the MMF.
---------------------------------------------------------------------------
\127\ Specifically, the TGP was open to all money market funds: (1)
registered under the Investment Company Act of 1940; (2) offering
securities registered under the Securities Act of 1933; (3) operating
under a policy of maintaining a stable NAV or share price of $1.00 per
share; and (4) operating in compliance with Rule 2a-7 under the
Investment Company Act of 1940. In addition, any MMF wishing to
participate in the Program was required to have a market-based NAV of
at least $0.995 per share on September 19, 2008. U.S. Department of the
Treasury, Summary of Terms for the Temporary Guaranty Program for Money
Market Funds, at 1 (online at www.treas.gov/offices/domestic-finance/
key-initiatives/money-market-docs/TermSheet.pdf) (accessed Nov. 2,
2009) (hereinafter ``TGP Term Sheet'').
\128\ See TGP Term Sheet, supra note 127 at 1; U.S. Department of
Treasury, Guarantee Agreement, at 4 (Sept. 19, 2008) (hereinafter
``Treasury Guarantee Form Agreement'') (accessed Nov. 2, 2009) (online
at www.treas.gov/offices/domestic-finance/key-initiatives/money-market-
docs/Guarantee-Agreement_form.pdf).
\129\ See Section D; see generally TGP Term Sheet, supra note 127.
---------------------------------------------------------------------------
Coverage under the TGPMMF was capped at an investor's
holding in a participating MMF account on September 19,
2008.\130\ Thus, if an investor had purchased additional
interests in a participating MMF after September 19, 2008,
those interests would not be insured by the MMF.\131\
Similarly, if an investor subsequently sold shares in a
participating MMF and owned a lesser amount at the time of a
guarantee event, the lesser amount would be covered.\132\
---------------------------------------------------------------------------
\130\ See generally TGP Term Sheet, supra note 127.
\131\ See U.S. Department of the Treasury, Frequently Asked
Questions About Treasury's Temporary Guarantee Program for Money Market
Funds (Sept. 29, 2009) (online at www.ustreas.gov/press/releases/
hp1163.htm) (hereinafter, ``Treasury TGP FAQ''). The MMF trade
association, the Investment Company Institute (ICI), stated that
Treasury originally proposed to impose a broader guarantee of the
industry, and the ICI successfully urged Treasury to limit coverage to
the amount in investors' shareholder accounts as of September 19, 2008
to reduce opportunities for arbitrage and to prevent the possibility of
large flows in and out of MMFs upon implementation and expiration of
the TGP. See Paul Schott Stevens, President and CEO, ICI, Remarks at
ICI's 2008 Equity, Fixed-Income & Derivatives Markets Conference (Oct.
6, 2008) (online at www.ici.org/policy/regulation/products/mutual/
08_equity_stevens_spch); Investment Company Institute, 2009 Annual
Report to Members (forthcoming).
\132\ See Treasury TGP FAQ, supra note 131. Treasury's
implementation of the TGP goes beyond the scope of any insurance
offered by the private market for MMFs. In 1998, the ICI Mutual
Insurance Company, a captive insurance company, offered its members a
limited insurance product designed to protect participating funds
against default risk arising from issuer payment default, insolvencies,
and other credit-related events but not against interest rate risk or
market illiquidity. See U.S. Securities and Exchange Commission,
Division of Investment Management (July 27, 1998), Ref No. 98-441-CC,
ICI Mutual Insurance Company, File No. 132-3 (online at www.sec.gov/
divisions/investment/noaction/1998/icimutual072798.pdf). According to
an industry source, its insurance coverage was limited to $50 million
with premiums set by portfolio risk, and a similar limited insurance
product was offered by non-captive insurance providers. Industry
participation in private insurance arrangements was never extensive,
and the products were discontinued after several years because
relatively high premiums in a low interest rate environment made use
economically unattractive.
---------------------------------------------------------------------------
Additionally, the guarantee agreements specifically limited
aggregate coverage to the amount of funds available in the ESF
on the date of a guarantee event, with investor claims in
excess of available funds subject to pro-ration.\133\
---------------------------------------------------------------------------
\133\ See TGP Term Sheet, supra note 127; see Section D, infra.
Because the balance of the ESF hovered around $50 billion, a relatively
large cascading set of fund failures--precisely the sort that the
program was designed to prevent--would have to occur before otherwise
eligible claimants would be subject to pro-rationing of claims. And
this possibility was further mitigated when Section 131 of EESA
compelled Treasury to replenish the ESF when it was depleted by program
claims. EESA Sec. 131(a). According to Treasury, it would not have been
permitted to replenish the ESF with TARP funds because TARP funds can
only be used to purchase or guarantee ``troubled assets.'' COP August
Oversight Report, supra note 45, at 127-129 (reprinting ``Letter from
Treasury Secretary Timothy Geithner to COP Chair Elizabeth Warren''
dated July 21, 2009 (hereinafter ``Geithner Letter to Warren'')); EESA
Sec. 115. Thus, according to Treasury, had it been required to
replenish ESF funds, it would have had to do so pursuant to Section 118
of EESA, which authorizes Treasury to sell ``any securities issued
under chapter 31 of title 31'' for the purpose of carrying out ``the
authorities granted in this Act.'' EESA Sec. 118. Thus, in Treasury's
view, the TGP could not and did not involve the use of TARP funds;
rather, it involved ESF funds backstopped by other, non-TARP Treasury
funds, which were available as ``in effect a permanent, indefinite
appropriation.'' Geithner Letter to Warren, supra note 133 at 129.
---------------------------------------------------------------------------
c. Participation Fees
Funds participating in the program paid fees based on their
NAV as of September 19, 2008.
For the period between September 19, 2008 and
December 18, 2008, funds whose NAV per share was greater than
or equal to $0.9975 paid a fee equal to the number of
outstanding shares multiplied by 0.00010.\134\ For funds whose
NAV per share was less than $0.9975, the fee was the number of
outstanding shares multiplied by 0.00015.\135\
---------------------------------------------------------------------------
\134\ U.S. Department of the Treasury, Summary of Terms for the
Temporary Guaranty Program for Money Market Funds (online at
www.treas.gov/offices/domestic-finance/key-initiatives/money-market-
docs/TermSheet.pdf) (accessed Nov. 3, 2009).
\135\ Id.
---------------------------------------------------------------------------
For the period between December 19, 2008 and April
30, 2009, the fee for funds with NAV per share greater than or
equal to $0.9975 equaled the number of outstanding shares
multiplied by 0.00015.\136\ For funds with NAV per share less
than $0.9975, the fee was the number of outstanding shares
multiplied by 0.00022.\137\
---------------------------------------------------------------------------
\136\ U.S. Department of the Treasury, Temporary Money Market Fund
Guarantee Program Extension Announcement, at 1 (online at treas.gov/
press/releases/reports/moneymarketextension.pdf) (accessed Nov. 3,
2009).
\137\ Id.
---------------------------------------------------------------------------
For the period between May 1, 2009 and September
18, 2009, the fee was the number of outstanding shares
multiplied by 0.00015 for funds whose NAV was greater than or
equal to $0.9975.\138\ For funds with NAV per share less than
$0.9975, the fee was the number of outstanding shares
multiplied by 0.00023.\139\
---------------------------------------------------------------------------
\138\ U.S. Department of the Treasury, Temporary Money Market Fund
Guarantee Program Extension Announcement, at 1 (online at
www.treas.gov/press/releases/reports/
03312009ExtensionAnnouncement.pdf).
\139\ Id.
---------------------------------------------------------------------------
Treasury has explained that the two-tiered fee structure
reflects the higher risk of MMFs with NAVs below $0.9975
triggering a TGPMMF claim and that the variation in basis
points among program periods indicates a stable fee of 4 or 6
basis points on an annualized basis, the nominal differences of
fees reflecting the unequal lengths of the program
periods.\140\
---------------------------------------------------------------------------
\140\ Treasury information provided to Panel staff (Nov. 2, 2009).
Treasury staff explained that agency officials involved in the initial
fee setting were no longer available, and that they were unaware of any
memoranda on the topic. See id.
---------------------------------------------------------------------------
d. Scope of the Program
In the initial phase of the TGPMMF, 1,486 MMFs
participated, representing over $3.2 trillion or 93 percent of
the assets in the MMF market as of September 19, 2008.\141\ As
liquidity returned to the market and MMFs held less risky
commercial paper, fewer funds chose to participate. These
figures, however, inflate Treasury's true exposure under the
TGPMMF in each program phase because the guarantee is specific
to investor accounts in participating funds as of September 19,
2008. There is no exact correlation between a MMF's
participation in the TPGMMF and the coverage of its assets by
TPGMMF. If an investor sold its shares in the MMF to a new
investor (or even transferred his shares between accounts)
after September 19, 2008, Treasury was not obligated to
guarantee the NAV of the new shareholder's shares even if the
MMF continued to participate in the program.\142\ It is unclear
whether later investors truly understood this important
coverage limitation despite a Treasury FAQ on point.\143\ Given
the cycling in and out of MMF accounts, it is possible that
Treasury's exposure was well under $2 trillion by the second
extension. Finally, Treasury's practical exposure was even more
limited because a majority of the assets in covered accounts
were not subject to real credit risk, including Treasury
securities and GSE securities, which both had implicit or
explicit federal government backing.
---------------------------------------------------------------------------
\141\ See Next Phase Report, supra note 49, at 46.
\142\ See Treasury TGP FAQ, supra note 131.
\143\ Id.
FIGURE 3: TGPMMF PARTICIPATION AND PREMIUMS \144\
[Dollars in billions]
----------------------------------------------------------------------------------------------------------------
Participating Assets of Participating
Program phase investment participating funds' assets as Premiums
companies \145\ funds % of MMF market collected
----------------------------------------------------------------------------------------------------------------
Initial phase (9/19/08-12/18/08).... 366 $3,217.4 93 $0.3316
First extension (12/19/08-4/30/09).. 352 3,118.0 83 0.4817
Second extension (5/1/09-9/18/09)... 296 2,470.0 68 0.3865
----------------------------------------------------------------------------------------------------------------
\144\ This chart is based on information provided by Treasury to Panel staff and the Next Phase Report, supra
note 49, at 46.
\145\ 1,486 individual funds participated in the initial phase with many investment companies enrolling multiple
MMFs. See Next Phase Report, supra note 49, at 46.
3. FDIC Guarantees Under the Temporary Liquidity Guarantee Program
The TLGP is an FDIC program intended to promote liquidity
in the interbank lending market and confidence in financial
institutions. It has two aspects. The DGP guarantees newly
issued senior unsecured debt of insured depository institutions
and most U.S. holding companies, and the Transaction Account
Guarantee Program (TAG) guarantees certain noninterest-bearing
transaction accounts at insured depository institutions.\146\
---------------------------------------------------------------------------
\146\ Final Rule: Temporary Liquidity Guarantee Program, 12 C.F.R.
Sec. 370, 73 Fed. Reg. 72244 (Nov. 26, 2008) (online at www.fdic.gov/
news/board/08BODtlgp.pdf) (hereinafter ``TLGP Final Rule'').
---------------------------------------------------------------------------
Announced on October 14, 2008, the program was authorized
by Section 13(c)(4)(G) of the Federal Deposit Insurance Act,
which gives the FDIC the authority to provide assistance
following the determination of systemic risk by the Secretary
of the Treasury (in consultation with the President), with the
recommendation of the Board of Directors of the FDIC and the
Federal Reserve Board of Governors.\147\
---------------------------------------------------------------------------
\147\ See Federal Deposit Insurance Act of 1950, Pub. L. No. 81-
797, Sec. 13(c)(4)(G); TLGP Final Rule, supra note 146. Though the
statute can be read as only authorizing assistance to a single
institution, the FDIC believes that it is drafted broadly and supports
the TLGP.
---------------------------------------------------------------------------
The DGP automatically enrolled all institutions that were
eligible to participate. Institutions had until December 5,
2008 to opt out if they did not want to participate. ``Eligible
institutions'' are FDIC-insured depository institutions, U.S.
bank holding companies, U.S. financial holding companies, U.S.
savings and loan holding companies, and affiliates of insured
depository institutions. The FDIC-insured branches of foreign
banks were not included.\148\
---------------------------------------------------------------------------
\148\ 12 C.F.R. Sec. 370.2(a)(1). The statutory authority of the
program is broad, allowing it to provide guarantees to non-bank
financial institutions that are affiliates of insured depository
institutions, with the approval of the FDIC.
---------------------------------------------------------------------------
Under the terms of the DGP, on the uncured failure of a
participating institution to make a scheduled payment of
principal or interest, the FDIC will pay the unpaid
amount.\149\ The FDIC will then make the scheduled payments of
principal and interest through maturity. Under the terms of the
DGP Master Agreement, the FDIC is subrogated to the rights of
the debt holders in any claims against the issuer.\150\
---------------------------------------------------------------------------
\149\ 12 C.F.R. Sec. 370.3(a).
\150\ Federal Deposit Insurance Corporation, Master Agreement, at
Annex A (online at www.fdic.gov/regulations/resources/TLGP/master.pdf)
(accessed Nov. 2, 2009).
---------------------------------------------------------------------------
Fees for the program vary by the term of the debt:
Debt with a maturity of 31 to 80 days carries a
fee of 50 basis points annualized.
Debt with a maturity of 181 to 364 days carries a
fee of 75 basis points annualized.
Debt maturing in more than one year carries a fee
of 100 basis points.
The program did not guarantee debt of less than 30 days'
maturity or debt maturing after June 30, 2012.\151\ Debt issued
after April 1, 2009 carries an annualized surcharge of 10 basis
points for insured depository institutions and 20 basis points
for other participating entities. There was a cap on the amount
of guaranteed debt that an institution could issue.\152\
---------------------------------------------------------------------------
\151\ Debt maturing after June 30, 2012 was considered long-term
non-guaranteed debt. Institutions issuing such debt during the program
were required to pay a fee of 37.5 basis points on the maximum debt
limit. The FDIC explained that it needed to limit non-guaranteed debt
because, ``[f]irst, and most importantly, limiting a participating
entity's ability to issue non-guaranteed debt reduces the risk of
adverse selection--the risk that the participating entity will issue
only the riskiest debt with the guarantee . . . [In addition,] limiting
a participating entity's ability to issue non-guaranteed debt reduces
the possibility of confusion over whether debt is, or is not,
guaranteed.'' TLGP Final Rule, supra note 146, at 72255.
\152\ See 12 C.F.R. Sec. 370.3(b)(1). In general, the cap is set at
125 percent of the institution's unsecured debt outstanding on
September 30, 2008 that will mature before June 30, 2009. See id.
---------------------------------------------------------------------------
The program was designed such that it would be funded
entirely from its own fees \153\ and would require no
expenditure of the FDIC or other government funds. As of
September 30, 2009, the FDIC had collected $9.64 billion in
fees.\154\
---------------------------------------------------------------------------
\153\ A guarantee premium is paid each time debt issued by the bank
is guaranteed under the TLGP program. The guarantee premium is recorded
as a prepaid expense and amortized over the life of the debt into
interest expense. Unlike the loss-sharing agreement discussed, infra,
if the bank defaults on TLGP guaranteed debt, the bank will not record
an asset on its books because the FDIC will send the funds for the
default amount directly to the holder of the underlying debt (i.e., the
creditor to which the debt was issued). Financial Accounting Standards
Board, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others,
FASB Interpretation No. 45 (Nov. 2002) (online at www.fasb.org/cs/
BlobServer?blobcol= urldata&blobtable= MungoBlobs&blobkey=
id&blobwhere= 1175818750722&blobheader= application%2Fpdf).
\154\ See FDIC, September Monthly TLGP Report, supra note 8.
---------------------------------------------------------------------------
The DGP has proved popular among larger financial
institutions.\155\ Approximately 6,500 institutions, mostly
smaller institutions, chose to opt-out.\156\ As of September
30, 2009, a total of 89 institutions have $307 billion in
outstanding debt under the program.\157\ Six issuers raised
almost 82 percent of this debt: General Electric Capital,
Citigroup, Bank of America, J.P. Morgan, Morgan Stanley, and
Goldman Sachs. The research firm SNL Financial (SNL) also found
that the DGP saved issuers 39 percent in interest costs: non-
TLGP debt carried a weighted average coupon of 3.9 percent,
compared to 2.374 percent for TLGP debt.\158\ These savings of
approximately 1.53 percent, on average, or 153 basis points,
are greater than even the highest fees under the current
program, 120 basis points. This study evaluated senior debt
issued between November 21, 2008 and November 4, 2009. During
this time period, $7.1 billion of non-DGP debt was issued,
compared to $303.8 billion of DGP debt. All of this non-DGP
debt was issued by DGP participants.\159\ According to SNL, no
debt was issued by eligible institutions that did not
participate in the DGP.\160\ Debt issued under the DGP is
heavily weighted towards medium term debt. Of the $307 billion
currently outstanding under the program, $304 billion has a
term of one to three years. Participating institutions issued
more medium term and less long term debt than in prior periods,
reflecting the attractiveness of the guarantee and the
difficulty of raising capital, through either debt or equity,
during this time period.\161\
---------------------------------------------------------------------------
\155\ See Federal Deposit Insurance Corporation, Monthly Reports on
Debt Issuance Under the Temporary Liquidity Guarantee Program (May 31,
2009) (online at www.fdic.gov/regulations/resources/tlgp/
total_issuance5-09.html). See list of issuers using DGP at Annex A of
this report.
\156\ Smaller banks do not typically issue debt, so they would have
less interest in the program. See, e.g., Federal Deposit Insurance
Corporation, List of Entities Opting Out of the Debt Guarantee Program
(online at www.fdic.gov/regulations/resources/TLGP/optout.html)
(accessed on Nov. 2, 2009).
\157\ See FDIC, September Monthly TLGP Report, supra note 8; FDIC
written responses to Panel questions (Oct. 30, 2009).
\158\ See Matt Herb, Turning off the TLGP Tap: FDIC Says `Last
Call' For Cheap Debt; SNL Financial (Sept. 18, 2009) (hereinafter
``Last Call for TLGP Debt'') (online at www2.snl.com/Interactivex/
article.aspx?CDID=A-10036796-12080).
\159\ See id.
\160\ See id.
\161\ Compared to the approximately $308 billion of medium and long
term debt issued from 4Q 2008 through 3Q 2009, DGP participants issued:
Time period Medium and long term debt Medium
term debt
4Q 2004 through 3Q 2005 $196 billion
$36 billion
4Q 2005 through 3Q 2006 $243 billion
$55 billion
4Q 2006 through 3Q 2007 $227 billion
$108 billion
4Q 2007 through 3Q 2008 $242 billion
$84 billion
These figures are slightly over inclusive, as they include senior
debt issued by subsidiaries that would not have been eligible for the
TLGP DGP.
---------------------------------------------------------------------------
The DGP closed to new issuances of debt on October 31,
2009. The FDIC will continue to guarantee debt issued prior to
that date until the earlier of its maturity or June 30, 2012.
As discussed in further detail below, the FDIC has established
a six-month emergency guarantee facility to be made available
to insured institutions and other participants in the DGP.\162\
This facility will be available only to institutions that
cannot issue debt without the guarantee, and will carry
significantly higher fees of at least 300 basis points.\163\
---------------------------------------------------------------------------
\162\ The DGP was originally set to expire on June 30, 2009, but
the FDIC extended it to October 31, 2009. See Federal Deposit Insurance
Corporation, Extension of Temporary Liquidity Guarantee Program (Mar.
18, 2009) (hereinafter ``TLGP Extension Notice'') (online at
www.fdic.gov/news/news/financial/2009/fil09014.html); Federal Deposit
Insurance Corporation, Expiration of the Issuance Period for the Debt
Guarantee Program, Establishment of Emergency Guarantee Facility
(hereinafter ``DGP Expiration Notice'') (online at www.fdic.gov/news/
board/NoticeSept9no6.pdf) (accessed Nov. 2, 2009).
\163\ See DGP Expiration Notice, supra note 162.
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The other part of the TLGP was the TAG. Under the FDIC's
deposit insurance program, the FDIC insures deposit accounts up
to $100,000. EESA temporarily increased this limit to
$250,000.\164\ This increase was enacted to improve confidence
in the banks as well as to provide additional liquidity to
FDIC-insured institutions.\165\ Separately, the TAG insures
deposits in non-interest bearing accounts to an unlimited
amount.\166\ Though it covers all depository accounts, this
program was intended to benefit business payment processing
accounts, such as payroll accounts.\167\ Unlike the FDIC
deposit insurance program, banks' participation in TAG is
voluntary. To participate, banks pay a fee of 10 basis points
annualized for deposits over $250,000.\168\ Though originally
scheduled to end on December 31, 2009, TAG has been extended
until June 30, 2010. Coverage after December 31, 2009 will
carry higher fees; banks must have opted out of the extended
coverage by November 2, 2009.\169\
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\164\ EESA increased the insured limit through December 31, 2009.
EESA Sec. 136(a). The increase has since been extended through December
31, 2013. Helping Families Save Their Homes Act of 2009, Pub. L. No.
111-22, Sec. 204.
\165\ House Committee on Financial Services, Testimony of Sheila
Bair, Chairman, Federal Deposit Insurance Corporation, Oversight of
Implementation of the Emergency Economic Stabilization Act of 2008 and
Of Government Lending and Insurance Facilities, 110th Cong. (Nov. 18,
2008) (online at www.fdic.gov/news/news/speeches/archives/2008/
chairman/spnov1808.html).
\166\ 12 C.F.R. Sec. 370.4(a).
\167\ See Federal Deposit Insurance Corporation, Interim Rule,
Temporary Liquidity Guarantee Program (Oct. 29, 2008) (hereinafter
``TLGP Interim Rule'') (online at www.fdic.gov/news/board/TLGPreg.pdf)
(``The FDIC anticipates that these accounts will include payment-
processing accounts, such as payroll accounts, frequently used by an
insured depository institution's business customers, and further
anticipates that the Transaction Account Guarantee Program will
stabilize these and other similar accounts.'').
\168\ 12 C.F.R. Sec. 1A370.7(c).
\169\ Federal Deposit Insurance Corporation, Final Rule regarding
Limited Amendment of the Temporary Liquidity Guarantee Program to
Extend the Transaction Account Guarantee Program with Modified Fee
Structure (Aug. 26, 2009) (online at www.fdic.gov/news/board/
aug26no4.pdf).
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4. Other Programs That Have ``Guarantee'' Aspects
As discussed above, the federal government designed all of
its financial stabilization programs to work together, and the
guarantee programs can only be examined in this joint context.
Effectively, the entire stabilization program has functioned as
a ``guarantee'' in that the combined efforts of several
government entities signaled to the markets and the broader
economy that there would be no large-scale failure of the
financial system, and that further support would be available
to large private financial institutions if necessary. The
actions taken to ensure the continued viability of American
International Group are just one example.
The Federal Reserve Bank of New York's (FRBNY) Term Asset-
Backed Securities Loan Facility (TALF), which was announced on
November 25, 2008, is another. It provides non-recourse loans
to any participating institution pledging eligible asset-backed
securities (ABS) as collateral.\170\ This program was designed
to stimulate the origination of new ABS at a time when the
credit markets were almost entirely frozen.\171\ TALF
encourages new ABS originations by shifting the risk of
declining ABS values to the U.S. government. Although TALF is
not a direct guarantee of any financial institution, market, or
class of securities, it functions as a guarantee by permitting
participating ABS owners to default on their TALF loans without
further recourse from the lender, the government. Thus, the
FRBNY serves as a quasi-guarantor of the newly issued ABS under
TALF.
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\170\ Board of Governors of the Federal Reserve System, Press
Release for Release at 8:15 a.m. EST (Nov. 25, 2008) (online at
www.federalreserve.gov/newsevents/press/monetary/20081125a.htm).
\171\ Federal Reserve Bank of New York, Term Asset-Backed
Securities Loan Facility: Frequently Asked Questions (online at
www.newyorkfed.org/markets/talf_faq.html) (accessed Oct. 30, 2009).
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Another program that had the same effect is the Public-
Private Investment Program (PPIP), announced on March 23, 2009
by Treasury in conjunction with the Federal Reserve and the
FDIC.\172\ PPIP is designed to provide liquidity for legacy
assets and assist financial institutions in raising
capital.\173\ PPIP, as originally envisioned, would address two
components: legacy loans and legacy securities. Although the
legacy loans program has been postponed,\174\ the legacy
securities program continues to move forward. To restart the
market for legacy securities, the government provides debt
financing from the Federal Reserve under TALF and through
matching private capital raised for dedicated funds targeting
legacy securities.\175\ Although the FDIC provided debt
guarantees for investors purchasing legacy loans, the bulk of
the government's initiatives under PPIP do not explicitly
guarantee legacy assets. Instead, like TALF, PPIP provides a
quasi-guarantee to the markets by demonstrating the U.S.
government's willingness to subsidize private investments and
implement measures to encourage market liquidity.
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\172\ U.S. Department of the Treasury, Treasury Department Releases
Details on Public Private Partnership Investment Program (Mar. 23,
2009) (online at www.treasury.gov/press/releases/tg65.htm).
\173\ Id. (stating the goal of PPIP is ``to repair balance sheets
throughout our financial system and ensure that credit is available to
the households and businesses, large and small, that will help drive us
toward recovery.'').
\174\ 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). The Legacy Loans
Program creates Public-Private Investment Funds (PPIFs) comprised of
private equity, public equity, and FDIC-guaranteed debt, and allows
participating banks to sell certain existing assets, typically whole
loans or pools of loans, into the program. U.S. Department of the
Treasury, Public-Private Investment Program, $500 Billion to $1
Trillion Plan to Purchase Legacy Assets (online at www.treas.gov/press/
releases/reports/ppip_whitepaper_032309.pdf) (accessed Nov. 5, 2009).
\175\ The Legacy Securities Program pre-selects investment fund
managers, who then raise private equity to fund purchases of mortgage
backed securities. These managers receive matching TARP money for any
amount they raise privately, and are eligible to seek additional TARP
funding. Id.
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D. Analysis of the Creation and Structure of the Guarantee Programs
1. AGP Guarantees for Citigroup and Bank of America
a. Treasury's Authority to Create the AGP
Treasury created the Citigroup AGP under Section 102 of
EESA, which requires the Secretary, if he creates the TARP,
also to ``establish a program to guarantee troubled assets
originated or issued prior to March 14, 2008, including
mortgage-backed securities.'' \176\ The Citigroup AGP raises
three questions.\177\
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\176\ EESA Sec. 102(a)(1).
\177\ During a discussion with Panel staff, Treasury stated that
the Bank of America asset guarantee would have been assigned to the AGP
had it been finalized. Treasury conversations with Panel staff (Nov. 4,
2009). Thus, it is reasonable to assume that the Bank of America
arrangement would have taken roughly the same form as the Citigroup
arrangement, and therefore been subject to the analysis set forth here.
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The first is whether the term ``guarantee'' in Section 102
embraces the AGP. The section prominently and repeatedly uses
that term,\178\ with no additional definition.\179\ The
Citigroup AGP is not a classic guarantee; instead it is an
insurance contract, a two-way agreement under which Treasury
will reimburse Citigroup up to a certain amount if assets
within a defined pool lose value.\180\
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\178\ EESA, Sec. Sec. 102(a)(1), 102(a)(2), 102(a)(3), 102(c)(2),
102(c)(4), 102(d)(3).
\179\ As noted in Section B(1), infra, a true guarantee involves
three parties: the one to whom the original obligation is owed, the
person who owes the original obligation, and the guarantor.
\180\ Treasury AGP Report, supra note 31 at 1.
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Section 102 can be read to authorize only classic
guarantees \181\ or both classic guarantees and insurance-like
arrangements. Either would allow an institution to hold real
estate-based obligations on its books rather than forcing it to
dispose of them at greatly reduced prices, and it is noteworthy
that Section 102(c) refers to ``credit risk,'' ``premiums,''
and ``actuarial analysis,'' all classic insurance
concepts.\182\
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\181\ The only part of the section to speak in terms of a
traditional guarantee is section 102(a)(3), which authorizes the
Secretary ``[u]pon the request of a financial institution . . . to
guarantee the timely payment of principal of, and interest on, troubled
assets in amounts not to exceed 100 percent of such payments.'' Under
that arrangement, Treasury does agree to pay the financial institution
seeking the guarantee if the person obligated to pay the principal and
interest does not do so. The Citigroup arrangement, however, operates
in terms of write-down values, which may depend on other factors
besides the timely payment of principal and interest.
