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


                                     


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



 
                       NOVEMBER OVERSIGHT REPORT

                                _______
                                

                November 6, 2009.--Ordered to be printed

                                _______
                                

                          EXECUTIVE SUMMARY *

---------------------------------------------------------------------------
    * The Panel adopted this report with a 5-0 vote on November 5, 
2009. Additional views are available in Section Two of this report.
---------------------------------------------------------------------------
    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
--------------------------------------------------------------------------------------------------------------------------------------------------------
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).
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.''
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    Typical provisions in guarantee contracts include: \19\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
           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.
---------------------------------------------------------------------------
    \20\ U.S. GAAP Codification of Accounting Standards: Codification 
Topic 460--Guarantees.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \21\ U.S. GAAP Codification of Accounting Standards: Codification 
Topic 450--Contingencies.
---------------------------------------------------------------------------
    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
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                               Treasury/TARP                          Federal Reserve                              FDIC
                                 -----------------------------------------------------------------------------------------------------------------------
                                    Agency accounts     Federal budget      Agency accounts     Federal budget      Agency accounts     Federal budget
--------------------------------------------------------------------------------------------------------------------------------------------------------
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\
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
    \26\ See discussion of asset guarantees and liability guarantees 
supra Section B(1).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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'').
---------------------------------------------------------------------------
    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'').
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
            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'').
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
            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'').
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------

           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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

  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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
     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.
---------------------------------------------------------------------------
            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.
---------------------------------------------------------------------------
            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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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'').
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

 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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

                   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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