\182\ In addition, the fund to be created to hold premiums under
section 102 is called the ``Troubled Assets Insurance Financing Fund,''
and Sections 116(e)(2) (termination of reporting obligations of GAO)
and 121(h)(2) (termination of authority of Special Inspector General
for the Troubled Asset Relief Program) speak of ``insurance contracts
issued under Section 102.'' Finally, although the titles of statutes
generally have a low impact on statutory meaning, Section 102 is
entitled ``Insurance of Troubled Assets.'' There is no legislative
history suggesting that Congress intended to distinguish between
``guaranteeing'' and ``insuring'' troubled assets.
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It is likely that if there were a litigant with standing to
challenge Treasury's interpretation that Treasury would rely on
``Chevron deference'' but the eventual outcome of such
litigation is not clear.\183\
---------------------------------------------------------------------------
\183\ Under the doctrine of Chevron U.S.A., Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837 (1984), a court defers to
an agency's interpretation of an ambiguous statute so long as the
interpretation is ``based on a permissible construction of the
statute.'' Id. at 843.
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The second question is whether Section 102 authorizes a
program limited to ``assets held by systemically significant
financial institutions that face a high risk of losing market
confidence due to a large portfolio of distressed or illiquid
assets'' and not ``made widely available.'' \184\ Here again,
the statute grants considerable discretion to Treasury. Thus,
although an initial reading of the statute suggests that
Congress sought a broad-based program to complement direct bank
stabilization efforts,\185\ the broad language of Section
102(a)(2) authorizes the Secretary to ``develop guarantees of
troubled assets and the associated premiums for such
guarantees.'' That language is sufficiently broad to allow
design of a program like the AGP, however far it may have been
from Congress' original intention.
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\184\ Treasury AGP Report, supra note 31. In exercising the
authorities granted under EESA, the Secretary is required to ``ensur[e]
that all financial institutions are eligible to participate in the
program, without discrimination based on size, geography, form of
organization, or the size, type and number of assets eligible for
purchases under [EESA].'' EESA Sec. 103(5).
\185\ Section 102(c)(2) speaks of the Secretary developing
guarantees and premiums ``according to the credit risk associated with
the particular troubled asset that is being guaranteed.''
---------------------------------------------------------------------------
The third question is whether Treasury has complied with
the terms of Section 102 governing the implementation of
guarantee programs. Here the answers are less clear, in two
important respects:
Treasury has not ``publish[ed] the methodology for
setting the premium for a class of troubled assets together
with an explanation of the appropriateness of the class of
assets for participation in the program established under
[Section 102],'' despite the requirement of Section 102(c)(2)
that it do so.\186\ Treasury has explained in discussions with
Panel staff that publication of the methodology has been
delayed until the full pool of assets subject to the guarantee
has been assembled and will be forthcoming when assembly of the
pool is complete.\187\
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\186\ EESA Sec. 102(c)(2).
\187\ For a discussion of pool finalization, see supra Section
C(1)(a)(iii). This raises the question as to how the premium for
covering assets could be set almost a year ago, before the assets to be
covered were known. There is, however, a mechanism for revising
premiums upwards. Citigroup Master Agreement, supra note 35.
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Section 102(d)(2) requires that ``any balance'' in
the Troubled Assets Insurance Financing Fund ``shall be
invested by the Secretary in United States Treasury securities,
or kept in cash on hand or on deposit, as necessary'' (emphasis
added). The language, coupled with the traditional
understanding of premiums as cash payments, would seem to bar
Treasury from taking premiums in the form of preferred stock
and warrants. The reason is to assure that the premiums
supporting the actuarial risk of liability do not lose value.
Preferred stock and warrants do not have the same constant
value.
Treasury reads the statute differently. It believes that
Section 102 does not limit the form premiums can take; rather
it requires only that cash balances in the Fund, for example
those derived from preferred stock dividends, must be invested
in the specified form. It has also explained that if sufficient
cash is not on hand to pay claims under the AGP, it will
``borrow from the Bureau of the Public Debt through the
financing account to pay the claims. This borrowing will be
repaid when cash is received from the preferred stock [received
as a premium for the guarantee].''
Whichever reading is correct, receipt of premiums in the
form of preferred stock and warrants, without a public
statement of the methodology used to set premiums, makes it
impossible for the public to determine the sufficiency of what
has been received to back Treasury's obligation or the
potential cost of that obligation. Treasury can ease the
uncertainty raised by its interpretation of the operating rules
of Section 102 if it publishes its actuarial methodology,
carefully protects the value of the assets received as
premiums, administers those assets independently of similar
assets received in exchange for direct TARP assistance, and,
above all, presents the AGP with transparency and clarity in
the future.
b. FDIC's Authority To Participate in the AGP
When asked to identify its legal authority for
participating in the AGP, the FDIC pointed to Section
13(c)(4)(G) of the Federal Deposit Insurance Act, which gives
the FDIC authority to provide assistance ``following the
determination of systemic risk by the Secretary of the Treasury
(in consultation with the President), with the recommendation
of the Board of Directors of the FDIC and the Federal Reserve
Board of Governors.'' \188\ The FDIC noted, however, that the
Secretary made this determination in order to provide the
additional assistance to Citigroup, but did not make the
determination for Bank of America.\189\ While the Panel
recognizes that no definitive AGP agreement was ever reached
between Bank of America and the three agencies, the lack of the
systemic risk determination for Bank of America raises critical
questions about the AGP. First, since the statutory provision
calls for this determination, the lack of that determination
seems to imply that the FDIC had no authority to enter into the
Bank of America deal. Second, in various conversations with
Panel staff, Treasury has indicated that it called for Bank of
America to pay a termination fee for exit from the AGP because,
while there was no contract, Bank of America did incur a
benefit and the three agencies represented that they were ready
and willing to guarantee and share losses that Bank of America
might have incurred commencing on the date the AGP was
announced. Being ready and willing to backstop any losses,
however, implies that all three agencies participating had the
legal authority to participate in the AGP from the date of
announcement.
---------------------------------------------------------------------------
\188\ FDIC conversations with Panel staff (Oct. 26, 2009).
\189\ FDIC conversations with Panel staff (Oct. 26, 2009).
---------------------------------------------------------------------------
c. Why was additional assistance necessary?
It is not possible to know what would have happened without
additional assistance, and it may be some time before the full
story is known, if ever. Certainly, the U.S. governmental
agencies believed at the time that such assistance was
essential, and there is data and anecdotal evidence to support
that view. As discussed above, on November 23, 2008, Treasury,
the Federal Reserve, and the FDIC responded to Citigroup's
request for assistance by providing Citigroup with an
additional package of guarantees, capital, and liquidity
access.\190\ The additional assistance to Citigroup was
considered and ultimately approved by the supervisors primarily
because of the systemic risk concerns it posed due to its size
and significant international presence. Citigroup was an even
larger market player than Bank of America.\191\ Believing that
additional assistance was necessary, Citigroup engaged in
discussions with federal regulators during the weekend of
November 21-23, and discussed possible options.\192\ In
addition, Citigroup faced widening credit default swap (CDS)
spreads and losses due to write-downs on leveraged finance
investments and securities, particularly those in the
automobile, commercial real estate, and residential real estate
sectors.\193\ For example, in October 2008, credit rating
agencies considered placing Citigroup and many other TARP-
recipient financial institutions on watch for potential credit
downgrades. During a period of much fluctuation, Citigroup's
stock price fell below $4 per share on November 21, 2008 from a
high of over $14 per share just three weeks earlier on November
3, 2008. This constituted a loss of more than two-thirds of
Citigroup's market capitalization during those three weeks.
Citigroup ultimately incurred a loss of $8.29 billion for the
fourth quarter of 2008. Both regulatory and internal Citigroup
projections at this time ``showed that the firm would likely be
unable to pay obligations and meet expected deposit outflows
the following week without substantial government intervention
that resulted in positive market perception.'' \194\
---------------------------------------------------------------------------
\190\ Treasury Citigroup Press Release, supra note 45; Board of
Governors of the Federal Reserve, Report Pursuant to Section 129 of the
Emergency Economic Stabilization Act of 2008: Authorization to Provide
Residual Financing to Citigroup, Inc. For a Designated Asset Pool
(online at www.federalreserve.gov/monetarypolicy/files/
129citigroup.pdf) (hereinafter ``Section 129 Report'') (accessed Nov.
2, 2009) (noting that the package of additional assistance to Citigroup
``will augment the capital of Citigroup; protect the company from
further declines in the value of a substantial pool of primary
mortgage-related assets; and better enable the company, its subsidiary
depository institutions and the financial system to weather the current
difficulties, and provide credit and other financial services needed by
consumers, small businesses, and others.''); Treasury conversations
with Panel staff (Oct. 19, 2009).
\191\ Treasury conversations with Panel staff (Oct. 19, 2009).
\192\ Citigroup conversations with Panel staff (Oct. 26, 2009). It
is interesting to note that in discussions with Panel staff, Citigroup
personnel, perhaps naturally, emphasized external elements such as
market perception and share price, while government officials focused
on whether Citigroup could open its doors the following Monday.
\193\ Treasury conversations with Panel staff (Oct. 19, 2009);
Federal Deposit Insurance Corporation, Responses to Panel Questions
About the AGP (Oct. 30, 2009) (in its responses, the FDIC noted that
``[o]n Friday, November 21, 2008, market acceptance of the firm's
liabilities diminished, as the company's stock plunged to a 16-year
low, credit default swap spreads widened by 75 basis points to 512.5
basis points, multiple counterparties advised that they would require
greater collateralization on any transactions with the firm, and the UK
FSA imposed a $6.4 billion cash lockup requirement to protect the
interests of the UK broker dealer . . .'').
\194\ Federal Deposit Insurance Corporation, Responses to Panel
Questions About the AGP (Oct. 30, 2009); Treasury conversations with
Panel staff (Oct. 19, 2009).
---------------------------------------------------------------------------
For its part, Bank of America incurred its first quarterly
loss in more than seventeen years in the fourth quarter of
2008. Bank of America's year-end financial data for 2008
illustrates that these losses were largely due to capital
markets losses and rising credit costs caused by the global
economic downturn and continued uncertainty in the capital
markets.\195\ Upon the completion of its acquisition of Merrill
Lynch in early January 2009, Bank of America became
substantially exposed to losses on Merrill's distressed assets,
including significant assets belonging to Merrill Lynch
International.\196\ The integration of Merrill Lynch's
portfolio--a large and complex broker-dealer portfolio--into
Bank of America's substantial commercial lending portfolio
presented a major challenge.\197\ Following the completion of
Bank of America's acquisition of Merrill Lynch, and upon the
request of Mr. Lewis,\198\ Treasury, the Federal Reserve, and
the FDIC provided Bank of America with $20 billion of
additional assistance under TIP and asset guarantees related to
$118 billion of distressed or illiquid assets.\199\
---------------------------------------------------------------------------
\195\ See Bank of America, Bank of America Earns $4 Billion in
2008, (Jan. 16, 2009) (hereinafter ``Bank of America 1Q 2009 Release'')
(online at http://newsroom.bankofamerica.com/index.php?s=43&item=8316)
(reporting Bank of America's year end 2008 results and describing its
fourth quarter losses). Key factors that impacted Bank of America's
financial results included losses associated with certain securities
and legacy trading books; write-downs in commercial mortgage-backed
securities and private equity, trading disruptions, and continued
economic decline. These conditions caused additional credit
deterioration across Bank of America's loan portfolio.
\196\ Treasury conversations with Panel staff (Oct. 19, 2009); Bank
of America conversations with Panel staff (Oct. 26, 2009). In the
conversation between Bank of America and Panel staff, Bank of America
personnel concurred that the additional assistance was necessary
primarily because of the Merrill Lynch acquisition. In particular, Bank
of America personnel noted the size of the Merrill Lynch loss and the
speed with which it happened.
\197\ Treasury conversations with Panel staff (Oct. 19, 2009).
\198\ Emergency Capital Injections, supra note 30, at 23-29.
\199\ See Bank of America 1Q 2009 Release, supra note 195 (noting
that ``in view of the continuing severe conditions,'' the U.S.
government ``agreed to assist in the Merrill acquisition by making a
further investment in Bank of America of $20 billion in preferred
stock'' under TIP while also providing Bank of America with asset
guarantee protection against further losses on a pool of assets
``primarily from the former Merrill Lynch portfolio . . .'').
---------------------------------------------------------------------------
Treasury, the Federal Reserve, and the FDIC stated that
this additional assistance to both institutions was necessary
not only to keep these institutions afloat, but also ``to
strengthen the financial system and protect U.S. taxpayers and
the U.S. economy.'' \200\ The banking industry suffered one of
the worst earnings quarters in recent history during the fourth
quarter of 2008, and economic deterioration persisted into
2009. Noting that at the end of 2008 no one knew what might
happen to the economy next, Treasury stated that a driving
force behind the decisions was a fear that either institution's
failure would cause the same deep, systemic damage as Lehman
Brothers' collapse.\201\
---------------------------------------------------------------------------
\200\ Treasury Citigroup Press Release, supra note 45; see also
U.S. Department of the Treasury, Treasury, Federal Reserve and the FDIC
Provide Assistance to Bank of America (Jan. 16, 2009) (online at
www.financialstability.giov/latest/hp1356.html).
\201\ Treasury conversations with Panel staff (Oct. 19, 2009).
Confidential Treasury documents shared with Panel staff support this
rationale.
---------------------------------------------------------------------------
Treasury, the Federal Reserve, and the FDIC ultimately
decided to use this program for only two institutions. One
possible explanation for why the government did not extend
asset guarantees to additional institutions may be that the
mere existence of the AGP (and its implementation in a test
case) calmed the market sufficiently. Several of the factors
that supported the provision of additional assistance to
Citigroup and Bank of America, however, likely also applied to
other financial institutions, including the others that
received the initial CPP assistance, especially given the
deteriorating economic conditions and deteriorating balance
sheets that plagued many financial institutions at the close of
2008 and into 2009. It is also possible that the AGP was
superfluous in light of other initiatives.
While Treasury indicated that the existing TARP assistance
to both institutions did not influence the decisions to provide
additional assistance, Treasury stated that the three agencies
remained aware of the substantial capital infusions already
provided and realized that they were not sufficient to
stabilize these institutions.\202\ As reflected above, both
institutions received additional TARP capital infusions through
TIP, and the additional assistance provided under both TIP and
AGP was coordinated and announced simultaneously.
---------------------------------------------------------------------------
\202\ Treasury conversations with Panel staff (Oct. 19, 2009).
---------------------------------------------------------------------------
d. How and why was an asset guarantee program selected?
The idea for the AGP was apparently based on a guarantee
framework developed earlier by the FDIC and Citigroup to
support Citigroup's failed bid for Wachovia in late September
2008.\203\ During the discussions preceding the announcement of
additional assistance, including the AGP, Citigroup suggested
that the parties model the guarantee after the Wachovia
structure.\204\
---------------------------------------------------------------------------
\203\ Citigroup conversations with Panel staff (Oct. 26, 2009).
\204\ Id.
---------------------------------------------------------------------------
In Treasury's view, asset guarantees would ``calm market
fears about really large losses,'' thereby encouraging
investors to keep funds in Citigroup and Bank of America.\205\
---------------------------------------------------------------------------
\205\ Treasury conversations with Panel staff (Oct. 19, 2009);
Government Accountability Office, Troubled Asset Relief Program: One
Year Later, Actions Are Needed to Address Remaining Transparency and
Accountability Challenges, at 77 (Nov. 2, 2009) (online at www.gao.gov/
new.items/d1016.pdf).
---------------------------------------------------------------------------
When asked to discuss possible alternatives to asset
guarantees and why they were not selected, Treasury indicated
that no alternatives were seriously considered.\206\ Since
Treasury was already providing capital infusions, it believed
that guarantees could work in tandem to help restore market
confidence and financial stability.\207\ In particular, since
Treasury had established a precedent for providing guarantee
protection through its additional assistance to Citigroup,
Treasury felt that it was important to provide Bank of America
with similar assistance so that ``systemically significant''
institutions needing ``exceptional assistance'' would be given
consistent treatment.\208\ However, the FDIC indicated that the
agencies considered providing liquidity support to Citigroup
through expanded access to the CPFF, the Primary Dealer Credit
Facility (PDCF), and the Term Securities Lending Facility
(TSLF), but concluded that that type of short-term liquidity
support would not have been an effective solution.\209\
---------------------------------------------------------------------------
\206\ Treasury conversations with Panel staff (Oct. 19, 2009).
\207\ Id.
\208\ Id.
\209\ FDIC written responses to Panel questions (Oct. 30, 2009).
---------------------------------------------------------------------------
Economic and practical considerations largely drove the
inter-agency coordination on the creation and structure of the
asset guarantees. Section 102 of EESA seems to intend for the
cost of a guarantee program to be borne by TARP, rather than
the Federal Reserve or the FDIC, perhaps signaling that no
tripartite structure was envisioned.\210\ Nonetheless, the TARP
purchasing authority is reduced dollar-for-dollar by the amount
guaranteed, meaning that insuring an asset under Section 102 of
EESA has almost an equivalent impact on TARP purchasing
authority as purchasing the same asset.\211\ Treasury needed
the joint participation of the Federal Reserve and the FDIC to
cover the sizeable Citigroup and Bank of America
guarantees.\212\ While the Federal Reserve would provide
financing only after the loss sharing agreements with Treasury
and the FDIC were exhausted, it is the only agency that could
provide a non-recourse loan of large notional value, if
necessary, because of its emergency lending authority under
Section 13(3) of the Federal Reserve Act. Treasury also
indicated that the expertise and experience of the other
agencies helped in coordinating, structuring, and implementing
the AGP.\213\
---------------------------------------------------------------------------
\210\ See EESA Sec. 102 (requiring the Secretary of the Treasury to
``establish a program to guarantee troubled assets originated or issued
prior to March 14, 2008, including mortgage-backed securities,'' if he
establishes the Troubled Asset Relief Program under Section 101, and
referring only to the Treasury Secretary throughout the section text).
\211\ See Treasury AGP Report, supra note 31 (noting that Treasury
``generally achieves a greater impact per TARP dollar absorbed by
taking an early loss position over a narrow interval of losses rather
than a late loss position over a larger range of losses'').
\212\ Treasury conversations with Panel staff (Oct. 21, 2009).
\213\ Treasury conversations with Panel staff (Oct. 21, 2009).
---------------------------------------------------------------------------
EESA statutory considerations largely drove the cost
allocation for the asset guarantees among the three agencies--
Treasury and the FDIC each received preferred stock and
warrants--along with each agency's individual determinations
about their loss positions.\214\ Potential loss estimates for
the asset pools determined the deductibles for Citigroup and
Bank of America.\215\ Jointly Treasury and the FDIC made the
decisions regarding the loss positions and the split of any
loss share.\216\ The Section 13(3) legal authority supporting
the Federal Reserve's participation in the AGP only provides it
with emergency lending authority. Since the Federal Reserve
lends solely against collateral that meets particular quality
criteria (and applies haircuts where necessary), the financing
it would provide is collateralized by the assets in the
designated pools.\217\
---------------------------------------------------------------------------
\214\ Treasury conversations with Panel staff (Oct. 19, 2009).
\215\ Treasury conversations with Panel staff (Oct. 19, 2009).
\216\ Treasury conversations with Panel staff (Oct. 19, 2009).
\217\ The history and role of Treasury, the Federal Reserve, and
the FDIC in the provision of additional assistance to Citigroup is the
subject of some press accounts suggesting some amount of interagency
tension in the decision to extend support. See, e.g., Edmund L. Andrews
& Louise Story, Regulators Press for Change at Two Troubled Big Banks,
New York Times (June 5, 2009) (online at www.nytimes.com/2009/06/06/
business/economy/06bank.html) (stating that the FDIC ``reluctantly went
along'' in the decision to provide Citigroup with a package of TARP
funds and guarantees). Contradicting these reports, the government
agencies assert that the approach was well-coordinated and
conversations with Citigroup and Bank of America suggests that the
agencies presented a united front.
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e. How Were Assets Selected with Respect to Citigroup and
Bank of America?
Under the AGP, insured assets are ``selected by Treasury
and its agents in consultation with the financial institution
receiving the guarantee.'' \218\ Pursuant to EESA's statutory
mandate, the assets selected must be ``troubled assets
originated or issued prior to March 14, 2008, including
mortgage-backed securities.'' \219\
---------------------------------------------------------------------------
\218\ Treasury AGP Report, supra note 31.
\219\ EESA Sec. 102(a)(1).
---------------------------------------------------------------------------
Initially, Citigroup identified a pool of assets for which
it sought coverage under the asset guarantee, selecting what it
viewed as some of the riskiest classes of assets on its balance
sheet and providing an asset class by asset class
presentation.\220\ The initial amount of the pool Citigroup
presented--roughly $307 billion--was in the same range as the
Wachovia guarantee model.\221\ The Federal Reserve conducted
some initial diligence work on the pool presented, with the
understanding that the amount would change after the pool was
subject to more thorough diligence.\222\ Treasury ultimately
narrowed this pool to $306 billion due to certain filters, such
as EESA statutory requirements, including the provision that
assets needed to be ``originated or issued prior to March 14,
2008,'' \223\ as well as the exclusion of some foreign assets
deemed impermissible due to policy considerations.
Subsequently, the asset pool amount was lowered to $301 billion
due to accounting changes, corrections, and voluntary
exclusions.\224\
---------------------------------------------------------------------------
\220\ Treasury conversations with Panel staff (Oct. 19, 2009);
Citigroup conversations with Panel staff (Oct. 26, 2009).
\221\ Citigroup conversations with Panel staff (Oct. 26, 2009).
\222\ Treasury conversations with Panel staff (Oct. 21, 2009).
\223\ EESA Sec. 102(a)(1).
\224\ Treasury conversations with Panel staff (Oct. 19, 2009).
---------------------------------------------------------------------------
As discussed above, while the Citigroup Master Agreement
does not identify the value or composition of the guaranteed
asset pool, it sets forth the criteria for covered assets, as
well as a post-signing process for negotiating and finalizing
those matters.\225\
---------------------------------------------------------------------------
\225\ For further discussion on how assets were selected, see
Section C, infra.
---------------------------------------------------------------------------
As assets are sold, losses are taken against the portfolio
and the size of the asset pool diminishes.\226\ Citigroup and
Treasury have both detailed substantial monitoring and auditing
on the asset pool.\227\
---------------------------------------------------------------------------
\226\ Citigroup conversations with Panel staff (Oct. 26, 2009).
\227\ Id.
---------------------------------------------------------------------------
Like Citigroup, Bank of America also identified and set
forth the pool of assets that it sought the government to cover
under the asset guarantee, selecting what it viewed as the
riskiest assets on its balance sheet and providing an asset
class by asset class presentation.\228\ The Federal Reserve
also conducted some initial diligence work on the pool
presented, with the understanding that the amount would
ultimately change after the pool was subject to more thorough
diligence.\229\ At the time of termination of the term sheet,
the value of the pool was established at $83 billion for
purposes of calculation of the termination fee.\230\
---------------------------------------------------------------------------
\228\ Treasury conversations with Panel staff (Oct. 19, 2009).
\229\ Treasury conversations with Panel staff (Oct. 21, 2009).
\230\ Treasury conversations with Panel staff (Oct. 22, 2009).
---------------------------------------------------------------------------
f. Analysis of the Terms of the Guarantees
As discussed above, the asset guarantees negotiated
pursuant to the AGP share several key features. The federal
government was largely consistent in negotiating asset
guarantee agreements with Citigroup and Bank of America.
Broader comparisons are tricky. In particular, it is
difficult to say whether the terms of these asset guarantees
resemble ``typical'' or ``standard'' commercial terms; the
agreements are sui generis. Generally speaking, however, there
is nothing unusual about the terms negotiated by the federal
government.\231\ Moreover, to the extent that useful
comparisons are possible, the terms of these guarantees seem
relatively typical.\232\ For instance, the durations of the
guarantees (five years for non-residential assets and ten years
for residential assets) mirror the FDIC's standard loss-sharing
protocol.\233\ In addition, the interest rate that will apply
should Citigroup draw funds from the Federal Reserve's loan
facility in order to cover residual losses on the guaranteed
pool--that is, a floating rate of OIS plus 300 basis points--is
standard and within commercial limits. The asymmetric nature of
some key terms in the Master Agreement also works in the
government's favor while disadvantaging Citigroup in some ways.
While losses are calculated with respect to each security, as
discussed above,\234\ gains and recoveries are credited across
the board, meaning that any gain on any asset will offset any
losses on the pool. Since the quarterly calculation of net
covered losses under the guarantee includes all gains and
recoveries, this diminishes the likelihood that the government
agencies will have to pay out on the guarantee (and thereby
protects the taxpayers).\235\
---------------------------------------------------------------------------
\231\ The Citigroup guarantee arrangement does include an unusual
provision limiting Citigroup's ability to issue dividends. See
Citigroup Master Agreement, supra note 35, at 30. Bank of America's
provisional guarantee arrangement contemplated a similar limitation.
\232\ As a point of comparison, the Panel notes that the United
Kingdom is likely to require the Royal Bank of Scotland Group PLC (RBS)
to increase its deductible under the U.K. government's asset protection
plan. This would increase RBS' deductible to #60 billion ($99 billion)
from 42 billion in initial losses that the bank originally agreed to
incur last February. See Sara Schaefer Munoz, RBS Likely to Pay Higher
Insurance Fee, Wall Street Journal (Nov. 2, 2009) (online at
online.wsj.com/article/
SB125692835737019207.html?mod=rss_Europe_Markets_News). This decision
highlights how the European Union is ``cracking down on RBS as a
condition for the billions in taxpayer aid it has received since the
start of the financial crisis.'' Id. While it is unlikely that the
assets could be compared, the comparison provides an idea of the
appropriateness of the price paid by Citigroup for the guarantee.
\233\ U.S. Department of the Treasury, Citigroup Asset Guarantee
Agreement, Summary of Terms, at 1 (Nov. 23, 2008) (online at
www.treas.gov/press/releases/reports/cititermsheet_112308.pdf);
Treasury conversations with Panel staff (Oct. 21, 2009). In
conversations with Panel staff, Treasury indicated that since the
federal government had never created a guarantee program like this
before, the agencies determined that it was important to use a pre-
existing framework and not resort to another framework on an ad hoc
basis.
\234\ See Section C(1)(a), infra.
\235\ Treasury winds up paying less by reason of the netting
process that only goes one way. To illustrate this accounting method,
the Panel provides the following example. Asset A in Pool X has a
quarterly loss of $25,000, and Asset B in Pool Y has a quarterly loss
of $50,000. A different asset, Asset C, in Pool Z, has a quarterly gain
of $100,000. Since the quarterly gain for Asset C exceeds the quarterly
losses in Assets A and B, that gain will net out the losses on Assets A
and B, even though they are not in the same asset class. However, even
if Asset C only had a quarterly gain of $50,000, the losses in Assets A
and B would not offset that gain since losses are not treated across
the board.
---------------------------------------------------------------------------
While there have been reports of banks marking down assets
aggressively and then benefitting from an uptick in value,
certain clawback provisions in the Master Agreement ensure that
the U.S. government will likely be able to benefit from any
recoveries or gains in the asset pool. If the deductible is
met, Citigroup would be permitted to collect on the insurance
while continuing to carry the assets on its books. However, if
the assets later stabilize and improve and Citigroup incurs
quarterly recoveries or gains (that exceed its quarterly
losses), it is required, pursuant to the Master Agreement, to
reimburse the U.S. government for its outstanding advances in a
specified manner.\236\ Such contractual provisions allow the
U.S. government (and the taxpayers) the opportunity to benefit
from any upside in value within the guaranteed asset pool.
---------------------------------------------------------------------------
\236\ Citigroup Master Agreement, supra note 35, at 23-25.
---------------------------------------------------------------------------
The terms of the Citigroup asset guarantee also address
certain corporate governance issues including executive
compensation, asset management, and personnel.\237\ Recent
press reports indicate that Bank of America, as part of its
package of additional assistance, is operating under a slightly
different memorandum of understanding (MOU) that requires it to
change its board of directors and address certain risk and
liquidity management issues.\238\ The Panel has made numerous
requests to Treasury and the Federal Reserve for this MOU and
similar documents. To date the Panel has not received this or
any other related documents.
---------------------------------------------------------------------------
\237\ For further discussion of the particular aspects of corporate
governance addressed in the Citigroup Master Agreement, see Section C,
infra.
\238\ See, e.g., Dan Fitzpatrick, U.S. Regulators to BofA: Obey or
Else, Wall Street Journal (July 16, 2009) (online at online.wsj.com/
article/SB124771415436449393.html).
---------------------------------------------------------------------------
g. Termination of the Bank of America Asset Guarantee
As discussed above, Bank of America notified Treasury, the
Federal Reserve, and the FDIC on May 6, 2009 that it intended
to terminate its asset guarantee because executives ``believed
that the cost of the guarantees outweighed the potential
benefits.'' \239\ The federal government and Bank of America
held extensive discussions in the period between January 15 and
May 6 regarding the identity of the assets to be covered.\240\
In the end, Bank of America was not satisfied with the federal
government's negotiating position.\241\ Treasury acknowledges
that Bank of America's position in May, after the completion of
the stress tests, as discussed below, was different than it had
been in January when the asset guarantee was announced.\242\
For one, the $20 billion TIP investment substantially helped
Bank of America's capital ratios.\243\ In addition, Mr. Lewis
and other Bank of America senior executives concluded that
future losses would not exceed the initial $10 billion that the
bank would need to cover pursuant to the AGP negotiated term
sheet.\244\ Upon the termination of the asset guarantee term
sheet on September 21, 2009, Mr. Lewis stated, ``[w]e are a
stronger company than we were even a few months ago, and while
we continue to face challenges from rising credit costs, we
believe we have all the pieces in place to emerge from this
current economic crisis as one of the leading financial
services firms in the world.'' \245\
---------------------------------------------------------------------------
\239\ Treasury conversations with Panel staff (Sept. 23, 2009);
Emergency Capital Injections, supra note 30, at 29.
\240\ Treasury conversations with Panel staff (Oct. 19, 2009).
\241\ Id.
\242\ Id.
\243\ Id.
\244\ Emergency Capital Injections, supra note 30, at 23-29.
\245\ Bank of America, Bank of America Terminates Asset Guarantee
Term Sheet (Sept. 21, 2009) (online at newsroom.bankofamerica.com/
index.php?s=43&item=8536).
---------------------------------------------------------------------------
Between May 6, 2009 and September 21, 2009, Treasury, the
Federal Reserve, and the FDIC reviewed the likely effects of
Bank of America's withdrawal from the AGP and then negotiated
an appropriate fee or rebate for Bank of America's
withdrawal.\246\ As noted above, Bank of America initially took
the view that since no contract was executed, no fee was
owed.\247\ The government agencies disagreed, on the basis that
the government had stood ready to make good on the guarantee
even though the guarantee had not been formally executed, and
that Bank of America clearly benefitted from the market's
perception that the government had agreed to guarantee Bank of
America's assets. This approach resulted in a $425 million
termination fee. While some critics have argued that the
government should have demanded more,\248\ it appears that
Treasury, the Federal Reserve, and the FDIC negotiated robustly
and achieved a commercially reasonable result.
---------------------------------------------------------------------------
\246\ Treasury conversations with Panel staff (Sept. 23, 2009).
\247\ Treasury conversations with Panel staff (Oct. 19, 2009).
\248\ See James Kwak, Bank of America $4 Billion, Taxpayers $425
Million, Baselinescenario.com (Sept. 23, 2009) (online at
baselinescenario.com/2009/09/23/bank-of-america-4-billion-taxpayers-
425-million/); James Kwak, More on Bank of America,
Baselinescenario.com (Sept. 28, 2009) (online at baselinescenario.com/
2009/09/28/more-on-bank-of-america/) (questioning the U.S. government's
decision to pro-rate the $4 billion in preferred stock by the effective
term of the guarantee--4 months--and arguing that Bank of America was
``buying insurance against the bad state of the world'' and should not
be able to get its money back ``[w]hen the good state occurs.''). Such
arguments, however, do not reflect the terms of the term sheet. The
term sheet contemplated that there would be a rebate if the guarantee
were terminated. This was a policy decision made by the U.S. government
and Bank of America. In addition, the fees for the guarantee were
calculated at the outset of the program, when both parties felt asset
guarantees were needed, and on the basis of the assets those parties
thought would be in the pool. Treasury's negotiating stance was that
when the additional assistance was announced, Bank of America had
obligated itself to pay for the guarantee at the rates set out in the
term sheet. The U.S. government concluded, however, that the
construction of Bank of America's fee should be based on the fees in
the term sheet, adjusted for the shortened time period between
announcement and termination and some adjustments in the size of the
asset pool.
---------------------------------------------------------------------------
The fees for the guarantee were calculated at the outset of
the program, when both parties felt the guarantee was needed,
and on the basis of the assets the parties thought would be in
the pool.\249\ Those fees were set out in the term sheet dated
January 15, 2009.\250\ The termination fee was calculated using
the fees in the term sheet as a starting point, and then
adjusted for the length of time the guarantee was perceived to
be in effect. Bank of America had obligated itself to pay for
the guarantee, pursuant to the rates set out in the term sheet.
---------------------------------------------------------------------------
\249\ Treasury conversations with Panel staff (Sept. 23, 2009);
Treasury conversations with Panel staff (Oct. 22, 2009).
\250\ Bank of America Provisional Term Sheet, supra note 75.
---------------------------------------------------------------------------
While it is impossible to determine whether Treasury, the
Federal Reserve, and the FDIC needed to ``save'' Bank of
America, the Panel notes that one of the primary reasons given
by both sides for not needing the guarantee is the market-
calming effect of the stress tests. The fact that the agencies
were ready to backstop Bank of America's losses, if necessary,
also had a calming effect on the financial markets, and likely
aided its ability to raise capital and terminate the guarantee
in the ensuing months.
2. TGPMMF
a. Legal Authority for the TGPMMF
It is not immediately apparent that the Gold Reserve Act of
1934 authorizes Treasury's decision to fund the TGPMMF with the
$50 billion assets held in the ESF. The Act currently provides
that, ``[c]onsistent with the obligations of the Government in
the International Monetary Fund on orderly exchange
arrangements and a stable system of exchange rates, the
Secretary or an agency designated by the Secretary, with the
approval of the President, may deal in gold, foreign exchange,
and other instruments of credit and securities the Secretary
considers necessary.'' \251\ The statute and its legislative
history both suggest that Congress intended principally for
Treasury to use the ESF ``to provide short-term credit to
foreign countries to counter exchange market instability.''
\252\ Treasury has traditionally used the ESF to support the
dollar in international exchange markets and to extend credit
and loans to foreign sovereigns and central banks;\253\ the use
of the ESF to enact an insurance program to ensure
macroeconomic stability amidst a domestic financial crisis
marks a significant departure from prior practice. The TGPMMF
seems to represent Treasury's first use of the ESF involving
domestic counterparties and the first to establish an insurance
mechanism.
---------------------------------------------------------------------------
\251\ 31 U.S.C. 5302(b).
\252\ S. Rep. No. 1295, 94th Cong., 2d Sess. 17 (1976), reprinted
in 1976 U.S.C.C.A.N. 5950, 5966; see also Id. (``[U]se of the ESF [is]
authorized only for purposes consistent with United States obligations
in the IMF regarding orderly exchange arrangements and a stable system
of exchange rates.''); 31 U.S.C. 5302(b) (conditioning in 1976 loan or
credit to a foreign government or entity for more than six months only
upon written statement of President to Congress of ``unique or
emergency circumstances.'').
\253\ See U.S. Department of the Treasury, Exchange Stabilization
Fund History (accessed Nov. 3, 2009) (online at www.treas.gov/offices/
international-affairs/esf/history) (periodizing over 100 uses of the
ESF from 1936 to 2002; explaining that from 1961 to 1971, the ESF was
used to incentivize foreign banks not to make demands on the U.S. gold
stock; explaining further that from 1972 to 2002, the ESF was primarily
used to acquire foreign currency reserves and extend lines of credit to
foreign nations, and, more recently, to provide loans to the United
Kingdom, Brazil, Argentina, Nigeria, and Romania).
---------------------------------------------------------------------------
Treasury has justified its use of the ESF for the TGPMMF as
follows:
The IMF obligations referenced in this provision link
orderly exchange arrangements to the stability and
health of the global financial and economic system.
Because the extreme demand for redemptions facing money
market funds at the time the [TGPMMF] was initiated had
magnified liquidity strains in global funding markets
and greatly exacerbated global financial instability,
the [TGPMMF] was expected to counter such instability
and help restore financial equilibrium. This objective
was consistent with the terms of the statute.\254\
---------------------------------------------------------------------------
\254\ Treasury information provided in response to Panel written
questions (Oct. 29, 2009). Although Treasury informed Panel staff that
Treasury's Office of General Counsel had prepared a more formal legal
analysis of its authority under the Act, Treasury has not shared this
analysis with the Panel despite our requests. Treasury also contended
that ``the guarantee structure of the Program was consistent with the
requirement in Sec. 31 U.S.C. 5302(b) that use of the ESF involved a
deal[ing] in an `instrument of credit'.'' Id.
While one could argue that the distress in the MMF market
had--and the prospect of a prolonged run on the markets would
have had--serious consequences for international financial
stability,\255\ Treasury's position raises the prospect of
using the ESF for other domestic activities that can be
plausibly linked to ensuring international financial stability.
---------------------------------------------------------------------------
\255\ See, e.g., BIS, U.S. Dollar Money Market Funds and Non-U.S.
Banks, supra note 95 at 79 (explaining that ``[g]lobal interbank and
foreign exchange markets felt the strain'' of run on MMFs after the
collapse of Lehman).
---------------------------------------------------------------------------
Treasury's use of the ESF for the TGPMMF led Congress to
include in EESA requirements that Treasury replenish any funds
paid out of the ESF under the TGPMMF and a prohibition against
Treasury from using the ESF to guarantee money market funds in
the future.\256\
---------------------------------------------------------------------------
\256\ EESA Sec. 131(a)-(b). Treasury's use of the ESF to purchase
$3.6 billion of USGF's assets raises related legal questions. While
Treasury has explained that ``unique and extraordinary circumstances''
justified the purchase, See Treasury Reserve Fund Release, supra note
118, its connection with the statutory purposes of the ESF is more
attenuated than the use of ESF to fund the TGPMMF. A disorderly
liquidation of USGF in November 2008 was likely not large enough to
have the same sort of direct impact on global exchange rates as the
potential collapse of the entire MMF market in September 2008. While it
is possible that the orderly liquidation of USGF had a stabilizing
effect on exchange rates and global financial health, it is not clear
why a similar result could not have been achieved by allowing USGF to
file a claim under the TGPMMF.
---------------------------------------------------------------------------
b. Impact of the TGPMMF
Treasury created the TGPMMF at the height of the crisis
last fall, and, at the time, stated that ``[m]aintaining
confidence in the money market fund industry [was] critical to
protecting the integrity and stability of the global financial
system.'' \257\ The program was designed to enhance market
confidence, alleviate investors' concerns that money market
funds would drop below a $1.00 NAV, and ease strains on
financing that threatened capital markets and financial
institutions.\258\ The TGPMMF has succeeded under these stated
objectives, as measured by the absence of any additional MMFs
breaking the buck, the declining commercial paper yield
spreads, and stability in the commercial paper market.\259\ In
conjunction with the Federal Reserve's programs, CFPP and AMLF,
which both saw heavy use during the TGPMMF's first months, the
TGPMMF has helped stabilize the MMF and commercial paper
markets.\260\
---------------------------------------------------------------------------
\257\ U.S. Department of the Treasury, Treasury Announces Guaranty
Program for Money Market Funds (Sept. 19, 2008) (online at
www.treas.gov/press/releases/hp1147.htm).
\258\ Id.
\259\ See Section E, infra.
\260\ See Board of Governors of the Federal Reserve System, Federal
Reserve Statistical Release H.4.1: Factors Affecting Reserve Balances
of Depository Institutions (online at www.federalreserve.gov/releases/
h41/) (accessed Oct. 29, 2009) (showing peak CPFF participation of $351
on January 21, 2009 declining to $39.4 billion on October 21, 2009 and
peak AMLF lending at $152 billion on October 1, 2008 declining to $0 on
October 21, 2009).
---------------------------------------------------------------------------
After the Reserve Primary Fund broke the buck and before
the TGPMMF's institution, investors fled from prime funds and
also from MMFs in general. The day the program was announced,
the flight from prime funds arrested and, over the course of
the program, reversed.\261\ Yields in the commercial paper
market also reflect the TGPMMF's impact.\262\ Perhaps equally
important, since the expiration of the guarantee program,
strong investment in MMFs has occurred. While total assets in
MMFs have declined slightly from $3.482 trillion to $3.372
trillion since September 18, 2009, and have declined more
significantly from the January 2009 market peak of $3.920
trillion,\263\ market observers attribute this gradual decline
to the relative attractiveness of other higher risk
investments, not to fears regarding MMF market stability.\264\
---------------------------------------------------------------------------
\261\ See Figure 12, infra; ICI Money Market Working Group Report,
supra note at 98 (``The U.S. Government's programs were highly
successful in shoring up confidence in the money market and money
market funds. Immediately following the difficulties of Primary Fund,
assets in institutional share classes of prime money market funds
dropped sharply as institutional investors, Seeking the safest, most
liquid investments, moved into institutional share classes of Treasury
and government-only money market funds . . . and bank deposits. Within
a few days of the announcements on September 19 of the Treasury
Guarantee Program and the Federal Reserve's AMLF program, however,
outflows from institutional share classes of prime money market funds
slowed dramatically. Indeed, by mid-October, the assets of prime money
market funds began to grow and continued to do so into 2009, indicating
a return of confidence by institutional investors in these funds.
During this same time period, assets of Treasury and government-only
money market funds also continued to grow, although at a much reduced
pace.'').
\262\ See Figure 14, infra (showing a narrowing of spreads between
overnight commercial paper and 3-month Treasury bills in the months
following the implementation of the TGP).
\263\ Investment Company Institute, Money Market Fund Assets
October 22, 2009 (Oct. 22, 2009) (online at www.ici.org/research/stats/
mmf/mm_10_22_09); Investment Company Institute, Weekly Total Net Assets
(TNA) and Number of Money Market Mutual Funds (online at www.ici.org/
pdf/mm_data_2009.pdf) (accessed Nov. 4, 2009); see also Figure 13,
infra.
\264\ See, e.g., David Serchuk, Another Run on Money Market Funds?,
Forbes.com (Sept. 24, 2009) (online at www.forbes.com/2009/09/24/money-
market-lehman-intelligent-investing-break-buck.html) (quoting Jeff
Rubin, head of research at Birinyi Associates, as attributing move from
MMFs since January 2009 peak to the search for higher yields).
---------------------------------------------------------------------------
One result at least partially attributable to the TGPMMF
was the Congressional decision in October 2008 to increase
deposit insurance from $100,000 to $250,000. Banks complained
that the guarantee program tilted the balance unfairly to MMFs
in their competition with FDIC-insured depository institutions
for funds and used this argument effectively as leverage to
have deposit insurance increased.\265\
---------------------------------------------------------------------------
\265\ Letter from Edward L. Yingling, President, American Bankers
Association, to Henry M. Paulson, Jr., Secretary of the Treasury and
Ben S. Bernanke, Chairman of the Federal Reserve System (Sept. 19,
2008) (hereinafter ``ABA Letter to Paulson and Bernanke'')
(illustrating the comparative advantage the TGP granted MMFs in their
competition for investors' funds with FDIC-insured banks, which he
contended face higher costs to fund deposit insurance and a greater
regulatory burden than MMFs) (online at www.aba.com/aba/documents/
press/LetterGuarantyProgramMoneyMarketFunds091908.pdf); see James B.
Stewart, The $4 Trillion Rescue You Should Be Grateful For,
SmartMoney.com (Sept. 15, 2009) (online at www.smartmoney.com/
investing/stocks/the-4-trillion-rescue-you-should-be-grateful-for/)
(reporting that guarantee set off ``howls of protest from the banking
industry'' that led the FDIC to raise the insurance limit to $250,000).
---------------------------------------------------------------------------
TGPMMF made no outlays, but that does not mean that the
program eliminated all pressure on funds' NAVs. Even after the
guarantee, funds provided ``parental support'' to preserve
their NAV, although the rate of this support decreased as
liquidity improved. No fund chose to rely on the TGPMMF in part
because the consequences of a triggering event and payment from
the fund were so draconian--liquidation, and the reputational
hit that liquidation would involve.\266\
---------------------------------------------------------------------------
\266\ See BIS, U.S. Dollar Money Market Funds and Non-U.S. Banks,
supra note 95, at 68, 71 (reporting that while around 145 funds
provided support in the thirty years up to July 2007, one third of the
top 100 U.S. MMFs received support since that time); Id. at 71 (showing
largest money market funds seeking support both before and after
program was in place); U.S. Securities and Exchange Commission, No-
Action Letters for Money Market Funds (online at www.sec.gov/divisions/
investment/im-noaction.shtml#money) (accessed Nov. 2, 2009).
---------------------------------------------------------------------------
Draconian consequences tend to temper the moral hazard
resulting from government guarantees of private
obligations.\267\ The Obama Administration has called for and
the SEC has moved to further mitigate the moral hazard in the
MMF industry through regulatory reform.\268\ The first approach
to reform is to minimize the risk by mandating disclosure and
setting further limits on the liquidity, maturities, and
composition in assets in MMF portfolios.\269\ The premise
behind this approach is that more tightly regulated MMFs will
not include illiquid and/or high risk assets. This approach may
be insufficient to address the contagion dynamic of runs on
MMFs, and it raises the possibility of excess reliance on the
credit rating agencies. The second approach is to create a
private or public insurance mechanism that would internalize
the cost of a potential bailout to market participants.\270\
Institution of a public insurance mechanism would go some way
into regulating MMFs like banks, with the acknowledgement that
some MMFs will adopt strategies that will fail, but that the
industry will pay for any bailout and that contagion will be
limited by the existence of an explicit guarantee. This
approach would have its own problems in that the traditional
boundaries between banking and securities regulators would be
tested. Some commentators have taken this insight a step
further and counseled the abandonment of expectation of a $1.00
NAV either for a portion or the entirety of the market.\271\
The SEC is in the process of finalizing its rule, and the
President's Working Group on Financial Markets has delayed the
issuance of its report on MMF regulatory reform in order to
assimilate the public comments on the proposed rule.\272\
---------------------------------------------------------------------------
\267\ Moral hazard is discussed in more detail in Section E(2),
supra.
\268\ See U.S. Department of the Treasury, Financial Regulatory
Reform: A New Foundation, at 38-39 (online at
www.financialstability.gov/docs/regs/FinalReport_web.pdf) (accessed
Nov. 2, 2009) (instructing SEC to promulgate rules ``to reduce the
credit and liquidity risk profile of individual MMFs and to make the
MMF industry as a whole less susceptible to runs.''); SEC Proposed
Money Market Fund Reform Rule, supra note 124.
\269\ This approach was advocated by the Investment Company
Institute, the industry trade group, and largely reflected in the SEC's
proposed amendments to Rule 2a-7. See SEC Proposed Money Market Fund
Reform Rule, supra note 124; ICI Money Market Working Group Report,
supra note 98 (recommending new disclosure requirements, shorter
maturities, and new liquidity standards).
\270\ See, e.g., Bullard, Federally-Insured Money Market Funds,
supra note 95 (proposing the creation of permanent, full federal
insurance for MMFs and similarly regulated ``narrow banks'' both
regulated by the FDIC).
\271\ See Letter from Jeffery N. Gordon, Alfred W. Bressler
Professor of Law, Columbia University School of Law, to Elizabeth M.
Murphy, Secretary of the U.S. Securities and Exchange Commission (Sept.
9, 2008) (commenting on SEC Proposed Money Market Fund Reform Rule and
stating ``Institutional MMFs should give up the promise of a fixed
NAV.'').
\272\ See Mary L. Schapiro, Chairman, U.S. Securities and Exchange
Commission, Speech at SEC Open Meeting (June 24, 2009) (online at
www.sec.gov/news/speech/2009/spch062409mls.htm).
---------------------------------------------------------------------------
Finally, on October 10, 2008, the SEC ruled that funds
could temporarily (until January 12, 2009) value their
portfolio securities by reference to their amortized cost value
rather than their market quotations as part of MMFs' daily
shadow pricing to determine NAV.\273\ The SEC's action was
intended to correct for what MMFs contended were depressed
market-based values of commercial paper that would not
accurately reflect asset values at maturity because they were
attributable more to market disruption and illiquidity than to
fundamental components of asset valuation like credit
risk.\274\ Although the Panel has not been able to test this
proposition, according to market participants, the SEC's
measure was successful in relieving pressure on MMFs facing
pressure on their NAVs due to temporarily illiquid commercial
paper markets.\275\
---------------------------------------------------------------------------
\273\ Unlike other mutual funds, which can use an amortized cost
value to calculate their daily NAV, MMFs have typically been required
to rely on market quotations for their daily shadow price valuations of
portfolio securities. See Investment Company Institute, SEC No-Action
Letter (Oct. 10, 2008) (online at www.sec.gov/divisions/investment/
noaction/2008/ici101008.htm) (hereinafter, ``SEC No-Action Letter to
ICI''). The SEC restricted the application of amortized cost valuation
to First Tier Securities of MMFs with 60-day or less maturities that
the fund reasonably expected to hold to maturity. Id.
\274\ See SEC No-Action Letter to ICI, supra note 273; ICI Money
Market Working Group Report, supra note 98, at 99-100.
\275\ ICI Money Market Working Group Report, supra note 98, at 100.
---------------------------------------------------------------------------
c. USGF Purchase
As previously noted, Treasury support of the Reserve Fund's
USGF appears to constitute an activity outside of the
parameters of the TGPMMF.\276\ Treasury's actions in this
regard raise additional important questions, including the
legal authority for Treasury's use of the ESF for such purpose.
The letter agreement between Treasury and the Reserve Fund was
entered into on November 19, 2008, which was more than one
month after EESA prohibited the Secretary of the Treasury from
using the ESF for ``any future guaranty programs.'' \277\ Given
Congress's pronouncement only a month previously in enacting
EESA that it would not allow Treasury to use ESF in the future
to fund an MMF guarantee program, Treasury's decision to go
forward with another novel use of ESF to stabilize the MMF
market--albeit through an asset purchase and not through the
use of a guarantee--raises significant questions.\278\
---------------------------------------------------------------------------
\276\ See Treasury Reserve Fund Release, supra note 118 (describing
the asset purchase as a ``separate agreement'').
\277\ See EESA Sec. 131.
\278\ See Report infra, section 2(a) (discussing authority for the
TGPMMF under 31 U.S.C. Sec. 5302(b)). Treasury disagrees with this
analysis and states that the USGF asset purchase was authorized under
the TGPMMF. In Treasury's view, a September 29, 2009 Presidential
approval of the TGPMMF did not limit the mechanism of meeting TGPMMF's
``principal'' objective--making shareholders whole--to a guarantee
claim and thus provides sufficient authority within its broad contours
for Treasury to make shareholders whole by entering a contingent asset
purchase agreement (separate from the Guarantee Agreement) with a
liquidating participating MMF. On September 29, 2009, the President
issued a memorandum to the Secretary of the Treasury approving ``the
use of funds from the Exchange Stabilization Fund as a guaranty
facility for certain money market mutual funds, consistent with your
recommendation to me and the terms and conditions set out in your
memorandum to me dated September 26, 2008.'' See Administration of
George W. Bush, Memorandum on Use of the Exchange Stabilization Fund To
Support the Money Market Mutual Fund Guaranty Facility, at 1279 (Sept.
29, 2008) (online at http://frwebgate.access.gpo.gov/cgi-bin/
getdoc.cgi?dbname=2008_presidential_documents&docid=pd06oc08_txt_15.pdf)
. Treasury has provided the Panel a brief oral summary of the September
26, 2008 memorandum from the Secretary of the Treasury to the
President, but has not provided the memorandum to the Panel.
---------------------------------------------------------------------------
The second issue is a question of policy. Why did Treasury
determine it was more beneficial to purchase the USGF's assets,
rather than trigger the TGPMMF? \279\ Treasury's choice to
provide support to the USGF in this case raises the question
whether Treasury believed that the bolstering of market
confidence that occurred upon TGPMMF implementation might be
vitiated if the program actually had to pay a claim.
---------------------------------------------------------------------------
\279\ Treasury's press release further indicates that were the SEC
to have allowed other funds to suspend redemptions, Treasury may have
pursued a similar course. See Treasury Reserve Fund Release, supra note
118 (stating ``no other funds participating in Treasury's temporary
guarantee program received a similar order from the SEC. Because of
this, Treasury does not foresee a need to take similar actions with
regard to any other funds participating in Treasury's temporary
guarantee program.'').
---------------------------------------------------------------------------
3. FDIC Guarantee Program
a. The Rationale for Creating Guarantees
On October 14, 2008, the same day that Treasury announced
the CPP and the Federal Reserve announced additional details of
its Commercial Paper Funding Facility, the FDIC announced the
creation of the TLGP. The TLGP is part of a coordinated effort
by Treasury, the Federal Reserve, and the FDIC to address
substantial disruptions in credit markets and the resultant
inability of many institutions to obtain funding and make
loans. The FDIC has cited the disruptions in the credit
markets, especially inter-bank credit markets, as well as
concerns that bank account holders ``might withdraw their
uninsured balances from depository institutions'' (the loss of
which might have ``impaired the funding structures of the
institutions that relied on them'') as primary rationales for
the creation of the TLGP.\280\ The FDIC worked closely with
Treasury and the Federal Reserve in formulating this multi-
pronged governmental intervention.\281\
---------------------------------------------------------------------------
\280\ FDIC written responses to Panel questions (Oct. 30, 2009).
\281\ FDIC conversations with Panel staff (Oct. 22, 2009).
---------------------------------------------------------------------------
While the TARP-funded CPP capital infusions would help
bolster banks' balance sheets, the agencies concluded that the
provision of guarantees through the TLGP would help foster
liquidity in the nation's banking system.\282\ By guaranteeing
debt, the FDIC acted to provide investors ``with the comfort
necessary to invest in longer-term obligations of financial
institutions.'' \283\ With respect to eligibility, the FDIC
concluded that making the program as widely inclusive as
possible would help ensure that credit--particularly inter-bank
lending--would start to flow again.\284\ The FDIC decided to
allow banks, thrifts, and holding companies to participate
given their substantial role in the credit markets and inter-
bank lending. FDIC Chairman Sheila Bair encouraged eligible
institutions of all sizes to participate in the TLGP, hoping
that the program ``will once again spur credit to flow, which
is essential for banks to return to normal lending activity.''
\285\
---------------------------------------------------------------------------
\282\ Id.
\283\ Federal Deposit Insurance Corporation, Chairman's Statement
on the Temporary Liquidity Guarantee Program (Oct. 23, 2008) (online at
www.fdic.gov/regulations/resources/TLGP/chairman_statement.html).
\284\ Id.
\285\ TLGP Interim Rule, supra note 167.
---------------------------------------------------------------------------
While these developments were influential, the FDIC
tailored its programs to problems in the U.S. markets.\286\ The
actions of foreign governments, including members of the G-20,
also substantially influenced the creation of the TLGP. In the
absence of similar action by the U.S. government, foreign banks
could have gained a competitive advantage. Prior to the FDIC's
announcement, various European countries announced plans to
provide additional deposit insurance or to guarantee various
debt obligations of financial institutions, including Austria,
Belgium, France, Germany, Ireland, Italy, Portugal, Spain, the
Netherlands, and the United Kingdom. As FDIC Chairman Bair
noted in announcing the TLGP, ``[o]ur efforts also parallel
those by European and Asian nations. Their guarantees for bank
debt and increases in deposit insurance would put U.S. banks on
an uneven playing field unless we acted as we are today.''
\287\
---------------------------------------------------------------------------
\286\ FDIC written responses to Panel questions (Oct. 30, 2009).
\287\ Federal Deposit Insurance Corporation, Statement by Federal
Deposit Insurance Corporation Chairman Sheila Bair, U.S. Treasury,
Federal Reserve, FDIC Joint Press Conference (Oct. 14, 2008) (online at
www.fdic.gov/news/news/press/2008/pr08100a.html) (hereinafter ``Bair
Statement'').
---------------------------------------------------------------------------
The FDIC introduced the DGP to restart senior debt
issuances by banks. Only $661 million in debt was issued in
September 2008, a 94 percent decrease from September 2007. The
program succeeded in jumpstarting debt issuances, with $106
billion in guaranteed debt issued before the end of 2008.\288\
There was no non-guaranteed senior unsecured debt issued by DGP
eligible entities between October 14 and December 31, 2008.
---------------------------------------------------------------------------
\288\ See Last Call for TLGP Debt, supra note 158.
---------------------------------------------------------------------------
b. Analysis of the Terms of the Guarantees
The FDIC released the TLGP master agreement for the DGP on
November 24, 2008.\289\ The terms contained in the master
agreement generally seem to be normal commercial terms. To some
degree, however, any discussion about ``normal'' commercial
terms in this context is complicated and challenging because
the creation of this program involved the invocation of the
``systemic risk exception,'' which can be applied only in very
explicit and unusual circumstances.\290\ In other words, the
government provided normal financing at normal prices during
abnormal times.
---------------------------------------------------------------------------
\289\ Federal Deposit Insurance Corporation, Master Agreement,
Federal Deposit Insurance Corporation Temporary Liquidity Guarantee
Program--Debt Guarantee Program (online at www.fdic.gov/regulations/
resources/TLGP/master.pdf) (accessed Nov. 2, 2009) (hereinafter ``TLGP
Master Agreement'').
\290\ See Federal Deposit Insurance Act of 1950, Pub. L. No. 81-
797, Sec. 13(c)(4)(G). The systemic risk determination authorized the
FDIC to take actions to avoid or mitigate serious adverse effects on
economic conditions or financial stability, and in response to this
determination, the FDIC established the TLGP. The FDIC adopted the TLGP
in October 2008 following a determination of systemic risk by the
Secretary of the Treasury (after consultation with the President) that
was supported by recommendations from the FDIC and the Federal Reserve.
---------------------------------------------------------------------------
There are, however, several provisions worth noting. For
example, unlike Treasury, which obtained special supervisory
powers from Citigroup with respect to the ring-fenced assets
and management and imposed other restrictions on the
institution,\291\ the FDIC does not seem to have obtained such
consideration from the institutions participating in the TLGP.
While such additional leverage might not have been practical or
feasible given the size of the TLGP and the number of
participating institutions, it is at least worth noting.
---------------------------------------------------------------------------
\291\ For further discussion on the structure of the Citigroup
guarantee, see Section C, infra.
---------------------------------------------------------------------------
Additionally, the FDIC also indicated that it based its fee
structure on practical considerations.\292\ While the FDIC
found the idea of risk-based pricing (i.e., calculating fees by
reference to the risk or the size of the institution, which
would have been normal commercial practice) \293\ appealing and
considered it in the process, the combination of the short
amount of time available and the fact that non-insured
depository institutions were eligible to participate in the
TLGP made such risk-based pricing impractical, according to the
FDIC.\294\
---------------------------------------------------------------------------
\292\ FDIC conversations with Panel staff (Oct. 22, 2009).
\293\ For example, the FDIC uses risk-based premiums for its
Deposit Insurance Fund and Congress, in providing the Treasury
Secretary with the authority to create an asset guarantee program in
Sec. 102 of EESA, also provided him with the authority to base premiums
on the credit risk pertaining to the asset(s) being guaranteed.
\294\ FDIC conversations with Panel staff (Oct. 26, 2009).
---------------------------------------------------------------------------
c. FDIC Decision to End the DGP and the Rationale Behind It
Initially, the DGP allowed participating institutions to
issue FDIC-guaranteed senior unsecured debt until June 30,
2009. The FDIC Board subsequently issued a final rule that
extended the period during which participating institutions
could issue FDIC-guaranteed debt until October 31, 2009, with
the stated purpose of reducing ``market disruption at the
conclusion of the DGP and [facilitating] the orderly phase-out
of the program.'' \295\
---------------------------------------------------------------------------
\295\ Federal Deposit Insurance Corporation, Notice of Proposed
Rulemaking, Expiration of the Issuance Period for the Debt Guarantee
Program; Establishment of Emergency Guarantee Facility (Sept. 9, 2009)
(hereinafter ``FDIC DGP Rule Notice'') (online at www.fdic.gov/news/
board/NoticeSept9no6.pdf) The FDIC chose October because it believed
that the markets ``were recovering in the spring of 2009, and that they
were likely to return to a reasonable level of stability by then--just
over one year from the start of the crisis.'' FDIC written responses to
Panel questions (Oct. 30, 2009).
---------------------------------------------------------------------------
In early September 2009, the FDIC issued a notice of
proposed rulemaking that presented two options for ending the
program.\296\ While acknowledging that the DGP could terminate
in light of improved market conditions, the FDIC indicated that
it might be ``prudent'' to create an emergency guarantee
facility to serve as a safeguard in limited circumstances.\297\
Under the first alternative, the DGP would terminate as
provided in the existing regulation. Under the second
alternative, the DGP would terminate as provided in the
existing regulation, but the FDIC would create a limited six-
month emergency guarantee facility \298\ to be used by insured
depository institutions and other DGP participants to guarantee
senior unsecured debt.\299\ Institutions seeking to participate
in the emergency guarantee facility would need to ``demonstrate
an inability to issue non-guaranteed debt to replace maturing
senior unsecured debt as a result of market disruptions or
other circumstances beyond the entity's control.'' \300\
According to the FDIC, a limited six-month extension (with a
definite end date of April 30, 2010) would ``serve as a
mechanism to phase-out the DGP,'' not to promote ``indefinite
participation.'' \301\ The FDIC would also assess an annualized
participation fee of at least 300 basis points (or three
percent of the amount of debt issued) on any FDIC-guaranteed
debt that institutions issued under the emergency
guarantee.\302\ The FDIC intends this provision to deter
applications based on ``other, less severe circumstances or
concerns.'' \303\
---------------------------------------------------------------------------
\296\ FDIC DGP Rule Notice, supra note 295.
\297\ FDIC DGP Rule Notice, supra note 295.
\298\ In the FDIC's view, creating an emergency guarantee facility
would be in accord with both the rationale for developing the TLGP and
the October 14, 2008 systemic risk determination pursuant to Federal
Deposit Insurance Act of 1950, Pub. L. No. 81-797, Sec. 13(c)(4)(G),
and the authority to act was granted to the FDIC Board by
Sec. 9(a)(Tenth) to issue ``such rules and regulations as it may deem
necessary to carry out the provisions of the FDI Act.'' Pub. L. No. 81-
797 Sec. 9(a)(Tenth); see also FDIC DGP Rule Notice, supra note 295.
\299\ FDIC DGP Rule Notice, supra note 295.
\300\ FDIC DGP Rule Notice, supra note 295.
\301\ Federal Deposit Insurance Corporation, Final Rule: Amendment
of the Debt Guarantee Program to Provide for the Establishment of a
Limited Six-Month Emergency Guarantee Facility (Oct. 20, 2009)
(hereinafter ``DGP Final Rule'') (online at www.fdic.gov/news/board/
Oct098.pdf); FDIC conversations with Panel staff, Oct. 22, 2009.
\302\ FDIC DGP Rule Notice, supra note 295.
\303\ FDIC DGP Rule Notice, supra note 295. As the discussion in
Section C, infra, indicates, this fee is significantly higher than the
fee initially charged.
---------------------------------------------------------------------------
After receiving only four comments on the proposed rule,
all of which generally supported the second alternative, the
FDIC Board voted for the second alternative on October 20,
2009, offering a limited six-month emergency extension through
April 30, 2010.\304\ In doing so, the FDIC selected the
approach that it believed to be the ``most appropriate phase-
out of the DGP,'' \305\ and signaled that the DGP adds value as
an additional support mechanism even if it is not heavily
utilized.
---------------------------------------------------------------------------
\304\ See Federal Deposit Insurance Corporation, Memorandum Re:
Final Rule Allowing the Basic Debt Guarantee Component of the Temporary
Liquidity Guarantee Program (TLGP) to Expire on October 31, 2009 and
Establishing a Six-Month Emergency Guarantee Facility (Oct. 20, 2009)
(online at www.fdic.gov/news/board/Oct097.pdf) (providing FDIC staff
recommendation that the Board allow the DGP to expire on October 31,
2009 and to establish a six-month emergency guarantee facility); DGP
Final Rule, supra note 301.
\305\ DGP Final Rule, supra note 301.
---------------------------------------------------------------------------
The FDIC's decision-making has been largely driven by
recent market data suggesting that the TLGP and other federal
efforts have helped to restore liquidity and confidence in the
banking and financial services industries.\306\ Furthermore,
the FDIC noted that only a limited number of participating
institutions have issued FDIC-guaranteed debt under the
extended DGP, and that a number of banks have issued debt
successfully and rather inexpensively without government
backing.\307\ FDIC-backed deals, which reached 60 in number
during the first quarter of 2009, dropped to eight in the third
quarter.\308\ Such events are in large part a reflection of the
TLGP's design and structure. The FDIC intended for the TLGP
debt guarantee program to become uneconomic once the market
improved. While fees to issue debt under the TLGP ranged from
50 to 100 basis points at the program's commencement, the FDIC
increased these fees by 25 to 50 basis points on April 1,
2009.\309\ As the market has stabilized and economic conditions
have shifted, borrowing costs in the private markets have
lessened, making the TLGP debt guarantee program fees less
appealing to issuers from an economic standpoint.\310\ As of
October 22, 2009, there has been one failure of an institution,
an affiliate of which had issued guaranteed debt.\311\ The FDIC
anticipates up to a $2 million loss on that issuance. No
losses, however, have been paid out yet with respect to the DGP
and the FDIC expects ``very few losses on the remaining
outstanding debt through the end of the program in 2012.''
\312\ This decision parallels Treasury's decision to terminate
its TGPMMF as of September 18, 2009.\313\
---------------------------------------------------------------------------
\306\ FDIC DGP Rule Notice, supra note 295.
\307\ FDIC DGP Rule Notice, supra note 295. According to FDIC
Chairman Sheila C. Bair, ``[t]he TLGP has been very effective at
helping financial institutions bridge the uncertainty and dysfunction
that plagued our credit markets last fall. As domestic credit and
liquidity markets appear to be normalizing and the number of entities
utilizing the Debt Guarantee Program (DGP) has decreased, now is an
important time to make clear our intent to end the program. It is also
important to note that FDIC has collected over $9 billion in fees
associated with this program. FDIC will be using some of this money to
offset resolution costs associated with bank failures.'' Federal
Deposit Insurance Corporation, FDIC Board Approves Phase Out of
Temporary Liquidity Guarantee Program Debt Guarantee Program to End
October 31st (Sept. 9, 2009) (hereinafter ``TLGP Phase Out Notice'')
(online at www.fdic.gov/news/news/press/2009/pr09166.html).
Furthermore, data provider Dealogic highlighted that the DGP's largest
users had issued over $81.3 billion in medium-term debt outside of the
program by early September.
\308\ FDIC DGP Rule Notice, supra note 295.
\309\ Federal Deposit Insurance Corporation, FDIC Extends the Debt
Guarantee Component of Its Temporary Liquidity Guarantee Program (Mar.
17, 2009) (online at www.fdic.gov/news/news/ press/2009/pr09041.html).
\310\ At this point, it remains unclear whether these changed
circumstances have arisen because creditors view the banks as strong
and not needing guarantees or because creditors view the banks as
receiving other implicit guarantees for which the banks are not paying.
\311\ FDIC written responses to Panel questions (Oct. 30, 2009);
see also discussion in Section E, infra.
\312\ FDIC written responses to Panel questions (Oct. 30, 2009);
see also discussion in Section E, infra.
\313\ See U.S. Department of the Treasury, Treasury Announces
Expiration of Guarantee Program for Money Market Funds (Sept. 18, 2009)
(hereinafter ``Money Market Expiration Release'') (online at
www.treasury.gov/press/releases/tg293.htm).
---------------------------------------------------------------------------
E. Cost/Benefit to Taxpayers of the Guarantee Programs
By guaranteeing or backstopping the assets of troubled
financial institutions, the federal government was taking
sizeable risks. It is important to consider the relationship
between measures of the benefit provided--the risk absorbed by
the taxpayer--and the fees and other compensation the
government received for taking such extraordinary risks.
1. Direct Cost/Benefit from the Programs
To date, the federal government has made one small payout
on a financial stability guarantee program: a $2 million DGP
claim associated with a failed bank.\314\ Fee income has been
significant: a total of $17.4 billion across the three major
programs. A simple summation of claim payments relative to fees
received does not capture the long-term costs and benefits of
these programs. A better analytical approach would be to
calculate the discounted present value of the projected cash
flows of the guarantee program. This is the approach CBO and
OMB use to estimate the credit reform subsidy when calculating
the federal budget, as described in Section B. On this basis,
for example, the Asset Guarantee Program was estimated in May
by OMB to produce a ``negative subsidy,'' or net benefit, of
0.18 percent, meaning that, from the federal government's
perspective, the program's fees and revenues will exceed its
projected losses by roughly $752 million.\315\
---------------------------------------------------------------------------
\314\ FDIC written responses to Panel questions (Oct. 30, 2009).
\315\ Office of Management and Budget, FY 2010 Budget: Department
of the Treasury at 983 (online at www.whitehouse.gov/omb/budget/fy2010/
assets/tre.pdf) (hereinafter ``Treasury 2010 Budget'').
---------------------------------------------------------------------------
Receipts may not accurately measure the benefits conveyed
under a federal guarantee, even when discounted at a rate that
attempts to capture market risk, which is the calculation made
by CBO and OMB under EESA. One obvious alternative is to look
at market prices to gauge the value of the financial guarantee.
This can be approached in two ways: (1) determining what a
private sector entity would charge for guaranteeing debt
issuances on the exact terms as those guaranteed under the TLGP
and TGPMMF; or (2) measuring the spread between the interest
rate at which banks or money market funds have in fact been
able to issue debt under these programs and the rate they would
have been charged without the guarantee. Not surprising, there
are virtually no private sector institutions capable of
insuring the risks of the magnitude discussed in this report.
Hence, only the second analytical approach was pursued here.
a. Asset Guarantee Program
The Panel reviewed an analysis performed for Treasury by
the FRBNY of the asset guarantees for Citigroup. No such
analysis was performed for the Bank of America guarantees
because supporting details--such as the composition of the
ring-fenced asset pool and projected losses on that pool--were
not available.
In order to calculate the fees that should be charged for
the Citigroup AGP, the FRBNY conducted an actuarial analysis of
the performance and estimated future losses of the ring-fenced
assets included in the Citigroup AGP.\316\ This involved using
a statistical model that incorporates probabilities of expected
losses based on a stress test, and a discount rate that
includes a market risk component.
---------------------------------------------------------------------------
\316\ This analysis was performed in late November 2008 for the
Citigroup ring-fenced assets as of November 21, 2008.
---------------------------------------------------------------------------
The stress test undertaken by the FRBNY provided an
estimate of losses on the ring-fenced assets in the AGP under
two scenarios: (1) a moderately adverse asset performance, and
(2) a severely adverse asset performance. Given the fact that
the asset composition of the guaranteed pool was not finalized
at the time the stress test was conducted as part of the
actuarial analysis, the FRBNY based the performance on assets
similar to those likely to be in the portfolio. Two key
economic indicators that were factored into the stress tests
were: the projected unemployment rates for 2009 and 2010, and
housing prices, utilizing the Case-Shiller 20-city housing
price index for 2009 and 2010 (see table below for details). It
should be noted that, as illustrated in Figure 4, the projected
unemployment rate for the severely adverse scenario is lower
than the actual unemployment rate as of October 2009 (9.8
percent).
FIGURE 4: ECONOMIC INDICATORS INCLUDED IN STRESS TEST MODELS
[GRAPHIC] [TIFF OMITTED] T3348A.001
The result of the FRBNY's actuarial analysis (conducted
November 21, 2008) on the expected future losses on the ring-
fenced assets was $26.5 billion in losses above $8.1 billion in
loan loss reserves (total $34.6 billion) under the moderately
adverse scenario and $35.8 billion in losses above $8.1 billion
in loan loss reserves (total $43.9 billion) under the severely
adverse scenario. As such, the base scenario conducted during
November 2008 projected losses below the $39.5 billion AGP loss
threshold or deductible that must be reached before any losses
are absorbed by the federal government. On the other hand, the
severely adverse scenario analyzed by the FRBNY projected $4.4
billion in losses above the $39.5 billion AGP loss threshold or
deductible that must be reached before any losses are absorbed
by the federal government. This implies that Treasury will have
to pay out $3.96 billion under its share of the Citigroup AGP
agreement. The Panel believes this a more likely scenario than
the moderately adverse case because: (1) the unemployment
assumptions used in both scenarios have in fact already been
exceeded, and (2) the FRBNY analysis was based upon the
Citigroup asset pool prior to Citigroup's exercise of its
ability to substitute more troubled assets.
Finally, based on a probability model for its two stress
test scenarios, the FRBNY then formulated a loss distribution
analysis to predict the estimated expected costs to the
guarantor (Treasury, the Federal Reserve, and the FDIC). The
result was that the FRBNY actuarial analysis of the Citigroup
AGP projected that premiums would exceed expected losses to be
absorbed by Treasury and other government guarantors by $700
million.\317\
---------------------------------------------------------------------------
\317\ The FRBNY estimated the expected cost to TARP was $2.07
billion. The estimated benefit to TARP, based on the expected cashflows
of the fees received by TARP (estimating the current value of the
preferred shares and warrants using information on the current market
value of similar Citigroup preferred shares and expected returns to
Treasury and the FDIC from holding the preferred shares and warrants)
was $2.73 billion (calculated using a simple average of cashflows under
the 2-10 year preferred shares prepayment).
---------------------------------------------------------------------------
Similarly, the two federal budget agencies OMB and CBO are
required under EESA to estimate the costs of the AGP (and other
TARP initiatives) under modified ``credit reform'' budget
accounting rules (see Section B above). As noted above, the
most recent OMB analysis for the combined Citigroup and Bank of
America guarantees produces a ``negative subsidy'' of 0.18
percent, meaning the guarantees produce a $752 million receipt
to the federal government. CBO calculates a large positive
subsidy amount for the Citigroup (64 percent) and presumably
would have shown a similar estimate for Bank of America had it
been executed. For the Citigroup guarantee alone, the latest
CBO analysis shows a cost to the federal government of $3
billion out of the $5 billion maximum exposure. This
calculation is based upon their analysis of the Citigroup ring-
fenced portfolio and disclosed charge-off rates of comparable
assets. However, the CBO subsidy estimate excludes offsetting
fees, which are recorded elsewhere in the budget.
The Panel was not able to complete its own analysis of
expected losses on the Citigroup guaranteed portfolio. On the
benefit or receipt side of the ledger, however, the Panel
estimated the current market value (as of November 4, 2009) of
the preferred shares issued to the federal government for the
Citigroup AGP (subsequently converted to trust preferred
shares). This analysis is based on using existing Citigroup
trust preferred shares trading in the market with a similar
dividend yield and maturity to model a ``synthetic Citi AGP
trust preferred security'' to estimate the market price of the
non-trading Citi AGP trust preferred shares. According to the
Citigroup AGP Master Agreement, Treasury and the FDIC received
Citigroup non-voting preferred shares with a combined face
value of $7.059 billion ($4.034 billion to Treasury and $3.025
billion to the FDIC). Figure 5 below highlights the estimate.
Based on the analysis, the Panel's staff estimates that the
market value of Citigroup AGP trust preferred shares at $5.76
billion as of November 4, 2009, of which Treasury holds $3.29
billion and the FDIC holds $2.47 billion. By comparison, the
Panel's staff estimates the market value of the Citigroup
preferred shares on November 21, 2008 were $2.14 billion.
FIGURE 5: ESTIMATE OF THE MARKET VALUE OF PREFERRED SHARES ISSUED UNDER
THE CITIGROUP AGP
------------------------------------------------------------------------
------------------------------------------------------------------------
Citigroup 7.625% Trust Preferred Share (Existing Trading Security)
------------------------------------------------------------------------
Maturity date................... 12/1/2036
Outstanding shares.............. 200,000
Issue price..................... $100
Market price (11/04/2009)....... $82.00
Dividend........................ 7.625%
Market price/issue price........ 82.0%
------------------------------------------------------------------------
Synthetic Citigroup AGP 8% Trust Preferred Share (Model)
------------------------------------------------------------------------
Maturity date................... 7/30/2039
Outstanding shares.............. 7,059,000
Issue price..................... $1,000
Market price (11/04/2009)....... $816.14
Dividend........................ 8.000%
Market price/issue price........ 81.6%
Market price/issue price........ 81.61%
Face value of Citigroup AGP $7.06 billion
Trust preferred shares.
Estimated market value of $5.76 billion
Citigroup AGP Trust pref shares.
------------------------------------------------------------------------
The Panel also estimates the value of the warrants received
by Treasury for the Citigroup AGP at $61.2 million as of
October 20, 2009 using an estimated implied volatility of 58.7
percent. The Citigroup AGP actuarial analysis conducted by the
FRBNY estimated that the value of the warrants on November 21,
2008 was $30 million using an estimated volatility of 40
percent.
Finally, the Panel also reviewed Citigroup's own internal
monthly summary analysis of the performance of the ring-fenced
assets.\318\ Citigroup conducted its own stress test of the
ring-fenced assets with similar inputs to FRBNY's actuarial
analysis. Citigroup's stress test of the ring-fenced assets is
periodically adjusted to reflect changing economic and asset
assumptions. Given the Panel's review of the FRBNY's analysis
as discussed above, the Panel intends to monitor closely trends
in the performance of the ring-fenced assets.
---------------------------------------------------------------------------
\318\ These documents were provided to the Panel on a confidential
basis by Treasury.
---------------------------------------------------------------------------
b. TGPMMF
MMFs do not issue marketable securities but instead
purchase securities issued by others, and there is a unified
market for and hence no difference in the interest rates of
similar securities held by MMFs versus those held outside such
funds. Furthermore, there is no private sector firm that
provides protection for investors' holdings in MMFs by
guaranteeing the MMFs' NAVs.
The government incurred no costs from claims made under the
TGPMMF. It should be noted, however, that the government was
exposed to significant potential costs from claims while the
program was in effect. The Administration's 2010 Budget, for
example, projected losses of $2.5 billion in 2009 for the
TGPMMF, well in excess of the $1.2 billion in fees collected.
There is evidence that yields of commercial paper were
substantially affected largely by the financing available in
the healthy and stable MMF market buttressed by the TGPMMF and
related Federal Reserve initiatives. Commercial paper yields,
as measured by spreads over Treasury securities, quickly
declined after the program was instituted and stayed at low
levels for the duration of the program.\319\ This is an
understandable result of the program (which, at the onset
guaranteed 93 percent of the MMFs outstanding value), the fact
that a substantial amount of commercial paper was held in MMFs,
and the liquidity and purchase of commercial paper by the
Federal Reserve's AMLF and CPFF. The MMF guarantees allowed
issuers of commercial paper to pay lower interest rates.\320\
As with the TLGP analysis discussed below, the difference
between what the interest rates were after the MMF guarantees
and what the rates would have been without guarantees is a
measure of the government subsidy to the issuers of commercial
paper, typically large businesses.
---------------------------------------------------------------------------
\319\ See Annex, Figure 14; ICI Money Market Working Group Report,
supra note at 98.
\320\ Id.
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c. Temporary Liquidity Guarantee Program DGP
In order to measure the value of the government assistance
to the banking industry provided by the DGP, the Panel measured
the spread between the interest rate at which banks issued debt
under TLGP and compared that rate to non-TLGP debt they issued
in the same period. This analysis was conducted using two
alternative methodologies. The first method, highlighted in
Figure 6 below, is based upon interest rate spreads calculated
by SNL. This analysis calculates how much the TLGP
participating firms saved in borrowing costs by comparing the
interest rates on the $304 billion in senior debt issued under
TLGP to interest rates on $7.1 billion of non-TLGP senior debt
with similar maturities issued by some of the same firms. The
difference represents the interest rate savings and provides an
estimate of the TLGP subsidy. (The analysis compared debt that
had a fixed coupon rate and did not include debt issued with a
floating rate.) \321\
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\321\ When comparing TLGP debt and debt issued outside of FDIC's
TLGP, SNL Financial used all senior debt that had been issued between
11/21/2008 and 11/04/2009. For TLGP debt, SNL Financial used all senior
debt that had been issued under the TLGP, excluding issuances with
maturities of less than one year (e.g., commercial paper), for a total
of $303.78 billion. For the offerings issued in foreign currencies, SNL
Financial converted those offerings to USD by using the appropriate
exchange rate as of the offering completion date. In addition, SNL
excluded equity linked notes such as ELKS or Internotes and offerings
with maturities of less than one year.
---------------------------------------------------------------------------
For the period of November 21, 2008 through November 4,
2009, TLGP-participating banks have issued senior debt on a
guaranteed basis at a weighted average coupon rate of 2.374
percent, compared to a 3.9 percent coupon rate for the small
amount of comparable debt issued on a non-guaranteed basis (see
table below). This savings of 1.53 percentage points would
translate into an annual subsidy of almost $4.73 billion, or a
subsidy of $13.4 billion over the weighted average term of the
TLGP loans.
A second method for calculating the implicit subsidy
provided by the TLGP is to compare the interest rates on each
slice of the $276 billion in senior debt issued under TLGP
program by the top ten issuers to non-TLGP floating senior debt
with similar maturities issued by these same firms and trading
in the secondary market on the date of issuance of TLGP debt.
This allows for computation of an implicit savings for those
banks that did not actually issue any non-TLGP debt during this
period. The result as computed by the Panel shows a subsidy of
$28.9 billion (see Figure 7 below).
It should be noted that compared to the two subsidy
estimates described above ranging from $13.4 to 28.9 billion--
FDIC's TLGP collected fees of $9.64 billion during the same
period (see table).
FIGURE 6: TLGP DEBT COMPARED TO NON-TLGP SENIOR DEBT ISSUANCE (METHOD 1)
[Dollars in millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Amount offered Weighted average coupon Weighted average
-------------------------- (%) maturity (years) Borrowing
---------------------------------------------------- cost savings
Non-TLGP TLGP Non-TLGP TLGP Non-TLGP TLGP \322\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Citigroup Inc.............................................. $1,453 $64,600 0.00 1.91 3.02 2.55
General Electric Co........................................ 1,500 54,846 3.50 2.26 3.01 2.96 $1,941.6
Bank of America Corp....................................... 15 44,000 0.00 2.48 1.01 2.76
JPMorgan Chase & Co........................................ 2 40,435 0.00 2.61 1.04 2.80
Morgan Stanley............................................. ........... 23,769 0.00 2.50 0.00 2.81
Goldman Sachs Group Inc.................................... 1,000 21,614 3.63 2.61 3.05 2.50 606.9
Wells Fargo & Co........................................... ........... 9,500 0.00 2.68 0.00 3.12
GMAC Inc................................................... ........... 7,400 0.00 2.20 0.00 3.55
American Express Co........................................ ........... 5,900 0.00 3.15 0.00 2.67
State Street Corp.......................................... ........... 3,950 0.00 2.03 0.00 2.55
All other participants..................................... 3,177 27,767 4.33 2.44 2.75 2.91
--------------------------
Total.................................................. $7,147 $303,781 3.90 2.35 2.90 2.78 $13,445.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
\322\ The method 1 cost savings analysis was conducted using a company-specific comparison made between non-TLGP senior unsecured offerings made between
11/21/08 and 10/19/09 and TLGP issued debt issued during the same period. There were only three instances of a participant with both a non-TLGP
offering with a set coupon rate and a TLGP offering. Thus, the analysis represents an extrapolation from these three eligible offerings.
FIGURE 7: TLGP DEBT COMPARED TO NON-TLGP SENIOR DEBT ISSUANCE (METHOD 2)
[Dollars in millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Weighted average
Weighted average Weighted average of existing non- Borrowing cost
Amount offered maturity (years) coupon (%) TLGP floating savings
debt (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Citigroup Inc............................................ $64,600 2.7 1.9 5.6 $6,780
General Electric Co...................................... 54,846 2.9 2.3 5.3 4,696
Bank of America Corp..................................... 44,000 2.7 2.4 5.5 3,761
JPMorgan Chase & Co...................................... 40,435 3.1 2.7 4.5 2,156
Morgan Stanley........................................... 23,769 2.8 2.4 7.7 3,748
Goldman Sachs Group Inc.................................. 21,614 2.8 2.6 6.7 2,379
Wells Fargo & Co......................................... 9,500 3.1 2.7 5.7 903
GMAC Inc................................................. 7,400 3.4 2.0 17.1 3,813
American Express Co...................................... 5,900 2.9 3.1 4.8 327
State Street Corp........................................ 3,950 3.1 2.0 4.8 362
------------------- ------------------
Total for Top 10 Issuances........................... $276,014 2.8 2.3 5.9 $28,924
--------------------------------------------------------------------------------------------------------------------------------------------------------
FIGURE 8: TLGP FEES COLLECTED \323\
[Dollars in millions]
------------------------------------------------------------------------
Period Fees
------------------------------------------------------------------------
Fourth Quarter 2008........................................ $3,437
January 2009............................................... 1,024
February 2009.............................................. 1,087
March 2009................................................. 1,323
April 2009................................................. 712
May 2009................................................... 488
June 2009.................................................. 597
July 2009.................................................. 387
August 2009................................................ 296
September 2009............................................. 288
------------
Total.................................................. $9,639
------------------------------------------------------------------------
\323\ Federal Deposit Insurance Corporation, Monthly Reports on Debt
Issuance Under the Temporary Liquidity Guarantee Program (Oct. 21,
2009) (www.fdic.gov/regulations/resources/TLGP/fees.html).
2. Moral Hazard Considerations
In addition to direct monetary costs, the guarantee
programs discussed in this report have broader costs resulting
from the moral hazard that arises when the government agrees to
guarantee the assets and obligations of private parties.
Generally, the question of moral hazard arises when a party is
protected, or expects to be protected, from loss. The insured
party might take greater risk than it would otherwise, and
market discipline is undermined.\324\
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\324\ Without protections, Citigroup would have more of an
incentive to not properly manage the protected assets under the AGP.
Treasury has provided certain safeguards against this risk. First, the
AGP carries a very high deductible for Citigroup--it is liable for the
first $39.5 billion of losses in the pool, and 10 percent of losses
thereafter. Second, Citigroup must abide by strict asset management
guidelines as set forth in the agreement. And third, if the pool loses
more than $27 billion, the government may demand a change in the
management of the pool.
---------------------------------------------------------------------------
The problem is more pronounced when the protected party is
not required to purchase the protection. For example, investors
and issuers of commercial paper paid nothing directly for
Treasury's guarantee of MMFs,\325\ and yet received its
protection or benefits. The TGPMMF served to backstop not only
the funds themselves, but also the commercial paper market to
which the funds are so crucial. It should also be noted that
the fees the government charged the financial institutions for
the guarantees in all of the programs were lower than fees
commercial entities would have charged for the same protection.
---------------------------------------------------------------------------
\325\ The funds themselves paid fees, however, which were passed on
to investors. See, e.g., BlackRock Liquidity Funds, Certified
Shareholder Report (Form N-CSRS), at 60, 102 (Apr. 30, 2009) (online at
www.sec.gov/Archives/edgar/data/97098/000119312509141660/dncsrs.htm)
(accounting for TGP fees as ``federal insurance'' on statement of
operations and explaining that fees ``are not ordinary expenses and are
not covered by the contractual agreement to reduce fees and reimburse
expenses'').
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Some commentators have expressed the view that market
participants believe that should money market funds again
threaten to break the buck or threaten contagion, the federal
government will again step in to guarantee the money market
funds and the solvency of system.\326\ (On the other hand, not
everyone believes that the government's temporary guarantee of
money market funds created an implicit and permanent
guarantee.) \327\
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\326\ American Enterprise Institute for Public Policy Research, Do
Money Market Funds Have a Future in the New Financial System (May 5,
2009) (online at www.aei.org/EMStaticPage/100048?page=Summary) (quoting
Marcel Bullard: ``We have permanent implied money market insurance.
It's with us now and it's likely to be with us forever . . .''); ABA
Letter to Paulson & Bernanke, supra note 265; (citing the ``perception
by the market that money market mutual funds now have a permanent
implicit government guaranty--much like Fannie Mae and Freddie Mac
did''); Robert L Hetzel, Should Increased Regulation of Bank Risk-
Taking Come from Regulators or from the Market?, Economic Quarterly,
Vol. 95, No. 2, at 161 (Spring 2009) (``[R]egulators had drawn the
financial-safety-net line to exclude money market mutual funds, these
funds would have been subject to the market discipline of possible
failure. They would then have had to make one of two hard choices to
become run-proof. Prime money funds could have chosen some combination
of high capital and extremely safe, but low-yielding, commercial paper
and government debt. Alternatively, they could have accepted variable
NAV as the price of holding risky assets. Either way, the money market
mutual fund industry would have had to shrink. At present, the
incentive exists for money funds to take advantage of the government
safety net by increasing the riskiness of their asset portfolios.'').
\327\ Peter Wallison, Panel Discussion: Do Money Market Funds Have
a Future in the New Financial System, American Enterprise Institute for
Public Policy Research, at 1:05 (May 5, 2009) (online at www.aei.org/
video/101087) (``I disagree completely with [the] view that money funds
are now guaranteed or insured in some way because the government
stepped in this case.'').
---------------------------------------------------------------------------
A larger issue arises when one considers the implicit
guarantees, those that are paid for by neither party, but whose
cost is borne by the taxpayer. The DGP and TGPMMF both carry
fees paid for by the financial institutions. But their
existence, and the existence of the other elements of the
bailout of the financial system, could imply that there is a
permanent, and ``free,'' insurance provided by the government,
especially for those institutions deemed ``too big to fail,''
or ``too connected to fail.'' There is an implication that, in
the case of another major economic collapse, the government
will again step in to prop up the financial system, especially
the ``too big to fail'' institutions. This moral hazard creates
a real risk to the system.
This ``free'' insurance causes a number of distortions in
the marketplace. On the financial institution side, it might
promote risky behavior. On the investor and shareholder side,
it will provide less incentive to hold management to a high
standard with regard to risk-taking. By creating a class of
``too big to fail'' institutions, it has provided these
institutions with an advantage with respect to the pricing of
credit:
Creditors who believe that an institution will be
regarded by the government as too big to fail may not
price into their extensions of credit the full risk
assumed by the institution. That, of course, is the
very definition of moral hazard. Thus the institution
has funds available to it at a price that does not
fully internalize the social costs associated with its
operations. The consequences are a diminution of market
discipline, inefficient allocation of capital, the
socialization of losses from supposedly market-based
activities, and a competitive advantage for the large
institution compared to smaller banks.\328\
---------------------------------------------------------------------------
\328\ Speech of Federal Reserve Board Governor Daniel K. Tarullo,
Confronting Too Big to Fail (Oct. 21, 2009) (online at
www.federalreserve.gov/newsevents/speech/tarullo20091021a.htm).
The implied guarantee of ``too big to fail'' institutions
might also result in a concentration of risk in this group,
resulting in greater danger to the taxpayer if and when the
government must step in again.
Treasury and the other government entities involved in the
financial system bailout are aware of the problem of moral
hazard, and have taken a number of steps to combat it.\329\ It
will be difficult, however, if not impossible, to erase all
effects of the moral hazards created by these government
guarantees, whether expressed or implied.
---------------------------------------------------------------------------
\329\ See, e.g. Senate Committee on Banking, Housing, and Urban
Affairs, Statement of Sheila C. Bair, Chairman, Federal Deposit
Insurance Corporation, Modernizing Bank Supervision And Regulation
(Mar. 19, 2009). Likewise, federal regulators have proposed and
undertaken several initiatives designed to lessen the moral hazards
caused by the existence of financial entities that are perceived as
``too big'' or ``too important'' to fail, such as:
Partnering with other central bankers, the Fed developed
heightened international standards for bank capital and liquidity under
the Basel II framework.
The Fed, FDIC, Office of the Comptroller of the Currency,
and Office of Thrift Supervision proposed a rule requiring banks to
factor their unconsolidated subsidiaries into risk-based capital
adequacy calculations.
The White House and House Committee on Financial Services
drafted legislation centralizing oversight for systemically important
financial firms and requiring them to pay into a ``Resolution Fund''
for future financial system backstops.
See Board of Governors of the Federal Reserve System, Speech given
by Chairman Ben S. Bernanke at the Federal Reserve Bank of Boston 54th
Economic Conference, Financial Regulation and Supervision after the
Crisis: The Role of the Federal Reserve (Oct. 23, 2009); Federal
Deposit Insurance Corporation, Notice of Proposed Rulemaking with
Request for Public Comment: Risk-Based Capital Guidelines; Capital
Adequacy Guidelines; Capital Maintenance: Regulatory Capital; Impact of
Modifications to Generally Accepted Accounting Principles;
Consolidation of Asset-Backed Commercial Paper Programs; and Other
Related Issues (Aug. 26, 2009); House Committee on Financial Services,
Financial Services Committee and Treasury Department Release Draft
Legislation to Address Systemic Risk, ``Too Big to Fail'' Institutions
(Oct. 27, 2009).
---------------------------------------------------------------------------
F. Market Impact
Measuring the value of the federal financial guarantee
programs means looking beyond the costs and benefits of
assisting individual financial institutions or individual
sectors of the financial market. These guarantee initiatives
were part of the larger effort to restore financial stability
and to renew access to credit. Improved credit conditions and
restoration of markets for commercial paper and other short-
term debt suggest that guarantee programs have helped achieve
their objectives and can now be withdrawn.
Treasury interest rates dropped sharply during this period
as investors engaged in a ``flight to quality.'' \330\ Rates
have subsequently rebounded as the markets have stablized and
as guarantee programs have provided nervous investors with
assurance that other debt instruments are as safe as
Treasuries.\331\ Guarantees are now being phased out in an
orderly manner without a renewed flight to Treasuries or a
spike in interest rates.
---------------------------------------------------------------------------
\330\ Securities Industry and Financial Markets Association, SIFMA
Research and Statistics: US Key Stats (Instrument: ``Other and IR'', 3
Month T Bills and 10 Year Treasuries) (online at www.sifma.org/
uploadedFiles/Research/Statistics/SIFMA_USKeyStats.xls). See Figure 9
below.
\331\ Id.
---------------------------------------------------------------------------
FIGURE 9: TREASURY BILL AVERAGE YIELDS SINCE JANUARY 2008 \332\
[GRAPHIC] [TIFF OMITTED] T3348A.002
Introduction of the money market guarantee reversed
investor flight from prime funds; recent outflows may reflect
both a continuing low interest rate environment and renewed
relative attractiveness of higher yielding alternative
investments. Moreover, there is evidence that yields of
commercial paper were substantially affected by the financing
available in the healthy and stable MMF market buttressed by
TGPMMF and related Federal Reserve initiatives. Commercial
paper yields, as measured by spreads over Treasury securities,
quickly declined after the program was instituted and remained
at low levels for the duration of the program.\333\
---------------------------------------------------------------------------
\332\ Securities Industry and Financial Markets Association, SIFMA
Research and Statistics: US Key Stats (Instrument: ``Other and IR'', 3
Month T Bills and 10 Year Treasuries) (online at www.sifma.org/
uploadedFiles/Research/Statistics/SIFMA_USKeyStats.xls).
\333\ See Figure 14; ICI Money Market Working Group Report, supra
note at 98.
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G. The Guarantee Programs as Part of the Broader Stabilization Effort
1. The TARP and the Guarantee Programs
The TARP, the TLGP, and the Federal Reserve Board's
programs are, and have been presented as, parts of a single,
coordinated program to stabilize the nation's financial
institutions.\334\ The first two, and several of the Reserve
Board's programs, were organized immediately after enactment of
EESA.\335\ A joint statement by Secretary Paulson, FDIC
Chairman Bair, and Chairman Bernanke made 11 days after EESA
became law described TARP's Capital Purchase Program (CPP), the
TLGP, and the Federal Reserve's new Commercial Paper Funding
Facility \336\ as
---------------------------------------------------------------------------
\334\ Neither TARP nor the TLGP can operate without the authority
of the Secretary of the Treasury. The TARP is implemented by Treasury;
the TLGP is an FDIC program, but its creation required a finding by the
Secretary (in consultation with the President), upon the recommendation
of both the FDIC and the Board, that the program was necessary to avoid
``serious adverse effects on economic conditions or financial
stability'' that would be avoided or mitigated by that program. See 12
U.S.C. 1823(c)(4)(G)(i). Whether this clause in fact authorizes
creation of a general program, rather than an exception to the ``least
cost resolution standard'' directed at a single failing institution, is
an issue on which the Panel takes no view.
\335\ The use of such arrangements during the crisis predates EESA.
For example, the FRBNY provided $29 billion to finance the acquisition
of Bear Stearns by JPMorgan Chase in March 2008 under an arrangement
providing that Morgan would bear only the first $1 billion in losses;
the rest is to be borne by the FRBNY. And FDIC concluded a loss-sharing
agreement as part of the transfer in the same month of the single-
family residential portfolio of the failed IndyMac to OneWest Bank as
part of an agreement by the latter to continue FDIC's loan modification
program. (The single-family portfolio made up $12.8 billion of the
total $20.7 billion in assets transferred to OneWest; the transfer of
the $20.7 billion at an overall $4.7 billion discount has the economic
effect of a second guarantee).
\336\ That facility, which began operation on October 27, was
created to finance the purchase of highly-rated unsecured and asset-
backed commercial paper from eligible issuers via eligible primary
dealers.
actions to protect the U.S. economy, to strengthen
public confidence in our financial institutions, and to
foster the robust functioning of our credit markets [,
as well as] to restore and stabilize liquidity
---------------------------------------------------------------------------
necessary to support economic growth.\337\
\337\ Board of Governors of the Federal Reserve System, Joint
Statement by Treasury, Federal Reserve and FDIC (Oct. 14, 2008) (online
at www.federalreserve.gov/newsevents/press/monetary/20081014a.htm). At
the news conference that accompanied release of the statement, Chairman
Bair stated that ``the bulk of the U.S. banking industry is healthy and
remains well-capitalized. What we do have, however, is a liquidity
problem . . . In addition to the actions just announced by Secretary
Paulson and Chairman Bernanke, the FDIC Board yesterday approved a new
Temporary Liquidity Guarantee Program to unlock inter-bank credit
markets and restore rationality to credit spread. This will free up
funding for banks to make loans to creditworthy businesses and
consumers.'' Bair Statement, supra note 287.
The CPP and DGP are structurally connected. The debt
guaranteed by FDIC--and hence FDIC's potential liability as
guarantor--had, and has, a claim that is senior to the claims
of the CPP preferred stock on the assets of the guaranteed
institution. The TLGP initially ran through June 30, 2012, the
year before the rate of interest on the CPP preferred stock
increases from five to nine percent.
Perhaps more important, the DGP guarantee allowed
participating institutions to raise funds through obligations
that were backed by the full faith and credit of the United
States, when those banks otherwise might not have been able to
do so at acceptable interest rates, or perhaps at all. Addition
of the amounts generated through the issuance of guaranteed
debt likely took pressure off the balance sheets of
participating institutions at the same time that Treasury used
the CPP to stabilize those balance sheets as an alternative to
purchasing troubled assets directly.\338\ The FDIC announced
the end of the DGP (other than for emergency situations) at the
same time as the nation's largest banks were starting to repay
their CPP assistance; the DGP termination means that banks that
end their participation in the CPP cannot continue to receive a
related form of assistance from the FDIC, or to use the
continued availability of the guarantee program to obtain
assistance while avoiding the limitations imposed by the
executive compensation and corporate governance provisions of
EESA.
---------------------------------------------------------------------------
\338\ See COP August Oversight Report, supra note 45.
---------------------------------------------------------------------------
The support the two programs gave affected banks is
indicated by the numbers. Citigroup, for example, has received
$45 billion in TARP assistance, as well as the $301 billion
asset guarantee, and it has issued $64.6 billion of debt under
the DGP. Bank of America has received $45 billion of TARP
assistance, benefitted from a never-consummated asset
guarantee, and has issued $44 billion of debt under the DGP.
The 19 stress tested banks received a total of $163.5 billion
under the CPP (GMAC received $12.5 billion under the AIFP and
Bank of America and Citigroup got $20 billion each under TIP,
which are not included in this total) and issued $238 billion
of debt under the DGP.\339\ The nation's other banks received
$41 billion in CPP assistance and issued $65.6 billion of debt
under the DGP.\340\
---------------------------------------------------------------------------
\339\ October 30 TARP Transactions Report, supra note 27; SNL
Financial, TLGP Debt Issued (online at www1.snl.com/interactivex/
TDGPParticipants.aspx) (accessed Nov. 5, 2009).
\340\ October 30 TARP Transactions Report, supra note 27.
FIGURE 10: 19 STRESS TESTED BANKS, CPP ASSISTANCE AND DGP ISSUANCE (AS OF OCTOBER 23, 2009) \341\
--------------------------------------------------------------------------------------------------------------------------------------------------------
TARP assistance TARP investments TARP investments Debt guaranteed Asset guarantee
Institution amount repaid outstanding under the TLGP program (AGP)
--------------------------------------------------------------------------------------------------------------------------------------------------------
JPMorgan Chase........................................... $25,000,000,000 $25,000,000,000 - $40,435,009,000
Citigroup................................................ 50,000,000,000 - $50,000,000,000 64,600,000,000 $266,400,000,000
Bank of America.......................................... 45,000,000,000 - 45,000,000,000 44,000,000,000
Wells Fargo.............................................. 25,000,000,000 - 25,000,000,000 9,500,000,000
Goldman Sachs............................................ 10,000,000,000 10,000,000,000 - 21,614,310,000
Morgan Stanley........................................... 10,000,000,000 10,000,000,000 - 23,768,503,000
MetLife.................................................. - - - 397,436,000
PNC...................................................... 7,579,200,000 - 7,579,200,000 3,900,000,000
U.S. Bancorp............................................. 6,599,000,000 6,599,000,000 - 2,679,873,000
Bank of New York Mellon.................................. 3,000,000,000 3,000,000,000 - 603,448,000
GMAC..................................................... 12,500,000,000 - 12,500,000,000 7,400,000,000
Sun Trust................................................ 4,850,000,000 - 4,850,000,000 3,000,000,000
State Street............................................. 2,000,000,000 2,000,000,000 - 1,500,000,000
Capital One.............................................. 3,555,199,000 3,555,199,000 - -
BB&T..................................................... 3,133,640,000 3,133,640,000 - -
Regions.................................................. 3,500,000,000 - 3,500,000,000 3,750,000,000
American Express......................................... 3,388,890,000 3,388,890,000 - 5,900,000,000
Fifth Third Bancorp...................................... 3,408,000,000 - 3,408,000,000 -
KeyCorp.................................................. 2,500,000,000 - 2,500,000,000 1,937,500,000
----------------------------------------------------------------------------------------------
Total Stress Test Banks.............................. 221,013,929,000 66,676,729,000 154,337,200,000 234,986,079,000 266,400,000,000
Total All Other Participants......................... 245,964,872,956 6,199,452,870 239,765,420,086 68,624,448,000
Total................................................ $466,978,801,956 $72,876,181,870 $394,102,620,086 $303,610,527,000 $266,400,000,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
\341\ October 30 TARP Transactions Report, supra note 27, SNL Financial, TLGP Debt Issued (online at www1.snl.com/interactivex/TDGPParticipants.aspx)
(accessed Nov. 5, 2009).
As under the CPP, there was no requirement to track the use
of funds obtained through the DGP without the cooperation of
the banks involved.\342\ The FDIC does not require financial
institutions to use capital raised through the issuance of
guaranteed debt for lending or to free up funds for lending.
Although the FDIC cautioned that the short-term nature of these
guaranteed funds meant that downstreaming them to augment the
capital of a subsidiary bank ``should be carefully
considered,'' it allowed such a use. Moreover, the extent to
which a bank holding company can use guaranteed funds in its
securities trading activities is unclear. The FDIC will not
guarantee debt issued directly by a broker dealer holding
company subsidiary, and many market instruments are altogether
excluded from the definition of DGP guarantee-eligible senior
debt. But the FDIC has also explicitly stated that firms may
use capital raised by selling guaranteed instruments in market-
making activities.
---------------------------------------------------------------------------
\342\ Federal Deposit Insurance Corporation, Temporary Liquidity
Guarantee Program Frequently Asked Questions (online at www.fdic.gov/
regulations/resources/TLGP/faq.html) (accessed Nov. 5, 2009). In July,
SIGTARP released an audit on the topic. The first paragraph of the
audit states: ``Although most banks reported that they did not
segregate or track TARP fund usage on a dollar-for-dollar basis, most
banks were able to provide insights into their actual or planned use of
TARP funds. Over 98% of survey recipients reported their actual uses of
TARP funds.'' SIGTARP Bank Audit, supra note 42, at 1.
---------------------------------------------------------------------------
Thus, the relationship between the DGP and the FDIC's
general resolution authority is unclear.\343\ The FDIC protects
guaranteed amounts if a holding company becomes insolvent
according to the terms of the guarantees.\344\ But the
resolution authority only extends to depository institutions,
and the use of funds raised with guaranteed debt is not
restricted to shoring up depository institutions. The FDIC's
intention to maintain an emergency guarantee facility once the
DGP is terminated would not seem to alter this situation.
---------------------------------------------------------------------------
\343\ The Panel has not studied, and expresses no view, on the
general relationship between the TLGP and the capital position of FDIC.
\344\ TLGP Final Rule, supra note 146.
---------------------------------------------------------------------------
Finally, the terms of the DGP permit its use for other non-
insured financial institutions. The FDIC has repeatedly used
this capability. Approximately $248.2 billion of debt has been
issued by non-insured affiliated bank and thrift holding
companies.\345\ The policy implications of the use of the FDIC
guarantee in this situation is beyond the scope of this report.
While the public could have reasonably expected that the FDIC
would provide support for insured depository institutions, they
may well not have anticipated that the FDIC would come to the
aid of non-insured financial institutions.
---------------------------------------------------------------------------
\345\ Federal Deposit Insurance Corporation, Monthly Reports on
Debt Issuance Under the Temporary Liquidity Guarantee Program (Oct. 21,
2009) www.fdic.gov/regulations/resources/TLGP/total_issuance9_09.html
---------------------------------------------------------------------------
2. Interaction with Stress Tests
In early 2009, Treasury and the Federal Reserve announced
that the 19 BHCs, including Bank of America and Citigroup,
would undergo a supervisory action to test the BHCs' current
economic health and their projected health if the economic
crisis continued.\346\ Specifically, the tests considered
whether these BHCs had the necessary capital buffers to
withstand losses while continuing lending even in a worsening
economy. These tests, called the Supervisory Capital Assessment
Program or colloquially the ``stress tests,'' assessed the
BHCs' capital under two potential scenarios: one in which the
crisis continued along the trajectory most economists were
projecting at that time, and another more adverse scenario in
which the crisis worsened beyond current projections.
---------------------------------------------------------------------------
\346\ For a detailed description and analysis of the tests, see
Congressional Oversight Panel, June Oversight Report: Stress Testing
and Shoring up Bank Capital, at 13 (June 9, 2009) (online at
cop.senate.gov/documents/cop-060909-report.pdf) (hereinafter ``COP June
Oversight Report'').
---------------------------------------------------------------------------
On May 7, 2009, the Federal Reserve announced the results
of the stress tests under the more adverse scenario.\347\ The
tests found that Bank of America would require $33.9 billion in
additional tier 1 capital in the more adverse scenario and
Citigroup would require $5.5 billion.\348\
---------------------------------------------------------------------------
\347\ 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/
bcreg20090507a1.pdf).
\348\ Id. at 20, 24.
---------------------------------------------------------------------------
The AGP guarantees had a very limited effect on the stress
tests. They did not affect the calculation of potential losses
at all, however, they did impact the calculation of assets
available to absorb losses. In conducting the test on
Citigroup, this effect was taken into account in reaching the
final determination that Citigroup required an additional $5.5
billion in tier 1 capital. In the case of Bank of America,
however, Bank of America indicated it wished to terminate the
guarantee while the stress test was ongoing. For this reason,
the Federal Reserve calculated two possible results for Bank of
America, which would be required to raise $33.9 billion in tier
1 capital in the event the guarantee was in place and $35.7
billion if the guarantee were terminated, which was eventually
the case.\349\ One consideration that would have reduced the
impact of the guarantees on the stress tests overall is the
fact that the guarantees were not likely to have become
relevant until after the period covered by the stress tests
because the banks were unlikely to exceed their ``deductibles''
under the AGP by then. As of June 30, 2009, Bank of America
reported that it had increased its tier 1 capital by $39.7
billion, which renders the distinction between $33.9 billion
and $35.7 billion moot.\350\
---------------------------------------------------------------------------
\349\ See Board of Governors of the Federal Reserve System,
Overview of Results, at 9 (May 7, 2009) (online at
www.federalreserve.gov/newsevents/press/bcreg/20090507a.htm) (stating
``[f]or BofA, includes capital benefit from risk-weighted asset impact
of eligible asset guarantee'' but does not mention Citigroup's asset
guarantee).
\350\ U.S. Securities and Exchange Commission, Quarterly Report for
Bank of America Corporation (for the quarter ended June 30, 2009) (Form
10-Q) (Aug. 7, 2009) (online at sec.gov/
Archives/edgar/data/70858/000119312509168935/d10q.htm).
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3. The Guarantees and Exit from TARP
None of the financial stabilization programs were intended
to be permanent. Under EESA, Treasury's authority to guarantee
and make and fund commitments to purchase assets with TARP
funding will terminate on December 31, 2009. (The Secretary of
the Treasury may extend that authority to October 3, 2010 by
submitting written certification to Congress.) \351\ For
various reasons, however, while some of the guarantees
discussed in this report have already terminated, others extend
beyond 2010.
---------------------------------------------------------------------------
\351\ EESA Sec. 120. The Secretary has not, as of this writing,
announced whether he intends to extend TARP.
---------------------------------------------------------------------------
For example, while Treasury created the AGP pursuant to its
TARP authority, Treasury is contractually obligated to continue
guaranteeing Citigroup assets until 2013 (for non-residential
assets in the guaranteed pool) or 2018 (for residential assets
in the guaranteed pool).\352\ For Bank of America, Treasury's
guarantee obligations ended when the parties agreed to
terminate Bank of America's guarantee.
---------------------------------------------------------------------------
\352\ Next Phase Report, supra note 49, at 44. According to
Treasury, these guarantee obligations may also be terminated ``upon
mutual agreement by Citigroup, Treasury, Federal Reserve, and FDIC.''
Id.
---------------------------------------------------------------------------
The TGPMMF and the TLGP are not TARP programs. As discussed
above, Treasury terminated the TGPMMF on September 18, 2009,
claiming that it had accomplished its goal of adding stability
to the money market mutual fund industry.\353\ The DGP
component of the FDIC's TLGP ended on October 31, 2009. Banks
were permitted to issue new FDIC-insured debt only until
October 31, 2009, with the guarantee for such debt terminating
by December 31, 2012.\354\ However, the FDIC created a limited
guarantee facility for insuring debt in emergency situations
beyond October 31, 2009. This facility will be available only
for banks that are unable to issue debt without the guarantee,
and will carry significantly higher fees.
---------------------------------------------------------------------------
\353\ See Money Market Expiration Release, supra note 313.
\354\ FDIC DGP Rule Notice, supra note 295.
---------------------------------------------------------------------------
Finally, it is worth noting that the DGP plays a role in
determining which financial institutions may repay the capital
infusions they received under the CPP and TIP.\355\
Specifically, the federal government has announced that if any
of the 19 TARP recipient, stress-tested BHCs wish to repay
those funds,\356\ they must first ``demonstrate [their]
financial strength by issuing senior unsecured debt for terms
greater than five years, not backed by FDIC guarantees, in
amounts sufficient to demonstrate a capacity to meet funding
needs independently.'' \357\
---------------------------------------------------------------------------
\355\ See Congressional Oversight Panel, July Oversight Report:
TARP Repayments, Including the Repurchase of Stock Warrants, at 8 (July
10, 2009) (online at cop.senate.gov/documents/cop-071009-report.pdf)
(hereinafter ``COP July Oversight Report'').
\356\ See id. at 40.
\357\ U.S. Department of the Treasury, Capital Purchase Program,
FAQs on Capital Purchase Program Repayment, at 1 (May 2009) (online at
www.financialstability.gov/docs/CPP/FAQ_CPP_guidance.pdf) (emphasis
added); see also 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) (``Any BHC
seeking to redeem U.S. Treasury capital must demonstrate an ability to
access the long-term debt markets without reliance on the [TLGP], and
must successfully demonstrate access to public equity markets.''). To
be clear, however, a financial institution is not excluded from
participating in the TLGP simply because it has repaid TARP funds. See
COP July Oversight Report supra note 355, at 18, supra note 355
(observing that institutions who have repaid TARP funds ``remain
eligible to use FDIC's Temporary Liquidity Guarantee Program, as well
as other indirect support through the Federal Reserve's various
liquidity Programs'').
---------------------------------------------------------------------------
H. Transparency Issues
Treasury, the Federal Reserve, and the FDIC have taken
different approaches with respect to disclosing information
regarding the implementation, administration, and status of
their respective guarantee programs.
1. Asset Guarantee Program
On January 16, 2009, after Treasury and Citigroup had
finalized the terms of their guarantee agreement, Treasury
disclosed these terms by posting the Citigroup Master Agreement
on its Web site.\358\ The Master Agreement sets forth much if
not all of the process with respect to asset valuation, the
criteria for selecting covered assets, as well as the criteria
for asset selection.\359\ Also, at the time of each
announcement, Treasury publicly disclosed the term sheets for
the transactions with each institution. The Federal Reserve,
pursuant to Section 129(b) of EESA, released a report
discussing its authorization to provide residual financing to
Citigroup for its asset pool.\360\ Treasury provides a summary
of the program on its website.\361\ Furthermore, in its
quarterly SEC filings, Citigroup has disclosed the current
value of the assets, with any declines due to receipt of
principal repayment charge-offs, and asset sales.
---------------------------------------------------------------------------
\358\ Treasury AGP Terms Release, supra note 31. In a September
2009 briefing with Treasury, the Panel learned the absence of a master
agreement contract with Bank of America on Treasury's website was
because no formal asset guarantee agreement had been signed.
\359\ See Citigroup Master Agreement, supra note 35, at
Sec. Sec. 1, 5.
\360\ Section 129 Report, supra note 190.
\361\ AGP Overview, supra note 34.
---------------------------------------------------------------------------
While Treasury, the Federal Reserve, and the FDIC provided
extensive details of the mechanics with respect to additional
assistance to Citigroup and Bank of America, the rationale
underlying the guarantees remains somewhat unclear. To date the
three agencies have not disclosed why these programs were
selected; why Citigroup and Bank of America were the only
institutions selected for asset guarantee protection; what
alternatives were available; and why those alternatives were
not chosen. Nor has Treasury provided a detailed legal analysis
explaining how the AGP is consistent with section 102 of EESA.
While Treasury, the Federal Reserve, the Federal Reserve Bank
of New York, and the FDIC discussed some of these issues with
Panel staff during recent briefings, the Panel believes that
the assumptions and rationale underlying policy decisions
should be made public to ensure program transparency, and as
they are necessary in order to provide meaningful program
evaluation and oversight. More transparency also assists the
efficiency and stability of the financial markets.
The Panel has identified several instances where Treasury's
disclosures have been insufficient. First, since the Master
Agreement was executed in January, Treasury has not provided
sufficient information concerning the estimated potential
losses on Citigroup's asset pool. While Citigroup's second
quarter 10-Q recorded approximately $5.3 billion of charge-offs
on the asset pool for the period between November 21, 2008 and
June 30, 2009,\362\ Treasury has not disclosed information
concerning cumulative asset pool losses or the projected losses
of the pool and how they have been calculated. While as yet the
losses remain less than the deductible needed to trigger
Treasury and FDIC pay-outs, these metrics are critical to any
assessment of the program.\363\
---------------------------------------------------------------------------
\362\ Citigroup Second Quarter 2009 Report, supra note 48.
\363\ It must also be noted that a complete list of Citigroup
covered assets has not yet been published. Treasury has informed the
Panel that such a list is pending finalization of the asset pool. At
the time the final list is published, Treasury will also be able to
publish the methodology by which it calculated the premium for
coverage.
---------------------------------------------------------------------------
Additionally, given the deteriorating economic conditions
at the time when Citigroup and Bank of America received
guarantee protection, and that the banking industry as a whole
suffered substantial losses during this period, it would be
useful to have better details and analysis on why these
financial institutions were selected for the AGP and not
others. It would also be useful to understand why these
institutions received asset guarantees instead of the approach
used with AIG, the giant failing financial institution. AIG
received cash and its shareholders were wiped out.
2. TGPMMF
Several transparency-related concerns arise with respect to
the TGPMMF. First, Treasury has not disclosed why it decided to
use a guarantee program to stabilize the money market funds,
nor whether it considered alternative methods for achieving
that policy goal. Understanding the analysis that informed
these decisions would permit the Panel, and taxpayers, better
to evaluate Treasury's performance.
Second, as discussed above, Treasury has never fully
explained the legal basis for structuring the program as it
did. In particular, Treasury has never explained how its
initial reliance on up to $50 billion in funding from the ESF
comports with the language and intent of the Gold Reserve Act
of 1934. Treasury has failed to disclose publicly any internal
analysis of its legal authority to expose the ESF to liability
in the way discussed above.\364\
---------------------------------------------------------------------------
\364\ Section 131 of EESA requires Treasury to reimburse ESF for
any depletion of the fund attributable to the TGPMMF and prohibits
Treasury ``from using the [ESF] for the establishment of any future
guaranty programs for the United States money market mutual fund
industry.'' EESA Sec. 131(b). One could interpret the latter provision
as an expression of Congressional disapproval of Treasury's use of the
ESF in this case. While Congressional disapproval does not necessarily
signal illegality, it does further support the notion that Treasury was
obligated to explain and justify its actions.
---------------------------------------------------------------------------
Finally, Treasury did not take steps to address uncertainty
among market participants regarding the true extent of
Treasury's obligation to honor the guarantees under the program
in the hypothetical context of widespread claims beyond the $50
billion ESF.
Treasury's disclosures were geared primarily to explaining
program requirements to potential market participants, and
these appeared to be responsive to participants' needs. After
announcing the program, Treasury created a Web page that
detailed the eligibility conditions andapplication processes
for would-be-participant money market funds.\365\ The website also
included samples of guarantee agreements, a comprehensive list of
frequently asked questions, and a term sheet for the guarantee program.
---------------------------------------------------------------------------
\365\ U.S. Department of the Treasury, Treasury's Temporary
Guarantee Program for Money Market Funds (online at www.treas.gov/
offices/domestic-finance/key-initiatives/money-market-fund.shtml)
(accessed Nov. 2, 2009).
---------------------------------------------------------------------------
Treasury never disclosed a list of participating MMFs for
the initial program period or for the two subsequent extensions
of the program. In addition, Treasury, unlike the FDIC in its
disclosures under TLGP, did not provide monthly reports of the
total number of MMFs participating in the program or the total
dollar value of funds guaranteed, and provided only aggregate
data participation levels and premiums collected on its program
website in September 2009, days before the program was set to
expire.\366\ Treasury explained that it relied on the funds
themselves to decide whether to disclose their participation in
the program to their potential investors.\367\
---------------------------------------------------------------------------
\366\ See Next Phase Report, supra note 49, at 2, 10, 46 (reporting
aggregate fees collected to date at $1.2 billion, number of funds
participating at 1,486, and gross assets of and percentage of total
MMFs participating the program in its initial and two extension
periods). Treasury did provide monthly and fiscal year to date program
insurance premium fees in its monthly reports on the ESF, see, e.g.,
U.S. Department of the Treasury, Exchange Stabilization Fund Statement
of Financial Position as of July 31, 2009 (July 31, 2009) (online at
www.treas.gov/offices/international-affairs/esf/esf-monthly-
statement.pdf), but this information was sequestered in a difficult to
locate and to interpret financial statement on the website of a
different Treasury office and only minimally added to the TGPMMF's
transparency.
\367\ Treasury conversations with Panel staff (Oct. 20, 2009).
---------------------------------------------------------------------------
Before Treasury's limited September 2009 disclosures, the
only additional publicly available information on many key
aspects of the TGPMMF's operation resulted from the Panel's
publication of the results of an information request that it
had submitted to Treasury. Chair Elizabeth Warren, on behalf of
the Panel, sent a letter to U.S Treasury Secretary Geithner on
May 26, 2009 concerning, among other issues, the extent of
Treasury's obligation under EESA to reimburse the ESF for any
funds used for the TGPMMF.\368\ In his July 21, 2009 response,
Secretary Geithner stated that money market funds that applied
for participation in the money market guarantee ``represented
over $3.2 trillion of money market assets as of September 19,
2008,'' and that those funds continuing to participate through
the program's extension period had an ``aggregate designated
asset base of nearly $2.5 trillion calculated as of September
19, 2008.'' \369\
---------------------------------------------------------------------------
\368\ See COP June Oversight Report, supra note 346 (reprinting
``Letter from Chair Elizabeth Warren to Secretary Timothy Geithner'').
\369\ See Geithner Letter to Warren, supra note 133, at 126-129.
---------------------------------------------------------------------------
Also of concern is Treasury's transparency regarding two
important aspects of the operation of the TGPMMF. First, it
appears that Treasury never conducted an estimate of losses
under the program. While the Office of Management and Budget's
fiscal year 2010 budget request for Treasury estimates a $2.5
billion pay-out under the TGPMMF for fiscal year 2009, \370\
Treasury did not assist in calculating this estimate.\371\ In
addition, despite the presence of a yearly audit of ESF that
implies that Treasury undertook some form of an analysis of the
likelihood and magnitude of claims under the program,\372\ and
a statutory requirement for Treasury to provide Congress with a
monthly estimate of ESF liabilities,\373\ Treasury has informed
the Panel that it did not conduct any extensive analysis
regarding the risk of losses to the TGPMMF because of the
``exigent circumstances'' of the program's establishment.''
\374\ Although the TGPMMF was undoubtedly created in an
atmosphere of dire necessity, the program was in place for a
full calendar year with taxpayers subject to large exposures,
and it is troubling that Treasury did not conduct (or could not
produce to the Panel) any substantial analysis of program
risks.
---------------------------------------------------------------------------
\370\ See Treasury 2010 Budget, supra note 315, at 975; see also
Section E, infra.
\371\ Treasury responses to Panel questions (Nov. 2, 2009).
\372\ See U.S. Department of the Treasury, Department of the
Treasury Exchange Stabilization Fund: Financial Report Fiscal Year
2008, at 26 (online at www.treas.gov/offices/international-affairs/esf/
congress_reports/final_22509wdc_combined_esf_auditreports.pdf)
(accessed Nov. 4, 2009) (``ESF management has assessed the likelihood
of claims related to this contingency as well as any potential
resultant losses. This included gathering analytical data about the
Money Market fund industry and specifically the history of funds from
which NAV has dropped below the aforementioned thresholds. Based on
this assessment, management has determined that while any loss on
claims could be significant, currently such amount is not quantifiable
and the likelihood of claims under the Treasury Guarantee Program is
deemed to be remote.'').
\373\ See 31 U.S.C. Sec. 5302(c)(1) (requiring that Treasury
provide the Senate Banking and House Financial Services Committees a
monthly ``detailed financial statement on the stabilization fund
showing all agreements made or renewed, all transactions occurring
during the month, and all projected liabilities'').
\374\ Treasury responses to Panel questions (Nov. 2, 2009).
---------------------------------------------------------------------------
The second issue concerns Treasury's purchase of $3.6
billion of GSE securities from the USGF to provide support to
the fund and to prevent a TGPMMF claim. Although it appears
that Treasury will not incur any losses from the purchase,
Treasury's disclosures about the purchase have been less than
complete. While Treasury announced the asset purchase agreement
shortly after the time of its execution and posted the letter
agreement on its website, it has not adequately publicly
explained its connection with the TGPMMF or disclosed how much
of a subsidy it represented to the USGF and its investors.
3. Temporary Liquidity Guarantee Program
Nine days after the FDIC announced the TLGP, it issued an
interim rule to implement the TLGP and defined in detail the
program's framework and operating mechanics.\375\ A legal
analysis supporting the FDIC's authority to create the program
also accompanied this release. The FDIC provided a 15-day
comment period for institutions to suggest changes to the
interim rule, offer feedback, and consider their interest in
program participation. In response to more than 700 comments,
the FDIC made significant alterations to the interim rule,
including changing the debt guarantee trigger to payment
default rather than bankruptcy or receivership, and determining
that short-term debt issued for one month or less would not be
included in the TLGP.\376\ The FDIC Board of Directors approved
the TLGP final rule on November 21, 2008.\377\
---------------------------------------------------------------------------
\375\ FDIC DGP Rule Notice, supra note 295; TLGP Interim Rule,
supra note 167.
\376\ See TLGP Final Rule, supra note 146.
\377\ Federal Deposit Insurance Corporation, FDIC Board of
Directors Approves TLGP Final Rule (Nov. 21, 2008) (online at
www.fdic.gov/news/news/press/2008/pr08122.html) (accessed Nov. 5,
2009).
---------------------------------------------------------------------------
In general, the FDIC has disclosed extensive information
related to the TLGP throughout the life of the program. For
example, the FDIC's website includes a separate webpage devoted
to the TLGP that contains various postings such as financial
institution letters, reports, and data. It has also included
all TLGP amendments and modifications since the program's
commencement.\378\ The FDIC has published regular reports of
debt issuance under the TLGP, including the amount outstanding
and type and term of FDIC-guaranteed debt instruments at
issuance, as well as TLGP opt-out lists.\379\ The FDIC has also
provided extensive information concerning its subsequent
decision to extend the debt guarantee portion of the TLGP from
June 30 through October 31, 2009, and impose a surcharge on
debt issued with a maturity of one year in order to phase-out
the program.\380\ In particular, the FDIC concluded that an
extension of the program would ``provide an orderly transition
period for participating entities returning to non-FDIC-
guaranteed funding, and reduce the potential for market
disruption when the DGP ends.'' \381\ Additionally, on
September 9, 2009, the FDIC issued a detailed notice of
proposed rulemaking seeking comment on its proposed
alternatives for terminating the DGP and describing its
rationale for setting forth both alternatives.\382\ The FDIC
noted that it would be ``prudent'' to allow the DGP to expire
as of October 31, 2009, while also creating a limited six-month
emergency facility to be accessed on a ``limited, case-by-case
basis.'' \383\ By voting to establish a limited extension on
October 20, 2009, the FDIC intends to provide protection to DGP
participants unable to issue non-government-guaranteed debt due
to ``market disruptions or other circumstances beyond their
control.'' \384\
---------------------------------------------------------------------------
\378\ Federal Deposit Insurance Corporation, Temporary Liquidity
Guarantee Program (online at www.fdic.gov/regulations/resources/TLGP/
index.html) (accessed Nov. 2, 2009).
\379\ Id. See Section C, infra, for a detailed explanation of the
opt-out concept.
\380\ TLGP Extension Notice, supra note 162; Federal Deposit
Insurance Corporation, Amendment of the Temporary Liquidity Guarantee
Program to Extend the Debt Guarantee Program and to Impose Surcharges
on Assessments for Certain Debt Issued on or after April 1, 2009, 12
C.F.R. Sec. 370 (hereinafter ``TLGP March 2009 Rule'') (online at
www.fdic.gov/news/board/Mar1709rule.pdf) (accessed Nov. 2, 2009).
\381\ TLGP March 2009 Rule, supra note 380.
\382\ FDIC DGP Rule Notice, supra note 295.
\383\ FDIC DGP Rule Notice, supra note 295.
\384\ FDIC DGP Rule Notice, supra note 295.
---------------------------------------------------------------------------
The FDIC's disclosures to date help policymakers and the
public evaluate the TLGP's impact on the availability of credit
and its effectiveness in achieving its objective: ``helping
financial institutions bridge the uncertainty and dysfunction
that plagued our credit markets last fall.'' \385\
---------------------------------------------------------------------------
\385\ TLGP Phase Out Notice, supra note 307. Although the FDIC has
achieved a high level of transparency with regard to this program
overall, the importance of transparency with regard to the TAG portion
of the program must be emphasized. Given the widespread impact of this
portion of the program, and its potential impact on the vulnerabilities
of weaker small banks, it is particularly important that the FDIC be
transparent and vocal about its decisions regarding the duration of the
TAG.
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I. Conclusions and Recommendations
With so many stabilization initiatives in use at any time,
it is impossible to attribute specific results to a particular
initiative. The guarantees provided by Treasury, the Federal
Reserve, and the FDIC helped restore confidence in financial
institutions, and did so without significant expenditure,
initially at least, of taxpayer money. Moreover, as the market
stabilizes and the scope of the programs decreases, the
likelihood that any such expenditure will be necessary
diminishes. Additionally, the U.S. government--and thus the
taxpayers--benefit financially from the fees charged for
guarantees. At the time of this report, the programs under
discussion have generated fees of $17.4 billion, and only up to
$2 million is expected to be paid out to cover a default under
the DGP.
This apparently positive outcome, however, was achieved at
the price of a significant amount of risk. A significant
element of moral hazard has been injected into the financial
system and a very large amount of money remains at risk. At its
high point, the federal government was guaranteeing or insuring
$4.3 trillion in face value of financial assets under the three
guarantee programs discussed in this report. Taxpayers' funds
remain at risk as follows:
The TGPMMF has ended with no loss, but $3.6
billion was used from the ESF to purchase assets from the USGF
outside of the TGPMMF.
The DGP currently guarantees a principal amount of
$307 billion (plus interest), which will diminish as June 2012
approaches, with $2 million in expected losses to date.
The AGP guarantee for Citigroup is still in place,
and initial actuarial estimates point towards a possible $34.6
billion loss under the moderate stress test scenario and $43.9
billion loss under the severe stress test scenario, which,
after the 39.5 billion ``deductible,'' would result in no loss
for the government entities under the moderate scenario and a
loss of $3.96 billion to Treasury under the severe scenario.
The AGP guarantee for Bank of America ended with no loss.
The Panel has not identified significant flaws in
Treasury's implementation of the programs. To the contrary, the
Panel has noted a trend towards a more aggressive and
commercial stance on the part of Treasury staff in safeguarding
the taxpayers' money, evidenced, for example, in the apparently
robust negotiation of the Bank of America termination fee. The
Panel recommends that this trend continue. It should be noted,
however, that this newly aggressive stance has a
disproportionate effect on banks that remain governed by TARP,
meaning that financial institutions that have already exited
TARP have been treated more leniently.
The analysis in this report raises some issues, however,
particularly with respect to the question of transparency and
clarity of purpose, a theme of several previous reports. While
it may be understandable that much of the government's reaction
to the financial crisis was based on expediency rather than
clear and transparent principles, the result is that government
intervention has caused confusion and muddled expectations.
Extraordinary transparency is necessary in order to determine
the rationale behind the guarantee programs, and whether they
have achieved their objectives.
First, the Panel recommends that Treasury disclose
the rationale behind the creation of guarantee programs,
including a discussion of any alternatives, why those were not
selected, a cost-benefit analysis of all options, and why
Citigroup and Bank of America were the only institutions
selected for asset guarantee protection.
Second, the Panel recommends that Treasury fully
and publicly disclose its legal justification for creating the
TGPMMF through the use of the Exchange Stabilization Fund.
Treasury should also provide reports of the total number of
money market funds participating in the program, or the total
dollar value guaranteed, for each month that the program was in
existence.
The Panel also recommends that the MOUs with
Citigroup and Bank of America, and the MOU with any other
institution relevant to this report on the AGP and other TARP-
related guarantees, be provided to the Panel to inform its
oversight functions, to be used subject to applicable legal
protections.
Finally, the Panel recommends that Treasury
provide regular disclosures relating to the guarantee of
Citigroup assets under the AGP, including the final composition
of the asset pool (as reflected on Schedule A to the Master
Agreement) and total asset pool losses to date, as well as
projected losses of the pool, and how these estimates have been
calculated.
ANNEX TO SECTION ONE:
FIGURE 11: TLGP DEBT BY CONSOLIDATED ISSUER \386\
[Dollars in millions]
----------------------------------------------------------------------------------------------------------------
TLGP issuance
--------------------------------------------------------
Total amount Weighted average Weighted average
offered coupon maturity
----------------------------------------------------------------------------------------------------------------
Access National Corp................................... $30,000.0 2.7 3.0
American Express Co.................................... 5,900,000.0 3.2 2.7
Banco Bilbao Vizcaya Argentaria SA..................... 470,000.0 2.2 2.7
Bank of America Corp................................... 44,000,000.0 2.5 2.8
Bank of New York Mellon Corp........................... 603,448.0 FLOAT 3.3
Cascade Bancorp........................................ 41,000.0 2.7 3.0
BNP Paribas Group...................................... 1,000,000.0 2.2 3.0
Banner Corp............................................ 50,000.0 2.6 3.0
Citigroup Inc.......................................... 64,600,000.0 1.9 2.5
First Merchants Corp................................... 52,882.0 2.6 3.0
General Electric Co.................................... 54,846,345.0 2.3 3.0
GMAC Inc............................................... 7,400,000.0 2.2 3.5
Goldman Sachs Group Inc................................ 21,614,310.0 2.6 2.5
HSBC Holdings plc...................................... 2,675,000.0 3.1 3.0
Huntington Bancshares Inc.............................. 600,000.0 FLOAT 3.3
Integra Bank Corp...................................... 50,000.0 2.6 3.0
Deere & Co............................................. 2,000,000.0 2.9 3.5
JPMorgan Chase & Co.................................... 40,435,009.0 2.6 2.8
KeyCorp................................................ 1,937,500.0 3.2 2.9
LaPorte Savings Bank MHC............................... 5,000.0 2.7 3.0
MetLife Inc............................................ 397,436.0 FLOAT 3.3
Morgan Stanley......................................... 23,768,503.0 2.5 2.8
National Consumer Cooperative Bank..................... 75,000.0 2.3 3.0
New York Community Bancorp Inc......................... 602,000.0 2.9 3.3
Oriental Financial Group Inc........................... 105,000.0 2.8 3.0
PAB Bankshares Inc..................................... 20,000.0 2.7 3.8
PNC Financial Services Group Inc....................... 3,900,000.0 2.2 2.9
Preferred Bank......................................... 26,000.0 2.7 3.9
Provident New York Bancorp............................. 51,493.0 2.7 3.0
Regions Financial Corp................................. 3,750,000.0 3.1 2.3
Renasant Corp.......................................... 50,000.0 2.6 3.0
Banco Santander SA..................................... 1,600,000.0 2.7 3.3
State Bancorp Inc...................................... 29,000.0 2.6 3.0
State Street Corp...................................... 3,950,000.0 2.0 2.6
SunTrust Banks Inc..................................... 3,576,000.0 3.0 2.7
Superior Bancorp....................................... 40,000.0 2.6 3.0
U.S. Bancorp........................................... 2,679,873.0 2.0 3.0
Mitsubishi UFJ Financial Group Inc..................... 1,000,000.0 FLOAT 2.5
United Services Automobile Association................. 95,000.0 2.2 3.0
Wells Fargo & Co....................................... 9,500,000.0 2.7 3.1
Zions Bancorp.......................................... 254,895.0 FLOAT 3.4
-------------------
Total (For All Issuances).......................... $303,780,694.0 2.4 2.8
----------------------------------------------------------------------------------------------------------------
\386\ SNL Financial, TLGP Debt Issued (online at WWW1snl.com/interactivex/TDGPParticipants.aspx) (accessed Nov.
5, 2009). This data includes only senior debt issued under the TLGP as of September 29, 2009 and excludes
short-term offerings and commercial paper.
[GRAPHIC] [TIFF OMITTED] T3348A.003
[GRAPHIC] [TIFF OMITTED] T3348A.004
[GRAPHIC] [TIFF OMITTED] T3348A.005
SECTION TWO: ADDITIONAL VIEWS
A. Damon Silvers
While I support this report, there is an important
limitation to its analysis that was not present in prior
reports of this panel addressing valuation issues associated
with TARP.
Past reports of our Panel have valued securities such as
CPP preferred stock and warrants by reference to public market
prices for related securities. This report contains similar
efforts to value guarantees for bank public debt and the
preferred stock and warrants received as compensation for the
Citigroup guarantee. I view this type of analysis as a critical
component of our Panel's mission.
However, the Panel staff's efforts to analyze the asset
guarantees provided to Citigroup have been hampered by the
staff not having access to a comprehensive, itemized list of
the assets that have been guaranteed by Treasury or information
as to the detailed characteristics of those assets. In
addition, there remains uncertainty as to which assets will
ultimately be guaranteed by Treasury because a final agreement
has not been entered into between Treasury and Citigroup that
fixes which assets are subject to the guarantee.
As a result the Panel has had to rely upon the analysis of
the tentative portfolio of assets subject to the guarantees
performed by the Congressional Budget Office and the Office of
Management and Budget. In the case of OMB their analysis was in
turn reliant upon the analyses of the parties to the
transaction--Citigroup, Treasury, and the Federal Reserve.
CBO's analysis was based not on looking at the assets
themselves but on making estimates based on assumptions that
categories of assets in the guarantee pool would perform
similarly to their asset class as a whole. In each case, our
staff, CBO and OMB lacked the data needed to do more.
The consequence is that there has been no independent,
asset-specific valuation of the Citigroup guarantee either as
of the time the guarantee was made or as of a more recent date.
Thus the detailed statements made in this report about
potential losses on Citigroup assets covered under the
Citigroup guarantee must be understood to be based on Federal
Reserve Bank of New York analyses and not on an informed,
independent valuation of the risk Treasury has assumed as a
result of the guarantee of these specific assets.
B. Paul S. Atkins
With the publication of a report on federal government
guarantee programs to the financial system, the Panel has
produced a detailed perspective on an area that has received
little public attention. I support the issuance of the report
and appreciate the very hard work during the past month that
the Panel staff has poured into this subject to produce this
historical analysis.
With Congressman Hensarling, I believe that a few points
should be noted with respect to this report:
First, American taxpayers have borne and continue to bear
significant costs from the huge risk incurred in extending the
guarantees, the direct administrative costs of the guarantee
programs, and the expense of overseeing the programs. Even
though many today seem to think mistakenly that the federal
budget is limitless, there are also indirect costs to the
taxpayer of issuing guarantees in the hundreds of billions of
dollars, including market distortions, potential higher
borrowing costs, opportunity costs of these off-balance sheet
contingencies, and hard-to-quantify implications of moral
hazard that arise when the government issues guarantees to
private parties who have been unsuccessful in the marketplace,
for whatever reason.
Second, the report's very matter-of-fact treatment of the
guarantee programs should not be taken as a sign that all of
the Panel members necessarily approve of the use of U.S.
Government authority and resources in this way. These
guarantees were issued in unusual circumstances, and as the
facts come to light over time and ARE scrutinized as the crisis
recedes, the wisdom and outworkings of the various decisions
will be debated and judged. I also agree with Congressman
Hensarling that this report should not be interpreted as
advocating any particular legislative or regulatory response.
Finally, it is important that the Panel focus on ways in
which TARP might be transformed over the coming months,
particularly if the Treasury Secretary extends it pursuant to
Section 120(b) of Emergency Economic Stabilization Act (EESA).
Programs that demand especial scrutiny by the Panel are those
that have the greatest enduring financial exposure and public
policy implications for the taxpayer: AIG, Chrysler, GM, GMAC,
Citigroup, the Capital Purchase Program, and imprudent efforts
regarding mortgage foreclosures. If TARP is extended, perhaps
the greatest danger is that other initiatives may be undertaken
that depart from the intent of the Congress that approved EESA
in 2008. The taxpayers depend on this Panel's vigilance in that
respect.
C. Representative Jeb Hensarling
I concur with the issuance of the November report subject
to my observations included in prior reports as well as those
noted below.\390\ I thank the Panel for incorporating several
of the suggestions I offered during the drafting process.
---------------------------------------------------------------------------
\390\ The Panel's reports may be found at cop.senate.gov/reports/.
My separate views are included in each report. For example, my
dissenting views from the September report on the bailout of Chrysler,
GM and GMAC may be found at cop.senate.gov/documents/cop-090909-report-
additionalviews.pdf, and my dissenting views from the October report on
foreclosure mitigation may be found at cop.senate.gov/documents/cop-
100909-report-hensarling.pdf.
---------------------------------------------------------------------------
The TARP funded and other guarantee programs
analyzed in the November report carry significant costs to the
taxpayers attributable to the moral hazard that arises when the
government agrees to guarantee the assets and obligations of
private parties.
Simply because the guarantee programs do not
require an immediate outlay of taxpayer sourced funds, they are
by no means free from risk. Such programs in fact burden the
taxpayers with hundreds of billions of dollars of contingent
obligations that must be funded in accordance with the terms of
each governmental undertaking.
The guarantee programs analyzed in the report
should not serve as a template for future bailouts and the
report should not be interpreted as advocating any particular
legislative or regulatory response.
As Treasury unwinds several TARP programs where
the taxpayers have recouped their investments with interest,
the Panel should focus its attention on the new and existing
programs that are likely more enduring and costly to the
taxpayers. The opportunity cost of not providing rigorous
oversight in these areas is high. These programs include
taxpayer funds directed to AIG, Chrysler, GM, GMAC, foreclosure
mitigation, preferred share purchases in Citigroup, Bank of
America and hundreds of additional large and small financial
institutions and other initiatives.
TARP was promoted as a way to provide ``financial
stability,'' and the American Reinvestment and Recovery Act
(ARRA) was promoted as a way to provide ``economic stimulus.''
Regrettably, TARP has evolved from a program aimed at financial
stability during a time of economic crisis to one that
increasingly resembles another attempt by the Administration to
promote its economic, political and social agenda through
fiscal stimulus.
In order to end the abuses of EESA as evidenced by
the Chrysler and GM bankruptcies, misguided foreclosure
mitigation programs and the ``re-animation'' of reckless
behavior, the TARP program must end. To accomplish this goal, I
introduced legislation--H.R. 2745--to end the TARP program on
December 31, 2009.
As discussed in detail in the October report, I
encourage the Panel to adopt and make publicly available an
oversight plan and a budget.
I again note my disappointment that the Panel has
not held a hearing with AIG, Citigroup, Bank of America (other
than with respect to foreclosure mitigation) and many other
significant recipients of TARP funds.
1. TARP's Guarantee Programs
Although I do not object to the subject matter addressed in
the November report, I suggest that other topics would have
been more relevant and timely regarding the Panel's discharge
of its oversight responsibility. For example, the Panel has yet
to produce a report on AIG or Treasury's exit strategy with
respect to its TARP funded investments. I also question the
overall timeliness of the topic. With the exception of
Citigroup, most guarantee programs associated with financial
stability through TARP, the FDIC and the Federal Reserve are
winding down in the immediate term. Treasury's Temporary
Guarantee Program for Money Market Funds (TGPMMF) ended in
September and the FDIC's Temporary Liquidity Guarantee Program
(TLGP) expired for new contracts at the end of October. Bank of
America terminated its term sheet for the Asset Guarantee
Program (AGP) at the end of September and the actual risk-
sharing program was never launched.
In voting to approve the report, it is with the caveat that
I do not endorse further extensions of TARP, either through
asset or debt guarantees or other means. I also submit that it
is too early to properly determine if the guarantee programs
analyzed in the report achieved their intended purposes or
whether the fees charged by Treasury were properly structured
or adequate in amount relative to the contingent liabilities
undertaken by the taxpayers. I am also by no means convinced
that Treasury had the authority under EESA to implement the
guarantee programs as structured.
I appreciate there may be upfront advantages of contingent
credit support--which is not triggered unless certain adverse
events occur--over direct taxpayer outlays. But the long term
moral hazard effects on entrepreneurial activity and the
capital costs of unfurling the government safety net widely
will surely dwarf even CBO's $3 billion \391\ in estimated
subsidies. By its very nature, ring-fencing allows firms to
keep poorly-performing assets on their balance sheets until
recovery when a backstop is no longer needed. This type of
credit support cannot become a permanent part of an overall
expectation that the taxpayers will again respond and assume
risky bets should they sour. In other words, the guarantee
programs analyzed in the report should not serve as a template
for future bailouts and the report should not be interpreted as
advocating any particular legislative or regulatory response.
---------------------------------------------------------------------------
\391\ Congressional Budget Office, The Troubled Asset Relief
Program: Report on Transactions Through June 17, 2009 (June 2009)
(online at www.cbo.gov/ftpdocs/100xx/doc10056/06-29-TARP.pdf).
---------------------------------------------------------------------------
2. Moral Hazard
I am pleased the Panel gave some consideration to the issue
of moral hazard. Indeed, one of the most regrettable legacies
of TARP is that the all-but-explicit government guarantee of
financial institutions (and non-financial institutions such as
Chrysler and GM) \392\ has severed the link between risk and
responsibility, resulting in greater threats to economic
stability and growth.
---------------------------------------------------------------------------
\392\ The Administration ``invested'' TARP funds in Chrysler and GM
even though neither company is a ``financial institution'' as required
by EESA.
---------------------------------------------------------------------------
Given the length of the report, I think it is important to
highlight the Panel's analysis of the moral hazard issue
presented by the guarantee programs in particular and the
broader TARP program in general.
In addition to direct monetary costs, the guarantee
programs discussed in this report have broader costs
resulting from the moral hazard that arises when the
government agrees to guarantee the assets and
obligations of private parties. Generally, the question
of moral hazard arises when a party is protected, or
expects to be protected, from loss. The insured party
might take greater risk than it would otherwise, and
market discipline is undermined.\393\
---------------------------------------------------------------------------
\393\ Without protections, Citigroup would have more of an
incentive to not properly manage the protected assets under the AGP.
Treasury has provided certain safeguards against this risk. First, the
AGP carries a very high deductible for Citigroup--it is liable for the
first $39.5 billion of losses in the pool, and 10 percent of losses
thereafter. Second, Citigroup must abide by strict asset management
guidelines as set forth in the agreement. And third, if the pool loses
more than $27 billion, the government may demand a change in the
management of the pool.
---------------------------------------------------------------------------
A larger issue arises when one considers the implicit
guarantees, those that are paid for by neither party,
but whose cost is borne by the taxpayer. The DGP and
TGPMMF both carry fees paid for by the financial
institutions. But their existence, and the existence of
the other elements of the bailout of the financial
system, could imply that there is a permanent, and
``free,'' insurance provided by the government,
especially for those institutions deemed ``too big to
fail,'' or ``too connected to fail.'' There is an
implication that, in the case of another major economic
collapse, the government will again step in to prop up
the financial system, especially the ``too big to
fail'' institutions. This moral hazard creates a real
risk to the system.
This ``free'' insurance causes a number of
distortions in the marketplace. On the financial
institution side, it might promote risky behavior. On
the investor and shareholder side, it will provide less
incentive to hold management to a high standard with
regard to risk-taking. By creating a class of ``too big
to fail'' institutions, it has provided these
institutions with an advantage with respect to the
pricing of credit.
Creditors who believe that an institution will be
regarded by the government as too big to fail may not
price into their extensions of credit the full risk
assumed by the institution. That, of course, is the
very definition of moral hazard. Thus the institution
has funds available to it at a price that does not
fully internalize the social costs associated with its
operations. The consequences are a diminution of market
discipline, inefficient allocation of capital, the
socialization of losses from supposedly market-based
activities, and a competitive advantage for the large
institution compared to smaller banks.\394\
---------------------------------------------------------------------------
\394\ Speech of Federal Reserve Board Governor Daniel K. Tarullo,
Confronting Too Big to Fail (Oct. 21, 2009) (online at
www.federalreserve.gov/newsevents/speech/tarullo20091021a.htm).
---------------------------------------------------------------------------
The implied guarantee of ``too big to fail''
institutions might also result in a concentration of
risk in this group, resulting in greater danger to the
taxpayer if and when the government must step in again.
The Panel also concludes:
This apparently positive outcome, however, was
achieved at the price of a significant amount of risk.
A significant element of moral hazard has been injected
into the financial system and a very large amount of
money remains at risk. At its high point, the federal
government was guaranteeing or insuring $4.3 trillion
in face value of financial assets under the three
guarantee programs discussed in this report. Taxpayers'
funds remain at risk as follows:
The TGPMMF has ended with no loss, but $3.6
billion was used from the ESF to purchase assets from
the USGF outside of the TGPMMF.
The DGP currently guarantees a principal
amount of $307 billion (plus interest) which will
diminish as June 2012 approaches, with $2 million in
expected losses to date.
The AGP guarantee for Citigroup is still in
place, and initial actuarial estimates point towards a
possible $34.6 billion loss under the moderate stress
test scenario and $43.9 billion loss under the severe
stress test scenario, which, after the $39.5 billion
``deductible,'' would result in no loss for the
government entities under the moderate scenario and a
loss of $3.96 billion to Treasury under the severe
scenario. The AGP guarantee for Bank of America ended
with no loss.
I wish to emphasize that the apparently ``favorable''
outcome for some of the guarantee programs analyzed in the
report should not obscure the overwhelming burden that could
have fallen to the taxpayers if the government had been called
upon to honor its guarantee obligations. The take away point is
not to view government sponsored guarantee programs as cost-
effective bailout tools. Instead, these programs are fraught
with uncertainty and peril for the taxpayers and create
significant moral hazard risks.
3. Taxpayer Protection
As Treasury unwinds several TARP programs where the
taxpayers have recouped their investments with interest, the
Panel should focus its attention on the new or existing
programs that are likely more enduring and costly to the
taxpayers. The opportunity cost of not providing rigorous
oversight in these areas is high. These programs include
taxpayer funds directed to AIG, Chrysler, GM, GMAC, foreclosure
mitigation, preferred share purchases in Citigroup, Bank of
America and hundreds of additional large and small financial
institutions and other initiatives. Despite a weakened appetite
from the private sector and recovery in asset values, Treasury
has recently used $16 billion of authority for a public-private
investment vehicle to purchase troubled assets.\395\ Although
the Capital Purchase Program (CPP) has yielded around a 17
percent annualized rate of return (mainly through the repayment
of institutions like Goldman Sachs and JP Morgan Chase),\396\
Treasury is set to chart a new course by providing lower-
interest financing for community banks that extend credit to
small businesses.\397\ The Panel should undertake to analyze
these programs to determine if the investment of taxpayer funds
is appropriate, authorized under EESA and adequately protected.
---------------------------------------------------------------------------
\395\ U.S. Department of the Treasury, Transactions Report (Nov. 3,
2009) (online at www.financialstability.gov/docs/transaction-reports/
10-30-09%20Transactions%20Report%20as%20of%2010-28-09.pdf).
\396\ U.S. Department of the Treasury, Secretary of the Treasury
Timothy F. Geithner Written Testimony before the Congressional
Oversight Panel (Sept. 10, 2009) (online at www.ustreas.gov/press/
releases/tg283.htm). See also, Dealbook, Some Profits from TARP, but
Are They Enough, New York Times, (Aug. 31, 2009) (online at
dealbook.blogs.nytimes.com/2009/08/31/are-profits-on-tarp-funds-enough-
feel-free-to-change/) (illustrating the repayment returns).
\397\ White House, Treasury Announces New Efforts to Improve Credit
for Small Businesses, (Oct. 21, 2009) (online at www.whitehouse.gov/
assets/documents/small_business_final.pdf).
---------------------------------------------------------------------------
4. Financial Stability v. Economic Stimulus
TARP was promoted as a way to provide ``financial
stability,'' and the American Reinvestment and Recovery Act was
promoted as a way to provide ``economic stimulus.''
Regrettably, TARP has evolved from a program aimed at financial
stability during a time of crisis to one that increasingly
resembles another attempt by the Administration to promote its
economic, political and social agenda through fiscal stimulus.
If TARP is not being used for ``economic stimulus,'' then
how else is it possible to explain the $81 billion
``investment'' in Chrysler and GM, neither of which is a
``financial institution'' as required under EESA? \398\ In
addition, the United States government has agreed to transfer
to Fiat part of the equity it received in Chrysler if Fiat
assists Chrysler in building a car that produces 40 miles per
gallon. What does this transfer of United States government
owned Chrysler stock to Fiat have to do with ``financial
stability''? As if this was not enough, the Wall Street Journal
recently reported that Treasury is considering the investment
of up to an additional $5.6 billion in GMAC.\399\ No
transparent end-game is in sight for TARP's $81 billion plus
commitment to support Chrysler, GM and GMAC.
---------------------------------------------------------------------------
\398\ Although not directly related, an analysis recently released
by Edmunds.com indicates that the so-called ``cash-for-clunkers''
program cost the American taxpayers approximately $24,000 per car
purchased ($3 billion program divided by 125,000 incremental sales
attributable to the program).
``Edmunds.com has determined that Cash for Clunkers cost taxpayers
$24,000 per vehicle sold.
Nearly 690,000 vehicles were sold during the Cash for Clunkers
program, officially known as CARS, but Edmunds.com analysts calculated
that only 125,000 of the sales were incremental. The rest of the sales
would have happened anyway, regardless of the existence of the
program,'' See Edmunds.com at www.edmunds.com/help/about/press/159446/
article.html.
\399\ ``The U.S. government is likely to inject $2.8 billion to
$5.6 billion of capital into the Detroit company, on top of the $12.5
billion that GMAC has received since December 2008, these people said.
The latest infusion would come in the form of preferred stock. The
government's 35.4% stake in the company could increase if existing
shares eventually are converted into common equity.'' GMAC Asks for
Fresh Life, the Wall Street Journal, (October 29, 2009) (online at
http://online.wsj.com/article/
SB125668489932511683.html?mod=djemalertNEWS).
---------------------------------------------------------------------------
If, in effect, the Administration now equates TARP funds
with Stimulus funds, the Administration should direct the
resources in the most efficient, equitable and transparent
manner by granting tax and regulatory relief to small
businesses--the economic engine that creates approximately
three out of every four jobs--and other American taxpayers.
In a recent report, SIGTARP addressed the problem of moral
hazard, stating that ``TARP runs the risk of merely re-
animating markets that had collapsed under the weight of
reckless behavior.'' \400\ I am concerned that TARP is again
inflating the problem of moral hazard by providing government
capital to institutions that contributed to the crisis,
modifications to homeowners who may have taken on too much
risk, and lower-cost loans to spur the purchase of what may be
volatile, high-priced asset backed securities.
---------------------------------------------------------------------------
\400\ See SIGTARP, Quarterly Report to Congress, at 4 (October 21,
2009), (online at) http://sigtarp.gov/reports/congress/2009/
October2009_Quarterly_Report_to_ Congress.pdf.
---------------------------------------------------------------------------
The SIGTARP report also discussed the cost of TARP to the
government's credibility. It claims, ``[u]nfortunately, several
decisions by Treasury--including Treasury's refusal to require
TARP recipients to report on their use of TARP funds, its less-
than accurate statements concerning TARP's first investments in
nine large financial institutions, and its initial defense of
those inaccurate statements--have served only to damage the
Government's credibility and thus the long-term effectiveness
of TARP.'' \401\ I do not see how Treasury will be able to
regain the public's trust so long as it continues to employ
taxpayer sourced funds to make investments based upon the
Administration's economic, political and social agenda where
there is little promise that such funds will be recouped.\402\
---------------------------------------------------------------------------
\401\ See id.
\402\ Three recent examples of the problems that may arise with
respect to government financed investments in the private sector
include:
(i) GAO recently issued a report on the Chrysler and GM bailout.
The GAO report states:
``As long as Treasury maintains ownership interests in Chrysler and
GM, it will likely be pressured to influence the companies' business
decisions.
``Treasury officials stated that they established such up-front
conditions not solely to protect Treasury's financial interests as a
creditor and equity owner but also to reflect the Administration's
views on responsibly utilizing taxpayer resources for these companies.
While Treasury has stated it does not plan to manage its stake in
Chrysler or GM to achieve social policy goals, these requirements and
covenants to which the companies are subject indicate the challenges
Treasury has faced and likely will face in balancing its roles.''
GAO, TARP: Continued Stewardship Needed as Treasury Develops
Strategies for Monitoring and Divesting Financial Interests in Chrysler
and GM, (November 2009), (online at http://www.gao.gov/new.items/
d10151.pdf).
(ii) Evidence exists that Treasury arguably ``pressured'' creditors
of Chrysler to support the Chrysler Section 363 bankruptcy sale. I
requested Secretary Geithner to investigate the allegation and, to my
disappointment, he declined. Specifically, I submitted the following
question for the record to the Secretary:
``Will you agree to conduct a prompt and thorough investigation of
this matter by contacting Mr. Rattner, Mr. Lauria and representatives
of Weinberg Perella and submit your findings to the Panel?''
The Secretary responded:
``SIGTARP will determine the appropriate actions with regard to
this issue. But as noted above, I would reiterate that Mr. Rattner
categorically denies Mr. Lauria's allegations.
``Again, I ask the Secretary to investigate this matter and report
his findings to the Panel.''
Congressional Oversight Panel, Questions for the Record from the
Congressional Oversight Panel at the Congressional Oversight Panel
Hearing on Sept. 10, 2009, Questions for Timothy Geithner, Secretary of
the Treasury, U.S. Department of the Treasury, at 27 (Sept. 23, 2009).
See my dissent from the September report on the auto bailouts at
http://cop.senate.gov/documents/cop-090909-report-additionalviews.pdf,
pages 166-168.
(iii) The Wall Street Journal recently reported.
``Federal support for companies such as GM, Chrysler Group LLC and
Bank of America Corp. has come with baggage: Companies in hock to
Washington now have the equivalent of 535 new board members--100 U.S.
senators and 435 House members.
``Since the financial crisis broke, Congress has been acting like
the board of USA Inc., invoking the infusion of taxpayer money to get
banks to modify loans to constituents and to give more help to those in
danger of foreclosure. Members have berated CEOs for their business
practices and pushed for caps on executive pay. They have also pushed
GM and Chrysler to reverse core decisions designed to cut costs, such
as closing facilities and shuttering dealerships.''
See Politicians Butt in At Bailed-Out GM, The Wall Street Journal,
(October 29, 2009), (online at http://online.wsj.com/article/
SB125677552001414699.html#mod=todays_us_page_one).
---------------------------------------------------------------------------
In order to end the abuses of EESA as evidenced by the
Chrysler and GM bankruptcies, misguided foreclosure mitigation
programs and the ``re-animation'' of reckless behavior, the
TARP program must end. These activities clearly show that the
program is beyond capable oversight. Further, the TARP program
should be terminated due to:
the desire of the taxpayers for the TARP
recipients to repay all TARP related investments sooner
rather than later;
the troublesome corporate governance and
regulatory conflict of interest issues raised by
Treasury's ownership of equity and debt interests in
the TARP recipients;
the stigma associated with continued
participation in the TARP program by the recipients;
and
the demonstrated ability of the
Administration to use the program to promote its
economic, social and political agenda with respect to,
among others, the Chrysler and GM bankruptcies.
Some of the adverse consequences that have arisen for TARP
recipients include, without limitation:
the private sector must now incorporate the
concept of ``political risk'' into its due diligence
analysis before engaging in any transaction with the
United States government;
corporate governance and conflict of
interest issues; and
the distinct possibility that TARP
recipients--including those who have repaid all Capital
Purchase Program advances but have warrants outstanding
to Treasury--and other private sector entities may be
subjected to future adverse rules and regulations.
A recent report issued by SIGTARP provides an insightful
analysis of the actual cost of the TARP program.\403\
---------------------------------------------------------------------------
\403\ SIGTARP, Quarterly Report to Congress, (October 21, 2009),
(online at http://sigtarp.gov/reports/congress/2009/
October2009_Quarterly_Report_to_Congress.pdf).
---------------------------------------------------------------------------
Assuming that most financing for TARP comes from
short-term Treasury bills, Treasury estimates the interest cost
for TARP funds spent to be about $2.3 billion, although SIGTARP
says a blended cost would double this amount and an ``all-in''
estimate would triple or quadruple it.\404\
---------------------------------------------------------------------------
\404\ A blended cost combines short- and medium-term Treasury
securities, while an ``all-in'' cost balances those with longer-term
Treasury securities. If TARP is a medium- to longer-term program,
either approach would seem more sensible than Treasury's current short-
term interest estimate.
---------------------------------------------------------------------------
Were TARP to reach its $699 billion potential, it
would mean a $5,000 expenditure for each taxpayer.\405\ TARP
represents 5 percent of 2008 GDP.
---------------------------------------------------------------------------
\405\ The $5,000 ``cost'' per taxpayer assumes 138.4 million
taxpayers are covering the full $699 billion.
---------------------------------------------------------------------------
Other costs identified by SIGTARP include (1)
higher borrowing costs in the future as a result of increased
Treasury borrowing levels, (2) a potential ``crowding out
effect'' on prospective private-sector borrowers, potentially
driving private-sector borrowers out of the market, (3) moral
hazard, or unnecessary risk-taking in the private sector due to
the bailout, and (4) costs incurred by the other financial-
rescue-related Federal agencies that have not yet been
quantified.
I introduced legislation--H.R. 2745--to end the TARP
program on December 31, 2009. In addition, the legislation:
requires Treasury to accept TARP repayment
requests from well capitalized banks;
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;
provides incentives for private banks to
repurchase their warrant preferred shares from
Treasury; and
reduces spending authority under the TARP
program for each dollar repaid.
5. Oversight Plan, Budget, Press Releases and Hearings
As discussed in detail in the October report, I encourage
the Panel to adopt and make publicly available an oversight
plan and a budget.\406\
---------------------------------------------------------------------------
\406\ See Representative Jeb Hensarling, An Assessment of
Foreclosure Mitigation Efforts After Six Months, Additional View by
Representative Jeb Hensarling, (Oct. 9, 2009) (online at http://
cop.senate.gov/documents/cop-100909-report-hensarling.pdf).
---------------------------------------------------------------------------
Finally, I again note my disappointment that the Panel has
not held a hearing with AIG, Citigroup, Bank of America (other
than with respect to foreclosure mitigation) and other
significant recipients of TARP funds.
SECTION THREE: TARP UPDATES SINCE LAST REPORT
A. TARP Repayment
Since the Panel's prior report, additional banks have
repaid their TARP investments under the Capital Purchase
Program (CPP). A total of 42 banks have repaid in full their
preferred stock TARP investments provided under the CPP to
date. Of these banks, 27 have repurchased their warrants as
well. Additionally, during the month of September, CPP
participating banks paid $138.9 million in dividends and $1.92
million in interest on Treasury investments.
B. CPP Monthly Lending Report
Treasury releases a monthly lending report showing loans
outstanding at the top 22 CPP-recipient banks. The most recent
report, issued on October 15, 2009, includes data through the
end of August 2009 and shows that CPP recipients had $4.21
trillion in loans outstanding as of August 2009. This
represents a one percent decline in loans outstanding between
the end of July and the end of August.
C. Term Asset-Backed Securities Loan Facility (TALF)
At the October 21, 2009 facility, there were $2.1 billion
in loans requested for legacy CMBS, but none for new CMBS. By
way of comparison, there were $1.4 billion in loans for legacy
CMBS requested at the September facility, and $2.3 billion at
the August facility. There has never been a request for TALF
loans for new CMBS.
At the November 3, 2009 facility, there were $1.1 billion
in loans requested to support the issuance of ABS
collateralized by loans in the credit card, equipment,
floorplan, small business and student loan sectors.No loans in
the auto, premium financing, and servicing advances sectors
were requested. By way of comparison, there were $2.47 billion
in loans requested at the October 2, 2009 facility to support
the issuance of ABS collateralized by loans in the auto, credit
card, equipment, floorplan, small business, and student loan
sectors.
D. TARP Executive Compensation Determinations
On October 22, 2009, Kenneth R. Feinberg, the Special
Master for TARP Executive Compensation, released his
determinations on the compensation packages for the top
executives at the seven firms that have received exceptional
TARP assistance. These seven firms are: AIG, Bank of America,
Citigroup, Chrysler Financial, Chrysler Group, General Motors,
and GMAC. The executives covered by these determinations
include the senior executive officers and the next 20 most
highly compensated employees at each of these seven firms.
For each of these firms, the Special Master's
determinations set specific standards in compensation for the
covered employees. The determinations limit the annual base
salaries of these employees to no more than $500,000 unless
determined otherwise by the Special Master. In three cases, the
Special Master approved annual base salaries of greater than $1
million: the new CEO of AIG and two employees of Chrysler
Financial.
The determinations also affect covered employees with
respect to cash bonus payments, incentive awards, stock
received as salary, personal expense payments and ``golden
parachutes.'' Cash bonus payments are prohibited. Incentive
awards may only be paid if the employee provides at least three
years of service to the firm after an award is made.
Additionally, stock received as salary may only be sold in one-
third installments not to begin until 2011. Further, personal
expense payments made to these employees by each of the firms
will be capped at $25,000, unless determined otherwise by the
Special Master. Finally, the new rules prohibit any increases
in golden parachute payments made in 2009.
E. Metrics
Each month, the Panel's report highlights 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 EESA.
This section discusses changes that have occurred in several
indicators since the release of the Panel's October report.
Interest Rate Spreads. Interest rate spreads
continue to flatten. Interest rates on overnight commercial
paper have returned to near pre-crisis levels. The interest
rate spread for AA asset-backed commercial paper, which is
considered mid-investment grade, has decreased by 23 percent
since the Panel's October report. The TED Spread, which is the
difference between three month LIBOR and the three month
Treasury Bill rate, increased by 16 percent during the same
period. Contrary to the other key metrics presented here,
increases in the TED Spread signify a contraction of liquidity
in the market. This measure, however, still remains 94 percent
below its October 3, 2008 level (see Figure 15 below).
FIGURE 15: INTEREST RATE SPREADS
----------------------------------------------------------------------------------------------------------------
Current spread (as of Percent change since
Indicator 10/28/09) last report (10/09/09)
----------------------------------------------------------------------------------------------------------------
3 month LIBOR-OIS spread \407\................................ 0.11 -12.2
1 month LIBOR-OIS spread \408\................................ 0.09 -5.5
TED spread \409\ (in basis points)............................ 23.2 16.1
Conventional mortgage rate spread \410\....................... 1.57 4
Corporate AAA bond spread \411\............................... 1.73 1.17
Corporate BAA bond spread \412\............................... 2.87 1.06
Overnight AA asset-backed commercial paper interest rate 0.20 -23.1
spread \413\.................................................
Overnight A2/P2 nonfinancial commercial paper interest rate 0.13 -7.1
spread \414\.................................................
----------------------------------------------------------------------------------------------------------------
\407\ 3 Mo LIBOR-OIS Spread, Bloomberg (online at www.bloomberg.com/apps/quote?ticker=.LOIS3:IND) (accessed
October 28, 2009).
\408\ 1 Mo LIBOR-OIS Spread, Bloomberg (online at www.bloomberg.com/apps/quote?ticker=.LOIS1:IND) (accessed
October 28, 2009).
\409\ TED Spread, SNL Financial.
\410\ 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 October 28, 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 October 28, 2009) (hereinafter ``Fed H.15 10-Year Treasuries'').
\411\ 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 October 28, 2009); Fed
H.15 10-Year Treasuries, supra note 410.
\412\ 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 October 28, 2009); Fed
H.15 10-Year Treasuries, supra note 410.
\413\ 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 October 28, 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 October 28, 2009) (hereinafter ``Fed CP AA
Nonfinancial Rate'').
\414\ 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 October 28, 2009); Fed CP AA
Nonfinancial Rate, supra note 413.
[GRAPHIC] [TIFF OMITTED] T3348A.006
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
non-financial commercial paper outstanding increased by over 25
percent since the last report, the total outstanding is still
25 percent below its level in January 2007.\416\ Financial
commercial paper outstanding increased again in October,
returning the measure to its January 2007 level.\417\
---------------------------------------------------------------------------
\415\ SNL Financial, Historical Dividend Yield Values, 3 Month
Libor (online at www1.snl.com/InteractiveX/
history.aspx?RateList=1&Tabular =True&GraphType=2&Frequency
=0&TimePeriod 2=11&Begin Date=12%2F29%2F06 &End
Date=11%2F4%2F2009&Selected Yield2=YID%3A63&ct l00%24ctl09%24Index
Preference=default&Comparison Index2=0&Comparison Yield2=1&Custom
Index=0&ComparisonTicker2=&Action=Apply) (accessed Nov. 5, 2009); SNL
Financial, Historical Dividend Yield Values, 3 Month Treasury Bill
(online at www1.snl.com/InteractiveX/history.aspx?Rate List=1 &
Tabular=True & Graph Type =2 & Frequency=0 &Time Period2=11 &Begin
Date=12%2F29%2F06&EndDate=11%2F4%2F2009&SelectedYield2=YID%3A63&ctl00%24
ctl09% 24 Index Preference=default & Comparison Index 2=0 & Comparison
Yield2=1 & Custom Index = 0& ComparisonTicker2=&Action=Apply) (accessed
Nov. 5, 2009).
\416\ 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 Oct. 28, 2009).
\417\ 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 Oct. 28, 2009).
FIGURE 17: COMMERCIAL PAPER OUTSTANDING
[Dollars in billions]
----------------------------------------------------------------------------------------------------------------
Current level (as of Percent change since
Indicator 10/28/09) last report (10/09/09)
----------------------------------------------------------------------------------------------------------------
Asset-backed commercial paper outstanding (seasonally $548.6 5.04
adjusted) 418................................................
Financial commercial paper outstanding (seasonally adjusted) 683.3 13.4
419..........................................................
Nonfinancial commercial paper outstanding (seasonally 133.2 25.5
adjusted) 420................................................
----------------------------------------------------------------------------------------------------------------
418 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 October 28,
2009).
419 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 October 28, 2009).
420 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 October 28,
2009).
Lending by the Largest TARP-recipient Banks.
Treasury's Monthly Lending and Intermediation Snapshot tracks
loan originations and average loan balances for the 22 largest
recipients of CPP funds across a variety of categories, ranging
from mortgage loans to commercial real estate to credit card
lines. The data below exclude lending by two large CPP-
recipient banks, PNC Bank and Wells Fargo, because significant
acquisitions by those banks since October 2008 make comparisons
difficult. Originations decreased across nearly all categories
of bank lending in August when compared to July.\421\ Lenders
surveyed by Treasury attribute this decrease to bank charge-
offs, outstanding debt payments, decreased demand from
borrowers, and natural seasonal patterns.\422\ Average loan
balances decreased by approximately one percent from July to
August while total loan originations declined by over 16
percent during that same period.
---------------------------------------------------------------------------
\421\ U.S. Department of the Treasury, Treasury Department Monthly
Lending and Intermediation Snapshot Data for October 2008--August 2009
(Aug. 31, 2009) (online at www.financialstability.gov/docs/surveys/
Snapshot_Data_August_2009.xls) (accessed Nov. 5, 2009).
\422\ U.S. Department of the Treasury, Treasury Department Monthly
Lending and Intermediation Snapshot: Summary Analysis for August 2009
(Oct. 28, 2009) (online at www.financialstability.gov/docs/surveys/
Snapshot%20Analysis%20August%202009%20Data%2010%2014%2009.pdf).
FIGURE 18: LENDING BY THE LARGEST TARP-RECIPIENT BANKS (WITHOUT PNC AND WELLS FARGO) 423
----------------------------------------------------------------------------------------------------------------
Most recent data Percent change since Percent change since
Indicator (August 2009) July 2009 October 2008
----------------------------------------------------------------------------------------------------------------
Total loan originations............ $175,850 -16.5 -19.4
Total mortgage originations........ 61,181 -19 38.1
Mortgage new home purchases........ 23,614 -8 10.3
Mortgage refinancing............... 35,201 -25.2 87.6
HELOC originations (new lines & 2,216 -10.8 -53.4
line increases)...................
C&I renewal of existing accounts... 44,148 -21.9 -23.1
C&I new commitments................ 26,431 -17.8 -55.2
Total average loan balances........ $3,398,679 -0.89 -0.7
----------------------------------------------------------------------------------------------------------------
423 Treasury August Lending Snapshot, supra note 422.
[GRAPHIC] [TIFF OMITTED] T3348A.007
Housing Indicators. Foreclosure filings increased
by roughly seven percent from May to June, and are nearly 25
percent above the level of last October. Housing prices, as
illustrated by the S&P/Case-Shiller Composite 20 Index,
increased slightly in June. The index remains down over 10
percent since October 2008.
FIGURE 20: HOUSING INDICATORS
----------------------------------------------------------------------------------------------------------------
Percent change from
Most recent monthly data available at time Percent change since
Indicator data of last report (8/5/ October 2008
09)
----------------------------------------------------------------------------------------------------------------
Monthly foreclosure filings 424...... 343,638 -4.1 22.9
Housing prices--S&P/Case-Shiller 144.5 .97 -7.9
Composite 20 Index 425..............
----------------------------------------------------------------------------------------------------------------
424 RealtyTrac, Foreclosure Activity Press Releases (online at www.realtytrac.com//ContentManagement/
PressRelease.aspx) (accessed Oct. 28, 2009). Most recent data available for September 2009.
425 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_102706.xls) (accessed Oct. 28,
2009). Most recent data available for August 2009.
[GRAPHIC] [TIFF OMITTED] T3348A.008
Commercial Real Estate. The commercial real estate
market has continued to deteriorate since the Panel's last
report. New CRE lending by the top 22 CPP recipients has
decreased by over 71 percent since the enactment of EESA. A
recent Goldman Sachs report notes that rent growth in this
market declined at an annualized rate of 8.7 percent in the
second quarter and estimates that there will be a total of $287
billion in aggregated losses.\427\ Furthermore, the Federal
Reserve's recently released quarterly survey of senior loan
officers reported that the net percentage of respondents
reporting weaker demand for CRE loans was 63 percent during the
third quarter of 2009.\428\
---------------------------------------------------------------------------
\426\ RealtyTrac, Foreclosure Activity Press Releases (online at
www.realtytrac.com//ContentManagement/PressRelease.aspx) (accessed Oct.
28, 2009); 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_102706.xls) (accessed Oct. 28, 2009).
\427\ The Goldman Sachs Group, Inc., US Commercial Real Estate Take
III: Reconstructing Estimates for Losses, Timing (Sept. 29, 2009).
\428\ Board of Governors of the Federal Reserve System, The July
2009 Senior Loan Officer Opinion Survey on Bank Lending Practices
(online at www.federalreserve.gov/boarddocs/snloansurvey/200908/
fullreport.pdf) (accessed Nov. 4, 2009).
FIGURE 22: COMMERCIAL REAL ESTATE LENDING BY TOP 22 CPP RECIPIENTS (WITHOUT PNC AND WELLS FARGO) \429\
[Dollars in millions]
----------------------------------------------------------------------------------------------------------------
Percent change since
Indicator Current level (as of 8/ Percent change since ESSA signed into law
31/09) last report (10/9/09) (10/3/08)
----------------------------------------------------------------------------------------------------------------
CRE New Commitments.................. $2,982 -13.4 -71.7
CRE Renewal of Existing Accounts..... 8,246 -20 -8.3
CRE Average Total Loan Balance....... 377,433 0.43 0.69
----------------------------------------------------------------------------------------------------------------
\429\ Treasury August Lending Snapshot, supra note 422.
[GRAPHIC] [TIFF OMITTED] T3348A.009
F. Financial Update
---------------------------------------------------------------------------
\430\ Treasury August Lending Snapshot, supra note 422.
---------------------------------------------------------------------------
Each month since its April oversight report, the Panel has
summarized the resources that the federal government has
committed to economic stabilization. The following financial
update provides: (1) an updated accounting of the TARP,
including a tally of dividend income and repayments that the
program has received as of September 30, 2009; and (2) an
update of the full federal resource commitment as of October
28, 2009.
1. TARP
a. Costs: Expenditures and Commitments \431\
---------------------------------------------------------------------------
\431\ Treasury will release its next tranche report when
transactions under the TARP reach $500 billion.
---------------------------------------------------------------------------
Treasury is currently committed to spend $531.3 billion of
TARP funds through an array of programs used to purchase
preferred shares in financial institutions, offer loans to
small businesses and automotive companies, and leverage Federal
Reserve loans for facilities designed to restart secondary
securitization markets.\432\ Of this total, $391.6 billion is
currently outstanding under the $698.7 billion limit for TARP
expenditures set by EESA, leaving $307.1 billion available for
fulfillment of anticipated funding levels of existing programs
and for funding new programs and initiatives. The $391.6
billion includes purchases of preferred and common 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 (SPV) used to guarantee Federal Reserve TALF
loans; and the $5 billion Citigroup asset guarantee, which was
exchanged for a guarantee fee composed of additional preferred
shares and warrants and has subsequently been exchanged for
Trust Preferred shares.\433\ Additionally, Treasury has
allocated $27.3 billion to the Home Affordable Modification
Program, out of a projected total program level of $50 billion.
---------------------------------------------------------------------------
\432\ EESA, as amended by the Helping Families Save Their Homes Act
of 2009, limits Treasury to $698.7 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. Pub. L. No. 110-343,
Sec. 115(a)-(b); Helping Families Save Their Homes Act of 2009, Pub. L.
No. 111-22, Sec. 402(f) (reducing by $1.26 billion the authority for
the TARP originally set under EESA at $700 billion).
\433\ October 30 TARP Transactions Report, supra note 27.
---------------------------------------------------------------------------
b. Income: Dividends, Interest Payments, and CPP Repayments
A total of 42 institutions have completely repaid their CPP
preferred shares, 27 of which have also repurchased warrants
for common shares that Treasury received in conjunction with
its preferred stock investments. Treasury received $88.4
million in repayments from three CPP participants during
October.\434\ There were over $68 billion in repayments made by
12 banks in June the total repayments since then have been
approximately $680.8 million. In addition, Treasury is entitled
to dividend payments on preferred shares that it has purchased,
usually five percent per annum for the first five years and
nine percent per annum thereafter.\435\ In total, Treasury has
received approximately $86 billion in income from repayments,
warrant repurchases, dividends, and interest payments deriving
from TARP investments \436\ and another $1.2 billion in
participation fees from its Guarantee Program for Money Market
Funds.\437\
---------------------------------------------------------------------------
\434\ October 30 TARP Transactions Report, supra note 27.
\435\ See, e.g., U.S. Department of the Treasury, Securities
Purchase Agreement: Standard Terms (online at
www.financialstability.gov/docs/CPP/spa.pdf) (accessed Nov. 4, 2009).
\436\ U.S. Department of the Treasury, Cumulative Dividends Report
as of August 31, 2009 (Oct. 1, 2009) (online at
www.financialstability.gov/docs/dividends-interest-reports/
August2009_DividendsInterestReport.pdf); October 30 TARP Transactions
Report, supra note 27.
\437\ Money Market Expiration Release, supra note 313.
---------------------------------------------------------------------------
d. TARP Accounting
FIGURE 24: TARP ACCOUNTING (AS OF OCTOBER 28, 2009)
[Dollars in billions]
----------------------------------------------------------------------------------------------------------------
Anticipated Purchase Net current
TARP Initiative funding price Repayments investments Net available
----------------------------------------------------------------------------------------------------------------
Total.............................. $531.3 $467 $72.9 $391.6 \438\ $307.1
CPP................................ 218 204.7 70.8 133.9 \439\ 13.3
TIP................................ 40 40 0 40 0
SSFI program....................... 69.8 69.8 0 69.8 0
AIFP............................... 80 80 2.1 \440\ 75.4 \441\ 0
AGP................................ 5 5 0 5 0
CAP................................ TBD 0 N/A 0 N/A
TALF............................... 20 20 0 20 0
PPIP............................... 30 16.7 N/A 16.7 13.3
Supplier support program........... \442\ 3.5 3.5 0 3.5 0
Unlocking SBA lending.............. 15 0 N/A 0 15
HAMP............................... 50 \443\ 27.3 0 27.3 22.7
----------------------------------------------------------------------------
(Uncommitted)...................... 167.4 N/A N/A N/A \444\ 242.6
----------------------------------------------------------------------------------------------------------------
\438\ This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($167.4 billion)
and the difference between the total anticipated funding and the net current investment ($139.7 billion).
\439\ This figure excludes the repayment of $70.7 billion in CPP funds. Secretary Geithner has suggested that
funds from CPP repurchases will be treated as uncommitted funds of the TARP upon return to the Treasury.
\440\ This number consists of the original assistance amount of $80 billion less de-obligations ($2.4 billion)
and repayments ($2.14 billion); $2.4 billion in apportioned funding has been de-obligated by Treasury ($1.91
billion of the available $3.8 billion of DIP financing to Chrysler and a $500 million loan facility dedicated
to Chrysler that was unused). October 30 TARP Transactions Report, supra note 27.
\441\ Treasury has indicated that it will not provide additional assistance to GM and Chrysler through the AIFP.
Government Accountability Office, Auto Industry: Continued Stewardship Needed as Treasury Develops Strategies
for Monitoring and Divesting Financial Interests in Chrysler and GM, at 28 (Nov. 2009) (GAO-10-151) (online at
www.gao.gov/new.items/d10151.pdf) (hereinafter ``GAO Auto Report''). The Panel therefore considers the repaid
and de-obligated AIFP funds to be uncommitted TARP funds.
\442\ On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5
billion, this reduced GM's portion from $3.5 billion to $2.5 billion and Chrysler's portion from $1.5 billion
to $1 billion. October 30 Transactions Report, supra note 28.
\443\ This figure reflects the total of all the caps set on payments to each mortgage servicer. October 30
Transactions Report, supra note 27.
\444\ This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($167.4 billion),
the repayments ($72.8 billion), and the de-obligated portion of the AIFP ($2.4 billion). Treasury provided de-
obligation information on August 18, 2009, in response to specific inquiries relating to the Panel's oversight
of the AIFP. Specifically, this information denoted allocated funds that had since been de-obligated.
FIGURE 25: TARP REPAYMENTS AND INCOME
[Dollars in billions]
----------------------------------------------------------------------------------------------------------------
Repayments Dividends \445\ Interest \446\ Warrant
TARP Initiative (as of 10/ (as of 9/30/ (as of 9/30/ repurchases \447\ Total
28/09) 09) 09) (as of 10/28/09)
----------------------------------------------------------------------------------------------------------------
Total............................. $72.9 $9.3 $0.22 $2.9 $85.6
CPP............................... 70.8 6.8 0.01 2.9 80.5
TIP............................... 0 1.9 N/A 0 1.9
AIFP.............................. 2.1 0.5 0.2 N/A 2.82
ASSP.............................. N/A N/A 0.01 N/A 0.01
AGP \448\......................... 0 0.2 N/A 0 0.2
Bank of America Guarantee......... ........... ............... .............. ................. .28
----------------------------------------------------------------------------------------------------------------
\445\ U.S. Department of the Treasury, Cumulative Dividends Report as of September 30, 2009 (Oct. 30, 2009)
(online at www.financialstability.gov/docs/dividends-interest-reports/
September%202009_Dividends%20and%20Interest%20Report.pdf).
\446\ U.S. Department of the Treasury, Cumulative Dividends Report as of September 30, 2009 (Oct. 30, 2009)
(online at www.financialstability.gov/docs/dividends-interest-reports/
September%202009_Dividends%20and%20Interest%20Report.pdf).
\447\ This number includes $1.6 million in proceeds from the repurchase of preferred shares by privately-held
financial institutions. For privately-held financial institutions that elect to participate in the CPP,
Treasury receives and immediately exercises warrants to purchase additional shares of preferred stock. October
30 Transactions Report, supra note 28.
\448\ Citigroup is the lone participant in the AGP.
Rate of Return
As of October 30, 2009, the average internal rate of return
for all financial institutions that participated in the CPP and
fully repaid the U.S. government (including preferred shares,
dividends, and warrants) is 17.2 percent. The internal rate of
return is the annualized effective compounded return rate that
can be earned on invested capital.
2. Other Financial Stability Efforts
Federal Reserve, FDIC, and Other Programs
In addition to the direct expenditures Treasury has
undertaken through TARP, the federal government has engaged in
a much broader program directed at stabilizing the U.S.
financial system. Many of these initiatives explicitly augment
funds allocated by Treasury under specific TARP initiatives,
such as FDIC and Federal Reserve 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 section 13(3)
facilities and SPVs and the FDIC's Temporary Liquidity
Guarantee Program, operate independently of TARP. As shown in
the following tables, the Federal Reserve and the FDIC have
earned approximately $18 billion in fees from programs aimed at
stabilizing the economy and expanding the credit markets.
3. Total Financial Stability Resources (as of October 28, 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 calculates the total value of these resources at over $3
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.
With respect to the FDIC and Federal Reserve programs, the
risk of loss varies significantly across the programs
considered here, as do the mechanisms providing protection for
the taxpayer against such risk. As discussed elsewhere in this
report, the FDIC assesses a premium of up to 100 basis points
on TLGP debt guarantees. In contrast, the Federal Reserve's
liquidity programs are generally available only to borrowers
with good credit, and the loans are over-collateralized and
with recourse to other assets of the borrower. If the assets
securing a Federal Reserve loan realize a decline in value
greater than the ``haircut,'' the Federal Reserve is able to
demand more collateral from the borrower. Similarly, should a
borrower default on a recourse loan, the Federal Reserve can
turn to the borrower's other assets to make the Federal Reserve
whole. In this way, the risk to the taxpayer on recourse loans
only materializes if the borrower enters bankruptcy. The only
loans currently ``underwater''--where the outstanding principal
amount exceeds the current market value of the collateral--are
two of the three non-recourse loans to the Maiden Lane SPVs
(used to purchase Bear Stearns and AIG assets).
FIGURE 26: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF OCTOBER 28, 2009)
[Dollars in billions]
----------------------------------------------------------------------------------------------------------------
Treasury Federal
Program (TARP) Reserve FDIC Total
----------------------------------------------------------------------------------------------------------------
Total....................................................... $698.7 $1,651.8 $846.7 iii $3,028.
2
Outlays i............................................... 387.3 0 47.7 435
Loans................................................... 43.7 1,431.4 0 1,475.1
Guarantees ii........................................... 25 220.4 630 875.4
Uncommitted TARP Funds.................................. 242.7 0 0 242.7
AIG......................................................... 69.8 95.3 0 165.1
Outlays................................................. iv 69.8 0 0 69.8
Loans................................................... 0 v 95.3 0 95.3
Guarantees.............................................. 0 0 0 0
Bank of America............................................. 45 0 0 45
Outlays................................................. vii 45 0 0 45
Loans................................................... 0 0 0 0
Guarantees vi........................................... 0 0 0 0
Citigroup................................................... 50 220.4 10 280.4
Outlays................................................. viii 45 0 0 45
Loans................................................... 0 0 0 0
Guarantees.............................................. ix 5 x 220.4 xi 10 235.4
Capital Purchase Program (Other)............................ 97.3 0 0 97.3
Outlays................................................. xii 97.3 0 0 97.3
Loans................................................... 0 0 0 0
Guarantees.............................................. 0 0 0 0
Capital Assistance Program.................................. TBD 0 0 xiii TBD
TALF........................................................ 20 180 0 200
Outlays................................................. 0 0 0 0
Loans................................................... 0 xv 180 0 180
Guarantees.............................................. xiv 20 0 0 20
PPIP (Loans) xvi............................................ 0 0 0 0
Outlays................................................. 0 0 0 0
Loans................................................... 0 0 0 0
Guarantees.............................................. 0 0 0 0
PPIP (Securities)........................................... xvii 30 0 0 30
Outlays................................................. 10 0 0 10
Loans................................................... 20 0 0 20
Guarantees.............................................. 0 0 0 0
Home Affordable Modification Program........................ 50 0 0 xix 50
Outlays................................................. xviii 50 0 0 50
Loans................................................... 0 0 0 0
Guarantees.............................................. 0 0 0 0
Automotive Industry Financing Program....................... 75.4 0 0 75.4
Outlays................................................. xx 55.2 0 0 55.2
Loans................................................... 20.2 0 0 20.2
Guarantees.............................................. 0 0 0 0
Auto Supplier Support Program............................... 3.5 0 0 3.5
Outlays................................................. 0 0 0 0
Loans................................................... xxi 3.5 0 0 3.5
Guarantees.............................................. 0 0 0 0
Unlocking SBA Lending....................................... 15 0 0 15
Outlays................................................. xxii 15 0 0 15
Loans................................................... 0 0 0 0
Guarantees.............................................. 0 0 0 0
Temporary Liquidity Guarantee Program....................... 0 0 620 620
Outlays................................................. 0 0 0 0
Loans................................................... 0 0 0 0
Guarantees.............................................. 0 0 xxiii 620 620
Deposit Insurance Fund...................................... 0 0 47.7 47.7
Outlays................................................. 0 0 xxiv 47.7 47.7
Loans................................................... 0 0 0 0
Guarantees.............................................. 0 0 0 0
Other Federal Reserve Credit Expansion...................... 0 1,156.1 0 1,156.1
Outlays................................................. 0 0 0 0
Loans................................................... 0 xxv 1,156.1 0 1,156.1
Guarantees.............................................. 0 0 0 0
Uncommitted TARP Funds...................................... 242.7 0 0 242.7
----------------------------------------------------------------------------------------------------------------
i 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. Outlays as used here represent investments and assets
purchases and commitments to make investments and asset purchases and are not the same as budget outlays,
which under section 123 of EESA are recorded on a ``credit reform'' basis.
ii 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.
iii This figure is roughly comparable to the $3.0 trillion current balance of financial system support reported
by SIGTARP in its July report. SIGTARP, Quarterly Report to Congress, at 138 (July 21, 2009) (online at
www.sigtarp.gov/reports/congress/2009/July2009_Quarterly_Report_to_Congress.pdf). However, the Panel has
sought to capture additional anticipated exposure and thus employs a different methodology than SIGTARP.
iv 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).
v This number represents the full $60 billion that is available to AIG through its revolving credit facility
with the Federal Reserve ($42.8 billion had been drawn down as of October 29, 2009) and the outstanding
principle of the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of October 29, 2009,
$16.3 billion and $19 billion respectively). Income from the purchased assets is used to pay down the loans to
the SPVs, reducing the taxpayers' exposure to losses over time. Board of Governors of the Federal Reserve
System, Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance Sheet, at 17
(Oct. 2009) (online at http://www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200910.pdf)
(hereinafter ``Fed October 2009 Credit and Liquidity Report'').
vi A further discussion of the Panel's approach to classifying this agreement appears, infra.
vii October 30 TARP Transactions Report, supra note 27. 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.
viii October 30 TARP Transactions Report, supra note 27. 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.
ix U.S. Department of the Treasury, Summary of Terms: Eligible Asset Guarantee (Nov. 23, 2008) (online at
www.treasury.gov/press/releases/reports/cititermsheet_112308.pdf) (hereinafter ``Citigroup Asset Guarantee'')
(granting a 90 percent federal guarantee on all losses over $29 billion after existing reserves (totaling a
$39.5 billion first-loss position for Citigroup), 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).
x Citigroup Asset Guarantee, supra note ix.
xi Citigroup Asset Guarantee, supra note ix.
xii 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, and the
$70.7 billion in repayments that are reflected as uncommitted TARP funds. This figure does not account for
future repayments of CPP investments, nor does it account for dividend payments from CPP investments.
xiii The CAP was announced on February 25, 2009 and as of yet has not been utilized. The Panel will continue to
classify the CAP as dormant until a transaction is completed and reported as part of the program.
xiv This figure represents a $20 billion allocation to the TALF SPV on March 3, 2009. October 30 TARP
Transactions Report, supra note 27. Consistent with the analysis in our August report, only $49.8 billion
dollars in TALF loans have been requested as of November 2, 2009, the Panel continues to predict that TALF
subscriptions are unlikely to surpass the $200 billion currently available by year's end. Congressional
Oversight Panel, August Oversight Report: The Continued Risk of Troubled Assets, at 10-22 (August 11, 2009)
(discussion of what constitutes a ``troubled asset'') (online at cop.senate.gov/documents/cop-081109-
report.pdf).
xv This number is derived from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value
of Federal Reserve loans under the TALF. 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 $20 billion of losses on its $200 billion in loans,
the Federal Reserve Board's maximum potential exposure under the TALF is $180 billion.
xvi It now appears unlikely that resources will be expended under the PPIP Legacy Loans Program in its original
design as a joint Treasury-FDIC program to purchase troubled assets from solvent banks. See also 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) and Federal Deposit Insurance Corporation, Legacy Loans
Program--Test of Funding Mechanism (July 31, 2009) (online at www.fdic.gov/news/news/press/2009/pr09131.html).
The sales described in these statements do not involve any Treasury participation, and FDIC activity is
accounted for here as a component of the FDIC's Deposit Insurance Fund outlays.
xvii 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) (``Treasury will invest up to $30 billion of equity and debt in PPIFs established
with private sector fund managers and private investors for the purpose of purchasing legacy securities.'');
U.S. Department of the Treasury, Fact Sheet: Public-Private Investment Program, at 4-5 (Mar. 23, 2009) (online
at www.treas.gov/press/releases/reports/ppip_fact_sheet.pdf) (hereinafter ``Treasury PPIP Fact Sheet'')
(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). As of October 23, 2009, Treasury reported $11.1 billion
in outstanding loans and $5.6 billion in membership interest associated with the program, thus substantiating
the Panel's assumption that Treasury may routinely exercise its discretion to provide $2 of financing for
every $1 of equity 2:1 ratio. See, October 30 TARP Transactions Report, supra note 27.
xviii U.S. 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) (hereinafter ``GAO June 29 Status Report''). Of the $50 billion in announced TARP
funding for this program, $27.3 billion has been allocated as of October 23, 2009. October 30 TARP
Transactions Report, supra note 27.
xix 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. 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).
xx October 30 TARP Transactions Report, supra note 27. A substantial portion of the total $80 billion in loans
extended under the AIFP have since been converted to common equity and preferred shares in restructured
companies. $20.2 billion has been retained as first lien debt (with $7.7 billion committed to GM and $12.5
billion to Chrysler). This figure represents Treasury's current obligation under the AIFP. There have been
$2.1 billion in repayments and $2.4 billion in de-obligated funds under the AIFP.
xxi October 30 TARP Transactions Report, supra note 27.
xxii Treasury PPIP Fact Sheet, supra note xvii.
xxiii 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. $307
billion of debt subject to the guarantee has been issued to date, which represents about 50 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 (Sept. 30, 2009) (online at http://
www.fdic.gov/regulations/resources/TLGP/total_issuance9_09.html) (updated Oct. 28, 2009). The FDIC has
collected $9.64 billion in fees and surcharges from this program since its inception in the fourth quarter of
2008. Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary Liquidity
Guarantee Program (Sept. 30, 2009) (online at www.fdic.gov/regulations/resources/TLGP/fees.html) (updated Oct.
23, 2009).
xxiv 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 and second quarters of 2009. 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); Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF
Income Statement (Second Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/cfo_report_2ndqtr_09/
income.html). This figure includes the FDIC's estimates of its future losses under loss share agreements that
it has entered into with banks acquiring assets of insolvent banks during these four quarters. Under a loss
sharing agreement, as a condition of an acquiring bank's agreement to purchase the assets of an insolvent
bank, the FDIC typically agrees to cover 80 percent of an acquiring bank's future losses on an initial portion
of these assets and 95 percent of losses of another portion of assets. See, for example Federal Deposit
Insurance Corporation, Purchase and Assumption Agreement Among FDIC, Receiver of Guaranty Bank, Austin, Texas,
FDIC and Compass Bank at 65-66 (Aug. 21, 2009) (online at www.fdic.gov/bank/individual/failed/guaranty-
tx_p_and_a_w_addendum.pdf). In information provided to Panel staff, the FDIC disclosed that there were
approximately $82 billion in assets covered under loss-share agreements as of September 4, 2009. Furthermore,
the FDIC estimates the total cost of a payout under these agreements to be $36.2 billion. Since there is a
published loss estimate for these agreements, the Panel continues to reflect them as outlays rather than as
guarantees.
xxv This figure is derived from adding the total credit the Federal Reserve Board has extended as of October 23,
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 Securities (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. The level of Federal Reserve lending under these
facilities will fluctuate in response to market conditions. Fed Report on Credit and Liquidity, supra note v.
SECTION FOUR: OVERSIGHT ACTIVITIES
The Congressional Oversight Panel was established as part
of the Emergency Economic Stabilization Act (EESA) and formed
on November 26, 2008. Since then, the Panel has produced eleven
oversight reports, as well as a special report on regulatory
reform, issued on January 29, 2009, and a special report on
farm credit, issued on July 21, 2009. Since the release of the
Panel's October oversight report assessing foreclosure
mitigation efforts, the following developments pertaining to
the Panel's oversight of the Troubled Asset Relief Program
(TARP) took place:
The Panel received a letter from Ben S. Bernanke,
Chairman of the Board of Governors of the Federal Reserve
System, dated October 8, 2009,\449\ providing commentary on a
July Report from the Government Accountability Office, titled
Financial Crisis Highlights Need to Improve Oversight of
Leverage at Financial Institutions and Across System.
---------------------------------------------------------------------------
\449\ See Appendix I of this report, infra.
---------------------------------------------------------------------------
The Panel held a hearing in Washington, D.C. with
Assistant Secretary of the Treasury for Financial Stability
Herbert M. Allison, Jr. on October 22. Assistant Secretary
Allison answered questions relating to the Panel's recent
report on foreclosure mitigation efforts, compensation issues
for executives of firms that had received TARP funds, and the
Administration's recent proposed program to assist small
businesses and community banks.
Upcoming Reports and Hearings
The Panel will release its next oversight report in
December. The report will assess TARP's overall performance
since its inception.
The Panel is planning a hearing with leading economic
experts on November 19, 2009. The Panel will seek the
perspective of these experts on TARP performance to help inform
the upcoming December report.
The Panel is planning its third hearing with Secretary
Geithner on December 10, 2009. The Secretary has agreed to
testify before the Panel once per quarter. His most recent
hearing was on September 10, 2009.
SECTION FIVE: 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. Congress subsequently expanded the Panel's
mandate by directing it to produce a special report on the
availability of credit in the agricultural sector. The report
was issued on July 21, 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, Director of Policy and Special 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, 2008 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. Effective August 10, 2009, Senator Sununu
resigned from the Panel and on August 20, Senator McConnell
announced the appointment of Paul Atkins, former Commissioner
of the U.S. Securities and Exchange Commission, to fill the
vacant seat.
APPENDIX I: LETTER FROM FEDERAL RESERVE BOARD CHAIRMAN BEN S. BERNANKE
TO PANEL MEMBERS, RE: COMMENTARY ON JULY GAO REPORT ON FINANCIAL
CRISIS, DATED OCTOBER 8, 2009
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